Ideology takes its toll: "The corporate privatization model pushed by the Bush DOT and Rick Perry are by far the most expensive way to do the job."

The Wrong of Way

Texas highways for lease.



by Pat Choate
The Texas Observer
Copyright 2008

The administration of President George W. Bush had three major domestic goals: privatize Social Security, transfer federal work to private corporations, and shift the financing, construction, and operation of America’s busiest highways, including the high-traffic parts of the interstate system, from public freeways to privately operated toll roads.

The tolling of major parts of America’s road system is a fundamental shift from traditional U.S. policy of providing the best roads at the lowest cost to a market-based approach that seeks to maximize highway revenues. The resulting costs can be high. In northern Virginia, for instance, a private consortium led by an Australian company is now constructing toll lanes inside the public right-of-way and will charge commuters $1.54 per mile during rush hours. Similar projects are under way in 24 other states.

The two people responsible for implementing the Bush administration’s tolling policies are U.S. Secretary of Transportation Mary Peters and D.J. Gribbin, the department’s general counsel. Both worked for the Federal Highway Administration during Bush’s first term, and then both left to work for companies involved with tolling. Peters headed consulting at HDR Inc., a major engineering firm. Gribbin was the Washington lobbyist for Macquarie Holdings (USA) Inc., one of the world’s largest toll road operators.

Not surprisingly, George W. Bush’s home state of Texas, following the lead of states like Indiana, is a principal proving ground for his administration’s road privatization program.

In brief, the generic name for the U.S. Department of Transportation’s privatization program is Public-Private Partnerships. Most often, the arrangement allows a private company either to convert existing highways to toll roads or to plan, finance, build, and operate roads and bridges.

In 2005, for example, the state of Indiana created one of the first partnership arrangements by selling a 75-year operating concession on the Indiana Toll Road, which runs east-west for 157 miles across the northern part of the state, to Macquarie-Cintra, an Australian-Spanish consortium, for a $3.85 billion up-front payment.

Newly elected Republican Gov. Mitch Daniels, who was Bush’s first budget director, rushed the deal to a conclusion in a record 117 days in 2005. The enormous up-front payment allowed Daniels to keep his “no-new-taxes” campaign pledge, distribute $250 million to the counties surrounding the toll road, and fund dozens of other projects. In exchange, the toll company got to double the tolls, then double them again. Further on, the consortium can raise tolls according to a generous formula built into the contract.

Later, Indiana legislators learned that they had leased a public asset for $3.85 billion that would produce at least $121 billion of revenue over its 75-year contract life.

They also discovered that they had given the Spanish and Australian corporations a “no compete” clause in an area 10 miles along either side of the road. If Indiana violated that clause, such as improving local roads that would deflect traffic from the turnpike, the state had to pay the consortium for any lost revenues. Thus, for the next 70 years, two foreign corporations will have control over development in a 20-by-157 mile, 2-million-acre swath through the middle of Indiana.

As part of these tolling deals, the state also gets part of the revenues—up to half in the Texas contracts—making these programs as much about financing state government through transport taxes as it is about providing good roads and bridges. Today, Texas uses half the monies collected for its highway fund to finance nontransportation functions, including education and the Department of Public Safety. Since the state budget surplus is more than $10 billion, road tolling in Texas is also about political ideology. (The accessible surplus is lower because about $6 billion is reserved for the state’s “rainy day” fund and about $3 billion is earmarked to cover property tax cuts approved by the last Legislature.)

Gov. Rick Perry, from Paint Creek, is the driving force behind the tolling of Texas roads. Then-Lt. Gov. Perry succeeded President-elect George W. Bush as governor in December 2000. Elected twice subsequently, Perry is now the longest-serving governor in Texas history.

The highway privatization program that Perry unveiled in June 2002 consists of a massive, 4,000-mile network of supercorridors, some of which would be a fifth of a mile wide, take 146 acres of land per mile, and carry parallel links of toll roads, rails, and utility lines. The projected cost of the so-called Trans Texas Corridor is between $145 billion and $184 billion in 2002 dollars, which, the governor said, would come from a combination of state funding, local toll segments, and exclusive development agreements with private corporations.

Before Texas could implement the plan, the governor needed 10 changes in Texas law. One would give the Texas Department of Transportation authority to acquire private property through quick condemnations. Another would allow TxDOT to grant private organizations the right to develop all types of transportation projects anywhere in Texas. Perry also wanted and got the authority to hold toll revenues outside the state treasury, assign ownership of those toll revenues to corporate developers, allow the issuance of bonds to finance the corridor, and remove all restrictions on the number of projects that TxDOT could pursue. He also wanted an exemption from federal environmental laws for those projects that had no federal funding. In short, the governor sought a free rein.

First, however, voters had to amend the Texas Constitution. Thus, the 2002 election ballot included something called Constitutional Proposition 15. It read: “The constitutional amendment creating the Texas Mobility Fund and authorizing grants and loans of money and issuance of obligations for financing the construction, reconstruction, acquisition, operation, and expansion of state highways, turnpikes, toll roads, toll bridges, and other mobility projects.”

While many voters thought Proposition 15 was simply authorizing a new transportation financing authority, Perry and TxDOT later claimed that the four little words, “and other mobility projects,” ratified the 4,000-mile Trans Texas Corridor.

Second, implementing legislation from the Texas Legislature was required. Thus, in June 2003, as the legislative session was drawing to a close, state Rep. Mike Krusee, the Round Rock Republican and longtime Perry ally who chaired the House Transportation Committee, introduced a bill known as the “Driver Responsibility Law” that zipped through the Legislature on a vote of 146-0 in the House and 31-0 in the Senate. Few legislators read the particulars, and Krusee emphasized to the media that this was a law to crack down on drunk drivers, plus provide some money for the governor’s proposed corridor. With only a few members of the Legislature in the know, both houses authorized TxDOT to privatize the Texas highway system.

On August 20, 2003, barely two months later, TxDOT convened a conference at its Austin headquarters with its staff and private contractors. Phillip Russell, director of the Texas Turnpike Authority, told the group that the drunk driver bill “gives us all of the authority and all of the power we need on a state level to move forward on the Trans Texas Corridor, plus some.”

Indeed, TxDOT and the U.S. Department of Transportation were forging a new national model for financing, building, and operating highways. In the process, TxDOT changed its bidding process from one that relies on the lowest bid for the same work to a “best value” selection, allowing the consideration of political and other factors. In addition, the implementing legislation empowered TxDOT to make sole-source agreements with a single company or group to design, develop, construct, finance, acquire, operate, and maintain facilities such as turnpikes, highways, freight or passenger rail, and public utilities. In effect, Perry put a “for lease” sign on all Texas state roads.

A major problem that the governor and TxDOT faced early on is that many Texans hated the plan. They did not like turning public roads into private tollways. They hated the idea of the state’s seizing some 500,000 acres of farm and ranch land for the supercorridors. Most galling, they loathed the notion that two foreign corporations would be profiting from the operation of highways that the people of Texas had paid for and owned.

Among the earliest opponents were David and Linda Stall of Fayetteville, Texas, a small community between Austin and Houston. David Stall is a fourth-generation public servant and professional city manager. Linda Stall is a community organizer, issues activist, and teacher.

In February 2003, the Stalls attended a luncheon speech at the La Grange Chamber of Commerce, where TxDOT Director Michael Behrens described the corridor. Afterward, Linda called TxDOT headquarters in Austin and got several boxes of the full plan, titled “Crossroads of the America’s Plan.” David, who is intimately familiar with the laws and rules of Texas, says he was surprised by the arrogance of it all—the corridor process had no transparency, no participation by other public planning entities, no involvement of local governments, and, worst of all, no participation by the public.

Linda also learned that the corridor authorizing legislation required TxDOT to hold a hearing in every county through which one of the super corridors would go. In early 2003, TxDOT officials chose to obey the letter rather than the spirit of that law by quickly convening pro forma hearings in all 254 Texas counties, giving the absolute minimum public notice. Consequently, many hearings had no attendees other than TxDOT employees.

When Linda Stall learned about the meeting in the county where David was working, she went to the local Lions Club, Chamber of Commerce, and other organizations urging people to attend. Twenty-five people were present, but the local TxDOT employees did not know enough about the corridor to answer their questions. After that meeting, the Stalls created a Web site, Corridor Watch, where they began to post information—www.corridorwatch.org.

A week after their first county hearing, the Stalls learned that TxDOT had scheduled a session for Fayette County, where the Stalls live. Linda stirred up enough interest to get more than 80 residents to attend the meeting at the local TxDOT office, which could handle only 60 people. Again, TxDOT personnel could not answer the public’s questions. However, this session was different.

After about 30 minutes of presentation and questions, County Judge Ed Janecka interrupted the session and pointed out that the meeting did not count because Texas law says space is required for all parties who wish to attend, plus TxDOT personnel were not answering people’s questions.

Three weeks later, more than 700 people came to the TxDOT hearing at the Knights of Columbus Hall in La Grange, as did senior TxDOT officials. The audience asked hard questions. Local newspapers reported that the overwhelming majority of attendees had decided they wanted the corridor canceled.

Undeterred by the public’s opposition, in 2004 TxDOT awarded a contract to a Cintra-Zachry consortium to develop a project design for the first phase of the corridor. Cintra, a large Spanish firm that builds and operates infrastructure projects worldwide, is a partner with the Australian firm, the Macquarie Infrastructure Group, in many global projects, including the Indiana toll road concession. Zachry Group is one of the largest construction companies in Texas, and its owners are longtime political supporters of Perry and Bush. The Cintra-Zachry team in Texas includes 16 other firms, including J.P. Morgan Securities Inc. and PricewaterhouseCoopers LLP

At that point, the Stalls went political. Because of their efforts, the 2004 Republican State Convention in San Antonio adopted a platform plank that called for the repeal of the Trans Texas Corridor. In 2006, the GOP retained the plank in defiance of the governor. The Texas Democratic Party and the Libertarian Party adopted similar positions in 2006. By then, the concerns of a few isolated people had become a movement involving thousands of Texans from all political parties and all parts of the state.

Because TTC-35, the portion of the super corridor that runs north to south from San Antonio through Austin and Dallas to Oklahoma, uses some federal funds, TxDOT had to hold environmental hearings in the summer of 2006. More than 14,000 people attended. William H. Molina, a filmmaker, made a documentary, “Truth be Tolled,” which shows Texans at those hearings who are stunned, angry, and desperate to keep their farms and ranches from being taken by the state. The film also shows the obvious indifference of the TxDOT officials as they stall the meetings, provide dismissive answers, and simply ignore many speakers. The film won the first prize at the 2007 WorldFest-Houston International Film Festival.

The corridor was a top issue in the 2006 Texas gubernatorial election. Nevertheless, Perry won re-election with 38 percent of the vote; three other candidates—a Democrat, an Independent and a local showman—split the opposition.

In early 2007, the Stalls and other corridor opponents mounted an aggressive lobbying campaign in the Texas Legislature to get a two-year moratorium on corridor activities; they were trying to kill the project through delays. The opponents brought thousands of people to anti-TTC rallies at the Capitol in Austin, hundreds of whom also attended corridor-related legislative hearings.

As political prospects for a moratorium brightened in early 2007, Perry rushed into a deal with Cintra to lease a partially finished state highway in Dallas, convert it to a toll road, and take a concession payment of $2.8 billion. Perry’s panicky move, however, angered Jere Thompson Jr., former chairman of the North Texas Toll Authority, an old and experienced public toll organization that TxDOT had discouraged from bidding on the Dallas project. Thompson sent a letter to the Dallas Morning News claiming that if NTTA could bid using the same assumptions as had Cintra, the state and region would get $3.5 billion more.

The resulting political uproar forced Perry to allow an NTTA bid. In a further twist, the U.S. Department of Transportation sent TxDOT a letter threatening to withhold future federal highway funds from Texas if it rejected the Cintra bid. U.S. Sen. Kay Bailey Hutchison, a Republican, challenged Transportation Secretary Peters on the matter, but she quickly backed off.

NTTA’s bid, which included a pledge to reinvest its anticipated $1.3 billion in profits in Texas, had a total value of $6.69 billion, which clearly won over Cintra’s bid, valued at $5.07 billion.

As that bid process was taking place, TTC opponents were continuing their siege of the Texas Legislature. Consequently, the moratorium passed both Houses in May 2007 by large, veto-proof margins. Perry threatened to hold the part-time lawmakers in Austin in special session for as long as required to get his way. When thus confronted, “the legislators,” according to one Austin political writer, “crumbled as easily as a piece of tin foil.”

Perry vetoed the moratorium bill, and neither house even attempted to override, choosing instead to enact a weak compromise bill. After the Legislature adjourned, Perry and TxDOT acted as though the legislative session had never happened. They moved forward on 80 toll road projects. David Stall wrote to Corridor Watch members in early August 2007 that TxDOT officials had resumed “their headlong rush to use every available loophole, exception, and remaining authority to build toll roads and grant toll road concessions just as fast as possible.”

Perry also vetoed other TTC-related legislation. One bill would have reduced the potential abuse of TxDOT’s eminent domain powers by ensuring limited uses for private properties seized and providing for just compensation. Another vetoed bill would have required TxDOT to study the upgrading of existing routes before seizing private property for new corridors.

In August 2007, TxDOT announced that the state would stop all new highway construction. If Texas communities wanted new roads, they would be required to either raise local taxes and pay for the roads themselves or accept toll roads. The facts that the state used almost half the monies from the state highway fund for nontransportation spending and had a $10 billion surplus were seemingly irrelevant realities.

In late August 2007, San Antonio radio station WOAI obtained a TxDOT report Perry had sent to President Bush and the Congress asking that the federal laws be changed so states could toll all or part of the interstates. Additionally, he requested that Congress exempt private investors in toll road projects, such as the Cintra and Macquarie consortia, from federal income taxation. The report created another political storm, but TxDOT pushed ahead with its tolling efforts, which continue until this day.

Update

Despite the fact that TxDOT and Perry mounted a $9 million public relations program to sell their road program to Texas voters, polls reveal that many voters remain intensely opposed.

The crash of global financial markets in the summer of 2008 dried up much of the easy financing used by private toll corporations. To keep the Texas road building program funded, the state’s top three public officials—Perry, Lt. Gov. David Dewhurst, and Speaker of the House Tom Craddick—announced on August 19 their intention to use monies from the $135 billion state employee and teacher retirement systems.

Meanwhile, the U.S. Department of Transportation is providing every governor and state legislature legal research on how they can change their constitutions and laws to facilitate the private tolling of their roads and bridges.

On July 24, U.S. Sen. Jeff Bingaman, a New Mexico Democrat and chair of the Senate Finance Committee’s Subcommittee on Energy, Natural Resources, and Infrastructure, held a hearing on the tax implications of the private financing of programs such as the Texas corridor. Edward D. Kleinbard, the top staffer at the Joint Committee on Taxation, testified that if public-private partnership deals such as those of Indiana and Texas have a lease that is 55 years or longer, the concessionaire is deemed the “constructive owner” and can accelerate depreciation over a 15-year period, giving the investors a quick return on their money.

Dennis J. Enright, an investment consultant, testified that if roads were built and operated as a public sector funding authority, such as the North Texas Toll Authority, it could produce the same value as a private sector entity, as Cintra or Macquarie does, for at least 30 percent lower user charges. Why? The cost of capital for a public authority, Enright testified, is that much less than for a private corporation. In the North Texas Toll Authority versus Cintra bid-off, NTTA’s bid would produce 32 percent more value for Texas.

In sum, while Perry is correct that Texas needs massive new investment in its highways, the private corporate model he has chosen and that the federal Transportation Department is pushing on other states is by far the most expensive way to do the job.

Pat Choate is an economist and author of Hot Property; Agents of Influence; The High-Flex Society; America in Ruins; and co-author with Ross Perot of Save Your Job, Save Our Country. He was Perot’s vice-presidential running mate in 1996. His latest book, Dangerous Business: The Risks of Globalization for America, from which this article is adapted, was published this year by Alfred A. Knopf.

© 2008 The Texas Observer: www.texasobserver.org

RELATED LINK: Q & A with Pat Choate

To search TTC News Archives click HERE

To view the Trans-Texas Corridor Blog click HERE