Monday, April 10, 2006

More on Texas' new approach to toll roads

Continuing from this morning's post, I wanted to speculate on where all this toll-road stuff is headed. I should start with the caveat that I have not followed the development all of these new toll road plans in-depth, so some of what I may talk about here may or may not already be part of what's going on. My apologies in advance if any this is "obvious" or already well known, or, conversely, has nothing to do with current thinking among the transportation shoguns in our state.

The historical evolution of major roads in Texas seems to have gone something like this:
  1. The state builds a highway, and adjacent land owners see huge windfalls from their increase in land values for commercial and residential development. Much political manuvering happens behind the scenes by large landowners to get road projects routed such that they maximize the value of their landholdings.
  2. The state gets tight on funds, so there's a shift towards toll roads to pay for their construction. Adjacent landowners still make out like bandits, but the roads can be risky, since they take a while to develop traffic and cash flows to cover the construction bonds.
  3. The state starts eyeing all this windfall value landowners are getting, which would make these toll roads far less risky if it could be tapped. Why shouldn't taxpayers capture the windfall instead of lucky landowners? What if the state used eminent domain to take not just the highway right-of-way, but the land on both sides, and captured that value for itself? How would it do that? By turning over the land to a private developer through a comprehensive development agreement (CDA), who not only builds and manages everything, but also might pay the state for the privilege. The Trans-Texas Corridor (TTC) is the first large-scale attempt at this approach.
Now, myself and others have pointed out a couple of downsides to this last arrangement of essentially selling off toll roads:
  1. Since the private developer must cover their relatively high cost of capital, they must pay less than the value of the cash stream if the government kept it to itself and used tax-free municipal bonds to fund everything (although I don't know if tax-free bonds are being woven into these agreements as they're currently structured - it seems unlikely if taxpayers would be on the hook if the developer went bankrupt).
  2. The developer gets a monopoly on those tolls, which is doubly dangerous if they also get some kind of "non-compete" guarantee that no competitive roads will get built nearby. They may also intentionally try to restrict capacity increases as demand grows so they can raise tolls.
The first is definitely a loss, but might be made up for by private market efficiency (vs. government operations) and the removal of voter political pressure in keeping tolls artificially low. The government getting into adjacent land development seems particularly problematic.

The second one worries me more. But there's an interesting counter-balancing force that I'm not sure many people have considered. The land adjacent to the highway is valuable specifically because of the number of daily passersby. If tolls get raised too high and restrict traffic, that land also loses value. Commercial tenants might sign leases contingent on certain traffic levels. That gives the developer an incentive to not only keep tolls reasonable, but even expand capacity if needed, which would enable more potential customer visibility and traffic for those businesses, and therefore might command higher rents. Maximizing the total value of the system really involves trying to move as many people through the corridor as possible, and that means having lots of capacity at low prices.

The key to keeping these forces in balance is to force the private developer keep ownership of the adjacent land (although they could lease to anyone). If they build the road, then cash out on the adjacent land by selling it off after the value has been added, we're back to the problem of monopoly pricing with little incentive to keep tolls low or add capacity. To keep their interests aligned with the public interest, they must own and maximize the value of the whole package.

Of course, another downside the state is seeing to this whole approach is unhappy landowners, who are mobilizing political opposition because their financial incentive is being stripped out of the deal. I would think the key would be to get just enough right-of-way to control the commercial development along the corridor and capture its value, but there will also be valuable residential development behind the commercial strip, and that value can still be captured by those landowners. Should work out well in major urban areas like Houston with plenty of demand for residential development, but the prospects may not work out as well for the rural parts of the TTC where residential value is minimal. Those rural landowners will either need a financial incentive structured for them to earn their support, or they may simply get overruled in our democratic political process.

I still have serious concerns about Harris County privatizing our existing toll road network without the adjacent land, but this broader process for new roads is very interesting, and, with the proper public-interest safeguards, may make a lot of sense in addressing Texas' infrastructure crunch as we continue our rapid growth.

5 Comments:

At 12:23 PM, April 11, 2006, Blogger kjb434 said...

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At 12:25 PM, April 11, 2006, Blogger kjb434 said...

Interesting concerns. Especially with the Kelo vs New Haven supreme court ruling, eminent domain could be used to take whatever property outside of the toll road right of way for economic development use.

Texas needs to pass a law either through vote or legislature to prevent the abuse of eminent domain for private development use (non-transportation) some states and local entities are alread moving this direction.

Also, some states already have this situation. Florida definitely has it on there Florida's Turnpike facility. The road has few exits throughout its long corridor to only certain primary roads. At other locations throughout the facility, the median gets extremely large and a comercial development is constructed with shops, eateries and a gas station. The prices are generally higher than anywhere else since at the exit location there is little available in services even in the urbanized areas. This is from personal experience too. I've driven the Florida's Turnpike from just south of Ocala (northen terminus) to Miami (southern terminus). To me, it is very similar to what the TTC is in a preliminary state. Add some truck lanes and a rail corridor and you'll have the TTC. After this, the primary issue with the TTC is the private partnership aspect and not the potential facilities to be constructed. Kansas and Oklahoma have similar facilities, but I haven't personally driven them.

 
At 4:07 PM, April 11, 2006, Blogger Sal Costello said...

It's worse than you think.

Gov. Perry's Freeway tolls are NOT traditional toll roads. Freeways have never been shifted to toll roads in the history of our country.

TRADITIONAL TOLL ROADS vs. FREEWAY TOLL ROADS
Myself, and most people have no objection to traditional tollroads, where toll revenues on Turnpike A are tied to the investor financed Turnpike A, and Turnpike A is designed and built as an ALTERNATIVE to our public expressways.

In contrast, the special interest freeway tolls - privatize and toll our public highways as well as:

• Permanently take public expressways from drivers.
• Create a growing Class System, separating those who can pay from those who can't.
• Double tax drivers since the freeway tolls are funded with gas tax dollars.
• Create more congestion on our frontage roads with stop lights and other parallel roads.
• Fail to provide important viability studies (that investors demand with traditional toll roads).
• Cost much more for construction, right of way, utility relocation, maintenance and service than nontolled roads.
• Create corporate welfare as privately owned corporations profit off publicly owned assets.
• Add more bureaucracy: Regional Mobility Authority.
• Allow nonelected people (toll authority board members) to set the tax rate (toll tax) for our public highways with no limits.
• Create unfair taxation as one portion of a region pays a toll to drive an expressway while others drive their expressways free.
• Produce a second inefficient, unaccountable tax on top of the gas tax.
• Will never be removed, as the sloppy slush fund gets spent on other politicians favorite pet projects (not good government).
• Give road project location decisions to the private sector to be based on profitability rather than need.

Sal Costello
http://www.texastollparty.com

 
At 4:13 PM, April 11, 2006, Blogger Sal Costello said...

Also, see my blog here for news:
http://salcostello.blogspot.com/

 
At 10:23 PM, April 11, 2006, Blogger Max Concrete said...

The concept of an investor controlling the land along a corridor is not viable, in my opinion. Land along an urban freeway is valuable because of the frontage roads, which makes the land attractive to commercial development. But toll roads generally don't have frontage roads and investor-financed roads almost certainly won't have them due to the competition for motorists and extra cost. Sure, private investors could build them, but I don't see it happening.

In urban areas I just don't think it is politically or financially feasible to acquire any land in addition to the typical 400 foot wide strip needed for the tollway. (Of course, tollways without frontage roads can be squeezed onto a much narrower strip, but TxDOT's standard is 300 to 400 feet).

In rural areas, it would be feasible to acquire the land but the land would have little or no value. Perhaps land at intersections with major highways will have some extra value.

To Sal's list, I'll add the extra cost and overhead of collecting tolls. Enforcement, administration, credit card fees, tag distribution are pure administrative overhead which buy you nothing except bureaucracy.

 

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