More on Texas' new approach to toll roadsContinuing 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:
- 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.
- 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.
- 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.
- 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).
- 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 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.