Private toll roads: take the money (and concrete) and run?There's a big debate going on in Texas about private toll roads, especially for the Trans Texas Corridor. The legislature slapped a two year moratorium on them last session, although with enough loopholes to be pretty toothless. I've been very skeptical myself. Private companies have an inherently higher cost of capital (their bonds aren't tax free like municipal ones, and they need a profit margin), and 50+ year non-compete clauses scare me. Who knows what roads will need expansion over the next 50 years? Can you imagine what a mess Houston would be today if we were stuck with the roads - and capacities - planned in 1957? It seems better to have the flexibility of a public agency, like HCTRA or TXDoT, that can adapt its road network to changing growth demands, rather than being locked in to a bunch of multi-hundred-page private contracts (and people have noted to me that these companies hire higher-dollar lawyers than the government - not a good sign for the public toll/taxpayer).
But I've recently been thinking about an alternate view. A tremendous amount of private capital is sloshing around out there in private markets just itching to build infrastructure for a decent return. All of the private investment models assume status quo trends in growth and commuting. But what if we're going into a long-term mega-boom in gas prices as global demand outruns supply, as well as getting near the tipping point on telework technologies? (aka "why am I driving an hour a day to go from one computer screen to another?") That could radically reduce commuting and the tolls they might be able to charge. If we assume that is a likely future scenario (and I believe it is), then the best strategy for the state is to collect billions in road building and cash (they prepay for the concession) now while the market is hot, knowing that these investors are likely to lose their shirts over the long haul, but by then it will be too late - the roads will have been built, and they aren't going anywhere. Texas gets the infrastructure, and private investors eat the cost.
It's a very viable scenario. But it does require quite a leap of faith to think you're smarter than the market. And I'm usually a believer in the wisdom of crowds/markets. But in this particular case, I think the market is ignoring the potential impact of these changes (energy costs, telework) on their returns. Why? Mainly because of the short-term focus of our financial markets and money managers. They want their bonuses this year and next year. To be perfectly honest, they don't care too much if they buy some bonds for their clients that implode in 2012 or 2020 or whenever (that's someone else's problem). What matters is how those investments look in their portfolio today, and they look good based on past history (shades of Enron, anyone?).
So should Texas take the money and run? I'm not sure this completely turns me in favor of private toll roads. But maybe it brings me back to a more neutral stance, since I can see a happy outcome either way. It'll be interesting to see how it all plays out. Stay tuned...