Thursday, September 29, 2005

Harris County will study leasing toll roads

According to the Chronicle yesterday, Harris County is looking at selling the operating rights to their toll roads for a big chunk of cash - potentially up to $7 billion.

An investment bank concluded that a private firm might pay up to $7 billion for the right to operate Harris County toll roads, prompting Commissioners Court Tuesday to authorize a study of the pluses and minuses of such a deal.

If the plan worked right, the multibillion-dollar windfall could be invested, and interest earned on it would pay for future road projects. Pricey road bonds likely would be a thing of the past, Harris County Judge Robert Eckels said.

"This could avoid the need for bond elections and the need to go to taxpayers for tax increases," he said.

As part of the 50- to 75-year deal, the county would maintain ownership of the toll roads, decide whether the system should expand and possibly set limits on future toll increases.

I have to say this seems really risky to me. There are a whole lot of ways this could go wrong. I'm a big fan of the private free market, but companies love to wring cash out of a good monopoly (noticed your cable bill the last few years?). Their interest will be to restrict supply to drive up prices and maximize revenue, exactly the opposite of what we need in Houston.

This deal sounds a lot like the airport concession agreements. You may not know that the city doesn't lease individual retail spaces at the airport. They give a monopoly over the entire airport to one vendor, who then chooses who fills the spaces and how much they charge. The city maximizes the value of the space, the vendor makes profits hand-over-fist, but guess who gets screwed? Yes, you, the hungry/thirsty flyer. Now you know why everything is overpriced at airports. Sound like a good model for our toll road network?

I would like to specifically critique the second excerpt paragraph above from a financial perspective. HCTRA has an asset that generates cash: the toll road network. Financial markets see that cash stream and are willing to let them float bonds at very low tax-free interest rates for new road building, because they know the county will be able to make the payments. Not a bad arrangement. But if you try to monetize that long-term cash stream into a lump-sum today, that investor is going to discount the value of that cash flow at a pretty high interest rate. To put it in layman's terms, this is why winning the $10 million lottery becomes a $5 million check (or less) when you choose the "instant cash payout" option instead of taking it in smaller checks over 20 years.

Next, they tout that that big lump sum of money the county just got can earn interest that can help build roads in the future. But I can pretty much guarantee you that any interest earned on the lump-sum will be less than the discount rate the private investor used. If I had to take a wild guess, I'd bet the private investor would discount the expected toll cash stream at 8-10%, and then the county would be able to reinvest it at maybe 4-5%. It's like loading up your credit card at 10% and keeping cash in a 5% CoD: you're losing money in the spread. Not such a good deal.

But my biggest concern is a potential loss of mobility flexibility for Houston. A lot of very interesting experiments are going on around this country with managed lanes, congestion-pricing, high-occupancy toll roads, and virtual exclusive busways. Houston is actually on the leading edge trying out some of these new innovations, and our congestion woes mean we need to be able to stay there. Right now, if HCTRA decides they want to try something, they can just do it. If a private contractor gets involved under a thousand-page legal agreement, that throws a major wrench in the works, potentially even an insurmountable barrier. They could demand the county compensate them any time a new project might adversely affect their revenues. They might even demand "non-compete" clauses which prevent nearby roads from being upgraded. The problems got so bad with the private operator of the 91 Express lanes in California that the state had to buy out the company.

The bottom line is that we could really screw up an agency that is working remarkably well just the way it is. An analyst with the Reason Foundation recently told me she thought Houston's mobility authorities had their act together as well or better than any other city in the country. Why mess with a good thing? To use a very Texan sounding cliche, "If it ain't broke, don't fix it."

Update: Kuffner hosts Robin's analysis here. She has a much more recent Rice MBA than me, so her financial analysis is much sharper than mine.


At 9:06 AM, September 30, 2005, Anonymous Anonymous said...

Uh, does anyone else realize that should you do this, you lose the revenue stream? And isn't that revenue stream there to build more roads in the future? And isn't that revenue stream the basis for the valuation? And when you "invest" (not spend, right...) the proceeds, aren't you just recreating that revenue stream but with a lot of transaction costs. Seems like a bunch of hooey to me, having not studied it in detail.

In short: I find it hard to believe the county (which can issue tax free bonds) has a higher cost of capital than does a private investor.

At 10:23 AM, September 30, 2005, Anonymous Anonymous said...

Dear CTC members and friends:

In other Harris County news this week, Art Storey told Commissioners' Court that he has directed the Toll Road Authority (HCTRA) to suspend project development on the Grand Parkway (and other projects that fall in TxDOT's right of way or the state highway system) until the County reaches a revenue-sharing agreement with TxDOT. (Note that TxDOT's development efforts continue.)

Storey explains the decision in a letter to the Commissioners and a letter to HCTRA. I've posted excerpts in CTC's online forum here:

I'm interested to hear your reactions. Please feel free to post your thoughts in the forum. If you have not yet registered to use CTC's forum, instructions are here:


p.p.s. If you received this email from a friend and would like to
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At 4:02 PM, October 01, 2005, Anonymous Anonymous said...

It sounds like they have been listening to the METRO bureaucrats.

What will the up-front lump sum be squandered on?

What about when the bonds are retired? The toll roads are supposed to revert to non-toll expressways.

Since the County has already been diverting excess tolls to other projects, I guess we will never pay off the bonds.

The bureaucracy lives on, and we just shoulder a heavier load on Houston's Animal Farm.

At 11:00 PM, October 08, 2005, Blogger Sal Costello said...

Somebody's nest is getting feathered. Tolls are big business, and privatization of tolls is bigger.

Learn more about it here:

Sal Costello

At 2:45 PM, March 15, 2006, Anonymous Anonymous said...

What ever happened to the idea of suspending tolls once the bonds were paid? Which politicians do we need to nail down?

At 3:23 PM, March 15, 2006, Blogger Tory Gattis said...

It's gone by the wayside. Roads need maintenance, and essentially a complete re-build every 20-30 years. Plus, it's cheaper to use cash flow from existing tolls to finance new construction than float new bonds.


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