Road Pricing as Innovative Finance An Assessment

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Road Pricing as Innovative FinanceAn Assessment

• Genevieve Giuliano
• International Symposium on Road Pricing
• November 2003

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Presentation Overview

• What is innovative finance?
• What explains changing perspective on finance?
• Road pricing as innovative finance some examples
• Conclusions

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What is Innovative Finance?

• Everything that is not traditional finance
• Grant-based, pay-as-you-go, no risk (?)
• Innovative Finance
• Accelerated use of traditional funding sources
• Use of non-traditional funding sources, public
  and private
• Use of new institutions for infrastructure
  provision, ownership, management
• Privatization

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Innovation Continuum
Private funds, ownership, mgmt
PPP finance, build, operate
Private
Public/private finance partnerships (TIFIA)
Leveraged debt (Garvees, SIBs)
Funding
Conventional debt (bonds, loan programs)
Public
Public funds, pay-as-you-go
Public
Private
Ownership/mgmt
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The Problem California Capital Outlays (1998
dollars) Relative to Population Growth
Source Center for Continued Study of the
California Economy (CCSCE)
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More of the Problem California Travel and
Infrastructure Growth
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Conventional Explanation

• Declining productivity of the fuel tax
• Rising costs of maintaining an aging system
• 80 of state transportation expenditures in
  Calif.
• Rising construction costs
• Planning and environmental review
• Public sector inefficiencies
• Politics and delays
• I-105 34 years, 3 billion
• Budget crises, tax revolts

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A Closer Look.

• Shift in perceptions re role of government
• Public sector as provider of last resort
• Benefits of competition, profit motive
• Shift in understanding industry structure
• Contestability as sufficient condition for
  competition
• Deregulation of rail, trucking, air transport
• Lack of evidence re productivity benefits
• 1990s productivity studies

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A Closer Look, cont

• Increasing concern with environmental costs of
  transportation
• Air pollution, habitats, endangered species, open
  space, urban runoff
• You cant build your way out

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Bottom Line

• Less consensus on adding capacity, accommodating
  growth
• Public net (social) benefits of infrastructure
  may not be positive
• If benefits are mainly private, those who benefit
  should pay
• (.as long as I dont have to pay)

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Risks and Project Feasibility(Its all about
risk)

• Risk related to project scale
• Long time horizon, uniqueness, uncertainty
• Construction
• Management, uncertainty, Robert Moses problem
• Operations
• Costs, revenues and debt financing
• Planning and politics
• Environmental review, visibility, conflicts,
  payoffs

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The Risk Continuum
Big Dig ?
Channel Tunnel 10B
Alameda Corridor 2.4B
NJ LRT 1.1B
G. Bush Turnpike 700M
Project Scale
Dulles Greenway 350M
AK I-state Rec. 360M
Butler Highway 150M
SR 91 130M
Extent of Innovation
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Some ExamplesPayoffs and Pitfalls
AB 680 Projects Toll Roads

• AB 680 Projects
• Toll Roads

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1989 California AB 680

• Promote privately funded, built operated
  facilities
• 4 Demos
• PPP
• State DOT project sponsor manage environmental
  review, provide access to financing
• Private entity builds, operates
• BTO state DOT retains tort liability
• 35 year lease
• 1990 RFQ 13 qualified consortia 4 projects
  chosen

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Observations on Project Outcomes
SR 57 Toll road on viaduct in ROW of Santa Ana River in fully developed area strong local political opposition unlikely to ever be built, despite recent study
I-80 Overly ambitious project strong local political opposition to project and to concept
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Observations, cont
SR 125 Toll road in rapidly growing suburban area extensive environmental work adds costs and delays turnovers in ownership due to rising carrying costs tolls unlikely to cover debt service
SR 91 Low cost project ROW existed very congested corridor. Public agency buys facility due to restrictive contract provisions that prevents adding non-toll capacity
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Examples of Suburban Toll Roads

• SR 241/261
• Suburbs of Orange County, CA
• SR 73
• Suburbs of Orange County, CA
• SR 125
• Suburbs of San Diego, CA
• Dulles Greenway
• Suburbs of Washington D.C.

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241/261 73 125 Dulles
Length 51 mi 15 mi 10 mi 14 mi
Cost 1.8 B 1.5 B 642 (est) 350 M
Date auth. 1986 (TCA) 1986 (TCA) 1989 (AB 680) 1988 (HCA)
Date open 1993 Phase 1, not yet completed 1996 Not open est. 2005 1995
Financing State/federal funds, bonds, private equity State/federal funds, bonds, private equity Private equity, bonds, TIFIA, long term debt Private equity, long term debt default 1996 1999 refi bonds
Revenue Developer impact fees, tolls, interest earnings Developer impact fees, tolls, interest earnings Tolls Tolls
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Risk Assessment 1

• Scale
• All projects have long payback period
• All projects highly visible
• Unexpected changes in conditions
• SR 73 downzoning, restrictions on development,
  lead to reduced toll revenues
• SR 125 changes in route due to endangered
  species, local opposition
• SR 91 increased demand, congestion make
  non-compete clause untenable, yet revenues not
  sufficient to expand capacity

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Risk Assessment 2

• Construction
• All projects had underestimated costs, unexpected
  construction problems
• SR 91 was least complicated, with existing ROW
• Delays, environmental problems
• Operations risk
• Revenue shortfalls for SR 73 lead to downgrade of
  debt and possibility of default
• Additional problems for SR 73 drainage control
  system, wildlife corridors
• Revenue shortfalls for Dulles result in default
• SR 241/261, SR 73 multiple revenue sources
  reduces dependence on tolls

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Risk Assessment 3

• Planning risk
• All projects had delays related to environmental
  review SR 73, SR 125 have environmental problems
• Endangered species
• Wildlife habitat
• Water quality
• SR 241/261, SR 73 were well advanced in review
  process before 1986
• Dulles consortium responsible for clearances and
  ROW, but no eminent domain
• SR 57 a regional priority, but a local problem

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Risk Assessment 4

• Politics
• I-80, SR 57 had strong local public opposition
• SR 241/261, SR 73 located in sparsely populated
  area, under control of single landowner/developer
  similar situation for Dulles
• SR 241/261, SR 73 had strong support of County
  govt, and County took lead in EIR process
• SR 125 did not have strong local support
  Caltrans as lead agency
• SR 91 non-compete clause became major problem,
  despite favorable performance

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Conclusions

• Necessary conditions for any major infrastructure
  project
• Strong local public support, public sector
  support
• Toll revenues will likely not cover long-term
  costs except in the very long run
• Most highways are free
• Toll roads built in mostly undeveloped areas
  demand develops over long time
• High enough tolls to support long-term facility
  expansion politically unacceptable or impossible
  with competition from untolled facilities

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Conclusions, cont

• Success stories
• Some toll roads have exceeded revenue
  expectations (SR 241/261, SR 91)
• Financing packages, institutional arrangements
• Public leverage
• Roads would not have been built otherwise
• No toll roads have closed
• Public sector retains residual risk
• SR 91 bought by public agency
• No toll roads have closed