Despite bumps in the road, privatization races on
Congestion pricing toll roads, such as SR-91 in California, are blazing the trail as local governments encourage public-private partnerships to build highways.
Privatization of America’s highways is on the move again – but not without a few bumps along the way. Proponents of the strategy to improve the nation’s highway infrastructure through public-private enterprise partnership see the opening of the Dulles Greenway in Virginia on Sept. 29, and the projected December opening of State Route (SR) 91 in California, as giant leaps forward for privatization – an idea that attracted considerable attention in the mid-1980s but languished during the late ’80s and began regaining momentum in the ’90s.
The 14-mile, four-lane Greenway (see related article, p. 19), built at a cost of $326 million, is the first privately financed toll road in Virginia since 1814.
Meanwhile, a continent away, contractors are finishing SR-91, the country’s first true “congestion pricing” toll road. Tolls on the 14-mile, $410 million road in northern Orange and Riverside counties will be higher during rush hours and lower at off hours to attract drivers.
SR-91 is the most advanced of four demonstration projects selected by the California Department of Transportation in 1990 to attract private capital. Others are SR-125, serving San Diego County, which is expected to open next year; SR-57, also in Orange county, is a 10-mile private expressway elevated above a flood channel, currently on hold because of county bankruptcy; and the Midstate Tollway in the northern part of the state, now delayed by political opposition from farmers and environmentalists.
William Allen, a principal in Dewberry & Davis of Fairfax, Va., one of the engineering firms that worked on the Greenway, attributes the surge in privatization to a revitalized real estate industry, passage by Congress in 1992 of the Intermodal Service Transportation Efficiency Act (ISTEA) and the pressure on states by taxpayers to reduce costs. ISTEA permits use of federal funds to finance public-private highway projects.
The flurry of interest in privatization in the 1980s was blind-sided when the bottom fell out of the real estate market, and private investors lost interest in toll roads, which, Allen says, “are based on future development. Build it, and they will come.”
Tracing the genesis of the Dulles Greenway project to 1985 when there was a lot of innovative thinking about infrastructure projects, Allen says, “We were originally looking at a rail line to Washington-Dulles International Airport, but it is difficult to make a rail line pay.”
TAXES AN ADDED FACTOR
John O’Leary, deputy director of the privatization sector at the Reason Foundation in Los Angeles, adds another factor stimulating privatization to Allen’s list: tax cuts.
Noting that 21 states cut taxes in 1994, and 30 have pledged to do so this year, O’Leary sees continued pressure on government to deliver services in more predicts tax cuts will stimulate a “sizable increase in state-level privatization.”
And, finally, there is the demand for highway construction and improvements by harried drivers fighting traffic congestion. The Texas Transportation Institute, which surveys grid-lock annually from Federal Highway Administration data, reports the 50 leading U.S. cities for which it examines data are adding 1,016 land/ miles of freeway a year, compared with the 1,680 needed annually just to stop congestion from getting worse.
Complaining that his constituents have been waiting 30 years for someone to “do something about that road,” a Minnesota legislator vented a national frustration when he pleaded with attendees at a pre-proposal privatization conference conducted in September by the Minnesota Department of Transportation to take a close look at congested, unsafe State Highway 212 southwest of Minneapolis.
STATES ENACT LAWS
State laws enacted in the past few years permitting privatization seem to support O’Leary’s and Allen’s optimism. Following the lead of California, which passed Assembly Bill No. 680 in 1989, authorizing the awarding of the four demonstration projects to the private sector, at least 10 other states have enacted legislation allowing state authorities to enter into agreements with private entities to plan, finance, design and construct transportation facilities.
In addition to the Greenway and California contracts, substantial privatized initiatives are underway in Washington and Arizona, prompting Wallace Hawkes, a managing partner in the National Transportation Authority, to declare enthusiastically, “It’s the first time we’ve had four states so active at the same time.” He also noted that Florida and South Carolina are working on proposals, and Georgia’s DOT is urging passage of a privatization law.
The Commonwealth of Virginia, perhaps the first jurisdiction to look at privatization – the Greenway project – is, ironically, one of the latest to enact a comprehensive framework to enter into privatization agreements.
Virginia’s Public-Private Transportation Act of 1995, which Allen believes will serve as a model for other states, allows for solicited and unsolicited proposals for projects and explains the steps in evaluating, selecting and implementing projects.
OPENING UP THE PROCESS
Allen believes the law will be copied because “Virginia went out to the private sector and the community asking for comments. The state then integrated those comments into the law. At the same time the state is still firmly in charge. It’s the best piece of legislation and the best process.”
And the process is extremely important in bringing projects to fruition. It not only involves soliciting ideas from developers, but also in gaining public acceptance. Minnesota conducts meetings with the community and developers, reports Shayla Tate, communications manager for the state’s Office of Alternative Transportation Financing (OATF). “We are saying [of the state’s $5 billion in unfunded projects] ‘Look at the projects. If you have a better plan, a more viable idea, go ahead and make a proposal.'”
Minnesota’s major unfunded projects include Interstate 35 from Minneapolis south to suburban Burnsville, a fast-growing area. Current plans to alleviate traffic on the highway are projected to cost $1.2 billion. In the metro area alone there are $2 billion in other projects identified by the Metro Council, which is responsible for looking at the Twin Cities transportation needs.
The state opened the door to public-private toll roads in 1993 with passage of a private toll way law and founded the OATF in December 1994. A bi-partisan committee of the state legislature in May recommended that all transportation projects of $10 million or more look consider alternative financing.
Washington State, on the other hand, saw its innovative public-private partnership crash into a wall of opposition from citizens protesting tolls, individual programs and, finally, the entire concept.
The Public-Private Initiatives in Transportation Program was passed in 1993 when there was a critical shortfall in funding for transportation. It established clear authority for the state to solicit proposals and develop up to six projects using tolls and user fees as a cost-recovery mechanism.
Shortly after five specific projects were announced, however, “all hell broke loose,” says Rhonda Brooks, manager of the New Partners: Public-Private Institution in Transportation Program for the Washington State Department of Transportation.
OBJECTIONS TO TOLLS
“People didn’t want to pay tolls. They liked the public-private concept but thought this would be a charity program. The public learned little about the plans until they were announced and felt left out of the entire process. In retrospect, not having the public on board at every step of the process did the most damage to the program,” she says.
IMPACT OF TOLLS STUDIED
Three project proposals are subject to an advisory vote after studies have been completed on the social and economic impact of tolls: SR-522 Corridor Improvements, a 10-mile, limited access, four-lane toll highway between the cities of Woodinville and Monroe; SR-520/Evergreen Floating Bridge improvements, a two-phase project connecting freeway ramps with the I-5 express lanes and addition of high-occupancy vehicle (HOV) lanes with a bicycle-pedestrian path; and SR-16 Tacoma Narrows Bridge, a series of alternatives to reduce congestion and complete HOV lanes on SR-16.
Park and ride capacity enhancement projects in Washington’s King County are moving ahead because citizens failed to submit enough petitions to force a vote, and the Puget Sound Congestion Pricing Project, which would convert existing underused HOV lanes to Fare Lanes, is waiting legislative approval.
ARIZONA FACES OPPOSITION
Arizona, also facing citizen resistance to paying tolls, has several proposed projects on hold in metropolitan Phoenix, including segments of the Squaw Peak Freeway and the 1-10 bypass south of the city. A directive from the governor allocates more money to continue to build highways but at the expense of maintenance budgets. Contracts have been awarded to instrument segments of the 100 miles of freeway around the metropolitan area by installing message signs, video cameras and entrance ramp meters to control freeway access.
Phase I of the instrumentation project, covering 16 miles and costing $15 million, went on line in August. A contract for Phase II, a $6 million effort covering an additional 13.5 miles, was awarded this month.
Texans have no problem with toll roads but struggle with developing a coordinated, state-wide privatization effort. “Texas has a history of successful toll roads,” says Emily Braswell, director of planning for the Texas Turnpike Authority (TAA). A state law passed in 1913 granting broad authority to private road companies to build highways was repealed in 1991 when the legislature included a privatization bill in its overhaul of transportation policy. Private toll road projects proposed by nine corporations prior to repeal were grandfathered.
NAFTA SPARKS BRIDGES
Some of the entities authorized to construct and operate toll roads in Texas include private toll road corporations, road utility districts and certain counties. The Harris County Toll Road Authority, for example, oversees two toll roads and a bridge in Houston, and 13 other entities operate toll facilities in the state.
“The good news is we have lots of good experience. The bad news is we haven’t always used it. Now we’re beginning to use it,” says Braswell.
With passage of the North American Free Trade Agreement (NAFTA) expected to stimulate trade with Mexico, the focus of many new projects is along the border. Construction of 10 new toll bridges has been proposed in cities such as Brownsville, Mission, Hidalgo, Laredo, El Paso and Socorro, and Sunland Park, New Mexico.
Like Texas, Florida, too, has had considerable experience with private transportation infrastructure projects and has numerous authorities and agencies selling bonds to fund projects. And, like Texas, the state aggressively pursues creative ways to build and finance projects.
Half of Florida’s Southern Connector Extension, the southernmost piece of the Eastside Beltway around Orlando, was financed by private landowners who put up the right of way and cash. The DOT is empowered to pay maintenance and operating costs of private facilities through a trust fund, and the state is willing to commit $70 million a year for up to 25 years to help a private consortium build high-speed rail service from Miami to Orlando to Tampa Bay.
LOCAL SUPPORT IMPORTANT
The Miami Sunpike in northern Dade County is the state’s newest facility, says Tom Barry, assistant secretary of finance and administration in the department of transportation. “Sponsors are seeking local support, and then the project will have to be approved by the county’s Metropolitan Planning Organization. Final approval is up to the state legislature.
“The private sector isn’t knocking down doors to work on Florida projects,” Barry says, noting this fuels a type of built-in competition “because if a project is good enough for the private sector, it’s good enough for the public sector.”
But, while high profile projects dominate the privatization scene in some states, others, such as New Jersey and South Carolina are just beginning the process of looking at public-private partnerships.
NEW JERSEY EYES TURNPIKES
In New Jersey, a commission formed by Gov. Christine Todd Whitman recommended that the state’s three turnpike authorities look at various options including privatization to create operating efficiencies.
The state’s three toll roads, operating under state-created authorities – the New Jersey Turnpike, the Garden State Parkway and the Atlantic City Expressway – have been under increased pressure to raise tolls because of stagnating revenues, rising operating costs and increasing debt payments.
“The savings from private operation might reduce the need for future toll hikes,” the report states. Additionally, “electronic toll collection and other new technologies that would improve customer service may be introduced sooner and at less cost by private contractors.”
LOOKING AT THE NUMBERS
Annual revenues and expenses in 1994 for the authorities were $560 million and $325 million, respectively. Debt service totaled $211 million in 1994. The authorities also paid $24.5 million to the state’s Transportation Trust Fund.
Although the governor has approved privatization of a number of state facilities, she has not yet addressed the toll road recommendations, according to Philip Beachem, executive vice president of the New Jersey Alliance for Action and a member of the commission.
“I don’t even know if she has signed off on the toll roads,” he says, noting that the commission made its report less than a year ago. The commission, he emphasizes, viewed privatization as one option. “We also encouraged turnpike authorities to look at consolidating services such as purchasing.”
Beachem says privatizing existing toll roads is more difficult than privatizing other facilities because there are bond covenants and other issues to deal with. “It’s not just a simple government operation.”
Still, as head of the alliance, an organization promoting public-private partnerships, Beachem says he is “very positive about on-going projects” but, he emphasizes, “we’re just starting.”
Having no private tollway law but encouraged by passage of ISTEA, South Carolina is moving ahead with three projects: the Conway to Myrtle Beach bypass; the Sea Island Expressway in Charleston; and the Southern Connector in Greenville. Financing for Conway hinges on passage of a 1 percent sales tax referendum scheduled to go to the voters this fall or early spring. Proposals may be for totally private or totally public projects or a combination of the two.
LAWMAKERS SAVE JOBS
Not all states are embracing privatization, however. An anti-privatization law has brought Massachusetts Gov. William Weld’s privatization efforts to a virtual standstill despite estimates by state official estimates that privatization has saved the Commonwealth $274 million.
Charles Kostro, chief policy analyst for the Executive Office of Transportation, does not, however, see the anti-privatization mood affecting highways because, “if we went ahead with a project, we wouldn’t displace any state employees. The purpose of the anti-privatization law was to protect state employees’ jobs,” he says.
James Kerasiotes, Massachusetts’ transportation secretary, has identified Route 3 from Boston to New Hampshire as an ideal candidate for a build-operate-transfer tollway. It is a heavily traveled road linking southern New Hampshire and the northern tier of the Bay State to routes 128 and 495 and Boston.
“We’re still analyzing the best way to move,” reports Kostro, “researching what other states are doing, looking at their experiences. We’re looking at drafting legislation.”
GEORGIA TRIES AGAIN
In Georgia, proponents of privatization, including Gov. Zell Miller, having seen two privatization bills never come to a vote in the General Assembly, plan to try again.
David Burgess, Georgia’s tollway administrator, says the governor formed a privatization research committee, and he is working with the state’s legal affairs office to draft a bill. “The DOT thinks private tollways are viable, but until we can get a consortium to make a presentation to the state, we’ll not be able to evaluate fully the benefits,” he says.
Burgess believes legislators prefer to see the results of privatizing toll-taking functions on Georgia 400 and evaluate how much revenue the highway generates before enacting a law. Revenue from the road, traveled heavily by commuters from the northern suburbs to Atlanta, have exceeded projections. Looking at the future of privatization, Allen believes the biggest advance is that states and the private sector have learned the most efficient approach is a public-private partnership.
PRIVATIZATION ANOTHER TOOL
He warns, however, that privatization “isn’t something that you can do everywhere. It’s just another tool in the tool box. You have to look at the public mood and temperament.” He points to toll road opposition in Washington State, Arizona and even Virginia as examples. “Virginia has used toll roads before. They are not happy with toll roads but would rather have toll roads rather than no roads at all.”
The Reason Foundation’s O’Leary sees states turning to privatization “wherever the infrastructure can pay for itself.”
“Privatization is a way to stretch our transportation dollars,” says Shirley Ybarra, deputy secretary of transportation for Virginia. “It does not supplant the state’s transportation role but gives the private sector the opportunity to help and allows state dollars to be used elsewhere,” she says.
“The key benefit to the state,” says Minnesota’s Shayla Tate, is that “privatization allows us to go beyond business as usual. If there is a more efficient way to do things, we want to know about it.”
So do taxpayers and government administrators.
It was the best management decision I ever made,” says James Rozelle, referring to contracting out operations of two Ohio wastewater plants near Dayton in the mid-1980s. He could not, however, foresee that his decision would lead to a first in public-private partnerships.
The contract with Wheelabrator Technologies, Hampton, N.H., solved a number of problems: maintaining staff, eliminating odors, retaining technical expertise to operate the plants and solving effluent problems, says Rozelle, the general manager and chief engineer of the Miami Conservancy District (MCD), a regional flood control district serving southwestern Ohio.
Pleased by the way the New Hampshire firm had operating the North Plant in Huber Heights since 1985, the district’s board decided two years later to contract out operating a similar plant in Franklin, Ohio. The contractor won the bid to operate that facility, too.
In August, the district sold the Franklin Area Wastewater Treatment Plant to the contractor for $6.8 million. The transaction was the first public-private partnership involving a federal- and state-funded municipal wastewater treatment plant under presidential executive orders, which encouraged private capital investment to help municipalities meet growing infrastructure needs.
Under terms of the agreement, the contractor will own and operate the 4.5 mgd plant for 20 years. The plant, which is located 25 miles south of Dayton, serves 25,000 residents in the MCD.
Operating costs to the three communities are projected to be reduced 14 percent annually, which, explains Rozelle, will stabilize rates. Each community is expected to receive between $1.8 million and $2 million in first-year savings, Rozelle says.
The contractor is also responsible for capital improvements and future expansion to meet growing demand. Franklin, the primary user of the plant, is located near I-75 where a “fair amount of growth is anticipated,” Rozelle says.
“The board was ahead of its time back then,” he says. “They were interested in divesting the two plants as soon as they saw the results from [a private firm] operating the North Plant.”
Rozelle expects the district to divest the North Plant also, but nothing is in the works right now.
Shortly after announcing the purchase of the Franklin plant, the New Hampshire firm reported its selection by Wilmington, Del., to negotiate acquisition of the city’s 90 mgd advanced wastewater treatment plant serving 400,000 residents in the city and New Castle County in northern Delaware. The transaction is valued at $53 million, according to company officials.
The firm will negotiate a public-private partnership for the ownership, management, operation and maintenance of the Wilmington Wastewater Treatment Plant modeled after the Franklin plant agreement. Private operation could begin as early as January.