Texas Cedes Leadership After Moratorium Puts Toll Road PPPs On Ice

The great state of Texas takes pride in the grandness of its visions, the ambitiousness of its undertakings and the scale of its achievements. From the wild-catting days of the late 1800s to Mission Control, Houston, the pioneering spirit of Texans has been an inspiration to the nation and the world.

So when the idea of building a new 4,000-mile network of giant multi-modal super-corridors took shape to supply modern transportation infrastructure, move people and goods from the Gulf Coast and Mexican border through to the major population centers and on to the Oklahoma border, it was bound to be big.

And so it was. The Trans Texas Corridor project, I-35, would have been 370 meters wide, four American football fields,  and run for 6,400 Km. It was going to supply multiple lane toll highways for passenger traffic, separate lanes for freight travel, rail lines, water pipeline, natural gas and oil pipelines, fiber optic cable lines and even power transmission infrastructure for wind energy. In so doing, it would have resolved increasingly dire traffic problems for Texas’ most congested highways, and prepared the state not only for the alternative energy revolution, but for the flood of goods from Asia that are due to start arriving there after the Panama canal widening project completes in 2025.

The plan for TTC-35 wasn’t just big, it did real justice to Texas’ visionary traditions. The private partner companies that undertook the design and construction of the route, Cintra-Zachry, were committed to providing long-term infrastructure maintenance – resolving an increasingly important issue as gas tax revenue continues to dwindle.

Financing was to be provided through similarly innovative structures, with Cintra-Zachry funding 22% of the initial construction costs through equity investment and the remainder coming through tax-exempt bank bonds. In return for shouldering the initial $8 billion of costs and risks associated with construction of  infrastructure, Cintra-Zachary would have gained the right to charge tolls, and to collect anywhere from $104 billion to $142 billion in toll revenue over the 25 years of the concession. It would have not only been by far the largest Public Private Partnership ever undertaken in the U.S., but one of the largest in the world and set an example for the rest of the nation.

But so big were TTC-35’s ambitions in delivering comprehensive 21st century solutions that it wasn’t long before the concept ran into trouble. Some of the opposition was valid, some of it ideological, some of it opportunistic, and some of it just plain bizarre.

There were property owners who were rankled at the indiscriminate use of eminent domain to seize land for the project. Property rights are taken seriously by Texans, notwithstanding the physical size of the state, and it didn’t help that the lack of clarity on the exact path of the corridor necessitated seizure of more acreage than would actually be used in the project. It also stirred the hackles of environmentalists, for whom the scale of the project seemed unjustified. Much of this opposition was legitimate, and should have been better anticipated.

More attention should also have been given to the anti-tax lobby, which is perhaps uniquely influential on both sides of the aisle in Texas. Here the libertarian notion that the government has no right to tax anyone for anything other than to support national defense, (or to defend the Mexican border) is widely entertained. The idea of paying for access to motorways, however necessary to maintain them, was always going to be a tough sell to this crowd, notwithstanding the best efforts of then-governor Rick Perry to convince them otherwise.

Opposition to TTC-35 also began to probe the paranoid reaches of the Texas psyche, tapping into anti-foreign sentiment with help from a book written by a far right conspiracy theorist, who postulated that TTC-35, or the “NAFTA Superhighway” was nothing less than a plot to surrender America’s sovereignty to some mythical North American Union with Mexico and Canada. It didn’t help that some of his ideas were picked up by future presidential candidate Ron Paul. But the icing on the cake for xenophobic crackpots was that Cintra is part of Spain’s Ferrovial SA,  leading to some amusing, but ultimately damaging tales about the Spanish crown having an interest in the project.

While all of this was happening, local public sector highway authorities such as the North Texas Toll Authority, and the Harris County Toll Road Authority went to work on legislators to get them to wind back the clock on PPP, which had only been adopted in Texas in 2003. They worried about losing the most lucrative toll road projects to the private sector, and NTTA in particular was determined to get back in the game, by any means necessary. So in early 2007, soon after Cintra and its financial backer JPMorgan  won a competitive tender for building and running the state’s first PPP toll road, SH 121, with a $2.8 billion 50-year concession bid, the Texas Department of Transportation was told to reopen bidding on the road. This ultimately led to NTTA trumping Cintra with a $3.3 billion offer that relied on dubiously assembled public funding that would leave the taxpayer far more exposed to toll revenue shortfalls in the event of recession than a fully private financing package.

The combined forces of opposition to PPP that began with TTC 35 culminated with a vote by the Texas Legislature in mid-2009 not to reauthorise long-term highway PPPs in Texas, at least until 2011. That puts PPP on hold for the next two years just when the rest of the U.S. is waking up to its potential.

I mention all of this because there are broad consequences to think about. While the legislature ponders whether to reauthorise PPP in 2011, Texas will be doing things the old-fashioned way, straining public coffers and risking its credit rating while trying to build transportation infrastructure to meet the needs of a population that’s growing at the rate of 1,000 people a day. Other states have already learned from Texas’ experience in crafting their own PPP legislation, and are avoiding the pitfalls that undermined efforts there. States like California and Arizona,  which have set up PPP units within the past year, are actively soliciting private investment and expertise from companies that might otherwise have been looking to fund projects in Texas.

And while Cintra still has plenty of business coming its way in Texas, including two huge projects in and around Dallas, other companies with the expertise to deliver and maintain long-term PPP concessions might think twice about setting up shop in a state where contracts can be withdrawn after they are awarded. There’s also some real fence-mending that will need to be done to reassure foreign-based  companies, particularly the several other Spanish construction firms with strong technical qualifications, that Texas is still open to their business and their capital.

Yes, TTC-35 as originally envisioned was too big to push through as a first-time project in a state that’s just getting started with PPP.  Future undertakings, should they be allowed to resume in 2011, will need to be more targeted, and better planned before going through a tender process. Until then, the Lone Star state will just have to watch the use of PPP in highway redevelopment gain momentum across America from the side of the road.