Road Pricing as Innovative FinanceRoad Pricing as Innovative FinanceAn AssessmentAn Assessment

Genevieve Giuliano

International Symposium on Road Pricing

November 2003

Presentation OverviewPresentation Overview

• What is innovative finance?• What explains changing perspective on

finance?• Road pricing as innovative finance: some

examples• Conclusions

What is Innovative Finance?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

Innovation ContinuumInnovation Continuum

Ownership/mgmt

Fu

nd

ing

Public funds, pay-as-you-go

Conventional debt (bonds, loan programs)

Leveraged debt (Garvees, SIBs)

Private funds, ownership, mgmt

Public/private finance partnerships (TIFIA)

Public

Pu

blic

Private

Pri

vate PPP finance, build,

operate

The Problem: California Capital Outlays (1998 The Problem: California Capital Outlays (1998 dollars) Relative to Population Growthdollars) Relative to Population Growth

0

0.5

1

1.5

2

2.5

3

3.5

PopulationCapital Outlay

Source: Center for Continued Study of the California Economy (CCSCE)

More of the Problem: California Travel and More of the Problem: California Travel and Infrastructure GrowthInfrastructure Growth

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

Annual VehicleMiles (Millions)

Taxable GasolineSales (Gallons, noaviation)

State Lane Miles

Conventional ExplanationConventional 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

A Closer Look….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

A Closer Look, con’tA Closer Look, con’t

Increasing concern with environmental costs of transportation– Air pollution, habitats, endangered species,

open space, urban runoff “You can’t build your way out”

Bottom LineBottom 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 don’t have to pay)

Risks and Project FeasibilityRisks and Project Feasibility(It’s all about risk)(It’s 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

The Risk ContinuumThe Risk Continuum

Extent of Innovation

Pro

ject

Sca

le

SR 91$130M

Channel Tunnel£10B

Alameda Corridor$2.4B

G. Bush Turnpike$700M

Dulles Greenway$350M

Butler Highway$150M

AK I-state Rec.$360M

NJ LRT$1.1B

Big Dig ?

Some Examples:Some Examples:Payoffs and PitfallsPayoffs and Pitfalls

AB 680 Projects

Toll Roads

AB 680 Projects

Toll Roads

1989 California AB 6801989 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

Observations on Project OutcomesObservations 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

Observations, con’tObservations, con’t

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

Examples of Suburban Toll RoadsExamples 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.

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

Private equity, bonds, TIFIA, long term debt

Private equity, long term debt; default 1996; 1999 refi bonds

Revenue Developer impact fees, tolls, interest earnings

Tolls Tolls

Risk Assessment 1Risk 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

Risk Assessment 2Risk 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

Risk Assessment 3Risk 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

Risk Assessment 4Risk 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 gov’t, 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

ConclusionsConclusions

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

Conclusions, con’tConclusions, con’t

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