GMI May 1996 Growth Management Reporter

Privatized Highways: A Toll Too Far?

A Special Issue of The Growth Management Reporter

May, 1996

What is so dear to a fiscally challenged public official as the opportunity to attract private funds for building public facilities? Exacting tolls from road and bridge users is not exactly a new approach to financing facilities -- many settlers heading west from Colonial days onward paid fees for travelling on roads hacked through the wilderness and for crossing rivers on boats and bridges operated as private enterprises. And we're all familiar with the midwestern and eastern long-distance turnpikes that charge tolls for getting places faster and easier than before.

In the past 50 to 100 years, however, most toll facilities have been authorized, constructed, and managed by quasi-public authorities established by state and local governments. The new wrinkle is that states are becoming interested in granting such rights to private enterprises, as profit-making ventures. With a bow to the current political correctness of private entrepenurial activities, as well as a widespread paucity of public funds to build things, a number of states have encouraged private firms to engage in road and bridge building, promising a pot of gold behind every toll collector.

Public officials defend the approach as tying the costs of facilities to users -- if you want mobility you must pay for it -- and as a means of supplementing scarce public funds with private dollars. They also hint that private companies may be able to build and manage such facilities more efficiently, allowing public officials to cut back on future budgets.

These arguments may not take into account a couple of known facts about the reluctance of highway users to pay out of their pockets on a day-to-day basis instead of through a tax revenue stream often hidden. The first fact: tolls generally have been unpopular with drivers. Florida learned this when it started proliferating toll bridges and roads a couple of decades ago, then quickly retracted the program as voter protests mounted. The state of Washington learned the lesson more recently. Following initiation of a much-publicized program in the early 1990s to lure private investors into the road-and-bridge-building business, the state put the program on indefinite hold. The reason: voters across the state rose up in indignation against the whole idea of paying tolls to get from one place to another. The irony: the program was hatched by a Democratic administration eager to prove its support of private enterprise and throttled by a Republican legislature aghast at the concept of allowing profit-making at the expense of highway users. (There are probably other ways of interpreting that experience; you can draw your own conclusions.)

The second fact about the likelihood of depending on tolls paid by highway users is that their hesitancy to pay up, plus the costly ornaments hung on the tree by public officials, may make the venture questionable as a profit-making business.

This special edition of The Growth Management Reporter summarizes current efforts at private road-building and examines the experience of two major examples. Dan Carlson, author of two studies of transportation-related land use planning, then provides a view from the Dulles Greenway at the land use implications of the deal.

State Public/Private Transportation Ventures

A quick list of current efforts shows that a rash of proposals appears to be running into roadblocks.

Arizona: The state's enactment of legislation authorizing privatized roads followed a notorious shortfall in public funds to acquire right-of-way and construct a major highway in the Phoenix area. One answer was an unsolicited proposal for a private beltway around Phoenix, 70 miles in length, that would have installed tolled express lanes on 30 miles of existing roadway and congestion pricing on the new highway. The price tag: an estimated $1.5 billion. In 1995 the proposal was withdrawn. Now the Arizona Department of Transportation is issuing a request for proposals for a scaled-down project that will require some public funding support.

California: With state authorizing legislation in place, Caltrans issued a request for proposals in 1990, encouraging construction and financing firms to scour the state for potential projects. Caltrans selected four proposals for SR 125, SR 91, SR 57, and the Mid-State highway. Of these, the SR 91 Riverside-Orange County Freeway has been completed (and is profiled below).

Colorado: The state has been trying for over ten years to build the 48-mile E-470 beltway around the eastern part of Denver, to be financed through tolls. The state established a public highway authority to oversee construction and management by private contractors. The project has been dogged since the beginning by suspicions that a highway viewed as "way out in the prairie" could not pay for itself. Disagreements over traffic forecasts held up action for a time. Nevertheless, in 1986, the state sold $720 million in bonds for the project, then used arbitrage on the bonds to pay for planning and design, a practice since forbidden by the Tax Reform Act of 1986. A voter referendum in 1989 established a vehicle registration fee to provide further funds for the highway and $65 million in revenues were authorized to fund the first segment. The road, now only 29 miles long, is now under construction with the contractor's equity and profit subordinated to bond repayment.

Florida: With Florida's transportation secretary announcing a policy to limit public highway widths to ten lanes (!), the state's legislation authorizing privatized road construction took on a new meaning. Two early proposals, however, have been replaced by public toll projects. The privately proposed Miami SunPike ran into political difficulties. A shorter Dade County Expressway may be built instead. The Sun Coast Parkway, first proposed as a private tollway, is being built by the public turnpike authority. A highly publicized proposal for a high-speed rail line from Miami to Tampa to reduce road needs received five proposals and negotiations are underway with a potential builder/manager. The state has committed $70 million annually for 25 years to assist in underwriting costs, which are estimated at almost $5 billion. The state estimates that a ten-lane road following the rail alignment would cost $7 to $8 billion.

Minnesota: The state legislature enacted a bill in 1994 mandating consideration of alternative funding for projects of over $10 million and another bill in 1995 establishing the "TRANSMART" program promoting privatized highways. Like California, the state solicited private proposals for privatization projects from the $5 billion in unfunded projects on the state's list. Unlike Washington, MnDOT required community support for projects and allowed community vetos over unwanted projects within 30 days after project selection by the state. The state's solicitation was answered by five proposals from three teams. One team proposed three projects in the Minneapolis-St. Paul area totalling about $600 million in funding. Others proposed a $194 million trunk highway on a new alignment from southwest Minneapolis to western Minnesota and a $1.3 billion toll highway for trucks from Winnipeg to the Port of Duluth, part of which would be adding truck lanes to an existing highway. Project selections will be finalized by development agreements later in 1996.

South Carolina: A $175 million Greenville County/Southern Connector is being built as a private tollway. A request for proposals for a Horry County/Conway Bypass around Myrtle Beach attracted a design/build proposal by a developer dependent on revenues from a proposed sales tax. A $1 billion tax initiative, bundling the $450 million project with $600 million of additional county projects, will be put before voters. Observers fully expect them to vote "no." The state also received a proposal for a Sea Island Expressway to Kiawah Island but financing is on hold until environmental studies have been completed.

Virginia: With enabling legislation in place, the Dulles Greenway was launched with great expectations, now decidedly moderated, as described below.

Washington: As reported above, the six projects selected by the Washington Department of Transportation to proceed are dead in the water. Recent legislation subjects private projects to assessments of potential toll impacts and public participation requirements, including a voter referendum on major projects.

The "91 Express Lanes" Project: A Sometime Success

The privately constructed toll lanes along State Route 91 in Orange County, California are famous on two counts: as a major capacity addition to a highly congested highway corridor, and as a high-tech answer to traditional toll-collection problems. The existing highway had long since bogged down as a traffic carrier, overcome by 270,000 trips a day, many commuters from the bedroom communities of Riverside County in the outer reaches of the Los Angeles metropolitan area. Bumper-to-bumper gridlock for several hours a day was practically guaranteed, causing commuters an extra half hour or so in travel time to the employment centers of Orange County.

The cure to this case of traffic indigestion? Construction of ten miles of a four-lane highway in the median of the existing highway. Tolls are collected electronically via special transponders the size of a pack of playing cards that automatically debit tolls from their accounts. Tolls are keyed to demand: off-peak prices might be as low as 25 cents while rush-hour travel can cost up to $2.50. And HOV motorists pay no toll as long as three people ride in the car.

The new highway was constructed and is managed by the California Private Transportation Company, a partnership formed by subsidiaries of Peter Kiewit Sons' Inc., Cofiroute Corporation, and Granite Construction Incorporated. Selected by Caltrans for the job, the firm planned and managed construction of the $126 million road and now manages daily operations.

Following the provisions of Assembly Bill 680, which established the privatization alternative to state-financed roads, the private company builds the facility and transfers it to state ownership with a lease-back for 35 years. During this period, toll rates are unregulated except to limit the developers to a "reasonable return." Excess revenues, if any, are used to retire the facility's debt or contribute to the state highway fund. The company will pay costs for maintenance (by Caltrans), law enforcement (by the state police), and facility operations, saving general taxpayers an estimated $120 million over the life of the agreement.

The tolls are intended to apply congestion pricing techniques to balance traffic demands on the new lanes and the existing highway. Toll-payers are guaranteed a 65-mile per hour trip. As more commuters use the new lanes, traffic on the older lanes will free up, reducing demand for the toll lanes. When the new lanes become congested, tolls will be raised to deflect more traffic to the older highway.

Continued buildup of traffic along the corridor eventually will test capacities of all the lanes, a probability that planners like not to think about. (The opening of Metrolink train service along the same corridor attracted about 460 drivers and may yet prove to be the ultimate solution for rising travel demands.)

Has the experiment succeeded? The private company has issued no bottomline figures to date but maintains that projected income levels are being met. Plunking new capacity down in a bottlenecked traffic corridor would appear to be the best way to assure success.

The Dulles Greenway: Fast Road to Failure?

A few years ago the State of Virginia constructed a tollway on either side of the infamous Dulles Access highway -- infamous because it afforded little access to anything in this congested Northern Virginia corridor except the airport. The tollway changed all that; it immediately provided evidence for the saying "if you build it, they will come." Popular from the start, the tollway set entrepreneurs to thinking that an extension of the tollway into fast-growing Loudoun County was a natural. After years of painstaking negotiations with landowners, the Virginia legislature, county officials, and financial backers, the road was constructed and opened for business as a privately owned tollway in September, 1995.

Authorized by state legislation, the Toll Road Investors Partnership constructed the 14-mile, $326 million facility and has a concession to operate it for 35 years, supposedly ten years past debt retirement. Initial tolls were low to attract users -- $1.75 one-way -- but still expensive for the mileage involved compared to other toll roads. Despite optimistic predictions by all involved, the road failed to attract anything close to the 33,000 vehicles a day required for the company to make loan payments, let alone the 68,000 vehicles a day needed to turn a profit. In early 1996, the road was averaging 10,500 vehicles daily. The scheduled fee raise to $2.00 on January 1 was postponed and the company laid off a third of its toll collectors and maintenance workers. Instead, fees were dropped to $1.00 for a trial period to attract users. Nevertheless, driver reception remains tepid. Many complain that the one-way fee is too high to save only 20 minutes. Others object to paying a single fee no matter how far they drive on the road.

The state legislation authorizing the private tollway does not allow the state to bail out the Greenway. If it fails to make enough money to meet debt payment requirements the facility would revert to its largest creditors, three major insurance companies.

Unlike the Orange County tollroad, the Dulles Greenway extends a busy corridor rather than adding capacity in an already congested highway section. Whether growth will occur rapidly enough (Loudoun County is expected to grow by 55 percent over the next decade) to meet traffic projections is problematic. Its experience to date sounds a warning for other states evaluating private tollway options for highway construction.

The Dulles Toll Road Extension Plan: Route to Nowhere?

by Daniel Carlson, Research Consultant

Institute for Public Policy and Management, University of Washington

The Dulles Toll Road Extension (known locally as the "Greenway") connects the Dulles toll road and Dulles International Airport at the eastern end of Loudoun County with the city of Leesburg, 14.5 miles to the west. Leesburg is the county seat and largest municipality in the largely rural county of just over 100,000 population. The county is poised for the spread of metropolitan growth of the kind that created Tyson’s Corner, an "edge city" of 22 million square feet of office and retail space, and the new town of Reston, both in Fairfax County.

In 1993, Loudoun County formed a Toll Road Technical Committee comprising land owners, developers, real estate and environmental interests, and public agencies to develop a plan for land uses roughly 1.5 miles on either side of the toll road. The County Board of Supervisors hoped the plan would result in "encouraging concentrated, nodal development along the corridor; balancing this intense development with open space; ensuring the best economic use of the corridor; and planning for mass transit." The Technical Committee completed its work by the end of 1993 and the Board of Supervisors adopted the corridor plan in June 1995.

The plan designates nodes of high-density, mixed-use development around future rail transit stations and links land use densities to transit, while at the same time accommodating suburban developments, business parks, and "big box" retail centers. The 20-year projected growth for the 45-square-mile corridor would more than double the entire existing population of Loudoun County.

The corridor plan builds on an APA award-winning comprehensive plan, Choices and Changes: Loudoun County General Plan, adopted in 1991. The plan uses growth management principles to retain its rural character by concentrating growth in urban growth boundaries in which urban services will be provided and by establishing hamlet and village ordinances for rural areas.

The eastern portion of the county, generally the Dulles corridor area, is slated for urban and suburban growth. The county worked with property owners and developers to draw urban growth boundaries in conformance with existing property lines and approved projects. Nodes of intensive development are planned between the nine highway interchanges in the corridor to provide the critical mass needed to support bus and rail transit. Development in the nodes is capped at six du/acre for residential and .6 FAR for commercial uses when served only by roads. When served by express buses, residential densities double to 32 du/acre and commercial development may increase to 1 FAR. When rail transit is in place, residential densities can rise to 50 and non-residential FAR up to 2. Transit stops are to be located in the center of each node, within a seven-minute walking distance from the edge of the node.

At the interchange areas, the plan calls for automobile-oriented uses such as large shopping center and office development as well as some high-density housing, mixed uses, and business employment. A new zoning category called High Density Residential permits apartments and townhouse development at densities up to 24 du's/acre.

The western portion of the county, generally from Leesburg west of Route 15, is to remain, rural, small town, and agricultural. Creeks, watersheds, steep slope areas, and wildlife areas are identified and protected from development.

Modest levels of bus commuter service are provided by Loudoun County. Future rail transit is currently being studied under the auspices of the Washington Metropolitan Area Transit Authority and the Virginia Department of Rail and Public Transportation.

How the plan will be implemented remains in question. The plan is premised on the county sustaining two waves of growth, one traditional suburban development and the second more oriented to transit service. Achieving transit-oriented development is predicated on building transit lines first and then initiating the mix of uses around services and housing within walking distance to stations. The question is whether transit and pedestrian-oriented land uses can be fostered once auto-oriented sprawl establishes the predominant pattern of growth, occupying all the choice land near interchanges. While that future offers something for everyone, it is potentially the worst of something. Suburban sprawl mixed with transit-oriented development would seem to offend almost everyone.

Furthermore, there is no greenbelt buffer separating the corridor from the next suburban planning area. In the western, more rural part of the county, planners are relying on their exemplary hamlet and village ordinances to encourage traditional dense rural development around common areas and protect surrounding greenbelts in perpetuity through conservation easements. But outside villages and hamlets, the underlying county zoning allows one dwelling per three acres, hardly a reassurance that farmland and open areas will be protected.

At first blush, the Dulles Toll Road plan offers some exciting approaches to community economic development. Dulles Airport and the tollway are accurately seen as the infrastructure for economic growth. The economic recession of the past five years, however, has made counties at the edge of the metro area thirst for new commercial development. In addition, the low esteem in which public servants and government are held has weakened the county’s ability to negotiate powerfully with the developers connected to the Dulles Plan.

A third factor concerns the location of future rail facilities. Although the plan clearly states that nodes will develop around transit stations, cost constraints may force future rail stations to be developed in the median of the four-lane highway, hardly a pedestrian-oriented town square. Developers now believe that they would need to pay to bring a future rail alignment into their developments.

One wonders if anything has changed. Private investors, empowered by special state legislation, could find $500 million to build a road while the concept of building a rail line instead is dismissed out of hand for being much too expensive (although each would cost about the same. In land use terms, the difference would be a high likelihood of real TODs and an absence of big boxes at those new interchanges.

(This case study is part of a larger study funded by the Energy Foundation to look at examples of transportation corridor management in locales around the country. The report, tentatively titled "Transportation Corridor Management: Are We Linking Transportation and Land Use Yet?," will be completed this summer.)

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