Faced with a fast-growing population, congested roads, and a limited budget, the Texas Department of Transportation (Texas DOT) has looked towards the PPP model to fund and expedite the design, construction, operation, and maintenance of new highways. Texas DOT and related state and regional highway authorities have embarked on ambitious plans to develop the road network with extensive private-sector involvement. Several of these projects, including the State Highway (SH) 130 project discussed below, have been implemented successfully. However, recent public concerns about tolling arrangements with the private sector and the political reaction to those concerns have cast a cloud over the future of PPPs in the Texas highway sector. The Texas experience to date with PPPs can serve as a valuable lesson for governments and private entities looking to work together on future highway projects.
The SH-130 project is a 91-mi toll highway that ex-tends from north of Georgetown to Sequin County. SH-130 is the largest element of the $3.6 billion Central Texas Turnpike System, which also includes SH-45 N and the Loop 1 Extension. Segments 1-4 of SH-130 were developed through an exclusive development agreement.50 Segments 5-6 were the first Texas high-way development under a comprehensive development agreement (CDA). The CDA provides for the design and construction of SH-130 by the private consortium and also gives Texas DOT the option of requiring the D/B firm to provide capital maintenance. Texas DOT is responsible for operating the toll facility.51
The SH-130 project does not involve any private financing (except for a $10 million subordinated note provided by the D/B firm to cover change orders) and is being funded with tax-exempt bond proceeds (including low-interest Bond Anticipation Notes that mature in 2007 and 2008), a TIFIA loan (which can be used to retire the Bond Anticipation Notes before principal and interest payment obligations kick in under the loan), and state and local monies. Texas DOT estimates that the entire Central Texas Turnpike System (including SH-130) will be completed 25 years sooner that it could have been under the traditional highway procurement approach as a result of the innovative PPP under the CDA and the innovative financing plan.
The entire first phase of the Central Texas Turnpike System is scheduled to be completed by the end of 2008. Three of the four segments of SH-130 already have opened for traffic, and the final segment was scheduled to open in 2008. The initial phases of SH-130 opened nearly 1 year ahead of schedule and more than $400 million under budget. Prior to the execution of the CDA, Texas DOT performed due diligence activities (including traffic and revenue studies, surveys, and geotechnical investigations) and obtained NEPA environmental approval. The D/B company also performed limited de-sign and right-of-way acquisition activities prior to the financial close by Texas DOT. Texas DOT paid for these prefinancing costs and was reimbursed from the financing proceeds. 52
Under Texas law, a CDA is a project delivery tool that Texas DOT or a Regional Mobility Authority53 can use to enter into an agreement with the private sector to design, construct, rehabilitate, expand, and improve certain qualifying transportation facilities including toll roads. A CDA also can be used to arrange for private-sector financing, right-of-way acquisition, and maintenance and operation of a qualifying transportation facility. The SH-130 project involved a D/B CDA, which Texas DOT believes is appropriate for "well-defined" projects where environmental activities are complete, major regulatory approvals are in place, right-of-way acquisition is underway, the financial plan is finalized, and funding will be provided by public funds including toll revenue bonds.54
The D/B CDA used for the SH-130 project enabled Texas DOT to shift the risk of design and construction from taxpayers to a private-sector firm. The potential benefits of this approach include greater price certainty and a guaranteed delivery date. By allowing many de-sign and construction activities to occur concurrently, a D/B CDA can be completed faster and at lower cost than a traditional design-bid-build procurement. By all indications, the completed work on the SH-130 project has come in under budget and ahead of schedule.
The relatively defined scope of the SH-130 project can be contrasted with the visionary scope of the Trans-Texas Corridor initiative. The Trans-Texas Corridor (sometimes referred to as the "TTC") is a massive infrastructure plan covering 4,000 mi of multimodal "super corridors" that would contain toll roads, high-speed freight and commuter rail operations, and various utility lines running in the same 1,200-ft-wide corridors. The conceptual financial plan calls for tolls and other user fees to generate sufficient revenues to finance the construction and operation of these multimodal corridors. The total cost of the TTC project has been estimated to be approximately $185 billion.
According to Texas DOT, the amount of vehicle miles driven on Texas roads has skyrocketed by 103 percent since 1980, but as of January 2008, total road capacity for the same period had increased less than 8 percent.55
Texas DOT, still in the early planning and development phase for the TTC, has focused on the possibility of using a variety of PPP structures for the development, planning, financing, design, construction, and maintenance of this ambitious plan.56 The master plan for the construction and operation of the TTC calls for a close relationship between the state government and the private sector, and the state has developed an umbrella CDA framework to guide such long-term partnerships.
While Texas DOT expects the ultimate construction and completion of the TTC to take place over a 50-year period as routes are phased in based on need, Texas DOT has prioritized the early construction of TTC-35, a new toll highway that would extend between Oklahoma and Mexico, as the first segment of the larger project. In March 2005, Texas signed a CDA for the development of TTC-35 with a consortium of private companies led by Spain's Cintra and San Antonio's Zachry Construction Company (Cintra-Zachry).57 The CDA is a predevelopment agreement pursuant to which Cintra-Zachry agreed to develop preliminary concept and financing plans for TTC-35 in exchange for $3.5 million.
The CDA required the production of a master development and financial plan from the Cintra-Zachry consortium, which was submitted to Texas DOT in September 2006.58 The plan identifies specific transportation facilities within the TTC-35 corridor that could be developed in the near term (2005-2010), mid term (2010-2025), and long term (after 2025). The plan also provides an overall project schedule and financing plan for those facilities. Cintra-Zachry concluded that seven primary toll road segments could be developed in the near term through a DBFOM arrangement based on a concession payment of approximately $2.4 billion to the State of Texas.
The CDA gives Cintra-Zachry a "right of first negotiation" to be the developer of certain facilities that it identified in the development plan. In other words, with Texas DOT approval, Cintra-Zachry can elect to finance, plan, design, construct, maintain, or operate any of the toll road segments that it determines would be viable once environmental approvals are received.59 Under the CDA, Texas DOT retains the option to seek competitive bids from other developers on any TTC-35 facilities. The CDA also provides that a variety of project delivery structures can be employed in developing the facilities, including design-bid-build, D/B, DBOM, and the DBFOM concession.
While Texas DOT has moved quickly to engage the private sector in the construction and operation of highways throughout the state, recent action by the Texas state legislature threatens to curtail the process.60 In June 2007, the Texas legislature, emboldened by constituent concern about excessive tolls, the destruction of farmland, and the transfer of public assets to foreign corporations, passed Senate Bill 792, calling for a 2-year moratorium on future highway PPPs.61 Senate Bill 792 also calls for local toll authorities, rather than private corporations, to have the first opportunity to bid on projects in their regions.62
Texas also has faced recent problems outside the Texas state legislature with highway-sector PPPs. In February 2007, Cintra signed a 50-year concession agreement with the State of Texas to invest $5 million in developing a 26-mi segment of SH-121 north of Dallas, Texas.63 The agreement called for Texas to receive an up-front payment of $2.8 billion from Cintra in exchange for the rights to collect toll revenue on SH-121.64 However, in June 2007 the North Texas Regional Transportation Council and the Texas Transportation Commission reversed their previous decision and transferred the project from Cintra to the North Texas Tollway Authority (NTTA), an existing state tollway au-thority.65 Local politicians hoping to prevent private foreign corporations from obtaining control over public highways and the establishment of toll rates on those highways explained the reversal by pointing to the aforementioned Senate Bill 792 and its provisions encouraging public investment in the highway sector.66
In response to the SH-121 development, FHWA, in a letter sent to Texas DOT on August 16, 2007, concluded that Texas DOT violated FHWA regulations67 that re-quire a "fair and open competitive process" and also violated FHWA regulations68 that specifically prohibit a public entity from bidding directly against a private entity. Recognizing that the NTTA had no current plans
to use federal funds for the development of SH-121, FHWA imposed other "compliance measures" against Texas DOT, including the withdrawal of its February 2006 SEP-15 waiver, the withdrawal of prior approval for TIFIA financing and authority to issue private activity bonds, and the requirement that Texas DOT reimburse FHWA for all expenses incurred in evaluating a proposed TIFIA loan to Cintra on the SH-121 project. The FHWA letter strongly implies that these compliance measures will not be imposed if Texas DOT com-plies with federal law by exercising the options of either canceling the Cintra bid award and going with NTTA or just canceling all and starting over.69
The recent experience in Texas with highway-sector PPPs shows the importance of local political support and public education about the potential benefits of different arrangements involving the private sector. Texas DOT was criticized for its quick approval of the TTC corridor plan in 2002 with limited public input. Texas DOT also resisted requests for more transparency on its agreement with Cintra-Zachry until the Texas Attorney General's Office ruled that the entire CDA had to be released to the public.70 These initial actions may have fostered the growing suspicion about whether Texas DOT's embrace of private-sector involvement in highway development is beneficial for the public. In 5 years, Texas moved from the forefront of those states using highway-sector PPPs to a much less receptive environment due to the backlash from the public and local politicians.71
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50 Texas House Bill 3588, 78th Legislature, Regular Session,2003, amended Transportation Code, ch. 361, by amending §§361.302-361.306 and adding §§ 361.3021-361.3024 to amend the requirements and procedures for entering into comprehensive development agreements for department turnpike projects. The amendments to Chapter 361 change the name "exclusivke development agreement" to "comprehensive development agreement" and prescribe a detailed process for entering into comprehensive development agreements. The amendments to §§ 27.1-27.5 implement this process and other requirements of House Bill 3588, and establish a competitive process for selecting the proposal for a turnpike project that offers the best value to the department. 28 Tex. Regs. 8005.
51 See testimony of Phil Russell, Assistant Executive Director of Innovative Project Development, Texas Department of Transportation, before the Texas State Senate, July 22, 2008, Comprehensive Development Agreements: SH-130 (Segments 5 and 6), available at http://www.senate.state.tx.us/75r/senate/commit/c820/handout s08/072208/Phil_Russell.pdf.
52 For more detailed information on the SH-130 project, see FHWA Case Study: Texas State Highway 130, available at http://www.fhwa.dot.gov/ppp/sh130.htm.
53 A Regional Mobility Authority (RMA) is a political subdivision formed under Texas law by one or more counties to finance, acquire, design, construct, operate, maintain, expand, or extend transportation projects.
54 Texas Dep't of Transp., TxDOT: Open for Business-Comprehensive Development Agreements (2006).
55 Doug Woodall, Texas Department of Transportation,Trans-Texas Corridor and Public-Private Partnerships for the21st Century, presented at AASHTO Standing Committee on Quality workshop, Apr. 3-6, 2006, available at http://www.transportation.org/sites/quality/docs/TransTexas.pdf.
56 Texas Dep't of Transp., Strategic Plan for 2007-2011 (2006), available at http://www.keeptexasmoving.com/var/files/File/strategic_plan2 007.pdf.
57 See TxDOT's First Toll Concession-Cintra-Zachry to Build 64 Km More of TX130 Worth $1.3b, Tollroad News,posted June 27, 2006, available at http://www.tollroadsnews.com/node/3432.
58 Id.
59 As part of its conceptual proposal during the CDA bid process, Cintra-Zachry offered to provide $6.0 billion in private investment to design, construct, and operate a four-lane, 316-mi toll road between Dallas and San Antonio for up to 50 year sas part of the initial segment of TTC-35. In exchange for these concession rights, Cintra-Zachry offered to pay the State of Texas $1.2 billion that the state could use to fund road improvements or rail projects within the TTC-35 corridor or the adjacent I-35 corridor. See N.Y. State Dep't of Transportation, 10 Transportation Development Partnerships: Tools for Innovative Transportation Operations and Finance (2006).
60 Patrick Driscoll, Perry's Office Sees No Toll Moratorium At All, San Antonio Express-News, June 3, 2007.
61 Id.
62 Richard Williamson, NTTA Takes $5 Billion Tollway from Cintra, The Bond Buyer, June 19, 2007.
63 Cintra Bets $2.8bn on SH 121 Toll Concession in Dallas, 213 Public Works Financing 1 (Feb. 2007).
64 Id.
65 Williamson, supra note 36.
66 Id.
67 23 C.F.R. § 636.103.
68 23 C.F.R. § 635.112(e).
69 See Letter from FHWA Administrator J. Richard Capka to Texas Department of Transportation Executive Director Michael Behrens (Aug. 16, 2007).
70 A copy of the CDA is available on the Trans Texas Corridor project Web site at http://www.keeptexasmoving.com.
71 Texas PPP enabling legislation can be found at Tex.Transp. Code Ann. ch. 227, http://tlo2.tlc.state.tx.us/statutes/docs/TN/content/pdf/tn.006.00 .000227.00.pdf; Tex. Transp. Code Ann. ch. 366, http://tlo2.tlc.state.tx.us/statutes/docs/TN/content/pdf/tn.006.00 .000366.00.pdf; and Tex. Transp. Code Ann. ch. 370, http://tlo2.tlc.state.tx.us/statutes/docs/TN/content/pdf/tn.006.00 .000370.00.pdf.