| TOMMY WILLIAMS |
|
December 9, 2008
The Honorable John Carona, State Senator
State Capitol
Austin, Texas 78701
Re: Legislative Study Committee on Private Participation in Toll Projects (the "Committee")
Chairman Carona:
As the Author and Sponsor of SB792 which created the Legislative Study Committee on Private Participation in Toll Projects we would like to submit for inclusion in the report a few of our observations and comments.
We would like to express our appreciation to the Committee and staff for their hard work and diligence over the last several months. We have studied and analyzed the very complex issue of public-private partnerships and comprehensive development agreements in the financing and development of toll roads in Texas and heard many hours of testimony from expert witnesses on various aspects of project development.
The Committee was able to reach a general consensus on many topics, however, there was irreconcilable disagreement on some matters. We believe the debate was healthy, and everyone's hard work and diligence is greatly appreciated. This debate will need to be continued and the consequences of any actions fully considered as legislation is developed to create a long term sustainable transportation funding solution for the state during the 81st Legislative Session.
The Report does a good job of conveying the fundamental funding issues associated with improving and expanding our transportation infrastructure, as well as the problems associated with the State's existing market valuation process. We agree that conventional alternatives will not fully satisfy projected funding shortfalls and that private capital, together with the elimination of diversions, the possible indexing or raising of the motor fuels tax, transportation reinvestment zones, and various other alternatives are all important issues for the Legislature to evaluate and consider in the upcoming session.
The Report as submitted raises several areas of concern.
• The Report has an underlying tone that, because adjustments to the traditional system of transportation finance will not fully meet funding needs, they should be deemphasized. The only solution that is presented is that the state must embrace private finance to close the funding shortfall. We need to approach this problem from every angle, and these adjustments to the traditional methods should be considered seriously. If implemented correctly, they can be leveraged to secure additional funding. Private finance, appropriately designed for Texas, is only one financing tool and will not solve all the problems facing us in the decades to come.
• In certain instances the Report seems to include unsubstantiated criticisms and cites examples from outside Texas that are less relevant to the Texas P3 debate than recent experiences of our local toll agencies. In this respect, the Report has a broad criticism of public sector finance and contracting experiences that does not comport with the very successful experiences of established local toll entities. Local toll entities in Texas have a long track record of innovation, projects being completed on time and under budget, and the introduction of best practices to Texas. Recognition and appreciation of such experiences are instrumental to weighing the public benefits and viability of comprehensive development agreements as an alternative to established practices. Additionally, these successes should help us guide and structure emerging local toll entities so they too can build sustainable systems elsewhere in the state.
• In some instances the Report appears to overstate the advantages of private finance. The potential for over-leverage is not adequately described and assumptions about the possible benefits of private equity are not challenged, particularly where there may be overpayments.
• Risk shifting is a very complex issue, and the use of private capital in transportation finance may not necessarily result in an actual shifting of risk that truly benefits the public.
• Experience in Texas suggests that it is unfair to assume that public toll agencies are unduly influenced by political pressures to set toll rates too low. To the contrary, rates in many cases are adjusted to meet the challenges of an expanding toll system and are subject to an automatic increase mechanism indexed to cost of living increases. Additionally, had the Market Valuation process been implemented as the legislation describes as a way to set initial toll rates and increases over time rather than using a private concession model this would have further reduced these concerns.
• Moreover, we don't see private finance as necessarily creating "new" money. Whether in a public or private transaction, the feasibility of a toll project is fundamentally determined by net revenues, and the ultimate funding source is the users of the toll road system. Overly aggressive assumptions in P3 transactions and over-leveraged private projects that fail can result in the public sector being burdened by ill-conceived private financing.
• We express strong concerns and reservations with the statement in the Report that there is "broad agreement" that local primacy is unsatisfactory. The Report seems to confuse market valuation and primacy. We are all in agreement that market valuation as implemented has been unsatisfactory. However, primacy is a separate and distinct concept not necessarily related to how and when private finance should be used to best benefit the citizens of the state. We firmly believe primacy and the full range of tools granted to local toll authorities are important concepts that must be preserved and are outside the scope of the P3 debate.
• Finally, as to the recommendations in the Report, we note that the concept of the "Public Sector Comparator" is not adequately described or developed for a worthwhile assessment. Testimony about this issue was never evaluated during the hearing process and while it may be a potential solution, simplistic comments about its universal acceptability are inappropriate until more is known about this concept.
In closing, we would like to again thank the Committee and staff for their hard work. We believe the draft report is largely comprehensive and detailed. The wealth of information provided will be useful as we develop solutions that work for Texas. We offer up our concerns and comments included above in an effort to further the dialogue about the appropriate use of public-private partnerships as a tool for transportation development in Texas.