Road Pricing as Innovative Finance An Assessment

1. Road Pricing as Innovative FinanceAn Assessment Genevieve Giuliano International Symposium on Road Pricing November 2003

2. Presentation Overview • What is innovative finance? • What explains changing perspective on finance? • Road pricing as innovative finance: some examples • Conclusions

3. 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

4. Innovation Continuum Private funds, ownership, mgmt PPP finance, build, operate Private Public/private finance partnerships (TIFIA) Leveraged debt (Garvees, SIBs) Funding Conventional debt (bonds, loan programs) Public Public funds, pay-as-you-go Public Private Ownership/mgmt

5. The Problem: California Capital Outlays (1998 dollars) Relative to Population Growth Source: Center for Continued Study of the California Economy (CCSCE)

6. More of the Problem: California Travel and Infrastructure Growth

7. Conventional 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

8. 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

9. A 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”

10. Bottom 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)

11. Risks and Project Feasibility(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

12. Big Dig ? The Risk Continuum Channel Tunnel £10B Alameda Corridor $2.4B NJ LRT $1.1B G. Bush Turnpike $700M Project Scale Dulles Greenway $350M AK I-state Rec. $360M Butler Highway $150M SR 91 $130M Extent of Innovation

13. Some Examples:Payoffs and Pitfalls AB 680 Projects Toll Roads AB 680 Projects Toll Roads

14. 1989 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

15. Observations on Project Outcomes

16. Observations, con’t

17. Examples 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.

20. Risk 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

21. Risk 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

22. Risk 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

23. Risk 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

24. Conclusions • 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

25. Conclusions, 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