COLUMN ONE : Firms See Profit in Toll Roads : At a time when governments are having trouble finding money for highways, some private businesses have offered to build them.
With classic American entrepreneurial spirit, some daring businessmen are trying to turn a longstanding problem into a gold mine--or, more precisely, to convert vexing traffic jams into money-making toll roads.
Private concerns are organizing across the nation to do what only governments have traditionally done: build roads. And what’s more, they think they can make it pay.
“Traffic congestion problems are a business opportunity for us,” said Ralph Stanley, chief executive of Toll Road Corp. of Virginia. “We’re exploring the possibility of doing this nationwide.”
The need is enormous. Government officials estimate that whereas the nation should spend about $101 billion a year for highway repairs and construction, it is actually mustering only about $66 billion. The federal interstate highway system is buckling for want of reconstructive surgery, and about one-third of the nation’s bridges have been determined by federal officials to be structurally deficient.
On top of that, the emergence of suburban employment centers is increasingly displacing city jobs, redirecting traffic away from existing expressways and clogging inadequate rural roads. An increasing number of commuters need access from suburb to suburb and have no use for freeways and transit systems that radiate from center cities.
The deficit-bound federal government has backed away from subsidies for urban transit and highway construction. State legislatures frequently cannot afford to take up the slack. So state transportation officials, who once viewed highway construction as their province alone, are increasingly willing to yield some of their duties to private entrepreneurs.
“Where else do we go?” asked Carl B. Williams, assistant director of the California Department of Transportation. “We’ve finally realized there is a limit to the public’s coffers. . . . Private money is abundant, if you allow them to make a profit.”
But there are problems. Wall Street has yet to be fully convinced that permitting private firms to build such toll roads makes economic good sense. Most Wall Street firms are waiting to see if the nation’s earliest private road projects, including four in California and more fully developed proposals in Denver and from Chicago to Kansas City, make money.
One imponderable, say big-money investors, is whether toll-based revenues would be adequate to cover the construction and operating costs of the roads, not to mention the costs of insurance to cover injuries on the tollways.
Then there is the uncertainty that tollway builders would be able to buy all the land they need at a price they could afford. Unlike governmental units, private developers have no power to condemn land for public purposes. State legislatures could provide such authority, but so far none has.
It is for such reasons that private toll roads have not been common since the last century, when local, state and federal officials encouraged them as a way to open the nation’s Western frontier. The idea fell out of favor in the 20th Century as the public grew to consider the roadways in the same category as sewer service and fire departments--a social necessity to be provided by government.
In 1956, President Dwight D. Eisenhower sold Congress on a 43,000-mile interstate highway network as a civilian and military necessity. The roads were called freeways--toll-free transportation provided by taxpayer money.
Today, as the 1992 completion of the interstate system draws near, the earliest segments of those highways desperately need repair and improvement. The federal government says it does not have the money to repair its roads and is encouraging state officials to find alternative sources of funds.
Steve Lockwood, associate administrator for policy at the Federal Highway Administration, said the federal share of highway transportation spending had fallen from 27% in 1977 to 23% in 1987. “We’re looking at restructuring the roles of the public sector and private sector in providing transportation systems,” he said.
That is already happening in Virginia.
Stanley’s Toll Road Corp. of Virginia expects to break ground in the spring on a 16-mile road from Dulles Airport, which serves Washington, D.C., to Leesburg, the county seat of Loudoun County, which is largely rural now but is a likely target of Washington’s suburban expansion.
In exchange for assuming the $155-million cost, Stanley, who was head of the federal Urban Mass Transportation Administration under former President Ronald Reagan, demands the right to charge a toll of $1 to $2--the exact amount would be regulated by the state--for highway access.
Stanley’s Virginia toll road, which won the Commonwealth Transportation Board’s unanimous approval last summer, is perhaps the nation’s best-known and most advanced private roadway project. It is the first private toll road authorized in the state since 1816, and it will be the nation’s longest private toll road.
Stanley’s plans for building and operating toll roads and bridges extend nationwide.
“Right now, we’re the only incorporated company that is doing this,” he said. “We want to do this in Virginia first to prove how we can get it done. There’s a gap that has to be filled by someone.”
California has already opened the way to private highways. A law enacted earlier this year allows private companies to build four demonstration tollways, including at least one in the southern part of the state and one in the north. These roads, unlike the three state-financed toll roads under development in Orange County, will be built solely with private money.
Williams, the Caltrans official, said more than 450 companies worldwide had expressed an interest in the four roads. “That’s a hell of a good indication that (private business) thinks this is a good idea to pursue,” Williams said.
He expects some 30 to 40 firms to develop consortiums capable of doing the work and about 15 to 20 of those to spend “several hundred thousands of dollars to make a proposal.” He estimates that the ultimate investment in the four roads will be $2 billion to $4 billion.
Williams predicts that ground breaking on the first of the California projects will take place in early 1991. “I don’t know that Virginia will be first,” he said. “It’s possible we could get started just as soon as they do.”
California and Virginia are not alone. In Colorado, Front Range Toll Road Co. of Denver is thinking about building a $1.3-billion, 210-mile corridor from Pueblo just east of Denver to Ft. Collins. It would connect at both ends to Interstate 25 and relieve some of that freeway’s burden.
“We didn’t start out to be in the highway business,” said Ray S. Wells, the company’s president. “We were just responding to a need that the state couldn’t afford.”
Wells envisions not only a four-lane highway but also a double-track railway for coal cars, a water conduit and rights of way for high-tension power lines, underground cables and natural gas lines.
“This will be a genuine transportation corridor,” Wells said. “We are looking at transporting not only traffic but information and services.”
In Illinois and Missouri, state transportation departments are eagerly awaiting a feasibility study for a privately financed 450-mile, $2.5-billion tollway between Chicago and Kansas City. Other public-private toll ideas are in various stages of development in Dallas, Houston, Miami and at least nine other cities or states.
“The roads are going to get built,” said Bill Allen, vice president at Parsons Brinckerhoff, the nation’s largest highway engineering firm. “There is a need, and throughout the history of this country, needs get filled. If the government doesn’t fill it, then the private sector will find a way to get it done.”
In Florida, Chun King founder Jeno F. Paulucci wants to build and operate a 97-mile beltway around Orlando. In a letter to Orlando Mayor Bill Frederick seeking political support for the project, Paulucci complained that “partisan political maneuvering and game playing” at the state level had left Florida with “inadequate highways.”
“We can have our beltway on a basis of doing what has been done for years in Europe--let the private sector finance and build it and collect from users and not the general public,” Paulucci said.
But Wall Street is cautious. The tollway from here to Dulles Airport found private investor money as soon as it was proposed. But many other ideas are stalled on developers’ drawing boards.
Wells said his company has completed preliminary feasibility studies for the Front Range Tollway in Colorado and has been negotiating for nearly a year to complete the financing.
“One of our first problems has been to convince investors that the project is possible,” Wells said. “They are cautious, wanting second and third and fourth opinions. There is interest, but they are very cautious.”
For projects as costly as Wells’ tollway, tolls alone probably could not yield a sufficient profit on investment. So proponents are looking at ways to capture dollars created by the inevitable development that would spring up along their highways. Highway builders say they can generate additional revenues by leasing roadside space for gas stations, restaurants and motels.
“Depending on just tolls is a very bad scheme in some cases,” Williams said. “For a businessman to get a profit, sometimes they must add value-capturing revenue structures.”
And in some cases, businesses are considering schemes to build a highway or bridge, give it to the state and then lease it back to collect the tolls and provide maintenance. Such arrangements would allow the private builders to escape the enormous insurance costs associated with owning a highway or bridge.
Steven Steckler, a senior consultant with Price Waterhouse in Washington, said the proposed toll road through Illinois and Missouri is unlikely without some form of government assistance.
“The Chicago-to-Kansas City road would go through largely rural areas,” he said. “There are a number of routes and competing roads to get from one point to another. The developer would have a tremendous time getting rights of way for such a distance. And at what cost? Would truckers pay to save time by using that route or take a competing route for free?”
Steckler is worried more than anything else about the potential risk to investors. “Because they’re new projects, there’s a lot of uncertainty,” he said. “Wall Street is unaccustomed to dealing with that level of uncertainty.”
Frank McDonough, vice president at Goldman Sachs, investment banker to the projects in Virginia and in Illinois and Missouri, agreed that private toll roads are risky. “But that’s because it’s never been done before on this scale,” he said.
As in Virginia, the suburbs seem to be the likeliest targets for the first private tollways, not only because existing highways frequently are inadequate but because such areas generally are wealthy.
“Private toll roads are going to do better in affluent areas,” said Allen, the highway engineer. “In suburban Virginia, people are willing to pay anything to get out of traffic.”
Lockwood, the federal highway official, expects private tollways to spawn a whole new technology, including credit card-sized transmitters that monitor drivers’ access and allow them to pay for right of way by writing a monthly check. The transmitters, which could be attached to drivers’ windshields and read by radio waves as the drivers pass a checkpoint, would prevent the stop-and-pay toll booths that slow traffic and anger drivers. Lockwood also looks for roads embedded with computer-chips that interact with a car’s on-board computer system to warn the driver of traffic or road conditions ahead.
“We have been living with the same type of highway system for 50 years,” Lockwood said. “As private businesses get involved, we may be on the edge of a time when there will be great change.”
