The hidden costs of road privatization
By Melissa Cubria, Advocate, Texas Public Interest Research Group
“When infrastructure is privatized (or corporatized), the decisions about its size, shape and placement are driven by market demand. The private partners are interested in elements of infrastructure that can yield the longest and strongest streams of privately capturable revenue not the ones that yield the largest public benefits.”
A WORRISOME TREND
It is easy to see why many states are turning to infrastructure privatization in order to repair, build, modernize, and operate highways and other infrastructure. Cash-strapped states and cities are drawn by up-front payments or other ways to move costs “off budget,” such as shifting to private user fees rather than taxes to address their budget deficits. They may also see privatization as a way to shift future financial risks to private contractors.
In Texas, proposals for private toll roads have come under much criticism, prompting heated debates with most public attention paid to soaring toll rates, seizures of ranch land through eminent domain, and concerns about foreign corporations owning vital Texas roads. Largely neglected from these debates has been a discussion about the long-term effects of standard provisions of privatization contracts. The common terms of road privatization deals restrict the public’s ability to act on its own behalf, force the state to pay privatization companies when those companies claim they would have reaped more revenue if not for state actions, and reduce the public’s right to know information about how public functions are performed and how public dollars are spent.
Eliminating competition would seem to undermine a basic argument for privatized roads that ongoing choice between competing products in the free market will spur better performance and reduce costs. However, investors in a particular privatization project are looking for profit, not competition. They seek to avoid competition, especially if the project will last for many years, because the threat of competition makes their future revenues less certain. For that reason, investors often demand “non-compete clauses” which, for instance, can restrict the public’s ability to build or upgrade transportation infrastructure near existing private roadways if the state’s structure will compete with the toll revenue on the existing private toll road.
The fact that in Texas private toll road contracts last as long as 52 years means that they create a state-sanctioned monopoly rather than competition among private companies. Private investors additionally seek to use non-compete clauses to eliminate potential competition from the public sector. For example, the contract for SH 130 Segments 5 & 6 in Central Texas includes a non-compete provision that requires that the Texas Department of Transportation (TxDOT) pay Cintra-Zachry for lost profits if state projects reduce toll traffic, such as from the widening or construction of competing roads.
As a result of concerns about these provisions, Texas lawmakers prompted state officials to hold hearings and convene legislative study groups to study private participation in toll roads. In 2008, a report by the Texas Legislative Study Committee on Private Participation in Toll Contracts subsequently explained that non-compete clauses help ensure that private toll road developers will generate a profit on their investments. If such a provision were not included, it explains, the state could easily build a free, competing roadway that would divert traffic from the private toll road and thus decrease the amount of toll revenue collected by the private entity.
Texas lawmakers in 2007 revoked the state’s ability to enter into private toll road deals though several projects already in the works were exempt from what is known as the “moratorium bill” (SB 792). A partial ban on non-compete clauses was also included in the moratorium legislation, along with several other provisions governing the terms of the deals. Unfortunately, the partial ban on non-compete provisions did not adequately protect the public since Texas lawmakers allowed compensation clauses to remain in road privatization contracts.
COMPENSATION PROVISIONS & ADVERSE ACTIONS
Rather than outright forbidding the public from promoting competition, road privatization contracts in Texas can instead stipulate that the public must pay steep compensation for the company’s loss of profits. According to contractual provisions in the CDA for the North Tarrant Express, competing transportation facilities may be built at any time by anyone including TxDOT. However, TxDOT must compensate NTE Mobility Partners if the state builds additional lanes within the right of way of the project that reduce the private partner’s revenues or increase their costs. This compensation would add significantly to the cost of construction, limiting funds for other public projects. As an added cost, the exact level of these future payments may be subject to dispute and lawsuits.
Private infrastructure firms protect their profits and limit their exposure to risk by designating a wide range of state actions as potential “adverse actions,” for which they can claim to deserve compensation from the state. The contract for the now bankrupt San Diego South Bay Expressway, gives the private contractor the right to compensation if the state legislature, CalTrans, any administrative body, or voters create a law in any form that leads to acquiring part of the road, negatively affects the private contractor’s rights, or regulates or interferes with its ability to collect tolls. It is also entitled to compensation if any of those results are caused by a court order, decree, or judgment.
These clauses are particularly attractive for investors when long periods of time are needed to recoup costs and become commercially viable. It is understandable why an investor entering into a multi-decade contract with a government would want to limit the state’s power to alter the terms of the agreement or existing opportunities for making a profit by using its powers to legislate or adjudicate. However, these provisions effectively grant private firms governmental powers without adequate levels of public scrutiny or accountability to voters. They elevate private contractors to a quasi-governmental status, giving them power over new laws, judicial decisions, propositions voted on by the public, and other government actions that a contractor claims will affect toll roads and revenues through the life of the contract.
Many compensation events would otherwise be normal governmental functions intended to advance the public’s interests through upkeep of infrastructure or public safety needs. Examples include, inspecting the quality of the roadbed or responding to emergencies. Compensation clauses force officials to view decisions related to these types of situations, which have a direct impact on the public interest, through the lens of what might impair a private operator’s profits. Public officials must consider the contractual constraints much the way an injured person should check their provider health care contract before seeking medical action. Even basic maintenance can create situations under which a government entity owes compensation to private contractors.
The complex legal analysis required to interpret compensation clauses produces an additional burden on state and local governments. Contracts can run more than a thousand pages largely because companies stipulate so many ways to insulate themselves against the risks of other public actions. The contract for SH 130 Segments 5 and 6 is more than 1100 pages long. The contract for just the first 3 segments of the North Tarrant Express, a 13-mile project in the Dallas-Fort Worth metroplex, is more than 600 pages long. Many of the terms have special meanings that require referring to the contract’s lengthy definition section. Such is the prevailing practice, and as “legal terms of art they are also highly subjective concepts. Thus, contract terms that are included to provide the contractor with certainty that it will receive its anticipated revenue create new uncertainties for the government and the public."
As an added complication, the exact level of these future payments might be subject to dispute and lawsuits. To avoid being completely at the private operator’s mercy, the state must hire additional accountants and lawyers to defend the public purse from these claims.
An odd variant of the compensation clause provides incentives to the government, but in ways which are not necessarily good for the public. For example, some privatization deals include monetary incentives for the state to divert traffic to toll roads or decrease safety standards in an effort to boost profits. The Texas contract with a consortium led by Cintra for SH-130 Segments 5 and 6 contains “revenue-sharing provisions” that provide incentives for officials to raise the speed limit on the private road. For example, TxDOT would get an extra $67 million if the speed limit were 80 mph. If the state raises the speed limit to 85 mph, that premium rises to $100 million.
The logic is that a faster speed limit will draw more toll-paying drivers to the road and thus increase Cintra's revenue.
LACK OF TRANSPARENCY
Given the profound implications of road privatization, no deal should be approved if the public lacks meaningful opportunities to review, question and comment upon it. Public transparency helps check that private and political interests do not enrich themselves at public expense and that proper procedures are followed. The public needs to have both raw information and also analysis written in language they can understand about the value of a proposed contract, which depends on forecasts for income, expenses, and other factors. Transparency should continue even after a deal is signed to show how much toll and other revenue a company receives, how much it is investing in future repairs, and how much is being charged for compensation events.
Texas legislation does not require transparency in private toll road projects, such as making proposals available to affected communities in an understandable manner. Despite the fact that private road contracts can last 52 years, there is no way for the public or even most state officials in Texas to verify, review or comment on the revenue predictions in order to ensure the public is getting a good deal. In fact, Texas law stipulates that many important terms of private toll road contracts such as revenue predictions may not be released to the public until after the contract has been finalized and the public has been locked into the deal. The state’s refusal to provide information has typically been justified on the basis that private road builders and operators regard their own analysis and proposals as “proprietary” business secrets The public’s interest in preventing a bad deal and bad implementation of a deal should trump the interest to retain these proprietary secrets.
In 2011, during the 82nd Legislative session, lawmakers pushed through a number of road privatization projects by adding them to a long, complex bill. This process discouraged public debate over traditionally controversial legislation and enabled some lawmakers to pass contentious transportation policies without much scrutiny. Furthermore, key lawmakers misrepresented the deals to their constituents, to the public at large and to their colleagues. Cloaked in the guise of local options for districts and counties facing transportation shortfalls and stagnate revenues, the private toll road projects authorized in bills passed during the 82nd Legislative session were nothing more than the same taxpayer-backed schemes that all Texans will subsidize and many Texans have protest for the past decade. As a result, the taxpayers of Texas will be saddled with billions of dollars of debt, which they will pay off through rising tolls for half a century, tolls that are not collected for public use or future reinvestment into the state's infrastructure needs.
Excluding the public from negotiations makes it easier for the process to become dictated by the interests of private contractors. Public officials representing the citizens of Texas in these negotiations may be more concerned with simply sealing the deal than whether or not the deal is in the best interest of Texas‟ taxpayers. After all, many of the problems that will emerge from a bad deal will not occur for many years, at which point the officials involved in the original negotiations may no longer serve in the public sector and the many long-term consequences the public will find themselves burdened by will never be traced to their failings. Public officials can only effectively demand adequate information and negotiate successfully on the public’s behalf if rules mandate that information must be publicly disclosed and the negotiation process is structured to serve the citizens.
Transportation policy should be made according to what is best for the public not conditioned by specific corporate interests. Non-compete clauses and adverse action events in privatization agreements give private contractors power over decisions that affect the public interest and are normally made by public officials and subject to oversight, disclosure, and accountability—none of which apply to private contractors. Although public officials approving these agreements may seek to develop new transportation assets that will serve the public, private toll road contracts instead tend to hinder the state’s responsiveness to the needs of the public. These agreements can constrain the state’s options for addressing critical infrastructure problems and public needs for generations.
State and local governments must weigh the numerous long-term risks of bad road privatization deals against the potential upsides. Texas officials must ensure that the needs of the citizens of Texas come before the needs of any other special interest or investment entity. They must insist on the strongest possible public protections to protect public assets, ensure that transportation policy remains in the hands of the public and negotiate all privatization deals with the utmost transparency. Once the public has been given full information and the opportunity to weigh in, state officials must move to engage in truly open and honest dialogue about the long-term effects of privatization deals before leaving the consequences to their grandchildren.
 Elliott D. Sclar, “The Political-Economics of Private Infrastructure Finance: The New Sub Prime,” Paper Prepared for Annual Meeting Association of Collegiate Schools of Planning, Crystal City, VA: 2009.
 Report of the Legislative Study Committee on Private Participation in Toll Projects, December 2008, available at http://www.senate.state.tx.us/75r/senate/commit/c820/SB792Report.pdf.
 See Senate Bill 792, Sec. 371.103. PROHIBITION AGAINST LIMITING OR PROHIBITING CONSTRUCTION OF TRANSPORTATION PROJECTS.
 Maribel P. Chavez, P.E., Public Hearing Presentation by NTE Partners, 17 April 2009, available at ftp://ftp.dot.state.tx.us/pub/txdot-info/ftw/nte_presentation.pdf.
 Steve Schmidt, “Toll Road Operator Files for Chapter 11 - South Bay Expressway Use below Forecast,” San Diego Union-Tribune, 23 March 2010.
 Fed. Highway Admin., Agreement Review: South Bay Expressway (SR 125), Sept. 2005, available at http://www.fhwa.dot.gov/ipd/p3/agreements/sr125.htm. Quoted in Ellen Dannin, “Crumbling Infrastructure, Crumbling Democracy: Infrastructure Privatization Contracts and Their Effects on State and Local Governance,” Northwestern Journal of Law and Social Policy 6, no. 1 (Winter 2011)(6 Nw. J.L. & Soc. Policy 47): note 98 at 58.
 Dannin, supra, at 65.
 See Comprehensive Development Agreement for SH 130 Segments 5 & 6, available at http://www.txdot.gov/business/partnerships/sh_130.htm.
 Dannin, supra, at 24. Referencing Pennsylvania Turnpike Contract Definition § 6 (2008).
 11 Ben Wear, “Flap over speed limits in Trans Texas Corridor Repeal,” Austin American-Statesman, 17 April 2011.
 Dannin, supra, abstract.