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Availability-Pay Concessions vs. Toll Concessions

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The popularity of long-term highway projects procured as availability-payment concessions, rather than traditional toll concessions, has been increasing over the last year. At the ninth annual InfraAmericas US P3 Infrastructure Forum in New York in June, several speakers noted the trend. Peter Allison of InfraAmericas was quoted in a long article (by the Council of State Governments) as saying that “our estimate is that availability deals could move from funding for a third of the market . . . to two-thirds in future deals.” In the highway sector, at least, I hope that prediction is not borne out, for several reasons.

First, let’s make clear the differences among the several different types of long-term concessions. The model used for highways by most countries (France, Italy, Spain, Australia, Brazil, Chile, etc.) is the long-term toll concession. The winning consortium, based on a detailed concession agreement, goes into the capital markets to finance the deal, raising the entire construction cost up front, with the revenues to service the debt and (they hope) to provide a return on their equity investment coming from tolls that the company charges to customers of the project.

By contrast, a pure availability-payment concession is structured very similarly in terms of the long-term agreement, but the financing raised by the company is based on a schedule of annual payments to be made by the public-sector partner over the N years of the concession. This is the model used for the Port of Miami Tunnel project, where for policy reasons, the sponsoring governments judged charging tolls to be counter-productive to its objectives of getting heavy trucks to use the tunnel instead of local streets. This model has also been used in the U.K. where the government thought they had no political support for tolling, and for some highway projects in Spain, Portugal, and Germany.

A hybrid model includes tolls as at least part of the funding mechanism, but has the government as the toll collector, while compensating the concession company via annual availability payments. This is the model adopted for the I-595 reconstruction project in Florida, where only the three new reversible express lanes are being tolled, but the project cost includes rebuilding the entire freeway. It’s also the model Indiana adopted for the new tolled East End Crossing of the Ohio River.

In terms of benefits, all three of these models shift the risks of construction cost overruns and of late completion to the concession company, and they also put the responsibility for maintenance on the company. In the case of the hybrid model, tolls provide a new revenue stream to pay for at least part of the project cost, but the government takes on the traffic and revenue risk. Whether it is prudent for taxpayers, as opposed to sophisticated investors, to take that risk is a key question.

Some of those in the construction industry who are championing the availability-pay approach argue that very few companies are willing or able to take on traffic and revenue risk. I think that’s an exaggeration, with some evidence to the contrary from Texas. In three recent RFQs for major highway projects in Texas last year and this, the question of using the toll concession model was left open. For the Grand Parkway in Houston, five consortia said they would be interested in doing it as a toll concession, versus seven proposing a simple design-build approach. For I-35E in Dallas, four proposed using a toll concession versus five favoring design-build. And for SH 183, announced as a toll concession, there was only one interested bidder—which may well suggest that the traffic and revenue potential does not lend this project to the toll-financed model.

I am generally opposed to the pure availability-pay approach for highway projects, except for those rare cases (like the Miami tunnel project) where a real policy reason argues against tolling. In most cases, limited-access projects represent premium capacity that responsible governments cannot prudently go into debt for (which is what a pure availability-pay agreement amounts to). The larger a government’s use of AP concessions, the larger the set of long-term liabilities it builds up. And that is the opposite of what state governments, already burdened with massive unfunded pension liabilities, should be doing.

Portugal’s large commitment to AP-concessioned highway projects is being painfully unwound, as that government digs its way out of fiscal disaster. Those concessions are in the process of being converted to toll concessions, in which the users, rather than taxpayers, will pay the costs.

I’m less concerned about the hybrid model, which is what a number of recent concession projects are following, including Florida’s I-4 express toll lanes and several projects in Texas (if TxDOT can gain legal authority to do this type of concession). The greatest single problem in highway infrastructure today is lack of sufficient funding, so tolling should be an integral part of just about every limited-access project from now on.

For those projects, like SH 183 in Dallas that are unlikely to generate enough toll revenue to fully pay for the project, the alternative to the hybrid model is for the state to buy down the amount that must be financed based on toll revenue. In effect, the state would invest equity in the project alongside the private sector, with both parties hoping to earn equity returns on their investments after bondholders get their returns. That way, the concession company would be the party running the road as a business, and establishing the customer-provider relationships that a highway business ought to have. The state would be taking far less traffic and revenue risk in that model, compared with taking 100% of it in the typical hybrid model being advanced these days.

(This article first ran in Surface Transportation Innovations)

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