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The Value of Innovation in Toll Concession Projects

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Most discussions of the pros and cons of P3 concessions cite as benefits the availability of investment from new sources (e.g., pension funds and developer equity), shifting various risks (such as construction cost overruns) from taxpayers to investors, and ensuring proper maintenance over the life of the project, thanks to the long concession term.

In addition to those benefits, I have long maintained that if and as we transition major highways from purely public sector endeavors to something closer to customer-serving businesses, we will also see significant innovations in design and operation. We did see the first U.S. express toll lanes P3 (the 91 Express Lanes in California) innovate by—for the first time ever—using transponders to eliminate toll booths and to charge variable prices to manage traffic flow. And another innovation was the Fluor/Transurban unsolicited proposal to develop express toll lanes instead of Virginia DOT’s un-financeable plan to add four HOV lanes to the Capital Beltway, at about 40% lower cost.

But I have just read a new paper that documents nearly $2 billion worth of cost savings on three express toll lanes projects in the Dallas/Fort Worth metro area. The paper is “Innovation Capture through the Alternative Technical Concept Process in PPPs in Texas: A Tool for Financial Viability,” by Fidel Saenz de Ormijana and Nicolas Rubio. It will be presented at the ICPPP2015 conference at UT Austin in May (see Upcoming Transportation Events, below).

Texas DOT has been gradually increasing the extent of design flexibility it gives project developers, via two methods. One is to encourage P3 developers to submit “alternative technical concepts” (ATCs) as part of their proposals in response to an RFP. The other is to encourage potential developers to present innovative ideas during the industry review meetings that precede issuance of the RFP. In the latter case, those ideas may be included in the RFP as options for all potential bidders to consider.

The largest cost savings discussed in the paper concern the LBJ (I-635) project in Dallas, where TxDOT’s conceptual design called for the express lanes to be constructed in a new tunnel beneath the existing general-purpose lanes, due to severe right of way constraints. During design review, the authors’ companies (Ferrovial and Cintra) suggested the alternative of a depressed center section for the express lanes, with the rebuilt general-purpose lanes partly cantilevered over the express lanes. This was presented in the RFP as an option, and the authors’ consortium’s bid that used this approach came in at substantially lower cost, contributing a large fraction of the resulting $1.3 billion construction cost savings.

The other cases described in the paper deal with several phases of the North Tarrant Express project in Fort Worth. In these cases, the developer-proposed changes were of two types. Some were changes in the design and placement of lanes and ramps, to provide better traffic flow (and generate more toll revenue). Others were changes in phasing, so as not to incur premature construction costs for lanes needed only in the ultimate configuration (10 to 20 years in the future), while designing now to facilitate their later addition within the long term of the concession agreement. These changes saved $480 million in NTE 1 and 2W and another $150 million in NTE 35W.

There is a connection between these changes being proposed by the developer and the procurement method being a toll concession. As the authors put it:

“The main drivers of innovation and efficiency are the integration of activities (design, construction,

finance, operation, maintenance, revenue management) with a life-cycle perspective, plus the private enterprise incentive when interests are properly aligned between the Private Developer and the Public Owner, to achieve the project purpose . . . . These innovation and efficiency drivers are more powerful and produce even better results when revenue risk is effectively transferred to the Private Developer.” [emphasis added]

What I find most striking about this assessment is that many people believe that express toll lane/managed lane projects are too risky to be procured as toll concessions, where the developer/operator bears the traffic and revenue risk. That is why, for example, Florida DOT chose a hybrid concession model for both I-595 and I-4 projects, under which the tolls on the newly added express lanes are collected by the DOT, at its own risk, and the concession company is compensated via availability payments. But the authors of this paper dispute that premise, writing that “In the managed lanes projects in Texas described in this paper, the most innovative solutions at procurement stage occurred precisely in those projects where financial feasibility was initially under question.”

In effect, by looking at the LBJ and NTE projects as businesses, the team was strongly motivated to come up with alternative designs and more-careful phasing of improvements to make the projects financially feasible. And to its great credit, Texas DOT was willing to accept many of those changes, resulting in projects that will provide very tangible benefits, without putting taxpayers at risk.

(This article first ran in Surface Transportation Innovations, February 2015)

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