The Texas Department of Transportation (TxDOT) has relaunched its toll road public-private partnership pro­gramme. It released requests for information for the more than $900 million Grand Parkway and $3.86 billion I-35E managed lanes project in June and requests for qualifications (RFQs), though delayed, are expected either this month or in October. Despite this progress, rebuilding its reputation will take time.

State senate bills 1420 and 19 give the grantor legislative authority to procure 11 projects as PPPs. TxDOT’s definition of PPP includes everything from design-build (DB) contracts to toll concessions and availability-based design-build-finance-operate-maintain (DBFOM) concessions. The legislation, which passed in June, stipulates that all environmental approvals be completed by 31 August 2013 and tender processes begun by 31 August 2015. The state legislature halted the state’s previous PPP programme in 2007.

SB 19 is arguably the more important piece of legislation. It stipulates that local authorities have first right of refusal to develop and build a project. If they opt not to, TxDOT has exclusive authority over the project. The law should stop situations where the grantor rescinds an awarded concession, as was the case with the SH121, which was awarded to Cintra in 2007 and later handed over to the North Texas Tollway Authority (NTTA), a public body.

The proposed 97.9km Grand Parkway long-term concession includes building 61.7km of a future 288km tolled outer ring road around Houston. The grantor has already award­ed roughly $300 million in contracts for the remain­ing 36.2km. TxDOT delayed the RFQ to allow local stake­hold­ers more time to review a long-term concession structure.

The proposed 44.8km I-35E long-term concession includes reconstruction and the addition of managed lanes to the existing highway, north of Dallas. $592 million in local toll revenues have been set aside for the project and the grantor has applied for an $800 million US Department of Transportation TIFIA loan. The RFQ was delayed in order to allow the NTTA first right of refusal under SB 19.

Project Finance held a roundtable discussion with seven representatives of TxDOT, sponsors and lenders to discuss the new programme in Austin on 12 August. Participants from TxDOT include Amadeo Saenz, former executive director, Ed Pensock, interim director of the Texas Turnpike Authority (TTA) division, and Mark Tomlinson, former director of the TTA division, as well as Lee Madruga, responsible for US business development at Acciona, Juan Santamaria, chief operating officer of ACS Infrastructure, Mitchell Gold, managing director of global markets and public finance at Bank of America Merrill Lynch, and Paul Ryan, head of infrastructure and managing director of public finance at JP Morgan.

Edward Russell, Project Finance (ER): What is Texas’ history with toll road PPPs?

Amadeo Saenz, TxDOT (AS): The department received its PPP authority back in the late 1990s, It started as something we called ‘exclusive development agreements’ and was later changed to ‘comprehensive development agreements’ (CDA) where the department could procure PPPs – ranging from a DB project to a design-build-finance (DBF) and DBFOM – in 2001.

As we evolved into the CDAs, we went out on a procurement to bring onboard a development partner to develop Trans-Texas Corridor/I-35. We were able to enter into a comprehensive development agreement, or facility agree­ment, with Cintra and Zachary. They put together a proposal where, to no cost to the department, they provided $25 million upfront and included a mechanism to share revenues.

As we were moving along we had also identified several other major projects in the Dallas-Fort Worth area. Fort Worth wanted to get the North Tarrant Express project and Dallas the I-635/LBJ Freeway built. Last year [2010] we entered into CDAs for both of these projects. They required an investment of the department of about $1 billion and cost, including capital, maintenance and operations for 50 years, about $6 billion. That is a pretty good return.

Through our planning process we had identified 80 some-odd projects that could be developed under some kind of PPP model. But, when the magnitude or number of projects evolved out into the public, there was push-back. The public really did not understand, one, that we were going from a state that was mostly free public roads to tolling roads and, two, that now we were going to bring in a private investor and they were going to maintain and operate that road.

ER: How are SB 1420 and SB 19 different from the earlier PPP authority?

AS: The legislature has added some controls within the parameters of SB 1420 and SB 19 as to how we’re going to address the issues that we’ve had in the past. We’ve run into the question of whether a private partner or a local toll road entity, like the NTTA, is going to build the project. SB 19 addresses that and it complements SB 1420, which gives us the authority, identifies the projects and gives us the tools to move forward. Those 11 projects were developed in cooperation with our local planning partners and constituencies, and are ready to go right now. We have the support of the locals and we have the support of the legislature.

Mark Tomlinson, TxDOT: An important point I think is that the public is often scared of things that are new and they haven’t experienced before. With these projects they now see that things are happening and that they’re happening quickly.

AS: SB 19 puts in place a process for who will develop projects. The local toll entity will have first choice but we’re no longer going to be arguing about what is the value of the project. They only have so much time to make their decision and in the end they either have to do it or pass it. That’s very important. At the end of the day, developers want to know that they have the chance to bring the project across the end zone. It puts certainty into the process.

On the Grand Parkway, I went back and asked them [local authorities] to reaffirm that they’re also in agreement and that they’re waiving primacy to us. On the I-35E project, the NTTA decided that they want to take one quick look and then they are going to make their decision. We want to make sure that problem is solved and the public developer of the project is identified so that there is no question.

L-R: Amadeo Saenz, TxDOT; Juan Santamaria, ACS; Ed Pensock, TTA; Paul Ryan, JP Morgan.

ER: Why the RFI for the Grand Parkway and I-35E projects?

AS: We put out an RFI to, one, let the industry know that these projects are coming forward and that this is kind of the timeline we expect to follow and, two, I wanted to get feedback from the industry in respect to what they thought were the potential development models that we could use to develop these projects – whether it is DB, availability payment, full concession or any other model.

Juan Santamaria, ACS (JS): As part of the RFIs, TxDOT is soliciting a lot of different feedback. On the private side, we can provide them our feedback on what will reduce the cost of capital, what is going to be more efficient in terms of risk allocation and if there is any appetite from our side for a particular project.

We see pros and cons for the public side for both formulas. A traffic [risk] project has the benefit of taking the risk off the state’s balance sheet, and highly leverages public funds but still maintains all the public policy standards. With an availability payment, they still get the risk allocation of a traffic project, in terms of construction and maintenance, but it retains those public funds on the state’s balance sheet. The good news is that the projects are well chosen and could move forward in any of those formulas.

Lee Madruga, Acciona (LM): You’re going to get people in the marketplace who have a preference for one type of revenue model or the other, either tolls or availability. How­ever, there is a revenue model where everyone’s interest’s overlap and you will find that all in the PPP business will seriously consider and attempt to pursue the projects.

By and large if it’s an availability-based project, people in the construction, finance and concession businesses will prioritise it ahead of other types of revenue streams. It offers a more secure source of revenue, it’s easier to finance and history has shown projects are more likely to be successful. It is going to attract the most competition and is where you’re most likely to see the best value for ratepayers. In other jurisdictions seven or eight teams pursue availability-based projects of the size of the Texas deals, whereas if it’s toll-based you’re definitely going to see less competition in the form of fewer teams, and higher pricing.

Ed Pensock (TTA): We got almost 35 responses on the two RFIs. Some of us were kind of hoping that they would point us towards the decision but a better thing happened – there was good appetite for almost any kind of business model for both projects. That says to me that they’re two good, strong projects. We’re going to push them forward as fast as we can.

ER: Is an availability-based project with TxDOT as counterparty financeable?

Paul Ryan, JP Morgan (PR): Highly financeable. As the components come together between tolling and appropriate use of fund six [the Texas state highway fund] – what you can use it for as a backstop – I think the markets are pretty flexible in identifying the credit quality of those components, sizing a debt offering and then pricing for size, given the risk of the cashflow profile.

Mitchell Gold, BAML (MG): In the current market, there is plenty of capital markets availability for either type of concession structure. There is a lot of demand right now for higher quality bonds, such as the kind that might be sold for an availability payment deal, but there’s also very good demand for higher yielding, BBB category bonds that might be sold more with a full traffic-risk structure.

TxDOT has flexibility on the type of financing structure it could use to meet its policy goals, financial goals and transportation goals, without necessarily needing to bend in any one direction, because the markets will only accept one type of structure. That’s a good position to be in.

LM: The two most important things to consider for rate payers are the level of competition you will attract and the overall cost of project delivery. Obviously those are going to be different, whether you finance the project if it is a toll project or an availability-based scheme. The debt-to-equity ratios are going to be different for a toll-based project. The cost of equity and transaction costs, the length of the process, all need to be taken into consideration when considering how to reduce the cost burden to the travelling public. Also you will have less competition, you’re not going to have as many teams interested in a toll deal.

ER: What kind of financial support can TxDOT offer the private sector?

AS: We have private activity bonds and TIFIA – though we’re not in control of TIFIA in terms of we’re not the ones who select the projects. On the I-35E project, we’ve identified $592 million that has been set aside by the local metropolitan planning organisation. What we’re doing on segment E of the Grand Parkway, where we’re spending $300 million to build it, is a form of public equity. Instead of providing cash, we’re providing a product that can be used to leverage more money.

ER: What debt structures are possible in today’s market?

PR: The PABs market certainly stepped in nicely when there were some fairly obvious weaknesses in the bank market for the toll product. In the end, both North Tarrant Express and LBJ were done with bonds rather than bank debt but prior to that I-595 was done with bank debt. Availability structures may lend themselves more easily to a bank debt structure. The good news is that you have choices and a low rate environment. The capital markets are alive and well and ready to go.

MG: For some time now, interest rates and capital market appetite have been extremely strong. Part of the reason is that given low rates, investors are hungry for higher yielding securities, such as those you often find in greenfield toll projects. Another factor that affects market acceptance is the types of risks that TxDOT imposes upon a developer. Some risk structures suit themselves more to bank financing where the banks can offer some flexibility that the capital markets can’t; others lend themselves more to the capital markets.

Ultimately, we’ll see where the markets are when these projects are financed, and what types of risk structures exist. The good news is a structure that’s put together well and reasonably structured should find financing.

ER: What structures is TxDOT comfortable with?

AS: We have business terms where we recognise that there is going to be a certain amount of refinancing. We have a mechanism to cover that. We’ve addressed some of the other major issues that the public is concerned about, especially non-compete and buyback. The private developers will find a way to finance the project and if they make more money, that’s fine. But they also stand a chance of not. If things change so much that there is an additional refinancing that gives them a financial gain, then we have a mechanism in which we both share in that gain. We leave it up to the developers to come up with the best financial plan.

ER: What is TxDOT’s position on non-compete?

AS: We’ve in essence identified what’s allowable to be built and by who, and we expect that to be priced in. We don’t want any non-compete clauses, we will basically give you the right to build the road and we won’t build anything on top or under of you – which we probably couldn’t afford to do anyway.

ER: TxDOT has pulled an awarded concession before, what guarantees are there that this will not happen again?

AS: It’s very important that when I go out with an RFQ, that TxDOT is going to take a project from here to a successful commercial and financial close. I don’t want to have hiccups. We need to make sure that anything that could cause a problem is identified early and before we start asking our partners to spend a lot of time and effort on getting us firm proposals.

My goal is that by the time the legislature comes back to town in January 2013, we have at least two or hopefully more of these projects commercially closed. We may still be working on financing, that’s fine, but we’ll have at least commercial close.

LM: The most important thing is that when you start the process, you finish it. We have to commit resources from other opportunities elsewhere around the world and its difficult to commit them when the outcome of a project is uncertain. The best PPP market that I’ve seen is in Canada. The procuring agencies push projects out if they’re not ready to go to market, but once the procurement starts it often finishes in a timely way.

JS: The cost of going through the procurement process is high, the resources that need to be allocated are intensive and that means that a delay or even a cancellation at any point makes a big impact. Obviously, we’d all like to see many different projects in the pipeline moving up soon but we concur that we need to be patient and to see these ones go through.

MG: The capital, bank and equity markets all value certain­ty and clarity. A careful review and good decision-making upfront, even if it takes a little more time, in the end will lead to a more cost effective result whatever the ulti­mate solution. It will attract the highest quality and number of market participants because they will have confidence in the process and that there will be less likelihood of discrepancies or differences of opinion later on. The extra effort spent up-front is time well spent and will benefit everybody. ■