First Private Shadow Toll Road Deal in Texas

A Texas highway contractor is poised to become the first private company in the U.S. to sign a “pass-through” shadow toll financing agreement with a state Dept. of Transportation. If negotiations now underway are successful, Austin-based J.D. Abrams LP will build a 7-mile inner loop in El Paso in exchange for tax-funded payments based on the number of vehicles using the new road. Motorists would not be tolled.

Both sides are aiming to get a deal hammered out in time to get it approved at the Feb. 28 Texas Transportation Commission (TTC) meeting. If the Texas Dept. of Transportation (TexDOT) cannot reach an agreement with J.D. Abrams, the agency can start negotiating with another company that also wants to build the highway, Zachry American Infrastructure.

This kind of arrangement has been used frequently in Europe and Latin America (see p. 12). Texas lawmakers approved pass-through financing as part of a wide-ranging authorization of toll roads and public private partnerships in 2003. Most of the 25 applications for pass-through financing so far have come from counties, cities and other public entities willing to issue bonds and get reimbursed over time, usually 10 to 20 years. TexDOT has received only three applications from private companies.

“There would be a risk to us if for some reason the traffic doesn’t generate enough revenue to retire the bonds,” says Bill Burnett, vice president for project development at J.D. Abrams, one of the five largest highways contractors in Texas. “But we’re very comfortable that with our team members and traffic and revenue numbers we’ll be able to negotiate a rate over a period of time that will be able pay off that debt.”

Transportation Commission chairman Ric Williamson predicts that news of a successful private deal will encourage others to follow suit.

“We have fairly fertile minds in the transportation construction world, and we’re going to start seeing a bunch of those applications, I think,” Williamson said at the commission’s December meeting.

The commission has approved projects worth about $834 million for pass-through financing so far. Contracts include a minimum reimbursement payment as well as a maximum payment. Traffic levels determine how much money actually gets paid between those two extremes.

The money for the pass-through payments comes from a special fund used by the commission to target “strategic priority” projects needed for hurricane evacuation or to respond to economic opportunities or needs near military bases. If the maximum payments were made on the projects approved so far, the fund would be liable for $80 million a year starting in 2010. However, TexDOT chief financial officer James Bass told commissioners in November that the fund could support up to $240 million a year for pass-through payments.

The El Paso project will cost about $250 million to design, purchase right-of-way, and build, says Chuck Berry, TexDOT’s district engineer in El Paso. The road, designated as state highway 601 but known as the Inner Loop, will connect Loop 375 with U.S. 54, along the border of the Fort Bliss army base. Need for the project accelerated with the announcement that Fort Bliss will be getting 20,000 additional troops in the next three to five years.

“I don’t think we wanted to toll a road where the army has committed to such a large expansion,” Berry says. “It’s real clear that TexDOT sees this as an economic development project.”

J.D. Abrams submitted an unsolicited proposal in December 2005. Zachry submitted a competing proposal that also included maintenance. But TexDOT determined that the J.D. Abrams proposal offered the most value and began negotiations.

Some other private applications for pass-through financing are, so far:

A local home builder and developer made the first private application, to build an overpass on Loop 20 in Laredo. Although TexDOT began negotiations towards an agreement, the developer has since put that project on hold.

San Antonio-based Zachry submitted an unsolicited proposal in April 2006 to design, build, finance and maintain 24 miles of U.S. 290 in Bastrop and Lee counties near Austin as a pass-through project. The TCC approved seeking competing proposals in June, but TexDOT has not yet issued an RFP.

Zachry also made an unsolicited proposal to Brazoria County to widen State Highway 36, a hurricane evacuation route, from two to four lanes and maintain it for 35 years. The county was already negotiating a pass-through agreement with TexDOT when Zachry offered to take on the project and receive the payments.

“We don’t have to take the financial risk,” says Brazoria County engineer Gerald Roberts. “They’re [proposing] to take all the risk and build the project for us.”

Now, officials are trying to determine whether to expand the scope of the pass-through project to include widening SH 36 though adjacent counties all the way to Interstate 10. An amended application would then be submitted to TexDOT.