Toll road debate lures bond-finance experts on Capitol cash hunt

Toll roads, despite a troubled history in California and an uneven record
nationwide, are tucked deep into the governor’s two-year, $12 billion
transportation proposal. They are starting to draw attention from private
investors–and from lawmakers who see scant public dollars available to ease
traffic congestion.

“The feeling is that we’ve got to find additional dollars for
infrastructure. There are some places that are finding private dollars, and
we need to see if this is viable,” said Sen. George Runner, R-Lancaster, a
member of the Senate Transportation Committee.

Republican Gov. Arnold Schwarzenegger wants private entities to handle the
toll roads–the bureaucratic term of art is “public-private partnership.”

Under his proposal, the government and private enterprise would combine to
build and operate toll roads, with state-issued revenue bonds backed by the
money from tolls, and investment-driven private groups actually running and
maintaining the roads in a lease, collecting the tolls and paying the state
for the privilege.

Variations on this theme have worked elsewhere–in Chicago, for example,
where the eight-mile-long elevated Skyway link to Indiana was sold last year
to a consortium of Spanish and Australian investors for $1.8 billion. Two
weeks ago, the same group purchased the Indiana Toll Road in a $3.85 billion
deal. The Wall Street firm of Goldman Sachs played a key role in both deals.

Richard Gephardt–the former House Democratic leader and presidential
candidate–now works for Goldman Sachs, and he was in the Capitol on Jan. 26
talking with Senate leaders and staff members about the benefits of
public-private partnership for toll roads. The discussions were private.

Kathleen Brown, the former state treasurer and gubernatorial candidate, is
director of Goldman Sachs’ western region. She did not accompany Gebhardt
during his recent visit, although she has been active in the past on
California bond proposals. Last year, she headed an investment group that
proposed raising up to $1 billion for the San Francisco Bay Bridge
replacement project by charging a fee for container shipping.

Schwarzenegger’s plan, absent specifics, is a work in progress. It is
included in his transportation package, AB1838, carried by Assemblywoman
Jenny Oropeza, D-Long Beach, the chairwoman of the Assembly Transportation
Committee. Oropeza does not support all of the governor’s proposals, by any
means. But she’s carrying the legislation, at Schwarzenegger’s request, to
get the ball rolling on the governor’s election-year proposal. “While we may
not yet agree on the specifics of his proposed infrastructure bond, I am
confident we share many of the same goals to improve transportation, air
quality and traffic safety,” Oropeza says.

If ultimately approved, the toll road routes would be determined by state
and local authorities, and could involve local voter approval. The
governor’s plan doesn’t lay out specific toll road routes, but establishes a
framework that could apply to all projects for setting up the projects.

Members of both parties were expected to discuss possible routes at their
private retreats this week. The push for toll roads, while not as strong as
the push for new, non-toll freeways, is motivated by the same
issues–drivers’ frustration with traffic congestion, the builders’ desire to
get new construction contracts and lawmakers’ desire to get projects for
their districts.

But discussions already are starting to focus on specific projects, Capitol
sources said. One is a toll road along Interstate 710 designated for trucks.
In return for shouldering the cost of the tolls, the truckers would be
allowed to add a third trailer to their rigs–California law currently limits
the trucks to two trailers. The toll road would have staging areas at either
end for the trucks.

Another is a toll road paralleling Interstate 680 along the Sunol grade, a
major traffic bottleneck near San Jose. And another involves U.S. 101 north
of the Golden Gate Bridge. That project could involve a reconfiguration of
the heavily traveled highway to include pay-only lanes, or a separate road
nearby to handle toll vehicles.

Unlike earlier toll road legislation, the governor’s proposal does not
contain a “non-compete” clause, in which state or local authorities are
barred from building new highways in toll-road service area. Toll road
operators complained that as congestion increases over time, the new
construction takes diverts traffic and cuts into their revenue, sparking
court fights. Schwarzenegger’s proposal shuns the “non compete” notion, but
instead offers to compensate toll road operators if new roads cripple their
revenues. For investors, this assurance is critical because the life of
private toll road lease typically spans decades.

The governor’s plan offers another sweetener to private investors. In
earlier legislation, the leases covered 35 years. In the governor’s
proposal, the length of the leases is nearly tripled–to 99 years, before
reverting to the state. Presumably, that means the revenues would nearly
triple, too. “That 99-year lease is a big deal to Wall Street. This is
something that investors like,” a Senate staffer said.

But the real debate over toll roads may not involve money, but the
traditional biases of Californians.

“California has long had a public policy that roads and highways are paid
for by our taxes, as opposed to a toll. But that doesn’t mean that it will
always be that way in the future,” Runner said.

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