On December 30, 2007, the State of Texas lost a visionary leader on transportation with the passing of Ric Williamson, Chairman of the Texas Transportation Commission. After serving seven terms in the Texas legislature from 1985 to 1998, Williamson was appointed to the Commission by Governor Rick Perry in 2001 (becoming chairman in 2004) and became the key architect of the state's bold embrace of tolling and public-private partnerships as the primary means of addressing its growing urban congestion and staggering transportation infrastructure needs.
I was fortunate to have had the opportunity to interview Williamson this past September about the genesis and implementation of Texas' groundbreaking transportation policy innovations.
Leonard Gilroy, Reason: You've presided over a major paradigm shift in the Texas Department of Transportation (TxDOT), a major change in the way the Department does business. TxDOT embraced public-private partnerships and tolling as major components of the state's strategy to fill the funding gap. Can you describe that shift and how it came about?
Ric Williamson: Shortly after Governor Perry ascended from Lieutenant Governor to Governor following the President's election, he called me. We talk frequently. And he was in the process of thinking through where he wanted to leave his print on the future of Texas. And he had decided that transportation, utilities, water, the tort liability system were the major challenges facing the economic development of our state. And he wanted to be known 20 years from now principally as a governor who recognized the relationship between economic maturity and social progress.
I think he feels like most politicians begin with an understanding of this relationship, but as they move through their career they forget that economic maturity does in fact drive social progress. If you really want more money for your schools, then the way you do that is you mature your economy so that more people are making more money themselves, paying more taxes with which to pay for education. If you really want good health care for your citizens, you mature your economy to the point that people can afford the health care that they select for themselves.
One component of that economic maturity was obviously a transportation system that could deal with the population growth that was already occurring in Texas and that most of us who live here realized was going to continue. There are lots of reasons why that population growth is going to continue in our state. But most of us who work for Governor Perry tend to point to three things.
We are a very low tax state, we're a very low regulation state, and we have a very limited welfare system in our state. What that means is, individual entrepreneurs want to live in Texas because they don't pay any income tax. Businesses want to locate in Texas because they're not overly regulated. And people don't come to Texas for welfare because none exists. So people who show up in Texas show up to work, generate wealth, and contribute to the overall economy.
Based upon his belief that the transportation grid had not been managed—and was not projected to be managed—to deal with our population growth, he tasked me with quantifying the problem on a dollars basis and then identifying a range of solutions and a range of strategies that would address the dollar cost and when fully implemented would result in a modern transportation system. I spent the first couple of years trying to quantify the true costs of what we needed to do, and I reached a certain point where I thought that I knew that. I estimated it was somewhere in the 60 to 80 billion dollar range—I think we finally settled on 86 billion dollars of revenue—that we couldn't see was going to come from anyplace—to address our needs.
I determined from my years in politics—and just observing, just common sense, listening to people—that there was a reason why, all across our country, citizens less and less support general taxes into a common pool to be distributed by political decision-makers. There's a reason why people vote for Republicans and Democrats who claim that they won't raise those common taxes, and the reason is, our citizens, whether we like it or not, have decided that it's not in their best interest to permit themselves to be taxed in common and the money put into a common pool to be distributed based on political will. They have rightfully, I think, ascertained that when that occurs, the investment of the tax revenue is not made in the best interest of their welfare, but rather in the best interest of the welfare of the elected class.
So that's how I concluded that we would have to go to a toll-based system because gasoline taxes at the local, state, and federal level weren't going to be raised to generate that 86 billion dollars. And then beyond that, a toll-based system tends to put some market pressures on decision-making that are beneficial to the society as a whole because you're not going to build a toll road where you can't collect tolls.
The problems of the state actually were easily divisible into three categories. There were short-term problems that were driving congestion and air quality issues. There were mid-term problems that were driving economic opportunity and air quality issues. And then there were long-term problems that were going to drive congestion, economic opportunity, and safety in the future, if not addressed immediately.
We created several strategies and several tactics that he [Gov. Perry] could choose from to address one, two, or three of those strategies. And after going through all the choices, it was his decision to go ahead and attack all three. He said, "I want to put in place the law necessary to address the short-term problems, the mid-term problems, and the long-term problems."
The short-term problems were characterized by bottlenecks in existing urban and suburban transportation grids. Not big projects, not loops, not new roads, not major thoroughfare overhauls, but rather grade-separations, short lengths of roads, and footprint expansions for a whole series of bottlenecks that were creating congestion locally, but worse were adding to the air quality problem inside of urban airsheds. And the tactics we selected to address the short-term problems were the pass-through toll process and the Texas Metropolitan Mobility Plan (TMMP). One of our overarching strategies was to rely upon local and regional government to tell us which projects needed to be fixed, as opposed to us telling them which projects we wanted to fix.
To address the mid-term problems—which were more loops, Interstate expansion through the urban environment, and a few new footprints, but primarily within the urban airshed, not even the suburban airshed—we used almost exclusively the Mobility Fund invested according to the TMMP. We focused on urban toll roads controlled by local or county toll authorities in which we would invest state tax money.
That then left the long-term problem and the solution of the Trans-Texas Corridor, which was entirely financed privately on a pay-as-traffic-suggests-they're-ready-to-pay basis.
So we had short-term problems, mid-term problems, and long-term problems, and we developed a set of strategies to deal with all of them. The strategies were to rely on regional government to plan, local government to execute, and rely on the private sector to invest money, take risk, and enjoy profits if they made a good decision. Use competition to drive down the costs of the construction projects and drive up the value-added of toll projects. And regionalize—just use a regional approach.
Our strategies fit all three timeframes, and then the tactics were selected through the legislation—pass through tolls, mobility bond program, Texas Mobility Fund, Trans-Texas Corridor. When he made all those selections and decided how he wanted to proceed, it was simply my job and the job of the other commissioners just to apply the strategies to the situation and then select the tactic that makes the most sense. And that's what we've done.
Our overwhelming reliance on private sector financing was based upon our belief that there are two kinds of toll roads: there are toll roads of necessity and there are toll roads of convenience. Toll roads of necessity should be financed with the public trust. Toll roads of convenience should be financed with the private trust. They still operate to reduce congestion, improve air quality, improve safety, and in particular, bring economic opportunity to your community. But you characterize them as toll roads of convenience because they are the roads not chosen by the public. If we did the regional plan and the local execution correctly, then if we have five roads out here proposed and the regional planners selected the first three, by definition those must be the roads of necessity because they wouldn't have selected those three over the other two if those three weren't absolutely necessary, in their view, to their regional development.
That was one of the reasons that the strategy of regional planning and local execution was so important. Because we were, for the first time at the state level, doing something that I think hasn't been done in the rest of the country. We were basically turning to regional planners—as the federal highway bill envisioned 18 years ago—and we were saying, you know better how to solve your problems than we do. We know better how to solve the connection between the two—the connectivity between Dallas and San Antonio we know about. But within Dallas, Texas, you as city councilpersons, county commissioners, you know better which choices need to be made in the region. You tell us what your choices are, and you tell us if this is a short-term, mid-term, or a long-term solution, and then we'll help you frame the financing for it, either through Mobility Fund bonds, through direct gas tax investment, or through the public/private sector.
Toll roads, in our view, fall into those two categories: roads of convenience and roads of necessity. It is the roads of necessity that you want to finance with the public dollar. In fact, the truth is—whether it's a tax road or a toll road—if it's a road of necessity, that's the road that you want to finance with the public trust. If it's a road of convenience, that's a road that you want to finance with the private trust. Because a road of convenience will carry with it an element of risk or an element of delay in their cash rate of return. And the public trust isn't geared toward taking that risk.
I'll just give you an example. Between Austin and San Antonio, parallel to [Interstate] 35, is State Highway 130 which some day might be part of the Trans-Texas Corridor. The public trust could not afford to build the piece from Lockhart to Seguin. It could only afford to build the piece from Lockhart to Georgetown. So for three years we'd been using the public trust to build from Georgetown down to Lockhart. And the portion from Lockhart to Seguin, it just sat there—until all the laws were passed and we started asking for proposals from the private sector. And we got the Trans-Texas Corridor proposal and signed it, which permits roads that tie directly into the corridor footprint to fall under the public-private partnership.
The public trust didn't have the money to put into that same amount of road. We gave San Antonio and Austin—the two areas that are affected by it—the opportunity to take their gas tax money and their Mobility Fund money and call that a toll road of necessity, and they passed. It became a toll road of convenience. The cost of it was a billion dollars, and by everyone's calculation it will be 21 years before it throws off free cash flow. Yet, Cintra was willing to bank that the money they made in the 22nd through the 50th year would overcome the loss they would sustain in the zero to 21st year, and they were willing to move forward with it. So we signed an agreement with them.
That is a road of convenience, being built by the private trust. If Cintra is even a little bit off on their estimates, it will go from 21 to 30 years before they make any money. If they're a little bit off to the overload, it will only go from 21 to 18 years before they start making money.
So they've got a whole lot to lose and not much to gain. So by reverse, the public has a got a whole lot to gain and not a whole lot to lose from the traffic pattern on this road of convenience. That is the asset you want to build using private money and permitting the private sector to take the risk, and take the rewards. If the road ends up being in less demand than you thought, they take the hit. If it ends up being in more demand than you thought, they take the gain. You cap the toll rate at something reasonable, and you permit the private company to raise or lower that toll rate below that cap to incent people to use the road.
In the process of doing that, you know somebody's going to use that road—you don't know if enough people will use it for Cintra to make money—but you see, that's not the public's problem. The public doesn't have to worry about that. Once the public has decided that this is a road of convenience, then the public need not be concerned about how many people do or do not use that road, because it doesn't matter to the public. Except to the extent that it takes cars off of the road of necessity with which it competes—in this case, Interstate 35 sits right next to Highway 130. Interstate 35 is bumper-to-bumper congested. To the extent that you and I decide to take our car off of [Interstate] 35—the road of necessity—and to State Highway 130—the road of convenience—we've made every other driver on [Interstate] 35 more efficient in the use of the public road.
Gilroy: So in the worst case scenario, the state gets a free road.
Williamson: Yeah. Now people have said, well what about the money that Cintra makes. I've had more than one of my former colleagues tell me I've gone politically tone-deaf since I'm no longer in the legislature. I do understand the argument that says people do get concerned that you're giving away some kind of profits. And my response is, if you set up a framework like what we have—where you identify short-, mid-, and long-term problems, and you differentiate between assets of necessity and assets of convenience, and you allocate your tax resources to assets of necessity, then this is a road you never would have built anyway. The profits that the private sector earns should not be your focal point because you couldn't build this asset anyway. Without making this decision, the road wouldn't exist.
If you cap the toll rates at something reasonable, and if you provide for a rational repurchase of the asset at some point in the future—which we do—then the public's benefit to this road is the traffic diverted from the public-owned road of necessity. That's the public benefit. It's worth much more than whatever profits Cintra's going to gain.
Gilroy: And there is some revenue sharing above a certain point.
Williamson: Yes. We negotiated revenue-sharing in addition to the buyout. And in fact, revenue-sharing begins on day one. There's a certain amount of it that occurs upon the collection of the first dollar. And then there's more of it that occurs if the private trust starts making too much money above a pre-set rate of return.
But for us, creating the private component was never about setting up the private sector. It was always about solving congestion, economic opportunity, safety, asset value, and air quality issues.
Gilroy: The five goals of TxDOT.
Williamson: Yes. We set five goals and then said, how do we reach these goals? And the use of private money was one way that we were going to reach those goals. Just one, not the only one.
Gilroy: What would you point to in terms of the demonstrable benefits of competition, public private partnerships and tolling?
Williamson: It's kind of interesting because no one—except, I think, the governor—thought this would happen. But as it turned out, because the tax revenues of the nation related to transportation have started to stagnate, the private sector's investment in labor, management, and equipment to build roads has started stagnating as well. Because as anyone in the private world knows, organizations invest today in preparation for the markets they see tomorrow. If they see a stagnant market—which is a reflection of a stagnant revenue stream—they quit buying a new Caterpillar Dozer every year. They quit training three new asphalt layers every year. They quit hiring a new road cost estimator and training her up. They just live with what they have.
As a consequence, the number of organizations competing to build your projects dwindles. The bids go up, and thus the cost-per-unit goes up. The minute the world perceives that every year—in our case, for the next 25 years—you were going to be building more projects than the year before, suddenly organizations start moving to Texas and old organizations start expanding. That puts competitive pressure on the marketplace and drives the cost-per-unit down. And we started seeing that almost instantly. We've started seeing companies from Nebraska and Iowa and Australia and Portugal and Tennessee showing up in Texas to design and build and finance roads, which drives the unit costs down. That was one benefit.
We have a couple of other examples of the pressure of competition at work. We had a public-private effort on State Highway 121 in North Texas. We ultimately had to give that to a regional toll authority, although they took it at a slightly higher value than the private sector had associated with it. We began with an asset that would have been built for 600 million dollars and would have instantly become as congested as the other assets in the area. We ended up with an asset that was full valued at 3.3 billion dollars, which permitted us to spend 2.7 billion on other congestion-relieving projects in the area, and let just those who choose to use that piece of road pay for it. Which suggests higher tolls, which suggests more limited congestion. That would be an example of our approach working.
We've got pass-through toll projects all across the state, where communities that otherwise would not have gone to the bond market and borrowed against their property tax base, but because they know that we'll reimburse them have come forward and said, this is a choke-point right now. It's causing congestion right now. It's polluting the air right now. We'll go borrow the money and we'll fix this if you'll just pay us on a pass-through toll over the next 15 or 20 years. We've got probably ten of those projects right now, and they're all 10 to 30 million dollar projects—they're not small projects.
Of course, the Mobility Fund is fully operational. And the Metropolitan Mobility Plan is fully operational—that's what the Austin area is putting the finishing touches on this week.
My guess is that there will probably be 50 local and regional toll roads on the ground and operating within ten years. All of them will help to solve the state's problems.
Gilroy: When you were putting together your package of solutions, and you were breaking down short-, mid-, and long-term priorities, how much did you look to other states and countries, and how much was just homegrown innovation?
Williamson: We got the pass-through toll concept from Europe. They do it slightly differently, and we just took it and changed it to put a Texas twist on it. But I would have to say that the rest of it is homegrown. When it started out, we hired a group of professionals, we sent them to Europe to visit all the big public-private partnership companies there. We sent them all across the United States to visit what little privatization was going on here. Paid for by the state—we wouldn't let the industry pay for it. We hired what we think is the best lawyer in the nation—the Nossaman firm out of California—to represent us. We hired what we thought were the best financial advisors; we got all of them away from the private sector first. The legislature let us put them on contract at a high enough rate to keep them with us, and then they helped us build our body of law and our whole approach to the problem.
In effect, the governor decided to put his print on this and make it a priority for him, lobbying the legislature with us. He empowered us to do this exactly right from the start. Even with the retrenchment of the last session—that was to have been expected. You can't go as far, as fast, and as hard as we did without having some pushback from some of your citizens and from some of your policymakers. What we went though was entirely understandable and entirely expected. And it really is good for the system—it washes out the anger and lets it get to the side of the road, so to speak, where you can move on down the road. But I would say it's mostly homegrown.
Gilroy: Can you describe what the transition was like from an institutional perspective? You were taking a government agency that had been doing things a certain way for many years and then embarked on an entirely new course. What was the learning curve like, and what lessons would you offer to another state DOT going on a similar journey?
Williamson: We approached it a different way. Normally, when government is going to change, it stops and spends some time trying to figure out how it's going to get the institution to change with it. We made the conscious decision that in our state, we had 15,000 employees who would adapt, who knew how to adapt, and we didn't need to spend any time training them. We just leapfrogged that whole process. We went straight to the top with our administrative employees—the 25 leaders out of 15,000—and we said this is what we're going to do, and the rest of the employee base will follow us and they will adapt. That's a key decision we made early in the process, and it turned out to be correct. Most of our employees adapted very, very well. Now a few still would like to go back to the old days, but we know the old days will never be here again, and they will adapt eventually. But for the most part, the largest percentage of our employees—they just fell right in.
Whereas if we would have started from the start with that, it might have taken us years. Because the problem is, the private sector doesn't do it that way. In the private sector, you get up every morning and you adapt to the competitive pressures that are there. And so you learn to change quickly and to change in a positive way in order to persevere and move on. We just applied private sector principles to the public sector.
We just said, the equity owners—or in this case, the legislature—decided to change the law, and we're changing, and here we go.
Gilroy: You mentioned the pushback. Obviously, this last legislative session saw not only a moratorium on some public-private partnerships but also legislative intervention that allowed a public toll authority take over a project for which a private concessionaire had already been selected in a competitive procurement process. What would you say to those in the private sector that are wondering if Texas is still a good place to do business? Or asked differently, what do you see as the role of the private sector in helping the Department address Texas's mobility needs in the future?
Williamson: Well, it's important to note that the legislature did not do away with private sector financing and a certain level of risk-taking. They suspended the concession model, except for 11 identified projects. I truly believe that the legislature is going spend the next 18 months absorbing the good and bad of all this, and we will have a CDA [comprehensive development agreement] process come out of the next session. It might look different, but it will essentially be the same financing model. Meanwhile, we're still able to privately finance all of our toll roads, and we're doing that. We've notified local toll authorities of 87 toll projects and we're negotiating the market value of those 87 projects starting next week. And the private sector, we hope, is right here making proposals to design, build, and finance those projects.
Gilroy: And you've mentioned shifting some of the responsibilities from the state to local and regional governments. You see it in multiple different ways. You see it in the market valuation process you just mentioned. You see it in the creation of regional mobility authorities as a local funding solution to match up with a metropolitan planning organization—which is a planning body, so you have complementary skills there. In a certain sense, you see a devolution of authority from the state to local and regional government.
Williamson: Well, Governor Perry believes that the closer you can get decisions to the taxpayers who pay the bills, the better the decisions that will be made. And he practices what he believes. And to the extent that we are devolving power from TxDOT to local and regional governments, that's reflective of his philosophy. To the extent that that's a good or bad decision, we've thought local school districts were the best model for years. I don't know why local transportation districts would be any different.