Lone Star Report: Kolkhorst on audit report– "We can smoke and mirrors this Ric…but those numbers are real"

Auditor questions TxDOT development pacts
by Christine DeLoma
Lone Star Report
March 5, 2007

It’s been a rough couple of weeks for Transportation Commission chairman Ric Williamson, who has been publicly skewered by lawmakers over his agency’s handling of the controversial Trans-Texas Corridor (TTC) toll road plan.

Adding to the agony, the State Auditor’s Office is raising serious questions about the corridor’s cost to taxpayers.

A Feb. 23 report on the Texas Department of Transportation’s Comprehensive Development Agreement (CDA) with private consortium Cintra-Zachry points to potential costs for state government if too few private investors step forward.

The Texas Department of Transportation (TxDOT) signed a $3.5 million CDA with Cintra-Zachry to partner in the planning of the high priority projects, called TTC-35, which are to run 560 miles parallel to I-35 from Oklahoma City to Laredo.

Public funds used for toll roads
Whereas the master development plan indicates scant need, if any at all, for taxpayer dollars to build the seven planned road segments, the audit report shows otherwise.

To date, according to the report, TxDOT has spent $3.5 million on the master development plan and $28 million for environmental studies and preliminary engineering on two segments of the corridor. Since 2001, another $28 million has gone for legal fees.

Greg Adams, of the auditor’s office, told the House Appropriations Committee Feb. 27 a lack of private investors could result in the spending of public dollars to build portions of TTC-35.

There are seven facilities (or road segments) that Cintra-Zachry or another private developer could bid on to build. Should no bidders emerge in particular cases, TxDOT might have to take on the project, Adams said. The fragmented design concept of the corridor came as a surprise to Rep. Dan Gattis (R-Georgetown). “I didn’t realize that we were segmenting them out and that we were going to let people pick and choose which ones they wanted to go do.” Gattis said.

Williamson told Gattis the state might have to build portions of the toll road. “The problem the state faces is that there’s not enough free cash flow in the transportation system now to do these things,” Williamson said.

According to the audit report, the state could also pay up to 55 percent of project costs ($16.5 billion) for the construction of high-speed rail lines and freight rail for all of TTC-35. Private developers may fund 24 percent of the rail project. The rest of the money would come from interest earned on cash balances from raised but unspent project funds, the report says.

In addition, the audit report found that TxDOT is counting on private developers to seek up to $3.9 billion in limited federal Transportation Infrastructure Finance and Innovation Act (TIFIA) loans. The auditors said TxDOT did not consider federal credit assistance as public funds.

State concession fees are not guaranteed
In exchange for allowing private companies to build, construct, and operate toll roads for the seven priority segments of toll roads, TxDOT may receive upfront concession fees estimated at $3 billion. The audit report, however, indicates that “concession payments could be reduced if factors such as cost of financing each road segment, inflation, and interest rates increase developers’ costs. Significant changes in the cost of financing each road segment could result in the Department foregoing any concession payment.”

The finding sat poorly with Rep. Lois Kolkhorst (R-Brenham). “There’s federal dollars being used, there’s state dollars being used, and there’s no guarantee on our concession up front?” Kolkhorst asked.

Keeping contracts secret
The audit report recommends the Legislature require TxDOT to provide all draft contracts worth more than $250 million to the Attorney General for review before signing on the dotted line.

In 2005, TxDOT kept its proposed comprehensive development agreement with Cintra-Zachry confidential for 18 months, despite an Attorney General’s ruling that the document be made public. Nonetheless, TxDOT sued the state to keep from disclosing the details of the agreement. The issue was so controversial it became a political football in the gubernatorial race. In the end, TxDOT dropped its suit when the CDA was finalized.

“As you put together future contracts, do you plan to follow the same model of holding the information and not releasing it?” asked Rep. Ruth Jones McClendon (D-San Antonio).

Williamson, however, maintains it is the agency’s prerogative to do so. “That has been the contracting history of TxDOT for 50 years,” Williamson replied. “And I suggest to you it’s the contracting history of every state agency.”

TxDOT assistant executive director Amadeo Saenz said that lawmakers wishing to view the draft contracts would have to sign a confidentiality agreement with TxDOT to ensure the plans would not be shared with the public.

Non-compete clauses
The audit report raised concerns over the non-compete clause in a draft agreement with Cintra-Zachry to complete the last two segments of the toll road, State Highway 130. Although SH 130 is not a part of the Trans-Texas Corridor, the auditors provided the draft contract as an example of the implications of non-compete clauses that protect the interests of private developers at the expense of the state.

The non-compete clause in the draft segment agreement requires TxDOT to compensate the developer for lost revenues if the state builds ancillary roadways near the toll road. “TxDOT could continue to make those expansions if they wanted to, but they may have to compensate the developer,” said assistant state auditor Sandra Vice.

The possibility of TxDOT’s including non-compete clauses in TTC-35 segment contracts appear to be giving several lawmakers heartburn.

“I feel like I’ve been kicked in the asphalt.” said Rep. Fred Brown (R-College Station). “I’ll tell you what, this non-compete clause has really got me worried because without seeing the contract, we don’t know what our real liability could be on this, especially when you’re talking about a 50-year contract.”

Brown suggested the Legislature impose a moratorium on non-compete clauses. Transportation Commissioner Ted Houghton, however, reassured the committee that no contracts have been signed so far that include non-compete clauses.”That’s [in] the planning document,” Houghton said. “That’s not what we are currently negotiating with the developer on (SH) 130 and the developer on State Highway 121.”Cintra-Zachry signed a contract with TxDOT Feb. 28 to build and operate SH 121 in North Texas.

However, the master development plan allows TxDOT to include non-compete clauses in any of the TTC-35 contracts. There are currently 21 projects in the planning stages.

How much will TTC-35 cost?
The auditors found that TxDOT lacked reliable information on projected toll revenue, operating expenses and developer profits; likewise that the TTC-35 master development plan lacked an estimate of the total cost of the corridor. The audit report, however, estimates the entire project at $105 billion. It says if Cintra-Zachry built and operated 330 miles of TTC-35, estimated gross profits could reach $523 billion.

TxDOT disputes the numbers. “There’s no way in God’s earth any of us know what their revenue or profits are going to be 50 years from now,” Williamson told lawmakers. “It is impossible to know that.”

When lawmakers asked Vice how she derived the numbers, she told them it came straight from the master development plan.
“We don’t disagree with the 523 [billions]. It’s a number that’s in that section for the purpose of negotiating the contract,” Williamson said. “It is unreal. It’s fiction. It’s fantasy. It’s a plug number to calculate how to do the mix.”

Yet Kolkhorst wasn’t buying it. “I do enough business deals to know you just don’t pull numbers from the sky. Aren’t these numbers based off of something, Ric?” asked Kolkhorst. “I can tell you the bond lawyers are not going to let Cintra-Zachry enter into a bad deal. We can smoke and mirrors this, Ric, all we want, and say those aren’t real numbers. They’re conceptual, whatever. When you hire people that good, then those numbers are pretty real.”

Increased oversight needed
The audit report recommends that before the signing of each contract an independent third party such as the Comptroller of Public Accounts prepare and provide a financial forecast that includes costs and toll revenue estimates to the governor, Legislature, Legislative Budget Board, and state auditor’s office. It also recommends that the auditor’s office annually audit the financial statements for each toll road segment.

TxDOT agrees more transparency is needed, but disagrees that revenue projections should be handled by the Comptroller. The Bond Review Board is more suited to handle those functions, Williamson told lawmakers.

With the possibility of private companies’ earning a five-fold profit on building toll roads in Texas, some lawmakers are questioning whether the state could do the job instead.

In order to make a profit on the tolls, the developer is allowed to raise the tolls each year in line with inflation. According to the Master Development Plan, initial toll rates are set at 12.5 cents for cars and 48 cents for trucks. The audit report, however, points out that TxDOT has no statutory authority to approve (or reject) actual toll rates.

Gattis expressed concern that private toll road operators have a profit motive setting toll rates and may not have the public’s interest in mind.

“I don’t have a problem with the need to build roads,” Gattis said. “In Central Texas, if I’ve got toll roads, my goal is to clear up congestion, and in order to do that I build a toll road. I want to set those tolls as low as possible and still take care of debt service and take care of operations. My goal is to pay them off, take care of them.

“That motive’s completely different under the Trans-Texas Corridor theory. If I’m the toll operator, I’d set them as high as possible as long as people will still drive on them to maximize my profit. And those are competing interests. And think there’s a definite conflict there.”

Kolkhorst, who has filed legislation repealing the Trans-Texas Corridor, told committee members the building of infrastructure was a basic function of government. “Do we need a middleman doing this for us?” she asked. “We can do it ourselves.”