Express lanes drive in more revenue than expected
Priced-managed lane projects are thriving with higher-than-projected revenues, which analysts said is caused by increased traffic and a strong economy in defiance of the skepticism that has surrounded such projects.
According to a recent Fitch Ratings report, express lanes’ higher revenues were caused by increased traffic driven by a strong economy and less conservative assumptions.
“In more recent years, there’s been a pickup in growth and in inflation and so those things have helped to drive both traffic and revenues,” said Scott Monroe, director in Fitch Ratings’ global infrastructure and project finance group.
Fitch’s study includes express lanes that users must pay to use. That could include those that do not charge for vehicles that have two or more people, such as high occupancy vehicles or HOV.
Express lanes can be financed and completed by a government entity or through a private company creating a public-private partnership.
There are currently 51 priced-managed lanes in 11 states, according to the International Bridge, Tunnel and Turnpike Association.
No priced-managed lanes have failed completely, said Pat Jones, IBTTA executive director and CEO. Though some may not reach goals tailored by traffic, population and other characteristics, it’s a timing issue and could be reached over the next few years, Jones said.
“I would say they’re doing well overall,” Jones said.
Priced-managed lanes have not always been popular from the outset as users often don’t like paying for them.
In September 2018, North Carolina’s first transportation P3 contract got some heat for building managed toll lanes on I-77 in Charlotte. Local drivers didn’t want to pay tolls on an interstate that they considered a freeway and didn’t think an express lane would improve the gridlock of driving to work, and back home in the evening.
“There’s usually a level of dislike of a toll increase or having to pay for a managed lane type of service but in the end, people will pay,” said Kurt Forsgren, managing director at S&P Global.
Fitch gave 8% of managed lanes it assessed an A+ rating, 54% are BBB- and 38% were rated BBB.
Fitch upgraded two SR-91 express lane projects in Southern California, which is owned by the Orange County Transportation Authority and Riverside County Transportation Commission to BBB stable from BBB-stable because of stronger traffic and revenue performance.
Fitch also upgraded the Orange County Transportation Authority’s senior revenue bonds to A+ stable from A positive outlook because of its “strong financial performance subsequent to the opening of RCTC’s connecting SR-91 managed lanes.”
"The opening of the RCTC SR-91 project in 2017 was very successful in its own right and also led to lasting revenue gains for the connecting OCTA project," Monroe said.
The average traffic growth across Fitch’s portfolio of all toll roads was 3% in 2018, Monroe said. As traffic in those corridors increases, so does the express lane traffic. Express lanes usually have to raise their toll rates to maintain a free flow of speed that general purpose lanes are trying to achieve, Monroe said.
Since traffic growth increased in those corridors, growth in the express lanes increased by two or three times to between 6% and 9%.
“So that multiplier effect has certainly helped push financial metrics up,” Monroe said.
Some managed lanes use the Transportation Infrastructure Finance and Innovation Act to finance debt, which makes projects’ debt structure more flexible. TIFIA’s low interest helps cut borrowing costs for the public-private partnerships.
Fitch also rated five managed lane projects under construction. Currently, those projects have ratings in the BBB category on their revenue bonds and TIFIA loans.
In Fitch’s report, analysts said IH 35E in the Dallas-Fort Worth metropolitan area benefited from its location and said a concrete barrier separating them helps increase user value by removing the possibility of traffic weaving in and out.
In a statement, the Texas Department of Transportation wrote that North Texas grows by more than one million new residents every six to seven years and motorists look for predictability in their travel options. The I-35E corridor’s managed lanes serves Dallas County and Denton County, which is one of the fastest-growing counties in the country, Texas DOT wrote.
“In general, what we have seen is a substantial demand for the managed lanes, which offer a reliable commuting option along a major city-to-suburb corridor,” Texas DOT wrote.
Increased revenues in managed lanes is a byproduct of states turning to P3’s for alternate ways of funding, Forsgren said.
A strong economy and growth of people using vehicle miles traveled factor into why managed lanes are doing well, Forsgren added.
“History has shown in good economic times, which we’ve had for a long time now, people are willing to pay for conveniences that these facilities deliver,” Forsgren said.
For a while, states have relied less on the federal government to fund needed infrastructure projects as a bill seems less likely to pass.
In late May, President Donald Trump, House Speaker Nancy Pelosi and Senate Democratic Leader Chuck Schumer were squared away to discuss how to fund a $2 trillion infrastructure plan proposed by Trump. However, Democrats said Trump left the meeting abruptly after Pelosi, D-Calif., accused Trump of engaging in a “cover-up.”
“The economy has been doing great and states have been picking up the slack in terms of infrastructure funding,” Forsgren said. “We expect that that will have to continue absent any kind of major federal funding source, probably regardless if there’s an infrastructure bill.”
The need for infrastructure funding is so great, Forsgren said that states will come up with other ways to find funding from managed lanes to toll roads to raising the gas tax.