US toll roads to “increasingly” use P3s

Toll roads are expected to face slow traffic growth, reduced pricing power, and uncertainty over some types of funding.

Public-private partnerships (PPP; P3) will increasingly become the source of funding for capital projects as toll roads face flat to slow growth, reduced pricing power and uncertainty over some types of funding, according to a new Fitch Ratings report.

While traffic on urban bridges, expressways and turnpikes is expected to be “very resilient, with quasi-monopolistic positions in the near term,” forecast risk remains “high” for greenfield or recently-constructed projects, the report said.

In the meantime, revenue from toll roads is expected to be affected by reduced pricing power and new, higher-leveraged projects, which are dependent on achieving sustained revenue growth and are more exposed to future downturns.

Because of uncertainty surrounding the funding of required works to national networks, most of the new capacity will be tolled, Saavan Gatfield, senior director of global infrastructure, said in the report, adding that pressure will grow to toll currently free roadways.

As a result, we are likely to see growing use of the P3 framework to fund capital projects, he added.

Fitch retains a “stable” ratings outlook for US toll roads, despite a renewed economic downturn being a downward risk. The gap between traffic and revenue growth is expected to remain steady, it added.

Other issues the ratings agency listed in the report pertain to debt for US toll roads.

Loans advanced under the Transportation Infrastructure Finance and Innovation Act (TIFIA) programme remain critical to ensure projects can begin, while flexible TIFIA terms are important in lieu of additional liquidity support, it said.

Funding shortfalls from the Department of Transportation (DOT) put pressure on existing, mature assets to increase leverage, it said.

New debt issued on existing toll road assets is being used to fund other statewide infrastructure, or non-system purposes projects, which does not help in terms of financing existing upgrades or new construction of toll roads.

Nonetheless, Fitch said managed lanes, which provide time savings and travel reliability, will become key to success for toll roads operators and investors.

The ratings agency gave two examples that illustrate how the nature of high occupancy vehicle (HOV) policies can significantly affect revenues.

In most cases, projects with free access policies for HOVs with two or more passengers (HOV2+) are generally able to meet operation & maintenance (O&M) expenses, with some generating small operating profits as non-tolled vehicles crowd out paying drivers thereby limiting revenue potential during congested periods.

Projects with a free access policy for HOVs with three or more passengers (HOV3+) tend to produce larger operating margins.

In addition, the choice of toll pricing mechanism can affect performance, not just in terms of traffic and revenue, but also in terms of traffic behaviour itself and, as such, is a very important decision, it added.

The performance of managed lanes also depends on factors including demographics, geography, and road configuration.

Furthermore, conversion of existing HOV lanes versus expansion of highway capacity involves different cost profiles, financing approaches and ability to meet O&M and Department of Transportation objectives, it said.