Nicolas Rubio is the CEO, Americas, at Meridiam
The U.S. express lanes industry is at quite a crossroads. On the one hand, the sector and its project pipeline are clearly growing like never before, and more public sponsors are seeing the value of express lanes as a transportation solution. On the other hand, competition is growing as well. The trends are obviously related, and both have been underway for some time now, but things culminated in recent weeks with the mind-blowing levels of concession fees for the I-24 project in Tennessee, and (more recently) the I-285 East project in Georgia.
Notwithstanding all the recent activity, express lanes have been around for a long time. Public Works Financing covered the SR-91 Express Lane project in California back when it reached financial close in 1995! To step back and discuss how the industry, and its value proposition, has evolved over the years, this month PWF spoke with Nicolas Rubio, CEO, Americas, at Meridiam.
Nicolas is a good person to speak to on the topic. In fact, he is reportedly referred to by some in the industry as the “grandfather” of the U.S. express lanes industry (I did not ask him about the label). Prior to joining Meridiam, Nicolas had been the U.S. President of Cintra from 2009 to 2016.
The subject that prompted this interview was not stratospheric concession fees, though you can bet that came up. It was instead to discuss a recent case study and economic analysis published by TEXpress, the brand operating a massive network of express lanes in the Dallas-Fort Worth metro area. The TEXpress network of P3 express lanes is actually three different concessions: The LBJ Expressway, the North Tarrant Expressway (NTE), and the NTE 35W. Cintra and Meridiam developed and invested in all three concessions alongside APG. The case study examines the performance and economic impacts of the network, parts of which have been in operation for more than a decade.
Meridiam is a global investor, developer, and long-term asset manager of resilient infrastructure, and has developed a pretty unique portfolio of express lanes for an infrastructure fund manager. The firm developed, invested in and manages the I-66 Outside the Beltway Express Lanes concession in Virginia (alongside Cintra and APG); the C-70 Managed Lanes project in Denver (alongside Kiewit); and the SR-400 Express Lanes project, which is currently in development in Georgia (alongside ACS and Acciona).
Note: This interview was conducted prior to the announcement of the I-285 East Express Lanes preferred bidder in Georgia.
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Nicolas Rubio
PWF: Perhaps the best place to start is the TEXpress case study. Could you speak a bit about the projects and their performance or impacts?
NR: I think those projects are a good illustration of why we’re seeing the express lanes industry really start to grow today. When we bid on the first of those projects in 2008 just after the financial crisis, many toll roads were underperforming. At the same time, in these cases we had a robust record of traffic in the existing free lanes, so it wasn’t like bidding on a greenfield toll road. In hindsight that seems obvious now, but it was a confusing time to bid and a relatively new sector at the time.
And yes, I think in hindsight the results of the project – not just as an investment but as a public service – really speak for themselves. The rebuilt corridor has yielded travel time and reliability improvements to users of both the managed lanes and the general-purpose lanes (on average, 161 and 39 minutes per week respectively), bringing users of both options to excellent service satisfaction levels. The safety record is clear. The value proposition of these projects – in terms of alignment and public benefits – which we’ve discussed at length, can now be seen in actual performance as well.
PWF: One of the most interesting parts from the report to me was the user behavior for the express lanes – particularly the finding that 85% of users only use the express lanes one to three times per week, and that 70% of users spend less than $30 per month. Express lane critics have called them “lexus lanes” to imply that only the wealthy use them, but that doesn’t look to be the case in Texas.
NR: I’m not aware of these projects performing as critics have said – “lexus lanes” – anywhere. The user behavior that you see in Texas is more or less consistent across other projects as well, so I didn’t find those figures unusual.
It does challenge some of the usual assumptions around the value of time, though. We often think customers have a fixed value of time and are making a decision based on that each time, but that isn’t how it works. This isn’t just a decision on time but on the quality of the experience. It is important to design these projects with the perspective of the customer; to ensure a better experience.
There are some people who use it every day, but most aren’t. And people aren’t making a decision based on a value of time, but on how they’re feeling, where they need to be, and how much risk they are willing to take on their travel that day. If it were just a mathematical utility calculation then when there was no traffic in the general-purpose lanes there should be no one in the express lanes, but that isn’t what happens.
PWF: The NTE project has paid $314 million back to Texas as well. Is that just because demand and revenue forecasts for the project are exceeding expectations or are there other sources?
NR: The contracts in Texas and elsewhere have gain-sharing provisions for when revenues exceed certain pre-agreed thresholds and for specific financing optimization scenarios.
But what is really interesting in these projects is that when interests are aligned and the partnership works well – as has been the case in Texas since 2008 – there are multiple opportunities throughout the life of the asset for connectivity and other performance improvements which create additional value for communities, customers, investors, and the state.
PWF: So, there is an intuitive argument that these express lane projects also improve traffic in the existing free lanes, as long as they are adding capacity and not taking a free or HOV lane and converting it into an express lane or something. That is simply because any traffic that uses the express lane will reduce demand for the free lanes. However, is there also empirical evidence to support this from the NTE or otherwise?
NR: There are multiple benefits for general-purpose traffic in most of these projects, not only for traffic performance improvement, but also quality-of-service benefits. Many of these concessions require the concessionaire to maintain the whole road, providing the same quality of maintenance service for both the free and express lanes. The concession agreements in many cases also require significant additional investments beyond the express lanes, including rebuilding the general-purpose lanes, adding free capacity over time – as we did with NTE – or making other general improvements.
Then, yes, obviously you’re taking traffic out of the general-purpose lanes so there is less traffic there, but I think that is a mistaken way to describe the impact. For example, with NTE, we have seen driving conditions in the free lanes improve over pre-construction levels even with the same number of lanes carrying higher overall traffic volumes. This is not only due to better design but also to the flattening of the daily traffic profile as capture rates are higher during peak and lower in off-peak hours. People may not always appreciate that shaving a small amount off of peak traffic can have a huge multiplier effect on performance.
PWF: How about takeaways for other states. Obviously one of the reasons you put together the case study is to encourage other states to consider the projects and the procurement model as a transportation solution. Honestly, they appear to be one step ahead of you. However, these aren’t the optimum solution to every transportation problem. What are some of the regional conditions that allow projects like TEXpress to be successful, not just economically but in terms of providing the greatest public benefit?
NR: Let me first say, Michael, that the main reason why we put together the case study was to share what we believe to be an excellent story with its primary beneficiaries: the people of North Texas. We are good at developing and operating infrastructure, but at times, not as good at telling the story. And this is a beautiful story to share.
Now, back to our question. For starters, there are two sine-qua-non conditions for an infrastructure investment at large to succeed: First, it has to be critical infrastructure, not just a welcome development. Second, it has to be backed by strong political and community consensus. Those two things are related but not always the same.
With that in mind, the next condition is having a fair and transparent procurement process and a project structure that encourages healthy competition and then strong alignment between the public and private parties to achieve long-term success. Things work better for everyone when the developer’s financial success is conditional on providing excellent quality of service to the customer through the life of the project.
Another key factor for success is capacity and flexibility on the public side to review alternative concepts and provide fair feedback prior to the submittal of bids. During the procurement there is typically room for innovation via [Alternative Technical Concepts or ATCs] from the private sector. However, when ATCs are accepted they create new environmental risks because the new work will need to be permitted. In the 2008 Texas projects, ATCs were welcomed provided only bidders would take the full environmental review risk, which discouraged innovation. The recent procurements in Georgia and Tennessee have seen greater bidder innovations precisely because those DOTs were willing to have skin in the game and share environmental review risk.
And lastly, a positive move I see trending today is DOTs’ smarter approach to risk allocation. Moving from a “push-as-many-risks-as-you-can-to-the contractor” strategy to a more thoughtful approach factoring in how the transfer of the different project risks may impact the ultimate delivery pricing – and therefore the public benefit. I think that is a big improvement for all sides.
PWF: Well what are the headwinds then? They clearly exist, even in states that are interested in express lanes as a policy solution. The I-77 South project was recently cancelled in North Carolina, though it appears to be back on now.
NR: Obviously there are some and they are important. One that is clear in hindsight in Texas is that there were some stakeholders that feared that this transition to a new procurement model would impact their own business opportunities. These projects really improve transportation network and create true value, so I think a challenge for the industry will be to make sure there is room for legacy stakeholders and to make room for everyone to benefit. I think increasing the involvement of American contractors in particular is very important.
The other big headwind in my view is the industry’s poor record communicating the benefits of this model for all stakeholders. As mentioned before, this is one of the main reasons why we put together this North Texas managed lanes case study.
The private development of critical infrastructure is too many times seen just as an alternative financing tool. While alternative finance is part of it – at very competitive prices when the risk transfer is taken into account – the ultimate benefit of the model is its ability to deliver better, faster and more efficient infrastructure.
PWF: Could bid discipline be an issue for the industry in the future? When the SR-400 procurement ended a few years ago, the concession fee offers were pretty mind blowing, but in that case there actually wasn’t a – relatively at least – huge gap between the bid teams. I think everyone is still trying to get their head around the numbers coming out of the I-24 procurement from Tennessee last month.
NR: Interest in these projects is clearly growing. At the same time, procurements are long and expensive and require tremendous resources. In my view, there will continue to be plenty of competition for these procurements going forward provided only there are clear rules of the game which are respected. Open questions on procurement fairness will discourage competition globally.
I obviously cannot comment on some of the ongoing procurements, but I can speak generally. In an environment with a growing number of states bringing opportunities to the market, clarity on procurement and scope will be existential. One key element to improve the industry’s ability (and willingness) to price a procurement is to avoid uncertainties on the final project scope. While I understand that attaching to initial hard bids the potential for future extensions may facilitate a DOT’s management of those future developments, that option injects substantial uncertainty, opens the possibility for “gaming”, and ultimately can leave significant public value on the table.
PWF: Not to get too technical, but could you speak to how the government’s dynamic tolling rules or algorithms work, and whether that might impact the pricing we’re seeing for some of these procurements?
NR: Tolling regulations in the concession agreements are critically important, and do differ between projects. And yes, that does drive a wide range of concession value inputs.
For example, in the Texas projects – whose contracts are available on TxDOT’s website – under normal traffic conditions, toll rates are capped to pre-set maximum values that escalate over time. When driving conditions in the express lanes start to deteriorate, the concession contract mandates toll rate increases to avoid congestion and ensure we keep providing an optimal service to customers, which is our ultimate purpose. The same principles apply in other states although the precise rules and algorithms may differ.
Nicolas Rubio is CEO of Americas, Meridiam. The testimonials and endorsements provided herein by N. Rubio were not compensated.