SH 121 Toll Project, Texas, USA

Skanska Infrastructure Development

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Summary

Talanworth commenced working with Skanska Infrastructure Development in the summer of 2005. Skanska ID wished to add Talanworth’s project finance expertise to the established skills of its expanding US offices.

That year, Skanska submitted an unsolicited proposal to the Texas State Department of Transportation (TxDOT) www.dot.state.tx.us for State Highway 121 (SH 121) as a toll road project.  TxDOT later chose to develop SH121 into a full public-private partnership (PPP) toll road under the terms of a Comprehensive Development Agreement (CDA).

The scope of work for Talanworth encompassed liaising with project advisers and consultants, including the financial advisers and lead arranging banks, monoline insurers, rating agencies,  as well as traffic consultants, insurers, tax and accounting representatives, and legal advisers. Talanworth also provided strategic support to Skanska during its negotiations with the state.

As the project evolved, other sponsors were added to the team and Talanworth, in turn, expanded its assistance to the full group of sponsors for development of the bid.

In January 2007, TxDOT received three private sector bids and selected a preferred bid. Then in May 2007, the North Texas Tollway Authority (NTTA) www.ntta.org submitted to the Regional Transportation Council a public sector proposal to finance, design, construct, operate and maintain the SH 121 toll project. As a result, the Texas Transportation Commission on 29 August 2007 cancelled the SH 121 toll road project as a CDA and authorised the finalisation of an agreement with the NTTA.

As is common for all US PPPs, the project is governed by a strict Non-Disclosure Agreement so the information provided here about third parties is limited to publicly available information and Talanworth accepts no liability for any reliance which users of this web site may place on such information.

Detail

Project Description

A map of the tollroad is available on TxDOT's Texas Tollways web site www.texas121.org.

The Dallas-Fort Worth Metroplex is responsible for 34% of the GDP for all of Texas (source:  US Bureau of Economic Analysis), and makes up 31.3% of the state population, 27% of the labor force, and 26% of all wage and salary jobs (source:  US Bureau of Labor Statistics).  The total Gross Domestic Product (GDP) of the Dallas-Fort Worth region in current dollars was more than $284 billion in 2005 (source:  US Bureau of Economic Analysis) and as at 2006 Texas would have ranked 9th in world GDP terms (Sources US Bureau of Economic Analysis and IMF GDP at constant prices)

SH 121 is an important link in both the regional and national transportation infrastructure, and an increasingly important route for national and international trade activity.  The Dallas-Fort Worth metropolitan area is equally close to the five largest business centers in North America:  Chicago, New York, Los Angeles, Mexico City and Toronto (source:  Dallas-Fort Worth Airport website), and is home to the nation’s largest “Inland Port” with over 600 motor / trucking carriers and 100 freight forwarders (source:  North Central Texas COG). 

The improved access to the Dallas-Fort Worth Airport provided by the Project is critical to the North Central Texas region’s continued economic success. Located halfway between the cities of Dallas and Fort Worth, Texas, DFW International Airport is the world's third busiest, after Atlanta Hartsfield-Jackson and Chicago O'Hare International, offering nearly 1,900 flights per day and serving 60 million passengers a year with seven runways and five terminals using 152 active gates. DFW International Airport provides non-stop service to 135 domestic and 36 international destinations worldwide. The 2006 Financial Report for the airport states that it made a $14.3 billion contribution to the local economy employing nearly 268,500 There are 22 Fortune 500 headquarters in the Metroplex with more than 85,000 local employees. The Metroplex has a population of approximately 5.8 million people, fifth among U.S. metro markets. Population growth and business diversity are significant drivers of the Airport’s business.  (source:  Dallas-Fort Worth Airport website).

Project Rationale and background

TxDOT is a state agency responsible for planning, designing, building, operating and maintaining the transportation system of the State of Texas www.dot.state.tx.us. TxDOT goals are to reduce congestion, enhance safety, expand economic opportunity, improve air quality and increase the value of the state’s transportation assets.

Texas has about 300,000 centerline miles of roads (state as well as locally maintained), 49,000 bridges, 12,000 miles of rail lines, 35 urban transit systems, 41 rural transit systems, 16 inter-city bus lines and Amtrak, 27 commercial service airports, 21 executive or freight only airports, 250 county airports, 27 water ports, 423 miles of Gulf Intracoastal Waterways, and 31 international motor vehicle and rail border crossings. Source TxDOT Strategic Plan 2003 – 2007.

TXDOT maintains some 79,000 miles of highways including interstate highways, of which US highways are 12,100 miles, state highways 16,200 miles plus farm-to-market roads. The department also registers motor vehicles (18.4 million vehicles registered), provides travel information, licenses automobile dealers and oversees many other programs. 

As of 2006, TxDOT had 14,831 employees and an approved spending appropriation of $15,162 billion from all funds including $7 billion from Federal Funds spending $6.9 billion on Federal Programs.  Source: Texas Fact Book Seventy-ninth Texas Legislature.  TxDOT’s Strategic Plan 2007-2011 provides a breakdown of revenues and expenditures.

TxDOT gained experience from the Trans-Texas Corridor (TCC) project which is described on its web site.  With the experience of the TTC, TxDOT developed further plans for the procurement of concessions that would generate considerable revenues for the State from the upfront payments paid by successful bidders for the right to the concession, from sharing of toll revenues and other payments that bidders choose to propose in open competition, such as payments linked to certain conditions being achieved.

The concession would be governed by extensive terms and conditions including obligations to construct, finance and maintain roads within the State-owned right of way, the right to operate a toll-road subject to tightly controlled toll regimes, service standards obligations including safety, and rights for the State to take back the concession. These and further terms and conditions would be laid down in a Comprehensive Development Agreement (CDA) developed around a common framework with specific provisions for each transportation project. 

The CDA would be an agreement entered into between the State and special purpose entities established by the successful private sector bidders. The intention is to create public private partnerships that generate substantial funds for the State to spend on additional infrastructure and also to fast - track new developments undertaken by private sector firms under the terms of the CDAs.

In 2004, the Texas State Legislature passed House Bill HB 3588 enabling private toll concessions by giving TxDOT the authority to contract toll concessions based on long-term leases in a competitive procurement process. This legislation allowed TxDOT to commit to spending $30 billion on preserving and expanding the state road network for the period 2004 -2008.

Widely reported by the media, these projections have been scaled back as a result of challenges from the Legislature (known as “Lege”) which have had the effect of reducing forecast cash flows available to TxDOT.  The effect was presented by TxDOT to the Texas Transportation Commission in September 2007 details of which can be found on TxDOT’s web site.

The challenges faced in the future and TxDOT’s plans for meeting them are contained in the Strategic Plans available on TxDOT’s web site.

Project Timeline

In January 2005, Skanska ID submitted an unsolicited proposal to TxDOT to promote the concept of developing the SH 121 as a PPP under TxDOT’s CDA program.

TxDOT then issued a request for competing proposals and qualifications in March 2005.  In response, Skanska ID submitted on June 23, 2005, a proposal and qualification submittal (PQS) to develop, design and construct, and potentially finance, operate and maintain portions of SH 121 from Business SH 121 to US 75 in Denton and Collin Counties, as well as other potential facilities to the extent necessary for connectivity and financing, under the terms of a CDA.  TxDOT then down-selected to a short list of proposers, which included Skanska ID.

Talanworth commenced work for Skanska on the SH 121 in August 2005.  The scope of work undertaken is detailed later in this case study.

In January 2006, TxDOT conducted an industry review via CDA Workshops to obtain feedback from the industry on how CDAs should be developed as described on TxDOT’s web site.  Talanworth worked with Skanska ID’s senior management to draft feedback and coordinate its response.  A number of the issues addressed in the feedback, which were likely echoed by other proposers, were subsequently incorporated in the CDA for the SH 121. 

In parallel to this process, TxDOT proceeded with the development of the SH 121 and other projects but the local political situation delayed the SH 121 project, a cause and effect situation that is beyond the scope of this case study.

On May 12, 2006, TxDOT issued its first Request for Detailed Proposals (RFDP) shortly followed in May 25, 2006 by the RFDP package #2.  This consisted of the Instructions to Proposers (“ITP”) and a draft CDA Term Sheet.  At this time TxDOT announced to shortlisted proposers that that the NTTA had stated its intent to submit a formal request to TxDOT to allow NTTA to deliver, operate and maintain the project. To promote fairness, TxDOT intended to consider such a request from NTTA subject to certain conditions laid out to proposers.

TxDOT launched an Industry Review of the RFDP, which at this stage included the CDA in Term Sheet form, and launched a Q&A procedure seeking comments on the documents from the shortlisted proposers at private one-on-one meetings with each proposer.  This Q&A procedure included seeking feedback from proposers on TxDOT’s plans to apply for an allocation of Private Activity Bonds (PABs) under the recently announced SEP-15 (a experimental process to identify and evaluate PPP approaches), and also to the Federal Highway Administration (FHWA) for approval of support under the Transport Infrastructure Funding and Innovation Act (TIFIA).

In August 2006, TxDOT issued RFDP #3, with an updated ITP and a draft CDA.  Addendum 4 detailed refinements to the documents, and further Q&A sessions continued leading up to the bid submission in January 2007. Information about the RFP documents in these latter stages is currently available on TxDOT’s web site.

In response to the RFDP #3, TxDOT received three private sector bids as reported to the Texas Transportation Commission on February 28, 2007 and made a selection of the preferred bidder.  However, the North Texas Tollway Authority (NTTA) submitted to the Regional Transportation Council in May 2007 a public sector proposal to finance, design, construct, operate, and maintain the SH 121 toll project. Details of the NTTA proposals can be seen on its web site.

The Texas Transportation Commission on 29 August 2007 cancelled the SH 121 toll road project as a CDA and authorised the finalisation of an agreement with the NTTA.

With that announcement, Talanworth’s role ceased with this project.

Talanworth’s scope of work

Talanworth was integrated into the management structure for the project working extensively with the local client teams in Dallas and Washington, and with the financial advisors, legal advisers, tax advisers, lead arranging banks, rating agencies and monoline insurers in New York and also in London.  As the team was expanded to include additional sponsors, Talanworth’s role evolved accordingly with their teams in New York.

The objective was to take a major role in developing the project and the scope of work included:

Bankability review of the construction contract which involved liaison with Skanska ID’s contracting operations and their partners.

Assisting with the finalisation and documentation of the mandate appointing the financial advisers, which included the development by such advisers of a comprehensive financial model.  Working closely with the financial advisers based in New York was a material part of the work, which included:

• Writing the specification for the financial model, assisting with its development and optimisation of the financial model in conjunction with all sponsors.
• Assessment of the suitability of innovative financial instruments such as Private Activity Bonds and TIFIA financing, and use of derivatives.
• Meetings with and presentations to monoline insurers, including obtaining commitments.
• Presentations to, identification and selection of lead arranging banks, including negotiation of their mandates, negotiation of credit and security documentation, drafting of the Project Information Memorandum and briefings on revenue analysis used to obtain credit approvals, and obtaining support letters for the financial bid.  Management of the relationships with banks and their advisers throughout.
• Preparation of presentations to the rating agencies and discussions and meetings led by the financial advisers.
• Review of bond underwriting documentation and support letters.
• Writing the financial bid, details of which are strictly confidential.

Working with legal advisers based both in Texas and in New York, including all project documentation both for the CDA and for the underlying detailed contracts and heads of terms agreed with all project participants.  This included assisting senior management to develop scope of work for the legal advisers and to optimise their involvement in the project.

Review of the programmatic CDA documentation established by TxDOT as described above and also comprehensive reviews of the ITP and CDA documentation, including producing detailed position papers and preparing for the one-on-one meetings with TxDOT on commercial, financial and legal aspects, including with lenders and their legal counsel where appropriate.

Facilitating the commercial / financial discussions with the state, in close co-operation with the Commercial Director, at many of the one–on-one meetings, including the drafting and presentation of briefing papers to the state and their advisers.

Taking a leading role in preparation of the questions submitted during the Q&A process, and assessment and management of the consequences of the answers provided by TxDOT or on their behalf.

Working with Skanska central financial management on the selection, project presentation, negotiation of fees, drafting of agreement and appointment of insurance advisers, and also the tax and accounting advisers.  Assisting in the Management of relationships during the development of the project, including building in the advice received into the project documentation. Responsible for keeping such parties updated as the project dynamics progressed and developed.

Working closely with the revenue forecasting team assisting the client team and also the traffic consultants and lenders own advisers.

Design and oversight of the management of the comprehensive due diligence process followed by lenders with their traffic and technical consultants and legal counsel.

Assisting with the development of the operations and maintenance contracts, including developing the operating cash flows for the special purpose vehicle in conjunction with the teams responsible for detailed development of the toll operations and for human resources.

Talanworth assisted with the development of the management structure for the Special Purpose Vehicle (SPV), especially the financial function.  Staff build-up and HR planning was integrated into the cash flow forecasts, allowing management to take a flexible approach

Talanworth also assisted with project team presentations to central management covering especially aspects related to risk allocation and the impact on financing the project.

Close working relationships were established with both the US teams working in Dallas, Texas; Washington, DC; and New York, and also with central management in London and Stockholm.

Benefits to the client

Ability to expand resources to meet project development needs without disrupting existing team structures.

Talanworth, due to of the extensive experience of Nigel Hawke as a project finance professional, is able to assist the client team to manage virtually any aspect of the project so covering the scope of a number of specialists. 

The client was able to benefit from the extensive international experience of Talanworth staff.  Such experience includes a number of projects requiring working with governments who are developing PPP-style markets for the first time. 

Due to Nigel Hawke’s former senior roles in both banking and industry he is able to integrate smoothly into the senior management team and becomes an additional source of expertise and advice.