I’m no stranger to tollroads. When I was a child, my family drove from Illinois to the Jersey shore every summer to visit relatives. To get there, we used the Indiana Tollway, Ohio Turnpike, Pennsylvania Turnpike (the first limited access highway in the nation) and the New Jersey Turnpike. I can remember flipping those AAA TripTik pages as we passed major exits and crossed state borders. A once-every-trip treat was being able to stop at one of the Howard Johnson rest areas and eat a fast-food hamburger with ice cream for dessert rather than eating the relatively healthy (but boring) meals my mother packed in the cooler and we ate at the rest area picnic tables. With four kids in the family, paying for restaurant meals was something she tried to avoid (not to mention finding a table for six).
I’ve also spent countless Saturday early mornings and late evenings on the Chicago Skyway.
So I’ve seen tollroads in action. And they always seemed to be full of traffic, mainly because they were all in congested areas with very few viable alternative routes.
But just last week, driving back home from Tybee Island, Ga., we used the 16-mile long Greenville Southern Connector to bypass Greenville rush hour traffic. And we succeeded beyond our wildest expectations. We were the only car on the road. The lonely tollbooth attendant was surprised to see us and tried to engage in small talk (not uncommon in South Carolina, which could be called “The Chat ’Em Up State”). Once we were home, I had to look up the history of this spur and see who owned it — because obviously some investor was losing its investment.
Turns out the Southern Connector was an early public-private project – owned by the public South Carolina Department of Transportation and financed with private bonds by the non-profit Connector 2000 Association, Inc. (C2A), which holds a 50-year concession to manage the road. The tollway opened in February 2001 but by 2007, things were going south because ridership was not meeting original estimates (does it ever?). The group had predicted that tolls would be generating $14 million per year by that time. Turns out those projections were a bit optimistic. By 2007, the road was only generating $5.4 million in revenues — about 38 percent of forecast.
The group struggled on, looking for a buyer to take over its concession, but the numbers obviously weren’t very attractive. On June 24, 2010, the Southern Connector filed for bankruptcy.
The road came out bankruptcy a year later and now appears to be on better footing — though its recovery is due more to the restructuring of debt and lower interest rates on the bond payments than increased ridership. Tolls are slowly being increased and ridership is also slowly increasing. But 2013 toll revenues were still only at $6.96 million.
Why didn’t this road meet expectations? Part of it has to do with culture. People in the Northeast are used to paying for roads. People in the South aren’t. I’d be willing to bet that a lot of those using the road are northern transplants. So culture plays a part. But so does the fact that the road was really built to serve as a catalyst to growth in southern Greenville County — and the recession brought the hopes of growth to a screeching halt – road or no road. Tollroads work best when they are relieving congestion in already congested areas, not when they are being used as ways to encourage as-yet-undefined development in an area. Tollroad projects in Texas have run into the same problem. There’s no reason to pay a toll if alternative routes are available.
So what’s this say to investors looking at tollroad public-private partnerships? Be careful! Look both ways. Then look again. Turning I-95 into a toll road through Virginia makes a lot of sense because of the congestion in the area and the location of the existing road. Building a new road through forests and swamps in the sparsely populated Southeast doesn’t. At least not for the investor. Greenville and South Carolina have actually profited from the road because they were able to access matching federal funds to use on other road projects. The investors and bond holders, however? This tollroad has taken a toll on them — and probably on the future of toll roads in the South.
Not a subscriber to IREI Insights blog? Sign up to receive alerts on new blog posts.
Sheila Hopkins is managing director – Europe and infrastructure at Institutional Real Estate, Inc.
