Wednesday, May 10, 2006

Other States To Follow Daniels Lead On Toll Road Privatization

Andrew Bary writes in the latest edition of Barron's about how America's toll roads have become hot assets for privatization efforts, spotlighting the Chicago and Indiana toll road privatization deals. Bary writes:

AMERICA 'S TOLL ROADS, BETTER KNOWN for political patronage than for strong business and financial management, suddenly are hot assets. Already, foreign companies have paid rich prices for highways in Chicago and Indiana. And similar deals could be made over the next few years for the Ohio Turnpike, the Illinois Toll Highway , several toll roads around Houston, the Atlantic City Expressway and perhaps even the New Jersey Turnpike , America 's best-known toll road, featured in the opening credits of The Sopranos. Private money potentially also could fund a multibillion-dollar toll bridge that would replace the aging and congested Tappan Zee span across the Hudson River, north of New York City. The impetus toward privatization is partly financial and partly political. It's estimated that the nation might need to spend $92 billion annually just to maintain increasingly congested U.S. highways and bridges, let alone improve or expand them.

The toll road deals in Chicago and Indiana have opened the eyes of politicians all across the country according to Bary. He writes, "The $1.8 billion purchase last year of the Chicago Skyway and the $3.8 billion deal last month for the Indiana Toll Road have opened the eyes of politicians, who didn't recognize that their toll roads could fetch such hefty sums." The financial community thinks there's going to be many more privatization deal. "This is just the beginning," says Philip Villaluz, a municipal-bond analyst at Merrill Lynch. "The shock value of these price tags is getting the attention of politicians across the country."

So what's the allure to the investors? Bary says, "The lure for the investors is that, before maintenance costs are taken into account, the margins on toll roads can be 80% or more. But, ultimately, how well the investors do depends on the upfront cost of the roads, revenue growth and what they must pay in interest, maintenance costs and capital expenditures." Deals are also being made to build brand new toll roads. In Texas, the Spanish-owned Cintra will build a 316-mile toll road from San Antonio to Dallas that's expected to cost $6 billion according to Bary.

Is there an upside for motorists. Bary thinks so. He writes:

The upside for motorists is that the highways should be run better under experienced private operators, which recognize that if drivers are unhappy, they will seek alternative routes. The eight-mile Chicago Skyway didn't even have an electronic toll-collection system until the Cintra/Macquarie group took over, and the Indiana Toll Road still doesn't have one. Electronic tolls are very popular with drivers and account for about 60% of annual U.S. toll revenue . . . Toll authorities often are inefficient because profit maximization generally isn't a top priority. Patronage also can be a problem.

Gov. Daniels tells Bary that he once asked how much it cost to collect a 15-cent toll. "This being government, nobody knew, and they finally came back to me and said it was 34 cents. My response was that we'd be better off on the honor system," says Daniels, a Republican who was a federal budget chief in the Bush administration.

Bary concedes the downside to privatization may be higher tolls for motorists, but credits Mayor Daley and Gov. Daniels for being mindful of this concern. He writes, "But Chicago and Indiana politicians, aware of a potential backlash from voters, negotiated contracts that allow toll increases only at pre-determined dates or based on measures of inflation or economic growth." Bary also think motorists will like the infrastructure projects that the road deals will help finance. "Daniels called the transaction for the 50-year-old Indiana Toll Road a 'Louisiana Purchase of our time' because the windfall will allow the Hoosier State to move forward with a host of highway and other projects 'that would have remained on the drawing board for decades.'" More privatization deals may be in the offing for New Jersey, New York and Ohio.

Something critics will likely grab on to in the Bary's article is how the investors finance the debt they use to lease the toll roads. In the case of Indiana, Bary writes, "The good news for the Cintra/Macquarie group is that it didn't have to guarantee the Chicago and Indiana debt; the lenders accepted the road lease as collateral. Moreover, the group already has cut its exposure to the Chicago Skyway by refinancing that debt, allowing it to remove about 40% of its equity investment. Financial Security Assurance, the financial-guarantee company, is now on the hook for $1.4 billion of debt, backed only by the Skyway lease."

Bary also reports that the deal has not gone over well with Cintra/Macquarie's Australian investors. Its share are flat this year he reports. At least one Goldman Sach's analyst think the deal was bad for Cintra/Macquarie. Allison Booth says "it's difficult to see how this transaction is going to be value-accretive to MIG security holders." Bary says her concern is that "increasing competition for new toll-road projects is resulting in monopolistic returns being competed away." Bary deadpans in conclusion, "As Tony Soprano might advise: Take the money before they wise up."

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