The financial assumptions and rules built into a public-private partnership from the outset determine how much money a lease generates for a state and how those funds should be spent. Some governments want upfront, one-time payments to last until the lease expires, but others are content to use them as a shot in the arm to upgrade their infrastructure dramatically and quickly. (See Exhibit 5 on page 29.) In Indiana, for example, the $3.8 billion upfront payment for the Toll Road is being used to pay outstanding toll bonds and to fund the "Major Moves" program, the state's 10-year transportation plan. A large upfront payment does not drive deal making in all cases. Sometimes a state opts for a smaller first payment with the promise of additional revenue over future years. The Pocahontas Parkway in Virginia, for example, features a revenue-sharing agreement. If the concessionaire achieves a pre-tax, internal rate of return of 6.5 percent, the Virginia Department of Transportation is entitled to 40 percent of excess toll revenues. This entitlement increases to 80 percent if the internal rate of return equals 8 percent.67 Other times, governments pursue the deals because they believe the private sector can operate the road better.
Looking at the concession prices in France versus those paid for the Chicago Skyway and the Indiana Toll Road, researchers Germa Bel and John Foote concluded that the American deals were designed to maximize the upfront payment the government received, with longer deal lengths and more aggressive toll-setting allowances.68 In contrast, European concessions tend to be driven less by financial gain and more by the search for operational efficiencies. |
THE FRENCH DEAL-MAKING PROCESS |
France - Autoroutes de la France Facts and Figures • Leased in 2006 • 4,654 miles of road • Three separate deals at prices of $14.12 billion, $10.65 billion and $28.16 billion1 • Leases expire in early 2030s • Annual toll increases are limited to 70 percent of the Consumer Price Index, which means that tolls actually decline in real terms France entered into three separate concessions of its highway system in 2006. Each bidder had to provide a business plan and an industrial (enterprise) plan. With the requirement of these two documents as part of the bidding process, the French government required a higher level of transparency, especially for the financial assumptions adopted by the bidder. This step has not been required in any of the existing American concessions. Within the business plans the bidders were required to disclose their assumptions about traffic volumes, toll revenues, required maintenance and capital expenditures/ investments and the financial structure (level of debt/equity). The industrial plans disclosed details about how the bidders would approach a variety of issues related to the roads, including how they would be operated and maintained, and how management and labor questions would be addressed. Both plans were subject to review, comment and examination of reasonableness by the French government and formed an integral component of the bid-evaluation criteria. Source: Daniel Albalate, Germa Bel and Xavier Fageda, Privatization and Regulation of Toll Motorways in Europe (Irea Working Papers, University of Barcelona, Research Institute of Applied Economics, March 2007). 1 Assuming exchange rate at the time of 1 Euro to $1.18. |
States pursue long-term infrastructure leases with different revenue targets and needs in mind. But if they intend to save any of the principal for future use, they must assume interest income into their calculations of the lease's value. These assumptions include everything from the state's funding needs and obligations to the expected rate of investment return in 50 or 75 years-if policy makers have a goal of stretching the monies that farû
For a private firm, the main value proposition rests in its ability to raise revenues through tolls. The most significant reason for the relatively high prices paid for the Chicago Skyway and Indiana Toll Road is that the private operators can usually raise tolls at a faster rate than the governments had historically increased them.69 In Indiana, for instance, the average toll paid more than doubled within two years of the concession's start.70 In all of the American road concessions, the agreed-upon toll escalation rates guarantee that, at a minimum, the real price of tolls will remain constant or increase. In Europe, in contrast, toll increases are functions of a combination of inflation, productivity improvements, quality of service and errors in forecasted traffic volumes. For example, in France, the concessions of its motorway system arrange for the real price of tolls to fall over the concession term, because rates are set to rise at only 70 percent of inflation.
The concession agreements seen to date in the United States stretch over a longer time frame-generally 75 or 99 years-than in Europe, where they tend to last 20 or 30 years. The principal reason for the difference is the desire in the American deals to attract the highest possible upfront payments. The concessionaires are more willing to offer higher bids if they will have a longer term over which they can collect- and raise-toll revenue. Some experts also believe that other factors, such as tax laws, drive American concession lengths. If the concessionaire is deemed the "constructive owner" of the highway by virtue of controlling the road beyond its usable life, depreciation expenses from the highway can be written off on federal income taxes.71
Additional financial considerations are factored into the deal's worthiness by both the private and public sectors. For example, the private sector often faces higher borrowing costs. Unlike the public sector, it cannot issue tax-exempt debt. Some proponents of such concession deals contend, however, that the higher costs of financing are offset by improved operations and capital efficiency, investment returns and often the willingness to raise tolls higher and more frequently than the public sector. With regard to all questions of the cost of capital, policy makers should not base their decisions solely on tax preferences or exemptions, or assume that it is always more costly for private operators to borrow-consider that state interest rates for municipal bonds have increased substantially over the last year-just as policy makers cannot assume that the private sector will necessarily operate more efficiently than the public sector.