The Public Will Not Receive Full Value

Putting a fair dollar value on a long-term toll road lease is difficult. As events of the last year have shown, the state of the broader economy and financial markets can change quickly and dramatically, leaving business plans and state budgets in ruins.

The current crisis in state budgets makes large up-front payments for toll roads difficult to resist. To give a sense of scale, the $1.8 billion sum paid for the 99-year lease on Chicago's Skyway is enough to pay every resident in Chicago a one-time sum of $643.61

The consortium that purchased a 75-year lease to operate the Indiana Toll Road paid an even greater sum: $3.8 billion. Potential privatization deals for the New Jersey and Pennsylvania turnpikes mentioned payments between $10 billion and $30 billion. For elected officials struggling to plug chronic budget shortfalls, these short-term windfalls are enticing.

As impressive as the upfront payments are, they pale in comparison to the likely value of the future tolls traded for them. The sums are smaller than public entities could generate doing the same financing themselves.

Financial analysis by experts in as-set valuation confirms that privatization deals have failed to supply full value for the future tolls that private companies are expected to collect.

• Analysis of the Indiana and Chicago deals by Dennis Enright of NW Financial, a New Jersey investment bank, found that the private investors in those deals would likely recoup their investment in less than 20 years. That analysis is confirmed in at least Indiana's case by the company that won the bid. The company, Macquarie, sent investors a presentation asserting an "anticipated 15 year pay-back to equity."62 Given that Indiana's deal is 75 years long, and Chicago's is 99 years, the analysis demonstrates that governments in these states received far less for their assets than they are worth.

• Economist and long-term valuation expert Roger Skurski at the University of Notre Dame found that the $3.85 billion Indiana Toll Road lease should have more reasonably been valued at $11.38 billion.63

• A study by finance experts at Penn State and Harvard calculated that based on the same schedule of tolls on the Pennsylvania Turnpike, the public could generate $26.5 billion over 50 years compared with $14.8 billion for a 50-year private asset lease.64 That same year, after deterioration of private capital markets, a private consortium subsequently offered $12.8 billion for a 75-year lease.

• In Texas, the Department of Trans portation (TxDOT) initially excluded a public toll authority from bidding to build and run a new toll road planned near Dallas, even though it connected to another one of the authority's roads. Instead, TxDOT accepted a $3.1 billion bid from the private company, Cintra. The bid, though seemingly large, would have generated an estimated 12.5 percent rate of profit for Cintra and would have required the public to compensate the company if a competing roadway was built within 20 miles. Due to outrage over the deal, one state senator initiated hearings, which led to a temporary moratorium on private deals and provided the opportunity for the toll authority to bid. The public authority's bid offered an estimated $1.9 billion in additional proceeds, calculated on a net present value basis, despite the public entity's higher estimated investment for constructing the road itself.⁶⁵ The state was able to cancel its initial contract with the private operator.

• A 2008 report prepared for the Virginia Attorney General's office said of the experience with the Dulles Greenway, an early "green field" project, "it has been well known for some eighteen years that a private toll road would be significantly more expensive than a publicly funded project."66

• In 1999, Ontario, Canada, received $3.1 billion for the lease of toll road 407 ETR. In the following years, commercial and residential development exceeded government projections, and the value of the road increased. In 2002, a valuation con-ducted by an investor in the concession estimated that the road was actually worth $6.2 billion Cana-dian.67

Figuring out the fair price for a toll road is a high-stakes guessing game. The long-term value of the upfront payment itself depends on predicting correctly the extent to which inflation will erode the value of those dollars and the rate of return investors could have otherwise garnered with the money. Expected revenues depend on future toll rates and how many cars and trucks will use the road, as well as what-ever lesser revenue may be obtained from service area vendors and development of future advertising and amenities. Private concession deals attempt to reduce uncertainty by indexing future toll rates to factors such as inflation and the growth of the national economy, but much uncertainty remains on the revenue side. Meanwhile, the road operator's costs will depend on factors such as future maintenance and improvements, the number of workers that will be employed, and the cost of providing road safety and snow removal. All of these factors will themselves be influenced by future trends in transportation technology and demographics as well as the degree to which the road operator can shift costs onto the state. Furthermore, some private investors may gain substantially by refinancing their projects after a deal is completed. Sometimes allocation of these refinancing gains is included in the agreement; however, quite often they are not considered.⁶⁸

To be fair, it is not only state governments that have a difficult time estimating the value of toll roads. Private investors - fueled by the speculative fervor of the last decade - have also made big missteps. In late 2008, as a result of lower than projected traffic and the repercussions of the financial crisis, Macquarie Infrastructure Group was forced to write down the value of several of its toll road properties in the United States. The company wrote down the value of the Dulles Greenway by 13 percent, the Indiana Toll Road by 45 per-cent, the Chicago Skyway by 21 percent, and California's South Bay Expressway by 91 percent.69 Published reports have suggested that Macquarie may even be at risk of defaulting on debt payments for the Indiana Toll Road and the South Bay Expressway due to lower-than-expected revenues from the highways.70

Concession agreements must include clear provisions to deal with the potential for default - including provisions that guarantee ongoing maintenance of the highway and the quick and orderly reversion of the highway back to state control. (See page 27.)

But while both government and private actors can fail to put an accurate value on toll roads, the public is likelier to end up getting the short end of the deal.