Magnitude and Potential

Since the Chicago Skyway was leased to a private consortium in January 2005, transportation professionals, pundits and others around the country have observed that private investment in toll roads is a growing trend.5 Goldman Sachs recently raised $6.5 billion for its new infrastructure fund.6 The Indiana Toll Road was leased to a private consortium in 2006, and there are numerous other transportation projects involving increasing private sector participation throughout the U.S. Twenty-one states have now passed legislation enabling privatization of transportation assets.7

The State of New Jersey is now actively investigating the possibility of entering a PPP. The State has retained UBS Investment Bank to produce a series of reports evaluating State assets toward this end, and the initial report was released on November 15, 2006. The report does not explicitly recommend privatizing any specific asset, rather it inventories major State assets, describes different types of PPPs, and discusses how windfall revenue should be spent. The next phase of the UBS evaluation will discuss in depth how some of those options could be structured. UBS recommends the State choose a "Pathfinder Project" to get a large PPP underway quickly.

UBS examined 16 assets that could be subject to a PPP. Their potential for a PPP was ranked against a set of criteria such as the opportunity to increase net revenue production, improve operating performance and lower operating costs, and create additional business through alternative uses. Project size, security and safety management issues, non-commercial risk, and social impact were also considered. The 'best' assets for a PPP were the State Lottery and Atlantic City Expressway, followed by the Turnpike, Garden State Parkway, and others. In terms of 'market readiness,' the three highways again surfaced as the highest ranked assets. For the Turnpike and Parkway, UBS recommends forecasting traffic and revenue over a "minimum 50 year investment horizon."8 It does not estimate dollar values of assets but ranks them by value; as expected, the Turnpike is the most valuable asset examined.

There are several types of PPPs that could be used for the highways. PPPs are almost never outright sales of assets, conveying ownership entirely to a private party as has been the case with privatization of water and other utilities in the U.S. PPPs for transportation infrastructure are more likely to fall within a range of private participation, from an operating lease or management contract, to a long-term concession lease such as the ones used in Chicago and Indiana, to an initial public offering or trade sale where the asset is sold but the State may continue to participate by owning shares. As of the writing of this white paper in late December 2006, the structure of a PPP under consideration in New Jersey is unknown. The long-term concession has a track record in the U.S.9, however New Jersey's transportation assets are at an unprecedented scale for a concession in the U.S., and a new, unique PPP structure may be devised for this case.

The revenue that could be raised through a highway PPP could vary considerably depending on the structure of the deal and its terms for toll increases, labor agreements, competing facilities and other issues. One news report stated that a Turnpike PPP can raise at least $10 billion.10 Since the structure of the PPP is not known, it is impossible to determine whether that is a reasonable number. A long-term concession lease would probably bring in much more from the private sector: in Indiana and Chicago, the government signed leases with a private consortium of firms (Macquarie Infrastructure Group and Cintra Concesiones de Infrastructuras de Transporte, known as Cintra-Macquarie) giving it the right to collect tolls for 75 and 99 years, respectively, in exchange for a lump sum fee. In the case of Chicago, the fee was $1.83 billion, and in Indiana it was $3.85 billion. Given that the Turnpike alone raises 5.3 times more toll revenue than the Indiana Toll Road, a long-term concession PPP for the Turnpike is potentially enormous. In fact, the New Jersey Turnpike has the highest revenue flow of any tolled facility in the U.S.11 An alternative PPP structure, such as a shared ownership arrangement, could also potentially raise a significant sum, although probably less than a long-term concession.

Many of the policy concerns associated with PPPs are the same regardless of PPP structure.