This paper analyzes the large difference in the prices paid by investors for US concessions relative to the prices paid for French concessions using the Chicago Skyway and Indiana Toll Road in the US and Sanef, APRR and ASF in France as the sample. The significantly higher price-earnings multiples paid for the US concessions can be explained by two primary factors; structural differences between the US and French concessions, and procedural differences in the processes used by the City of Chicago and the State of Indiana and the French government to privatize their respective toll roads.
With respect to the structure of the concessions, both Skyway's and the Indiana Toll Road's longer lease terms, higher allowable toll rates and absence of capitalization restriction are major drivers of the higher prices paid by investors for those roads.
The procedural difference that had a significant impact on price was the auction award criteria. In the US concessions, "high bid wins" was the sole award criterion, The biding protocol gives the bidders the ability to make financial modeling assumptions that are not transparent to the public owner (and therefore not subject to review and evaluation). The lack of visibility into the bidding assumptions presents the opportunity for some bidders to overestimate the value of the concession, as is evidenced by the wide spread between the winning and second place bids in the US auctions.
Table 9 summarizes these structural and procedural drivers illustrating in a step-wise fashion how the Skyway concession price would converge to the French concession prices if the structural and procedural differences are removed.
(Insert table 9 around here)
The City of Chicago and the State of Indiana maximized the concession prices each received through the way they organized their respective bid process and the concession structure. In contrast, the French transactions were organized not with the objective (or the result) of maximizing the concession prices. Instead the French concessions were structured to balance consumer welfare and taxpayer welfare.
Certainly the much higher prices paid for the US concessions result in taxpayers being winners when compared to taxpayers in the French approach. This gain, however, is at the expense of the consumers, the toll payers. According to our calculations, the Skyway users (and the Indiana Toll Road users) not only lose purchasing power because tolls increase faster than CPI, but also do not share efficiency/productivity gains one might expect from placing the public toll roads under private control.
The higher prices paid for the US concessions also has the effect of placing more financial pressure on the concessionaire to maximize the net income that can be generated, not only to service debt, but also provide a satisfactory return to the equity investors. Although it is speculative at this point to identify the actual consequences of this, it is reasonable to expect that the Skyway and Indiana Toll Road concessionaires will operate their roads with the singular focus of maximizing profit, regardless of any external objectives or costs.
The recent transactions in the US and France illustrate how structural and procedural decisions made by the public owner affect the concession price. There is no intrinsic value that can be assigned to a particular toll road; the value, or more accurately the price, is largely a function of the characteristics of the concession and not the road itself. Further, the terms of the concession have direct consequences that are enjoyed or borne by the various stakeholders of the toll road.
Concessions can serve the public interest, but the decisions about how a concession is to be organized, both structurally and procedurally, should be made explicit and the tradeoffs inherent in these decisions made part of the public debate.