Friday, December 29, 2006

Moody's: Leasing the roads to someone else removes the political obstacles to raising tolls."

U.S. May Finally Warm Up to Toll-Road Sales in 2007


By Joe Mysak
Copyright 2006

Maybe 2007 will be the year when we all sell the streets.

I know, I know, states and localities don't actually "sell'' their toll roads -- in return for a big chunk of cash, private companies such as Australia's Macquarie Infrastructure Group and Spain's Cintra Concesiones de Infraestructuras de Transporte SA lease them for 50, 75 or 99 years, and collect the tolls.

Such transactions have been done in Chicago, in Indiana, and in Virginia, and lawmakers in New Jersey, Pennsylvania and Texas seem to be looking hard at the possibilities.

People still haven't seen enough of these deals to get very comfortable with them. There's a lot of second-guessing going on, as critics scrutinize what it means to enter into one of these lease transactions.

What's holding them up? Just a few years ago, in the summer of 2005, Merrill Lynch & Co. estimated that there were potential candidates for toll-road privatization in 22 states. The problem doesn't seem to be that people believe states and cities can operate toll roads better than anyone else. Instead, what's worrying everyone is: Are we getting the right price for one of the few cash cows we possess?

Something tells me that the tipping point might well be reached in the new year. Put together another two or three multibillion-dollar deals, and public officials will all be wondering why they are in the toll-road business, anyway.

No Free Ride

Moody's Investors Service rates $47 billion in bonds sold by states and municipalities for toll roads, and liked the idea of privatization well enough in a report on the subject published in September.

For one thing, the report said, leasing the roads to someone else removes the political obstacles to raising tolls. Not raising tolls "can lead to pressure on financial margins, lower debt service coverage ratios and elevated credit risks,'' according to Moody's.

Rating companies like things such as fees and tolls, and especially taxes.

Politicians really hear it when tolls are increased. Most Americans still seem to subscribe to the notion that, at some point, toll roads have been "paid off,'' and that the toll booths should come down. In reality, of course, there's no such thing as a free ride, except on the federally financed Interstates.

Transfer Risk

Leasing toll roads means transferring operating, maintenance and construction risk. Moody's said it views this in "a generally positive light,'' so long as governments make sure that the private operators keep up their end of the bargain.

That's a key point to keep in mind about these transactions. States and municipalities aren't selling their roads; and private operators can't just roll them up and make off with the things in the middle of the night. The owners have extensive oversight responsibilities.

The future for toll-road leases is pretty bright, at least from the states and localities' point of view.

That's because everyone wants to get involved in this business. There just aren't that many more opportunities in Europe, for example. Add to that a weaker dollar, and what Moody's termed "a lower perceived risk profile for U.S. assets'' compared with those in the developing world, and you begin to see where the real risk lies.

It's not that the current owners, if they play their cards right, won't get enough for their toll roads. The real risk is that the new operators will pay too much.

Think about it in the same terms as why hedge-fund returns are falling. They say too much money is chasing too few opportunities.

Pay Up

This is why states and municipalities are sitting pretty. Some may have budget deficits, while others may want to address pension and other post-employment benefit shortfalls. But there are no panic sales of turnpikes and parkways.

Earlier this month, Pennsylvania released a list of the firms that have expressed interest in leasing the 537-mile (864- kilometer) Pennsylvania Turnpike. The next step will be for the state to decide to invite some of those firms in for a chat.

The real story, though, is how many expressions of interest the state received: 48.

Everybody wants a piece of the U.S. toll-road business.

To get it, they will have to pay up.

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Joe Mysak in New York at

Last Updated: December 29, 2006 03:00 EST

© 2006 Bloomberg: