Friday, November 02, 2007

Highway Alchemy: "Should we motorists be alarmed? In some cases, you bet."

Turning Asphalt into Gold

Selling the roads out from under us: Tapped-out Governments grab for cash.

November 2007

Patrick Bedard
Car and Driver Magazine
Copyright 2007

“Pssst. He. Buddy, I got this bridge, goes to Brooklyn, make ya a deal.”

Yeah, right –snicker—that’s the oldest con on the planet.

But maybe the joke is over. The City of Chicago, in 2004, really did sell its famed Chicago Skyway Bridge connecting the Dan Ryan Expressway to the Indiana East-West Toll Road. The price was $1.83 billion. Two years later, the state of Indiana sold the Toll Road for $3.85 billion.

To us motorists, roads are about getting where we’re going, but to the buyers and sellers in the above deals, it’s about the money. Chicago and Indiana wanted money right now, for reasons that governments always have for wanting money—passing out bennies to voters. Will they hock the furniture to do it? Just watch ‘em.

Why would somebody buy a toll road? There’s only one reason: to capture a steady stream of income. Pension funds, particularly, have to plan for 50, even 100 years into the future. With interest rates low over the past half-dozen years, they’re grabbing for better returns. They’re looking for income streams that have been poorly managed. Almost anything operated by government fits that definition.

The buyer of both the Chicago skyway and the Indiana Toll road was the Australian syndicate Macquarie Bank, as lead partner along with Spanish investment company Cintra SA. Macquarie Bank has been buying roads worldwide. It’s operating the Dulles Greenway, a toll road from Dulles airport to Leesburg, Virginia, and bidding on several more, including an 11-mile highway in Denver.

Cintra has a $1.3 billion deal with Texas to build two segments of the Trans-Texas Corridor east of Austin, after which it would collect tolls for 50 years. While interest rates stay low, expect these highway plays to continue.

We’re watching the undoing of the American way. We’ve always counted on our government to lead in building transportation networks. The Midwest was opened in the early 1800’s when New York governor De witt Clinton built the Erie Canal. The nationwide interstate highway system was a vision of the Eisenhower administration.

Should we motorists be alarmed? In some cases, you bet. For example, Texas has been scheming to convert State Highway 121 in Dallas, which was built by taxpayers as a free road, into a private toll road. Earlier this year, the Texas house put a two- year kibosh on such “public-private partnerships,” although the politics could change before this sees print. Chicago’s sale of the skyway looks like something only a politician could love.

First, a clarification. The roads mentioned above weren’t actually sold. The deals are written as long-term leases in which the buyer—technically, the lessee—pays the money up-front in exchange for the toll income over a stated period—99 years for the Chicago Skyway, 75 years for the Indiana Toll Road.

Why would Chicago pols love the skyway deal? Easy. All politicians dance to this ditty: don’t tax you, don’t tax me, tax the man behind the tree. The taxman’s game is to shift the burden out of his district to voters who have no say in his reelection. Skyway toll payers are almost entirely commuters from Indiana. So, in effect, the pols secured a $1.8 billion windfall, about one-third of Chicago’s operating budget, at the expense of Indiana residents.

But what’s that giant sucking sound? Chicago sold a 99-year stream of revenue for payments that will end in 10 years. What will the pols do for cash over the following 89 years? Worse, not one dollar of that income will go to Chicago-area transportation projects. Talk about a complete sellout of motorists. Skyway tolls hadn’t been raised since 1993, but the fine print of the contract allows the new owner to more than double the tolls over the next dozen years, and to continue raises for the rest of the lease.

Selling roads and bridges isn’t necessarily a bad deal. At least Indiana earmarked all the proceeds from selling the toll road for investment in transportation infrastructure. Moreover, tolls were significantly increased in advance of the sale, by 70 percent for two-axle vehicles and a multi-step 113 percent for trucks. In effect, this cranked up the income stream immediately, thereby increasing the price a buyer would be willing to pay. The bottom line is more money up front for Indiana.

But watch out for toll increases. Financial analysts calculate that a three percent annual hike will be necessary to justify the $3.85 billion purchase price. That would raise passenger-car tolls for the road’s full 157 miles from $8 initially to $71 at the end of the lease. The contract allows that much and more, based on various economic-growth scenarios.

Financial analysts say all these infrastructure sales are based on the ability to raise tolls in the future. That’s what makes toll roads attractive investments compared with fixed-rate bonds. But governments could raise tolls, too, if politicians weren’t afraid of angry calls from constituents. Macquarie charges commission and fees when it repackages these investments for resale to pension funds. Moreover, private investors must rent money to put deals like this together in the first place. Since governments can always rent money cheaper than privateers—muni bonds pay lower interest rates—the state, acting for the taxpayers, should be able to fund better roads and bridges than private companies can.

Let me propose a simple standard by which we, the people, should decide if selling roads is a good idea. What happens to the money? If it is plowed back into transportation infrastructure, mobility will be improved. But if it’s a scheme to turn asphalt into pocket money for politicos, as Chicago did, just say no.

© 2007 Car & Driver:

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