Friday, June 13, 2008

“We need to keep a close eye on this.”

Risky Business

Tolls for Tots

June 13, 2008

The Texas Observer
Copyright 2008

Texas’ School Land Board is set to invest $100 million of public school endowment funds in a controversial company that privatizes public assets of cash-strapped cities and states that need billions of dollars to support aging infrastructures.

The company, Macquarie Infrastructure II LP US, hopes to build private toll roads in Texas and across the United States.
Its Australian parent, Macquarie Group Ltd., already owns private toll roads, airports, and other infrastructure assets around the globe.

So far, Macquarie has made a handful of unsuccessful bids on toll roads in Texas, including State Highway 121 and U.S. 281-Loop 1604 in San Antonio. It is still waiting on the results of an offer for Interstate 635 in Dallas. Recently, Macquarie also entered negotiations to lease Austin-Bergstrom International Airport. Another subsidiary of the Macquarie Group owns several small-town newspapers in Texas.

General Land Office Commissioner Jerry Patterson, who oversees the School Land Board, said he sees nothing wrong with investing public funds in private toll roads. “With a 15 to 16 percent annual rate of return, I don’t see a problem,” he said. “My duty is to make money for the Permanent School Fund.”

Patterson said the fund would invest nationwide and not necessarily contribute to toll roads in Texas. “This is a bluechip fund that is not just limited to toll roads,” he said.

Dallas Republican state Sen. John Carona, chair of the Transportation and Homeland Security Committee, takes a more cautious view on the investment. He said this summer his committee will look closely at the policy implications of public pension fund and endowment investment in companies like Macquarie that privatize publicly owned properties.

“The state needs to invest very carefully and with significant due diligence,” Carona said. “We need to keep a close eye on this.”

Carona is concerned about reports in business publications charging that Macquarie has overpaid for projects and engaged in risky financial schemes. In a 2007 Fortune article, the magazine was critical of what it termed the “Macquarie Model,” whereby the company buys the rights to run toll roads from cash-strapped governments and then sells the roads back to the public via a stock offering.

Last April, an independent New York-based corporate governance service, RiskMetrics Group Inc., slammed the Macquarie Group for elevated debt levels, high fees, inadequate disclosure, and poor corporate governance.

Macquarie defended the performance of its funds in the 2007 Fortune article. The firm pointed out that its funds have returned an average of 19.8 percent annually and sold assets for more than twice their purchase price.

“It’s risky,” said Carona of the land board’s investment in Macquarie. “But then, with higher risk, there is a higher return.”

© 2008, The Texas Observer

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