Concerned Citizens Addressing Critical Transportation Issues
Special Report
Leasing Alligator Alley -- benefit or boondoggle?
By Leslie Williams, Naples Daily News, April 26, 2008
Try predicting the value of your home 75 years from now.
Or forecasting the return on an investment over 99 years.
It’s a tricky business, but one state officials soon could be banking on to boost revenue.
Alligator Alley, the 78-mile stretch of Interstate 75 between Naples and Fort Lauderdale, has caught the state’s eye as a candidate for leasing to a private company. Tolls have been raised only nominally since the road was completed in 1969, but privatizing the road could mean big changes.
Across the nation, billions of dollars in road maintenance isn’t getting done each year because there isn’t enough money. In the present economy, lawmakers are loathe to increase gas taxes to make up the difference.
So some governments are turning to alternate means of raising revenue, such as public-private partnerships. Plans to lease public roads to private entities are either being instituted or debated from Pennsylvania to Texas to California, and even internationally.
In 2005, the city of Chicago undertook a partnership that launched the trend in state revenue production. Chicago was interested in leasing out the 8-mile Chicago Skyway, part of which arches over the Calumet River before connecting with the Indiana East-West Toll Road at the border.
The skyway was taken over by Cintra-Macquarie, a consortium of Spanish and Australian companies. Cintra-Macquarie’s bid for the 99-year lease was $1.8 billion, 160 percent more than the next-highest bidder.
Florida Department of Transportation officials said they are examining a 50- to 75-year lease for Alligator Alley. The schedule for toll increases are an ongoing topic of discussion as the state moves forward.
This would be Florida’s first foray into a public-private partnership for an existing toll road since Gov. Charlie Crist signed a bill into law allowing the DOT to engage in the deals.
Much of the $1.8 billion netted in the Chicago deal was used by Chicago Mayor Richard Daley to retire outstanding debt, including $430 million in skyway bonds -- the city had invested $250 million to widen and improve the bridge in 2003 and 2004, just before announcing plans for the lease. The remainder is either covering annual budgetary needs or earning interest as an emergency reserve.
In Florida, the state hasn’t yet identified a specific use for any revenue generated by an Alley partnership. The toll road generated $23 million in profits in 2007, and is ahead of projected earnings for fiscal 2008. Operating costs were just $3 million in 2007.
Following the Cintra-Macquarie deal in Chicago, the state of Indiana entered into a partnership with the same company. Indiana Gov. Mitch Daniels announced a plan in 2006 to form a public-private partnership to lease the Indiana East-West Toll Road -- the same toll road that connects with the Chicago Skyway.
The 157-mile highway was leased for 75 years to Cintra-Macquarie. Indiana gained a quick $3.8 billion for the deal, but some observers contend the state got shorted on the exchange.
According to news reports, Macquarie, the Australian half of the consortium, reported to investors that it would return its $3.8 billion investment in the Indiana Toll Road after just 15 years. In addition, toll payers were expected to pay $120 billion over the 75-year lease.
Advocacy groups opposed to the deal argued that the full details were only disclosed after negotiations were finalized. Provisions include a non-compete clause that prevents Indiana from upgrading to a four-lane divided highway any 20-mile stretch of road within 10 miles of the toll road for at least 55 years.
Marsha Johnson, Florida’s director of financial development for DOT, told contractors at a forum Thursday in Orlando that the state is considering an initial 3- to 5-year lease before offering a concessionaire the opportunity to renegotiate. Also, she pointed out, Florida law requires that the state receive a cut from the revenue generated by tolls.
“Our goal is to balance the following: value to the state, but also, no matter what, we want to protect the public sector interests,” Johnson said.
Critics of these prior deals warn that financial connections were discovered between politicians and firms that performed work on the transactions.
An Indiana law firm that received $1.3 million in legal work during the transaction was found to be a major contributor to Daniels’ political campaign starting in 2003. The firm and seven attorneys or public affairs specialists that worked on the contract made a total of $39,000 in campaign contributions to Daniels prior to the deal.
Lobbyist Bob Burleson, who represents Florida’s building industry, said many international investors are open to the risks posed by public-private partnerships. He said the plummeting value of the dollar is likely to be a draw for international firms.
“It could go international, but I don’t think that’s a concern,” he said. “The fact is that international investors are more willing to take on a lower return on their investment.”
At Thursday’s meeting about Alligator Alley, DOT interim Assistant Secretary of Finance and Administration Bill Thorp asked for a show of hands to determine where attendees were from.
Many kept their hands down, but about 30 percent of those in the room raised hands for the East Coast, 15 percent for the West Coast and three people raised their hands to signify international interests.
Kevin Thibault, assistant secretary of Engineering and Operations, said there is no reason to sound the alarm bells.
He said the state will have the power to set the terms of the lease, even limit toll increases.
No matter what, he said, no leasing entity will have carte blanche with Alligator Alley.
“Remember, at the end of the day, we’re still going to own it,” he said after the conference. “People think we’re giving it away.”
Gary Eidson, chairman of the Collier Citizens Transportation Coalition, fears that any deal to lease the alley would come close to a give-away.
“There’s too much documentation to show that these deals go together bad,” Eidson said. “They’re undervalued when they’re purchased, particularly when leased to a private entity. And (the leases) run too long.”
Toll rates have remained modest for drivers using the Chicago Skyway and the Indiana Toll Road, with small increases during the first decade.
However, tolls in Indiana are scheduled to spike sharply after the initial period. Some contend the grace period is meant to allow elected officials enough time to clear out before voters have reason to get angry.
Some benefits have been realized from the public-private partnerships.
The Indiana Toll Road Concession Co., the venture created by Cintra-Macquarie, has been able to secure the types of contracts that were always expensive and cumbersome for Indiana.
Newspaper reports detail the use of high-tech coin- and bill-counting machines to cut down on labor costs and electronic toll booths that eliminate the need for attendants, as well as the purchase of snow plows and road de-icing liquid at lower rates than those negotiated by the state.
While Alligator Alley clearly isn’t in need of de-icing liquid, a partnership could yield other benefits.
Along the desolate stretch, drivers share the landscape with little more than sawgrass, slow-moving water and the animals for whom the stretch was named.
When there is an emergency along the road, first responders from Broward and Collier counties are in a race against time to reach isolated motorists.
“Since the construction of the alley, Collier County Emergency Services has responded to thousands of accidents on Alligator Alley at the expense of the citizens of Collier County,” said Les Williams, an EMS technician who made the trip to Orlando for Thursday’s meeting.
He wanted to present the concerns of Collier County’s emergency responders and make potential investors aware of the county’s intent to lobby the state for rights in any concession agreement.
“There is a stretch of road that is left virtually abandoned for help,” Williams said. “Collier County covers . . . 50 miles of Alligator Alley. Over 40 percent of Ochopee’s annual call activity is on Alligator Alley, yet their funding comes from a special assessment on the people of Everglades City.”
There is no guarantee that Williams’ concerns will be integrated into the process, but privatization and the availability of greater capital could answer the prayers of those who have been crying for assistance in providing emergency services on the alley.
DOT officials have cautioned that they still are in the discussion stage of any concession agreement. However, a tentative schedule has the department putting out the request for qualifications April 30. Under that schedule, the state could pick a concessionaire before the end of the year.
But before anyone gets too comfortable with the potential for the alley’s privatization, there is one possible roadblock. State Senate Majority Leader Dan Webster has proposed to lease the road not to a private interest, but to the state itself.
His proposal, which is waiting to go before the Senate, would use the Lawton Chiles Endowment Fund, a state-run fund set up following a major settlement between the state and tobacco companies. Interest from the $2.3 billion fund is used to finance health programs for children, primarily, but the principal from the fund is virtually untouched. Webster is calling his plan “Florida investing in Florida.”
DOT officials made brief mention of the proposal at Thursday’s forum, stating that it could cause a slight delay in the start of the bidding process as department administrators wait for a decision from the Legislature, which is scheduled to adjourn for 2008 in the coming week.
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Governor's Push to Privatize Roads Fails to Follow Public Protections
Publication: US Fed News Service, Including US State News; 12/6/2007
The U.S. Public Interest Research Group (US PIRG) issued the following news release:
Deals to privatize public toll roads, such as those proposed last week by Governor Crist, typically fail to protect the public, according to a new report released by the Florida Public Interest Research Group (Florida PIRG). The report explains seven basic protections that are required to ensure that these toll road sell-offs would benefit the public over the long term. None of these safeguards or assurances are currently in place.
"The public interest must stand at the forefront of any potential road privatization deal," said Brad Ashwell, Advocate for Florida PIRG. "These deals use a private middle man to deliver a big upfront payment in return for decades of escalating tolls from drivers. Before we consider such sell offs, we need to be sure that the public wouldn't lose control of these roads, that the public couldn't deliver the same value itself, and that the process is fully transparent and accountable."
Gov. Crist is reportedly exploring ways to privatize existing toll roads and bridges as a way to close the projected $2.5 billion budget shortfall over the coming two years. Gov. Crist has proposed 50-year leases on Florida toll roads such as Pinellas Bayway, Alligator Alley, and the Skyway in return for upfront cash. The Crist Administration could use the cash to close its immediate budget shortfall, but Florida drivers would pay higher tolls for generations and the public would lose out on those revenues.
The report from Florida PIRG describes how New Jersey, Pennsylvania, and Texas recently backed off from private road deals. New Jersey's Governor Jon Corzine had previously headed Goldman Sachs, a company that earned millions in road privatization consulting fees in Chicago and Indiana. After a lengthy consideration of whether to privatize New Jersey's own toll roads, Gov. Corzine concluded that it made more financial sense for the public toll authority to itself borrow money against future toll hikes. Texas placed a two-year moratorium on private deals after the public toll authority showed it could deliver billions more in value with the same toll hikes. Massachusetts passed a law in 1993 that ensures any private deal must demonstrate that it saves the public value in the long term.
"There's nothing innovative or magic about these proposals," explained Ashwell. "It's just borrowing money from big future toll hikes. If elected officials believe they must raise tolls, then they should make that case to the public, rather than outsourcing the political will and the revenues to some company in return for a short term wad of cash."
According to the report, Road Privatization: Explaining the Trend, Assessing the Facts, and Protecting the Public, toll road privatization proposals must include seven basic safeguards for the public. These include assurances that the public couldn't secure comparable payouts by borrowing against the same toll increases promised to private companies. Public control must also be retained over transportation planning and management decisions. The report outlines further bottom-line protections in terms of transparency of the process, road safety, and accountability of law makers to the public. Contact: Phineas Baxandall, 617/747-4351
************ Miami Herald By Phineas Baxandall www.pirg.org Sept. 16, 2008 Faced with desperate budget deficits, Gov. Charlie Crist has proposed a number of privatization deals to build or operate roads. Private investors would borrow upfront cash to pay the state and then charge decades of escalating tolls to Florida drivers. While the public has focused on the toll hikes that would follow, a number of other dangers deserve attention. Furthest along among these deals is Alligator Alley, which runs from Fort Lauderdale and Naples and is already at a second stage of bidding by toll companies. Not far behind is a proposal to lease the Sunshine Skyway bridge along I-275, the BeachLine Expressway in Orange and Brevard counties and the Pinellas Bayway System in Pinellas County. Also under consideration is a long-term toll concession to connect I-10 on the western side of Jacksonville and I-95 in northern St. Johns County. Much like the recent spate of no-money-down mortgages, private toll-road deals are driven by a profitable new industry that offers a quick solution to short-term cash-flow problems. The new highway merchants offer politicians upfront cash, innovative financing and tolls that typically start low and grow steeply over time. Profits increase with greater traffic, higher tolls and less investment in the roadway -- interests at odds with those of the public. Like the mortgage brokers, the toll-road industry asks to be trusted to better handle the public's financial risks. They also typically sell the investment to other financial traders while continuing for decades to impose restrictions and collect hidden fees from the public. Privatization contracts, such as those proposed for Alligator Alley, can have a variety of hidden costs. The contracts run for hundreds of pages and are peppered with references to ''adverse actions.'' These refer to situations in which the private road operator can sue the public for decisions that may reduce the flow of traffic -- for instance, if the state requires new safety measures or if too many emergency vehicles enter the toll road. Monitoring compliance and ongoing litigation over the contract will require a team of state lawyers at great expense. The problem is not simply that Florida will take on added hidden costs, or that officials will be forced to make decisions based on what's in the contract, rather than what's best for the public. More troubling, the public will lose control over planning its own transportation infrastructure. The pitfalls of private toll-road deals are magnified by their extraordinary length, such as the proposed 50-year Alligator Alley deal. Tax laws dictate such length. Private road companies can realize highly lucrative tax subsidies, but only if the contract lasts longer than the expected life of the road. At best, private road deals look more like the Port of Miami tunnel project. The city of Miami and Miami-Dade County have used the public sector's lower public borrowing costs to raise much of the funds. Private investors will build the tunnel using advanced tunnel technologies, but have no subsequent right to increased tolls or to sue the state for reduced traffic. Instead, the investors will be paid by the government for keeping lanes available for 35 years and will receive lower payments if lanes close. This deal may not be perfect or necessary; but it's much smarter than the quick-cash versions moving forward in other parts of the state. Florida should continue to use private contractors when they can provide discrete services better and more cheaply. But seeing privatized toll roads as an easy way to balance state budgets is a mistake. Like many of those ''innovative'' mortgages, if a deal seems too good to be true, it probably is. Phineas Baxandall is a senior analyst for tax and budget policy at the Florida Public Interest Research Group.
We will pay the cost of private toll road
********** Alligator Alley Will be a Foreign Owned Highway For 75 Years!!! Well here we go again, Alligator Alley a road traveled by 30,000 cars and trucks per day is going to be sold to a foreign investor for the next 75 years. Ok we need the money, the Florida budget is crushed by a tune of over 2 billions dollars in cuts, the recession is in full bloom glory here in Florida.-BUT wait a second! This type of move reminds me of…… ME….., twenty-five years ago and everytime my personal budget was upside down. Ok, I am in the red this month, let me take some ridiculous credit card cash advance, at a usery rate of interest to cover my tushy, panic, little thought, no research, no cost comparsions, no logic if I bite the bullet I will survive, etc…, etc., etc…, six months later cursing that I owe this money at this never pay off interest rate-I think a lot of us can relate… But the idea of having a foreign based corporation own the lease on Alligator Alley for the next 75 years make me feel extremely jittery. The way the State is slipping this agreement under the radar lets me know that they donot like it-But they want the money NOW. Read this article and I believe we need to re-think this issue before its to late. The Story Last week brought one of the weirder public meetings I’ve seen. Finished in 22 minutes, no questions or discussion, just some transportation bureaucrats obliquely briefing other transportation bureaucrats about documents the public and media couldn’t see. Welcome to the murky ride that’s taking us to the privatization of Alligator Alley. At this point, we don’t know a lot, like how much tolls might go up or how much the state might get for leasing out the 78-mile stretch of Interstate 75 to a private operator for 50-75 years. And I couldn’t get a clear answer Friday to an intriguing question: Whether part of the lease windfall would be used to help pay for Gov. Charlie Crist proposed $1.6 billion buyout of U.S. Sugar. All we know is that this path has been set in motion with alarmingly little public input or debate. This began last year when the Legislature approved, and Crist signed, a law allowing long-term private leases on state toll roads not operated by the Florida Turnpike Enterprise. Faced with a budget crunch, Crist has embraced the idea for some easy cash. I haven’t liked this proposal all along, but the way it’s moving forward makes me like it even less. It’s gone from “Oh, we’re just exploring the possibilities” to a timetable posted on a state Web site that concludes with “Execution of Concession Agreement.” The only two public hearings were held in May during workdays, and the Broward County meeting was sparsely attended. Those hearings were held before we knew the bidders or the proposed contract details. Barbara Kelleher, a spokeswoman for the Florida Department of Transportation, said it is unclear whether there’ll be more public hearings. Sterling Ivey, a spokesman for Crist, said there are still numerous opportunities for public input, including workshops and presentations to county commissions. Here’s my idea for public input. If you don’t like the idea of possible steep toll hikes and a profit-driven operator controlling a major highway crucial to hurricane evacuations, contact Crist and let him know. Six groups have submitted proposals to the state, and all have foreign ties. The bidders include Atlantia S.p.A. of Italy, Vinci Concessions of France and a partnership of a Portuguese company and JP Morgan. There are also three Spanish companies competing; each has teamed up with an American investment/equity firm ( Lehman Brothers, Goldman Sachs and the Carlyle Group). The field will be winnowed at an Aug. 25 meeting in Naples and a contract draft is supposed to be released the following day. Then comes the selection of a preferred bidder, followed by a posting of a “formal intent to award.” There is one hurdle. By law, the lease needs majority approval by the Legislative Budget Commission. “That’s kind of good news,” said Sen. Nan Rich, D-Weston, who sits on the commission, comprised of 10 Republicans and four Democrats. Rich is dead-set against the privatization proposal, and she also is bothered by the lack of public input. Like me, she wonders why the state would lease an existing toll road when the state could get upfront cash through a bond issue backed by future toll revenues. A study by the KPMG accounting firm has suggested the state could raise $600 million to $1.6 billion through bonds. “We can get money in another way and not sell our souls to outsiders or foreign companies,” she said. Last year, the state collected $23.5 million in tolls from Alligator Alley and spent $6.1 million on operations and routine maintenance, according to the DOT. About 30,000 cars travel the road daily. The DOT says the details of the toll increase won’t be known until a contract is worked out. Currently, the toll is $2.50 each way for passenger cars, $2 with a SunPass. Also unclear: Whether the lease money could fund the Evergladesdeal for U.S. Sugar’s land. State law allows Alligator Alley revenue to go to the South Florida Water Management District Everglades Fund. A 1997 agreement set a $63 million overall cap on the contribution over 20 years, but there’s wriggle room for change. Officials say the bulk of the lease money will go toward new road projects in Broward and Collier counties.
********** Protesting proposal to privatize Alligator Alley By Maggie Crane, WINK News Jun 6, 2008 SOUTHWEST FLORIDA - The price of gas sits at a record high for Southwest Florida today -- $3.97 a gallon. But filling up may not be the only thing that drives up the cost of a trip across Alligator Alley. **********
A proposal to privatize the alley could mean higher tolls, but there are some in Collier County fighting the change by protesting.
Members of the Citizens Transportation Coalition fear if the state hands over Alligator Alley to a private company, it could mean we'd all be paying as much as $20 to drive round-trip to Florida's east coast.
The group protested the potential leasing of the alley at Pelican Marsh Golf Club. They hoped to send a strong message -- don't privatize -- to Lt. Governor Jeff Kottkamp, who gave a speech to the Republican Men's Club this morning; however, none of the protesters actually got to see or talk to the Lt. Governort.
The Florida Department of Transportation tells WINK News it controls the tolls, but leaders there admit we could see a 25 to 50 percent increase if privatization passes.
Protesters say it shouldn't even be an option.
"Even if I don't drive the interstate, I'm going to be paying for it," Gina Downs, Citizens Transportation Coalition member, says. "I'll pay for it in goods that come across on trucks that have to pay more to get here. It's not fair."
FDOT has just received eight proposals from private companies to lease Alligator Alley.
Up next -- it will weigh the pros and cons of privatization. One pro, leaders believe, is that the private company would bring in immediate money to pay for currently unfunded road projects. The con, of course, is the potential for higher tolls.
If privatization passes, we could see that go into by the end of the year.
(Note from CTC: The following is the full article from Business Week Magazine. While lengthy, we think you will find it provocative and worth the read.)
MAY 7, 2007
Business Week Cover Story
Roads To Riches
Why investors are clamoring to take over America's
highways, bridges, and airports—and why the public
should be nervous
Steve Hogan was in a bind. The executive director of Colorado's Northwest Parkway Public Highway Authority had run up $416 million in debt to build the 10-mile toll road between north Denver and the Boulder Turnpike, and he was starting to worry about the high payments. So he tried to refinance, asking bankers in late 2005 to pitch investors on new, lower-interest-rate bonds. But none of the hundreds of investors canvassed was interested.
Then, one day last spring, Hogan got a letter from Morgan Stanley (MS ) that promised to solve all of his problems. The bank suggested Hogan could lease the road to a private investor and raise enough money to pay off the whole chunk of debt. Now Hogan, after being inundated with proposals, is in hot-and-heavy negotiations with a team of bidders from Portugal and Brazil. "We literally got responses from around the world," he says.
In the past year, banks and private investment firms have fallen in love with public infrastructure. They're smitten by the rich cash flows that roads, bridges, airports, parking garages, and shipping ports generate—and the monopolistic advantages that keep those cash flows as steady as a beating heart. Firms are so enamored, in fact, that they're beginning to consider infrastructure a brand new asset class in itself.
With state and local leaders scrambling for cash to solve short-term fiscal problems, the conditions are ripe for an unprecedented burst of buying and selling. All told, some $100 billion worth of public property could change hands in the next two years, up from less than $7 billion over the past two years; a lease for the Pennsylvania Turnpike could go for more than $30 billion all by itself. "There's a lot of value trapped in these assets," says Mark Florian, head of North American infrastructure banking at Goldman, Sachs & Co (GS ).
There are some advantages to private control of roads, utilities, lotteries, parking garages, water systems, airports, and other properties. To pay for upkeep, private firms can raise rates at the tollbooth without fear of being penalized in the voting booth. Privateers are also freer to experiment with ideas like peak pricing, a market-based approach to relieving traffic jams. And governments are making use of the cash they're pulling in—balancing budgets, retiring debt, investing in social programs, and on and on.
But are investors getting an even better deal? It's a question with major policy implications as governments relinquish control of major public assets for years to come. The aggressive toll hikes embedded in deals all but guarantee pain for lower-income citizens—and enormous profits for the buyers. For example, the investors in the $3.8 billion deal for the Indiana Toll Road, struck in 2006, could break even in year 15 of the 75-year lease, on the way to reaping as much as $21 billion in profits, estimates Merrill Lynch & Co. (MER ) What's more, some public interest groups complain that the revenue from the higher tolls inflicted on all citizens will benefit only a handful of private investors, not the commonweal (see BusinessWeek.com, 4/27/07, "A Golden Gate for Investors").
There's also reason to worry about the quality of service on deals that can span 100 years. The newly private toll roads are being managed well now, but owners could sell them to other parties that might not operate them as capably in the future. Already, the experience outside of toll roads has been mixed: The Atlanta city water system, for example, was so poorly managed by private owners that the government reclaimed it.
Such concerns weigh on the minds of public officials like Hogan. He intends to negotiate aggressively with corporate suitors and has decreed that the buyer must share future toll-hike revenues with the local governments that built the highway. But with the market for infrastructure still in its infancy, every deal is different. The ideal blend of up-front payment, toll hikes, and revenue sharing hasn't been found.
FLOOD OF MONEY
The nascent market in roads and bridges in the U.S. follows the shift toward privatization in Europe and Australia that began with British Prime Minister Margaret Thatcher in the 1980s. It took longer to develop in the U.S. because of the $383 billion municipal bond market, which has been an efficient source of capital for governments over the years.
But with the explosion of money flowing into private investments recently, fund managers have been exploring the fringes of the investing world in search of fresh opportunities. Now a slew of Wall Street firms—Goldman, Morgan Stanley, the Carlyle Group, Citigroup, and many others—is piling into infrastructure, following the lead of pioneers like Australia's Macquarie Group. Rob Collins, head of infrastructure mergers and acquisitions at Morgan Stanley, estimates that 30 funds are being raised around the world that could wield as much as $500 billion in buying power for U.S. assets.
Many investors think of infrastructure investing as a natural extension of the private equity model, which is based on rich cash flows and lots of debt. But there are important differences. Private equity deals typically play out over 5 to 10 years; infrastructure deals run for decades. And the risk levels are vastly different. Infrastructure is ultra-low-risk because competition is limited by a host of forces that make it difficult to build, say, a rival toll road. With captive customers, the cash flows are virtually guaranteed. The only major variables are the initial prices paid, the amount of debt used for financing, and the pace and magnitude of toll hikes—easy things for Wall Street to model. "With each passing week, there are more parties expressing unsolicited interest in some kind of a financial transaction that will involve one of our assets directly or indirectly," says Anthony R. Coscia, chairman of the Port Authority of New York & New Jersey.
Firms are even beginning to market infrastructure to investors as a separate asset class, safe like high-grade bonds but with stock market-like returns—and no correlation with either. The Standard & Poor's 500-stock index has returned about 10% a year, counting dividends, since 1926. Bonds have returned about 5%. Firms say infrastructure will beat both, and without having to sweat out market dips along the way. That's a huge selling point at a time when stock, bond, and commodity markets around the world are becoming increasingly interconnected.
Investors can't get in fast enough. They recently deluged Goldman Sachs with $6.5 billion for its new infrastructure fund, more than twice the $3 billion it was seeking. "We're using [infrastructure] as a fixed-income proxy," says William R. Atwood, executive director of the Illinois State Board of Investment, who plans to invest $600 million to $650 million, or 5% of its portfolio, in infrastructure funds over the next three years. "We're hoping to get 11% to 12% returns and lower risk." Pension funds in particular like the long-term investment horizons, which match their funding needs well. Infrastructure "delivers similar yield expectations to high-yield bonds and real estate, with less risk," says Cynthia F. Steer, chief research strategist at pension consulting firm Rogerscasey.
On the other side of the bargaining table from the investment firms sit struggling governments suddenly amenable to the idea of selling control of assets to solve short-term problems. The burden of maintaining roads, bridges, and other facilities, many built during the 1950s, is becoming difficult to bear. Federal, state, and local governments need to spend an estimated $155.5 billion improving highways and bridges in 2007, according to transportation officials, up 50% over the past 10 years. And that's hardly the only obstacle they face. In 2006 alone, states increased their Medicaid spending by an estimated 7.7%, to $132 billion. And state and local governments could be on the hook for up to $1.5 trillion in retiree liabilities, estimates Credit Suisse. At the same time, politicians find it difficult to raise taxes. Chicago's former chief financial officer, Dana R. Levenson, sums up the situation: "There is money to be had, and cities need money." U.S. Representative Chaka Fattah, a Pennsylvania Democrat who is running for mayor of Philadelphia, proposes to privatize the Philadelphia International Airport and use the proceeds to fund poverty programs—a much easier sell than a tax increase.
The combination of eager sellers and hungry buyers is shaking loose public assets across the country. The 99-year lease of the Chicago Skyway that went for $1.8 billion in 2005 was the first major transaction. Last year came the Indiana deal. Now states and cities are exploring the sale of leases for the turnpikes in New Jersey and Pennsylvania, a toll road in Texas, Chicago Midway Airport, and several state lotteries. Suddenly politicians around the country are wondering how much cash they might be sitting on. Based on the going rate of about 40 times toll revenues, the iconic Golden Gate Bridge could probably fetch $3.4 billion were California interested in selling. The Brooklyn Bridge? If permission were granted by New York City to charge the same tolls as the George Washington Bridge, a private owner might shell out as much as $3.5 billion for it.
PAVEMENT PRICING
But there's a downside to the quick cash: planned toll hikes that are usually quite aggressive. Chicago's Skyway could see car tolls rise from $2 in 2005 to $5 by 2017. For some perspective, if a similar scheme were applied to the Pennsylvania Turnpike during its 67 years of existence, the toll for traveling from the Delaware River to the Ohio border would be as much as $553 now instead of $22.75. Macquarie, which teamed up with Spain's Cintra to purchase the Chicago Skyway and the Indiana Toll Road, underscored the governmental trade-off during a presentation at the recent White House Surface Transportation Legislative Leadership Summit: "More Money or Lower Tolls." In an extreme scenario, governments could begin to sell properties that aren't tolled to private owners who will impose fees.
Of course, tolls won't go to the moon if they result in dramatic reductions in traffic. For example, investment firm NW Financial Group estimates that if the Chicago Skyway pricing scheme were applied to New York's Holland Tunnel over its 80 years, it would cost $185 to travel through it instead of the current $6. "No one will pay that much," says Murray E. Bleach, president of Macquarie Holdings (USA) Inc. "It's just not going to happen."
Still, Indiana legislators became so alarmed by promised hikes that they changed the terms before the toll road lease was completed. The state set aside $60 million to pay the difference in tolls for up to two years or until the buyers install electronic tolling equipment. After that, the fee for cars with electronic toll cards will rise to $4.80 over the full 157 miles, while the fee for cars without the cards will soar to $8. After 2010, both rates will rise each year by 2%, the pace of inflation, or the rate of economic growth, whichever is highest.
The certainty of future toll hikes doesn't jibe with the uncertainty of service quality. Assets sold now could change hands many times over the next 50 years, with each new buyer feeling increasing pressure to make the deal work financially. It's hardly a stretch to imagine service suffering in such a scenario; already, the record in the U.S. has been spotty. In 2003 the city of Atlanta ended a lease of its water system after receiving complaints about everything from billing disputes to water-main breaks. The city wrestled with the owner, United Water Inc., over basics like the percentage of water meters it should monitor. Both parties acknowledge that the contract lacked specifics. In the end, "we didn't believe we were getting performance," says Robert Hunter, commissioner for Atlanta's Dept. of Watershed Management. "I don't believe the city will ever look at privatizing essential services again." United Water says the contract wasn't financially feasible because Atlanta's water system was in worse shape than the city had represented.
A CHAMPION'S PERSPECTIVE
States are wrestling with other public policy issues, too. Bankers say New York could reap a combined $70 billion for long-term leases on a bunch of assets, including the state's lottery, the Tappan Zee Bridge, and the New York State Thruway. New York state officials have looked into the option of leasing the lottery, which itself might command $35 billion—a sum that could substantially upgrade, say, New York's higher education system. The downside? The state would probably have to remove constraints on the lottery's marketing designed to discourage people from gambling more than they can afford. If the state insists on keeping the constraints in place, it could reduce the value of selling it.
Chicago's experience shows the possibilities and the pitfalls of privatization. Former CFO Levenson has been one of the movement's biggest champions. He was an architect of the Skyway deal, which kicked off the market. Then he sold control of parking garages to Morgan Stanley for $563 million. Next, he started shopping around a lease for Midway Airport that could fetch as much as $3 billion. And soon the city hopes to auction off rights to operate some recycling plants. Levenson dismisses critics who argue that he has dumped prized assets. "This is not like where a person goes in and buys a loaf of bread from a store and walks out with that loaf of bread," he says. "Some entity, we expect, will make an offer to lease the Midway Airport for 75 to 99 years, and the following day I'm pretty sure it will still be there."
Wearing a crisp suit and stylish eyeglasses, Levenson looks like the Wall Streeter he once was, working for Bank One Corp. and Bank of America Corp. (BAC ) before taking the Chicago city job in 2004. In April he returned to banking: As a managing director at the Royal Bank of Scotland Group (RBS ), he now beats the bushes for infrastructure deals. Levenson doesn't understand how local governments can afford not to put public works up for sale. Thanks to the 99-year lease for the Skyway, Chicago has paid off its debt and handed over $100 million to social programs like Meals on Wheels. Plus, says Levenson, it's earning as much in annual interest on the $500 million it has banked from the transaction as it used to earn from running the Skyway ($25 million).
In some ways, Levenson argues, the city still has control over the highway. The agreement with the new owners spells out guidelines in mind-numbing detail, dictating everything from how quickly potholes must be filled (24 hours) to how rapidly squirrel carcasses must be removed (8 hours). If Macquarie and Cintra violate those conditions, the city can take back the road.
So far, the buyers have strictly adhered to the rules. At 7 a.m. on a Wednesday in March, five workers begin another day at the Chicago Skyway's Snow Command. On their to-do list are potholes to be checked and cracks to be sealed. Juan Rodriguez used to patrol the freeway for Chicago city. Today, he cruises the road for private owners. He discovers some potholes have grown unacceptably large because of salt that was spread the previous night. There's some tire debris that must be removed, and a disabled vehicle holding up traffic.
A SMOOTH RIDE?
In the past, Rodriguez says, he had to write out a ticket for each problem, which would be added to a long list of chores. Addressing problems often took days, Rodriguez recalls. But by 10:25 a.m., all of this morning's issues on the Skyway's 7.8-mile stretch of pavement are resolved. "The new owners are taking the Skyway to a whole new level," he says.
They've certainly spent money on improvements. The message "a clean workplace is a happy workplace" is scrawled on a whiteboard in a freshly painted and ventilated garage where workers meet. There's electronic tolling, which didn't exist before. A bunch of new lanes are under construction. The investments seem to be paying off: Since taking over two years ago, the Skyway's operators estimate traffic has risen 5%.
It's all encouraging, except that Chicago "probably could have gotten more without privatizing," according to Dennis J. Enright, a principal and founder of NW Financial. His firm's analysis shows that Chicago could have done a lot better by handling the whole deal itself. It could have raised tolls and sold tax-exempt municipal bonds backed by the scheduled hikes. That would have given the city the up-front cash it needed while preserving some of the income from the toll hikes. Instead, that money will go to Macquarie and Cintra.
Meanwhile, the higher tolls will take a big bite out of lower-income people's wallets. "You have to ask yourself if you want roads that used to be considered a public service to be rationed by income class," says Princeton University economics professor Uwe E. Reinhardt. Chicago says it hasn't received any formal complaints from citizens, though two different drivers recently went to extremes to avoid tolls, says Skyway maintenance manager Michael S. Lowrey. When the new owners introduced free towing for broken-down vehicles, the drivers called the Skyway for help, claiming to be stranded. After workers hauled the vehicles past the tollbooths, they hopped in their cars and sped away.
For workers, the privatization wave has wrought many changes. Skyway toll takers used to be full-time city employees with rich benefits. Now most are part-time independent contractors without benefits. Brian Rainville, executive director of the Chicago Teamsters Joint Council 25, helps manage the union's pension fund. When he listened to a recent pitch from a pension consultant about infrastructure funds, it sparked a realization: The returns he might generate for his pensioners could be canceled out by the union's shrinking number of contributors. "It's pretty obvious that it's not sound fiscal policy for the [pension] fund to undercut the people it's serving," Rainville says.
Pushback against private investors is now playing out in different ways elsewhere. In Pennsylvania, the state turnpike commission is going head-to-head with private bidders for the right to operate the state's 537-mile toll road. Pennsylvania desperately needs cash to repair its nearly 6,000 structurally deficient bridges. Some pundits expected Pennsylvania Governor Edward G. Rendell to propose hikes in gas taxes and other fees to fund the projects. But in December, Rendell unexpectedly announced plans to privatize the turnpike. Timothy J. Carson, vice-chairman of the commission, scrambled to submit an expression of interest for the turnpike to continue to run itself. His proposal is being judged against many others, including those from big Wall Street firms.
Carson isn't dissuaded by arguments that investors are better qualified to run turnpikes profitably. "There's no magic here," he says. "These [deals] are largely driven by one factor: the permitted toll increases." Carson says the state doesn't need to hand over the turnpike to private owners. Historically, he says, the state wanted the turnpike to collect only enough money to break even. But it could just as easily adopt its own toll-hike schedule. The state could also charge tolls on more roads. In other words, the public could remain in control simply by changing the turnpike's mission. That would ensure that the benefits of the toll hikes were spread throughout the populace, says Carson.
Pennsylvania's isn't the only turnpike authority exploring the possibility of bidding for roads. The North Texas Tollway Authority calculated in March that it would have valued a partially constructed 25-mile stretch of highway near Dallas 26% more than a private investor had bid. Now it's considering making a formal bid. And on Apr. 11, the Texas House of Representatives passed an amendment by a vote of 134 to 5 to impose a two-year moratorium on privatizing state toll roads. "We need to put the brakes on these private toll contracts before we sign away half a century of future revenues," said representative Lois W. Kolkhorst, who proposed the bill. A similar bill was passed in the state senate on Apr. 19.
With so much money at stake and so many options available to states, it's impossible to know how the great infrastructure craze may play out. But this much is certain, says Pennsylvania's Carson: "People are willing to pay more than they are currently being charged. The only question is to what extent you're willing to take advantage of that."
