Download Applying the Toll Road Privatization Model to Other

APPLYING THE TOLL ROAD
PRIVATIZATION MODEL TO
OTHER ASSETS
John Schmidt & David Narefsky
NYU Wagner Rudin Center for Transportation
Policy & Management
March 25, 2008
Mayer Brown LLP
CHICAGO SKYWAY AND
INDIANA TOLL ROAD
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First privatizations of major U.S. toll roads-transactions
done in 2005 and 2006
Sparked wide interest in U.S. privatization
New infrastructure funds/commitments by pension funds
have created pool of $400B+ for U.S. infrastructure
investment
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LARGE VALUES RECEIVED BY
PUBLIC ENTITIES
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$1.85B to City of Chicago for 99 year
lease of Chicago Skyway
$3.8B to State of Indiana for 75 year
lease of Indiana Toll Road
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VALUE FROM 2 SOURCES:
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1. Value of asset increases in private
hands
* Private operator will raise tolls
regularly
* Capital costs significantly reduced
* Lower after-tax financing cost
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2. Public recovers its equity in the asset
* Equity increases with overall value
* Long-term equity in U.S. infrastructure
has enormous value in world market
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MAKES SENSE IF PUBLIC HAS
BETTER USE OF CAPITAL
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Public capital not needed in operating roads—can be
redeployed to other uses
Chicago created $500M reserve, paid off $400M city debt—
raised bond rating + significantly reduced financing costs
Indiana put $3.8B into transportation infrastructure—only
fully funded U.S. transportation program
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OTHER ELEMENTS OF MODEL
* Long-term lease shifts all financial risks to
private operator
• Any debt is subordinate to lease
obligations of maintenance/capex
* Operating standards assure quality
● Independent engineering inspections—
strong remedies for violation
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TRANSPARENT COMPETITIVE BID
PROCESS IS ALSO KEY
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No politics - professionally run
Open to all qualified bidders - no
local or national xenophobias
Bidding based on fixed contract with
decision based solely on price
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MODEL CAN BE USED FOR OTHER
TYPES OF ASSETS
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Assets must be revenue-producing
Infrastructure investors want stability and
predictability—ideally monopoly or quasimonopoly element
Private operators must bring added value
to get substantial returns—increase
political support
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CHICAGO UNDERGROUND
PARKING SYSTEM
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9000 spaces—4 connected garages-underneath Grant Park/Millennium Park in
downtown Chicago
Owned by City and Chicago Park District
After competitive auction, leased in 2006
to Morgan Stanley Infrastructure Fund for
$563M
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ASSET VALUE INCREASED UNDER
PRIVATE OPERATION
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Private operator could raise parking rates—stop
subsidizing suburbanites and others driving
downtown
Flexibility to take advantage of special events—
develop relationships
Substantially reduced cost of major
reconstruction of one garage
Improved signage--new revenues from
advertising, concessions
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CITY COULD REDEPLOY
CAPITAL TO OTHER NEEDS
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Used partially to pay off Millennium Park
bonds that were drain on city revenues
Most proceeds used for capital
improvements at neighborhood parks
Chicago Park District had no prior capital
program—enormously popular result
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OTHER PARKING POSSIBILITIES
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Street parking--Chicago is now privatizing
street parking system--asset of every city
Airport parking--Puerto Rico is privatizing
San Juan Airport Parking—has ideal
“monopoly” elements
Private operators can maximize revenues,
bring efficiencies—cities or airports can
use capital for other purposes
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LOTTERIES
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Illinois and Indiana Governors proposed lottery
privatizations in 2007—no legislative approval yet
in either state
State lotteries vary enormously in per capita
revenues—uneven management
Private operator can bring best practices and
increase revenues substantially
States can redeploy capital—to education in
Indiana, capital projects in Illinois
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PORTS
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Port of Corpus Christi proposing to build
new terminal facility on privatized basis
Existing terminals being privatized in
Portland
Virginia just established commission to
study privatizing Virginia Port Authority
Large-scale U.S. need for expanded port
facilities—private capital essential
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TRANSIT
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Generates revenue, but no profit—
requires ongoing subsidy
Can still be privatized to reduce subsidy
BART undertaking privatized Oakland
Airport connector
Denver Regional Transportation District
proposing privatized light rail system
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