Seeing gold at the end of the privatized road

Push to privatize turnpike reflects shift in thinking about financing, and financial benefits of, highway ownership

Sunday, January 28, 2007

By Bill Toland
Pittsburgh Post-Gazette

In 1937, at the far edge of the Great Depression, a traumatized banking sector balked at financing what was then a 160-mile vision of a road between Irwin and Harrisburg's western outskirts. Instead, construction money for what would become the Pennsylvania Turnpike, the nation's original superhighway, was provided by President Roosevelt's New Deal funds via loans from the Reconstruction Finance Corp. and grants from the Works Progress Administration.

But seven decades will change a lot of minds, and open a lot of wallets.

Now, banks -- foreign ones, anyway -- can't get enough of superhighways. In Illinois, the Chicago Skyway was turned over to private investors, Australia's Macquarie Bank Ltd. and Spain's Cintra Concesiones, for $1.8 billion over a 99-year lease. Last year, Indiana received $3.8 billion from the same investment duo in exchange for the rights to collect fares on the state's toll road for the next 75 years. Another investor forked over $600 million to operate a toll road in Virginia.

Today, Pennsylvania is casting into these same waters. At the invitation of Gov. Ed Rendell, four dozen investment and advisory groups have expressed an interest in leasing or otherwise getting a piece of the turnpike, a good signal that there's lots of appeal in the 537-mile highway system, especially the 359-mile mainline connecting Ohio and New Jersey, one of the most traveled roads in the Northeast.

Why would anyone want to lease the turnpike?

Quite simply: money.

It comes with a captive, cash-paying audience of a half-million daily motorists who have no time to drive north to catch Interstate 80 and no desire to take Route 22 or 30 across the state. Investors like products that create predictable cash flow, and thus, a reliable return for shareholders. It also helps that such leases require few immediate and large upfront capital expenditures, making the deals relatively easy to implement from a bank's perspective.

But if all that's the case, why are cities and states, including Pennsylvania, lining up to auction off their cash cows? And is it a good idea?

"The biggest question is, how do you know if you're getting enough?" said Cherian George, the managing director of the transportation division at Fitch IBCA, an international bond rating agency that has studied the Pennsylvania Turnpike and issued opinions on the turnpike's investment health for years.

"It's very valuable. And if it's very valuable, you ought to be very careful in how you do it."

Valuable, indeed. Mr. Rendell has estimated that the lease deal for the Pennsylvania Turnpike, which at current fare rates generates about $600 million annually in tolls, could bring Pennsylvania as much as $30 billion -- not to mention savings from no longer having to pay for upkeep, renovations and turnpike employees. That kind of cash would allow Pennsylvania to immediately undertake simultaneous highway and bridge upgrades, rather than putting projects on a 14-year waiting list, as is typical now.

'Grave concern to everybody'

If Pennsylvania received even a third of the estimated $30 billion kitty, the deal would still easily surpass those made in Chicago and Indiana. In the process, the turnpike would become the longest ribbon of American highway to be privatized to date.

And if the team of Macquarie and Cintra, which already have captured Chicago and Indiana, were to win the rights to operate in Pennsylvania, it would represent a watershed in the highway privatization movement, said Rod Nofziger, director of government relations with the Owner-Operator Independent Drivers Association, a truckers' lobbying group that opposes these private deals. Ohio might follow, then New Jersey, and soon, these two banks could control more than 800 miles of toll road between the Midwest and the Atlantic coast.

"That should be a grave concern to everybody, particularly to people in the trucking industry," Mr. Nofziger said. Pennsylvania, he said, has "both a strategic and a symbolic" importance to the Macquarie and Cintra investors.

All Americans, he said, should be wary.

Skeptics will note that President Dwight D. Eisenhower, a fiscal conservative and a military man, was the one to champion the cause of the national highway infrastructure. The concept was of such paramount importance to Mr. Eisenhower that he made it a top priority to update the Federal Aid Highway Act. He signed the updated law in 1956, spurring the development of 40,000 miles of roadway across the country.

In pushing for the funding during his State of the Union address that year, he said a new road system was "needed for the personal safety, the general prosperity, the national security of the American people." And in his own memoir, the president said the publicly owned highway system was his top accomplishment: "More than any single action by the government since the end of the war, this one would change the face of America. ... Its impact on the American economy -- the jobs it would produce in manufacturing and construction, the rural areas it would open up -- was beyond calculation."

'A license to print money'

So how is that 50 years later, we are soon to be paying foreign investors for the right to drive across Mr. Eisenhower's vision of an American highway system? If our major highways are of such vital importance to the American public, should we be letting the private sector maintain them?

These are the primary philosophical objections of those who denounce such highway deals. Opponents also say they have financial objections: Are legislators and governors underestimating the value of the asphalt assets resting beneath their noses? Will a private company raise fares beyond what the Turnpike Commission would have? (Answers to both questions: yes, probably.)

"We see [public highway privatization] as pawn-shop sort of mentality," said Mr. Nofziger, of the truckers' group, whose main concern is increased tolls because truckers are typically paid by the mile. "You're hawking your assets now, and you're going to end up paying a whole lot more down the road," possibly in fares, and almost certainly in unrealized future revenues.

U.S. Rep. Peter DeFazio, D-Ore., has been a critic of highway privatization in general, and the Indiana deal in particular, saying Indiana Gov. Mitch Daniel, a former Bush administration official, was doing the president's bidding in shedding Indiana's toll road.

"What he has done with the 75-year deal is: He's given away an income stream that could have financed projects until the end of this century," said Mr. DeFazio, who leads the House Subcommittee on Highways, Transit and Pipelines. "Clearly, this is not about improving the nation's infrastructure" -- it's about making an ideological point, he said.

The big winners in the deal, he says, are the foreign banks. In the Indiana lease, for example, they fronted only a percentage of the $3.8 billion -- the rest of the capital was raised from other investors. "The finance houses love these things," Mr. DeFazio said. "It's a license to print money."

Wooing the rural holdouts

Reason Foundation's magazine, a champion of libertarian causes that seeks to reduce the government's role in our lives, says there's nothing to fear about privatization -- our phone lines, electric utilities and gas pipelines are just as vital to the U.S. infrastructure as is the highway system, yet no one minds that these are owned by the private sector.

"I almost have to laugh," said Geoffrey Segal, of Reason magazine. "Elected officials fight each other over landing a Toyota or Honda facility in their back yard." And the same officials complain when American companies want to outsource to India.

Now, when foreign companies want to invest here, they complain about that, too, even though there's no chance of shifting these investments overseas. "These are hard assets," he said. "You can't exactly pick it up and move it."

Any worries about exorbitant tolls or lack of road maintenance can be addressed in the lease agreement, he said. The more control the state exerts over the process -- if it would put a cap on fare increases, for example -- the less cash the state is likely to see.

State Rep. Richard Geist, the Blair County Republican who has chaired the House Transportation Committee for more than a decade, said he expected enabling legislation to be introduced by the end of next month and hoped that it would be approved by July, when the state typically completes its budget. Once the legislation is in place, PennDOT would go about reviewing bids and awarding contracts -- the Legislature wouldn't have to doubly approve the deal, just the original law.

Mr. Geist acknowledged that Pennsylvania would represent the crown jewel of the highway privatization movement thus far -- "We have 42 percent more trucking than New York and New Jersey put together," he said -- but threw cold water on the notion that the Macqaurie-Cintra team is out to build a monopoly.

"I don't think that they would definitely win this one," he said. "There is a tremendous amount of interest in the money market."

How would such a deal get done in Pennsylvania? Gov. Rendell might meet resistance at first. But with $30 billion in his pocket, he can woo the rural holdouts with promises of new bridges and road upgrades, then promise Democrats in Pittsburgh and Philadelphia lots of money for their ailing transit systems.

Greed over patronage

Some politicians, Mr. Geist predicted, will hold out simply because they want to preserve the patronage system in place at PennDOT. But in the end, he said, "the greed is going to out-trump patronage," meaning lawmakers won't be able to turn away from a deal that brings a renovated highway or bridge to their home base.

"We have a maintenance problem that's staggering," Mr. Geist said. "You can't duck it."

The deal likely would include at least a temporary cap on fare increases and a requirement that the new lessees initially abide by the terms of the turnpike's contract with its 1,800 unionized employees. Last, if the Indiana deal is any indicator, bidders will be expecting big tax breaks in exchange for their upfront cash.

But how to know if it's a good deal?

It's not that Pennsylvania, or any other state, is incapable of negotiating a good contract, said Mr. DeFazio, the congressman. It's that the state is the only party in the deal assuming any risk. The banks are eager to invest because they know they have a captive audience, but it's the states that run the risk of someday discovering that they've undervalued their highways.

And by then, it will be too late because there's no way out of the deal unless the bank defaults on the terms of the contract. Future Legislatures, governors and city councils will find that their hands have been tied by their predecessors, for better or worse.

"Thirty years from now, when they're charging exorbitant tolls and the adjacent roads are way over capacity, [motorists will] be looking for someone with pitchforks" in hand, Mr. DeFazio said.

"Unfortunately, those politicians will be long gone."

(Bill Toland can be reached at btoland@post-gazette.com or 412-263-2625. )