Financial analysts say NTTA proposal flawed - could bankrupt toll authority

2007-05-08

TOLLROADSnews

A KPMG/Goldman Sachs analysis of the North Texas Toll Authority (NTTA) and Cintra proposals for a toll concession on SH121 says NTTA have used an unrealistically low discount rate on future revenues - giving only the appearance of a superior bid. They say unless NTTA were able to increase toll rates more than the the Dallas Regional Transportation Council (RTC) limits in force on the TxDOT-selected Cintra proposal, the public toll authority could be bankrupted.

The terse 2-page paper being circulated in Dallas says the NTTA proposal is seriously flawed with its low 5% discount rate. They say that unlike the Cintra offer, the NTTA proposal makes no allowance for risk.

They also suggest NTTA's proposal underfunds operations and maintenance.

They say in two out of three modeling scenario runs NTTA's proposal led to bankruptcy for the public toll authority.

KPMG/GS's paper says that an NTTA bond sale of the size required (over $2.5b) would lead to an immediate downgrade of their rating and incur an interest rate on borrowing of greater than 5.5%.

They say NTTA might be able to avoid bankruptcy in taking on SH121 but only with toll increases beyond the limits laid down by the Regional Transportation Council (RTC) for Cintra's concession.  NTTA has claimed toll increases under their proposal would be smaller than Cintra has committed to.

Says the paper: "At first glance it appears the NTTA proposal indicates the private sector proposal is not good value. However, there is a serious flaw in NTTA’s characterization of their proposal – that is use of the 5% discount rate."

Under a heading "Selecting the proper discount rate for comparative analysis" the financial analysts say:

• the discount rate must include not just financing cost but also allowance for uncertainties or risk

• financial analysis should use annual cash flow in real dollars for the years in which the cash flow occurs

• there is uncertainty in inflation, population growth, capital costs, costs of operations and maintenance

• NTTA's $500m lower costing of operations and maintenance adds risk

They say NTTA should use a discount rate in the range 7 to 9% rather than the 5% they used.

Using a discount rate of 8.5% KPMG/GS find the total value of the NTTA proposal is $3.08b to $4.35b compared to Cintra's $5.06b to $5.08b.

They say when an acceptable discount rate is used on the NTTA proposal it "makes no sense (and indicates negative cash flow)."

The KPMG/GS paper is based on analysis of financial projections in a four page letter by NTTA to state senator John Carona (2007-03-12) which is thought to underlie the proposal announced yesterday that is in preparation.

NTTA's full proposal not yet ready

Although NTTA announced its proposal yesterday, the details are not yet fully written, a spokesman says. It will consist of two large volumes, and the aim is to have it ready by May 25, or a few days earlier.

Only an executive summary and powerpoint are available now.

NTTA requires the Texas Transportation Commission (TTC) to approve its intervention in the SH121 procurement process for the public toll authority to proceed with a proposal.

TTC would have to order Texas DOT to negotiate an amendment to a TxDOT/NTTA Regional Protocol or inter-agency agreement of 2006-08-10. This agreement between the two government agencies commits NTTA to supporting the private concession (CDA) procurement by TxDOT and states explicitly that "NTTA would not be making a proposal..."

Sam Lopez of NTTA said the state (TTC/TxDOT) has to agree to amending this protocol or NTTA cannot proceed with a proposal. If the TTC/TxDOT approve the protocol amendment releasing NTTA from its commitment not to propose, it will then take the proposal to the Regional Transportation Council.

Even if RTC favored NTTA, still, TxDOT and the state would have to approve replacing Cintra with NTTA.

The state is being pulled in two directions. On the one hand popular sentiment favors consideration of the NTTA proposal especially as it looks better than Cintra's.

On the other hand to accept the NTTA proposal would violate the TxDOT procurement process laid down for the concession since Cintra was selected with NTTA standing aside.

To consider the NTTA proposal could open the state up to expensive litigation, damage the  credibility of the state's procurement processes, and subject the state to large federal penalties for violation of requirements for fair and open competition.

Either way TTC/TxDOT face trouble.

KPMG are a large international consulting company headquartered in Switzerland and Goldman Sachs is one of New York's leading investment banks.

TOLLROADSnews 2007-05-08