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Challenging the Wisdom of the Trans Texas Corridor.
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New Jersey treasury-UBS say
2006.11.17 A joint New Jersey state treasury-UBS Investment Bank (UBS) privatization project team finds the Atlantic City Expressway along with the state lottery as the two top candidates for privatization among all state assets. The New Jersey Turnpike, Garden State Parkway, HOT Laners and new tolled facilities are called very viable candidates among the state's assets that would bring the highest returns in privatization after extinguishing their current debt. This is the conclusion of an 84 page report on Phase 1 of a three phase privatization process by the administration of Governor Jon Corzine (Democrat). The report describes many forms or degrees of privatization but says that a longterm concession and lease is the "lynchpin". Context for the study is that NJ has the highest property taxes in the country and the third highest debt. Tollroads are in the "very viable" class along with rights-of-way, real estate near train stations, convention centers, stadiums, waterways and ports, hospitals and student loans. Transit, airports, water, wastewater and prisons are in a third class, "moderately viable." Among the toll facilities the Atlantic City expressway is ranked highest, apparently on the basis that it is smaller size than the Turnpike and Garden State Parkway make it more manageable as a project. Also no doubt relevant is the fact that it caters more to vacation and interstate traffic than the big two. Goals The state's goals are put as:
Selection criteria
Structures considered The report looks systematically at all the theoretically possible structures "varying along a spectrum from minor (private) involvement in maintenance and operations to transfer of full and permanent ownership to the private sector." Disadvantages of the public authority model are listed as:
Short term leasing vs longterm lease/concession The report looks at short-term leasing and sees attractions (quick implementation, political acceptability, some private sector economies) but issues (no upfront capital, difficulty setting targets, modest benefits). But it points to concessions as the preferred vehicle: "The longterm concession (sometimes referred to as the Concession and Lease, or just the Lease) is the lynchpin and the fundamental platform for implementing a public-private partnership arrangement in the infrastructure sector." Under the concession/lease, says the report, the state assigns the rights to set, collect and manage user fees (tolls in the case of roads) in exchange for (1) a lump sum upfront fee or annual fees and (2) acceptance by the concessionaire of an agreed set of obligations and responsibilities over the term of the lease. Title to the assets remains with the state, but responsibility for operating, maintaining, investing and financing the asset is transferred to the concessionaire. Rate setting is controlled in the concession/lease contract. The private operators profit depends on its performance and efficiency of operations. The state may have a right to a share of profits. Attractions are significant upfront fees for the state, transfer of costs and responsibilities from the state, and failure to perform results in full reversion to the state. Issues include:
Implementation time is put at 9 to 12 months. The report discusses shadow toll and availability contracts, and trade/sale. Full sale has the advantage of the maximum upfront proceeds for the state but the disadvantage of loss of control except to the extent it devises an adequate regulatory framework, and and loss of any reversion rights. A variation of sale is sale to a company in which the state forgoes some sale proceeds retaining a share in the equity - corporatization in which the state has shares. IPO the "French" model Corporatization is discussed as "the French model" - creation of a new publicly traded company in which the state retains significant shares, maybe a majority of shares. Implementation time is put at 12 to 18 months. Another corporate form discussed is the not-for-profit trust. Then there is a discussion of methodologies to estimate value. The main conclusion of this section is that "core value drivers" are within the state's control, and that the value the state extracts from the privatization process will depend heavily on decisions it makes on pricing and regulation. Toll increases, labor costs and the required amount of spending will have major impacts. Concession length will be important up to a critical point, beyond which it has limited value. The market for equity investment in infrastructure is described as "strong" with a wide range of interested investors and strong competition for a limited supply of available assets. Unparalleled opportunity UBS says New Jersey "has an unparalleled opportunity to capitalize on robust market conditions and on the attractiveness of its infrastructure assets to launch a highly successful program." Its attractiveness is based on the strong local economy, high incomes, high population density, and location among major east coast population centers. $45b of toll concession likely "Current estimates for north American concessions to be sold in the next few years approach $50b with roads accounting for more than 80% of the pipeline, followed by bridges and tunnels (10%), healthcare (5%) and ports (3%)." However UBS says the number could be substantially higher, perhaps double that. Mature assets like NJ tollroads attract a different class of investors from the 'greenfields' new construction ' which is dominant in Texas. UBS says the size of NJ assets is not a problem given the "very strong current availability of equity funds in the market for these kinds of assets." Indeed they say large assets tend to attract greater interest because the commitments required to bid are similar regardless of size, and larger assets promise larger rewards. Atlantic City Expressway (ACE) is described as "very attractive" and the New Jersey Turnpike/Garden State Parkway as "extremely attractive" as candidates for privatization. The Turnpike/GSP's attraction is based on its long operating history, diversified traffic base, critical position in the national highway system, and sheer size of traffic and revenue. New traffic and revenue forecasts needed In the case of ACE the city airport is a liability because it presently absorbs toll profits. There are environmental cleanup issues in the right of way and the question of labor contracts with ACE workers. It needs a new T&R study. The Turnpike/GSP also needs a new T&R study including toll elasticities of demand on each, a policy decision on the concessionaire's responsibility to the existing employees, union contracts and benefits, a plan for capital improvements, operating standards, possible increased value and reduced operating costs. UBS is also proposing privatization of the state's fiber optic network which is built along 440 route miles (708km) along the three tollroads. HOT lanes are "very attractive PPP candidates" also the report states, but there isn't adequate T&R data either. "The state could also apply a variable tolling regime approach to manage road congestion," says the report. It says that new toll facilities could also be "attractive as PPP candidates." An appendix has a 2 page list of what it calls the US pipeline of infrastructure projects, in which toll concessions dominate. Phase 2 UBS is developing an optimization model to develop strategies to accomplish the state's debt reduction in the best way. The model will take details of some 1800 state debt maturities and using linear programming work out the best way to reduce the burden of state debt. Phase 2 will estimate specific values for the state's assets and Phase 3 will implement privatization. see http://www.state.nj.us/treasury/pdf/asset_evaluation_report.pdf RFQs for T&R and engineering costs Last month the NJ Treasurer's office began competitive hiring of a traffic and revenue consultant and an engineering consultant for Phase 2 of privatization. Scope of services says the consultants may be asked to review T&R prospects for NJ Turnpike, Atlantic City expressway, Garden State Parkway, I-78, I-80, NJ440 (from I-287/NJTpk to GSP) and Pulaski Skyway (US1&9). T&R projections will be up to 99 years. Some of the roads may be divided into segments and the segments analyzed separately. The value of competing free routes to motorists may be assessed and diversion estimated. Revenues will be assessed for different toll rates. The RFQ mentioned the need for international experience and work for either buyers or sellers of assets. The engineering hire requires an assessment of the condition of the roads, and an opinion on the remaining economic and service life, life cycle costs, environmental issues etc for a report called an asset analysis. The results are required within 90 days. A selection of consultant is expected shortly. contact Christine.Weiland@treas.state.nj.us TOLLROADSnews 2006-11-17 ADDITIONS 2006-11-20 |
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