Public-private partnerships spread like a national canker

Innovation Briefs
News Analysis
March 20, 2006

We have received numerous requests for periodic updates to our “Tipping Point” brief documenting new developments in highway tolling. Here is a roundup of news since the late January. Its highlights are the final passage of the Indiana Toll Road concession bill (signed by Governor Mitch Daniels on March 15) and the March 10 announcement by the private equity fund, The Carlyle Group, that it will start investing in transportation infrastructure. These brief overviews are not meant to replace the excellent in-depth reporting by my colleague, Peter Samuel, in his web-based (which we recommend highly to anyone wishing to follow toll road developments in depth.) Our succinct announcements are merely offered in further evidence of the growing role of highway tolling and private sector involvement in developing and financing highway infrastructure.

January 24, 2006: Ohio Secretary of State Ken Blackwell, a candidate for Governor, proposes to lease the Ohio Turnpike to private investors. The proposed concession should generate $4-6 billion according to Blackwell. Unlike Indiana whose concession payment will be devoted fully to expanding and modernizing the state’s transportation network, Blackwell would invest the funds in economic development projects across Ohio, a move that has already stirred up criticism.

February 19: Federal Highway Administration approves a Colorado DOT study that recommends a $385 million plan to add toll lanes on C-470 between I-25 and South Kipling Parkway, a 12.5 mile road that handles up to 100,000 vehicles a day. With Colorado’s highway budget extremely tight, tolling, it seems, has emerged as a preferred way of paying for highway expansion.

February 22: A proposal championed by State Senate president and former Gov. Richard Codey would lease or sell the New Jersey Turnpike or the Garden State Parkway, a deal that Codey advisers say could raise more than $12 billion to replenish the nearly bankrupt state Transportation Trust Fund. For the time being, Gov. Corzine has taken a wait-and-see attitude, and is leaning in favor of refinancing the fund’s debt of approximately $7.3 billion, according to press reports. Corzine is the former head of Goldman Sachs, the Wall Street firm that has figured prominently as financial advisors to Governor Mitch Daniels in the Indiana Toll Road negotiations. Some of our sources speculate whether his former colleagues might not eventually change the Governor’s mind.

February 28: Future sections of Interstate 540 and the Triangle Parkway through Research Triangle Park are being considered as toll roads. Building the roads now and paying for them later with tolls could speed up road construction, according to Perry Safrant, head of the North Carolina Turnpike Authority. The first toll road is expected to be under construction in the Research Triangle area within a year.

February 28: The House Select Committee on Toll Roads of the Pennsylvania State legislature releases a study recommending approval of legislation that would enable the state to enter into public-private partnerships and use toll-generated revenue to fund construction of new roads (“Study of Innovations in the Funding and Delivery of Transportation Infrastructure Using Tolls” by John T. Durbin, former executive director of the Pennsylvania Turnpike Commisssion). “The bottom line is that existing public funding is insufficient to meet the growing needs of Pennsylvania’s transportation infrastructure…We’re just not going to be able to raise any more revenue at the pump,” said Richard Geist, chairman of the House Transportation Committee. The most likely first candidate for a tolling concession is the proposed MonFayette Expressway/Southern Beltway south of Pittsburgh.

March 1: A bill (SB 80) authorizing Utah’s DOT to enter into public-private partnerships to build new toll roads passed the state legislature. According to press reports, the first likely target will be the planned Mountain View Corridor stretching from the Salt Lake City International Airport to Pleasant Grove.

March 10: Texas DOT issues a Notice of Intent to issue Requests for Proposals to “develop, design, construct, finance, maintain and operate” a series of toll projects. Among them are two segments of the Trans Texas Corridor (I-35 and I-69), two Managed Lane projects (IH-635 and IH-820/SH-183) and seven other toll-related procurements. The projects will be developed under “Comprehensive Development Agreements” with private road builders.

March 10: The Carlyle Group, one of the largest and most respected private equity firms, announces creation of an Infrastructure Investment Team “to conduct investments in the infrastructure sector, including investments in transportation facilities…” The team will engage in public-private partnerships with governments at all levels as well as purchase projects outright or through long-term concessions, the announcement said. The eight-member team will be co-headed by Robert W. Dove, former Executive Vice President of Bechtel Enterprises Barry Gold, former Managing Director at Citigroup/Salomon Smith Barney. “The U.S. is finally starting to realize what the rest of of the world has learned, that private dollars can help to alleviate persistent infrastructure challenges,” said David Rubenstein Carlyle’s CEO in announcing the initiative.

In our January/February Brief, “Private Toll Road Financing: Will the US Transportation Community Rise to the Challenge?” we asked rhetorically “What would it take to persuade private equity funds to participate in toll road financing?” Our thanks to the Carlyle Group for providing the answer.

March 15: New York State holds a conference in Albany New York to address innovative approaches to the funding of transportation infrastructure. Participating in the conference were Thomas Madison, Commissioner of New York State DOT, Michael Fleisher, Executive Director of the NYS Thruway Authority and members and staff of the New York State legislature. The 300 attendees included a Who’s Who of the financial and construction world, including the Wall Street firms JP Morgan, Lehman Brothers, UBS, Merrill Lynch and Macquarie Securities; and construction/engineering giants, Bechtel, DMJM+Harris, Fluor, HNTB Corporation, Kiewit, Parsons Brinckerhof and URS Corporation. Discussion centered around two types of initiatives – public-private financing of new transportation projects and concessions of existing toll facilities as a means of raising capital for new construction. The conference was organized by the Region 2 University Transportation Research Center, Robert Paaswell, Director.

March 15: Governor Mitch Daniels signs a landmark bill authorizing a concession of the 157-mile Indiana Toll Road to the Macquarie-Cintra consortium for 75 years. In exchange, the state will receive an upfront payment of $3.8 billion with which the Governor intends to finance a program of highway improvements across Indiana, called “Major Moves. As one of our colleagues remarked, “For those of us who are used to waiting decades for the funding needed for projects to advance, this transaction is mind numbing. Suddenly, the State’s entire 10-year plan is funded.”

Some media dispatches chose to focus on the fact that the bill “squeaked by” in the House by a mere three votes. Undoubtedly, the measure suffered in the final weeks from adverse publicity generated by the Dubai port deal and the nativist sentiments that it aroused. But the anti-foreign opposition, we suspect, will be short lived, as the public learns of improvements in the toll road’s operation by its new “owners” and as the U.S. investment community becomes more involved in concession-type deals (see the Carlyle Group announcement above).

C. Kenneth Orski
Innovation Briefs
10200 Riverwood Drive
Potomac, MD 20854
tel: 301.299.1996
fax: 301.299.4425