Turnpike – Page 3 – Hank Kalet

Leases take their tolls

This week’s cover story in Business Week offers a primer on the benefits and extensive pitfalls of leasing out public infrastructure — a primer that should give Gov. Jon Corzine and the state Legislature more than pause as they wade into the deep end of the pool on the issue.

In the past year, banks and private investment firms have fallen in love with public infrastructure. They’re smitten by the rich cash flows that roads, bridges, airports, parking garages, and shipping ports generate—and the monopolistic advantages that keep those cash flows as steady as a beating heart. Firms are so enamored, in fact, that they’re beginning to consider infrastructure a brand new asset class in itself.

With state and local leaders scrambling for cash to solve short-term fiscal problems, the conditions are ripe for an unprecedented burst of buying and selling. All told, some $100 billion worth of public property could change hands in the next two years, up from less than $7 billion over the past two years; a lease for the Pennsylvania Turnpike could go for more than $30 billion all by itself. “There’s a lot of value trapped in these assets,” says Mark Florian, head of North American infrastructure banking at Goldman, Sachs & Co (GS ).

There are some advantages to private control of roads, utilities, lotteries, parking garages, water systems, airports, and other properties. To pay for upkeep, private firms can raise rates at the tollbooth without fear of being penalized in the voting booth. Privateers are also freer to experiment with ideas like peak pricing, a market-based approach to relieving traffic jams. And governments are making use of the cash they’re pulling in—balancing budgets, retiring debt, investing in social programs, and on and on.

But are investors getting an even better deal? It’s a question with major policy implications as governments relinquish control of major public assets for years to come. The aggressive toll hikes embedded in deals all but guarantee pain for lower-income citizens—and enormous profits for the buyers. For example, the investors in the $3.8 billion deal for the Indiana Toll Road, struck in 2006, could break even in year 15 of the 75-year lease, on the way to reaping as much as $21 billion in profits, estimates Merrill Lynch & Co. (MER ) What’s more, some public interest groups complain that the revenue from the higher tolls inflicted on all citizens will benefit only a handful of private investors, not the commonweal (see BusinessWeek.com, 4/27/07, “A Golden Gate for Investors”).

There’s also reason to worry about the quality of service on deals that can span 100 years. The newly private toll roads are being managed well now, but owners could sell them to other parties that might not operate them as capably in the future. Already, the experience outside of toll roads has been mixed: The Atlanta city water system, for example, was so poorly managed by private owners that the government reclaimed it.

The issue is far from settled, though it seems foolish of supporters (like Philadelphia mayoral candidate Chaka Fattah this morning on WHYY radio) to crow about the benefits without acknowledging the potential problems.

The thing that strikes me about the discussion is that privatization is being pitched as a creative solution to public financing problem and that so-called liberals like Fattah and Gov. Corzine seem willing to play the game. The problems they are hoping to address — broken budgets and a lack of money for social programs — are very real, of course, but the solution is shortsighted and does not address the root causes of the problem.

In fact, privatizing only exacerbates it because the chief problem is and has been privatization and the demonization of government. We have been engaged in a decades-long downward spiral in which the word taxes and the notion of government as protector of the citizenry has been denigrated. This has led to a starvation of public resources and a group of weak-kneed elected officials at the state level unwilling to raise taxes or talk straight about service levels and who rely on borrowing to pay for what is offered.

Add to this the inability or unwillingness of Congress to fund what is needed (either directly, or through grants to states and local governments) and you have a mess.

“Asset monetarization,” to use Corzine’s term, will remain an attractive approach for governors and legislators around the country until we repair the damage done over the last three decades.

South Brunswick Post, The Cranbury Press
The Blog of South Brunswick
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To sell or not to sell

Editorials in the state’s major papers over the last few days are asking that voters and legislators keep an open mind on the governor’s “asset monetization” proposal, asking that critics hold their fire until the governor puts a plan on the table.

The Record, for instance, calls legislators’ attempts to block the plan — essentially a privatization of state assets — premature and “flat-out wrong.”

They have decided they are dead set against the sale or lease of a major highway or other asset before they even know what the Corzine administration will come up with.

Their premature opposition is a disservice to the public. It threatens to kill the proposal for an asset sale before it has even been made.

Of course, that’s the game plan. The idea of selling off the Turnpike is dangerous at the very least, raising the specter of some unregulated business raising tolls and shirking on maintenance, leaving the state’s drivers holding the bag for years.

The Record admits that

there are serious, legitimate concerns about the notion of giving a private company control of any major highway or other state asset. Would tolls rise unreasonably high? Would the highway be properly maintained?

Most important, would an asset sale benefit the state over the long run, or would it bring only temporary relief that would lead the state into a deeper fiscal hole in the future?

These concerns need to be fully debated. But it is impossible to debate a proposal that doesn’t yet exist.

The Asbury Park Press also remains skeptical, but is open to some options,

such as the sale of naming rights and air rights — developing the empty space above state properties — and the use of financial techniques to generate regular income from state assets. None of the alternatives should involve ceding control over the assets, such as the roadways, which would hurt commuters most with nonstop toll increases.

And it wants voters to have the final say — which only seems reasonable, given what may end up being proposed.

Let’s be fair here. “Asset monetization” is a dangerous gamble, as I said. Handing off public assets, even if safeguards are built into the contract, means handing off control. You can’t have it both ways.

I wouldn’t take the proposal off the table, necessarily, but before anyone can take this discussion seriously, the governor has to show the state that there are no other options. The governor says that voters will not stand for an income tax hike. My answer is: Let’s ask them. He says they won’t stand for service cuts: Explain the potential cuts and then ask them whether they can live with them.

If, in the end, “asset monetarization” is the only way to stave off financial ruin, then we can talk about it.

South Brunswick Post, The Cranbury Press
The Blog of South Brunswick
The Cranbury Press Blog

E-mail me by clicking here.

Toll sale would take its toll

The debate on selling off the state’s toll roads has begun.

The Assembly Transportation Committee began hearings today to discuss the misbegotten proposal — with many of the members rightly pointing out how it is less likely to fix our debt problems than exacerbate them.

Assemblyman John Wisniewski, D-Middlesex, the committee chairman, warned that any “monetization” plan would be similar to past borrowing schemes that have led to the state’s crushing debts. Selling or leasing state assets is now being promoted as a way to ease those burdens.

Wisniewski said a long-term privatization plan would still leave the public on the hook for billions of dollars of debt through higher tolls.

And this does not take into account the potential maintenance issues associated with a privatization plan.

As I’ve said before, end this debate now before we talk ourself into doing something dopey.

South Brunswick Post , The Cranbury Press
The Blog of South Brunswick