APPLYING THE TOLL ROAD PRIVATIZATION MODEL TO OTHER ASSETS

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APPLYING THE TOLL ROAD PRIVATIZATION MODEL TO
OTHER ASSETS

• John Schmidt David Narefsky
• NYU Wagner Rudin Center for Transportation
• Policy Management
• March 25, 2008

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CHICAGO SKYWAY AND INDIANA TOLL ROAD

• First privatizations of major U.S. toll
  roads-transactions done in 2005 and 2006
• Sparked wide interest in U.S. privatization
• New infrastructure funds/commitments by pension
  funds have created pool of 400B for U.S.
  infrastructure investment

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LARGE VALUES RECEIVED BY PUBLIC ENTITIES

• 1.85B to City of Chicago for 99 year lease of
  Chicago Skyway
• 3.8B to State of Indiana for 75 year lease of
  Indiana Toll Road

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VALUE FROM 2 SOURCES

• 1. Value of asset increases in private hands
• Private operator will raise tolls regularly
• Capital costs significantly reduced
• Lower after-tax financing cost

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2. Public recovers its equity in the asset
Equity increases with overall value
Long-term equity in U.S. infrastructure
has enormous value in world market
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MAKES SENSE IF PUBLIC HASBETTER USE OF CAPITAL

• Public capital not needed in operating roadscan
  be redeployed to other uses
• Chicago created 500M reserve, paid off 400M
  city debtraised bond rating significantly
  reduced financing costs
• Indiana put 3.8B into transportation
  infrastructureonly fully funded U.S.
  transportation program

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OTHER ELEMENTS OF MODEL

• Long-term lease shifts all financial risks to
  private operator
• Any debt is subordinate to lease obligations
  of maintenance/capex
• Operating standards assure quality
• ? Independent engineering inspections strong
  remedies for violation

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TRANSPARENT COMPETITIVE BID PROCESS IS ALSO KEY

• No politics - professionally run
• Open to all qualified bidders - no local or
  national xenophobias
• Bidding based on fixed contract with decision
  based solely on price

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MODEL CAN BE USED FOR OTHER TYPES OF ASSETS

• Assets must be revenue-producing
• Infrastructure investors want stability and
  predictabilityideally monopoly or quasi-monopoly
  element
• Private operators must bring added value to get
  substantial returnsincrease political support

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CHICAGO UNDERGROUND PARKING SYSTEM

• 9000 spaces4 connected garages--underneath Grant
  Park/Millennium Park in downtown Chicago
• Owned by City and Chicago Park District
• After competitive auction, leased in 2006 to
  Morgan Stanley Infrastructure Fund for 563M

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ASSET VALUE INCREASED UNDER PRIVATE OPERATION

• Private operator could raise parking ratesstop
  subsidizing suburbanites and others driving
  downtown
• Flexibility to take advantage of special
  eventsdevelop relationships
• Substantially reduced cost of major
  reconstruction of one garage
• Improved signage--new revenues from advertising,
  concessions

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CITY COULD REDEPLOY CAPITAL TO OTHER NEEDS

• Used partially to pay off Millennium Park bonds
  that were drain on city revenues
• Most proceeds used for capital improvements at
  neighborhood parks
• Chicago Park District had no prior capital
  programenormously popular result

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OTHER PARKING POSSIBILITIES

• Street parking--Chicago is now privatizing street
  parking system--asset of every city
• Airport parking--Puerto Rico is privatizing San
  Juan Airport Parkinghas ideal monopoly
  elements
• Private operators can maximize revenues, bring
  efficienciescities or airports can use capital
  for other purposes

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LOTTERIES

• Illinois and Indiana Governors proposed lottery
  privatizations in 2007no legislative approval
  yet in either state
• State lotteries vary enormously in per capita
  revenuesuneven management
• Private operator can bring best practices and
  increase revenues substantially
• States can redeploy capitalto education in
  Indiana, capital projects in Illinois

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PORTS

• Port of Corpus Christi proposing to build new
  terminal facility on privatized basis
• Existing terminals being privatized in Portland
• Virginia just established commission to study
  privatizing Virginia Port Authority
• Large-scale U.S. need for expanded port
  facilitiesprivate capital essential

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TRANSIT

• Generates revenue, but no profitrequires ongoing
  subsidy
• Can still be privatized to reduce subsidy
• BART undertaking privatized Oakland Airport
  connector
• Denver Regional Transportation District proposing
  privatized light rail system