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Toll road selloff madness spreads to Austin

Late last year, the Harris County Commissioners’ Court got the bright idea to consider selling off its toll road system to a private operator (see here and here for more). Apparently, the folks up in Travis County now think that’s just swell.

Officials here in Austin, including state Rep. Mike Krusee, R-Williamson County, say they are open to the idea of selling the 66 miles of toll roads under construction on Austin’s north and east sides. And, oh yes, the original plan for expanding Capital of Texas Highway (Loop 360) involved a long-term concession agreement with a private operator.

And that’s just what we know of now.

“Texas is open for business,” said the opening slide in a Texas Department of Transportation workshop put on last week for an overflow crowd of industry contractors, including toll road companies. The Texas Transportation Commission makes no bones about it: It wants companies to come to Texas, wallets open, and build or buy toll roads.

“We’re prepared to make sure you’re rewarded for taking on that risk,” commission Chairman Ric Williamson told the crowd.

That potential reward is the nub.

One of the primary sales points for toll roads has been that once the turnpikes are in place, with forevermore toll charges, the profits would be plowed back into the road system. The turnpikes would become unceasing fountains of transportation cash that would allow Texas to close what Williamson says is an $86 billion funding gap over the next quarter-century, and maybe build some passenger rail systems to boot.

So, if we sell the fountains now, we’d be flooded with transportation cash for projects, but we’d lose the future cash flow. The toll road operators, meanwhile — no fools they — would certainly do everything they could to pay Texas less than what those roads will eventually generate in revenue.

That margin, the profit, is money that would go to their stockholders, not Texas roads.

“That could go both ways,” Krusee said, noting that the roads might underperform and thus swing the transactions to Texas’ favor. And if the state gets big money now, Krusee said, more roads could be built faster, and the state would see an economic development benefit from that acceleration.

So as long as the toll roads that we sell off to the highest bidders, roads that were built on the premise of being sufficiently good moneymakers that they could help close an alleged $86 billion funding gap, are unprofitable for those buyers, the deal is a winner for the state of Texas. Genius!

I’m sorry, but I just don’t see how it’s a better idea to sell off assets to raise a boatload of cash to finance capital spending instead of borrowing against the future revenue of those assets and the investment-grade bonds they help generate. Am I missing something here? How exactly does this make sense? Link via Eye on Williamson, who’s as skeptical as I am.

UPDATE: sigh

[Harris] county agreed today to pay investment banks $1 million to study the toll road system, including a plan to privatize it.

Commissioners Court voted to study three possible scenarios for the Harris County Toll Road Authority: keeping the 83-mile system as is; selling it outright; and leasing the long-term rights to operate it.

[…]

Financiers worldwide have begun viewing busy toll roads that draw hundreds of thousands of daily users as investment opportunities.

Investment houses and private toll-road operators have inquired whether the county is interested in privatizing, saying it might be able to lease its system for $2 billion to $7 billion.

An outright sale might net $2.7 billion to $4.4 billion, concluded First Southwest Co., the county’s financial adviser.

But First Southwest and the investment banks have provided only preliminary estimates of how much the county could make. The studies will try to determine more exactly how much the county could reap by selling or leasing.

Here’s a hint, fellas: If professional investors think toll roads have good long-term moneymaking potential, then maybe selling them off isn’t such a bright idea. If “underperforming” is the key to making this work in our favor, we’re kidding ourselves. Thanks to Christof in the comments for the catch.

UPDATE: In the comments, Steve says:

[T]here is a possibility that the prices are inflated right now — Macquerie, a big Australian investment bank, has been plowing money into this sort of project all over the globe because Australia, for a variety of reasons related to their pension reform laws, is desperate for bonds; a 50-year or 99-year right to operate a toll road can be securitized and sold to the pension funds. It pretty much seems like a seller’s market, so it is possible that buyers are prepared to pay more than the roads would be objectively worth.

That’s an interesting point, and it does cast Krusee’s perspective in a different light. Robin Holzer noted the importance of toll road revenues for Harris County’s bond ratings when this topic first came up. To my way of thinking, the county would have to be overpaid by a lot to make this a good deal for the taxpayers.

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6 Comments

  1. How’s this for timing?

    Houston Chronicle, Jan 24, 2006:

    County pays $1.7 million to look at toll road options, including privatization

    http://www.chron.com/disp/story.mpl/front/3608899.html

  2. Charles Hixon says:

    The County has for the record given up its authority in Education (ISDs) and Utilities (MUDs), but cannot sell its charity hospitals. The Port Authority was supposed to have been privatized long ago but no one is being held accountable.

    The arduous planning process involved in an all-too-slow-but-deliberate building of new rights-of-way was bypassed with significant infrastructure expansion attributed to toll roads. The old process of building rights-of-way incorporated the maintenance expense in the County’s budget. But with rapid expansion from the toll road concept came poor planning: too many inefficient, impractical multilane highways with too little traffic.

    Not a problem, because our toll roads are sort of new and maintenance is low. Large maintenance expenses will be coming due as the system deteriorates. Higher tolls will fund these repairs, but being privatized, folks will have a hard time of accusing the County of raising taxes, just as the citizen cannot hold the County accountable for raising education and utility taxes anymore.

    Although the County is an extension of the State government, the State apparently doesn’t want to participate: give all proceeds to the County. In hindsight, maybe the State should have supervised, possibly reined in construction of those currently unjustifiable projects for which it might ultimately be held accountable. But now we have a means for which the State can still back out of its responsibility.

    Apparently the mechanism to eminent domain and build works fine but the maintenance responsibility is lacking. Back to the eminent-domain-for-private-use issue: the new owner will have ultimate say on who gets to use his private road, including law enforcement.

    If I remember my grade school history right, private toll roads made up a good portion of Colonial infrastructure. Private abuse of the system stymied commerce. This is how public rights-of-way came about in the first place.

    Naming rights to these roads will follow.

  3. Steve says:

    Charles, I don’t know a thing about Texas politics, but there is a possibility that the prices are inflated right now — Macquerie, a big Australian investment bank, has been plowing money into this sort of project all over the globe because Australia, for a variety of reasons related to their pension reform laws, is desperate for bonds; a 50-year or 99-year right to operate a toll road can be securitized and sold to the pension funds. It pretty much seems like a seller’s market, so it is possible that buyers are prepared to pay more than the roads would be objectively worth.

  4. Charles Hixon says:

    Steve: yes, I too get proposals daily for free money at my e-mail address.

    Raiding pension funds is what we have organized crime and Enron for.

  5. Steve says:

    I’ve got no dog in this fight, Charles (Hixon), but Macquarie (I spelled it wrong upthread) paid significantly more than expected for the Chicago Skyway and is about to pay significantly more than expected in Indiana. The trick is that their demand for infrastructure-backed securities seems pretty inflexible right now, so they can overpay, pass the assets on in bond form, and make their money on the gigantic fees they charge to do it all. The Times had an article on the phenomenon last weekend, although IIRC it glossed over why exactly there’s such raging demand in Australia (as I said, it has to do with pension reform — compulsory private pensions, a sort of quasi-private Social Security system, were introduced and reached full funding of 9% of payroll just in time for a global decline in interest rates). The real clip job happens down under.

    However, given that my knowledge of Texan politics is largely based on Charles’ writing, I wouldn’t for a minute doubt the statehouse’s ability to make a sow’s ear out of a lovely silken highway system.

  6. Steve says:

    Charles, I don’t know a thing about Texas politics, but there is a possibility that the prices are inflated right now — Macquerie, a big Australian investment bank, has been plowing money into this sort of project all over the globe because Australia, for a variety of reasons related to their pension reform laws, is desperate for bonds