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APPLYING THE TOLL ROAD APPLYING THE TOLL ROAD PRIVATIZATION MODEL TO PRIVATIZATION MODEL TO

OTHER ASSETSOTHER ASSETS

John Schmidt & David NarefskyJohn Schmidt & David Narefsky

NYU Wagner Rudin Center for NYU Wagner Rudin Center for Transportation Transportation

Policy & Management Policy & Management

March 25, 2008March 25, 2008

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CHICAGO SKYWAY AND CHICAGO SKYWAY AND INDIANA TOLL ROADINDIANA TOLL ROAD

First privatizations of major U.S. toll roads-transactions done in First privatizations of major U.S. toll roads-transactions done in 2005 and 20062005 and 2006

Sparked wide interest in U.S. privatizationSparked wide interest in U.S. privatization New infrastructure funds/commitments by pension funds have New infrastructure funds/commitments by pension funds have

created pool of $400B+ for U.S. infrastructure investmentcreated pool of $400B+ for U.S. infrastructure investment

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LARGE VALUES RECEIVED LARGE VALUES RECEIVED BY PUBLIC ENTITIESBY PUBLIC ENTITIES

$1.85B to City of Chicago for 99 year $1.85B to City of Chicago for 99 year lease of Chicago Skywaylease of Chicago Skyway

$3.8B to State of Indiana for 75 year $3.8B to State of Indiana for 75 year lease of Indiana Toll Roadlease of Indiana Toll Road

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VALUE FROM 2 SOURCES:VALUE FROM 2 SOURCES:

1. Value of asset increases in private 1. Value of asset increases in private handshands

* Private operator will raise tolls * Private operator will raise tolls regularlyregularly

* Capital costs significantly reduced* Capital costs significantly reduced * Lower after-tax financing cost * Lower after-tax financing cost

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2. Public recovers its equity in the asset2. Public recovers its equity in the asset

* Equity increases with overall value * Equity increases with overall value

* Long-term equity in U.S. * Long-term equity in U.S. infrastructureinfrastructure

has enormous value in world markethas enormous value in world market

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MAKES SENSE IF PUBLIC HASMAKES SENSE IF PUBLIC HASBETTER USE OF CAPITALBETTER USE OF CAPITAL

Public capital not needed in operating roads—can Public capital not needed in operating roads—can be redeployed to other usesbe redeployed to other uses

Chicago created $500M reserve, paid off $400M Chicago created $500M reserve, paid off $400M city debt—raised bond rating + significantly city debt—raised bond rating + significantly reduced financing costsreduced financing costs

Indiana put $3.8B into transportation infrastructureIndiana put $3.8B into transportation infrastructure—only fully funded U.S. transportation program —only fully funded U.S. transportation program

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OTHER ELEMENTS OF OTHER ELEMENTS OF MODELMODEL

* * Long-term lease shifts all financial risks Long-term lease shifts all financial risks to private operatorto private operator

•• Any debt is subordinate to lease Any debt is subordinate to lease obligations of maintenance/capexobligations of maintenance/capex

* * Operating standards assure qualityOperating standards assure quality

●● Independent engineering Independent engineering inspections—inspections—strong remedies for strong remedies for violationviolation

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TRANSPARENT COMPETITIVE TRANSPARENT COMPETITIVE BID PROCESS IS ALSO KEYBID PROCESS IS ALSO KEY

No politics - professionally runNo politics - professionally run Open to all qualified bidders - no Open to all qualified bidders - no

local or national xenophobiaslocal or national xenophobias Bidding based on fixed contract Bidding based on fixed contract

with decision based solely on with decision based solely on priceprice

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MODEL CAN BE USED FOR MODEL CAN BE USED FOR OTHER TYPES OF ASSETSOTHER TYPES OF ASSETS

Assets must be revenue-producingAssets must be revenue-producing Infrastructure investors want stability Infrastructure investors want stability

and predictability—ideally monopoly and predictability—ideally monopoly or quasi-monopoly elementor quasi-monopoly element

Private operators must bring added Private operators must bring added value to get substantial returns—value to get substantial returns—increase political supportincrease political support

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CHICAGO UNDERGROUND CHICAGO UNDERGROUND PARKING SYSTEMPARKING SYSTEM

9000 spaces—4 connected garages--9000 spaces—4 connected garages--underneath Grant Park/Millennium Park underneath Grant Park/Millennium Park in downtown Chicagoin downtown Chicago

Owned by City and Chicago Park Owned by City and Chicago Park DistrictDistrict

After competitive auction, leased in After competitive auction, leased in 2006 to Morgan Stanley Infrastructure 2006 to Morgan Stanley Infrastructure Fund for $563M Fund for $563M

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ASSET VALUE INCREASED ASSET VALUE INCREASED UNDER PRIVATE OPERATIONUNDER PRIVATE OPERATION

Private operator could raise parking ratesPrivate operator could raise parking rates—stop subsidizing suburbanites and others —stop subsidizing suburbanites and others driving downtowndriving downtown

Flexibility to take advantage of special Flexibility to take advantage of special events—develop relationshipsevents—develop relationships

Substantially reduced cost of major Substantially reduced cost of major reconstruction of one garagereconstruction of one garage

Improved signage--new revenues from Improved signage--new revenues from advertising, concessionsadvertising, concessions

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CITY COULD REDEPLOY CITY COULD REDEPLOY CAPITAL TO OTHER NEEDSCAPITAL TO OTHER NEEDS

Used partially to pay off Millennium Park Used partially to pay off Millennium Park bonds that were drain on city revenuesbonds that were drain on city revenues

Most proceeds used for capital Most proceeds used for capital improvements at neighborhood parksimprovements at neighborhood parks

Chicago Park District had no prior capital Chicago Park District had no prior capital program—enormously popular resultprogram—enormously popular result

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Street parking-Street parking--Chicago is now privatizing -Chicago is now privatizing street parking system--asset of every citystreet parking system--asset of every city

Airport parking-Airport parking--Puerto Rico is privatizing -Puerto Rico is privatizing San Juan Airport Parking—has ideal San Juan Airport Parking—has ideal “monopoly” elements “monopoly” elements

Private operators can maximize revenues, Private operators can maximize revenues, bring efficiencies—cities or airports can bring efficiencies—cities or airports can use capital for other purposesuse capital for other purposes

OTHER PARKING POSSIBILITIESOTHER PARKING POSSIBILITIES

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Illinois and Indiana Governors proposed Illinois and Indiana Governors proposed lottery privatizations in 2007—no legislative lottery privatizations in 2007—no legislative approval yet in either stateapproval yet in either state

State lotteries vary enormously in per State lotteries vary enormously in per capita revenues—uneven managementcapita revenues—uneven management

Private operator can bring best practices Private operator can bring best practices and increase revenues substantiallyand increase revenues substantially

States can redeploy capital—to education in States can redeploy capital—to education in Indiana, capital projects in IllinoisIndiana, capital projects in Illinois

LOTTERIESLOTTERIES

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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 facilities—private capital essential

PORTSPORTS

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TRANSITTRANSIT

Generates revenue, but no profit—Generates revenue, but no profit—requires ongoing subsidyrequires ongoing subsidy

Can still be privatized to reduce subsidyCan still be privatized to reduce subsidy BART undertaking privatized Oakland BART undertaking privatized Oakland

Airport connectorAirport connector Denver Regional Transportation District Denver Regional Transportation District

proposing privatized light rail systemproposing privatized light rail system