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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