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APPLYING THE TOLL ROAD PRIVATIZATION MODEL TO OTHER ASSETS

This article discusses the application of the toll road privatization model to various infrastructure assets, including the Chicago Skyway, Indiana Toll Road, underground parking systems, lotteries, ports, and transit systems. It explores the benefits, such as increased asset value, capital redeployment, and improved financial stability, that can be derived from privatization. The model emphasizes transparent competitive bid processes and the need for private operators to bring added value to ensure substantial returns.

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APPLYING THE TOLL ROAD PRIVATIZATION MODEL TO OTHER ASSETS

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  1. APPLYING THE TOLL ROAD PRIVATIZATION MODEL TO OTHER ASSETS John Schmidt & David Narefsky NYU Wagner Rudin Center for Transportation Policy & Management March 25, 2008

  2. 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

  3. 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

  4. 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

  5. 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

  6. MAKES SENSE IF PUBLIC HASBETTER USE OF CAPITAL • Public capital not needed in operating roads—can be redeployed to other uses • Chicago created $500M reserve, paid off $400M city debt—raised bond rating + significantly reduced financing costs • Indiana put $3.8B into transportation infrastructure—only fully funded U.S. transportation program

  7. 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

  8. 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

  9. MODEL CAN BE USED FOR OTHER TYPES OF ASSETS • Assets must be revenue-producing • Infrastructure investors want stability and predictability—ideally monopoly or quasi-monopoly element • Private operators must bring added value to get substantial returns—increase political support

  10. CHICAGO UNDERGROUND PARKING SYSTEM • 9000 spaces—4 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

  11. ASSET VALUE INCREASED UNDER PRIVATE OPERATION • Private operator could raise parking rates—stop subsidizing suburbanites and others driving downtown • Flexibility to take advantage of special events—develop relationships • Substantially reduced cost of major reconstruction of one garage • Improved signage--new revenues from advertising, concessions

  12. 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 program—enormously popular result

  13. 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 Parking—has ideal “monopoly” elements • Private operators can maximize revenues, bring efficiencies—cities or airports can use capital for other purposes

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

  15. 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 facilities—private capital essential

  16. TRANSIT • Generates revenue, but no profit—requires ongoing subsidy • Can still be privatized to reduce subsidy • BART undertaking privatized Oakland Airport connector • Denver Regional Transportation District proposing privatized light rail system

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