The process by which construction crews grind up rock with water to create cement is a relatively simple and ancient one. The process by which cement is turned into money for cash-strapped states and into a new asset class is a little more complicated, much newer--and far more controversial.
Across the country, from the Great Lakes to the shores of Southern California, the highways, roads, tunnels and parking garages that were built at public expense and for public benefit are being sold or leased to corporations. And in a related development, states with little cash but a big need for new infrastructure are partnering with private investors who are eager to ribbon states with toll roads. What's driving this is supply and demand, or rather demand and supply.
First, the supply. This summer's bridge collapse in Minneapolis tragically illustrated how badly U.S. infrastructure is in need of repair. In 2005, the American Society of Civil Engineers estimated that $1.6 trillion is needed over a five-year period to bring the nation's vast infrastructure network up to good condition. The Federal Highway Administration 2006 report says $79 billion a year is needed just to maintain highways and bridges and another $131.7 billion is required annually to improve them. But from the federal government in Washington down to municipal administrators in Michigan, money for new roads is hard to come by. Given their harsh fiscal realities, it's easy to see why states would rather earn cash from their roadways than spend money on them.
The demand? It's coming from pools of capital forming around the globe, seeking safe havens that provide consistent, reliable returns. For those investors, toll roads seem the way to go. The reasons: toll collection is done electronically and efficiently, traffic is rising steadily and Americans have generally not changed their driving behavior despite rising gas and toll prices. There are several major players looking to profit by paving more of America. Among the biggest are Macquarie, a massive Australian financial conglomerate, and Spanish roadway operator Cintra. But Wall Street firms aren't far behind, and investment houses like Morgan Stanley are forming funds to invest in infrastructure in the United States and around the world.
The recent trend to monetize America's infrastructure started in 2005, when Chicago Mayor Richard Daley decided to sell the Chicago Skyway, the 7.8-mile toll road that connects the Dan Ryan Expressway to the Indiana Toll Road. Just months after a $250 million modernization was completed, Chicago reaped a $1.83 billion windfall by selling a 99-year lease on the toll road to Macquarie.
Indiana Gov. Mitch Daniels followed suit the following year by selling the Indiana Toll Road, which traverses the northern part of the Hoosier state from the Illinois border to Ohio, to a consortium of Macquarie and Cintra. The price tag: $3.8 billion for a 75-year lease. Not to be outdone, Chicago last fall agreed to sell 99-year leases on four city-owned parking garages to Morgan Stanley and a private company for $563 million to Morgan Stanley's Infrastructure Group.
Governments have also been turning to public-private partnership to build new roads. The 91 Express Lanes, a four-lane, 10-mile toll road built in the median of California's State Route 91 in Orange County, was the first privately backed American toll road built in modern times. It was constructed by a private company, which transferred ownership to the state upon completion and then leased it back for 35 years. In April 2002, the Orange County Transportation Authority bought the road back for $207.5 million. The same year California's SR-91 went operational, the Dulles Greenway, a privately owned, six-lane 14-mile toll road in suburban Virginia, opened for business.
And Macquarie of Australia is currently working on the South Bay Expressway, a 10-mile toll road running north from the U.S.-Mexico border. The $650 million road is financed by cash from Macquarie, and debt provided by banks and by the U.S. government ($154 million). In another border state, Texas, Gov. Rick Perry is hoping that the ambitious Trans-Texas Corridor project, a multiphase project that will see fast new highways criss-cross the state, will attract private investment.
What's not to like? In each case, the state and city governments set their terms in highly detailed operating agreements that force the owner (or leaser) to provide certain levels of service and maintenance, and to keep tolls and other costs under control. For the most part, the concept of enlisting private support for public works projects has drawn support from across the political spectrum. These deals also help place large capital projects off the states' balance sheets.
Last March, a consortium led by San Antonio-based Zachry Group and Spain's Cintra signed a contract with the state of Texas to build a 43-mile segment of SH-130, a toll road in Texas running from north of Austin to Seguine. Texas state highway projects have historically been funded on a pay-as-you-go basis. "We're able to go and sell bonds or some other debt instrument to raise the capital necessary to finance the construction," said Vicky Waddy, director of public affairs at Zachry Group. Once the $1.3 billion project is completed, the consortium will share toll revenues with the state.
Critics note, however, that there are several potential problems. The companies do have leeway to boost tolls, and frequently do so. And Fortune magazine's Bethany MacLean, the first reporter to sniff a rat at Enron, has raised questions about the sustainability of Macquarie's business model. Selling leases on public property are also classic one-shots: short-term, unrepeatable moves that serve to camouflage true structural deficits. And in this case, the push for public-private partnerships highlights the congenital unwillingness of elected officials at all level of government to align revenues (read: taxes) with the spending necessary to fulfill basic public responsibilities.
"We've got to acknowledge that infrastructure funding in the U.S. is at a crisis level and states are scrambling to try to come up with the funds," Rep. Terri Austin, chair of the Indiana House of Representatives Roads and Transportation Committee, who was critical of her state's decision to lease the Indiana Toll Road. While the sale produced funds for state highways, the benefits have been distributed disproportionately within Indiana. Austin is also concerned that the consortium, which froze tolls through 2016, might jack up rates. "The consortium maintains the authority to set the tolling rate upon the expiration of that freeze," she said.
What's more, the assumption behind this trend is that private entities can build and operate roads more effectively than governments can, and that shareholders can realize the maximum benefits from their investments by selling to private firms. These assumptions haven't always held true. The tunnel under the English Channel, built by a private company, has repeatedly run into trouble. Its debt was restructured in the 1990s, and it declared bankruptcy last year. Last month-13 years and billions of dollars in bad debt later-the company operating the tunnel was finally awarded an investment-grade ranking.
When the projected levels of traffic and tolls didn't materialize at the Dulles Greenway, its finances had to be restructured in 1999. (In August 2005, the owners eventually sold out to Macquarie for $617.5 million.) In August, Texas walked away from a deal to lease State Highway 121 to Cintra and a group of investors advised by JPMorgan for 50 years because the North Texas Tollway Authority, a state agency, offered substantially more. While disappointed, Cintra, which believes its offer "was the best option for both the State as well as Dallas-Ft. Worth," said it will "continue working in Texas and the rest of the United States to offer the most efficient solutions to help the public sector improve its highways" and reduce congestion. Sal Costello, founder of AustinTollParty.com and TexasTollParty.com, which oppose the proposal to turn 121--currently a free highway--into a toll road, says, "The only folks that want the toll roads are people who profit from it, the construction company, the toll-road operator and developers that see it as a endless slush fund."
Finally, there are signs that private owners won't do much better than governments in alleviating chronic delays. When Macquarie gained control of the South Bay Expressway project in California in 2002, it promised the road would open in late 2006. In July, the company said it could open by the end of September. Well, September has come and gone, and as the construction photos show, the South Bay Expressway is still very much a work in progress. The reason: "The contractor that was hired to build the project got behind on the construction schedule," said a Macquarie spokesperson. This week, Macquairie promised it would open on Nov. 19.