A lending institution?

Dec. 2, 2008

In today’s road- and bridge-building industry, which answer is most correct? A public-private partnership (P3) is:

A. A paradigm for private investment in public highways.

B. A financial necessity—a political reality—given the lack of governmental investment in infrastructure today.

C. A new term for an old-style joint venture between private-sector enterprises and governmental agencies.

D. An oxymoron that might be more moronic than oxy as the world falls deeper into financial crisis.

E. All the above.

In today’s road- and bridge-building industry, which answer is most correct? A public-private partnership (P3) is:

A. A paradigm for private investment in public highways.

B. A financial necessity—a political reality—given the lack of governmental investment in infrastructure today.

C. A new term for an old-style joint venture between private-sector enterprises and governmental agencies.

D. An oxymoron that might be more moronic than oxy as the world falls deeper into financial crisis.

E. All the above.

In the current climate of infrastructure building, or, depending on your viewpoint, a lack of building, some believe P3s are a takeover of vital public assets and a possible hindrance to commerce. In this school of thought the word “private” in the P3s acronym is synonymous with “foreign.” On the opposite side of the issue, others see P3s as having arrived just in time to rescue state road and bridge programs that are unable to keep pace with building and maintaining their roads and bridges. Centrists see P3s as neither good nor bad, just necessary given the lack of public funding. Perhaps this makes the most correct answer to the multiple-choice question “all the above.”

The tollway train

Taking extreme measures, the states of Illinois and Indiana entered into P3s, choosing to fold rather than hold their nearly 50-year-old tollway operations. The result: The Chicago Skyway became the first, and the Indiana Toll Road the second, public-toll-road operations in the U.S. to relinquish their tolling and concession operations. Leasing their state tollways to private-sector companies has brought about a one-time infusion of cash to underfunded transportation programs.

Today, Pennsylvania’s Gov. Ed Rendell is trying to convince the state’s legislature to become the third state to pitch its tollway tent. Ready to acquire the tolling rights to 500 miles of the Pennsylvania Turnpike is a Spanish investment firm. Barcelona-based Abertis, a company that has already purchased airport concession contracts in the U.S., is offering a cash payment of $12.8 billion for guaranteed control of the “Granddaddy of Turnpikes” for three-quarters of a century, longer than the first and legendary superhighway has existed. One U.S. investment bank states that the bid is at least $5 billion lower than what the market is willing to pay.

The Pennsylvania Turnpike is a cash cow by any standard, kicking more than $600 million a year into state coffers. Gov. Rendell has had a challenge in convincing key legislators to put the pike into private hands. State Representative and Majority Chairman of the Pennsylvania House of Transportation Committee Joe Markosek said that the iconic highway “is a huge contributor to our transportation infrastructure. To get an up-front cash payment and give away control for 75 years would be detrimental.”

Foreign interests, such as Cintra-Macquarie, the joint venture that purchased the rights to own and operate Illinois’s and Indiana’s public rights-of-way, are eager to lease other tracts of vital U.S. highways. Existing tolling operations, such as roads, bridges and tunnels, are on their short list of infrastructure to purchase. Simply, they are prepackaged assets ready for a sale with tolling plazas and a paying clientele already in place. Current tolling operations offer the shortest sale cycles and the quickest routes to profitability for prepared foreign investors.

Behind the global curve, investment firms in the U.S. are only now beginning to analyze the potential profitability of leasing pubic infrastructure. Foreign interests are decades ahead in valuing and buying U.S. infrastructure. Before the stock market crashed, domestic firms and their investors were scrambling to join the race to the purchasing party. This past spring Morgan Stanley successfully raised $4 billion, nearly doubling expectations, in part by placing advertisements on the front page of the Wall Street Journal. With a picture of the famous Bixby Bridge along California’s Pacific Coast Highway, an April 16, 2008, ad read, “The U.S. received a ‘D’ grade for its infrastructure conditions. Morgan Stanley can help determine how your portfolio might take part in the $1.6 trillion needed to improve that grade.” The company plans to invest 40% of its funds in the U.S. and the rest in Europe and the Middle East.

Goldman Sachs outperformed Morgan Stanley by raising $6.5 billion for its infrastructure fund. Citigroup Inc. is raising their own capital, and plans show them outpacing expectations with their subscribership. Going a step further, Citigroup is teaming up with the Spanish firm Abertis to purchase tolling rights on the Pennsylvania Turnpike. Seeking out the wealthy private and large institutional investors, U.S. companies are emerging as a powerful force in the world of P3s. Still, they remain decades behind their sophisticated foreign owner-operators.

Evolution of P3s

Starting in Europe, the term P3 came into vogue over 30 years ago. Transportation P3s took root in southern Europe in the early 1990s and then quickly spread around the world. P3s are well established and successfully substituting for governmental planning and investment in infrastructure in Europe, Australia, Asia and the Middle East, and now in the Americas. Not only have they launched highway projects that might never have been built, but P3s have done for Spain and other countries what the building of the interstate system did for the U.S. by facilitating commerce and saving lives.

In Spain today over 30 tollway companies operate more than 2,173 miles of toll road. According to the Trade Commission of Spain, that puts more than 25% of Spain’s superhighways under private control.

Prof. Edward Peebles, a director in the Department of Latin American & Iberian Studies at the University of Richmond, explained the consequences of P3s on the citizens of Spain: “The changes began in the ’80s and have accelerated in the ’90s. They’ve brought highway death rates way down as compared to the typical old nondivided, two-lane rural highways. But they’re very expensive by U.S. standards. For example, the Seville-Cádiz toll road costs about 6 Euros for a 60-mile stretch.”

Wherever in the world transportation P3s are found, they all depend on public-sector land uses and licensing privileges. These rights are offered to private organizations in return for lump-sum cash payments. Civic authorities negotiate long-term contracts with one or more private-sector businesses offering them entitlements in return for revenue that may also come in the form of lease payments. Highways, as well as hospitals and high schools, have been successfully built and managed by P3s. In the road-building community, however, P3s have existed longer than the popular term has been applied to them.

Early version

Private ownership has been viewed with skepticism by federal officials of the past. The Federal Highway Administration’s own book America’s Highways: 1776-1976 states, “As interstate roads were completed and connected with each other, the growing stream of traffic attracted another class of highway parasite—the private toll bridge promoter. By 1928, private bridges were becoming a serious threat to the free use of the highways. In 1928 alone, Congress granted 75 franchises for private toll bridges over interstate waters and the states issued many others. Most of these were stock promotion projects, giving favored cliques a strangle hold for years on key sites on the main highway arteries on terms inadequate to protect the public interest.”

More recently, just 50 years ago, Americans wanting to buy cars and drive far and fast were pushing for highways to be built. Absent a serious federal program to provide the necessary funding to build them, state and local government officials and eager private-sector partners formed working P3s to build toll roads. Turning to Wall Street for financing, large design firms for planning and oil companies and restaurant chains for the management of their concessions, the states moved ahead without much federal government help. More public than private, the early turnpike authorities were an early form of P3.

The first modern tollways took on the appearance of linear botanical gardens complete with art deco bridges and stylish rest stops. Traveling down the early tollways, drivers learned by doing. They experienced the advantages of limited access by driving the flowing, curving four-lane highways. Travel time was reduced. Oncoming traffic was safely separated, all the while avoiding the heavily congested U.S. routes that the new toll roads typically ran parallel to.

Superior in design and maintenance to the U.S. routes, the only interstate highways of the day, these modern turnpikes raised the public’s standards for roads. Later still, the turnpikes became a working model of the future U.S. Interstate System. By the end of the decade, high-speed neophytes were traveling at previously unimagined speeds between the East and Midwest. To the surprise of many, drivers of sedans and commercial vehicles paid to avoid the “free” buy of heavily congested public roads. The early tolling partnerships for the most part were financial successes.

In the 1950s, six states connected their tolling operations by linking their roads and bridges together, making a chain of tollways between New York City and Chicago—an approximately 1,000-mile stretch of superhighway. This system of turnpikes formed the greatest unbroken stretch of semipublic-semiprivate highways in the world.

Steering their huge and heavily chromed autos and sitting high in their trucks, the first superhighway interstate travelers leaving New York City crossed the Hudson River on the George Washington Bridge. Entering the swamps of New Jersey, they crossed the Delaware River before speeding into the Allegheny Mountains. From the Pennsylvania peaks, these early drivers plunged into the plains of the Buckeye State, rolled along “the Main Street of the Midwest” in Indiana, finally crossing the 8-mile-long bridge called the Chicago Skyway that landed the intrepid into the Windy City.

“We built a bunch of the rest stops along the turnpike system before they became part of the interstate system,” said Mal Middlesworth, a former Pure Oil executive, who as a U.S. Marine survived Pearl Harbor and brutal amphibious landings in the South Pacific before joining the oil giant in 1950. “It was a highly functioning public-private partnership we had going with turnpike authorities. We leased their land and then built and operated our service stations along their highways. We had excellent relations with the authorities. Oh sure, they loved us; they knew we’d deliver.”

Paradoxically, soon after their ribbon cuttings, these quasi public-private roads were and still are placarded with the very public signs of the U.S. Interstate System, the largest public project in the history of the world. Today, half of those tolling structures have been or are in serious negotiations to be “sold off” in the form of 75-99-year leases. Some are not happy. Others see it as the future.

The first to go

The Chicago Skyway was born into this world of political high jinx. In the late 1950s, when the road was being planned, the city of Chicago, wanting a highway to improve its access to and from the city’s east side to connect the city with the steel mills in Indiana, pushed to build an 8-mile expressway. Legally challenged to construct highways outside of the city’s limits, city officials drove a semitruck through a loophole in order to broaden its jurisdiction.

The city, it was discovered, could build bridges spanning the city limits—the catch being there were no limits to the length of the said bridges. As a result, designs were drawn for a bridge into the city, complete with a 6-mile-long “access ramp.” In other words, the highway was technically a bridge and the portion of bridge outside the city’s jurisdiction was legally an approach to the legitimate bridge. To comply, no off- or on-ramps were built between the toll plaza that sat inside the city limits and the Indiana Toll Road’s toll plaza eight miles away.

At first, the bridge was called the Calumet Expressway, but eventually it was renamed the Chicago Skyway. The toll bridge was not a financial success at first—too many nearby highways offered drivers a free ride. Desperate to unload the Skyway, the city tried giving it away. City and state officials asked the federal government to buy the bonds used to fund its construction so it could declare the road a toll-free facility eligible for federal interstate highway funding. Regardless of the FHWA’s refusal to buy into the failed venture, city officials placed I-90 signs on the Skyway anyway. When they were questioned about the authenticity of the I-90 signs, they recanted and replaced them with “To I-90” signs. Stranger still, the Skyway was under the control of the city’s sanitation department for nearly half a century before its tolling rights were leased out.

On the morning of Jan. 24, 2005, $1.8 billion was wired from the accounts of Cintra-Macquarie to a government account in Illinois. At 2 o’clock that afternoon, after the funds were considered cleared, the Skyway Concessions Co. LLC took control of the Skyway. The 99-year lease gives control of the entire roadway to the Skyway Concession Co., which in turn is controlled by Concesiones de Infraestructuras de Transporte, based in Spain, and the Macquarie Infrastructure Group, based in Australia. Popular riverboat casinos in Indiana as well as the ever-increasing flow of commuters willing to pay to bypass increasingly congested free public roads promises to make the deal a profitable one.

On June 29, 2006, the golden anniversary of the Dwight D. Eisenhower System of Interstate and Defense Highways, the Spanish-Australian joint venture closed the deal to own the tolling rights to “The Main Street of the Midwest.” With another lump-sum cash payment, this time for $3.8 billion, Cintra-Macquarie took control of the 157-mile-long Indiana Toll Road. The largest-ever highway privatization deal in U.S. history, and one of the largest in the world, gives Cintra-Macquarie, under the operating name Indiana Toll Road Concession Co. (ITRCC), ownership rights of the entire stretch of Indiana’s I-90 for the next 75 years.

Pushing the historical public-private deal through to completion was the governor of Indiana, Mitch Daniels. Critics of Daniels nicknamed him “Governor Privatize,” saying he was going to privatize the entire state, including thousands of public toilets. On a serious note, some of those same critics claim that billions of dollars were “left on the table” after the toll-road transaction was finalized. In other words, when the 75-year lease expires, the Spanish and Australian owners will have earned tens of billions of dollars of what should have been Indiana taxpayer money. Daniels sees it differently, saying, “Government is the last monopoly. So competition is the key. That’s why I’m indifferent—public or private, as long as the benefits of competition are brought to bear.”

Historical events, however, are more powerful than public opinion. One of the darkest economic times ever to descend upon the nation has brought about a new world order in short time. The failure of banks, even governments, has changed the economic viability of P3s—certainly for now, perhaps for good. The past months have seen once-powerful financial institutions collapse, erased from the landscape, taking with them vital private-sector funding.

On Sept. 15, 2008, Lehman Brothers Holdings filed for bankruptcy, triggering a chain reaction that eventually dried up funding on the Golden Ears Bridge, a six-lane bridge over the Fraser River in British Columbia. The $800 million project is to connect the city of Vancouver with highways in the U.S. It was only 80% complete when Lehman failed. Now the bridge’s financier, an Irish company by the name Depfa, is scrambling to secure the project’s once-sound financials. Almost certainly, the cost of borrowing money will rise, pushing the cost of the project ever higher.

If the nation—and the world with it—sinks deeper into economic crisis, the old model of the New Deal may get dusted off and put back into play. The nation’s taxpayers, hungry for jobs and good-old-fashioned nation building, may demand that their tax dollars be invested in infrastructure projects that are planned, paid for and provided by their government, giving renewed meaning to the term P3.

About The Author: McNichol is a freelance writer based in Boston.

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