» Return to Annual Privatization Report 2013: Surface Transportation
» Return to Annual Privatization Report 2013 homepage
For all the political furor over the issue of long-term leasing existing toll roads, only a handful of such deals have taken place in the United States. The best-known of these, until 2011, were the Chicago Skyway in 2005 and Indiana Toll Road in 2006, both acquired by a Cintra/Macquarie joint venture. Lesser-known leases involved failing toll roads: the Pocahontas Parkway in Virginia and the Northwest Parkway in Colorado, each of which was rescued and refinanced by an investor-owned toll road firm. The largest failed attempt was then-Gov. Ed Rendell’s effort to lease the Pennsylvania Turnpike in 2008. New life was breathed into “brownfield leasing” of toll roads in 2011 when Puerto Rico leased its PR-22 and PR-5 toll roads to Abertis Infraestructuras for 40 years.
Puerto Rico’s success stimulated the interest of Ohio Gov. John Kasich in a possible long-term lease of the Ohio Turnpike. Enabling legislation was passed in 2011, permitting a lease term of up to 75 years and requiring the RFP and proposed business terms to be submitted to the legislature for approval in advance of issuing the RFP. Ohio selected KPMG as its financial advisor, and that consultant has evaluated several restructuring alternatives. In December 2012, Gov. Kasich disappointed PPP advocates by deciding not to lease the Turnpike, which KPMG estimated could have yielded $4.03 billion ($2.6 billion up-front and the balance as annual revenue-sharing). He decided instead to issue $1.5 billion worth of bonds backed by future toll revenue to pay for other highway projects, mostly in northern Ohio.
Many critics of brownfield leases claim to support long-term PPP concessions for new highway capacity (“greenfield” projects), but this distinction is not persuasive. Highways in the United States are designed to have a useful life of around 50 years with proper ongoing maintenance. After that, they generally need costly rehabilitation or reconstruction. Thus, any lease of an existing highway more than 10 years old for 40 years or longer will require some degree of reconstruction in order to be handed back at the end of the lease in acceptable condition, per the terms of the concession agreement. Well before then, if the highway is in an area with economic growth, it will require some degree of capacity expansion-added lanes, new on-ramps and off-ramps, redesign and rebuilding of obsolete interchanges. The concession company will be responsible for those investments needed during the term of the lease.
A presentation by Cintra, developer/operator of two new PPP megaprojects in the Dallas/Ft. Worth metro area, at the 23rd annual American Road & Transportation Builders Association (ARTBA) PPP conference, showed initial capital costs to build these new express toll lanes of $4.04 billion. Subsequent capital expenditures during the 50-year concession term were estimated at another $1.35 billion, and maintenance over the 50 years at $2.2 billion. Thus, total expenditure on this $4.04 billion (initial cost) project will be $7.59 billion, nearly twice the initial investment. Likewise, the private company that acquired a 99-year lease of Toronto’s Highway 407 for $3.1 billion in 1999 has invested an additional $1.2 billion since then on extensions and widening projects.
The idea that an existing toll road “has already been paid for” ignores both the need for ongoing maintenance and the full panoply of capital investments that will be needed over a typical lease term of 50 or more years. Thus, the main difference in principle between a brownfield concession and a greenfield concession is the timing (and perhaps the amounts) of the construction projects the concession company must carry out. If it is acceptable in principle for an investor-owned company to make a profit providing high-quality highway services to customers, then greenfield vs. brownfield is a distinction without a meaningful difference.
» Return to Annual Privatization Report 2013: Surface Transportation
» Return to Annual Privatization Report 2013 homepage