Equity Investors: A New Dawn for Toll Roads in America

Companies make large investments, take on huge risks to operate toll facilities

What links the following recent events around the country?

  • Cintra/Macquarie pay $1.83 billion to lease the Chicago Skyway for 99 years.
  • Governors of Delaware, Indiana, and New Jersey talk seriously about selling or leasing existing toll roads.
  • Cintra proposes a $7.2 billion investment in the Trans-Texas Corridor.
  • Transurban joins Fluor’s team for two Virginia HOT lane projects, which shift from requiring taxpayer support to being 100% toll-funded.
  • Macquarie offers to bail out the struggling San Joaquin Hills Toll Road in California, and Transurban does likewise for the troubled Pocahontas Parkway in Virginia.

The common factor is equity investment as a new tool for funding major U.S. highway investments. While the specifics differ-mature, financially healthy toll roads; brand-new HOT lanes; and troubled start-up toll roads-the deals proposed by global companies all offer to make large investments and take on significant risks in exchange for a long-term right to charge tolls and operate the facilities. They are U.S. versions of the long-term concession model used for decades for toll road projects in Europe and more recently in Australia, Asia, and Latin America.

Elected officials, transportation professionals, and media commentators are still trying to make sense of this raft of proposals. Back in February when I was interviewed on a CNBC investment show about the possible privatization of the New Jersey Turnpike, the host treated it as a crackpot idea. And the initial reaction by several elected officials to Macquarie proposed San Joaquin bail-out was disdainful. But the proposals keep coming, and once one or two more deals actually get funded, the reactions are going to change.

The financial community is certainly taking this new trend seriously. In Standard & Poor’s Credit Survey 2005 (May 2005), analyst Kurt Forsgren and colleagues highlight the long-term concession model as an important new U.S. trend. As they note in the report, “Attracting private capital to advance roadway infrastructure will require both public owners and investors to reconsider the standard U.S. approach of development and risk-sharing and, in typical American fashion, [to] borrow and modify what has worked elsewhere to fit the demands of a large and unique market.” The S&P report cites all the usual reasons why existing highway funding sources will not be sufficient to rebuild and modernize our aging freeways and Interstates, and suggests, correctly, that there are serious limits to the existing “innovative finance” mechanisms such as state infrastructure banks, 63-20 nonprofit corporations, and federal TIFIA loans.

Still, despite the fact that the system is desperate for increased investment, there are sure to be objections to this enlarged role for the private sector. Despite the fact that the United States has historically enjoyed top-notch infrastructure provided by investor-owned utilities (in electricity, gas, telephones, etc.) while most of the rest of the world used state-owned monopolies for those services, somehow the idea that companies would make profits by developing and operating highways seems bizarre to many people, at least on first hearing. So there is a big educational job ahead of us, getting people to see that the underlying idea is not a radical departure, either from U.S. practice in other network utilities or from global highway practice in other advanced economies.

In addition to the broader case for the legitimacy of profit-making highway companies, we also need to make the practical case for the merits of private equity investment in the several different types of projects typified by my initial listing, above.

Start-up Toll Roads and Toll Lanes

This is probably the easiest case to make, because the benefits are straightforward. First, the private sector tends to be more innovative, coming up with better ways to get things done (e.g., value pricing using all-electronic toll collection on the 91 Express Lanes, or Fluor’s Washington, DC Beltway HOT lanes project, which is adding four new lanes for $900 million compared with VDOT’s design costing between $2 billion and $3 billion). Second, when states do toll roads themselves, or when they use 63-20 nonprofits, the financing is usually all debt. That’s very risky for a start-up toll road, because debt service has to be paid like clockwork, even if toll revenue in the early ramp-up years is well below forecast. By contrast, a financing structure with one-third equity has to make only two-thirds as much fixed-schedule debt payments, thereby providing a lot of wiggle-room for below-expected traffic.

Rescuing Troubled Toll Roads

This lower-risk approach likewise applies to private-sector bailouts of start-up toll roads like Pocahontas Parkway (63-20) and San Joaquin Hills (government toll authority), both financed 100% with debt. But as with the all-private start-up project, the trade-off for getting equity into the deal is a longer length of the concession. Equity is sometimes described as “patient capital”; investors in for the long haul can wait till after a lot of the debt has been repaid to reap their rewards-but only if the concession is written for a long enough term. That’s why we’re seeing an increase to 40 and 50-year terms, as more private proposals involve significant equity.

Modernizing Mature Toll Roads

It’s easy to caricature a proposed long-term lease of the New Jersey Turnpike as “selling the family silver,” or “selling one’s birthright for a mess of pottage.” But there can be very good reasons, both financial and transportation reasons, for public officials to do so. In financial terms, if a state is making a 0.6% return on the assets represented by a toll road (a recent estimate for the New Jersey Turpike) but borrowing funds at 3 to 6%, should it really be owning that asset? And if, as the City of Chicago did with the Skyway lease proceeds, it invests the proceeds in balance-sheet items (paying off debt, creating a reserve fund, making one-time capital improvements), how is that a mess of pottage? Furthermore, most mature toll roads and bridges will need major reconstruction (and often capacity expansion) in the next decade. There’s certainly a case that the innovative private sector could do a better job of designing and managing such projects, if it became the de-facto owner of those facilities.

This is a big subject, of great importance to the future of highways in America. I’ve only scratched the surface here, but you can read a lot more in the new Reason policy study “Should States Sell Their Toll Roads?” (

Robert W. Poole Jr. is director of transportation studies and founder of the Reason Foundation.