The financially troubled 73 toll toad has a new alternative future: a 50-year lease by a private firm that would avoid a messy bankruptcy. Orange County officials aren’t quite sure what to make of this idea, with reactions ranging from “I don’t see the advantage” to “We ought to be entertaining any and all ideas.”
A global toll road operator, the Macquarie group, suggests it might be willing to relieve the Transportation Corridor Agencies (TCA) of their $1.9 billion debt on the 73. In exchange for a long-term lease (i.e., the right to operate the toll road and collect tolls for something like 50 years), Macquarie would refinance TCA’s debt and take full responsibility for paying it off. At the end of the lease, it would hand the road back to Orange County, free and clear, and in good repair.
TCA officials have two concerns with this possible deal: Will they lose all control of toll rates, which might rise sky-high so that Macquarie can pay off the debt? And would the tolls have to stay on the road for 50 years, instead of possibly coming off sooner (if the bonds were paid off earlier)?
If the toll road’s status quo continues and the 73 is forced to default in 2014, control would shift from TCA to the courts. A bankruptcy judge would restructure the debt and devise a future toll rate schedule to pay it off. Thus, TCA would lose control of both the timingand amount of toll rate increases, plus the number of decades that tolls will be in effect. Tolls, at whatever rates the courts set, will be there for however long it takes to pay off the refinanced bonds, which could very well be longer than 50 years.
Macquarie’s proposal, though unexpected, did not just come from out of the blue. There is a large and growing global toll road industry, made up of at least a dozen major players operating over 8,000 miles of toll roads.
The city of Chicago recently sold its Chicago Skyway toll road. The winning bidder is paying Chicago $1.83 billion in return for a 99-year lease and operating rights. In announcing sale of the Skyway, Chicago Mayor Richard Daley said running a toll road “is not a core function of city government.”
A key factor in these agreements is shifting risk from the public sector to sophisticated investors who are better placed to take on such risks. This is especially important for start-up toll roads, like the 73, which are inherently high-risk endeavors. Although Orange County’s taxpayers would not be at risk if the 73 went bankrupt (only its bondholders would directly suffer), it would hardly help the county’s still-recovering bond rating to have a major toll-road bankruptcy occur within its public sector.
Orange County now knows that at least one firm seems willing to negotiate a deal that does two things not possible under a bankruptcy scenario:
1) Works with TCA to develop a fair toll increase schedule that the company agrees to live within for the entire length of the lease.
2) Guarantees that tolls remain in place only until the lease terminates.
In making that kind of commitment, the company would be bet- ting that it could collect sufficient revenue during the lease to retire the debt and still make a reasonable return on its investment. But there is no guarantee that they would profit. What makes such a deal plausible, however, is that global toll road companies deal with these kinds of risks all the time, and presumably know what they are doing. This looks to me like a good alternative – certainly better for the TCA and its toll road customers than losing all control to a bankruptcy court.
But if TCA officials are serious about pursuing this, I have two pieces of advice.
First, hire a financial adviser experienced in very large deals (as Chicago did for the Skyway lease).
Second, don’t just sit down and negotiate with the firm that has made this conceptual proposal. Instead, announce your interest in this kind of a deal and invite qualified companies to submit their credentials and letters expressing interest. I expect more than one global toll road company would be interested.
Robert W. Poole Jr. is director of transportation studies and founder of the Reason Foundation.