POSTED ON JANUARY 27, 2010:
Pay the Toll
Public/private partnerships could have a greater advantage in Oklahoma than thought
I met Indiana Governor Mitch Daniels at the 2007 OSU-Indiana Insight Bowl. I was having breakfast with my sons; he dined alone a few tables away, thin and unassuming. He ate breakfast alone each of the three days I saw him. To the Hoosier Boosters passersby, he was polite and they passed by him. He showed no interest in joining another table. Audrey Hepburn once said she did not want to be alone, she wanted to be left alone. That's Governor Mitch Daniels.
I liked him. I give high marks for the non-gregarious politician. They offer the sort of authenticity rarely seen in the wearisome contrivance that is modern politics, perhaps an indicator for one not in search of exaltation or praise but simply the next good idea.
His most controversial proposal is the successful lease of Indiana toll roads to a consortium of Australian and Spanish firms. The transaction brought nearly $4 billion to Indiana coffers, dedicated funds for a massive 10-year investment in the state's transportation system.
Under the Indiana transaction, the firms agreed to operate and maintain the toll road under a multi-year lease in return for the up-front payment and the right to collect the tolls. The firms also agreed to widen seven miles of congested roads, build a new state trooper post and contribute to the salaries of state troopers.
The Indiana transaction is not the first of its nature. Chicago leased the Chicago Skyway for $1.8 billion under a similar proposal. And it's unlikely to be the last. The Nebraska Legislature will consider leasing its toll roads this year. Several states, all constrained and all pent up like an uncoiled spring, are looking to the private sector and their deep pools of capital.
Critics liken privatization of state assets to tossing one's own furniture in the fire to keep the house warm. But dang, it's cold all across the nation now. And there are several advantages to these public/private partnerships--P3 as they have been labeled:
The private sector can access capital. The fact is, federal, state and local governments simply aren't willing to raise the funds to meet infrastructure needs.
Bonded indebtedness rarely exceeds a 20-year amortization. The private sector will pay a present value up front payment four times that time period.
Since the private sector pays taxes and can deduct depreciation on assets, the up-front payment includes the value of the tax benefit. That's value publicly held assets never realize.
There may also be some benefit from countries holding a current surplus of dollars and worried about a weakening dollar. Holding an asset that generates a return in the eight percent range is far preferable to holding Treasury bills.
Countries in Europe, often thought less capitalistic than the United States, have partnered with the private sector for years to address infrastructure challenges, including P3 in building and maintaining roads, bridges and highways.
In Oklahoma, we have partially privatized prisons; there have been discussions concerning social services at the Department of Human Services, now the subject of a federal lawsuit for alleged widespread failure to protect children; and Texans leer at our water resources like Silas Marner his hoards of gold.
But toll roads have remained off radar insofar as P3 efforts are concerned. Aside from a brief non-committal Oklahoman editorial in December of 2005, there's been virtually no discussion. That is surprising given Republican calls to shrink the size of state government. (The size of Oklahoma state government, as a percent of the gross state product, has not changed much at all in the past 50 years).
For 2010, the Oklahoma Turnpike Authority projects about $55 million in net revenues available after debt service on total operating revenues of $225 million. They estimate an annual increase in net revenues of about eight percent. The Australian/Spanish consortium paid about 40 times the cash flow for the Indiana turnpike lease. However, the consortium won the right to increase toll fees by 25 percent in the first year with annual inflation increases thereafter.
At 40 times cash flow, Oklahoma could receive more than $2.2 billion, minus turnpike indebtedness. That money could be invested in our own crumbling infrastructure, and we would create thousands of jobs for Oklahomans in the process. It would be the most significant economic development initiative in decades on one of the few public investments pillared upon bipartisan support.
The National Conference of Legislators reports that Oklahoma's budget deficit is the largest in the country--an 18.5 percentage drop from last year. There is no interest or political will to raise additional revenue. Monetizing state assets might be the only viable alternative. The danger of higher user costs on our toll roads can be addressed in a carefully worded agreement, but that danger is mitigated somewhat by the fact that 40 percent of toll revenues in Oklahoma derive from out-of-state motorists.
We have had plenty of hand-wringing and despondency this year about state finances and there is more to come. We need to search for creative solutions to our infrastructure needs. Why not invite the financiers to Oklahoma to see what our turnpike system offers to the private sector?
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