The leasing of state-owned toll roads to private interests could allow states struggling through the ongoing COVID-19 pandemic and affiliated recession to make ends meet and fund other transportation projects, according to a new report from the nonprofit think tank Reason Foundation.
“States need to examine if they are maximizing the value of their existing toll roads,” Robert Poole, study author and director of transportation at Reason Foundation, said.
The study details how states could monetize the value of their existing toll road systems through long-term public-private partnerships (P3). Each government entering into a P3 would need to choose whether to enter a long-term lease that guarantees annual payments or take a lump-sum payment upfront. States could determine based on their financial situation whether to spend the proceeds on infrastructure needs or invest in other areas.
“Many taxpayers and lawmakers will think the best way to invest a windfall from leasing the state’s toll roads would be to reinvest that money in needed infrastructure projects the state doesn’t currently have the money for,” Poole said. “Others will recommend strengthening the state’s balance sheet by paying down existing debt, including pension debt.”
A number of state governments could expect to receive substantial proceeds if they entered into 50-year leases for their toll road systems. In the United States, the report states that a change of control, such as a long-term lease, requires that existing tax-exempt toll road bonds be paid off.
The Reason Foundation, which studied the potential of long-term P3 leases of nine state-owned toll road systems, determined that all offer monetization potential through P3s. The report found that the middle range of net proceeds after paying off outstanding bond debt would yield between $1.1 billion for the Kansas Turnpike to more than $19 billion for the Illinois Tollway.
However, outstanding debt greatly impacts the net proceeds a state might receive under such a transaction. For example, the report specifically cited the Pennsylvania Turnpike and New Jersey Turnpike as having lower net proceeds due to their large debt burdens that would need to be repaid.
Actual leasing of such toll roads remains, however, an uncommon practice in the United States, though there are exceptions, such as the Chicago Skyway and Indiana Toll Road. Other nations have been more receptive to the idea, such as Australia, France, Italy, Portugal, and Spain.
The report broke down its considerations by various details, from the history of long-term franchises to the three categories of likely investors and earnings estimates – divided into high, medium and low potential proceeds – based on earnings before interest, taxes, depreciation and amortization, along with debt data, from major state-owned toll roads. All projections were based on a 50-year lease for each toll road system.
“Despite the pandemic and recession, car usage is nearly back to normal levels in many areas, and there continues to be great interest in long-term investing in U.S. toll roads,” Poole said. “With today’s low-interest rates, these types of acquisitions are still attractive to global toll road companies, infrastructure investment funds and pension funds.”
The Reason Foundation ticked off several items it saw as advantages for leasing to private interests, with the caveat that most agreements allow for oversight by the state, including punishment for non-compliance of agreed terms and provisions for terminating leases early, with cause.
“First, it can recruit and retain experienced toll road senior management — taking politics out of the process,” the foundation said. “Second, it can pay market compensation to its staff rather than civil service pay rates. Third, it can finance major improvements using a mix of equity and debt, rather than 100 percent debt financing that government toll agencies use. Fourth, the long-term lease agreement should safeguard the toll revenue from being diverted to other purposes by legislators, which has happened in states like New York, New Jersey, and Pennsylvania.”
Global toll road companies operate widely throughout Europe, Latin America, Australia and Asia. Infrastructure investment funds have raised over $1 trillion to invest in infrastructure over the past 15 years, with an eye on securing revenue-generating opportunities. Even public pension funds have increased their infrastructure investments in recent years, to reverse the declines squeezing their returns on investment.
The Reason Foundation identified unfunded public pension liabilities as a major issue for each of the nine states examined for the study. Supposing middle-range net proceeds if toll road leases moved forward, some states could pay off massive portions of their 2018 unfunded pension liabilities.
For example, Oklahoma could pay off 54 percent of its liability and Florida 49 percent. Others, such as Ohio, would see a lesser benefit, with just 5 percent of its pension liability able to be paid off. This would eat significantly into some of the gains states could bank from these arrangements. In Illinois, for example, the state could generate the largest net toll road lease proceeds but its unfunded pension liability is so large that the lease proceeds would cover just 14 percent of its pension debt, the report noted.