NJPIRG Citizen Lobby’s Presentation to the IMN National Public-Private Partnership Symposium, March 30, 2007 Washington D.C.

Good afternoon. My name is Abigail Field, and I am the Legislative Advocate for the New Jersey Public Interest Research Group Citizen Lobby. NJPIRG has over 30 years of experience of consumer, environmental and good-government activism in New Jersey. We became involved in the discussions surrounding the potential privatization of the New Jersey Turnpike and Garden State Parkway last December because we were quite concerned that a deal would occur that would be against the interests of everyday New Jerseyans.

My talk today is going to focus on two different kinds of concerns. First I’ll focus on why we believe there is a very high risk that a Turnpike deal would be a terrible financial deal for New Jersey. Then I’ll turn to the inherent tension between the public interest and the profit incentives for private operators– and how this creates additional risks for New Jereyans.

Throughout my talk my example of a private deal will be the one signed in Indiana, not the bill that Senator Lesniak introduced, although I will highlight when his proposal is significantly different than what happened in Indiana. I use Indiana for two reasons; one, it is a done deal whose terms are publicly available. Two, Senator Lesniak’s bill doesn’t necessarily reflect what’s on the table in New Jersey. Its terms have been introduced, not enacted, and the Governor has yet to announce what he is interested in pursuing.

The Risk that a Turnpike Deal Will Be a Terrible Financial Deal for New Jersey

Although NJPIRG does not endorse asset monetization, for the purposes of this talk I’ll assume for the moment that the question isn’t whether to get a large upfront payment for the Turnpike tolls; it’s how. Then I’ll illustrate why an Indiana-style deal is such a poor option compared to a consider first a public-financing approach.

Public versus Private Financing
Public financings have two major advantages over a privatization; first, the costs of capital are less, which means that less total toll increases are needed. Second, control of the asset remains in public hands, avoiding many of the tricky public policy issues I’ll address shortly.

One type of public financing would be for New Jersey to simply issue tax-exempt, toll-backed bonds. At an Assembly Transportation Committee hearing, a partner at a major law firm explained a different public approach: securitization of New Jersey’s toll revenue. His back-of-the-envelope calculation showed that New Jersey could securitize each $100 million in annual toll revenue over 15 years for a lump sum of $1.2 billion. Given that the Turnpike Authority currently brings in some $700 million per year, securitizing all of it for 15 years would net $8.4 billion.

Senator Lesniak’s bill would allow a deal for the same length of time as Indiana’s, namely 75 years, and is expected to raise about $20 billion. If New Jersey instead simply securitized the toll revenues five times—five times 15 years would be giving up the toll revenue for the same 75 years— New Jersey would net $42 billion. So one way we know there’s a great risk that New Jersey would leave a lot of money on the table in doing one of these deals is simply to compare it to securitizing the existing toll revenues for the same period of time, an approach that unlike privatization does not require any toll increases.

A number of other types of public financing approaches exist, and I don’t have time to compare them each to privatization. Instead, I’ll now look at why privatization on its own terms is likely to be a terrible financial deal for New Jersey.

Private Financing Financial Risks—High Costs and Impossible Valuation
Privately financed deals are financially disadvantageous to New Jersey for four reasons. First, the costs of capital are relatively high so the upfront payment is less for the same amount of toll revenue than a public financing. Second and relatedly, a private operator will maximize toll hikes, making driving more expensive for New Jerseyans than a public financing. Third, deals create a “tax” on New Jersey’s sovereign abilities to manage transportation policy and safety. That one I’ll explain in terms of the Indiana deal in a moment. The fourth problem is perhaps the most profound; it is impossible for New Jersey to accurately price the asset, and it is almost certain to be undervalued.

Tax on Managing Transportation Policy and Safety
Under the Indiana deal, if the state wants to make a change to the road, say, add an exit or build rail down the Turnpike median, it has to pay not only the costs of construction, but it has to pay the investors for the impact of the construction. That has two components; first the state must compensate the investors for toll revenue lost during construction. Second, the state must compensate the investors for any ongoing toll loss that resulted from the construction.

An extreme example would be building rail down the median of the turnpike. Although such an idea is not on the radar now, over a 75 year deal a lot can change; population centers can grow and shift such that a turnpike rail line makes sense. Under the terms of an Indiana-style deal, New Jersey would face the prospect of making compensation payments for the remainder of the deal, payments that increase over time as the tolls increased. Those payments, added to the cost of the transit line, could easily make it prohibitively costly for New Jersey to build the new line. In effect, this prevents New Jersey from managing its transportation policy as it sees fit.

The issue is the same when it comes to safety. If New Jersey wants to maintain the Turnpike as a state-of-the-art road, it will always have to pay for the additional safety improvements; the Indiana deal only allows the state to require generally adopted safety standards.

In short, under a private deal the state’s normal sovereign decision making over transportation policy and safety standards is hindered by substantial extra costs that would not be present if no monetization or a public financing was done.

Valuation Impossibility
Perhaps the most troubling financial aspect is trying to get the price right. The investment community can make very conservative assumptions about traffic volume, toll increases and incidental revenues like those from vendors. They can calculate a price with which they are reasonable sure to earn a healthy profit. But the state isn’t trying to figure out the minimum likely revenue; it wants to estimate the maximum likely revenue. Otherwise it risks leaving a lot of money on the table.

So how does the state estimate what level of profits investors would likely make from an offer? Over a 75 year time frame, it’s not clear how. First, the permitted toll schedule allows maximum toll hikes, but doesn’t mandate them, so it’s hard to know exactly what the mix of tolls will be over the time frame. Second, given how New Jersey’s population can change radically in both number and distribution over 75 years, and given how many cars on the Turnpike are from outside New Jersey, it’s hard to accurately guess what the volume of cars paying those tolls will be. Third, how to estimate vendor revenue such as from rest stops, which under the Indiana deal goes to the investors? How much will rents increase? In addition, over a 75 year time frame, it’s likely that the private operator will develop new services along the road; perhaps even a mini-mall or some type of retail or entertainment destination spot. How much will the revenues from that be?

Again, if the goal is to answer all these questions very conservatively, which is the investors’ task, it is much less difficult. But the state’s goal is to capture as much of the potential upside as possible, and to be able to reject extremely low bids. And yet the timeframe makes answering these questions impossible.

When compared to public securitization, we saw that the state may be leaving $20 billion on the table based on existing toll revenue alone. Considering all of the unknowns related to revenue on these roads and the long time frame involved, how much would New Jersey leave on the table in a private deal? Consider that a financial analysis done of the Indiana deal by an investment bank in New Jersey found that the private operators would make their money back in less than 20 years; that’s 55 years of pure profit remaining.

The Tension Between the Public Interest and Maximizing Private Profit
That’s New Jersey’s costs-and-valuation problem inherent in a privatization deal. I’ll take a couple of minutes to highlight another big concern: the tension between the public interest and maximizing private profit. First I’ll give a simple example that already happened, and then explain a much more profound one that looms in the future.

Shortly after the Indiana deal closed, the private operator put barriers up on the turnarounds to prevent drivers from avoiding tolls. Unfortunately, the emergency services—police, fire and ambulance—routinely use those turnarounds but were now blocked. In response to the public outcry, the private operator announced it would modify the barriers to allow emergency vehicles through. This seems like a simple enough fix and an issue that could be addressed in future contracts. But my point is simply that Indiana didn’t anticipate it, and it happened in the first year. What else, over the remaining 74 years, will we discover Indiana didn’t anticipate

A much more profound manifestation of the tension between the public interest and maximizing private profit arises from the toll regime approved in the Indiana deal. Now, Senator Lesniak’s proposed toll regime is less aggressive, and I don’t yet know if it would give rise to the same problem, just as I don’t know that his proposed toll regime will be what would make it into a final deal. A New Jersey investment bank applied the Indiana toll regime to the Holland Tunnel and found that, if tolls always went up the maximum allowed, a single trip through the tunnel would cost over $180 today.

I’m not suggesting that anyone would charge $180 for the Holland Tunnel today; the market wouldn’t bear it. But the point is that by conferring the authority to charge $180, the toll regime gives the private operator complete pricing power.

It’s well known that toll rates shape traffic patterns. The idea of congestion pricing is premised on the fact that traffic avoids high tolls. So too are California’s Lexus lanes, where drivers pay very high tolls because they know it will gain them the convenience of low traffic. In New Jersey, when tolls last went up on trucks on the Turnpike, a lot of them shifted to local roads, creating serious congestion problems and eroding quality of life in nearby communities.

When given power to price tolls at will, and thus to shape who uses the toll roads, there is great potential for a huge clash of interests between the private operator and the public. Perhaps the private operator would find it most profitable to turn the entire Turnpike into a kind of Lexus-lane, expensive enough to deter a lot of routine traffic, but cheap enough to maintain significant high-paying volume. That approach would lead to less wear and tear, less maintenance costs, and still generate significant (perhaps greater) revenue. Just imagine the burden on local roads.

Or perhaps the private operator is willing to make deals with major trucking companies, but apply high tolls to all other trucks. The owner-operators and small businesses could be driven out of business. These kinds of decisions determine who are the winners and losers under toll policy. They are major public policy decisions and should be made by government— this is, by people accountable via election to the public and therefore more responsive to the public.

In short, if New Jersey does a private deal, it must find a way not to cede fundamental transportation policy to the imperatives of a private operator’s profit.

Thank you for your time, and I’m happy to take any questions.