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Indiana Toll Roads Then there were two.. Indiana Toll Road vs. Chicago Skyway An Analytical Review of Two Public/Private Partnerships A Story of Courage and Lost Opportunity November 1, 2006 NW FINANCIAL GROUP, LLC Exceeding Expectations Overview In the aftermath of the Chicago Skyway 10-year transportation capital program transaction, the State of Indiana decided for the State of Indiana, however the to privatize the statewide Indiana East- State has given up 75 years of revenues West Toll Road through the awarding of from the sale of Toll Road revenue a 75-year concession agreement. The stream. winning bidder of this long-term lease agreement is the same Cintra/Maquarie Query: syndicate that won the Chicago Skyway concession. In the case of Indiana the Where will State transportation winning bid was $3.85 Billion. Proceeds funding come from in years 11 from the transaction will be used to fund through 75? a ten-year transportation capital needs initiative of the Governor of Indiana In the past governments undertook called “Major Moves”. privatizations primarily to reduce costs and stabilize, not increase, rates to The Indiana transaction differs from the users. These prior efforts were also Chicago deal in several major ways: contracted to more limited terms of 5-30 years so that retention of public control • Concession is for period of 75 was always nearby. There are many years versus 99 years lessons to be learned from past infrastructure privatizations’ both good • Indiana initial toll increases of and bad, however, very few of these between 73% and 113% were put efforts have been a pure monetization of in place by the Governor prior to assets in the fashion of the Indiana Toll the concession bid Road and the Chicago Skyway. In some circumstances there has been • The roadway is a full statewide monetization in order to raise money to thoroughfare not a limited access solve budget problems, but the funds road such as the Chicago Skyway were quite limited due to sensitivity to ratepayer’s costs. • Traffic on the road is mainly commercial In the case of the Indiana Toll Road sale there was no serious sensitivity to • Indiana Toll road is not a major ratepayer impact, as evidenced by initial commuter route for most of its rate increases of between 73% and length 113% and ongoing increases of a minimum of 2% to 7% or more over the The Governor of Indiana demonstrated life of the franchise. This will drive the tremendous courage when he instituted beginning $8.00 passenger car through toll increases of over 70% on the Toll trip toll up to over $71.00 per passage if Road, however, by using the concession rates increase at only 3.00% per annum method of monetization lost the and vastly higher at greater per annum opportunity to raise the capital at much increases. A large part of this lower rates and thus either raise more willingness to impose large toll capital for the his “Major Moves” increases may likely have been the fact initiative of capital spending over the that these increases will largely be paid next ten years or to allow for lower by drivers, primarily truckers, from other future toll increases. Major Moves is a states passing through Indiana, not voters in Indiana. If the Toll Road were a 1 significant in-state commuter road, it is upfront toll increase would have an highly unlikely that the toll increases economic value in 2006 dollars of $.93 would have been politically palatable. Billion or 24% of the $3.85 Billion concession fee. Review Features After the initial toll increase, assuming the same traffic volumes, the annual toll These differences drive a somewhat road revenues would increase to different analysis than the one we $173.56 million (a 97% increase). The prepared on the Chicago Skyway expected contribution to revenues was transaction (published in Tollways disproportionately increased to put a Autumn 2006) and raise different issues. higher toll burden upon commercial Among these policy issues are: traffic. 1) What is the economic value of the Value of 2006 Toll Increase State’s initial pre-privatization toll increase? Using a range of expected traffic growth assumptions would produce the 2) How high could toll increases following potential upfront economic really get? benefit from the 2006 toll increases alone without any future toll increases: 3) How much more would tolls need to be increased to achieve the Indiana East West Toll Road Transaction $3.85 Billion price? Value of 2006 Toll Hike Initial Toll Increase Only 4) What is the impact of the Annual Traffic privatization on toll payers? Growth 2006 Values Zero$ 928,062,098 5) What is the projected profit margin for the winning bidder? 1.00%$ 1,396,183,595 2.00%$ 2,034,977,564 6) Could the same economic value have been delivered through a 3.00%$ 2,931,315,485 public financing rather than a 4.00%$ 4,224,537,126 private sale of the road? 5.00%$ 6,141,107,496 We will also analyze the impacted loss of funding on the public transportation system and the potential for public Meeting a $3.85 Billion Bid funding to achieve the same results as we did in the Chicago Skyway analysis. Thus in order to produce the same results as the concession sale without The Pre-Privatization Toll Increase any further toll increases the traffic growth on the road would need to be In early 2006 Indiana put into place a between 3% and 4% per annum. In the massive toll increase on the Indiana world of mature toll roads this is a very East West Toll Road of 73% on two axle unlikely annual growth to obtain; vehicles and phased 113% on larger therefore it would be necessary to vehicles. This was the first toll increase increase tolls in combination with traffic in 21 years. Assuming no increase in increases in order to create the same traffic volume and no future toll economic value as obtained in the increase, over the next 75 years, this 2 concession offer. Conversely the $3.85 Thus the private buyer has been Billion could be obtained by having toll guaranteed a floor of 2% per annum and increases of between 3-4% with no real is limited by a ceiling of either CPI or growth in traffic. Using a spectrum of toll GDP growth. Most of us think in terms of increases and traffic volume increases 3-3.5% CPI increases being a likely would allow a variety of scenarios to case over time, however most people do achieve the $3.85 Billion economic not know the history of GDP growth, result: which has averaged greater than 7% over the last 50 years. Obviously the Indiana East West Toll Road Transaction GDP index is likely to drive the growth in Spectrum of Values to Achieve Concession Price Values above Concession Price Highlighted in Yellow toll rates given its higher historic results. Values in 2006 Dollars Future Annual Toll Increases Using these three options we have Annual modeled the likely dollar toll results for Traffic Growth Zero 1.00% 2.00% 3.00% 4.00% 5.00% the 75 year term of the concession agreement for both passenger cars and Zero$ 0.93 $ 1.43 $ 2.11 $ 3.07 $ 4.46 $ 6.53 5 axle commercial vehicles as shown 1.00%$ 1.40 $ 2.08 $ 3.04 $ 4.45 $ 6.55 $ 9.78 below: 2.00%$ 2.03 $ 3.00 $ 4.41 $ 6.52 $ 9.79 $ 14.95 Indiana Toll Road Transaction 3.00%$ 2.93 $ 4.33 $ 6.44 $ 9.71 $ 14.91 $ 23.34 Projected Passenger Car Tolls 4.00%$ 4.22 $ 6.31 $ 9.57 $ 14.75 $ 23.20 $ 37.22 5.00%$ 6.14 $ 9.34 $ 14.47 $ 22.86 $ 36.85 $ 60.51 Initial Tolls W ith 2% W ith 3% W ith 4% with 5.5% with 7% Year Maximums Floor CPI GDP GDP GDP 2 Axle Toll Rates for Through Trip 2005$ 4.65 Thus given the low traffic growth 18.00$ (72% Initial Increase) 28.00$ expectations an annual toll increase of 38.00$ 48.00$ approximately 3.00% is required in order 58.66$ $ 9.00 $ 9.36 $ 9.91 $ 10.49 68.83$ $ 9.27 $ 9.73 $ 10.46 $ 11.22 to justify the $3.85 billion purchase 79.01$ $ 9.55 $ 10.12 $ 11.03 $ 12.01 89.19$ $ 9.84 $ 10.53 $ 11.64 $ 12.85 price. This expected increase is 99.37$ $ 10.13 $ 10.95 $ 12.28 $ 13.75 highlighted in the chart in the following 10$ 9.56 $ 10.44 $ 11.39 $ 12.95 $ 14.71 section. 20$ 11.65 $ 14.03 $ 16.85 $ 22.13 $ 28.93 50$ 21.11 $ 34.05 $ 54.67 $ 110.27 $ 220.24 Impact on Toll Payers 75$ 34.63 $ 71.29 $ 145.73 $ 420.51 $ 1,195.33 The Indiana concession sale was Indiana Toll Road Transaction structured with the same toll escalation Projected 5 axle Truck Tolls regime (after initial toll increases) as was designed for the Chicago Skyway Initial Tolls With 2% With 3% With 4% with 5.5% with 7% transaction, namely: Year Maximums Floor CPI GDP GDP GDP 4 Axle Toll Rates for Through Trip 2005$ 14.60 1$ 17.90 (113% Initial Increase over 4 years) The Concession agreement allows toll 2$ 22.61 3$ 27.32 increases at the highest of three factors: 4$ 31.87 5$ 34.50 $ 35.87 $ 37.28 $ 39.48 $ 41.78 6$ 35.19 $ 36.95 $ 38.78 $ 41.65 $ 44.70 • 2.00% per annum 7$ 35.89 $ 38.06 $ 40.33 $ 43.95 $ 47.83 8$ 36.61 $ 39.20 $ 41.94 $ 46.36 $ 51.18 9$ 37.34 $ 40.37 $ 43.62 $ 48.91 $ 54.76 • Increase in the Consumer Price Index 10$ 38.09 $ 41.58 $ 45.36 $ 51.60 $ 58.59 (CPI) 20$ 46.43 $ 55.89 $ 67.15 $ 88.14 $ 115.26 50$ 84.10 $ 135.65 $ 217.79 $ 439.31 $ 877.41 • Increase in nominal Gross Domestic 75$ 137.98 $ 284.02 $ 580.58 $ 1,675.24 $ 4,762.06 Product per capita (GDP) 3 The highlighted 4% column above any growth created by increased represents the approximate toll increase volumes.
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