So PA’s governor has decided to lease out the turn-pike. I just don’t understand how this can be a good thing. It may give PA some short-term cash, but in the long run I’m not getting the economics of it.
The people leasing it will have to maintain it just as the state does. Can they have the economics of scale that a state can?
They have to man it: I can see where they could pay less than the state for this.
My feeling is that they will have to run up the cost of driving on it to make a profit for them *and *pay the state. It would seem that the state would be better to simply raise the costs themselves and keep the money. This way seems like the costs will skyrocket because we have added a middle-man. IMO, either costs will go up, maintenance will go down or both will happen.
So my questions:
Does your state lease out any of their roads?
How has it worked out for them?
Have you seen costs for driving on them increase, decrease, stay the same?
Have you seen the road maintenance quality increase, decrease, stay the same?
I studied this in my macroecon class back in college. I can’t say there was an answer, just a huge class debate on it. The idea that we were supposed to flush out (I guess, my econ professor was also a law professor and was in the habit of not actually telling us the answer) is that the private lessee is supposed to be able to handle those things that the state cannot do: maintain roads, hire workers, and other things that I’m not remembering at the moment.
Further, the idea is that the state is actually quite incompetent at doing anything which involves spending money wisely, because they have no market (I’m using the word loosely) or price indicators to determine the best course of action. The state tries to correct this deficiency by establishing a bidding/RFP process which does not perfectly simulate the market so results are startling less than perfect (but that’s another whole discussion).
Anyway, by leasing the right to the road, the state divests itself of all the primary liabilities, the costs and expertise of operating and maintaining the road, and resorts back to its best capacity, i.e. collecting money.
The lessee is supposed to be super-efficient, well, at least, rather, way more efficient than the super-inefficient state. They have an expertise on roads, they have crews and maintenance workers to maintain the roads, and they relationships with the market and can be more competitive with buying services that the road needs.
The state in the mean time, can then release those employees which were supposed to work on the roads down to a minimum, just enough to check on the progress of the lessee. So, in the process of relieving itself of primary liabilities and obligations it can also reduce its workforce and capital. There’s also some tax and auditing benefits, too, I’m sure, but they’re probably minimal at best.
There’s a company called Macquerie that seems to be in the business of leasing and operating toll roads.
Here’s its report onthe Chicago Skyway. It shows the revenues exceed operating expenses, but the enterprisei s being eaten up by interest payments on the original loan. It lost $42 million in 2006.
Here’s the report on the Indiana Toll Road. Again, a slight profit on revenues over operating expenses, but a massive loss when you include interest payments. It lost $98 million in 2006.
The company also leases the Dulles Greenway.. Once again, revenues exceed operating expenses, but interest payments alone aren’t much less than total revenues. It lost $19 million in 2007.
They also own toll roads in other countries:
The M6 in England, losing money.
The APRR in France is said to be turning a profit, but the annual reports adds “Consolidated net debt increased after the distribution of the available cash in June 2006 and the payment of an interim dividend in December 2006. At the same time, the group’s financial structure was strengthened by the negotiation of a 7-year syndicated loan amounting to €1,800m.” In other words, they refinanced.
There are also toll bridges in Portugal, the report shows a profit, but also notes that shareholder equity decreased. IANA financial analyst, but I believe reducing the owner’s equity in a company is a bad sign.
I don’t see how any profit-making entity can afford these type of projects over a long term. They’ll either have to drastically increase tolls or cut expenses somewhere. Given that operating expenses are already less than revenues, they’ll have to do some financial wizardry in refinancing their debt.