Monetizing Harris County's toll roads

I missed this story yesterday, but Albert Hollan was kind enough to forward me the link, so here it is.

An investment bank concluded that a private firm might pay up to $7 billion for the right to operate Harris County toll roads, prompting Commissioners Court Tuesday to authorize a study of the pluses and minuses of such a deal.

If the plan worked right, the multibillion-dollar windfall could be invested, and interest earned on it would pay for future road projects. Pricey road bonds likely would be a thing of the past, Harris County Judge Robert Eckels said.

"This could avoid the need for bond elections and the need to go to taxpayers for tax increases," he said.

As part of the 50- to 75-year deal, the county would maintain ownership of the toll roads, decide whether the system should expand and possibly set limits on future toll increases.

The county isn't looking to turn the Harris County Toll Road Authority over to an operator that would be interested solely in the bottom line and wouldn't be flexible in helping meet the region's transportation needs, Eckels said.

"I believe it is a good idea to do something like this," he said.

[...]

The court appointed Dick Raycraft, director of county management services, to report back Oct. 25 on what exactly will be studied.

[...]

The group that does the study would give its report by April. A deal, if it is approved, could be in place by spring 2007.

[...]

First Southwest estimated the county could net between $2 billion and $5.1 billion by selling concession rights.

Goldman Sachs, another investment bank, reported that concession rights might be sold for $7 billion or more.

In its report, First Southwest says the authority is marketable because it is one of the more successful toll roads nationwide.

It took in $318 million in tolls last year and has $1.8 billion in outstanding bond debt.

I'm no financial guru, but it seems to me that if the system is earning enough to pay off all its debts in six years, it's making pretty good money, and I don't quite understand the rationale for selling. Fortunately, Robin Holzer has an MBA, and she doesn't think this is a good deal, either.

This deal is NOT about Harris County finding a private outfit to operate the toll road system more cheaply. It's about selling off the taxpayers' financial interest in the toll system to a private investor. "Monetizing" the toll road system means finding a way to trade the future cash revenue of our toll road system for cash today. The problem is, no private entity can afford to pay the County what it's really worth. Here's why:

1. The Harris County Toll Road system generated ~$318 million in toll revenue during the last fiscal year. This cash cow currently belongs to Harris County taxpayers. As Harris County tax payers, we are essentially shareholders of HCTRA. We taxpayers already receive the financial benefits from public investments like the Sam Houston Toll Road, and we will for years to come. Some of that revenue is spent servicing HCTRA’s $1.8 billion in debt, and the rest is spent to improve and expand the toll road system.

2. In order for the County to receive up front today as cash the benefit of 30-75 years of future toll revenue -- the "multi-billion dollar windfall" referred to by Judge Robert Eckels -- taxpayers will have to pay a significant premium, either in the form of increased borrowing costs, increased tolls or both.

3. Harris County is already in the business of borrowing against future toll revenue (i.e. floating toll-backed revenue bonds) to get cash today to pay for road projects. As long as the county's bond rating remains investment grade, the county enjoys a lower cost of capital than that of any U.S. for-profit entity (e.g., bank, hedge fund, toll consortium, etc.).

4. An investor (i.e. Cintra/Zachery) will be interested in this deal based on the profits they expect to be able to extract from the toll roads, which must more than cover the price they pay to Harris County and whomever is providing the capital to purchase the tollroads.

5. Harris County, as a public entity, can borrow at a lower rate of return than a private borrower can achieve. Given that a private investor will have a higher cost of capital than Harris County does, then basic finance says that the present value of the cash flows from our toll road system will be worth less to them than they are to Harris County. Since the cash flows are worth less to a private investor than the County, that means no private investor can afford to pay the County what the flows are worth to taxpayers.

6. Further, this “deal” is a once-only proposition. If we sell our interest in Harris County's toll revenue to a private investor, we can never again borrow against it. We will have to borrow against other, less-desirable assets, which will affect the County's bond rating. So, this "deal" may have the effect on Harris County taxpayers of raising our cost of borrowing to 3-5 times the current rate. It would suddenly be as if we had built the toll road system and then decided to pay for it with high-rate credit cards instead of the low-risk bonds for which the taxpayers voted.

In my opinion, it is NOT in the interest of Harris County taxpayers to allow the County to do such a deal. Frankly, I'd prefer the County did not spend any more money studying the concept either.

By the way, Robin notes that "this concept was NOT included in the posted agenda for the meeting, and was NOT mentioned at all at the County's agenda briefing Monday morning". That's our county government for you.

Basically, I have two questions at this point: What in the world does the Commissioner's Court want to do with all the up-front cash they'd get out of this, and would this proposal be put up for a public vote before any agreements are signed? And if it isn't (okay, three questions), why the heck not? Robin's right - the toll road system belongs to all of us. Its disposition should be subject to our say so.

I feel like there's more to this than what we know so far. Anyone want to speculate?

UPDATE: Tory also thinks this is a bad idea.

Posted by Charles Kuffner on September 29, 2005 to Planes, Trains, and Automobiles | TrackBack