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The Risks and Rewards of Leasing Toll Roads

The NJBIZ Interview – Brian SedlakAs a partner in the Chicago law firm Jones Day, attorney Brian Sedlak is an expert on the subject of leasing toll roads and other public assets to private operators. New Jersey is currently studying the lease of the Chicago Skyway as the state considers privatizing the New Jersey Turnpike and the Garden State Parkway. Sedlak, who has represented private buyers and financing parties in public infrastructure deals in states including Illinois, Indiana and Colorado, has been following the situation in New Jersey. He discussed privatization with NJBIZ Staff Writer João-Pierre S. Ruth.

NJBIZ: What issues typically arise in privatization deals?

Sedlak: Here in the United States our firm has been involved in the bidding process for the Indiana toll road and the Chicago parking system, and we represent a client in connection with the sale of the Northwest Parkway toll road in Denver. In terms of infrastructure transactions, these are relatively new phenomena. They’ve started to occur here in the last four or five years, although they have occurred in Europe and Latin America for the last four or five decades.

After World War II, those countries did not have the same types of highways as we have here. We used municipal finances to build these assets. In this country, we are playing a little bit of catch-up, trying to get our arms around the sale of infrastructure socially as well as economically.

One of the issues to watch out for is the valuation of private assets. These assets are public assets. These assets are being sold for periods of 75 to 99 years and there is a certain art in predicting the value of the assets. No one can determine at this point if the infrastructure companies are overpaying for them and that the cities and other municipalities are making the best deal ever, or whether or not they are being purchased for significantly undervalued amounts.

The difficulty in part is that the assets are valued based on future income streams. There has been resistance to raising tolls by public authorities for 20 or 30 years and so those tolls have not kept up with inflation. The value of those assets to the municipal authorities is much less than what they are in the hands of the private operators, because the private operators pencil out the transactions using the maximum amount they could actually charge and still have an appropriate number of people using the toll roads and make a profit.

NJBIZ: How does this compare with deals done outside the United States?

Sedlak: I think for the most part they are handled in a similar manner. Sometimes operators are able to obtain minimum traffic guarantees and other types of guarantees from municipal authorities because they are untested infrastructure assets.

NJBIZ: How do the guarantees work? Would there be compensation if the traffic falls below a certain level?

Sedlak: If it doesn’t hit a certain level by “x” years, then the governmental authority would make up the difference. That has not occurred in the United States because the traffic is more predictable.

NJBIZ: Did the deals in Chicago and Indiana include certain guarantees to the state such as maintenance, upkeep, and improvements going forward? One issue raised in New Jersey is that while the state feels compelled to widen and upgrade roadways, a private operator might not.

Sedlak: Authorities have traditionally required very strict operating standards with respect to the roads. In Indiana, there is a 400-page operating manual the purchaser has to abide by. It covered everything from when roads have to be resurfaced to how long a dead carcass could remain on the side of the road before it has to be picked up. They were specific on when the road should be widened based on traffic levels.

NJBIZ: The Indiana deal was put together without much public input and resulted in some backlash. Is there a sense that local governments are looking to include more public comment before proceeding?

Sedlak: I think it depends on the style of government of the particular municipality and how their constituents are. I think there will be much more discussion from the populace about these transactions moving forward, which probably indicates that governments will have to review the public’s comments. How soon that occurs is hard to say.

NJBIZ: To date, with the deals in the United States, has there been any talk of the outright sale of such assets?

Sedlak: No, and that mainly stems from governments wanting to maintain control of the assets and ultimately receive them back, at least with respect to toll roads. With water filtration plants and minor assets, there have been cases of governments selling the infrastructure assets outright.

NJBIZ: What liabilities do private operators have with these assets?

Sedlak: They have all the requirements of ownership so they take all the risks of ownership and they have to view this as if they are going to be an owner. It’s not just a matter of calculating the revenue that they will obtain from the tolls, but also the expenditures and what upgrades they will need to perform to modernize the road and keep it running in a manner that will make people want to use it.

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