Get ready for more public toll bridges and roads
Governor John Kasich of Ohio and Governor Steve Beshear of Kentucky are forming a bi-state team to research funding options to replace the 50 year-old bridge that crosses the Ohio River and connects their states. The Brent Spence Bridge carries about double the volume it was designed for on Interstate 71. It is an example of valuable U.S. infrastructure in need of replacement. The big question is where the funds will come from. AP has the story:
The two governors were joined by U.S. Transportation Secretary Ray LaHood, and all three said that charging tolls would need to be a part of any financing plan.
“Uncle Sam is not coming in on a white horse to pay for all of this. Those days don’t exist anymore,” [Kentucky governor] Beshear said. “We need to find all kinds of sources.”
Beshear and [Ohio governor] Kasich stressed that tolls would be in place only for as long as needed to pay off any bonds to build the bridge, but added that could take decades. They said it was too soon to say how tolls could be collected or what individual tolls might cost.
LaHood said that major bridge projects nationally now include some sort of tolls, a departure from previous federal policy that frowned upon charging travelers along federal interstate highways.
The days of federally funded highways and bridges are on the way out. The federal government (unless Congress raises the gasoline tax) does not have the fiscal space to continue paying for big infrastructure projects.So what options have states been exploring?
In another transportation related matter, Governor Kasich announced Thursday that Ohio would be issuing approximately $1.5 bilion in debt backed by toll revenue from the Ohio Turnpike. This was a surprise because Kasich had spent some time exploring the privatiztion of the turnpike. Again from the AP:
The route [Ohio Turnpike], which stretches 241 miles, is funded through tolls and the sale of gas and food at rest stops.
Kasich at first appeared to be intent on leasing or selling the road, but local leaders from counties and cities along the turnpike objected loudly, saying they feared a private operator would spike tolls so high that traffic would be driven onto local routes that meander through small towns.
They pointed to the fact tolls have nearly doubled since investors took over the Indiana Toll Road.
The privatization of the Indiana Turnpike, led by Governor Mitch Daniels, is likely to go down as one of the worst privatization deals in public finance. In a recent study by two academics at the College of William and Mary, they termed the turnpike privatization “an intergenerational cash transfer.” The state got $3.8 billion in cash upfront, but it gave away the right to collect toll revenue for 75 years. And, unsurprisingly, the toll road consortium is moving toward restructuring its complex capital structure. Debtwire has the story:
Indiana Toll Road (ITR) has retained Morgan Stanley and Moelis & Co. to help address approximately 3.7bn of loans set to mature on the public-to-private partnership’s balance sheet in 2015, two sources familiar with the matter tell Debtwire. The mandates complement management’s ongoing engagement with Kirkland & Ellis as its restructuring counsel, the sources added.
[…]Adding to the balance sheet stress, interest rates on ITR’s bank debt and fixed-rate swap agreements are set to increase. Margins on the term loan will rise to Libor+ 125bps in 2014, up from the current L+ 110bps rate. The fixed rate in each swap contract increases every two years to 3.65% from 30 June 2011 to 30 June 2013, to 4.15% until 30 June 2015, and all the way up to 11.29% in the final year of the swap agreement, which expires on 30 June 2026.
Translation: the privatization of the Indiana toll road was a disaster. It certainly should be a lesson for public officials who are considering this approach to finance infrastructure.
Fitch Ratings says that toll roads are becoming more common due to shrinking federal funding:
The tolling of roads and bridges is expected to increase going forward due to the lack of state and local funding for infrastructure. Elasticity may be higher and the political appetite to increase tolls may be lower going forward than when the crisis began in 2007.
Less federal funding is causing states to explore alternative financing schemes for infrastructure. It is likely that the tried and true model of issuing municipal debt, backed by toll revenues, will continue to prevail.