Bill in New Jersey senate to allow 49% investor ownership of the Turnpike

New Jersey's TRs diagrammed. The Turnpike proper and the Garden State Parkway each go the full length opf the state north-south and form a kind of X. The Atlantic City Expressway is independent. NJ Senator Raymond Lesniak sponsor of S1777 Available at www.reason.org/ps334.pdf Got the story first

A bill has been introduced into the New Jersey senate which would allow a "non-controlling interest" in the New Jersey Turnpike to be sold to investors, the proceeds being used to fund outstanding state pension obligations. S1777 as introduced by Senator Raymond Lesniak is described so far only in a formal one-liner as: "S1777: Permits New Jersey Turnpike Authority to sell or lease a non-controlling interest to private parties and directs that proceeds from this transaction be used to finance outstanding State pension obligations."

The text has not yet been drafted, but the senator says the legislation would provide for corporatization in which up to 49% of the stock could be held by investors or some kind of concession in which the state retained a controlling interest. He also says his legislation will limit annual toll increases to the increase in the consumer price index.

Senator Lesniak says he has estimates the non-controlling interest could raise $6b while providing investors with an 9% annual rate of return.

The Star Ledger, the leading New Jersey newspaper, which broke the story quotes Governor Jon Corzine: "First of all, I haven't evaluated it. Senator Lesniak didn't screen it with me. He's generally been a cooperative individual in my political life. But if it's not used for paying down debt or investing in capital functions, I'd probably have difficulty. I'm more inclined to believe that if you are going to do something with turnpikes or parkways, it should go into long-term benefits. I think that pension payments are an operating expense."

Contacted Friday a Lesniak aide said the senator has not finalized details of the bill. He is discussing it with other legislators and will respond to some of their arguments in framing the text.

Background

The New Jersey Turnpike is America's largest toll system by daily transactions combining the New Jersey Turnpike proper, and the Garden State Parkway. It raises about $650m/year in toll revenues.

Full privatization in the form of a liberal longterm concession would probably bring in the range of $20b to $30b.

Senator Lesniak a veteran

Senator Lesniak who is sponsoring S1777 is a leading Democrat in a Democrat dominated state. He was a state assemblyman 1978 to 1983, when he successfully won a state senate seat. He has got re-elected every election since then. He is chair of the senate committee on Economic Growth and vice-chair of the Legislative Oversight Committee. 60 years old this year he represents Legislative District 20 which is dominated by the Turnpike. His district office is in Union Township, and his district includes Elizabeth to the immediate south of the ports and airport of Newark.

European route

Italy, France, Portugal and Japan have all had major state toll authorities going the corporatization route, which S1777 would enable. Italy's leading toll operator Autostrade SpA, now fully privatized, has its origins in a state owned toll authority going back to the time of Mussolini. It was partially privatized by being formed into a publicly listed corporation in the late 1990s but the state retained a controlling share. It has only been 100% owned by investors for the past several years. In Portugal BRISA was the major state toll authority until 1997-98, but now is investor owned. In Spain and Norway tolling is substantially in private concessions now. In France all toll enterprises except Cofiroute were formed as publicly listed companies under state ownership back in the 1970s, but until this year they all had a controlling interest by the state and other public sector entities. However the state share in the three largest ASF, SAPRR, and SANEF was put up for sale by tender last year and their privatization is in process of being completed. The majority shares being sold are netting $17.7b (E14.8b) for the French government. (see http://www.tollroadsnews.com/cgi-bin/a.cgi/HGDwHmzHEdqcEIJ61nsxIA)

Japan too

Japan's four big state toll businesses were converted into six publicly listed corporations in August last year - the biggest of the old four, the nationwide Japan Highway Public Corp became three regional intercity toll companies. There is no investor equity in these companies yet, though the government plans public stock offerings to enable that. For now the state is to maintain a controlling interest, as envisaged in S1777.

COMMENT

S1777 is good, if only because it will bring serious public discussion of the future governance of the New Jersey Turnpike - a huge underutilized asset of the state. The Turnpike system - now also encompassing the Parkway - is so large and so central to the state economy it seems implausible to do a single longterm toll concession like that of the Chicago Skyway or the Indiana Toll Road.

One more manageable approach would be to concession segments of the system, starting with the least difficult - Turnpike Southwest from Exit 8A in South Brunswick south to the Delaware River, the true interstate segment.

Then if it was successful other segments could be concessioned successively as separate parcels: (2) Industrial Turnpike, Exit 8A north to the Geo Washington Bridge (3) Suburban Garden State Parkway north of the Raritan River (4) Jersey Shore Parkway, the GSP south of the Raritan River.

S1777 is a more gradual approach to enlisting investors than a concession, but quicker. And it keeps the present nearly unified structure of the system - we say "nearly" because the Parkway and Turnpike proper retain significant separate operations.

S1777 seems to envisage either corporatization along the lines of the initial European model, or concessions of segments.

Corporatization with 51% (or more) state equity is a toe-in-the-water approach to privatization. The state would retain control with the numbers of voting shares to appoint all the directors.

With tradeable shares a Public-Private Jersey Turnpike Corporation (PPJTC) would have access to the private equity markets. Management of the PPJTC would be forced to focus more on return on capital. Investors, though they would not have the numbers to appoint directors to the governing board, could become a force to be reckoned with at annual meetings and in public commentary. The PPJTC could have its Kirk Kerkorian, not on the board of directors, but clever enough and motivated to be a major influence!

As a publicly listed company the PPJTC would have to meet tougher corporate accounting standards and meet reporting deadlines. The stock price of the corporation would provide a continual measure of how it was valued in the capital markets. With political appointees still dominant on the board of directors investors would pay less for the stock than if it were a full-blown commercial operation. However the transition would be simpler to implement than a concession. Investor stock could be sold under some kind of state buyback conditions to allow a return to the status quo if the state wanted to retreat from privatization. On the other hand if fears of investor ownership waned, or state budget exigencies required, the state government's 51% share in the PPJTC could always be sold to investors under concession-like conditions.

An interesting question is whether a PPJTC would be allowed - as Autostrade SpA was allowed even before it was fully privatized - to do business outside the state and internationally. Autostrade as a public private corporation was an investor, and ran toll operations, in the Dulles Greenway tollroad in Virginia for example.

A large part of the productivity of investor-owned operations is their ability to operate free of geographical bounds. Imagine Microsoft's potential if it could only sell software in the state of Washington, or Boeing its planes in Illinois, or if Bechtel was confined to engineering in the Bay Area! That's the tragedy of state toll authorities. Imprisoned by state lines they cannot use their staff expertise outside their limited jurisdictions.

European and Australian companies are dominant in the hunt for toll concessions in the US precisely because American toll expertise is located within geographically circumscribed state toll authorities and investor-owned firms built to be specialist suppliers, subcontractors, and consultants to toll authorities, none individually having the broad capabilities to make serious concession bids.

An unbounded PPJTC could have major toll business opportunities in the burgeoning new American tollroad markets of Texas, Florida, Colorado, the Carolinas, Utah, and the Pacific coast. And overseas.

Of course the greater the risks undertaken the less the argument for keeping the state taxpayer equity element as connoted by the first of the two 'P's. Then, logically, it would be wholly privatized and made into the PJTC, the Private Jersey Turnpike Corporation.

Reason paper

There is extensive background discussion on this subject in "Should States Sell Their Toll Roads?" published by Reason May 2005 at

http://www.reason.org/ps334.pdf

TOLLROADSnews 2006-03-23 MODIFIED 2006-03-24 (MORE ADDITIONS LIKELY)