91X: CPTC talks sale of 91X to non-profit

Calif Private Transp Co (CPTC), the private company that owns and operates 91 Express Lanes (91X) in southern Calif, is negotiating to sell the operation to NEWTRAC, a non-profit established for the purpose of a takeover by a local political figure and three local businessmen and professionals. In a joint press release, Sept 11, CPTC and NEWTRAC said they both see potential benefits for commuters in the sale.

NEWTRAC is led by Gary Hausdorfer, 52, who works out of the Diamond Group, a PR and consulting firm and was mayor of San Juan Capistrano for 17 years and is a former chairman of the Foothill/Eastern Transp Corridors toll agency and later of the country transp authority (OCTA). The others are a prominent builder, engineer and car dealer.

Hausdorfer in the statement called the 91X a “successful project” adding “we’re committed to making it even more successful.” Non-profit ownership, he claimed, “could result in several million dollars per year available for public benefits, money that otherwise would be retained by CPTC for profits and debt service under the current for-profit structure...Instead of returning excess revenues to profits, we will be reinvesting them for the public benefit.”

The non-profit ownership structure would “offer the best of both worlds — the entrepreneurial approach of a private company, coupled with the advantages of of a non-profit venture.”

NEWTRAC says “one of the immediate moves will be the removal of tolls on HOV3 lanes to allow free carpool access once the sale is complete.” (Carpoolers presently pay half-tolls -TRnl) Hausdorfer is quoted as saying: “This in itself could save carpoolers up to $2m/yr in tolls.”

“As a non-profit corporation and grassroots organization, our mission is to build on what CPTC has done to provide outstanding service and traffic relief for thousands of motorists using the 91-corridor.”

CPTC managers seem pleased with the proposal. They say the cost of their debt — 9% on about $100m of borrowings is burdensome. Under the federal tax code a non-profit can borrow at 2 or 4 points less interest because the earnings are tax-exempt.

CPTC comprises three partners, the largest being a subsidiary of the large Omaha NE construction company Peter Keewit & Sons, second Cofiroute, the international arm of many of the large French toll companies and third Granite Construction a Calif road builder. The Keewit side sold its half share of United Infrastructure to Bechtel and is not pursuing new highway ownership, so for it 91X has become an orphan. It and the smaller partners Cofiroute and Granite are rightfully proud of what they have accomplished in building a business successfully out of a never-before-implemented idea — value pricing. They are breaking even in their third year, but they now face new tough competition from the county toll agency’s new toll road.

The press statement says that “NEWTRAC...has approached CPTC... regarding acquiring the 91 Express Lanes.” People connected with NEWTRAC say it was the other way around, and that the non-profit was CPTC’s idea. They say CPTC wants out and that it took the initiative.

Tough competition

Profitability over the next several years on 91X is going to very tough to achieve and major losses are a real possibility if the new Eastern county toll road siphons sufficient traffic from the free lanes to allow what remains to flow more freely. Why not get out while the going’s good?

Greg Hulsizer the general managaer and Steve George the managing director told us in a telephone conference call that they think the takeover by a non-profit may be a “new model.” They think that there is a strong case for the private sector doing the development and setting up the business, a stage in which private sector “juices” are needed, but that once that’s done, and it is a matter of management of an established operation and customer service, then perhaps a non-profit with strong local roots becomes appropriate. They stressed that NEWTRAC is a private non-profit so it doesn’t suffer the problems of political appointees by governments. Those involved are “highly successful business people” and are in it as “volunteers.”

Hausdorfer

Gary Hausdorfer head of NEWTRAC told us he has the impression continued operation of 91X is “not in the business plan” of Keewit, the lead partner of CPTC. He has agreed to see if he can put something together which serves everyone’s purposes. He says the major reason for non-profit status is the tax-exempt borrowing advantage. He doesn’t think that without that 5 or 6% financing the takeover will fly. An application for tax exempt status has been filed with the IRS and he expects it will take until about the end of the year to get a ruling. Meanwhile he has the law firm Orrick and Lehman Bros advising on how to raise money.

“Whether it all happens or not is very hard to say,” he said.

Hausdorfer agrees that the next few months will be very interesting with the opening of the Eastern toll road. He says it is “very hard to imagine” it will not have a significant impact on 91 traffic and hence on 91X revenues. He says a lot of thought will need to be given as to how to get the various operators working together to serve motorists best.

91X is disadvantaged by not being able to serve Eastern toll road patrons, Hausdorfer says. He is referring to the lack of 91X ramps to the Eastern. Such ramps from 91X westbound to the Eastern southbound (and the reverse) would only have cars traveling on the 91X lanes about 4km, and the toll that could be extracted seems unlikely to pay for the ramps. If however the X-lanes are extended east into Riverside Co another 14km to the I-15/CA91 IC, as is currently under study, then direct connector ramps to the Eastern might make a great deal of sense.

Hausdorfer thinks that an advantage of a non-profit might be that it would find it easier to bring the various agencies together to cooperate for the benefit of motorists.

“We’ll need to be building bridges, both figuratively and literally to other agencies,” he says.

Questions

Thomas DiLorenzo of the Sellinger School of Business and Management at Loyola College Baltimore and a leading researcher and author of books on non-profits is skeptical. I read him out the statements by Hausdorfer and he said: “This sounds like a campaign speech. Promises, promises. What’s this guy running for? County executive? State assembly? Why does he want to run a road. As a charity? Give me a break.”

DiLorenzo says “When we want service and public benefit from the airlines, or from the electric company or from the supermarket, or IBM, we don’t ask that it become a non-profit? We don’t ask that it be run by volunteers.”

He said a major problem of non-profits is that their objectives are vague since there is no bottom line profit target. Private non-profits tend to be small self-perpetuating cliques with limited accountability. The initial board has the power to appoint new board members. For-profits by contrast are accountable to shareholders. Management is liable to be thrown out if it is too self-indulgent and not producing a competitive return on capital. Takeovers happen.

Comparisons of for-profit hospitals and non-profit hospitals show systematic significant differences in performance, DiLorenzo says, with the non-profits almost invariably being higher cost. They have a record of indulging their staff, partners and select suppliers.

“Non-profits are a ready made for self-dealing. There is no structure to tie how they spend their money to the public benefit. Board members serve at the pleasure of the in-group. People running non-profits find all kinds of ways to spend money on themselves, on their colleagues and on their friends. Some will build a political empire out of a non-profit, others will use it for social climbing, a few will even establish a feudal fiefdom with sinecures for their children, corporate jets and multiple mistresses maintained in luxury.”

The last was a reference to the longtime head of the United Way “non-profit” — William Aramony.

Comment

The claim that a business will take its profits out while a non-profit will reinvest in the facility, first assumes that both a business and a non-profit are equally likely to make a profit or a surplus. Given that NEWRAC’s first proclaimed intention is to let go the half-toll revenues paid by HOV3s it is clear it is not as concerned about making a surplus as CPTC. Second, CPTC as a profit seeker WILL reinvest in 91X — to the extent that such reinvestments are judged likely to make a return on capital comparable or superior to returns on capital its partners might be able to obtain investing elsewhere. If 91X expansion looks profitable the capital will flow into that under CPTC or under any other profit-seeker.

The very fact that a business’s profits and capital goes where the returns are most promising is part of its general striving to gain revenues and to contain costs. The very ability to take profits elsewhere, or to bring capital in from outside if prospects inside are good, is what make business tend to invest in productive ventures and to avoid the unproductive. This is a huge advantage of having for-profits.

The non-profit because it cannot take money out will reinvest surplus regardless of whether there’s a prospective return on that reinvestment, so it is likely to spend surplus wastefully — if it even achieves a surplus. If it doesn’t have anything very promising to put money back into it will likely spend it on managerial perks or on political favors.

Hausdorfer is principally a politican. His political accomplishments stand out in his resume. He has been a mayor for nearly two decades and chaired two major county boards. His promise to immediately drop tolls on HOV3s, appealing to a special constituency, has all the hallmarks of a political rather than a business approach.

The great political philosopher Adam Smith writing in the year of America’s foundation was dismissive about people claiming to work for the public via non-profits saying: “I have never known much good done by those who affected to trade for the public good.” (Wealth of Nations p423) People work best for the public good when they can personally profit from serving the public well, Smith insisted, and those who claim not to be concerned for profit will usually be conspiring for special private benefits and special priveleges at the expense of the public.

“Nothing can be more absurd,” wrote Smith, “than to imagine that (people) work less when they work for themselves, than when they work for other people...It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard for their own interest.”

(Contacts Gary Hausdorfer, NEWTRAC 949 727 4650, Greg Hulsizer CPTC 714 637 9191, Thomas DiLorenzo, expert on non-profits 410 617 2755)