JP Morgan on Tolling

“A more viable model requires the use of tolls for several reasons. First, stand-alone project finance is not the best way for us to finance capacity. There seems little question that existing state toll-road authorities will have to step up to the plate and be willing to use their existing capacity. It is a lot cheaper to finance off of an existing revenue base than it is with new projects. You get higher ratings, much lower financing costs, and you don’t have to buy bonds.

“What if we didn’t have tax-exempt bonds? What if Congress finally decided that tax-exempt bonds are gone? We would have very rapid innovation in financing highways in this country. Tax-exempts are really a crutch in many ways because they’re so easy to use. One of two things may happen. States will continue to issue taxable securities at interest rates that will be 30 or 40 percent higher than tax-exempt debt. That necessarily reduces impact. Coverage numbers go down and the amount of roads that you can build under that model goes down. Basically, the elimination of tax-exempt financing will require state and local governments to raise taxes to finance higher cost debt. The alternative, if you have tolls, is a private-sector version of financing and a sure revenue stream that will allow private companies to come into this business and begin a lot more financing. Equity is not cheap. A lot of people think that private company financing is a much cheaper way of doing the tax-exempt model. That is not true. It’s an alternative model. It is a model that by its nature provides more innovation, more creativity, and perhaps more efficiency. But it isn’t absolutely a better model than what we have today.

“I did an exercise of turning some of our state toll-road authorities into private companies and creating initial public offerings for these companies. Right now, state and local governments are as flush as can be. If we get into a recessionary environment, my guess is that they are going to feel really pressed for money, and change will come in that environment. When they seek more private involvement, the question will be making better use of the assets to meet needs. States might consider their turnpikes as a source of money. For example, the Massachusetts Turnpike in 1996 would have fetched, under my model, about $200 million to $250 million. Its outstanding net debt was $390 million-before the Boston Central Artery. Using some standard ratios from other types of privatization, I found that there was not enough money at the existing toll level to pay off their taxes and debt. That implies a large subsidy and certain policy issues. The New Jersey Turnpike was even more interesting. I came up with about $1 billion off the turnpike against $2.1 billion of debt. The answer is that you would not have been able to sell the New Jersey Turnpike.”

Which perhaps is the reason they have to start charging some real tolls. (Robert Muller, JP Morgan in GAO’s “Surface Transp...”)