91X:CPTC Defends Itself, Hits Critics and Caltrans

The ‘Briefing’ admits no error on the part of CPTC, let alone any wrongdoing, and attributes the furore and aborted sale to a “politically-fueled controversy” fired by “longtime opponents of the Express Lanes.” Though much of the ‘Briefing’ repeats many arguable themes that have been heard before, it also reveals a lot of new information about the project.

An attachment “Statement of Operations” with unaudited income data for 1999 suggests that the opening of the Eastern Toll Road only reduced operating income about 10%. If traffic was down heavily, toll rates were able to be hiked to offset much of the loss of traffic. (see p14)

On its future plans CPTC says it still wants to sell the Express Lanes “at a fair price as soon as reasonably possible” but that none of its partners needs to sell immediately so there will be no “fire sale.” It wants to sell, it says, because the franchise is no longer an appropriate investment for two of its three partners. In 1997 Level 3 which owns 65% of CPTC decided to focus solely on telecommunications and began to sell all its non-telecom assets. CPTC is just the last of $1.5b of non-telecom assets to be disposed of. Granite Construction with 22.5% of CPTC had always intended to sell its stake once the project was operationally stable. Cofiroute the third and 12.5% partner supported the sale which provided for a contract with a Cofiroute-led joint venture (named Co-Par after partners Cofiroute and Parsons) to operate the project for NewTrac for at least 5 years.

The ‘Briefing’ says that NewTrac came into existence after the financiers Lehman Brothers were engaged by CPTC to advise on a sale and suggested a private non-profit purchaser as the best model: “Lehman Brothers identified (Hausdorfer) as a potential candidate to organize and lead a non-profit entity to consider the purchase. In early 1998 Lehman Bros and CPTC approached (Hausdorfer) about forming the non-profit entity.”

It admits that CPTC’s gen-manager Greg Hulsizer served for a while on the NewTrac board and lent NewTrac money but insists this was “not unusual” since the plan was for Hulsizer to be gen-manager of Co-Par, the proposed operating contractor of NewTrac.

The Briefing insists that relations between CPTC and NewTrac were at arms length and indeed that the sale price was the subject of “tough, occasionally acrimonious negotiations” and that they had independent financial advisers throughout. NewTrac required that CPTC take the financial risk of litigation over Caltrans efforts to build extra capacity in the form of auxiliary lanes. When CPTC made concessions to settle with Caltrans, NewTrac reduced its offering price by $12m. NewTrac also negotiated a sale arrangement in Sept 99 based on a bond issue providing for a 1.6/1 debt service coverage, so because of higher interest rates by the time of the Dec attempted closing the price would have been $210m vs $250m as originally agreed.

The Briefing says that based on a $210m sale price $125m would have gone to discharge debt, $33m would have paid off cash investment, and $10m was to go into an Unanticipated Costs Escrow account for NewTrac, leaving $42m to be distributed as capital gain on the sale, or compensation for forgone equity distributions over the remaining life of the franchise – which it put at $1b, pre-tax.

It insists due diligence was performed on behalf of NewTrac independently, extensively, and without any restriction. CPTC lent NewTrac $1m for the due diligence work, but it was nonetheless independently conducted. This, it insists, is quite normal.

The “Briefing” contains a fierce attack, extending over 3 pages, on the behavior of Caltrans officials, and says that the agency has conceded that its plan for ‘Auxiliary Lanes’ on the 91 Freeway “was nothing more than congestion relief dressed up as a safety improvement.” It says over an 18 month period Caltrans District 12 Director Mike McManus refused it any explanation of the auxiliary lanes scheme and indeed twice defied orders from the director of Caltrans James Van Loben Sels to settle the issue with CPTC. Caltrans only once cited safety data supporting the auxiliary lanes project, it says, and these were inconsistent with published accident statistics and likely were deliberately distorted.

CPTC says Caltrans district office set out to build extra capacity in breech of the franchise contract, and liable to reduce CPTC revenues by as much as 30%, then after the event contrived the safety justification to give the plan legitimacy. CPTC was confident it could win the litigation but made a settlement with Caltrans (agreeing to construction of the extra capacity after 2006) because the dispute holding up the sale to NewTrac.

The no-new-capacity provisions in the concession contract are defended, on the grounds that without them there would have been no viable commercial project, no finance and no construction of the express lanes, and congestion in the CA-91 corridor “would today represent an immense crisis.” (“Briefing” is available from CPTC PR, Frank Wilson & Assoc 949 588 1124, or Jane Blythe CPTC 714 637 9191x228 )

COMMENT: The ‘Briefing’ is a welcome document. It puts the CPTC case strongly on some issues and, if the facts presented are true, refutes some of the criticisms, including some we made (TRnl#44 Nov/Dec 99). But it is many weeks late and in politics, as they say, timing is everything. Some of the points – about the hard bargaining by NewTrac – are so striking, it is amazing, if they are true, they were not put out during the controversy. During that period neither CPTC, nor NewTrac, nor its consultants would say anything serious to refute their critics. They behaved like stunned chickens.

Maybe they hadn’t worked out a party line, so they were frightened to say anything for fear of contradicting one another? NewTrac’s Gary Hausdorfer was reported as saying he lacked access to CPTC’s financial accounts (LOS ANGELES TIMES 12/7/99) which hardly jibes with the strong claim in the ‘Briefing’ of serious, independent and unobstructed ‘due diligence.’

The central theme of the ‘Briefing’ that CPTC simply wanted to get the best price possible for its investors is belied by its actions. Someone wanting to get the best price for a property puts it on the market and asks for offers. Requests for proposals! They advertise it. They have an agent who hawks it. They get independent appraisals.

CPTC management instead got fixated on the idea of contriving its own private non-profit and selling to that, despite the huge risk of being accused of doing a bogus sweetheart deal in which profits were taken by people on the way out, with the risks being off-loaded onto a shell that would leverage the credibility of a state ‘bank.’

Why would you play that kind of high risk political game unless there were some personal payoffs?

The ‘Briefing’ claims that “most non-governmental toll road financings completed in recent years have used private non-profit corporations as the financing vehicle.” That is flatly false, and importantly false. The Greenville Connector SC, Lake of Ozarks MO, the 895 in VA and proposals by Interwest in AZ, MN and CA have all been public (not private) non-profits whose board members have been heavy with elected public officials or actual appointees of elected officials. Also, the operating contracts in all these cases were negotiated with, or supervised closely by state DOTs, not with a business group wanting to get out of the business. This is a qualitative difference. It is a serious misrepresentation by CPTC to claim that the other non-profit deals are like this one.

There is a chain of accountability to the voters in the typical public non-profit. SCDOT was up to its neck in the Greenville deal, VDOT in 895, Arizona DOT in the South Mountain. Bob Farris of Interwest has been scrupulous in seeking local public officials to serve on the boards of his non-profits. United Infrastructure (UI) in WA state for the 2nd Tacoma Narrows Bridge will set up a non-profit to gain tax advantage for the financing, but its board members will be selected in consultation with the state DOT and they will be prominent community leaders. UI’s operating contract will be with the state, not with the non-profit. Those kinds of details makes these non-profits semi-governmental entities and public in character, and utterly distinct in nature from the private cabal NewTrac. It is slander on the others for CPTC to put NewTrac in the same category.

Or else the private financings have been simple for-profit ventures accountable to shareholders – the Detroit-Windsor Tunnel, the Camino-Columbia toll road, the Adams Avenue Turnpike in Ogden UT, United Toll Systems three toll bridges and the McInnes Corp’s Foley Beach Expressway in AL. The CA-125/South franchise is held by San Diego Expressway Limited Partnership, a simple for profit group, accountable to PB, Egis, Koch Industries and other investors. These private for-profit financings are quite viable, as is the Dulles Greenway VA now, having recovered from a bad start.

Newtrac, far from being in the mainstream, was quite unique in assembling a bunch of businessmen (headed by a former small-town mayor, Gary Hausdorfer, who regards it as libelous to be characterized as a politician, according to his lawyer) in a private non-profit accountable to absolutely noone, and negotiating an ongoing operating contract utterly outside any framework of governmental responsibility.

By what right does NewTrac’s Hausdorfer, without putting at risk a cent of his own resources, without any accountability to shareholders, to any voters, to any elected institution, or indeed to anyone except a few cronies that he (with CPTC’s help) has chosen himself and who serve at his behest, aspire to take control over a toll road? The proposition was preposterous. Banana republic stuff. That is what the furore over the Newtrac deal was all about.

But CPTC still doesn’t get it, apparently. Or they pretend not to. The ‘Briefing’ simply fails to deal with the central issue of legitimacy, the lack of accountability of NewTrac.

Giving back

Then there is this unforgivable populist claptrap: “If a for-profit owner holds the franchise for the remainder of the franchise term, not one dime of toll revenues will return to the corridor.” (p4) They make the anti-business pitch that a non-profit is superior to a for-profit because, rather than rewarding and satisfying risktaking investors, and competing in the capital markets to secure a return on capital, it puts any surplus “back into” the corridor, or will be dangled as rewards to gain favor with local political entities. But what incentive structure is there in a non-profit to generate a surplus beyond what can be characterized as expenses? Costs of “doing business” are almost infinitely elastic when there are no shareholders, so these so-called ‘profits’ to ‘go back into’ the local community are likely a mirage.

And don’t businesses put resources “back into” their business so long as it remains a viable business? Do CPTC’s flacks think the readers of the ‘Briefing’ have not heard of business reinvestment?

The whole rationale of AB680 under which the CPTC franchise was granted was that for-profit business would bring to road development and operations the commercial discipline of developing a paying project in which resources are deployed where they generate the best return on capital.

Resources should, as a matter of important principle, only “go back into the corridor” to the extent they can be used to generate benefits that motorists will pay for, not into things that will win political plaudits for Hausdorfer and his friends. A for-profit will have to put resources back into 91X to retain its business and it will have capital at stake. A Hausdorfer will have no capital at stake. A for-profit owner of 91X will put new resources into the corridor to the extent it can serve more motorists and get them to attest to the value of that service by paying tolls, whereas a Hausdorfer will only put resources in to the extent he prefers that to making grants to local political entities.

Noone suggests that an electric company should put all its surplus back into new power plants, or that the local telephone company put back all its surplus into the locality. Efficient resource allocation is at the heart of the great economic issue of the cold war – what works better for people, competitive capitalism or planned socialism.

CPTC seems not to have noticed, but most of the world has decided that capitalism is superior to socialism, because it puts resources back into the big pool of general competitive capital markets, and from there goes to places where it will make the best returns. In socialism it goes back into the pockets of local fiefdoms like NewTrac and so gets squandered for private enrichment and political payoffs.

Coming from an academic at Berkeley the shopworn marxist cliches of the CPTC ‘Briefing’ would sound merely silly. But from businessmen’s mouths they are pathetic.

The good news is that 91X is a solid and sound business that has weathered the competition from the Eastern toll road remarkably well. The Wilbur Smith projections, like all such traffic and revenue forecasts will probably be off for individual years, but they are credible as a trendline over a run of years, which is what will matter for serious investors.

Hopefully for the 91X lanes the petty fixers and political dabblers will soon be bought out by more straightforward business people. However it would be more fun if the CPTC circus act continued a while longer, with new “Greg and Gary” highwire acts keeping us all entertained.