Pennsylvania Turnpike's cost of capital for Act 44 borrowings 5.08% vs 4.71% (ANALYSIS)

Pennsylvania Turnpike Commission (PTC) lead spokesman Timothy Carson and finance professors supporting the Commission have said repeatedly that the Turnpike Commission can borrow at significantly lower interest rates than a private concessionaire. Carson was quoted in a press release April 21 as claiming that $245m of Act 44 bonds sold at especially good interest rates.

The official announcement strangely did not give the actual interest rates. And nothing that the Turnpike Commisssion has put out gives the interest rates - their cost of capital. See link to the press release below.

So what interest rates did they have to pay?

After some searching we found a financial analyst with access to the details of the transaction. He kindly produced a spreadsheet for TOLLROADSnews which calculated the weighted average cost of capital for those borrowings by the PTC. He found the average rate for the $245m borrowed in April was 5.08%. See spreadsheet link below.

$177m of tax-exempt bonds sold at an interest rate of 4.89% and $69m of taxable bonds at 6.11%.

A central theme of a study called "For Whom the Road Tolls" commissioned by the Democratic Caucus of the Pennsylvania House of Representatives (February 2008) by three finance professors Gary J Gray, Patrick J Cusatis and John H Foote said that the PTC can borrow at 4.5% (p24) as compared to 6.65% for a concessionaire (p27), a difference of 2.15 percentage points in favor of the PTC. Adding in the cost of equity they got a weighted average cost of capital (WACC) for a concessionaire of 7.75%.

They wrote: "On a purely financial decision making basis and given the same expected future toll revenue assumption, the toll road operator with the lowest borrowing cost or lowest weighted average cost of capital should win every time." (p43)

Leaving aside the way they gloss over the enormous differences in the efficiency and hence the operating cost of a concessionaire versus the PTC it now looks as though they aren't even right about borrowing costs.

(On operating cost differences see second half of

http://www.tollroadsnews.com/node/3489)

The three profs wrote for the Dem Caucus in February, but the April borrowing rates for the PTC were 5.08% vs the 4.5% rate the three professors had estimated.

A private concessionaire, Transurban has just closed on the major financing of the Capital Beltway project in northern Virginia, making use of TIFIA and Private Activity Bonds (PABs).

The Capital Beltway TIFIA loans of $587m supported by USDOT were 40 year loans and they went for an interest rate of 4.45% last December. $589m of PABs went for 4.97% last week. The weighted average of borrowing cost of the Beltway concessionaire was 4.71% vs that 5.08% for the April financing of the Pennsylvania Turnpike Commission.

see http://www.tollroadsnews.com/node/3604

So much for the three professors and PTC vice-chair Timothy Carson's claim the Turnpike Commission has a major borrowing advantage.

The cost of capital of the Commission is much the same as a concessionaire's.

What drives the greater value of a concession on the Pennsylvania Turnpike is the ability of a concessionaire to manage and operate at dramatically lower operating costs through a businesslike as opposed to a political - that's the polite word - approach to management of staff, consultants, technology and contracting.

The PTC press release on the Act 44 financing:

http://www.paturnpike.com/news/2008/apr/nr042108.htm

The 3 Profs report for the Democratic Caucus is here:

http://www.paturnpike.com/straighttalk/pdf/For_Whom_the_Road_Tolls_Final_2-23-081_FINAL.pdf

Here's the spreadsheet on the PTC's cost of borrowing for Act 44 in April:

http://www.tollroadsnews.com/sites/default/files/PTCcostCapital.pdf

TOLLROADSnews 2008-06-19