Economics of Privatized Toll Roads/ Utilities

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COUNT US! Economics Education Report. (Getting smarter as we go.)

Today we look at Long Term Utility Equities, Specifically Privatized Toll Roads

http://www.theaustralian.news.com.au/story/0,20867,20849447-36375,00.html

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COUNT US! thinks that the articles that follow make the privatization of roads easier to understand as "an investment". Here is our primer on the subject.

Australia has a privatized social security system. Their workers must pay into private banks a portion of their earnings/ wages for the "management" of private banking experts. This gives Australian banks like Macquarie lots of cash needing a long term gradual pay back.

Valuation: means what is someone willing to pay for something.

Industries go bankrupt when investors pay many times what an industry or asset is capable of returning. Because investors sometimes buy long term contracts as a short term product to sell to another, the asset becomes a "hot potato". It is worth what the next investor will pay for it, until it fails and investors holdings drop in value.

>From the "COUNT US!" point of view this is made worse, because in our case Hoosiers are saddled with guarantees on the back side of these contracts that protect investor and therefore increase the value of the contracts by increasing the liability and costs to taxpayers.

One example, if it will necessarily "pick up the pieces of a failed toll road", we are paying a "valuation" tax.
Another example, by allowing the admitted higher tolling and fees of a privatized toll road, we are paying a "valuation tax".

Unfortunately the Concession Contracts that Daniels and the Trans Texas Corridor are using have been developed by the same corporations who are buying and trading these "contracts" that then become "investment instruments" for the duration of their 50, 75, and 99 years.

Politicians like Daniels are our lawyers representing three or four generations of Hoosiers to come. We don't trust him.

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Prices up as funds set sail for ports

WHEN Dubai's DP World agreed to buy the global terminals business of US railroad operator CSX for $US1.15 billion ($1.47 billion) in late 2004, there was general astonishment in the world ports industry.

The valuation was seen as a giddy high because it valued the terminals -- in places as varied as Hong Kong and the Dominican Republic -- at 15 times annual earnings before interest, tax, depreciation and amortisation.

However, that multiple now looks modest. Most analysts valued DP World's pound stg. 3.92 billion ($9.8 billion) takeover this year of British container ports and ferries operator P&O at 19 times EBITDA.

Last week, the Ontario Teachers' Pension Fund announced that it would pay $US2.35billion for the container terminals business of Orient Overseas International, the Hong Kong-based parent of container shipping line OOCL, a valuation of more than 20 times EBITDA.

There have been fierce contests to buy other assets, including Britain's PD Ports and Associated British Ports, which was bought by a consortium led by US investment bank Goldman Sachs in July for pound stg. 2.8billion, about 15 times EBITDA.

The Goldman consortium had to raise its bid twice, once after being rejected by the ABP board and once after a counter-bid from Australia's Macquarie.

The series of deals has been accompanied by news that owners of other port operations, such as Seattle-based SSA Marine and Oakland-based Marine Terminals Corporation, have hired investment bankers to consider sales to cash in on investors' new appetite for the assets.

But at the same time other industry observers have expressed scepticism about whether port assets -- long regarded by investors as overly risky because of their exposure to cyclical shipping markets -- can suddenly be worth so much more than previously thought.

There is, nevertheless, agreement on the main reason for the increased prices. The ports sector has become the latest infrastructure class -- after toll roads and airports -- to attract investors such as pension funds seeking a stable long-term return on investors' cash.

"There's a general realisation that these are scarce assets," says one person involved in the industry. "It's difficult to increase supply, particularly in developed countries where planning and environmental concerns come into play."

Trade growth is seen as reasonably certain, in the same way toll road investors have been sure that people will keep driving cars.

Tom Cooper, the UBS investment banker who handled the OOIL sale on the seller's behalf, agrees about infrastructure funds' significance. But he says there is a separate battle between Hong Kong's Hutchison, PSA and DP World to dominate the world container ports industry.

"You have two different things going on," Mr Cooper says. "You have infrastructure funds on the one hand, which are participating in a rather different market from the game of global consolidation of container ports that's going on between Hutchison, PSA and DP World."

Not everyone agrees prices can continue at their present level. Kim Fejfer, chief executive of APM Terminals, the world number three container terminal operator by throughput, said he expected valuations to return to closer to historic levels.

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Take a look at Florida's effort at Privatized Tolling. Surely the big guys, Goldman Sachs, Cintra of Spain and Macquarie (groups) of Australia could not be capable of such blunders.

Audit Rouses Authority Critics

TAMPA - The state auditor general's scathing assessment of the Tampa-Hillsborough County Expressway Authority only confirmed beliefs that the troubled toll road agency should be abolished or transformed, current and former Florida lawmakers said Friday.

"This may be the final straw for this expressway authority," said former state Senate President Tom Lee, who helped spur the investigation.

"There's obviously been a culture of disregard for good management and the law," said Lee, a Valrico Republican. "I don't know how elected officials can continue to defend this agency against the backdrop of one controversy after another."

Many, however, have called for changes for months and plan to use the audit to push hard for them this legislative session. State Sen. Mike Fasano, R-New Port Richey, plans to propose creating a regional authority, absorbing Hillsborough's, to make policy and build roads for a seven- to nine-county area.

Other critics suggest overhauling the agency but preserving local control. State Sen. Victor Crist, R-Tampa, wants to get rid of the seven board members, four of whom were appointed by Gov. Jeb Bush, and give locally elected officials the power to appoint the majority of a new board.

Rhea Law, the authority's interim general counsel, refused requests Friday to discuss the preliminary findings or what they may bring. She said in a prepared statement that she would comment Monday at the authority's next board meeting.

Chairman Thomas Gibbs said Thursday that he had not read it and hung up on a reporter. He did not return calls Friday. Former state Sen. James Hargrett said he might not have time to read it until the weekend.

Don Skelton, a district secretary for the Florida Department of Transportation, was on vacation and said he did not plan to go to the office to get his copy of the findings.

Robert Clark Jr., owner of Tampa Steel Erecting Co., said he had seen parts of the report, but "it doesn't look like a real audit to me." He said it sounded more like "someone's opinion."

The 13-page report portrayed a sloppily run agency that spent public money with little regard for the public interest. The 43-year-old agency built and operates the Lee Roy Selmon Expressway. Its salaries and consultant expenses are paid with Selmon tolls.

Law May Have Been Broken

Auditors found that the authority paid its contracted lobbyists $1.5 million from July 2001 to June. The report said those contracts could violate state law and should be canceled.

John Beck of Beck Consulting Group, a Tallahassee lobbying firm, has handled the bulk of lobbying and consulting duties since 1999. He played a central role in planning the authority's major new project, a toll road connecting New Tampa to Interstate 275, the first in Florida to be built and operated by a private company.

•Nine employees received pay raises of 8.1 percent to 13.6 percent during the 2005-06 fiscal year with no justification for the increases.

•The agency paid $1.4 million in salaries but lacked basic guidelines for its one part-time and 11 full-time employees.

•Eleven of 12 personnel files lack employment applications. Three employee files are missing evidence of professional licenses or certification.

•The authority's recent choice of Jim Drapp as temporary interim executive director violated state law because Drapp works for a company that is under contract with the authority.

Though she would not discuss the audit, Law did issue a statement defending Drapp's temporary appointment.

"Following the departure of the previous Executive Director [Ralph Mervine], the Expressway Authority asked Jim Drapp to temporarily 'oversee' daily operations so that transportation projects would move forward without delay. Drapp's involvement is based strictly on the board's request and the pressing needs of the organization."

Former state Sen. Jim Sebesta, a St. Petersburg Republican who led the Senate Transportation Committee, said he does not know how the problems with the expressway authority will be resolved. "They seem to go on ad infinitum," he said.

Last month, the authority board rejected Sebesta for the interim executive director position, saying it wanted to consider more than one candidate. Gibbs had recruited Sebesta for the job. Sebesta says he would not take the job now.

"Holy cow, if I had to work with those people, it would drive me crazy," he said.

"I think they have lost so much credibility in the last four months. … Actually that goes back to 2004 when the bridge fell down," Sebesta said, referring to the collapse of an elevated section of the Selmon expressway under construction.

Soon after the collapse, then-Executive Director Pat McCue was fired. His successor, Mervine, resigned last month after The Tampa Tribune revealed that he owned a gay pornographic production company in San Diego.

Bidding Process

The latest spate of troubles began in August over a controversial competitive bid process for the authority's outside legal services contract. Beck and Mervine each met privately with one of the bidders, who won the contract over a firm that was the top choice of a selection committee.

A governor's investigation turned up no wrongdoing, but the situation looked so bad that Bush asked Lee and then-House Speaker Allan Bense to call for the state audit.

Lee said he had heard months ago that the authority might be in violation of state law for having hired an outside lobbyist. He asked the auditor general to look at that issue specifically.

Devoting nearly a page to the question, the report said agencies created by the Legislature can use staff to lobby on their behalf, but they cannot use public money to pay an outside firm or individual.

Beck and his associates were paid $175 an hour. Its monthly invoices show they billed the authority for lobbying the governor's office about appointments to the authority's board. They billed for taking part in partisan political fundraisers. Beck did not return calls for comment.

Former general counsel Steve Anderson, who spent nine years with the authority and lost that job in August, said he disagreed with the auditors' conclusion about lobbyists. He said he researched the question years ago.

The law that created the authority gave them the power to "hire whomever we needed. … There was no limitation in that language," Anderson said.

"That does not perhaps justify the activities of a particular lobbyist," he said, "but that doesn't mean the underlying hiring is wrong."

Reporter Lindsay Peterson can be reached at (813) 259-7834. Reporter John W. Allman can be reached at (813) 259-7915.

Public water and transportation are now seen as "utilities" by privateer advocates like Daniels. It is perhaps the latest "dot com" in the investment market except when these fail our drinking water or road to work may be disrupted.

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Excerpts from:

Michael Harrison's Outlook: ...

A utility bubble waiting to burst; London beware: NY is wising up

No sooner had the ratings agency Standard & Poor's warned of the dangerous asset bubble developing in the utility sector, than Thames Water gave its new owner, Macquarie, something to think about. Thames' first-half profits fell by a quarter - a salutory reminder that even with inflation-busting price increases, water companies are not always a one-way bet.

The "dual curse" of over-valuation and excessive leverage which S&P is so worried about is evident in spades in the water industry where suppliers are being snapped up by bidders stuffed to the gills with debt financing and prepared to pay top dollar. Thames and AWG, the owner of Anglian Water, have been bought at a premium to their asset value that would have seemed impossible only a couple of years ago.

But the phenomenon is not confined to water. The auction of BAA resulted in the airports owner being sold on a sky-high multiple to a highly-leveraged consortium led by the Spanish toll-road contractor Ferrovial. London City airport also went for a fancy price, as have Britain's two principal ports operators, P&O and ABP. And the definition of what constitutes an "infrastructure" business is being stretched all the time, to include companies such as Laing, which is a collection of contracts rather than assets.

There is an undeniable attraction in asset-backed regulated businesses for pension funds which can match their profit flows against long-term liabilities, unlike private equity funds which operate on a much shorter timescale. But there is also an inherent danger. The whole edifice is being held together at present by cheap and plentiful debt. That is not bound to last forever, as the Governor of the Bank of England told MPs yesterday.

If interest rates rise then it is not hard to see how a number of these new owners of utility companies could find themselves under water. In that event, they cannot expect to be bailed out by the regulators. Ofwat and the Civil Aviation Authority have made it clear that they will set prices to reflect the investment needs of the airport and water industries, not to accommodate the particular way in which the owners of these businesses have chosen to finance themselves.

Ofwat has even gone as far as to ring-fence revenues of regulated water companies to prevent their parent companies squeezing more money out should a fall in their debt rating increase financing costs. The utility bubble is obviously different to the dotcom bubble, which grew from inflated valuations being placed on companies with minute revenues and nothing in the way of profits. But the consequences of it bursting are, if anything, greater. Life went on pretty much as normal when the fashion retailer boo.com went bust. It would be hard to say the same if Thames Water went under.

... continued at source.

m.harrison@ independent.co.uk

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STRATEGY

A potential treasure trove for investors

Infrastructure assets gaining more appeal

http://www.theglobeandmail.com/servlet/story/LAC.20061129.RTEACHERS29/TPStory/Business

JOHN PARTRIDGE

INVESTMENT REPORTER

Another round of power Pac Man in Europe has intensified the spotlight on the global infrastructure and utilities sectors, which some analysts have pegged as the next great treasure trove for investors.

The deal announced yesterday will see Iberdrola SA, Spain's No. 2 power producer, gobble up Scottish Power PLC, Britain's No. 5 producer, for £11.6-billion or about $22.5-billion (U.S.).

In size, the transaction ranks third in Europe behind the proposed $100-billion merger of French utilities Suez SA and Gaz de France SA and the continuing 14-month battle by German power colossus E.ON AG to take over Gas Natural SDG SA of Spain for $48.7-billion.

There are other massive mergers and acquisitions going on in the infrastructure sector.

Print Edition - Section Front

Spain's Abertis Infraestructuras SA, for instance, is -- with the support of European Union regulators -- trying to overcome Rome's opposition to a $14.4-billion takeover of Italy's largest operator of toll roads, Austostrade SpA. As well, Rinker Group Ltd. of Australia, which is, among other things, Florida's biggest supplier of concrete blocks, is fighting a $11.7-billion hostile bid from Mexico's Cemex SA, the third-largest cement maker on the planet.

It is part of a broader market shift that has seen long-term investors, especially major pension funds seeking predictable multiyear returns, push more heavily into the ownership of power producers, pipelines, roads, harbours and freight terminals and other types of infrastructure that have in the past been government financed and owned as often as not.

Canadian investors are in the vanguard.

Just last Thursday, for example, the Ontario Teachers Pension Plan, one of Canada's largest institutional investors, expanded its infrastructure holdings with the $2.4-billion (U.S.) purchase of four marine terminals in Canada and the U.S. from Orient Overseas (International) Ltd. of Hong Kong.

With this transaction, the pension fund now has $14-billion locked away in natural gas pipelines, power networks, water systems, timberland, private equity plays and other so-called alternative assets.

As well, the Ontario Municipal Employees Retirement Board, another major Canadian pension fund, is in a consortium led by U.S. investment bank Goldman Sachs that has bid $4.7-billion for Associated British Ports Holdings PLC, the largest port operator in Britain.

Some of the impetus that has made Europe a particular hotbed of utilities consolidation is a push by European Union authorities for the liberalization of the energy sector in general and the electricity market specifically, analyst Andrew Kuske at UBS Securities Canada Inc. said when reached yesterday in Toronto.

However, a key driver not only there but in North America and elsewhere has been low interest rates. "The rates of financing available today in the marketplace [make] many long-life infrastructure assets with steady-state cash flows very attractive," Mr. Kuske said. And while purchasers are paying top dollar, "the financing rates are so much lower than they have been in historic terms that the valuations actually do make sense."

The appeal of long-life assets such as utilities and pipelines is especially strong to pension funds that are anxious to lock in predictable and to some extent inflation-proof cash flows to ensure there will be enough money to pay pensioners down the road.

In fact, in a research report earlier this month, UBS analysts in Britain and Australia, said the infrastructure and utilities sector has outperformed equities and government bonds around the world over the past 10 years and will likely continue to do so.

The report, to which Mr. Kuske also contributed, suggests the continuing globalization and securitization of the infrastructure and utilities sector will be one of the major trends in global capital markets over the next decade.

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"VALUATION TAXATION"

An international broker of these private consession agreements in "private e-mails" to COUNT US! argued that the problem with Indiana's Toll Road contract was not the privatization but instead the ease of demands of the contracts offered.

He said Indiana should be requiring the costs as in tolls to users or motorists to go down over time rather than up.
This would reduce the value of our contracts and thus the payment for the contracts though.

The problem with Indiana and Illinois Toll Road deals according to this brokers analysis was the desire to bring in the maximum up front cash by giving too much back side payback.

He also rightly identified that our I-69, 3c could not provide the volume of traffic that would have been required to make it a valid candidate for privatized tolling. He warned us to watch out for Goldman Sachs and what might be given in order to market what was at that time on the world market as Toll-69, Indiana 3-c.

Higher tolls, longer duration of contracts, and guarantees of "customers" and buy back provisions improve the quality of the contracts as an investment. COUNT US! labels these "valuation taxation". This term we have coined here will be added to the COUNT US! Glossary of Privatized Tolling Terms. http://www.i69tour.org/glossary.html

We continue to be interested in tolling because the Commerce Corridor is an extension of our I-69 fight at this time. Or maybe we are just having a hard time shifting gears.