Thursday, 28 July 2011

Why does San Diego want to buy a bankrupt toll road?

The South Bay Expressway has been a financial disaster in the world of private concession toll roads. It opened in 2007 as a new 10 mile stretch of tolled highway, but has never generated enough demand to be profitable enough to service its debts.  TollRoadsNews has a long list of reports on the project.

Where is it?

Beginning at SR-905 in Otay Mesa, the Expressway provides fast and convenient access to and from Mexico and communities across San Diego County.

It filed for bankruptcy in March 2010 and since then has been owned by the banks and federal government, which supplied the debt for the road. However, the San Diego Association of Governments is seeking to buy it. This is rather strange.

Why? Because the road is there now, working and providing service to users. It isn’t going to close down. The concession agreement hands it back to state ownership in 2042 regardless. In addition, SANDAG would presumably have to borrow money or raise taxes to buy it back. Unless it believes reducing or eliminating tolls on the road would create net economic benefits that outweigh the purchase, it seems like a very strange move indeed for a public body.

Another report quotes Gary Gallegos, Executive Director, saying the road is strategic and demand will be increasing – implying that it would be money making. He also said money to buy it back could come from an existing sales tax.

Bankruptcy court apparently valued the road at US$287 million, but it is apparently now generating an operating surplus. SANDAG thinks that as a result it wont be a bad investment, although I’d have thought it would not be a good investment if the return on capital is less than the cost of debt to buy it (or the interest gained from a bank deposit).  However, it is likely that the consortia of 10 banks that own 68% of the road will want out of it quickly, as will the US Department of Transportation which holds the other 32% because of loans it made to the previous owners.

Note: This was one dud investment for the Macquarie Group, which was at one time a 50% shareholder in the road.  It wrote off the entire value of the investment in 2009 according to the Bond Buyer.

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