Thursday, 16 May 2013

Ohio Turnpike not to be privatised

As has been previously reported, there had been a lot of debate as to whether it was worthwhile to privatise the Ohio Turnpike.  

According to an article on Cleveland.Com, the revenues for the 241 mile long Ohio Turnpike for 2012 were at a record US$270 million (with an expected profit of US$15 million).

Governor John Kasich is keen to utilise the value of the toll road to support other transport infrastructure projects in the state.  The law currently restricts the net revenues to being spent on transport projects within one mile of the road.

Tolls increased by 10% in January 2012 and traffic volumes have increased, making the toll road a lucrative asset for the state.  It has been reducing staff and consequential costs.

So the decision has been made not to privatise the road, but instead have it issue bonds which will essentially mean the state is borrowing against future revenues from the Turnpike to pay for other transport projects.  US$1.5 billion in bonds will be issued.  

A website called Ohio Turnpike Analysis contains more details. With a specific report of more in-depth analysis here, supported by Big Four accountancy firm, KPMG.  Indeed that report had been commissioned to specifically restrict options to those that exclude privatisation, but could include a lease to a concessionaire for the revenues.

In announcing the decision on the Turnpike the website states:

While the state could have realized more money by leasing the Turnpike, maintaining public control of the Turnpike and keeping the Turnpike Commission independent helps keep tolls low and workers on the job. Better coordination with ODOT keeps virtually all Turnpike revenue in Northern Ohio.

The Ohio Turnpike Commission is to be expanded into the Ohio Turnpike and Infrastructure Commission, which will have new "expanded authority" over major transportation projects in Ohio.

In addition, there will be a cap on tolls as follows:

Tolls for local passenger trips that are paid with EZ Pass will be frozen at current levels for the next 10 years. For all other tolls (longer passenger trips and all truck trips) any increases will be capped at the rate of inflation, or approximately 2.7 percent annually, assuming sustained traffic growth at the historic 1 percent rate. This low, stable rate will be less than half the rate of increase that passenger tolls have seen over the past 20 years and almost a full percentage point less than past increases to truck tolls.

Comment

It is always curious to see how reluctant authorities in the United States are to embrace private enterprise, capitalism and free markets when it comes to roads, especially when compared with countries that many Americans would consider to be more regulated and pejoratively, socialist (e.g. France, which has had little hesitation to have a large network of privately owned highways).   The rhetoric around it is remarkably parochial (with the implication that only people from Ohio could run the road "properly").  

What is almost completely absent is this analysis is any idea of the capital value of the Turnpike. The private sector has to account for its assets, but the public sector should as well.  It should make a return on that capital value, because taxpayers' money is tied up in it.  They should understand why their money is making more than a market return or less than that, otherwise it isn't clear whether the asset is being well managed or not.  Of course the only way to get a market capital value would be to talk to the market.  What would it be worth if it was sold, unencumbered (or encumbered by specific legislation)?  It would be dependent on revenue forecasts and expected costs, then the analysis can be done as to whether the surplus, after renewals and depreciation is worth more than the expected sale price.

There is a reasonable case to be made for reducing the risk of monopolistic pricing of the Turnpike, but beyond that if pricing can be efficient, and also reflect demand, there is scope for it to improve utilisation and get better value out of the asset.

In short, it appears that retaining the asset in state ownership is a political decision based on parochial and  long term financial grounds (better for the money to stay in Ohio, and better for the state to spend the revenues rather than monetise the asset, and let the private sector enjoy the revenues).  

The estimated value of a lease was a net NPV of US$1.8 billion, but I would have liked there to be some consideration of the most radical option - selling it.  Not that this is what should be done, but that it would provide a benchmark of value, to measure others against it.  The value of the sale money can then be treated on its own merits.

What I hope is that the new Ohio Turnpike and Infrastructure Commission efficiently transitions to fully electronic free flow tolling, adopts international best practice in asset management and customer management, and so replicates as much as is possible the efficiencies the private sector would bring to its operations.  It should also apply this to how it will supervise and manage other infrastructure projects financed through the forthcoming bond issue.

However, I also hope that the broader issues of sustainable revenues for Ohio are looked at more widely.  The Ohio Turnpike is not enough in itself to generate revenues to replace declining fuel tax yields.  Moreover,  Ohio should look at how it can leverage revenues from transit traffic and improve pricing overall to get better network utilisation, and better distribution of charges across users.  

The Ohio Turnpike may not be privatised now, or in the near future, but it should raise the debate for others. Why should states own roads, especially toll roads?  What are the deadweight unseen costs of maintaining that ownership?

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