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Abstract
Recent concessions in France and in the USA have resulted in a dramatic difference in the valuation placed on the toll roads; the price paid by the investors in France was 12 times current cash flow whereas investors paid 60 times current cash flow for US toll roads. In this paper, we explore two questions: what accounts for the difference in these multiples? and what are the implications with respect to the public interest? Our analysis illustrates how structural and procedural decisions made by the public owner affect the concession price. Further, the terms of the concession have direct consequences that are enjoyed or borne by the various stakeholders of the toll road.
Acknowledgements
Germà Bel thanks the Spanish Commission of Science and Technology for financial support (SEJ2006‐04985). Both authors are thankful to Fundació Abertis for the support provided. This paper was presented at the 2007 Conference of the International Bridge, Tunnel and Turnpike Association, Vienna, and at a Seminar in the University of Barcelona. We have received useful comments and suggestions from Daniel Albalate, Toni Brunet, Joan Calzada, Laia Domènech, Xavier Fageda, Rick Geddes, Tony Gómez‐Ibáñez, Jordi Graells, Enric Pérez and Kenneth Small. Comments and suggestions by three anonymous referees have been very useful as well.
Notes
1. Financial factors have been the primary reason for privatizing motorway concessions over the last decade. In Italy, Autostrade was transferred to the private sector in 1999. Autostrade’s concession was scheduled to expire in 2003. To maximize privatization proceeds the concession was extended until 2038 and the level of tolls was maintained (and further adjusted for inflation), although most investments had been amortized before 1999 (Greco and Ragazzi, Citation2005). Financial engineering motivations have also been responsible for the use of payment schemes like shadow tolls (Shaoul et al., Citation2006).
2. It is worth noting that only 4 billion obtained from the sale of the French concessions have gone to the agency of infrastructures—AFITF. The last year when these funds are available is 2008, and AFITF funds after 2008 are expected to decrease (SÉNAT, Citation2008, pp. 15–16). Overall, only 27% of total revenues from privatization (14.8 billion) have been allocated to AFITF; the rest went to the state budget.
3. The industrial plans laid out the operating strategy and assumptions that underpin the bid. The French government has a representative in the board of directors of each concession (without voting rights), whose function is to assure that the industrial plan is effectively implemented.
4. Uncertainty about the cash flow may differ between projects because of inherent differences in the projects, as pointed out by a referee. However, we think this does not affect our study, since all the roads we analyse are mature facilities and therefore have similar operating and capital requirements. And, more importantly, they have similar ‘risk’ profiles. In fact, our analysis is based on price expressed as multiple of EBITDA.
5. Instead, we do not see any influence of differences in tax regimes on the bids. First, US Federal Corporate taxes and French corporate taxes are the same (35%). There is a small state tax in the USA (around 5%), but the effect is small. Second, due to the ability of the US concessionaires to depreciate the leased assets, all income is effectively sheltered. Hence, taxes for the US deals are irrelevant. If there is a tax income liability associated with the French concessions, this may have some small impact on price. That said, it is worth noting that all valuations were done on earnings before taxes and depreciation basis.
6. As discussed previously, the appropriate discount rate is the weighted cost of capital that is used to finance the concession price. In the absence of leverage constraints, this cost of capital is a function of the bidders’ perception of the risk of the project; the higher the risk, the higher the cost of capital. This assumes that all of the bidders have essentially the same access to capital markets.
7. Differences in availability of alternative free roads might contribute to the less optimistic forecasts for tolls and traffic in France, particularly as compared with the Chicago Skyway.
8. The concept of the Winner’s Curse was first discussed in Capen et al. (Citation1971). Thaler (Citation1988) contains a useful explanation of this concept and its applications.
9. Even if Macquarie and Cintra ‘over paid’ for these concessions, their downside risk is minimal, from a corporate perspective. This is due to the relatively small size of the deals, and the fact that, in the case of Skyway, they were able to structure the financing so that it shifted much of the financial risk to the lenders using leverage, bond insurance and liberal dividend provisions. This, together with the wining bidders’ desire to acquire good reputations and leading positions as industrial players, makes us believe that expectations of renegotiation did not play a significant role in the Skyway and ITR cases. In this sense, those operations are not comparable to those in Latin American that have caused renegotiation to strongly emerge in the literature (Guasch, Citation2004; Guasch et al., Citation2007, Citation2008).
10. Consumers’ surplus is the difference between what a consumer is willing to pay for a good and the actual price of the good. Producer surplus is the difference between what a producer obtains from selling a good and the cost involved in producing it.
11. Taxpayers’ surplus is the difference between the utility derived from public services and the costs implied by taxation to pay for the services. It is worth recalling that setting tolls is not a ‘zero sum game’ between taxpayers’ surplus and consumers’ surplus. We do not go deeper into the workers’ perspective. The work force in tollways is relatively small (and therefore has small impact on the overall welfare), so we believe we can safely disregard this variable.
12. An optimal toll should be set at the level that equals the social marginal cost (e.g. congestion costs, apart from externalities). However, toll setting procedures in France and the USA have no relationship to social marginal cost. As happens in natural monopoly pricing, higher tolls do not simply shift benefits from consumers to producers: they also reduce total social welfare. This being said, we recall that the economic basis of toll setting, even if a very relevant issue, is not the central focus of our paper.
13. The use of the proceeds is a factor in whether these sales are ‘good public policy’, but it is not a differentiator between the two approaches.
14. Theoretically, the taxpayer ‘windfall’ is not a risk even if the deal is not financially sustainable. But, in practice, costs are likely to be borne by taxpayers if the concessionaire defaults. Also, there is a situation in which a higher price and greater leverage could have a long‐term detrimental effect on taxpayers; in Skyway, the City can terminate the concession early, but only upon payment to concessionaire of the fair market value of the concession (but not less than the value of the debt outstanding). To the extent that concessionaire keeps the asset fully leveraged, this termination option will be expensive for taxpayers.
15. Macroeconomic indicators in the USA show that CPI growth is lower than nominal GDP per capita growth. In the ten years before Skyway privatization, only in 2002 was the CPI higher than nominal GDP per capita.
16. It could be argued that purchasing power by users is better measured by the change in nominal GDP per capita than by CPI. In our context, it must be recognized that traffic on the Chicago Skyway is used for commuting purposes disproportionately by people who live outside Chicago and work in the city. In this context, it is important to recall that real wages in the USA have not grown in the last three decades, and by the middle of the present decade they were lower in real terms than those in the 1970s. At present, real wages stand at the same level as those of the middle 1980s (source: U.S. Bureau of Labor Statistics).