This P3 model involves the long term lease of existing, publicly-financed toll facilities to a private sector concessionaire for a prescribed concession period during which they have the right to collect tolls on the facility. In exchange, the private partner must operate and maintain the facility and in some cases make improvements to it. The private partner must also pay an upfront concession fee.
Long term leases are procured on a competitive basis, with awards going to the qualified bidder making the most attractive offer to the sponsoring agency. The most important criterion for the award of a long term lease concession generally is the amount of the concession fee. Other criteria may include the length of the concession period and the credit worthiness and professional qualifications of the bidders.
Long-term highway lease transactions can be grouped into the following three categories:
Through 2012, five major long term lease transactions have closed in the United States.
|Facility||Date||Length||Lease Term||Upfront Lease
|Chicago Skyway (Chicago, IL)||January 2005||7.8 miles||99 years||$1.83 billion||Value extraction||O&M|
|Pocahontas Parkway (Richmond, VA)||June 2006||8.8 miles||99 years||$611 million||Hybrid||O&M
Upgrade to electronic tolling
Construction of the 1.58-mile Richmond Airport Connector
|Indiana Toll Road (Northern IN)||June 2006||157 miles||75 years||$3.85 billion||Value extraction||O&M|
|Northwest Parkway (Denver, CO)||November 2007||8 miles||99 years||$303 million
$40 million (placed in escrow; release contingent on parkway extension within specified timeframe)
$200 million administrative fee (total over lease term, inflation adjusted)
$60 million contribution toward parkway extension within specified timeframe
|Puerto Rico PR-22 and PR-5 (Northern PR)||September 2011||54.5 miles||40 years||$1.08 billion||Value extraction||O&M
$356 million in upgrades and safety improvements
There are a number of factors that influence the use of long term leasing arrangements. For the public sector the most basic factors are the political and financial situation of individual states and local jurisdictions. When these two factors coincide, local leaders may make the decision to consider leasing arrangements. In cases where there is not a pressing financial need, local decision makers may explore the possibility of leasing toll road assets to ascertain whether the terms of a potential transaction would be attractive enough to move forward with an actual transaction. For private investors, the primary motivation for pursing leasing opportunities is the potential to gain an adequate rate of return on their investment.
Moody's Investors Service has identified several characteristics that may make certain toll facilities good candidates for long term lease arrangements. These include:
Established toll roads that have political limits on toll raising ability
Roads owned by governments that are short of capital to fund government programs
Roads with a significant number of non-resident users, such as truckers or tourists, who may be less able to effectively protest against privatization
Roads that are financially distressed but which may present a strategic business opportunity for concessionaires seeking to enter the U.S. market
The potential benefits of long term lease transactions include:
Several policy issues associated with long term leases need to be assessed carefully to ensure a beneficial outcome. One of the most important is the potential undervaluation of an asset to be leased. As was witnessed with the Chicago Skyway procurement where the value of the winning proposal was 2.6 times greater than that of the next highest bid, competition can help prevent undervaluation. Toll road owners considering leasing options should also seek the advice of financial advisors who can identify fair market values of lease transactions based on the anticipated revenue streams.
Other policy issues can be addressed in the legal terms and conditions underpinning lease transactions to ensure a fair outcome and protect the public. Such issues may include:
The significance and implications of each of these issues would vary depending on the facility considered and various means exist for addressing or mitigating their effects. For example, a lease's terms and conditions can preserve some public control over toll rates. Similarly, caps can be place on the private sector's rate of return. As with the Indiana Toll Road transaction, other regulations can be enacted to ensure that the lease proceeds are used to support transportation improvements in prescribed areas. Governments also provide oversight of the private sector partner's performance as well as include capital reinvestment, availability, safety, and customer services requirements in their lease agreements. Public agencies executing long term lease agreements can protect the public interest when they use these tools effectively.