Bloomberg News

Kasich Exploring Ohio Turnpike Lease as Neighbors Question Price

August 12, 2011

Aug. 12 (Bloomberg) -- Governor John Kasich said he is convinced that leasing the Ohio Turnpike is “a winner,” even as current and former governors in neighboring states say they doubt he would get as much as they did for their toll roads.

Indiana Governor Mitch Daniels said it’s “unreasonable” for Ohio to expect the $3.8 billion investors paid for his toll road in 2006. The $12.8 billion bid for Pennsylvania’s turnpike in 2008, which was rejected by lawmakers, likely would be less today, former Governor Ed Rendell said.

Kasich said it’s wrong to compare past deals with what Ohio may get because they were done before the 2008 financial collapse weakened the market for private leases of state assets. Ohio, which is hiring advisers to explore a lease, can still tap the 241-mile (388-kilometer) toll road’s underutilized value to pay for infrastructure projects it otherwise couldn’t afford, and will walk away from a deal if the price is too low, he said.

“We’re not disappointed with the numbers we’re hearing at this point,” Kasich said in an Aug. 4 telephone interview from Columbus. “If we get a good deal, great. If we don’t have a great deal, we won’t do it.”

Kasich, 59, a first-term Republican, declined to say how much would determine a good deal for the turnpike, which opened in 1955 and runs across northern Ohio from Pennsylvania to Indiana. He has said Ohio could get as much as $3 billion, of which $600 million would be used to pay off turnpike bonds.

Puerto Rico

The recent lease of two Puerto Rico toll roads covering 56 miles shows there is private-sector interest, said Robert Poole, director of transportation studies at the Los Angeles-based Reason Foundation, which advocates free markets and limited government.

Puerto Rico announced June 20 it will receive $1.08 billion up front plus $356 million in improvements during a 40-year lease from Goldman Sachs Infrastructure Partners II and Abertis Infraestructuras SA, Spain’s biggest toll-road operator.

The Ohio Turnpike should get as much or more interest because “other things equal, that would be a much more attractive asset to acquire than a road on an island,” Poole said in a telephone interview.

Still, it’s unlikely Ohio would get offers comparable to what was received by Indiana, Pennsylvania and Chicago’s $1.8 billion lease of its Skyway in 2005 because they were highly leveraged deals with an expectation of economic growth that didn’t materialize, Poole said.

‘Sweet Spot’

Leasing the Ohio Turnpike doesn’t make sense if the state gets less than Indiana for a longer road that’s in better shape, said Gary Suhadolnik, a Republican who was executive director of the Ohio Turnpike Commission from 2003 to 2008.

“We’re going to accept less than Indiana and giving them a better road,” Suhadolnik said in a telephone interview.

Daniels said in a July 25 telephone interview that Indiana hit a “double sweet spot” with its lease of the 157-mile toll road to fund highway and bridge projects.

The markets were favorable, and bidders were aggressive in seeking to establish themselves with such deals by offering three times the value of the road in state hands, Daniels said.

“I don’t know anybody who thinks that could ever happen again, but that leaves a lot of room for a great, great deal,” said Daniels, a two-term Republican.

Failed Deal

The bid for the 545-mile Pennsylvania Turnpike by Abertis and Citi Infrastructure Investors died because the Legislature didn’t want to lose patronage jobs at the Turnpike Commission, Rendell said in an Aug. 9 telephone interview from Philadelphia. Ohio and Pennsylvania probably wouldn’t get as good an offer today, he said.

“But could they get a good deal? I think probably yes,” said Rendell, a two-term Democrat.

It’s unlikely an Ohio deal would be structured like Indiana’s or Pennsylvania’s because prices and markets have changed since the global financial crisis, said D.J. Gribbin, a managing director for Macquarie Capital (USA) Inc. The company holds leases or operates four U.S. toll roads, including Indiana’s, and advised Puerto Rico on its deal.

Still, there is more capital available worldwide to be invested in infrastructure than available projects, and Ohio is “going about it in absolutely the right way,” Gribbin said.

Road Revenue

Ohio is soliciting letters of interest by Aug. 24 to hire a consultant team, according to a state posting. The first phase, which may last up to four months, will involve analyzing options including a lease, partial private operation and the state selling bonds backed by toll revenue, said Jerry Wray, director of the state transportation department.

If a lease is recommended, which Wray said is his first option, the second phase would involve developing a request for proposals within six months that the Legislature must approve, the posting said.

The final phase would be helping to evaluate and award a bid, with a goal to complete a deal in 18 months to two years, Wray said in an interview.

The Ohio Turnpike collected $232.2 million of toll revenue in 2010, according to the commission’s annual report. Fares were last raised in October 2009. It costs the driver of a vehicle with two axles and shorter than 7 feet 6 inches (229 centimeters) $15 to travel the full length of the road if they pay cash, according to the commission’s website.

An Ohio turnpike revenue bond maturing in February 2021 traded on Aug. 10 for an average yield of 3.26 percent, down from 4.32 percent on Jan. 18, according to Municipal Securities Rulemaking Board data compiled by Bloomberg. The bond is rated AA by Standard & Poor’s and Fitch Ratings.

Capital Needs

Fitch has a negative outlook on the debt, based in part on the need to replace the road’s original concrete base, “a project that could possibly result in significant capital or debt needs in future years that are beyond current expectations,” the company said in an October report.

Ohio expects a lease term of about 40 years, compared with Indiana’s 75-year deal and Chicago’s 99-year agreement, Wray said. It also would retain a percentage of the toll revenue over time, even if that reduces the upfront payment, he said.

Any lease contract also would restrict future fare increases and set requirements for road maintenance, Wray said.

That doesn’t reassure Dave Schuler, a truck driver from Cleveland who travels the Ohio Turnpike five times a week. Road conditions and snow removal might suffer under a private operator, he said.

Toll Fears

“I just can’t see it benefiting anyone using the toll road,” Schuler, 48, said in an interview at a turnpike service plaza in Mantua, Ohio. “I think the quality would go down and tolls would go up.”

The state’s contract plus market forces will keep tolls in line and the roadway maintained, and the experience of other states won’t deter Ohio, Wray said.

“There’s a lot of talk out there about this deal that went bad, and that deal that went bad -- some of them because of the finances, some of them because of the politics or whatever --but nothing that would scare us away from doing this,” Wray said.

--Editors: {Stacie Servetah}, {Walid El-Gabry}

To contact the reporter on this story: Mark Niquette in Columbus at mniquette@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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