An analysis of the current investment trend in the U.S. toll road sector

Abstract

In recent years, long term concessions through public-private partnerships (PPP's) in the US toll road sector have emerged and are expected to become a phenomenon in the near future. Up until now, only two large scale transactions, the $1.83bn Chicago Skyway and $3.85bn Indiana Toll Road (ITR) have been completed and a $12.8bn Pennsylvania Turnpike deal has just been accepted (There are numerous other much smaller existing toll road concessions in the US not covered in this paper). One interesting observation is that for the Skyway and ITR deals, the Macquarie and Cintra duo overbid the second bidder by an astonishing 161.4% and 26.2% bid spread. At the same time, the famous "Macquarie model" was recently criticized by scholars as financial engineering based and as being unsustainable (Lawrence and Stapledon, 2008).In this thesis, the financial engineering based funds led by Macquarie have been singled out and labeled as "intra-marginal investors", whose asset investment value1 (IV) is typically higher than the asset market value (MV) and have a tendency to overbid. Other private infrastructure funds and toll road developers have been categorized as marginal investors, whose investment value equals market value. The hypothesis is that for intra-marginal investors, the investment value of the asset is the value created through financial engineering by using the asset as the tool to speculate on. While for marginal players, the investment value is close to the fundamental value of the asset, which depends on the future income, but, investment constraints have caused the differences of investment incentives among them.

(cont.) The main findings of this thesis are: (1) Within a project consortium formed by marginal investors, private infrastructure funds and toll road developers have a short-term and long-term vision mismatch; (2) For intra-marginal investors, the asset's "nominal" IV created through financial engineering can be significantly higher than the asset's real MV. However, these investors tend to pay IV because the financial engineering system has set up an endogenous relationship between their fee profit and the price they pay, thus creating a big bid spread. (3) The current credit crunch has weakened the position of intra-marginal investors and will start a market correction period, leading the asset price toward MV.