A toll too far?

Abertis’ win of the bid to operate the Pennsylvania Turnpike, the biggest toll road concession in US history, is spectacular. It’s a major strategic victory over local political will. But it comes at a price.

Rival Spanish operator Cintra, which already has several US toll roads, only initally bid US$8.15 billion for the concession. That’s far short of the US$12.8 billion that won Abertis its 75 years to operate the turnpike. The nearest bid was US$700 million less and many analysts are asking whether it’s a case of irrational exuberance on the side of the Barcelona-based company.

That’s despite some in local government saying that they were not impressed with the bid numbers and wanted more.

Will hike deter drivers?

Abertis now has to convince that the immediate 25% hike in the toll will not diminish traffic after four years without an increase. With Americans facing a tough economic patch and possible recession, combined with gas pump prices hitting record levels, that’s something of a gamble. The economic downturn caused by the housing price slump and subsequent credit crunch has hit American pockets hard. Gas prices too have a long way to rise in the US, which has got used to cheap energy.

The Pennsylvania Turnpike lease allows for the immediate increase and then a further 2.5% or an amount equivalent to consumer price inflation after that. The metric is between how much traffic falls because of the toll increase and the allowed toll rise over the next few years.

The next year is going to be the most risky.

Projections by US analysts point to a 13% to 15% fall in traffic on the road between Pittsburg, Harrisburg, Scranton and Philadelphia due to the toll increase. Put that against Abertis’ forecast that revenue will rise to US$780 million next year from the present US$607 million and questions have to be asked as to whether the numbers stack up?

The next step is getting Pennsylvania’s state legislature and elsewhere to approve the deal. Already there are grumbles and cut-and-thrust politics threatening to scupper Abertis’ hard-fought win. Democrats in the House and Senate oppose the scheme while Republicans appear to be more willing.

Backing from the governor

Traditionally the political will has been against privatisation of state-run assets. Supporting the bid, Pennsylvania governor Ed Rendell stressed that this is “a lease, we will maintain power... it is not a sale.”

But the concession has the virtue of providing US$1.1 billion annually to the state government, based on a 12% rate of return.

Those who want Abertis to gain approval must shout loudly about individual road and bridge improvements in each politician’s district. Pennsylvania has 6,000 structurally deficient bridges and 9,000 miles of highway that need renovation, and this deal will go some way to plug the funding gap.

The other carrot is that Pennsylvania will be able to abandon the unpopular plan to introduce tolls to Interstate 80 (I-80), which were expected to generate US$500 million per year for infrastructure improvements. Businesses and people that use the I-80 will be pleased with the Abertis concession, which could help it to make friends in high political places, allowing it a smoother passage through the legislature.

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