Taking tolls

If state and local authorities’ price expectations aren’t met, negotiations with state legislatures can prove futile for private infrastructure investors, writes Cezary Podkul.

Last week's concurrent expiration of the $12.8 billion Citi/Abertis Pennsylvania Turnpike bid and the awarding of Chicago’s Midway Airport concession to a Citi-led consortium for $2.5 billion offered a lesson and a warning to infrastructure investors.

With approval from state and local authorities as the biggest risk for the eventual success or failure of privatisation projects, the asking price is the single best barometer to see whether putting in a bid is worth the time, money and effort.

When Pennsylvania Governor Rendell originally requested bids, a financial analysis requested by the US state determined that the net present value of a 50-year lease would be worth around $26.4 billion.

Cezary Podkul

For sceptical legislators who would eventually be asked to approve the deal, this became a steep reserve price that only solidified opposition, especially when Citi and Abertis offered half that amount for a lease that was 25 years longer. To make matters worse, other bidding consortia led by Macquarie and Goldman Sachs struggled to get past the $8 billion and $12 billion marks, respectively.

“The Pennsylvania Turnpike is arguably the most valuable asset in the commonwealth,” said Congressman Joe Markosek, the Democratic chairman of the Pennsylvania House of Representatives’ transportation committee. “With the bid they offered, they would make a huge profit over 75 years. If that’s the case, then we’ll just hang on to it,” he added.

Eventually, Abertis realised that Pennsylvania state legislators would do exactly that and so it declined to extend the deadline for them to accept the bid for a third time.

And so ends months of modeling, negotiating, due diligence and research – not to mention the millions of dollars needed to make it all possible.

Enter Midway.

During the last few days’ hearings in Chicago on the Midway airport privatisation, Chicago’s chief financial officer Paul Volpe has faced the same kind of scepticism. Some aldermen worry that the city, which many analysts expected could get north of $3 billion from the lease, is selling itself short by leasing the airport now instead of holding out to see if it can get a higher price.

“Somewhere in this deal we’re getting screwed,” one of the aldermen was reported to have said after leaving a hearing on Midway, adding: “I just can’t figure out where yet”.

While most privatisations attract scrutiny and calls for higher bids, the freshly failed turpike deal and ongoing Midway hearings serve as reminders that when there exists a huge gap between government expectations and what investors are willing to pay, investors' trip to the legislature may not be worth the gas.