Transurban’s Low Cost of Capital

There’s a very interesting story lurking within Len Gilroy’s column, “Another One Bites the Dust.” Gilroy tackles the idea that privately financed public-private partnerships are a bad deal for motorists because the private sector can’t avail itself of tax-free bond financing like state and municipal governments can.

In the last few weeks, the Pennsylvania Turnpike Commission issued $177 million in tax-exempt bonds at a 4.89 percent interest rate. Transurban, the major investor in the Interstate 495 HOT lane project, went to financial close earlier this month on $589 million of 40-year, tax-exempt bonds with an average interest of 4.97 percent, and $587 million in TIFIA loans at 4.45 percent for 40 years.

Bottom line: Transurban has a lower cost of capital than the Pennsylvania Turnpike Commission.

How did Transurban get such low financing? Writes Gilroy: “Because private investor-operators can tap into both federal tax-exempt financing vehicles and robust global capital markets, they can structure sophisticated financial arrangements at highly competitive rates that can neutralize the public financing’s supposed advantages.”

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  1. Anonymous Avatar

    Well, a red herring is a red herring. If the pblic sector can neutralize the public secotrs financing advantage, they still can’t do much better.

    Saying the private sector can achieve low rates by digging into the federal pocket isn’t really saving us much, is it?

    And if they need sopisticated (read risky) packages to do that, how are we better off?


  2. Anonymous Avatar

    Hmmmm…”robust capital markets”…”…structure sophisticated financial arrangements at highly competitive rates….”?

    My, that sounds very similar to those “investment vehicles backed by securitzed mortgage instruments…” that some of our good friends were touting not too long ago.

    You’ll have to forgive me if I have become a little suspicious of new magic financial bullets.

    Adam Smith

  3. “Clearly the professors who authored the Pennsylvania report were way off target — nearly two percentage points — with their estimate of private sector borrowing rates.”

    This is really deceptive stuff. We are not talking about “private sector borrowing rates” here. The bonds that the Australians will be using are public sector subsidized bonds.

    There’s hardly a difference between making the bonds tax exempt and the government charging taxes and then cutting rebate checks. There is a cost to the public for this method of financing — and it’s scored against the budget at about $100 million (I’m guessing).

    This form of financing also creates a distortion of the private capital market. There’s no such thing as a free lunch — someone has to pay for it, and the payees here are taxpayers (the winners are investors).

    The main point of the argument, that the cost of financing has been equalized is partially correct. The cost of financing is made to appear equal through subsidy.

  4. Anonymous Avatar

    Yep, sounds like yet another paid flack slinging chum to the masses.

  5. “Clearly the professors who authored the Pennsylvania report were way off target — nearly two percentage points — with their estimate of private sector borrowing rates.”

    I also take issue with this statement. It implies that PSU finance professors don’t know how to add or that they somehow don’t understand how things work in the real world. According to the press release USDOT put out: “tax-exempt private activity bonds were issued for the first time ever” for this project.

    So it’s pretty spin-tastic to imply toll road critics are somehow “myth” peddlers because they didn’t factor in something that has never been done before.

    Note: The Democratic Caucus report is also filled with spin designed to keep the tolls as a fountain of state-run patronage jobs.

  6. Larry Gross Avatar
    Larry Gross

    I pretty much agree.

    but I think the irony here is thick as hen snot.

    Your Federal Gas Tax is what is being used to subsidize these Toll Roads.

    How will you “unelect” the folks who have decided to use your gas tax to enrich the Australians with American Tax Dollars and use 3 cents of the 16 for transit?

    Let me know which Congressmen and Senators you plan to target for their votes to support transit and tolls with your gas taxes.

  7. Larry Gross Avatar
    Larry Gross

    The Federal Gas Tax is the reason why Tysons to Dulles rail – in it’s current developer-laden configuration has “legs”.

    Take away that Billion dollar Federal Gas Tax subsidy and what happens to all those plans for extreme FARs in Tysons – because then you’re talking about the first billion dollars coming from local tax dollars.

    this thread entitled: “Transurban’s Low Cost of Capital” should have a subtitle:

    “What happens when your Federal Gas Tax money gets sent to Washington”.

    That’s the essential problem for the folks who believe that the gas tax is a better funding mechanism than tolls.

    Mary Peters, the TOP DOT, says that the Federal Gas Tax should be done away with and let the States decide if they want to replace it at the local level.

    I would submit that if that 18 cents – 3 cents went to Washington for “helping” other places and 15 stayed local.. that the priorities for spending it would be dramatically different.

    Here’s a test.

    How much money does the 18 cent Fed Gas Tax generate in NoVa?

    What has it been spent for in NoVa?

    If you don’t know the answer to the above questions – why in the world would you support that tax?

  8. “Mary Peters, the TOP DOT, says that the Federal Gas Tax should be done away with”

    You say that as if her being a former toll road executive has nothing to do with it.

    “What happens when your Federal Gas Tax money gets sent to Washington”

    You are certainly right on this point, but I disagree that “local money to local uses” is the right approach. Geographic diversion of money is good, as long as it’s not carried to extremes. (I.e., Ted Stevens’ Alaska corruption — can’t wait till he’s behind bars).

    Diversion of gas tax to prop up Australian boondoggles: bad. Diversion for transit: bad. So I’d modify your proposal and say 5 cents to pay for interstates in Montana and places where nobody lives & fund the monstrous US DOT bureaucracy (I’d love to reform it, but those plans never go far), and then let the states raise their gas tax 13 cents. No change in what taxpayers pay, but starve the bureaucracy so that it can’t use excess cash as a social engineering plaything.

    “How much money does the 18 cent Fed Gas Tax generate in NoVa? What has it been spent for in NoVa?”

    A $700m? for Dulles rail and $1.2 billion in subsidy (loan+bond) for the Beltway HOT.

    But besides that, it’s opaque. You’re not supposed to know how your money is being wasted.

    “How will you “unelect” the folks who have decided to use your gas tax to enrich the Australians with American Tax Dollars and use 3 cents of the 16 for transit?”

    I’ve been trying to find out where John McCain stands on these issues, and as far as I can tell he doesn’t. Certainly his gas tax holiday proposal suggests he doesn’t buy into the MYTH that the trust fund is broken. But then again, Mary Peters is a prominent Arizonan that McCain endorsed. (Rightly so: aside from tolls, she’s an incredible upgrade from Mineta.) The $1 billion in tax money US DOT is handing out to for-profit tolling boondoggles is the kind of corporate pork that McCain sometimes opposes. There’s hope there.

    Obama endorsed the Bloomberg congestion charge proposal, so he’s on record. On this, he’s the candidate of status quo.

    Overall, I’m not hopeful.

  9. Anonymous Avatar

    Local money for local uses just guarantees you won’t have enough money to do anything. Which is the whole point. It is another no-growth tactic, similar to APF.


  10. Larry Gross Avatar
    Larry Gross

    … and local money – sent elsewhere – will accomplish “anything”…

    I would submit that whatever gains that we might get with the efficiency of the gas tax – that we lose far more on the “other end” and that in the end – dollar for dollar – the 15% “overhead” for tolls is a bargain compared to the “overhead” for the Federal Gas Tax.

    Bob cited money that NOVA gets from the gas tax but of the amount that NoVA GOT – .. how much did NOVA residents put into the gas tax?

    Bloggers here seem convinced that the State takes more away from NoVa than NoVa gets back.

    Why would we assume that the reverse takes place with the Fed Tax?

    or here is any irony also.

    3 cents of the 18 cents Fed Tax goes to transit.

    Transit normally only goes for urban areas – so all those folks who are expecting “help” with their roads in Montana – 3 cents of ever gallon of gas they buy – goes to pay for Tysons to Dulles Rail – the very thing that Bob says Kaine is responsible for letting happen.

    Could it be that the Feds – your Congressman and Senators are the ones really responsible for taking 3 cents away from every non-urban purchaser of gasoline to fund boondoggles like Dulles Rail?

    Talk about a sweet irony.

    re: McCain – why bother – between now and election, he’ll likely change his position a half dozen times. McCain is McBush wearing a chameleon costume.

  11. At least we can agree more or less on the problem (aside from geographic diversion). But tolls are hardly a solution. How’s Kaine paying for the Dulles rail boondoggle? Tolls.

    So let’s not kid ourselves that tolls are anything other than a big, fat pot of money for politicians to play with — no different from the gas tax, just we end up paying more.

    The only possible solution is a constitutional amendment to limit the power of the legislature to divert money from motorists to transit, etc. Until then, the federal and state “highway trust funds” are as big a joke as Social Security.

  12. Larry Gross Avatar
    Larry Gross

    you sure are a hard learner…

    once you give that money to someone else – they’ll tell you all the lies you want to hear… lockbox… “rules”, “laws”….

    …. but in the end … they’re going to decide how to spend it.

    How about this:

    Multiple-Choice – pick your favorite

    1. – do away with the 17 cent gas tax – no more tax – permanent “holiday”

    2. – keep the 17 cents but let the State have it instead

    3. – keep the 17 cents but let Fairfax spend it

    4.- keep it yourself and decide how you want to spend it

    Ray’s already spoke – he thinks you should give it to the Feds.

    Your solution so far – give it to the Feds/State but make them promise to not waste it.

    I hope you are smiling as you read the last sentence.

  13. Anonymous Avatar

    “Ray’s already spoke – he thinks you should give it to the Feds.”

    It is a Federal tax. The Feds are responsible for Federal priorities, which might not be the same as Fairfax priorities.

    On the other hand, I’d hate to have to wait until Fairfax funds came up with enough money to build the Springfield interchange or the WW Bridge.

    Do I know how my particular two cents got spent, Nope. There is a lot of stuff I don’t know. The hardest thing about management is letting your experts do their job. Why do I care if my two cents went to roads Montana, and two cents from Montana came here to Metro?

    Will the Feds waste it? Not any more than someone else, given the system we have. They will ask for proposals on how to spend their money, and make the best choice, given the special interests and politics at hand. The ones with the best politico-social argument will win.

    Have a little faith. it is public participation at its best. All those proposals and hearings cost money, but is that a waste?


    Larry is trying to confuse the local (state) issues by dragging in the Feds.

    We bring this on ourselves by frettng over who pays for what, and whose costs are higher.

    I know tht if I decide to drive to Montana tomorrow the road will be there. That’s my two cents worth.


  14. Anonymous Avatar

    Thank you Adam Smith – unfortunately so few will get the significance!

  15. Larry Gross Avatar
    Larry Gross

    re: “Larry is trying to confuse the local (state) issues by dragging in the Feds.”

    I’m pointing out that when the Feds told you what you wanted to hear about Montana Roads

    …at the same time they were also not telling you about other ways of spending your taxes on things you would not approve of….

    … when you agree to pay the Fed Tax – you agree to let them decide what to spend it on…

    Yes.. you got your Springfield Interchange, and your Wilson Bridge but you also got your Dulles Rail (so far) and HOT Lanes.

    So.. while they were making you feel good about helping those Montanans with their road needs they were also planning to give an Australian company subsidized financing so they could charge you a buck a mile.

    Is it worth it?

  16. Anonymous Avatar

    “they were also not telling you about other ways of spending your taxes on things you would not approve of….”

    Why would I ever expect that the entire federal government would do only things that I approve of?

    Work for what you want, work against what you don’t want, learn to live with the difference.


    “you also got your Dulles Rail”

    I think it is pretty clear that they go jawboned into that: their first decision was a no-go. The economics were “improved” by taking out a bunch of stuff – which is going to have to get built later.

    In science and technical development, you first issue requirements, then you set test standards to see if requirements are met, THEN you design the project , and tests to ensure the standards, and therefore requirements, are met.

    What they did here was eliminate requireents to meet the cost effectiveness bogey.

    I’m pretty certain the same thing happens over at EPA. Requirements and environmental “savings” are juggled to fit some cost effectiveness bogey.

    So it boils down to WHO decides what is cost effective, just as you have noted in our other discussions. We DO have procedures for working these out, but unfortunately they are highly political in nature – not strictly evidence based.

    If you beleive that the political process results in what the most people want, then no problem. If you believe that what people want is the most bang for the most people for the minimum buck, then the political process for determining costs and benefits, as it stands now, is inadequate.


    Is it worth it?

    Well, HOT lanes are coming, and in the final analysis they will be THE TEST. We already tested HOV lanes for a number of years and found they came up short.

    I thinke we can generally agree that the more people per vehicle, the more efficient it is. Now the only argument is what size of vehicle, what frequency of operation, what comfort and sefety levels do we set as requirements. Train, Bus, Trolley, Auto, Bicycle? Or some optimum mix? How do we determine the optimum mix?

    If we agree that more people per vehicle is better, then HOT lanes should be rejected out of hand, because they do just the opposite. They charge some people for traveling alone, and not others. I can’t see anything about this that makes the slightest sense, but I don’t know everything.

    We will build the damn things and run them for 20 years, just like we did HOV’s – on a political whim, and eventually we will come to a consensus of

    Is it worth it?

    Spending $2 billion is a hard way to find out.

    And, if it “works” in the sense that it throws off revenue, we will STILL have people we don’t necessarily agree with spending it.


  17. Larry Gross Avatar
    Larry Gross

    RH – no.. not whether or not HOT lanes are worth it…

    is the PROCESS by which someone takes your Federal gas tax and decides to use it to subsidize financing for HOT lanes…

    is that PROCESS “worth” having someone else decide what to do with your Gas Taxes?

    If they want to INCREASE your gas taxes and they intend to use the increase for more TOLL ROAD subsidies would you AGREE to a higher gas tax?

    What if they told you that they wanted to raise the gas tax to better help Montana when all along they were planning to use the increase for more toll roads?

    would raising the gas tax be “worth it” to you?

    Assuming that it would not be – is it better to not let them raise the gas tax at all if you cannot trust them?

    or do you think you could say “raise my taxes but don’t spend it for things I don’t agree with”?

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