Major Arguments Against Privatization Tolls Relinquishing Government Control Future Capital Improvements Business’s Interest in Maintenance – Especially Towards End of Concession No Compete Clauses Property Taxes Constructions Industry Public Entities Can Borrow at Tax Exempt/Lower Rates 1. Tolls § Toll increases are allowed at the highest of three factors: [1] o 2.00% per annum o Increase in the Consumer Price Index (CPI) – 3-3.5% o Increase nominal Gross Domestic Product per capita (GDP) – averaged greater that 7% in the last 50 years. 4-7% § If the Chicago Skyway Formula is applied to the Holland Tunnel: [2] o From it’s opening in 1927 at $1.00 to today it would be $185.13. Currently it is $6.00. o If it were based on CPI alone it would be $ 11.42. o If it were based on GDP alone it would be $49.45. o With the 2% guaranteed floor for toll increases it protects the private operator from slow economic growth but it also allows for toll increase compounding when other indicators would force tolls downward. § Operators can impose higher tolls on vehicles with 3 or more axles and during peak hours. § It is projected that Cintra/Maquarie “would have broken even around the 15th year” for the Indiana Toll Road deal. So they “committed an asset for 75 years and after the 15th year the state could have been making money on it.” [3] § Higher tolls can quickly become a cycle, in which the citizens of New Jersey bear all of the costs. o For example, the Chicago Skyway can charge higher tolls during peak hours forcing more cars onto roads without tolls. Those free roads become more congested which allows the Chicago Skyway to charge even more for providing the service of a speedy journey home. 2. Relinquishing Government Control § Cannot control where there are exits, the widening of drives, and the state would lose leverage in negotiations. § Every clause written into the privatization deal to retain some government control would lower the value of the deal. § Businesses located around exits would suffer if the operating company decided to close an exit that they deemed “unprofitable”. § July 2004 – “the consortium that owns Toronto’s 407 ETR, a 67-mile highway that relies on transponders and cameras to collect tolls, sued the provincial government to force it to deny license plate renewals to motorists who hadn’t paid their tolls.” MIG and Cintra won. [4] 3. Future Capital Improvements § No one can deny that money from privatization would go a long way to help the state of New Jersey. § What will New Jersey do once the funding is spent? § Is $20-30 Billion enough to fund projects for 99 years? o For example, in Indiana the Governor of Indiana used the $3.85 Billion to fund his ten-year transportation initiative “Major Moves”. What will the state do for funding between years 11 through 75? § Senator Lesniak wants private companies to help run the toll roads to help pay the state’s pension deficit – an already controversial initiative. [5] o What will transportation projects then do for funding? 4. Private Entity’s Interest in Maintenance – Especially Towards End of Concession § What will hold the operator accountable for maintaining the roadway? § How can the state guarantee that the Turnpike will be returned in the same, if not better, condition? § If New Jersey decided to include all these points in to the contract, will the roadway still be worth $20-30 Billion? Every restriction and clause inserted into the deal will lower the value of the lease. § What precludes New Jersey from spending the funding all at once? § “Privatizing our toll roads means they would be operated as businesses by businesses, which are beholden to stockholders, not taxpayers, and to the bottom line.” [6] § Beesley’s Point Bridge o Rent owners, including Lew Katz, purchased the bridge in 1973. In 2004 they contended that it was a “money loser” and “they don’t have the resources to maintain it”. [7] The owners closed the bridge, asked the state to resume ownership, and reneged on all of their responsibilities. o Now, a bridge that was once used to reduce congestion on Rte. 9, for easier access for emergency vehicles, and “the only means a vessel can exit inland from Mays Landing or from Great Egg Harbor and Mays Landing Rivers into the Inland Waterway or Atlantic Ocean” has closed. “This would also force many local marinas out of business.” [8] o “Emergency vehicles should not have to make a 4-mile detour when someone’s life is at risk.” [9] 5. No Compete Clauses § “Private road operators often insist on noncompete clauses that limit governments from expanding nearby roads.” [10] § “In 2003, Orange County bought back the lease for a set of pay-to-drive express lanes in the median of Route 91 just so it could finally expand the adjacent road.” [11] 6. Property Taxes § Currently the Parkway and the Turnpike do not pay property taxes in the municipalities that they run through because they are government-operated roadways. § If the roadway’s ownership were transferred to a private entity would the municipalities still not want to collect property taxes? § Would the operating consortiums be willing to pay this expense? If not, how does the state of New Jersey rectify the municipalities’ interest in collecting property tax? § PNC Arts Center Court Case – Judge Cuskin 7. Construction Industry § A private company does not have to follow the public bidding requirements that are currently in place. Therefore, companies can grant contracts to anyone they want. o They can choose the cheapest contractor who will perform the lowest quality of work. o Joseph M. Giglio Jr. a proponent of privatization has said, “Public agency managers [are] … usually restricted to a small group of suppliers who have mastered the intricacies of government contracts. This and the avoidance of ‘waste, fraud, and abuse’ means higher costs that get built into the price of every purchase contract.” [12] § Higher quality generally implies a somewhat higher cost. § I would rather a company that knows New Jersey’s needs than one who would do a substandard job for a cheaper price. o They can only employ construction companies that are their subsidiaries. o “Cintra’s 2005 annual report describes the company as ‘one of the world’s leading private transportation infrastructure developers’, and reassures investors that it offers … ‘limited competition.’” [13] § MIG once owned 40% of Cintra, a Spanish company. § MIG-Cintra is the same consortium that leased both the Indiana Toll Road and the Chicago Skyway. § According to New Jersey Next Stop in 2004 the construction industry employed approximately 164,550 New Jerseyans. § The projected employment growth from 2002-2012 is on average 13%. [14] § Since it is a deal with a private entity the public no longer has access to the terms of the contract. There is a loss of transparency. 8. Public Entities Can Borrow at Tax Exempt/Lower Rates § The state can borrow money at a rate of 4-½%. § Private entities borrow money at a rate of 6-½%. § There is a difference of 2%. § Private capital is taxable. § We would therefore be allowing a private entity to profit from an arrangement the state could do cheaper. Points of Interest 1. Foreign Ownership § “Privatization promises a quick fix – and a way to outsource difficult decisions, like raising tolls, to entities that don’t have to worry about getting reelected. More often than not, those entities are foreign.” [15] o Most privatization transactions are with foreign companies because they have years of experience of leasing toll roads in countries like South America, Europe, and Australia. § Are there any American companies that are willing and capable of such an undertaking? o Phyllis Schlafly, a writer for a conservative publication Human Events, said “U.S. citizens must pay tolls to foreign landlords for the next two or three or even four generations.” [16] o Can easily compare the selling of our national roadways to foreign entities to Dubai and the recent controversy over selling our ports. § Indiana Toll Road: “Any money generated from the operation of this road will be sent overseas until 2081 (more than $100 billion), long after we have used up sale proceeds ($3 to $4 billion). The foreign consortium has told investors that it expects to operate the road at a 13% profit. [17] 2. The Goldman Sachs Connection § Governor Corzine used to be CEO of Goldman Sachs. § Goldman Sachs received $9 million in fees for the Chicago Skyway deal and over $20 million on the Indiana Toll Road deal. § “Like a real estate agent representing both buyer and seller, Goldman Sachs simultaneously urges governments to privatize highways, advises them as they structure the deals, and buys a piece of the action.” [18] § Quotes: o “I think that increasingly the public feels like what’s driving politics, what’s driving these decisions, is multinational corporations and deal-makers like Goldman Sachs, Merrill Lynch, and Morgan Stanley. They’re the ones making tens of millions of dollars ultimately at the public’s expense.” [19] o It does seem odd that they are effectively teeing up assets for their corporate clients to buy. In most situations, that wouldn’t be deemed ethical.” [20] [1] Then there were two... Indiana Toll Road vs. Chicago Skyway; NW Financial Group, LLC [2] The Chicago Skyway Sale: An Analytical Review; NW Financial Group, LLC [3] Mother Jones; Shulman [4] Mother Jones; Shulman [5] Selling Off the Turnpike; Robert Poole & Peter Samuel – The New York Post, March 28, 2006 [6] The Daily Journal – August 23, 2005 [7] Toll Bridge Owners Mum on Repairs; Richard Pearsall – Courier Post [8] Assemblyman Jeff Van Drew [9] Assemblyman Jeff Van Drew [10] Mother Jones; Shulman [11] Mother Jones; Shulman [12] Private Roads and Public Benefits; Joseph M. Giglio Jr. [13] Mother Jones; Shulman [14] New Jersey Next Stop [15] Mother Jones; Shulman [16] Mother Jones; Shulman [17] Private Doesn’t Serve Public; B. Patrick Bauer – USA Today, July 5, 2006 [18] Mother Jones; Shulman [19] Dave Menzer, an organizer at Citizens Action Coalition [20] Dennis Enright, NW Financial, LLC
Major Arguments Against Privatization
1. Tolls
§ Toll increases are allowed at the highest of three factors: [1]
o 2.00% per annum
o Increase in the Consumer Price Index (CPI) – 3-3.5%
o Increase nominal Gross Domestic Product per capita (GDP) – averaged greater that 7% in the last 50 years. 4-7%
§ If the Chicago Skyway Formula is applied to the Holland Tunnel: [2]
o From it’s opening in 1927 at $1.00 to today it would be $185.13. Currently it is $6.00.
o If it were based on CPI alone it would be $ 11.42.
o If it were based on GDP alone it would be $49.45.
o With the 2% guaranteed floor for toll increases it protects the private operator from slow economic growth but it also allows for toll increase compounding when other indicators would force tolls downward.
§ Operators can impose higher tolls on vehicles with 3 or more axles and during peak hours.
§ It is projected that Cintra/Maquarie “would have broken even around the 15th year” for the Indiana Toll Road deal. So they “committed an asset for 75 years and after the 15th year the state could have been making money on it.” [3]
§ Higher tolls can quickly become a cycle, in which the citizens of New Jersey bear all of the costs.
o For example, the Chicago Skyway can charge higher tolls during peak hours forcing more cars onto roads without tolls. Those free roads become more congested which allows the Chicago Skyway to charge even more for providing the service of a speedy journey home.
2. Relinquishing Government Control
§ Cannot control where there are exits, the widening of drives, and the state would lose leverage in negotiations.
§ Every clause written into the privatization deal to retain some government control would lower the value of the deal.
§ Businesses located around exits would suffer if the operating company decided to close an exit that they deemed “unprofitable”.
§ July 2004 – “the consortium that owns Toronto’s 407 ETR, a 67-mile highway that relies on transponders and cameras to collect tolls, sued the provincial government to force it to deny license plate renewals to motorists who hadn’t paid their tolls.” MIG and Cintra won. [4]
3. Future Capital Improvements
§ No one can deny that money from privatization would go a long way to help the state of New Jersey.
§ What will New Jersey do once the funding is spent?
§ Is $20-30 Billion enough to fund projects for 99 years?
o For example, in Indiana the Governor of Indiana used the $3.85 Billion to fund his ten-year transportation initiative “Major Moves”. What will the state do for funding between years 11 through 75?
§ Senator Lesniak wants private companies to help run the toll roads to help pay the state’s pension deficit – an already controversial initiative. [5]
o What will transportation projects then do for funding?
4. Private Entity’s Interest in Maintenance – Especially Towards End of Concession
§ What will hold the operator accountable for maintaining the roadway?
§ How can the state guarantee that the Turnpike will be returned in the same, if not better, condition?
§ If New Jersey decided to include all these points in to the contract, will the roadway still be worth $20-30 Billion? Every restriction and clause inserted into the deal will lower the value of the lease.
§ What precludes New Jersey from spending the funding all at once?
§ “Privatizing our toll roads means they would be operated as businesses by businesses, which are beholden to stockholders, not taxpayers, and to the bottom line.” [6]
§ Beesley’s Point Bridge
o Rent owners, including Lew Katz, purchased the bridge in 1973. In 2004 they contended that it was a “money loser” and “they don’t have the resources to maintain it”. [7] The owners closed the bridge, asked the state to resume ownership, and reneged on all of their responsibilities.
o Now, a bridge that was once used to reduce congestion on Rte. 9, for easier access for emergency vehicles, and “the only means a vessel can exit inland from Mays Landing or from Great Egg Harbor and Mays Landing Rivers into the Inland Waterway or Atlantic Ocean” has closed. “This would also force many local marinas out of business.” [8]
o “Emergency vehicles should not have to make a 4-mile detour when someone’s life is at risk.” [9]
5. No Compete Clauses
§ “Private road operators often insist on noncompete clauses that limit governments from expanding nearby roads.” [10]
§ “In 2003, Orange County bought back the lease for a set of pay-to-drive express lanes in the median of Route 91 just so it could finally expand the adjacent road.” [11]
6. Property Taxes
§ Currently the Parkway and the Turnpike do not pay property taxes in the municipalities that they run through because they are government-operated roadways.
§ If the roadway’s ownership were transferred to a private entity would the municipalities still not want to collect property taxes?
§ Would the operating consortiums be willing to pay this expense? If not, how does the state of New Jersey rectify the municipalities’ interest in collecting property tax?
§ PNC Arts Center Court Case – Judge Cuskin
7. Construction Industry
§ A private company does not have to follow the public bidding requirements that are currently in place. Therefore, companies can grant contracts to anyone they want.
o They can choose the cheapest contractor who will perform the lowest quality of work.
o Joseph M. Giglio Jr. a proponent of privatization has said, “Public agency managers [are] … usually restricted to a small group of suppliers who have mastered the intricacies of government contracts. This and the avoidance of ‘waste, fraud, and abuse’ means higher costs that get built into the price of every purchase contract.” [12]
§ Higher quality generally implies a somewhat higher cost.
§ I would rather a company that knows New Jersey’s needs than one who would do a substandard job for a cheaper price.
o They can only employ construction companies that are their subsidiaries.
o “Cintra’s 2005 annual report describes the company as ‘one of the world’s leading private transportation infrastructure developers’, and reassures investors that it offers … ‘limited competition.’” [13]
§ MIG once owned 40% of Cintra, a Spanish company.
§ MIG-Cintra is the same consortium that leased both the Indiana Toll Road and the Chicago Skyway.
§ According to New Jersey Next Stop in 2004 the construction industry employed approximately 164,550 New Jerseyans.
§ The projected employment growth from 2002-2012 is on average 13%. [14]
§ Since it is a deal with a private entity the public no longer has access to the terms of the contract. There is a loss of transparency.
8. Public Entities Can Borrow at Tax Exempt/Lower Rates
§ The state can borrow money at a rate of 4-½%.
§ Private entities borrow money at a rate of 6-½%.
§ There is a difference of 2%.
§ Private capital is taxable.
§ We would therefore be allowing a private entity to profit from an arrangement the state could do cheaper.
Points of Interest
1. Foreign Ownership
§ “Privatization promises a quick fix – and a way to outsource difficult decisions, like raising tolls, to entities that don’t have to worry about getting reelected. More often than not, those entities are foreign.” [15]
o Most privatization transactions are with foreign companies because they have years of experience of leasing toll roads in countries like South America, Europe, and Australia.
§ Are there any American companies that are willing and capable of such an undertaking?
o Phyllis Schlafly, a writer for a conservative publication Human Events, said “U.S. citizens must pay tolls to foreign landlords for the next two or three or even four generations.” [16]
o Can easily compare the selling of our national roadways to foreign entities to Dubai and the recent controversy over selling our ports.
§ Indiana Toll Road: “Any money generated from the operation of this road will be sent overseas until 2081 (more than $100 billion), long after we have used up sale proceeds ($3 to $4 billion). The foreign consortium has told investors that it expects to operate the road at a 13% profit. [17]
2. The Goldman Sachs Connection
§ Governor Corzine used to be CEO of Goldman Sachs.
§ Goldman Sachs received $9 million in fees for the Chicago Skyway deal and over $20 million on the Indiana Toll Road deal.
§ “Like a real estate agent representing both buyer and seller, Goldman Sachs simultaneously urges governments to privatize highways, advises them as they structure the deals, and buys a piece of the action.” [18]
§ Quotes:
o “I think that increasingly the public feels like what’s driving politics, what’s driving these decisions, is multinational corporations and deal-makers like Goldman Sachs, Merrill Lynch, and Morgan Stanley. They’re the ones making tens of millions of dollars ultimately at the public’s expense.” [19]
o It does seem odd that they are effectively teeing up assets for their corporate clients to buy. In most situations, that wouldn’t be deemed ethical.” [20]
[1] Then there were two... Indiana Toll Road vs. Chicago Skyway; NW Financial Group, LLC
[2] The Chicago Skyway Sale: An Analytical Review; NW Financial Group, LLC
[3] Mother Jones; Shulman
[4] Mother Jones; Shulman
[5] Selling Off the Turnpike; Robert Poole & Peter Samuel – The New York Post, March 28, 2006
[6] The Daily Journal – August 23, 2005
[7] Toll Bridge Owners Mum on Repairs; Richard Pearsall – Courier Post
[8] Assemblyman Jeff Van Drew
[9] Assemblyman Jeff Van Drew
[10] Mother Jones; Shulman
[11] Mother Jones; Shulman
[12] Private Roads and Public Benefits; Joseph M. Giglio Jr.
[13] Mother Jones; Shulman
[14] New Jersey Next Stop
[15] Mother Jones; Shulman
[16] Mother Jones; Shulman
[17] Private Doesn’t Serve Public; B. Patrick Bauer – USA Today, July 5, 2006
[18] Mother Jones; Shulman
[19] Dave Menzer, an organizer at Citizens Action Coalition
[20] Dennis Enright, NW Financial, LLC
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