What if toll roads traded like stocks?
I recently saw an article on the Atlantic Cities website talking about how the owners of the Empire State Building were taking the building public in an IPO. In this case, the Empire State Building will not be the only building in the IPO portfolio, but it started me thinking.
What if toll roads (or any other infrastructure asset) were traded like stocks?
Imagine a new class of publicly traded security, somewhere between equity stocks and bonds, that was dedicated to a single infrastructure asset. It would operate something akin to the Real Estate Investment Trusts (REIT), where 90% of the earnings had to be distributed to shareholders and daily operations were handled by a third-party (or potentially related) management company. There would only be one asset per traded entity and shareholders would have a stock-like risk profile (ie. it could all go to zero). You could even set up a NASDAQ like electronic exchange to trade the shares.
It would work best if the State sponsoring the project took the initial development risk (which could be offset by a GMP contract) and then went through the IPO process once construction was complete. A full prospectus would be prepared (like an IPO today), using the traffic and revenue study as the foundation for determining future revenue assumptions (having investors to answer to might improve the quality of these). The IPO would be completed at a set initial share price and proceeds would be used to repay the construction costs incurred by the sponsoring state. Post IPO, the shares would trade in the open market and the share price would rise and fall based upon market conditions and revenue prospects. Each project would file it Q’s and K’s and investors would use these as the basis for future investments. Share ownership would be open to everyone from Grandma with an E*Trade account to Sovereign Wealth Funds. Quarterly dividends would be paid from earnings.
If a state wanted (or needed) to make a contribution to the project to make it viable, they could do so by buying shares of stock at the IPO – just like everyone else. When those shares appreciated in value they could be sold in the open market and the proceeds used to repay the state contribution.
I see a few interesting things that this concept would accomplish. First, it would allow anyone to invest in infrastructure projects – tapping a large pool of ready capital. There’s alot of chatter in the Transportation Finance circles about getting access to new sources of capital, including institutional and pension fund monies. This would accomplish all of that – and more. Plus, if an investor needed to diversify their infrastructure portfolio then they would just buy shares of multiple projects. I can even see a type of mutual fund springing up from this that would handle the diversification for you.
It would also make infrastructure ownership much more liquid. If you decide you don’t want to own the road shares anymore, put in a sell order (this assumes an actively traded market with sufficient volumes).
This structure would also make sure that toll revenues stick with the particular project. Those revenues would go to pay shareholder dividends and couldn’t be redirected to other projects. An ongoing maintenance reserve account would be maintained to be sure that funds were available for annual maintenance as well as more significant periodic refurbishment.
IPO’s wouldn’t be limited to greenfield projects. If you had an existing, operating, revenue producing asset that you wanted to monetize you could just as easily do an IPO and “cash out”. My guess is established assets would trade better than new builds and generate better P/E ratios therefor higher IPO proceeds.
The best part of this is that it could be established relatively easily. It wouldn’t need congressional approval and most of the regulatory policies and procedures would be right inline with the established equity and bond markets.
The downside to this idea is that it would only work for projects that have an identified revenue stream. Of course, those are really the only projects that institutional capital would look at investing in anyway (through this structure or any other). No revenue –> no return on investment –> no interest. If there’s no revenue, then general obligation bonds are your best bet secured by general tax revenues.
What are some other downsides to this (or upsides) that I’m missing?