Why is New Jersey taking this approach of inventorying the assets it might consider selling?
First of all, I'm responding to what the governor asked of me. I didn't argue with him.
But it seemed a logical thing: Why should we presume, because someone else leased a toll road, that that was the wisest thing for us to do? It seemed a prudent approach to understand what all the possibilities are, and to begin our analysis not with an answer but with a question.
It's interesting how you characterized it. I was worried that people would view it as a fire sale. In fact, it's quite the opposite. We're starting with the presumption that we don't know what the answer is, just the questions to ask.
What happens next?
We're doing additional research on our assets and trying to collect more data. And we're going through a process of winnowing down the list of things we're looking at. Some things are easy. For example, it didn't take us long to decide not to sell the prisons.
Any thoughts on what asset you might make a deal on first?
We're not there yet. The governor wants us to move as quickly as we can. But this is not a trivial exercise. We will not sacrafice doing what we think is prudent and responsible analysis in order to achieve a specific timeframe.
What questions are you asking?
There's two fundamental questions. It's our job to provide a set of services to the citizens. It's not necessarily our job to provide those services directly. For us, we need to figure out which of these assets, from a policy perspective, we need to operate ourselves, whether it's because of national security or because we're the best-positioned to do it or for any number of considerations. Like I said, we already decided that with our prisons, it doesn't matter how much money people wnt to wave at us -- we're not going to do that. That's the first set of policy questions.
Then the whole notion of these partnerships is to define by contract a set of service levels that we think are consistent with the compact we have with citizens. No service agreement is perfect, and there's no perfect set of remedies for failure to meet contractual requirements.
We need to go through a careful and deliberative process to measure those, and then decide what the risk is versus the value. Does the ability to do these things outweigh the risk associated with the inherent difficulties of managing a complex contract? To me, that's where you can really fall down. The first time they fail to get snow off that road in Chicago, they'll be in deep trouble.
Privatization proponents say that by leasing off assets, government can unlock value that hadn't been realized before. I can't decide if that sounds like magic or Enron. Like Governor Corzine, you came to government from Goldman Sachs. What's your Wall Street perspective on how value is created in these deals?
We haven't gotten there in terms of studying the components of value and what creates the value. But there is some alchemy in this, in a sense. I don't mean in an Enron-ish sense. But the same thing can be of different value to different people who have different requirements and different needs. Remember, these are quite unusual assets. In the world, there are not many things like the Indiana Toll Road, where there's a predictiability to the revenue stream associated with that toll road and a predictability to the expenses.
That's hard to match, and there are some investors who will value that predictability. And oddly enough, if you're a pension fund, the duration of these contracts matches up pretty well with your time frame. So there may be characteristics that make these assets more valuable to one class of investors to own than it does to some others. So that's one potential component of value.
A second is that people may think they can do a better job of running it. If you're talking about the lottery, they may think there's some way they could do a better job of convincing more people to buy lottery tickets. They think they're better and smarter and they're willing to bet on it. So there's an efficiency theme.
Third, they may think they have a greater ability to raise revenues than we do.
At the end of this, pure and simple, there's a risk transfer going on. Someone enters a contract to lease the Chicago Skyway based on a set of assumptions about what's going to happen to the number of people who are going to drive across that road and what they can toll the riders for the priviledge of doing that. Then they own the risk that fewer people drive, or that they can't raise tolls as much as they thought they could without driving people off the road. That risk is transferred. That's what makes markets. People take different views on the question. So there's a bunch of different things going on in the determination of value. The one thing that's certain is that the Chicago folks put the money in the bank already.
Why is this discussion happening now?
Some of it is seeing it get done elsewhere emboldens you. I don't know if we'd be having this conversation if it hadn't already been done in chicago, Indiana, Virginia and Toronto. I understand that North America is late -- the U.S. in particular -- in coming to this. These are much better developed markets in Europe and Hong Kong. I don't know the answer, in terms of the political economy of the U.S., as to why we've viewed these as assets we want government to control.
Remember, government electrified rural America, but today the government doesn't own most of that generating capacity. No governmental body has taken the view that evertything we do now has to be done by government. There's a long history of people drawing those lines in different places over time, as far as what services have to be provided to the citizens versus what services government itself has to provide.
Does New Jersey have a plan for how it will use the proceeds from any asset sales?
We don't know how much we're talking about because we don't know what transactions we might enter into. But the context for us is pretty clear.
First we would be required to pay down the debt directly associated with any asset we enter into a transaction on. Then we'd look to invest in transportation infrastructure and other areas where we have capital needs. In New Jersey our foreseeable capital needs are in excess of what any proceeds would be. They range from assisting in construction of schools, to supporting capital funding in higher education, our psychiatric institutions are desperately in need of capital improvements, open space preservation is a big issue in New Jersey.
And then we'd hope to be able to put some amount of money into debt service reduction, or some kind of trust fund to achieve the same set of objectives. I don't know how we'd allocate funds within those buckets. One thing we'd certainly not do is enter into a long-term lease and then use the proceeds to plug a budget hole this year. We won't cross that line.
