Monday, July 21st, 2008
Matthew Tully had an interesting column [dead link] in last week’s Indy Star. Following onto reports of the complaints people had filed about the Indiana Toll Road in the wake of its privatization, he traveled in the entire length of it, spending time sampling the facilities and service areas, finding little to nothing wrong. He chalked up the complaints to continuing sour grapes from the lease itself.
If Gov. Mitch Daniels loses his re-election bid this year, you can probably chalk it up to two of his signature initiatives: observing daylight savings time and Major Moves. I’ll leave DST for another day, but I am amazed at the continuing gripes about Major Moves and leasing the Toll Road to “foreigners”. If you ask me, this program was a huge home run for the state of Indiana.
First consider the projects it allows the state to get done. Previously, INDOT had operated on the promise everything to everybody principle. The result was that there were far more projects that had been promised than there were dollars to deliver them. Some projects had been on the books since the 1980’s if not earlier, promised, but with no movement. I think of the East Washington St. widening in Indianapolis, for example. When Daniels took over he blew the whistle on this and went through a prioritization process that was scary in its implications. Now certainly some of this was exaggerated for effect in order to drum up support for Major Moves, but here is what was going to happen in the project version pre-Toll Road lease:
- Zero money for US 31 in Hamilton County, and the plug was going to be pulled on the entire idea of making it a freeway
- Zero money for the I-465 northeast corridor, where traffic literally sits dead stopped every day today
- Zero money to improve I-65 in Boone County
- Zero money to improve I-70 in Hancock County
- No money to improve SR 135 in Johnson County, SR 14 in Allen County, US 41 in Vanderburgh County, etc.
I think you get the picture. Now we’ll see how many of these actually do get built, but at least there seems to be chance of them making it now.
Next, by leasing the Toll Road now, Indiana is getting way more for its money. Inflation in road construction projects is out of control, running in the double digits per year. I noted recently how cost estimates for SR 32 in Hamilton County ballooned from $40 million to $112 million. The head of the Cincinnati transportation planning authority recently complained bitterly that regulatory delays alone were adding inflation cost of $1 billion to plans to replace the Brent Spence Bridge. Hendricks County rues the fact that they didn’t issue bonds to finish the Ronald Reagan Parkway 15 years ago, now that they are staring a $150 million bill in the face.
If all these projects were delayed 10-20 more years into the future, they’d probably double or triple in cost, making the likelihood of ever being able to afford many of them remote. Indiana got something like $3.9 billion on the Toll Road lease. It is probably effectively getting another $2-3 billion worth of project throughput just from avoiding the additional inflation.
Beyond the benefits of beating inflation by pouring concrete more quickly, Indiana also leased the Toll Road at an almost ideal time. In 2006 there was historically low inflation. Today inflation is much higher. A high inflation rate implies a high discount rate, so that the present value of the revenue stream from the tolls was much higher in 2006 than it is today. In plain English, you’re willing to pay more when inflation is low than when it is high. What’s more, one of the key drivers of inflation is gasoline. Gas was half the price two years ago. Higher gas costs depress travel volumes, which reduces the revenue the consortium is getting. Ohio, for example, just saw a systemwide decrease in vehicle miles traveled for the first time ever. And it raises their cost of maintaing the road. You can bet anyone looking to lease a toll road today is getting a less attractive proposition.
For those of you who’ve been reading since the beginning, you may recall how I showed that Gov. Daniels also had Macquarie over a barrel because they had already paid big money to lease the Chicago Skyway and Indiana was in a position to choke off their revenue stream anytime it wanted just by increasing the border crossing toll.
For those who think the state sold off an asset, think again. If you look at the skyrocketing cost of road maintenance, you’ll see that the state really got a private consortium to pay big money to take a liability off the state’s books. Normally if INDOT wants to get somebody else to take a road over, they have to pay big money to find someone willing. For example, they had to pay Carmel $90 million to take over Keystone Ave. In this case, the person taking over the road is actually paying money for the privilege. You can’t beat that.
Now all the exposure is to the concessionaires. They are paying the diesel fuel bills for the maintenance vehicles. They have to pay the high cost of asphalt (principal ingredient: oil) and steel. They are the ones who have to widen a big chunk of the road, fill the potholes, etc. for the next 75 years. They are the ones that installed electronic toll collection, something that, years after EZ Pass was available elsewhere, Indiana still had no concrete plans to deploy. They’ve got an incentive to make the road user-friendly because without users, they aren’t getting paid anything.
So what if “foreigners” paid Indiana $3.9 billion for a 75 year lease? It’s not like they can disassemble it and take it back to Australia with them. What’s more, when their lease is up, Indiana gets it back, along with all the improvements they made. The Toll Road was a breakeven operation at best for the state and there was no prospect of it ever becoming a cash cow. The politics just wouldn’t work. Now it is a huge boon to the state.
And if history is any guide, foreign money is often dumb money. Remember when the Japanese bought Rockefeller Center? People thought the world was coming to an end. But Mitsubishi Estate ended up losing a billion dollars on the deal. The sovereign wealth funds who provided capital injections to Citibank and others recently are sitting on huge paper losses.
People wonder how it is we can run trade deficits year after year. Well, here’s how it so often seems to work. Other countries send us oil, Lexuses, TV’s, toys, etc. And in return, we send them little green pieces of paper. You can’t do much with a little green piece of paper, so they send that back to us and use it to buy things like, let’s see, dot.com stocks, subprime mortgage backed securities, Rockefeller Center, Citibank stock, etc. They might as well have piled all those bills in a heap and burned them. So what if they are taking advantage of the cheap dollar? The way I see it, they’ve got nothing but downside currency risk. Remember when AOL used their overpriced stock to buy Time Warner? I guess we all know how that turned out.
I’m not going to say that Macquarie will end up ruing the day they paid $3.9 billion for a 75 year lease on the Toll Road. They might end up quite happy with the deal. I just want to illustrate that private investments can end up losing money as well as gaining it. Especially with the economic conditions and oil prices being where they are, I’d be much happier to be in Indiana’s shoes than Macquarie’s. And again, it’s not like they can pack the road up and take it with them.
On the whole, when you consider the projects that are getting done, the inflation savings, the offloading of a liability, and the changes in market conditions since the lease, I don’t believe there is any interpretation but that Indiana at a minimum did alright on this deal, and more likely has a huge, huge win on its hands.