Monday, July 21st, 2008

Major Moves is Majorly Great

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.

8 Comments
Topics: Transportation
Cities: Indianapolis

8 Responses to “Major Moves is Majorly Great”

  1. Gary says:

    Maybe we could buy some land and then lease it to some Euorpean country to build us a light rail system in Central Indiana. We own the land, they have to build it from America made material, use Americans to build it. Then run it for the next 75 years. ( Hamiliton County doesn’t get a line though LOL).

    We would probably end up with a workable light rail system that probably has a chance to work.

  2. thundermutt says:

    There’s the funding solution for Downtown Indianapolis Streetcar Corp.!

  3. CoryW says:

    Aaron-

    I have always thought that Major Moves was a major win too. HOWEVER, my beef with the whole plan (you know where I am going) is that NO money was earmarked for actual “major moves.” Northwest Indiana and Central Indiana are in desperate need of transportation alternatives to the automobile. Major Moves could have provided an immediate cash infusion to jump start some sort of rail in Central Indiana and easily could have helped get additional lines for the South Shore up and running. Further, the Midwest High Speed Rail innitiative is woefully underfunded in our State.

  4. Gary says:

    Seriously, I am not joking. Get rid of CIRTA which does not have a clue. Get a company out of Europe that knows something about rail and let them do it.

  5. Crocodileguy says:

    My issue with Major Moves was that Indiana could have/should have gotten more out of the toll road lease.

    I also have severe reservations with giving INDOT more money to build substandard designs, but that’s mainly based on the quality of the designers/engineers at INDOT. Seriously, there are so many “quick fixes” that would be relatively inexpensive to implement around town to make driving the freeways easier/more user-friendly. Minimizing motorist confusion through better (and not inaccurate) signage would be the first step. That would improve operational capacities without spending millions/billions on lane additions.

  6. The Urbanophile says:

    Thanks for the comments.

    Regarding rail transit, I’m a bit lukewarm on the idea, as most of you know, though I’m provisionally positive on the northeast corridor proposal currently on the table.

    But I look at Major Moves and say to myself: what Indianapolis project would I have canceled in order to fund a transit line? For me, the answer is clearly none of them. I think all the major highway projects are critically needed.

    Typically state DOT’s don’t get involved in funding transit. Transit in Indy would be a primary local affair in terms of its impact, unlike the interstate highway system which has national freight significance, for example.

    Now gary’s idea is a good one. Of course no one will pay for the privilege of building Indy a rail line, but there is no reason not to look overseas to an experienced operator. Instead of setting up a local agency to build and run a rail transit system, why not outsource the whole thing as a design/build/operate contract? In fact, I think I’ll post a future article with just that suggestion.

  7. Anonymous says:

    No Indy area Major Moves project need be cancelled to find money for a commuter or light rail system around the metro area.

    Cancel the funding for new terrain I-69 and a new I-65 bridge over the Ohio River, thereby saving over $1 billion.

    Commuter rail would work wonderfully in Indy.

    ANd if we hadn’t “elected” a right-wing president who steers all money into the black hole known as the military and cut taxes for the rich, then there would be more tax funds for infrastrucutre, thus obviating the need for leasing the toll road in the first place.

  8. Anonymous says:

    “the I-465 northeast corridor, where traffic literally sits dead stopped every day today”

    That’s a rather blatant case where a commuter rail line is needed, isn’t it?

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