Tuesday, May 19th, 2009
That quote sums up beautifully an article in last week’s Barron’s how Indiana fleeced a consortium of “foreigners” who paid $3.5 billion to lease the Indiana Toll Road for 75 years. Barron’s estimates the value of the lease at a maximum of only $1.5 billion. Uh, oh, Spaghetti-O. My simple math says Indiana’s profit is a cool $2 billion. As Gov. Daniels put it in the article, “It was the best deal since Manhattan was sold for beads.” And according to Barron’s, “one of the most illogical prices paid for any major piece of transportation infrastructure”
I’ve written about this before, but it is worth again summarizing some of the huge reasons why Major Moves is a grand slam for Indiana:
- The Toll Road was actually losing money when it was leased. Far from selling off the a key asset, or pawning the family silver if you will, the state actually got somebody to pay to take a liability off their hands. There was no prospect of the Toll Road ever being profitable so long as the state operated it.
- Indiana leased the Toll Road at the peak of the bubble. All the stars were in alignment: the economy was booming, credit was readily available, interested rates were low (which increases the net present value of a future income stream), inflation was low, and gas prices were reasonable. Fast forward and we have a recession, we’ve experienced a gas spike that has people wondering about their driving choices, the era of easy money is over, and “Helicopter” Ben’s printing presses have people worried about inflation.
- The most beautiful aspect of the lease is how it almost perfectly hedged Indiana’s future risk. In the environment above, VMT is actually down, not up like the lessee expected. Not Indiana’s problem. Oil spiked which boosted maintenance costs on the road. Not Indiana’s problem. America actually gives up cars 20 years from now and starts riding buses and trains? Not Indiana’s problem. Who knows what life in America will be like 50 years from now? I sure don’t. But whatever the case, it’s not Indiana’s problem.
- In addition to paying to lease the road, the consortium was also required to invest something like $400 million in improvements. Electronic toll collection with EZ Pass integration, something INDOT had no plans to install, is already live. Road widening is in progress.
- The lease proceeds are funding road improvements like the US 31 freeway upgrade, the Hoosier Heartland Corridor, and major improvements to I-465 and the Borman Expressway. As you may have read, construction cost inflation has been out of sight. By accelerating these unfunded projects, Indiana is probably getting an extra $2-3 billion in effective project throughput by getting these projects done more quickly. Realistically, without Major Moves a number of these projects would never get done. INDOT had already basically canceled the US 31 freeway upgrade in Hamilton County, for example.
Why did the consortium overpay? The same reason people overpaid for all sorts of assets during the bubble. But there’s another reason, and one not commonly understood. Mitch Daniels had Macquarie/Cintra over a barrel. You see, Mayor Daley of Chicago was also quick to grasp the financial equation here and had already leased the Chicago Skyway for a similarly inflated $1.9 billion. Now basically the only source of traffic to the Skyway is the Indiana Toll Road. Indiana’s border crossing toll was $0.50 while Chicago’s was $2. Seems unfair to me, but perhaps acceptable since Chicago’s toll was set by a judge since the Skyway was in receivership. (Daley subsequently restructured the debt, then leased the Skyway for big bucks – a genius move). I had been telling anyone at INDOT who would listen for over a decade that Indiana was being the chump here.
Mitch Daniels figured that out quickly and decided to make the consortium pay. When the Toll Road came up for lease, the same folks who took over the Skyway had no choice but to pay the maximum to make sure they controlled the Indiana Toll Road too. Otherwise a rival operator could jack up the Indiana toll to match Chicago’s and choke off their revenue stream. Checkmate.
The list of reasons why these deals were great for Indiana and Chicago goes on and on. I am always befuddled when people complain about leasing assets to “foreigners”. Well, right now those foreigners are hurtin’ for certain. Just like the Japanese investors who bought Rockefeller Center to similar sky is falling rhetoric and ended up losing a billion dollars on the deal, the toll road leases are proving that foreign money is often dumb money.
It’s like I said before. How can the US run trade deficits year after year? Well, at least partially it goes like this. They 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 them right back to us and buy things like dot.com stocks, subprime backed mortgage securities, Rockefeller Center, Citibank stock, and the Indiana Toll Road. They might has well have piled all those dollar bills in a big heap and burned them. Thanks for the Foster’s and jamon, however.
It gets even better. A group led by Citibank – yes, Citibank – recently tried and failed to lease Midway Airport in Chicago. The deal fell through when the group couldn’t secure financing. So they had to forfeit a $126 million profit. Think about it, Mayor Daley made $126 million just by running an auction. That’s a pretty good ROI. I’m guessing Citibank thinks that breakup fee is a cheap price to pay to get out of having to close that deal.
This also shows the big advantage you can get from being progressive and a first mover. Gov. Daniels and Mayor Daley are high fiving each other right now while other states can only look on with envy. They will never get another opportunity for a multi-billion windfall like that. Gov. Rendell in Pennsylvania has to be particularly mad right now. He had a deal on the table to lease the Pennsylvania Turnpike at a nice rate. This was not nearly as good a deal as Indiana and Chicago got since people were starting to wise up, but certainly much better than they’d get now. The legislature refused to approve the deal.
By the way, Indiana also shows the right way to make use of one-time windfalls from things like the Toll Road lease. There are three basic good ways you can use one time money: pay down debt, put it in the bank, or spend it on one time expenditures, preferably major capex. You don’t want to use it to plug operating holes or on boondoggle start up programs you can’t afford to keep going once the money runs out. Indiana did two smart things. One, it put $500 million into a trust fund for future projects and contingency. Two, it spent the money on one time capital investments – the Major Moves program. Now obviously new roads come with an operating tail, but that’s true of any capital expansion. And reconstructing old roads can actually reduce opex. So all around a great move.
High Speed Rail
A couple of interesting pieces of high speed rail info came over the wire this week. Firstly, Secretary of Transportation Ray LaHood suggested the Midwest states appoint a high speed rail czar. There was much speculation as to the real meaning behind this.
And here is a classic. Amtrak’s President told a group of people in Chicago that true high speed rail is unrealistic. I don’t know about you, but I would not be taking advice on what a quality rail system would look like from someone at Amtrak.
I previously published an opus on high speed rail that you can read for yourself, but in my view, if you are going to do high speed rail, you need to do it right. High speed rail is about game changing reductions in end to end journey time + dramatic improvements in reliability and quality of experience. The 110MPH Midwest network proposal does not accomplish that, period.
Several times in the last year I saw people from the Midwest go off to Spain to ooh and ahh their high speed system and use it to tout the Midwest nework. I’ve ridden high speed rail in Spain and it’s fantastic. But the proposal on the table is nothing at all like the Spanish system. To use the system in Spain or elsewhere to sell a 110MPH system is dishonest and unproductive in the long run. There is a huge danger that an “Amtrak on steriods” solution labeled high speed rail will only ruin the high speed rail brand in the US the same way Amtrak has done it for regular passenger rail.
Back to Indiana for a minute, while Gov. Daniels signed the endorsement letter for high speed rail along with every other Midwest governor, I think it is fair to say that he is at heart a skeptic. He was quoted as saying that he doesn’t want to get stuck with a huge bill to run the thing. Fair enough, especially when you see the subsidies that Wisconsin and others pay Amtrak today. But there’s a big difference between saying that’s not a good end state and jumping to the conclusion that it will be the end state.
Ironically, there’s no one who would be more likely to get high speed rail actually implemented than Gov. Daniels. A Daniels-Daley reprise of their tollway coup could make a real demonstration project of a Chicago-Indy link. Believe me, I appreciate the governor’s fiscal discipline. Keeping lid on spending and taxes is critically important. I don’t think Hoosiers understand the value they are getting out of a triple AAA credit rating and the value they will get in econdev if they can stick with balanced budgets and no tax increases through this recession.
But with Indiana’s traditional industries in competition with offshore labor at pennies per hour, Indiana will never be a truly low cost place to do business again. And with its future industries dependent on attracting a labor force that is in demand and where price is an important concern but also balanced against they amenities, services, and quality of experience they way, Indiana (and the rest of the Midwest) will not be able to reach future prosperity in the 21st century through cost cutting alone. Innovation has to extend beyond the fiscal realm.
To a great extent building infrastructure isn’t a cost, its an investment. And high speed rail is something that is clearly going to be a federal led program. My belief is that the Chicago-Indy route is a perfect demonstration route for a real high speed rail line in the United States – new terrain, 200 MPH peak, etc. It won’t be cheap, but if the feds paid for it, and chartered a new operating authority to run it, and did it right, I think there could be advantages over the long term, just like their have been in other places that have built it. Enough to justify it? There’s certainly room for debate. But remember about first mover advantage? Sometimes you have to be willing to take a risk. And there isn’t that much risk in buying what is effectively a dirt cheap out of the money call option on high speed rail by forming partnerships with Mayor Daley, lobbying, and launching aggressive environmental studies, probably funded by stimulus dollars. That’s similar to what Indiana is doing with the I-70 dedicated truck lanes initiative.
Long but highly recommended are my two core postings on the subject:
- Metropolitan Connections (the benefits case for high speed rail)
- High Speed Rail Overview (the system we need, including proposed routings)
Remember for something like this, the scope is the benefits, not the network.
I-465 Northeast Corridor Widening
The last part of this Indiana transportation trilogy involves the $565 million reconstruction and widening of eight miles of I-465 and two miles of I-69 in the northeast corridor. This is the most heavily congested section of road in Indiana by a mile and, now that the Borman Expressway is fixed, far and away the highest priority road project in the state – or at least it should be.
The project team recently held a Citizens Advisory Board meeting. The minutes from the meeting provide a lot of interesting updates.
The most interesting is the schedule. The project was originally scheduled to run from 2012-2016. Now this is an expensive project. How do you keep the costs from spiraling out of control? The best way to do so is to get things done faster. Construction cost inflation will eat you alive and every year of delay only jacks up the price tag. What’s more, if you do it more quickly, you get the benefits sooner. A double win. So it is great news to see that INDOT is planning to look at every possible part of this project to see what can be sped up. Impressively, some contracts might even be let this year! Here are some of them:
- Contract one is an accelerated contract for the section between the White River and Carmel Creek bridges and could advance as early as the fall of this year (2009).
- The mainline I-465 construction between College and Carmel Creek may be accelerated to the end of this year (2009).
- The Keystone Avenue interchange may begin about one and a half years from now, in September 2010.
- Another accelerated contract may be for overhead bridges at North River Road and Westfield Boulevard. The construction on these bridges could begin in late summer 2009.
- The next contract to advance could be 82nd Street and 75th Street and may be accelerated to Year 2011.
- The Allisonville Road interchange may be advanced to 2012.
- Because the Fall Creek Parkway to 75th Street section does not include much right of way issues or utility conflicts, this section could be advanced to begin in 2010.
- The largest interchange – I-465/I-69 – could advance to 2012.
- The I-69 section could begin in late 2012 or early 2013.
Pretty cool, eh? I have to give a round of applause to INDOT on these efforts.
Also, the preferred interchanges were selected. Keystone is a partial cloverleaf, Allisonville a SPUI, and I-69/I-465/82nd St complex a hairy system interchange with several flyovers and a collector-distributor system. INDOT’s web site has the renderings.
There are two important things to get right on this project that I haven’t read about yet:
1. The roadway design – particularly bridges – need to be built to the same standards as were done on the I-465 west and northwest projects with regards to quality of design and pedestrian/bike access. In particular, the aesthetic design of the current west leg project as embodied in the 38th St. interchange and 46th St. bridge should be carried over and copied for this project. Why?
Again, it goes back to quality of space and the need to attract the labor force of the 21st century. Another of my must read archived blog posts is “The Importance of Aesthetic Design in Transportation Projects“. The only impression people will have of Indianapolis is through driving through it on the expressway. In the modern era, our roads are our public space par excellence. Cities and towns will spend huge amounts of money to make their Main Street look good. But increasingly that is not the space most people see or experience in their daily life. In the modern era, getting it right on the quality of our public spaces is absolutely imperative to attracting the labor force of the 21st century.
Let me just say that I know nothing of INDOT’s plans here. But with projects like I-69 to Evansville experiencing significant inflation caused price increases, the temptation to save on costs by eliminating “gold plating” like attractive bridges can be strong. But Indiana will never thrive in the future with an “East Berlin” style built environment. The new Indianapolis Airport, and the I-465 west and northwest projects, are great examples of what the future should look like.
That’s not to say we shouldn’t strive for cost efficiency. But let’s not mistake service level for efficiency. First go pick out the car you want in your general price range, then go dicker with the dealer. INDOT is doing it right on the Evansillve segment by looking at how to save money by cutting back on things like median widths that add effectively nothing to safety or anything else, but cost money. And on this project INDOT wants to pull things forward to save money by getting things done more quickly. That’s all good. You want to look to save on mechanical systems in the utility closet, not try to save a buck by ripping out the tile in the entry way that is the first thing people see when they walk into your house, or by trading in those stainless steel appliances in the kitchen for “harvest gold”.
And why copy the west leg designs? Two reasons. First, if you use the same designs, you save money. The tooling should already exist for the decorative railings. A lot of the engineering is already done. The bill of materials is right there. Standardization drives down unit cost enormously. Secondly, it is imperative for Indianapolis to start building a stronger sense of distinct visual identity to overcome its “Generica” image and surface appearance. Not only do those bridges look nice, if used as a standard, they can start being a design signature for the city and a major part of civic branding – all at a low marginal cost.
2. INDOT should be sure to provide ROW and horizontal clearance to accommodate five continuous through lanes plus a C/D lane between I-69 and US 31, not four as currently envisioned. Don’t build them yet, but create a road with future expansion designed into it. Deploy the capacity incrementally as you need it. Do this simple thought experiment. The I-69 corridor is the fastest growing region of the state. If three lanes is badly congested today, why would anyone believe four lanes will be adequate 30 years from now? Especially when interchanges are being upgraded to channel cars more efficiently onto the freeway. In most cases, the congestion is a matter of too many cars, not inefficient interchanges getting it off the road.
Why only the section between I-69 and US 31? Because at 56th St. INDOT built an overhead bridge that cannot have any more lanes added. It might be possible to restripe without shoulders and add a fifth lane, but the cross-section only supports four standard lanes. This is how not to do it. What we don’t want to do is to spend $565 million to add the minimum possible amount of through capacity to a road (one lane each direction), and do so in a way that we can’t ever expand it again unless we rip and replace the whole thing.
This is a once in a generation type project. We need to make sure it gets done right.