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Wednesday, July 13th, 2011

More Privatization Good News in Indiana

I’ve written before about how the privatization of the Indiana Toll Road was a grand slam home run for the public (see “Australian and Spanish Investors Hurting, Hoosier Taxpayers Smiling,” “Major Moves is Majorly Great“, and “The Shrewdness of Mitch Daniels.” The Chicago Skyway lease was similarly great). The evidence just keeps rolling in for how great this deal was, this week in the form of a Bloomberg News piece (via the Indianapolis Business Journal) describing how the Toll Road concessionaires are missing financial projections bigtime.

Eleven million trucks. That’s how many 18-wheelers needed to rumble across northern Indiana in 2010 for the state’s 157-mile toll road to break even. Unfortunately, only about half that many did and the road came up $209 million short. This sounds like the beginning of yet another story about recession-ravaged states bleeding cash. And it is, sort of. The twist is that the Indiana Toll Road is managed not by the state, but by a group of corporate investors…Now five years old, the Indiana deal has yet to turn a profit, or break even…..It turned out to be a bargain for the taxpayers of Indiana.

$209 million per year. That’s how far short of original projections the Toll Road is performing. The good news for Indiana taxpayers is that this is not their problem. The state already has the money in the bank. Regardless of income, the concessionaire still has to maintain the road to standards. (In fact, they are in the middle of a lengthy project to reconstruct and widen several miles of the road through Gary). And if the concessionaire goes bankrupt, presumably their lenders will take over and still be on the hook. In any event, if there’s a default on the contract, the state can take the road back. They could even lease it again for even more money.

I don’t see how it would have been physically possible for the state to have gotten this good a deal itself. In effect, the vendor way overpaid at the peak of the bubble. (I wouldn’t worry too much about them – they are big boys who no doubt syndicated away much of the risk and who also have a big portfolio across which to diversity the unexpected wins and losses). Could Indiana have conceivably negotiated even stronger protections? Sure. It could have negotiated in that if the Borman were closed for flooding or something, motorists could drive the Toll Road for free. But even with compensation the state has had to pay in a few borderline cases like this, it is still way, way ahead.

I don’t think it’s possible to get a deal like that today, not with the way the markets have turned. But with massive transport investment deficits looming across the country, finding ways to tap into private capital, management, and operating expertise is still very much something cities and states should be looking to do. These can be risky deals if done poorly. But done right, and with the proper public scrutiny, they hold enormous potential.

20 Comments
Topics: Transportation
Cities: Indianapolis

20 Responses to “More Privatization Good News in Indiana”

  1. Nathaniel says:

    These bad deals, albeit beneficial for the general public, represent huge financial losses to the private sector (of whom ought to have negotiated better deals). Ideally, privatized infrastructure should be priced at levels that fosters both public benefit and profit. If a firm is unable to break-even(on a toll road, for example), it’s a sure bet there will be deferred maintenance and infrastructure enhancements.

  2. George Mattei says:

    Aaron, I think when you consider the cost of the tolls to the residents, you statement of “it’s not their (the taxpayer’s) problem” becomes less clear. Per a Columbus Dispatch article this Sunday on privatizing the Ohio Turnpike (“Ohio Turnpike lease plan Moneymaker or drain on drivers?”), tolls have doubled over the past 5 years for the Indiana turnpike. This may not be a “tax”, but it is a cost to the public nevertheless, regardless of what you call it.

    To be fair, you could argue tolls would go up regardless. The article goes on to state that the Indiana tolls had not been raised in years, so it sounds like it was going to happen anyways. But through tolls or taxes, the people ultimately are going to pay something.

  3. Allen J. Lopp says:

    OK, toll road shortfall is not the Hoosier taxpayer’s problem … but revilatizing the Hoosier economy so that those 11 million trucks do roll would be even better. Aaron, you seem to be arguing that toll road is a good deal because the economy is bad … but I would much rather have a healthy economy for everyone, even if the toll road investors laugh all the way to the bank.

  4. Mike says:

    @George, but with the toll road losing money hand over fist, the government had essentially three options, 1)Keep tolls where they were, continue to sink money into it, 2) Raise tolls themselves and hope that the increased tolls were enough to make up the difference, and 3)Sell road to an ivestor who undoubtedly would raise the tolls.

    I don’t see any difference between the state government raising the tolls, and the investor raising the tolls, except that the state government has $3.8 Billion in it’s coffers.

  5. Mike says:

    @Allen, I think this was the point of the post. The brilliant timing of leasing the road when he did, meant that the taxpayers were protected from having to finance the road during an economic recession outside of the state’s controls.

    Unless the economy is bad because the toll road changed hands, the fact that State Government doesn’t have to put needed funds into maintaining the road, means that in this case the taxpayer wins.

  6. John Morris says:

    Is the math based on 11 million truck trips at the current toll? Also, does the private owner have the legal ability to totaly control pricing and if so-would they consider dropping the price to boost business?

    Anyway, the bottom line here is just how bad and unbankable most highways are as an investment and just how unlikely it might be to find private buyers who want to do this in the future.

    Also am wondering if traffic has shifted to alternate “free roads”.

  7. marko says:

    I frequently travel this area through NW Indiana and Southside of Chicago for business. The east west toll road where it links into the Chicago Skyway is empty. At rush hour you can fly through there. Conversely the 80 /94 east west interstate just a few miles south is jam packed for miles around the tip of Lake Michigan. I’m wagering to bet the truckers are simply taking the Interstate rather than the toll road because frankly, they get to the same places. While the shore of Lake Michigan is still a very industrial area, the south suburbs nearer to 80 / 94 are lead to more suburban manufacturing and distribution centers than the toll road does to the southside. Unless Hamond, Chicago, East Chicago and the rest get together and make that area competative with the exurban greenfield development, I dont see it Changing. Essentially the Toll Road save you 30 min.

  8. david vartanoff says:

    so its okay that a corporate fool bought a bad deal and syndicated it out to unwitting investors? Isn’t this precisely the pattern of the mortgage backed securities which gave us the recession we are still in? Having the “free” 80/94 is of course the real problem, but that is merely the highway equivalent of the several major trunk line railroads which have been abandoned in the same general corridor for lack of business–too much capacity, not enough need.

  9. ABCDE says:

    Indiana’s government lacked the guts to raise tolls for fear of being accused of raising “taxes”. So they sold the right to raise tolls to someone else. Sometimes cowardice pays. Other times, as in the Indianapolis parking meter deal, it doesn’t.

  10. @John Morris, there is an alternate free interstate for part of the route, but no particularly good surface alternative routes. That free interstate doesn’t serve a number of the heavy industrial areas and doesn’t offer as short a trip to downtown Chicago. The Toll Road has other advantages like allowing triple-trailers (which were also allowed pre-privatization, btw).

  11. @Allen J. Lopp, I agree, it would be better to have a healthier economy, but given that the economy did get back, much better to be in Indiana’s position today than without privatization. As I noted in many previous posts, part of the value of the transaction was as a hedge against future risk, a hedge that paid off bigtime. Indiana effectively bought protection against future economic risk.

    @George Mattei, yes, tolls did go up. But given a fixed level of toll increase, Indiana did far better with privatization than without it. And there are benefits that go beyond just the cash. The private vendor, unlike INDOT, is contractually obligated to maintain the road in a good state of repair, for example.

  12. CJ says:

    As a former Hoosier and current Buckeye, and frequent traveler to Chicago via the three tollways, I’ve seen the quick rise in tolls in Indiana and Chicago thanks to privatization. Tolls have risen a bit in Ohio too, but there have also been regular improvements here.

    I think the point about the Spanish conglomerate “losing” money on the tollroad is wrong – perhaps the rise in tolls pushed some traffic to I-94 up in Michigan, but their ‘losses’ are on huge amount of money they borrowed to pay Gov. Daniels for the privilege of leasing that state property. The Toll Road wasn’t losing money before the privatization, and if it was, the state could have raised tolls. It was easier to get money up front for “Major Moves” (since the Indiana budget was very tightly balanced when Daniels took over, and had no state money for projects to which he could affix his name), and then let a foreign company do the political dirty work of raising tolls. In Ohio, where tolls are lower than Indiana per mile – the state makes almost a quarter of a BILLION dollars a year on the Turnpike – even as it has managed upgrades to six lanes between Hopkins Arpt and Toledo, and some of the best rest areas in the country. I hope Ohioans don’t make the same mistake as Indiana did, and keep the Turnpike in public hands where it belongs.

  13. Chris Barnett says:

    To expand on Aaron’s remarks: the Indiana Turnpike isn’t part of the Canada/Michigan/Chicago route except for those last few miles from Gary to Chicago, for which there is a nearby “free” (but terribly congested) alternative.

    The Turnpike is part of the long-haul New York State/Chicago routes, both I-90 to Upstate and I-80 to NYC. For that long haul there is no reasonable (either in mileage or time) “free” alternative to the turnpike for truckers in either Ohio or Indiana. The only real alternative is intermodal (rail-container).

  14. John Morris says:

    “The private vendor, unlike INDOT, is contractually obligated to maintain the road in a good state of repair, for example.”

    Oooh, there’s a dirty little subject to bring up. Just what obligation does the state have to maintain it’s assets and keep it’s implied promises? I think, the current state of our infrastructure and trillions in hidden debts, shows it really has none.

    What recourse was there if the state didn’t maintain the road? Was thre anyone one could sue-that would pay a nickel for screwing up?

  15. John Morris says:

    I have a question that relates also to many of the parking meter deals.

    From what I can tell. INDOT maded a long term lease deal which obligated this to remain a road.

    Suppose—and I know, for political reasons, this seems very far out- The road and right of way was sold outright leaving the buyer the option of using it for other uses?

    In this case we have a lot of long haul freight, Suppose in the future, fuel costs or just total demand dictates that long rail is the best option. Wouldn’t it be best to leave an opening to use the right of way or part of it for rail?

    It seems to me, this is also a huge issue with route 80 through PA, which occupies about the best single straight shot route across the state into NYC.

    As Aaron staed on here before, this is the big flaw with a lot of the parking deals which lock the city into setting aside huge amounts of parking regardless of how the future conditions may change.

    In the case of many turnpikes, one has roads that will never pay their capital cost and should be left open for other options. Just sell them outright.

  16. Ed Sanderson says:

    If truckers who don’t want to pay the tolls on the Indiana Toll Road, their best option for most of the way across the state is US 30. While the route has many traffic lights(and more each year, open a [big box], get a traffic light)once you cross the 140 miles of that wretched state, there are none in Ohio to reach north-south bound I-75, US 23 and I-71.

  17. This is short-term thinking. A private company has only one goal, to make as much money as possible. As this road becomes more and more of a drain, the costs will be (and it looks like are) passed on to the users. It will be higher tolls and less maintenance. When the road deteriorates, it will do more damage to people’s cars, costing more in repairs.

    Privatization of public assets never works in the long run as corporations do not buy them for the public good.

  18. Stuart, the tolls are set as part of the lease. Tolls will go up with scheduled increases, inflation, etc, but the vendor cannot raise them outside those limits. Also, they are contractually obligated to maintain the road. If the state provides proper oversight, this should not be a problem. If the vendor doesn’t perform, the state can sue them for a default on the contract and take the road back over if the vendor doesn’t cure the deficiency.

  19. Paul says:

    If the Indiana Toll Road operator fails to maintain the road to the standards set in the lease Agreement and is financially insolvent the state may have the right to set the agreement aside, but what incentive does the state have to set it aside? It will want to take on the expense only if the then current toll schedule covers the costs and the politicians don’t expect pressure from the northern counties to roll back the toll schedule.

    In addition, based on how I expect the loans to acquire the toll road lease were structured I’ve expected that the operator would sink into financial trouble if the U.S. Dollar began to weaken, as has happened in connection with the Federal Reserve’s programs of quantitative easing. What I honestly wonder about is the prospect of the operator entering bankruptcy, and whether the state’s “rights” will prevail over the creditors.

  20. Bob Cook says:

    Regarding Toll Road traffic, I wonder if another factor in the lower revenue is the extension of I-355 south to I-80, which created an outer bypass around Chicago from I-80 to I-90. That opened a year after the Indiana Toll Road was leased. Now, if you’re a trucker who has to get around Chicago but doesn’t need to go in it, you no longer are stuck with using the Dan Ryan and Kennedy, or even using the tolled I-294. Same with vehicle traffic, too. I’m sure there are plenty of people going around Chicago, willing to wait out jams on 80/94 in NW Indiana, so they can travel for “free” on I-355.

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