Wednesday, July 13th, 2011
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.