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, part of a public-private partnership experiment intended to show how businesses can help government run more efficiently and save taxpayers money—all while turning a profit.
The pitfalls of privatization have been ignored time and time again by many of the nation's business-happy politicians causing state coffers to continuously come back in the red. Indiana, on the heels of a medical benefits blunder resulting from privatization, has been informed of a $209 million loss in 2010 from their public-private road venture, the largest such in the country. From Business Week:
Now five years old, the Indiana deal has yet to turn a profit, or break even. Two overseas companies—Cintra Concesiones de Infraestructuras de Transporte, a unit of Madrid-based Ferrovial, and Macquarie Infrastructure Partners, an investment fund managed by Macquarie Group (MQG) of Sydney, won the right to run the road with a daring $3.8 billion bid—$1 billion more than the next-highest offer. The companies each owned a 50 percent stake of the project, which was backed by several overseas banks. The group then attracted other investors who bought pieces of the deal.
It turned out to be a bargain for the taxpayers of Indiana. The state received the upfront payment and has avoided more than $100 million a year in operating costs. “The state got a great deal,” says Jane Jankowski, a spokeswoman for Indiana Republican Governor Mitch Daniels. “The lease agreement contains numerous protections for the taxpayer and travelers and ensures the continued successful operation of the road.”
The private investors haven’t made out so well. Had the road been profitable, they stood to make millions per year over the life of the 75-year project. As it is, they have not been able to get past the debt they incurred winning the bid. They have met their annual debt payments only by borrowing money and may default before loans mature in 2015, according to disclosure documents from Macquarie Atlas Roads, one of the investors. The project’s 2010 prospectus said that revenue from the highway is “expected to remain insufficient to cover debt service obligations over the medium term.” The document cautions that “any default under the loan documents may lead to lender actions which may include foreclosure of the project assets or bankruptcy.” Even Governor Daniels, who had enthusiastically backed the venture, recently said that the foreign investors had overpaid.
Indiana's tollway sell-off, and others like it, are under taken despite glaring evidence of the drawbacks of highway forfeiture. Ellen Dannin's Crumbling Infrastructure, Crumbling Democracy: Infrastructure Privatization Contracts and their Effects on State and Local Governance provides a complete dissection of privatization's ills. She also cites the backlash Indiana Governor Mitch Daniels faced when he introduced road privatization:
It is easy to see why infrastructure privatization is the solution many states a returning to in order to repair, build, modernize, and operate highways and other infrastructure. States and cities are also using the up-front payments that are part of many infrastructure privatization deals to address their budget deficits. In addition to providing funds, privatization is popularly seen as a way to shift future financial risk to the private contractor.
However, not everyone is sanguine about infrastructure privatization as a solution to these problems. While the public wants good transportation, people do not necessarily embrace infrastructure privatization. Look no further than Indiana, where Governor Daniels‘ popularity ratings plunged in the wake of the sale of the toll road amid a hue and cry about foreign firms owning our roads. And as the self-styled populist Lou Dobbs asked, "What right do they have to sell something that belongs to the taxpayer?"
Macquarie, one of the international firms engaged in infrastructure privatization, has even been accused of running an old-fashioned Ponzi scheme, rather than inventing a new way to finance infrastructure.
In response to the $209 million loss revelation, Macquarie spokes-folks responded with deflection, according to Business Week:
In an e-mail, Macquarie spokeswoman Paula Chirhart said the prospectus was prepared in 2009 during the global financial crisis and “was never stated as a forecast or an expectation.” She added that “we expect the Indiana Toll Road to continue to meet its debt service payments as they fall due.” Patrick Rhode, a Cintra spokesman, said in an e-mail that more vehicles are using the Indiana road as the economy recovers. A reserve account was created to cover financial gaps that occur over long periods of time, he said. “We do not expect a default.”
A Northwest Indiana Times report suggests otherwise:
The private operator of the Indiana Toll Road could be in danger of defaulting on its huge debt by early next year, according to a report on the news wire service Debtwire.
The May report in Debtwire, a Financial Times Group publication, stated Toll Road operator ITR Concession Co. is rapidly burning through an interest reserve account, which must be maintained to keep $4.1 billion in loans in good standing.
Indiana Finance Authority Chairman Christopher Ruhl, in an email to The Times, stated that even in case of default and foreclosure, no taxpayer money is at stake, as the state has received the full $3.8 billion lease payment in June 2006.
On cue, the cost of traveling the toll road rose for Indianans on July 1st: 2% for travelers paying cash, and a full dollar for semi-trailers. Sadly, this is far from the first time rate hikes have been implemented:
The July 1 rates of $9 and $36.20 are essentially double the $4.65 and $18 charged at the time the toll road was sold in 2006.