King: The Toll Road: ‘Pay Me Now, Pay Me Later’
by Stephen M. King, Ph.D.
Seven years ago, Gov. Mitch Daniels’ “Major Moves” legislation, passed along partisan lines, authorized dramatic changes in Indiana’s transportation-funding system. Those changes included a $3.8-billion, 75-year lease of the Indiana Toll Road (ITR) to Macquarie-Cintra, a private Australian-Spanish consortium. The consortium, ITR Concessionaire Company, in exchange for the upfront cash, assumes all management, operation, costs and revenues for the life of the lease.
How did it work out?
The ITR, originally constructed in 1956, is 157 miles long, and extends from the Ohio Turnpike to the Chicago Skyway. It serves as the primary transportation link between major east and northeast coastal cities, northern Indiana, Chicago and western points. Indiana is not the first to enter into a public-private market of toll-road leasing, in which the public entity retains ownership of a turnpike or toll road but, in exchange for immediate cash, turns over management to a private company, which then sets and collects fares for decades into the future. One major question is whether such a public-private partnership is beneficial to the citizens of these states, including Indiana.
According to a recent report, “Private Roads, Public Costs” (2009), by the liberal public-interest think tank U.S. Public Interest Research Group (USPIRG), more than $20 billion was paid for 43 highways and other transportation facilities in the U.S. from 1994 to 2006, all using some hybrid system of public-private partnerships. In addition, since 2008, the USPIRG counts 15 roads privatized in 10 states, many modeling our ITR. An additional 79 roads in 29 states are under various stages of consideration for public-private partnerships.
The report specifically criticized the ITR takeover by the Australian-Spanish consortium largely because, in the estimation of the authors, the short-term financial benefits do not outweigh the long-term costs of higher tolls paid by future generations of Indianans, money which will not go into the state’s coffers.
Already the cost of travel on the ITR is going up. In July 2011, the cost of traveling on the ITR increased by as much as 2 percent, from $8.80 to an even $9. And the cost to long-haul drivers went from $35.20 to $36.20. The fares were considerably less before the ITR concession went into place, argue the opponents of privatization.
A more recent study (2011) was undertaken by Ronald Utt of the Thomas A. Roe Institute for Economic Policy Studies, which is affiliated with the conservative Heritage Foundation. The authors contend that, with the current national economic downturn coupled with recent slowdown in reauthorizing federal highway bills in Congress, public-private partnerships provide more opportunities for the states to experiment with ways to refill their coffers. According to Utt, public-private partnerships “have demonstrated the ability to raise substantial sums of money for major infrastructure projects . . .” even though, as Utt contends, “. . . not every transportation project is amenable to the P3 (public-private partnership) approach.”
Now a controversial academic study (2012) has been released by John Gilmour, professor of public policy at the College of William and Mary. The study, published in the Public Administration Review, argues that the ITR concession was a “bad deal” for Indiana, claiming disparity of “inter-generational justice.” This essentially means that future generations of Indianans will not benefit from a decision agreed to by current political officials. In rebuttal, Troy Woodruff, chief of staff for the Indiana Department of Transportation (IDOT), claims that Gilmour misleads the reader when he does not account for several important considerations within the lease agreement, including the responsibility of ITR Concessionaire Company for maintenance and capital improvements totaling over $4 billion.
According to Gilmour, tolls are not the issue — governments can and should establish “for-pay” roads. Rather, it is the privatization of the road through a complex outsourcing agreement with private firms that is unwise. Transportation is a public function, and states, such as Indiana, should not turn over management control of valuable public commodities to private interests.
At the heart of the Gilmour article are three issues: assessment of long-term asset leases as a way of states obtaining funding for basic government expenses, accuracy of estimating the costs and benefits of the ITR lease across the duration of the 75-year lease and the ethical consideration of inter-generational consequences. Let’s examine each issue.
First, an asset lease is a popular public-private partnership arrangement for existing projects or facilities because it involves raising large amounts of cash upfront for the government entity. The private entity agrees to pay an initial concession, while the public entity grants to the private firm the exclusive rights to operate, maintain and manage the project, e.g., the Indiana Toll Road. Even though Indiana owns the toll road, the private consortium owns all improvements and extensions to the system.
According to Gilmour, the length of the lease is often detrimental to the public entity because the longer lease, such as 75 to 99 years, means that, well before the lease expires, the life of the road system, which is usually between 25 and 30 years, and the financial viability of the system to the public entity have depreciated. Unlike the length of revenue bonds — generally regulated by a state’s constitution, usually for about 30 years — the length of concessions leases are unlimited.
So, even though a substantial sum of money is acquired up front, future generations of Indiana residents will sacrifice additional revenue. Gilmour recommends a maximum 30-year lease, largely because they are similar in practice to revenue bonds and will, as he states, “. . . reduce the amount of inter-generational cost shifting.”
An examination of the claimed benefits
The claimed benefits of the Indiana Toll Road (ITR) concession lease are fairly straightforward. Their examination comprises the second major issue regarding Indiana transportation funding. The benefits can be listed as the $3.8 billion initial payment, better maintenance and management of the ITR and immediate revenue enhancement, i.e., $500 million for 10 years to be set aside in a trust fund for Indiana to make statewide transportation improvements through the “Major Moves” program. Yet, according to the calculations in a recent study by John Gilmour of the College of William and Mary, all improvements generate a 5.8:1 benefits-costs ratio over the first 10 years and then gradually decline as building projects, such as newly constructed roads and bridges and other infrastructure, depreciate in value.
Troy Woodruff, of the Indiana Department of Transportation (IDOT), questions Gilmour’s accuracy. He notes that the “lease agreement requires future benefits of maintenance and capital improvements valued at $4.4 billion.” (Gilmour concedes that better maintenance and management might occur, but does not mention the speculated level of improvements at over $4 billion.) In addition, Woodruff states that additional benefits include upgrades made by the ITR Concessionaire Company, holder of the 75-year lease, including more than $330 million in electronic tolling.
Woodruff also cites incidental benefits — i.e., benefits not initially determined but realized nonetheless — from the use of the interest of the $500 million in seed money that contributes to infrastructure development. These were an economic-development magnet, he argues. Examples put forward are the building of a new Honda manufacturing plant located near the I-74 exchange in Greensburg and a soon-to-be-completed bridge project in southern Indiana that will help land a one-million-square-foot Amazon.com center.
Gilmour contends that calculation of costs is more complicated than proponents acknowledge. He conceives of cost “as the value of the revenue that the state sacrifices by giving the ITR-operator the power to collect and retain all future tolls.” By relinquishing the power to collect revenues from raising future tolls, the state loses future benefits. Gilmour assumes three separate discount-rate scenarios for future toll increases (3, 4 and 5 percent), taking into account traffic flow and toll-road enhancements. Generally, he concludes that “the bulk of benefits come early in the lease, and the bulk of costs are delayed until late in the lease.”
Woodruff, however, challenges these assumptions and findings by noting that “toll-rate increases are capped,” with “toll rates (that) compare favorably with toll ways in neighboring states.” Woodruff also contends that the ITR lease “shifts the risks of revenue and maintenance to the private sector,” thus preventing undue financial strain on Indiana. Further, even though the ITR Concessionaire Company will reap profits late in the term of the lease, they will pay state income taxes on those profits, thus benefiting Indiana, not costing her. Finally, Woodruff argues that there is the “poor history of 50-plus years of Indiana state government control and management of the ITR.” He claims the ITR was never debt free, including losing money for three of the last five years and a “$16 million loss in 2005.”
The third and perhaps most important of the three issues is the perceived “inter-generational shift” of costs. Gilmour argues that although determining this “inter-generational shift” of costs and benefits is complicated, it is certainly ethically detrimental to future generations of Indianans. Philosophically, “one generation should endeavor to leave the next at least as well off as before . . .” Using this standard of ethical fairness, “a policy that shifts benefits from the future to the present and costs from present to future” is not acceptable. Future generations of Indianans should be considered just as important as the current generation. Shifting benefits to the present and costs to the future is unethical and unfair. Thus, for Gilmour, “the ITR lease is insupportable” because it “deprives future (Indiana) governments of potential revenue source (and) provides no compensating tangible benefit . . .”
Again, Woodruff counters Gilmour’s claims by noting that “reserves of more than $2 billion and an estimated structural surplus of $500 million means . . . (Indiana) taxpayers will see automatic refunds totaling in excess of $360 million . . ..”
However, these benefits are only for the present generation, not future generations. So, what is the best transportation policy for Indiana, state-owned or privatized roadways? And which treats present and future generations equally?
It is clear that the most important and financially credible benefit of the 2006 sale of the Indiana Toll Road (ITR) was the upfront cash payment of $3.8 billion. At the same time, it is the crux of the ethical challenge: Will future generations of Indianans be as well off financially and structurally as the current generation that is the beneficiary of the upfront cash payment?
Philosophically, we must weigh the financial benefits with the ethical costs. Gov. Mitch Daniels clearly had the well-being of the current generation of Indiana residents in mind when he signed the ITR Lease Act into law. The initial gain of $3.8 billion provided revenue to retire state debt and to establish a 10-year, $500 million trust fund designed to pay for future transportation projects.
Still, a critical study by Gilmour contends that the $3.8 billion did not materialize out of thin air; it was not “free money.” It was paid out of future revenue generated by future drivers. Is this upfront benefit worth the cost to future Indianans?
Democrat and Republican politicians both declare that current elected officials, and even current citizens, have an ethical obligation to provide a better future for children and grandchildren than what they experience. Is this what the Republican-controlled Indiana state legislature, and a Republican governor, did in 2006?
Playing a zero-sum game — one generation loses while another one gains — clearly violates our ethical sensibilities. It suggests that political obligations and responsibilities are for the present and not for the future. If this is what Governor Daniels did in 2006, and this was in fact his motive, then he thought little of the state he calls home. However, analysis suggests otherwise.
Clearly, the $500-million trust fund had an immediate impact, but, as Gilmour contended, the benefits from the Major Moves program will last well beyond the 10th year, with the last benefit, i.e., bridge construction, coming at the end of the 60th year of the lease. The bulk of the benefits are received by the end of the 30th year, at which time he indicates that “benefits from all 10 years of Major Moves are being received and augmented by the income from the NGT (the trust fund).” Logically, without further improvements in the ITR, the costs of a decaying infrastructure and a resulting decrease in toll revenue will occur.
Would the private consortium let this happen?
According to Woodruff, a state oversight board meets regularly to determine compliance with the lease agreement. If the agreement is not being fulfilled, then Indiana has the legal (and ethical) right to terminate the lease, while keeping the $3.8 billion. Thus it would behoove the private consortium to act rationally and uphold their end of the contract in order to enhance opportunity for gaining and maintaining future toll revenues.
Still, Gilmour’s primary concern is with privatization of a public good, not so much with use of a toll road. Generating fees through use of tolls is one thing, but privatizing a public good, one that is clearly the responsibility of government and not of the private sector, spells challenges. Gilmour contends that issuing bonds against future toll revenue yields the same benefits, i.e., financial, as privatizing or outsourcing the public good.
So, why should state governments, such as Indiana, give up control over one of its most important public goods, its roadways?
The answer is in the question: Governments do some things well, such as fight wars, provide for public safety and citizen protection, finance and build major infrastructure, or provide opportunities for the private sector to succeed through the use of tax credits, rebates, vouchers, etc. But government bureaucracy is not nearly as proficient at managing many of these same sectors (although an exception could be made for the military and law-enforcement agencies).
Where government bureaucracy can succeed and manage public goods, then it should. Examples include the military, law enforcement agencies, and the criminal justice and court systems. However, when government management structure and process is not as efficient or effective at providing oversight, such as in garbage pickup or toll-road management, then it makes political and policy sense to privatize.
This is the benefit and test of a public-private partnership — generating the best of both institutions for the betterment of all citizens.
Stephen M. King, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, is a professor of political science at Taylor University.