March | April 2017

Legacy of the Lease

Indiana Toll Road Deal Successful, Not the Model Some Expected

By Sean Slone, CSG Senior Transportation Policy Analyst
The 2006 lease of the Indiana Toll Road may be the closest thing the United States can point to as a legacy for transportation public-private partnerships—P3s for short. The P3 is still a relatively new tool in this country, after all.
But while the agreement is one that already has allowed Indiana to reap enormous benefits, it has not become the model for the nation some originally expected as the public-private partnership trend has spread to other states in recent years.
The state of Indiana leased the 50-year-old, 157-mile, east-west tollway in the northern part of the state to private investors. Under the terms of the deal, a consortium that included Australian bank Macquarie and Spanish infrastructure firm Cintra gave Indiana a one-time, $3.8 billion, lump-sum payment in return for agreeing to operate and maintain the road—and keep the toll revenues—for 75 years.
Not only was the state able to pay off its original debt, invest in other projects and create a legacy fund for future projects, but it also reaped benefits as the private investors reportedly put hundreds of millions of dollars into upgrading the toll road, which had been in disrepair for years.
“I live up in that area and it’s probably the smoothest pavement we’ve had in 25 years,” said Rep. Edmond Soliday, the Valparaiso Republican who chairs the House Roads and Transportation Committee.

Pros and Cons

But the toll road lease was not without its critics, among them Rep. Patrick Bauer, a South Bend Democrat.
“I don’t think (Macquarie-Cintra has) done a good job at all,” he said. “I personally don’t take the toll road because so many times there’s trouble getting people through the gates. It’s not every time, but it’s enough times. I think they don’t clear the roads in the winter as well as the state did.”
Bauer’s criticism extends beyond the company’s stewardship of the road, however, and dates back to the 2006 lease agreement. At the time, he wanted the state to go in a different direction.
“If we had done what I suggested, we could have done four 20-year bonds and made over $3 billion every 20 years and (still) controlled the road and achieved four times as much,” he contends. “But I think (then-Gov. Mitch Daniels, who pushed for the deal) wanted to be an example of privatization. … He just wanted the money up front and quick. And he achieved his purpose. There are roads running everywhere and bridges to nowhere.”
In his criticisms, Bauer also cites the jurisdictional issues that can arise from a public-private arrangement on a transportation facility.
“A few years back, the state police wanted to close (the road) because of weather, and (the toll road operators) said, ‘We’re a private road, get the hell out of here,’” Bauer said.
“Meanwhile, they don’t pay property taxes on gas stations and restaurants because, by the way, they’re a public entity.”
The length of the 75-year lease also has been a target of criticism, most recently in a 2012 academic study by College of William and Mary professor John Gilmour, who argued that future generations of Hoosiers won’t experience the same benefits from the 2006 deal that this generation has, that transportation is a public function and that states should not turn over management control of valuable public commodities to public interests.
“It’s a scheme that’s short-lived,” Bauer said. “It helps the existing officeholder (the governor at the time), … but it doesn’t go on forever. … I just think we’re in an uncomfortable long-term position because we’re not in control. … We now have a situation where one of our major arteries is controlled by a foreign company. … You’re doing this for a company that intends to make a profit and that profit should be going to the state rather than to a private company. … I think a state or a public entity can make more money doing it themselves.”
Soliday and Sen. Thomas Wyss, a Fort Wayne-area Republican who chairs the state’s Homeland Security, Transportation and Veterans Affairs Committee, point out that the legacy fund is at least one benefit to future generations. They also note the lease agreement includes measures to ensure the road is properly maintained by the contractor, that toll rates aren’t increased over a certain level and that even if something went wrong with the contractor, the state would still get to keep all it has gained.
“If (Macquarie-Cintra) went bankrupt—which there’s no indication that they’re going to—but if they did, we’d own the toll road,” Soliday said. “We have all of that work done. We haven’t lost a thing. We have a much better toll road. The debt is paid off. We have billions of dollars of work done across our state. … Our state doesn’t get hurt at all.”
Rep. Ed DeLaney, an Indianapolis Democrat and member of the House Roads and Transportation Committee, is skeptical the toll road lease will look as good 68 years from now when the lease ends as it does right now coming off projects funded by Major Moves, a program that allowed the state to fund other transportation projects. But he said in the end, it likely won’t matter.
“My feeling and my experience is if you delay a funeral too long, the crowd has thinned,” he said. “The number of people who will remember this 30 or 40 years from now if it’s buried under bad circumstances won’t be very high and there will be no one (still around) to take responsibility.”

No Longer a Model

But Wyss, Soliday and DeLaney all agree Indiana—or any other state—is unlikely to see a deal like the toll road come along again anytime soon.
Wyss said the state likely couldn’t get $1.5 billion for the toll road today.
Soliday said as the state looks to new public-private partnerships, the balance of power between states and their private partners has shifted dramatically. Arguably, Soliday believes, it was the banks and private investors that ultimately learned more from the Indiana deal than other states did. While numerous models of P3s have emerged around the country and contracts have evolved since 2006, no state has signed a better one, he contends.
“I think you probably have seen the last deal like that where the leasor (the state) is going to have no risk in the game,” he said. “I’m out trying to sell the Illiana (Expressway) these days. We’ve got bidders and so forth. I think it’s going to be successful. And the Ohio River Bridges (Project) I think is going to be successful. But we’re going to have to have skin in the game.”
“I don’t think it’s a model anymore,” DeLaney said of the 2006 deal. “I think (then-Gov.) Mitch Daniels sold our toll road at the absolute top of the market, for which he deserves credit. If you’re going to sell it, sell it at the top of the market. But I don’t think it’s a model for very many other people in light of today’s economics. I don’t think that it can be repeated.”
Perhaps a case in point can be found next door in Ohio, where just over a year ago Gov. John Kasich hired a consultant to examine revenue options for the Ohio Turnpike, including a potential lease. Kasich announced in late 2012 that his preference was instead to increase the bonding capacity of the Ohio Turnpike Commission.
“It’s been a very big win for the governor and the people of the state of Ohio,” Jim Barna of the Ohio Department of Transportation told attendees at the Transportation Research Board’s annual meeting in Washington, D.C., in January. “The feedback we’ve gotten from all the local governments along the turnpike has been very positive. There was a lot of resistance for us to go out and privatize that asset. I think we’ve come up with the best option.”
One important lesson from Indiana’s toll road experience that other states should take away, some lawmakers say, involves the role of the state legislature in signing off on such deals at various points in the process. Before the $3.8 billion agreement was signed in 2006, a $4.6 billion offer for the toll road was on the table. But lengthy debate on the merits of the agreement in the legislature ultimately derailed it, which meant Indiana lost out on an additional $800 million that could have gone to transportation needs.
“(When) the legislature has to approve everything,” Soliday said, “banks or investors say ‘Hey, wait a minute, I’ve got this money. I need to invest it. I can’t mess around with the stuff you guys do in government. I’m tired of waiting.’ And they move on. They’ll pull out.”
In 2011, Soliday and Wyss were among the sponsors of legislation that shifted approval authority on future deals from the legislature to the governor.
“What we concluded was that we needed to create a system where the governor can act, particularly in these bi-state agreements where you’ve got to be working through each other’s cultures, as we’ve done with Illinois and Ohio and (with Kentucky) on the Ohio River bridges,” Soliday said. “And you can’t do that on the floor of the House of Representatives.”
But other states might also note what DeLaney sees as an unexpected benefit from the toll road lease, as Indiana faces a future without the money from the deal, which already has been spent.
“Now that (the Major Moves funding) is gone, we noticed that it was nice having revenue for roads and so we may actually take a serious look at a long-term solution to our roads and transportation problems,” he said. “(The toll road lease) artificially moved a lot of money forward, got a lot done in a short period of time and we noticed that and we liked the result. And now we’re saying, ‘oh my.’”
There are plenty of states saying “oh my” as they, like Indiana, contemplate how to fund transportation going forward. While they come with strings attached—and may come with even more in the future—public-private partnerships can provide states an important tool in playing catch up and moving ahead even as they work on those longer-term solutions.