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Indiana has benefited from toll road lease and could gain from Gov. Daniels' lottery plan
By Leonard C. Gilroy, AICP
Indiana Gov. Mitch Daniels' has proposed leasing the Hoosier Lottery to fund college scholarships and various education programs. His opponent this November, Democratic gubernatorial candidate Jill Long Thompson, recently announced that if elected, she would revisit and possibly reverse some of Daniels' privatization initiatives, including the $3.8 billion lease of the Indiana Toll Road (ITR) in 2006.
Long Thompson proposes a bipartisan commission to evaluate various aspects of the toll road lease and other privatization contracts. Further, she has indicated that the commission would pursue all available legal options with regard to the contracts between the state and private companies, including amendment, renegotiation, or termination.
While it's certainly good practice for government to periodically review their privatization initiatives-as we've seen recently in Florida with their Council on Efficient Government, for example-it's hard to believe that Long Thompson's proposed review would be fair and unbiased. Rather, in this election cycle it seems like a blatant attempt to use privatization as a political issue. Given her vocal opposition to Daniel's privatization deals, it's safe to assume that the deck would likely be stacked against privatization from the start.
In the press release announcing her proposal, Long Thompson said, "Mitch Daniels' policies have short-changed taxpayers and compromised the safety, security and welfare of our citizens while the private companies that were awarded these contacts make huge profits off of our tax dollars […] I believe that money should stay right here in Indiana, and, as Governor, I will fight to make sure that finally happens."
Can someone who says this really approach privatization objectively?
The Indiana Toll Road offers a useful example here. First, a citizen oversight commission already exists for the ITR. It was established under executive order by Gov. Daniels and is responsible for monitoring contract compliance. And the state bills the costs related to these monitoring efforts back to the concessionaire, the Indiana Toll Road Concession Company, so the company-and not taxpayers-bears the costs of this contract oversight.
Further, the mere notion of "undoing" the ITR concession stretches the bounds of logic. Would this commission propose a nearly $4 billion buyout of the concessionaire, and if so, how much would they have to raise taxes to accomplish it?
And Long Thompson claims to want the money to "stay right here in Indiana," apparently not realizing that it already is. Cintra and Macquarie Infrastructure Group joined together and wrote a $3.8 billion check to Indiana for the rights to run the road, and that money was used create the state's Major Moves transportation program. Under Major Moves, the state is undertaking hundreds of new construction and highway preservation projects, annual state highway spending will quadruple from $213 million in 2006 to $874 million in 2015, and every county in the state has or will receive additional funds for local transportation projects.
In short, the lease payment is funding permanent assets to serve the needs of current and future Hoosiers. Further, the concessionaire has spent over $88 million in 2008 so far on construction contracts for work on the ITR itself. Over 97 percent of this work went to Indiana businesses, well exceeding the 90 percent target specified in the lease contract for the roughly $4 billion planned in ITR construction work over the 75-year term. That's $4 billion in addition to the $3.8 billion upfront payment that will remain in Indiana.
Without the toll road lease, these projects would likely have never materialized, or they would have necessitated tax increases to move forward. And Indiana has also earned over $360 million in interest on the upfront payment in just two years (over $185,000 per day, at current rates), which will be used to fund additional state and local transportation projects for decades.
This sort of wise fiscal stewardship was a key factor in Standard & Poor's recent decision to award Indiana its first-ever AAA bond rating in July, indicating top-notch financial conditions and management. Indiana's excellent credit rating means it will save millions of taxpayer dollars in interest payments when it issues bonds to fund capital construction projects and the like.
The Indianapolis Star got it right in a recent editorial, saying that the S&P rating "has validated several difficult, controversial decisions that Gov. Mitch Daniels and the General Assembly made to bring Indiana's budget back into balance. [...] [T]he $3.8 billion in capital leveraged through the [ITR] deal has enabled the state to make much-needed improvements in infrastructure while handing off management of an underperforming asset."
Before the lease, it cost more to collect each toll than the actual toll amount itself under government operation. Gov. Daniels wrote in the 2006 Annual Privatization Report:
"Tolls had not been raised in twenty years; at some booths the charge was 15 cents. (As the new governor, I innocently inquired what it cost us to collect each toll. This being government, no one knew, but after a few days of study the answer came back: '34 cents. We think.' I replied, only half in jest, that we'd be better off going to the honor system.) With politicians in charge, neither sensible pricing nor businesslike operational practices were likely, ever."
So today, it's quite accurate to say that through privatization, Indiana essentially turned a liability into an asset.
And even in these tough economic times, the state comes out a winner. Indiana's budget director recently announced a decline in traffic on the toll road. Fortunately for Indiana, the $3.8 billion upfront payment they received from the concessionaire is already in the bank earning interest and funding new transportation infrastructure, and the revenue risk was shifted from government to the concessionaire. If future toll revenues fall short of expectations, it is the concessionaire-not taxpayers-that will take the hit.
Taxpayers and politicians need to understand that privatization has a long, international track record of successfully delivering such benefits as cost savings, more effective and efficient service delivery, higher performance, and sometimes even an injection of private dollars to fund public infrastructure, as we see in the ITR lease.
Privatization opponents ignore these fundamental realities in their discourse, instead preferring to demagogue the Indiana Toll Road and some of Daniels' other initiatives. What they fail to realize is that the logical outcome of their push would be to take proven policy tools off the table that are essential for smart fiscal stewardship and the future economic health of the state.
Leonard Gilroy is director of government reform at the Reason Foundation. An archive of Gilroy's work is here. Reason's privatization research and commentary is here.
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