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Reason Foundation

Evaluating the Indiana Toll Road and Privatization Deals

Chris Mitchell
August 26, 2008, 7:02pm

In his latest column, Reason's Leonard Gilroy says Indiana Gov.Mitch Daniels' privatization efforts, like the Indiana Toll Road lease, are paying off in big ways.
...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.
Full Column

Chris Mitchell is Director of Communications/Media Contact


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