In November, the company which had won a 75-year concession contract to operate, maintain, and improve the 157-mile Indiana Toll Road filed to begin Chapter 11 bankruptcy proceedings. Critics of the original 2005 Indiana Toll Road transaction are cheering, hoping this event will derail the growing trend of private investors moving into the U.S. highway sector. That, fortunately, is not likely to happen.
In the original deal, Indiana Gov. Mitch Daniels persuaded the legislature to outsource the management and operation of the state’s most important highway, Interstates 80 and 90, to a competitively selected consortium for 75 years.
The winning bidder would offer 75 years’ worth of lease payments, in an up-front lump sum. The highest bid was submitted by a joint venture of Spanish toll-road company Cintra and Australian investment bank Macquarie, bidding a whopping $3.8 billion, far more than anyone expected.
Post-Mortem
What went wrong?
Two factors were responsible. First, the company based its financing model on an overly optimistic projection of traffic and toll revenue. Second, it used a very aggressive financing structure, requiring large debt service payments toward the end of the first decade of the 75-year agreement. The “Great Recession” torpedoed both assumptions, making it impossible to meet the upcoming debt service payments.
The Indiana Toll Road Concession Company (ITRCC), 50 percent owned by Cintra and the remainder owned by two Macquarie funds, reached an agreement with its principal creditors on a “pre-packaged” Chapter 11 process. They will seek a new operator to take over the remainder of the 75-year concession agreement, subject to approval by the Indiana Finance Authority.
If that effort fails, ITRCC will complete a financial reorganization to recapitalize itself with a reduced debt structure. Typically in such reorganizations, the company loses all or nearly all of its equity investment, and the creditors accept a haircut on the debt obligations.
For customers of the Indiana Toll Road, things will proceed as usual. There will be no interruption of service, no increases in toll rates, and no change in the performance requirements embedded in the 75-year concession agreement, which will remain in force under either restructuring outcome. What it means for taxpayers is no impact, period: there will not be any taxpayer bailout.
Taxpayers Unaffected
Despite ITRCC’s current troubles, Indiana comes out of this deal in great shape. The $3.8 billion worth of up-front lease payments was used to pay for a 10-year highway capital improvement program which proved very popular.
Contrary to early critics’ predictions that Daniels would pay a high political price for “selling the family silver,” he was reelected, by a wide margin, to a second and final term.
Indiana Toll Road customers today have a much better highway than before. Since taking over in 2006, ITRCC has invested $458 million into the toll road, adding new lanes, rehabilitating bridges and pavement, and implementing a new electronic tolling system, the 15-state E-ZPass system, to replace the former cash tolls.
The Toll Road has high ratings on bridge sufficiency and pavement condition, consistent with the requirements of the concession agreement. A 2012 opinion survey found 76 percent of the Toll Road’s customers have a favorable impression of the highway.
Doom and Gloom Predictions
Mother Jones magazine featured the lease in a major story critical of long-term concessions, called “The Highwaymen.” The authors quoted several critics saying Indiana had let the tollway go at a “fire sale price,” implying ITRCC would make an enormous return on its investment, thanks to ever-higher toll rates.
This prediction ignores the large expenses involved in operations and maintenance, improvements over 75 years, and likely reconstruction and replacement of all the pavement, let alone debt service costs.
Rep. Peter DeFazio (D-OR) called the deal “a license to print money.” He and the late Rep. James Oberstar (D-MN) even called for congressional legislation to outlaw the leasing of existing highways—which, fortunately, went nowhere.
So what can we learn from this latest chapter in the ITR saga?
Most importantly, this event demonstrates, once again, that long-term toll concessions protect taxpayers. The risk of construction cost overruns, and of inadequate traffic and revenue, are shifted from taxpayers to sophisticated investors.
Even though the Indiana Toll Road was an existing highway, it has been measurably improved during its first decade under private management and operation. It definitely has not been run down via foolish cost-cutting as ITRCC encountered financial problems.
Teachable Moment
Infrastructure investment funds are not fleeing from long-term highway concessions. The impending bankruptcy filing of ITRCC has been rumored for the past year, yet the Florida Department of Transportation had no problem this summer in getting financing for its $2.3 billion concession for the Orlando I-4 reconstruction and modernization project, which added four express toll lanes.
Although Indiana used its $3.8 billion up-front payment to fully fund a 10-year highway improvement program, state departments of transportation should not optimize bidding competitions to seek up-front windfalls. Such rigging may well lead the winning bidder to take on excessive debt, jeopardizing its ability to run the project as a business.
Even more importantly, a long-term concession is intended to be a true public-private partnership over many decades. Having the concession company make monthly or annual lease payments provides both parties with ongoing incentives to work together to make their partnership succeed. It also avoids the unfairness of charging higher tolls to toll road users to pay for highways elsewhere in the state, which should be paid for by their own users.
Robert Poole ([email protected]) is a Searle Freedom Trust Transportation Fellow and director of transportation policy for the Reason Foundation. An earlier version of this story appeared at Reason’s Out of Control Policy Blog at http://www.reason.org/blog/. Reprinted with permission.
