Report on Indiana Toll Road deal paints ugly picture

by: Thomas

Mon Sep 17, 2007 at 12:54:08 PM EDT

On the hidden "tax" of future construction:

The Indiana deal also requires the state to pay investors compensation for reduced toll revenue when the state performs construction such as to add an exit or build a mass transit line down the median. This
compensation would add significantly to the cost of construction, and the state could potentially not afford to do the work it would otherwise perform.

As an added complication, the exact level of these future payments might be subject to dispute and lawsuits.

On guaranteeing state-of-the-art safety and maintenance standards:

The Indiana privatization deal, as a result, does not guarantee state-of-the-art standards. Under that deal, the state of Indiana can require the operator only to meet generally applicable safety standards. To get state-of-the-art, Indiana must pay the cost of constructing and maintaining the higher standards, as well as compensate the private company for any lost tolls caused by the construction. In other words, if Indiana intends to bring its toll road up to state-of-theart standards, it must pay dearly.

On the true value of the Indiana Toll Road:

Analysis of the Indiana and Chicagodeals by Dennis Enright of NW Financial, a New Jersey investment bank, found that the private $?? The Dangers of Road Privatization 13 investors in those deals would likely recoup their investment in less than 20 years. That analysis is confirmed in at least Indiana's case by the company that won the bid. The company Macquarie sent investors a presentation asserting an "Anticipated 15 year payback to equity."29 Given that Indiana's deal is 75 years long, and Chicago's is 99 years, the analysis demonstrates that governments in these states received far less for their assets than they are worth.

Economist and long-term valuation expert Roger Skurski at the University of Notre Dame finds that the $3.85 billion Indiana Toll Road lease should have more reasonably been valued at $11.38 billion.

On the "private sector is more efficient" argument of Governor Daniels:

Privatization advocates often counter concerns about the high capital costs of privatization by talking about potential efficiency increases from private operators. Relatively minor cost savings may be gained by avoiding public-sector rules about hiring standards.37 Overall, however, the potential savings are so financially limited that road companies do not even mention them to their own investors. Macquarie Investment Group, in its own PowerPoint presentation to investors on the Indiana deal, reports "no significant cost savings envisaged."38 Similarly, a leaked document from a private operator proposing a $30 billion deal in New Jersey explicitly states that the value is due to toll rate increases, not operating efficiencies.

On the short-term gain and long-term loss of Major Moves:

States or local officials may be attracted by the immediate payoffs of privatization deals because they face long-term revenue shortfalls that prevent them from funding public programs or force them to face criticism for tax increases. But because privatization payoffs are financed through future toll revenues, they can actually make future budget shortfalls worse. For instance, the Indiana Toll Road deal used a 75-year lease to finance a ten-year transportation plan. Whatever structural budget shortfalls Indiana faced before the deal will return in year 11, but the state will need to face these shortfalls without the yearly revenue from its toll road or the possibility of raising those tolls for public purposes in the future.