A Lesson for Missouri: Indiana Toll Road Bankruptcy Highlights Privatization Advantages
Here’s a story we’re familiar with in Missouri: Government officials propose a multimillion-dollar project. They sell the plan to taxpayers as a way to meet future needs and generate substantial economic growth. After the project gets built and the contractors get paid, it turns out rosy projections were dead wrong and the local residents are left holding the bag.
But what if the situation was reversed, so that when the project fails to meet expectations, the contractors are left holding the bag. Impossible? Well, it just happened in Indiana — thanks to privatization.
Recently, the Indiana Toll Road Concession Company (ITRCC), which operates the Indiana Toll Road, declared Chapter 11 bankruptcy. The ITRCC is a 50-50 partnership between Cintra SA (an international toll road operator) and Macquarie Infrastructure Group (an Australian investment bank). In 2005, those partners paid the state of Indiana $3.8 billion for the right to operate the Indiana toll road for 75 years. As part of the agreement, ITRCC had to make significant capital improvements to the toll road; from 2006 to the present the company invested $458 million.
ITRCC investors expected steadily rising highway traffic to generate returns that would exceed these upfront costs and justify the many stipulations under which the company had to operate the toll road. However, post-recession highway utilization has made the original traffic projections, and hence the debt repayment plan, untenable. This is what forced the company to declare bankruptcy.
While it is unfortunate to see any company fail, Indiana taxpayers have made out like highway robbers on the deal. The state invested its $3.8 billion windfall in a 10-year, statewide transportation improvement plan. The privatized toll road received $458 million in upgrades courtesy of ITRCC, making it a better road now than when Indiana privatized it. And even though ITRCC has declared bankruptcy and must be restructured, the investors, not the taxpayers, will take the hit for overly optimistic traffic projections.
When the highway was privatized in 2006, critics in Indiana and other states, including Missouri, were apprehensive of a foreign, private consortium buying state infrastructure. One Indiana legislator said that Cintra-Macquarie “got a heck of an unbelievable deal. We got a bad deal.” Now that it appears the results are exactly the opposite, infrastructure privatization critics argue that ITRCC’s bankruptcy shows privatization does not work.
But in reality, private toll companies already are succeeding in the United States and internationally, a prime example of which is the Chicago Skyway. Moreover, the important lesson for Missouri from this bankruptcy is not the inability of Cintra-Macquarie to recoup its investment, but rather that privatization can tap into significant capital for infrastructure improvements and transfer risk to the private sector.
In the case of Indiana, we can retrospectively say that the buyer overpaid, but that was (and still is) a risk investors are willing to make when there is a reasonable prospect of profit. Indiana residents did not share the investors’ risk, but they have benefited from more than $4 billion of investments to their transportation infrastructure. With the Missouri Department of Transportation (MoDOT) slowly running out of the money necessary to maintain the Missouri state highway system, the fate of Indiana’s highway privatization deal should not make Missourians wary. It should make them jealous.