The Bankruptcy of Indiana Toll Road Highlights Privatization Advantages
Recently, the Indiana Toll Road Concession Company (ITRCC), which operates the Indiana Toll Road, declared Chapter 11 bankruptcy. This bankruptcy will mean a new operator for the toll road and significant loses to ITRCC’s investors and creditors. Although this bankruptcy might be viewed as evidence that Missouri should not allow private toll concessions in the state, in reality this situation highlights the advantages of these concessions to taxpayers.
ITRCC is a 50-50 partnership between a Spanish toll road operator and 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.
The important lesson of the Indiana Toll Road bankruptcy is not that a private company failed to make a profit, but rather that privatization deals 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 MoDOT slowly running out of the money necessary to maintain its state highway system, the fate of Indiana’s highway privatization deal should not make Missourians wary. It should make them jealous.