Company from Austrial & Spain pay billions for Indianna money-losing toll roads.

May 27, 2006
Op-Ed Contributor
For Whom the Road Tolls
The New York Times
By MITCH DANIELS

Indianapolis

AS Americans hit the roads this Memorial Day weekend, debate is
building about how to pay for the first-class transportation network
that everyone agrees the United States requires. The money from
gasoline taxes no longer comes close to meeting needs. Nationally, the
gap between road-building needs and projected tax revenue is estimated
in the hundreds of billions of dollars, and growing. Almost every
governor I talk to faces a seemingly intractable shortfall.

When I became governor last year, my administration inherited a gap of
at least $3 billion, equal then to 10 years of new road
construction. Long-sought, long-delayed projects languished on the
drawing board. For Indiana, a centrally located state that calls
itself "the crossroads of America" and has great promise as a
logistics and distribution capital, the opportunity cost of inaction
was enormous.

A case can be made for higher gas taxes, but no economically rational
or politically imaginable increase could close a gap this huge, even
if leveraged through reckless borrowing. The only alternative to
throwing in the towel was to bring to bear that handiest of revenue
sources, Other People's Money.

This is hardly a novel idea. In much of the world, but only recently
in the United States, private capital has begun to play a role, most
often in partnerships with public authorities. The Reason Foundation
estimated in April that $25 billion of private investments have been
proposed or committed for new and existing roads in six states.

If it were merely a matter of getting hands on money today that would
otherwise come in over the years, such partnerships would make little
sense. The goal for states is to capture far more value than an asset
would be worth if it remained in public hands. That goal is often not
difficult to achieve.

The 157-mile Indiana Toll Road had lost money five of the last seven
years. A principal reason was its antique pricing; tolls had not
changed since 1985 and were far below what comparable American toll
ways charged.

As a private citizen, I had always been intrigued to stop at a
concrete booth and fish out a dime and a nickel to pay the 15-cent
toll at Gary. As governor, I asked, "What does it cost us to collect a
toll?" This being government, no one knew, but after a few days of
calculation, the answer came: "About 34 cents, we think." I said, only
half in jest, that we should just go to the honor system and we'd come
out way ahead.

Why would a losing enterprise with an underpriced product drift on in
that way? Because it was run by politicians, who are rarely
businesslike and deathly afraid to annoy anyone. So the state lost
money on the road, postponed repairs and expansions and failed to
install the electronic technology that makes toll ways elsewhere
faster, more convenient and more efficient.

Just as many business units are more valuable if separated from their
conglomerate parent, an asset like a highway can be worth vastly more
under different management. When we offered our road for long-term
lease, we received a high bid of $3.8 billion, cash, from
Macquarie-Cintra, an Australian-Spanish consortium. The highest
estimate of the road's net present value in state hands was less than
half that amount, and even that estimate assumed regular toll
increases of the kind past governors steadfastly refused to
impose. Noting the road's record of losses, one finance professor
remarked, "If they'd gotten a dollar for it, it would have been a good
deal." Instead, Indiana will soon cash a check that closes a gap most
had believed insoluble. Future toll increases will be capped at the
level of inflation.

Of course, the ultimate success of this policy depends on how the
state uses these new funds. As in business, in government it is a
mistake osity in Indiana was as genuinely grassroots as it gets. Many
Hoosiers convinced themselves either that our proposal borrowed from
the future, or that it gave away a part of America to "foreigners."

Their hearts were in the right place, but not their logic. The
economic case is ironclad; Indiana has scored a multibillion-dollar
financial gain. And the reflexive patriotism that saw this transaction
as a loss of control has it backward: in a world competing for
globally mobile capital, repatriating $4 billion that Americans spent
on Sonys, Audis, or, in my case, Foster's beer, to put Hoosiers to
work is not a loss but an emphatic win.

As governor, I should have done much more than I did to walk Indiana
through, in advance, both the business case and the realities of
today's global economic competition. But I urge my fellow governors in
other states now examining similar deals to focus on these facts:
Within a few years, Indiana will be home to some $5 billion of new
public assets that otherwise would not have existed. Tens of thousands
of jobs will be created in their construction, and in their
exploitation by businesses of the future. Neither statist dogma nor
xenophobia should be allowed to block huge public benefits of the
most, so to speak, concrete variety.

Mitch Daniels, the director of the Office of Management and Budget
from 2001 to 2003, is the governor of Indiana.