Lessons from the Indiana Toll Road

June 26, 2013

A new report by the Reason Foundation (PDF) reviews Indiana’s experience with leasing the Indiana Toll Road to a private operator.

The 156-mile Indiana Toll Road (ITR) lost money while under state operation and management. In 2006, the state leased the management, operation, expansion, and maintenance of ITR to the Indiana Toll Road Concession Company (ITRCC) for 75 years, in exchange for an upfront lump sum payment to the state of $3.85 billion.

The report outlines how the proceeds were apportioned: $2.8 billion for long term infrastructure investment (dubbed “Major Moves”), $200 million to completely pay off ITR debt, $150 million to counties for local roads, $240 million for local infrastructure to counties in which ITR operates, and $500 million for a trust account from which the accumulated interest will be spent every 5 years toward Major Moves. The first disbursement in 2011 was $124 million.

The lease contract requires the ITRCC to fund repairs, maintenance, and expansions, with state limits on toll rate increases and mandated standards for cleanliness and emergency response. Additionally, the ITRCC reimburses the state for law enforcement and contract monitoring costs of ITR. Contract underperformance, revision, or early termination by ITRCC results in fines payable to the state. Financial risk has been almost totally shifted from the Indiana tax payers to ITRCC.

The authors point out that Indiana is now the only state with a fully funded 10-year transportation plan which does not include debt or tax increases. With other federal funding, Major Moves spends about $11 billion from 2006 to 2015. Among 87 new corridors and 1,000 replaced/rehabilitated bridges, half of the state roads have already been upgraded. ITRCC will invest at least $4.4 billion in ITR itself over the life of the lease which includes expansions, maintenance, implementing electronic tolls, and rehabilitation of road structures such as bridges. An exclusionary clause does not prevent any nearby road development; but the state pays a fee if it builds a parallel expressway within 5 miles of ITR. As a result, state highway planning has not been limited or altered.

The study accurately explains that the ITR contract did not simply move revenues forward: ITR was had run persistent deficits and had a negative net present value under state management. The $3.85 billion was previously neither available for current nor future state spending of any kind. And no public employees lost their jobs. All of the public employees were adopted by ITRCC or other state departments without reducing compensation or pensions.

The study concludes:

Given the overwhelming benefits that Indiana has reaped from leasing its toll road to a private operator, it makes sense for policymakers in jurisdictions with public sector toll roads to explore the potential value of leasing those assets as they develop strategies for closing a long-term mismatch between transportation needs and available funding. The ITR lease allowed the state to invest billions in transportation infrastructure during a major recession, taking advantage of competitive pricing and robust contractor competition in a down economy to modernize the state’s transportation system for decades to come.

More about transportation funding here.

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