Strapped States Try New Route, Lease Toll Roads to Foreign Firms
June 14, 2006
By Amy Goldstein
ELKHART, Ind. -- Its official state motto is "the crossroads of America." Yet Indiana is about to turn over its entire toll road for the next 75 years to two foreign companies, making it more expensive to drive.
The decision to hand the Indiana Toll Road to an Australian and Spanish team for $3.8 billion at the end of this month has blown up into one of the biggest brawls here in a generation. It has unsettled the state's politics in the months before the November elections, pitting a governor who was President Bush's first budget director against the people of northern Indiana, which the highway passes through.
The decision also places Indiana at the leading edge of a nascent trend in which states and local governments are exploring the idea of privatizing parts of the United States' prized interstate highway system. The idea goes beyond projects, such as Northern Virginia's Dulles Greenway, in which states have turned to private companies to build or widen toll roads. Now, they are considering selling or leasing some of the best-known and most-traveled routes across America.
The trend started 1 1/2 years ago, when Chicago Mayor Richard M. Daley (D) pushed through a 99-year lease of the Chicago Skyway, nearly eight miles of elevated highway across the South Side, for $1.8 billion.
Since then, a New Jersey lawmaker has proposed selling a 49 percent interest in the New Jersey Turnpike and the Garden State Parkway. New York Gov. George E. Pataki (R) is trying to persuade the legislature to let investors rebuild or replace the Hudson River's Tappan Zee Bridge. In Houston, Harris County officials are studying leasing 57 miles of toll roads.
Locally, Virginia transportation officials announced last month that they would lease a debt-ridden toll road outside Richmond, the Pocahontas Parkway, to a private firm for $522 million.
Half a century after President Dwight D. Eisenhower persuaded the nation to build the interstate highway system, the allure of privatization is a rethinking of the relationship between the government and its roads. It reverses the view of highways as a public responsibility, ingrained since the first half of the 19th century, when states took over roads, bridges and canals that had gone bankrupt in private hands.
The Bush administration advocates the new view. "We are like a poker game," Transportation Secretary Norman Y. Mineta said in an interview. "We are inviting more people to the table and saying, 'Bring money when you come.' " Such eagerness for private investment stems from the financial strains on an overburdened highway system at a time when the White House and the Republican-controlled Congress want to curb domestic spending. The interstate system is decaying, and traffic congestion has worsened. Inflation in the price of building and improving roads is rampant.
Most significantly, money from federal and state gasoline taxes that pay for roads are falling further behind the need, with no political appetite in an era of record gas prices to increase the rates. According to U.S. projections, the part of the federal Highway Trust Fund devoted to roads is to run out of money for the first time in its history in 2009.
In response, the administration persuaded Congress last summer to take steps to make it easier for the private sector to finance new roads -- and take over existing ones. Lawmakers removed several legal barriers to charging tolls on interstates and gave private investors new access to tax-free bonds for transportation projects.
Mineta has been urging U.S. financial institutions to get involved. "This type of dialogue really didn't exist two years ago," said Mark Florian, a managing director at Goldman Sachs Group Inc., which was paid $19 million to negotiate the Indiana deal and has discussed similar possibilities with officials in more than 35 states.
Still, skepticism abounds: Will companies take good care of highways? Will toll roads become too expensive to drive? Will investors pluck profitable routes, leaving others to crumble? What will happen to public toll-road workers -- including 600 in Indiana who have been promised interviews by the new operators, but not the same job?
In Elkhart, resistance to such change runs deep. At a rest stop here on a recent day -- at Milepost 77 near the midpoint between Illinois and Ohio -- both Indiana drivers and interstate truckers were almost uniformly against what the state has done. "I heard that foreigners were going to lease it, and that sounds like a bad deal to me," said Kreig Eberle, 36, a truck driver from Chillicothe, Ill., who uses the toll road nearly every day. "I think it is kind of baloney. Indiana ought to run it itself."
Dankia McLaren, 22, a kitchen designer from nearby South Bend, said: "It is sad. . . . It is just going to make it more expensive to drive."
The passionate opposition has astonished the architect of the deal, Gov. Mitchell E. Daniels Jr. (R), Bush's first budget director.
Daniels said he had his "little epiphany" about the toll road in 2004, after he returned from Washington and was campaigning for governor. At a barbecue in rural western Indiana, a veteran of the state highway department came over and said: "You understand it's a joke, don't you."
The joke, he told Daniels, was that the state for years had a list of promised transportation projects that would never be built. Running on a platform of economic development, Daniels immediately viewed a roads program as a means of creating jobs and attracting business to spur Indiana's sagging economy.
Soon after taking office last year, the governor ordered his staff to compute the price of the pent-up projects -- $2.6 billion more, it turned out, than the state could afford -- and propose ways to pay for them. Of more than 30 options, Daniels said in an interview, generating money by leasing the 157-mile Indiana Toll Road was the only "real bold stroke that could substantially close this huge gap."
In the shower one morning, he came up a name for his plan: "Major Moves," borrowed from the title of a Hank Williams Jr. country song. The governor announced Major Moves in September, saying the state was open for bids on the toll road to raise money for a 10-year transportation plan.
Late in January, he invited legislators, builders, manufacturers, mayors and trade union leaders to his office in Indianapolis to disclose that the winning bid was $3.85 billion, more than enough to fund the state's road projects. The crowd burst into applause. "Everybody thought, that was that," Daniels recalled. "We can stop dreaming and start digging all these big projects."
But, Daniels had not anticipated what he calls "the x-word" -- for xenophobia -- or the protests or the bumper stickers that say, "Keep the Toll Road, Lease Mitch."
"This was an authentic, spontaneous, very emotional reaction," the governor said, "and no interest group caused it."
The proposal stirred up one of the biggest fights the Indiana legislature had ever seen, with rallies and expensive media campaigns on both sides, and the governor unable to change minds at jammed town hall meetings in communities along the toll road where opposition was most fierce.
"Never in my legislative career will I ever again be faced with a [bill] quite like this," said the chief sponsor, state Rep. Randy Borror (R) of Fort Wayne, who walked the statehouse with thick notebooks filled with figures showing how much transportation money each legislator's district would get from the plan.
The winning bidders were Macquarie Infrastructure Group of Sydney, the same firm that controls the Dulles Greenway, and Cintra Concesiones de Infrastructures de Transporte S.A. of Madrid. Under the lease, the companies got the right to raise tolls -- which have not been increased in two decades -- for cars and trucks right away, and eventually to keep pace annually with inflation. The 103-page lease spells out the companies' responsibilities in meticulous detail, including clearing snow and road kill within specified times, and granting state police the right to patrol.
Steve Allen, Macquarie's chief executive, said the company, which operates toll roads in nine countries, has an incentive to improve the highways to attract more drivers. Since it took over the Chicago Skyway, he said, the company has built electronic toll booths sooner than required and made lane changes that reduce backups.
Indiana legislators were not reassured. Daniels and his allies made big compromises: extra money for each county along the toll road, a postponement of higher rates for cars until electronic tolls are installed, job-training money for economically depressed Gary. Even so, the plan passed the state House by one vote.
Three months after the legislation squeaked through, feelings remain raw.
"The whole thing stinks," said state Rep. B. Patrick Bauer, the House Democratic leader. The two companies, he said, "got a heck of an unbelievable deal. We got a bad deal."
Daniels's approval ratings have plummeted, from about 50 percent early last winter to 37 percent in the most recent polls. Borror said the issue "complicates the election" for state legislators in November.
"There are going to be a lot of states that fail at this," Borror said, "because they underestimate the amount of work it takes to get this bill passed." Even so, Daniels said, "I don't believe we'll ever [again] be able to do any one thing that will be as transformative and positive for the future of this state."
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