Protecting Taxpayers When a Privatization Partner Goes Bust
Thanks to the way the deal to operate the Indiana Toll Road was structured, the state treasury and the road's users don't have anything to worry about.
Last month the company that won a 75-year concession to operate the Indiana Toll Road filed for Chapter 11 bankruptcy. That's bad news for the company, but not for the road's users. The bankruptcy demonstrates that, if structured correctly, roadway privatization deals can successfully shift risk to the private sector and protect taxpayers.
In 2005, two companies came together to form the Indiana Toll Road Concession Co. (ITRCC), which won the right to operate the toll road in exchange for a $3.8 billion up-front payment. The deal limited how much tolls could rise and included a trigger requiring the consortium to expand the roadway if certain congestion benchmarks were reached. The $3.8 billion threw off about $250 million that was used to fund other state transportation priorities.
Like so many other enterprises, ITRCC was done in by the Great Recession. Its financing structure called for large debt payments at the end of the first decade, which proved overwhelming in the face of revenues that didn't meet projections when the downturn hit and traffic volume fell.
But what's reassuring is that motorists will see no interruption in service or toll increases as a result of the bankruptcy. The roadway is still subject to the same performance metrics, and there will be no taxpayer bailout. State officials will first try to find a new operator to take on the remainder of the concession deal. If that doesn't work out, the ITRCC will likely be recapitalized with an altered debt schedule.
In either case, customers will retain the benefits from the $458 million ITRCC has invested since 2006 in road, bridge and pavement improvements and a new electronic tolling system.
While it appears that the Indiana Toll Road deal has succeeded at protecting taxpayers and motorists, that doesn't mean there aren't lessons to be learned from the bankruptcy. To maintain a true public-private partnership, governments might want to avoid taking the entire concession payment up front.
Chicago completed a similar deal just before the Indiana Toll Road agreement and couldn't resist the temptation to use the upfront windfall to plug other holes in the city budget instead of using interest from the concession payment to maintain transportation infrastructure. More recently, public-private partnerships for Virginia's Pocahontas 895 parkway and Colorado's Northwest Parkway featured smaller upfront payments but give taxpayers a cut of the ongoing toll revenue.
There may be other ways to improve on the concession model. Northeastern University Professor Joseph M. Giglio has proposed splitting roadway ownership three ways. The third class of owners -- banks, utilities and retailers whose revenue is dependent on regional economic activity -- have an interest in good service at acceptable toll rates. Their influence would balance the often conflicting interests of government, which wants to keep motorists' prices down, and private investors that want to maximize profits. Since it would likely be unwieldy for existing roads to shift to this approach, however, it might be most appropriate for fast-growing areas seeking new capacity.
Private-sector participation is becoming increasingly significant as governments become unwilling or unable to shoulder the full brunt of transportation infrastructure costs. As public-private partnerships for roadways evolve over time, some models will be more successful than others. While the Indiana Toll Road Concession Co.'s bankruptcy is unfortunate, the fact that the deal leaves taxpayers and the road's users unscathed is an important step forward.