The Toll Road debate: A question of assets

By RiShawn Biddle

Expresso • January 30, 2006

As important as the debate over the proposed lease of the Indiana Toll Road to a consortium controlled by Australian financial firm Macquarie Bank and Spain's Cintra, it is only the tip of the iceberg of a far larger debate symbolized by HB 1008, which would authorize Gov. Mitch Daniels to complete the deal: What assets should state government actually control and which ones should it be.

The fact that H.B. 1008, which would have allowed airports and other infrastructure to be leased or handed off to private operators, has since been limited to allow for toll roads and bridges, won't satisfy those opposed to its passage as much because their own philosophical leanings against any sort of reform (or even because of their opposition to Gov. Mitch Daniels, who proposed it, along with the Toll Road deal itself) as those who were legitimately concerned that the original law gave the governor too much discretion in such matters. Yet as with the debate over the Toll Road, the questions being asked aren't the right questions.

What should be asked is which assets should governments of all kinds, be it state, local or even the federal level, should control. The answer: It depends. Especially when considered against government's mixed record of building and managing infrastructure, technology and even park land.

One need only look at such publicly-run toll road busts as the San Joaquin Hills Toll Road in California's Orange County, whose problems -- including traffic that was 40 percent off initial estimates -- led to a bailout, to understand the problems governments have in managing toll road projects. Those problems, however, extend to such notable infrastructure busts as Boston's Big Dig, which grew from a $3 billion overhaul of the city's Central Artery to a $15 billion megaproject that has garnered more than its share of criticism.

Such issues extend beyond infrastructure: The federal government has long been criticized by environmentalists for poor stewardship as private mining and forestry firms have been accused of not cleaning up the toxic waste they leave behind or overcutting trees. One could even argue that the firms get to use the land on the cheap.

At the heart of the problem is the reality that politics plays in government asset management and development: From the consultants who provide overly optimistic traffic projections to help sell a mega-project to the landowner that contributes money to legislators in order to get a freeway located near his property (the better for development) to the make-work jobs, cheap land rents and the like, it's difficult for government to actually separate graft from proper asset management. That politicians love having their names slapped on interchanges and being associated with such projects means that a sort of scope-creep will inevitably play a role. Essentially even if I-69 was built on 'old terrain' instead of 'new terrain,' cost overruns are likely to occur anyway.

Even when government can manage assets such as airports in a decent manner, its ownership of them can create distortions in the economy that have wide-ranging impact. One can argue for example that as much the reason why air fares in the U.S. is higher than in Europe is because of the fact that there are more airports in

This doesn't mean that government should get out of all infrastructure and asset management. Building interstate highways used by most of a population, for example, is key in government's role as an economic development agent and in most cases; such a role actually serves the public better than handing out tax-increment financing packages that play a far lesser role in luring firms than whether a locale has the right kind of country clubs. The fact that it has other assets to manage, such as capital buildings and offices, means it ends up taking on an asset management role in the first place.

The question, however, comes down to what kind of assets should government manage. That depends on whether the asset benefits the largest percentage of the taxpayers, largely because the risks involved in controlling such an asset -- namely capital improvements -- are also borne by all taxpayers, regardless of whether they use them or not.

It goes even further: Does, say, a public toll road support the rest of the budget -- and thus the interests of all taxpayers -- with contributions to its treasury? Just as important: What is the financial nature of the asset. Does it, for example, tend to generate less traffic than it needs to support itself in early years or during periods after taking on debt to complete capital work? All the risks and benefits considered, does the record of government's management of such an asset prove that it can well-manage an asset of that kind?

What if there is a situation where privatization may occur, say a long-term lease of a toll road as in the case of the Indiana Toll Road? The question is does it make sense to hand it off. That depends on whether it generates too much risk to the taxpayers and too little reward. Another is whether the deal would help fund the acquisition or improvement of other assets that may be as risky, but also generate rewards that benefit all taxpayers.

Such a business-like analysis isn't something that most people associate with public policy, especially here in Indiana. Stephen Goldsmith attempted to apply this with his legendary Yellow Pages test during his years as mayor of Indianapolis; it was rejected statewide because it was considered too radical.

Yet when one thinks about the many roles governments of all kinds take on -- and how much of them at times resemble real businesses with real revenues and costs -- adapting some of the tools of business, including risk management and asset allocation, would not only help mitigate risks on behalf of taxpayers, but even help government focus on those roles it handles best.

This is especially true when one realizes that government isn't simply a charity or a hospital or a law enforcement agency, but a combination of public services (law enforcement, emergency health aid, long-term healthcare for the disabled) and businesses (healthcare financing, roads operator, financier) whose operations must be balanced in order to maximize the best value for taxpayers and minimize risks that they are forced by their citizenship or existence on a territory to bear.

Such thinking would be especially welcome in the debate over the Toll Road deal instead of what has become a less-than-thoughtful discussion, notably on the side of those who oppose the deal out of hand.