Earlier this month, in a triumph for Gov. Mitch Daniels, Indiana's House narrowly approved his proposal to lease the 157-mile Indiana Toll Road, which spans the northern part of the state, for $3.85 billion to a joint venture of Cintra, a Spanish company, and Australia's Macquarie Bank. The two companies have been active in the U.S. road business. In 2004, the two inked a 99-year lease for the 7.8-mile elevated Chicago Skyway. Last year, Macquarie completed its acquisition of the Dulles Greenway outside Washington, D.C. And Cintra, which manages toll roads in Europe and the Americas, is a strategic partner to the Texas state government in the planned Trans-Texas Corridor. There are likely more such deals to come.
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For Danielswho failed to live up to his nickname ("The Blade") when he served as director of the Office of Management and Budget in the first Bush administrationthe 75-year lease is an elegant solution. The state needs billions of dollars to invest in new roads. Getting the cash upfront will allow Daniels to speed up construction on needed infrastructure projects, create new jobs, and fund his Clintonian Major Moves initiative. (Here's a list of projects to be funded and a fact sheet on the deal.) And by raising the cash from foreigners, he's doing his part to rein in the pernicious current-account deficit. "Too often in Indiana, we see Hoosier dollars and jobs leaving the state. Major Moves is an exciting opportunity to recapture U.S. dollars by attracting foreign investment, and use them to create jobs for Hoosiers," he said.
What's in it for the foreign companies? Huge potential profits. Gigantic, steady profits. Toll roads are an incredible asset class. They're often monopolies. They can support debt, since they provide a recurring guaranteed revenue stream that is likely to rise over time, as more people take to the roads and tolls increase. According to Cintra, the Indiana Toll Road generated $96 million in revenues in 2005, and Cintra expects a 12.5 percent internal rate of return on its investment. The heavy lifting has already been done: The state or federal governments have acquired the land and rights of way, built the roads and maintained them for years, and enacted toll increases. All the private companies have to do is deliver cash upfront, maintain the roads, and collect the windfall. The buyers can also increase their profits by making toll roads run more efficiently with technology. After assuming control of the Chicago Skyway, the Cintra-Macquarie consortium installed electronic toll equipment on some lanes. And by refinancing nimbly, companies can cash out. Last yearjust seven months into its 99-year leaseCintra announced that it had recovered 44 percent of its initial investment in the Chicago road through refinancing.
(So, why aren't American companies buying up our toll roads? Here's a theory.)
This easy money for foreigners makes the locals uneasy. In mid-March, the Indiana House approved the deal by a surprisingly slim margin. The Indiana scheme continues to engender local opposition. Last week, while participating in a panel discussion in South Bend, Ind., I got the sense that the toll lease made Hoosiers uneasy for reasons they couldn't quite articulate. It's not like the buyers could uproot the concrete and move it to Queensland, Australia, or Seville, Spain. The 400-page contract spells out in detail obligations of the consortium to invest in maintenance and safety and to keep a lid on toll rates. And unlike the Dubai ports case, it's hard to see how management of the toll road by a foreign entity could raise security threats.
I think the uneasiness has more to do with what it says about the peculiar fiscal climate in the United States. How is it that in the richest nation on the earth, localities simply don't have the cash to do necessary maintenance on basic infrastructure, the political will to raise such funds, or the competence to run such easily profitable operations? Why are they being forced to sell off long-term cash cows for short-term cash?
Leasing or selling a public asset is a classic one-shota short-term measure that bolsters the balance sheet today but that can't be repeated. While politicians like Daniels focus on getting through the next few fiscal years with minimum pain, foreign companies are thinking about how to get rich off of tolls for the next three-quarters of a century. From Gov. Daniels to his former boss, President Bush, there's a troubling unwillingness to align governmental resources with the express goals and responsibilities of government. At the federal level, we rely on China's central bank to buy our bonds and fund basic operations. As a result, our tax revenues wind up in Beijingas interest payments. At the state level, Indiana is relying on foreign companies to lease public infrastructure like toll roads. And under these arrangements, tollstaxes people pay for drivingare being paid to foreign shareholders of foreign companies.
Of course, by selling public infrastructure at high prices, state governments could be taking foreigners for a ride. The Japanese famously overpaid for Rockefeller Center, after all. It's possible that Indiana just ripped off the Spaniards and Aussies. But I doubt it.
Yet...
..heh heh
My guess... they will end up losing their shirts in this deal!
Everytime a foreign nation starts investing heavily in a single area of American business they get creamed. Scottish in the cattle markets in the late 1800's? Creamed. Japanese in realestate in the 1980's? Busted. Arabs in Ports? Kicked out. Germans in.... well it goes on and on.
All in all, I don't think I'm too worried.
Indianapolis - Major Moves is making major money for the state of Indiana. The $3.8 billion the state collected in the Toll Road lease deal is now earning quite a bit of interest.
On Thursday alone, Indiana made more than $535,000 in interest from that amount. Every second, the money from Major Moves is making $6.
State Treasurer Tim Berry says while the money is currently invested, he is reviewing proposals for long-term investment.
A group of Spanish and Australian investors paid the nearly $4 billion to lease the Toll Road for the next 75 years. The Indiana Finance Authority transferred the money to the treasurer's office Wednesday, and it was immediately placed in various interest-earning accounts.
Nearly $3 billion was placed in government-sponsored securities including Fannie Mae and the Federal Home Loan Bank. Much of the rest went to banks in Indiana.
The money will eventually be used to finance road projects around the state.
Where's Jerome Corsi?
He can't overlook this one! Heaven forfend! Highways and bridges sold for cash!
Somebody quick, give him a call!
It seems like every day, business interests think of new things to sell to foreigners.
And foreigners buy older US ships, planes, etc., built by US taxpayers.
"Gigantic, steady profits. Toll roads are an incredible asset class."
I don't know about that. If the price of gas keeps going up, it might not even make a profit. Hey... Why not sell them to the Saudis and Venezuelans? Then they will be shooting themselves in the foot if they cut off our oil.
There are many ways to sell yourself into slavery.
Yes, it shows the incompetence of our public servants and agencies. My only gripe is that American companies aren't buying these roads and bridges. This is a step towards libertarianism and it should work out just fine. The roads will be operated for a profit and without political considerations.
And just think what will happen when they decide to pack-up all the bridges and roads and take them back to their country. ;~))
You forgot to mention the no-bid contracts that were/are going on in Texas, as well as the "partnerships" were formed only so that the European companies involved had an American presence. If a democrat did half of what Perry and his people have done, people would be up in arms (and interestingly enough, Perry used to be a democrat until a certain Texas Senator convinced him that he needed to change parties if he wanted to go anywhere).