Editor’s note: Over the next year, NCPPP will republish two articles each month from the most recent issue of Public Works Financing, the journal of record on public-private partnerships in infrastructure development. For a limited time, NCPPP Members can receive a 10% discount on a subscriptions to and advertising within this outstanding publication. – PD
Two of the world’s most experienced infrastructure investors paid Indiana $3.8 billion in 2006 for a 75-year lease of the Indiana Toll Road. Tolls had not been increased by the state since 1985. The road was deteriorating, and the toll collections system was outdated. Statewide Mobility Partners—Cintra and Macquarie—committed to set things right and paid a premium price for the right to try.
The region served by the 157-mile Indiana Toll Road contains 15.5% of the U.S. population. Recognizing that, Macquarie equity analyst Ian Myles titled his 2006 report on the Indiana Toll Road (ITR) lease transaction: “Acquiring America.” It might also have been called “Rebuilding America.” Gov. Mitch Daniels promised that most of the ITR concession fee would be used for transportation improvements, eliminating the state’s $2.8-billion funding shortfall in its 10-year transportation plan.
Most of the proceeds of the lease fee was used to defease $225 million in state debt on the toll road and fund a 10-yr transportation capital program, “Major Moves”. A total of 87 Major Moves projects have been built. Some 130,000 jobs were created during and after the recession, says the Indiana Finance Authority (IFA), which owns ITR.
In announcing Major Moves, Gov. Mitch Daniels, said: “We will deposit this astonishing sum, equaling more than a decade of new construction funding at the current level, into a new trust fund, to be invested as fast as legally and humanly possible in the biggest building program in state history.” He added: “A breakthrough like this may come but once in a public-service lifetime.”
Indiana’s current governor, Mike Pence, a possible presidential contender, has benefitted from Daniel’s successes, including the ITR lease. Since Pence took office in Jauary 2013, Indiana’s unemployment rate has dropped to 5.9% from 7.3%, the fourth best record in the country. Employment has risen by 120,000 jobs, many in manufacturing.
In addition to the $3.8-billion fee, the private operator has spent $458 million since 2006 to make a number of “crucial investments in and updates to the toll road that have improved travel for passenger and commercial traffic,” says IFA Director Kendra York.
The 2006 concession lease agreement also commits the operator to a long-term capital program of close to $4 billion over 75 years. Rather than being specified in the lease, capital spending by the new operators are determined by level-of-service guarantees, so the amount and pace of the spending is not precisely defined.
IFA was created in 2005 to consolidate all debt issuance by state building agencies. It managed the ITR procurement in the fall of 2005. The agreement with ITRCC was signed in April 2006. Financing was arranged two months later.
The ITR lease was modeled on a similar contract for a 99-year lease of the Chicago Skyway in 2005, which also was won by Cintra and Macquarie. Four international teams competed for the ITR lease and five for the Chicago Skyway.
Mayer Brown of Chicago drafted the contract terms for both agreements, which, among other things, governs toll increases, the private O&M performance, repairs, improvements and the eventual handback to the state. Any new operator must agree to the terms of that contract after being approved by IFA.
“Contingencies to address situations like this were written into the 2006 agreement,” says York.
Annual toll increases in the 2006 agreement are capped at the greater of 2%, or CPI or nominal GDP per capita. The bankruptcy court could adjust those rates to suit the hedge fund investors, who were promised 22% returns. In the end, however, markets and travel demand will determine price increases.
For the ITRCC financing, the private sponsors, Cintra and Macquarie, each put in $385 million in equity, which accounted for 19% of the $4 billion raised. Seven international banks syndicated the loans, which were oversubscribed. Macquarie had estimated its IRR on the ITR deal at 12.5-13.5%. Instead, both Cintra and Macquarie have lost all of their investment.
“Had we known we were heading into the worst recession since 1929, we would have bid much lower,” says Nicolás Rubio, President of Cintra US. “That’s business.”