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Indiana’s Toll Road Goes Bankrupt

America's highway system needs more feedback mechanisms, before we build our states into bankruptcy.
stop ahead pay toll

In 2006, the ITR Commission Co. purchased the right to operate a toll road in Indiana for 75 years for the cost of $3.8 billion. That investment that hasn’t worked out as planned, as ITR filed for Chapter 11 bankruptcy protection on September 21. They now have $6 billion in debt they are seeking to restructure.

The reason for ITR’s financial distress is simple: there isn’t as much traffic as they predicted. In fact, traffic is falling short of projections all over the country, an indication both of shifting social patterns and of the engineering profession’s institutionalized propensity to overestimate. With relatively fixed costs for maintenance, repairs, and operations, not enough traffic means not enough revenue.

Unfortunately, apologists for big government transportation projects are taking all the wrong lessons from this filing. From the South Bend Tribune:

Broden, D-South Bend, said he worries tolls will rise while the quality of the road and rest stops will deteriorate as the operator navigates bankruptcy.

State Rep. David Niezgodski, D-South Bend, said a potential sale of the lease could yield an operator willing to cut corners to make a profit.

While these are legitimate concerns, they are easily addressed by enforcing provisions of the lease agreement. A judge is not going to rewrite contract requirements. If ITR emerges from bankruptcy, it is still going to have to maintain restrooms and roadway conditions. What the political laments are really focused on is the underlying issue of privatization:

Joe Bock (D), who is running against Walorski (R), held a news conference Monday afternoon, and warned against the privatization of public assets.

Development of infrastructure is the “fundamental role of government,” Bock said.

The assertion here is that only the government has the proper altruistic motives to build infrastructure and maintain it in the public’s interest. Privatization is bad because it creates an economic force (a profit motive) that works against the public interest. Infrastructure is considered a communal investment that we all make collectively for the public good. For people with this mindset, the ITR bankruptcy demonstrates that privatizing infrastructure endangers our social contract.

This is the wrong lesson.

The ITR bankruptcy should teach us, first and foremost, that building more roads is really stupid. While the government it not compelled to maximize profit, when it comes to building and maintaining public infrastructure its revenues must be equal to or greater than its expenses (the latter condition is known, in accounting terms, as “profit”). If the government doesn’t collect enough money through taxes and fees to build and maintain public infrastructure, it falls apart, altruistic motives or not.

In states across the country, including Indiana, we see again and again that governments lack the financial resources necessary to meet their infrastructure maintenance obligations. This is more than an inflation problem; it is a massive gap between projected revenues (themselves based on those same bad assumptions of ever more driving) and planned expenses.

And in states across the country, we see again and again that taxpayers are unwilling to pay more for infrastructure. Not only that, their representatives are unwilling to raise taxes and fees to make up the difference.

I’m actually good with that. I would not spend any more money on our current approach to infrastructure either, but consider this: If ITR could not charge enough in tolls to avoid bankruptcy, why would public ownership of the toll way be any different? Is the government more or less motivated to recoup its costs than ITR was?

The reality is that the government continues to deliver what its customers want: more infrastructure at prices far below cost. What ITR had that the government didn’t was a financial feedback mechanism, the need to actually account for revenues and expenses. When former transportation secretary Ray LaHood said that, “America is one big pothole right now,” he was actually noting what results from building to our wants and desires instead of our willingness to pay: lots of roads with no money to maintain them.

The bankruptcy of ITR doesn’t demonstrate the perils of privatization, but the dangers of having no feedback mechanism. This toll way was supposed to be one of the most profitable segments of infrastructure in the state of Indiana, which is why ITR paid $3.8 billion to lease it. If this is the most profitable infrastructure the system can offer, what does that say about the financial productivity of the rest of the state’s transportation system?

This episode should also teach us that we need way more fiscal discipline—far more checks on the human impulse—than is currently in place. Unless Indiana’s then-Governor Mitch Daniels (R) suspected that traffic counts would underperform (I’m extremely doubtful that he did), leasing the toll way to ITR was akin to cashing in an annuity. The state gets the money to fill a budget hole today, but future generations miss out on an asset that should be generating ongoing wealth. This is the opposite of prudent, conservative governance. It is a deeply irresponsible way to live far beyond our means.

This is a valuable asset that was really, really sold off at a discount when you consider the value the Toll Road could have had by gradually raising tolls,” [former chairman of the Laporte County Democratic Party Shaw] Friedman said. “The problem is the $3.8 billion was gone in the first six or seven years. What do we do with the remaining 70 years?

Today’s rhetoric on privatization misses the mark. Bankruptcy of the ITR Commission Co. is not an indication that privatized roadways fail to safeguard the public interest. It actually suggests that our assumptions about the value of roadways and highway spending are not grounded in reality. This isn’t a misconception fomented by partisanship, but a widely held cultural belief.

When it comes to transportation, America doesn’t need more spending. It needs better feedback mechanisms.

Charles L. Marohn, Jr. PE AICP (@clmarohn) is a licensed engineer, a professional planner and the president of the non-profit Strong Towns. His latest book, A World Class Transportation System, is now available on Kindle.

This post was supported by a grant from the Richard H. Driehaus Foundation.