Infrastructure: A Road to Riches?

Ducking tax increases is what motivated the state of Indiana and the city of Chicago to sell their toll roads. Indiana was facing a $10 billion bill for updating its highway system when Gov. Mitch Daniels, a former federal budget director, came up with an alternative to paying the price -- tapping the toll road. Chicago didn't need roads; it needed money. Monetizing the Skyway brought in $1.8 billion. That was enough to pay off $855 million in debt -- only part of it due on the road itself -- as well as set aside $500 million for a "rainy day fund" and give a few million in home heating assistance to the city's poor.

If that sounds like tossing the family furniture in the fireplace to keep the house warm, you're getting the message.

Neither Chicago nor Indiana actually sold its toll road. Both deals are structured as long-term leases with all the money paid up front. In exchange for the cash, Macquarie and Cintra will take over the roads and take responsibility for upgrading them, a $700 million commitment in Indiana. In return they get to collect all the tolls they can squeeze out of travelers, subject to some regulation.

The theory behind privatizing toll roads is that profit-motivated managers can run them better and more efficiently than government bureaucrats. Given Chicago's ward-healing politicians and notoriously corrupt municipal contracting, it's pretty hard to argue with that premise.

Within six months of taking over the Chicago Skyway, Macquarie and Cintra had installed a complete electronic toll-taking system. Today more than a third of the tolls are being collected in the E-ZPass lanes. In Toronto and Sydney, Macquarie has done away with booths entirely, collecting all the tolls electronically.

High-speed electronic toll lanes, where drivers don't even have to slow down, are the state of the art. Most U.S. toll roads and bridges don't have them, however, because private and public officials view the investment from different perspectives.

To government budget analysts, the issue is how much will it cost. To private operators, it's how much it will return. So, too, with so many operating and management issues. For example, Indiana might have tackled its road problems by simply raising fares on the toll road, but the legislature has refused to raise tolls for 20 years.

The toll road privatization advocates argue that profit generates the motive for providing the best possible service. An army of anti-government academics and think-tankers supply the intellectual infrastructure for that argument.

But behind the private-is-preferable theory is the immediate reality that governments don't have -- or are unwilling to raise -- the billions needed to rebuild the nation's crumbling infrastructure.

The global theme, says Chris Leslie, managing director of Macquarie Securities (USA) Inc., is that "the fiscal constraints that governments find themselves under are driving them to explore new ways of finding money.

"Taxpayers want improved services, better roads, better airports, and yet of course nobody wants to pay higher taxes," he said. The public sector isn't ducking its responsibilities, he argues, "it is delegating to the private sector."

Surprisingly, America, the capital of capitalism, is far behind the rest of the world in privatizing infrastructure. Privately run roads, bridges, airports and ports are common all over Europe -- even in France, where government intervention in the economy is embedded alongside liberty, equality and fraternity.