Concessions Can Bridge Budget Gaps

In 1958, Chicago opened the 7.8-mile Chicago Skyway, an elevated tollway linking the downtown Chicago Loop with the Indiana Toll Road. Due to poor transportation planning and fiscal mismanagement, the city was unable to repay construction revenue bonds into the 1990s. After years of heated debate, the city finalized a $1.83 billion 99-year concession agreement in 2005 with a consortium consisting of Macquarie and Cintra, a Spanish infrastructure developer.

The $1.83 billion infusion to City of Chicago coffers allowed the city to repay $855 million in debt, fill a $375 million budget shortfall, and improve its debt rating to save millions annually in interest payments. It also funded a $500 million long-term reserve and a $375 million medium-term reserve for the city.

Opened in 1956, the Indiana Toll Road (ITR) spans the 157-mile width of the state, from the Ohio and Illinois state lines. After his election in 2004, Governor Mitch Daniels (R) ordered the Indiana Finance Authority (IFA) to investigate the feasibility of leasing the ITR to a private concessionaire. Macquarie and Cintra formed the consortium ITR Concession Company and made the winning bid, agreeing to pay the state $3.8 billion in exchange for a 75-year concession.

The authorizing legislation mandated that the $3.8 billion generated from the ITR concession be used almost entirely for transportation-related funding. It is difficult to say whether this is a positive aspect or not. On one hand, the City of Chicago dedicated a significant amount of its $1.83 billion on arguably wasteful discretionary spending. On the other, committing $3.6 billion to future transportation expenditures will likely incentivize the development of more poorly planned public transportation projects in Indiana.

But as states scramble to balance their budgets, shifting some of their transportation burdens to the private sector should be seen as a viable alternative to both tax increases and service cuts.

For more on road concessions, see here and here.