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Mitch Daniels: Heartland Reformer
Rebuilding Indiana's Infrastructure
When Mitch Daniels became Governor in 2004, you could travel the entire 157 miles of Indiana’s toll road, which spans the northern part of the state, for $4.65. If you think that sounds like a pretty good deal, you’d be right. It was a good deal for drivers, two-thirds of whom were from outside Indiana. It was a lousy deal for Indiana taxpayers, however, who had been subsidizing the toll road – and all those out-of-state drivers – for decades.
Trying to change how the toll road worked was not an initial priority of the Daniels administration, though the Governor had noted the road’s inefficiency and unsustainable financial model during his 2003 campaign. Rather, it was one of about thirty options on a list to help answer another pressing question: how do pay Indiana’s infrastructure bills?
As Daniels’ team examined over 30 options for raising funds to update its roads and bridges, the toll road began to stand out as a possibility. Leasing it might generate just the kind of revenue the state needed, more than any feasible increase in appropriations or gas taxes would ever achieve.
The short story is that it worked. How much? This much:
- It allowed the state to repay all $200 million in outstanding toll road debt, which made the toll road debt free for the first time in its 50-year history.
- It enabled the state to distribute $240 million to the seven Indiana counties through which the toll road runs for investment in local infrastructure and economic development projects.
- It made more than $2 billion in lease proceeds available for immediate work on 200 road and bridge projects across Indiana.
- Total investment income from the original toll road lease through April 2011 amounted to $755 million.
- By 2012, more than 5,000 miles of roadways in the state had been rehabbed or replaced.
The Deal: How to Lease a Toll Road in Less than Four Months
Before Indiana leased its toll road, the only previous example was its neighbor to the northwest, Chicago, which had leased its stretch of the Skyway (the toll road that connected to Indiana’s) for $1.3 billion. Daniels and his team took note of that precedent and improved upon it.
They believed that an auction for the lease of the toll road would generate the biggest dollar amount for the state and provide the best deal for the road.
Here’s how it worked:
First, they did an assessment of what they thought the road was really worth, and they set a floor below which they would not entertain any bids. That number was approximately $2 billion.
Second, and perhaps most importantly, they set the parameters in a way that would allow an attractive level of flexibility to the bidders and financiers of the deal. Municipalities frequently over-manage the financing terms of infrastructure deals and specify in ways that are too limiting how the contractors are to manage the road. Daniels decided to allow the bidders maximum flexibility. He wanted to go for as large a contract bid as he could get, and then – so long as basic INDOT requirements were met – allow the contractors to use the revenue from the toll road as they saw fit. The bidders said they had never seen such a financing-friendly deal before. The end result was a bid that everyone was pleased with.
Third, Daniels demanded an expedited bidding timeframe. He had originally been told that a bidding process would take a year (it had taken two and a half in Chicago). He insisted that it take less than 120 days. Indiana’s infrastructure needs couldn’t wait a year, and there was nothing inherent in putting together a lease bid that required such a long time horizon. The companies proved that an expedited timeframe was possible, and the winning bid was selected 117 days after the bidding had opened.
The Spanish-Australian consortium Cintra-Macquarrie was selected from among four competitors in January 2006. Their bid came in at $3.85 billion, an amount higher than anyone expected, for a lease period of 75 years.
Under the terms of the lease agreement, the state received $3.85 billion from the lessees in return for operating rights and the revenues generated from the road. The actual value of the lease is higher: the company agreed to invest more than $200 million on improvements to the road upfront, as well as upwards of $4.4 billion in improvements over the life of the lease. This type of arrangement also has other benefits. The state saved considerable money by paying for the majority of the costs of the Major Moves initiative upfront rather than financing the costs and paying interest over time.
A little more than a year after the toll road plan was approved, it was estimated that the state was earning $6 per second, or $500,000 per day, from interest on its transportation fund, funded in large part by revenues from the lease, while other states’ transportation departments were drawing from state funds for infrastructure repairs. As other states were scaling back due to economically challenging times after the markets crashed in 2008, Indiana was continuing to ramp up construction.
At the time the bid came in, none of this was known. And, as it turned out, getting the bid was the easy part. As Daniels has written in his book,Keeping the Republic, when the bid from Cintra-Macquarrie came in, he and his team assumed their fellow Hoosiers would share their enthusiasm for the $3.85 billion that would flow into the state’s coffers. That was not to be the case, though, because the politics of the toll road blew up.
Understanding the political landscape, and how Daniels maneuvered through it, is perhaps more important to future reformers than learning how the lease deal was structured.
The Political Landscape: Overcoming the Protectionism and Politicization of the Deal
The toll road hadn’t paid for itself in over 50 years. Like so many things the government runs, it had fallen into disrepair and was operated as if immune to the principles of innovation and efficiency. And yet addressing its artificially low rates head-on and working with private companies to improve the road revealed the kind of protectionism that just about any reformer across the country has experienced in one way or another when trying to introduce real change.
Upon announcing the toll road lease, the Daniels administration found itself confronting rumors that Indiana was selling its road to foreign companies, that it was going to result in Hoosiers losing jobs, and so on.
The opposition could be found on several fronts.
First, there was the sheer political opposition that one encounters anywhere there’s a legislature. All but two Democrats opposed the deal when the vote was taken in the Indiana House in March 2006. Given it was Daniels’ first term, turning the toll road into a grand liability served opposition interests looking ahead to 2008.
Second, there was the same kind of xenophobic anxiety that we saw nationally during the Dubai ports debacle. In fact the Dubai ports deal was occurring at the same time, so there was a heightened – if unfounded – level of fear about handing over our infrastructure and assets to foreign-owned companies. The xenophobia could be found in both parties.
Third, there is always the patronage lobby, which also does not discriminate based on party. Plenty of interests are embedded in any large-scale government entity such as a toll road. From unions to truckers associations, the subsidized toll road was equal to dollars in their pockets, and meddling with the status quo threatened that convenient arrangement.
In the darkest days between the announcement of the bid in January 2006 and the vote in March 2006, there were times the Daniels team wasn’t sure they would succeed.
Opposition was strong, and Daniels spent a good bit of his time motoring across the state to town hall meetings, assuaging concerns and answering questions. Out on the road he would challenge his opponents to say what they would do to invest in Indiana’s roads and bridges. Raise taxes? Take money from schools? No one ever had an answer.
In addition some state representatives and senators in critical parts of the state who supported the toll road deal made sure union members were at their town hall meetings so all sides could speak and so that the evidence of the benefits could be presented to all.
What was the key to success? In the end, it was twofold.
First, enough people came to see that the benefits of $3.85 billion in new roads and bridges outweighed whatever charges emerged from xenophobic and rooted interests. And the more they learned about the lease, the less spooky it seemed. You can’t achieve this kind of success with press releases and press conferences. You have to get out to meet with people, answer questions, let them talk. Doing the hard work out in public was what finally made it work.
By the time the vote neared, an unlikely coalition that included the likes of the Chamber of Commerce, the Teamsters, NFIB, Farm Bureau, a group called Voices for I-69. Importantly, the Indiana Motor Truck Association, which initially opposed the deal, reversed its position before the vote as the group decided the terms of the deal were a net plus to their members.
The second reason Daniels was ultimately successful was his promise to make sure all of the funds from the lease went to infrastructure. None of it would be siphoned off for other priorities, as often happens when a state or municipality finds itself sitting on new revenue. Every county received funds for infrastructure from the deal. This built up support for the lease across the state.
In the final analysis getting all of these players together took a lot of work and required many late nights. It didn’t just “happen.” Building the coalition was at every step mired in the political swamp the opposition was doing its best to maintain. The rhetoric was over the top, with one state legislator publicly likening the deal to compromising with the Nazis. But as saner heads prevailed and the benefits of the toll road became clear to more people, a winning coalition was assembled – though not by much.
The bill eventually passed the House 51-48. It cleared the Senate 31-19.
While selling the lease during those dicey days before the vote, and while talking about it with the public afterwards, Daniels always made clear that when you invest in roads and bridges, it’s a long-term thing. It has positive ripple effects, too. For instance, the Major Moves program gave the state the resources to put in a new interchange that was critical to winning the new Honda plant in Greensburg in 2008. Additional examples abound. But beyond all of the economic ripple effects, the additional resources also forced Indiana to reform its transportation department, which is an important second half of the story.
Making Major Moves Work
Like all other states, Indiana had more roads and bridges to build or repair than it had money to pay for them. Governor Daniels’ team at INDOT, Indiana’s transportation authority, discovered their job in the early days mainly consisted of fielding calls from local officials who had been promised this or that road repair, new bridge, or new lane of highway. INDOT’s modus operandi had for years been to commit to plans far beyond what the state had resources for.
As governors and officials in other states can attest, it is not at all unusual for the highway department to commit to more upgrades and repairs than its budget will allow. Things were no different in Indiana.
The toll road lease could have made things worse. Daniels told his team that their problems had completely changed. No longer were they an agency that rationed scarcity. They were instead an organization that had to manage an infusion of cash into a framework that wasn’t built to handle it.
He knew that Major Moves would not succeed if INDOT’s way of doing business was left unchanged. His team had concluded that INDOT was very good at getting actual work done, but it had never shown that they could successfully prioritize projects. Priorities moved around. Politics interfered as Senator X or Y promised City A or B this or that road. INDOT would make a list of priorities, and then it would change how it executed the projects according to no process and no identifiable rationale. If a project hemorrhaged from $50 million in its initial assessment to $130 million by the time it was completed, there was no penalty or accountability for the cost overruns. It was simply accepted. And other projects were then left unfunded as the fiscal profligacy here prevented a project from completion there.
Priority-based budgeting and management.
So Daniels instituted a disciplined process for identifying and executing priorities. His team built a trust-based process that was based on an understanding of what INDOT did well.
The process was, in essence, fairly basic and rooted in common sense – qualities often missing in government work. It required that cost assessments be done rigorously up front, and then it held each project accountable to that assessment. Previously, INDOT approved projects it could never feasibly complete, and thus it became an expert in shifting the blame to other sources, whether it was out of state suppliers or a particular politician. That dysfunction ended under Daniels.
Instead, projects were nailed down clearly up front, which made managing expectations much easier. INDOT noticed not long after the rigorous cost-accounting measures were put in place that the calls from local officials about this or that project fell to near zero.
Pay for performance and doing more with less.
Like the rest of the Daniels administration, INDOT was required to scrupulously review every job that cam open through attrition. Unless a job was determined to be mission-critical, it typically was not filled when an employee retired. By the time Major Moves was in full force, INDOT was about 900 people smaller than when Daniels took office.
The 2008 recession hit the agency especially hard as gas tax revenue fell as people drove less and commercial transport waned. INDOT’s budget dropped over $60 million as a result, but the agency fared rather well since its payroll reduction plan had begun before the economy fell apart.
Because Daniels ended collective bargaining for state workers on his first day in office, INDOT had the ability to move people into different positions and rework organizational charts more easily than one sees in most other states. Daniels’ team rewrote INDOT’s business processes according to its new focus on priorities and started matching employees’ skills with new objectives.
Then, as with all agencies in the Daniels administration, INDOT implemented a pay-for-performance compensation plan. For the first time, Indiana rewarded judicious budget management and attention to timelines as it built new road and repaired bridges.
INDOT also changed the incentive framework for contractors. The agency began rewarding the speed of construction by quantifying the dollar amount of getting a job done in a specific number of days. It began competing out aspects of a project that it used to dictate, such as whether asphalt or concrete would be used. It also allowed contractors from other states to compete that had not traditionally been involved in Indiana. This created some heartburn among Indiana companies, but given that capable contractors in other states with tanking economies were available for work, INDOT involved them to sharpen the competitive nature of contracting process, all with the goal of getting the best quality at the best price.
INDOT also began implementing design-build management in its contracting processes. In contrast to previous practice, in which the full specs for a project would be designed in advance of a multi-year project, with design-build INDOT would only design 30 percent of the project up front before beginning the work. Daniels’ administration officials discovered the private sector could find ways to save money and most the construction process along faster in this model.
Finally, INDOT’s work was empowered by the Governor’s personal involvement. During the bidding process for repairs to an interstate bridge that had cracked, he arrived at INDOT the day the bids were opened for review – and startled the staff who had worked at INDOT for several decades without ever having seen the Governor on their premises. Daniels made sure that all state workers involved in Major Moves knew they were working on a high-level priority.
These innovations changed the culture of INDOT. Measuring the right indicators became possible. Assessing performance became a priority. So, when a bridge needed repair in southern Indiana that would have under traditional processes required a one-year closure, INDOT worked with a private contractor that got the job done in ten days – and $30 million under the original bid.
Never before had INDOT operated this way. With the new cash infusion from the toll road lease, the state has accomplished an infrastructure expansion that other states could only envy:
- By 2012, 375 miles of centerline miles had been completed.
- More than $2.6 billion invested in more than 200 major road and bridge projects.
- Forty percent of the pavement in the state – or more than 5,000 miles – had been rehabbed or replaced.
- Eighty-seven new major roadway corridors, many of which had been discussed for decades without the plans and funds to see them through, were included in a new ten-year plan. By 2012, 65 of them had been completed and were open to traffic.
- More than $7 billion had been invested in construction by 2012, and by 2015, more than $11 billion will have been invested in Indiana infrastructure as a result of Major Moves.
- Overall, congestion was reduced on Indiana roads by 38 percent.
- Indiana invested over $1 billion in infrastructure for each of the past six years.
Every day in America, states sit on underperforming assets that could be re-conceived along the lines of the Indiana Toll Road. The Major Moves examples is unique, but it shows just how powerful new forms of public-private partnerships can be. With a little imagination and a lot of determination, America’s governors and mayors could find private entities whose interests intersect with their need to update and improve the goods they are obligated to provide for the public.