Privatization

Governors Know Best? When It Comes to Leasing Money-Losing Assets, They Do

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The Wash Post's David Broder has an interesting column about a pack of GOP governors who are doing pretty well both electorally and policy-wise. At the top of the list is Mitch Daniels, the governor of Indiana who was reelected with 60 percent of the vote after a pretty nasty campaign (full disclosure: Daniels has written for publications published by Reason Foundation, the nonprofit that publishes this website; analysts at the foundation's research division have advised his administration as well).

A snippet:

"One thing we have learned [says Daniels] is that fiscal restraint works. We dug out of a deficit and now we have a triple-A bond rating for the first time. Market principles work. We have begun to insure our uninsured, with health savings accounts, paid for with a higher tobacco tax. And I had no trouble supporting that, because I remember what Ronald Reagan said: When you tax something, you get less of it.

"We've learned that effective government works. We expanded our child welfare efforts to protect more children, and we reduced the waiting time in our license bureaus to an average of 7 1/2 minutes. We leased our tollway, and now we're improving roads all over the state without raising taxes or fees."

Daniels said he has traveled constantly for four years, listening to Hoosiers, and "I make a point of naming the voter who first alerted me to a problem." Governing seems abstract, he said, so it behooves officials to be very specific.

As for social issues, Daniels said, "I try to live traditional values and affirm them, but not impose them on others. I'm trying to bring the state together to do hard things— not look for ways to divide us."

Does it work? Daniels was reelected with almost 60 percent of the vote, and exit polls indicate that a third of the people who voted for Barack Obama on Tuesday also voted for Daniels. His share of the black vote topped 20 percent.

There's more here.

About the most controversial thing Daniels did in his first term was leasing the Indiana Toll Road. Under his direction, the state received $3.8 billion upfront to lease the operation of a money-losing asset to a (horrors!) consortium of Spanish and Australian companies.

I really don't understand why, but opposition to the lease ran something like 2-to-1, and for a while it looked like Daniels would get bounced over it. Yet it makes obvious sense: The state no longer has to deal with the hassle of running the roadway and it got enough money to undertake various transportation infrastructure projects it wouldn't have been able to do otherwise. As Len Gilroy of the Reason Foundation wrote in August:

The lease payment is funding permanent assets to serve the needs of current and future Hoosiers. Further, the concessionaire has spent over $88 million in 2008 so far on construction contracts for work on the ITR itself. Over 97 percent of this work went to Indiana businesses, well exceeding the 90 percent target specified in the lease contract for the roughly $4 billion planned in ITR construction work over the 75-year term. That's $4 billion in addition to the $3.8 billion upfront payment that will remain in Indiana.

Without the toll road lease, these projects would likely have never materialized, or they would have necessitated tax increases to move forward. And Indiana has also earned over $360 million in interest on the upfront payment in just two years (over $185,000 per day, at current rates), which will be used to fund additional state and local transportation projects for decades.

Leasing toll roads really gets under the skin of conservatives (if the leasee is a furrin company) and liberals and leftys (for an infinite number of reasons, none of which is particularly compelling).

It will likely be controversial forever (see the struggle over the deal Gov. Ed Rendell is trying to ink for the Pennsylvania Turnpike) but it's not just a good way to deal with transportation issues. It provides a model for strapped state governments to get out of certain businesses altogether and get some cash at the same time.

NEXT: Gaming for Columbine

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  1. As for social issues, Daniels said, “I try to live traditional values and affirm them, but not impose them on others.”

    And then said:

    We have begun to insure our uninsured, with health savings accounts, paid for with a higher tobacco tax. And I had no trouble supporting that, because I remember what Ronald Reagan said: When you tax something, you get less of it.

    So, Daniels doesn’t impose social values on people…except when he does via engineering the tax code.

    Look, he sounds like he’s doing good things, but he doesn’t have the intellectual girding to know why. And that irritates.

  2. We have begun to insure our uninsured, with health savings accounts, paid for with a higher tobacco tax. And I had no trouble supporting that, because I remember what Ronald Reagan said: When you tax something, you get less of it.

    Ok, so your health savings accounts are tied to an activity that you want to tax into oblivion. So, what happens when there aren’t enough smokers to cover the cost? Oh that’s right, you don’t give a shit because you’ll be long gone from office.

  3. TAO got it right. He doesn’t want to impose values on people, except for smokers, I guess. But that’s OK because smokers are subhuman retards anyway, right?

  4. You never know, those furrin’ consortiums might roll up their toll roads and go home, leavin’ us with nuthin but, uh, never mind.

    Actually, the only objection I would have to furrin’ owned toll roads is if there was an abuse of eminent domain, and most of that can be worked out by the proper amount of $$.

  5. Government tends to operate inefficiently, I know.

    But really, why doesn’t the government raise tolls themselves. The companies wouldn’t be interested if it they weren’t going to take a profit. Couldn’t the government then make a bigger profit if they ran it themselves than by leasing it to someone else?

  6. TAO: “Social issues” is codespeak for gays, or so I think.

    Nick, at least part of the opposition to the Indiana Toll Road leasing stemmed from a clause in the contract that left the State of Indiana on the hook for any liability or losses by the company leasing the road. Fortunately it looks like the whole thing has worked out, but there was real worry early on that if it didn’t work the State could have been much worse off because it would take on those liabilities. I think a lot of Daniels’ difficulty came because there was no real explanation given as to why this clause was there and how the State would be protected in the event of mismanagement or failure of the group leasing the road.

    Another strain of opposition centered on the proposed extension of tolls tothe IN-37 corridor from Indianapolis to Bloomington, thus raising costs for those in that part of Central Indiana, with no corresponding cut in taxes. It seems that this extension is several years off, but you have people in this area of the state asking why they should pay more to support the toll-road company and projects elsewhere in the state without any apparent local benefit.

    I was one of those here in Indiana who initially opposed the leasing on the grounds of the seeming sweetheart liability deal, but I’m entirely happy to have been proved wrong on that.

  7. How do you insure our uninsured, with health savings accounts. Help pay for health costs, yes… but insure?

    By the way, I love my HSA, but I’d like to add more than $2500 of sweet, sweet, pre-tax money a year. And let it roll over.

  8. What exactly is the argument for leasing/selling toll roads to private entities? I understand there is the obvious pro of getting the government out of another thing, but roads don’t exactly seem like an environment that is suitable to free market principles. For instance, when I think of NJ, if we sold the Parkway or Turnpike, and then the new private company jacked up the prices, most drivers would still have to take that road since there really isn’t another comparable option. It just doesn’t seem conducive to competition and also seems like it could therefore run like a monopoly. I also understand that a private company would be able to squeeze much more out of every dollar paid by the drivers due to being a much more efficient entity than the govt.

    So what is the argument pro-sale of roads? I am completely open to the idea, but how is a monopoly type environment prevented?

  9. The thing about leasing roads and the reason it’s more efficient is this: it’s OK if the cocktail you make for yourself is too strong or too weak or whatever because hey, you didn’t pay for it. But when you’re a customer, when there’s money on the line, all of the sudden your standards go way up.

    The thing is, governments don’t hold themselves accountable, but you can be damn sure they’ll be tough-as-nails on the foreign company. Constant demands for lower prices and higher standards.

  10. I love the idea of private pay roads to complement public ones, but I agree that roads (like, to a far lesser extent other land uses) are a hard area for real competition. I am fairly minarchist in my ideal, but I think roads are up there with police and courts as something I think the government should at least partially responsible for.

    In most areas, there are alternatives to pay roads. They are often way out of the way though.

  11. TAO, that makes sense and is sort of what I was expecting.

    It seems like a really well run state entity, insulated from other parts of the state government, could get a much higher return on user investment for the state, but I guess that is hard to do well in reality.

  12. TAO,

    That argument sorta makes sense until you look at the history of government contracts and their success.

    Governments are not always very attentive nor demanding customers and often are influenced by factors other than the quality of the product they are getting.

  13. Couldn’t the government then make a bigger profit if they ran it themselves than by leasing it to someone else?

    What exactly is the argument for leasing/selling toll roads to private entities?

    According to the link, This is significant because the Toll Road rarely, if ever, turned a real profit when capital expenditures were included. So there wasn’t much profit to be had by the state.

    The fact that a private enterprise will buy a break-even asset from the state for both a significant up-front cost and a revenue stream, and improve the asset, means that they see an opportunity. My concern is that state governments will see an easy source of immediate cash and use it to fund more programs that they will mismanage and need to sell to someone who knows what they are doing in the future.

  14. TAO, that makes sense, but the lack of competition still unsettles me. Is there any answer for that? I just see the problem being that since we are talking about roads, you can’t exactly just open up a new freeway to compete with the old one since consumers are demanding better product. Simply not driving on the toll road is not exactly an option, especially when one considers more congested states like NJ.

  15. That’s why you’d lease the road rights instead of selling them outright. The possibility of the lease not being renewed should keep the company motivated to keep service levels high and cost low. At least, more motivated than people working for a state bureaucracy.

  16. you can’t exactly just open up a new freeway to compete with the old one since consumers are demanding better product

    Back when railroads made a profit, that’s exactly what the competing NYC subway companies did. There are some areas with parallel lines and other areas with huge gaps because there was little co-ordination going on. That’s one reason I’m skeptical of certain transportation privatization schemes.

  17. The Wash Post’s David Broder has an interesting column…

    Sorry, you lost me there. I laughed so hard I blacked out.

  18. That argument sorta makes sense until you look at the history of government contracts and their success.

    I’m not saying that “government as consumer” works all that well, I’m just saying that it works better than government doing it for itself.

    I shutter to think what Iraq would have been like if the Army itself had been in charge of the living environments. Yikes. The thing is, if you get contract administrators who take their job seriously, they’re way more likely to nail some faceless subcontractor to the wall than they are “a fellow Soldier” (just using the Armed Forces as an example).

  19. I’m not saying that “government as consumer” works all that well, I’m just saying that it works better than government doing it for itself.

    So are you saying that the private soldiers contracting in Iraq are doing a better job than the US military?

    I think the “better than the government doing itself” statement suffers from the “except when it isn’t” problem.

    Government agencies are always the worst solution except when they’re not. The details matter.

  20. NM, I agree. I think the government’s role in social goods, on a state level of course, is to perform the social goods if and only if they can do so better than the market. These instances are rare, but they do exist, and you have to look at each issue to make sure it doesn’t fall into that category.

  21. Neu,

    I think the division between those who think the government can never do better and sometimes can do better (or no worse) is the precise divergent point between anarcho-capitalism and libertarianism.

    For example, I’m fine with government building and maintaining roads with sufficient oversight to reduce waste, fraud, and abuse. I think that a gov-road system is probably cheaper than than the opportunity costs of negotiating a patchwork system of private and competing roadworks. I also believe this about the police, the military, courts and other apparati of The Rule Of Law. (Capitalized for dramatic effect.)

  22. TAO and Jordan: If you have to have a tax, why not tax something you want to discourage? It’s a bit unfair to call it “social engineering” and “imposing values” when any tax does those same things (sale taxes discourage sales, etc.).

  23. “”Back when railroads made a profit, that’s exactly what the competing NYC subway companies did. There are some areas with parallel lines and other areas with huge gaps because there was little co-ordination going on.”””

    Well the MTA got rid of any competition. I welcome back the days of competing subways. Competition keeps prices down.

    I don’t think transportation routes really fit the free market concept well. You don’t need duplicate competing routes. From NC to Southern Cal, I-40 is the way. What sense does it make to build another road for that trip just to have a choice of which company you give your dollars?

  24. Lack of competition for a toll road? That’s like blaming people for not bringing other people into their own homes, it just doesn’t make sense to look at it that way. Besides, people can always try to buy shares of the companies that own the road.

  25. Neu, TAO, Sugar Free-

    There may well be instances of the government performing a task better and more efficiently than private enterprise, but those instances are usually just some statist’s subjective perception.

  26. PapayaSF,

    The social engineering or imposing values taxes are called sin taxes. They are greater in percentage than most others with the purpose of making the items unaffordable or at least painful to your budget.

    The amount of tax is an important factor. The purpose of 8% sales tax isn’t to prevent people from shopping like a 60% tax on sin items.

  27. but those instances are usually just some statist’s subjective perception.

    How substantive. Thanks for that completely irrelevant commentary.

    PapayaSF – if it’s something you “want to discourage”, you have to ask how that’s not driven by moralism in the first place.

  28. Government or private, either way is people running things. People in section A are not necessarilly better than people in section B just because of the section which they belong. The difference is usually in regulations. The people decide (cough, cough) government regulations via their elected officials. The only way for the people to hold private companies accountable is via the purse. That requires options.

  29. TAO-

    What is the problem? I made a comment that is no less substantive than you posts at 12:05 and 12:41. Besides, the burden is upon the person supporting the proposition that the state’s monopolization of the building, owning, financing and maintaining any channel of transportation is somehow superior to a competitive, market driven approach.

    Thus, how is my comment completely irrelevant?

  30. TrickyVic: True, it’s a matter of degree. But is it better to discourage something good by a little (sales), or something bad by a lot (smoking)? To me, sin taxes make more sense than taxes on productive economic activity, or outright bans on the substance/activity.

    TAO: Of course it’s driven by moralism. Isn’t that politics? When (e.g.) property is taxed to pay for schools, isn’t that based on a moralistic judgment? When the “rich” pay income taxes and the poor don’t, isn’t that moralistic? The only difference with sin taxes is a conscious choice to discourage a particular behavior, as opposed to a usually unconscious choice that discourages other behaviors that you don’t actually want to discourage.

  31. I welcome back the days of competing subways.

    The problem of course is that those companies were unable to make a profit after the rise of the automobile and the massive government spending which helped that along. The best you’re going to get is something along the lines of what happened to British Rail, with private companies running the service. And even then, a lot of them have failed to make a profit.

  32. “””To me, sin taxes make more sense than taxes on productive economic activity, or outright bans on the substance/activity.”””

    Taxing is the lesser evil than banning. But in a free society, the governemt shouldn’t force changes in habits or any activity via taxes just because they don’t like said activity.

  33. TrickyVic-

    The differnce between people in Section P (private enterprise)and people in Section G (government) is that the latter are empowered to take your money and throw you in jail and not have to worry about the consequences thereof, while the former have no such empowerment.

    Human nature, being what it is, militates against empowering the people in Section G-the shrieks, screams and wolf crying of imminent anarchy and chaos notwithstanding.

  34. Two problems with leasing out a toll road this way:

    (1) As with any government contracting situation, the contractor has a huge incentive to lobby the government to create more business for itself, give it more favorable terms, etc. Think military-industrial-complex.

    (2) Toll road leasing agreements often include some truly amazing anti-competition provisions. The toll roads are in competition with the surround county roads, freeways, etc, and they are worried the state will upgrade those roads (perhaps even using the toll leasing income for funding) and get lots of free roads while the toll company goes bankrupt from lack of business. So to get private companies to enter the lease agreement, the state has to agree to limit state road development, require approval by the toll company, require payments to the toll company for competitive road building, or something equally onerous. Because of (1), these can often be real sweetheart deals for the companies that screw over local residents wanting to take short trips on roads they aren’t allowed to improve.

  35. I shutter to think what Iraq would have been like if the Army itself had been in charge of the living environments.

    Well, this is debatable. Just for an example, there was a contractor cock-up that miswired the waterpumps on portable showers has has lead to the electrocution deaths of several (not sure of the number but its greater than two) soldiers. The guy doing the work is back in Alabama (or wherever) and so will never use these units. Now, compare with a guy who’s MOS is an electrician and is out in the field. Since he’s going to be using the thing when he’s done repairing it, don’t you think he’s got a better incentive to get it right than the dude in Alabama?

    This is also part of the rationale on why the Navy brings a lot of civilian shipyard guys on board during seatrials for new construction and major overhaul; there is a little more incentive to make sure you (or your guys/gals) do the job right when it is your ass at test depth.

  36. The competition in this case isn’t between companies who are producing roads for consumers (drivers); the competition is between companies for the license to manage a resource (the existing tollway). They’re competing for one consumer (the government) instead of individual consumers (drivers).
    Think of it like a competition for fishing rights in a particular area – the contract goes to the company most capable of exploiting the resource while maintaining the resource. If another company comes along which can do this more efficiently, they get the contract.

  37. I don’t think transportation routes really fit the free market concept well.

    Me neither, not the infrastructure, anyway. There’s plenty of room for competition in providing service on those routes, if only entrenched interests (ahem – unions) weren’t involved.

  38. “””The differnce between people in Section P (private enterprise)and people in Section G (government) is that the latter are empowered to take your money and throw you in jail and not have to worry about the consequences thereof, while the former have no such empowerment. “””

    Government is held accountable frequently, and we, the taxpayer, picks up the tab. If the same thing happens to a company, we still pay for it, unless we have a way to avoid doing buisness with that company.

  39. When you tax something, you get less of it.

    Which is why you’ll never see a government set sin taxes so high that it threatens to get rid of the social evil being taxed. And why carbon tax rates would soon stray from being set with much consideration of their effect on carbon emissions.

  40. There has been some success in taxing people into not smoking. A pack is what, 8 – 10 bucks in NYC.

    NY makes no bones about it, they ARE trying to tax it to the point you quit.

  41. Once again I propose the No Profit on Sin Act of 2008.

  42. NY makes no bones about it, they ARE trying to tax it to the point you quit.

    Or… average salaries are high enough in the downstate region, where most of the people live, that even 8 to 10 bucks isn’t that big a deal. It’s gotta be rough upstate though. I know the city tacks on more, but the state has high taxes too. Anyway, I think Mike is correct. No way are they doing this “for our own good”.

  43. re: private transit infrastructure and the nyc subway… private competition definitely created an imperfect system that drastically underserves certain areas while overserving others… but consider that since the city bought all the competing lines, there hasn’t been a single expansion of service anywhere (as far as i know, and excluding the debacle of the 2nd ave line) except the lr out to jfk (and that’s since like 1940)…

  44. I don’t live anywhere close to New York City, so I just googled to learn more about the cigarette tax there. I got article after article about how most smokers in New York buy their cigarettes in ways that are not sanctioned by the Empire State.

    So, I’ll make a bullshit argument about why I’m still right. If we consider the bribes that various New York officials take to overlook the illegal smuggling of cigarettes, then we can see that the tax level has been set to maximize those officials income. QED.

  45. “I’m trying to bring the state together to do hard things- not look for ways to divide us.”

    Then the post discusses his decision to lease the Indiana Toll Road, a decision which prompted 2-1 opposition. So wasn’t he just being “divisive?” No, he will say, he was being wise and statesmanlike, doing “the hard things” and making tough choices – and such actions tend to make you unpopular, but if you can’t stand the heat stay out of the kitchen, etc.

    So, to recap, a “divisive” issue is an issue where he doesn’t want to expend political capital. A statesmanlike, bring-us-together issue is one on which he *is* willing to expend political capital, even if it’s unpopular.

    Anyway, doing hard things is pretty much *guaranteed* to be divisive. So perhaps he should take his disingenuous double-talk and shove it.

  46. The beauty of a 99-year lease is I won’t be alive for the end of the leases of the Chicago Skyway and Indiana Toll Road, but I foresee lax capital spending on the roads a few years before the leases are up and the city/state will have massive projects with no funding when their ownership reverts back to them.

    Maybe everyone will get around in hovercrafts by then and the roads will merely be stripped for parts.

  47. The problem of course is that those companies were unable to make a profit after the rise of the automobile and the massive government spending which helped that along.

    People forget that private subways were restricted by law on their fares which reduced profitablity even before the widespread use of automobiles.

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