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.