Wednesday, June 21, 2006
Ind. Gov't. - More on the toll road and the ruling
From The Bond Buyer, The Daily Newpaper of Public Finance, today's report:
CHICAGO — Indiana now plans to close its $3.85 billion lease agreement for the Indiana Toll Road next Wednesday, after the state Supreme Court yesterday affirmed a lower court ruling that plaintiffs challenging the constitutionality of the precedent-setting transaction would have to post a $1.9 billion bond to proceed with their lawsuit.7th Circuit Judge Richard Posner opined yesterday about privatizing highways in the Becker-Posner Blog. A quote:
The state yesterday said it would collect the concession payment next week from Statewide Mobility Partners, a joint venture of Australia’s Macquarie Infrastructure Group and Spain’s Cintra Concesiones de Infraestructuras de Transporte SA. The joint venture, which named a separate concessionaire to operate the toll road, won the bidding for the agreement to operate the toll road for 75 years.
The state also plans to release the details of the unsuccessful bids that were submitted in the process early this year. The state will use a portion of the proceeds from the sale, about $220 million, to defease and retire debt issued by the Indiana Department of Transportation. * * *
The plaintiffs in the case were disappointed but “not surprised,” said Dave Menzer, campaign organizer for the Citizens Action Coalition. He suggested the outcome of the case and the lease agreement will reverberate across the country, and private leasing of public assets will become a larger debate in national and state politics.
“The American public is not pushing for privatizing roads,” Menzer said. The move is being pushed by private entities, including banks and private consortiums “at the public’s expense,” he said. * * *
The court also rejected the plaintiffs’ arguments that the state should pay down debt of the IFA and municipalities in the state with the proceeds from the lease. The court wrote that IFA debt and the debt of local municipalities do not constitute “public debt” as the plaintiffs had argued, saying that the Indiana Constitution requires that the proceeds from the sale of a public asset be used to pay down public debt.
In a “lay sense of the term,” both IFA and municipal debt may be considered public debt. However, neither is prohibited from issuing debt under the constitution, so that “a requirement to retire debt seems of little use unless there is also a prohibition against issuing new debt, and only the state itself is prohibited from issuing new debt,” the court wrote.
In addition, the court found it “inconceivable” that the constitutional framers “would wish to require that a sale of a state asset would trigger a duty to repay a debt of a unit of local government.”
The court also cited previous rulings that demonstrate the creation of entities such as the IFA to issue bonds to finance projects with revenue from those projects backing the debt.
“The general credit of the State is not on the line to discharge these revenue bonds, and a creditor could not levy on the State House … to recover its principal or interest,” the court said, citing previous case law.
“For that reason, the courts of this state and most others have consistently held that debt of these authorities is not debt of the State,” and therefore not subject to the requirement to be repaid using the proceeds from the lease, the court wrote.
The court also rejected the argument that the state should levy property taxes on the land that will be leased, the 157-mile toll road, because it will be operated by a private entity. The state legislature has the discretion to grant tax-exempt status, the court said.
The monopoly issue raises the question: what exactly was Indiana selling when it leased the toll road for $3.8 billion? The higher the tolls and the greater the lessee's freedom to raise the tolls in the future, the higher the price that the state can command for the lease. If the lease placed no limitations on tolls, the state would be selling an unregulated monopoly. If the lease could constrain the lessee to charge tolls just equal to the cost of operating the toll road (including maintenance, repairs, snow removal, lighting, and the collection of the tolls), the market price of the lease would be significantly lower. To the extent that the state wants to maximize its take from the lease, it will be creating allocative inefficiency by conferring monopoly power on the lessee.His colleague Becker writes:
It is difficult to determine whether the $3.8 billion price tag for the Indiana Toll Road is closer to the competitive or the monopoly price level. On the one hand, the lessee cannot raise tolls until 2010 or 2016 (depending on the type of vehicle), and increases after that are capped. On the other hand, the tolls were raised significantly just before the lease, and allowing the operator in 2010 to begin raising toll rates annually by the increase in GDP may confer windfall gains, since the cost of operating the toll road may not increase at so great a rate. One would have to know a great deal more about the economics of operating a highway than I do to figure out whether the terms of the lease confer monopoly power on the lessee.
I do not regard the monopoly concern as a strong objection to the leasing of the toll road, however. The reason is that most, maybe all, taxes have monopoly-like effects, in the sense of driving a wedge between cost and price. Suppose the lease price would have been only $2 billion had the state imposed more stringent limitations on toll increases. Then the state would have $1.8 billion less in revenue and would presumably make up the difference by increasing tax rates or imposing additional taxes, and these measures would have allocative effects similar to those of higher tolls charged by the lessee of the toll road. If the monopoly issue is therefore considered a wash, the principal effect of the lease will be the positive one of reducing the quality-adjusted cost of operating the toll road and the lease is clearly a good idea. * * *
Against all this it will be argued--it is an argument emphasized by opponents of leasing the Indiana Toll Road--that privatization, at least when it takes the form of a sale or long-term lease of government property for a lump sum, beggars the future by depriving government of an income-producing asset. The argument, at least in its simplest form, is unsound, because the state is not disposing of an asset but merely changing its form: from a highway to cash. The subtler form of the argument is that, given the truncated horizons of elected officials, the state will not invest the cash wisely for the long term, but will squander it on short-term projects. This is a danger--how great a one I do not know. It would be an interesting study to trace the uses to which privatizing governments here and abroad have put the proceeds of sales of public assets.
When dynamic competition is effective, a public enterprise, like a toll road or the postal system, should be sold without any restrictions on future pricing, unlike what happened in the sale of the Indiana toll road. I do not go so far as to claim that dynamic competition always arises in a powerful way to compete against privatized roads or other privatized infrastructure that have no restrictions on pricing. But I do believe it is far more common and effective than in textbook discussions of competition and entry. If that is the case, it would then pay to privatize most of the public infrastructure of roads, communication, mail delivery, electric power generation, and the like, with few controls over the prices that can be charged to consumers. That would create some pockets of persistent monopoly profits, but it would take politics out of rate setting. It would also stimulate the development of different ways to compete against what appears to be an unassailable monopoly enterprise.