Get­ting Taken for a Road

Newsweek - - NEWS - BY LY­DIA O’NEAL AND DAVID SIROTA @Lyd­soneal @david­sirota

If you want a peek at Trump’s grandiose in­fra­struc­ture plan, look at how Indiana drove the pri­va­ti­za­tion of public roads into a ditch

PRES­I­DENT DON­ALD Trump’s $1 tril­lion plan to re­build Amer­ica’s in­fra­struc­ture may be un­prece­dented in size and am­bi­tion, but it mim­ics a con­tro­ver­sial scheme cham­pi­oned by Vice Pres­i­dent Mike Pence when he was Indiana’s gover­nor. That’s why he is the public face of the Trump ini­tia­tive, and ex­ec­u­tives from fi­nan­cial com­pa­nies that helped pri­va­tize Indiana’s toll road are in the White House, sculpt­ing Trump’s na­tional plan.

Pence and his al­lies like to boast about how Indiana sold con­trol of ma­jor roads to pri­vate com­pa­nies, claim­ing the move prompted cor­po­ra­tions to in­vest money in in­fra­struc­ture that would oth­er­wise have been funded by tax­pay­ers. But op­po­nents say Indiana made some bad deals that of­fer a cau­tion­ary tale of get-rich-quick schem­ing, se­crecy and crony­ism that led the state to sell off valu­able as­sets that were then mis­man­aged.

Public-pri­vate part­ner­ships in­volve pri­vate com­pa­nies in­vest­ing in, con­struct­ing or main- tain­ing public as­sets such as roads, bridges and air­ports, in ex­change for those com­pa­nies rak­ing in tolls, fees or other rev­enues gen­er­ated by those as­sets. The model—some­times called “as­set re­cy­cling”—has been preva­lent in Aus­tralia, Asia and Europe, and since the turn of the 21st cen­tury, more Amer­i­can cities and states have be­gun to em­brace it. Few, how­ever, have been as ag­gres­sive as Indiana in pur­su­ing such part­ner­ships.

The Amer­i­can So­ci­ety of Civil En­gi­neers es­ti­mates it will take $4.6 tril­lion to main­tain and upgrade in­fra­struc­ture through­out the U.S., a ripe profit op­por­tu­nity for po­lit­i­cally con­nected com­pa­nies. Trump re­cently se­cured a pledge by Saudi Ara­bia’s gov­ern­ment to in­vest bil­lions in Amer­i­can in­fra­struc­ture. That money is slated to flow through Black­stone Group Lp—the pri­vate eq­uity company run by Trump ad­viser Stephen Sch­warz­man.

Pence be­gan his vice pres­i­dency with an Aus-

tralia trip to pro­mote Trump’s in­fra­struc­ture plan to for­eign in­vestors. Only weeks later, the In­ter­state 69 pri­va­ti­za­tion deal he cham­pi­oned as Indiana’s gover­nor col­lapsed amid con­struc­tion de­lays, al­le­ga­tions of fi­nan­cial mis­man­age­ment and a spike in traf­fic ac­ci­dents, cul­mi­nat­ing in the re­turn of the sec­tion of the road un­der pri­vate con­trol to the state in mid-au­gust of this year. At the same time, the for­eign company Pence ap­proved to run the 156-mile Indiana Toll Road an­nounced it would be ham­mer­ing eco­nom­i­cally bat­tered north­west Indiana with huge toll in­creases.

Those two road deals are pre­cisely the kind of ar­range­ments Trump’s in­fra­struc­ture plan hopes to repli­cate across the na­tion, led by a team with ties to the pri­va­ti­za­tion in Indiana. Along with Pence, White House of­fi­cials Gary Cohn and D.J. Grib­bin are spear­head­ing the White House pro­posal to let pri­vate com­pa­nies in­vest in, op­er­ate and pur­chase public as­sets. Cohn and Grib­bin worked for two com­pa­nies—gold­man Sachs and Mac­quarie, re­spec­tively—that helped pri­va­tize the Indiana Toll Road. Mean­while, fed­eral records re­viewed by Newsweek show the same for­eign company Pence ap­proved to run Indiana’s toll road has hired the same Pence-con­nected lob­by­ing company to lobby the vice pres­i­dent on fed­eral in­fra­struc­ture pol­icy. If Trump has his way, all of Amer­ica’s roads might be said to run through Indiana.

A DRAG ON MAINSTREET

The project that best em­bod­ies Trump’s in­fra­struc­ture model—and its chal­lenges—is the Indiana Toll Road, an east-west artery that serves an area with more than 15 per­cent of Amer­ica’s pop­u­la­tion. The effort to pri­va­tize the so-called “Mainstreet of the Mid­west” was launched by Mitch Daniels soon af­ter he was elected gover­nor in 2004. Daniels, a Repub­li­can anti-tax cru­sader who served as Ge­orge W. Bush’s bud­get direc­tor, wanted to raise rev­enue for new road con­struc­tion and main­te­nance with­out rais­ing taxes.

Soon af­ter his in­au­gu­ra­tion, Daniels’s ad­min­is­tra­tion an­nounced it had given a con­tract to Gold­man Sachs to be­gin so­lic­it­ing bids to man- age the high­way. Gold­man Sachs would go on to reap $20 mil­lion in fees from Indiana tax­pay­ers for its work there.

Daniels faced staunch op­po­si­tion from Democrats in his state Leg­is­la­ture. “This is a 75-year sur­ren­der of an in­ter­state high­way and all the [toll] rev­enue we could have brought in,” House Demo­cratic leader Pa­trick Bauer said at the time. “If there is any ‘wow,’ it’s the new sign that says ‘Indiana for sale or rent.”’

In push­ing the deal, the Daniels ad­min­is­tra­tion es­ti­mated the road would gen­er­ate $1.92 bil­lion in rev­enue over the next 75 years in state hands. That’s why it was crow­ing when it ac­cepted a $3.85 bil­lion bid from Span­ish company Cin­tra S.A. and Aus­tralia’s Mac­quarie to man­age the road un­til 2081. The lease ef­fec­tively ex­empted the con­sor­tium from state open-records laws but gave Indiana the right to take back the road if the com­pa­nies went bank­rupt.

State law­mak­ers nar­rowly ap­proved the deal Daniels promised would fund in­fra­struc­ture pri­or­i­ties across the state. Not ev­ery­one was as op­ti­mistic. A re­port by North­west Fi­nan­cial, for in­stance, found that the con­sor­tium was re­ly­ing on pun­ish­ingly steep toll in­creases to re­cover its in­vest­ment. The re­port warned that over the long haul, the scheme would “result in de­priv­ing the public trans­porta­tion fund­ing network of very large and much-needed fu­ture rev­enues.”

Over the next few years, rev­enue from the deal funded Daniels’s “Ma­jor Moves” ini­tia­tive, which fi­nanced the ren­o­va­tion and con­struc­tion of 87 road­ways, con­structed or ren­o­vated 60 in­ter­changes and fixed or re­placed a quar­ter of Indiana’s bridges, “with no new state debt and no in­crease to tax­pay­ers,” ac­cord­ing to the Indiana Depart­ment of Trans­porta­tion.

The deal ben­e­fited Indiana’s short-term in­fra­struc­ture bud­get, as well as the com­pa­nies that had de­liv­ered big money to Daniels. The Times of North­west Indiana, for in­stance, re­ported that le­gal and con­sult­ing com­pa­nies that worked on the deal contributed more than $90,000 to his

“PENCE BE­LIEVES IN THIS RE­LI­GION—THE MAGIC AND MYSTERY OF MAR­KETS IS SOLV­ING ALL THE PROB­LEMS.”

cam­paigns. As crit­ics called for tougher over­sight of the road, the lob­by­ing company for the pri­vate con­sor­tium also gave more than $114,000 to the gover­nor’s re-elec­tion cam­paign.

The com­pa­nies’ man­age­ment of the toll road drew crit­i­cism over ev­ery­thing from emer­gency man­age­ment to toll in­creases. In Septem­ber 2008, for in­stance, the state or­dered a sus­pen­sion of tolls so res­i­dents could evac­u­ate a flood zone, and, as a result, the state had to pay the con­sor­tium nearly $450,000 in for­gone rev­enue. Ad­di­tion­ally, the Pew Char­i­ta­ble Trusts found that, on one oc­ca­sion, “the op­er­a­tors did not al­low state troop­ers to close the road dur­ing a snow­storm, claim­ing it was a pri­vate road.” Mean­while, the con­sor­tium be­gan rais­ing tolls—a main rea­son for the 21 per­cent de­cline in traf­fic on that road be­tween 2006 and 2010, ac­cord­ing to a Con­gres­sional Bud­get Of­fice re­port.

Au­dits ob­tained by Newsweek also flagged de­te­ri­o­rat­ing con­di­tions af­ter the road was pri­va­tized. While the toll road con­sor­tium re­ports noted an im­prove­ment in the high­way’s pave­ment, a 2010 re­port said, “All bridge el­e­ment con­di­tions have wors­ened.” A 2014 au­dit showed that 21 per­cent of the con­crete bridges over the high­way had be­come struc­turally de­fi­cient. That rep­re­sented a near dou­bling of the road’s bridge de­fi­ciency rate in the eight years since it had been pri­va­tized—and it was well above the 5 per­cent de­fi­ciency rate that state of­fi­cials set as a max­i­mum limit for roads in Indiana.

A HEAVY TOLL

Soon af­ter Pence was elected to suc­ceed Daniels in 2012, he faced a cri­sis over that toll road when the con­sor­tium de­clared bank­ruptcy in 2014. Demo­cratic U.S. Se­na­tor Joe Don­nelly of Indiana urged Pence to con­sider fol­low­ing through on Daniels’s prom­ise to in­voke the bank­ruptcy clause in the pri­va­ti­za­tion con­tract and bring the road back un­der public man­age­ment. “I ask that you pri­or­i­tize main­tain­ing safe and ap­pro­pri­ate road con­di­tions, the ad­e­quate staffing and ser­vice of toll booths, and the good con­di­tions and clean­li­ness of rest plazas and re­strooms,” Don­nelly wrote in a let­ter ob­tained by Newsweek. “If these con­di­tions can­not be met, I ask that you con­sider re­vert­ing the toll road to state con­trol so we can be­gin the task of restor­ing the toll road’s rep­u­ta­tion and qual­ity.”

Don­nelly’s ar­gu­ment was but­tressed by a pa­per au­thored by Col­lege of Wil­liam and Mary pro­fes­sor John Gil­mour that es­ti­mated Daniels lost the state mil­lions by leas­ing the road, rather than keep­ing it and rais­ing tolls grad­u­ally. Pence’s ad­min­is­tra­tion coun­tered with a study ar­gu­ing that Indiana would re­ceive $2 bil­lion less in toll rev­enue if it held on to the road, rather than leas­ing it to other pri­vate com­pa­nies.

Pence—whose cam­paigns re­ceived more than $116,000 from the pri­vate road con­sor­tium’s lob­by­ing company, Bose—re­jected Don­nelly’s re­quest. In­stead, his ad­min­is­tra­tion opened up a new round of bid­ding to re­sell the lease.

Among the bid­ders were two north­west Indiana coun­ties. In con­sid­er­ing the new bids, Pence’s ad­min­is­tra­tion com­mis­sioned ac­count­ing firm KPMG to eval­u­ate dif­fer­ent sce­nar­ios for the road—but then re­fused to re­lease the company’s find­ings. Pence then re­jected the coun­ties’ pro­posal and ap­proved the pur­chase of the road by Aus­tralia-based IFM In­vestors (which this year hired Bose to lobby Pence on fed­eral in­fra­struc­ture pol­icy). “Pence be­lieves in this re­li­gion—the magic and mystery of mar­kets is solv­ing all the prob­lems,” says Shaw Fried­man, an at­tor­ney who rep­re­sented those Indiana coun­ties that tried to buy back the pri­va­tized road.

Less than a year later—and af­ter the new cor­po­rate owner moved to sell part of the road to another investor—pro­po­nents of public owner- ship said Pence’s de­ci­sion had harmed the state. “It is clear to any­one who has driven on the toll road that con­di­tions have wors­ened, and con­tin­ued state or lo­cal own­er­ship could have avoided this sit­u­a­tion,” Don­nelly said.

AC­CI­DENTS WILL HAP­PEN

The Indiana Toll Road wasn’t the only road­way run into a ditch by Pence’s pri­va­ti­za­tion fer­vor. As he took over for Daniels in Jan­uary 2013, Pence be­gan eye­ing public-pri­vate part­ner­ships for the con­struc­tion of a seg­ment of In­ter­state 69 that runs through the south­ern part of the state. In his first year as gover­nor, Pence and Indiana Repub­li­can law­mak­ers ap­proved a con­sor­tium led by Span­ish com­pa­nies to over­see the con­struc­tion and man­age­ment of a

21-mile upgrade of I-69. In ad­di­tion to over $100 mil­lion in fund­ing from the state, with more to come on an an­nual ba­sis, the part­ner­ship re­ceived more than $243 mil­lion in tax-ex­empt bonds, a fed­eral fund­ing mech­a­nism that Trump’s in­fra­struc­ture plan aims to ex­pand.

Only two years af­ter the deal was cut, the Span­ish firm, Grupo Isolux Corsán S.A., faced sanc­tions from Indiana trans­porta­tion of­fi­cials, who said it was be­hind on its pay­ments to con­struc­tion sub­con­trac­tors. Soon af­ter, the project be­gan to stall, with an 18-month de­lay push­ing ex­pected com­ple­tion back to May 2018, ac­cord­ing to The In­di­anapo­lis Star.

Within months of tak­ing over the gover­nor’s of­fice, Pence’s suc­ces­sor, Gover­nor Eric Hol­comb, an­nounced that Indiana would take back con­trol of the project and ter­mi­nate the con­tract with the pri­vate op­er­a­tors.

In a June re­port, the Star found that the road­way saw a 48 per­cent spike in car ac­ci­dents since the project’s con­struc­tion pe­riod be­gan. In Au­gust, the Indiana Depart­ment of Trans­porta­tion took back that sec­tion of the road, with the state promis­ing in a press re­lease to have it com­pleted one year later.

TAX­PAY­ERS WON’T PAY

David Wolkins, the sole Repub­li­can state rep­re­sen­ta­tive who voted against the Indiana Toll Road deal back in 2006, now be­lieves such deals are the only way to fund ma­jor in­fra­struc­ture projects. “There’s a gen­eral anti-tax sen­ti­ment out there,” he says. “Any­thing new is ei­ther go­ing to have to be a toll road or a public-pri­vate part­ner­ship, be­cause tax­pay­ers won’t let you raise taxes.”

Don­ald Co­hen, the ex­ec­u­tive direc­tor of the gov­ern­ment con­tract pol­icy think tank In the Public In­ter­est, says the deals mis­lead tax­pay­ers into think­ing there are no real costs as­so­ci­ated with im­prov­ing in­fra­struc­ture. “They say, ‘If we sell it to the pri­vate sec­tor, we don’t have to pay for it,’ and that’s out­right bullshit.”

As for Daniels’s ar­gu­ment that the state won out by re­ceiv­ing the money up front, Co­hen says that while some deals can help tax­pay­ers, in­vestors typ­i­cally get the better end of the bar­gain. “They’re do­ing the math,” he says. “They’re not stupid.”

“THEY SAY, ‘IF WE SELL IT TO THE PRI­VATE SEC­TOR, WE DON’T HAVE TO PAY FOR IT,’ AND THAT’S OUT­RIGHT BULLSHIT.”

FOR WHOM THE ROAD TOLLS: Pence and his al­lies boast about how Indiana sold con­trol of ma­jor roads to pri­vate com­pa­nies. But op­po­nents say Indiana made some bad deals that of­fer a cau­tion­ary tale.

SHOV­EL­ING IT: Crit­ics say Trump’s in­fra­struc­ture plan could lead to prob­lems sim­i­lar to what Pence’s ef­forts brought in Indiana, in­clud­ing crony­ism and mis­man­age­ment.

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