INDIANAPOLIS — Mitch Daniels paid up front in cash. Mike Penceis spreading the cost out over 35 years.
Together, the two vastly different highway construction approaches will give Indiana an Interstate 69 extension from Evansville to Martinsville by 2016.
The state is preparing to enter into a long-term contract with a private developer to build and then maintain the fifth section of Interstate 69 that will span 21 miles from Bloomington to Martinsville by upgrading Indiana 37.
The state heralds the deal as innovative as Pence has spoken of his commitment to finishing the I-69 extension to Indianapolis. Yet, transportation analysts suspect the state will end up paying more in the long run for the newest section of I-69 by entering into a public-private partnership than if it covers the cost up front.
“From a personal finance standpoint, few people come to the table with cash in order to buy their first house,” said Jim Tymon with American Association of State Highway and Transportation Officials.
“You have to finance and mortgage it over a number of years. I think that’s what you are starting to see with transportation projects as well. States don’t have the cash on hand to pay for a big project up front so therefore they are looking to finance it.”
In return, private developers could use higher quality materials to make the road last longer and open the road to the public earlier than if the state used its own funds.
“It might not be the cheapest up front option but in terms of the life-cycle cost of the asset, a lot of times they are better,” said Patrick Sabol with Brookings Institution’s Metropolitan Policy Program. “Keeping it running for 30 years only with the same amount of money a month, they might invest more up front to make it better.”
A public document states the reasoning behind the state pursing private financing. INDOT wanted to deliver the project quickly to “alleviate concerns about the need for improvements” to Indiana 37 expressed by community members as the state prepares to open the fourth section of I-69 from Crane to Bloomington this year, according to a final environmental analysis of the project.
To meet that goal, the state plans to contract with a Spanish-led team to design and build the $325 million project and then maintain it for a 35-year period. The state will pay I-69 Development Partners, arranged by Isolux Infrastructure Netherlands B.V., annual payments for the 35-year maintenance period when the company will be responsible for any infrastructure improvements to the roadway, snow plowing and pothole patching. The state has said the annual payments will amount to $21.8 million, though portions are subject to inflation.
The deal has raised the ire of a Democratic lawmaker from Bloomington, who said in the short-term Pence will look like a better manager because he’s building more miles of road.
“It’s a quick easy fix for government that can’t afford to build and maintain the roads that people want. By at least getting it out there, the question is is that fair to the next generation? We have pushed off the burden to future generations, years beyond what we would be normally paying,” Rep. Matt Pierce said.
However, the project has found support in Sen. Luke Kenley, who plays a key role in writing the state’s biennium budget. Kenley, a Noblesville Republican, said the best part of the deal for Indiana is the private developer handling road maintenance for 35 years.
“I just didn’t see how the state could lose on that deal,” said Kenley, who chairs the State Budget Committee that reviewed the agreement.
Over the long term, the state believes working with a private developer will be more affordable, Indiana Department of Transportation spokesman Will Wingfield said.
“For example, on such projects, you start with private companies competing to provide the lowest-cost private financing,” Wingfield said in a statement. “Then you have an acceleration of construction to completion, which gives taxpayers quicker access to an improved roadway. And, finally, when private companies are going to be maintaining and operating the roadway as part of the agreement, you tend to get a project that is built to last over the long term.”
The relationship between the state and the private developer is clear Indiana gets a road built earlier and I-69 Development Partners has found a good place to invest its money and get a 35-year return.
Advantages to a private developer entering into a contract with a government agency vary from company to company, Wingfield said.
“All companies that do business with INDOT, such as highway contractors or engineering design firms, include profit margins in the competitive bid prices they supply. However, private-sector members generally qualify this as proprietary information, and so that specific information is not itemized generally in the proposal,” Wingfield stated.
A Global Trend
While the United States hasn’t embraced public-private partnerships to the extent of Great Britain or Australia, the number of states partnering with private consortiums to build roads is growing as federal funding for highway projects is waning. The public-private partnerships represent about 2 percent of total U.S. capital investment in highways, but 11 percent of new highway projects, according to AASHTO statistics.
In Indiana, a similar public-private partnership model is being used for East End Crossing, a new bridge to connect Southern Indiana to Louisville, though unlike I-69, that project will charge tolls. Revenue from tolls collected on the Ohio River Bridges Project is divided evenly between the two states, Wingfield said.
Under the Daniels’ administration, the state paid for the I-69 project out of the $3.8 billion made off the long-term lease of the Indiana Toll Road, and a combination of traditional state and federal funds. Toll Road lease dollars that comprised the “Major Moves” program already have been spent or allocated on infrastructure projects throughout the state. While the private developer will operate the Bloomington to Martinsville stretch for 35 years, the state is responsible for any work that needs to be done on the existing I-69 extension, including the portion set to open later this year from Crane and Bloomington.
The private developer will need to keep the road open to traffic and up to INDOT standards or run the risk of the state reducing the annual payment, Indiana Public Finance Director Kendra York told the State Budget Committee earlier this month.
“Clearly it’s in the developer’s best interest to make sure they are doing everything they have to do to live up to the terms of the contract,” York said at the hearing.