Following the successful financial close of the Chicago Skyway transaction, the Indiana Finance Authority launched a competitive bidding process in the fall of 2005 for a concession to operate and maintain the Indiana Toll Road (the "ITR"). The ITR runs east-west for 157 miles in northern Indiana between the Chicago Skyway and the Ohio Turnpike. A private consortium made up of Cintra and Macquarie won this concession as well, and in June 2006 the concessionaire made an upfront payment for the concession of $3.8 billion. As with the Chicago Skyway, the concessionaire will operate and maintain the ITR for the full term of the concession, in this case 75 years, and has the right to collect all toll revenue during the term. The concessionaire will use the toll revenues for similar purposes, and the toll rates have similar maximum limits.
Unlike the City of Chicago, however, Indiana is reinvesting the full amount of the upfront payment in the State's transportation program. The ITR concession was an important part of Governor Mitch Daniels' plan to address the State's $1.8 billion transportation funding gap from 2006 to 2015. The ITR was an underperforming asset that consistently lost money - the ITR lost money in three of the last five years it was publicly operated, and in 2005, the ITR lost $16 million.29 The $3.8 billion upfront payment fully funded Indiana's 10-year road improvement plan. In addition, the upfront payment provided funding to each county in Indiana, and the counties where the ITR is located received one time payments of between $40 million and $120 million for local transportation projects. According to the Indiana Department of Transportation, interest on the upfront payment currently earns about $500,000 each day.30
The Chicago Skyway and ITR concessions drew attention to the significant amount of private capital that can be raised upfront through long-term concessions of existing assets. The Chicago Skyway and ITR are both mature facilities with existing traffic, which provides comfort to the private sector that there is a group of customers who will continue to use the road and pay tolls. These conditions facilitate a bidding process aimed at leveraging the full value of the facility. However, other long-term concessions for existing toll road facilities have employed a very different model.
Some existing facilities have been in operation for only a few years and do not have a proven customer base that bidders can rely on for toll revenue. These facilities may be having difficulty attracting customers and may not be collecting enough toll revenue to make required debt service payments. Bidders in these circumstances have less comfort that toll revenue will be sufficient to repay the facility's debt and pay for the road's operation and maintenance, let alone provide a reasonable return on investment. As a result, the project owner may explore a PPP not for a large upfront payment, but to help bridge a gap in the project's financing. The long-term concessions for the operation and maintenance of the Pocahontas Parkway and the Northwest Parkway are good examples of this type of PPP.
______________________________________________________________________________________________
29 http://www.in.gov/indot/2276.htm (last visited July 7, 2008)
30 http://www.in.gov/indot/2276.htm (last visited July 7, 2008)