It Tolls for Thee Reputations, Fellas

The FLUBA Committee on Economists Who Can't Be Embarrassed is having to work overtime countering the fantasy lives of Mad Max and pgl, neither of whom can grasp the concept of a profit seeking business being willing to pay to lease an economic asset in the hope of making that asset more productive.

Max's singular contribution being that the state of Indiana is 'borrowing' by leasing its toll roads for 75 years to a Spanish-Australian consortium of toll road operators. Though under pointed questioning he seems to have admitted that, no, the state will not have to return the lease payment ($3.85 billion dollars) to the 'lender' at the end of the lease.

pgl, is more interesting in that he's busy trying to deny the definition of economics; the analysis of alternative uses of scarce resources, as well as the basics of arithmetic. Even when it's been spelled out for him by another professional economist:

Cintra is paying $3.85 BILLION up front for this lease. And they expect a 12.5% internal rate of return. If I can still do arithmetic, that's more than $400 MILLION per year in net income from the lease.. From a toll road currently generating only $96 MILLION in REVENUE (before any costs). And Cintra will be responsible for the operating costs, maintenance, and at least some expansion costs. The more I look at the numbers, the more I think it's a better deal for the state of Indiana than I originally thought.

Explanations of what is going on have not been in short supply, and they include a New York Times Op-ed by Indiana's governor:

In much of the world, but only recently in the United States, private capital has begun to play a role, most often in partnerships with public authorities. ....

If it were merely a matter of getting hands on money today that would otherwise come in over the years, such partnerships would make little sense. The goal for states is to capture far more value than an asset would be worth if it remained in public hands. That goal is often not difficult to achieve.

The 157-mile Indiana Toll Road had lost money five of the last seven years. A principal reason was its antique pricing; tolls had not changed since 1985 and were far below what comparable American toll ways charged.

As a private citizen, I had always been intrigued to stop at a concrete booth and fish out a dime and a nickel to pay the 15-cent toll at Gary. As governor, I asked, ''What does it cost us to collect a toll?'' This being government, no one knew, but after a few days of calculation, the answer came: ''About 34 cents, we think.'' I said, only half in jest, that we should just go to the honor system and we'd come out way ahead.

Why would a losing enterprise with an underpriced product drift on in that way? Because it was run by politicians, who are rarely businesslike and deathly afraid to annoy anyone. So the state lost money on the road, postponed repairs and expansions and failed to install the electronic technology that makes toll ways elsewhere faster, more convenient and more efficient.

Just as many business units are more valuable if separated from their conglomerate parent, an asset like a highway can be worth vastly more under different management. When we offered our road for long-term lease, we received a high bid of $3.8 billion, cash, from Macquarie-Cintra, an Australian-Spanish consortium. The highest estimate of the road's net present value in state hands was less than half that amount, and even that estimate assumed regular toll increases of the kind past governors steadfastly refused to impose. Noting the road's record of losses, one finance professor remarked, ''If they'd gotten a dollar for it, it would have been a good deal.'' Instead, Indiana will soon cash a check that closes a gap most had believed insoluble. Future toll increases will be capped at the level of inflation.