'This time the natives won'

In 1626, Dutch settlers supposedly exchanged Native Americans a pile of beads for a deed to Manhattan. 383 years later, Cezary Podkul sat down with Mitch Daniels, Governor of Indiana, to find out how the $3.8 billion lease of his state’s toll road compared with that original big deal

Peek in room 206 of the Indiana Statehouse. A sign on the large brown door informs you that you’ve entered the governor’s office.

Inside, you’re immediately greeted by a portrait of Joe Kernan, the man Mitchell Daniels battled for the job in 2004, when he crisscrossed the state in a motorhome with an appropriately homely slogan: “My Man Mitch.” A coaster with an imprint of the motorhome adorns his desk. A report card of his first year in office lies stashed in his drawer.

Mother Theodore Guerin, a French nun renowned for setting up schools across America, looks on from a wall also hosting likenesses of famous Indiana residents. Daniels leans back and looks in the opposite direction. With a crease in his brow, he warns:“I don’t want [my] mother to reach down from heaven and smack me for gloating.”

“But as I expressed to somebody recently: this is the best deal since Manhattan for the beads – except this time, the natives won,” he adds, smiling.

He has just finished describing Monday, 23 January, 2006: the day he unveiled the bids for the state’s 157-mile toll road. On that day, his office – about the size of a small gymnasium, now empty except for the two of us – was crammed to capacity. Legislators, road builders, union representatives and journalists all gathered to learn how much the state would get for leasing the road for 75 years.

“When I said that the leading bid [was] from a consortium of Macquarie and Cintra, $3.85 billion, all the oxygen went out of the room. There was this huge gasp and then applause and people smacking their foreheads and just wide-eyed,” Daniels recalls, gesturing as much.

“At that moment, I guarantee you, everybody in the room thought: ‘Holy cow, what a coup! This thing will sail,’” he says, then pauses briefly. “But we were wrong.”

‘Major Moves’, the proposal to lease the toll road, became one of the most bitter, partisan battles in Indiana’s history. Legislators eventually accepted the Macquarie/Cintra bid, but with a razor-thin margin of just three votes in the House of Representatives.

Three years on, its mere mention still raises ire in this Midwestern state, nicknamed the crossroads of America. But Daniels, a Republican recently re-elected by an 18 percent margin while Democrats swept the state for the first time in 44 years, is proof that public private partnerships are politically viable – even if they remain as difficult as ever to pull off. These days the governor busies himself with other priorities but remains convinced as ever that it was the right thing to do at the right time. He hopes others will follow.


“I sold some things and I bought a ring, and I’ve been married before one time. And this major move just goes to prove, like they say love is really blind,” goes “Major Moves”, a country music tune by Hank Williams Jr.

“I’m a country music fan,” Mitch says as his mind turns to the Williams classic. “One day in the shower while humming it, I realised,‘now there’s the right brand for what we’re trying to do.’”

Indiana, he says, needed a major overhaul of its infrastructure funding. The state had promised about $3 billion more in projects than what could realistically be delivered. Work on several major arteries crucial to the state’s economic future – such as the Hoosier Heartland Corridor and a highway linking Evansville and Indianapolis – was badly delayed. So were nearly 200 other projects starved for funds.

A chance conversation during the 2004 campaign first called his attention to this problem. “I was at somebody’s charity golf outing in a little rural community in Western Indiana and fell into conversation with a highway worker who said to me: ‘You know, it’s a joke, don’tcha?’ And I said: ‘What?’ And he said: ‘All of our highway plans. We’ve got $3 or $4 of projects designed and on the books for every $1 we have.’ And I said: ‘No kidding.’ And he said: ‘Oh yeah – we’ll never get that stuff built.’”

“I said, ‘well, there’s nothing wrong with lots of choices – you have to prioritise, don’tcha?’ He said, ‘Yeah, whatever falls out of the Xerox machine, or whoever has the loudest voice in the state legislature.’ This was the beginning of wisdom for me,” he recalls.


The Indiana state flag features a torch symbolising liberty and enlightenment, radiating six rays that symbolise the spread of both. Having found his torch, Daniels set about spreading its light. “I had come [to Indianapolis] and found out that that worker was exactly right,” he says.

So in April 2005, after a tense legislative session focused on reigning in the $200 million budget deficit he inherited from his predecessor, Daniels turned to infrastructure.
He created a working group to explore 31 options for raising funds for the state’s
transportation budget.

“Tax increases, indexing gas taxes – nothing was out of bounds,” Daniels says. “And I knew from just keeping my eyes and ears open that PPP arrangements around existing assets were common in the rest of the world, so we looked into that too.”

Finding an existing asset to monetise was a no-brainer. He knew from personal experience that the Indiana toll road was not up to snuff.

“I could never get over when I was in Northwest Indiana I would be on the toll road, these very low tolls, including the very last toll road before Chicago: 15 cents … and I remember asking in early 2005: ‘What’s with the 15 cents? What does it cost to collect the toll?’ It’s government – they don’t know. No one ever asked, apparently. So they go back, and fool around, come back and say:‘We think it’s about 34 cents’.

No surprise to Daniels, given that the tolls had not been raised since 1985. “Politicians ran it – they were too cowardly to raise the toll,” he says. “So we were prepared, if nothing else happened, to raise the tolls.” In the meanwhile, he set his sights on something bigger: leasing the Indiana Toll Road.

Daniels breaks new ground “The people from investment banks just simply couldn’t believe what I wanted to do,” he recalls. Within months, he had hired Goldman Sachs – fresh from advising the City of Chicago on the landmark lease of its Skyway toll bridge for $1.8 billion – as the state’s financial advisor.

By October 2005, the toll road was put to tender. Just 117 days later – a record speed for a project of this size and complexity – the process was complete. Investors from the US, Europe and Australia parked four bids on the governor’s desk.

“I was prepared to go out and advocate anything probably north of $2 billion as achieving a clear premium for the state,” Daniels says. “Watching the process, seeing the bids come in, I was optimistic we’d get something north of that but I did not imagine $3.9 billion. And nobody else that I know did, either.”

“We had a little sort of guessing pool going. There were only three or four of us in this loop, plus the Goldman guys, and none of us – I didn’t – had the high guess.”


The deal was staggering for more than its size. Sure, $3.85 billion was a record amount for a US infrastructure asset that is yet to be topped. But it also included a number of public sector-friendly concessions that made it as attractive to the people of Indiana as trading a pile of beads for Manhattan must have been` to the Dutch in 1626.

Cintra and Macquarie placed $60 million in escrow that would freeze tolls at 1985 levels for 10 years and gave $6.5 million to the state police, allowing more troopers to patrol the road.

The seven toll road counties would receive $240 million of transportation funding, the state’s 92 counties would receive another $150 million and $2.6 billion would go towards fully funding the Indiana Department of Transportation’s road and bridge projects for 10 years. Why, then, did Major Moves nearly die in the state legislature?

“Well, it became partisan,” Mitch admits.“I thought this would be a great bi-partisan programme. And it could have been . . .but some folks, you know, didn’t get that and there was an irresistible political opportunity, which our good friends on the other side just couldn’t turn down so they jumped all over.”

Democrats attacked the plan as a sellout that would land the road in foreign hands and allow a private company to net billions by hiking tolls. Some attacked Daniels for being partisan and taking political cheap shots at them. One representative even blogged about a Macquarie investor presentation which described the toll road as “an attractive asset at an attractive price”. That showed it wasn’t in fact the money-losing scheme the governor pretended, he said.

Daniels dismisses these arguments as evidence of the misunderstanding that pervaded the public’s perception of the deal.

“I went to a funeral up North and was just expressing my sympathy to certain family members and this one young man, a teenager, says: ‘What do you want to give our road to, Russians for?’ And I said: ‘Let’s see.

First of all, son, we’re not giving anything to anyone, we’re not even selling anything, and the Russians have nothing to do with it.’ So the x-word came into play,” he says.

But rather than tempering such sentiments, politicians set against Major Moves used it as ammunition in their fight against it. So, looking back, Daniels wishes he had used bigger bullets.

“I came at this thing in so many different ways. There are a million ways to explain it. I probably should have hit on the regulated utility model a little sooner than I did. That’s another way to think about it.”

Utilities, like roads, are a type of core infrastructure. Unlike roads, though, they are predominantly run by the private sector in the US under tight government regulation. So even though the private sector is involved, the public’s interests are preserved.

That’s no soundbite. But it reflects a core belief that Daniels shares with other politicians seeking to execute similar deals: “Don’t be afraid to talk to people as grown-ups. And don’t cut and run on the first whiff of gunpowder.”

In the end, only one Democrat joined Republicans in voting for Major Moves in the House of Representatives. The margin in the Senate was wider, but Daniels knew that the victory – sweet as it was – came at a price.

“There’s no question in my mind that at the time it passed, it was politicallyunpopular,” he says, adding: “But we saw it through just the same and thank goodness.”


As the money flowed from Cintra and Macquarie to Indiana and then on to counties and transportation reserve accounts, the battle ground slowly turned into a testing ground. Legions of PPP supporters, investment bankers and investors wondered whether Daniels would get re-elected in 2008 and show the world that PPPs are politically viable.

Daniels passed that test with flying colours. He clobbered his opponent, Jill Long Thompson, who was openly critical of the toll road lease, by 18 percent, winning more votes than anyone else who has ever ran for ofice in Indiana.

The accolades poured in from far and wide. “I consider myself a good Democrat,” Pennsylvania Governor Ed Rendell told delegates gathered at the USA PPP Summit in Washington DC this March, “but it was great to see Mitch Daniels re-elected in Indiana.”

Daniels smiles as I read out Rendell’s remarks. But, as with so many other things discussed at our meeting, he doesn’t see things as black-and-white. “If you were somehow able to identify people who simply said, ‘the basis of my vote was that deal,’ it was probably a net negative,” he says. “But I think it was part of a complex of many, many missions that stamped us clearly as the party of purpose, the party of progress, and innovation.” This, of course, was in an election year that was all about change.

Still, even if it did not help, at least Major Moves did not torpedo Daniels’s re-election prospects. This he credits simply to the passage of time. After the deal closed in June 2006, he had a cushion of two years for the public to warm to its benefits before heading to the voting booth. During that time, Mitch arguably became the most mud-caked governor in the US – if only because he had the money to make mud fly. From the Fort to Port road in the North to portions of I-69 in the South – which would have been built as a toll road, were it not for the money the state received from Major Moves – shovels have hit the ground, and the governor has the pictures to prove it.

“People have begun to see the real results, the long dreamed-of projects actually getting going,” he says. Equally importantly: “None of the bad things that were forecast have happened.”

And so the light from his torch may finally be beginning to shine through. “Everyday, even now, somebody changes their minds in this state. A little light bulb goes on and somebody changes their minds from ‘no’ to‘yes’ – no one ever changes their mind from‘yes’ to ‘no’,” he says. “They learn something they didn’t understand: ‘Oh! We still own the road;’ ‘Oh! We got a great deal by any definition!’‘Oh! It’s a regulated utility model’”.

He points to a recent piece in the Indianapolis Star-Tribune, succinctly entitled: “Deal leaves state with one less worry”. Traffic has plummeted nationwide due to the recession, leaving many local and state toll road authorities strapped for cash. But that’s just one more thing Indiana doesn’t have to worry about. “A business writer figured out something we talked about before…the de-risking that goes with this,” Mitch says.

He doesn’t convey an ounce of nervousness as we discuss the toll road concessionaire’s recent troubles. Faced with falling traffic, Cintra and Macquarie had to dip into a reserve account to cover their massive debt service obligations. At over 80 percent leverage, the Indiana Toll Road lease was one of the highest-leveraged infrastructure deals ever done in North America.

Daniels knows that he can always take back the toll road in case of bankruptcy, but he certainly isn’t hoping that will happen. “I wish them well. I hope they do fine. And I think they will over time. Again, they have every incentive to take those steps to make this the quickest drive for a truck or the most pleasant drive for a car,” he says.

Arguably, a large part of that incentive comes from having paid so much for the road. Under-bidders on the transaction still wonder how Cintra and Macquarie managed to put $1 billion more on the table than the next-nearest bidder, a consortium led by Babcock & Brown.

“I think we got a significant premium for moving first. Bidders wanted to seize leadership in this market, and they did. Cintra did, Macquarie did.”

But even if he moved first, he thought others would follow. “On the day we announced the astonishing amount we’d been offered … I fully predicted this is going to be a record by a factor of two in the US but it won’t last very long at all,” Mitch says.

“And three years on now, it is still the record. Sooner or later it will be vastly surpassed, but that just shows how resistant the political system is.”


“Resistant” may be putting it lightly. US Representatives Jim Oberstar and Peter DeFazio, Democratic leaders of the House Committee on Transportation and Infrastructure, are downright skeptical of PPPs.
Last November, for example, the duo sent a letter to then-Secretary of Transportation Mary Peters asking that she reign in such arrangements and make sure that “roadway users are not forced to pay artificially high tolls to meet investor revenue expectations”.

Daniels listens intently as I read to him excerpts of their letter. Then I ask him what he thinks of it. He looks at me as he silently contemplates the right word.

“It’s troglodytic. It’s just amazing [that] the people who affect to be concerned about the infrastructure deficit are so theologically opposed to what could be part of the answer,” he says. “They’re just totally wedded to a system that’s totally failed.”

The Highway Trust Fund – the US government’s main source of surface transport funding, backed by petrol taxes – is running on empty. Last September, Congress had to appropriate $8 billion of emergency funding just to keep it afloat. In February, the National Transportation Infrastructure Financing Commission predicted the US would have a federal funding gap of $400 billion in the next six years, growing to $2.3 trillion through 2035 at current revenue levels.

The same commission argued unanimously that the government cannot meet its infrastructure spending needs alone. It must shift away from the gas tax as a funding source and give a greater role to private sector participation. Don’t Oberstar and DeFazio understand this?

“They do understand. They just don’t want to let go. They like to have everybody come down there and kiss their ring for the money, just to be direct. I finally realised this. They’re less concerned with rebuilding America than building the power of Congress in their committee. I’m afraid it’s that simple,” Daniels says.

This conclusion leaves him with a fairly small hurdle for the federal government’s role in PPPs: please don’t get in the way. “In my dreams the Federal government would incentivise this sort of thing,” he says. “It doesn’t have to be the preferred mode. But to try to stomp it out is to work against the objective that they claim to be pursuing.”


Still, he views infrastructure funding as a fundamentally bi-partisan issue on which Democrats and Republicans should work together to find solutions. “I’m happy to support their efforts in the traditional structure, but do the math. We cannot get there any conceivable way without finding new sources and again we found the source which was an absolute bonanza for the people of Indiana.”

He hopes others will see the light and follow his example. In the meantime, the country music fan might well expand his palette to another tune: Edith Piaf’s “Non, Je ne regrette rien.”

“We are busily reinvesting and re-employing money we never would have seen through any other means. Not if I added those other 31 options on that chart together would we have come up with what we did.”