Tuesday, March 21, 2006

Indiana Toll Road Deal

I seem to have missed this story last week.  In a very positive development, it turns out that the State of Indiana plans to lease the Indiana Toll Road to a private company for a term of 75 years.  Macquarie-Cintra, an Australian-Spanish consortium will pay the state $3.8B for the lease and will have management control over the toll road including maintenance and collecting toll revenue.  Apparently, Indiana plans to spend the lease money to finance other road improvements in other parts of the state.

I have previously written about the potential of privatizing much of our transportation infrastructure.  We need many more of these kinds of deals where government turns over operational responsibility of public assets to private firms.  (In fact I would go farther and assert the Indiana should simply sell the toll road to Macquarie-Cintra.)  

I found a pretty good financial analysis of the Indiana Toll Road that Crowe Chizek Financial prepared for the state.  Currently the tool road has annual revenues of about $95M and annual operating expenses of about $70M.  The financial analysis projects these revenues and expenses out for the next 75 years based on a variety of assumptions to reach the conclusion that if the state continued to operate the toll road it would be the equivalent of a public company worth $1.92B.  That Macquarie-Cintra is willing to pay $3.8B shows how optimistic the consortium is about its ability increase cash flow!  

It will be interesting to see how this deal unfolds.  Macquarie-Cintra is clearly paying a fairly dear price for the toll road based not only on the financial analysis, but also on the fact that there are not too many public companies with $100M in sales, 20% net operating margins, and $3.8B market capitalizations.  To make this work out, Macquarie-Cintra are going to have to move quickly to implement cost reducing technology, such as EZ-Pass, and find ways to increase revenues.  Hopefully, this deal and others like it will show the benefits to private profit seeking firms operating a larger share of what was once considered public property.  

1 comment:

Mark Jones said...

Very interesting Michael. I am Mark Jones from Fort Wayne, IN and we are doing a paper on this subject for our microeconomics class at Indiana Wesleyan University. You can contact me at mark6388@yahoo.com if you are interested.