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In the Nation's Interest

THE HOOSIER STATE’S PUBLIC PRIVATE PARTNERSHIP CHALLENGE: $3.8 Billion Privatized Indiana Toll Road is Running Fine, But Debt Problems Loom

By Jeffrey Hooke
Vice President and Director of Economic Studies

Public private partnerships (P3) represent an exciting area for developing new infrastructure in the United States. The P3 structure enables governments to stretch their infrastructure budgets by enlisting private sector participation, but not every project works out to everyone’s expectations. The Illinois- Indiana Toll Road was a financial windfall for the State of Indiana, but investors and lenders apparently miscalculated.

The Illinois-Indiana Toll Road

In 2006, the State of Indiana privatized a major east-west highway, the Illinois-Indiana Toll Road, also known as the Indiana East-West Toll Road. Built in the 1950’s, the highway runs for 156 miles through Northern Indiana, connecting the states of Ohio and Illinois. Working with a major investment bank, Indiana auctioned a 75 year concession on the road and received several multi-billion dollar bids.

The winning bid was $3.8 billion in cash, and the awardee was a joint venture between two international firms with significant experience in toll roads—Cintra Concessiones de Infraestructura de Transporte   (Spain) and Macquarie Atlas Roads (Australia).

Over the next eight years, 2006-2014, Indiana invested the bulk of the privatization proceeds in new infrastructure projects, rather than allocating the proceeds to general spending.

At the time, the privatization was a “signature deal” due to its size, and many financiers expected a slew of “copycat” transactions among other states. The financial crisis and political opposition derailed many infrastructure privatization proposals.

Plus/Minus to Privatizations

Toll road privatizations enable states to unload maintenance and physical improvement costs, while hopefully realizing operating efficiencies through private sector management.  Offsetting these benefits is the fact that concessionaires often seek higher tolls to cover debt capital costs and profit returns, which may be greater than if the road were under the public ownership model. Public sector unions sometimes criticize privatizations on several fronts, including the likelihood of the concessionaire using non-union employees.

State of Indiana Maintains Control of the Road

Under the 75 year concession, Indiana gave up de facto economic ownership of the Toll Road, but the deal’s terms provided it with extensive supervisory authority. Indeed, a 430 page agreement covers the joint venture’s project management, and it covers “everything from toll road rates to how long the operator has to remove dead animals,” according to former Governor Mitch Daniels (quoted by the Washington Post).

If the joint venture fails to meet stipulated performance standards, it incurs a financial penalty, and if it exceeds certain benchmarks, there is a reward. The “carrot and stick” approach has been successful in other privatizations.


On an operating basis (before debt costs), the Toll Road has performed well. Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), a popular measure of performance, has almost tripled. The principal reason has been the impact of higher tolls, which the state has been subsidizing so users don’t see the full increases.  See the table:

Nonetheless, the slow-growth economy, the higher gas prices and the increased tolls had the effect of lowering traffic count, as the next table shows. The number of vehicles using the road actually has fallen since the privatization.


In addition to borrowing most of the concession’s $3.8 billion purchase price, the joint venture borrowed the money needed to fund mandated capital improvements. Net of cash, the outstanding debt totaled $4.4 billion as of December 31, 2013. This amount is high relative to earnings, and it represented 27 times the level of annual EBITDA . Furthermore, the 2013 EBITDA ($158.6 million) didn’t cover the 2013 interest charges of $209 million. This heavy debt structure has led to concerns that the joint venture cannot repay its obligations. In fact, one European bank sold a $500 million position in the Toll Road loans for 60 cents on the dollar in April 2014, suggesting it had little confidence in getting repaid in full. With the entire debt load maturing in June 2015, the joint venture has to consider its refinancing options quickly.

Neither the State of Indiana nor the joint venture owners guarantee the Toll Toad’s debt. The debt is a “project financing,” whereby the lenders look principally to the Toll Road for funds for repayment. This type of project financing arrangement is quite common in public infrastructure. If the Toll Road fails to make payments when due, the lenders have the ability to take control of the Toll Road, find a new manager,  and operate the highway in lieu of the joint venture’s current owners.