By Bill Toland
In 1937, at the far edge of the Great Depression,
a traumatized banking sector balked at financing
what was then a 160-mile vision of a road between
Irwin and Harrisburg's western outskirts. Instead,
construction money for what would become the
Pennsylvania Turnpike, the nation's original
superhighway, was provided by President Roosevelt's
New Deal funds via loans from the Reconstruction
Finance Corp. and grants from the Works Progress
But seven decades will change a lot of minds, and
open a lot of wallets.
Now, banks -- foreign ones, anyway -- can't get
enough of superhighways. In Illinois, the
Skyway was turned over to private investors,
Australia's Macquarie Bank Ltd. and Spain's
Concesiones, for $1.8 billion over a 99-year lease.
Last year, Indiana received $3.8 billion from the
same investment duo in exchange for the rights to
collect fares on the state's toll road for the next
75 years. Another investor forked over $600 million
to operate a toll road in Virginia.
Today, Pennsylvania is casting into these same
waters. At the invitation of Gov. Ed Rendell, four
dozen investment and advisory groups have expressed
an interest in leasing or otherwise getting a piece
of the turnpike, a good signal that there's lots of
appeal in the 537-mile highway system, especially
the 359-mile mainline connecting Ohio and New
Jersey, one of the most traveled roads in the
Why would anyone want to lease the turnpike?
Quite simply: money.
It comes with a captive, cash-paying audience of
a half-million daily motorists who have no time to
drive north to catch Interstate 80 and no desire to
take Route 22 or 30 across the state. Investors like
products that create predictable cash flow, and
thus, a reliable return for shareholders. It also
helps that such leases require few immediate and
large upfront capital expenditures, making the deals
relatively easy to implement from a bank's
But if all that's the case, why are cities and
states, including Pennsylvania, lining up to auction
off their cash cows? And is it a good idea?
"The biggest question is, how do you know if
you're getting enough?" said Cherian George, the
managing director of the transportation division at
Fitch IBCA, an international bond rating agency that
has studied the Pennsylvania Turnpike and issued
opinions on the turnpike's investment health for
"It's very valuable. And if it's very valuable,
you ought to be very careful in how you do it."
Valuable, indeed. Mr. Rendell has estimated that
the lease deal for the Pennsylvania Turnpike, which
at current fare rates generates about $600 million
annually in tolls, could bring Pennsylvania as much
as $30 billion -- not to mention savings from no
longer having to pay for upkeep, renovations and
turnpike employees. That kind of cash would allow
Pennsylvania to immediately undertake simultaneous
highway and bridge upgrades, rather than putting
projects on a 14-year waiting list, as is typical
'Grave concern to everybody'
If Pennsylvania received
even a third of the estimated $30 billion kitty, the
deal would still easily surpass those made in
Indiana. In the process, the turnpike
would become the longest ribbon of American highway
to be privatized to date.
And if the team of
already have captured Chicago and
Indiana, were to
win the rights to operate in Pennsylvania, it would
represent a watershed in the highway privatization
movement, said Rod Nofziger, director of government
relations with the Owner-Operator Independent
Drivers Association, a truckers' lobbying group that
opposes these private deals. Ohio might follow, then
New Jersey, and soon, these two banks could control
more than 800 miles of toll road between the Midwest
and the Atlantic coast.
"That should be a grave concern to everybody,
particularly to people in the trucking industry,"
Mr. Nofziger said. Pennsylvania, he said, has "both
a strategic and a symbolic" importance to the
All Americans, he said, should be wary.
Skeptics will note that President Dwight D.
Eisenhower, a fiscal conservative and a military
man, was the one to champion the cause of the
national highway infrastructure. The concept was of
such paramount importance to Mr. Eisenhower that he
made it a top priority to update the Federal Aid
Highway Act. He signed the updated law in 1956,
spurring the development of 40,000 miles of roadway
across the country.
In pushing for the funding during his State of
the Union address that year, he said a new road
system was "needed for the personal safety, the
general prosperity, the national security of the
American people." And in his own memoir, the
president said the publicly owned highway system was
his top accomplishment: "More than any single action
by the government since the end of the war, this one
would change the face of America. ... Its impact on
the American economy -- the jobs it would produce in
manufacturing and construction, the rural areas it
would open up -- was beyond calculation."
'A license to print money'
So how is that 50 years later, we are soon to be
paying foreign investors for the right to drive
across Mr. Eisenhower's vision of an American
highway system? If our major highways are of such
vital importance to the American public, should we
be letting the private sector maintain them?
These are the primary philosophical objections of
those who denounce such highway deals. Opponents
also say they have financial objections: Are
legislators and governors underestimating the value
of the asphalt assets resting beneath their noses?
Will a private company raise fares beyond what the
Turnpike Commission would have? (Answers to both
questions: yes, probably.)
"We see [public highway privatization] as
pawn-shop sort of mentality," said Mr. Nofziger, of
the truckers' group, whose main concern is increased
tolls because truckers are typically paid by the
mile. "You're hawking your assets now, and you're
going to end up paying a whole lot more down the
road," possibly in fares, and almost certainly in
unrealized future revenues.
U.S. Rep. Peter DeFazio, D-Ore., has been a
critic of highway privatization in general, and the
Indiana deal in particular, saying Indiana Gov.
Mitch Daniel, a former Bush administration official,
was doing the president's bidding in shedding
Indiana's toll road.
"What he has done with the 75-year deal is: He's
given away an income stream that could have financed
projects until the end of this century," said Mr.
DeFazio, who leads the House Subcommittee on
Highways, Transit and Pipelines. "Clearly, this is
not about improving the nation's infrastructure" --
it's about making an ideological point, he said.
The big winners in the deal, he says, are the
foreign banks. In the Indiana lease, for example,
they fronted only a percentage of the $3.8 billion
-- the rest of the capital was raised from other
investors. "The finance houses love these things,"
Mr. DeFazio said. "It's a license to print money."
Wooing the rural holdouts
Reason Foundation's magazine, a champion of
libertarian causes that seeks to reduce the
government's role in our lives, says there's nothing
to fear about privatization -- our phone lines,
electric utilities and gas pipelines are just as
vital to the U.S. infrastructure as is the highway
system, yet no one minds that these are owned by the
"I almost have to laugh," said Geoffrey Segal, of
Reason magazine. "Elected officials fight each other
over landing a Toyota or Honda facility in their
back yard." And the same officials complain when
American companies want to outsource to India.
Now, when foreign companies want to invest here,
they complain about that, too, even though there's
no chance of shifting these investments overseas.
"These are hard assets," he said. "You can't exactly
pick it up and move it."
Any worries about exorbitant tolls or lack of
road maintenance can be addressed in the lease
agreement, he said. The more control the state
exerts over the process -- if it would put a cap on
fare increases, for example -- the less cash the
state is likely to see.
State Rep. Richard Geist, the Blair County
Republican who has chaired the House Transportation
Committee for more than a decade, said he expected
enabling legislation to be introduced by the end of
next month and hoped that it would be approved by
July, when the state typically completes its budget.
Once the legislation is in place, PennDOT would go
about reviewing bids and awarding contracts -- the
Legislature wouldn't have to doubly approve the
deal, just the original law.
Mr. Geist acknowledged that Pennsylvania would
represent the crown jewel of the highway
privatization movement thus far -- "We have 42
percent more trucking than New York and New Jersey
put together," he said -- but threw cold water on
the notion that the Macqaurie-Cintra team is out to
build a monopoly.
"I don't think that they would definitely win
this one," he said. "There is a tremendous amount of
interest in the money market."
How would such a deal get done in Pennsylvania?
Gov. Rendell might meet resistance at first. But
with $30 billion in his pocket, he can woo the rural
holdouts with promises of new bridges and road
upgrades, then promise Democrats in Pittsburgh and
Philadelphia lots of money for their ailing transit
Greed over patronage
Some politicians, Mr. Geist predicted, will hold out
simply because they want to preserve the patronage
system in place at PennDOT. But in the end, he said,
"the greed is going to out-trump patronage," meaning
lawmakers won't be able to turn away from a deal
that brings a renovated highway or bridge to their
"We have a maintenance problem that's
staggering," Mr. Geist said. "You can't duck it."
The deal likely would include at least a
temporary cap on fare increases and a requirement
that the new lessees initially abide by the terms of
the turnpike's contract with its 1,800 unionized
employees. Last, if the Indiana deal is any
indicator, bidders will be expecting big tax breaks
in exchange for their upfront cash.
But how to know if it's a good deal?
It's not that Pennsylvania, or any other state,
is incapable of negotiating a good contract, said
Mr. DeFazio, the congressman. It's that the state is
the only party in the deal assuming any risk. The
banks are eager to invest because they know they
have a captive audience, but it's the states that
run the risk of someday discovering that they've
undervalued their highways.
And by then, it will be too late because there's
no way out of the deal unless the bank defaults on
the terms of the contract. Future Legislatures,
governors and city councils will find that their
hands have been tied by their predecessors, for
better or worse.
"Thirty years from now, when they're charging
exorbitant tolls and the adjacent roads are way over
capacity, [motorists will] be looking for someone
with pitchforks" in hand, Mr. DeFazio said.
"Unfortunately, those politicians will be long
(Bill Toland can be reached at
firstname.lastname@example.org or 412-263-2625. )