Toll Road watchdog

Now that legal challenges to the Indiana Toll Road lease have been exhausted, and the lease exercised, all that remains is to reap the rewards of the Major Moves windfall, right? Not quite – a $3.8 billion lease agreement demands vigorous oversight. And to its credit, the Daniels administration appears to be watching.

Bloomberg News reported this week that Goldman Sachs Group Inc. lost the chance to serve as financial adviser for Chicago’s sale of Midway Airport after city officials learned the securities firm was planning to buy a European airport company that was a potential Midway buyer.

The blatant conflict of interest drew criticism not only from Chicago’s chief financial officer but also from Charles Schalliol, Indiana budget director.

The securities firm is building a $3 billion infrastructure fund it would use to invest in infrastructure such as toll roads and airports, according to Bloomberg.

“The objective of these funds is to buy assets on the cheap,” said Dana Levenson, Chicago’s CFO. “We’re concerned, but it’s unavoidable. It would be a lot easier if there were no funds housed in investment banks, but that’s not going to be the case.”

It won’t be the case because savvy investment professionals have recognized the lucrative potential of leasing government infrastructure. They can’t be faulted for trying to maximize their profits, but state and municipal government officials need to be aware that their interests as adviser might be compromised by their own investments.

To his credit, budget director Schalliol is on top of the situation. When he found out that Goldman Sachs was preparing to invest in toll highways and other infrastructure, he called the Goldman Sachs banker who oversaw the Toll Road deal. The state of Indiana paid the securities firm $20 million last month for drawing up and executing the public-private concession agreement.

“I told Mark Florian, after the transaction was done, it would have been a significant area of conversation,” Schalliol told Bloomberg News. “I would not go so far as to say it’s unacceptable to have a fund. I would say it creates some serious questions for the engagement.”

Indeed, advisers with financial interests on both sides of a deal have a conflict of interest that will inevitably benefit them at the expense of taxpayers because investors can recover their money more quickly and maximize profits by raising tolls. It’s encouraging to see that Schalliol was on top of Goldman Sachs’ venture and, more important, that he served the company notice.

As Indiana begins its 10-year Toll Road spending spree, the lure of infrastructure leasing will be strong. A representative of Macquarie Bank Ltd., one of the partners in the Toll Road operation, estimates that another $50 billion in new Toll Road projects will be leased to private developers in the next three years. Gov. Mitch Daniels has expressed interest in that form of financing for the construction of Interstate 69 from Indianapolis to Evansville.

If that’s the route the administration plans to pursue, it’s encouraging to note that it is aware of the risks as well as the rewards. Now that the Toll Road lease is a reality, those of us who were skeptical of unforeseen consequences will be reassured only by state government’s continual scrutiny of the agreement and any future leasing agreements.