Indianapolis

AS Americans hit the roads this Memorial Day weekend, debate is building about how to pay for the first-class transportation network that everyone agrees the United States requires. The money from gasoline taxes no longer comes close to meeting needs. Nationally, the gap between road-building needs and projected tax revenue is estimated in the hundreds of billions of dollars, and growing. Almost every governor I talk to faces a seemingly intractable shortfall.

When I became governor last year, my administration inherited a gap of at least $3 billion, equal then to 10 years of new road construction. Long-sought, long-delayed projects languished on the drawing board. For Indiana, a centrally located state that calls itself “the crossroads of America” and has great promise as a logistics and distribution capital, the opportunity cost of inaction was enormous.

A case can be made for higher gas taxes, but no economically rational or politically imaginable increase could close a gap this huge, even if leveraged through reckless borrowing. The only alternative to throwing in the towel was to bring to bear that handiest of revenue sources, Other People’s Money.

This is hardly a novel idea. In much of the world, but only recently in the United States, private capital has begun to play a role, most often in partnerships with public authorities. The Reason Foundation estimated in April that $25 billion of private investments have been proposed or committed for new and existing roads in six states.

If it were merely a matter of getting hands on money today that would otherwise come in over the years, such partnerships would make little sense. The goal for states is to capture far more value than an asset would be worth if it remained in public hands. That goal is often not difficult to achieve.

The 157-mile Indiana Toll Road had lost money five of the last seven years. A principal reason was its antique pricing; tolls had not changed since 1985 and were far below what comparable American toll ways charged.

As a private citizen, I had always been intrigued to stop at a concrete booth and fish out a dime and a nickel to pay the 15-cent toll at Gary. As governor, I asked, “What does it cost us to collect a toll?” This being government, no one knew, but after a few days of calculation, the answer came: “About 34 cents, we think.” I said, only half in jest, that we should just go to the honor system and we’d come out way ahead.

Why would a losing enterprise with an underpriced product drift on in that way? Because it was run by politicians, who are rarely businesslike and deathly afraid to annoy anyone. So the state lost money on the road, postponed repairs and expansions and failed to install the electronic technology that makes toll ways elsewhere faster, more convenient and more efficient.

Just as many business units are more valuable if separated from their conglomerate parent, an asset like a highway can be worth vastly more under different management. When we offered our road for long-term lease, we received a high bid of $3.8 billion, cash, from Macquarie-Cintra, an Australian-Spanish consortium. The highest estimate of the road’s net present value in state hands was less than half that amount, and even that estimate assumed regular toll increases of the kind past governors steadfastly refused to impose. Noting the road’s record of losses, one finance professor remarked, “If they’d gotten a dollar for it, it would have been a good deal.” Instead, Indiana will soon cash a check that closes a gap most had believed insoluble. Future toll increases will be capped at the level of inflation.

Of course, the ultimate success of this policy depends on how the state uses these new funds. As in business, in government it is a mistake — a misdeed, even — to take value from a capital asset and use it for short-term operating purposes. That’s why we insisted that the value liberated from our road be redeployed swiftly into new, long-term public assets that will strengthen our economic backbone: thanks to this deal, we will be able to quadruple the amount of state money devoted to new road construction projects over the next decade.

As clear as the business case was, politics intruded; in fact, Indiana very nearly tore up its equivalent of a Powerball check, with public sentiment running almost two to one against the deal before its passage by the General Assembly this spring.

While every business group, building trades union, and local government organization of consequence weighed in with support, the animosity in Indiana was as genuinely grassroots as it gets. Many Hoosiers convinced themselves either that our proposal borrowed from the future, or that it gave away a part of America to “foreigners.”

Their hearts were in the right place, but not their logic. The economic case is ironclad; Indiana has scored a multibillion-dollar financial gain. And the reflexive patriotism that saw this transaction as a loss of control has it backward: in a world competing for globally mobile capital, repatriating $4 billion that Americans spent on Sonys, Audis, or, in my case, Foster’s beer, to put Hoosiers to work is not a loss but an emphatic win.

As governor, I should have done much more than I did to walk Indiana through, in advance, both the business case and the realities of today’s global economic competition. But I urge my fellow governors in other states now examining similar deals to focus on these facts: Within a few years, Indiana will be home to some $5 billion of new public assets that otherwise would not have existed. Tens of thousands of jobs will be created in their construction, and in their exploitation by businesses of the future. Neither statist dogma nor xenophobia should be allowed to block huge public benefits of the most, so to speak, concrete variety.

Mitch Daniels, the director of the Office of Management and Budget from 2001 to 2003, is the governor of Indiana.