Concession contract for Indiana Toll Road detailed

February 7, 2006
Indiana Finance Authority retains legal title and many controls
Indiana Finance Authority retains legal title and many controls
The Cintra-Mac bid of $3,850m in handwriting
The Cintra-Mac bid of $3,850m in handwriting
Charles Schalliol, director state budget agency and the Indiana Finance Authority
Charles Schalliol, director state budget agency and the Indiana Finance Authority
Jose Maria Lopez de Fuentes, head of Cintra North America. Pic P Samuel
Jose Maria Lopez de Fuentes, head of Cintra North America. Pic P Samuel
State Governor Mitch Daniels (far left in cap) campaigning
State Governor Mitch Daniels (far left in cap) campaigning
Greater of three indices governs maximum toll rate increases
Greater of three indices governs maximum toll rate increases

With attachments the concession agreement or contract proposed to be signed by the state's Indiana Finance Authority and Cintra-Macquarie is about 80,000 words. Parts of it especially on toll rates are tough to understand because of their complexity. In general the concession contract restricts the growth of car tolls to about the rate of inflation, shorter distance truck tolls to increase moderately but allows longdistance truck tolls to increase in real terms substantially. These are the caps. Actual tolls imposed will still be subject to varying degrees of competition with users able to judge the value they get from ther ITR versus alternate routes and modes (Rail is active in the corridor).

We were rather surprised by the extent of powers retained by Indiana Finance Authority over the details of improvements to the road and over operations, especially over its powers to control any contracted operator. The state maintains a major say in how the concessionaire does business. It is certainly not as critics contended any "sell out" of the toll road. Not only is legal title fully retained, and the operating rights revert to the state in case of default, but at every step the concessionaire has to satisfy state requirements, though the state too is limited in its powers to dictate. There is an effort to balance power there.

In our opinion the concession contract errs on the side of excess restriction on the concessionaire's right to run his business in a commercial and entrepreneurial fashion, denying the public some of the benefits of privatization... but that's a judgment call.

Our summary of the ITR concession contract highlights what we found more interesting. We have paraphrased a lot of the key passages.


Interestingly for those of us who follow the semantics there is almost no reference to the ITR arrangement with the concessionaire as a "lease. It is on the cover of the document a "concession and lease" and the term concession is used in most of the text. "The term "public private partnership" appears nowhere.

Also the term "contract" is not used in the text but "agreement."

We think agreement is the wrong word because it hardly suggests legal enforceability the way contract does. An agreement has a sense of ambiguity or fuzziness to our ear for the language. We use the term contract because that better signals the detailed and very specific legal nature of the document.

TR is our abbreviation for tollroad generically, and ITR for the Indiana Toll Road.

The contract proper is 102 pages long and 50,000 to 60,000 words, with several schedules additional. The agency legally liable on the state side is the Indiana Finance Authority (IFA), the agency which presently holds legal title to the ITR and will continue to hold that title. The contract says IFA while we slip into the term state for ease of understanding.

No-competing highways provisions

On the non-compete issue designed to protect the ITR concessionaire from losing traffic to a taxpayer financed facility the concession contract defines a competing highway as any newly constructed comparable highway built by or on behalf of the state during the concession period. And to be competitive it has to have 20 miles (32km) continuously within 10 miles (16km) distance of the ITR. Comparable highway means an freeway/expressway standard road.

Existing US20 is not to be considered a competing highway. It is a parallel expressway through South Bend-Mishawaka-Elkhart located about 9 miles (15km) away from the ITR for about 22mi (35km). For the rest of its length parallel with the ITR US20 is either a 4-lane divided surface arterial or a 2-lane rural arterial. It is the main street of most of the towns along the way outside that expressway segment so travel times are considerably greater along most of its length.

The IRT concessionaire only gets this protection from a state upgraded US20 for 55 years of the 75 year term. That precludes free competition. But it apparently allows US20 to be upgraded to be a competing toll expressway in the meantime by a competing private toll operator.

Concession compensation

Concession compensation is the term for compensation due to the ITR concessionaire by the state or local governments for any adverse impacts caused by a 'compensation event' and is designed to restore the concessionaire's past and future financial condition. Compensation events include placement in service of a competing highway, delay events, and adverse actions, all of which are defined. Delay events include 'force majeur,' failure to obtain permits, legal changes, defaults by the state, discovery of hazardous materials, provided none of the delay the fault of the concessionaire.


The upfront concession fee (the $3,850m) is called "Rent" and in return for this the state (specifically the Indiana Finance Authority or IFA) is said to "demise and lease" the TR land and facilities "free and clear" for the 75 years and to give the concessionaire "an exclusive franchise and license" to provide TR services and to "operate, manage, maintain, rehabilitate and... (this is important) toll the TR."

We always thought demise meant the end, or death, a noun, but consulting a dictionary we discovered these lawyers weren't proposing to kill the TR, but they have their own archaic sense of demise as a verb - to transfer property. (The word goes back to the Normans and their French word demis, the past participle of demettre - to release.)

Transition to private ownership

In the transition to investor ownership the state is obliged to operate the TR consistent with past practices and to maintain goodwill and business relationships so it is handed over in similar condition as at time of the concession agreement is signed. On signing the concessionaire is to get immediate access to facilities and records in order to plan an orderly transition. At the request of the concessionaire the state will provide, at cost, "the services of any employee whose primary responsibility relates to the TR" for up to 18 months after closing.

Hiring practices to prefer Indianans but not existing TR employees

The concessionaire is under no obligation to give any preference to ITR employees.

"During the term (of the concession), the concessionaire and the operator shall give employment preference for postions with the TR to Indiana residents who are qualified for the position (as determined in the sole discretion of the concessionaire or operator, as the case may be) and willing to accept the position on the terms being offered." [Covenants Sec 2.5(h), p27]

Concessionaire to get "quiet possession and enjoyment" of the TR

The concessionaire gets the traditional renter's right to the "quiet possession and enjoyment of" the TR - perhaps to be construed as precluding the kind of hectoring, demagoguery, vilification and serial litigation to which the same Cintra-Mac tollsters have been subjected on the 407ETR in Toronto by the left Liberal government of Dalton McGuinty? (p28)

Actually, quiet possession and enjoyment precludes any government from actions at the entry or access ramps which would "materially adversely affect" TR operations for an extended period.

Assumes all ITR obligations and costs

The concessionaire assumes all new debts, obligations and costs and the state assumes all past costs and debt. Operations must be under the supervision of an active operator with the expertise, qualifications, experience, competence, skills, and know-how to perform in accord with the concession agreement or contract. The concessionaire is approved as the operator from the beginning of the concession.

If the concessionaire subcontracts operations they must inform the state and provide information about the qualifications of the operator. (p30) The state can, without penalty, terminate an operator's contract with the concessionaire on three days notice. The concessionaire assumes full responsibility for the acts of any contracted operator. The state can withhold approval from the employment of a new operator by the concessionaire if judged incompetent.


The present name of the TR is the "Indiana East-West Toll Road" and its name may not be changed by the concessionaire without state agreement. However the state may change the TR's name, and grant the concessionaire the right to use the new name. The concessionaire is granted the right to use the shortened and commonly used name "Indiana Toll Road" and the various logos and marks used by the ITR.


Under the concession policing is to be by the Indiana State Police, as of now. The concessionaire will pay the costs via the IFA. Policing will be at at least the same level as provided on other state roads. The concessionaire may contract separately with the state police for enhanced service or contract with another policing entity, but subject to state approval. State policing costs will start at $6m/yr and go up according to overall police costs statewide. Private security services may only be used by the concessionaire to catch toll violators, or the concessionaire may contract this with the state police. On closing the state police will be given $5m by the concessionaire for capital improvements for their facilities on the ITR.

Capital improvements

IFA will have control of all capital improvements on the TR. Mandatory capital improvements to be financed by the concessionaire are laid out in a schedule (5.5) in the concession contract. Any other improvements desired by the IFA will be funded by the state and will be done by a directive to the concessionaire.

Level of service reports

By July 1 every year the concessionaire must provide the state with a traffic study by an agreed independent traffic consultant. The study will describe the existing levels of service on the TR and project levels for the next seven years. The study will also measure current and estimate future traffic volumes on all mainline segments and interchange ramps and wave zones. The form of the study and LOS methodology is specified in the contract - based on the 60th highest volume of the year, based on 30th highest am an 30th highest pm peak hour measurements.

LOS requirements

LOS has to be a minimum C in rural areas and D in urban areas. If the annual study shows LOS has fallen below these levels the concessionaire will have 180 days to submit a plan to improve LOS. If approved the plan will be implemented at the expense of the concessionaire. If not approved the state doesn't approve the plan it may submit its own plan and unless disputed by the concessionaire will be implemented. The concessionaire has four years to award construction contracts.

If the study projects a future LOS falling below the minimum a similar procedure follows.

In case of IFA directed improvements the concessionaire will recompense the IFA to the extent of toll revenue increases attributable to the improvement.

Operating standards

Specified operating standards be followed by they concession. They will be "construed flexibly" so that occasional departures from standards will not be deemed a violation. Any different operating standards have to be spelled out and approved by the state. If the IFA wants new operating standards the state has to pay the extra cost.

Electronic tolling required

This is the one part of the country that has resisted electronic tolling (ET) technology. This time last year the nation's three larger toll authorities without ET were Chicago Skyway, Indiana TR, and Ohio Turnpike. The Skyway concessionaire installed it within six months of taking over. The Ohio Turnpike is attempting to perform a graceful U-turn after dismissing ET. And despite the efforts of Mike Puro as manager to introduce ET, Indiana DOT resisted implementation successfully until the recent change of governorship. Now the state is requiring ET of the concessionaire, although the concessionaire would do undoubtedly do it anyway because it pays off rapidly in lower costs.

In the western barrier tolling segment ET is required for at least 2x2 lanes by the second anniversary of the concession. They must be mixed mode - manual/ET.

The concessionaire has the "right, title, entitlement and interest" in all toll revenues, electronic and cash, and in lease revenues from vendors at the service plazas. The state retains the right to revenues from use of the right of way for power lines, telecom, billboards, mass transit, and sale of alcohol. Nothing specific on the allocation of revenue from Indian casinos, smuggled cigarettes, fenced freight, prostitution, or drugs. The concessionaire must gain the approval of the IFA for any contracts with vendors, but the IFA shall not withold.

Operations costs and debt service to take precedence over dividends

The concessionaire will use toll revenues to cover the costs of proper operation and maintenance before distributing any dividend to equity holders.

Quarterly reports required

The concessionaire must present the IFA with quarterly reports

* traffic counts for each month

* current level of service for each mile of the TR and projected levels of service for the year

* forecasting the next quarter's traffic by vehicle class

* forecasts of year ahead

Accidents, incidents and emergencies to be reported

The concessionaire has to notify the IFA of all emergencies, accidents and incidents, and any claims against it together with a monthly report tabulating such. Also any hazardous spills or dumping is reportable.

Financial reports

Financial reports showing net income and balance sheet are required half yearly, unaudited, within 60 days and annually audited within 120 days of the end of the reporting period.

Informing IFA on request

On request the concessionaire must provide the OFA with "all information relating to toll road operations," and respond to requests for interviews to discuss operations to allow the IFA to determine whether the concessionaire is complying with the concession contract. IFA will keep information gathered confidential if there are trade secrets or the information is proprietary, privileged or confidential and where its release might cause competitive harm as designated by the concessionaire in writing.

Audit, inspection, testing rights

IFA has the right on 48 hours notice to assign auditors to view the concessionaire's records and take copies and the concessionaire must cooperate in providing information requested. The concessionaire must also allow access to all parts of the TR and will assist the IFA in inspections. This covers tests, studies and investigations on the TR. The IFA in turn is required to minimize the effect and duration of inspections, tests, studies, investigations so there is "no undue interference." The concessionaire will reimburse the IFA for all costs and expenses "reasonably incurred" in this monitoring of its performance.

There are many representations and warranties of the accuracy of data provided to the concessionaire during the privatization process.

Non-discrimination, drug-free, MBE/WBE, buy-Indianan

The concessionaire agrees top follow federal and state non-discrimiunation laws and to promote a drug-free workplace, reporting and punishing any drug use. In procurement and contracting the concessionaire will follow state law and aim for 6% minority and 6% minority business procurement, and will work to award contracts for construction, repairs and maintenance with at least 90% going to Indiana business as defined in state law.

Insurance requirements

Insurance requirements by the concessionaire are laid out in detail. Failure to repair any damage may result in termination of the concession.

Adverse actions

Adverse action gets the acronym AA, and includes any action by state, city, county or other local government which imposes costs on the concessionaire and depresses the fair market value of the concession. Taxes borne broadly are excluded from AA. The concessionaire may claim compensation for AAs, or terminate the concession in response to an AA, after giving notice and detailing the extent of the damage claimed. AAs are distinguished from Compensation Events. Opening of a competing free highway is a CE not an AA! Delay events are another category of compensible possibilities - delays by government in fulfilling its commitments.

Concession default

In case of the concessionaire failing to perform and comply with the terms of the concession contract the IFA issues a directive. There is provision for a cure period, and dispute resolution before the concession is void. However if the concessionaire admits in writing it is unable to pay its debts, or otherwise moves toward bankruptcy. The IFA. too, can be held to have voided the concession, and required to pay compensation.

If the agreement is terminated by the state other than because of failures of the concessionaire the state is obliged to compensate the concessionaire for the remaining value of the concession. The IFA has no right to terminate the concession contract solely "for convenience."

Transfer of interest regulated

The transfer of any or all of the concessionaire's interest in the concession is subject to approval by the IFA, but approval may only be withheld because of the incapacity of the proposed new owner, based on financial strength, experience and background. The IFA for its part cannot transfer its interests in the TR in such a way that would adversely affect the concession.

Dispute resolution

Disputes between the concessionaire and the IFA are subject to arbitration following good faith efforts to resolve them in negotiation. They first get referred to Designated Senior Persons of each party. Statements made in these negotiations are not admissible in later proceedings. Unresolved negotiations go to a mediator with both parties having the right to "strike" or veto up to five proposed mediators. If mediation is not accepted there is arbitration.

That's the concession agreement summarized. 44 pages of schedules detail much boring stuff on small contracts to be taken over by the concessionaire, lawyers opinions of standing, but also spell out items contractually committed in the agreement.

Mandated expansions

Under mandatory expansion requirements is listed:

1. 3rd laning MP18.5 to MP20.3 by end 2007

2. electronic toll collection in the barrier system within two years of closing (mid-2008 expected)

3. 3rd laning MP14 to MP15.5 by end 2008

4. 3rd laning MP10.6 to MP124 and depressing of ITR pavement level to accommodate lower flight path plans of Gary-Chicago International Airport by end 2010

(Incompetent drafter has them out of chronological order, but we corrected. TRnews)


A schedule (7.1) details the concessionaire's right to set (they say "establish") tolls.

Exempt from tolls are vehicles of emergency services, diplomats, and state government departments and agencies.

Notice of proposed toll rate changes has to be given 90 days in advance, except that temporary discounts can be ended with one day's notice.

Toll rates at less than the maximums are set at the discretion of the concessionaire.

Maximum toll rates for Class 2 vehicles including cars doing through trips are:

* to mid-2010 5.1c/mi (3c/km)

Trucks get bigger increases

Maximum toll rates for Class 5 the regular 5-axle tractor-trailers doing through trips are as follows:

* to 2007-Q2 11.4c/mi

* to 2008-Q2 14.4c/mi (x1.26)

* to 2009-Q2 17.4c/mi (x1.21)

* to mid-2010 20.4/mi (x1.17)

For Class 7 vehicles or 7-or-more axles including long doubles, triples (LCVs) the maximum toll rates are:

* to 2007-Q2 24.9c/mi

* to 2008-Q2 31.4c/mi (x1.26)

* to 2009-Q2 37.9c/mi (x1.21)

* to mid-2010 44.5c/mi (x1.17)

Greater of three rule

From mid-2010 completely new provisions come into effect.

Then maximum toll rates can be increased annually by the greater of three data: 2 percent, the rise in the CPI, the increase in gross domestic product percapita. For Class 2 car rates for tolls which have been frozen from concession close to m id-2010 there is a "Look Back" increase based on the same formula compounded, so if, say the CPI increased 8.3% and GDP/capita 8.0% and 2% compounded is an 8.2% increase toll rates can be increased by the largest, namely 8.3%.

In mid-2010 because other toll rates (truck toll rates) have been increasing there is of course no look-back increase but the beginning of annual increases based on the greater of three.

Also from mid-2010 onward the concessionaire gets the flexibility to vary the maximum toll rates in different segments of the 157 mile road provided the maximum toll rate for the whole length of the road remains within the specified limit - any increases in the per-mile rate in one segment must be offset by a reduction in another segment. Also shorter trips have to be at the maximum rates set in another schedule (odd one that), and the highest increase must not be more than three times the smallest increase.

Shorter trips different limits

The actual increases in allowed toll rates is not easy to calculate. First, classes have been changed recently to axle-count so old toll schedules have to be translated into the new. Through trip tolls are now to be differentiated from shorter or "non-through trips," apparently an effort to assuage local constituencies. The concessionaire needs a smart programmer to write all the constraints and the pages of specifications into a toll calculation model to make sense of it all.

Complicating the issue further is the promise by the Republican leadership in passing the concession bill to freeze actual toll rates for trips within the northeast counties for ten years. Presumably this will be done by some rebating system to be operated by the state independently of the concession and the tolls charged by the concessionaire. Or else the concession will need to be renegotiated.

The concession contract has no provisions on flying of flags. The Democrats successfully moved in the state legislature to require the US flag at every tolling point. No word on whether Cintra-Mac will get state compensation for all those huge Spanish and Australian flags they invested in but now can't use. TOLLROADSnews 2006-02-07

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