The Highwaymen

at the western end of the Indiana Toll Road, just over the Illinois border, the scenery rolls by like the lyrics to a particularly forlorn Bruce Springsteen song. Passing over Wolf Lake, infamous in these parts as the site where "thrill killers" Nathan Leopold and Richard Loeb dumped the body of 14-year-old Bobby Franks in the 1920s, the highway skirts ghost factories and decaying main streets until, outside Gary, the smokestacks give way to cornfields and Christmas tree farms, and the scenery stays pastoral across the length of northern Indiana. If you've ever traveled cross-country on I-90, known here as the "main street of the Midwest," you've driven the Toll Road.

Privatizing this 157-mile interstate artery was the brainchild of Indiana governor Mitch Daniels, a former Eli Lilly executive and the director of the White House Office of Management and Budget between 2001 and 2003—a position in which he was known, for his budget-cutting fervor, as "The Blade." Daniels, by all accounts, began plotting the privatization of the Indiana Toll Road soon after he took office in January 2005. The new governor was inspired by Chicago's $1.8 billion Skyway deal but had something far bigger in mind. Leasing out the Toll Road would be the centerpiece of his transportation plan, "Major Moves," a name—borrowed from a Hank Williams Jr. album—that Daniels said he came up with while singing in the shower. Under the plan, Indiana will spend nearly $12 billion over the next decade on highway construction projects funded, in part, by the proceeds from the Toll Road lease.

By September 2005, the governor was soliciting bids for the project, with Goldman Sachs serving as the state's financial adviser—a role that would net the bank a $20 million advisory fee. The winning company would maintain and improve the highway, with the lease agreement spelling out its responsibilities down to the maximum time allowed for clearing roadkill. In return, the company would collect tolls, which it would be allowed to raise by a specified percentage each year after 2010. The deal (including the 75-year term chosen for the lease) was structured so the companies would gain a huge tax advantage; to further sweeten the pot, the state instituted the first toll increase in 20 years shortly before the agreement went through, nearly doubling the rate for passenger cars and gradually raising truck tolls 120 percent. (The toll for cars was promptly frozen pending the installation of electronic tolling, sometime before mid-2008; in the meantime, the state is paying mig-Cintra the difference.) 

Driving the Toll Road on a temperate late-summer morning, the sun squinting through a thick covering of stratus clouds, it was hard to find anyone who approved of Daniels' deal. "Our economy's already bad," said Amber Kruk, an 18-year-old starting her shift at a Perkins just off the highway in South Bend. "We don't understand why we're giving this road to a foreign company." Gassing up his flatbed at a service station off the Toll Road, 62-year-old trucker Richard DeRohan said he runs the road less now because of the increased tolls. "It should have stayed in state hands," he said. "I didn't like when they did it in Chicago. It should be run by a public entity—they're the ones who created it."

In a New York Times op-ed published in May, not long after Indiana's state Legislature approved the Toll Road deal, Daniels acknowledged that public sentiment had run almost 2-to-1 against the idea, and then summarily dismissed the opposition: "Their hearts were in the right place, but not their logic." Indiana, he argued, "very nearly tore up its equivalent of a Powerball check" as Hoosiers convinced themselves "either that our proposal borrowed from the future, or that it gave away a part of America to 'foreigners.'"

In fact, Daniels argued in a paper he wrote for the Reason Foundation last spring, "any businessperson will recognize our decision here as the freeing of trapped value from an underperforming asset, to be redeployed into a better use with higher returns." Yet his administration failed to commission an independent financial analysis of the Toll Road project until the deal was almost done—and when it did, internal emails obtained by Mother Jones show, the motivation was primarily political. "Current criticism from opposition is 'no independent analysis' and Scott and his team have kindly volunteered to fill this void," one high-level state official wrote in a February 2006 email, referring to Scott Nickerson, an executive at the accounting firm Crowe Chizek, which conducted the analysis.

The emails suggest that Daniels' administration remained preoccupied with how to deploy the analysis to best political advantage—for example, by releasing it through a third party, such as a think tank. "The Governor is of the opinion that in order for our response to be politically independent, he would prefer that Crowe not be formally engaged to do this work," one email states (emphasis in original). According to another, "Upon further discussion, the group decided that it would be beneficial to be engaged by a separate entity to allow us to perform the consulting project and avoid the appearance of a lack of objective, independent examination."

In the end, the "independent" analysis, released just days before legislators were set to vote on Daniels' plan, found exactly what the state had been arguing all along—that the private-sector bid far surpassed what the state stood to earn on its own. Near midnight on the final day of the legislative session, after contentious debate, the bill squeaked through the House in a 51 to 48 party-line vote.

Not everyone bought Crowe Chizek's conclusions, though. Roger Skurski, a professor emeritus of economics at Notre Dame, analyzed the deal extensively on behalf of an Indiana law firm that brought suit to block the transaction. (The lawsuit ultimately failed.) It was Skurski who found that the value of the road, over a 75-year term, could be as much as $11.38 billion; in a letter to Rep. Thomas Petri, the Wisconsin Republican who chaired the U.S. House Subcommittee on Highways, Transit, and Pipelines, the economist wrote that "based on the State of Indiana's own studies and figures...it seems that the conclusion changes from 'deal' to 'no deal.'"

"The public was ignored on this; public opinion was ignored on this," says Dave Menzer, an organizer at Citizens Action Coalition, an Indianapolis-based advocacy group that also joined the anti-privatization suit. "I think that increasingly the public feels like what's driving politics, what's driving these decisions, is multinational corporations and deal-makers like Goldman Sachs, Merrill Lynch, and Morgan Stanley. They're the ones making tens of millions of dollars ultimately at the public's expense."

Shortly after the coalition launched its campaign to stop the deal, Menzer says, its six phone lines lit up with callers from around the country seeking to help pay for the lawsuit. In less than a month, it had helped raise nearly $120,000 toward the legal bills. "We saw so many different interests coming together saying that they didn't like this," he says. There were libertarians and Republicans, who felt the state was giving away too much for too little; long-haul truckers, who viewed the deal as the first stage of a national trend that could threaten their livelihoods; and environmentalists, who in the fine print of Daniels' "Major Moves" plan had noticed an effort to revive (and possibly privatize) a long-stalled project to construct Interstate 69, the so-called nafta highway, through the farmlands of southern Indiana.

So why did Daniels insist on pushing the project through in the face of so much opposition? Daniels' office turned down Mother Jones' requests for an interview, but quite a few Hoosiers have come to believe that the governor could have been taking his cue from Washington. In this scenario, Indiana, a bellwether state in many ways, would serve as a test case. "Working to make Indiana one of the first states to pave the way for road privatization, to make a bad pun, was definitely his motivation," Menzer says.

in mid-September, as the 61st United Nations General Assembly convened in New York, the Waldorf Astoria's dim, ornate lobby was teeming with diplomats and dignitaries who sat huddled in armchairs, conferring in a multitude of languages. Rumor had it that President Bush himself had dropped by the hotel the night before.

Down the hall, in the chandeliered entryway that leads to the Waldorf's Park Avenue entrance, 300 sharply dressed men and women were carrying on a different sort of diplomacy. These delegates, as they referred to themselves, were representatives from white-shoe investment banks and consultancies; high-powered lawyers; executives from the world's leading infrastructure companies; and, sprinkled here and there, federal and state officials, who never seemed to go long without being pulled into a conversation and handed a business card. They were at the Waldorf for North American ppp 2006—a conference dedicated entirely to infrastructure privatization in the United States.

As the conference opened, on the morning of September 19, Tom Nelthorpe, the editor of the trade magazine Project Finance, addressed the audience, drawing a laugh when he joked about pirates "plundering the resources of the New World." "I hope you'll find today's varied program evidence of a more sophisticated approach," he said.

Emerging markets rarely emerge solely on their own, and would-be road operators have spent years working to convince state and local officials that privatization is a no-lose proposition. It has created something of an echo-chamber effect, says John Foote, a senior fellow at Harvard's Kennedy School of Government who specializes in transportation issues. "If you've got enough people whispering in the ears of governors and mayors and so forth saying that this is the greatest thing since sliced bread and don't miss the boat, pretty soon people start believing it."

Perhaps the most tireless of the privatization advocates is Mark Florian, the chief operating officer of Goldman Sachs' municipal finance division, who advised Chicago and Indiana on their toll road deals and says he has personally visited more than 35 statehouses to "help spur the market." Florian was a speaker at the Waldorf conference, and after his remarks in the hotel's lavish ballroom, the Goldman Sachs executive—who bears a mild resemblance to Stephen Colbert—was instantly mobbed, rock star style, by delegates, all of whom seemed to be on a first-name basis with him.

"I at times tell my colleagues that I kind of feel like a missionary—out trying to sell the religion," Florian told Mother Jones. "We have been heavily invested in this."

Florian's employer isn't just any old Wall Street firm. It is one of the nation's most active and most profitable investment banks, and top Goldman Sachs officials have served in numerous administrations. Last summer, President Bush tapped its ceo, Henry "Hank" Paulson, as secretary of the treasury. Another former Goldman Sachs ceo is New Jersey governor Jon Corzine, who in September commissioned an analysis of whether state assets, including the New Jersey Turnpike, should be turned over to private companies. In addition to advising Indiana on the Toll Road deal, Goldman Sachs has worked with Texas governor Rick Perry's administration on privatization projects, and according to Schmidt, the former adviser to the Chicago mayor's office, it was a Goldman Sachs representative who first pitched the city on the idea of leasing out the Skyway.

That deal, which yielded $9 million in fees for Goldman Sachs, was "an eye-opener" for the company, Florian recalls: "That was a pretty phenomenal transaction. As soon as we were involved in that and saw the potential application of doing this more broadly, we were very excited about doing that." After the Skyway lease closed, Florian says, Goldman Sachs was inundated with calls from investors worldwide who wanted a piece of America's transportation infrastructure. "We said, 'Well, gee, if all these people are interested in investing, perhaps we can create a vehicle for them to invest through,'" he explains. To that end, Goldman Sachs put together an infrastructure fund that, by the time Florian addressed the conference, had already surpassed its original $3 billion target. Other investment firms, including Morgan Stanley and the Carlyle Group, began putting together their own funds. So appealing is the infrastructure market that Goldman Sachs has made significant changes to its municipal finance group to better position itself for a coming boom.

When Goldman Sachs began advising Indiana on selling its toll road, it failed to mention to the state that it was putting together a fund whose sole purpose would be to pick up infrastructure for the best price possible in order to maximize returns for its investors. Nor did the bank advertise the fact that, even as it was advising Indiana on how to get the best return, its Australian subsidiary's mutual funds were ratcheting up their positions in mig—becoming de facto investors in the deal.

"The firm is an established adviser, but we also have this big investment arm," Florian told Mother Jones, arguing that Goldman Sachs' dual nature typically doesn't cause a problem in corporate deals. "But this is a trickier marketplace, and people are cognizant of that because it is so public. It's so new.... We're going to really feel our way along here." A Goldman Sachs spokesman later contacted Mother Jones to stress that there is "a wall" between the firm's investment and advisory divisions. "Asset management makes its investment decisions independently of the rest of the firm," he said. Asked whether the firm has a system to prevent conflicts of interest, the spokesman demurred.

Florian says Goldman Sachs does have a system for avoiding conflicts in situations when Goldman is a principal investor in a deal. "We put in a voice mail and some information about that situation and what our role might be, and it literally goes around the world.... It's a good system, but it's not always perfect." Indeed, the system didn't stop Goldman Sachs last spring from vying to advise the city of Chicago on a deal to privatize Midway airport—even as it was seeking, along with other partners, to take over British Airports Authority, one of the companies likely to bid on the airport.

"One of the things we've learned in these recent corporate scandals is that those firewalls may not be very soundproof," says Duane Windsor, a professor of business management at Rice University and an expert on business ethics. "There is a lot of leakage back and forth...that kind of problem where the motives are so mixed that it's hard to tell why you are getting a certain piece of advice.

"There's no reason to think the people in these companies are abnormally honest," he adds wryly.

Dennis Enright, a principal at NW Financial Group, a New Jersey-based investment banking firm that advises municipal governments, says that in transactions involving vital public assets, investment banks such as Goldman Sachs should be carefully watched. "It does seem odd that they are effectively teeing up assets for their corporate clients to buy," he says. "In most situations, that wouldn't be deemed ethical." John Foote, the Kennedy School fellow, also suggests that Goldman Sachs has "some decisions to make. People don't want them playing on both sides of the fence."

So, we asked Florian, does Goldman Sachs want to be an adviser or an investor in the business of roads? "Both," he replied.