Roads to Ruin
Opinion: "We’ve let private companies get away with the claim that efficiency will lead to cheaper and better highways when what it often leads to is massive taxpayer debt."
By Randy Salzman
November 11, 2014
The company that runs the $3.8 billion Indiana Toll Road went under in September, adding to the list of nearly a dozen transportation-based public-private partnerships in bankruptcy court across the country.
Few of the rest, including Virginia's 22 public-private partnerships, known as P3s, are meeting their toll and income projections. Maryland's InterCounty Connector has quadrupled in cost to $4 billion while carrying less than half of its projected vehicles.
But news media continue to report as if the private money is rescuing crumbling American highways when even Congress is questioning if taxpayers are throwing good money after bad — and spending more than if public money alone had built the highways.
Americans have forgotten what their grandmothers once taught: "If it sounds too good to be true, it probably is."
We've let the privates get away with claiming that business efficiency will lead to cheaper and better highways when what it often leads to is massive debt dumped on taxpayers. Through a federal program called the Transportation Infrastructure Finance and Innovation Act, American taxpayers are loaning huge chunks of alleged private equity to international financiers, and then guaranteeing billions of dollars in state bonds. The result? When private toll-operating companies go bankrupt, we taxpayers are left holding empty bags.
After bankruptcy, we pay the bondholders off at exorbitant rates — an average of 14.9 percent, according to one research firm.
Lane Construction spilled truth in announcing its desire to bid on Interstate 66 toll lanes near Washington.
Lane told Virginia the "well-known fact" that traffic projections, on which the bonds and loans allegedly will be paid back, "have an optimistic bias."
Optimistic? One study found that the projections tended to be 109 percent more than actual traffic — or more than double — and that nowhere in completed American P3s have actual traffic and toll income come close to projections.
Lane noted that the higher costs of public-private partnerships can be attributed to three key items: One, the equity investor seeks profit. Two, the legal fees, financial advisory fees, consultant fees, rating agency expenses and so on, "make the project cost initially higher than it would be under a conventional procurement." And three, the debt financing costs are out the door before the ink is dry on the contract.
T. Rowe Price is so happy, for example, it has 20.1 percent of its bond portfolio in Virginia transportation P3s — among Price's "top performers." But none of the three projects that the brokerage mentions is operating, and one contract, the U.S. 460 toll way between Norfolk and Richmond, is suspended and unlikely ever to be built.
Who's paying bondholders for projects that have yet to turn a penny?
It's time that news media asked questions:
Why does all this foreign money keep investing when so many P3s go bankrupt, and few, if any, meet their traffic and income projections?
Why do these tax-free, private-activity bonds generate junk-bond rates when other municipal and state bonds are much lower?
How does any investment manager, with the Indiana Toll Road already belly up, justify throwing another $2.75 billion at it?
If privates take the risk, why was Maryland forced to raise gas taxes to pay for the InterCounty Connector?
Why does any company, with one project in bankruptcy and another generating less than a half of projected income, bid on and win a third Virginia transportation project? (See Pocahontas Parkway, Capital Beltway Express, 95 Express Lanes.)
Why did California suspend all P3 contracting for a decade?
How come actual traffic and income never exceed projections?
If tolls will pay off loans and bonds, why does Lane Construction clearly state, "we are not willing to take on toll revenue risk" in its Interstate 66 information packet?
How come the signature transportation partnerships of Texas Gov. Rick Perry are on the verge of bankruptcy, and some 1,500 people turned out near Dallas to protest more toll roads and Texans ranked "building toll roads" dead last as a congestion strategy?
Will federal loans ever get paid back to taxpayers from any P3 transportation project?
Who borrowed the money to buy those tax-free private-activity bonds to start with?
If bankruptcy intervenes, who pays off bondholders?
P3s indeed might be, as promoted, capitalists' gift to taxpayers. But we need to ask critical questions to find out before taxpayers throw more money at them. S
Randy Salzman is a transportation writer and former journalism professor.