A Blueprint for Bankruptcy

Also see: US Treasury and Transportation Departments Hold a Privatization Party

Randy Salzman explains how the “privates” in the much-touted “public private partnerships” make billions by seeming to lose millions in American transportation projects. In the second part of his investigation he tells a slightly more cautionary tale.

Beginning with the contracting stage, the evidence suggests toll operating public private partnerships are transportation shell companies for international financiers and contractors who blueprint future bankruptcies. Because Uncle Sam generally guarantees the bonds – by far the largest chunk of “private” money – if and when the private toll road or tunnel partner goes bankrupt, taxpayers are forced to pay off the bonds while absorbing all loans the state and federal governments gave the private shell company and any accumulated depreciation. Yet the shell company’s parent firms get to keep years of actual toll income, on top of millions in design-build cost overruns.

US and state taxpayers are left paying off billions in debt to bondholders who have received amazing returns on their money, as much as 13 per cent, as virtually all – if not all – of these private P3 toll operators go bankrupt within 15 years of what is usually a five-plus decade contract.

While this may be legal, and Virginia Transportation secretary Aubrey Layne believes it is, it certainly “mines the tax code,” as Virginia’s P3 director, Doug Koelemay put it. Virginia’s 1995 Public Private Transportation Act is being promoted by financiers and international construction firms as the “model” for other states, but Secretary Layne is disturbed by what he’s found in the contracts of 22 Virginia P3s.

Under that “model,” his predecessor signed away Virginia’s transportation future, not only tying up well over US$6 billion, but also ensuring, through non-compete clauses, that the state cannot improve roadways near most toll facilities.

Secretary Layne’s “scrub” of Virginia projects comes too late for taxpayers who are on the hook for as much as US$1.2 billion for one tollway, a project which will likely never be built because The Corps of Engineers has consistently said there is no way to mitigate 480 acres of wetlands destroyed during construction.

Mitigating Circumstances

Although many P3s have questionable viability, whether the projects are even buildable is not the subject of this discussion. It is how the privates blueprint bankruptcies.

Of course, no executive comes forward and says, “We’re planning to go bankrupt,” but an analysis of the data is shocking. There do not appear to be any American private toll firms still in operation under the same management 15 years after construction closed. The original toll firms seem consistently to have gone bankrupt or “zeroed their assets” and walked away, leaving taxpayers a highway now needing repair and having to pay off the bonds and absorb the loans and the depreciation.

Uneasy Reading

The list of bankrupt firms is staggering, from Virginia’s Pocahontas Parkway to Presidio Parkway in San Francisco to Canada’s “Sea to Sky Highway” to Orange County’s Riverside Freeway to Detroit’s Windsor Tunnel to Brisbane, Australia’s Airport Link to South Carolina’s Connector 2000 to San Diego’s South Bay Expressway to Austin’s Cintra SH 130 to a couple dozen other toll facilities.

We cannot find any American private toll companies, furthermore, meeting their pre-construction traffic projections. Even those shell companies not in bankruptcy court usually produce half the income they projected to bondholders and federal and state officials prior to construction.

One judge in New York looked at the only American suit over traffic estimating firms and found the shell company “plainly actionable for fraud” in the way the traffic projections were produced. Though the suit was settled, the judge found “secret success fees” were paid to the traffic prognosticator without disclosure to bond buyers or federal officials.

In Australia, where P3s have a longer history and the government has better control over public-private spending, there are at least two suits against traffic projection firms working their way through the courts. One against the British firm ARUP and the other against LA-based Aecom. These class actions are brought by bondholders, who don’t enjoy, as American investors do, Uncle Sam’s guarantee, and therefore actually took real risk based on questionable traffic projections.

In one complaint, bondholders point out that Aecom projected 53,000 vehicles per day when the project was considered completely public but then when it became a public-private tollway – and drivers would have to pay – Aecom predicted 101,000 vehicles per day.

That, of course, is a reversal of basic economic reality. In another complaint, bondholders argue ARUP projected US$107 million in annual toll income but the tollway is actually producing a mere US$7.5 million.

Whether or not any of this is fraud is undecided, but it is similar to world experience. A 2006 study of 26 American P3 toll facilities found that “the average overestimate of revenues for each toll road for each year of the first five years of operation was 109 percent – more than double actual revenues.”

The Over-Forecast for Tomorrow

An international toll forecasting consultant studied 100 worldwide projects and said there is generally a 30 per cent over-forecast in the first year and actual vehicle counts never reach 80 per cent of the forecasts across the life of the pre-bankruptcy operation.

A not-yet-published study of 210 projects in 14 nations shows that “forecasters generally do a poor job of estimating the demand for transportation infrastructure projects” resulting in “substantial downside financial and economic risks.”

In America, unlike the rest of the world, these risks are rarely taken by private investors. Because Uncle Sam guarantees the bonds, taxpayers end up paying off the notes years after construction is complete when few, if any, Americans remember construction cost overruns or the arguments for or against a particular project. The shell company’s bankruptcy again ensures the private partner will not pay back Uncle Sam’s already-interest free loan on the project, nor the depreciation it took when it “struggled” to be viable before “succumbing” to bankruptcy.

The over optimistic traffic forecasts, furthermore, emphasize that alleged “struggle.” Actual traffic is usually compared to the forecast in mainstream news stories after construction, with the implication that some rational cause, such as the recession or a lack of new gates at a nearby airport, is keeping drivers away. Few reporters look beyond the private’s promotion and “follow the dollar,” as the old journalistic axiom put it, into a complex legal and financial world. Reporters never imagine that traffic forecasts might have been intentionally bogus.

Even in media-heavy Washington DC, the consistent media story was that the US$1.5 billion Capital Beltway Express was three-quarters private money even though US$587 million was federally guaranteed bonds and Uncle Sam loaned CBE another US$587 million. Privates put up only US$88 million cash but if and when CBE goes bankrupt – and CBE is presently generating barely one-fifth of its traffic projection – taxpayers will be forced to cover all costs.

TransUrban owns the CBE shell, as well as the already bankrupt Pocahontas Parkway. If TransUrban was actually taking major losses on those two projects, why would any board of directors allow it to bid on – and win – the 95 Expressway toll project?

Famed Bond

Each P3 bankruptcy, meanwhile, drives the cost of the next set of federally guaranteed bonds higher. CBE bond buyers, for example, were told to expect a 13 per cent return on their money and median returns over 100 projects, according to one investment research firm, were 14.9 per cent . Comparatively, Uncle Sam’s famed Treasury bill is selling with a 0.75 percent return – or one 20th the value of the Capital Beltway bond.

Finally, taxpayers find that toll projects are “eating up all (public) transportation dollars in sight, now and for years to come,” as a magazine story about Maryland’s InterCounty Connector put it. The originally US$1 billion tollway ballooned to US$4 billion including the state’s debt service for bondholders and Maryland was forced to raise gasoline taxes when ICC generated only one third of traffic projections.

The bottom line is that in the P3 contracting process unaware taxpayers, and drivers, are facing brilliant financiers, the best fiscal minds money can buy. As we should have learned in the mortgage meltdown, the “set of financial interests who have learned how to mine the tax code” – as Virginia’s P3 director noted — have few qualms about how they make money.

Mainstream media, as well as most Americans, have forgotten that our economic system demands “the buyer beware” at the same moment that two-thirds of American transportation infrastructure spending is “public-private-partnerships.”