The second of a four-part series
BALTIMORE — When public-private partnerships work well, they are a boon to government and investors. They deliver much needed infrastructure years sooner and at a more affordable price.
However, they frequently don’t live up to expectations. The result: citizen outrage over rapidly escalating user fees; unanticipated costs; a lack of transparency; and risks to taxpayers from the billions of dollars of federally guaranteed loans financing the projects.
A prime example of the potential that so-called P3s offer can be found in Baltimore, one of the nation’s busiest ports.
With the Panama Canal expanding to accommodate larger ocean freighters, Maryland state officials in charge of the port knew that remaining competitive meant building a wider, deeper berth to hold the out-sized freighters and purchasing larger cranes that could efficiently load and unload the behemoths. The cost: more than $100 million, money the Maryland Port Administration did not have.
The Maryland Department of Transportation, which also supports highways, bridges, tunnels, airports, and the motor vehicle administration, provides funds to the state agency. Taxpayers typically do not provide enough funding to meet all of those infrastructure needs. The debilitated state of the economy exacerbated the crunch.
“It was right in the middle of the Great Recession. Government dollars were scarce,” recalled James White, the port administration’s executive director.
So port officials approached Highstar Capital, a private infrastructure fund that has operated Seagirt Marine Terminal, one of six public terminals at Baltimore’s port. Highstar previously had invested about $5 billion into similar projects.
“We really didn’t have a choice. It was either get on board or you missed the ship,” Mr. White said.
In 2010, the state leased Seagirt to Highstar’s Ports America Chesapeake unit for 50 years. In exchange, Ports America invested $75 million in equity and $249 million in debt into the terminal. It spent $105 million to build the new berth and equip it with four 140-foot high cranes and make other improvements.
The new berth opened in January 2013, ahead of schedule and under budget. If Maryland had relied on its own resources, “you might not be standing on a finished berth today,” said Mark Montgomery, former Ports America Chesapeake president and CEO .
Ports America also provided $140 million for the state to improve highway, bridge and tunnel access to the port. The lease requires Ports America to pay the state annual, inflation-adjusted payments of at least $3.2 million and additional payments once cargo volume hits certain levels.
In exchange, the port agreed to a 50-year lease, which gives Ports America a tax advantage that convinced investors there will be plenty of money left for them after debt payments and other costs are covered. Maryland also transferred some container business from another terminal to Seagirt.
“The state won. The port won, and the private partner won,” Mr. Montgomery said, noting that the P3 created about 3,000 construction-related jobs and is expected to provide 2,700 permanent jobs once the Panama Canal opens in 2016.
Meanwhile, in California, private investors who used a P3 to build the South Bay Expressway, a 10-mile San Diego toll road, came out losers. Whether taxpayers will join them won’t be known for years.
Originally expected to cost $658 million, construction delays and contractor disputes drove the toll road’s cost to $843 million by the time it opened in 2007. California gave a 35-year lease to build and operate the road to affiliates of the Macquarie Group, the Australian company involved in P3s in Virginia and other states.
Financing included $340 million in bank debt and $140 million in federal loans, both backed by toll revenue. Investors contributed $130 million. Terms of the agreement permitted them to earn returns of as much as 18.5 percent on their investment.
Toll revenue fell well short of projections after the recession curbed commercial and commuter traffic, prompting the venture to file for bankruptcy in 2010. By that time, provisions in the federally guaranteed loans that allowed the private operators to forgo interest payments had increased taxpayer exposure from $140 million to $172 million.
Lenders, including the federal government, brought the venture out of bankruptcy the next year. As part of the reorganization, the $140 million federal loan was replaced with debt and equity worth only 58 percent of the taxpayers’ original investment, according to the Congressional Budget Office.
A short time later, a regional government coalition paid $341 million for the highway, or about 40 percent of what it cost to build. The road’s deeply discounted price enabled its new owners to dramatically slash toll rates.
Because the U.S. Department of Transportation gets a share of future tolls and the road’s finances are improving, the federal agency expects to recover the $140 million it provided in financing, but whether it will won’t be known for more than 20 years, when the original agreement comes to an end. That uncertainty concerns critics who say more attention needs to be paid to the taxpayer risks P3s impose.
“The claim that you somehow shift risk is fantasy. The [P3] can always declare bankruptcy. The government can’t,” said Columbia University professor Elliott Sclar, a P3 critic.
Tolls and troubles
“It’s a treasure trove of taxpayer abuses that’s going on down here. They’re giving private companies complete control of Texas travel,” said Terri Hall, founder of Texans Uniting for Reform and Freedom. “We’re talking about a massive, massive increase in the cost of travel.”
The citizens group is fighting the Texas Department of Transportation’s use of P3s to relieve congestion in Houston and Dallas and along highway corridors leading from Mexico.
One of the group’s prime targets is State Highway 130. The $1.3 billion, 41-mile toll road just south of Austin, was built, financed and is operated under a 50-year lease Texas gave to Cintra, a Spanish construction firm, and Zachry American Infrastructure, a San Antonio infrastructure developer. The highway sports the highest speed limit in the nation — 85 mph — but the economics of the project are going nowhere fast.
Because motorists haven’t cottoned to the idea of paying tolls when there’s a free, albeit congested alternate route, revenue has fallen well short of projections, resulting in a June 30 default on about $686 million in bank debt. Private operators are renegotiating terms with their banks, talks the Texas Department of Transportation declined to comment on.
“This is an issue between that developer and its lenders,” spokeswoman Veronica Beyer said in an email.
The default endangers another $430 million in federally backed loans. The private operators aren’t scheduled to make their first interest payment on the low-cost federal financing until June 2017. They are required to start repaying the principal on the government loan in 2018.
Anticipating the shortfall in toll revenue, Moody’s downgraded State Highway 130’s debt to junk bond status in October. Last month, the ratings agency said that even though toll revenue is up about 25 percent from a year ago, it won’t grow fast enough to meet the highway’s rapidly increasing debt payments.
Financial issues also have come up in other places that used P3s.
While Chicago motorists are bearing the brunt of dramatic parking rates since the city turned over 36,000 meters to an investment group Morgan Stanley led in 2009, many motorists who use the Indiana Toll Road have been spared draconian toll increases for the time being.
That’s because of state subsidies that were part of the $3.8 billion agreement that turned the major east-west highway over to a partnership between Cintra and a unit of Macquarie Group. The subsidies were later extended, allowing tolls to stay frozen until 2016 for passenger cars equipped with transponders that electronically debit a motorist’s account. The price tag so far? $176 million, according to an Indiana Department of Transportation spokesman.
When those subsidies end in two years, motorists will face “above-average toll rate increases” under the terms of the 75-year agreement, according to FitchRatings, a credit ratings agency.
“It was a bad deal, and they’ve got control of a formerly public roadway,” said Indiana state Rep. Patrick Bauer. He points out that less than 10 years after the state turned the highway over to investors, the $3.8 billion it received is gone, and the state is dipping into general funds for transportation money.
Mr. Bauer is not the only critic to say P3s allow elected officials who get big upfront payments to look like heroes in the short term but handcuff public policy down the road.
“Eventually, the pot of gold runs out, as it has in Indiana, and users are left with an overpriced highway,” said Penn State logistics professor Peter Swan.
Mr. Swan and Wayne State University’s Michael Belzer found that when trucks diverted from the Ohio Turnpike because of toll increases, the costs related to truck accidents on local roads were greater than the revenue the state collected from the higher tolls.
That illustrates how taxpayers can be hit with unanticipated costs when it comes to privately operated toll roads, Mr. Swan said. The costs include the added expense of maintaining roads that weren’t designed for the heavier traffic and the impact on the quality of life along the alternate routes, he said.
Who takes the risk?
Proponents contend P3s allow governments to address critical infrastructure shortages sooner while transferring risk to the private sector.
“If the asset does not perform, that’s on us,” Transurban executive Jennifer Aument told a House Transportation committee in February.
Ms. Aument was referring to a $2 billion project on a 14-mile Virginia stretch of the Washington Beltway that allows I-495 commuters to escape congestion to use express lanes where tolls vary depending on the speed of traffic.
Transurban and Irving, Texas, engineering and construction firm Fluor Enterprises, received an 85-year contract from the Virginia Department of Transportation for the project.
The agency also awarded them a 76-year deal to add managed lanes on I-395 and I-95 south of Washington, D.C., at a cost of $923 million. The Beltway project was completed in 2012, early and on budget, Ms. Aument testified. Even though revenue has fallen short of projections, commuters are benefiting from shorter drive times, and the project is “a major success story,” she told lawmakers.
Transurban’s financial statements show the toll road operator lost about $48 million on its 68 percent stake in the project during the last half of 2013. At about the same time as Ms. Aument was testifying, Transurban told securities analysts that the company planned to improve the project’s long-term prospects by contributing more cash to repay some of the project‘s debt early. Recently, it acquired Fluor’s stake in the Beltway and I-395/I-95 projects for $44 million.
Meanwhile, the economics of the Beltway project are improving. Average daily tolls collected doubled from year-ago levels, thanks in part to a 22 percent increase in average daily traffic. It also helped that the average toll collected from motorists, who pay variable tolls based on traffic conditions, rose 19 percent, Transurban reported.
About 100 miles south of the project, Transurban took more drastic measures for the Pocohantas Parkway, a nine-mile toll road bypassing Richmond, Va. The highway opened in 2002 after a nonprofit group that built it issued $354 million in tax-exempt bonds to be repaid with toll revenue.
When tolls fell short, Virginia signed a lease in 2006 turning over the highway to Transurban for 99 years.
The agreement obligated Transurban to assume the risk that tolls would pay off $625 million in debt the company would incur as part of the agreement. The financing included $150 million in federally guaranteed loans, the same type of financing used for San Diego’s South Bay Expressway and Texas’ State Highway 130. Last year, Transurban approved turning the beleaguered project over to its lenders, who took control in May.
Moody’s analyst John Medina said even though P3 road projects backed by toll revenue struggle to obtain and maintain investment grade credit ratings, most projects do not fail as spectacularly as the Pocohontas Parkway did.
“If you look globally at private toll roads, there’s only been a handful of defaults. There’s a lot that are performing just fine,” Mr. Medina said. The track record does not comfort critics. They contend the Pocahontas Parkway and San Diego’s South Bay Expressway show the federally guaranteed loans put taxpayers at risk.
They also say for all the talk about the private sector’s willingness to embrace risk, P3 investors heavily rely on government funding for their projects.
“This is the most corporate welfared-up industry that there is,” said Lee Cokorinos, a public interest research consultant based in Silver Spring, Md.
Len Boselovic: 412-263-1941 or email@example.com.