More P3s Coming. Taxpayers, Hang onto Your Wallets

The twice-bankrupted Pocahontas Parkway: Virginia's poster child for failed P3s.

The twice-bankrupted Pocahontas Parkway: Virginia’s poster child for failed P3s.

by Randy Salzman

The history of American transportation “public private partnerships” indicates that virtually all P3 shell companies go bankrupt before paying back federal loans and the “private activity bonds” which they sold to finance part of the debt.

When these firms go bankrupt, who loses? Taxpayers. We get stuck (1) with paying back the money Uncle Sam lent the privates; (2) paying off bonds guaranteed by the state; and (3) picking up the maintenance costs. As a practical matter, the supposedly entrepreneurial, risk-taking private sector doesn’t take nearly as much risk as taxpayers do.

Aubrey Layne, Virginia’s secretary of transportation, recognized that his predecessor gave away Virginia’s transportation future with $6 billion (yes, with “b”) in 2012 through P3s. He has undoubtedly done a much better job negotiating Virginia’s latest P3, the I-66 project, but he’s a state official and has been interested in protecting Virginia taxpayers; not federal taxpayers. Most of us pay both state and federal taxes.

The I-66 partners are putting up over $500 million. Obviously, they expect to realize a profit or they wouldn’t have submitted the bid. That’s simple business and should underline, even if nothing else, what a horrifying reality previous P3s were for state and federal taxpayers. That 460 Mobility Partners put up zero dollars for the disastrous Suffolk-to-Petersburg connector under the McDonnell administration and walked away with $350 million is almost criminal.

The issue is especially timely now that President Trump is promoting public-private partnerships as a tool for increasing infrastructure spending and stimulating the economy. He has proposed $137 billion in federal tax credits for  investors who commit to financing infrastructure, which would transfer even more risk from the private sector to the federal government.

The justification for P3s is that the private sector can build and operate projects more efficiently and economically than government can. But the public record is splotchy, and the news media needs to dig into it. In the U.S., more than a dozen billion-dollar transportation P3 projects have gone bankrupt. Even the Indiana Toll Road, the poster child for the privatization of transporation infrastructure, went belly up in 2015.

Cintra, which won the I-66 contract, went belly-up this spring with Texas SH-130, a toll road from San Antonio to Austin. Heavily promoted by former Texas governor and present U.S. Secretary of Energy Rick Perry, the project was absurd from the gitgo. The highway is located is only 20 miles east of an existing interstate, I-35. Even though Texas increased speed limits to the highest in the nation, few drivers were willing to pay tolls to use the road. SH-130 is so underutilized that airplanes have on at least two occasions landed on it! The project generated less than half the traffic and income that Cintra cronies projected when bonds were sold and federal loans obtained. Even though Texas bought down the tolls (wasting additional taxpayer dollars), Cintra’s shell company still went bankrupt and taxpayers were will be stuck paying off the bonds.

We taxpayers are told, pre construction, that tolls will pay off P3 bonds and back the notes. Even honest media such as The Washington Post parrot that line without  examination. Yet no one can find a single instance in which a  U.S. P3 toll road has generated the projected traffic or income. There is no bell curve of successes and failures that as one would expect if the forecasting of future traffic and future income was done correctly.

Inevitably, a few years later, after all the politicians and reporters have changed, the same excuse is given as the reason for the eventual bankruptcy:  “For XXX reason, the drivers didn’t show up as expected and, reluctantly, the poor private had to give up the ghost.” Never do P3 advocates suggest that bankruptcy was the business model.

Here in Virginia, our first P3, Pocahontas Parkway outside of Richmond, has gone bankrupt twice (yes, twice) in a little over a decade. The owner: an Australian infrastructure company, Transurban. Since then, Transurban participated in the Capital Beltway Express public-private partnership. After CBE took in only one-fifth the projected tolls, the company had to restructure its debt on the project. Despite those negative experiences, Transurban is building the Interstate 95 HOT lanes and competed unsuccessfully for the I-66 project.

If Transurban keeps losing its shirt on P3s, why does it keep coming back for more? I cannot prove it, but I strongly suspect that the company hires the smartest lawyers and smartest financiers to structure the P3s so as to offload risk and ensure the company comes out whole regardless of what tolls are generated. The P3 contracts runs hundreds of pages, and I question whether anyone in the McDonnell administration truly understood them, or even read them as they farmed out negotiations to private law firms that proudly on their websites the great returns they got for private investors..

It remains to be seen whether Secretary Layne and Governor Terry McAuliffe truly understand the I-66 contract, although I am more hopeful that they do. Clearly, the deal they negotiated is far more advantageous to taxpayers than the deal originally presented to them. Layne claims to have saved the state $2.5 billion over the lifetime of the decades-long contract.

Still, I wonder. Cintra is the contractor on the I-66 contract. How, if it had truly lost its own money on SH-130, did this Spanish company’s board of directors approve spending $500 million to Virginia to get another project which, history indicates, probably will go bankrupt?

I applaud Secretary Layne and Governor Terry McAuliffe for endeavoring to protect Virginia from another P3 scheme gone bad. Unfortunately, they have only one more year in office, and there’s no guarantee that the discipline they’ve shown will be passed on — especially if Trump starts doling out a trillion dollars for infrastructure spending.

Future transportation bankruptcies will greatly increase the U.S. national debt, but that’s not a problem I expect to concern Trump. He’s always used the bankruptcy laws at least six times to to dump debt on other people, and he won’t be president when his infrastructure boondoggles unleash another flood of taxpayer red ink. Besides, he doesn’t pay taxes. He leaves that to the little people, like you and me.

Randy Salzman is a free-lance journalist based in Charlottesville specializing in writing about transportation issues.

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5 responses to “More P3s Coming. Taxpayers, Hang onto Your Wallets

  1. P3s can be good , bad or ugly – no question about it but they are not unique by any means in terms of possible paths that govt can take – across the board on the provisioning of infrastructure and services.

    The truth is that we do not have enough money to build the infrastructure that P3s are building and we do not have the capacity to borrow the money so we turn that risk over to the private sector and yes.. like a lot of private sector ventures, some go belly up – but many more of them do succeed or else companies like Cintra and Transurban would cease to exist.

    What I LIKE about well-structured, successful P3s is that users of the infrastructure largely pay for it – not everyone or all taxpayers although taxpayers do pick up some of those costs.. but in the end – we get more transportation projects – online – sooner – with P3 that we would otherwise.

    Bob McDonnell and Connaughton jumped the shark on US-460 but what McDonnell also did was modernize the gas tax by converting it to a percent of sale which automatically indexes it so that when prices change – so do tax revenues. They also increased the general sales tax to provide more revenues to transportation and they gave Hampton Roads and NoVa supplemental sales taxes also.

    the next result of that was that they pretty much maxed what could be squeezed out of the gas tax – and in turn, maxed out on the projects it could pay for. If we wanted more projects – there had to be another funding method and P3 seems to be the choice. If there are others, maybe Randy or Bacon can go over them… but right now it basically boils down to projects that use tolls to pay for themselves and as stated before – the tolls are paid by actual users of the facility – and I consider that better than taxes – which begets political machinations from the localities to see who can grab the most general tax dollars for their region.

  2. The ONLY reason that P3s are being proposed to toll our roads is the abject failure of gutless federal and some state legislators to adjust the fuel taxes to make up for about 20 years of inflation – and index them for future inflation so we don’t have this moronic shortfall of road funds in the future.

    James C. Walker, National Motorists Association

  3. Randy-

    One point of clarification… saying bankruptcy of the private partners on 895 makes it a failed P3 does not take into consideration some facts. Namely that the public did not repay anything owed by the private sector; those were part of the private sectors financial obligation and had no relation to the Commonwealth.

    No one wants a project to go through bankruptcy. The more normal approach is for the private sector to refinance/restructure their debt.

    However, at the end of the day, the Commonwealth still owns a new transportation facility; albeit with a new firm we approve handling the O&M obligations.

    Hope this helps clarify one aspect of P3 projects in Virginia.

  4. I think the current tax on gasoline in Va is 5.2% of the sale price.

    https://www.dmv.virginia.gov/webdoc/pdf/tracking_dec16.pdf

    Looking at the revenues – 5.2% would bring in about
    $868,900 of the total $3,420,542 billion.

    so if you doubled the 5.2% to 10-11% of the sale price, – you’d bring in 1.7 billion and end up with 4.1 billion .

    that sounds like a LOT of money but it’s not. If you divide it by 133 (number of jurisdictions in Va) – it comes out to be about 30 million per jurisdiction. It would buy only about 5 miles of 4-lane highway but it’s worse than that because about half of the revenues go to maintenance and operations first so in reality it not 3.4 (or 4.20 billion but much less.

    Next – consider WHERE you’d want MORE roads – probably in the urbanized areas – where right-of-way is developed, not raw land – where one mile of 4-lane can cost 50-100 million or more.

    there is no fiscal way to increase capacity in the urban areas without either taking all the dollars from the rest of the state – or tolling to generate the dollars needed to build.

    What VDOT is doing with P3 – is two-fold. The first is to get the dollars needed to build but the second is to use congestion tolls to manage the congestion – the more congestion – the higher the toll – and in the long run – future need for expansion is reduced and delayed.. and if has to be built – will be congestion tolled.

  5. Couple of points. Larry, yes, P3s can be good; yes, toll roads can be good (and I support them for their ability to get some of us to think about our driving) but neither of these “could be good” points hold up when taxpayers build these projects and are not paid back for the loans they gave the privates and are forced to pay massive rates to bond holders because the state guaranteed the bonds. Which is what HAS happened virtually, and maybe literally EVERY, time in the past. As the P3 office said, Virginia taxpayers have not yet paid for the two Pocahontas Parkway bankruptcies but Virginia’s P3 office doesn’t know what has happened to Uncle Sam’s loans but suspects, I’m sure, that we federal taxpayers have not been, and will not be, paid back for those loans. By the time all the bankruptcy proceedings are over, WE — taxpayers — will be the ones who lose.

    Even the present P3 director told me that there are “firms who have learned how to mine the tax code.”

    How much do they mine? According to a Canadian Auditor General, private financing costs 34 times what public financing costs.

    It’s complex, YES, but the media is not paying attention which means that taxpayers can’t pay attention. And WE have been getting scammed, or perhaps our children have been getting scammed, because when the bills come due, the shell company is history and the big pension funds — who bought the bonds — can’t be left to wither in the wind. As Streetblog put it after studying the Indiana Toll Road bankruptcy: P3s are “bailouts waiting to happen.” As the Royal Scottish accountants put it, they are “financial blackholes.”

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