Yet another Bridge to Nowhere?

By Cate Long
August 25, 2011

Alaska got a lot of attention several years ago when members of Congress belittled and then stripped the funding for the infamous “Bridge to Nowhere.” You would think the issue would have faded away as quietly as the Alaskan wildnerness, but the state’s penchant for building bridges to places with few inhabitants has actually been reborn in the Knik Arm Bridge Project, or the Bridge to No Where Part 2. And this time it’s not only members of Congress who are skeptical– locals are pushing back on this new project with lots of facts.

I’m not Alaskan, so it’s not my place to argue whether building a two-mile bridge to an undeveloped area would spur economic growth in the future. But I can look at the proposed public-private partnership that’s financing the project and say that Alaskans will bear all the financial risk and private participants will get a great part of the gain. As was said frequently during the financial crisis, the losses will be socialized and gains will be privatized. This is two-mile long extension of that maxim.

After reading a number of documents related to the Knik Arm Bridge, I estimate the cost to be about $1.5 billion. The Alaska Legislature created a public agency called KABATA in 2003 to create a method to finance the construction, operation and maintenance of the proposed bridge. KABATA has sought Congressional funding and low-cost loans from the U.S. Department of Transportation and is now pursuing a unique setup whereby a private firm builds the bridge and maintains it but bears no financial risk. It’s not clear why it’s necessary to have a private firm involved; after all there is really no privatization involved.

The Anchorage Daily News lays out the story (emphasis mine):

When the Legislature created the authority in 2003 to pursue the project, the idea was for tolls paid by drivers who use the bridge to cover the costs. Motorists would be charged $5 each way to cross. The goal is still for the state to team with the private developer, who would borrow money to pay for the bridge construction and operate it in exchange for the state sharing revenue from the tolls.

But bridge planners now say those tolls won’t bring in enough money to pay the developer during at least the first few years the bridge is open.

So Wasilla Sen. Linda Menard, who is on the authority board, introduced a bill to provide an initial $150 million in state money for the project.

She also introduced another bill saying the authority’s financial obligations under its partnership with the developer are “obligations of the state,” a term that had some legislators concerned it could affect the state’s credit rating in the event of default.

So what began as a project for a private group to issue bonds, build a bridge, collect tolls and pay the state the surplus revenues has been reversed. Now, in essence, Alaska would guarantee the private bonds as general obligations of the state, pay for the shortfalls of toll revenues indefinitely and, if there ever is surplus revenue, stand in line to be repaid. Sounds like a very sweet deal for Citibank, which is spearheading the project.

By the way you may wonder why public infrastructure is so expensive . Here is a little peek into the Knik Arm Bridge development costs from KABATA’s 2010 annual report:

KABATA has expended $45,329,809 of federal-aid highway funds and $4,755,254 of state matching and general funds through June 30, 2010, for the planning and environmental stages of the KAC.

Public infrastructure in undeveloped areas can seem unwise at the time of building and should be weighed in a rigorous and open process. But financing structures like the one being pushed for the Knik Arm Bridge are flat-out bad for the public. What began as an idea for private parties to bear risk and make some gains has morphed over time into a project where they bear no risk and make substantial gain. Alaska may be far from the mainland, but we watch and wonder how these things would be done in the daylight.

Further:

Wikipedia: Knik Arm Bridge

Anchorage Daily News: State expected to cover any shortfall in Knik bridge funding

KABATA: Knik Arm Bridge Project Briefing

KABATA: 2010 Annual Report

3 comments

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The cost of the Bridge will be far higher than $1.5 billion cited here because the tolls are so little in the early years that the unpaid interest –example a secondary capital acretion bond provides $40 MM at start but with tolls not allowing interest payments until 2034 that bond requires $238 MM before repaid –jacks up the cost to the state of financing the ballooning availability payments. By KABATA’s pro forma those 36 years of availability payments total $3.2 Billion; an independent analyst, after discounting the impact of the population overestimation and the changed Wilbur Smith revenue model, produces an estimate of $5.75 Billion in cumulative availability payments and the toll shortfall from that number is likely to be far larger than $1.5 billion. See http://www.knikbridgefacts.org for documentation.

Posted by akpundit | Report as abusive

Thanks for the very helpful comment AKPundit. Please post any new developments that you come across. I think your bridge to nowhere might become the poster child for privatization gone wrong. Thanks.

Posted by Cate_Long | Report as abusive

I’m from Alaska (state motto: “The Pork State”) and this yet another felonious boondoggle of Stevensesque proportions. This unneeded 6+ billion dollar structure is proposed to be built directly on top of the location of the 2nd largest megathrust earthquake in all of recorded history and in the most seismically active region of the planet. Built on 20 miles of bayfill (see the AlaskaKABATA bridge-booster cartoon) that liquified during that 1964 earthquake. These people need to be taken off welfare so they can leave to find gainful employment elsewhere.

Posted by NewEarth | Report as abusive