Denver’s botched FasTracks privatization
Reuters ran a piece yesterday that caught my eye: “Macquarie eyes $2 billion North American infrastructure fund: sources.” According to the article, Macquarie, the Australian company active in infrastructure privatization, wanted to leverage its prior American success as it begins to raise funds:
Macquarie has also proved successful in bidding for the few new assets on the market. It was behind the largest U.S. infrastructure deals of the last two years – a $2.1 billion project to build and operate commuter rail lines to Denver International Airport and a $1.7 billion upgrade of a tunnel between the cities of Norfolk and Portsmouth in Virginia.
The privatization of American infrastructure has become a hot topic, despite the lack of notable success stories. The Macquarie project building and operating commuter rail lines to Denver International Airport illustrates the costs associated with this approach. The project is not doing very well: Because of cost overruns, its budget was recently revised upward, to $7.8 billion.
Once construction is completed, Macquarie will have a concession to run the commuter rail system, an expansion of the Denver Regional Transportation District transit system called FasTracks. The company contributed $2 billion toward the cost of the project, of which $54 million was an equity investment (page 25). The remainder of Macquarie’s portion came from construction payments from the sponsor, the Regional Transportation District, and issuance of $397 million in private activity bonds in 2010. These bonds received the lowest possible investment grade rating, Baa3 and BBB-, demonstrating the weakness of the financing plan.
In partnership with the construction company Fluor, Macquarie became a leader in the Denver project by bidding $300 million lower than its competitors. The company also promised to complete the project 11 months ahead of the 2016 deadline. Unfortunately, they are running behind on these promises, according their February 2012 MSRB filing (pages 13 and 14). Many of the delays are related to the approval of “right of ways,” which could have been encountered even if the project had not been privatized.
The funds that pay for the entire $7.8 billion FasTracks project, beyond the $2 billion portion for which Macquarie is responsible, come mainly from a regional sales tax and federal funds, with a small portion from transit fares. There is some concern among state politicians about the management of the entire project:
A Colorado lawmaker says he will ask for an audit of the Regional Transportation District’s FasTracks program today, citing faulty planning for the Northwest Rail project.
Rep. Spencer Swalm, R-Centennial, said he will request that the Legislative Audit Committee ask State Auditor Dianne Ray to look into the RTD proposal, which critics say led to the squandering of taxpayer money.
“We need to get to the bottom of this,” said Swalm. “RTD has received billions in taxpayer funds, and we need to find out where that money has gone.”
The FasTracks plan led to metro-area voters approving a 0.4-percent sales tax increase in 2004 to fund several commuter-rail lines to be finished by 2020.
Weak planning seems to be a recurring theme in the FasTracks project. These revelations question the value of partially privatizing Denver’s commuter rail system. To complete the project, voters are being asked to support a sales tax increase.
Given the stumbles that FasTracks has had and how many public and private parties are involved, it’s far from clear that Macquarie could claim the Denver project as a success. One thing that is clear from the bond documents is that they intended to sell off their interests in the project long before it was completed (page 11):
Macquarie intends to sell its membership interest in DTH to Uberior Infrastructure Investments (#4) USA LLC [part of the Lloyds Banking Group], an affiliate of Uberior Infrastructure Investments Limited (#4) and to Eagle Rail Holdings Inc, a 100% subsidiary of John Laing Investments on or about the date the series 2010 bonds are issued.
We need more examination of infrastructure privatization, and especially the Denver FasTracks project, before declaring any side a winner.