The Brent Spence Bridge financing puzzle
The claim is often made that there are substantial savings for taxpayers when a public private partnership (P3) is used to build infrastructure. This claim is rarely backed with economic analysis. In fact, after a project like the Chicago parking meter deal is in place, it is often discovered that the project is bad economics for taxpayers.
P3s are not all one-size-fits-all. Public advocacy group “In the Public Interest” breaks them down into these categories:
Long-Term Lease Agreement - This is an agreement where a private company (or consortium of companies) receives the right to collect revenues associated with an existing asset in exchange for an upfront fee to the governmental entity. Examples of this model include the long-term leases of the Chicago parking meters [or the near bankrupt Indiana Toll Road].
Sale/Leaseback - A sale-leaseback is a transaction in which the owner, in this case the government, sells public property and then leases it back from the private buyer. Examples of this model include the recently proposed and rejected sale/leaseback of numerous California state office buildings.
Design-Build-Finance-Operate-Maintain - There are many variations of this model, such as Design-Build, Design-Build-Operate, etc., depending on the private entity’s role. In this model, a private entity is involved in varying aspects of the financing, design, building, operation and maintenance of the asset, and is compensated for its investment by receiving the right to collect future revenues associated with asset, such as user fees [ie tolls].
Availability Payment - In this model, the governmental entity provides regular payments, based on criteria such as project milestones or performance standards, to private investors, developers, and operators that design, build, finance, operate, and maintain the asset (or perform a subset of these activities). This project is similar to the design, build, finance, operate, and maintain-type contract described above, but uses an availability payment scheme to compensate the private companies.
Some of these P3 models might be useful for communities and states as they consider monetizing existing facilities or adding new infrastructure. Any time a government considers privatizing infrastructure, it should conduct economic analysis and make it publicly available.
A common financing issue is that P3s are almost always structured with a BBB- rating, which rewards bondholders, but penalizes citizens. Most public agencies can get the necessary financing at a AA or even A rating, which is an enormous saving over a 25-30 year bond issue.
A proposed bridge project today, the Brent Spence Bridge, will connect Indiana and Kentucky. Although there is a lot of documentation for the project, it is not clear what the economic advantage is for the “availability payment” model that was chosen.
In this model, private firms will design, build, finance, operate, and maintain this toll bridge and receive “availability payments” from a “toll authority” over several decades. When you drill down into the available economic analysis, it is not clear that the engineering firm that prepared the analysis understood what the proposed financing costs would be (table 8A2) for public or private borrowers. In fact, it appears that only a day and a half of “workshops” were convened to evaluate what the cost variables would be for a multi-billion dollar project (page 19).
There are still public arguments over the economics of the financing structure for the bridge. In the comments on a Louisville Courier-Journal article this week, the city commissioner of Covington, KY, Steven Frank, debates the executive director at the Kentucky Transportation Cabinet about the weakness of the complex deal structure for the bridge:
If the bridges do not generate sufficient cash flow, the Authority itself has no money to ever repay anyone. The State of Kentucky is on the hook for all shortfalls which will come out of every region’s projects. So yes, the whole state should be rightly concerned with the financial engineering done in Louisville as should the local drivers who think that tolls can only increase by CPI or 2.5 percent.
The last point is this. The legislature can repudiate its [debt] obligation without harming its own credit rating; but that too comes with a price. Kentucky loses its place to vote its interests on the Authority and the bondholders become debtors in possession and can choose whatever tolls or maintenance program for the bridge that suits them and not the citizens. It’s about time the citizen of Louisville woke up and realized what was done to you by a bunch of hacks.
Too bad that all the legal and financial engineering details Frank cites were not available in voluminous public disclosure before the bridge project was finalized. Public officials should make their legal and economic analysis available before public revenues are transferred to private entities.
Here is why this is important: Steven Frank in another comment highlights the wide number of privatized road, tunnel and bridge P3 projects that have gone bankrupt by overestimating project revenues:
To name but a few lessons in overoptimistic projections leading to financial disasters consider the following list: American Toll Road Company which consists for 3 toll roads in Alabama and the Windsor Tunnel connecting Detroit to Canada; bankrupt. The Pocahontas toll road outside Richmond, VA; bankrupt. Dulles Greenway; bankrupt. St Route 91 in California toll road; bankrupt. St. Route 125 in California toll road, Bankrupt. The Foothills-Eastern Orange County toll road, soon to be the second largest municipal bond bankruptcy after Detroit; pending. The Southern Connector outside Greenville South Carolina; bankrupt. Teetering on the edge of bankruptcy, the Indiana Toll Road System and the Sky Loop in Chicago. The Austin Turnpike is also considering bankruptcy as soon as June 2014.
Think it is isolated to the USA? Almost every toll road in Spain; bankrupt. The German toll system; bankrupted in 2002, revived and on the brink of insolvency again. Australia, the home of the original movement to begin the modern era of P3 legislation behind the financial legerdemain of Australia’s version of Goldman Sachs, Macquarie; there are multiple bankruptcies. I will list in an appendage web sites that document the financial carnage.
P3s may be a good model for public assets, but their history is uneven. Taxpayers and citizens must have economic analysis to judge if a public private partnership is in the public interest before the final contracts are signed.