MuniLand

Officials react to tunnel toll block

In a three minute court hearing in Virginia, Portsmouth Circuit Judge James A. Cales Jr. rejected as “unconstitutional” the ability of the state’s Department of Transportation to set tolls on a Norfolk tunnel. The tolls are being collected to fund 17 percent of a new tunnel that is being built by a public private partnership (PPP). The private entity in the PPP is putting up 12 percent of the cost, but it will receive most of the cash flow over the term of the 58-year lease. I wrote about this project last year:

The project, which is now owned by Australian infrastructure company Macquarie, will add another tunnel under the Elizabeth River to relieve congestion in the Norfolk and Hampton Roads area. Getting control of the project will bring in rich rewards for Macquarie and its construction partner Skanska. For an equity investment of $208 million, Macquarie stands to realize over $5 billion in cash flow over the 58-year concession after repayment of bonds, loans and mandated capital expenditures.

Judge Cales did not discuss the unfair economics of the deal, rather he said the Virginia Assembly could not give the Department of Transportation unilateral power to set tolls and taxes. The judge wrote:

The General Assembly has exceeded its power by ceding the setting of toll rates and taxes in violation of Article 4, Section 14, of the Constitution of Virginia.

The Bond Buyer described the potential consequences of the ruling (emphasis mine):

Concerned Residents Confront Carlyle Over Sludge Dumping*

I’ve written numerous times about how public private partnerships (PPP) are often a bad deal because they privatize profits and socialize risks. A perfect example of this is the bankruptcy of privately-held Synagro Technologies, which contracted with municipal governments to treat raw sewage and then spread it on farm fields. Reuters reports:

Carlyle Group LP’s (CG.O) Synagro Technologies Inc filed for Chapter 11 bankruptcy protection on Wednesday with a plan to sell the business to a Swedish private equity firm for $455 million.

Synagro, the largest recycler of organic waste in the United States, has agreed to a sale to an investment fund associated with EQT.

The Port Authority of New York and New Jersey announced on Wednesday that it has awarded the contract to rebuild the Goethals Bridge to a public private partnership (PPP). Bloomberg reports:

A group led by Kiewit Corp. and a Macquarie Group Ltd. (MQG) unit won a Port Authority of New York and New Jersey contract to finance, design and build a $1.5 billion replacement for the 85-year-old Goethals Bridge…

…“As we move forward with continuing constraints on our resources, we’re financing necessary infrastructure and at the same time minimizing the use of public funds and public debt capacity,” Port Authority Executive Director Pat Foye said yesterday at a board meeting in Manhattan.

The poster boy for privatizing U.S. public infrastructure has been Virginia’s governor Bob McDonnell. I wrote last June about McDonnell:

Governor Bob McDonnell might as well have put a for-sale sign on Virginia’s front lawn when he announced that the state’s Office of Transportation Public-Private Partnerships (OTP3) has a ‘pipeline’ of potential privatization projects. The governor and Sean Connaughton, the head of the Department of Transportation, appear to be racing to move as many of Virginia’s public assets into private hands as possible.

How was McDonnell doing this? The Bond Buyer had the story:

In a move that is likely to make Virginia the leading state for public-private partnerships, Gov. Robert McDonnell has announced 22 transportation and infrastructure projects that may be developed as P3s.

President Obama and others have called to create a “national infrastructure bank” that would leverage the credit backing of the U.S. to fund more privatization of public assets – also known as public-private partnerships. In other words, a federal bank to fund the selling off public assets with loans or guarantees provided at low interest rates. But is control of public assets a successful business model for the investors? Actually, it seems to be a disaster. Let’s look back at private toll roads over the years.

An academic paper “Is there ‘value for money’ in transportation PPP’s?” looked at the efforts of the Australia infrastructure firm, Macquarie, in building private toll roads in the United States. The paper, published in 2007, included this table of Macquarie’s U.S. projects. The record for these projects is abysmal.

Two of the projects declared bankruptcy. The assets of one, Pocahontas, were written down to zero by its new owner, and two were bought by the government jurisdictions where they were located. Another is in negotiations to be bought by the state of Virginia. None of these projects fulfilled their initial plans to operate successfully as profitable, private companies. Macquarie’s most substantial U.S. project, the Indiana Toll Road project, is near insolvency and attempting to restructure its loans.