North Carolina Threatens to Cancel Toll Road Project, Showing Political Risk of Infrastructure Deals

Politicians are finally waking up to the fact that infrastructure deals are bad deals for their citizens, as demonstrated by a revolt against a toll road project in North Carolina. From IPE (hat tip j3):

A vote this month in the North Carolina House of Representatives has highlighted the political risks inherent in infrastructure investment – at a time when institutional investors are increasing allocations to the asset class.

Local lawmakers in the US state passed a bill to cancel a 50-year toll road contract with Spanish developer Cintra Infraestructuras….

Cintra began work last November on the section of I-77 close to North Carolina’s primary business hub in Charlotte. North Carolina has experienced strong economic growth in the past decade. Some 25 miles north of Charlotte, areas such as Lake Norman have become affluent, while neigbourhoods closer to Charlotte’s north side are less so.

Residents object to having to pay tolls to commute to work when residents in southern suburbs have access to more free lanes built when the state had more funding available for highways. The objections can be seen as part of a wider public criticism of toll roads and growing support for the publicly-funded road building that created the free interstate highway system in the middle of the 20th century.

The fact that the North Carolina House of Representatives passed the bill to cancel the contract by an 81-27 margin, with strong bipartisan support, has implications for other infrastructure projects in the US.

Before you get too excited, some observers contend that the bill will die in North Carolina’s Senate. And Fitch, which rated the bonds on this project BBB-, appears unruffled, since it believes the cancellation clauses in the deal are strong and require bondholders to be made whole. The estimated cost exit up to $250 million. Backers of the bill to scupper the toll road contend they’d found other projects that could be delayed to defray the cost.

But the bigger issue, which the IPE article only alludes to, is that it appears that more and more state and local governments are starting to wake up to the fact that these deals are bad for their constituents.
As we wrote in 2013:

As we’ve discussed at length earlier, these schemes are simply exercises in extraction. Investors in mature infrastructure deals expect 15% to 20% returns on their investment. And that also includes the payment of all the (considerable) fees and costs of putting these transactions together. The result is tantamount to selling the family china and then renting it back in order to eat. There is no way that adding unnecessary middlemen with high return expectations improves the results to the public. In fact, the evidence is overwhelmingly the reverse: investors jack up usage fees and skimp on maintenance. And their deals are full of sneaky features to guarantee their returns.

And as we pointed out in a more recent post, toll road construction projects virtually without exception wind up in bankruptcy. From a 2014 article in Thinking Highways:

Beginning with the contracting stage, the evidence suggests toll operating public private partnerships are transportation shell companies for international financiers and contractors who blueprint future bankruptcies. Because Uncle Sam generally guarantees the bonds – by far the largest chunk of “private” money – if and when the private toll road or tunnel partner goes bankrupt, taxpayers are forced to pay off the bonds while absorbing all loans the state and federal governments gave the private shell company and any accumulated depreciation. Yet the shell company’s parent firms get to keep years of actual toll income, on top of millions in design-build cost overruns….

Of course, no executive comes forward and says, “We’re planning to go bankrupt,” but an analysis of the data is shocking. There do not appear to be any American private toll firms still in operation under the same management 15 years after construction closed. The original toll firms seem consistently to have gone bankrupt or “zeroed their assets” and walked away, leaving taxpayers a highway now needing repair and having to pay off the bonds and absorb the loans and the depreciation.

The list of bankrupt firms is staggering, from Virginia’s Pocahontas Parkway to Presidio Parkway in San Francisco to Canada’s “Sea to Sky Highway” to Orange County’s Riverside Freeway to Detroit’s Windsor Tunnel to Brisbane, Australia’s Airport Link to South Carolina’s Connector 2000 to San Diego’s South Bay Expressway to Austin’s Cintra SH 130 to a couple dozen other toll facilities.

We cannot find any American private toll companies, furthermore, meeting their pre-construction traffic projections. Even those shell companies not in bankruptcy court usually produce half the income they projected to bondholders and federal and state officials prior to construction.

In other words, the question North Carolina needs to be asking is not whether it should cancel the project. It is whether it is cheaper, all in, to cancel it now or wait and deal with the cost and disruption when it goes bankrupt down the road.

Another question is whether these cancellation clauses are as rock-solid as Fitch and others contend. Good faith and fair dealing undergird all contracts. If the failure of these projects is as inevitable as the 2014 article we cited suggests (and the IPE story lists other recent bankruptcies by the very same sponsor), can North Carolina argue that there were significant misrepresentations made and therefore the participants are not entitled to full cancelation fees? Or alternatively, that the state is entitled to pursue damages that will wind up being netted against those fees?

Even if the state were to pursue this line of argument and lose, it could still have a chilling effect for two reasons. First is that litigation is a crapshoot. A later plaintiff would build upon and improve North Carolina’s argument, and might also have a more damning set of facts to work from. Second is that political and legal action would make the consistent failure of toll road infrastructure deals better known. That in turn would make it more politically dangerous to enter into them, particularly given their one-sided terms.

Put it another way: since investors are so keen to get into infrastructure, cities and states have more bargaining leverage. It should be inexcusable if they fail to use it.

* * *

If you are in North Carolina, or have friends or family there, I hope you’ll sent this post to them, and urge them to call it to the attention of their state senator. Have them stress that given the record of toll road infrastructure deals, theirs is almost certain to be a goner. The question they need to analyze if whether they will do better by exiting now, since the state may face greater costs (making up revenue shortfalls, being stuck with an under-maintained asset) if it puts its head in the sand and pretends everything will work out in the end.

Print Friendly, PDF & Email

15 comments

  1. PlutoniumKun

    PPP’s (public private partnerships) are such an obviously terrible deal for the public sector for reasons which anyone with even the most basic knowledge of accounting should recognise that its very hard to see how they can be promoted by anyone who isn’t either an idiot or corrupt. I think support or otherwise for PPP investments is always a good proxy to recognise whether a politician has your interests at heart.

    1. Left in Wisconsin

      its very hard to see how they can be promoted by anyone who isn’t either an idiot or corrupt

      You wouldn’t referring to our famously liberal think tanks are you?
      Accelerating Infrastructure Improvements with Better Public Policies that Tap Private Investment

      Or our famously “progressive” Oministration?
      EXPANDING THE MARKET FOR INFRASTRUCTURE PUBLIC-PRIVATE PARTNERSHIPS

      The need to reverse years of underinvestment in infrastructure, despite tighter budgets at every level of government, calls for us to rethink how we pay for and manage infrastructure investment. … PPPs bring private sector capital and management expertise to the challenges of modernizing and more efficiently managing such infrastructure assets.

  2. Paul Tioxon

    When it came time to making sure highways in NE Pennsylvania would continue to be the lifeblood for the very lucrative warehouse real estate market that fed the NYC Metro area nearly all of its consumer goods, including the most recent of the 12 leviathan Amazon Fulfillment centers along the I-80 in Pennsylvania, the local law makers declined to have a turnpike toll system installed and voted instead for higher taxes at the gas pump. This money is split with the cities to pay for mass transit, finally a dedicated funding source for that purpose all across the state, and the upkeep of the roads that go from PA and then straight across New Jersey into the heart of NYC.

    It seems that the truckers in particular and the warehouses they service felt that the public access roads was a better deal, than going from the Mid-West to NJ on the PA Turnpike. The frequent trips add up in cost and the heavy trucking volume plus regional commuter traffic made commercial tractor trailers flee from the clogged Turnpike, to the untolled I-80 and other similar roads north of the Philly metro counties.

    While relentlessly lobbied for, by then Democrat Gov Ed Rendell, who went on to be DNC chair for a bit, the heavily dominated republican legislature was having none of the PPP. It seems free has a better ring to it than toll. The truckers have all but abandoned the expensive to them turnpike, in favor of the public roads across the state. Imagine that! Now of course, the state has the highest gas taxes in the country, but being the warehouse for NYC and surrounding areas seems to make up for that cost of doing business. So does having plowed roads in the winter and potholes repaired in the Spring. Trying to turn a pre-existing public asset into a private venture did not fly in this instance, this modern day closing off of the commons. But paying a proportion, based upon gas consumption to cross the public interstates seems to be the acceptable norm palatable to all but the deal makers for sale lease back schemes.

    “Having spent the past six or seven months in a knock-down drag-out political fight to defeat Governor Rendell’s plan to enlist the private sector in a longterm lease and toll concession on the Turnpike the PTC says:

    “PTC will seek opportunities to take advantage of private sector expertise and resources.”

    It cites a design-build with two bridges and outsourcing of E-ZPass toll collection as evidence of its willingness to get the private sector involved in “up-front costs” though none of these examples provided any.

    Axiom-breaking development

    This is by far the largest move yet to toll an existing free interstate which was built originally and since maintained with tax based grants. If successful it may encourage other states to toll their interstates to generate the urgently needed funds not presently available for enhancing major highways.

    This is an axiom-breaking development – the axiom having been that it is politically impossible to toll an existing free road.”

    http://tollroadsnews.com/news/feds-receive-request-to-toll-pai-80-from-penn-pike–amplified

    “”It’s official. Pennsylvania has passed New York and California by earning the dubious distinction of having the highest gasoline taxes in the nation. Combined with the federal gas tax of 18.4 cents per gallon, Pennsylvania’s state tax of 50.5 cents per gallon, brings the combined tax to 68.9 cents per gallon. Californians pay 63.7 cents per gallon. New Yorkers pay 63.4 cents per gallon, according to the American Petroleum Institute,” wrote Gregg Laskoski, senior petroleum analyst for GasBuddy.”

    http://www.pennlive.com/midstate/index.ssf/2015/01/pa_gas_taxes_are_highest_in_th.html

  3. Carl

    Well, no surprise as my state, Texas, has gotten behind a Cintra-built tolled highway, which has dramatically underperformed in actual traffic despite the carrot of an 85 mph speed limit (gosh, who knew that nobody wanted to drive 40 miles out of the way to actually get on the thing).

  4. Arizona Slim

    I’m a PA native who remembers when I-80 opened. It took a lot of traffic away from the Turnpike. And I don’t think that traffic ever went back.

  5. sharonsj

    When Rendell was trying to privatize the turnpike, Mother Jones magazine had an in-depth investigative article looking at such deals in other states. The deals always turned out to be bad for the taxpayer and good for private companies (and whatever politicians they gave money to). I called all my reps and yelled about selling the turnpike to foreign companies. Maybe lots of other PA residents did the same. That hasn’t stopped PA from doing other deals. They recently did a PPP involving our bridges that is a 99-year deal! Can’t wait to see what happens with that.

  6. L

    While good, the article is missing some important local context. The original toll road project, as well as some others, was sponsored by Tom Tillis the former Speaker of the Hose for the North Carolina State House, and a man who has strong financial ties to toll road management companies. He pushed it despite the existing opposition to more toll roads and the fact that the roads that exist have not been financial successes. He also was behind a doomed effort to “convert” some existing roads to toll roads.

    All of this was quite the scandal and hampered his bid to unseat Kay Hagen from her U.S. Senate seat. Ultimately, however, he succeeded and is now a U.S. Senator. With him gone the toll roads have lost their champion in the house thus making this bill possible.

    With respect to the State Senate, they may not let this bill fly because it would cost the state money. But they don’t love the roads either.

    1. Carolinian

      So the grifter got a promotion. Good job! What’s with N.C.these days?

      Here in S. Carolina our first toll road, which was built in nearby Greenville and is a shortcut to the state capital and a would be development corridor, is widely regarded as a failure and a boondoggle. Republican states like mine love public private partnerships but as the Penn commenters are pointing out they also love industrial development which the toll grift tends to inhibit. It could be this is all just a fad that will fade soon. The public, as always, will be left holding the bag.

  7. Steve H.

    – Good faith and fair dealing undergird all contracts. If the failure of these projects is as inevitable as the 2014 article we cited suggests (and the IPE story lists other recent bankruptcies by the very same sponsor), can North Carolina argue that there were significant misrepresentations made and therefore the participants are not entitled to full cancelation fees? Or alternatively, that the state is entitled to pursue damages that will wind up being netted against those fees?

    Damages against whom? Thus ‘to cancel it now’ is the option that works. Alternatively, while States can’t mint currency, they can tax, so tax the cancellation fees, or some similar creative clawback.

  8. Denis Drew

    There is a perfectly reasonable (and necessary) US constitutional provision that legislatures cannot neuter contracts (don’t really know the details). Without this no private contract would be safe from government corruption, political pressure, whatever.

    But, there needs to be an exception for when government itself gets into a manifestly bad deal. Think the sale of the Chicago parking meter system for 75 years for a billion dollars.
    http://www.bloomberg.com/news/2010-08-09/morgan-stanley-group-s-11-billion-from-chicago-meters-makes-taxpayers-cry.html
    http://www.theatlanticwire.com/business/2010/10/why-does-abu-dhabi-own-all-of-chicago-s-parking-meters/18627/

    Takes one corrupt or incompetent, or both, politician and huge chunks of the commons are gone — irretrievably. Need a constitutional amendment — too important to ignore.

    As I always add, if we were as thoroughly labor unionized as Germany most of these ripoffs would not be going off because the unions would act a guard dogs of the commonweal — supplying the necessary numbers of watch dogs to do the task.

  9. reader

    Under EU trade deal, if contract cancelled, Spanish developer and any European investors would have an ISDS claim against the US.

  10. sd

    West coast…

    California has implemented FasTrak tolls that are paid with a transponder. What previously were HOV express car pool lanes are being converted to express toll lanes. If you don’t have a transponder, you pay a violation fee. You can’t travel in the lanes without having a FasTrak account. It’s been nicknamed the 1% lane…we warn out of town guests to avoid the lanes.

    So first they built the express car pool lanes. And then they converted them to tolls.
    https://en.m.wikipedia.org/wiki/FasTrak

    1. Steve Gunderson

      Dallas has done the same. Out went the car pool lanes, in went the toll lanes. They even use “demand” pricing with higher prices during rush hour.

Comments are closed.