Hit or Miss: Bankruptcies Taking Toll on P3 Road Projects

 

Road to nowhere? The private entity behind the P3 tollroad, SH 130, last month filed for bankruptcy in Austin TX.

by JOHN GREGERSON, Senior Editor | April 15, 2016

The U.S. frequently is cited as the next big market for public private partnerships (P3), given large funding gaps for critical public projects involving transportation, infrastructure, and the like. In fact, those very words were voiced by many last month in Dallas TX at P3C, an over-flowing, national conference that drew more than 1,000, and which BuiltWorlds reported on here.

However, the alternative project financing concept continues to encounter bumps and potholes across the U.S. for projects involving tollways. Ironically, the latest high-profile casualty also made news in Texas last month when SH 130 Concession Co., the private entity that financed, built and maintains the $1.3-billion State Highway 130 — a 41-mile tollroad connecting Austin and Seguin — filed for Chapter 11 protection in U.S. Bankruptcy Court in Austin.

Like many P3 arrangements, Concession Co. had financed the project in exchange for a portion of projected toll revenues over a period of 50 years. However, upon completion of SH 130 in 2012, subsequent annual revenues continued  to fall short, prompting Concession’s court action.

Plans for SH 130 date back to 2006 and, at the time, prospects looked very good. In addition to an 85-mph speed limit — the nation’s fastest —  SH 130 would allow motorists to circumvent gridlock on Interstate 35 through Austin, the booming state capital and Southwest tech mecca.

However, motorists believed purported benefits did not outweigh the costs, particularly in view of the lingering sting of national recession. Once an initial rebate for trucks expired, drivers faced a price tag of nearly $34 dollars to ride the tollway, and opted out in droves. As a result, SH 130 did not generate the income that state and private planners anticipated, leaving Concession Co., owned by builders Cintra and Zachry Construction Corp., struggling to repay its debt.

Initially, then-Texas Gov. Rick Perry (R) had encountered skepticism about implementing SH 130 as a P3. It was a first for the state. However, it wouldn’t exactly be fair to say skeptics were correct. When the project broke ground, few could have anticipated the lingering effects of the national recession and an economy that continues to hobble eight years later, even in Texas.

On the other hand, SH 130’s financial woes do come on the heels of other failed P3 tollways in two other states where missed revenue projections also were cited as the culprits. Specifically, the South Bay Expressway, a 10-mile stretch in California’s South County, declared bankruptcy in 2011, and the privately operated Indiana Toll Road also filed for protection in 2014.

Public private perception

The problem is that failures of this magnitude leave a stench that makes it more difficult for viable projects to proceed. And word travels fast. Following the SH 130 bankruptcy, the Wall Street Journal on March 19 published a feature article entitled “Frugal Motorists Test Private Toll Roads.” A week earlier, The Newspaper.com published the article, Texas Toll Road Failure Raises Question of PPP Viability.

In March, North Carolina Dept. of Transportation Secretary Nick Tennyson traveled to Texas to meet with members of the Texas Dept. of Transportation and discuss SH 130’s bankruptcy. At issue: North Carolina officials are concerned about a $665-million P3 toll-road deal they are in the process of undertaking with Cintra. As planned, the state will contribute $90 million to the project and a Cintra-led consortium the balance. So, they fear a replay of SH 130’s failure.

According to WSJ, “Officials from states said the meetings were helpful bud did not offer details.”

One point that undoubtedly came up: P3 tollways can be highly risky ventures.

Recent failures suggest they clearly require more upfront vetting and analysis — including worst-case scenarios — before state agencies, investors and other stakeholders proceed with them.

That’s what occurred with the proposed the $1.1-billion, 47-mile project Illiana Tollway, a corridor would that would have connected Indiana’s I-65 to Illinois’ I-55, allowing truck drivers to bypass the always busy I-80. At first glance, revenue projections were very encouraging. At second and third glance, however,  projections plummeted, prompting then-IL Gov. Pat Quinn (D) to say that taxpayers would make up shortfalls — perhaps up to $1 billion — to investors if tolls fell short of projections. His successor, Gov. Bruce Rauner (R) mothballed it.

So, Illinois taxpayers dodged a bullet, it seems. Perhaps that patience here, and elsewhere, will create a more favorable climate for P3 financing when more viable models come along.