Public-Private Highways:

Careening Toward Failure Nationwide

 

Public-private transportation projects have been touted as the cure-all for all that ails the highways of the nation. In fact, they have just made the taxpayer ride much bumpier, full of potholes that consists of corruption, loan defaults, and eroding public roads because of “non-compete” contracts all of which have led to taxpayers picking up the tab for huge private profits.

 

Public/Private Toll Road Projects Are Subject To Corruption, Fraud,  Bond and Loan Defaults And Political Payoffs.

 

• A $340 million, 14-mile private toll road, called the “Dulles Greenway,” which linked Washington D.C.’s Dulles airport and a rapidly growing suburban area was built in 1995. It never turned a profit and defaulted on its loans in 1996. (South Bend Tribune {SBT} 1/23/06)

Despite optimistic predictions by all involved, the road failed to attract anything close to the 33,000 vehicles a day required for the company to make loan payments, let alone the 68,000 vehicles a day needed to turn a profit. In early 1996, the road was averaging 10,500 vehicles daily.

• Ten miles of private express toll lanes were built in California, along a highway in Orange County.  The non-compete clause in the lease prevented the state from building or improving roads within 1.5 miles of the toll road, resulting in decaying roads that created a political nightmare.  In 2003, the state bought the toll road for $207.5 million in bonds. (Briefing Papers, Pg. 15 and SBT 1/23/06)

• Cities in South Carolina, Florida and California have built toll roads to serve real estate projects of politically connected developers. Traffic has missed projections and road operators are headed toward default. (Business Week 8/5/02)

For example, the $200 million, 16-mile Southern Connector in Greenville S.C., was designed to steer traffic towards some private developers’ planned projects, the road opened just as the recession hit in February 2001. Drivers detour to avoid the $1.50 toll so less than half the projected 28,000 commuters use it daily. (Business Week 8/5/02)

 

There is a history of feasibility studies for toll roads being overly optimistic,” says John J. Hallacy III, director of municipal bond research for Merrill Lynch and Co., told Business Week.

 

“Of the 10 major private toll roads constructed since the mid-1990s, nearly half carry far less traffic than projected. Some $4 billion in toll road bonds risk default over the next five years unless they’re refinanced, estimates Robert H. Mueller, a municipal bond analyst at the J.P. Morgan securities Inc. (Business Week 8/5/02 )

• The 8.8 mile privately owned Pocahontas Parkway near Richmond, VA, cost $377 million to build, mostly financed through tax-free bonds.  The deal calls for the state to pick up the tab for operating it and maintaining it until it starts to show a profit.  But, according to the Government Accountability Office, an arm of Congress, toll receipts are about half of what had been projected. (SBT 1/23/06)

Last year (2005),Virginia paid $389,000 in maintenance on the Pocahontas Parkway.  So far, the parkway hasn’t repaid the state. (SBT 1/23/06)

 

In 2002, according to the case studies provided by Alexis Perrotta and Jonathan Peters in the briefing papers for this forum, “bond ratings (for the Parkway) were lowered to negative and below investment grade.  It appeared that toll revenue would be insufficient to pay off outstanding bonds.  Since then, tolls have been increased from $1.50 to $2.25. (Briefing Papers, Pg. 17)

• In Texas, a privately financed 22-mile highway from the Mexico border went bankrupt after three years. (SBT 1/23/06).

• In Texas, the top ten road contractors, including bidders on the $185.5 billion Trans-Texas Corridor (TTC), gave millions of dollars in contributions to executive and legislative candidates for Texas state offices. 

The winning team for the Trans-Texas contract, CINTRA gave $800,000.  (Citizens Against the TCC).

 

The Texas State leadership – Governor, Lt. Governor, Attorney General, Comptroller and House Speaker – received a total of $1.2 million in contributions from highway contractors. (Citizens Against the TCC)

 

The contract winner, CINTRA, will collect and keep all tolls on the TCC for 50 years. (Citizens Against the TCC)

 

• Privately financed  road projects will always cost more to build than publicly-financed projects because  the cost of private bonds are always higher than governmental tax free bonds.  Bond traders and the private companies will make profits and if they don’t they will just default on their loans and/or bonds. The taxpayers will always pick up the tab.

• Twenty years ago, Congress limited the use of private activity bonds because Congress thought they were being used improperly to subsidize private projects that often had little public and often no national purpose, according to the Briefing Papers, Pg. 8.  What assurances and checks have been implemented to ensure that this abuse does not re-occur now?

• “The private sector should not be presumed to act in the public interest.  Incentives and controls must be in place to align public and private interests in any given project.” (Briefing Papers, Pg. 12.)

• The Briefing Papers (Pg. 11)  also point out that some research on transportation privatization “indicates that what are often seen as efficiency gains are really budgetary gains to the public authority which are achieved through losses incurred by other groups.”  Essentially this involves shifting funding from public employees to private contractors.

• Selling public assets for a one-time gain can be a mistake, according to the Briefing Papers (Pg. 12).  “Selling a public asset below its true value may capture definite windfalls in the near term, but may be seen a regrettable decision over the long run.”

• Other problems with Public Private Partnerships as listed in the Briefing Papers:

Toll increases may be unpopular, inefficient or inequitable. An example is Toronto’s Highway 407 where a private firm initially raised tolls more than 250 percent. (Pg. 21)

 

Private toll road operators might choose to maximize profits, which could result in significant traffic delay. (Pg. 21)

 

Ignoring risk in PPP projects is likely to result in cost overruns, delays in service provision, reduced output and lower levels of service or the adoption of inferior projects. (Pg. 27)

 

SOURCES:

http://www.fortwayne.com/mld/fortwayne/news/local/13690590.htm

http://www.gmionline.org/may1996.htm

 

 

 

 

 

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