Private Toll Road Backed By $430 Million in Federal Funds Goes Bust

From the beginning, there were plenty of reasons to suspect that Texas 130 — a private toll road between San Antonio and Austin — was a bad idea.

Photo: Flickr/Ken Lund
Photo: Flickr/Ken Lund

For one thing, the state of Texas looked into extending the highway in 2006 and concluded it wouldn’t generate nearly enough toll revenue to pay for construction.

Nevertheless, when two private firms, Cintra and Zachry Corp., decided to take the project on in 2008, the state of Texas and federal officials were happy to help. Cintra and Zachry put together a deal to build the $1.35 billion freeway. They lined up $430 million in federally-backed TIFIA loans, and promised to share toll revenues with the state of Texas and pay $25 million upfront.

Today, four years after the road opened, it is bankrupt. Katherine Blunt at the San Antonio Express-News has done some Pulitzer-worthy reporting about Texas 130 and the questions raised by similar toll road projects. Here are a few of the highlights of her report:

  • At the time the road went bankrupt, traffic volume was just 30 percent of what consulting firm AECOM predicted. But AECOM — which has been sued for fraud in similar cases — and its subsidiary Maunsell have refused to disclose detailed traffic projections, saying they are proprietary. Both the Texas Attorney General and U.S. DOT have backed the company, allowing AECOM to withhold its justification for the project from the Express-News.
  • Cintra and Zachry put up $197 million — about 14 percent of the cost. But that stake was packaged and sold to investors (in the case of the Zachary Corp., to three investment funds overseen by a Australian firm). Since some construction contracts went to Ferrovial, Cintra’s parent company, the firm may have managed to make money even though the road did not.
  • The highway appears to have exacerbated flooding problems for the community of Lockhart. One resident told the Express-News that she now has to tie her propane tank to a tree to keep it from floating away when it rains.
  • Construction quality was not good. Just two years after the road was complete, an inspection found 160 pavement defects, though some of those have since been repaired.

Texas 130 is the third private toll road that received TIFIA funding to have declared bankruptcy or be restructured.

In another case, the “Pocahontas Parkway” in Virginia, the toll road received a $150 million TIFIA loan. The full balance of the federal loan was transferred to the new owner, DBi Services, in May 2014, after original owner Transurban surrendered the road in a “defacto bankruptcy” in 2013.

In San Diego, the South Bay Expressway borrowed $172 million backed by TIFIA, the Express-News reports. The balance of that loan was written down in bankruptcy to $93 million. In return, the federal government was given a 32 ownership stake.

As for Texas 130, it remains to be seen how much of the $430 million in TIFIA funds will be recovered. When pressed by the Express-News, U.S. DOT refused to comment.

Given the checkered track record of private toll roads, it might be worth considering a simple fix: Better independent vetting of traffic projections. Firms hired to produce traffic projections have a history of inflating the numbers. They have a financial incentive to do so, because it often leads to future business.

Robert Bain, an expert on toll road finance and traffic projection voodoo, has recommended “independent peer reviews” of traffic forecasts for private roads [PDF]. The TIFIA program could minimize losses by subjecting deals to more independent scrutiny before making an investment.

  • Kevin Love

    “Given the checkered track record of private toll roads, it might be worth considering a simple fix: Better independent vetting of traffic projections.”

    Here is a better fix: No socialist government loans. Instead, use the concepts of “capitalism” and “free markets.” Once private investors are on the hook for 100% of the cost, then I predict that this problem will suddenly fix itself.

    Also, please stop calling them “private” toll roads when they are financed with government money.

  • gb52

    Sounds like TIFIA should focus on the projects that really matter… These loans are no better than solyndra… Let’s use our money wiser and stop building freeways we do not need. Surprisingly these haven’t made headlines, likely because they are roads, and somehow we like roads even when they’re not used… BUT transit is measured to a different standard… Look at the costs here, HWY 130 cost $1.35 BILLION dollars. What if this was spent for a transit project to relieve congestion? Maybe more people would use it.

    Maybe we should expand TIGER grants and put our money toward more competitive uses.

  • AlanTobey

    The next time Republican pols complain about government loans to the now-busted Solyndra solar-panel company . . . .

  • No congestion? No complaints!

  • Kenny Easwaran

    Financing is usually not considered when determining whether something is private or public – ownership and equity are. If you want to call a toll road non-private because it had a government loan, then you should call various government projects non-public if they are financed partly through bonds sold to private investors.

    Also, I don’t think it’s reasonable to say that government loans are necessarily socialist. If there really is due diligence, then they’re just part of the same sort of financial ecosystem. Only if there is a government mandate to give loans to companies that are bad risks is there a kind of socialism.

  • Richard Gadsden

    A much simpler solution is to ensure that the parent companies guarantee the loan, so they can’t just have the road go bust when it makes a loss.

    Cintra is part of an €8bn corporation. They could take that $430m hit if they had to. They don’t want to, because it would wipe out most of a year’s profits. But if they’d guaranteed the loan, then they wouldn’t have a choice.

    The whole point of it being private is to transfer the risk; instead of the DOT assessing the risk, the private company does. Special-purpose corporate vehicles use limited liability to shift the risk back again. Don’t let them do it.

  • Southeasterner

    “Better independent vetting of traffic projections.”

    Because forecasting firms take pride in getting their projections wrong? I would note that it wasn’t only traffic projections that were way off due to the recession, almost every industry made the same screw up and almost every sector had bankruptcies and bailouts. Anyone remember the airlines, banks, and auto companies?

    IF forecasting firms are forced to use extremely optimistic government land use projections to be considered for the job (often contractually required), you can bring in as many consultants and modelers as you want, which will drive up the costs of the project, and they will all tell you the exact same thing.

    A better solution is not dumping more money on traffic projections but allowing the current forecasting firms to use their own land use assumptions.

  • Kevin Love

    Thank you for agreeing with me. There is a government mandate to give loans to companies that are bad risks; no private lender was willing to touch this the way that the government was. As you state, this is a kind of socialism. The kind where the government is displacing private lenders.

  • Kevin Love

    An even better solution is making the private sector take 100% of the risk. When their own money is at stake, investors tend not to buy dodgy forecasts.

  • FlamingoFresh

    Fire ’em all!

  • Uh, maybe that would work if our entire federal transportation system wasn’t funded by smoke and mirrors because we aren’t willing to raise the gas tax. They are desperate to get these private $$ off the sidelines.

  • Kristan Overstreet

    Better fix still; ban toll roads. If a right of way is gained through eminent domain, it should be tax-funded and open freely. The powers of government should not be used to guarantee profits for a favored few.

  • WISEONE

    The roads ARE funded, the problem is that politicians use the money for other things…………like vote buying.

  • WISEONE

    Ban them or in the case of the DFW Turnpike, keep tolls on them until the road is paid for and the bonds are paid off, then remove the tolls.

  • teetuhm

    *Zachry

  • Guest

    Should it be a surprise that the one road that needs to generate revenues privately would fail, while all the other surrounding roads receive subsidies?

    Before even getting into the projections issue, perhaps we should first ask why there is 1 road between San Antonio and Austin metro areas that is free to use and completely congested (I-35), and 1 that is expensive to use via the toll and hence completely empty (130).

  • Ray

    Here what is right and wrong about 130. First it’s correct to price roadways. The current gas tax funding doesn’t correctly value a roadway. A congested corridor has a greater value (and price) than an uncongested corridor. Privatizing the highway doesn’t help, it would have been just fine to have it built and tolled by the state. On top of that, I-35 should have had toll lanes also applied as an additional funding mechanism for the new highway and to divert traffic. If you congestion price correctly, you will have the necessary funding to pay back the bonds. I’ve never heard of a toll bridge not being able to pay back the bonds.

  • Claude

    …and all future maintenance and repair costs in perpetuity, so they don’t become yet one more drain on overstretched resources.

ALSO ON STREETSBLOG

Texas DOT Raring to Build Money-Losing Toll Lanes

|
States seem to love expanding highways by adding tolled lanes, even when the money doesn’t add up. The 495 Express Lanes in DC’s Virginia suburbs lost $51 million last year, forcing investors to restructure $430 million in debt. Similarly, Maryland taxpayers are likely to be on the hook for the state’s new I-95 lanes, which […]

The Great Traffic Projection Swindle

|
This is the final piece in a three-part series about privately-financed roads. In the first two parts of this series, we looked at the Indiana Toll Road as an example of the growth in privately financed highways, and how financial firms can turn these assets into profits, even if the road itself is a big money loser. […]

Five Factors That Will Determine Whether TIFIA Benefits Transit

|
Phineas Baxandall is a senior analyst at the U.S. Public Interest Research Group. Last week, Transportation Secretary Ray LaHood touted his department’s $545.9 million TIFIA loan to construct Los Angeles’ 8.5-mile light rail transit line along the Crenshaw corridor as “just one example of how DOT’s TIFIA credit assistance program extends the value of America’s transportation dollar.” But will […]

How Macquarie Makes Money By Losing Money on Toll Roads

|
This is the second post in a three-part series about privately financed highways. Part one introduced the Indiana Toll Road privatization as an example of shoddily structured infrastructure deals. Part three looks at how faulty traffic projections lead bad projects to get built, and how the public ends up paying for those mistakes. Macquarie Group, the gigantic Australian […]