This is the first post in a three-part series on the Indiana Toll Road and the use of private finance to build and maintain highways. Part two takes a closer look at how Australian firm Macquarie manages its infrastructure assets. Part three examines the incentives for consultants to exaggerate traffic projections, making terrible boondoggles look like financial winners.
Who owns the Indiana Toll Road? Well, as of the bankruptcy filing in September, Macquarie Atlas Roads Limited (MQA Australia), which is joined at the hip to Macquarie Atlas Roads International Limited (MQA Bermuda) on the Australian stock exchange, has a 25 percent stake. Macquarie’s investment bank arm brokers the various transactions related to ownership of the road, collecting fees on each one. Welcome to the world of privately financed infrastructure. Graphic: Macquarie prospectus
In September, the operator of the Indiana Toll Road filed for bankruptcy, eight years after inking a $3.8 billion, 75-year concession for the road with the administration of Governor Mitch Daniels.
The implications of the bankruptcy for the financial industry were large enough that ratings agency Standard & Poor’s stepped in immediately to calm nerves. In a press release, the company attempted to distinguish the Indiana venture from similar projects, known as public-private partnerships, or P3s: “We do not believe this bankruptcy will slow the growth of current-generation transportation P3 projects, which have different risk characteristics.”
But the similarities between the Indiana Toll Road and other P3s involving private finance can’t be ignored. And as we’ll see, even the differences aren’t all good news for the American public. Once hailed as the model for a new age of U.S. infrastructure, today the Indiana deal looks more like a canary in a coal mine.
At a time when government and Wall Street are raring to team up on privately financed infrastructure, a look at the Indiana Toll Road reveals several of the red flags to beware in all such deals: an opaque agreement based on proprietary information the public cannot access; a profit-making strategy by the private financier that relies on securitization and fees, divorced from the actual infrastructure product or service; and faulty assumptions underpinning the initial investment, which can incur huge public expense down the line. Though made in the name of innovation and efficiency, private finance deals are often more expensive than conventional bonding, threatening to suck money from taxpayers while propping up infrastructure projects that should never get built.
For the parties who put these deals together, however, the marriage of private finance and public roads is incredibly convenient. Investors are increasingly impatient with record-low returns on conventional bonds, and are turning to infrastructure as an asset class that promises stable, inflation-protected returns over the long run.
Meanwhile, governments are eager to fix decaying infrastructure — but without raising taxes or increasing their capacity to borrow. On the occasion of yet another meeting intended to drum up investor interest, Transportation Secretary Anthony Foxx recently wrote on the U.S. Department of Transportation’s blog: “With public investments in our nation’s important transportation assets steadily declining, we need to find better ways to partner with private investors to help rebuild America.”
Those investors are lining up to get in the infrastructure game. According to the Congressional Budget Office, about 40 percent of new urban highways in America were built using the private finance model between 1996 and 2006. Since 2008, that figure has jumped to almost 70 percent.
In an attempt to get even more deals done, the current federal transportation bill ramped up funding for the TIFIA program — which offers subsidized federal loans and other credit assistance, often to projects that also receive private backing — by a factor of eight.
Major private investors have stepped up their lobbying efforts to close more of these lucrative deals. Meridiam North America recently hired Ray LaHood, Foxx’s predecessor as Transportation Secretary, and Macquarie Group — which orchestrated the Indiana fiasco — hired away a White House deputy assistant to “continue strengthening our relationships with key elected officials… while also exploring new investment opportunities.”