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Posts from the "Privatization" Category

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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.

When you invest in Macquarie Atlas Roads, now-worthless shares in the Indiana Toll Road (and four “Other Toll Roads”) are an almost-free bonus with your purchase of shares in APRR, which runs profitable toll roads in France. Image: Macquarie Atlas’ September 2014 Investor Presentation

Macquarie Group, the gigantic Australian financial services firm with some $400 billion in assets under management, has made a lot of money in the infrastructure privatization game.

The publicly traded company owns the Brussels Airport, the Dulles Greenway, telecommunications towers in Mexico, a wind farm in Kenya, and much more. One of those assets was the Indiana Toll Road, which Macquarie purchased in 2006 with Spanish firm Ferrovial — whose most profitable assets include Heathrow Airport and the 407 toll road ringing Toronto. The Indiana Toll Road was housed in a spinoff company called ITR Concession Co. LLC., which filed for chapter 11 bankruptcy in September after a disastrous eight-year run.

Macquarie and Ferrovial paid the state of Indiana $3.8 billion for the Indiana Toll Road. At the time, it was the largest infrastructure privatization deal in U.S. history. Eight years later, the road was saddled with an astounding $5.8 billion in debt, far beyond the original, unexpectedly-high purchase price.

Traffic fell well short of the projections offered by the engineering firm Wilbur Smith (now CDM Smith), and the company blamed the bankruptcy on the fallout from the recession.

But some observers also pointed to the risky financing underlying the deal. Macquarie and Ferrovial each chipped in just $374 million of their own money to finance the deal. The other $3 billion was borrowed from seven European banks, six of which have since been bailed out by their respective governments.

Granted, the deal happened in 2006, when debt was flowing freely. According to a 2007 profile by Fortune’s Bethany McLean, Macquarie borrowed its billions using loans resembling a balloon mortgage. It would purchase a type of derivative, called an “accreting swap,” to get a low teaser interest rate, all the while assuming that a refinance was just around the corner. But when credit markets froze entirely, Macquarie couldn’t extricate itself from punishing interest payments.

McLean cited the example of the Macquarie-owned Chicago Skyway: “In 2007 the Skyway will pay interest of just $129,000 on $961 million of debt. But the interest payment for 2018 is to be $480 million — that’s not a typo.”

That helps explain how Macquarie and Ferrovial ended up owing almost twice as much as they paid for the Indiana Toll Road, after collecting tolls for eight years.

Randy Salzman, associate editor of Thinking Highways North America, has reported extensively about similar tollway deals and their aftermath, saying it’s common for privately financed roads to go bankrupt. He says that firms acquiring infrastructure typically provide very little of their own cash, and because of a complicated mix of fees and tax breaks, they may benefit financially even when the deals go sour.

“You’d think that they wouldn’t be investing in these things because so many of them go bankrupt,” he said. “You’d think that the money would be running away.”

But Salzman says he’s seen these kinds of bankruptcies happen over and over again. “The only question is when.”

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The Indiana Toll Road and the Dark Side of Privately Financed Highways

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.”

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Mica Won’t Let His Grudge Against Amtrak Die, Revives Privatization Scheme

Rep. John Mica (R-FL) no longer chairs the House Transportation Committee, but that doesn’t mean he’s eased up on his crusade against Amtrak. Calling the company a “Soviet style monopoly,” Mica used his afternoon address to the U.S. High Speed Rail Association to announce his plan to revive his despised and defeated measure to privatize parts of Amtrak.

Ray LaHood takes questions from reporters after telling the U.S. High-Speed Rail Association, "Do not be dissuaded by a few detractors." A few hours later, Rep. Mica called Amtrak a Soviet style monopoly that should be disbanded. Photo: Tanya Snyder

Mica plans to introduce legislation to end Amtrak’s “monopoly” by allowing “open competition to provide intercity passenger and high-speed rail service.”

Of course, high-speed rail in California is open for bids from private, mostly foreign, firms, and many have expressed interest. Fully private entities are moving forward with rail projects in Florida and Texas. Amtrak simply doesn’t have the stranglehold on rail in America that Mica tries to convey. And in the sense that Amtrak does have a broad network of lines, it’s in large part because it was created by Congress and is partially funded by taxpayers with a mandate to provide mobility services to the country.

To illustrate the land of milk and honey that awaits rail privatization, Mica cited the European Union’s decision to end state rail monopolies. Perhaps he isn’t up to speed on the latest news: The European Commission planned last month to break up the monopolies and open the rail system to free market competition but took a step back from that two weeks later due to opposition, favoring instead a proposal that will allow Germany and France to keep their state-dominated systems. Meanwhile, rail privatization in the UK has let to a tripling of fare prices and plummeting investor confidence.

Earlier in the day, Transportation Secretary Ray LaHood also had an anecdote from Europe and Asia. He’s toured 18 countries’ high-speed rail systems during his tenure as secretary. “The common thread in every country was the idea that unless the national government makes the investment in high-speed rail, it will not happen,” he said.

Mica hopes to include his privatization proposal in the Passenger Rail Investment and Improvement Act reauthorization this year. The last time he tried to include a similar idea in the surface transportation reauthorization, the proposal was so widely panned he had to retract it. Mica now has no leadership post within the committee. He is the senior member of the Rail Subcommittee but not the chair or the vice chair.

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What Kind of Leadership Would Bill Shuster Bring to the Transpo Committee?

Rep. Bill Shuster (R-PA) could be the next chair of the House Transportation Committee. Photo: Office of Rep. Bill Shuster.

This is the first of two posts examining Rep. Bill Shuster’s candidacy for the chairmanship of the House Committee on Transportation and Infrastructure. We’ll post the second one, focused on his positions on bike/ped programs and funding issues, tomorrow.

Over the next few weeks, we could see a shake-up on the Transportation and Infrastructure Committee in the House. Current Chair John Mica (R-FL) has been the top Republican on the committee for six years, and according to GOP rules, that’s the limit. While Mica is asking leadership for a little wiggle room, his deputy is making the case for his own candidacy. Rep. Bill Shuster (R-PA) announced late last week that he would seek the chairmanship.

If that name rings a bell, it may be because his father was a legend on Capitol Hill. Evoke Bud Shuster’s name in Washington and you’ll hear story after story of the deal-making he pulled off when he chaired the Committee on Transportation and Infrastructure from 1995 to 2001. He brought home more bacon to his district in rural Pennsylvania than it could even handle, according to a profile that ran in the National Journal as his Congressional career came to an end.

Bill Shuster took over his father’s seat in Congress in 2001, and soon joined the committee his father presided over. Now he could take over his dad’s gavel, too, when the new Congress is seated in January.

Mica is meeting with Republican leaders this week to discuss the possibility of getting a waiver to the six-year rule. Rep. Paul Ryan is expected to receive such a waiver, so that he can go on serving at the helm of the Budget Committee. But does Ryan’s exception mean Mica will get one too? Unlikely. Last spring, rumors circulated that Republican leaders were fed up with Mica’s inability to pass a transportation bill and were looking to Shuster to step in. Those rumors were somewhat overblown, but may indicate that leaders aren’t looking for two more years of John Mica at the gavel of T&I.

Shuster, meanwhile, has excellent relationships with House GOP honchos. And as chair of the Subcommittee on Railroads, Pipelines, and Hazardous Materials, he put his own stamp on the reauthorization process. He, with Mica, inserted a highly contentious “red meat” provision (later dropped) to privatize Amtrak’s profitable Northeast Corridor service, and he supported the inclusion of automatic approval for the controversial Keystone XL pipeline.

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Advocates: Private Transit Giant Lobbied House to Weaken Public Transit

The threat of service reductions and fare increases always loomed large over the transfer of Long Island Bus service to a private operator. After Nassau County refused to assume its share of costs for the service, international private transit provider Veolia Transport was brought on to take over from the New York MTA at the beginning of the year.

100 people protested international private transit operator Veolia Transport yesterday in Silver Springs, Maryland. Photo: Transportation Equity Network

It wasn’t long before the ax dropped. Two weeks ago, it was announced that the Nassau Inter-County Express (NICE bus) would see cutbacks to some 30 of its routes.

On Tuesday more than 100 protesters from around the country, representing transit and labor advocates as well as local religious leaders, staged a protest at Veolia’s Silver Springs, Maryland offices. The French-based international transportation service provider operates transit in 150 cities, transit authorities, counties and airports in the U.S. and Canada. From Denver to Tucson, from Seattle to Dallas — there’s hardly a state where Veolia doesn’t hold a contract.

Veolia has also played a role in shaping HR 7, the House transportation bill put forward by GOP leadership. Through the law firm Patton Boggs, Veolia lobbied for measures that would accelerate the transfer of transit service to private operators, according to Sam Finkelstein, a spokesperson for the Transportation Equity Network, which organized the protest. A provision of the bill would reward transit agencies that privatize a portion of their service by offering increased capital funding [PDF, pages 322 and 323]. Veolia did not respond to requests to confirm or deny that the company lobbied for that provision.

Protestors said Veolia’s contracts are a bad deal for transit riders. “We’re here to demand our money back,” said protestor Irma Wallace of Springfield, Illinois. “These private companies siphon profits out of our public services and we’re sick and tired of our municipal services being managed for private profit instead of public good.”

On Long Island, Veolia says its management will bring efficiencies to the system. “I like to call it a reallocation of resources,” Veolia’s Michael Setzer told WABC New York. “We’re taking all the money available from Nassau County and applying it much more smartly than it has been.” But WABC was quick to point out that while Veolia had added a few express routes, the overwhelming majority of changes were service cuts.

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