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Fed Financing Act Not at Risk from SH 130 Bankruptcy

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Speaking of populist critics of P3 concessions, one of the oddest is a Virginia writer named Randy Salzman. In pieces written for various media, including Thinking Highways, Salzman has put forth the view that P3 concessions are actually scams that harm taxpayers. The opening sentence of his Feb. 9, 2017 commentary for the “Bacon’s Rebellion” blog in Virginia, was the following: “The history of American transportation ‘public private partnerships’ indicates that virtually all P3 shell companies go bankrupt before paying back federal loans and the ‘private activity bonds’ which they sold to finance part of the debt.”

His target in this column was last year’s bankruptcy filing of the concession company for SH 130 (Segments 5 & 6), a toll road sponsored by Texas DOT to relieve growing congestion on parallel I-35 between Austin and San Antonio. The northern sections, through Austin’s suburbs, are doing fine, but the rural Segments 5 and 6 (the only ones developed under a revenue-risk P3 concession), fell far short of projected traffic and revenue.

Salzman wrote this piece before the final bankruptcy settlement, which I have recently researched to see who won and who lost. The original SH 130 Concession Company lost its $220 million equity investment, as is typical in a bankruptcy, in which providers of debt have priority over equity investors. Instead of Private Activity Bonds, the largest debt provider was a consortium of eleven Spanish banks, which loaned $686 million. And the federal Transportation Infrastructure Finance and Innovation Act (TIFIA) program provided a loan of $550 million.

The banks and TIFIA negotiated the bankruptcy settlement, which became final on June 28, 2017. Under that settlement, a new concession company was created, to manage and operate the toll road for the remaining years of the concession, and the existing debt was wiped out. The banks and TIFIA now own about half the equity in the new company, and TIFIA also holds a new $87 million subordinated loan. A slight majority of the equity in the new company is owned by Strategic Value Investors. SVI has hired a company to make some needed pavement repairs and has contracted with Louis Berger Services for operations and maintenance on the toll road. SVI also negotiated a $260 million credit facility with Goldman Sachs, to provide working capital.

It is widely believed that once the repairs are completed, the TIFIA office will offer most or all of its ownership stake for sale—and my guess is that there will be many bidders. SH 130’s traffic has recently increased by 16%, attracting about 10% of the traffic on I-35. And Berger is projecting annual traffic increases of about 6% a year, based on continuing increases in congestion on I-35.
So who are the winners and losers from this bankruptcy? Cintra and Zachry were the equity investors, and they lost their equity in this project—a risk they were willing to take. TxDOT got the final sections of its long-planned alternative to I-35 at no cost to its budget. Motorists got a high-speed, uncongested alternative to I-35 that has remained in service during the bankruptcy process. And TIFIA is expected to come out whole once it sells its new equity interest in the toll road.

And for those who worry that the TIFIA program is a risk to federal taxpayers, an update on the overall TIFIA portfolio, from the Transportation Research Board’s 2017 Annual Meeting back in January, found the portfolio to be in good shape. Of the projects generating pledged revenue (mostly tolls), 76% were either well above base-case forecasts or somewhat above base-case. Some 20% were below-case by 20% or less, and only 5% were well below base-case. As for credit ratings, 78% were unchanged from financial close, 19% have been upgraded, and only 3% have been downgraded. The report also noted that “Some of our best-performing projects are currently green-field toll roads,” such as Houston’s Grand Parkway, Dallas’s SH 161 and Chisholm Trail Parkway, and various express toll lane projects.

The bottom line, contrary to Randy Salzman’s fever dreams, is that toll-financed P3 concession projects are doing well. And even in the case of the occasional bankruptcy, taxpayers have not been put at risk.

(This column first ran in the September issue of Surface Transportation Innovations)

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