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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. In this piece, we examine the shaky assumptions that toll road investments are based on, and how that is putting the public at risk.

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A consultant predicted traffic on the Indiana Toll Road would rise 22 percent in seven years. Instead, traffic fell 11 percent in eight years. Photo: Jimmy Emerson/Flickr

For privately financed toll road deals, traffic projections are critical. These forecasts tell investors how much revenue a road will generate, and thus whether they should buy a stake in it, and what price to pay. While traffic projections have underpinned the rapid growth in privately financed highways, the forecasts have a dismal track record, consistently overstating the number of drivers who will pay to use a road.

Private toll roads have been sold to the public as a surefire something-for-nothing bargain — new infrastructure with no taxes — but it turns out that the risk for taxpayers is actually substantial. The firms performing traffic projections have strong incentives to inflate the numbers. And the new breed of private finance deals are structured so that when the forecasts turn out wrong, the public incurs huge losses.

Given the huge sums of money involved, even small errors in traffic projections can result in huge problems down the line — and, as Streetsblog has reported, traffic projections everywhere have tended to be wildly off-target. A whole financing scheme, meant to last for generations, can easily be sunk in just a few years by exaggerated traffic projections. The Indiana Toll Road, purchased in 2006 for $3.8 billion, is a great example. The firm that owned it, ITR Concession Co. LLC, declared bankruptcy in September.

Wilbur Smith Associates had predicted that traffic volumes on the Indiana Toll Road would increase at a rate of 22 percent over the first seven years. Instead, traffic volumes shrank 11 percent in the first eight. The result was financial disaster for the concession company, owned jointly by Australian firm Macquarie and Spanish firm Ferrovial. By the time they filed for Chapter 11, debt on the road had ballooned to $5.8 billion.

The company blamed the recession for putting a damper on truck traffic. The same story was offered on another bankrupt Macquarie-owned project, San Diego’s South Bay Expressway. But is that explanation sufficient?

UK-based consultant Robert Bain literally wrote the book on traffic projections, warning in 2009 against forecasters who blamed faulty predictions on the economy [PDF]. Commenting on the flurry of global toll highway bankruptcies that was just starting then, Bain said they had “less to do with the present economic climate, and more to do with a market readiness to be seduced by hopelessly optimistic traffic and revenue projections.”

Bain went on to list 21 ways in which forecasters systematically overestimate future traffic. Each one may tilt the forecast by a tiny amount, but cumulatively they result in huge errors. Some of the errors indicate that forecasters have not yet acknowledged the broader decline in driving and sprawl underway, while others “underestimate the reluctance of some to paying tolls.” Bain argued for a paradigm shift in the use of traffic projections, recognizing that many of them “resemble statements of advocacy rather than unbiased predictions.”

Phineas Baxandall, a senior researcher with the U.S. Public Interest Research Group who’s written extensively for Streetsblog on trends in driving, says the engineering firms that provide the figures know how things work. “Companies seeking investment for privatized toll roads shop for the forecasting they want,” he said. “[There's] no incentive to tell bad news. And if the deal appears promising, then the forecasting company gets other opportunities to sell further analysis, legal advice, raising debt, selling equity, etc.”

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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 the Indiana Toll Road and privately financed highways. Read part one.

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 whom 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 P3s, saying that 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. 

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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Not Just a Phase: Young Americans Won’t Start Motoring Like Their Parents

Image: U.S. Public Interest Research Group

Young adults in 2009 were driving less and walking, biking, and riding transit more than young adults in 2001, according to the National Household Travel Survey. Chart: U.S. Public Interest Research Group

A raft of recent research indicates that young adults just aren’t as into driving as their parents were. Young people today are walking, biking, and riding transit more while driving less than previous generations did at the same age. But the vast majority of state DOTs have been loathe to respond by changing their highway-centric ways. 

A new report by the U.S. Public Interest Research Group points out the folly of their inaction: If transportation officials are waiting for Americans born after 1983 to start motoring like their parents did, they are likely to be sorely disappointed.

Though some factors underlying the shift in driving habits are likely temporary — caused by the recession, for instance — just as many appear to be permanent, the authors found. That means American transportation agencies should get busy preparing for a far different future than their traffic models predict.

“The Millennial generation is not only less car-focused than older Americans by virtue of being young, but they also drive less than previous generations of young people,” write authors Tony Dutzik, Jeff Inglis, and Phineas Baxandall.

There’s a good deal of evidence that the recession cannot fully explain the trend away from driving among young people. Notably, driving declined even among millennials who stayed employed, and “between the recession years of 2001 and 2009, per-capita driving declined by 16 percent among 16 to 34 year-olds with jobs,” the authors write.

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To Destabilize Detroit’s Fragile Renaissance, Go Ahead and Widen I-94

Several historic buildings, including Detroit's oldest recording studio, would be mowed down to widen I-94 for no reason. Photo: Mode Shift via U.S. PIRG and Frontier Group

Several historic buildings, including Detroit’s oldest recording studio, would be mowed down to widen I-94 for no reason. Photo: Mode Shift via U.S. PIRG and Frontier Group

A recent report by U.S. PIRG and the Frontier Group, “Highway Boondoggles: Wasted Money and America’s Transportation Future,” examines 11 of the most wasteful, least justifiable road projects underway in America right now. Here’s the latest installment in our series profiling the various bad decisions that funnel so much money to infrastructure that does no good. 

Michigan highway planners want to spend $2.7 billion to widen Interstate 94 through the heart of Detroit, saying that the existing road needs not just resurfacing and better bridges, but also more space for traffic. State officials continue to push forward with the project despite Detroit’s rapid population loss and other woes, and despite the fact that traffic volume on the stretch being considered for expansion is no higher than it was in 2005. Expanding the highway might even make Detroit’s economic recovery more difficult by further separating two neighborhoods that have been leading the city’s nascent revitalization.

The proposal would widen a seven-mile segment of I-94 called the Edsel Ford Expressway, which runs in a trench through the center of the city between the Midtown and New Center neighborhoods. Those areas are important for the city’s revitalization because of their central location. Efforts there to boost arts and culture, retail and commercial space, and downtown living have been gaining steam in recent years.

In fact, better connecting the neighborhoods is one reason for a $140 million streetcar project that broke ground this July. Officials have already begun calling for expansion of that project, but funds are currently lacking.

The proposed expansion of the highway would have the opposite effect, widening the physical trench between the neighborhoods and removing 11 bridges across the freeway that would not be replaced. As a result, walking and biking in the area would become much less convenient, forcing people to travel as much as six blocks out of their way to reach destinations.

Transportation officials say many buildings would have to be removed to make room for the wider road. The project requires displacing or demolishing 12 commercial buildings, 14 single-family homes, two duplexes and two apartment buildings with 14 units between them, as well as three buildings either on or eligible for inclusion in the National Register of Historic Places, including the city’s oldest recording studio.

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Seattle’s Alaskan Way Viaduct: King of the Highway Boondoggles

The Alaskan Way Viaduct, damaged decades ago, will be rebuilt as a double-decker highway, even though a transit-heavy alternative would have been at least as effective at reducing congestion. Photo: Rootology/##http://en.wikipedia.org/wiki/Alaskan_Way_Viaduct#mediaviewer/File:The_Alaskan_Way_Viaduct.jpg##Wikimedia##

The Alaskan Way Viaduct, damaged decades ago, will be rebuilt as an underground highway, even though a more transit-focused option would have been at least as effective at reducing congestion. Photo: Rootology/Wikimedia

A recent report by U.S. PIRG and the Frontier Group, “Highway Boondoggles: Wasted Money and America’s Transportation Future,” examines 11 of the most wasteful, least justifiable road projects underway in America right now. Here’s the latest installment in our series profiling the various bad decisions that funnel so much money to infrastructure that does no good. 

Seattle’s aging Alaskan Way Viaduct is a crumbling and seismically vulnerable elevated highway along the city’s downtown waterfront. After an earthquake damaged the structure in 2001, state engineers decided that the highway needed to come down, but the question of how (and whether) to replace it sparked nearly a decade of heated debate. The Washington State Department of Transportation (WSDOT) rejected calls to replace the viaduct with a combination of surface street and transit improvements, choosing instead an option that would result in more capacity: boring a mammoth tunnel underneath the city’s urban core. At 57 feet in diameter, it would be the widest bored tunnel ever attempted, with the full project carrying an estimated cost of at least $3.1 billion and perhaps as much as $4.1 billion.

Digging a double-decker tunnel was always the riskiest option for replacing the viaduct. The tunnel carried a high risk of going over even its exorbitant budget. In 2010, WSDOT acknowledged a 40 percent chance of a cost overrun, with a 5 percent risk that overruns could top $415 million.

With Bertha trapped underground, cost overruns could go into Big Dig territory. Image: U.S. PIRG and Frontier Group

With Bertha trapped underground, cost overruns could go into Big Dig territory. Graph: U.S. PIRG and Frontier Group

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Southern California Road Agency Courts Bankruptcy With Highway Addition

California 241 needs an extension so more people can not use it. Photo: Transportation Corridor Agencies via U.S. PIRG and Frontier Group

California 241 needs an extension so more people can not use it. Photo: Transportation Corridor Agencies via U.S. PIRG and Frontier Group

Today, U.S. PIRG and the Frontier Group released a new report, “Highway Boondoggles: Wasted Money and America’s Transportation Future.” In it, they examine 11 of the most wasteful, least justifiable road projects underway in America right now.

This week we’ve previewed the report with posts about the proposed Effingham Parkway in Savannah, Georgia and the harebrained scheme to widen I-240 through Asheville, North CarolinaHere we continue with an egregious example from the Golden State. 

Southern California’s toll road agency has proposed extending an existing toll highway that might eventually span inland Orange County and connect to Interstate 5. The number of cars on previous sections of the highway, however, have failed to meet projections. Also, the agency is already struggling to avoid default on its debts.

California 241 is one of several toll roads in Orange County built and operated by the legislature-created Transportation Corridor Agencies (TCA). California officials enabled the creation of toll roads in the area in the late 1980s amid both a shortage of state transportation funding and the perception of insatiable demand for more highways.

Traffic on California 241, however, hasn’t met official projections for a decade. In recent years — and especially since the collapse of the housing bubble in 2007 — driving on existing sections of California 241 has declined.

The TCA measures road use by counting the number of transactions conducted by toll payers on the combined Foothill/Eastern Toll Roads, which include not only Route 241 but also Routes 133 and 261. The TCA’s count shows fewer transactions in fiscal year 2014 than in fiscal 2004. As indicated by the dotted trend line below, there were about 32 million fewer transactions in fiscal year 2014 than would have been expected if the trend from 2000 to 2006 had continued.

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Will Missouri Voters Go Along With the Highway Lobby’s Money Grab?

Next week, Missouri voters will decide on Amendment 7 — a three-quarter-cent sales tax hike to pay for transportation projects that would be the largest tax increase in the state’s history. Construction industry groups have poured millions into convincing Missourians to pay $5.4 billion over the next 10 years. Will they bite?

A coalition of pro-transit forces is urging them not to. Thomas Shrout, a long-time St. Louis transit advocate, is heading the opposition, a group called Missourians for Better Transportation Solutions. Shrout says the tax fails on a number of levels.

For one, 85 percent of the money would be spent on roads. Only 7 percent would go to transit and a small portion would go toward local governments.

“It’s just out of proportion,” said Shrout.

Highway capacity in slow-growing Missouri is already abundant. Compared to other American cities, Kansas City and St. Louis rank near the top in highway miles per capita. Driving has been declining nationwide and Missouri’s population grew less than 1 percent over the last 13 years.

So why the push to raise taxes to build new roads? Follow the money. “Just about every major [engineering and construction] firm in the country has given to the Yes campaign,” Shrout told Streetsblog.

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Building Cloverleafs Won’t Inspire Americans to Pay More for Transportation

The federal transportation fund is running out of money, threatening the country with potholes, stopped construction, and economic downturn. Congress, which has kept the program solvent with short-term patches for years, now finds itself unable to do more than buy a few months’ time.

Mainstream opinion pins the blame for this state of affairs on partisanship and anti-tax extremism. But the crisis has a deeper cause. In transportation, as in so many areas of American politics, the terms of debate are controlled by an elite that has lost touch with the rest of the country.

Voters on both the Tea Party right and the urban left have lost the desire to pay higher taxes for new roads. Yet powerful highway bureaucracies and their political allies insist that added revenues must go toward ever more cloverleafs and interstates. They keep searching for money to build what voters don’t want to pay for, a quest doomed to end in futility.

The roots of the congressional deadlock are best seen far from Washington.

When Texas Governor Rick Perry took office in 2000, he found himself caught between campaign contributors’ yearning to build expressways and conservative hostility to tax increases. He sought a way out with an aggressive program of toll-road building.

But when the highways opened, drivers rebelled against the stiff fees. Revenue fell far below forecasts, and grassroots activists launched an anti-toll campaign. At last month’s state Republican convention, the insurgents triumphed. The state party platform now calls for no new tolls (as well as no new taxes).

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Other Cities Look to Tear Down Their Old Highways, But Not Denver

Denver's plan for I-70 is to bury it, widen it and cap it. Image: I70east.com

Denver’s plan for I-70 is to widen it, bury it, and cap a small part of it. Photo: I70east.com

Denver has one of those golden opportunities that many American cities are seizing: An elevated highway that damaged neighborhoods is nearing the end of its life, giving the city an opening to repair the harm.

Unfortunately, as Tanya has reported, Denver seems poised to double down on highway building instead. The city is looking to bury and widen Interstate 70 through the Elyria-Swansea neighborhood, then cap a small section. The $1.8 billion proposal would add four lanes to I-70 — two in each direction — for a total of 10 lanes.

This visualization shows how the highway would look widened and with a cap. Image: I70east.com

A look at the proposal to sink and widen I-70 and put an 800-foot-long park on it. Image: I70east.com

While Denver has been booming in general, the neighborhoods bisected by I-70, which was laid down through the city in the 1950s, haven’t shared in the good fortune. Thanks to the many trucks roaring through and the eyesore of the elevated highway, Elyria-Swansea and nearby communities suffer from excessive traffic, environmental problems, and disinvestment.

Proponents of the highway plan call it a “corridor of opportunity” and are promising a network of parks, open space, and transit. A big sweetener is the proposed 800-foot-long park they say would be built on the highway lid.

But according to community activist and  former City Council member Susan Barnes-Gelt, the design does little to mend connections between the two neighborhoods. She says there’s no excuse for widening highways through urban neighborhoods in an age when many cities are choosing to tear them down.

In a Denver Post editorial earlier this year, Barnes-Gelt wrote that under Mayor Michael Hancock, what could have been a big step forward for the city is “morphing back into a highway project.” It’s especially disappointing considering Denver’s recent history of smart planning, she said.

“This is what happens when people that can make a difference don’t pay attention,” she told Streetsblog.

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