Tuesday, July 24, 2007

Double edged sword of private infrastructure financing

By Faith Chatham - July 24, 2007

Crossposted on EPLURIBUS MEDIA

Many lawmakers and local/regional governmental officals erupted in glee at the prospect of transferring financing of public infrastructure projects to private equity partners. The traditional group of public works hogs at the public money bins jumped cartwheels anticipating funding to flow more rapidly out of other pockets into theirs. Governor Rick Perry spent Texan's hard earned tax money to fly to Europe to court potential European and Australian partners. TxDOT repeated the same old lies: "There is no way to finance roads without tolls."  

To the public CDAs or Private Public Partnerships for toll roads is presented as being financed by private partners. When we look up close and get real personal and examine specific projects however, the facade doesn't hold up to scrunity. For example, Cintra, if awarded SH 121, would have invested about the same amount of money which Texas taxpayers have already invested in the project (state, federal dollars and local governments investment in right of way). The Federal Government would also loan the private partner additional fund and faciliate borrowing of billions of dollars of tax exempt money from other private lenders. A key phrase to note is tax exempt. That is another way of saying that the tax liabilty will be passed from these lenders to the rest of the taxpayers. Taxes never go away when they are "exempted". They are merely passed along to the next guy up (or more probably) down the ladder!

I've made a number of inquiries about these US government faciliated loans which the changes to U.S. Law allows to enable private equity partners to utilize on public works (highway toll roads) projects. I want to fully understand who holds the bag if the project fails and the "borrower" defaults on the loan. What happens if there isn't the anticipated traffic on a toll road? If the U.S. Government faciliates these tax exempt bonds for the private partner (such as Macquarie or Cintra), does the US Government (i.e. U.S. Taxpayer) stand behind the loan as is the case when a bank forecloses on an FHA home loan or a VA home loan or a Federal Guaranteed Student Loan?

I've asked this question to numerous engineers and officials at TxDOT and RTC meetings and to date have yet to have anyone show me in writing where the US Government isn't standing behind these loans. If a private partner is going to make the profit I think the private equity firm should take the risk. However, I am suspicious.  There is a rush across the pond to court American lawmakers and acquire toll road deals. Is one of the edges of the sword that somewhere there are clauses buried in those mountains of fineprint and legalize which transfer the risk to the taxpayers?

Examining Australian sources, another edge to the sword emerges.  Most of these equity firms are borrowing from retirement funds. The retirement accounts of working men and women and retirees from all over this nation are invested in bonds and stocks.  John L. Goldberg, in "The Fatal Flaw in the Financing of Private Road Infrastructure in Australia" wrote a paper last year which analyzes the cash flow of four private public road infrastructure projects in Australia and probability of solvency/insolvency.

Goldman wrote:

The repayment of debt is clearly on the minds of the toll road owners and operators as revealed by the recent release of a draft prospectus for the so-called Sydney Roads Group (Macquarie Infrastructure Group, 2006). This group consists of three existing toll roads, the M4, M5 and Eastern Distributor. The financial arrangements are similar to those of the M2. In February 2009, the debt of the M4, currently at about $57.6 m must be paid. The method of doing this is said to involve the use of reserves and a securitization arrangement (Alles, 1999) involving the M4 and M5. This means that future cash flow receivables and/or the asset value of the M5 is to be used as collateral for a new financial structure for refinancing. It should be noted that the M5 has a debt of $515m which has to be repaid or refinanced by June 2010. But in the final prospectus, serious doubts have now been raised about the ability to repay the debt or refinance it on

favourable terms (MIG, 2006).

He concludes that the private investors are using various public private road projects as collateral for other projects, creating a " financial house of cards".  Macquaire and Cintra are partners in many projects around the world and have bid on numerous projects in Texas and the DFW area. They are presented to citizens as private partners who will take the responsiblity for risk from the government and taxpayer in exchange for tolls. Citizens' protest that the cost for tolls is higher than those projected if citizens finance road construction with gas tax and public bond financing the old fashioned traditional way goes are unheeded by lawmakers and transportation policy gurus and state and US DOT bureaucrats.

Goldman analyzed their business methodology in Australia and reported:

The data in the financial models attempt to portray the best possible outcome for the consortiums promoting the projects using for example, unrealistic traffic projections, and creative accounting. Despite this attempt the probability of financial failure has been shown to be 100% in every case, in the sense that cash flow will be insufficient to amortize debt. Not only do the models specify unattainable rates of return to investors but the true financial position of the projects is being masked by financial engineering leading to increased debt out of which equity dividends are being paid. Such an approach is unlikely to be sustainable, but may nevertheless lead institutional investors and others to erroneously believe in the long term outcome portrayed by the promoters.

Why does this matter?  It matters because citizens deserve to be able to trust the reliability of financial institutions. It matters because retirement accounts are being invested in bonds to finance private equity firms share of investment in public private partnerships for toll roads (and toll bridges and other infrastructure). If the cards begin to fall, and the toll road private investor public partnership CDA financial house crumbles, then as each card will take down an adjacent investor and that one will take down the next. If the model used to predict traffic, fees, maintenance costs for a 50 year toll road project are faulty and the private equity partner does not get the anticipated return on investment, everyone who loaned money on the project will lose. It is very likely that much of those loans will be held by retirement funds! Ouch! When you lose your retirement account, it is difficult for many people to recoup before they are out of the job market. I know. My 401K account dried up a few years ago when utility. telops stocks switched from reliable investments to swindles!

With retirement account investment in private public infrastructure equity partnership (toll roads) we may see scandals which reek of the hot sultry days of Enron investigations and energy sector manipulation which cost trusting investors and employees their life savings and retirement incomes. As the energy grid spread from state to state, we are watching a network of toll corridors spread throughout the North American continent, attracting international partners who are not totally without controversy in their home countries.

Possible remedies

Protection for retirees who invest in PPP/CDAs presents a classic catch-22. Private partnership who claim to remove the risk from taxpayers on infrastructure projects in return for receiving tolls (retrn on investment) should not have their loans guaranteed by the US Government.  That is unfair to taxpayers!

Goldberg pointed out:

Recent statements about the use of securitization as a means of debt amortization are unconvincing. In the event of corporate collapse, and in the absence of government guarantees, the trust/company structure of these projects will be used to claim limited liability for the entire structure. But such a claim may be rejected by a court, leaving investors liable.

That brings me back to my original quest. Are there guarantees written into these volumes of contracts, bills, agreements, which transfers the risk from the private partner to the U.S. taxpayer?  If you know where the guarantee is that the US Government will not back the tax exempt bonds they faciliate for private partners in public infrastructure projects, please share that with me. I need to see it in writing and be able to verify the source.  There are too many inconsistencies in what transportation engineers and TxDOT and regional transporation policy boys have told me about toll roads, CDAs and the benefit to the public for me to really rely on what they tell me without being able to evaluate it and verify it. This is an instance when if it isn't on paper, published in government documents within the public domain then it is probably more urban legend than reality.

Additional articles on these topics are posted on Grassroots News U Can Use

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