By Noel T. Braymer

The Reason Foundation is a libertarian “thing tank” with close ties to the Oil Industry and Wall Street. It gets funding from the Koch Family and David Koch is a trustee of the Reason Foundation. It comes as no surprise that the Reason Foundation is opposed to most forms of public transportation, particularly rail service. It is also a major booster of building more roads, in particular Toll Roads that depend heavily on private investment and management. The Reason Foundation and most other opponents of rail passenger service, particularly High Speed Rail passenger service, claim that rail service is a “boondoggle” that wastes the taxpayers a great deal of money. The Reason Foundation and others claim with little supporting evidence that estimates of ridership and revenue for rail are always exaggerated, that they have no impact on traffic congestion and that more roads are what is needed to eliminate traffic congestion. These same criticisms can be made with plenty of history to back them up of most if not all of the Toll Roads the Reason Foundation so fondly loves that have been built or created in the last 20 years or so.

Let’s start with Indiana. Here are some excerpts from the post on Streetsblog USA  from November 18, 2014

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

“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…”
“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…”

“Whatever the cause, the Indiana Toll Road’s traffic projections were indeed very, very wrong. Although the actual projections contained in the signed contract are proprietary and shielded from public view, the state of Indiana released an analysis they conducted prior to the sale showing expected increases amounting to 22 percent every seven years. What actually occurred after ITR took over the lease in 2006 was closer to the inverse: traffic declined more than 11 percent.

But even if traffic levels had met the projections, that would not have been enough to save ITR. As Toll Roads News pointed out, predicted traffic growth plus profit-maximizing toll rates still couldn’t have balanced the books:..”

“Media outlets also noted that the ITR bankruptcy was just the latest and largest in a crop of privately owned tollway failures that now litter the land. In recent years, other privately financed toll roads that have filed for bankruptcy protection have included San Diego’s South Bay Expressway (also owned by Macquarie and the first project to receive federal TIFIA funds), South Carolina’s Southern Connector, and the Alabama and Detroit roads owned by American Roads. Many more are limping along and may well end up bankrupt, like SH-130 outside Austin or the Northwest Parkway between Denver and Boulder.

Bankruptcy or default won’t necessarily eliminate the risk of a public bailout. The 12-year-old Pocahontas Parkway outside Richmond has now failed twice, largely because projected sprawl in its vicinity just never materialized. (Instead, Richmond’s core is booming, as in other metro areas.) Since TIFIA loans account for one-fourth of Pocahontas’ debt, taxpayers will eventually take a hit if the road continues to miss its payments…”

So what is gong on here? The backer  of these projects go deeply into debt, run companies into bankruptcy and they make lots of money. How is this done? The most successful company in private financing of infrastructure is the Australian financial services firm the Macquarie Group. Streetsblog USA ran a separate post about the Macquarie Group as part of a series on November 19, 2014

How Macquarie Makes Money By Losing Money on Toll Roads

“In 2011, the South Bay Expressway emerged from bankruptcy and ownership of the road reverted to its private lenders and the federal government. The same year, SANDAG (San Diego’s regional planning agency) purchased the road from the lenders for $344 million, almost half off the original price — using, of course, a fresh federal TIFIA loan to partially pay off the one that went sour.

The public took a hit from all this restructuring, according to a report by the Congressional Budget Office –The new financing and ownership structure required by the bankruptcy court imposed a loss of 42 percent on federal taxpayers, replacing the original TIFIA investment with a package of debt and equity worth only 58 percent of the original investment.

 “Some financial industry analysts have raised these types of concerns about Macquarie in particular, since surprises can easily hide within its opaque corporate structure. The lengthy Macquarie expose by McLean, who also broke the Enron scandal for Fortune, included interviews with several financial analysts who raised troubling points about the company. One of those analysts said that trying to understand the firm’s structure is “like wrestling in the dark with a ghost…””

“Macquarie flips its infrastructure purchases into separate corporations that are sold to investors as “income trusts,” an increasingly popular way to acquire shares of assets — like real estate, oil pipelines, or transportation infrastructure — that pay out steady streams of revenue. Investors like income trusts because their high dividends exceed the low returns on bonds, and companies like them because tax laws exempt these trusts’ profits from corporate income taxes.

For example, Macquarie transferred half of its share of the Indiana Toll Road to a private fund for large investors, Macquarie Infrastructure Partners. The other half, along with interests in six other toll roads, was folded into a new public company called Macquarie Atlas Roads. The other roads include the Dulles Greenway, Chicago Skyway, the ill-fated South Bay Expressway, and the Autoroutes Paris-Rhin-Rhône (APRR) in eastern France. The investors in these assets, Macquarie explains, are mostly institutions like pension funds and large banks, although small investors own 9 percent of Atlas…”

This all sound much like the Housing Bubble of the first decade of the 21st Century. The financiers behind the mortgage crisis didn’t make money selling homes. These were mostly bad home loans or as they were called “liar loans. They made their money reselling  these bad mortgages as a safe investment to institutions looking for safe investments. When the mortgage bubble popped, it was the homeowners and the buyers of the trashy mortgages that lost money.

Much is being made by groups like the Reason Foundation that the California High Speed Rail Authority is having trouble finding private investors. One reason is the project is still years away from being ready for outside investment . The projects has most of the money needed through funding or borrowed money serviced with future Cap and Trade funds to build the first 300 miles of High Speed Rail. The plan is this will be able to make a profit which will attract future private investors. The reason “Private Investors” like Macquarie are not interested in California High Speed Rail is they are not assured of a government bail out. Many of the Public Private Projects like the toll roads mentioned by Streetsblog  had in the hard to understand contracts language which placed the burden of default not on the private investors , but on the public. For many of these Public, Private Partnership, the Private sector enjoys the profits, while the public takes all of the risks. This is doesn’t hold true with the Public, Private Partnership for California High Speed Rail. The language of Prop 1A which created $10 Billion dollars in bond funding for California High Speed Rail forbids the State of California from bailing out this project.