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Hullabaloo


Wednesday, December 24, 2014

 
Rewarding failure by design?

by Tom Sullivan

For the investor class, it is a tragedy of the commons when they don't get a cut from it. That's why, for example, they are so hot to see a middle man in every middle school.
Since the GOP took over in North Carolina in 2011, we've been warning about efforts by industry and ALEC to privatize public schools and public infrastructure:

Public private partnerships are a hot, new investment vehicle. PPPs are a way for getting public infrastructure — that you, your parents, and their parents’ parents paid for and maybe even built with their own hands — out of public hands and under the control of private investors who are more than happy to sell your own property back to you at a tidy profit. A turnpike here, an airport there, or your city’s water system.
Psst. Hey, bud. C’mere. I got this bridge in Manhattan ...
In fact, the Macquarie Group is "buying" a bridge in Manhattan. As the nature of public-private partnership deals (P3s) for new highway expansions became clear, both the left and the right have found a common adversary: kleptocrats stripping America for parts.
David Dayen wrote yesterday at Salon about Sen. Elizabeth Warren's opposition to investment banker, Antonio Weiss, President Obama's nominee for Treasury Department undersecretary for domestic finance. One of Weiss' biggest clients is Brazilian private equity fund 3G. Dayen describes deals that would make Paul Singer blush. (Okay, maybe not.) They seem almost designed to reward failure:
The deals also exhibit the modern hallmark of corporate America: financial engineering. Decisions are made to satisfy shareholder clamoring for short-term profits rather than any long-term vision about building a quality business. The manager class extracts value for their own ends, and the rotted husk of the company either sinks or swims. It doesn’t matter to those who have already completed the looting.
So now, back to those P3 deals. North Carolina's senator-elect Thom Tillis' 50-year I-77 "Tholl Road" deal with Spain-based Cintra Infraestructures continues to draw scrutiny this week. Time Warner Cable News in Charlotte interviewed Nicholas Rubio, the U.S. president of Cintra (sorry, no video embed, watch it at the link):
The company's project on Highway 130 in Texas came close to bankruptcy this summer before it restructured $1 billion in debt. Another Cintra toll road in Indiana did file for bankruptcy to restructure nearly $6 billion in debt.
Time Warner Cable News asked Rubio if North Carolinians should be worried because of those financial issues.
"Rather than worry, they should be comforted," Rubio said. "At the end of the day, part of the advantage of this business is you are passing the traffic risk to private developers."
Uh, not exactly. As I wrote in September:
Here's how those "innovative ideas" have worked elsewhere:
Just yesterday (9/22/14), debt-ridden Spanish-Australian Cintra-Macquarie infrastructure group filed for bankruptcy on its 75-year contract to operate the Indiana Toll Road. After just eight years.
Moody's, the rating agency, declared Cintra's 50-year Texas toll road concession in default in July.After just two years.
After opening in 2007, Macquarie's 35-year concession for the South Bay Expressway (San Diego) went bankrupt in 2010. After just three years.
Nevertheless, North Carolina is signing contracts with Madrid-based Cintra for a 50-year toll lane project (HOT lanes - High Occupancy Toll) on I-77 north of Charlotte in Speaker Thom Tillis' district, with Tillis' enthusiastic support and backed with federal and state tax dollars. Yours.
In "A Blueprint for Bankruptcy," here's how Randy Salzaman of Thinking Highways described these deals for Truthout in October:
Beginning with the contracting stage, the evidence suggests toll operating public private partnerships are transportation shell companies for international financiers and contractors who blueprint future bankruptcies. Because Uncle Sam generally guarantees the bonds – by far the largest chunk of "private" money – if and when the private toll road or tunnel partner goes bankrupt, taxpayers are forced to pay off the bonds while absorbing all loans the state and federal governments gave the private shell company and any accumulated depreciation. Yet the shell company's parent firms get to keep years of actual toll income, on top of millions in design-build cost overruns.

US and state taxpayers are left paying off billions in debt to bondholders who have received amazing returns on their money, as much as 13 per cent, as virtually all - if not all - of these private P3 toll operators go bankrupt within 15 years of what is usually a five-plus decade contract.

A "staggering" number go bankrupt, Salzman continues.
Of course, no executive comes forward and says, "We're planning to go bankrupt," but an analysis of the data is shocking. There do not appear to be any American private toll firms still in operation under the same management 15 years after construction closed. The original toll firms seem consistently to have gone bankrupt or "zeroed their assets" and walked away, leaving taxpayers a highway now needing repair and having to pay off the bonds and absorb the loans and the depreciation.
But wait! There's more. These projects are frequently sold both to governments and to investors on the basis of inflated traffic/revenue projections. Creditors of failed projects such as American Roads LLC's Detroit Windsor Tunnel are suing. This account of the legal proceedings, for example, from 2013:
In the little publicized litigation in the State Supreme Court of New York Syncora alleges that the financing and spinoff by Macquarie involved fraud and misrepresentation, in particular that Macquarie had a secret and improper relationship with Australian traffic and revenue forecaster Maunsell Australia Pty Ltd (since absorbed into Aecom) to produce unrealistically high traffic and revenue forecasts.
American Roads was originally a creation of Australian financial services giant, Macquarie Group/Macquarie Capital. It paid undisclosed "success fees" for those rosy projections. The judge was not amused and ruled against Macquarie:
Schweitzer continued: "Syncora argues, and the court agrees, that the undisclosed conflict of interest under which Maunsell operated, in addition to secret success fees that Maunsell was paid... do amount to a material misrepresentation or omission of fact."
This, the judge said, was "plainly actionable as fraud."
Aecom and a competitor, CDMSmith, keep turning up as sources of the inflated traffic and revenue projections in failed project after failed project. Aecom performed traffic studies in California in 2003 (South Bay Expressway – BANKRUPT); in Virginia in 2006 (US Route 460, planned); Texas in 2009 (Dallas North Tarrant Express); Texas in 2010 (SH-130 – BANKRUPT/Restructured); and Michigan in 2010 (Detroit's Windsor Tunnel – BANKRUPT); and in Indiana in 2006 (Indiana Toll Road – BANKRUPT). CDMSmith performed traffic studies in Virginia (Dulles Toll Road), in South Carolina (Greenville Southern Connector – BANKRUPT).

There's something oddly "designed to fail" about these P3 infrastructure deals. And awfully, awfully familiar. Remember the Brazilian private equity fund, 3G, from above? Remember securitized mortgages and credit default obligations? The phrase, "this is not a boat accident," comes to mind.
(Barry Summers of Making Progress: News for a Change contributed to this post.)