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Heavy hauling shifts to taxpayers in privatizations

Heavy hauling shifts to taxpayers in privatizations

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Former Indiana Gov. Mitch Daniels appeared to strike the best deal since the Dutch bought Manhattan for beads when he landed a $3.8 billion windfall by leasing the Indiana Toll Road to a private consortium in 2006.

One recession and eight years later, privatizations are again the rage in the region. But the tables have turned, with most of the risk in the deals shifting to government and windfall payments becoming a thing of the past.

Nationally, that trend has played out most predominately on road-building projects. Investment teams are demanding states guarantee them fixed annual payments, known as availability payments, before they will build anything.

Those payments, due every year for decades into the future, give investors the confidence they need to provide upfront funds for the projects, said Robert Poole, director of transportation policy at the Reason Foundation. That is because the payments insulate them from the risk of toll collections not meeting expectations.

"The traffic and revenue risk, that's really the hardest to quantify and we have seen quite a few examples of both public and PPP (public-private partnership) projects that have gotten into trouble because projections were a little too rosy," Poole said.

Lane shifts hit expressway deal

The prime example of that shift in this region is the bi-state Illiana Expressway, which has five private investment teams vying to build all or part of the 47-mile toll road.

In early 2013, hopes were high investors might pay the entire cost of the road for the right to keep the tolls. But that idea was dropped. Indiana and Illinois are now offering private investment teams annual availability payments throughout the 35-year lease.

If toll collections don't exceed the amount of those fixed payments, the states will have to dip into their highway funds to pay the bill.

Indiana and Illinois also estimate they may have to fork over up to a combined $270 million in cash to investors in the form of milestone payments in 2018 and 2019 once the road is built.

"We will take that risk, but we are also getting the upside of that risk," said IDOT Secretary Ann Schneider shortly after touting the expressway's benefits to a 200 community leaders last month in Park Forest.

One of the prime benefits is simply getting the road constructed and open much earlier than could have been done using only state funds, Schneider said. That in turn will get heavy trucks off local roads that much quicker, saving states on maintenance costs for roads that now take a beating.

"It's a double bang for the buck," Schneider said.

Gary deal ready for takeoff

The shifting of risk, and expense, to government entities is not only occurring on road projects.

When a joint city/airport committee opened bidding on the privatization of Gary/Chicago International Airport early in 2013, they were adamant they would not talk to anyone without $100 million to offer.

But when the deal was inked with Aviation Facilities Co. Inc., of Dulles, Va., in January there was no upfront payment and no project. Instead, the city and Airport Authority had to settle for a contract clause that allows them to end the experiment if $25 million in new investment doesn't flow in five years. They also expect to see a plan by next year outlining how $75 million more can eventually be found.

City and airport officials delivered a vigorous defense of the deal in April at a series of forums in each Gary City Council district, saying they will work to see that local residents are employed on airport projects.

"Our job and our challenge is not to assume and not count on the good faith of local employers, but to provide incentives and sanctions for the future to employ local residents," Freeman-Wilson said at the last of those forums April 23 at the Marquette Park Pavilion.

Interviewed two weeks ago, Freeman-Wilson also emphasized AFCO has deep experience operating and developing similar small and niche airports across the nation.

"From a taxpayer standpoint, we have the potential to develop an asset that has been underdeveloped for 40 years," she said.

Bridge deal carries hidden risks

The city of East Chicago is involved in the one privatization project that appears to put all the risk on private investors. That is the new Cline Avenue Bridge over the Indiana Harbor and Ship Canal.

After Indiana refused to build a new one, the right of way for the demolished bridge was turned over to United Bridge Partners, a private consortium. It hopes to borrow up to $250 million from investors to build a new bridge and pay them back with tolls collected from motorists.

However, an examination of the Aug. 30, 2012, privatization agreement for the bridge shows it also entails risk for East Chicago. It essentially ties up the Cline Avenue right of way for at least four years and maybe longer – even if a bridge is not built.

It also forbids the city or state from ever building any bridges anywhere else over the canal if United Bridge Partners is successful in getting its up.

East Chicago Mayor Anthony Copeland last week said he thinks construction of the bridge could start later this summer, with the consortium's bridge-building partner now scouting out sites for staging construction equipment. He also maintained there is little risk for the city in that it would get possession of the right of way if the bridge is not built.

"The only thing is if they don't build it then we are back to square one," he said.

Travel carefully, keep eyes on road

Current trends in public-private partnerships undercut boosters' claims the deals reduce risk for governments and taxpayers, according to Donald Cohen, executive director of In the Public Interest, a group that educates officials and the public on privatizations.

Cohen recently examined the public-private partnership contracts for the Gary airport and spoke about the dangers of privatization in March at a community forum at Gary's Trinity United Church of Christ.

The lack of any job guarantees for local residents in the airport contracts is a glaring omission, Cohen said. He said city official's contention they can negotiate jobs for local residents deal by deal just isn't realistic.

"Gary and every other city, but clearly in Gary's situation, they ought to be sure their people really have access to those real good jobs," Cohen said.

Poole said public-private partnerships still hold great promise for rebuilding the United States' crumbling infrastructure. He said the current shift in bargaining power means some safeguards are needed, such as a cap on how much future revenue states can dedicate to availability payments.

Both Cohen and Poole say residents asking the right questions during the deal-making process are essential to striking agreements that are truly in the public interest.

"People should always take what elected officials of any kind say with a grain of salt," Poole said. "They should be asking who's really responsible for what in the future, and who is taking on the risk, and how much are they taking on?"


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