South Bay Expressway: Bankrupted Toll Road Tests Transportation Department Program
When federal officials finalized a loan to a consortium building a toll road through open country in San Diego County near the Mexican border in 2003, they had high hopes for the project: the South Bay Expressway. Taking advantage of the Transportation Infrastructure Finance and Innovation Act, the investors behind the four-lane highway sought to prove that the private sector had a role to play in America's transportation infrastructure.
Unlike other so-called "brownfield" acquisitions of existing toll roads like the Chicago Skyway, the South Bay Expressway was supposed to serve as evidence that private industry could build "greenfield" highways with a little help from the feds.
The $140 million in federal money loaned to the highway, Bush Transportation Secretary Norman Mineta said at the time, was "a TIFIA success story, demonstrating how innovative federal financing tools can attract private investment to critical transportation projects."
Officially owned by the California Department of Transportation, the road would be leased to a group of private backers until 2042. The toll road's backers -- including an assortment of some of the world's leading banks and the Macquarie Infrastructure Group, a major player in the burgeoning world of such so-called "public-private partnerships," (PPPs) -- expected that the then-seemingly unstoppable suburban growth near San Diego would repay their investment handsomely.
Eight years later, after $635 million in construction costs, disappointing traffic revenue, the housing crash and bankruptcy, the South Bay Expressway is something less than a monument to "innovative" financing methods and private industry. Instead, the the toll road, which emerged from Chapter 11 bankruptcy in April, was officially sold to the San Diego Association of Governments on Dec. 21. Macquarie, the Australian infrastructure investment company, simply wrote the road off as a loss.
In the meantime, the bankruptcy tested one of key provisions of the TIFIA program: the so-called "springing lien" that jumps the federal government to the head of the line of creditors looking to recoup their investments. The bank lenders on the project will all lose money, but the federal government, which saw its initial $140 million loan to the company running the toll road chopped down to $94.2 million during the bankruptcy period, says that it will still break even on the South Bay Expressway because of higher interest rates paid on its loan.
"I think in the end we were able to construct a deal that was good for both the region and TIFIA," said Marney Cox, chief economist for the new owners, SANDAG. At the same time, Cox said, negotiations over how to construct the deal in such a way that the federal government wouldn't lose money were difficult.
"To have the first one go bad on you wouldn't have been a good sign for the program over all," Cox said. "So I think they were trying to figure out a way to save that program from going under."
Under a new arrangement with SANDAG, the Federal Highway Administration says, it may even have a shot at making more than the original principal and interest it predicted it would when it made the loan in 2003 -- as long as traffic exceeds conservative estimates.
The road's tortured history, and especially its journey through bankruptcy court, are enough to convince critics of PPPs that this is one bet the feds never should have made.
"Private toll roads are backed by expectations about increased driving volume," said Phineas Baxandall of the U.S. federation of state Public Interest Research Groups.
The decision to build any road is based in part on projections of future traffic volumes, which are notoriously tricky to calculate. In the case of toll roads with private investors, however, when the government gets involved, the government's ability to break even is dependent on how accurately those private investors have judged the market.
Baxandall thinks the Federal Highway Administration should have taken a harder look at the South Bay Expressway's traffic projections. He also argues that projects like Los Angeles's "30/10" expansion of its mass transit program, which promises to build 30-years'-worth of subway and transit expansions in just 10 years, are a better bet for taxpayers.
"Local transit projects like LA's expansion or Denver's light rail program are backed by local taxes, which are more reliable and can be tweaked to produce more revenue, so they should protect federal taxpayers' TIFIA dollars better," Baxandall said. Proposed legislation in the Senate could do away with mass transit's edge in the TIFIA selection process.
In San Diego, critics also raised eyebrows at the $341.5 million that SANDAG, the league of municipal governments, agreed to pay for the roads. That was significantly more than the road's assessed value of $287 million during the bankruptcy.
But Cox said the company in charge of the toll road after its bankruptcy was able to convince SANDAG that its business was worth the larger amount, because of arguments that it might be able to extend its lease on the road, chop executives' salaries and reduce its property taxes.
Carolyn Chase of the San Diego chapter of the Sierra Club said it was a case of misplaced priorities.
"They love freeways," Chase said. "Honestly. When you ask to use money for a better transit system, for instance, they'll say 'oh no, we can't do that.' But when it comes to a freeway, they find the money."
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First Posted: 12/27/11 07:59 PM ET Updated: 12/28/11 08:39 AM ET