Who Pays When a Private Toll Road Goes Bankrupt?
We have written in support of financing highway improvements through public-private partnerships (PPPs) before, most recently in regard to the bankruptcy of the privately leased Indiana Toll Road. In that case, a private international consortium paid $3.8 billion in upfront lease payments to operate the Indiana Toll Road for 75 years. Although the company failed, it would be hard to argue that Indiana residents did not come out ahead.
However, many opponents of PPPs on toll roads point out that if the projects are funded through federal Transportation Infrastructure Finance and Innovation Act (TIFIA) loans, a bankruptcy means that federal taxpayers are on the hook. While this concern is legitimate, a broader view of TIFIA shows that it promotes limited government spending and is no argument against leasing toll roads.
TIFIA, originally passed in 1998, was designed to provide gap financing for large ($50 million-plus in most cases) transportation infrastructure projects that have a dedicated funding source but would have difficulty getting full financing without federal backing. The program allows projects to receive a line of credit of up to 33 percent or a loan of up to 50 percent of the project budget.
TIFIA provides partial financing only for infrastructure improvement projects. Typically, PPPs for highway improvements consist of multibillion-dollar construction plans that are financed through a mix of private equity, state highway funds, toll revenue bonds, and TIFIA loans. This means that the act of leasing a toll road (as was the case in Indiana) could not be financed through TIFIA.
However, the federal government takes on some risk; typically, 10 percent of all loaned money must be budgeted to cover possible default. However, this is not a situation of moving from no federal financing to massive federal financing, but rather from a situation in which the federal government is expected to provide 80-90 percent of all funding to a situation where it provides 50 percent or less of financing. That fact, coupled with the necessity that all non-TIFIA senior debt for a project be investment grade, means TIFIA encourages more economically sound highway projects with fewer taxpayer dollars.
Assume Missouri decides to rebuild I-70 (a $3 billion project) as a toll road, using TIFIA loans to finance a PPP. If I-70 generates sufficient toll revenue, the federal taxpayer dollars would not be used. If revenue falls short, private investors lose their investment and the federal government may lose some money in debt restructuring. But the alternative (I-70 were rebuild as freeway) requires the federal government to provide 80-90 percent of the funding, with the rest coming from state taxpayers. If such a project were funded at all, it would likely require tax increases in Missouri.
This thought experiment demonstrates that PPPs, financed in part through TIFIA, may provide more transportation infrastructure at much lower taxpayer cost.