How Indiana Saved Hundreds of Millions
of Dollars on Interstate 69
– and then Blew It (Part 2)
The words now seem prophetic. They foretold a highway-construction debacle that would eventually cost Indiana taxpayers at least a half-billion dollars, endanger drivers, tarnish the state government’s reputation and even prompt President Donald Trump to take a U turn on his own national infrastructure plan.
“Developer recognizes … that a pattern or practice of continuing, repeated or numerous Noncompliance Events … will undermine the confidence and trust essential to the success of the public-private agreement …”
Those fateful words are on page 186 of a 2014 contract between the Indiana Finance Authority and I-69 Partners LLC, a Spanish-backed consortium the state picked to upgrade 21 miles of Interstate 69 between the cities of Evansville and Crane, and then maintain and operate it for 35 years.
Three years later, after the development group stiffed subcontractors, missed deadlines and ran out of money, the contracted consortium’s principle partner, Isolux Corsán, filed bankruptcy. The insolvency stuck Indiana taxpayers with a project that was just 60 percent complete. Even worse, according to a recent state analysis, taxpayers will have to come up with at least $563 million to finish it and to pay off outstanding bills.
Meanwhile, the number of automobile accidents in the construction zone rose nearly 50 percent while the project dragged out. According the Indianapolis Star’s review of state traffic data, “There were 354 crashes in 2016, the last full year for which numbers are available. That’s 114 more than in 2014, an Indy Star review of state data found. Some resulted in injuries.”
Where did it all go wrong?
The answer to that question can be summed up with the letter P and the number 3.
“P3” is shorthand for “public-private partnership,” a controversial practice in which a public agency contracts a private firm or several firms to finance, design, build, and operate public infrastructure such as a road, a bridge or even an airport or rail line. In theory, the company profits come from government payments, fees or tolls paid by users, or both.
The conventional construction method for highways, design-bid-build, keeps government in control. Financing comes from tax-free government-backed bonds. Publicly-employed engineers draw up the designs. Then those specifications go out to private contractors who competitively bid to build the projects. And finally, as the project is constructed, it is subject to government inspection.
Indiana officials competitively bid the various parts of the I-69’s first four sections and maintained government control. The construction went quickly and smoothly, and those segments opened early and hundreds of millions of dollars below estimated costs.
Then, citing tight budgets that couldn’t stand taking on debt, state officials decided to use a P3 to deliver the fifth section.
The proposal envisioned handing over the design and construction of Section 5 to a private firm that also would finance and maintain the segment for 35 years. The firm would profit from a combination of tolls and “availability payments” from the state for keeping the road open and in good condition.
The plan was sold to Indiana taxpayers, as such agreements almost always are, as a way to inject private-sector investment, innovation and impetus into the project while sidestepping state bond debt that could downgrade its credit rating.
“You start with private companies competing to provide the lowest cost financing,” an INDOT spokesman told the press in 2014. “Then you have an acceleration of construction to completion, which gives taxpayers quicker access to an improved roadway. And, finally, when private companies are going to be maintaining and operating the roadway as part of the agreement, you tend to get a project that is built to last over the long term.”
Such schemes tend to “mine the tax code” for business write-offs, as one Virginia P3 director put it, and the private “investment” often includes a heaping helping of government loans that keep taxpayers on the hook if a P3 project fails.
And they do. According to one report, “virtually all – if not all – private P3 toll operators go bankrupt within 15 years,” long before their operating contracts expire.
Indianapolis state officials didn’t have to wait nearly that long for trouble with the I-69 project. From the start, according to reporting by the Indianapolis Star, the state failed to recognize warning signs that its partner was not up to the task of financing, designing and building a major freeway upgrade:
- Despite asserting that it was an experienced P3 firm, the winning company had little experience in the United States, and none building roads or bridges.
- The group won on the strength of an exceptionally cheap bid that beat the nearest competitor by $73 million – and undershot the state’s own estimate by $22 million.
- Three Section 5 bids by experienced firms with large nationwide construction portfolios all fell within $23 million of each other.
The state also made an error that Jane Campbell, the former mayor of Cleveland, described in a recent Governing column: “Fundamentally, P3s are a financing mechanism, not a source of funding. That is an important distinction – otherwise known as the ‘no-such-thing-as-a-free-lunch’ rule.”
Indiana’s slow-motion disaster continued just days after the P3 deal was announced.
Three weeks after the contract was finalized – and before bonds were issued for the I-69 work — Isolux became embroiled in an embezzlement scandal involving a public rail project in Spain.
When asked whether those alleged crimes gave state authorities pause, Indiana Finance officials told reporters that the state had followed “best practices” in choosing the company.
Bad news dogged the project over the ensuing months and years. Construction started late due to design and permit issues. Then a few months later, a subcontractor filed a claim that it was not being paid timely for work performed.
The payment was made, but then two more default notices were filed. The balance owed subcontractors: more than $4 million.
The unpaid subcontractors walked off the job the second time. Indiana’s private “partner” filed bankruptcy. Last summer, the state took over the incomplete project and its obligations.
As of this writing, Indiana finance and transportation officials had not settled on how to finish Section 5. Despite a state estimate that a public-private partnership would be more expensive than a traditional delivery method, another P3 remained an option.
Meanwhile, Indiana’s experience has given President Trump qualms about using P3s to revitalize America’s infrastructure systems. As a candidate, Trump supported the concept. He backed away from it, however, during a meeting with Congressional leaders in September.
“They’re more trouble than they’re worth,” Trump said, according to two congressmen who were in the meeting.
The president didn’t identify a specific project as proof, but he did cite Indiana’s experience. Vice President Mike Pence was governor of the state when the I-69 project failed and when a different private consortium, formed in 2006 to operate a major Indiana toll road, filed for bankruptcy.
“They tried it in Mike’s state,” Trump said, “and it didn’t work.”