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As Indiana Toll Road Funds Wind Down, State Looks to More Transportation P3s

MAY 22, 2012 7:17pm ET
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CHICAGO — As Indiana spends down $3.8 billion generated by its 2006 lease of the Indiana Toll Road, the state has a series of new public-private partnerships in the pipeline that underscore its continued reliance on the technique to provide financing for transportation infrastructure projects.

As of this year, all of the remaining cash from the toll road lease to a private consortium — $1.7 billion — is earmarked for ongoing projects, and officials plan to rely on other P3s to help finance transportation projects in the future.

The Hoosier State has three major privatization deals in the works under a P3 program launched by Indiana Department of Transportation for the state’s largest infrastructure projects.

The transactions include the state’s participation in a bi-state effort with Kentucky to build a new $2.4 billion bridge spanning the Ohio River, a planned 47-mile expressway that connects to Illinois, and a major revamp of a highway that runs north of Indianapolis.

On the local side, the city of East Chicago, Ind., recently inked a deal with a private company that will create the state’s only privately owned toll bridge to replace a failing span that was shuttered in 2009.

“Indiana has tried to position itself as being innovative with regard to leveraging private capital for infrastructure,” INDOT spokesman Will Wingfield said. “It’s very important in the current economic climate that Indiana makes it clear to the private sector that Indiana is open for business and interested in engaging in these types of innovative deals that help improve transportation for Hoosiers.”

Gov. Mitch Daniels, who will leave office in January, has been one of the biggest cheerleaders for P3s throughout his years in office.

He completed the toll road lease in 2006 shortly after taking office, a deal that benefited from fortuitous market timing. With the $3.8 billion, the state financed a 10-year transportation construction plan, and it has not issued any transportation bonds during the governor’s two-term tenure.

“Gov. Daniels is trying to build on the success he had with the Indiana Toll Road to use that method more broadly throughout the state,” said Tim Wilschetz, a principal in the infrastructure advisory group at KPMG Inc., which acts as INDOT’s financial advisor on its P3 program.

“Gov. Daniels’ interest is to try to more effectively partner with the private sector to do more efficient risk allocation on projects as well as to share the financing risks,” Wilschetz said. “That’s one of the fundamental principals of the P3 program that they’re putting in place.”

Investors in the toll road didn’t make out as well. In financial statements for 2011, they acknowledge the “risk of not meeting debt service requirements” through the 2015 maturity of their financing.

The $3.8 billion of lease proceeds has been either spent on or earmarked  for various highway projects, except for $500 million deposited into a trust fund. INDOT is allowed to tap the interest earnings from the trust fund every five years, and last year for the first time dipped into the account, using roughly $120 million for various projects.

The state’s three deals in the works would finance new assets rather than leasing existing ones, although officials have not ruled out future asset leases. The three transportation P3s already launched and the INDOT’s P3 program are designed to help offset future reliance on traditional financing, Wingfield said.

The Ohio River Bridges project marks Indiana’s second-largest P3 project following the toll road deal. The project is a bi-state effort with Kentucky with a final price tag of $2.4 billion, with each state financing roughly $1.2 billion.

The two states decided to pursue separate financing models, with Kentucky opting for a more traditional mix of cash and debt, and Indiana entering into a public-private partnership.

Last week, the Indiana Finance Authority approved an inducement resolution for a $755 million private-activity bond issue that can be tapped by the final developer of the project.

Over the summer the state will hold a series of meetings with a list of five teams vying for the project that were shortlisted from a request for qualifications issued in March, according to Kendra York, the IFA’s executive director. The authority will work with the teams to craft a final RFP, expected to be issued in July, with proposals due in October and a so-called commercial close set for December.

The project will be structured as an availability payment model, with the private firms providing nearly all of the financing costs up front and the state making annual payments to the team after construction is complete.

The final financing plan is expected to include a mix of equity and debt, York said. On the debt side, the private firms could use all or part of the $755 million of private-activity bonds issued under a federal program, with the IFA acting as a conduit issuer.

“Tax-exempt financing will significantly lower the interest cost of this developer project debt,” York said. “That lower cost of capital to the developer will benefit IFA by reducing the amount of the availability payment made by IFA to the developer.”

Also last week, East Chicago, in the northwest corner of Indiana, reached a deal with a team of private firms to build what will be Indiana’s first and only privately owned toll bridge to replace a span the state declared unsafe and closed in 2009.

As part of the deal, INDOT will give United Bridge Partners the state-owned land under the bridge in exchange for land of comparable value that Indiana will use for other projects.

The 1.3-mile bridge is expected to cost between $150 million and $250 million. Under the deal approved by the City Council last week, East Chicago would get 10 cents for every vehicle that crosses the bridge. In return, the city will give United Bridge Partners a 10-year property tax abatement and make the bridge area a tax increment financing district.

The toll is expected to be set at around $2, officials said.

Meanwhile, INDOT last week held a bidders’ conference for a revamp of U.S. Highway 31, a four- to six-lane highway that runs north of Indianapolis — a city whose mayor, Greg Ballard, has created his own reputation for high-profile privatization projects, including the sale of the city’s water and sewer systems and parking meters.

INDOT plans to enter into a partnership with a private company for the construction aspect of the project, officials said. Under the current plan, the private team would build the new road and the state would repay the team over a period of eight years.

Indiana is also in the first phase of an environmental studies for the Illiana Expressway, a 47-mile connector between Indiana and Illinois that is also expected to be structured as a public-private partnership. The legislatures in Indiana and Illinois both passed laws allowing public-private partnerships for the expressway.

Outside of the transportation sector, the Indiana Lottery Commission last week issued a request for expression of interest from private firms to help the commission wring more revenue out of lottery gambling.

That proposal comes after Daniels tried unsuccessfully for years to privatize the Hoosier Lottery.

“Under this scenario the lottery will continue to be a state agency under full control of the state, but we are seeking some potential assistance from private firms to help up grow our net income,” said lottery spokesman Al Larsen. “We want to see if it’s possible to significantly increase our net income, and we left it open to the bidders to let us know how to get there.”

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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