CHICAGO — Illinois and Indiana plan this fall to formally begin a search for private partners for the proposed $1.25 billion Illiana Expressway, but the plan faces a new obstacle following the release of a stinging report that warns of the project's financial risk to Illinois.

The report released Friday comes from the Chicago Metropolitan Agency for Planning which was asked by the Illinois Department of Transportation to include the project in its long-range regional transportation development program. The agency's staff examined whether the project meets the policy goals for the plan known as GO TO 2040 and on a number of fronts found it lacking.

"The proposed facility's estimated cost and potential financing structure expose the state of Illinois to extensive financial risk. The information provided to justify the project's financial viability has been incomplete and largely anecdotal," the report said. The 47-mile toll highway would link Interstate 65 in Indiana to Illinois' Interstate 55.

The agency warned that details about Illinois' planned use of a public-private partnership remain sketchy and it raised the specter that under some funding scenarios the project could result in a public subsidy of between $440 million and $1.1 billion. Illinois' share of the expressway is $950 million with Indiana picking up the remainder of the tab.

The report dealt a blow to the project. The agency's board will discuss the report at a meeting later this month and as will the planning committee for another regional planning agency that holds sway on federal funding.

The Federal Highway Administration earlier this year approved the Illiana corridor but a vote against including the project in the regional planning agency's GO TO 2040 program could hinder future federal support. Federal regulations dictate that the next step in Illinois' evaluation of the project's environmental impact can only be completed if the proposed new highway is approved as a GO TO 2040 major capital project.

The staff analysis followed the announcement earlier in the week by both states of a key agreement advancing the project. The Illinois Department of Transportation, the Indiana Finance Authority, and the Indiana Department of Transportation reached agreement on how to design, build, finance, operate, and maintain the toll highway.

Each state would manage the development of its share of the roadway using their respective P3 laws to enter into long-term concession agreements. Both states intend to issue requests for qualifications for private parties interested in the project this fall. It would lead to a request for proposals process in hopes of beginning construction in 2015.

"The Illiana project is a 'win-win' for both Illinois and Indiana and will result in a reduced financial burden while creating much needed infrastructure," said Illinois DOT Secretary Ann Schneider. "It will save millions for Indiana and Illinois taxpayers while producing huge economic benefits for both states, and that is good news."

"We look forward to working with our partners at IDOT on this very important project to the entire region." said Kendra York, Indiana's public finance director.

Illinois Gov. Pat Quinn and Indiana Gov. Mike Pence defended the project Friday during a tri-state economic summit, saying it's needed to support the region's traffic and promote development. Supporters argue the expressway would reduce truck traffic on local roads, improve travel times and safety and spur development. They estimate it could create more than 9,000 construction jobs and more than 25,000 longer-term jobs.

Opponents include residents who would be impacted, and environmental groups. They challenge the need for the highway need and have filed a lawsuit seeking to block it.

While Indiana has turned to the P3 model to finance a series of projects and leased the Indiana Toll Road in 2006 to raise funds for transportation projects, its neighbor has been slower to embrace the template.

For Indiana, the expressway is a follow-up to another major project involving a border state. Indiana used a design-build-finance-operate and maintain model with availability payments to cover the state's half of the $2.6 billion Ohio River Bridges project.

The Indiana Finance Authority in March issued $640 million of private activity bonds for the project on behalf of WVB East End Partners LLC, the company that is building Indiana's half of the project. It marked the state's first P3 structured with availability payments.

For the Illiana project, the two states are considering either the availability model or a more traditional P3 structure in which an upfront investor payment finances the project, with investors reaping the benefit of toll collections.

For Illinois, the use of a P3 model to develop a new highway would mark a first. Illinois' six-year $12.6 billion transportation program includes $92 million for Illiana planning. Quinn and Pence held a two-day business forum in June aimed at luring private contractor and investment interest in the project.

The planning agency's report raises concerns over the risk posed by an availability model. "Given the low projected traffic and the inherently higher risk associated with exurban toll facilities, P3 bidders will likely propose an availability payment model that puts taxpayers at risk to pay revenue shortfalls," it warns.

The agency worries that the rural region offers minimally congested alternative routes, adding to the tolling risks and potential burden on taxpayers. The report states that IDOT has said it expects Illiana would generate sufficient toll revenue to repay the initial costs and cover operations and maintenance. But, the report notes, its assessment has been made more difficult by a lack of information from the state on a proposed P3 structure or updated tolling analysis, project cost estimates, or other updated data due to the confidentiality required for the P3 solicitation process.

To reach its conclusion, the planning agency assumed the project would be financed through a mix of private equity, private loans, private activity bonds and TIFIA loans. It also accounts for initial construction costs, financing costs, and private sector return requirements. It assumes normal operations and maintenance costs, a range of typical interest rates, a mix of debt and equity similar to other recently-completed P3 toll projects, and a range of project costs and annual toll revenues.

"This analysis indicates that, over a 35-year timespan, the Illiana Corridor is unable to repay its initial debt, pay for annual operations and maintenance, finance required periodic capital maintenance expenditures, and meet private-sector return on investment requirements without public subsidy," it concludes.

The staff recommends against inclusion of the project in the regional plan due to the financial risk, what it considers a negligible impact on mobility in the region, skepticism over its long-term economic benefits, and concerns it would draw investment away from what it considers more valuable projects. CMAP's long term plan focuses on modernizing and expanding existing assets.

Illinois DOT countered in a statement that a growing number of elected officials and communities, businesses, and labor groups support the project.

It challenged CMAP's assessment, charging it was based on the agency's "own simplistic and misleading analysis" that "dismisses the comprehensive studies that have been done by IDOT/INDOT and their international consultant teams and reviewed by USDOT."

The Northwest Indiana Regional Planning Commission is conducting a similar review for the Indiana piece of the project.

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