DALLAS – As the nation waits for details on President Trump's plan to tap private investment for a trillion dollar infrastructure program, Indiana's I-69 project provides a roadmap for what can go wrong.

In August the Indiana Finance Authority completed the process of taking over the private–public partnership used to finance the highway work, following delays, a threat of insolvency and a near bond default.

Though Trump had signaled plans to leverage funding with private investment, in September he told members of congress that P3's don't work, indicating the program may rely more on investment from states and localities.

“The project's demise has been cited as a possible factor that caused an about face of the Trump administration, which until recently had enthusiastically endorsed private funding of public infrastructure as a way to jump-start badly needed investment,” S&P Global Ratings wrote in a report last week.

The project was to extend I-69 from Bloomington to Martinsville, relying on private sector equity to bring it in on time and under budget. It had no complex construction challenges.

Indiana says I-69 private partnership woes are not representative of P3s on the whole.

Structured as a so-called availability P3, the project's risks were confined to getting the road built, maintaining it to specified standards, and keeping its costs under control. In exchange, the IFA, a highly rated partner, agreed to give the project fixed payments designed to be sufficient to pay project expenses, meet debt service, and generate an equity return for the project owners.

The project, however, ran into a number of problems and under the threat of looming insolvency the state of Indiana stepped in and bought out the debt held by private bondholders.

“It is very rare to see the chain of events that occurred for the I-69, especially given the project's low level of construction complexity,” S&P said. “Its failure was driven by an unusual mix of events that included the default of a globally experienced Spanish contractor, extraordinary project delays, insufficient liquid security to meet these unusual events, and a lack of time for stakeholders to devise a solution—despite their incentives to do so.”

The Indiana case is “an example of a lot of financial relationships -- some won’t work and sometimes companies go out of business,” said Doug Hecox, a spokesman for the Federal Highway Administration.

Initially, Hecox said, the concern was that the problems, instead of viewed as isolated, would be somehow be applied with a broad brush to other projects.

“As far as I know that hasn’t been the case,” said Hecox. “There are still a lot of states pursuing these and using these – not just for highways but for a variety of costly construction projects. The Federal Highway Administration and others still see this as viable financing option for states, and states are still pursuing them because they offer resources that wouldn’t otherwise be available.”

As of Jan. 23, nearly $6.6 billion in PABs have been issued to date, according to the US Department of Transportation. PAB allocations approved by U.S. DOT total approximately $4.3 billion. Though the House version of the tax bill would have banned PABs after this year, the final version of the bill to be voted on Tuesday preserved the bonds.

Indiana has embraced the structure to finance several projects. The state used P3 financing to privatize its existing Indiana Toll Road in 2006 which resulted in $3.8 billion that funded more than 80 infrastructure projects throughout Indiana across a decade -- including earlier sections of I-69. Likewise, the Ohio River Bridges P3 project, which followed a similar contractual structure as I-69 Section 5, was finished on-time and under budget -- and today is generating higher toll revenues than projected.

Indiana public-finance director, Dan Huge said that each P3 opportunity teaches something new, and the state approaches each opportunity “as a continuous improvement endeavor — and we apply what we learn to each new project.” “We agree with the S&P report specific to its viewpoint that the I-69 Section 5 project is not representative of P3s on the whole, and that P3s can deliver significant value to taxpayers,” Huge said.

S&P cited a number of reasons for the failure of the I-69 P3.

For starters, the private partner had no prior experience building roads in the US. Out of four qualified bidders the IFA chose Isolux Infrastructure Netherlands B.V. as the equity partner. S&P said that some of the delays, such as disputes with subcontractors and permit revisions, were likely tied to the partners lack of regional experience.

There was also the fact that Corsan Corviam Construccion S.A., an affiliate of the equity partner, was the only lead construction company on the project. That meant that the I-69 construction plan relied on the financial stability and experience of only one contractor. By contrast many of U.S. P3s S&P rates have used joint ventures of several construction companies so if a member of the joint venture defaults, the remaining solvent construction companies are legally obligated to complete the work.

The group also came in with a bid of $325 million, which was about $73 million lower than the next lowest bid and $22 million less than the state’s own estimate.

“We can't say unequivocally that the winning contractor underbid, nor can we know for sure that the other bids were fairly priced or overpriced,” S&P said. “The gap between the winning bid and its competitors, however, certainly suggests that the winning bid may have been too low—though it is also possible that a contractor with more regional experience could have completed the project at that price.”

The project’s construction delays, cost disputes, and the financial woes of the design-builder tipped the PABs’ ratings deep into junk as the bonds headed toward default. S&P on June 7 dropped its rating to CCC-minus from B-minus. In May, S&P lowered the bonds to B-minus from B-plus. Fitch lowered the rating to B-plus in April. Fitch said in its June 9 report it was lowering the rating to CC from B-minus.

The IFA issued the project bonds, lending the proceeds to private contractor I-69 DP to finance the upgrades to a 21-mile stretch of highway between Bloomington and Martinsville that will become Interstate 69.

The bonds are secured by a first priority lien on I-69 DP net revenues. The IFA was to make milestone payments during the construction period and then availability payments after the road opened.

By August 2017, The IFA announced that it was stepping in to take over the project and terminating the state’s contractual relationship with the private partner, reimbursing the developer’s bond holders for $246 million, and returning direct control of the I-69 Section 5 project to the Indiana Department of Transportation.

The state used the $180 million in highway-revenue bonds to retire the developer’s private-activity bonds. Goldman Sachs is senior manager, Public Financial Management is the financial advisor and Ice Miller LLP is bond counsel. The bonds are rated AA-plus by S&P and Fitch Ratings. Moody’s Investors Service rates the bonds Aa1.

The settlement agreements release the state from future liabilities or claims that could have been made by bondholders, the developer, the design-builder Isolux Corsan, and insurance and surety companies. The state assumes all future financial risk to operate, maintain, and preserve the new roadway over the next 35 years instead of its private partners.

Data is limited as how many U.S. P3 projects experience delay. In Canada, where the P3 model has been in use for longer, the data shows that a significant number of projects run into construction delays. Out of 51 P3 projects tracked by the government of Ontario, 27% were delayed by a month or more.

“The largest cautionary tale in the I-69 is that construction projects—whether structured as a P3 or created using conventional state or local procurement—always carry delay risk,” according to S&P. "The challenge is to try to develop indicators that predict when construction projects can become meaningfully behind. In the case of the I-69, the predictors were not strong.”

Indiana is also looking beyond P3s to finance its infrastructure projects. The state said last month that adding tolls to its interstates could generate between $39 billion and $53 billion for highway construction and maintenance and fill a gap created by declining revenue from fuel taxes.

The state posted a request for proposals from firms interested in developing a strategic plan toward developing and implementing tolling on interstate highways. A vendor will be selected in January and the plan would be due December 2018.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.