How Cintra Makes Money
Editors note: the following has been sent to certain elected officials at the state level. It is based on publicly available information.
I-77 Managed Lanes Project: North Carolina Liability & Developer Profit
- If the I-77 managed lane project is built North Carolina taxpayers will pay $540 million in capital costs, operating subsidies and Developer default compensation.
- Project construction costs including tolling-specific infrastructure is $496 million. Project costs excluding tolling-specific infrastructure is estimated at $130 million.
- The private company, Cintra, will recoup their $250 million equity investment prior to collecting toll revenues through a combination of noncompetitive fees charged by wholly-owned affiliates, debt deferral, favorable tax treatment and overcharges. These provisions are embedded in the Comprehensive Agreement.
The proposed I-77 managed lanes project will add approximately 100 lane-miles to I-77 along a 26 mile corridor from Charlotte to Mooresville. The lanes will be operated under a 50 year contract by I-77 Mobility Partners, a special purpose entity (SPE) created for this project, and the SPE will be granted the exclusive right to toll the newly constructed lanes. The SPE will have autonomy in setting toll rates.
Construction is expected to take 43 months and is set to begin in Spring 2016. Project completion has been publicly stated to be achieved in 2018 but the above constraints make a completion date of early 2020 more likely.
Fully ramped toll revenues are projected to be $40.6 million per year and growing at a 6.3% CAGR thereafter. Full ramp up is expected to be achieved in 2021 based on the 2018 completion date.
2.1 North Carolina Liability- Capital & Operating Costs
The capital structure of the project is as follows:
North Carolina’s initial contribution to the project is $91.4 million in public funds. An additional $74 million in “bonus allocation” funds will be used to build two direct-access ramps to the managed lanes. Therefore the total upfront costs are $91.4 + $74 million.
(1) Total upfront costs: $165.4 million
In addition the contract contains a credit support provision (the Developer Ratio Adjustment Mechanism or DRAM) which would subsidize toll revenues should the debt service coverage ratio fall below 1.0. The DRAM is capped at $12 million per year and $75 million in aggregate. The ratings agencies assume the project will require a DRAM contribution of $47 million. Debt payment will be timed so that by design the DRAM subsidy is utilized. For the purposes of determining minimum NC liability we will conservatively use $47 million instead of $75 million.
(2) Total operating subsidy: $47 million
Total initial state contribution (1) + (2): $212.4 million
2.2 North Carolina Liability- Default Compensation
The TIFIA loan terms allow 50- 90% of interest payments to be deferred until 2037. For both the TIFIA and PAB loans the first principal repayment is not until 2033. In addition, interest payments will not commence until 2023 resulting in $46.6 million in capitalized interest. Interest rates are not available to the public, but the general TIFIA rate is ~3%, which we will use for our calculations.
In similar projects Developers deferred principal and interest repayment to the maximum extent allowable. When a balloon payment came due the Developer simply walked away from the SPE leaving creditors with little recourse.
For example, debt on the Indiana Toll Road increased from $3.4 billion to nearly $6 billion by the time the project entered bankruptcy last fall. In 2007 owners of the Chicago Skyway paid interest of just $129,000 on $961 million of debt. In 2018 the project faces a massive $480 million payment making default a near-certainty. In response to this the project was recently put up for sale a mere ten years into a 99 year contract.
A similar situation confronts the SH-130 project in Texas, owned by the Cintra special purpose entity SH-130 Mobility Partners. Construction was initially secured with $430 million as part of a larger loan package. When the SPE was unable to make the debt payment last June, TXDOT deferred the payment six months in the hopes of finding another buyer. This was after TXDOT contributed $30 million to buy down truck toll rates. TXDOT also asked the Texas legislature for $40 million in subsidies to buy down the truck toll rates for 2016 and 2017.
In fact debt default is the rule, not the exception, for private tolling operations in the United States. MacQuarie, an Australian infrastructure firm, developed seven projects in the United States. Every one has either gone bankrupt or been bought out by a municipality. Cintra’s has six U.S. projects. Two went bankrupt, one is “technical bankruptcy” and three have recently opened or are under construction.
Therefore, debt restructuring under default conditions should be considered an eventuality. In the case of I-77 Mobility Partners (Developer) default, the Comprehensive Agreement contains the unusual provision of North Carolina compensating the defaulting party, i. e., the Developer. The Agreement requires NCDOT to pay 80% of the outstanding senior debt (with adjustments) as compensation to the Developer. The PAB’s are senior to the TIIFA loan, but in the case of default are pari passu. Therefore compensation must be paid on both the PAB and TIFIA loan.
North Carolina’s liability is therefore calculated as follows:
TIFIA principal: $189 million
TIFIA capitalized interest (at 90% deferral): $128.6 million
PAB principal: $105 million
PAB capitalized interest (at 90% deferral): $71.4 million
Total: $494 million
80% of senior outstanding debt (3): $395.2 million (2033 dollars)
$327.1 million (2015 dollars)
2.3 North Carolina Liability- Total
Therefore, the total taxpayer expenditure is as follows:
Initial capital costs (1): $165.4 million
Operating subsides (2): $47.0 million
Developer default compensation (3): $327.1 million
Total: $539.5 million (2015 dollars)
In a typical default the defaulting party’s assets are seized and turned over to creditors. For this project, rather than NCDOT seizing Developer’s assets, NCDOT compensates the Developer. Since default occurs prior to bankruptcy it is unlikely any of the NCDOT compensation will be used to recompense the bond holders. The $189 million principal on the TIFIA loan will remain unpaid.
Therefore, the total taxpayer liability (state + federal) is $539.5 million + $189 million = $728.5 million.
3.0 Developer Profit
Cintra, through the SPE, will be contributing over $250 million in equity to the project. Despite the high likelihood of project default, the legal structure and contractual terms enable Cintra to recover their equity investment and turn a profit. There are four mechanisms for doing so.
Included in the use of funds are costs that are neither reasonable nor customary. Uses of funds break down as follows:
Project costs are $651 million, and construction costs are $445 million, resulting in a difference of approximately $210 million between project and construction costs. Therefore, non-construction costs account for one-third of a construction project, a significant sum. Project cost inflation is due to three major factors:
1) “SPV” (Special Purpose Vehicle) cost of $52 million. This is the cost associated with creating and funding I-77 Mobility Partners. It does not include cash reserves and working capital as those costs are enumerated separately ($26.8 million). The costs associated with creating a legal entity are immaterial; there is no further breakdown of costs in the category, but even if it involves staffing the entire entity immediately, it is excessive.
2) Bid cost and fees of $37.4 million. In normal business practice, proposal preparation is considered part of the cost of doing business and these costs are recovered as part of project cost. However, in this project’s case significant preliminary design work was performed as part of the proposal. How much remains in question as the bid documents are unavailable to the public. Nevertheless, $37 million for proposal work and “fees” is excessive.
3) Structural opportunities for overcharging. For instance, the tolling system costs $51 million in addition to construction. This was not competitively bid but rather sourced directly to Cintra Toll Services, a captive LLC. Also, the project cost increased $100 million despite the cost of asphalt decreasing 20% in the past year. The construction costs themselves are most likely inflated for the same reason.
Since these documents are not available to the public any estimate would be an uneducated guess.
For purposes of this analysis, we will assume in Cintra’s favor that construction costs are not inflated. This leaves us with potential overcharges of $52 million + $37 million = $89 million.
3.2 Internal Business Churn & Non-Competitive Fees of Affiliates
The project’s legal structure serves not only to deliver the project, but also allow internal profitability through fees and charges of affiliates. Here is the legal structure Cintra created to run the I-77 toll project:
At the center is the SPE, I-77 Mobility Partners. We will examine the other entities, especially the “Key Contractors” i.e. the ones in the white boxes, in turn.
The firm responsible for construction (the “Lead Design Firm”) is Sugar Creek Construction LLC. It is 70% owned by Ferrovial, Cintra’s parent and was incorporated the same day as I-77 Mobility Partners.
Sugar Creek has the Design Build contract with I-77 Mobility Partners, so the net effect is the vendor and the customer are one and the same. This enables a situation where the vendor has a perverse incentive to overcharge the customer with the parent pocketing the difference, especially if a third party is paying.
An analogous situation would be where a doctor is a patient to himself. He charges the “patient” an outrageous fee knowing he can bill an insurance company anxious to do business with him. In this case the “doctor” is Sugar Creek, the “patient” is I-77 Mobility Partners. The “insurance company” is the state and federal DOT’s, and ultimately the taxpayer backing the bonds. As we have noted previously, the fact that construction costs increased $100 million despite asphalt costs decreasing lends credence to this scenario.
Similarly, the tolling system integration is contracted to Cintra Toll Services, LLC, an SPE of Cintra based in Austin, Texas. Operations and Maintenance will be performed by the Cintra as well. Each of these are separate legal entities charging fees to I-77 Mobility Partners. The Comprehensive Agreement refers to these entities as Affiliates.
There are no internal checks on the reasonableness of Affiliate’s fees. In fact, the Comprehensive Agreement contemplates the contrary. In five places it contains the clause:
…payments to Affiliates in excess of reasonable compensation for necessary services….
Further, Comprehensive Agreement expressly allows the Developer to use toll revenues to “pay non-competitive fees and charges of Affiliates.” The Developer may pay these noncompetitive fees provided payment is first made to (in order of precedence): NCDOT payables, O&M costs, debt service, reserves and taxes.
However, with the exception of O&M costs, each of these will be negligible. First, NCDOT amended the revenue sharing provision so that, for all practical purposes, it will not receive any toll revenue share. Debt service will be deferred, as previously discussed, and reserves are already funded through the issuance of debt.
Given the legal structure and contractual framework, it is clear the Developer contemplates a scenario where they will charge fees to the extent the project will not be externally profitable, thereby eliminating any tax liability.
The amount of excessive fees is dependent on toll revenue and therefore impossible to determine. For purposes of these analyses, they are assumed zero even though this is clearly not the case.
3.3 Tax Receivable Agreements
The capital costs of the project may be depreciated resulting in a reduction in tax burden. The capital costs (net of taxpayer contribution) would be $556 million. At the 35% maximum corporate tax rate, such a deduction could be worth $195 million in reduced tax liability.
However, a tax deduction is of no benefit to an entity lacking taxable income. As shown above, due to fees charged by Affiliates the project will not have any taxable income. However, the Developer can still take advantage of the tax deduction via a tax receivable agreement. There are several prerequisites before such an arrangement can be executed. The Comprehensive Agreement enables all of them.
First, NCDOT is leasing the toll lanes to I-77 Mobility Partners and operating leases are not subject to capital depreciation. However Part 197 of the Internal Revenue Code the government classifies “tolling concessions” as assets, and these assets can be depreciated. But in order to qualify the tolling concession has to be a government-granted right separate from the lease agreement.
Article 2 of the Comprehensive Agreement NCDOT grants the tolling concession to Developer.
Second, the concessionaire must be the owner of the asset, not a lessee. The Comprehensive Agreement states Developer will “be treated, to the maximum extent permitted by law, as the owner for federal income tax purposes…” despite the leasing arrangement.
Third, a capital expenditure is normally depreciated over the life of the asset, in this case 50 years. Of course, the longer a deduction takes the less it is worth. However, the tax code allows intangible assets to be written off in a mere 15 years. The Comprehensive Agreement is accommodating, as it states Developer’s property interests are “intangible personal property.” Thus we have the curious scenario of hundreds of millions of dollars’ worth of concrete and asphalt being classified as “intangible.”
Fourth, since the project will be externally unprofitable, the Developer must be able to sell its interest to entities that are able to take advantage of the tax deduction. Once again the Comprehensive Agreement enables this. It allows the Developer’s equity to be obtained by the parent without a change in control. Once in the hands of the parent the project equity is securitized and sold through special purpose funds owned by the parent. Further, the Comprehensive Agreement allows project debt to be securitized and syndicated.
Most likely an entity looking for this type of deduction would be in the highest corporate tax bracket, which today is 35%. That means the deduction would be worth $566M x 35% = $194M. The NPV of the deduction would be less because it taken over the course of 15 years and a company would not pay the full amount because it would be a zero-sum gain. Most tax receivable agreements pay eighty five cents on the dollar, so the value of this deduction would be on the order of $165 million. In 2015 dollars, the figure is on the order of $150 million.
3.4 Back-Ended Debt Payment
Cintra’s equity will be the last disbursement to the project. The Developer will then defer debt repayment and instead direct excess cash flow toward equity repayment. Per one ratings agency, “the amortization profile of the PABs and TIFIA is highly back-ended, which allows for substantial equity distributions prior to meaningful principal repayment occurring.”
Therefore, Cintra’s equity will be disbursed last and recovered first.
3.5 Developer Profit
Prior to charging any fees or collecting any toll revenues, Cintra’s equity profile is as follows:
Overcharges $89 million
Tax Receivable Proceeds $150 million
Equity Contribution ($252.8 million)
Net proceeds before fees: ($13.8 million)
This total does not include potential overcharges for construction and non-competitive fees of Affiliates. These amounts are unavailable to the public but should be made available for public review.
Essentially, breakeven occurs prior to collecting any toll revenues. The only activity- and therefore expense- not performed by an Affiliate is maintenance. Revenues exceeding this cost will be for necessary expenses (such as back office operations) and then fees and equity disbursements.
North Carolina’s liability for the managed lanes project is $540 million. It can be argued for this amount the state is purchasing $650 million worth of infrastructure. However, construction cost- assuming it is not inflated- is $440 million. Therefore, the state will have overpaid by $100 million. This is, purely by coincidence, the amount publicly stated for terminating the contract.
However, much of the infrastructure is toll-specific, such as dedicated flyover bridges and adding toll lanes where traffic congestion is not a problem. A focused solution addressing the congested region would cost on the order of $130 million. Therefore, the North Carolina taxpayer will have overpaid $410 million ($540 – 130) for this project.
Given all of the towns in the Lake Norman region, Mecklenburg and Iredell counties, and the Lake Norman Chamber of Commerce have taken positions against the managed lanes contract, and a focused general purpose lane solution would cost a fraction of the current taxpayer exposure, the project should be cancelled.
 Parsons Brinkerhoff, “I-77 Feasibility Study”, December 7, 2009, adjusted for inflation
 Louis Mitchell, NCDOT Division 10 Engineer, June 8, Davidson Town Board Meeting
 DBRS, p. 13
 DBRS p. 13
 Forbes, “The Indiana Toll Road: How did a good deal go bad?”, Puentes, Robert, Oct 2014
 Fortune , “Would you buy a bridge from this man?”, Maclean, Bethany, Oct 2007
 High Speed Toll Road Considered in Default By Moody’s, Transport Topics, July 2014
 Legislative Appropriations Request, Texas Department of Transportation, August 25, 2014
 Comprehensive Agreement Exhibit 15
 The precise amount varies depending on compounding frequency, which is not available to the public. This figure assumes monthly compounding.
 AsphaltRoads.com, accessed June 12, 2015
 Delaware Secretary of State
 Comprehensive Agreement
 NCDOT, Contracts and Project Delivery, Carolina’s AGC Divisions Conference, Rodger Rochelle, Aug 1, 2014
 Comprehensive Agreement, 3.6.2
 Comprehensive Agreement Amendment 5 now states the revenue sharing bands are in thousands of dollars. Therefore, at full ramp up the revenue share will not kick in until toll revenues exceed $108 million, a completely unrealistic number.
 CA, Section 2.2.2
 CA, Section 2.1.2
 CA, Exhibit 1, p. 11
 CA, Section 4.4.3
 The CA allows this task as well to be contracted to an Affiliate