Taxpayers on the hook if I-77 toll project fails

UPDATE: Added scenarios prior to Substantial Completion and bankruptcy exception.

The proposed plan to widen I-77 with toll lanes is expected to cost $550M.  The bulk of that cost will be financed by a private company in what’s called a public-private partnership, or P3, and will be repaid with toll revenues.  Estimates put the required toll revenues at $20- 30M per year which would make it the second-highest grossing toll lane in the country, and significantly higher than the national median of $4.3M. By way of comparison, last year toll revenues from I-15 in Salt Lake City, with a similar metropolitan population, were $600K.

In January NCDOT officials noted a key value proposition of the proposed public-private partnership (P3) was that it “passes substantial risk to the private sector.” At a pre-meeting of the Cornelius Town Board, one commissioner stated he received a call from an NCDOT official who told him the private companies were “excited” and the bond rating agencies had given the project “an investment-grade rating.”

I don’t doubt the commissioner heard it right, but how can that be if revenues from similar projects are a mere quarter of the expected costs?

The answer lies in the contract, which contains extensive provisions for compensation if it is terminated.

There are three basic scenarios for termination (the contract refers to the private company as the “Developer”):

  1. NCDOT terminates or defaults on the contract
  2. Developer terminates or defaults on the contract
  3. An event happens beyond anyone’s control (i.e. a hurricane), and either the NCDOT or Developer terminates the contract

In each case, the Developer is entitled to compensation. The amount varies based on the reason and timing of the termination. I’ll try and explain, but full disclosure: I’m not a lawyer.  I may not be the brightest bulb on the marquee but I’m not the dimmest either, and I am befuddled by the contract language.  It’s 18 pages of convoluted language. This may get a little tedious.

First, some background.  Projects of this type are typically funded by a combination of taxpayer contribution (in our case, $170M), debt (by issuing bonds on the private market) and equity (contributed by the Developer).  We do not yet know how much will be debt vs equity, but we can expect the Developer to issue as much debt as possible. We’ll learn why in a minute.

If the NCDOT decides to terminate the contract, they have to pay the Developer the greater of either the fair market value of the project, or the amount of debt still remaining.  (There’s ancillary compensation, but the remaining debt is the biggie.)  The key point here is “greater of either.”

Let’s say the project is a disaster. Revenues don’t cover the cost, and the project is swimming in red ink. The Fair Market Value of the project would be zero.  No one values a project that loses money.  So the NCDOT would have to pay nothing, right?  Wrong.  They would still have to pay off the remaining debt (called the Senior Debt Termination Amount, or SDTA, and subordinate debt), even if the project is a failure.  With interest.

If the Developer defaults on the contract (i.e. they don’t do the required maintenance, they don’t keep the lanes open like they’re supposed to, etc), the NCDOT pays 80% of the above upon termination. The sole exception to this is if the Developer goes bankrupt, in which case they would not be entitled to any compensation.  However, this is not a realistic scenario.  Long before the Developer would be in this situation, they would opt to terminate.  Yes, they stand to lose 20%, but this would be preferable to bankruptcy.

The above scenarios are after Substantial Completion.  There are also provisions for compensation prior to Financial Close (Developer is paid for Work Product + work invoiced); during the Ramp Up Period (which is basically the same as if NCDOT terminates + the cost to demobilize the project); and before Notice to Proceed 1 (NTP1) and NTP2 (Developer is paid either the Ramp Up compensation or the same as if NCDOT terminates).

Now for the last point.  An event beyond anyone’s control is called a force majeure.  Say a hurricane tears through the area and makes a mess of I-77.  The Developer decides they don’t want to incur the cost of repairs due to force majeure, so they terminate the contract.  They are entitled to the essentially the same compensation as if the NCDOT elected to terminate the contract.

Regardless of the fiscal nuances, the fact is if the contract is terminated, the taxpayer bails out the Developer.  This is most certainly not “insulating the public from risk”, as some have toll lane advocates have stated. (I don’t think any of that was said with the intent to mislead, but I do think we should be asking tougher questions.)

Widen I-77 previously concluded the project had become so bloated it would collapse under its own weight.  Unfortunately, that likely won’t happen with the taxpayer propping it up.  No matter how awful the income statement looks, the taxpayer will be there as a backstop. That’s what the underwriters and rating agencies are banking on.

This is not speculation- it’s history.  North Carolina’s only toll road, the Triangle Expressway, cost one billion dollars.  It was paid for by state bonds and a “loan” from the federal government.  Toll revenues are so low the General Assembly has allocated $25M per year for the next 30 years to cover expected shortfalls.

There’s a good possibility our children and grandchildren will be paying to bailout I-77.  And they’ll get to pay the tolls, too.


PS If you’re a glutton for punishment, here is an excerpt from the Termination Compensation clause (Exhibit 15) of the contract.  Good luck:

Developer will be paid…

(B) An amount which, when added to all Distributions described in clause (a) of the definition thereof actually paid to Equity Members or their Affiliates on or before the Early Termination Date: (1) yields as of the Early Termination Date at an internal rate of return on Committed Investment described in clause (a) of the definition thereof, other than Subordinate Debt (taking into account the timing of such Distributions and Committed Investment), equal to the Base Case Equity IRR; plus (2) repays as of the Early Termination Date outstanding Subordinate Debt (excluding Breakage Costs) with interest thereon accrued up to the Early Termination Date at a rate equal to the lesser of (X) the non-default interest rate provided in the Funding Agreements for the Subordinate Debt or (Y) the Base Case Equity IRR;plus

(iii) If termination occurs prior to Substantial Completion of all Project Sections, Developer’s own reasonable and documented out-of-pocket costs to demobilize;minus

(iv) The incremental increase, if any, in the costs Developer incurs under Section 19.5.10 of the Agreement over the present value of such costs under the Base Case Financial Model, but without double counting of the amounts under clauses (i), (ii) and (iii) above; minus

(v) All Borrowed Cash and Credit Balances, except to the extent such

balances are already deducted in determining the Senior Debt Termination Amount; minus

(vi) The portion of any Compensation Amounts previously paid to Developer that (i) compensated Developer for cost and revenue impacts attributable to the period after the Early Termination Date and (ii) were not previously used to reduce Project Debt within the definition of Senior Debt Termination Amount.

10 Responses to Taxpayers on the hook if I-77 toll project fails

  1. Tracy Patterson says:

    Sounds like a valid assessment of this bad idea. The irony I see happening is that if tolls are set to the proposed levels for forecast profitability, but drivers avoid using the toll lanes, then tolls will have to be increased. This will force even more drivers to avoid using the toll lanes and we will have a slow motion collapse at taxpayer expense. In the mean time traffic will be worst than ever on existing lanes. Additionally some drivers will use side roads to avoid the disaster that I77 will become.

  2. Anonymous says:

    WOW – This item posted is what one would have hoped investigative reporters in the media would do, but since the country has changed the rules to allow the super rich to control everything including the roll up of media to a scant few owners, it doesn’t surprise me.

    I am completely baffled as to how any of the elected folks sees there being any benefit whatsoever in this HOT lane project. It basically locks us in to 50 years of what we have with no chance for improvement. Only the super rich will be able to afford the tolls, which I see based on the toll and distance with current Atlanta HOT tolls would be approx $10 one way from the lake to center city during the rush hour blocks.

  3. […] so fast.  As we have pointed out previously, under the terms of the existing contract the taxpayer will be responsible for all but the equity […]

  4. […] so fast.  As we have pointed out previously, under the terms of the existing contract the taxpayer will be responsible for all but the equity […]

  5. […] I-77 for 50 years.  As we’ve reported elsewhere, a cursory reading of the contract shows the taxpayer is at substantial risk.  So who exactly wrote this contract? I was under the impression it was the State of North […]

  6. […] under the current proposed contract, the taxpayer may be the one ensuring that return. As we’ve written about elsewhere, the taxpayer stands to bail out a significant portion of the project if (when?) it fails […]

  7. […] one important difference:  the taxpayer will be on the hook for a bailout. Contractually, even if the private company defaults the taxpayer pays off the remaining debt to the tune of eighty cents on the […]

  8. […] except that’s just not true.  If Cintra defaults, the contract contains umpteen pages detailing how they’ll get paid. In all but a few exceptional circumstances, you the taxpayer will be bailing them out for eighty […]

  9. […] except that’s just not true.  If Cintra defaults, the contract contains umpteen pages detailing how they’ll get paid. In all but a few exceptional circumstances, you the taxpayer will be bailing them out for eighty […]

  10. […] While we are encouraged the Governor is investigating the latest private toll lane failure, we are compelled to point out that, contrary to NCDOT’s statement, North Carolina taxpayers are at risk if the project defaults.  We wrote about this extensively here. […]

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