The dedication of funds to the SMF could mean further debt for Arizona and tolling and/or tax increases to pay for future repairs and new roads. Inflated traffic estimates have been used to justify the freeway, something that is typical of projects planned as toll roads. That this road was intended as a toll road likely shaped the "purpose and need" of the approximately $2 billion project.
Two companies who had been involved in plans for the project to be a toll road, HDR and CDM Smith (formerly Wilbur Smith), contributed to traffic projections to show the alleged need for the road, and later to the Environmental Impact Statement, as described in "South Mountain Freeway Justified by Controversial Traffic Projections?".
Arizona Department of Transportation (ADOT) relies on these types of traffic projections because of how their budgeting is based on revenue from gas and local sales taxes. This fact may impact the rest of the Arizona transportation system, potentially leading to tolling on commonly used roads currently under consideration, as ADOT sinks further into debt.
Although the project's contract has not yet been signed, ADOT announced on December 28, 2015 that they had chosen one of the three consortia for the public-private partnership (P3) to build the South Mountain Freeway (SMF). Connect 202 Partners, a team that includes Fluor Enterprises, Granite Construction, Ames Construction, Parsons Brinckerhoff, DBi Services, and others expect to begin construction later this year.
The project would use the relatively new P3 arrangement, said to save states money but in reality providing additional ways for financial institutions to profit off debt and for construction and engineering firms to get contracts. There does not seem to be a guarantee that ADOT would save money by making this a P3, however. Notice the careful wording on the part of ADOT Director John Halikowski: "ADOT will be able to complete this much-needed project sooner as a result, while increasing the likelihood of saving taxpayer dollars."
This would be the state's first P3 for a transportation project, and the largest-ever highway project in the state. While its pace may be accelerated so far, considering the road may be unnecessary and definitely comes with other costs, it can't be called less expensive. Some of the hidden costs include consulting fees, the salaries for everyone working on the freeway—especially given the special circumstances of the P3—federal tax dollars, potential complications, and more.
Influence
Most public-private partnerships for transportation projects involve tolling. Those without tolling concessions tend to involve availability payments to reimburse the companies that finance the project. Even though Gail Lewis of the Office of P3 Initiatives has promoted P3s as a way to shift risk away from the state and make use of financing by the private sector due to lack of state funds, ADOT went with an atypical P3 arrangement that does not involve private financing. ADOT says they'll "fund the project capital costs with a combination of available federal funds, regional sales tax revenues and tax-exempt bonds." It's possible that this choice could be the more responsible approach within the constraints of a P3, but in actuality it remains irresponsible for a number of reasons, as will be explained below.
So why pursue a P3 in which tolls and availability payments are not involved? One major benefit for the companies is a single guaranteed decades-long contract for designing, building, and maintaining the project. Connect 202 Partners would get a thirty-year maintenance contract on top of design and construction. This is a big deal considering many such companies worry about their fate if economic conditions continue to lead to less infrastructure projects procured on state and local levels. For example, Goldman Sachs listed Granite Construction as one of the companies that would go under if government spending was severely limited. It is no wonder they're pushing for P3s, given the increase in such contracts they are likely to generate.
ADOT would establish this contract at a fixed fee (with contingencies) which is preferable to them than non-P3 contracts. While P3s are often framed as a better option for the public sector to
accomplish their goals with limited resources, these arrangements are widely promoted by the large companies who profit off them. And due to a combination of pro-P3 lobbying and market-oriented leadership (those who favor austerity or structural adjustment programs involving privatization), the federal government increasingly incentivizes local governments going with P3s by subsidizing them through low-interest loans (e.g. TIFIA, discussed below), tax-free bonds, etc. So while ADOT may seem to be getting a deal, the public subsidizes private companies.
HDR Engineering, one of the companies that made traffic projections for the SMF, was hired on as ADOT's P3 Adviser/Program Manager, and was more recently named by ADOT as their General Engineering Consultant for the SMF. They are part of the Transportation Transformation Group which describes itself as "an unprecedented alliance of state government, finance, academic and private industry leaders who aspire to transform American transportation policy into a goal-based arrangement that maximizes flexibility to enhance the roles of the state and local public sectors and their private partners to solve the growing problems of congestion and mobility." This group includes a variety of notorious financial institutions like Goldman Sachs, Citi, JP Morgan, and so forth.
It becomes clear that the SMF is not about solving problems of congestion and mobility (arguably SMF really isn't a solution at all, and if anything it is for the benefit of trucks). Construction companies, engineering firms, consultants, law firms, and banks all see dollar signs in these partnerships, and they form organizations (like AIAI and NCPPP) and host conferences to reach out to local officials to steer them in that direction. (It's worth noting that smaller local companies who cannot join such a consortium cannot access large-scale P3 deals).
Banks profit massively from the financialization of expensive infrastructure projects. JP Morgan, Morgan Stanley, and Goldman Sachs are involved with P3 conferences like the National P3 Symposium.
Parsons Brinckerhoff, Fluor, and Granite (plus ADOT-consultants HDR and Nossaman LLP, and several companies who also bid and lost on the 202 project) are sponsors and attendees of the ARTBA P3s in Transportation Conference. Gail Lewis, Director of ADOT Office of P3 Initiatives and International Affairs has spoken at this conference, as recently as last summer.
Traffic Projections
With all the interest in P3s, it is no wonder why traffic projections have been found to be overestimated on a national and even global level to legitimize funding for projects like the South Mountain Freeway. In some cases this is due to optimism bias, but likely often it is for the sake of profit. Higher traffic forecasts mean more revenue, which increases the chances of investment on a project.
HDR's role is significant here in this respect. Although "South Mountain Freeway Justified by Controversial Traffic Projections?" focused primarily on Wilbur Smith Associates (now CDM Smith) because they are more notorious across the country, HDR may deserve equal scrutiny when it comes to the SMF. HDR is a primary consultant in the traffic portion of the Draft and Final Environmental Impact Statements for the freeway. As the article above explains, critics of the traffic projections found that outdated census data were used as inputs and aggressive estimates were made. This is something that Wilbur Smith, who was a subconsultant for these studies, is known for in various projects.
Going further back, HDR was actually once involved in plans for a failed South Mountain toll road around 1994. Years later, HDR was chosen by ADOT in or before January 2001 to be the consultant for the "South Mountain Highway Project," specifically for the Environmental Impact Statement (EIS), with Wilbur Smith Associates as one of the subconsultants. Wilbur Smith was also involved in an attempt to build the South Mountain highway as a toll road with a controversial company in 1995. It appears that the team that determined that the EIS process was worth continuing, likely based on overestimated projections made while planning to make money from a toll road, was the South Mountain Community Advisory Team that held an early 2002 meeting which included two staff members from HDR and one from Wilbur Smith.
Several toll roads across the country have gone bankrupt due to over-estimated traffic projections, many involving the same consultants who worked on the SMF (Nossaman, HDR, Wilbur Smith) in some capacity. While some companies do make money from toll concessions that don't go bankrupt, complicated financial methods have even allowed some companies to continue to profit despite bankrupted toll roads, to the point where the risk of bankruptcy does not necessarily deter companies from inflating their numbers over and over again.
While the financing for the SMF does not involve toll revenue, it does rely on expected revenues from certain taxes. What if overestimated traffic projections for the SMF mean Arizona drivers may end up paying more in either higher taxes, tolls, or both?
Wilbur Smith Associates contributed to ADOT's Long Range Transportation Plan 2010-2035 by providing socioeconomic projections as they relate to revenue from things like gas taxes, vehicle registration, that go into the Highway User Revenue Fund (HURF), in addition to the more general projections related to future sales taxes that go into the Regional Area Road Fund (RARF). These funds are a primary source of future funds for the Loop 202, among other projects.
ADOT's SMF Request for Proposals states, "Project costs will be funded through a combination of Regional Area Road Fund (RARF) revenues, Highway User Revenue Fund (HURF) revenues, and federal funds dedicated to the Maricopa County region and ADOT. To facilitate acceleration of the Project, ADOT will also utilize some combination of financing mechanisms, including but not limited to its RARF credit, HURF credit, and Grant Anticipation Notes which leverage future federal funds."
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| Projected revenue for RARF and HURF were also provided by Wilbur Smith Associates. http://azmemory.azlibrary.gov/cdm/singleitem/collection/statepubs/id/20585/rec/1 |
This is not to accuse the consultants of projecting plenty of money for ADOT's budget, but it could be overestimated nonetheless. What is important is whether the data and methods used for the South Mountain toll road projects and for the Environmental Impact Statement are similar to those used for determining the availability of funds from which the freeway would be financed.
What happens if the HURF and RARF end up with much less money than forecasted? Both funds rely on socioeconomic growth. These funds would be affected by any future economic downturns, and the HURF would be impacted by gas prices and use of alternative fuels and vehicles. In 2010, the unpredictable and fallen rates of HURF inputs were actually used to argue for the use of P3s (toll roads specifically) in Arizona.
ADOT has done and will continue to do some refinancing and leveraging of these funds to access bonds and federal loans. Since the state is arranging the financing in the case of the SMF, rather than the private partner that could otherwise declare bankruptcy, the state will be responsible for future debt service costs (as it is, ADOT paid over $124 million dollars in interest in FY 2015).
ADOT may be counting on getting a large portion of the project financed by a loan or line of credit through the Transportation Infrastructure Finance and Innovation Act (TIFIA) program. They plan to apply, but getting TIFIA funding isn't easy. Additionally, the lawsuits confronting the SMF project pose a major obstacle since all TIFIA-financed projects must comply with the Civil Rights Act and the National Environmental Policy Act (NEPA). Although the SMF already received federal approval through the Record of Decision, lawsuits claim that the SMF would be breaking these laws. Part of at least one lawsuit relates to the inflated traffic projections in the EIS. The EIS, of which PARC points out various problems, is a necessary part of NEPA compliance.
The timing of the completion of the EIS process may actually have had something to do with TIFIA. There was a major increase in TIFIA funds for fiscal years 2013 and 2014 (which was temporary, as the 2015 FAST Act drastically cut the available funding). On July 25, 2013, the day after the EIS comment period ended, ADOT announced the receipt of an unsolicited proposal from a consortium that didn't end up winning the bid. ADOT had quietly received that proposal months before. Did the TIFIA funding motivate the consortium to put in the proposal when they did? Did that proposal expedite the completion of the EIS process which had been in effect since at least 2001? Even without the answers, we can conclude that it is likely that without the P3 arrangement, the SMF would not be where it is today and that's not a good thing.
Even if the SMF receives this loan, we would still pay for it. About TIFIA, Darwin Bondgraham writes that P3 projects can be provided "with much cheaper interest rates and more flexible terms than anything available in the private capital markets—again because the public subsidizes them."
Consultants and Tolls
Consultants specializing in P3s are expensive. These professional fees are likely not factored into the $1.8 billion price tag for the SMF contract. This is a cost worth concern considering the financial situation ADOT is in, and considering that these consultants have a lot to gain from more P3s and toll roads.
Recent press articles report that ADOT is already struggling with money, and that they may turn to tolling and/or increasing gas taxes to make up for it. Tolling is being discussed as an option for improvement of the I-17. There's a high likelihood that the related taxes will be increased one or more times before the SMF is completed. AZCentral reported at the end of 2014 that "the tax has raised about $3.1 billion for dozens of freeway, street and transit projects, but that vast sum is still $1 billion less than initially projected, with the Great Recession largely to blame. The revenue gap is expected to widen to about $3.2 billion over the next decade, until the Prop. 400 tax expires in 2025. As a result, regional officials say, the public will almost certainly be asked to approve another tax extension, perhaps as soon as 2020."
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| ADOT's 2014 Request for Information |
HDR and Nossaman (and Wilbur Smith/CDM Smith), the consulting companies involved with ADOT's Office of P3 Initiatives and with the SMF, would benefit if Arizona has to resort to more P3s and tolling to pay for future transportation repairs and projects.
Wilbur Smith Associates was hired as a consultant to help set up the Office of P3 Initiatives and International Affairs for ADOT, including determining what types of projects would be good candidates for a P3.
ADOT has already paid their P3 Legal Advisor, Nossaman LLP, nearly $3,000,000 for their services since obtaining them in 2010 (information accessed through http://openbooks.az.gov). Frederic Kessler of Nossaman is the "Lead attorney advising on development of ADOT's [P3] program covering new toll facilities, managed lanes, transit and other transportation facilities, as well as other assets..."
Protecting Arizona's Resources and Children (PARC) reported on their website,
From records obtained through the Freedom of Information Act, PARC has found that ADOT has paid Nossaman $1,082,553.40 of our tax dollars from June 2014 when they were apparently hired through July 2015. Much of this expense to the attorneys was to research PARC (yes, the invoices say that)!PARC also pointed out that Nossaman attorney(s) (probably Frederic Kessler and Robert Thornton) are paid "$635 per hour when the AZ Attorney General’s Office has attorneys on staff who are also being used on the case." PARC requested information specifically about the SMF. According to openbooks.az.gov, Nossaman was paid over $2 million by ADOT just in FY2015, so the additional payment is likely going to more general P3 work.
On top of what they'd been paid by ADOT, Nossaman has additionally been paid by the Arizona state Attorney General's (AG) office ($656,000 so far in FY 2016, $402,000 in FY 2015, according to openbooks.az.gov), as the AG is also involved in legal aspects of P3 procurement and probably around the lawsuits against the freeway. As for HDR, they work on a few projects for ADOT, so it's hard to determine without a FOIA request how much they've been paid specifically for consulting on the SMF and/or for the P3 Office (same goes for Wilbur Smith). (PARC did not FOIA this information.)
The Office of P3 Initiatives and International Affairs is meant to be small, to rely on outside advisers and simply manage the consulting team. How much influence do outside companies have over important decisions? We should also question the price tag for this office. Gail Lewis makes nearly $100,000 a year as the director of this office and the deputy director made around $93,000 in 2008-2010 (no record could be found online about whether there is a new deputy director and that their name is). On the subject of whether P3s save the state money, it should also be pointed out that a stipend of up to $2 million is owed to each of the two other consortia that submitted proposals for the SMF.
ADOT selected HDR to serve as their Public-Private Partnership (P3) Adviser/Program Manager and as such, they led the Value for Money (VfM) study and alternative delivery analysis on the SMF. The VfM approach is controversial because it can easily be skewed in favor of the P3 option. The October 2015 announcement of HDR becoming ADOT's General Engineering Consultant for the South Mountain Freeway was more vindication for HDR's approach, but time will tell.
HDR and Nossaman have both been major advocates for and consultants on P3s and tolling for several years. One of HDR's board members, Mary Peters publicly promoted High Occupancy Toll (HOT) lanes for Arizona in late 2009. HOT lanes are a type of managed lane similar to HOV lanes, with exemptions for tolling for high-occupancy vehicles and others (such as hybrid vehicles), while the rest would have to pay to use those lanes. Peters was HDR's national director of transportation policy and consulting, is described as a "respected national expert on transportation policy and public-private partnerships" and was director of the ADOT from 1998-2001. After that, she also served as administrator of the Federal Highway Administration and then United States Secretary of Transportation.
HDR proposed to build HOT lanes in eastern Phoenix as far back as 1996. More recently, a Toll Road Modeling report was done by HDR in 2012 for the Maricopa Association of Governments (MAG) which has been studying tolling, specifically managed lanes. Another study on Managed Lanes Pricing and Tolling Methods by Parsons Brinckerhoff was also completed in 2012.
Portions of Interstate 11 in Arizona, if it is built, will likely be public-private partnerships and possibly tolled as well. HOT lanes are being discussed as a possibility on a Nevada portion of Interstate 11. Considering the Interstate 11 is intended as a trade corridor, there is likely to be push-back from the trucking industry.
Atypical P3
So if ADOT is so interested in tolling, why exactly is the SMF P3 not similar to most P3s across the country? Aside from the hesitancy around tolling due to social attitudes in Arizona, this particular P3's characteristics could take a financial expert to explain—and most probably couldn't. The arrangement is different than what was surmised previously on this blog at "Companies seek partnership with ADOT to profit on freeway, Part 2: The Methods". You can read the finance jargon-filled commentary on the current arrangement by ADOT's consultant Frederic Kessler of Nossaman on their website.
In December 2014, Kessler stated that a certain Alaskan project exemplified the evolution away from typical P3s. The Knik Arm Bridge in Alaska is a problem-ridden project with which Kessler, Wilbur Smith Associates, and HDR have all been involved. Although still meant to be a toll road, the bridge is transitioning to a similar P3 arrangement as that of the SMF, no longer to be financed by the private partner due to earlier traffic projections proving overly optimistic and therefore not profitable. Prior to the transition, Wilbur Smith did the traffic projections, later also hiring HDR and another consultant to "massage" a university research institute's forecasts to make them more favorable, according to one report. The resulting forecasts were significantly higher. Kessler says that the agency in charge, "abandoned its toll concession procurement in favor of an availability payment P3 when it became clear that the short listed proposers would not proceed without state subsidies of the tolls due to the significant revenue risk in the early years."
Many P3s have moved away from reliance on toll revenues due to decrease in traffic, and went instead with availability payments. Availability payments bring their own risks, however. Kessler explains that a key factor is the "perception of greater public owner flexibility under the [Design Build Maintain (DBM)] method as compared to availability payment P3s."
He continues:
Public owners are effectively locked into long term payment obligations with availability payments... The cost to exit early is enormous... At a time when public owners are seeing stagnant or declining revenues at both the federal and state levels to pay for highway operations and maintenance, they are reluctant to take on long term payment obligations that can only be cancelled at the price of paying off debt and equity early.The Alaska Legislative Budget and Audit Committee determined that the toll and revenue projections were unreasonably optimistic and the state decided to go with public funding for the project instead. The project remains controversial. It appears that the latest arrangement shows that the problems with most P3s are catching up with them. Here's hoping ADOT is just trying to be really smart about their first P3 for a road, in lieu of not doing it at all, but it's hard to tell.
The inflated projections that have hindered the Knik Arm Bridge and other toll road projects have a lot to do with why the SMF will not be a toll road. On the other hand, inflated projections for the SMF and Arizona in general might mean tolls on other roads regardless. Either that or we'll have tax increases sooner than later.
"We are preparing to land a white whale," stated ADOT director Halikowski about the SMF at a State Transportation Board meeting last July. A long time coming, and perhaps even well-deserved, he implies. Well, if you want to compare Moby Dick to the freeway, or perhaps more accurately, the ability to construct the freeway—spoiler alert: everyone but the whale dies.
Some in Arizona think the state should keep growing and building even though most signs indicate that it has grown too much already. According to the Gila River Against Loop 202 website, the main concerns around the SMF are health, air quality, ground water, loss of land, and desecration of Muhadag Do’ag (aka South Mountain) and other sacred places. Water scarcity and a rising temperature, perpetuated by increased urbanization threaten Arizona in general.
At the same time that ADOT and other Arizona officials try to justify these projects with numbers that are too high, they're also encouraging more growth and in particular, truck traffic between Arizona and Mexico.
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