North Carolina voters’ anger about privatized infrastructure projects should serve as a warning to policymakers
Donald Trump’s preliminary plans for an infrastructure spending bill include a heavy role for private sector financing. We have argued elsewhere that this raises troubling questions. If our arguments have not yet persuaded policymakers on the dangers of wholly outsourcing infrastructure investment to private developers, perhaps they will be convinced by the result of a public-private partnership (P3) in North Carolina—an exercise in privatization that may have helped swing that state’s gubernatorial race.
Prior to the election, there was some speculation about whether or not an unpopular public-private partnership (P3) infrastructure deal in Charlotte would affect its outcome. The Charlotte Observer explains why initial indications suggest that this unpopular toll road did indeed likely sink the incumbent Governor McCrory’s bid for reelection. The issue is simple: North Carolina voters saw that the P3, which was sold on the basis of having a more innovative and competitive private sector direction, instead just became pure crony capitalism. The company got profits and excessive control in dictating what should be publicly-accountable decisions about public investments. North Carolina residents got tolls and are likely on the hook for taxpayer-funded bailouts. All in all, it is a clear cautionary tale about relinquishing control of infrastructure investments.
The Charlotte P3 financed the building, operating, and maintaining of new tolled express lanes on I-77. With mayors and governors usually hoping that ribbon-cutting on new infrastructure projects will be a boon to their campaigns, it may be surprising that additional lanes to alleviate congestion in a growing region would help sink a campaign. However, as is always the case with P3s, the devil is in the details.
In this case, the P3 contract would have given the private firm Cintra control of the lanes for a whopping 50 years. NCDOT itself notes that the population of the serviced region is expected to double by 2040. So what happens if in the next 25 years, let alone the next 50 years, one additional lane each way just doesn’t cut it? Well, the contract ensures that before North Carolina can build any more free lanes on the road, they’ll first need to pay Cintra for the right to do so. Why a private company should have substantial control over the future infrastructure needs of a major American city is an obvious question.
But the contract was even worse than simply guaranteeing a Cintra monopoly, the needs of Charlotte commuters aside. Ratings agencies DBRS and Fitch warn that the financing structure is “highly back-ended,” “allows for substantial equity distributions prior to meaningful principal repayment,” and has “risk exacerbated by a back-ended debt service profile.” What does this mean? Simply that Cintra can make some quick profits off of the project by collecting tolls in the first few years. After this they could stop doing any serious maintenance or upkeep, because they plan to simply file for bankruptcy when the deferred debt payments come due many years down the road (remember, debt payments are “highly back-ended.” Is this a totally speculative, conspiratorial worry? Not really. Cintra has already filed for bankruptcy on a P3 toll project in Texas and a P3 toll project in Indiana, and it has sold its ownership of the privatized Chicago Skyway—all in the past two years. This isn’t speculation, it’s a business model.
It’s not clear just how much taxpayers will be on the hook once Cintra declares the project bankrupt, but with a contract that so obviously facilitates funneling profits to the private provider, opposition was clear and overwhelming. The North Carolina House passed a bill to cancel the project immediately by 81 votes to 27. But Republicans in the North Carolina Senate decided not to move that bill. And while local transportation leaders in Charlotte were deciding whether to approve the plan, McCrory decided to put his thumb on the scale, warning about the “significant ramifications” from stopping the project.
We recently noted how President-elect Trump’s current infrastructure plan is just a tax giveaway to private financiers and developers rather than any sort of P3. However, the Charlotte saga highlights another caution we raised: labeling something a P3 is far from comforting for those worried about crony capitalism and graft. Giveaways to private developers are still giveaways, whether they’re called a tax credit or a P3. And the Charlotte deal-gone-bad should give pause to policymakers hoping that any ribbon-cutting on infrastructure will be good for reelection. It becomes apparent pretty quickly when infrastructure deals serve private rather than public interests.