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The road to ruin?

Here’s something to chew on while you sit in the traffic jams caused by the Downtown Bridge construction.

There’s a school of thought, articulated by New York Times senior critic Michael Kimmelman, that the Downtown Bridge and the web of interchanges and overpasses is the last thing Louisville’s riverfront needs … an outdated solution to a problem that doesn’t exist. There’s also a school of thought that says we can’t afford it.

Here’s a data point confirming both schools might be right.

Last week, the Italian/Australian consortium that owns the Indiana Toll Road filed for bankruptcy protection with a plan to restructure some $6 billion in debt, the latest example of a private investment in public infrastructure that failed to meet (read: “didn’t come anywhere near”) revenue projections, according to the Wall Street Journal.

Why is this relevant to us? Well, the Ohio River Bridges Authority had massaged the number for the Downtown Bridge, saying it would relieve cross-river congestion in the early days of the environmental impact study, then finding traffic would actually decrease when preparing the investment grade tolling study last year.

With more than a billion dollars in construction costs to repay, the tolls could start out at a reasonable level but quickly rise if traffic fails to materialize. And that, of course, would dissuade motorists, which could lead to tolls on all Ohio River crossings in Louisville, higher tolls and ultimately the same situation as our neighbors to the north.

Anyway, the WSJ reported ITR Concession Co. filed for Chapter 11 protection in U.S. Bankruptcy Court in Chicago. ITR bought the Indiana Toll Road under the assumption that tolls would cover purchasing and maintaining the 157-mile road. They didn’t.

The 58-year-old road in Northern Indiana between the Ohio Turnpike and Chicago Skyway has struggled for years with a heavy debt load and lower-than-expected traffic, according to the WSJ post.

In 2006, our Italian/Australian friends paid $3.8 billion for the right to operate the road for 75 years as Indiana sought to privatize its infrastructure. The winning bid brought in twice the value state-paid consultants had calculated for the lease, according the WSJ. Which of course was great for Indiana … until the whole deal gets nullified by bankruptcy courts.

From the post:

ITR has since pumped $458 million into improving the toll road, Mr. Redondo said in a court filing, but a drop in interstate commerce following the global recession dampened revenue on the trucking-heavy route.

Last year, ITR generated $158 million in earnings before interest, tax, depreciation and amortization but paid approximately $193 million to service its debt, filings show. In June, the company missed a $102 million interest payment, which helped accelerate restructuring talks with hedge funds that bought the road’s bank debt.

ITR’s secured debts include $2.15 billion owed on terminated “swap” transactions set up to hedge against interest rate fluctuations, as well as $3.85 billion in first-lien syndicated bank debt. Its restructuring plan has the support of more than 87% of debtholders in amount and 89% in number, court papers show.

So, essentially, the toll road deal includes all the elements of poor infrastructure financing in one package, including interest rate swaps!

The Indiana Toll Road ain’t the only case of brutal reality diverging dramatically from revenue projections. American Roads, which operates toll roads in Alabama and Michigan, went bankrupt last year, the post notes.

And if you think it’s better that private companies and the financial giants backing them take a bath than states, it is … except the pain connects back to real people. The teachers who find out their public-employee retirement funds invested in the hedge funds that invested in the roads and bridges, for just example.

Ultimately, the chickens always come home to roost.