California: Leading the Way in Failure

As one might expect of California, successful transportation public-private partnerships (P3s) face many government hurdles. In the early 1990s, the California Department of Transportation (Caltrans) initiated three pilot P3 projects in Southern California and one in Northern California. Only two of the four went forward: State Route (SR) 91 Express Lanes in Orange County and SR-125 in San Diego County.

The SR-91 toll lanes in Orange County were built in just over a year, with Caltrans estimating that they would have taken at least until 2001 to compete were the private sector not involved. A consortium of private investors secured a 35-year concession to operate the tollway, and the consortium financed the entire $135 million project. However, the agreement between Caltrans and the consortium mandated a three-mile “protection zone” adjacent to the lanes. This protectionist move prohibited Caltrans from adding competing lanes within the zone—public- or private-funded—and specified a bizarre series of restrictions on investment rate of return, maintenance, and infrastructure improvements.

In less than a decade, these contract provisions and the resulting practices had led to a rapidly deteriorating situation, with confusion and panic on all sides. The consortium was facing internal pressure from investors and was involved in several protracted legal battles with Caltrans and other interests. In 2002, the California Assembly passed legislation that authorized the Orange County Transportation Authority (OCTA) to buy out the concessionaire, shut down the protection zone, and eliminate tolls at the end of the 35-year period. The legislation also prohibited OCTA from entering into new P3 agreements with potential SR-91 concessionaires, and required that all future franchise agreements be approved by the legislature.

The story of SR-125 is equally absurd, albeit in entirely different ways. SR-125 concerned building a new 12.5-mile $650 million road between SR-905 and SR-54 in San Diego County. The project was also a 35-year build, operate, and transfer concession, but it took nine years for the project to receive final approval from state and federal environmental authorities. In 2002, the original private investment consortium sold its interest to Macquarie Group, an Australian infrastructure development, financing, and management firm, before construction had even begun. The southern tolled portion, since renamed the South Bay Expressway, eventually opened in 2007, and Macquarie was optimistic about the prospect of turning the project around.

In March of this year, Macquarie’s subsidiary filed for bankruptcy protection (reorganization). Many of the less savvy critics were quick to blame the private sector. Here’s a personal favorite:

San Diego’s South Bay Expressway foreign-owned toll road has become the new poster child for the failed policy of road privatization. Up until now, most “conservative” and libertarian think tanks have promoted PPPs (public private partnerships) as the “free market” solution to road building. I’ve said all along it’s no such thing.

Yikes! But given California’s particularly ailing economy, bloated regulatory state, and business flight to friendlier states–not to mention that private toll operators still compete with traditional government monopolies–is it fair to blame Macquarie? These problems were nearly entirely the result of sloppy, slow, and stupid government actions. They highlight the inherent flaw with P3s: one of the Ps stands for the public sector.