FORBES MAGAZINE REPORT:Major toll projects called

The Interwest Management group that is promoting toll roads in Phoenix AZ, Greenville SC, and Minneapolis MN has taken a beating from activists, lawyers and now from the press, including the nation’s top circulation business magazine FORBES. The latest issue (7/7/97 p47) lambastes the outfit and particularly Interwest president Richard Carr, saying he has a “dubious past.” It accuses him of: (1) defrauding taxpayers and lenders in Apache Junction AZ (nr Phoenix) in a non-profit sewage treatment plant he established that filed for bankruptcy in Jan 97, just 15 months after it began (2) employing a project manager just out of jail for an insurance fraud attempt that involved staging a phony terrorist bombing (3) producing a feasibility study that “grossly overstated” revenues (4) beating Fluor Daniel and Perini Harbert Yeargin for the Greenville SC toll road job by improperly inflating by 50% toll projections from Wilbur Smith (5) planning to make off with $10m in management fees in Greenville SC (6) hunting “bigger game” namely taxpayers money at the State Infrastructure Banks (SIBs)

The FORBES report drew strongest rebuttals, demands for retraction and threats of libel suits, on point (4). The suggested 50% inflation appears to have been a misreading of an ambiguous phrase. It refers to an inflation, not of toll revenue, but of toll rates. It was a “baseless” charge, I was first told in my effort to follow up. Not entirely. It derives from a complaint by runner-up Perini Harbert Yeagin in a letter to SCDOT 3/11/96. I was told by a couple of people who wanted me to discount it that the letter had been “withdrawn” but John Rizzo, VP at Perini who wrote it says that’s absolutely not so. The Perini letter states as a “serious concern...the increased toll revenue schedule proposed by Interwest Carolina for whom Wilbur Smith Associates (WSA) served as traffic engineer.” It poses three questions: “What has happened in this (Greenville) area since 1994 to warrant a 50% increase in the recommended tolls? Was the first study which was provided to all proposers not prepared carefully? Has Wilbur Smith Associates prepared a study to support the project costs?” The letter goes on to refer to the “difficulties” that arise when consultants who have been involved in preliminary work available to all then participate in the preparation of a single final proposal. It notes that some jurisdictions do not allow this.

I was told emphatically that there was no “inflating” of toll forecasts and indeed that as the consultants refined their estimates they revised them down. The same Wilbur Smith forecasts were available to all contenders and so were not a factor in the choice of Interwest, they said. According to a paper by Ed Regan of WSA from the 1994 initial feasibility study for SCDOT to the 1995 preliminary traffic & revenue study for Interwest there was a 17.6% increase in estimated toll revenue for 2015 ($34m vs $29m), which seems to be consistent with a 50% increase in assumed toll rates (and associated reduced traffic). Regan’s paper says this 17.6% revenue increase was “due primarily to higher toll rates and higher corridor growth forecasts” because WSA was “provided with a completely new regional planning model and new socioeconomic growth forecasts.”

Interestingly the 1996/7 investment grade study for Interwest has revised the toll estimates for 2015 rather drastically down 35% on the 1995 numbers to $22m, which is 24% below the initial feasibility study, but by then Interwest had been chosen. 2002 opening year revenues stayed much the same 1994 to 1995 ($12.0m, $12.7m) but have dropped in the 96/97 investment grade study to $9.8m. Smoking gun? Or just honest revisions to forcecasts? Not sure.

(1), (2), and (3) have been the subject of much damaging publicity in Arizona and South Carolina and of a lawsuit against Interwest and others by the Apache Junction sewage project’s biggest lender, Allstate insurance, in connection with loans of $32m in 1995 on which the sewage project defaulted just over a year later. Allstate’s 68-page complaint filed in US District Court, AZ, May 12, says that Interwest is just a “corporate veil” for a DLR Group of Omaha Nebraska, and alleges a variety of frauds and securities misrepresentations against Interwest, DLR and others associated with the sewer project gone bad. Carr has said the suit is a “bunch of nonsense” and that blame for its problems lie more with the city than with Interwest.

Carr has quite a history of recent problems. Since 1990 he has been associated with multiple bankruptcies and lots of litigation. Robert E. Farris, Federal Highway Administrator under Reagan, has played a major role working as a consultant for Interwest. He seems as straight as they come and he tells me Carr has had some bad luck but has always been completely honest in his experience. Farris says the reports are “a bunch of trash” and “old news” — the work of “malcontents” desperate to stop the project in South Carolina who have lost cases in court and are resorting to misrepresentation. The opponents have played a big role in the news stories, no doubt about that, but there has been sufficient substance there to get the media to run with it. (Contact Bob Farris 202 879 3973, Tim Brett 864 239 0616, David Wettlin 864 298 6093)

Toll roads in jeopardy: In Arizona the state has a process in place in which Interwest is the only contender to develop the South Mountain toll road, and in South Carolina Interwest was chosen against competitors to build the Greenville Southern Connector and is now negotiating a detailed agreement with the state. In South Carolina where Bob Farris has been more prominent on behalf of Interwest the project seems to be continuing on course though the state is going to be extremely careful how it proceeds. In the Arizona project Richard Carr seems on the way out. There is talk there of Interwest being “restructured without Mr Carr.” An official told us Interwest has been “severely savaged” by the publicity over the sewage project and Carr’s background and there is concern that so much damage has been done to Interwest’s reputation that it may not be able to gain the financial and other partners to fund and build the project, even if Carr is eventually vindicated. Either or both these projects may unravel for Interwest and be thrown open for development by substitute companies. So, vultures: fly!

Greenville SC: The Greenville Southern Connector (GSC) is an approx $180m c25km long 4-lane motorway around the southern part of Greenville SC, pop 700,000 but growing rapidly with economic development. GSC takes off at the west end from the major interstate I-85 at its interchange with I-185 (which comes from the center of town) and loops through developing southern industrial and residential areas with four intermediate interchanges for access, and ends at I-385, the major highway southeast to the capital Columbia and to the port city of Charleston. The GSC will serve both bypass and local access/regional distribution functions. Envisaged in city plans since 1968, it is designed with two barrier and 4 ramp toll plazas. The opponents say it is an “industrial driveway” for major corporations planning to build factories there and that there is no way people will pay the tolls proposed. The first is probably true in part but I don’t see what’s wrong with it. The second is a matter for professional evaluation and commercial risk-taking. The courts seem to have defeated the challenges so far, but FORBES’ questions may make it difficult for them to raise their loan money. (Contact Larry Duke, SCDOT 803 737 1240)

South Mountain AZ: The proposed South Mountain Toll Road (SMTR) is a $300m to $400m c40km long L-plan road around the southwest fringe of the 2.3m pop Phoenix Arizona Valley area taking off from I-10 at 59th Avenue west of the center and heading due south to South Mountain then veering east to rejoin I-10 south of Mesa, providing motorway standard access via some 10 intermediate interchanges to about 250k people and also providing a bypass of the center of Phoenix. A couple of alternate alignments along the south are in play, a far south one in the Gila Indian community popular with the land-owners, but which generates less traffic than a closer alignment which has more property-owner opposition. (Contact Bill Hayden AZDOT 602 255 7524)

No-profits: Carr, Farris and others make the case for a toll road concession being held by a not-for-profit (NPF) corporation and Interwest has formed strong local NFPs to actually finance and own each of its three proposed toll roads. The idea is that these NFPs can take advantage of favorable tax treatment and be headed up, and indeed controlled, by a board of prominent local leaders and businessmen in the community they serve, giving them a strong local voice, local muscle and local responsiveness. My impression is that in Greenville at least government officials believe that this corporate form has substance and that the proposal offered by Carolina Interwest was the best of the three.

Buckpassers trebuchet: The downside of the NFP is that the promoters without equity get their money up-front and have no direct interest in the longterm viability of the projects they promote, and also no ability to influence how they are managed. Interwest says the problem at Apache Junction was that the local board that ran the project messed things up when it was beyond their control as developers. That’s the whole point! A developer may have a good viable project or a wonky one, but once the local NFP takes over and it goes sour, it becomes one hell of a mess to see where responsibility for failure lies. The developer/NFP form is a buckpassers trebuchet!

Capitalism is built on regular for-profit businesses in which those who promote and invest remain accountable through ownership, being rewarded with big returns and capital appreciation when they invest and manage well, while being punished with losses if they invest and manage badly. Not-for-profits are a bastard model, an awkward marriage of a charity and business.

Squalid SIBs: And as FORBES says State Infrastructure Banks (SIBs) are a potential arena for massive ripoffs by promoters. There has been a lot of hokey talk about innovative finance, public-private partnerships and leveraging taxpayers’ money through SIBs. The enthusiasts all emphasize the need for more “flexibility” in lending, which is another way of saying the SIBs won’t apply prudent lending rules and won’t, like real banks, insist on major minimum equity on the part of the borrower and won’t practice the same level of care in analysing downside risks as private sector lenders — and Gawd they get it wrong often enough! The SIBs are being deliberately structured to put the taxpayers money more at risk than the commercial lenders. Won’t there be political hell to pay once the inevitable failures begin to roll in, and the state “banks” are seen as having taken the hit, while investors walk away smiling? S&Ls all over again! SIBs will be at best pseudo-banks, lenders of last resort which get the poor projects that the market won’t touch, the very kind of projects which generally should not get the green. SIBs are also touted as channels for lending at below-market rates. With such goodies and boards appointed by politicians they will be sources of political patronage and corruption. Made-in-Little-Rock bucketshops?(see “Public/private ventures — great opportunity & great danger” TR#9 Nov 96)