Saturday, December 28, 2013


The future of the proposed $2 billion South Mountain extension of the Loop 202 freeway is not looking so bright, and with good reason. In August the Environmental Protection Agency (EPA) released a statement which found the Arizona Department of Transportation's $22 million Draft Environmental Impact Statement (DEIS) to be "inadequate", and unbalanced by overstating the risk of greater traffic congestion and air pollution if the freeway was not built.

In addition, two school districts have passed separate resolutions against the extension of the Loop 202 freeway citing environmental impact and health concerns for students and residents. The Tempe Union High School District Governing Board passed a resolution in November opposing the new construction, while the Kyrene School District Governing Board passed a resolution in October that opposed the extension and in support of the "No Build" alternative to the Pecos Rd alignment. 

The anti-freeway resolutions supported by two school districts, and the EPA's statement are validations of the concerns of Akimel O'odham residents of the Gila River Indian Community and their grassroots campaigns to halt the project.  Despite the opposition from community members and the negative report from the EPA, a coalition of construction groups continue to lobby for the South Mountain extension, along with the Arizona Republic's editorial board, and a handful of Phoenix politicians (including two who admit they have taken donations from the construction groups, and another who has land investments tied to the freeway). While the freeway project appears to be in limbo, state transportation officials insist that construction will begin soon, even if the funding sources could face more criticism than the politics behind the freeway.

The article below is the second part to the series of article from the Stop CANAMEX blog and details more of the complex relationships between the business interests lobbying for the construction of the freeway, and the larger economic vision for central and southern Arizona.

Down and Drought have reprinted the article with the author's permission.Please also see, "Companies seek partnership with AZDOT to profit on freeway, Part1: The Networks" at

Disclosure: The author of this piece was unfamiliar with the financial concepts discussed below, prior to researching this specific public-private partnership for the Loop 202 extension.  This is meant to provide a starting place for further examination of these issues.

You're likely wondering, "No tolls?  How are private companies going to make profits fronting the money for a freeway?"  Well, here's what you need to know.  These companies' vast public-private partnership (P3) promoting networks have come up with a number of ways to make profits from joining with the public sector to work on projects that would normally be funded by tax dollars.  But wait- these projects would be funded by our tax dollars anyway, and on top of that, these companies can avoid paying some of their own taxes.  Some recent transportation P3 arrangements include something called "availability payments" which come from our local sales taxes several years down the road, TIFIA funds which are federal loans with lower interest rates than private entities can usually get, and other options such as private activity bonds which the companies don't have to pay taxes on.  This P3 arrangement is actually preferred by companies because they take on less risk than with a toll road since they're not relying on the traffic to pay the tolls; they get paid no matter what, as long as they finish it.

It appears likely that one or more of these "innovative financing solutions" may be part of the proposal put forth by the South Mountain Development Group (SMDG) to build the Loop 202 South Mountain Freeway.  This unsolicited proposal is being sold to us as a way to get the road built more quickly, even though the companies would make a profit from our tax dollars.  Not only are many opposed to the freeway whether or not it would involve a P3, it also may not even qualify for federal funds if it violates federal environmental and civil rights laws.

The South Mountain Development Group (SMDG) is made up of Kiewit Development Co., Kiewit Infrastructure West Co., Sundt Construction Inc. and Parsons Corp.  The way availability payments work is that essentially the companies and the Arizona Department of Transportation (ADOT) would come into an agreement in which SMDG fronts the money and after completing the project, they receive payments from the state years down the road, as they become available (hence the name).  When they say that SMDG would front the money, this means they are likely to put up some of their own money, but most of the funds will come from loans from banks and/or financing such as loans with lower interest rates through federal programs.  In fact the timing of this P3 proposal may have to do with a temporary increase in funding through a federal program called Transportation Infrastructure Finance and Innovation Act (TIFIA), to be discussed below.

The lack of state funds is the primary barrier to completing projects, which is a good thing for the many people who do not want damage done to South Mountain, the surrounding environment, and the community resulting from the proposed Loop 202 extension, aka the South Mountain Freeway.  With private interests putting up the funding, the construction could start that much sooner.  The companies' interests in profit may also impact our ability to oppose it.

Availability Payments

The limited information about the arrangement for this P3 can be found in various news articles. According to an Arizona Republic editorial, SMDG, "offered to front the money and design and build the freeway, with the state paying them back later."1  Another AZ Central article provided a bit more information on this sales tax. "Because much of the project is funded by Maricopa County’s voter-backed, half-cent-per-dollar sales tax, the South Mountain Freeway has a dedicated stream of revenue that takes uncertainty away from would-be private financiers."2

The availability payments, it appears, would likely come from the Maricopa County Regional Area Road Fund into which the Arizona Transportation Excise Tax is deposited.  The sales tax extends through the end of 2025.3 

This would not be Kiewit's first transportation project that involves availability payments on a non-toll road, and as the nation's third largest contractor, this definitely wouldn't be their first P3.  Kiewit is part of the construction of San Francisco's new Presidio Parkway P3 project. "No tolls will be collected. Instead, the legislature has agreed to annually appropriate the availability‐based payments promised to the P3 developer for the 30‐year term of the concession. That money will be used to secure about $300 million in loans to build the project, cover the developer’s profit and pay all operating expenses."4  Other projects in North America with Kiewit as part of the P3 have involved availability payments, often in combination with toll concessions.5  

Another reason to assume that availability payments are part of the SMDG plan is that Kiewit is also directly involved in promoting the availability payments arrangement and P3s as part of the Association for the Improvement of American Infrastructure (AIAI).  "The growing acceptance of the availability-pay model for delivering transportation megaprojects has drawn an alliance of major U.S. and Spanish contractors into the P3 advocacy business. Five builders and investor Star America launched the [AIAI] at a conference in New York this June. Their aim, among other things, is to put a lobbyist in key states to promote all types of P3 models—availability, revenue risk and 63-20 nonprofits."6  Arizona already has what is termed "broad-enabling" P3 legislation which allows for availability payments and unsolicited proposals, which means this is one of a minority of states that are the most lax about P3s.7

Why are these companies increasingly pushing for P3 with availability payments?  In "Highway Robbery: How 'public-private partnerships' extract private profit from public infrastructure projects," Darwin Bondgraham explains further, 

Availability payments are akin to lease payments, whereby the state pays the private developer of a highway to maintain the road for public use. Rather than collecting tolls from drivers who use the route, the state pays the private developer directly from general state revenues collected through a gasoline tax or other taxes...
P3 companies, in short, are now virtually guaranteed returns on their investments. The shift away from tolls and the growing use of availability payments means P3 investors no longer need worry about traffic flows. Guaranteed lease payments, together with the low interest rates of federally subsidized loans and tax-exempt bonds they use to pay for construction, mean sure profits.8
It is the combination of the availability payments and federally subsidized loans that makes these deals work so well for private companies.

TIFIA funds

The primary reason for the timing of this large-scale P3 project is likely the increased access to TIFIA funding.  Last year, Obama signed into law Moving Ahead for Progress in the 21st Century Act (MAP-21) which provides more funding for transportation projects for a limited time. In a section titled "Public-Private Partnerships," a MAP-21 Analysis report summarized, "MAP-21 makes strategic investments to attract private sector resources to transportation improvements. Specifically, it increases funding for the Transportation Infrastructure Finance and Innovation Act (TIFIA) program from $122 million per year to $750 million in FY 2013 and $1 billion in FY 2014. The measure also increases the maximum potential TIFIA share of total project cost from 33 percent to 49 percent."9   This report was published by American Road & Transportation Builders Association (ARTBA), whose conference sponsors include HDR (contracted to do the Environmental Impact Statement for Loop 202) and speakers include Gail Lewis of ADOT.

The Loop 202 extension may have caught the eye of SMDG members because USDOT Federal Highway Administration website lists "South Mountain Toll Road" among other examples of illustrative U.S. projects that could be funded with TIFIA.10

Keiwit's construction of the Presidio Parkway in San Francisco was also partly financed by TIFIA loans, but it likely won't be the last.11  The Federal Highway Administration's website explains the appeal, "The new FHWA policy will allow those considering the availability payment public-private partnership (P3) delivery method to count on a level of Federal assistance comparable with that of a traditional public works project. Although San Francisco's Presidio Parkway was the first project in the country to use Federal-aid for availability payments, these new and expanded policy flexibilities will make it easier for other States to follow suit and take advantage of this form of innovative financing."12   

In "Highway Robbery," Bondgraham cautions,
Although P3s are advertised as tapping the power of private capital markets to invest in public infrastructure, the reality is that P3 investors enjoy large public subsidies. For example, private companies building P3 highway projects now routinely expect states to grant them authority to issue qualified private activity bonds (PABs). Unlike most lending in private capital markets, interest payments on PABs are exempt from federal taxes (because the cash proceeds are expected to be put to use building goods with broad public utility, rather than projects that solely benefit private parties). Since the bonds are not taxed, they allow the borrower to obtain cash at less cost. This form of financing, then, is essentially a tax cut for the investment banks and corporations with the P3 contract. The U.S. Department of Transportation also routinely grants Transportation Infrastructure Finance and Innovation Act (TIFIA) loans to P3 developers. TIFIA loans provide companies with much cheaper interest rates and more flexible terms than anything available in the private capital markets—again because the public subsidizes them.13  
It will be interesting if HDR comes out with a competing bid on the Loop 202 extension P3 since they have directly "consulted frequently to the Federal Highway Administration's Program Office of Transportation Infrastructure Finance and Innovation Act (TIFIA) on risk-based revenue and credit forecasts."14  They have also be involved in projects that have received TIFIA funding.

The Arizona Republic reports that Rick Norment, executive director of the National Council for Public Private Partnerships stated that they, "advise folks to take the low-hanging fruit first." He sees the Loop 202 extension as too risky for ADOT because it is a more difficult project.  However, Gail Lewis, Director of ADOT Office of P3 Initiatives and International Affairs, and Eric Anderson, MAG’s transportation director see it differently because of the new availability payments option. The companies, "know they’ll get paid back, making Loop 202 'low-hanging fruit' in Lewis’ and Anderson’s minds."15

Limitations to their funding strategy

Now, the good news is that if SMDG is counting on access to these TIFIA funds, they are in for an uphill battle to get approved.  As of right now, the EPA does not accept the current DEIS for the Loop 202 South Mountain Freeway extension.16   The proposed freeway may also not meet National Environmental Policy Act (NEPA) standards, and may violate civil rights as well.  The TIFIA statute requires that "...all projects receiving TIFIA credit assistance must comply with generally applicable Federal laws and regulations, including title VI of the Civil Rights Act of 1964, the National Environmental Policy Act of 1969..."17 

Attorney Howard Shanker outlined the problem in a cover letter regarding comments on the Loop 202 South Mountain Freeway DEIS. "NEPA requires a fully informed decisional process through, in part, the preparation of a DEIS.  The DEIS, however, treats the crucial decision to proceed with a $3 billion tax payers' funded project not as an impending choice to be pondered, but as a foregone conclusion to be rationalized.  The DEIS provides flawed analyses, generalities, heavy-handed self-justifications.  This is a direct violation of applicable law and a gross abuse of the public trust.  No reasoned decision could be made on the basis the DEIS that, for example, improvements to existing highways or arterials would not better serve regional transportation needs; that public transportation alternatives are not viable; or that abandonment of the project is impractical."18 The organization Protecting Arizona's Resources and Children intends to fight for No Build in court if need be.19

Additionally, a Federal Title VI Civil Rights complaint was submitted to ADOT on July 30.  "The civil rights complaint alleges that ADOT violated the civil rights of Native peoples of the Gila River Indian Community by proposing and promoting the South Mountain Loop 202 Freeway that would negatively and disparately impact Gila River Indian Community tribal members by desecrating their sacred South Mountain and causing disparate health impacts."20

At this point it seems that ADOT may issue a call for competing proposals, and we wait to see what happens with the Draft Environmental Impact Statement.  There are various reasons to oppose the project even if it is not a P3, although P3s pose new problems.  We are likely to see more P3 proposals, such as for the Interstate 11 connecting Phoenix with Las Vegas,21 and/or the North/South Corridor22 to facilitate CANAMEX freight traffic.

Thanks to Gila River Against Loop 202 and Darwin Bondgraham for assistance and insight for this series.

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