CalPERS appears to be going from the frying pan into the fire. Having managed finally to exit hedge fund investments, years later than for their own good, but still well ahead of their peers, they’ve gone for another type of high-risk investment. One of the giant fund’s recent deals was an investment in a private toll road. CalPERS appears not to have gotten the memo that the privatization of roads and bridges predictably turn out to be turkeys.
As we’ll see below, CalPERS can argue that its investment is different from the typical toll-road money pit, in that it’s buying into a restructuring, not an original financing. But there’s every reason to think that CalPERS, as a newbie, does not know what it does not know. And as with private equity, it is up against players with vastly more sophistication that it has.
Here’s the outline of the CalPERS investment by Jon Ortiz the Sacramento Bee, which focused on the critique made by the state engineers’ union:
The retirement fund recently purchased 10 percent of Indiana Toll Road Concession Co. The firm runs a 157-mile stretch of highway that runs across northern Indiana from Illinois to Ohio. California’s state engineers’ union says it’s a horrible investment that sinks government employees’ money into a project that, ironically, is hostile to government employees.
The toll-road company is the first of what fund managers anticipate will be more investments in infrastructure and transportation projects as the $291 billion system broadens its reach into those sectors.
Indiana Gov. Mitch Daniels thought a public-private highway partnership would be a win-win for the state and the private sector when he proposed it in 2005. A year later, Indiana Toll Road Concession Co. won the contract with a bid that included $3.8 billion up front. The money was earmarked for highway construction and maintenance projects statewide. Meanwhile, the 75-year deal gave the firm responsibility to manage the state-owned road in exchange for keeping collected tolls.
Then the recession hit. Traffic volumes fell. The company’s debt reportedly grew from $3.4 billion to $6 billion eight years later. It went bankrupt in 2014. (Indiana got to keep the up-front money.)
IFM Investors bought the company for an undisclosed sum last year. Then last week CalPERS announced its stake, the fund’s first U.S. transportation purchase in a new program emphasizing infrastructure investments. CalPERS didn’t say how much it paid.
The deal gives Professional Engineers in California Government a heaping helping of heartburn, however. The union has fought public-private partnerships for years. Handing over what should be government work to profit-driven firms invites cost-cutting for profit, the union says, which hurts projects’ quality and compromises safety. Such agreements also shift work from the public-sector servants to the private-sector mercenaries, PECG has said. The bulk of its 13,000 members are Caltrans employees.
“Public-private partnerships are risky investments for anyone, but it is particularly troubling when you’re investing the hard-earned money of public employees,” said union spokesman Ryan Endean, noting that a Texas toll-road partnership recently failed. “CalPERS members would be better served by putting money in investments with a proven record of strong returns, not speculative deals like public-private partnerships.”
The CalPERS spokesman gave the industry patter on infrastructure deals, that they provide predictable returns with moderate long-term inflation protection.” Someone might clue her in that theory and practice are often two different things.
Now CalPERS may have bought into a distressed project at such a good price that everything will work out. But as a newbie investor in this field, the odds are against it being able to identify all the pitfalls and value them well. And CalPERS did not decide to invest via a fund; this is a direct deal with an Australian infrastructure manager (IFM is the seventh largest in the world)>
And the record of road and bridge privatizations is consistently lousy. From a 2014 article in Thinking Highways:
Beginning with the contracting stage, the evidence suggests toll operating public private partnerships are transportation shell companies for international financiers and contractors who blueprint future bankruptcies. Because Uncle Sam generally guarantees the bonds – by far the largest chunk of “private” money – if and when the private toll road or tunnel partner goes bankrupt, taxpayers are forced to pay off the bonds while absorbing all loans the state and federal governments gave the private shell company and any accumulated depreciation. Yet the shell company’s parent firms get to keep years of actual toll income, on top of millions in design-build cost overruns….
Of course, no executive comes forward and says, “We’re planning to go bankrupt,” but an analysis of the data is shocking. There do not appear to be any American private toll firms still in operation under the same management 15 years after construction closed. The original toll firms seem consistently to have gone bankrupt or “zeroed their assets” and walked away, leaving taxpayers a highway now needing repair and having to pay off the bonds and absorb the loans and the depreciation.
The list of bankrupt firms is staggering, from Virginia’s Pocahontas Parkway to Presidio Parkway in San Francisco to Canada’s “Sea to Sky Highway” to Orange County’s Riverside Freeway to Detroit’s Windsor Tunnel to Brisbane, Australia’s Airport Link to South Carolina’s Connector 2000 to San Diego’s South Bay Expressway to Austin’s Cintra SH 130 to a couple dozen other toll facilities.
We cannot find any American private toll companies, furthermore, meeting their pre-construction traffic projections. Even those shell companies not in bankruptcy court usually produce half the income they projected to bondholders and federal and state officials prior to construction.
And again, while CalPERS is not investing in a new deal but a restructuring of a deal gone bad, which was originally done by industry leader Macquarie Bank and is now in the hands of IFH Investors, another major Australian player and the seventh largest infrastructure firm in the world. The major player seek to emulate the Macquarie model, which entails pulling out tons of fees. CalPERS is escaping only one layer of fees by going direct, at the cost of diversification. From a November 2014 article, How Macquarie Makes Money by Losing Money on Toll Roads:
The Sydney Morning Herald’s Alan Kohler shares [hedge fund manager Jim] Chanos’ skepticism. In a 2004 editorial, he wrote, “The Macquarie model is justly famous around the world. It is quite possibly the most efficient method of legally relieving investors of their money ever conceived.”
On the one hand, CalPERS was wise to avoid investing in new construction, since those deals involve such huge information asymmetries, with both the contractors and infrastructure firm having aligned incentives in paying too much for the deal, that investors are taking undue risks. But on the corporate side, there is a long history of companies coming out of bankruptcy only to wind up back in it again in a few years. And the asset manager, as with the original deal, pulls out enough in fees so as to be indifferent to the outcome of any particular project. There’s not much history on these restructurings of infrastructurings, and CalPERS appears to be exhibiting overconfidence in venturing into an area where it has little experience.
19 comments
Comments are closed.
“CalPERS can argue that its investment is different from the typical toll-road money pit, in that it’s buying into a restructuring, not an original financing.”
um, I’m no expert (understatement) but isn’t buying into a bad restructuring deal the essence of PE investing? So, isn’t buying into a restructuring deal, sans PE fees, still buying into a bad deal? (Shakes head in confusion….)
Thanks for your continuing reporting on CalPERS, PE, and pension funds.
adding: if CalPERS wants to do its own in-house PE investing (not a bad idea), maybe they ought to get some actual expertise. They could start by reading NC.
These corporate looters are strip mining our national assets. Everyone involved should be facing criminal prosecution. This is just one more example of committing theft on such a massive scale that everyone just goes along, because they are too brainwashed to imagine that maybe, just maybe, the people they have put in charge of their governments (and their retirement funds) are colluding with Wall Street pirates to rob everyone.
I’ve been wondering for quite some time now how blatant the criminal activities of the PTB would have to become before a critical mass of people will actually do something about it….and I’m still wondering.
+1
+2
This deformed version of public infrastructure provision will be exactly the kind of crap that HRC’s husband will be shoving at us if dynastic succession prevails. It’s the perfect sequel to the assault on regulation and cheerleading for markets that was part of his presidency and has been the ideological cologne for his corrupt practices since 2000.
I just said on another thread here that there’s no fool like an American fool. Don’t care how people vote. I had a few hopes – keeping my expectations low, however – that maybe with Sanders (and yes, even with Trump) US voters might actually wake up a little and learn something.
My conclusion: not so much.
People aren’t paying attention. And stuff like this requires citizens to really get into the weeds and grasp the depths of the robbery and plundering that’s happening. As long as people have their gizmos and gadgets and can watch cat videos, I guess it’s all good… for now.
Not to mention this investment is directly at odds with members’ interests:
http://www.sacbee.com/news/politics-government/the-state-worker/article76809757.html
basic physics—–road damage increases exponentially (by a **power** of 4) as weight increases. Tolls increase linearly by weight.
But given lobbying/insider access freight companies, tolls are always set below the true cost of the road damage that commercial vehicles cost with passenger cars subsidizing the difference.
and yet another subsidy that makes hyper-long supply chains profitable.
Keep up the good work on exposing dumb investments like this that CalPers seems to make on a routine basis. Believe me, some of us are watching and taking action where we can.
This is just pathetic. Everyone who pays any attention – admittedly too small of an amount of citizens – knows that Toll Roads are a terrible investment. Just more Wall St Piracy on display.
Wake up, CalPers! Or are you being “compensated” to make these skeevy “investments” with MY money?? Inquiring minds would love to know.
I think the railroads went bust in the 1800s despite having slave labor. Those who benefited from these railroads are not the same as those who built them. Everyone wants the infra but no one wants to pay for it. Infra needs to get fixed but who gets to pay for it?
We need more business investment, therefore more risk… so who gets to bag the losses? The retirees or those with guaranteed pensions get the guaranteed 5-7% returns while the younger generations get the venture capital and the maintenance costs that bring no gains? So the 55+ get the profitable infra projects and government funds the losers?
The prevailing ideology is that everyone should be responsible for funding their own retirement but from top-down, we know from the get go that half will be under the median and fail. How can such a system of known failure be acceptable?
Fighting for the protection of these failed pension is a lost cause because they are part of systemic failure. We know that many projects fail and some do well. When groups become powerful they will do whatever it takes to avoid the losses. And that includes the 55+ in an ageing demographic.
If government is to pay for infra, government should also pay for pensions. The idea of everyone funding they own pension is flawed… why should everyone be expected to save in case they live to 95? How inefficient!
Here in Colorado we’ve got two examples of toll road chicanery.
In one a Portuguese company bought the state out after construction and several years of meager use. Looking at the numbers this company will lose money for the first twenty years but more than make up for that lost money in the ensuing long term contract.
Another one the multi-national company committed money into construction of an additional toll lane to an existing road that runs free. This ppp deal is so convoluted and encompassing I won’t go into the details. But outside of the politicians that didn’t have to come up with more tax money to make a go of the project not too many are happy with the long term contract. But again the numbers long term will provide a good return on investment for the private investors.
The Portuguese company is committed to many such projects in Europe and I doubt they are in it to file bankruptcy. The other conglomerate is going to make so much guaranteed money there isn’t a chance they are in it for bankruptcy, the guarantees of profit and control of competition are too extreme to expect any exit strategy.
Interesting article though. Without details of the contract entered into by CalPERS it is difficult to evaluate properly. Same thoughts for the failed projects listed.
Lambert probably has some insight on this subject here in Colorado.
The FILO Bankruptcy Queue, employing the global middle class ponzi pyramid to manage debt slaves to produce scarcity, a demographic pendulum clock, is simply too heavy for the next phase, and has burned out the old motor. But that isn’t going to stop the expert mafia from pretending otherwise, because coercion with infrastructure debt money is all they know. The rest, the Silicon Valley Internet, is bread and circuses. The tent is rolling up, with no list of future engagements.
Common sense tells you that what the experts know is a tiny slice of what there is to know.
God is the , unknowable.
Worship no other God.
Seek and you shall find.
The future only exists in the eyes of children. And only for so long.
As you now see, the empire is capable of transmitting false signals for generations, millennia with cultural rotation, placing its time on the side of scarcity markets, with a job bait for accumulated debt swap. The experts have no idea how the if/then/else genetic code works on the DNA protein bank shared by species. To know is to stop learning, and there is no line of talent waiting to bail the experts out.
You can bet on a repeat of WWII, but I wouldn’t. The screw fulcrums are separated into event horizon gears by a quantum vortex dimension, with a preamp filter and power amp, fusion fission fusion, fission fusion fission, and Not.
Whenever one of these toll roads deals goes down, look very carefully for Dick Cheney’s godson, D.J. Gribbin IV around somewhere, the former Koch Industries guy and Bush Administration guy, has long been a toll roads lobbyist.
I just spent some time at Gonzaga, my personal favorite. What the multinationals are doing to cultures is a pity, but the overwhelming efficiency is something to behold.
> CalPERS appears not to have gotten the memo that the privatization
> of roads and bridges predictably turn out to be turkeys.
For whom?
It offloads an operational cost from some politician’s budgetary problems,
onto the backs of future CalPERS pensioners, who will eat the loss
eventually (delayed grenade going off is a feature, not a bug),
while the faciliators take their skim immediately (and are well outside the blast radius when the grenade
goes off, also a feature, not a bug) for setting the whole thing up.
It’s just a variation of the Private Equity takeover scam.
This is never going to end if people keep
repeating the language that is designed to misdirect attention in the 3 card monty…
Sounds like a real-life “The Producers”. If we’re lucky, we’ll go bankrupt!
In real life, Max & Leo walk, and the old ladies eat cat food.
There is a certain type of beauty in watching private industry
pack public employee pensions with explosives….I’m sure
it will be used later to show how “government doesn’t work”.
Texas has its own version of PPP. TX SH130 toll road declared bankruptcy in just 3 years.
I find it surprising that as a rule these investments loose money given the subsidies and other hand outs, though based on the shell company hanky-panky above, I can see why they would continue to line up at the trough.
A considerable part of the French highway system is either private or private/public and while I have no idea about bankruptcies, I can say the tolls are like their train system ever since they turned everything into high speed: expensive. That said, from the outside at least, it appears they keep them up well (both).