Public-Private Partnership Policy Casebook/I-69

Summary

The I-69 Section 5 Project is an initiative led by the state of Indiana to upgrade and incorporate 21 miles of the existing SR 37 highway between Bloomington and Martinsville to U.S. Interstate quality. The $325 million dollar project will add additional travel lanes, overpasses, and improve interchanges throughout the Southwestern Indiana corridor. Although currently being constructed and managed by the State of Indiana (as of November 2017), this project was initially part of a Public-Private Partnership (P3) between the State of Indiana and the I-69 Development Partners, a concessionaire created by contractor Isolux Infrastructure Netherlands B.V. The I-69 Development Partners were contracted to design, build, finance, operate, and maintain (DBFOM) I-69 Section 5 for 35 years, however, control and operation of the 21-mile project shifted back to the State of Indiana in 2017 after I-69 Development Partners failed to meet contract requirements and nearly defaulted in 2017.

Actors

• State of Indiana: The overarching public entity involved in the Indiana I-69 project. At the time of the project, the State was under the leadership of Governor Mike Pence, who served from January 2013 to January 2017.
  • Indiana Finance Authority (IFA): The IFA’s mission is to “oversee State-related debt issuance and provide efficient and effective financing solutions to facilitate state, local government and business investment in Indiana.” The IFA was in charge of putting together the Statement of Qualifications to design, build, finance, operate and maintain (DBFOM) the I-69 Section 5 Project through a Public-Private Partnership Agreement. The IFA was also in charge of selecting the winning bid. In 2017, the IFA was instrumental in negotiating and taking over the management of the Section 5 project from the concessionaire.
  • Indiana Department of Transportation (INDOT): INDOT is an Indiana government agency responsible for regulating transportation infrastructure in the state. INDOT was the project sponsor for I-69 Section 5.
• I-69 Development Partners: Selected as the winning bid for I-69 Section 5, the I-69 Development Partners is the group of companies that collectively make up the project concessionaire. The companies include: the project proposer; equity members; maintainers of the project; engineering firms; construction firms; contractors; and local contractors.
  • Isolux Infrastructure Netherlands B.V. (Isolux Infrastructure): The original project proposer, sole equity member, and lead firm responsible for operations and maintenance of the project. Isolux Infrastructure was constructed under Netherlands’ laws.
    • Public Sector Pension Investment Board (PSP): PSP was a AAA rated Canadian Corporation that acquired 19.23% of equity share capital of Isolux infrastructure.
    • Grupo Isolux Corsan S.A. (GIC) - GIC was the original parent company of Isolux Infrastructure. After reorganizing in 2012, GIC became the primary equity shareholder, acquiring 80.77% of the equity share capital of Isolux Infrastructure.
  • Corsan-Corviam Construcción, S.A. (Corsan): Corsan was the lead contractor and the design-builder for the I-69 Section 5 project. Additionally, Corsan is a subsidiary of GIC.
  • AZTEC Engineering & TYPSA: AZTEC and TYPSA formed a joint venture to serve as the lead engineering firm for I-69 Section 5.
  • Local contractors (subcontractors)
    • E&B Paving (Anderson, Indiana): A paving company that is a subsidiary of Irving Materials Inc., a large concrete, aggregate and building materials supplier.
    • Force Construction Company (Columbus, Indiana): A construction firm headquartered in Columbus, IN.
    • Gradex Inc of Indianapolis (Carmel, Indiana): A heavy highway contractor headquartered in Carmel, Indiana specializing in excavations and grading.
    • Burgess & Niple, Inc.: A architectural and engineering firm headquartered in Ohio, with a branch office in Indianapolis, IN.
    • Christopher B. Burke Engineering, LLC: An Indiana firm that specializes in planning, design, construction of municipal and private infrastructure projects. Infrastructure Engineering, Inc.: A civil engineering firm with an office in Indianapolis, IN.

Timeline of Events

• 1991: U.S. Congress passes the Intermodal Surface Transportation Efficiency Act (ISTEA) and designates I-69 from Indianapolis to Memphis as a priority route, but provides no funding for the project.
• 1993-1998: North American Free Treaty Agreement (NAFTA), National Highway System designation Act (NHSDA), and the Transportation Equity Act for the 21st Century (TEA21) are all introduced, both prioritizing the importance of I-69 construction.
• 2005: New Indiana Governor Mitch Daniels supports the I-69 extension project and seeks to finance the project through the privatization of the east-west Indiana Toll Road (ITR). Gov. Daniels starts the Indiana Major Moves initiative to fund transportation highway infrastructure projects. As part of Major Moves, Indiana enters a partnership with Macquarie-Cintra, an Australian-Spanish consortium, leasing the ITR to the private operator for $3.85 billion over 75 years.
• 2006: After a close vote in the Republican-controlled senate and house, the Major Moves bill is passed and approximately $700 million of the ITR earnings are earmarked for the I-69 extension in Indiana. These funds cover the construction of the first four sections of the I-69 project, leaving Sections 5 and 6 without funding.
• 2013: The State of Indiana adopts the Public Private Partnership (P3) method to fund I-69 Section 5 and releases an RFP. In May 2013, the IFA selects four potential candidates.
• 2014: The IFA selects I-69 Development Partners as the concessionaire for the I-69 Indiana Section 5 project with the expectation that the project will be completed by the end of 2016. Isolux bid is for $325 million, $73 million dollars less than the nearest bidder. Isolux develops the project company/ concessionaire, I-69 Development Partners, for the DBFOM process.  
• 2015: Isolux Infrastructure Netherlands sells stake in concessionaire I-69 Development Partners to Canadian Public pension manager, PSP.
• 2016: Contractors hired to construct I-69 halt work, citing a months of delayed payments from the concessionaire. IFA issues a letter of non-compliance to I-69 Development Partners. Fitch Ratings downgrade bonds to B rating.
• 2017: Standards and Poors (S&P) downgrade bonds to CCC-, citing the likelihood of default by I-69 Development Partners.
• 2017: State of Indiana Department of Transportation (INDOT) takes control of the Section 5 project from the concessionaire and I-69 Development Partners avoid defaulting. The State of Indiana assumes all financial risk to operate and maintain the roadway.

Map of Locations

• I-69 Section 5 map from Evansville, Indiana to Indianapolis, Indiana broken into the 6 project sections.

I-69 Background

I-69 Background

Originally nicknamed the NAFTA superhighway, due to its potential to establish stronger trading routes between the US, Canada, and Mexico, Interstate I-69 includes over 800 miles of highway through 8 US states. When completed, US I-69 will span from Port Huron, MI to Southern TX, traversing through portions of Indiana, Kentucky, Tennessee, Mississippi, Arkansas, and Louisiana. although designated in the 1950's and strongly advocated for since the 1970's, major advancements to move the project forward didn't occur until the 1990's when congress proposed the New National Highway System in 1991, designating the I-69 route as a “Corridor of the Future”. Since the 1991 designation, states have individually been making progress on filling the gaps for I-69, bringing current highways up to U.S. interstate standards or building new expressways. Funding shortages and general unpopularity of using toll roads for financing the projects have delayed the implementation of many of the segments needed to complete the Interstate.

Indiana Section

In Indiana, the proposed I-69 project spans from Evansville to Indianapolis and covers a total of 142 miles. Major goals of the I-69 project in Indiana include the improvement of economic vitality of southwestern portion of the state and better connecting the region through improving access to jobs, education, and healthcare. The State has broken the 142 mile corridor into 6 sections, each with their own plans for funding, design, and construction. Sections 1-3 of I-69 in Indiana opened for operation in 2012, saving motorists 30+ minutes of travel time spanning the 67 miles, while Section 4 opened in 2015. Sections 1-4 were funded by the state of Indiana, with approximately $700 million in funds coming directly from the sale of the Indiana Toll Road in 2006.  Section 5, described in greater detail in the following sections of this wikibook, was funded through a Public-Private Partnership rather than public funding. After the selection of the private concessionaire, the I-69 Development Partners, the project quickly fell behind schedule, experiencing multiple delays in construction between 2014 and 2016. As of 2017, management of Section 5 has been transitioned back to the State of Indiana. INDOT is currently working on finalizing the preferred route for Section 6, which they are basing on the Draft Environmental Impact Statement (DEIS) and public feedback. Brief descriptions of Sections 1-6 are provided below:

Section 1: Runs from I-64 north of Evansville to S.R. 64 near Oakland City and is approximately 13 miles in length. The Record of Decision was received on December 12, 2007. Section 1 is now open to traffic.

Section 2: Runs from S.R. 64 near Oakland City to U.S. 50 just east of Washington and is approximately 29 miles in length. The Record of Decision was received on April 30, 2010. Section 2 is now open to traffic.

Section 3: Runs from U.S. 50 near Washington to U.S. 231 near NSA Crane and is approximately 26 miles in length. The Record of Decision was received on January 28, 2010. Section 3 is now open to traffic.

Section 4: Runs from U.S. 231 near Crane NSWC/NSA to State Road 37 south of Bloomington and is approximately 27 miles in length. The section Record of Decision was received in September 2011. Section 4 opened to traffic on Dec. 9, 2015.

Section 5: 21-mile portion of I-69 between Bloomington and Martinsville. This section of the project was originally structured through a public-private partnership.

Section 6: On March 24, 2004, the Federal Highway Administration issued a Record of Decision (ROD) approving a corridor for I-69 between Evansville and Indianapolis. As of 11/4/2017, this project was in the site location selection phase.

Indiana I-69, Section 5

Bidding Process

On October 15, 2013, the (IFA) issued a request for proposals (RFP) to design, build, finance, operate and maintain (DBFOM) Section 5 of the I-69 expansion project. Indiana leveraged its credit rating to attract low-cost private sector financing for the project. In response to the RFP, the finalist bid proposals came from the following project companies: Connect Indiana Development Partners ($419 million bid); Plenary Roads Indiana LLC ($406 million bid); WM I-69, LLC ($397 million bid); I-69 Development Partners. The lowest bid was from I-69 Development Partners at $325 million, which was $73 million lower than the next lowest bid.

Why a P3?

The Indiana Finance Authority (IFA) wanted to do Section 5 through a public-private partnership structure through an availability payment concession. According to Indiana Department of Transportation, Indiana has been successful in leveraging private capital to deliver transportation infrastructure faster than expected and at the lowest cost to taxpayers, which was a driver for why a public-private partnership approach was pursued. In 2014, Governor Mike Pence issued the following statement regarding the decision to use a public-private partnership structure:

“I am firmly committed to finishing what we started with I-69 from Evansville to Indianapolis so products and people will be able to move even more freely, and towns will be open to commerce and opportunity for more Hoosiers. The private sector can harness a different character of innovation to find greater efficiencies, and this project will continue Indiana's strong track record of partnering to deliver quality projects on budget and ahead of schedule."

Selection Process

The IFA proposal review process took only four weeks. Technical and financial review teams of IFA and INDOT staff evaluated and scored the final proposals, using specific criteria. Announced in February 2014, the IFA selected the I-69 Development Partners bid at $325 million to design and build Section 5 of the I-69 expansion under an availability payment P3.

Financing Structure

Under the original contract agreement, I-69 Section 5 was financed using a mix of Private Activity Bonds (PABs), private equity, and public funding from the IFA and INDOT. The payment scheme was based on periodic availability payments made by the IFA to the I-69 Development Partners after substantial completion of construction. All payments to the concessionaire, over the 35 year DBFOM contract agreement, were to be made pending review of required performance metrics, which if not met, would lower the availability payment. The projected total cost of the project was to be approximately $560 million over 35 years including the operation and maintenance of the project.

Original financing under P3 agreement

Source	Amount
Private Activity Bonds (PABs)	$243.6 million
PAB sale premiums	$8 million
Equity	$115.8 million
Milestone payments (from IFA)	$108 million (state and fed sources)
INDOT public sector funds	$93 million

In 2016, the State of Indiana assumed responsibility for the completion of the Section 5 project. Since Indiana’s takeover, the project has developed a new financing scheme, including $246 million of State issued Highway Revenue bonds and $50 million paid to the IFA from the I-69 Development Partners.

Settlement at State takeover of the project

Source	Amount
Highway Revenue bonds	$246 million
Bondholder Reimbursement (I-69 Development Partners	$12 million
Payment to IFA (I-69 Development Partners)	$50 million

Risk Analysis

The following table examines the risk allocation divided between the State of Indiana and the I-69 Development Partners (I-69 DP) through the original contract agreement.

Risk type	Risk Allocation
Scope Changes	State of Indiana
Environmental Approvals	State of Indiana
Permits & Approvals	Shared
Right of Way	Shared
Utility relocation	Shared
Design	I-69 DP
Ground Conditions	Shared
Environmental Contamination	Shared
Construction	I-69 DP
Labor Disputes	I-69 DP
Quality Assurance/Control	I-69 DP
O&M + Lifecycle	I-69 DP
Financing	I-69 DP
Interest Rate/credit Spread	State of Indiana
Changes in law	Shared
Force majeure	Shared
Traffic & Revenue	I-69 DP

Issues

Selecting the Lowest Bidder

I-69 Development Partners bid was $325 million, approximately $73 million less than the company with the next closest bid, and $22 million less than the State of Indiana’s cost estimate for Section 5. The lowest bid (by such a large amount) being selected, raised concerns about whether this decision was thorough enough and whether the project would experience issues during implementation stages.

Lack of Experience and Embezzlement

From the beginning of the bidding process, concerns were raised about the fact that Isolux had no prior experience in the United States, in contrast to other project bidders who did have US experience. After the public-private partnership contract was finalized, but before the bonds were floated to finance the project, nine Isolux company and public officials were arrested in Spain for embezzlement. Not long after, the I-69 Section 5 project delays in construction and payment became a major issue for subcontractors waiting to be paid by Isolux, and the company’s financial status deteriorated quickly toward insolvency. Around the world, Isolux has been replaced by other companies for projects in Brazil, Bolivia, and Chile.

Significant Delays

Signs that the concessionaire (I-69 Development Partners) was having difficulties carrying out the project implementation first were made public in Spring of 2016. Locally hired subcontractors refused to continue construction work, citing long overdue payments never received from Isolux Corsan LLC (the company responsible for the design and build pieces of Section 5). The break in the work of the subcontractors effectively shut down construction of the project. In an attempt to deflect blame, Isolux Corsan attributed construction delays and late payments to “unforeseen geological issues” and “inappropriate permits”, all of which materialized due to actions of the IFA. While these claims were later disputed by the IFA, it became clear that the project was not going according to plan as the delays led to multiple project deadline extensions. Subsequently, the construction delays and project extensions caused a downgrade of bonds used to finance the project, dropping first from Investment grade to B- and later to CCC- in 2017.

Surety Bonds

In most federal and state public-private partnerships, statutory requirements exist that “require the contractor to provide a surety bond as a security for the project.” In the state of Indiana, for traditional procurement, current law would require the contractor to obtain payment and performance bonds for any project over $200,000. However, when the project falls under an Indiana P3 structure, the public entity (in this case IFA) has discretion on whether to require any bonds and set the bond amount. In the contract with I-69 Section 5 contract with I-69 Development Partners, IFA accepted a 5% payment bond and set the performance component at only 25%. This meant the bond secured only $16.25 million payment to contractors and suppliers, and on the performance side, there was only security in $81.25 million of the project. Signs that the financial health of the P3 deal was declining and I-69 Development Partners was unable to pay the subcontractors, complete the project, and left the state with a partially finished project, and without carrying out operations and maintenance. Stronger bonding requirements could have helped shift risk away from the state and the contractors.

Personnel

Most public-private partnerships rely on the expertise of the private sector partner for the responsibilities they have contracted for. However, for Section 5, a state employee was hired by Isolux to manage the project. It’s unclear what direct impact this had on the project, but perhaps Isolux or one of the contractors could have provided private sector experience to ensure deadlines were met through project completion.

Project Transfer to the State and Current Project Status

By June 2017, S&P Global Ratings had downgraded construction bonds to CCC- and indicated that a default was inevitable within the next 6 months. The many issues plaguing the project under the management of the I-69 Development Partners and the multiple construction delays indicated a need for new management. Shortly following the bond downgrade, the I-69 Development Partners and the State of Indiana came to consensus on a deal to transfer the control of I-69 Section 5 from the I-69 Development Partners to the State of Indiana. The transfer of the project once again pushed back the completion date of the project from May 2018 to August 31, 2018. The original scheduled completion for Section 5 was October 2016.

With the State at the helm, INDOT assumed responsibility for the completion of Section 5, which was approximately 60% constructed at the time of the transfer. IFA Public Finance Director, Dane Huge, speculated that the State's takeover of the project may actually save Indiana money in the long run as the total cost estimate of the project was reduced to $560 million from $590 million, partially as a result of lower interest payments. In addition to surrendering control of the project, the I-69 Development Partners were responsible for paying bondholders $12 million and the State of Indiana $50 million. Based on a IFA estimation issues on June 2nd, the State was left with $72 million in funding to complete the project, with approximately $237 million still needed, leaving a gap of approximately $165 million to finish construction. Upon receiving control, the State began the process of ridding itself of Private Activity Bonds associated with the project by issuing $246 million in highway revenue AA+ bonds backed by state funding. The State was then able to fully pay off previous bondholders at the amount of $242 million.

Discussion Questions

1. Was the I-69 Section 5 project subject to failure due to poor management by the Parent company, Isolux? Or were disruptions and delays relating to permitting issues with the State of Indiana to blame?
2. Did the State of Indiana end up with better deal financially post-collapse of the I-69 DP agreement than they would have had they taken on the project themselves initially?  
3. Was enough due diligence completed by the public sector on the I-69 Development Partners before signing the public-private partnership agreement?
4. What advice would be given to the state of Indiana as they consider how they will handle operations and maintenance with this project moving forward, since Isolux was supposed to operate and maintain before the contract was terminated?