I-69 takeover reimburses bonds to end troubled PPP

The state’s takeover of Indiana’s I-69 Section 5 construction project last week brought an end to the ill-fated public-private partnership, which has been marred by delays and financial difficulties.

The Indiana Finance Authority announced the deal, which will see the state end its partnership with I-69 Development Partners and reimburse the group’s bondholders for $246 million, last Monday. The agreement was met with approval by Fitch Ratings, which called it “an effective resolution to a stressed situation and a practical step by the state toward resolving a construction project that has been hampered by issues since early days”.

In February 2014, the IFA picked I-69 Development Partners – at the time owned by Spanish contractor Isolux Corsán and Canadian pension PSP Investments – to build the 34km stretch of road running from Bloomington to Martinsville. The $325 million project was expected to be completed by the end of 2016.

But the project soon ran into trouble, as routine environmental and permitting issues were compounded by Isolux Corsán’s financial difficulties – the firm applied for bankruptcy proceedings in July – and deteriorating credit quality. The company was unable to pay sub-contractors, who responded by leaving the site. The expected completion date was bumped back repeatedly; it is now slated to finish around August 2018.

I-69 Development Partners, now owned by PSP, said the delays were caused by “unexpected circumstances” due to the project’s complexity. But while the project did confront environmental delays, Fitch director Stacey Mawson told Infrastructure Investor that these issues were nothing unusual and that it was Isolux’s falling credit quality that prevented the project from getting back on track.

This spring, bonds issued by I-69 were downgraded to just one notch above default. With the state takeover, IFA public finance director Dan Huge said the agency will use highway revenue bonds, rated AA+, to retire the developer’s private activity bonds. In June, the project was expected to require an additional $236.8 million to complete, putting it on course to run $162.4 million over budget.

Critics of PPPs have pointed to the difficulties seen in the I-69 project as a warning sign. The role of Vice President Mike Pence, Indiana’s governor at the time of the original agreement, has added to the deal’s political relevance. But Fitch managing director Cherian George, who heads the rating agency’s Americas team, said PPP agreements generally transfer risk to the private entity.

“The reality is that under almost any procurement you are vulnerable to the counterparty risk of the contractor,” George told Infrastructure Investor.

Indiana will now complete the project under state control, retaining most of the existing primary and subcontractors.