A toll road built nearly a decade ago under an innovative public-private partnership model is seeing its financial woes deepen.

The problems of the Connector 2000 toll road project in South Carolina are yet another sign that it’s going to be hard for state and local governments to rely on public-private partnerships to address their failure to spend enough on infrastructure. There isn’t a free lunch on offer here.

A non-profit consortium built the Connector 2000 under a PPP through which a non-profit group set up for this purpose designed, built, and now manages the stretch of road, whose purpose was not to relieve congestion but to encourage new development around Greenville.

The road issued $200 million in senior and junior debt in 1998, with Lehman Brothers and Mesirow Financial as the underwriters.

The road has no official state or city financial support; instead, it relies on the tolls to pay its debt and runs the road under a long-term contract with the state.

But the road has long been “relying on reserves” to pay its debt as toll revenue has run short, and “there will likely be insufficient cash in the reserve fund on January 1 and thus a payment default is likely,” reports Municipal Market Advisors (MMA). “The road has a new schedule of tolls but these are disclosed as likely to be inadequate under any scenario,” MMA continues.

The main problem is that “the traffic on the tollway has been substantially below originally expectations” and people have been less willing to pay higher tolls than the financiers thought, meaning less money for the bondholders.

The road’s experience bodes poorly for PPPs for a few reasons. 

First, unlike some others, like the Indiana toll-road cashout, the South Carolina deal wasn’t designed in a credit bubble. The non-profit company and its lenders thought that they were making realistic assumptions about traffic at the time, not relying on a quick refinancing based on a higher asset value a few years later.

Second, the company gave itself a significant margin for error. The bonds came with a huge grace period on principal repayment — 10 years — to account for low drivership and toll revenues in the first years of use. But even this wasn’t enough, as Connector is unable to make full interest payments on its senior debt out of toll revenue, it reported a few months back.

On future new-build roads, then, state and local governments may have to resign their taxpayers to taking traffic risk, if they want anything built.

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