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Indiana Highway Gives ‘Black Eye’ to Private Investment in Infrastructure

A project green-lighted by then-Governor Mike Pence in 2014 is two years behind schedule and back under the state’s control, reflecting the mixed results of the partnerships funding a growing number of roads and bridges.

By

Cameron McWhirter

At a time when Washington is promoting private investment in roads, bridges and other infrastructure, a 21-mile stretch of highway in Indiana provides what critics say is a cautionary tale.

The project, a partnership between the state and private investors, was signed by Vice President Mike Pence in 2014 when he was the state’s governor. It is two years behind schedule and only 60% built. The state is in the process of taking it over and will have to issue debt to finish it.

“It became clear that the only way to ensure completion in a reasonable time frame would be to put it back under the state’s control,” said Stephanie Wilson, spokeswoman for current Republican Gov. Eric Holcomb. “As with any project, we must pivot and change course when needed. That’s what we did here.”

Asked about the failed partnership, vice presidential spokesman Mark Lotter said Mr. Pence “was proud of Indiana’s many accomplishments during his tenure as governor” including investments in infrastructure.

The road’s troubles come as more cash-strapped states explore deals with the private sector as an alternative to finance and fund delayed infrastructure projects. More than 30 states have created rules for such deals to be possible. These arrangements, known as public-private partnerships, are still new to the U.S., where states typically have used bonds to pay for such deals. Some of these projects have saved states time and money. Others have landed in bankruptcy.

The southern Indiana project near Bloomington had a raft of setbacks early on. The state selected a consortium that included a Spanish construction company, Grupo Isolux Corsán S.A., that hadn’t worked on a road project in the U.S. Its $325 million winning bid was nearly $75 million below the next-lowest one. The company quickly ran into unrelated legal difficulties in Europe that hurt its finances.

“Unexpected circumstances have led to delays that are not uncommon to projects of this complexity and scope,” said a spokesman for the private group, I-69 Development Partners LLC, that was building the road.

President Donald Trump is calling for $1 trillion in infrastructure investments over the next decade—funded mostly from the private sector—to upgrade America’s roads, bridges, ports, airports and railroads.

Supporters of this approach say one troubled project shouldn’t tarnish the rest. They say the private sector has financial incentives to build the projects cheaply and on schedule.

“For every I-69 that gives the industry a bit of a black eye, there are many more successes with on-time, on-budget projects,” said Dolly Mirchandani, a partner for law firm White & Case LLP and an expert on infrastructure and public-private partnerships.

Indiana has another public-private partnership for a bridge over the Ohio River that was recently completed ahead of schedule and $200 million below the state’s estimated cost.

There have been some notable public-private failures. Toll-road partnerships in Alabama, Texas and California declared bankruptcy in recent years after revenue from tolls used to finance these projects fell short of projections. Indiana’s first major public-private partnership, a deal with Ferrovial S.A.’s subsidiary Cintra to operate the Indiana Toll Road, fell into bankruptcy after revenue missed targets. It has since been bought by new owners.

“I might caution on drawing conclusions regarding all projects based on some individual project circumstances, as the role of private capital is undeniable in bringing large-scale congestion relief projects to market that otherwise may not exist,” said Patrick Rhode, U.S. vice president for corporate affairs for Cintra, which now has projects in Dallas, Fort Worth, Tex., Charlotte, N.C., and Toronto, Canada.

For Indiana, the I-69 partnership’s failure and delays in construction puts the responsibility for maintaining the road back on the state.

Matt Pierce, a Democratic state representative from Bloomington, said the private structure gave the state less ability to oversee the project and its finances. “I have never understood how putting a for-profit entity in the middle of a public works project advances things,” he said.

The delays have frustrated residents and businesses near the still-incomplete road, who are tired of traffic congestion and want the road to be finished as soon as possible.

The project delays “have been devastating for the community and those that depend on that infrastructure,” said John Hamilton, Bloomington’s Democratic mayor.

Melissa Schiff, who owns several businesses including a storage facility and an accounting office right next to construction, said the congestion and delays have customers wary of making the drive to her building. Some evenings on the road, “it’s a parking lot,” she said.

The state’s decisions to go with a low bid from a foreign contractor with little U.S. experience was a mistake, she said. “The low number is not always the right answer,” she said “You just bought yourself more headaches.”

The I-69 expansion project was rocky from the beginning. There were permitting and environmental delays, cost overruns and work suspensions because subcontractors had trouble getting paid, according to Stacey Mawson, a senior credit analyst in Fitch Ratings’s Global Infrastructure & Project Finance Group who has been following the I-69 project.

Financial problems arose in part because of “Insolux’s credit-quality deterioration,” she said.

Isolux Corsán, which filed for bankruptcy in July and lost its equity in the partnership last year, didn’t respond to emails and phone calls to its Madrid office seeking comment.

In June, the state said it would assume responsibility for the project. And I-69 Development Partners, now controlled by a company owned by a Canadian pension fund, is negotiating terms of debt with bond holders and the state. Standard & Poor’s Rating Services downgraded the $243 million in debt, saying a “default appears to be inevitable.”

Despite the problems, Indiana will continue to team with private investors for future needs, according to the governor’s spokeswoman. The public private partnership “has proven effective in other Indiana projects.”

Write to Cameron McWhirter at cameron.mcwhirter@wsj.com

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