Federal regulators are not doing a very good job at overseeing complex toll road projects, according to an audit report released last week. The US Department of Transportation's inspector general in 2017 opened an investigation of the Federal Highway Administration's (FHWA) oversight of "public-private partnerships" (P3), the preferred euphemism for selling public roads to private, often foreign, companies that charge tolls. It found evidence that the agency's lax oversight has put taxpayers at risk by accepting inflated claims of toll project proponents at face value -- problems that would have been addressed by adhering to agency guidelines.

"FHWA has not followed its procedures to ensure project financial plans assess the appropriateness of a P3 for project delivery, as required in the law that provides the foundation for FHWA's Federal-aid highway project approval and oversight," assistant inspector general Barry J. DeWeese wrote.

The audit examined seven tolling projects worth $8.1 billion, including the Interstate 95 toll lanes in Virginia and the I-35W toll lanes in Texas. Auditors also looked at the controversial funding of the Presidio Parkway in California, which is not a toll road. Instead, the route is funded with $80 million in tolls from the nearby Golden Gate Bridge, plus $65 million in taxes.

While FHWA issued official guidelines on how to review potential toll projects for suitability, they were largely ignored. FHWA failed to do any assessment of the suitability of using public-private partnership for the Interstate 69 toll project in Indiana (which the state later terminated). Two other deals were approved without adequate assessments. The most significant issue the auditors identified was the failure of FHWA to verify whether toll revenue projections from the private companies were realistic. The inspector general noted FHWA oversight of smaller projects was especially lax after initial construction was completed and the private company took control of the road.

"FHWA officials in three of the four division offices we visited were unaware of this guidance or not carrying it out during this phase," the audit report noted.

Agency officials insisted that they are understaffed and unable to meet the oversight demands. This caused major problems with the SH130 toll road in Texas, which was bankrolled with a $430 million federal loan. The deal went bankrupt when the traffic and toll revenue forecasts proved wildly optimistic.

"As a result of these issues, the federal government is now the part owner of a state highway, a role that the federal government typically does not play, and FHWA is taking on an enhanced oversight role," DeWeese wrote.

As the inspector general noted in a 2011 financial audit, use of public-private partnerships to build or manage roads is far more expensive than traditional public financing methods (view report in a 2mb PDF file). Public financing carries tax benefits that do not apply to private bonds, raising the cost of debt for partnerships. Toll road companies offset this disadvantage by hiking tolls far higher than any publicly accountable official would be willing to approve.

"PPPs are not likely to significantly reduce the infrastructure funding gap because they change the timing with which funds become available, but generally do not increase overall funding levels," the inspector general concluded in 2011.

A copy of the new audit is available in a 500k PDF file at the source link below.