Mike Pence's infrastructure mess: What went wrong with I-69?

Show Caption Hide Caption Why I-69 is behind schedule When former Indiana Gov. Mike Pence changed course and went with a public-private partnership for the I-69 construction, problems set in for the private company that won the bid.

At first, it sounded like a good idea: Indiana would use a public-private partnership to extend I-69 from Bloomington to Martinsville, relying on private sector ingenuity to bring it in on time and under budget.

But the project is two years behind schedule. The prolonged construction has increased traffic accidents and lengthened commute times. And, now, as the state is dissolving the partnership — which some argue could end up costing Hoosiers millions of dollars — a difficult question needs to be asked:

How did this once-touted project — pitched and promoted by then-Gov. Mike Pence as a model for smart infrastructure planning — become such an embarrassing mess?

I-69 construction impact: Car accidents have increased during I-69 delays

An IndyStar investigation reveals that much of the trouble can be traced to the state’s inability to heed several warning signs about the project’s most prominent player, Isolux Corsan. The European company had more than an 80 percent stake in I-69 Development Partners, the company building the road.

But IndyStar found numerous reasons why the state should have been wary of signing off on a plan that relied so heavily on this particular company for the success of the project:

Isolux had little prior experience in the U.S., and no experience building roads and bridges in the U.S.

The group bid $325 million — about $73 million less than the closest competing bid and $22 million less than the state’s own cost estimate.

The other three bid finalists fell within $23 million of each other, and had large portfolios of work throughout the country.

Rather than relying on private sector expertise, which was how the deal was pitched to the public, Isolux hired a state employee as project manager.

And then there’s this: A mere three weeks after the contract was finalized, before bonds were floated to finance the work, nine company and public officials in Spain were arrested on embezzlement charges. The allegation? They had profited illegally from a bribery scheme related to a high-speed rail project built by Isolux, a scandal that's still unfolding in Spain.

State officials did not respond when asked by IndyStar if they were aware of the arrests. The Indiana Finance Authority said the state followed industry best practices as it chose the consortium to design and build the highway, and maintain it for 35 years.

The financial health of Isolux deteriorated quickly after the consortium was formed. By November 2015, it was "the riskiest company in the world," based on a Bloomberg analysis.

Still, in the following year, as Pence was running for vice president, the state clung to the contract despite a litany of performance issues in Indiana — and elsewhere.

Within the past two years, Isolux has been replaced on jobs in Brazil, Bolivia and Chile. The company is near insolvency. The bonds it used to finance I-69 construction, to use the industry's term, are "junk."

Why I-69 delays are costly and dangerous for Hoosiers Constructions delays on the Bloomington to Martinsville section of I-69 are not only frustrating to motorists, they're costly and dangerous to Indiana residents because of an increase in related crashes.

Even a supporter of public-private partnerships, Robert Poole of the libertarian Reason Foundation, had a harsh assessment: "This is one of the worst failures that I've seen in the state-level P3s."

The IFA defended its due diligence. It said the U.S. Department of Transportation, as well as technical and legal experts and internal state experts were involved in the decision to choose I-69 Development Partners, and that the analysis took into account the "significant difference in bid amounts."

But state Sen. Luke Kenley, R-Noblesville, questioned the IFA's vetting. Kenley, who chaired the committee that approved the project, said he realizes now that Isolux wasn’t "really as substantial as somebody evaluated them." He said the company "was not as financially strong as they needed to be or as managerially well-equipped."

Said Poole, "Given what turned out to be the financial condition of Isolux, I suspect that the Indiana Finance Authority didn’t do the due diligence they should have with that."

Trouble finding road funding

When Pence took over as governor in 2013, he had pledged to finish I-69, whose construction had begun years earlier. Four prior sections of I-69 relied on funds from the lease of the Indiana Toll Road. But that money was either spent or allocated to other projects.

"We were having trouble even back then coming up with enough road-funding money," Kenley said.

In such situations, P3s can be politically appealing because they offer a way to finance projects without affecting the state's credit rating.

For I-69 Section 5, Indiana initially did not borrow money. Instead, it helped I-69 Development Partners borrow the money, and agreed to make regular payments to the company to build and maintain the road.

A U.S. DOT publication, however, warned state governments to be cautious: "There have been many examples of poorly structured P3 and privately financed projects that were used to circumvent fiscal limitations."

Still, Kenley and others thought the P3 would offer advantages by transferring risk to the private sector and providing better value for taxpayer money. "But," Kenley added, "you've got to select good contractors to start with."

How well the Pence administration did that remains questionable.

Isolux's only U.S. projects involved the installation of power lines in Texas and solar panels in California, while competing bidders had extensive experience. Walsh, for example, built Indiana's successful Ohio River bridge and 20 other U.S. road and bridge projects.

IFA spokeswoman Stephanie McFarland has repeatedly emphasized that the state has no contractual relationship with Isolux, which is true. But as a major owner of the company that won the bid, and full owner of the lead construction contractor, Isolux was deeply entangled in the project.

The IFA said its due diligence included an independent party assessing the companies' "technical capability and fiscal viability to undertake the project."

To ensure the highway is completed in the event of a company default, the IFA required a performance bond covering 25 percent of the cost. Fitch analysts said that was on the low end for what's acceptable. For non-P3 projects, the state requires 100 percent performance bonds.

Private sector expertise?

Indiana’s troubles began before the state even had a signed contract in April 2014.

After winning the bid, Isolux asked one major subcontractor, Gradex of Carmel, to lower its negotiated price to remain part of the consortium. The company refused, and had to be replaced.

Construction started four months behind schedule because of design and permit issues.

By then, I-69 Development Partners made a hire that might surprise proponents of P3s who extol the virtues of private sector expertise. Gary Vandegriff moved from highway maintenance director at the Indiana Department of Transportation to project manager for I-69 Development Partners.

State law requires a one-year cooling-off period before a state employee can move to a private position related to his or her state employment. Vandegriff made the move within a week of leaving INDOT. But both state officials and Vandegriff, who has since moved to another company, declined to say whether he sought an ethics opinion before the move.

A source with direct knowledge of the project told IndyStar that Isolux “didn’t really know what they were getting into.” IndyStar agreed not to name the source because of business interests with the state.

Just four months after construction finally started, one of the subcontractors, Aztec Engineering Group, issued a Notice of Default to Isolux for not paying for work on time, according to a court record.

Isolux made the payment but was the target of two more notices in March and June 2016, due to an outstanding balance of more than $4 million.

At various times that summer and into fall, as Pence campaigned for vice president, unpaid subcontractors walked off the job site. In June, Aztec suspended its work altogether and was replaced. In September, Crider & Crider of Bloomington stopped work.

Acrimony between IFA and I-69 Partners that summer showed in correspondence obtained by IndyStar.

In a formal “failure to perform” notice, the IFA accused I-69 Partners of using “misleading and inaccurate information” in its June 2016 Project Status Schedule. At one point, Vandegriff accused the IFA of “operating under an astonishing misunderstanding" of the public-private contract.

IFA said it “has consistently observed actual progress well below planned levels.” The company had paved 20,000 tons of asphalt by July 2016, when the plan was for 273,000 tons.

I-69 Partners said the IFA violated its obligation of “good faith and fair dealing.”

“This conduct is going to have to change immediately if we expect to complete the Construction Work in a timely fashion,” said the letter from the state’s private partner.

But it would be nine months before Indiana announced its intention to end its contract.

Rep. Matt Pierce, D-Bloomington, a frequent critic of I-69, blamed Pence's campaigns for governor and vice president for the state not terminating its contract sooner.

"Clearly the project started to go south under his administration," Pierce said. "They weren't interested in admitting there were any problems."

Micah Vincent, director of the Office of Management and Budget, said that until recently it would have been too expensive for the state to get out of the deal, because it needed a "willing partner" to negotiate.

A spokesman for Pence didn't answer specific questions about the project, but issued a statement saying Pence is proud of his record as governor on infrastructure, jobs, education and tax cuts.

The state also says taxpayers are protected. Financial analysts from both Fitch and Standard & Poor's said the project cost will be higher than the original bid, with Fitch estimating the overrun at $162 million, for a total cost of $497 million.

But state officials said Friday that, while construction costs will be higher with the takeover, the entire project cost — including financing and 35 years of maintenance — will actually come in lower.

One caveat: the state will now assume the risk of any unforeseen maintenance costs over that 35-year-period.

Lack of transparency

As the project deteriorated — it's about 60 percent done, S&P estimated — Bloomington, a liberal college town and no friend of Pence, suffered the brunt of the problems. Mayor John Hamilton complains about added travel time, safety issues and general frustration.

Small towns south of Bloomington have yet to see economic development as they wait for I-69 to finally be connected with Indianapolis.

A lack of transparency also became an issue. Bloomington politicians and the media generally have reported problems getting information from the IFA or its partners.

For example, the U.S. DOT's best practices for doing a P3 include a "value for money" analysis comparing P3 financing to traditional financing. According to the DOT, making the report public "fosters transparency and explains the value of the procurement approach."

But the IFA initially refused to provide IndyStar with the records, then referred IndyStar to INDOT, which has yet to provide the documents.

In 2014, the Bloomington Herald-Times wrote this about the IFA:

“Repeated attempts over the course of the past month to interview someone from the finance authority about how the agency operates, concerns about transparency and its willingness to consider input from the public were met with email responses and attempts to screen questions in advance.”

Kendra York, director of the IFA when the project was launched until leaving in early 2015, declined comment.

McFarland of the IFA issued this statement: “The IFA has been consistently responsive to news media on inquiries related to I-69 Section 5, and have good relationships with the media in general regarding those inquiries. They have worked fairly with IFA, and been appreciative of the efforts to provide information to their questions."

Asked if the state made mistakes with I-69, IFA director Dan Huge, in a written statement, characterized the I-69 experience as something of a teaching moment.

"As we have with previous P3 projects, we will learn and evolve how we approach future projects," Huge wrote. "I-69 is one of the most significant road projects currently in progress in the United States. We look forward to the day it is completed, and the contribution it will make to Indiana and beyond."

To P3 or not to P3?

Because Indiana has been something of a leader in P3 projects, and former Gov. Pence is now vice president, the Indiana experience appears relevant on a national level.

Said Michael D. LaFaive of the Mackinac Center for Public Policy: “I wonder if his opponents may not use this story as a cudgel against the changes and perhaps agree to the spending but not to the manner in which assets are redeployed,”

President Donald Trump is launching his own infrastructure plan with emphasis on private sector funding.

Trump campaigned on the promise of a $1 trillion investment in infrastructure. Instead, his proposed budget only included $200 billion in tax credits to private investors, which he said would encourage $800 million in private funds.

Earlier this month, Gov. Eric Holcomb, who inherited the I-69 project from Pence, flew to Washington, D.C., to take part in a meeting with Pence and Trump, as they promoted public-private partnerships as a way to rebuild America’s roads and bridges.

Not every state is expected to jump on the P3 bandwagon. Many don't even allow it.

At the event, Pence said: “We’re going to restore accountability to infrastructure and forge new partnerships with your states and your cities, but also with businesses, to leverage private sector expertise and tap into the bottomless well of American innovation.“

That statement echoed the words he used to launch the I-69 project in 2014: “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 products on budget and ahead of schedule.”

Some question how the I-69 experience will be influence policy in Indiana and beyond.

Said Fitch analyst Eric Kim: "From our perspective, it would likely lead Indiana to think a little harder about when it really makes sense to enter into P3 agreements. They're not, by any means, the answer to every situation, but it's also untrue that it's not ever the answer."

State officials said it was too early to speculate whether a public-private partnership would be used to build the last stretch of I-69, connecting it to Indianapolis. The state now is exploring a P3 to widen a portion of I-70.

IFA officials on Friday said they saw no reason to change anything about the way Indiana analyzes such projects.

"The vetting process, we believe, was appropriate," Huge said.

Like Kenley, they are far from ready to discard the P3 concept, saying I-69 should be viewed in the context of other P3 successes, including a toll bridge over the Ohio River near Louisville, Ky.

Still, Kenley does see an important lesson in I-69.

“Since Indiana is a pioneer," he said, "it just tells us you need to manage the bid process a little differently."

Call IndyStar reporter Mark Alesia at (317) 444-6311. Follow him on Twitter: @markalesia.

Call IndyStar reporter Kaitlin L. Lange at (812) 549-1429. Follow her on Twitter: @kaitlin_lange.

Indiana's P3 projects

Other states have had successful public-private partnerships, and Indiana has used them as well, with mixed results: