The company hired by the Texas Department of Transportation to study the viability of toll lanes on Interstate 35 is battling allegations that it used inflated traffic projections for toll road assets in other states, court documents show.
TxDOT awarded the $6.8 million contract to Macquarie Capital in 2014, two years after a lawsuit alleged the firm paid kickbacks — in the form of undisclosed “success fees” to a consultant — in exchange for inflated traffic projections that allowed Macquarie to overbid for toll bridges in Alabama and a tolled tunnel in Detroit.
The company, named Macquarie Securities when the suit was filed, is a subsidiary of the Australian investment giant Macquarie Group. The lawsuit is still pending.
Under its contract with TxDOT, Macquarie will provide a detailed feasibility analysis of the proposed toll lanes on I-35 through Central Texas and investigate various funding options for the $1.5 billion project. The analysis would be a critical component of any application for federal loans, which TxDOT lists as a possible source of financing for the toll lanes.
The toll lanes, which would run on I-35 from Texas 45 Southeast to Texas 45 North, are a key part of the $4.6 billion plan to overhaul the traffic-clogged freeway through Central Texas.
“Macquarie Capital is pleased to be working with the Texas DOT on this project, and we look forward to its successful completion,” Macquarie spokesman Rishi Sharma said in response to Statesman inquiries about the firm’s track record. The company did not provide any additional comment.
TxDOT spokesman Mark Cross said a key component of the analysis, estimating the traffic and revenue the roads would generate, will be conducted by a separate contractor and then provided to Macquarie to be included in its analysis.
“They are considered one of the best in their field and found to have the strongest bid for this project,” Cross wrote in an emailed response to questions.
However, one top lawmaker said the issues surrounding Macquarie should disqualify it from continuing work on the I-35 project.
“If I was executive director of the Texas Transportation Commission, I would find some way for my legal staff from having to accept this contract,” said state Rep. Joe Pickett, D-El Paso, the chairman of the House Transportation Committee. “The average person reading the story is just rolling their eyes wondering why we would ever contract with them.”
Cross said TxDOT was not aware of Macquarie’s legal challenges when it awarded the contract.
It is unclear what information Macquarie provided TxDOT as part of its winning bid for the I-35 toll road study against two other firms, EY (formerly known as Ernst & Young) and Claret Consulting.
Macquarie objected when the American-Statesman requested its proposal under the state’s Public Information Act, claiming its release could hurt its ability to compete for future projects. Texas Attorney General Ken Paxton upheld Macquarie’s request to withhold the information, citing the controversial Boeing decision by the state’s Supreme Court, which gave companies new ability to block the release of information they provide government agencies.
Judge allows lawsuit to proceed
The allegations about Macquarie and traffic studies stem from a 2012 lawsuit filed in Manhattan Supreme Court by insurer Syncora Guarantee. Manhattan Supreme Court Judge Melvin Schweitzer rejected Macquarie’s request to dismiss the case, issuing a 29-page ruling in 2013 that said Syncora had presented more than sufficient evidence to move forward.
The case, filed in the jurisdiction where both companies are headquartered, centers on Macquarie’s bid to refinance the debt it would take on by purchasing four Alabama toll bridges and the tolled tunnel that links Detroit to Windsor, Ontario. The roads would be held by a newly created Macquarie subsidiary, American Roads LLC.
In November 2005, Macquarie approached Syncora seeking to insure the nearly $500 million in bonds it wanted to sell to investors as part of the deal. The insurance, Schweitzer wrote, was necessary for the bonds to receive a AAA rating, “without which they could not be successfully marketed and sold.”
Before agreeing to back the bonds, Syncora received traffic and revenue projections done by a third-party Australian firm, Maunsell, which Macquarie hired and touted as “neutral.” The projections showed the roads would generate enough money to cover the debt payments.
As part of a complicated transaction, American Roads was sold in October 2006. Macquarie and Maunsell remained involved in the bond offering, which was completed that December.
By 2012, however, American Roads was falling apart. Syncora filed suit alleging fraud. Charts included in its lawsuit show the roads never once hit their traffic projections.
In July 2013, American Roads filed for bankruptcy, blaming falling toll revenues for its financial turmoil. It had more than $830 million in debt against more than $100 million in assets.
Officials at the company blamed a host of factors in the court papers, financial news service Bloomberg reported, including “the economic recession, the volatility of gas prices, reduced travel and discretionary spending.”
In his 2013 ruling, first noted by Toll Road News, Schweitzer wrote that Syncora presented sufficient evidence that more than bad math and bad luck was at play.
“Far from being an independent third-party, Syncora alleges that Maunsell had a clear economic incentive to provide unrealistically optimistic projections designed solely to help the defendants sell the transaction,” he wrote. “Maunsell was routinely paid undisclosed success fees by Macquarie, on top of Maunsell’s standard engagement fees, for projects that Macquarie successfully acquired as a result of Maunsell’s forecast.”
The judge also wrote in that 2013 decision: “It is eminently reasonable to infer from this collection of facts that Macquarie knew but intentionally concealed from Syncora the fact that Maunsell was not an impartial consultant, that the undisclosed success fees which Maunsell received incentivized Maunsell to inflate its projections, that those projections thus were not prepared in good faith, nor could they be relied upon as an objective assessment and that Macquarie had a strong motive to present them as otherwise.”
Other toll road deals soured
The American Roads deal was just one of several Macquarie-linked toll road transactions that banked on what later appeared to be overly optimistic traffic and revenue projections, which were provided by Maunsell, according to court documents, government records and news reports.
• Macquarie and its partners bid $3.8 billion in 2006 to manage the Indiana Toll Road for 75 years, a staggering amount that topped the next-highest bid by $1 billion. Macquarie’s bid was justified by projections from Maunsell, which were more optimistic than those from other consultants, Syncora’s lawsuit alleges. The toll road went bankrupt in 2014.
• Macquarie subsidiaries were heavily involved in the construction and operation of the $847 million South Bay Expressway in San Diego. The road opened in November 2007 but filed for bankruptcy in 2010 after it failed to meet traffic projections, the San Diego Union-Tribune reported. Government records show that Maunsell was an adviser on the project.
• Macquarie and its partners spent $1.8 billion to buy the rights to operate the Chicago Skyway in 2004, more than twice the $770 million “cover bid,” Syncora alleged in its suit. The amount, the insurer claimed, was backed by “optimistic” Maunsell projections. The tolls are so expensive now that Chicago’s WMAQ-TV (NBC-Channel 5) estimated driving the toll road every weekday would cost Chicago commuters $2,000 a year.
“It’s disturbing to think that the state of Texas would hire a company to do a toll road study that has been accused of cooking the books on toll roads’ traffic studies elsewhere,” said Andrew Wheat, the research director at Texans for Public Justice, an Austin-based watchdog group.
Additionally, in 2015, the Securities and Exchange Commission alleged that Macquarie Capital and two of its bankers violated securities law by underwriting a stock offering for a Chinese coal company, which they knew owned no coal — effectively making it an assetless shell.
Macquarie and the two bankers admitted no wrongdoing when they settled the charges for $15 million.