Is Virginia getting a good deal on public-private projects?
- December 29, 2012
On the day before Thanksgiving, Cindy Auten braved one of the country’s most notorious hotspots for traffic congestion. At 4:30 p.m., she left her office in Alexandria, entered the Capital Beltway and started her commute home to Frederick County, Va. “I knew I was risking a lot,” says Auten. “I’ve been stuck in traffic so many times.”
But instead of the horrendous commute she envisioned, Auten breezed through free-flowing traffic. She paid $1.70 to use the 495 Express Lanes, which had opened four days earlier. The construction project added two toll lanes in each direction on the 14-mile stretch of the Capital Beltway between the Springfield Interchange and Dulles Toll Road exit.
“I ended up making spectacular time heading home because I didn’t sit in that traffic,” says Auten, who estimates the toll lanes shaved at least 45 minutes off her commute. The time saved was “well worth the money spent for it.”
The 495 Express Lanes project is the latest road construction gem for Virginia, a state with aging infrastructure and insufficient transportation funds.
The Express Lanes mark only the fourth public-private partnership (P3) project completed since the Virginia Public-Private Transportation Act (PPTA) was enacted in 1995. However, as state coffers dwindle, the popularity of PPTA projects has exploded. Currently, there are 17 projects under construction, under contract or under consideration for P3s.
Gov. Bob McDonnell’s administration has embraced the law and its potential to leverage private-sector investment when transportation revenues are scarce. “We have limited resources,” says McDonnell. “I’ve got to use it. The alternative is you don’t get anything done. And that’s not acceptable, particularly in Hampton Roads and Northern Virginia. We’ve got four or five megaprojects going on [in those areas] that are public-private partnerships, and I’m delighted to say that the 495 HOT lanes just got done on time, under budget, as a public-private partnership. To me, it shows that’s a pretty good model.”
Streamlining the PPTA process has been a major goal of the administration, which is trying to make it more efficient and transparent to the public, the General Assembly and potential bidders. But controversy has surrounded many of the P3 deals, and a growing number of residents and legislators are questioning Virginia’s reliance on them. “As many more of these projects came forward, it crystalized our concerns, and it became apparent to a lot more people that there were flaws,” says Trip Pollard, a senior attorney at the Southern Environmental Law Center (SELC), which commissioned a report criticizing several aspects of Virginia’s PPTA, including a lack of transparency and oversight. “A number of folks were very surprised when they realized how little input the public has, and the legislature has in these deals.”
The expansion of P3s
P3s offer two major benefits for public entities: private equity and the transfer of risk to the private sector, says Michael Garvin, an associate professor at Virginia Tech, whose research specializes in public-private partnerships. “P3s can transfer meaningful risks to private entities, which they must mitigate or manage. Obviously, the private sector expects a return on its equity relative to its risk; the rub is whether this return comes at too great an expense,” says Garvin.
In the case of the 495 Express Lanes, the commonwealth spent $409 million on the $1.9 billion project with private partners Fluor-Transurban handling the rest through $389 in private equity and responsibility for debt service on loans and bonds. The project is designed to provide free-flowing lanes, which can be used for free by carpools of at least three people or commuters willing to pay a toll that increases as congestion worsens. In ideal circumstances, the new lanes ease congestion on the entire Beltway, and private investors make money.
It’s much too early to tell if the project will achieve these goals. In addition to building four additional lanes on 495, the project included $260 million to replace aging infrastructure, including 58 bridges and overpasses. The project will connect with another 29 miles of Express Lanes currently under construction on Interstate 95. “I think it’s important to recognize, as a starter, this project has rebuilt 14 miles of the most heavily used section of Virginia’s Capital Beltway,” says Bob Chase, president of the Northern Virginia Transportation Alliance, a business/citizen coalition that’s pushing for increased state transportation funding. “You’ve got 50-year-old bridges, ramps and interchanges that have all been rebuilt. You’ve got transit that didn’t exist on the Beltway before. [Previously,] transit wasn’t viable on the Beltway because the buses were stuck in the same gridlock that the cars were.”
Chase, however, is among many observers, who think Virginia has used the PPTA to avoid making tough decisions on raising sustainable new revenues for transportation. “I think it would be generous to say that more than 10 or 15 percent of the state’s transportation needs could be met by P3s,” says Chase. “That’s not to say that P3s aren’t a part of the overall mix of solutions, but they’re a very, very small portion of the overall needs in Virginia.”
An underfunded network
Virginia’s transportation system has been underfunded for years. By 2017, Virginia is expected to have only enough money in the transportation trust fund to cover maintenance, with nothing for new construction. And since the state’s 2009 fiscal year, there’s been no money for the state’s funding formula that doles out money for urban, secondary or primary road construction.
That situation has left the state relying on private partners to get construction off the ground. Currently projects worth a total of more than $14 billion are either under construction, procurement or consideration under a PPTA. “That’s more than anytime in Virginia history,” says McDonnell. “And we wouldn’t be there if we didn’t have public-private partnerships.”
Virginia’s debt capacity limits the amount it can spend on large construction projects. “In the glory days you had rising revenue, and that created a gush of funds,” says Del. Jimmie Massie, R-Henrico. “The Virginia debt capacity model says that the state of Virginia can only issue about $400 to $450 million in new bonds in any one year. You can hardly build an interchange in Northern Virginia for $450 million.”
As state revenues dwindle, PPTA deals are becoming a primary source for funding transportation construction in the commonwealth, with decisions being made by the governor’s administration rather than local transportation organizations. The Southern Environmental Law Center concludes in its report that the PPTA “has evolved beyond the original intent,” says Pollard.
PPTAs under fire
The report, written by James J. Regimbal Jr. of Fiscal Analytics Ltd., criticizes the current use of PPTA for lack of oversight by governing boards or the General Assembly and failure to inform the public why these deals are better than the traditional design-bid-build approach. The report concludes that the PPTA process should be more transparent, include more independent reviews of project development and procurement, and have more uniform rules on determining the level of risk and public subsidy.
The law center is not the sole critic of these megaprojects. Residents in Hampton Roads are reeling over tolls that will be charged as part of a plan to rehabilitate the Downtown and Midtown tunnels, build a new tube adjacent to the Midtown tunnel and extend Martin Luther King Boulevard.
The projects were deemed the region’s top transportation priorities by the Hampton Roads Transportation Planning Organization. Motorists, however, are irate because they will have to pay new tolls on existing tunnels to finance the improvements. Tolls will be $1.59 for cars during off-peak hours and $1.84 during peak hours. Truck tolls will be $4.77 for off-peak hours and $7.36 for on-peak hours.
Tolls were to begin last summer, but Virginia added $100 million to its contribution to the projects to delay tolls until January 2014. Tunnel users, however, still will wind up paying tolls to support projects that won’t be completed until 2018. A group of residents calling itself Citizens Against Unfair Tolling has filed a lawsuit against the projects, which are in the early stages of construction.
Tolls also are part of the controversy surrounding the new U.S Route 460, a planned 55-mile alternative to an existing highway connecting Suffolk and Petersburg. The new road is designed to improve safety, reduce congestion from trucks serving the Port of Virginia and promote economic development. But tolls would be $3.69 for cars and $11.72 for trucks to use the entire corridor — while the old 460 would still be open for business.
A study by Richmond-based Chmura Economics and Analytics predicts the new corridor would be an economic engine, supporting 14,120 jobs. Still, questions have been raised about the size of the public’s contribution to the $1.4 billion project — as much as $1.2 billion — and how many drivers would use it instead of the existing, toll-free highway. “It borders on criminal negligence,” says state Sen. Dick Saslaw of Fairfax, the leader of Senate Democrats.
“You’re going to spend $1.4 billion on a road that currently carries 12,000 cars a day. The estimate is there are going to be 5,500 a day on the new road. I have subdivision streets that carry more traffic than that. If you were to spend money on a cost – benefit ratio like this in a corporation, they would fire you on the spot.”
Sean Connaughton, Virginia’s secretary of transportation, defends the route. “This project is a sort of unique one because what we’re trying to do is alleviate some of the traffic on Interstate 64 and provide a truck route out of Hampton Roads so that our expansion plan at the Port of Virginia doesn’t have a further negative impact on the Hampton Roads area and the Peninsula,” he says.
Connaughton says the high level of state money in the project was necessary to keep tolls attractive to truckers. “It’s the cheapest project that we could pursue that would have a positive impact in and out of Hampton Roads. The $1.4 billion that project costs is a drop in the bucket if you look at the cost of adding another Bridge Tunnel and widening 64.”
Another controversial PPTA project is the prospect of privatizing operations at the Port of Virginia. The Virginia Port Authority Board of Commissioners is evaluating detailed proposals from two bidders and a third from Virginia International Terminals, the private, nonstock corporation that has run the port for more than 30 years. “We already have a private operator; it’s VIT,” says McDonnell. “They have been in that position for about 30 years so the question really is: Can we do better? And can we have a better value proposition for the taxpayer in terms of money that we get to the bottom line? The answer is that I don’t know yet. We have a process set up with the Virginia Port Authority that will evaluate these proposals.”
The port community has been wary of the idea of switching operators, and many legislators are up in arms because they have no say in a decision regarding one of Virginia’s largest economic engines.
Because of the wide ranging opposition to the projects, legislation has been introduced to give the General Assembly members say into these massive projects. One bill would authorize the Public-Private Partnership Advisory Commission to provide input on detailed proposals submitted under PPTA projects. Other legislation would remove operations at the Port of Virginia from consideration under the PPTA and require General Assembly approval of any ownership changes.
The McDonnell administration’s attempts to improve the PPTA have overhauled how P3s are handled. Recommendations form a state audit of Virginia’s program, done at McDonnell’s request, were used to create a system that was more uniform, predictable and timely for private bidders.
Connaughton says that these efforts already have improved the program’s transparency. “What we’ve been trying to do is revise the whole program so that it is much more transparent and uniform and predictable,” he says. “Up to this point, we have used P3s on a per project basis, and we’re trying to make it much more programmatic.”
As a result of the state audit, the administration created the Office of Transportation Public-Private Partnerships, or OTP3, to handle P3 projects. Since its creation in 2010, the office has published a pipeline of possible projects that could attract private partners, revised its implementation manual and guidelines, and established a project identification and screening process. These documents are available on the office website. “To my knowledge, these are the most comprehensive documents of their kind in the United States,” says Garvin at Virginia Tech. “Are they flawless? Of course, not. What they attempt to do, however, is to balance the commonwealth’s need to identify and advance worthwhile transportation projects, preserve the public’s interest and attract private participants and investors.
“Plus, they are commonly viewed as model documents by other states and the federal government.”
Connaughton also points out that, while P3s centralize the decision-making process, they still go through normal channels for review. “The legislature deemed 460 a priority project of the state 20 years ago, and we’re only bringing it forward to procurement today,” says Connaughton. “[The PPTA] is a procurement process, it’s not a different mechanism to avoid all the transportation planning and evaluation that goes on for any project. Every one of these projects has gone through years of environmental, transportation planning and process, been reviewed by local governments, federal government and all the federal agencies.”
In addition, a steering committee made up of key personnel from the Virginia Department of Transportation and representatives from various transportation boards now oversee the projects, instead of having separate independent review panels appointed for each one.
McDonnell has created a working group to help the PPTA office better explain the process to the public and legislature. “We need to do a better job of communicating and educating the public and the legislature on the advantages of P3 projects, and so I think that’s going to be our primary objective going forward,” says Massie, the delegate from Henrico who is leading the group.
But all the planning may be for naught if more revenue isn’t pumped into the system. The last of the transportation bond sales were held last spring, leaving little public money to leverage future projects. McDonnell plans to ask the General Assembly this session to help him find ways to raise annual revenues by $500 million by 2019. The money would be used for maintenance, allowing the legislature to free up money for construction.
“As the revenue stream continues to get tighter in the future, it will become more difficult to even get P3 projects done,” says Connaughton. These “megaprojects,” he adds, won’t be completed without help from the private sector. “There will never be another megaproject built that is not a PPTA project. The cost of these projects are such that it is very difficult for any state to build.”