Category Archives: Transportation

More P3s Coming. Taxpayers, Hang onto Your Wallets

The twice-bankrupted Pocahontas Parkway: Virginia's poster child for failed P3s.

The twice-bankrupted Pocahontas Parkway: Virginia’s poster child for failed P3s.

by Randy Salzman

The history of American transportation “public private partnerships” indicates that virtually all P3 shell companies go bankrupt before paying back federal loans and the “private activity bonds” which they sold to finance part of the debt.

When these firms go bankrupt, who loses? Taxpayers. We get stuck (1) with paying back the money Uncle Sam lent the privates; (2) paying off bonds guaranteed by the state; and (3) picking up the maintenance costs. As a practical matter, the supposedly entrepreneurial, risk-taking private sector doesn’t take nearly as much risk as taxpayers do.

Aubrey Layne, Virginia’s secretary of transportation, recognized that his predecessor gave away Virginia’s transportation future with $6 billion (yes, with “b”) in 2012 through P3s. He has undoubtedly done a much better job negotiating Virginia’s latest P3, the I-66 project, but he’s a state official and has been interested in protecting Virginia taxpayers; not federal taxpayers. Most of us pay both state and federal taxes.

The I-66 partners are putting up over $500 million. Obviously, they expect to realize a profit or they wouldn’t have submitted the bid. That’s simple business and should underline, even if nothing else, what a horrifying reality previous P3s were for state and federal taxpayers. That 460 Mobility Partners put up zero dollars for the disastrous Suffolk-to-Petersburg connector under the McDonnell administration and walked away with $350 million is almost criminal.

The issue is especially timely now that President Trump is promoting public-private partnerships as a tool for increasing infrastructure spending and stimulating the economy. He has proposed $137 billion in federal tax credits for  investors who commit to financing infrastructure, which would transfer even more risk from the private sector to the federal government.

The justification for P3s is that the private sector can build and operate projects more efficiently and economically than government can. But the public record is splotchy, and the news media needs to dig into it. In the U.S., more than a dozen billion-dollar transportation P3 projects have gone bankrupt. Even the Indiana Toll Road, the poster child for the privatization of transporation infrastructure, went belly up in 2015.

Cintra, which won the I-66 contract, went belly-up this spring with Texas SH-130, a toll road from San Antonio to Austin. Heavily promoted by former Texas governor and present U.S. Secretary of Energy Rick Perry, the project was absurd from the gitgo. The highway is located is only 20 miles east of an existing interstate, I-35. Even though Texas increased speed limits to the highest in the nation, few drivers were willing to pay tolls to use the road. SH-130 is so underutilized that airplanes have on at least two occasions landed on it! The project generated less than half the traffic and income that Cintra cronies projected when bonds were sold and federal loans obtained. Even though Texas bought down the tolls (wasting additional taxpayer dollars), Cintra’s shell company still went bankrupt and taxpayers were will be stuck paying off the bonds.

We taxpayers are told, pre construction, that tolls will pay off P3 bonds and back the notes. Even honest media such as The Washington Post parrot that line without  examination. Yet no one can find a single instance in which a  U.S. P3 toll road has generated the projected traffic or income. There is no bell curve of successes and failures that as one would expect if the forecasting of future traffic and future income was done correctly.

Inevitably, a few years later, after all the politicians and reporters have changed, the same excuse is given as the reason for the eventual bankruptcy:  “For XXX reason, the drivers didn’t show up as expected and, reluctantly, the poor private had to give up the ghost.” Never do P3 advocates suggest that bankruptcy was the business model.

Here in Virginia, our first P3, Pocahontas Parkway outside of Richmond, has gone bankrupt twice (yes, twice) in a little over a decade. The owner: an Australian infrastructure company, Transurban. Since then, Transurban participated in the Capital Beltway Express public-private partnership. After CBE took in only one-fifth the projected tolls, the company had to restructure its debt on the project. Despite those negative experiences, Transurban is building the Interstate 95 HOT lanes and competed unsuccessfully for the I-66 project.

If Transurban keeps losing its shirt on P3s, why does it keep coming back for more? I cannot prove it, but I strongly suspect that the company hires the smartest lawyers and smartest financiers to structure the P3s so as to offload risk and ensure the company comes out whole regardless of what tolls are generated. The P3 contracts runs hundreds of pages, and I question whether anyone in the McDonnell administration truly understood them, or even read them as they farmed out negotiations to private law firms that proudly on their websites the great returns they got for private investors.. Continue reading

Who Needs Amazon Drones When You’ve Got a Starship Robot?

The Starship robot moves at pedestrian speed and weighs no more than 40 pounds, fully loaded.

The Starship robot moves at pedestrian speed and weighs no more than 40 pounds, fully loaded. The company claims the devices are “inherently safe and can navigate around objects and people.”

A robot developed by Starship Technologies, of London, can make deliveries in urban environments. Capable of carrying loads as large as two grocery bags, this “personal courier” can make deliveries of groceries, wine, flowers, whatever, within a three-mile radius. Customers can track the robot’s location location on a smart phone.

“Our delivery platform will launch a new era of instant, unscheduled delivery as well as significantly lower the costs of shipments,” says the Starship website.

Legislation allowing the use of Electric Personal Delivery Devices (EPPDs) in Virginia unanimously passed the state Senate today.  The bill marks the first statewide approval of EPDDs operating on sidewalks, shared-use paths, and crosswalks in the United States, according to a press release issued by the office of Sen. Bill DeSteph, R-Virginia Beach, who patroned the bill. A companion bill has been introduced in the House of Delegates.

“Starship Technologies is delighted with the passage of Senator DeSteph’s legislation from the Senate, and the team is excited about the opportunity to bring this technology to the Commonwealth of Virginia” said Allan Martinson, COO of Starship Technologies.  The bill was supported also by the Unmanned Systems Association of Virginia.

Governor Terry McAuliffe, U.S. Sen. Mark Warner, and other Virginia officials have targeted unmanned vehicles as an economic development opportunity for the state. Drones are regulated by the Federal Aviation Administration, which has held up their deployment for safety reasons, but the use of ground-borne robots on public roads and sidewalks are governed by the states. Virginia also is playing a leading role in the research of driverless cars.

Impact on human settlement patterns… The Starship robot could tilt consumer preferences for urban areas over suburban. As a practical matter, the device can travel only where there are sidewalks and where development is compact. As much as I would love to order my Kroger groceries online (which I now can do) and have them delivered by a robot, there is no sidewalk in suburban Henrico County the device could travel to reach me. The street network and relatively high density of the City of Richmond would be far more suitable. In the grand scheme of things, delivery-by-robot is a small amenity. Still, it is one more reason to move from the ‘burbs into the city.

MTR, Would You Take over Metro, Please?

MTR, the Hong Kong commuter rail system, is arguably the world's most efficient.

MTR, the Hong Kong commuter rail system, is arguably the world’s most efficient.

Here’s an idea for readers to chew on while the Big Bacon is on vacation: How about privatizing the Washington Metro system? Honk Kong privatized its subway system in 2000, and it has worked out pretty well.

Writing on the Cato Institute blog, Chris Edwards quotes a report by McKinsey:

Hong Kong’s MTR Corporation has defied the odds and delivered significant financial and social benefits: excellent transit, new and vibrant neighborhoods, opportunities for real-estate developers and small businesses, and the conservation of open space. The whole system operates on a self-sustaining basis, without the need for direct taxpayer subsidies.

MTR’s railway system covers 221 kilometers and is used by more than five million people each weekday. It not only performs well—trains run on schedule 99.9 percent of the time—but actually makes a profit: $1.5 billion in 2014. MTR fares are also relatively low compared with those of metro systems in other developed cities. The average fare for an MTR trip in 2014 was less than $1.00, well under base fares in Tokyo (about $1.50), New York ($2.75), and Stockholm (about $4.00).

The ratio of passenger fares to operating costs is a high 185 percent, which means that fares cover not only operating costs but a share of capital costs. MTR raises other funds for capital from real estate deals under which it gains from land value increases near stations — a concept known as “value capture” that we have touted on this blog. MTR is so highly regarded in the mass transit world that it has contracted to run commuter rail systems in cities China, the United Kingdom Sweden and Australia. Why not Washington? (Hat tip: Tim Wise.)

Bacon’s bottom line: It would be unrealistic to expect Hong Kong results in in the Washington Metro. For one reason, Hong Kong is far more densely populated and rail is a more attractive option compared to driving. For another, it’s not clear whether Washington Metro could extract the same economic benefit from putting real estate deals together that MTR could. Zoning controls and land use planning may work very differently in the U.S. than in Honk Kong.  But the idea certainly appears to be worth pursuing. If MTR could do no more than bring operational efficiencies to Metro, Virginians would benefit from better service and lower subsidies.

Transportation Revolution Ain’t Slowing Down

Don Perrone epitomizes the transportation revolution. Project manager at Crozet-based Perrone Robotics, he displays the innards of his self-driving car.

Don Perrone epitomizes the transportation revolution. Project manager at Crozet-based Perrone Robotics, he  displays the innards of his self-driving car. Photo credit: Daily Progress.

Just a reminder of how rapidly technology is transforming automobiles and transportation, I submit two stories published yesterday….

From the Daily Progress: Perrone Robotics, a Crozet-based software company, is testing automated and fully autonomous vehicles on Virginia roads. Although driverless cars in Virginia must be manned, the laws regulating autonomous driving are more accommodating here than in many other states. “It’s pretty much an open playing field,” said Greg Scharer, Perrone’s chief operating officer “Virginia has a ‘tabula rasa’ on [automated vehicle] legislation.”

California may be dominating the transportation revolution, but Virginia is a player. Virginia Tech runs one of the nation’s leading transportation research centers in Blacksburg. And in 2015 Gov. Terry McAuliffe announced the opening of the Virginia Automated Corridors, a 70-mile network of highways and arterial roads in Northern Virginia outfitted with high-definition mapping and data acquisition systems to support automated-vehicle testing. Those assets, with a friendly legal climate, makes Virginia an attractive location for research on autonomous vehicles.

Meanwhile, an MIT study hints at what carpooling options created by companies like Uber and Lyft, can accomplish. Smart phones and algorithms can accomplish amazing things. Says lead author Daniela Rus:

Instead of transporting people one at a time, drivers could transport two to four people at once, resulting in fewer trips, in less time, to make the same amount of money. A system like this could allow drivers to work shorter shifts, while also creating less traffic, cleaner air, and shorter, less stressful commutes.

The MIT team found that 95 percent of demand would be covered by some 2,000 10-person vehicles, compared to the nearly 14,000 taxis that currently operate in New York City. The algorithm works in real-time to reroute cars based on incoming requests and can dispatch idle cars to areas with high demand, says the MIT article.

Virginia doesn’t have any localities with the population density of New York. But cut the ride-sharing trips in half or two-thirds and you still have a remarkable reduction in the number of vehicles on the road. It makes no sense to spend multi-billions on new highways and transit projects when this potential lies within our grasp.

Who Will Champion Mobility as a Service?

Uber was just the first step. The App-algorithm-transportation revolution will evolve into Mobility as a Service.

Uber was just the first step. The App-algorithm-transportation revolution will evolve into Mobility as a Service. Virginia Virginians lead the way or fall behind?

Around the world, companies and muncipalities are experimenting with Mobility as a Service (MaaS). Fast Company describes how a new company, MaaS Global, is changing the thinking about transportation, in Helsinki, Finland:

If you need to go somewhere, you pull up a new app, which calculates the best way to get there—public transit, a bike-share bike, taxi, a rental car, or a combination. Instead of buying individual tickets, you pay a monthly fee of €249. …

Users can choose to link their calendars with the app, so routes will be planned in advance. With each trip, it’s possible to make a choice of transport mode based on what’s cheapest or greenest or most convenient—or mood….

MaaS Global is “in talks” with several cities in North America, Fast Company says. The company may or may not have devised a viable economic model — a fixed monthly prescription that doesn’t vary by usage seems problematic to me. But the company is only one of many experimenting in this space. Sooner or later, someone will figure out how to make it work.

Bacon’s bottom line: I’ve often referred to the integration of smart phones, algorithms and transportation as the Uber revolution because the ride-scheduling company Uber developed it first. But Mobility as a Service (MaaS) is much bigger than Uber, and its potential ramifications are even more far reaching. First and most important, it can save people money and expand their transportation options, thus improving their quality of life. Second,  MaaS could reverse the decades-long decline in shared ridership, meaning that we can get much more mileage (so to speak) out of our existing infrastructure.

Virginia can continue approaching transportation as it always has — by building new stuff, at a cost of billions of dollars a year — or it can foster the growth of Mobility as a Service. We Virginians need to ask ourselves, how can we encourage innovative transportation companies to set up shop in Virginia? We reached the right solution with Uber and Lyft, enabling them to compete in the transportation marketplace. That was a good start,  but what else can the public sector do to create a welcoming environment for entrepreneurs to expand beyond what is essentially a taxicab service?

The idea is just hanging out there, waiting for a champion. We probably can’t expect much from Republicans and Democrats, who are beholden to entrenched special interests. (The “transportation” sector has contributed roughly $35 million over the past decade to Virginia political candidates, according to the Virginia Public Access Project.) Republicans are the party of roads, and Democrats the party of mass transit. Both transportation modes are more than a century old, and both have much to fear from the MaaS revolution.

Only one party, the Libertarian Party, is the natural home for entrepreneurs and innovators who seek to disrupt the status quo. If Libertarians want to broaden their popular appeal by creating community-based, private-sector solutions for real-world challenges, then they should lead the charge for Mobility as a Service.

Washington Metro Needs another $1 Billion… Fast

The Washington Metro train wreck keeps piling up.

Washington Metro needs another $242 million from Virginia and its localities over three years.

The train wreck of the Washington Metro keeps piling up higher. The Washington Post sums up the situation this way: Local governments are “alarmed” as Metro says it needs an extra $1 billion over the next three years from Virginia, Maryland and Washington, D.C.

Metro General Manager Paul J. Wiedefeld has earned credibility as an executive willing to make tough decisions, such as shutting down rail service at times and locations where maintenance and repairs are urgently needed. Now he’s telling local governments in the Washington area that fulfilling his goals for safety and reliability — needed to reverse a continued decline in ridership — will cost them an additional $1 billion over what they’ve budgeted for the next three years. That translates into a 36% increase in annual operating subsidies. Writes the Post:

According to Metro’s new forecasts, the District’s total contribution for operations and capital would jump from $467 million in the current budget year to $735 million in fiscal 2020. Maryland’s total would rise from $479 million to $727 million, and Virginia’s would increase from $332 million to $574 million. (Metro’s fiscal years run from July 1 to June 30.)

“We have a $40 billion investment [in Metro], and it’s 40 years old,” said Wiedefeld. “As we replace that, there’s big numbers going forward, and they grow with inflation. . . . Either we start to wrestle with this so it’s where we want it to be, or we just push it down the road.”

Bacon’s bottom line: Maintenance is a bitch, especially when you fail to properly fund it over 40 years. Politicians love the accolades for building new highways, bridges and transit projects. Of course, the ribbon-cutters are long gone when the infrastructure wears out and someone else has to pay to fix it. I wonder how many other Metros there are in Virginia, quietly racking up unfunded maintenance liabilities while nobody notices.

CTB Approves $4 Billion Interstate 64 Project

CTB approves $4 billion project to benefit Interstate 64, Hampton Roads Bridge-Tunnel

The CTB approved Option A, one of four options, to relieve chronic congestion on Interstate 64 and the Hampton Roads Bridge-Tunnel.

Wow! The Commonwealth Transportation Board  approved yesterday a $4 billion plan to expand the Hampton Roads Bridge-Tunnel and widen twelve miles of Interstate 64 from four lanes to six. Said Transportation Secretary Aubrey Layne after the vote: “Historic day for Hampton Roads and the state.”

The Virginian-Pilot provides these details:

The additional lane capacity in each direction would likely be high-occupancy toll lanes, which would require that a car carry three people to avoid a toll during peak hours. Vehicles with one or two people could choose to pay a variable toll based on congestion during peak hours. The Commonwealth Transportation Board will be able to weigh in later on the “managed lane” concept.

Buses would use the new lanes, too.

The existing lanes will remain free.

Funding will come from tolls and bonds, regional gas tax revenue, and federal loans.

Bacon’s bottom line: Northern Virginians have had to learn to live with HOT lanes, and now Hampton Roadsters will, too. Nobody likes paying the tolls, but the money to widen highways and build the tunnel has to come from somewhere.

Should Hampton Roadsters (or Virginians) pay higher gasoline taxes to improvements on Interstate 64? Nobody likes gasoline taxes either — especially if they’re not the ones benefiting from the project.

Should VDOT toll the new tunnel and its companion tunnels in order to lower the tolls? That, too, is a non-starter. No one likes paying a toll where they weren’t paying one before.

How about tolling just the new tunnel? That’s the plan! No one loses. If traffic is logjammed and you desperately need to get to the other side of the river, you can pay a toll (which will vary, depending upon demand) for an expedited trip. But you don’t have to pay the toll if you don’t want to. You can join the schlubs in the slow lanes, and you’re no worse off than before.

If you carpool or ride a bus, you’re better off. You can use the HOT lane for free, and you don’t wait in the schlub lanes.

Even if you’re a schlub, you’re probably better off. The slow lanes will be less congested than they would have been without the project. The HOT lanes will divert toll payers, carpoolers and buses who would have been clogging the slow lanes with you.

I haven’t seen how the deal or financing is structured, so I can’t comment on the soundness of the Interstate 64 plan. But construction of a HOT lane is both morally and politically defensible.

Tesla Scores Big Victory in Virginia

Tesla Model X

Tesla Model X — pedal to the metal in Virginia.

First Uber, then Air BnB, now Tesla. Free markets in Virginia’s “new economy” are making steady ground.

Uber and Lyft, the revolutionary ride-hailing companies, overcame the taxicab industry two years ago to win the right to compete in the Virginia transportation marketplace. Last year, the General Assembly legalized Air BnB, an online marketplace for short-term rentals of private rooms and homes, after creating a mechanism for homeowners to pay occupancy taxes on the same basis as hotels.

Then yesterday, the Department of Motor Vehicles handed Tesla Motors, a manufacturer of electric vehicles, a major regulatory victory by ruling that the company could open a company-owned store in Henrico County. State law prohibits an auto manufacturer from owning dealerships, unless it can be demonstrated that no independent dealer is available to sell its cars “in a matter consistent with the public interest.”

DMV Commissioner Richard D. Holcomb accepted the California company’s argument that no independent dealer in the Richmond area could profitably operate under its retail business model. Wrote Holcomb in his ruling:

Tesla’s business model differs from traditional car dealerships in many ways; but specifically, Tesla sells its vehicles at uniform prices whether a customer purchases through [its] website or at a Tesla store. Tesla could not or would not offer “dealer discounts” or “wholesale pricing” on new cars to a prospective dealership. VADA’s own experts agreed that it would be very hard or impossible for a dealership to be profitable unless Tesla offered their cars at wholesale prices. Although many of the dealers testified that they could eventually make a profit with a Tesla dealership, they admitted that it would not be from new car sales. Those dealers indicated they could make a profit through other departments; and those areas, like sales of parts and used cars or profits on service and financing mark-ups, run counter to the Tesla business model.

That doesn’t come close to describing all the innovations the company would bring to Virginia. Founder Elon Musk’s grand plan is to integrate electric vehicles, home solar power, and battery storage to move the country toward a environmentally sustainable energy economy. (See my post outlining that vision.)

The Virginia Automobile Dealers Association (VADA) has vowed to fight Holcomb’s ruling, either through the courts or in the General Assembly, so Tesla’s victory may be temporary.

From my perspective, VADA offers one legitimate argument: The EV manufacturer should be required to abide by the same consumer-protection measures that automobile dealers do. The company says that its practices are effectively equivalent to those of the auto dealers, but it is not bound to them by law.

Just as Uber and Lyft were required to adopt certain consumer-protection measures so they would not enjoy an unfair advantage over taxis, it is reasonable for Tesla to accept consumer-protection measures to compete on a level playing field with automobile dealers. Tesla and other manufacturers — China-based automaker Geely also plans to sell cars in the U.S. through a direct-consumer model, according to the Richmond Times-Dispatch — should compete on their ability to provide a better value proposition to consumers such as better pricing, a better service model, and superior customer relations. I expect the details will be worked out in the 2017 legislative session.

Privatization, Outsourcing and Risk

Privatization entails risks and rewardsIn negotiating a public-private partnership for building and operating improvements to the Interstate 66 corridor outside the Beltway, Transportation Secretary Aubrey Layne has created a new template for looking at privatization and outsourcing.

Traditionally, when government perceives a public need — building roads, educating children, running prisons — it undertakes to do the job itself. But government bureaucracies are prone to rigidity, bloat and overruns. As a corrective, Republicans and conservatives often propose outsourcing important functions to the private sector. But privatization is vulnerable to cronyism, favor-seeking and private enrichment at public expense.

A third way, Layne’s way, requires government to run more like a business — but not in the sense normally understood as a penny-pinching attention to costs. When businesses negotiate deals and contracts, they expend tremendous effort thinking about risks and contingencies. Government rarely does. That’s why privatization efforts often go awry. Private-sector negotiators take their public-sector counterparts to the cleaners by extracting concessions on obscure points in the contract that can lead to big payoffs down the road. Layne says government needs to develop a similar capacity to manage risk.

As I explained in the previous post, “How the McAuliffe Team Saved $2.5 Billion,” Layne adopted a new approach to project management for “Transform 66.” First, he developed a term sheet, a list of elements deemed essential from a public-policy perspective that could not be bartered away. In the case of I-66, these included park-n-ride lots, a mass-transit service, and future upgrades to the transportation corridor.

Then he established a baseline — what would it cost for the Virginia Department of Transportation to undertake the project itself? If VDOT could do the job for less, on a risk-adjusted basis, then there was no point in dishing off the work to the private sector. But if a private bidder could do the job for less, the public would benefit.

But those were just first steps. Layne analyzed transportation projects as a continuum of risks. For any large project, for instance, there is the risk that construction could run behind schedule or over cost. VDOT was once notoriously unreliable in delivering projects on schedule and on budget, although it has gotten much better. Also, there is O&M risk — the risk that operations & maintenance will cost more than assumed. This is particularly an issue if the condition of roads and bridges is to be maintained to specified performance standards. Then there is financial risk, critical in toll-financed projects. Financial models are predicated on assumptions of how many motorists will pay tolls and how much they will pay. If ridership and revenues fall short, the tolling entity, whether public or private, could wind up defaulting on its bonds — a highly visible event.

It is worthwhile noting that these risks exist whether VDOT explicitly recognizes them or not. For many years, construction delays and overruns were routinely buried in budgets that were impenetrable to the public. Maintenance costs were divorced from project costs and rolled into transportation district expenditures. No one bothered to check if actual ridership matched the projections that justified the project. If ridership fell short, there were no visible repercussions. Poor management might result in less money available for future construction projects, but it was invisible, so no one was held accountable.

Layne’s key insight is that different parties vary in their tolerance for taking different types of risk — for reasons often unknowable to the state. One player, for instance, might accept a lower return on investment in order to get a toehold in a strategic market. A corporation, facing zero-interest policies in the European Union, might wish to transfer assets to the U.S. Another player might have tax reasons for structuring an investment in a particular way.

Therefore, it is critical to bring as many players bidding on a project as possible, and not to settle upon a given approach right away. When discussing the I-66 project, five different consortia submitted five different design-build proposals (in which they would design and build the project, then turn it over to VDOT), five design-build-operate projects (leaving bond-financing and ridership risk with the state) and three outright concessions (in which the private parties would assume operational and financial risks).

Negotiations with multiple parties also creates what Layne calls “price discovery” — the state gains new insight into the economics of the project that allows it to push for better terms. Private consortia suggested opening HOT lanes to trucks to generate additional revenue. The idea added value to the deal, and Layne accepted it. Continue reading

How the McAuliffe Team Saved $2.5 Billion

The I-66 public-private partnership will save Virginia $2.5 billion

Location of the Transform 66 outside-the-beltway project. Map credit: Virginia Department of Transportation

Transportation Secretary Aubrey Layne makes a strong case that Virginia’s overhaul of the public-private partnership law made possible $2.5 billion in savings on Interstate 66.

On Nov. 3, Governor Terry McAuliffe made the audacious claim that his administration had saved taxpayers $2.5 billion on the Interstate 66-outside-the-Beltway project thanks to 2015 reforms to the Public-Private Partnership (P3) law.

The original proposal brought to Commonwealth by the former Office of Transportation Public-Private Partnerships indicated that the state would have to subsidize the construction of 25 miles of general-purpose lanes and express lanes by between $900 million and $1 billion — and the concessionaire would contribute nothing toward bus mass transit or future corridor improvements.

By the end of a revised, 16-month procurement process, the state struck a 50-year deal with a consortium of Cintra, Meridiam, Ferrovial Agroman US and Allan Myers VA, Inc. Express Mobility Partners agreed to pay Virginia $500 million up front, invest $800 million towards transit operations, and make $350 million in future corridor upgrades.

The I-66 corridor improvements, both inside the Beltway and out, are the signature transportation projects of the McAuliffe administration. After cleaning up the fallout from the Norfolk-Portsmouth Midtown-Downtown Tunnel project and the botched U.S. 460 Connector, the heat was on Transportation Secretary Aubrey Layne, to get I-66 right. While aspects of the inside- and outside-the-Beltway projects have been controversial, Layne can reasonably say one thing: He has saved the state $2.5 billion.

P3 projects have not always worked out well in Virginia, as Layne knows better than anyone. I wondered how it was possible to negotiate a deal that, on the surface at least, was so vastly superior to what the state had been considering. I sat down recently with Layne and Deputy Transportation Secretary Nick Donohue to get their story.

The starting point for understanding the McAuliffe administration’s approach to P3s is the continuum of risk associated with highway mega-projects. One approach, as the Virginia Department of Transportation (VDOT) did for decades, is to assume the risk for everything: cost overruns, construction delays, operations & maintenance, and the risk of financing, in particular, that toll revenues will suffice to pay bond obligations.

During the previous administration’s flirtation with P3s, an infatuation with concept of “privatization” inspired the state to dish off all the risk to the private sector. (Layne, a Republican, rarely mentions the McDonnell administration by name.) But Layne found that no more acceptable than keeping a project in-house with VDOT regardless of cost. Instead, Layne started with no preconceptions about the best way to structure a deal. Getting the best deal depended upon the situation, knowing the risks the state was comfortable assuming, and knowing the risks it was comfortable dishing off.

Back to the drawing board. Early in the administration, in 2014, the old P3 office delivered a proposal for I-66 for submission to the Commonwealth Transportation Board (CTB) for approval. “The P3 office had no idea what it was doing,” says Layne. “It was embarrassing.”

At the risk of delaying a high-priority project, Layne spiked the deal. He didn’t present it to the CTB. Rather, he waited for the General Assembly to enact major reforms to the P3 process so he could start over. The problem with the old process, he says, was that after soliciting proposals, VDOT selected one private consortium to negotiate with. Under the guise of protecting the partner’s proprietary information, VDOT conducted the negotiations out of the public eye. When a product emerged, the CTB had no choice but to vote it up or down without amendment. “I don’t know how anyone could have set up the process to be more biased,” says Layne.

Before soliciting private-sector proposals, Layne determined the essential elements from a public policy perspective the project needed to have. In other P3s, the state allowed the private party to chip away at public-interest protections, refusing to fund public transit in the transportation corridor, for instance, or penalizing the state for investing in projects that might drain traffic from toll revenues.

Layne next drew up a term sheet based on the “must have” attributes, and then asked VDOT to determine how much it would cost to deliver the project in-house. Just taking this obvious step would have saved $1.5 billion. The 2015 “public option” cost roughly $500 million less than the previous private sector proposal, thanks in large measure to the state’s ability to tap tax-free public financing, plus VDOT would put $800 million into transit and $350 million into future corridor improvements. Continue reading