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.

The in-house scenario established a baseline against which future proposals would be compared. Mass transit and park-n-ride were non-negotiable. If potential partners couldn’t deliver, Layne was fine with turning the I-66 project over to VDOT.

The P3 industry was unhappy with Virginia, and Layne says there was pushback in the General Assembly. (Transurban, one of the players, made $150,000 in campaign contributions 2014-2015.) “They said we were against P3s, we were killing the process, we were making numbers up,” Layne recalls. In truth, he says, they were upset that Virginia’s new approach would narrow their profit margins.

The virtues of competition. After soliciting potential partners, the state began talking to five teams. Talking to different players gave Layne keener insight into the economics of the deal. It quickly became apparent that, given the extraordinary revenue potential from tolls, some bidders were willing to pay the state in order to get the concession.

“The more people you talk to, the better the price discovery,” Layne says. “It was fascinating, the stuff we learned when we put it out to competition.”

For example, two teams asked if the commonwealth would allow commercial trucks to use the express lanes, generating more revenue than originally contemplated. VDOT hadn’t considered that possibility, but it enhanced the public benefit, so Layne agreed to it.

In the end, Express Mobility Partners made the best offer. The consortium gave Virginia everything the McAuliffe administration wanted — and invested in $1.5 billion in equity financing. That was a bigger equity investment than for all other P3 deals in the Commonwealth (including the Pocahontas Parkway, the 495 Express Lanes, the Midtown-Downtown Tunnel, U.S. 460, and the 95 Express Lanes) combined. A bigger equity stake means the private party has more skin in the game and has less debt exposure if revenue projections don’t pan out.

Crucial to the successful negotiation, says Layne, was McAuliffe’s attitude that he would rather have no deal than a bad deal. As long as VDOT could deliver the public option, the administration was able to walk away from a bad deal. McAuliffe’s approach contrasted to that of his predecessor. By publicly proclaiming U.S. 460 to be his top transportation priority, Gov. Bob McDonnell put enormous pressure on Layne’s predecessor, Sean Connaughton, to keep the project moving, even if the cost and risk were unacceptable.

“The governor wasn’t up there saying, ‘I’ve got to have this deal,'” says Layne. “He’s never done anything but ask us to get the best deal.”

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13 responses to “How the McAuliffe Team Saved $2.5 Billion

  1. re: ” Layne, a Republican”

    funny!!!!

    Is Lane using “Republican Principles” for Transportation and doing so under a Democratic boss who if you believe conventional Republican dogma – is not fiscally responsible?

    Did McDonnell have the same opportunity to hire a competent person to do P3 and Transportation and in theory if you believe Republicans – know how to do fiscal – “right” and that’s why Republicans should be elected to run Govt?

    This is rich!

    lots of angst from the public on tolling – apparently not a GOP principle, eh?

    • But Tim Kaine OK’d the contracts for construction of the Silver Line under P3, but did not require the contractor (Bechtel & others) to put up a dime of private money. Oooops.

  2. I think people forget what P3 is… and how “private money” gets repaid…

    money does not suddenly and miraculously “appear” out of nowhere!

    Ergo – how would a “P3” for transit “appear” and repay the contractor?

    The concept of any private entity building and charging for something like a road – is the subject of much anger and angst whether it’s tunnels in Hampton or Express lanes on I-66 – and I suspect on any transit project also.

    It gets even more problematical if the P3 contractor says they cannot deliver the project on user fees alone and need an additional pot of govt subsidy to get the job done – e.g. US 460 , the tunnels in Hampton – and initially the I-66 project.

    Should be no great surprise that some infrastructure projects cannot be built and operate solely on user fees… but the issue is – how much is the “right” amount and that answer seems to be specific to a given project as opposed to a general guideline for any road or transit or any other project – but again the key issue not well understood is that P3 means a private entity- that has to be paid back from a particularly structured project – as opposed to the state putting out for low bid – a design-build or variation – funded solely from state money.

    I don’t know Layne’s prior work history but Sean Connaughton who was McDonnells Transportation Sec was a Prince William Board of Supervisor – (and perhaps had a real job also) but clearly did not get P3 “right”. To be fair, perhaps it was VDOT and the State also that had a learning curve and now Layne just happens to be the guy in front once the state got it’s act together.

    I think not – I’ve seen Layne in many different venues and I think he sharper than the average guy and appears to have been the right guy at the right time – and if he is a said to be a “Republican” I just don’t know what to say because so was McDonnell and he just royally screwed up on several levels – from trying to use the ABC stores to fund transportation to a series of screwups on transportation and I’m hard-pressed to name his accomplishments to be honest. Perhaps others can…

  3. “The governor wasn’t up there saying, ‘I’ve got to have this deal,’” says Layne. “He’s never done anything but ask us to get the best deal.”

    Only in government could this be a “revelation.”

  4. why such a critic ? I think absolutely whether the Governor said so or not – SOMETHING had to be done about the tunnels in Hampton and the beltway and I-66 in NoVa.

    I think Layne has had some measure of success compared to his counterparts and his predecessors in Va – and perhaps as time goes by – we’ll find out that he was not infallible and had some failings also.

    but all things considered – tunnels are being built and changes made to I-395 and I-66, etc.

    is there a feeling it was done wrong?

  5. Here’s a graphic detailing the various options for P3 which is more than just one thing:

  6. Virginia Republicans claim that Bob McDonnell passed the largest tax hike in Virginia history. Bob McDonnell said it was to solve the transportation crisis. The taxes fell disproportionately on Northern Virginia. Now, every new road in Northern Virginia needs to be tolled – usually at absurdly high rates.

    Why would any competent entrepreneur want to start a technology business in Virginia? The only part of the state with a sufficiently large technology skill base is Northern Virginia. And Northern Virginia is the perennial piggy bank for the crony capitalist crooks in Richmond to loot. Meanwhile our own politicians in Northern Virginia are largely useless opportunists who happily sell their constituents down the river in order to further their ambitions with their respective state parties.

    Despite being a lifelong Virginian I can’t in good conscience tell any company of any size involved in technology that the company ought to come to Virginia or expand in Virginia. There are so many better options where the state and local governments are competent. Nashville, Tennessee for example. Or Austin, Texas. Even a company that needs to be near the federal government would be better advised to consider Annapolis than anywhere in Virginia.

    Virginia better hope that Trump doesn’t “drain the swamp” because the only thing holding this goat rodeo of a state up is federal spending.

    • I agree wholeheartedly.

      Northern Virginia’s crony capitalists and its ineffective politicians, working in tandem with the Commonwealth’s pervasively corrupt political system, are strangling Northern Virginia by their every act, deed, and omission. In so doing they are transforming Northern Virginia into a grossly dysfunctional Urban No Where Place that reeks harm, despondency, and desolation daily on all of its citizens and neighbors save for only for its wealthy ruling class that milk the region and its institutions daily for their own personal gain and benefit.

      These elites, their corrupt culture and business practices, now infect, control and milk of personal advantage most all major institutions, public and private, in Northern Virginia.

      Thus Northern Virginia today is a poster child for a death spiral of a once prosperous and wealth generating region, one whose demise is being brought about by the actions of corrupt, ineffective, gutless and deeply selfish leaders, all of whom have been acting in tandem for decades within a Balkanized system of local governments whose parts work daily with its leaders to insure the abject failure of the whole of Northern Virginia.

      This dysfunction now threatens the entire region from Fredericksburg to Haymarket to Point of Rocks Md and all the lands in between and south of the Potomac River, and its dysfunction is now spreading far and wide and ever faster into DC and Maryland too.

      Take only one example: Last Thursday it took me 1 hour and 50 minutes to drive from Northwest Washington DC to Crystal City, Virginia, a total distance of 6 miles. This is not an anomaly. It’s become a way of life in and around Northern Virginia for everyone trying to pass through the place. And now the elite are forcing ever higher Tolls on citizens exercising what should be their right to travel while their leaders impose tolls that are monuments and hourly reminders of the gross failures of thoes leaders.

  7. Tolls are more than just a way to pay for infrastructure. They are the way that the State intends to manage congestion / traffic demand in the urbanized areas at peak hour commute time.

    This approach is being adopted – across the country – in many urbanized areas – because of the reality that there are fewer and fewer places left to put major new roads that won’t require tearing down developed property at 10 times the cost of roads on undeveloped land. It’s become fiscally and physically – untenable.

    But when you ask people what to do about urbanized congestion other than tolling – you get just unreasonable, outlandish and unrealistic answers of “build more roads” and “don’t increase taxes” – and those answers have convinced the State Transportation folks that people are not adults and are not sources of better ideas – just things they want – without regard to the realities of cost and reality.

    I note now in some VDOT hearings – they are actually asking for alternatives – to the proposed… and listening.. and actually generating cost data in response.. but all this does is basically inform folks of the realities that VDOT is already dealing with.

    Ask yourself – Don and others -what exactly WOULD YOU DO for Northern Va… that would make a dent in rush hour? That’s the fundamental problem..

    What Bob McDonnell “promised” was little different than what most politicians “promise” versus deliver, but the tax increase – helped a lot – and at the same time – VDOT realized that it would not be “enough” and so went to the next level of how to get more Transportation done – without more tax increases.

    The tunnels in Hampton alone – without tolls – would consume a decade worth of transportation revenues for the entire state!

    Despite Don and others yammering – there were two basic choices in NovA – do what little you could do for new roads and watch congestion inevitably become gridlock or.. 2. – set up a toll system to incentivize HOV and time-shifting.. and ultimately engender people who do commute SOV 100 miles a day – to realize and accept the financial and time costs that they have chosen… for themselves rather than shift to taxpayers who don’t commute such distances – and who are not about to pay even more gas taxes.

    People are no longer adults on the tough issues, transportation, health care, education .. they want simple answers.. and the world is not that way… no matter who they vote for.

    • Put gantries everywhere in Virginia and have everybody pay the costs of the roads based on the miles they drive and the roads on which they drive.

      Everybody pays the true costs of their driving.

      If you drive on a road that needs to be widened (like Rt 66 inside the beltway) the costs of that road work are added into the per mile charge for driving on that part of Rt 66. If you are driving on a road that needs to have overpasses instead of “curb cuts” like Rt 29 through Charlottesville then the costs of that improvement are added to the cost per mile for driving on that part of Rt 29. If you are driving on one of the very few roads where increased capacity is truly impossible (within economic boundaries) then the cost of mass transit solutions are added to the cost per mile.

      And if your driving on some beautifully paved, low traffic country road then the cost per mile is high because the denominator of “mies driven” is so low.

      No more gas taxes, car taxes, license taxes – all costs of driving are allocated to the per mile charge.

      If you think this is hard – download Waze and watch it work. Put a black box in everybody’s car, collect the driving data and periodically upload it for billing to the car owner. Police cars can “ping” the device to see if it’s working. The penalty for a device that isn’t working? $1,000.

      Oh, and ALL proceeds from the cost per mile charge go back to the specific area where the charges were incurred.

      Think about that, Larry – pay your actual costs. No more “biggest tax hike in Virginia history” to fix transportation followed immediately by sky high tolls. No more sluicing the transportation funds from one jurisdiction to another.

      • Great idea with two critical amendments:

        Any driver making less than a $100,000 annually drives free.
        Any driver making more than $400,000 annually pays triple charges.
        Any driver making over $1,000,000 annually, or who holds leadership positions in government, pays all revenue shortfalls arising by reason of those enjoying toll free status.

        This will for sure fix the problem.

  8. Having spoken with Sec. Layne a couple times before this project, I suggest that he has a solid grasp of the P3 scheme and how it has successfully — especially in Virginia under Gov. McDonnell — transferred tax dollars to private internationals, like Cintra (Spain), Ferroval (Spain), Macquarie (Australia) and Transurban (Australia). Previously, like the 460 case, the privates put up nothing, or very little, and the so-called private money was all federal loans and state private activity bonds (PABS) — which when the construction-operating shell company went bankrupt (as they all seem to do), the loans were not paid off and the bonds were picked up by the taxpayers a couple administrations later. Usually, the shell company was in the black before even completion of construction and, though it’s always spoken of as a great plus for P3s, the privates have never had any incentive to build for the long-term. They are bankrupt by then, usually before 15 years after construction because that’s when their tax benefits dry up; when the loans begin to be repaid; and perhaps most importantly when a highway might actually need major repairs. With their blueprinted bankruptcy, the privates avoid all that, ensuring taxpayers are left with an empty bag. When I laid this scenario out to Sec. Layne three years ago, his response: “It has happened.”

    Generally, we taxpayers — unbeknownst to us — have paid millions to a handful of law firms to negotiate in “our behalf” but when one checks on those law firms, we discover that they are very proud of the great returns they get investors. PABs average between 8-14 percent, or double junk bond rates. Since these law firms are not government employees (just contractors), this is NOT a conflict of interest. But under Sec. Connaughton, this was encouraged and, as the 460 case illustrates, negative news and concepts were swept under the rug in pursuit of ever-more privatization. I happened to be at the CTB meeting when brand-new Sec trans Layne chokingly tried to explain the 460 disaster and why he suspended that project. Finally, FINALLY, after being both a CTB board member when 460 was funded and the head bond salesman for the tollway, FINALLY as sec trans, he was allowed to read the contract. Not when he voted for the funding; not when he was promoting the bonds. FINALLY, reading the contract, he was appalled.

    Hopefully, he and his “new” law firm have solved the issues to prevent I-66 to become yet another taxpayer disaster. But I wouldn’t bet on it. The privates have the best legal and financial minds in the world and they play the federal government off brilliantly agasint the state. Cintra, which just had it’s Texas SH 130 project go bellyup even after Texas decreased the tolls, didn’t collect what Cintra contracted to owe the state, and increased the speed limits, will have to generate two and half times the income from America’s most lucrative tollway in order to meet it’s contractual obligations to North Carolina and Uncle Sam for Cintra’s I-77 Mobility Partners project. Needless to say, north of Charlotte (where the I-77 project is planned) has one-seventh the population as Los Angles, where the nation’s most lucrative toll road is. If Cintra’s shell actually — honestly — planned to pay off Uncle Sam’s loans and the state’s bonds with those tolls, it would never have signed contracts which claimed it would pay $25 million annually to North Carolina while ensuring that 75 percent of all revenue went towards the TIFIA note. Without expenses (or repairs or other debt service), this means that short stretch of new highway MUST generate $100 million annually in tolls, again 2 and a half times the most successful. It won’t, of course, and after a handful of newspaper articles about how it’s not generating the traffic that was projected when the bonds were sold — sounding as it’s driver’s faults — then that highway, as will most probably all Virginia’s Connaughton projects, will likely go bankrupt. No one ever notes that the same firms do all the traffic forecasting and they have NEVER — not once — forecast less traffic than actually shows up. If there was decent forecasting, then there would be a bell curve instead of what consistently happens, less than one half the traffic which was originally forecast generally arrives to drive the spanking new highway and — allegedly — pay off the loan and bonds. A couple years ago, the Capital Beltway Express was generating one-fifth of the monthly income it projected when it put out its bond prospective. It’s already restructured the debt, of course, and will soon likely go belly-up as another Transurban Virginia project did, the Pocahontas Parkway.

    Privatization — which in theory sounds so great — has proven itself successful at lining the pockets of those “in the know” at the expense of all taxpayers. Yes, there might be good P3 projects (and maybe this is one), but no one ever notes the downsides. We’re learning that charter schools are OFTEN — not always — no better than traditional public schools at two and three times the cost and that privatized prisons are incentivized to put, and keep, more people in jail while taxpayers go around with our thumbs up our… Why must we presume, as Donald Trump is doing, that his $1 trillion in private money is actually out there and actually truly private???

    Trump figured out how to game the system to make money out of going bankrupt six times (or his lawyers/financiers did). Expect our national debt to triple in a very short period as he promotes P3s as the be-all, end-all for American infrastructure. Except that if he’s successful at starting a trade war, China won’t be there to lend him the money…

    Excuse typos, grammar, etc. Off top of head.

    • Thank you for your excellent comment.

      You put a great deal of flesh on the bare bones of my earlier comments posted above.

      As you point out, these P3 projects, if they are to have any chance of working, require high standards of Public ethics and the assumption of substantial risk by those who put the public projects together and are paid to make those projects work over the long term for the public benefit, and thus provide a public service on which all citizens and our society generally and greatly depends for its health, welfare, prosperity.

      That is the fatal flaw. Today’s culture, government, and applicable business community is woefully inadequate for this task. The reasons are obvious. Today ethics are not up to the task. Nor is there any appetite or ability on the part of any of these players to take anywhere near the financial risk that these massive public undertakings require. And why should they undertake such business fatal risk, even if they could? They are not fools!

      Hence these power elites instead use these P3s financial “business” structures to build what, absent luck, will always amount to a receipt for failure along the sure chance of huge compensation that enriches the few players at the table at the expense, loss and risk of the public and the public interest.

      So systemic failure and Highway Robbery by these roads, their sponsors and facilitators, is what we most always get. And all of it is enabled and facilitated by the state if only because such failures are inherently built into the deals that allow private companies to undertake these great public tasks – building, designing, operating massive public highways – that are by their very nature public government projects.

      But here, under the scheme at hand, the project and the system by which it will be built and operate breed consequences that are far worse than normal highway robbery. This is because these dynamic toll schemes that enrich only a few favored by the state depend on tolls designed to milk the public, and alter its behavior, daily so as to generate the wealth to build roads while they divert large portions of that money to the few tasked to manage the process with little real world risk to themselves. So the the public, instead of a long term transportation system on which a a region can depend and thrive, gets is one that over the short term artificially enhances the assets of the rich (land, buildings, big businesses along the roadway) while over time the transport system collapses and fails and brings down a whole region while daily it milks the hard working citizens trying to use it to earn a living and raise a healthy family with a good lifestyle. Hence this scheme will leave huge devastation in its wake, as so many have done before.

      This has been going on in Northern Virginia since the early 1980s.

      And now we are also seeing the same thing happening in Virginia’s system of higher education. With notable exceptions such as Liberty University.

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