The Risks of Building Highways on Spec

Work on the Panama Canal expansion has ground to a halt.

Work on the Panama Canal expansion has ground to a halt.

by James A. Bacon

State governments take on major risks when they fund transportation mega-projects to stimulate economic development — not that they ever acknowledge those risks at the time. The U.S. 460 toll road between Petersburg and Suffolk is a classic case study.

Last time I checked in, the Commonwealth of Virginia had committed $1.15 billion in public dollars to subsidize construction of the 50-mile interstate-grade highway through peanut country. A mere $216 million of the construction cost would be supported by tolls. The McDonnell administration justified the massive subsidy on the grounds that the Panama Canal expansion, expected to open by late 2014 or early 2015, would give the Ports of Virginia a competitive edge over other East and Gulf Coast ports for several years because Virginia’s deep channels could accommodate the super-large neo-Panamax ships while other ports were dredging their channels to catch up. Virginia officials hoped that Virginia ports’ head start would lead to long-term commitments and, possibly, large warehousing and manufacturing investment in industrial parks along the highway.

I was uncomfortable with the economic analysis performed by the administration, as I wrote in October 2012:

The McDonnell administration has justified the $1.4 billion project mainly on economic development grounds based upon (1) an expectation that Virginia ports will gain significant market share when the Panama Canal widening project is complete, and (2) a belief that Virginia economic developers can parlay the increased freight traffic into major industrial development along the U.S. 460 corridor. Neither assumption has been subjected to rigorous analysis.

One question no one thought to ask (not even me) was whether the Panama Canal expansion might finish on time and, if there were delays, what impact they might have upon the Virginia ports.

That question has gone from the theoretical to the real. It turns out that the Panama Canal expansion has incurred significant cost overruns, which could lead to major delays in completing the project if new financing terms aren’t worked out. The project has been delayed until June 2015, according to the Wall Street Journal, but the European building consortium, Group United for the Panama Canal (GUPC) has warned that completion could be bumped by three to five years if it is forced to abandon the project.

No one knows what will happen. The Europeans are desperately trying to cobble a deal together, which depends upon a obtaining a hefty loan from the financially strapped Spanish government.  Panama has indicated that it might step in and complete the project itself. Meanwhile, the rest of the world is left holding the bag. Orders have been placed for 214 of the neo-Panamax vessels, smaller ships are being converted to scrap, and U.S ports are planning projects costing $11 billion to dredge deeper channels and upgrade their terminals to handle the monster ships.

How about Virginia? “We thought we had a window of seven to 10 years to just make hay of our natural assets,” Virginia Port Authority spokesman Joe Harris told the Journal. “Maybe that window is shortened a bit.”

Three to five years? That’s more than “a bit.”

Environmental and smart-growth groups opposed the U.S. 460 project on the grounds that it would threaten wetlands and that the nearly $1.2 billion in public funds could be better spent elsewhere. The latter concern is looking a lot more valid right now. The Europeans and Panamanians may work everything out, the canal may finish by mid-2015 and the hoped-for traffic for the highway may materialize as forecast. But there is an object lesson for state policy makers when they build roads for speculative economic development: You are taking a big risk.