by James A. Bacon
The specter of the botched U.S. 460 project will be hovering over the Commonwealth Transportation Board (CTB) today as Transportation Secretary Aubrey Layne updates the board about project financing for Interstate 66 outside the Washington Capital Beltway, expected to cost in the realm of $2 billion.
Del. Greg Habeeb, R-Salem, set the stage Sunday in an op-ed in the Richmond Times-Dispatch, in which he advocated using a Public Private Partnership (P3) to finance improvements to the critical Northern Virginia transportation corridor as opposed to a “design-build” contract. Design-build was the approach employed in the U.S. 460 connector between Petersburg and Suffolk that resulted in $300 million spent “without a single shovel of dirt being turned.”
Habeeb is asking a vital question: What is the best way to finance and operate mega-transportation projects with costs running into the billions of dollars? Under the old model, the Virginia Department of Transportation (VDOT) designed, built, financed and operated big projects entirely in-house. But with limited transportation funding available and restrictions on how much the state could borrow during the Warner, Kaine and McDonnell administrations, nothing much was getting built. The idea behind P3s was to leverage scarce state funding with private sector funding for tolled projects capable of generating a revenue stream. Toll revenues would pay off the private-sector bonds used to finance the improvements. In effect, P3s amounted to an end run around the tight strictures on how much debt the commonwealth could issue without jeopardizing its AAA credit rating. The debt, and the risk that went along with it, would be shifted to the private sector.
Habeeb likes P3s. Construction of express lanes on Interstate 495 and 95 in Northern Virginia opened on budget and ahead of schedule, he says. Further, he adds, “These two projects produced $5 billion in economic activity but because they were pursued as P3s taxpayers contributed only $492 in state transportation funds.”
By contrast, he writes, the U.S. 460 project was conducted as a design-build, in which design and construction were outsourced to a private-sector consortium but the state planned to finance and operate the highway, “leaving taxpayers on the hook if the project failed” … which it did, costing taxpayers in the neighborhood of $300 million.”
I think there’s a time and place for P3s, but the cost-benefit calculus is more complex than Habeeb acknowledges in a 750-word op-ed. The big bugaboo is risk. There are many types of risk associated with transportation megaprojects, and it isn’t always clear what they are and who is shouldering it. Virginia’s Office of Transportation Public Private Partnerships was tracking risks in the U.S. 460 project — the risk that really mattered, and ended up killing the project, whether or not the U.S. Army Corps of Engineers would not issue required wetlands permits — but the concerns were ignored by the McDonnell administration for political reasons.
Would the U.S. 460 fiasco have been avoided if it had been a P3? Undoubtedly, a private-sector partner would have taken greater precautions to get its permits lined up before expending $300 million of its own money on design and construction-mobilization costs. So, most likely, the fiasco would not have occurred. On the other hand, a P3 partnership was not practicable. Toll revenues would have been so meager that only a small percentage of the project could have been funded privately — that’s why the state decided to take over the financing itself.
It’s easy to forget that there are risks associated with P3s as well. What happens if toll revenues fail to meet forecasts, as has been the case with the 495 Express Lanes? It all depends on how a particular deal is structured. Many projects are backed by federal loan guarantees called TIFIA (Transportation Infrastructure Finance and Innovation Act) loans. Every bond financing provides a buffer for modest revenue shortfalls. But if revenues fall far short, TIFIA eats the loss before non-guaranteed loans do. Instead of state taxpayers taking the hit, federal taxpayers do. If TIFIA bond holders get wiped out, then holders of the private bonds are next in line. In the worst case scenario, as happened with the Pocahontas Parkway outside Richmond, a project can get turned over to the banks.
The commonwealth ordinarily takes great pains to protect itself from financial liabilities in case of P3 failure. But there are other risks. P3 contracts usually last 50 to 100 years, and private-sector partners negotiate terms that protect their revenue stream over the long run. Typically, they insert clauses that restrict the state from building roads, rail lines or other transportation alternatives that might divert paying customers. Unfortunately, there is no way to predict 50 years in advance how future growth and development will alter travel patterns and what options might be necessary. P3 anti-competitive clauses could limit the ability of the state to provide adequate transportation to some of its citizens far into the future. Those are risks that may not become evident for decades.
I, for one, will be interested to see how Secretary Layne proposes to finance the I-66 improvements. Hopefully, he’s learned the right lessons from the U.S.460 experience.
Update: In an op-ed published May 27, Layne states that the U.S. 460 project was not a design-build project but a P3. “Had the U.S. 460 projet been procured as a design-build rather than a P3, it is highly unlikely that state standards for such projects would have permitted it to go so far forward as it did.”
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