by James A. Bacon
Transurban, the majority investor in the Pocahontas Parkway (Route 895) has learned the hard way that human settlement patterns hit a major inflection point during the 2007-2008 recession. Unlike most planners and politicians in Virginia, whose policy prescriptions presume that nothing fundamental has changed, the Australian infrastructure company has taken a $181 million write-off, effectively reducing its equity investment in the project to zero.
Said Transurban CEO Chris Lynch:
The Pocahontas investment was made in 2006 on the expectation of significant housing and other development along the corridor resulting in growing traffic volumes and revenues. That development, due to specific issues in the local area and the continuing difficult macro-economic environment, has not yet manifested and is now expected to take longer to eventuate, resulting in a significantly reduced population of potential toll paying customers.
Based on revised traffic forecasts, Transurban now believes Pocahontas’ future cash flows will be significantly impaired relative to the original forecasts.
The 8.8-mile highway, which creates a southeastern bypass for the Richmond metropolitan region, was promoted as an economic development project and opened in 2002. Toll revenues did not live up to forecasts, however, and the project was close to defeasing on its bonds. Transurban took over in 2006, recapitalized the project and began operating the toll road. Now it, too, has lost its shirt.
The significance of this announcement cannot be over-stated.
Lesson No. 1: Beware transportation projects that are justified on the basis of anticipated economic development. I’m talking to you, Loudoun County supervisors, as you prepare to approve the new financing structure for the Rail-to-Dulles project! I’m talking to you, members of the Commonwealth Transportation Board (CTB), which just approved a subordinated $80 million loan for the U.S. 460 Connector in the expectation of a Panama Canal-sparked port boom! The hoped-for traffic may not materialize.
Lesson No. 2: Beware all transportation projects built to serve the metropolitan periphery. There ain’t no more growth heading out there any time soon! The limited development that is taking place is shifting closer to the urban core. It’s re-development, really, recycling aging neighborhoods and commercial areas into walkable, mixed-use communities for which there is considerable pent-up demand. There is very little demand for conventional development on the metropolitan periphery.
Corollary to Lesson No. 2: Beware all major real estate projects built on the metropolitan periphery. I’m talking to you, CTB members, who just approved an $80 million loan to fund transportation elements of a $2 billion mixed-use mega-project in Loudoun County.
Lesson No. 3: Let the private sector shoulder the risk of speculative transportation projects. I bear Transurban no ill will, but I’m really glad that it’s Transurban taking the hit and not Virginia taxpayers. The road never should have been built in the first place. But if the state is bound and determined to get speculative roads built, then the deals should be structured so that private-sector partners assume the risk and pocket the reward. The Commonwealth of Virginia should not be in the business of making speculative infrastructure deals.
Lesson No. 4: Public-private partnerships create transparency. As a publicly traded company, Transurban must use Generally Accepted Accounting Procedures and report material write-offs like the Pocahontas Parkway. There is no such accounting or accountability for non-tolled state projects, whose accounting is opaque and inaccessible to outsiders.
For purposes of comparison, consider Rt. 288, an untolled section of the Richmond metropolitan beltway built entirely with state dollars — including many tens of millions from the General Fund — just a few years later. Rt. 288, too, was touted for its “economic development” benefits. Has it lived up to expectations in light of the real estate crash? Do traffic counts meet projections? Is there even any way to measure the success or failure of the project? No, there is not. The public is left in total ignorance, decision makers are not held accountable, and critical questions never get asked.