Optimism Bias and Risk in Public Private Partnerships

The tolling technology is better than ever -- but traffic forecasts are a disaster.

The tolling technology is better than ever — but traffic forecasts are a disaster.

by James A. Bacon

Randy Salzman, a free-lance Charlottesville writer, has spent the last couple of years trying to understand how Public Private Partnerships (P3s) work in Virginia. If the private sector is supposed to be so much more efficient than government, he asks, how  come so many big P3 transportation projects in Virginia and across the nation have gone bankrupt? Why do private sector companies continue investing in similar projects despite the obvious risk? And what exposure do taxpayers when deals go bad? He doesn’t have any definitive answers, but he lays out a lot of good questions in the latest issue of Style Weekly.

Salz, an occasional contributor to Bacon’s Rebellion, gets closest to the truth when he mentions the “optimism bias” in traffic forecasts. In project after project across the country, private P3 companies and  their government partners have over-estimated traffic volumes on the roads they build. Writes Salz:

One study found that the projections tended to be 109 percent more than actual traffic — or more than double — and that nowhere in completed American P3s have actual traffic and toll income come close to projections.

Here in Virginia, flawed traffic forecasts were at the root of the Pocahontas Parkway debacle in eastern Henrico County and, if I’m not mistaken, the Dulles Greenway bankruptcy in Loudoun County (although that was not a P3 project). And there’s a very good chance that the Capital Beltway Express’s Northern Virginia HOT lanes project will experience a similar fate.

I think there are two things going on here. First, the private sector’s flawed traffic project models paralleled flawed public sector models. Everybody in the transportation business extrapolated the growth trends of the ’60s, 70s, ’80s and ’90s indefinitely into the future. I warned a decade ago that that was folly, but not many people listened. Reality set in in the mid-2000s when growth rates started tapering off and during the 2007-2008 recession, when traffic volume actually declined. The reasons are many and complex, as I have enumerated ad nauseum on this blog, but they are fundamental and lasting, not just a blip. We will not in our lifetimes return to the traffic-volume growth rates experienced during the post-World War II era.

The forecasts of traffic volume and associated toll revenues for the P3 projects were predicated on the assumption, now revealed to have been astonishingly naive, that traffic volume would increase on the same trajectory pretty much forever. That’s why the bankruptcies ensued, and why there will be more to come.

If experience tells us anything, the private sector will figure that out before the public sector does. As Salz quotes Lane Construction as saying in regard to proposed Interstate 66 toll lanes near Washington: Traffic projections have an “optimism bias.” Which brings us to the second reason for the wave of bad deals. Once someone, whether a private investor or a government agency, invests hundreds or thousands of man hours in analyzing a project, they get personally invested. No one likes to pull the plug. They want to see the project move forward. They tend to adopt assumptions that will make the project look more viable in order to obtain the financing needed to move it from paper to reality. This bias is so endemic in all types of projects that we can almost call it a part of human nature.

The private sector has built-in bullshit detectors. They’re called investors and bond holders. Investors want to generate a positive risk-adjusted return on investment. Bond-holders want to get their money back, plus interest. They may rely upon flawed traffic projects that no one questions, but they don’t suffer from the optimism bias of the project sponsors. They are naturally skeptical and have an interest in asking tough questions. Now, these investors and bond holders aren’t infallible by any means. They make bad investments, too. But they demand a higher standard of certainty than, say, politicians who want the glory of building a road but won’t be around to take the blame if the project falls apart.

Every toll-backed P3 project sells bonds to investors. How, then, did so many go wrong? The key is to look at how the public partner biased the outcome through subsidies and loan guarantees. Every big P3 project applies for financing from the federal Transportation Infrastructure Finance and Innovation Act (TIFIA). These federally guaranteed loans create a tranche of subordinated debt that creates a layer of protection for private bond holders. In other words, if Project A experiences a revenue shortfall, what revenues it does produce will go to bond holders first. Here’s how the Federal Highway Administration describes it: “The TIFIA lien on project revenues may be subordinated to those of senior lenders except in the case of bankruptcy, insolvency, or liquidation of the obligor.”

This layer of protection significantly reduces the risk for senior bond holders, who then demand fewer assurances than they would otherwise before purchasing the bonds. In Virginia, the commonwealth has reduced project risk by making significant cash contributions as well. Most of the P3 projects set up in Virginia in recent years have used some combination of TIFIA funding and public subsidies to make the projects work. Without these contributions, the perceived risk would have been far higher, and the chances of getting pure private financing would have been much diminished. It’s fair to say that many, if not most, of the deals never would have happened.

Combine these three factors — highly flawed long-term traffic projections embraced by the public and private sectors both, the optimism bias for specific projects, and the diminution of risk through TIFIA financing and public subsidies — and we can explain a lot of went wrong. That’s not an exhaustive list of explanations but it accounts for a lot.

There are some things that public-private partnerships do well. Capital Beltway Express, a partnership of Transurban and Fluor, did an exceptionally competent job on the design and construction of the U.S. 495 HOT lanes. A well-crafted P3 deal can offload the risk of project overruns and construction delays to the private-sector partner. P3s also encourage private players to bring innovative ideas to the table that the commonwealth may not have considered before.

But the private sector doesn’t have any free-market fairy dust that magically transforms an ill-conceived project into a money maker. A poorly crafted P3 can end up with state government getting clobbered if traffic projections and toll revenues fall short.  A poorly crafted P3 can create something like the U.S. 460 fiasco in which the state stands to lose $300 million or more without a yard of roadway being built.

Salz is right to dig into these transportation mega-projects that can run into the billions of dollars. Virginia has a lot at stake, and neither he nor I are persuaded that the public or our elected politicians fully understand the issues. I hope he keeps digging.

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66 responses to “Optimism Bias and Risk in Public Private Partnerships

  1. very informative…and I think largely correct and thank GAWD it’s not about race or genes or culture!

    but govt likes P3 also because it allows them to hide behind “proprietary” data…from the public, that’s what greased the skids for US 460 and essentially the wetlands issue to escape the focus. I mean who knew that Virginia had signed a contract that guaranteed payment even if the permits were denied? Who would even sign such a thing but we don’t know … because it was a P3.

    I think P3’s are a basic violation of the idea behind getting public bids… and VDOT went over the line in Cville on that issue I believe and had other potential bidders claiming foul.

    but on the demand side, the other thing is that people don’t like paying tolls and the amount of traffic on a new road varies tremendously if it is not tolled verses being tolled.

    there are some roads that are less sensitive to it like the Dulles Tollway and I assert that 495 will eventually get to that point because there is no more available right of way to add capacity to the beltway as the region grows.

    I also think p3/TIFIA dynamic tolls are not the same as traditional fixed-rate tolls and that dynamic tolls are the wave of the future… and toll road operators are going to get very good at determining how much they can charge because they have an instantaneous feed-back on the demand.

    Finally, we’re spending more and more on transportation – maintenance and operations – every new road – every new subdivision adds to this in Virginia and we use all of our own in-state tranpo money for M&O and Fed money for new construction – and that money is steadily shrinking as it is a tax by the gallon – and doomed like the state per gallon tax was and the GOP is arguing that we are now using general revenues to supplement the revenues from the Fed Gas tax and they want to do away with using general revenues – even do away entirely with the Fed Gas tax and return that function to the states totally…(wow, is this a run-on mess of a paragraph!)

    which if this happens is going to do two earth-shaking things:

    1. – virtually all new roads are going to be toll roads – P3 or not.

    2. – all the transit money is going to go away unless the states pick it up.

    and for tolls – why not? if we can use transponders – why not actually determine true need for a new road by how many are willing to pay to use it?

    not city surface streets.. by the limited-access belts and spurs, bypasses, etc.

    why not?

    I think once that happens the whole thing about the localities crying that Richmond is giving their money to another jurisdiction is going to evaporate.

  2. LarryG is on the right track. People who pay their full measure of taxes for roads don’t like to turn around and pay tolls for roads when they know the vast majority of people in the state don’t have to do that. It certainly seems like double taxation to me. The other point is the elasticity of demand. If the “free” commute took 40 minutes before the toll road was built and the toll is $3.50 each way, how much will a person pay to cut the trip to 32 minutes? You can look at that one of two ways – a 20% drop in commute time to and from work sounds pretty good. Paying the equivalent of $26.50 per hour sounds pretty bad. Alternately, paying $1,760 after taxes per year (250 days * $7.00 per day) means losing $3,100 per year in before-tax salary.

    Finally, there are some people who will use the toll road for $3.50 to save 8 minutes. Some companies will allow salesmen, for example, to put the $7/day on their expense report. This means that there are initially fewer people on the original, un-tolled road. That 40 minute commute might just drop to 37 minutes because of the few who do use the toll lanes. Now I have to consider paying $3.50 to save 5 minutes.

    The right way to price tolls is to start out very cheap and accept the losses in the early years. Then, raise the cost slowly but surely. I’ve driven on the Dulles Toll Rd for years. The rates go up but the amount of traffic really doesn’t seem to go down.

    • re: the full measure of taxes for roads –

      Well we used to say that with no increase since 1980 something that in order for us to pay our full measure that the 17 cents per gal would have to double and it clearly has not – even after we went to a percent of purchase because even at the 5.1% the tax will be in January – it amounts about 15 cents for 3 bucks worth of gas which would have been 17 on a per gallon basis.

      If the average person drives 20K a year and has a F-150 that gets 15mpg – he’s gonna buy about 1300 gallons of fuel at 3 bucks – about 200 bucks.

      compare that to what you pay for other things like schools.

      it’s not near enough and the numbers sort of show that.

      but if the GOP in Richmond decided to bump the tax from 5 cents on the dollar to 10 cents – you’d pay more like it at $400 but then you worry that Rova would get the money so you refuse…

      that pretty much leaves you with tolls.

      and it’s actually worse than that, because there are rumblings in the GOP Congress of getting rid of the Fed gas tax which pays for new roads and METRO, VRE and other transit of which NoVa is probably a net recipient of Fed money not a donor.

      I think the future is tolls – and in urban areas dynamic tolls for new roads that are not built from gas taxes …

      • I don’t have any problem with tolls … as long as you put them everywhere. Tolls for new road construction, tolls for maintenance, tolls for the construction of mass transit, tolls for bike and running trails. All fine by me. In fact, the tolls in any region should be sufficient to pay for the entirety of road construction and maintenance in that region. Self-sufficient regional transportation funding. Works for me. Then … get the state out of almost everything to do with roads. They can keep a relatively small budget for funding roads of statewide significance. That’s about it. The Feds and the localities can take care of everything else.

        Interesting eight part series of articles in the Daily Press about the squalid level of entrenched corruption inside our state government. Today’s article – Part time career, full time retirement.

        Pretty much everybody is starting to see our state government for the criminal enterprise it is.

      • Hey LarryG – Here you go, buddy …

        Another fine article about the state government you want us to trust with transportation …

        http://www.roanoke.com/news/politics/lawmaker-father-benefit-from-film-tax-credit/article_3ebd0208-9194-519c-bd11-b3d2110b2462.html

        Cool. Henrico Republicans. Crony Capitalism. Dominion Resources. Mindless tax credits.

        I wonder if Bacon voted for this yo-yo.

        • “Fairfax County Democrat Del. Scott Surovell said Virginia’s expansive tax credit programs, including the film incentive program, needs an overhaul. He said lawmakers voted to approve the film credit program with the idea that it would lure Hollywood billionaires to film their projects in Virginia, not help one of their own members.

          “I’m pretty sure that when we adopted that legislation we weren’t thinking about movies that were going to be financed and produced by legislators,” Surovell said.”

          • I think it is terrible also but realistically – it’s symbolic at best.. it has no real impact on the state’s finances…

            if you want to really worry – think about how much money the state has to pay their PPTA “partner” for US 460 no matter if they never lay a mile of pavement. millions upon millions of dollars..

            with respect to the “bleeding NoVa dry” sentiment.

            If you guys were a righteous haven of real entrepreneurial activity and enterprise but the fact is you exist on the teat of the Federal Govt – 2 way.

            1. – employment – paid for by taxpayers in RoVa and Rural USA.

            2. you get far more in Federal transpo dollars for things like METRO that the rest of Virginia combined in their transpo money.

            give it up Don… NoVa is the biggest sucker of the Federal Teat by far… and all you are now demonstrating is greed and sloth… as bad as the McDonnells…

            😉

        • I don’t think tolling roads has much to do with good or bad government.

          and as far as tolling everything… it won’t happen except for the larger projects that are limited access and can’t be built otherwise because there is no money to build them.

          it won’t happen overnight – it will be a slow transition… but if you look at the northeast – most new roads for the last 30 years have been done that way.

          • Don’t look at the NorthEast, look at Singapore. Gantries everywhere adding costs to any drive. Don’t fool yourself – a coalition of urban young people and older suburban conservatives like Bacon are going to put those gantries up everywhere. You want to drive, you pay. You pay enough to maintain the road you’re driving on. If that road is getting too congested you also pay enough to expand the road or put in some mass transit.

            Funny how people who will yip and yelp about economic fairness can’t understand how charging the actual drivers for the actual cost of driving is a whole lot more fair than any other plan.

            Toll gantries are getting cheaper by the day. Time to start putting them up all over the place. Drivers should pay for the costs of their driving. Localities should fund their own road maintenance and construction from the money they charge drivers.

          • re: ” charging the actual drivers for the actual cost of driving is a whole lot more fair than any other plan.”

            it’s a curious perspective unless you have some real data on what is “fair”.

            all aspects of urban areas are more expensive – right? How many places in ROVA do you know that got a billion dollars for their transportation?

  3. Urban areas cost more for transportation than less dense areas because more roads and wider roads are needed to convey traffic at rush hour.

    A simple two lane road can handle most traffic in rural areas even at “rush hour” whereas trying to move traffic on a two lane road at rush hour in an urbanized area is usually a disaster. Wider roads are far more expensive than just the extra lane – if they have to buy developed or developable property to get the lane.

    The ICC is Md is an example of a road that had to buy developed and developable land to get it’s 4-6 lanes and it ended up costing twice and three times what other non-urban roads cost.

    A mile of 4 lane interstate in a rural area can be built for 20 million. A mile of road built on developable property in an urban area can cost 5 times as much and it won’t convey 5 times as much traffic – especially at rush hour.

    so I’d guess that you don’t get as much for your tax dollar in urban areas but it might be interesting to do that calculation.

    • Yes, the urban roads cost more. However, there are many more drivers and many more miles driven. When I look at other states that have come down in favor of regions generating all their own transportation funding it is the rural roads that don’t generate enough money to maintain. There is a pretty widespread trend toward letting paved rural roads fall back to gravel / unpaved since the regions don’t generate enough money to pay for the roads.

      Bring it on. Everybody pays their own way for transportation. No more sending all the money to Richmond for politically inspired reallocation.

      What’s bad for the Imperial Clown Show in Richmond is good for Virginia.

      It really is just that easy.

      • “Yes, the urban roads cost more. However, there are many more drivers and many more miles driven.”

        which causes congestion .. and limits the effectiveness of the road…

        ” When I look at other states that have come down in favor of regions generating all their own transportation funding it is the rural roads that don’t generate enough money to maintain. There is a pretty widespread trend toward letting paved rural roads fall back to gravel / unpaved since the regions don’t generate enough money to pay for the roads.”

        The General Assembly just gave you your own gas tax, right?

        If you actually look at the allocations for the rural areas – it’s basically non-existent right now – Don. The secondary six year plan for Spotsylvania last year was zero.

        “Bring it on. Everybody pays their own way for transportation. No more sending all the money to Richmond for politically inspired reallocation.”

        The gas tax in Virginia pays for maintenance.. every bit of it and then some.

        New roads in Va are built from the Federal Gas tax money.

        “What’s bad for the Imperial Clown Show in Richmond is good for Virginia.

        It really is just that easy.”

        the reality is that you don’t have easy places to build new roads in NoVa. You’re so developed that anywhere you try to build -you’re going to run into opposition (like building a new connector where you live) and you’re going to have to buy very expensive land for the right of way.

        so how would you like a busy connector where you live?

        • ” … and you’re going to have to buy very expensive land for the right of way.”

          So … forcing every region to have their own taxes for transportation funding is a good and fair idea then?

          Why should the people of NoVa, Richmond and Tidewater be taking money out of other people’s pockets for our gluttonous transportation needs?

          Like I said – bring it on. Regional taxes, regional transportation funding. Up here I’d hope we hand out the EZ Passes, put up the gantries and start tolling people for the miles they drive. The more I drive, the more I pay. Seems fair to me.

          • Re: the more you drive, the more you pay.

            let me give you an example.

            an interchange that can handle 100,000 cars a day costs 40 million in a rural area but that very same interchange – that can handle no more cars than the rural one will cost 5-10 times as much.

            the rural interchange uses undeveloped land – the urban interchange is using high value property that not only has to be bought with big bucks but it takes that land off the tax rolls.

            All urban areas in the US – pay for the rural areas.. right? even the home rule ones.. right?

            are you advocating that cities now become stand-alone states?

  4. I have never seen a P3 I thought was thoughtfully crafted (to the extent I read up on the Crafting) or executed.
    I can say however, with 100% certainty, that when it opened, 895 HAD NO TRAFFIC. ZERO. And that trend continued for a long time. I travel that mini span almost every day. It was “MY road”…now it’s not because (huge gasp) other people are using it.
    As for traffic “projections’: I have been arguing with VDOT for nearly 15 years over these projections. They are always wrong, but to make it worse, there are other ways (and even modified methods of current crap) to accurately project future volume, but NO ONE uses them. Unless and until someone starts looking at the bigger picture, and possibly looks at alternate projection methods, nothing will change. 15 years of frustration has taught me that much.

  5. Thank you, mr. Bacon, for extending this discussion. The point is that the system since the 1995 Public Private Transportation Act in Virginia is “rigged” to reward “private” money for “investing” in transportation projects.

    Why all the quote marks above? Because the privates don’t really invest any significant money (usually 5 percent or less of any given project — about three years worth of actual tolls) and are guaranteed that they can’t lose any — and indeed — can only gain. Taxpayers are still building the highways and it’s actually costing US more money than if we’d have built them without any “private” investment. (CBO research says that the comparison is at least a wash and that the privates never lose). Why? Because when the operating companies go bankrupt, as they almost inevitably do, we taxpayers pay off the bonds at junk bond rates and we don’t get the loans paid off by the “privates” who took them. Plus we also lose X number of years of accelerated depreciation. Taxpayers might, eventually, get pennies on the hundreds of dollars but the bondholders are getting massive returns on their money for all the years before bankruptcy and then are allowed great tax relief when the bankruptcy actually takes place.

    To ensure that half-aware legislators and totally unaware taxpayers are coddled in this “mining of the tax code” (as VA’s P3 director put it), the “forecasts” are much more than questionable. I can find only one court case (in NY) aboiut P3 traffic projections. Prior to settlement, the judge ruled that pre-construction communication between toll operating company and the traffic projection company was “clearly actionable for fraud.” In Australia, where they have more experience with transport P3s, I can find two court cases underway. In one, when the road went from public (free) to privately-operated toll, the traffic prognosticator suddenly discovered that it would generate twice as much traffic. Thta’s a total reversal of all economic theory and both projections were done by the same company using, apparently, the same methodology. (And yes, this is what the complaintants argue but it’s unlikely complainants would make totally outrageous claims in court filings.) In the other case, traffic was supposed to generate over $100 milliioin in tolls but is generating $7.5 million. Poor projections by the pulic process does not explain these massive discrepancies. Any sort of bell curve on “honest” prognostications should find that some prognosticators at some point in time would project more P3 traffic and income than actually appeared. This, to my knowledge, has happened NOwhere in any American P3 process. It has happened, however, when the roads are totally free for day-to-day usage.

    Your private industry “bull shit detector” — if it’s working — is working to ensure that the “privates” can’t lose. Remember: Our system is “let the buyer beware” and we, the taxpayers, aren’t in the room when these “proprietary information” contracts are negotiated. Indeed, even the Commonwealth Transportation Board is not (or was not) in the room when Sean Connaughton negotiated over $6 billion in 2012 P3s alone.

    The “private” shell companies (because of course the big money protects itself) now demand “availability payments” — which are guarantees that tolls will generate X amount of monthly revenue which the state now promises taxpayers will pay if tolls don’t). Under availability, the privates can’t even lose in day-to-day operating costs.

    I apologize for all typos in the above off-the-top-of-my-head discussion but I don’t have the time to go back and edit as there is nothing in this for me EXCEPT that I believe my children and grandchildren shouldn’t be forced to pay for highways they will not use. (As Bacon’s Rebellion has reported several times, our kids are driving less, much less, than we are.) Most of the actual lost taxpayer money happens after these things go bankrupt. And they all seem to.

    Remember, Pocahontas Parkway, completed in 2002, is already through it’s second bankruptcy and the past owners — while it was going belly up the second time — still own Capital Beltway Express which, in April, was generating one-fifth of the daily income taxpyers had been promised prior to construction (with Virginia and Uncle Sam putting up $1.5 billion to build; or better than three quarters of all costs). At the same moment the actual big money owners KNEW these two key examples of Virginia P3 performance, they sought and won the 95 Expressway project which is scheduled to open next year. We taxpayers gave them a series of huge loans to assume the Pochonatas project which we are unlikely to get as the second owners, from Australia, have disappeared from the Parkway, givng the remaining “value” (and it’s all in tax relief) to huge European bank bond-holders.

    Unless they are total fools — or understand something that tazpayers don’t — the board of directors would never have allowed management to seek a third P3 if its other two projects were losing so much “real” money. One does not get on the board of directors of an international financier, it is safe to say, by being a total fool. That’s my “bullshit detector.”

    Consequently, Pocahontas could easily be the first American P3 to “zero the assets” for the third time with each time, American taxpayers finding themselves owing more dollars to more international financiers. (Which is what happened with the first Pocohantas bankruptcy).

    The “private” money’s “bullshit detector” is all about detecting how to ensure the most money for the least cost with the least risk. With American media failing so horribly as it is still doing here, where is the taxpayer’s “bullshit detector?”

    Bacon’s Rebellion has done, BY FAR, the best reporting on the 460 Tollway fiasco, putting — unfortunately in my opinion — ALL the blame on the state where — in my opinion — it is still richly deserved. Bacon’s Rebellion is willing to dwell into the complexity of that particular project of which most media are not. That project, however, isn’t simply a “bad apple.” It might be the “worst” of all the P3 tolled highway projects; yes, that’s true. But as such, it should be the trigger to lead America’s daily media into looking at entire P3 transportation construction, at least in Virginia and probably the entire U.S. It hasn’t.

    By the time American media begin to write more than press releases about any given P3 project, it is already a done deal and taxpayes will be — as Virginia is presently hoping — praying that Spanish financiers are willing to let us out of the $1.2 billion 460 Tollway debt.

    If 460 ends up like Pocahontas, some future VA government will pay someone else to push the debt off further onto some next generation of taxpayers, both American and state.

    Missing from any reporting on the P3s is one huge fact. The American Legislative Exchange Council writes the “model” laws, like VA 1995 transportation act, and the council is bankrolled by the big money financiers and contractors. Legislators aren’t just lobbied by ALEC, they are literally given the “model” law to propose and vote on — and of course legislators are indeed lobbied by ALEC. ALEC and the money understand how to game the system and part of that gaming is the media being too something (unaware, unwilling to deal with complexity, paid off by big money advertisers, scared of an audience who thinks Jon Stewart provides news) to connect the dots and ask the tough questions.

    Finally, to be totally clear: I personally think toll roads are a “good” thing because they force people to think about the externality costs of their driving. (And I’m a driver too). But the P3 projects — and every contract is different — are not about what’s best for U.S. citizens and taxpayers. Or even drivers. These contracts are about what’s best for the so-called “private” money and media is allowing that money to get away without any scrutiny. Media is allowing these projects to expand and overwhelm all other American transportation construction funding today under the guise that private industry is somehow more efficient and effective than public projects. In pre-construction article after article, the P3s are always portrayed as a “better deal” for taxpayers when the actual post-construction data indicates something is “rotten in (at least) Richmond.” Modern American media — with the partial exceptions of Bacon’s Rebellion and Style Weekly and a few generally non-mainstream others — has forgotten what our grandmothers used to tell us time and again: “If it sounds too good to be true, it probably is.”

    salz

    • Salz’ comment above is long but meaty, and I urge readers to read it.

      Here’s what stood out to me:

      The “private” money’s “bullshit detector” is all about detecting how to ensure the most money for the least cost with the least risk. With American media failing so horribly as it is still doing here, where is the taxpayer’s “bullshit detector?”

      Bingo!

      • but we should not conflate P3 with anti-toll.

        there are toll projects that “work”.

        VDOT is not the one who should project traffic as Pocahontas proved but keep in mind that many roads in the Northeast as well as the Penn Turnpike , our own CBBT and Maryland’s Bay Bridge, the Harry Nice bridge on 301 and the Downtown Expressway are all toll facilities that did sustain traffic projections.

        And if you wanted to actually try to kill a golden goose – do what MWAA did to the Dulles Tollway – and see that it’s still a cash cow.

        Having said this – I also share the concern about P3s in terms of transparency and efficacy…

        We have had a few non-transportation P3s up our way – primarily school and YMCA collaborations where the school board got a larger parcel and let the YMCA on the remainder of the parcel to co-locate in exchange for school gym and swimming programs, etc. a win-win for the schools and the YMCA.

        http://goo.gl/MZkmLU

  6. Bond investors are very wary of TIFIA’s “spring lien” and do not treat TIFIA as a subordinated creditor.

    • can you speak further on this? it sounds like TIFIA takes precedence if the project goes bankrupt.

      the other thing to keep in mind – at least in Va – is that the private companies do not own the infrastructure. it reverts to Virginia if things go sideways,, I believe.

      • TIFIA does not take “precedence” in bankruptcy, but it’s status in capital structure improves to being on parity with other creditors (“springing lien”). If one if lending money alongside TIFIA, need to anticipate that as potential scenario.

        There is also a political risk to lending alongside TIFIA that is hard to quantify: What happens if Congress sours on program and pressures TIFIA staff to get tough with borrowers and other creditors.

        A public policy concern with TIFIA is it is charging well below market for the loans it is making and the credit risk it is incurring.

        • I’d like to make a request Mike and that is if you would consider doing a more comprehensive post on TIFIA and hopefully Jim Bacon would be on board with that.

          TIFIA is the lynchpin of many, if not most transportation PPTA if not mistaken…

          and I for one could benefit from reducing my ignorance on the subject.

  7. Curious if you have any data on transit projects?

    • LarryG: I am not opposed to P3s in theory, only in the way they are practiced in Virginia, and many states in the U.S., in tolled highway construction. The devil is in the details. For example, in the 460 Tollway project, leading negotiations for Virginia taxpayers was Sean Connaughton who is/was totally convinced that the privates do everything better than any public agency and whose background came from the maritime industry; Tony Kinn, the state’s first P3 director, who came out of the convenience store industry; and the NY law firm of Allen and Overy. Go to their web page where they proudly tell the world that “Infrastructure Investor” magazine — a publication for the private money — has twice named it law firm of the year and boasts about the return A&O gets for investors. Is it likely that a publication for private money honors hard bargainers for taxpayers? (II mag also named the former gov man of the year in 2012 when Virginia threw away — my opinion — our transportation future on P3s .)

      Mr. Hamilton: No, I don’t look too much at transit or any other type of P3s, such as LarryG mentions. I’ve mostly stuck to tolled highways which is difficult enough; indeed too difficult for anyone without a finance degree (and I don’t have one). The 460 contract is 700 pages long… However, I discovered an interesting exchange between the D.C. shadow congressman, Eleanor Norton, and the PR guy, a man named ___ Washington, for a Denver light rail project and emailed her staff last spring about where she came up with the numbers she was stating. The answer:

      “The 3 percent figure (cited by Ms. Norton) was a calculation of the amount of private equity in the Denver Eagle P3 project as a percentage of the total project cost. The project financing breaks downs as follows (taken from page 5 of RTD’s testimony).

      “The total cost of the federal project is $2,043.1 million, which is financed as follows:

      • FTA New Starts Full Funding Grant Agreement – $1.03 billion, awarded in August 2011
      • Private Activity Bonds – $396.1 million
      • TIFIA loan – $280.0 million
      • Other federal grants – $57 million
      • RTD sales tax revenue – $128.1 million
      • Revenue bond proceeds – $56.8 million
      • Local/CDOT/other contributions – $40.3 million
      • Equity – $54.3 million

      “So, $54.3 million is 2.7 percent of $2 billion. We’re not sure where Mr. Washington got 6 percent from. The PABs portion – $396 million – represents almost 20 percent of the project cost. ”

      Similar things show up in the tolled highway P3 game. While media around Washington continually talk about the “private money” in the Capital Beltway Express, for example, in actuality CBE took a $589 million TIFIA loan; sold another $589 million in pivate activity bonds (neither of which will be re-paid by CBE’s parent company when/if CBE goes — as I submit — bankrupt in a few years) and Virginia put up $409 million. Total equity from privates originally: $88 million or about two years of actual toll income (which, again, was running at 1/5 of traffic projections in April). But CBE claims the TIFIA loan and the PABS are “private” money because until it goes bankrupt, they are always expecting to pay it back.

      All those numbers are courtesy of “Public Works Finance” — anoher mag for investors. PWF informed potential investrs prior to construction to expect a 13 percent return on any CBE bonds they purchased and pointed out that there was ZERO interest on the TIFIA loan for a decade and that CBE would not have to begin paying principal for 25 years. I project CBE will be bankrupt long before 25 years and probably around the time interest begins to accrue. Why? Not only is the money entirely free until that moment but also that at about 15 years, CBE might have to actually do some serious maintenance on the tollway and that’s about when their accelerated depreciation schedule will end. Going under eliminates — or greatly decreases — every single cost which the private money would normally be expected to pay. Already, two years into CBE’s operation, the Aussie money behind CBE has “restructured the debt” — a step towards bankruptcy — because the tolls are not generating anywhere close to the income “projected.” This, again, appears to be standard operating procedure for U.S. P3 toll roads. I can’t find a project wich comes close to traffic projections and, therefore, each has a damn good reason to go under. It sounds totally plausible when one looks at only one project, as any reporter will do when reporting the bankruptcy filing. When he/she looks back through the clips of prior articles about Project X, the reporter will find article after article noting that Project X is generating less than half the money it was expected to prior to construction and some plausible reason, like the economy, to blame for the lack of vehicles.

      Think about this: In September, the $3.8 billion Indiana Toll Road went belly-up but on Oct. 28, just a month later, it had found ove $6 billion in new financing to emerge from bankruptcy. If Indiana Toll Road couldn’t pay its debts when it owed less than $3.8 billion, how can it pay the debt when the debt has almost doubled? Who, and why, does anyone so quickly throw what is apparently “good money after bad” unless that anyone understands there really isn’t any true risk?

      • Salz, I think you have the ITR debt figures reversed: $6b was the debt before, ~$3.8 would be the debt after refi.

        • US 460 was a CF from day one and P3 was used to hide the truth.

          and I agree. The problem with P3 is that it is used to submerge the info from public view.

          there are two aspects to toll roads these days:

          1. – is an investor-grade study done on the projects rather than a DOT study which is usually crap for toll roads.

          2. – how good are – even the investor-grade analyses if the numbers come in lower than expected – which seems to be the case on more than a couple?

          that does not mean toll roads are necessarily a failure – if – they actually cause traffic to decrease!

          I think once you put a dollar and cent value on travel – people find more efficient ways to accomplish their travel.

          they stack errands.. rearrange their schedules to kill two birds with one stone on one trip… kids who want to go out for pizza – find a way to do it without paying a toll.. two folks who drive to work suddenly find they can carpool, etc.

          tolls are used not only to pay for infrastructure but to manage congestion – to squeeze out travel efficiencies.

          if doing this – slows down need for more roads – then that saves money also.

        • Nope, Mr. Craft, unfortunately I don’t have them mixed up. Your thinking makes sense from a reasonable perspective and that is my point.

          • The highway was valued at $3.8 billion when Indiana let the lease in (if memory serves) 2006 but today it must refinance $6 billion to emerge from bankruptcy. Most likely, taxpayers will “back” the $6 billion wherever the money comes from. If taxpayers aren’t guaranteeing the money, then why would any savvy investor put money into it today? The Indiana Tollway has been losing (by this smple calculation) almost a million dollars a day to get from $3.8 billion as the max which might have been borrowed upon purchase to $6 billion, right?

            When debt service is included, Maryland’s “InterCounty Connector” ballooned from $1 billion to $4 billion…and it’s not coming close to making toll projections either.

          • Taxpayers should not and likely will not back the revenues of the ITR
            road for a new buyer. New buyer will be making bet that toll revenues over life of concession will lead to a profit after capital and operating expenses.

            The original concessionaire did some financial engineering in an attempt to lower capital cost, it did not work as intended. That compounded the mistake of overly optimistic traffic forecasts (also by concessionaire).

            “Those swaps were intended to give ITRCC the security of fixed interest rates on the $4 billion in debt taken on to finance its winning bid in 2006. But the swaps instead had the effect of swelling its debt by $2.15 billion more as of this summer, according to the bankruptcy filings.”

            http://www.nwitimes.com/business/transportation/indiana-toll-road-operators-declare-bankruptcy/article_39a56179-6de9-5549-a9d3-f8d1ce03caf8.html

          • we need to make clear what bankruptcy is and is not.

            things that go bankrupt don’t go “poof” and disappear.

            they just lose value and in turn those that invested in it lose money but the highway will continue to operate and will continue to take in money.

            Salz mentioned the ICC losing money but it was known BEFORE it was built that it would not pay for itself over a normal timeframe and the intent was ALWAYS to cross-subsidize it from other toll roads that were cash cows.

            In the end – companies and investors – as well as state toll road agencies – diversify – to spread out their risk so that they can lose on one and still stay afloat if others do well.

            I’m playing the devils advocate here a bit.

            If Walmart runs a thousand stores and some of them are marginal but still bring in revenues – there may be a calculation as to just how strong a philosophy ANY company would have to basically subsidize some operations as long as others meet or exceed profit expectations.

            When business does this – we say that business knows how to operate and be efficient.

            When the govt does this – we think bad things about it…

            the big toll companies might well be looking at the totality of their holdings and if they suffer a setback on one – they always have the option of whether to keep it or get out of it and write it off.

            We talk about Pocahontas which was originally a VDOT road that never met projections and was at risk for defaults on it’s Va-backed bonds.

            I’d like to ask folks – if you were a toll company and you already knew the numbers for Pocahontas were bad – WHY would you buy that road ?

            anyone got an answer?

          • To get in VDOT’s good graces by bailing them out of a problem in order to get a leg up on future opportunities.

          • re: to get in VDOT’s good graces….

            okay.. but what about the “investors”?

            did they get provided a prospectus and all that rot?

            who would buy Pocahontas bonds unless they were wrapped up in a bundle of several bonds but even then it appears to be a loser.

          • Larry, Do you mean investors in original Pocahontas bonds?

          • Mike – no … I’m not sure. When the state sold Pocahontas to Transurban – did the original bond holders get their money and Transurban then issued new bonds for that one road or did Transurban just incorporate it into their existing holdings and not hold it as a separate investment?

            If you understand how this works – by all means share it.

          • 1) VDOT agreements with original bondholders (bond documents) required that first use of money from Transurban was to retire original bonds
            2) I am not sure how Transurban financed the purchase, but I would assume bank loans.

          • re: ” Transurban financed the purchase, but I would assume bank loans.”

            bank loans to Transurban based on their credit ability – not for the Pocahontas?

  8. there are more than just transportation projects that offer potential for P3.

    They can range from school/ymca, to county landfills and recycling companies, etc.

    but they have issues – primarily in that companies and businesses know finance and govt employees do not… unless they are finance professionals.

    It’s not unheard of anyhow as many govt enters into partner agreements with other agencies like regional libraries of or independent entities that perform services for counties – regional libraries, jails and entities like MWAA.

    I’m not justifying bureaucratic malfeasance and incompetence but it’s not restricted to only governments.. you’ll find it in private companies also – and no, they don’t necessarily go broke just because they’re wasteful and inefficient.

    Consumers – who also happen to be taxpayers – will buy all kinds of substandard crap produced by private companies.. at outrageous prices..

    and despite all the yammering about ObamaCare – the average person knows almost nothing about the real nuts and bolts of their “private” health insurance plans.. until of course they get the bill for something not covered.

    • and it can end up in the hands of local govt as a non-profit enterprise:

      http://tollroadsnews.com/news/la-porte-county-press-release

      One has to believe that beyond the idea that DOTs use more flawed traffic projections than potential investor – that there is another dynamic in play and that is that toll roads – actually change people’s driving behaviors to further reduce unnecessary trips or combine them or ride-share…

      It would be interesting to see a chart of recent toll roads with one column being the projected average daily traffic and the second column the average actual.

      my bet is that investors have already done this and it will be reflected in future proposals – and that we may see more roads like US-460 which will be determined to not be fully sustainable as a toll road and in fact, like US 460 the government will be providing a subsidy to operate – i.e. actually helping to pay for a road but have it operated by a private company.

      toll roads are not going to go away – but they will change and State DOTs may well get into the business of partially subsidizing toll roads.

  9. Here’s the premise that is likely incorrect.

    That there is no profit potential in any toll road.

    here’s another –

    that the state can successfully convince drivers that increased taxes for more roads is better than tolls.

    and here’s a question –

    PPTA is a concept – as well as various implementations. Conceptually – are PPTAs of any flavor fundamentally flawed and in general a bad idea?

    to a certain degree – DOTs enter into PPTAs to shift risk and the demise of a PPTA company is a purposeful possibility – as long as there is a govt follow-on plan if that happens.

    My understanding is that the Va HOT lanes – are owned by Virginia no matter what happens – that the financial agreement is a lease not ownership.

    • Larry, your assumption that toll roads can be profitable seems true to me. Before the rail worshipers raped the DTR (and it was priced reasonably), it was extremely profitable and well on its way to fulfill the promise made when its was built – once the bonds were redeemed, the road would be free. Senator Omer Hirst made that promise in good faith to the people of NoVA, but his promise was hijacked to fund Dulles Rail and, not surprisingly, push more traffic onto other roads, including those in the surrounding neighborhoods. Priced fairly, a toll road can be successful.

      • my only quibble with your analysis TMT is the perspective that a road is “paid for” and from that point on – it should be “free”.

        Tolls on the CBBT as well as the New Jersey Turnpike or the Powhite Parkway have never gone away – because those roads have to 1. pay off their bonds 2. operate and 3. be maintained.

        But I would agree – with your analysis of the DTR – that unlike the Illinois Tollway or the ICC – it has strong demand and continues to have strong demand even though the tolls are much higher than actually needed to pay for it bonds and operation.

        I would say that at one point I heard that the HOT lanes on 495 and very shortly on I-95 had some delegated to transit and VRE.

        In Maryland – they use excess toll revenues on some toll roads to subsidize others like the ICC.

        In other words – the desired situation is to have a group of toll roads – all generating revenues – some will be cash cows and some will need subsidies….

        companies do this all the time with some of their stores… and we know, for instance that electric and and other utilities also do this.

        why is it okay for some companies and industries and not toll roads?

        • Larry, that was the promise made by one of the key proponents of building the DTR – Senator Omer Hirst (D-Fairfax). As I’ve been told by his son, public support for the road was hinged to that promise. While no legislature can bind its successors, everyone simply ignored the promise. At a bare minimum, it should have been part of the debate. Where was the media?

          • I don’t blame the media TMT – most of this stuff is reported but not widely and most people ignore it …

            Have you every watched Watters World on FOX?

            their angle of course is to find young and liberal clueless but the reality is, it describes most people.

            We had a bond referenda does this way – 5 questions. I spent time at the precinct – a lot of time.. and many folks who showed up did not even know there was a referenda much less the questions…

            there are hundreds if not thousands of appointed authorities that make decisions that cost people money and there is no real effective way to get at them… right?

            Fairfax Water Authority?

  10. wHAT ABOUT POCOHANTAS? Good question, LarryG. Of course, that knowledge leads to more and more questions. Remember, please, that the best financial minds money can buy are negotiating for the “private” money and on VA taxpayers side, we have (or had)… Sean Connaughton and a law firm which is very proud that it gets great returns for private investors in public projects.

    Read the Mineta Transportation Institute’s paper on the first Virginia P3, the Pocohantas Parkway. http://transweb.sjsu.edu/PDFs/research/2503/2503_cases/2503-cs5-richmond-airport-connector.pdf

    Mineta Transportation Institute:

    Study of Pocahontas Parkway and Richmond Airport Connector by Mineta Transportation Institute, released in May 2012.

    “The cost of developing the RAC (Richmond Airport Connector) was estimated by Transurban in 2010 at about $50 million, with construction costs at $39.5 million and land acquisition and right of way costs at $10.25 million. The development of RAC was financed by Transurban using a $150 million loan from the U.S. Department of Transportation under the federal Transportation Infrastructure Finance and Innovation Act (TIFIA), which also provided a line of credit to upgrade the electronic toll collection system on the parkway and refinance some of the debt that had been incurred in assuming responsibility for operating the Parkway. The TIFIA loan would be paid off from the toll revenue from the Parkway.”

    “Since the capital costs of developing the RAC were financed entirely through the TIFIA loan, the connector was effectively constructed entirely with public funds, although including the development and operation of the RAC under the PPP makes Transurban responsible for maintaining the connector and repaying the TIFIA loan through toll revenues.”

    “From the total $150 million line of credit, $95 million was designated to refinance the long-term senior debt, $7 million to upgrade the electronic tolling system (PRIOR SYSTEM WAS ONLY 4 YEARS OLD), and $48 million to develop the RAC.”

    TIFIA PAID THE ENTIRE CONSTRUCTION COSTS OF THE AIRPORT CONNECTOR AND PICKED UP (perhaps picked up, see below) ONE THIRD OF THE PRIOR BONDS SOLD BY FLOUR, ET AL, UNDER THE Pocohantas Parkway Association ORIGINAL P3 PROCESS. PPA WENT BANKRUPT IN ONLY TWO YEARS.

    “The analysis (by Fitch Rating, a BBB-) found that in the absence of the TIFIA loan, the RAC would not be economically viable, with the net present value of the toll revenues from incremental traffic generating by the RAC over the 99-year lease amounting to only a fraction of the RAC construction cost.”

    POCOHANTAS WAS NEVER CONSIDERED ECONOMICALLY VIABLE. WHAT INVESTOR, AND WHY, PUTS UP “real” PRIVATE MONEY FOR PROJECTS WHICH IT IS KNOWN WILL NOT PAY OFF?

    “Changes to the TIFIA program authorized by Congress in the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) had given the U.S. Secretary of Transportation authority to grant TIFIA loans to assist with refinancing long-term debt, but did not specify the maximum amount the Secretary could allow to refinance[LJ1] a project. Therefore VDOT requested that the definition of “eligible project costs” be expanded to include the $548 million acquisition price that Transurban had paid for the parkway, to which the FHWA [LJ2] subsequently agreed.”

    SINCE TIFIA IS NOW (apparently) RESPONSIBLE FOR TRANSURBAN’S PURCHASE PRICE, DID TRANSURBAN (Apparently) MAKE SEVEN YEARS OF TOLL REVENUES WITHOUT PAYING ANY COSTS AT ALL?

    OR DOES THIS IMPLY THAT uNCLE SAM PAID OVER 30 PERCENT JUST TO DO THE REFINANCING? DID TAXPAYERS GET NOTHING FOR OUR $95 MILLION LOAN EXCEPT PAYING LAWYERS, ADVISORS, ETC FEES? NOT ANY BONDS EVEN PAID OFF???

    THAT’S THE IMPLICATION OF LANE CONSTRUCTIONS “REQUEST FOR INFORMATION” ON BUILDING THE I-66 TOLL LANES PROJECT WHERE LANE TELLS VDOT UNEQUIVICALLY THAT P3S COST MORE MONEY BECAUSE 1) oPERATORS MAKE A PROFIT; 2) ALL THE CLOSING COSTS ARE HUGE; 3) THE DEBT SERVICE IS MASSIVE.

    “TIFIA loan repayments will begin in 2029 and finish in 2043.”

    nOW, THAT POCOHANTAS IS BANKRUPT (again), HOW WILL THEY BEGIN LOAN REPAYMENTS IN 2029?

    “The analysis performed at the time VDOT applied for the TIFIA loan suggest that there is a high likelihood that the incremental toll revenues from the RAC traffic will not be sufficient to cover the operating and loan repayment costs for the Connector, and thus the project would in effect be subsidized by toll revenues from other Parkway traffic.”

    POCOHANTAS TRAFFIC/REVENUE WAS 42 PERCENT OF PROJECTIONS IN 2003. HOW DOES THAT SUBSIDIZE THE CONNECTOR?

    .And then there’s the upcoming next D.C. area VA toll lanes project on I-66 where Lane Construction literally told VDOT that P3s cost more money than conventional (and why) and refused to take “toll revenue risk.” Lane is VERY clear that the P3s cost MORE money for the same transportation product and that tolls will never pay off the bonds, loans, etc.

    Again, LarryG, I’m not opposed to P3s, and I totally support toll roads — except that I wouldn’t allow the usage of electronic collection — for many reasons which you, LarryG, have outlined in prior comments. But, I submit, the P3/toll road theory is running up against the P3/toll road reality as practiced in Virginia — and elsewhere — today. In the process, I submit, taxpayers are the ones getting scammed and if media doesn’t start asking questions, we taxpayers (and our children/grandchildren) can only go bankrupt too.

    About the lease thing: yep, you’re right, it’s a long-term lease, so long in fact that it gives the “privates” even another benefit. Under federal law, a lease LONGER than the projected lifetime of anything is considered ownership. Hence, the privates can take depreciation on the highway — even though taxpayers still “own” it. Generally, they do this, taking accelerated depreciation over usually about 15 years on an asset (the lease) of 75 (usually) plus years. I submit that this means one major thing: that it gives privates a pre-bankruptcy “life” which is about the same as the maintenance life of the highway. In about 15 years, that’s when a highway generally needs significant rebuilding, pushing the privates twards bankruptcy regardless of the toll income (or availability payments). And one, even more, major thing which is more difficult to communicate: If one blueprints any kind of bankruptcy or walking away and giving “lease” back to state or… in 15 years or so, does one build today asset protection over 75 years??? Suppose, for example, the Elizabeth River Crossings (Midtown Tunnel) in Norfolk goes bankrupt in 15 years (and the project is still a couple years from completion)? This all-concrete (and apparently the world’s ONLY all concrete) tunnel then reverts back to VA, right? Concrete always cracks, every engineer on the planet knows that. What happens to liability from year 15 to year 58 (the length of the ERC “lease” with Virginia)?

    It’s the media who is NOT performing here. We — all mainstream media — are letting the “money” rule by re-writing press releases from the “money” instead of asking tough questions. As I say in the Style Weekly piece, P3s just might be capitalists’ gifts to taxpayers as they are today promoted. Media needs to ask questions; to “follow the dollar” and actually find out.

  11. That’s a pretty damming indictment and there are more players involved that just VDOT, Va and Transurban – the Feds are involved and I wonder who is going to ultimately end up with the loss.

    but again, I don’t blame the media.. there are LOTS of ways that info is developed these days – Mineta Transportation Institute (not sure who they are).

    but you know there are some general similarities between the DTR and the Dulles Airport and the Richmond airport and the Pocahontas…

    you make good points about the competence of the folks representing the government.. which is not easy to fix no matter where it happens but when you talking about billions … it’s important.

    Has JLARC or the AUditor of Public accounts written a critique of PPTA in Va?

  12. You may or may not find this interesting but the Mineta Institute is funded by the US govt.

  13. I’m not aware if JLARC has done a study of VA P3s. Sec Trans Aubrey Layne told me in early summer that he ordered a “scrub” of VA’s 22 P3s but I don’t know if/when/whether that actually happened.

    One of the things I’m trying to do is get just such a serious study by someone with the resources (not an individual like me) to figure out whether these things, in total, are pluses or minuses. Obviously, I’m not impressed by their performance from what I’ve discovered BUT I don’t have the financial, engineering, legal knowledge to say one way or the other. I think questions NEED to be asked — and they are not being asked. JLARC has a major issue, however, about doing a study. The speaker of Virginia’s house is a member American Legislative Exchange Council and ALEC, heavily backed by financiers and contractors, writes the “model” laws for getting more states more times to utilize P3s.

    Yes, I knew Mineta got federal dollars, also — I believe — California state dollars. Uncle Sam’s DOT is now heavily promoting P3s because so much, about 2/3 of all transportation new construction dollars, money goes into them today. Only a couple DOT engineers are wondering about them (publically, at least) because, I submit, so many state DOT’s (like Virignia) are being cut way, way back. State engineers have little future UNLESS they go to the private sector and if they do get into the private sector they generally get a siginificant raise. So state transport engineers are likely to say little that might be construed as negative about P3s…

    Today, VDOT also hires the “oversight” of most P3 projcts, meaning that a consulting engineer on any project might be looking for a job at that project or the contractor’s other projects while ensuring the contractor is building something safely or efficiently or…other oversight areas. Sec. Layne said that the contractors are “incestuous” because the engineers move around from company to company as the contractors get P3 jobs and other contractors are hired to do the oversight.

    Regardless, its highly likely that very few engineers understand any of the financing arrangements anyway. What I thik is that everyone (except taxpayers who seemingly aren’t willing to try and understand), everyone else’s interests are aligned. Take investors, which Mr. Bacon thinks should be gatekeepers. They find out they can invest in tax free P3 “private activity bonds” returning on average (according to one study) 14.9 percent and they no longer put their money in municipal bonds because they get an amazing return for the same, or lower, risk factor. They don’t howl about taxpayers perhaps getting screwed; they go out and buy PABs… I checked the T.Rowe Price portfolio and it is increasing PAB holdings, saying that three VA P3s — none of which is complete and operatng– are “among its top performers.” The tolls are supposed to pay off the bonds, but some bond “top performers” are not generating a penny??? Another question…

    • Unless the GA nixe it – JLARC is usually informative but P3s are essentially finance world critters and as you say – engineers are not financiers…

      but in a state with truly notoriously weak ethics laws… I’m not surprised at all to see chicanery and skullduggery… especially when the likes of folks like Bacon – defend it at the Gov level… !!!

      Seriously – I don’t think the average person has a clue and media/journalist are not financiers either… and we have a GA that thinks the “Virginia Way” means citizens and voters are mostly ignorant and need Richmond and their ALEC buddies to take care of us.

      I think VDOT is a giant organization – it used to be the biggest in the state until Allen downsized them and forced them to contract out more. So now the Dept of Corrections is the biggest..

      I think there are folks “out there” that understand P3s and I actually think Mineta is a legitimate player .

      Do you have a view of Phillip Shucet who seems to be involved in the Cville 29 issue?

  14. I am not convinced that tolls, under any form, is a particularly effective way to fund transportation. Let me explain:

    If the Capital Beltway (495) had been a till road, we would have no Tysons Corner. Instead we now have a very vital and profitable, for both the private and public sectors, area. It was made possible by easy transportation.

    The success of Tysons made the Dulles Toll Road possible. Unfortunately that road became a toll road because Virginians are too short-sighted to build roads to the airport. But if there was no Tysons, by now there would be no Dulles airport.

    In other words, transportation enables tremendous economic activity. To repeat what I have posted previously: except for the investment in infrastructure of Tysons, Rosslyn, and Crystal City, Virginia would be indistinguishable from Mississippi.

    • I dunno. Tysons is considered by some to be an example of exurban sprawl rather than economic development as a result of the beltway.

      There are considerable locations around the entire beltway that did not turn into Tysons.. so what’s the difference between them?

      It had to be more than just a beltway. The airport was pre-ordained no matter what happened to Tysons or even Reston because Washington National cannot handle the 24/7 international traffic.

      the question always was – how to get to Dulles after it was built…

      I think all this stuff is arguable.. for sure.. and maybe worth it…

      but I don’t advocate tolls to pay for roads. I advocate them for two reasons.

      1. – in an environment where we don’t have enough money for a new road

      2. – to manage congestion in corridors where building new lanes or new roads is impossible or cost prohibitive.

      I think tolls only really work for limited access roads not surface streets or grid streets unless you set up a Cordon toll and that has an evil more hostile reception from folks that dynamic tolls on limited access highways.

      When I look at a map of NoVa and try to envision a major new “connector” I see nothing but existing houses and commercial development except along the riparian corridors which are parks and environmentally difficult to site roads on.

      VDOT is doing a new prioritization system that will rank roads by things like congestion relief – but also economic development but both will require quantitative measures – not unsupported claims.

      More and more – especially in urbanized areas – the shortage of money for new roads combined with fewer and fewer locations with less potent opposition combined with the expense of high valued property for right-of-way, is driving things to optimizing and managing congestion on existing roads with dynamic tolling.

      The only way you’re going to get more money is if you can figure out how to compensate for better and better mileage cars – and paradoxically – the higher you tax gasoline – the more folks will buy more and more efficient cars.

      Virginia, for instance, no longer gets more than a third of it’s transportation funding from fuel taxes. 2/3 of it now comes from sales taxes on non-fuel items.

      so I don’t see how you can get major new roads in urbanized areas

  15. LarryG wrote:

    The ICC is Md is an example of a road that had to buy developed and developable land to get it’s 4-6 lanes and it ended up costing twice and three times what other non-urban roads cost.

    Not really correct. Much of the land for Md. 200 had been in “reservation” (and not available for other uses) since the late 1960’s and early 1970’s, which meant that it could not be developed or used for other purposes. Only a few homes had to be condemned and torn-down, and most of those were near the west end in the Derwood area of Montgomery County, Maryland where federal environmental regulators insisted that the route of the road be changed to reduce impact on a tributary of Rock Creek.

    The increase in cost since the 1980’s tracks pretty well with inflation, and the road is now complete at a cost of about $2.6 billion, including an extensive amount of environmental mitigation near the road and in some cases rather far from the road. The vast majority of the road is 6 lanes – the only four lane section is between I-95 and U.S. 1 (this was the last section to open, having been completed earlier this month).

    • no ..something is wrong with the numbers… then because the cost was 2.6 billion for less than 20 miles and that’s over 100 million per mile, twice, 3 times what most 4-6 lane limited access roads cost.

      I assume it was the land that drove the price up but what other reason could it be? Was it tough terrain with alot of bridges and grade-separated stuff?

      at any rate – the main point was the cost of building new location roads in urbanized areas where available corridors are pretty scarce … either you run into property that is valuable or property that is uneconomic for development and has environment issues..

      there just are not that many venues for limited access roads in highly developed areas… The last one I know of was the Fairfax County Parkway..
      which contradicts my assertion – 35 miles at about 100 million… so maybe there are options.

  16. LarryG also wrote:

    Salz mentioned the ICC losing money but it was known BEFORE it was built that it would not pay for itself over a normal timeframe and the intent was ALWAYS to cross-subsidize it from other toll roads that were cash cows.

    Larry, standard operating procedure for the Maryland Transportation Authority (the state agency that owns and operates the ICC and nearly all of the other state toll roads and toll crossings) dating back decades has been to sell bonds that are secured by the “basket” of all of those toll facilities.

    It results in the state paying lower interest charges because the risk of default associated with those bonds is lower.

    Presumably of relevance to the readers of Bacon’s Rebellion, that “basket” of tolled roads and crossings may well secure the bonds that must be sold to fund a replacement for the Gov. Harry Nice Memorial Bridge (U.S. 301) over the Potomac River estuary between King George County, Va. and Charles County, Md.

  17. LarryG wrote:

    Zilliacus – wasn’t cost and displacement of homes and businesses – at issue with the Cville Bypass?

    Charlottesville U.S. 29 Bypass?

    I thought it was about the impact on at least one historic building, and on waters of the United States (possibly including wetlands, but I am not sure).

    One of the reasons that Md. 200 (ICC) ended up being as expensive as it was can be traced to very expensive “high” bridges (instead of precast culverts) that were used to span tributaries of both the Rock Creek and the Anacostia River in the upper reaches of both watersheds (they both drain to the Potomac River and ultimately to the Chesapeake Bay).

    • My bad – I thought you were from Cville and very familiar with the Bypass.

      On the ICC – the obvious question is did they have to spend over 100 billion dollars for 19 miles of road?

      I assume they had no choice if they wanted it built…so there must have been reasons why they built significant bridges and things… no?

  18. LarryG wrote:

    My bad – I thought you were from Cville and very familiar with the Bypass.

    Maryland resident since 1960. But spend a lot of time across the creek in the Commonwealth, so I very much enjoy this site.

    On the ICC – the obvious question is did they have to spend over 100 billion dollars for 19 miles of road?

    A little less than that. $2.6 billion for the road, its maintenance facilities, the toll collection hardware and software (no cash toll collection) and for an extensive program of environmental stewardship, which included improvements in many streams that cross the highway (Md. 200 runs east-west, but nearly all of the streams it crosses run N-S).

    I assume they had no choice if they wanted it built…so there must have been reasons why they built significant bridges and things… no?

    The many streams that the road crosses were a major bone of contention. The federal environmental regulatory agencies had suggested a routing that ran north of the long-planned right-of-way, into another watershed (the Patuxent River – a river that is not a tributary of the Potomac River, but drains directly to the Chesapeake Bay) – but the Patuxent River watershed is a source of drinking water to the millions of residents of the Maryland suburbs of D.C., so the state rejected the alternative alignment for that reason (and because it had never been on any county planning maps).

  19. Please take a closer look at the ICC. When one includes the debt service, according to an area magazine story, the ICC is ending up costing tax payers $4 billion and was a key factor in the need to raise the state’s gasoline tax.

    According to Lane Construction, there are three reasons why P3s cost MORE money than traditional finance-construction (and that claim is confirmed by the recent report from Congress’s Transportation committee P3 panel).* One, the “privates” are seeking profit. Two, the amazing array of consultant, legal, advisory fees. Three, the debt service. But when media write about these projects, they write about the construction cost only.

    For example, T. Rowe Price lists three VA P3 bonds in its “top performers,” implying that VA transportation bonds are PRESENTLY successful for bond-buyers. None of those three projects, however, is actually open and one, the 460 toll way, is suspended. Someone — and is there anyone except taxpayers? — is paying interest on those bonds when they are producing zero dollars in toll income (which, of course, are allegedly supposed to pay off the federal and state loans and bonds). Media reports use the bond-sales principal, not the pay-off of bonds plus interest over years, when media says something like “the $1.2 billion 460 toll way.”

    Streetblog has an outstanding series, just out, on the P3s:

    http://usa.streetsblog.org/2014/11/18/the-indiana-toll-road-and-the-dark-side-of-privately-financed-highways/

    http://usa.streetsblog.org/2014/11/19/how-macquarie-makes-money-by-losing-money-on-toll-roads/

    http://usa.streetsblog.org/2014/11/20/the-great-traffic-projection-swindle/

    salz

    *The Congressional Budget Office and Congressional Research Service also have reports illustrating that the privates ACTUAL equity is less than the cost of the financing with all the advisory fees.

    • what’s the difference between P3 and design-build in terms of a compan seeking a profit?

      If Virginia does not have money to build a road unless it is tolled – what is a better approach than P3?

  20. LarryG wrote:

    2.6 billion … 100 million+ per mile.

    As I said above, not all of it was for toll road construction. In addition to the program of environmental stewardship in involving retrofit and new stormwater management and detention facilities in several degraded sub-watersheds (not cheap), it also funded a multi-use trail along some (but not all) of Md. 200.

    are there any more roads LIKE this one in terms of 4-6 lane limited access planned up your way?

    The two big highway projects planned (and on the planning maps) are the total replacement of a long and deteriorated viaduct on the Baltimore Harbor Tunnel Thruway (I-895) in Baltimore City north of the tunnel portal and the total replacement of the Gov. Harry Nice Memorial Bridge (U.S. 301) over the Potomac River estuary. Both mostly or entirely to be funded by toll revenues.

    However, Maryland just elected Larry Hogan, Jr. (R) to be its new governor. During the campaign, Hogan was sharply critical of the cost of two light rail lines that had been proposed (and at least partially funded by an increase in the state motor fuel tax) by the incumbent O’Malley Administration (the Purple Line in the close-in Washington suburbs and the Red Line in Baltimore City and Baltimore County, both with estimated construction costs between $2 billion and $3 billion – each), and vowed to not spend all of those dollars on light rail, but instead spend it on highway system improvements. So stay tuned.

    • thanks.. but I’m presuming that what was done for the ICC was mandatory not optional.. because the costs were already through the roof and normally DOTs will abandon such projects that have such poor financials.. and in this case – putting substantial strain on the rest of the projects and toll road authority.

      a couple more questions –

      1. – is it a “good” or “bad” thing to “bundle” toll roads into one authority to mitigate risk? If it is a good idea, why has Virginia not done it.

      2. – do you favor or opposed using taxes gasoline to pay for transit?
      if a general tax – like a sales tax funds “transportation” is it fair game
      for transit rail as well as highways?

      3. – Should there be dedicated, sustainable taxes separate from highway, fuel tax to fund METRO?

      finally, you do know which Gov approved the ICC, right?

  21. LarryG wrote:

    thanks.. but I’m presuming that what was done for the ICC was mandatory not optional.. because the costs were already through the roof and normally DOTs will abandon such projects that have such poor financials.. and in this case – putting substantial strain on the rest of the projects and toll road authority.

    It was binding in that it was in the Final Environmental Impact Statement (FEIS) issued by the state.

    a couple more questions –

    1. – is it a “good” or “bad” thing to “bundle” toll roads into one authority to mitigate risk? If it is a good idea, why has Virginia not done it.

    In my personal opinion, it is a good thing, since it drives down the cost (to some extent) of interest rate that must be paid on toll road bonds, and the toll roads are run by an agency that is reasonably accountable to the General Assembly (but there are good things and not so good things associated with toll roads being run by the state).

    2. – do you favor or opposed using taxes gasoline to pay for transit? if a general tax – like a sales tax funds “transportation” is it fair game for transit rail as well as highways?

    Maryland’s long-standing policy has been to use motor fuel tax revenue to provide capital and operating subsidy for rail and bus, especially for transit systems in Baltimore and Washington, and the suburbs in between.

    We it up to me (and it’s not), I personally prefer the radical approach outlined by David Levinson, professor of Civil Engineering at the University of Minnesota on the Citylabs Web site here.

    3. – Should there be dedicated, sustainable taxes separate from highway, fuel tax to fund METRO?

    See above.

    finally, you do know which Gov approved the ICC, right?

    Complex answer.

    1. Parris Glendening (D) ran for Governor and won narrowly over Ellen Sauerbrey in 1994, and stated clearly his support for the ICC (an EIS process was under way when he took office), and won re-election in 1998 at which point he was not as supportive, and in 1999, he announced that he wanted to cancel the project entirely.

    2. Robert Ehrlich, Jr. (R) ran a successful campaign in 2002 to succeed Glendening, and stated clearly his support for the ICC.

    3. Ehrlich was defeated by Martin O’Malley (D) in 2006. O’Malley came under intense pressure from many groups to cancel the ICC, which had completed nearly all of its environmental clearance process by the time that he was sworn-in, but he decided to get the road built, and bonds were sold and the first construction contracts were let in 2008.

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