Tag Archives: Public private partnerships

U.S. 460: Peeling Back the Onion

peeling_onionby James A. Bacon

Structuring the U.S. 460 Connector as a public-private partnership (P3) shielded the $1.4 billion project from much of the oversight required for conventional Virginia Department of Transportation (VDOT) projects, found a confidential report by VDOT’s Assurance Compliance Division and the Office of the State Inspector General.

As a consequence, the McDonnell administration was able to pursue a “very aggressive or extremely aggressive” schedule for advancing the project without informing the Commonwealth Transportation Board (CTB) or the general public of major regulatory issues that threatened the project’s viability. Due to concerns over the impact on nearly 500 acres of wetlands, the U.S. Army Corps of Engineers had balked on issuing needed environmental permits. Even so, VDOT paid $250 million to the design-build contractor, US Mobility Partners, under the terms of the contract.

“This action may have placed additional permitting risks and associated schedule risk on taxpayers of the commonwealth of Virginia,” states the confidential, 54-page report obtained by the Richmond Times-Dispatch.

Secretary of Transportation Aubrey Layne, appointed by Governor Terry McAuliffe, suspended the project early this year until the permitting issues could be resolved. He said the state potentially could be exposed to $500 million in losses. VDOT is examining alternative routes for the project that the Army Corps might find more acceptable.

I have not seen the report. I base this commentary purely upon the distillation of it appearing in the T-D. What appears to be absent is any assessment of who was responsible for pursuing the project so aggressively and whether that effort triggered any alarms or pushback within VDOT. Perhaps that omission is inevitable, given that McDonnell administration officials and U.S. 460 Mobility Partners declined to hand over requested documents. The governor, his chief-of-staff Martin Kent and Transportation Secretary Sean Connaughton said that the state code protected the documents as governor’s working papers.

(Update: A copy of the report has fallen into my hands, and I was incorrect to surmise that it did not address who was responsible for pushing the project. In fact, the report concludes: “The Route 460 project was a priority of the McDonnell Administration and championed by the former Secretary of Transportation, who provided persistent oversight and direction to both the Office of Transportation Public-Private Partnership (“OTP3″) Director and VDOT staff to ensure the timely execution of the Comprehensive Agreement.”)

There is an inherent tension between confidentiality and the public’s right to know in a public-private partnership. A prospective private-sector partner understandably does not want to negotiate a contract in the media. On the other hand, when a contract is completed, it is presented as fait accompli. If the public does not like the terms, too bad, the contract will not be renegotiated. Also, as it transpires in this case, US 460 Mobility Partners was able to withhold invoices that would be public record if the project had been conducted by VDOT.

The original impetus behind the P3 project was understandable. The McDonnell administration wanted to solicit independent and creative thinking from the private sector on how to finance the project. But all three of the consortia that submitted proposals agreed that tolls could support only a small portion of the total cost. The McDonnell team scrapped the idea of contracting with a private partner to design, build, own and operate the 55-mile, Interstate-grade highway, and decided to hire one of the three, US Mobility Partners, to design and build the project, and then turn it over to VDOT to own and operate. Why not let VDOT handle the entire project? In theory, US Mobility Partners would shoulder the risk of completing construction on time and on budget.

In practice, the use of the partnership structure allowed the McDonnell administration to cloak problems from the CTB and the public. While VDOT did brief the CTB on the project, it never mentioned the Army Corps permitting issues that could put the entire deal in jeopardy. The inspectors concluded that the state had not broken any rules in handling things the way it did but there is no denying that the McDonnell administration kept a massive problem out of the public eye until the McAuliffe team took over and Layne could see what had transpired.

The report made two worthwhile recommendations. First, there should be a 30-day cooling-off period for public-private deals to allow legislators to review negotiated contracts before they take effect. Second, VDOT should consider the Corps’ input in the planning stages of highway projects, not after a project has been contracted. Sounds pretty basic.

This report doesn’t close to answering all the questions I have (and that others should have) about this project. But it does represent progress. We know more now than we knew before.

Quote of the Day: Doug Koelemay

koelemayAs it appears increasingly likely that Congress will throttle the flow of federal transportation dollars to the states, state officials are looking at alternative financing mechanisms such as Public Private Partnerships (P3s). As it happens, Virginia is one of only four states with extensive experience with P3s — the others are California, Texas and Florida — so it’s no surprise that Governing magazine touched base with Doug Koelemay, the McAuliffe administration’s P3 chief, for comments in a recent article.

Koelemay, who heads the state’s Office of Transportation Public-Private Partnerships, … stresses the need for an open process in developing the agreements. Public notice and comment periods are often “sterile” and yield little useful information. But more public involvement can help planners develop better projects, Koelemay says, because they can understand the public’s concerns as consumers of transportation services.

P3s are an invaluable tool for building transportation mega-projects. But as experience in Virginia has shown, there is a built-in tension between protecting the confidentiality of P3 contract negotiations and maintaining openness and transparency. The public is not well-served by a process in which a negotiated contract is presented with a take-it-or-leave-it option. Of course, the public is not well served either by an open-ended process that allows for continual modifications and revisions leading to mission creep and cost overrruns.

I’m not sure how to balance the conflicting considerations. There are no easy answers. Koelemay is clearly signaling that the McAuliffe administration is leaning toward greater openness and transparency.

– JAB

Horse Gone, Search Ensues to Find Out Who Should Have Closed the Door

barn_doorby James A. Bacon

A new question has arisen about the proposed $1.4 billion upgrade to U.S. 460 between Petersburg and Suffolk. Once the McDonnell administration ascertained that none of the three public-private partnership proposals on the table were viable and that the state would operate the road instead, why didn’t the Virginia Department of Transportation re-submit the construction project to competitive bidding? Why did the administration choose from among the three consortia that had submitted the original proposals?

“There is no doubt in my mind that this should have gone back out for new bids,” Del. S. Chris Jones, R-Suffolk, told the Times-Dispatch. “That would have been the prudent thing for the commonwealth.”

The House Appropriations Committee has summoned Secretary of Transportation Aubrey Layne, appointed by Governor Terry McAuliffe, to appear before the committee today to explain the decision-making process. The highway upgrade, touted as a boon to economic development in southern Hampton Roads when the Panama Canal widening opens, has been put on hold until the U.S. Army Corps of Engineers completes its assessment of the proposed route, which would disrupt hundreds of acres of wetlands.  The state has already paid $300 million under terms of the contract even though construction work yet to begin.

The original concept for the project was a public-private partnership funded mainly by the private sector. Three design-construction consortia submitted proposals but all three made it clear that there would not be sufficient traffic volume on the highway to build it without massive government subsidies. The McDonnell administration decided to cut project costs by selling tax-free bonds through an independent financing authority and limiting the private sector role to designing and building the project.

Over and above seeking an explanation of how the state spent so much money before required environmental permits were obtained, legislators also want to know why VDOT didn’t open up the bidding process once a decision had been made to restructure the project. A larger number of bidders likely would have resulted in a lower winning bid.

An uproar developed over bidding for Phase 2 of the Rail-to-Dulles project in Northern Virginia when the Metropolitan Washington Airports Authority enacted a rule that would have required construction companies to enter into a Project Labor Agreement (PLA), effectively limiting the bidders to union companies. Many feared that the PLA requirement would result in fewer bids and a higher construction cost. Under public pressure MWAA backed off. Apparently, no one was watching the U.S. 460 project closely enough to question the McDonnell administration’s decision to avoid opening up the bidding process for a mega-project of comparable size.

How North Carolina Halted a Bridge Boondoggle

mid-currituck_bridge

Map credit: Lochner MMM

by James A. Bacon

Many Virginians know the agony of driving to vacation in the Outer Banks at the peak of the summer season. Heading south between Chesapeake and Kitty Hawk, you follow four-lane roads jammed with as many as 50,000 cars on Saturdays. Then, if you’re staying in Duck, Whalehead or Corolla, you have to head back north through more congestion. It sure would be nice to have a bridge across the Currituck Sound directly to Corolla.

As it happens, the state of North Carolina was planning to build a seven-mile span from Coinjock to Corolla. The Mid-Currituck Bridge, expected to cost $411 million in its most recent incarnation, could save an hour’s driving time. The project worked its way through the traditional North Carolina project-approval system and, at one point, construction was expected to begin in 2012 and to be open to traffic in 2013.

I’m sure there are a lot of vested interests in the Outer Banks that would love to see new transportation capacity that would make it easier for even more visitors to come rent cottages, rent kayaks and go surfing. But North Carolina has instituted a system that we’re still working on here in Virginia: a methodology for ranking proposed highway projects according to cost, saved travel time, congestion relief, safety and economic benefits. According to the Virginian-Pilot, the Tarheels have scored some 1,284 projects and plans to release results for another 500 in May.

The result for the proposed Currituck Bridge: a score of 23.4 points out of a possible 100, giving it a rank of 178th in importance to North Carolina. It doesn’t look like the bridge will get state funding any time soon.

I have a problem with over-development of the ecologically fragile spit of land that originates in Virginia and extends almost unbroken all the way to Hatteras. The Outer Banks are a national treasure. Federal flood insurance subsidies are already encouraging excessive building on sand that could literally wash away with the next hurricane. The state of North Carolina doesn’t need to be subsidizing over-building as well.

That concern aside, I have a suggestion for the county officials of Currituck County who have been lobbying for the bridge. Don’t ask the citizens of North Carolina to pay for your bridge. Figure out how to pay for it yourself.

Issuing 30-year, tax-free bonds to cover the cost of $411 million bridge would require roughly $30 million a year in revenue. Could the bridge generate enough value for the tourism industry in the Northern Outer Banks to pay $30 million in financing costs and have local businesses come out ahead? If so, enact the needed legislation and get the deal done. If not, then the bridge, which is needed to accommodate peak traffic that occurs 13 or 14 Saturdays out of the year, would destroy economic value, not create it, and should never be built.

There are at least three potential financing mechanisms: tolls, value capture and excise taxes.

Tolls: A harried dad with antsy kids in the back seat would gladly fork over $10 or more to shave an hour off his drive to Corolla or points south. A toll could generate millions of dollars in revenue each summer to pay off the bonds issued to build the bridge. Indeed, before the project was put on hold, the Mid-Currituck Bridge project would have charged tolls. However, the North Carolina legislature envisioned the need to spend $28 million a year in gap funding, according to the News & Observer.

Value capture. Major beneficiaries of a bridge would be the owners of hotels and rental property. A bridge that cut driving time and made Currituck destinations the closest to Northern markets would allow owners to raise rents and generate more revenue. Set up a special district to impose a property tax surcharge to capture some of that added value and use it to pay off the bonds.

Resort meals tax. Other beneficiaries include owners of restaurants, shops and other beach amenities. Create a special resort tax district that collects an extra penny per dollar on retail sales. Apply that to pay off the bonds. Continue reading

Picking up the Pieces of the U.S. 460 Fiasco

Aubrey Layne

Aubrey Layne

by James A. Bacon

Transportation Secretary Aubrey Layne said today he suspended work on the U.S. 460 Connector project because he didn’t want to run the risk of paying the contractor millions of dollars for work on a project that might be radically revised. The state of Virginia has spent $300 million already on the proposed 55-mile interstate-grade highway with no guarantees that it can obtain the necessary environmental permits to push the $1.4 billion project forward — or get its money back if the permits don’t come through.

“There’s no point in spending money on a road we don’t know will get built,” he said at the monthly Commonwealth Transportation Board (CTB) meeting. “There will be five alternatives looked at, including a no-build option.”

As a member of the CTB before he joined the McAuliffe administration as transportation chief, Layne had been one of the project’s most vocal backers. He reiterated his support today. “I still believe in the purpose and need – increased mobility in the corridor, support of the port, hurricane evacuation,” he said.

But Layne suspended work on the mega-project late last week, citing concerns that the U.S. Army Corps of Engineers might not give its approval. The Corps had expressed concerns from the very beginning about the impact of the proposed alignment on wetlands, he said. Early on, the best guess was that 200 acres of wetlands might be disrupted. But soil borings showed that nearly the entire route transversed wetlands. “It was discovered that it could be 480 acres,” he said.

When Layne took over as transportation secretary, he explained, he adopted a different perspective from his previous role as CTB member, advocate and chairman of the 460 Funding Corporation, the entity created to float toll-backed bonds to help pay for the project. As chairman of the funding corporation, he had a fiduciary responsibility to look out for the interests of the bond holders. As transportation secretary, he has a responsibility to look out for the interests of citizens and taxpayers.

To date the state has spent roughly $300 million on the project. VDOT accounts for roughly $60 million in project management costs. The contractor, US 460 Mobility, has spent about $100 million on environmental work, and the state has paid it roughly $140 million for “mobilization,” preparing for construction by setting up an office and hiring crews. He doesn’t have any more environmental work for the contractor, and he doesn’t want to continue paying millions of dollars for months on end when there is no certainty that the proposed route will win regulatory approval.

Problems with P3s. CTB members were generally supportive yesterday of Layne’s decision. Earlier this week, however, former Transportation Secretary Sean Connaughton was quoted in the Washington Post as saying, “Preliminary studies show around 400 acres impacted over a 55-mile corridor, which is fairly small given the size and scope of the project. The current Administration needs to complete the supplemental study, design a wetlands mitigation and avoidance strategy, get the Army Corps permit, and build the road. It’s that simple.” He also said there was “no problem with the structure of the contract” with US 460 Mobility.

In a lengthy explanation of the background to the deal, Layne offered a different spin. “From my viewpoint, it was people in their particular positions making the best decisions they had with the data they had,” he said. However, he alluded to the inherent tension between confidentiality and openness in the Public Private Partnership (P3) process.

The process was open in the early stage when an advisory group studied broad approaches to the 460 corridor. Based on that group’s recommendations, three different consortia submitted their proposals on how to finance and build the highway. In the end, the McDonnell administration decided they were all too expensive and took over ownership of the proposed highway, enlisting US 460 Mobility only to design and build the project. Those negotiations occurred totally in secret, as allowed by the P3 law. The McDonnell administration was not required to obtain CTB approval to sign the contract (although the CTB did have to allocate money for the project), and VDOT gave the CTB what Layne characterized as a “high-level briefing.” “The CTB,” he added, “was not privy to the terms of the contract.”

W. Sheppard Miller III expressed frustration with the process that he did not voice publicly at the time: “I have been very uncomfortable on a couple of projects we had. I didn’t have the data I needed to make a decision. At the same time, I was asked to vote. Don’t ask me to do something without giving me the information I needed. I voted like everyone else. I didn’t like it. I was very uncomfortable at the time. I don’t want to be in that position again.” Continue reading

The Statewide Importance of the 495 Express Lanes

express_lanes_photoby James A. Bacon

Traffic and revenues on Northern Virginia’s 495 Express Lanes increased steadily in 2013, generating a record 47,000 trips and toll revenue of $124,000 on December 19, according to data the company released yesterday. Whether that’s enough to meet expectations of parent company Transurban Holdings Ltd., headquartered in Australia, or to encourage additional private investment in Virginia’s transportation infrastructure, however, remains an open question.

At the end June 2013, Transurban stated in its annual report that the first half year’s traffic performance “has been lower than expected, but has continued to grow.” At that time the company said it was too early to determine any reliable traffic trends. The latest publication indicates that traffic volumes and average tolls have increased since then, even though 4th quarter results were hampered by the federal government shutdown. Of special note, revenues rose markedly, from $3.3 million in the first half of the year to $8.8 million the second half.

Source: 495 Express Lanes

Source: 495 Express Lanes

Here’s Transurban’s problem: When it was lining up financing in 2007 for the $2 billion project, which added four new lanes to a 14-mile stretch of the Capital Beltway, the economy was booming. A 2007 traffic and revenue study by Vollmer/Stantec forecast average weekday trips over the first full year of operations at 66,000 and revenue of $46.1 million, according to Toll Road News. After four years of operation, the study forecast, the express lanes would log 117,000 average weekday trips and annual revenue of $79 million. No one anticipated the severe recession or the national erosion in Vehicle Miles Traveled that eased congestion on the nation’s highways. The whole point of paying a toll to use the express lanes is to avoid the unpredictability and time delays caused by congestion. No congestion = no revenue.

The company pulled out of its investment in the Pocahontas Parkway outside Richmond last year but remains committed to completing the Interstate 95 express lanes project in Northern Virginia.

Bacon’s bottom line: For supporters of market-based and fiscally conservative solutions to Virginia’s transportation challenges, the 495 Express Lanes are a vital test. Failure would cast a shadow over future private investments in Virginia transportation infrastructure, and the state could return to Business As Usual practice of blindly building highway projects with no accountability for results.

The express-lanes concept is appealing for several reasons. First, the private sector raised most of the money to pay for the expansion of Interstate 495 capacity — money the state did not have — and assumed the financial risk should traffic and revenues prove disappointing. Given the shortfall in ridership and revenues, Virginians should be darn grateful that Transurban, not the commonwealth of Virginia, is taking on that risk. Transurban shareholders, not Virginia taxpayers, will take the hit if the shortfall persists.

Second, the express lanes use price as a rationing mechanism for scarce highway capacity. Those who place the greatest value on their time — to get to a business meeting, say, or to pick up a child from day care — can pay a premium to bypass the congestion and save themselves time. As it turns out, 84% of riders surveyed — yes, Transurban actually surveys its customers; take a hint VDOT — cited predictable travel times as one of their “favorite things” about the lanes. Sixty-eight percent said they use the lanes to “reach a destination on time.”

The logic of paying to avoid congestion is the antithesis of the all-too-common sentiment that roads should be “free” and that the state has an obligation to spend whatever it takes to keep those roads free-flowing — all with the expectation, of course, that “someone else” should pay. It is an axiom of economics that when a good is free, consumers will use far more of it than if they had to pay for it. In the case of roads,  excess demand creates pressure to create excess supply. Express Lanes avoid that trap — if motorists want free-flowing conditions during period of peak traffic, they pay for the privilege. If they are unwilling to pay, it’s a clear indication that they place trivial value on reducing their travel time.

Third, requiring road projects to cover their own costs is a mechanism for weeding out uneconomic projects, whether funded by private or public dollars. One good thing about 495 Express Lanes is that the public gets a regular accounting of traffic volumes, toll prices and revenue. (It would be nice if we got a cash flow analysis, too.) The project creates information about the economic viability of highway projects that we could not obtain otherwise. We get no such information from non-tolled projects, whose costs are buried within Virginia Department of Transportation budgets. We have no way to judge whether public investments in non-tolled projects such as Rt. 288 or the Interstate 295 circumferential highways around Richmond, to pick an example, were wise or foolish.

I regard the 495 Express Lanes as a template for transportation policy across Virginia. I would like to see it succeed financially because I’d like to see companies like Transurban propose more market-based solutions to Interstate congestion, not just in Northern Virginia but for congested stretches of Interstate 81 in western Virginia, Interstate 95 around Richmond and Interstate 64 in Hampton Roads. If the 495 Express Lanes project proves financially disappointing, I fear, the state will default to funding highway projects based upon political considerations with no mechanism to hold the decision-makers accountable. The end result will be construction of projects with weak economic justification and the squandering of billions of public dollars.

Investors Take their Licks from Toll Road Projects

Rt. 288 in Chesterfield County: Untolled, no tolling authority, no transparency, no accountability.

Rt. 288 in Chesterfield County: Untolled, no tolling authority, no transparency, no accountability.

by James A. Bacon

Private investors have pumped about $27 billion into toll-road deals in the United States since 2003, estimates the Wall Street Journal in an article today. Many of them have gone bust. The root problem: Not enough drivers. During the go-go years of the 2000s when traffic counts were soaring and real estate development in resorts and on metropolitan peripheries portended ever-increasing traffic, private investors made a lot of bad bets.

After peaking at three trillion miles in 2007, Vehicle Miles Traveled in the United States embarked upon their steepest and most prolonged decline since World War II. Many of the hoped-for real estate projects stalled or went belly up and the anticipated traffic never materialized. The WSJ points to the example of the Foley Beach Express toll bridge in Alabama. American Roads LLC banked on 10 million drivers in 2012. The actual number: 2.3 million. American Roads filed for bankruptcy protection in June. The article also mentions the Pocahontas Parkway outside Richmond, for which Transurban Ltd. paid the Commonwealth $600 million only to write off its investment several years later.

Some commentators may cite these numbers as evidence that public private transportation partnerships are a bad idea. I draw the opposite conclusion. The system is working exactly the way it should.

State governments and regional authorities have no business bankrolling mega-transportation projects based on highly speculative demand. Taking big risks — rolling the dice — is something that is best left to the private sector. If bets go bad, which many have done, I’d much rather have private investors take the hit than taxpayers.

Nothing against private investors. I wish them well. Profits make the world go round. But multinational infrastructure companies are big boys, and their business models are geared to evaluating and spreading risks. In most cases, they can afford the losses.

Here in Virginia, the McDonnell administration has made a habit of heavily subsidizing speculative projects that the private sector is unwilling or unable to undertake on their own. Thus, the state is putting roughly $1 billion of public dollars into the U.S. 460 “Commonwealth Connector” between Petersburg and Suffolk, which is being built on the hope that massive freight traffic will emanate from the ports of Virginia following the widening of the Panama Canal. Private interests provided a reality check: No one was willing to take the risk that the project would pay its own way. When the state put it its money, it did so with eyes wide open.

While I have serious reservations about that project, which the administration is pushing forward despite significant unresolved environmental issues, at least it is using tolls to recoup a portion of the construction costs, and a tolling authority, the U.S. 460 Funding Corporation, will provide a measure of transparency and accountability by reporting annual ridership figures and financial results. Further, if the numbers fall short of expectations, bond holders will take a hit before taxpayers do. And Virginians will be able to draw the appropriate conclusions about the value of the speculative commitment of capital. McDonnell may be long gone but at least historians will be able to hold his legacy accountable.

Contrast that to the Rt. 288 partial beltway around the southwestern edge of the Richmond region, which also had been billed as an economic development project. The decision was made not to toll the project, therefore there was no occasion to set up an ongoing authority to track ridership and finances. The numbers are all submerged in opaque VDOT statistics and budgets. No one is obligated to break out the numbers for the public; citizens have no way of knowing whether the project lived up to expectations or not. Ten years after it was built, is Rt. 288 a winner or a loser? Nobody knows. Will anyone learn anything from the experience to guide future investments? No, there will be no knowledge gained whatsoever. Continue reading

Testing the Limits

Tony Kinn

Tony Kinn

With 22 projects in the pipeline, Tony Kinn and his team are garnering national recognition for their work on public-private partnerships. And they’re just getting started.

by James A. Bacon

Earlier this month Infrastructure Investor, a magazine covering global transportation investment, recognized Governor Bob McDonnell as its fifth “Public Infrastructure Official of the Year.” It was the first time the publication had bequeathed the honor to an American, and the first time to a public figure who ranked less than a national transportation minister.

‘Having delivered more [public-private partnership] projects than any state in the last five years, Virginia clearly stands out as a leader in utilizing public-private partnerships to improve transportation infrastructure,” stated the magazine. “Virginia currently has 22 public-private partnerships projects in the pipeline, more than all other states combined.”

Tony Kinn, the man whom McDonnell appointed to run the Office of Transportation Public Private Partnerships (OTP3) is doing everything he can to build that project backlog. The Commonwealth has already branched out from traditional toll-backed bridge and highway projects to leasing “air rights” over state highway right-of-way and outsourcing operation of the state’s five regional traffic control centers.

Now the McDonnell administration is preparing to introduce legislation in 2014 that would enable Virginia to devise new funding structures for infrastructure projects and tap new sources of private investment capital not now available in the United States. The use of so-called “availability payments” would apply to situations in which the state has insufficient cash to build a project right now but the economic benefits are tangible and immediate.

In the meantime, expect to see more mega-projects on the scale of the Capital Beltway and Interstate 95 express lanes in Northern Virginia, the Midtown-Downtown Tunnel project in Norfolk and the U.S. 460 Connector between Petersburg and Suffolk. The state has solicited proposals for upgrading Interstate 66 in Northern Virginia and several credible groups are expected to submit ideas. Kinn wants to see if the private sector can come up with options that the Virginia Department of Transportation (VDOT) has not considered. Whoever wins that bid, look for something multimodal and vast in scope. Kinn foresees proposals for I-66 that include tolls, elevated lanes, dedicated Bus Rapid Transit lanes, even reversible lanes that run east toward Washington in the morning and west to the bedroom communities in the evening.

The overhaul of I-66 can’t come too soon. Texas Governor Rick Perry has already begun poaching Maryland for corporate investment, and the OTP3 chief is convinced that it’s just a matter of time before he hits Virginia, too. The Commonwealth must address the high cost of traffic congestion in Northern Virginia, he says. It is an economic-development imperative to get traffic moving.

Appointed in 2011, Kinn has lost no time — OTP3′s nine-man team has churned out public-private partnership deals at an extraordinary rate. A man lavish with praise for others, Kinn credits the skill and dedication of his staff and unstinting support from Governor McDonnell, Virginia Highway Administrator Greg Whirley and his boss, Transportation Secretary Sean Connaughton. Other states have tried to put together P3 deals but not all have succeeded. “You could not get this stuff done without the proactive leadership of Sean Connaughton,” Kinn says. “He is a leader’s leader.” Read more.

McDonnell Solicits Ideas for “Air Rights” Development

Rosslyn Metro station

Rosslyn Metro station

The McDonnell administration is soliciting “innovative ideas” from the private sector to develop air rights at the Rosslyn Metro station in Arlington and the East Falls Church Metro station on Interstate 66. In administrative parlance, this solicitation is a “request for information,” which will gather feedback on the feasibility and types of development that could occur in the two locations. After an evaluation phase, it could be followed by a formal “request for proposal” this fall.

“As governor, one of my primary goals has been to ensure that our transportation agencies utilize every innovative method to better leverage and maximize our existing resources,” said Governor Bob McDonnell in a press release today. “By leasing airspace above certain transportation facilities owned by the Commonwealth, we can better utilize our existing infrastructure to generate additional revenues to fund future transportation improvements, while at the same time attracting new jobs and economic development. ”

Added Secretary of Transportation Sean T. Connaughton: “The potential development of these air rights presents a unique opportunity to attract additional private sector investment to the Commonwealth and better utilize our existing assets to fund future transportation projects.”

The administration pointed to the granting of air rights in Massachusetts, which generated $40 million in FY 2011 through leases, with long-term income projected at $868 million.

McDonnell noted another advantage of air rights that can’t be readily measured by dollars and cents. “By co-locating these potential developments around existing Metro stations and other major transportation facilities, we can reduce congestion and create more livable communities.”

Bacon’s bottom line: McDonnell’s statement represents a dramatic leap for the governor, whose entire administration has been defined by the search for more money to pay for transportation projects with little consideration to the interaction between transportation and land use. Indeed, it seems to represent a conceptual breakthrough — at least as manifested by his public statements. Let’s hope he continues to follow that line of thinking.

The Office of Transportation Public Private Partnerships (OTP3) has been giving serious consideration to selling or leasing air rights since last year. (See “Conjuring Wealth out of Thin Air.”) Two days ago the administration included the air rights project in a list of 20 potential projects that may be suitable to pursue through public-private partnerships. The projects ranged from converting HOV lanes to HOT lanes (tolled express lanes) on Interstate 64 in Hampton Roads to enhancing rest areas with electric charging stations.

The most innovative thinking in Virginia state government today is coming out of the OTP3. The problem is that there is an inherent conflict between the need for confidentiality in OTP3′s negotiations with private-sector players and the need to disclose terms and conditions in a timely enough manner to permit meaningful public input. The McDonnell administration and the Virginia Department of Transportation have made efforts to keep the process transparent but not enough to satisfy citizen and public-interest groups. If this tension can be resolved, we could see some great projects coming out of the OTP3 pipeline.

– JAB

The Back Story on the Transurban “Relocation”

No one's pulling the wool over this guy's eyes!

No one’s pulling the wool over this guy’s eyes!

by James A. Bacon

The governor’s office issued a press release yesterday touting the fact that Transurban, operator of the 495 Express Lanes and 95 Express Lanes, has relocated its U.S. headquarters from New York City to Fairfax County.

The two express lane projects have been highly beneficial to Virginia, said McDonnell, supporting 16,000 jobs, generating $3.5 million in economic impact statewide and bolstering productivity by reducing “billions of dollars lost every year due to traffic congestion.”

Then the press release quoted Jennifer Aument, group general manager-North America: “As we celebrated the opening of the 495 Express Lanes in Fairfax County last fall, Governor [Bob] McDonnell urged us during the ceremony to move our U.S. headquarters to Virginia. We’re pleased to officially call Virginia our home base as we continue to partner with Virginia on innovative transportation solutions that keep Virginians moving.”

What a heart-warming economic development success story! Kudos to Governor McDonnell!

But Toll Road News mentions a few details that the press release omitted (hat tip to Larry Gross): It turns out that Transurban shut down its New York office earlier this month and laid off all six of its senior staff because the top brass in Australia was “most unhappy” with the American business environment and the performance of the operations here, and “ordered a windup of expansion efforts.”

As the Times-Dispatch reported, no one actually moved from New York to Fairfax. Snagging the Transurban U.S. headquarters is something of a hollow victory, to say the least.

Transurban wrote off $181 million on its Pocahontas Parkway investment, and the company conceded earlier this year that traffic and revenue expectations were running behind the first-year projections for the 495 express lanes. From all indications, Transurban has done a fine job of delivering projects on budget and on time, and it has handled the marketing roll-out of its toll roads in a professional manner. The problem isn’t Transurban’s operational competence, it’s that traffic volumes are not materializing as expected when the company embarked upon the toll-road projects in the mid-2000s.

Transurban’s CEO has read the writing on the wall: The economics don’t support continued expansion of toll-financed express lanes in North America. Now the question is whether Virginia’s governor will experience a comparable revelation before he starts spending some $800 million a year in new tax revenue on a grab-bag of projects justified by the desperate need to combat congestion.

I’m not holding my breath. Transurban conducts an arcane exercise called preparing a “profit and loss statement” and it insists that its highway projects meet “Return on Investment” hurdles for new projects. The commonwealth of Virginia does not calculate profits and losses for its transportation projects, and it has no ROI hurdle. State officials have no way of knowing whether they are creating or destroying economic value. Transurban makes mistakes — but at least the big boss back in Melbourne knows when the company screwed up. Virginia is flying blind.