Tag Archives: Public private partnerships

Building the New Midtown Tunnel


Graphic credit: Virginia Business. Click for more legible image.

Building the new Midtown Tunnel between Norfolk and Portsmouth is one of the more spectacular engineering feats ever attempted in Virginia. Elizabeth River Crossings (ERC), the private-sector partner in charge of the $1.5 billion construction project, has to dredge a 95-foot-deep trench in the Elizabeth River, float 11 massive concrete tubes the length of football fields down from Sparrows Point Md., submerge them, and then place them together within one-inch tolerances in order to snap them together.

The tunnel, only the second in the nation to be constructed in this manner, is engineered to withstand the weight of a Nimitz-class aircraft carrier. Virginia Business has the story.


Highway Robbery

express_lane_camerasby James A. Bacon

I’ve always considered Transurban, operator of the express lanes on the Interstate 495 and Interstate 95, to be a pretty savvy outfit. The company may have over-estimated traffic demand for its express lanes when deciding back in the mid-2000s to build the Northern Virginia toll operations, but corporate executives seemed highly professional in the way they designed, constructed, promoted and managed the business.

At least, they did until now…  Fox News reports that Transurban has filed 26,000 cases against I-495 express lane users for non-payment. It’s one thing to dun people for $10, $20 or even $100. But Transurban is slapping some drivers with thousands of dollars in fees and fines for a single offense. Reports Fox News:

Luis Viera used to take the Express Lanes from Clinton, Md., to his job in Tysons Corner. His E-ZPass was automatically deducting tolls from his credit card.

Then one day, Luis was slapped with a summons to Fairfax County Court. Transurban was suing him for $4,500 in fees and fines for exactly $7.70 in missed tolls.

Luis went to court the first time without a lawyer. “I was nervous,” Luis said. “I didn’t get any sleep. I wasn’t eating. It was a bad week leading up to it.”

In the courtroom, a woman who said she represented Transurban approached Luis before the judge entered. She said the company would settle for $2,488.

“How does $10 turn into $2,000?”

Darn good question. How does $10 turn into $2,000? Transurban responded as follows: “Although less than 0.1% of all 495 Express Lane trips end up in court, we continue to do all we can to minimize any traveler going to court, this is why we have the First-Time Forgiveness program which has helped nearly 800 travelers. Additionally, we do not profit from the fines or penalties. As defined by Virginia law, any and all revenue collected from toll fines and penalties are cost recovery only to fund the enforcement program and we currently we do not even recover costs.”

Ah, hah! The fines cover the expense of the entire enforcement program — including lawyers, license plate-reading cameras, and IT systems to track the scofflaws. I can’t blame Transurban for wanting to cover its costs but the company has to weigh the business consequences: Charging $2,500 or more will piss off a lot of drivers — I mean really piss them off. Luis Viera says he won’t ever use the express lanes again. Who can blame him? How many other people, hearing of Viera’s experience, will refuse to ever use the express lanes? Who wants to run the risk of getting clobbered with a $2,500 fine?

Bacon’s bottom line: Conceptually, using the price mechanism to ration scarce highway capacity is one of the most cost-effective tools we have to manage traffic congestion. But the devil is in the details. Economic models that model supply and demand equations don’t ordinarily consider such grungy facts as enforcement. People make mistakes. People cheat. Toll road operators must have a mechanism for enforcing payment. If those enforcement mechanisms lead to manifestly unjust results, as appears to be happening in Fairfax County, people will avoid the express lanes and political support will wither.

Virginia authorities need to revisit the enforcement provisions in the Transurban public-private partnership contract and, ideally, induce Transurban into re-negotiating the offending clauses. It won’t be easy because traffic volumes and revenues are falling short of projections, and Transurban may not be receptive to changes that might raise its cost structure. On the other hand, the company does have a 70-year contract and it needs to consider the long-term implications of alienating its customer base. If a huge fan of the express lane concept like myself finds $2,500 fines for $10 offenses to be outrageous and indefensible, I feel like I’m pretty safe in saying that Transurban stands all alone on this one.

(Hat tip: Rob Whitfield)

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. Continue reading

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.


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


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