Juggling Risk on Interstate 66

i66by James A. Bacon

The specter of the botched U.S. 460 project will be hovering over the Commonwealth Transportation Board (CTB) today as Transportation Secretary Aubrey Layne updates the board about project financing for Interstate 66 outside the Washington Capital Beltway, expected to cost in the realm of $2 billion.

Del. Greg Habeeb, R-Salem, set the stage Sunday in an op-ed in the Richmond Times-Dispatch, in which he advocated using a Public Private Partnership (P3) to finance improvements to the critical Northern Virginia transportation corridor as opposed to a “design-build” contract. Design-build was the approach employed in the U.S. 460 connector between Petersburg and Suffolk that resulted in $300 million spent “without a single shovel of dirt being turned.”

Habeeb is asking a vital question: What is the best way to finance and operate mega-transportation projects with costs running into the billions of dollars? Under the old model, the Virginia Department of Transportation (VDOT) designed, built, financed and operated big projects entirely in-house. But with limited transportation funding available and restrictions on how much the state could borrow during the Warner, Kaine and McDonnell administrations, nothing much was getting built. The idea behind P3s was to leverage scarce state funding with private sector funding for tolled projects capable of generating a revenue stream. Toll revenues would pay off the private-sector bonds used to finance the improvements. In effect, P3s amounted to an end run around the tight strictures on how much debt the commonwealth could issue without jeopardizing its AAA credit rating. The debt, and the risk that went along with it, would be shifted to the private sector.

Habeeb likes P3s. Construction of express lanes on Interstate 495 and 95 in Northern Virginia opened on budget and ahead of schedule, he says. Further, he adds, “These two projects produced $5 billion in economic activity but because they were pursued as P3s taxpayers contributed only $492 in state transportation funds.”

By contrast, he writes, the U.S. 460 project was conducted as a design-build, in which design and construction were outsourced to a private-sector consortium but the state planned to finance and operate the highway, “leaving taxpayers on the hook if the project failed” … which it did, costing taxpayers in the neighborhood of $300 million.”

I think there’s a time and place for P3s, but the cost-benefit calculus is more complex than Habeeb acknowledges in a 750-word op-ed. The big bugaboo is risk. There are many types of risk associated with transportation megaprojects, and it isn’t always clear what they are and who is shouldering it. Virginia’s Office of Transportation Public Private Partnerships was tracking risks in the U.S. 460 project — the risk that really mattered, and ended up killing the project, whether or not the U.S. Army Corps of Engineers would not issue required wetlands permits — but the concerns were ignored by the McDonnell administration for political reasons.

Would the U.S. 460 fiasco have been avoided if it had been a P3? Undoubtedly, a private-sector partner would have taken greater precautions to get its permits lined up before expending $300 million of its own money on design and construction-mobilization costs. So, most likely, the fiasco would not have occurred. On the other hand, a P3 partnership was not practicable. Toll revenues would have been so meager that only a small percentage of the project could have been funded privately — that’s why the state decided to take over the financing itself.

It’s easy to forget that there are risks associated with P3s as well. What happens if toll revenues fail to meet forecasts, as has been the case with the 495 Express Lanes? It all depends on how a particular deal is structured. Many projects are backed by federal loan guarantees called TIFIA (Transportation Infrastructure Finance and Innovation Act) loans. Every bond financing provides a buffer for modest revenue shortfalls. But if revenues fall far short, TIFIA eats the loss before non-guaranteed loans do. Instead of state taxpayers taking the hit, federal taxpayers do. If TIFIA bond holders get wiped out, then holders of the private bonds are next in line. In the worst case scenario, as happened with the Pocahontas Parkway outside Richmond, a project can get turned over to the banks.

The commonwealth ordinarily takes great pains to protect itself from financial liabilities in case of P3 failure. But there are other risks. P3 contracts usually last 50 to 100 years, and private-sector partners negotiate terms that protect their revenue stream over the long run. Typically, they insert clauses that restrict the state from building roads, rail lines or other transportation alternatives that might divert paying customers. Unfortunately, there is no way to predict 50 years in advance how future growth and development will alter travel patterns and what options might be necessary.  P3 anti-competitive clauses could limit the ability of the state to provide adequate transportation to some of its citizens far into the future. Those are risks that may not become evident for decades.

I, for one, will be interested to see how Secretary Layne proposes to finance the I-66 improvements. Hopefully, he’s learned the right lessons from the U.S.460 experience.

Update: In an op-ed published May 27, Layne states that the U.S. 460 project was not a design-build project but a P3. “Had the U.S. 460 projet been procured as a design-build rather than a P3, it is highly unlikely that state standards for such projects would have permitted it to go so far forward as it did.”

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  1. larryg Avatar

    When you’re not shadow boxing strawmen social policy -you’re not a bad commentator!

    My take is this. For the public – it’s not about PPTA …it’s just a buzzword they associate with tolls and if no-one has noticed – the public absolutely positively, no questions asked – hate the concept of tolls – and anyone and any buzzword associated with them.

    It’s like you ask a kid – “of the 3 not-so-wonderful choices” which one do you choose?

    and the answer is – “we chose NONE of them you clueless corrupt moron.. ”

    so now I’m wondering – if we should get into the business of referenda on roads where we show the cost – and pose the question about paying:

    1. – it will cost this much in tolls – vote
    2. – it will cost this much in increased gas tax -vote

    what do you think?

    I think this – if there is a write-in – (and there should be) – this will win
    hands down – “stop stealing our money and wasting it on ____ (fill in the blank).

    so no.. no matter what they do about I-66 the torch and pitchfork crowd are going to show up for scalps…

    Oh.. by the way – what happens to a bankrupt toll road??

    A – it closes and no one ever uses it again
    B. – are you an idiot ?

  2. Mike Craft Avatar
    Mike Craft

    I think 460 was a P3.

    1. The original proposal was for a P3. The economics didn’t work out, so the state shifted to a design-build, one variant of a P3, but under the deal the state would operate the road and assume the financial risk.

  3. larryg Avatar

    We need a better definition of “bankrupt” and unfunded liabilities when it comes to toll roads and Detroits…State pension plans and Social Security.

    or maybe we need to re-think of it in terms of auto bailouts and TARP for the banks.

    When the Kodaks and Blockbuster Videos go broke -they DO – disappear from the landscape.

    Let me know when they have a dispersal auction for the Pocahontas Parkway or Detroit…

  4. LifeOnTheFallLine Avatar

    460 was a P3, the awful tunnel project in Hampton Roads is a P3, Pocahontas Parkway/895 is a P3…

    Maybe it’s time to think back inside the box and just raise revenue already…

    1. I agree. Didn’t every Republican blogger in Virginia cry rivers of tears over “McDonnell’s massive transportation tax hike”? What happened to that money? Selectively privatizing roads is just a cover story for “raise taxes for transportation but charge the people paying the increased taxes to drive anyway”. I guess the extra taxes allow the thieves in Richmond to hand out even more company and industry specific tax-breaks to their friends and family. Classic Imperial Clown Show in Richmond.

      As far as failed P3s – keep your eyes on the Beltway HOT lanes. From my vantage point (in the free lanes) I don’t see a whole lot of traffic in the Lexus lanes.

      America’s infrastructure is a wreak. The country needs new roads, bridges, rail lines, airports, etc. We also need to raise the employment rate. Why is this hard? If government wants to charge people to drive then charge everybody to drive. Including the good people of Salem, VA.

      There is also another way to help relieve congestion along Rt 66 – build adequate parking at the Metro stations that dot that highway.

      1. Acbar Avatar

        My own experience is that the HOT lanes are their own worst enemy. They are super-useful on occasion for bypassing main-line congestion, but for through traffic, using them to their northern (Cabin John) or southern (Garrisonville) termini means diving right into a terminal merge that nearly negates the time saving from getting to the merge point. HOT to Garrisonville will never make money without an HOT extension past Stafford to Fredericksburg. Similarly, HOT to Maryland will never make money without an extension providing HOT express access beyond the Cabin John Bridge into Maryland. Why pay extra just to relocate, not eliminate, the bottlenecks?

  5. larryg Avatar

    what happened to the money?

    three things:

    1. – the price of gasoline went down about a buck just when the tax went from per gallon to purchase price.. bad timing – a billion dollars lost.

    2. – decades long back logs of projects not built

    3. – trying to make the money go further with PPTA

    but DonR typifies the average person. they hate tolls but they also hate taxes… but they want their roads.. and if there is not enough money – then someone had to have stolen it and no they have no other suggestions… thank you very much.

    So State Transportation officials have decided that it’s futile to try to meaningfully engage the public because the public is not inclined to agree to more money whether taxes or tolls. They’re just not having it – and VDOT is moving on.

    The GA did give both Hampton and NoVA some control of their own destiny but did not trust them with tunnels and HOT Lanes – not even places like Charlottesville if it involved a road of Statewide significance. VDOT is doing what it thinks has to be done … to keep the roads functional .

    HB2 is the vehicle and the state is committed to do that – and it will put all discretionary money in a competitive pool… it won’t be wonderful but it will have transparency and make it harder for under-the-table politics in project selection in the 6yr plan.

    Further, State officials – after many, many years of denial, finally got religion with regard to trying to build our way out of congestion especially as roads mature and additional land to expand a road is not available without tearing down developed property… that’s going to become a decisive disqualification factor in the priority scheme.

    Unless or until the public coalesces around an alternative that works, VDOT will move the ball themselves.

    1. TBill Avatar

      Why does lower gasoline cost impact tax income? Thankfully GA put a bottom of about 16.2 cents/gal on the state gaso tax so we should not see too much reduction. We should probably increase the gaso tax.

      1. larryg Avatar

        my understanding was that it is 5.2% on the price.. no? it’ still per gallon or what?

        1. TBill Avatar

          5.2% wholesale gaso tax is correct, but for the purpose of the tax calc, wholesale price is not allowed to go below what it was when the GA wrote the law. So Va. gasoline tax cannot go down below the floor. However, I believe the older +2% NoVA/Hampton addon gaso tax for mass transit/VRE does not have a bottom floor, so there is some loss of revenue with lower gaso prices.

    2. Here’s what I want LarryG – http://apnews.myway.com/article/20150520/us–oregon-charging_green_vehicles-eff38a74ea.html

      I want to see you and that numbskull from Salem paying for each and every mile you drive. If I have to pay to drive then so do you.

      Hell, I’d be willing to take the price / mile up to the point that public transit was subsidized to the point of being virtually free.

      So, LarryG – you ready to pay for every mile? I am.

  6. NoVaShenandoah Avatar

    Either get rid of the people, or raise taxes to build the infrastructure. Economic growth will follow, as it always has. The gimmicks, such as P3 etc, are simply a way to avoid facing the reality.

    Case in point: The company that ‘built’ the greenway is in bankruptcy – and they are guaranteed not to lose money in the first place. The I-495 toll lanes are basically empty – but that company is also guaranteed not to lose money.

  7. larryg Avatar

    If the toll lanes are empty then why are folks complaining about congestion?

    the problem is – people won’t deal with the realities.. and VDOT and the politicians just see any attempt to interact with the public – a lost cause because the public is not only not going to choose an option -they’r going to get into a blame game … so the govt basically just walls itself off from the public and proceeds to do what they think should be done.

    toll roads – broke or not – are not going to go away. The I-495 lanes , will, on a worst case basis – just have to wait for population and traffic growth to catch up … it’s just an investment that will take longer to deliver profits – but in the end – they will – and when they can – increase the tolls to catch up ….

    this is what happens when the pubic refuses to engage the realities.

    1. NoVaShenandoah Avatar

      People complain about congestion at the end of the toll lanes, when they merge with normal traffic. In other words, the party must end, and people must still step on the sidewalk.

      As for the normal lanes, traffic is still heavy, but not as heavy as while the toll lanes were being built.

    2. Re-read the Oregon article. Toll roads are most definitely going away. Or, alternately – every mile driven by every vehicle will be tolled. The reality is that the only fair approach is for everybody who drives to pay for the privilege.

      And the toll should include paying for the cost of maintaining the road you are on as well as funding the expansion of that road if the expansion is within a multi-year window.

      No more one region funding another. I hope there’s lots of traffic on the roads near where you live LarryG. You’ll quickly learn that the denominator is more important than the numerator in these kinds of calculations.

    3. “If the toll lanes are empty then why are folks complaining about congestion?”

      When there’s still caviar on the shelf why do people complain about the lack of milk?

  8. I partially agree with Don. A Vehicle-Miles-Traveled tax is the best way to charge drivers for their use of the roads, and it’s technologically feasible. (I’ll be interested to know how Oregon is working out the privacy issues.) But there’s one thing that a flat VMT tax wouldn’t do — it wouldn’t adjust the tax (or charge) for people who drive on the most congested roads at the most congested times. Price is an excellent tool for rationing scarce roadway capacity. If you could incorporate that into the VMT tax, then you’d really have something.

    1. I think that’s very feasible even if it might not be such a hot idea.

      Given that the Oregon GPS devices record not only miles by position they know if you are driving in congestion or not. Speed is distance / time. The devices have internal clocks and they know your position. Therefore, they know your speed. Accurate electronic road maps (with the posted speed limits) are widely available. If you are traveling at 30 mph on a highway with a 55 mph limit you are in congestion.

      The reason that it might not be such a hot idea is two fold:

      1. I struggle to blame drivers for our inept gubmint’s inability to build roads where they are needed.
      2. Many roads have variable levels of congestion. How would a driver be able to decide what route to take when the don’t know the congestion level in advance?

      My plan would be to declare some roads in need of expansion and some roads not in need of expansion. Drivers on roads in need of expansion would be charged not only a charge for the maintenance of THAT road but another charge for the expansion fund for THAT road. The key is that the toll would be the same whether the road was momentarily congested or not.

      It’s one thing to charge a variable rate when there is a free option (e.g. Beltway HOT lanes vs Beltway). The rate doesn’t change once the driver makes his or her selection. On a road that might or might not be congested (without a cheaper or free alternate) variable tolling would just cause endless confusion and frustration.

    2. NoVaShenandoah Avatar

      The tax on gas is also a way to pay as I drive. And I don’t need to report to anyone how much I drive, nor do I give anyone permission to track how much I drive.

  9. larryg Avatar

    Jim’s got it right and Don’s got it wrong. How about blaming the inept/corrupt/use your favorite pejorative – airlines for not knowing when and where people are going to “congest”.

    just set the price for supply and demand and let people make the choices that best meet their needs.

    what happened to that concept?

    but did I miss this in this post:

    ” Virginia may rely less on private financing as it embarks on its next massive transportation project: adding express toll lanes on Interstate 66 outside the Capital Beltway, Secretary of Transportation Aubrey Layne said Tuesday.
    Layne told the Commonwealth Transportation Board that Virginia might save as much as $1 billion on the $2.1 billion project over the next 40 years by keeping the project under state control rather than doing a public-private partnership.

    The savings would come by reducing some of the upfront costs and by capturing toll revenue that would otherwise be lost if the state entered a public-private partnership.”


    so Don… do you really think toll roads are going away?

    and bonus- if we are going to have toll roads – is it better for Govment to operate them instead of those nasty for-profit guys?

    The reason toll roads are going to prevail over VMT is simple. The can manage congestion in real-time.

    end of story. let the crying begin…

    1. Larry the Luddite:

      Yes, tolls are going away. Or, every mile will be tolled. Pick your poison. It’s been done in Singapore. It’s being tried in Oregon. It’s the ONLY fair way of paying for transportation.

      You drive, you pay. Every mile by the cost of the underlying road you are on.

      Get ready LarryG. Your days of driving cheap on the backs of others are coming to an end. You can run but you can’t hide. GPS is everywhere.

      VMT can manage congestion in real time too. It’s done every day of the week in Singapore. In Singapore, the device in your car has a display that tells you what you are paying. I explained some of this to Jim. The problem is that variable pricing is inherently unfair. People don’t know the price of transit when they pick the route they will take. I support different costs for different roads. Just not random changes in prices.

      It’s great to hear your arguments. Your “others should pay to drive but I should not” attitude is quite evident. Just another guy trying to heist money out of the pockets of others I guess. Sad really.

      You should pay your fair share to drive LarryG. No more pickpocketing those of us who live in urban locales. The technology exists for fair allocations of costs by mile driven by road costs. But that would mean everybody pays their fair share. Something people like you just can’t stand to consider.

  10. larryg Avatar

    They do real-time VMT in Singapore? Please do a blog post Don. seriously. I don’t see how you do that with only an in-car GPS unit. when/howdoes the data in the GPS get transmitted to the folks that bill you?

    we’re not going to do VMT here as long as people don’t want a govt-controlled device in their car – can you say NSA?

    I have been a toll advocate by the way – I WANT to pay by toll and I’d be fine paying every mile using electronic tolling/license plate readers but I suspect it’s going to be major arteries. I’ve had a transponder in my vehicle for nearly a decade…so I do intend to pay.. my fair share.

    Don – don’t you essentially pay variable demand pricing when you fly ?

    how about when you buy gasoline or “market-priced” products at the store?

    people who use the most scarce resources at the highest demand periods are essentially competing for that scarce resource and the way it get managed is by supply and demand pricing.

    I think it’s truly sad when the resident liberal in BR has to lecture the resident business guy… geeze… guy

  11. NoVaShenandoah Avatar

    Let’s see:

    1. Raise the tax on gasoline. I can buy fuel efficient means of transportation to lower the impact;

    2. Charge a toll on popular roads (?). Will they leave any without tolls? Will they eliminate the tax on gasoline?

    3. Have someone track where and when (and why?) I drive.

    Sorry folks: I pick #1 with #2 a very distant second. Anyone who advocates #3 needs to explain why the government can/should track everyone’s movements. In the process please explain why we need to recreate the KGB if we defeated the Soviet Union.

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