Lessons from the Pocahontas Parkway Fiasco

Pocahontas Parkway where it crosses the James River

by James A. Bacon

Transurban, the majority investor in the Pocahontas Parkway (Route 895) has learned the hard way that human settlement patterns hit a major inflection point during the 2007-2008 recession. Unlike most planners and politicians in Virginia, whose policy prescriptions presume that nothing fundamental has changed, the Australian infrastructure company has taken a $181 million write-off, effectively reducing its equity investment in the project to zero.

Said Transurban CEO Chris Lynch:

The Pocahontas investment was made in 2006 on the expectation of significant housing and other development along the corridor resulting in growing traffic volumes and revenues. That development, due to specific issues in the local area and the continuing difficult macro-economic environment, has not yet manifested and is now expected to take longer to eventuate, resulting in a significantly reduced population of potential toll paying customers.

Based on revised traffic forecasts, Transurban now believes Pocahontas’ future cash flows will be significantly impaired relative to the original forecasts.

The 8.8-mile highway, which creates a southeastern bypass for the Richmond metropolitan region, was promoted as an economic development project and opened in 2002. Toll revenues did not live up to forecasts, however, and the project was close to defeasing on its bonds. Transurban took over in 2006, recapitalized the project and began operating the toll road. Now it, too, has lost its shirt.

The significance of this announcement cannot be over-stated.

Lesson No. 1: Beware transportation projects that are justified on the basis of anticipated economic development. I’m talking to you, Loudoun County supervisors, as you prepare to approve the new financing structure for the Rail-to-Dulles project! I’m talking to you, members of the Commonwealth Transportation Board (CTB), which just approved a subordinated $80 million loan for the U.S. 460 Connector in the expectation of a Panama Canal-sparked port boom! The hoped-for traffic may not materialize.

Lesson No. 2: Beware all transportation projects built to serve the metropolitan periphery. There ain’t no more growth heading out there any time soon! The limited development that is taking place is shifting closer to the urban core. It’s re-development, really, recycling aging neighborhoods and commercial areas into walkable, mixed-use communities for which there is considerable pent-up demand. There is very little demand for conventional development on the metropolitan periphery.

Corollary to Lesson No. 2: Beware all major real estate projects built on the metropolitan periphery. I’m talking to you, CTB members, who just approved an $80 million loan to fund transportation elements of a $2 billion mixed-use mega-project in Loudoun County.

Lesson No. 3: Let the private sector shoulder the risk of speculative transportation projects. I bear Transurban no ill will, but I’m really glad that it’s Transurban taking the hit and not Virginia taxpayers. The road never should have been built in the first place. But if the state is bound and determined to get speculative roads built, then the deals should be structured so that private-sector partners assume the risk and pocket the reward. The Commonwealth of Virginia should not be in the business of making speculative infrastructure deals.

Lesson No. 4: Public-private partnerships create transparency. As a publicly traded company, Transurban must use Generally Accepted Accounting Procedures and report material write-offs like the Pocahontas Parkway. There is no such accounting or accountability for non-tolled state projects, whose accounting is opaque and inaccessible to outsiders.

For purposes of comparison, consider Rt. 288, an untolled section of the Richmond metropolitan beltway built entirely with state dollars — including many tens of millions from the General Fund — just a few years later. Rt. 288, too, was touted for its “economic development” benefits. Has it lived up to expectations in light of the real estate crash? Do traffic counts meet projections? Is there even any way to measure the success or failure of the project? No, there is not. The public is left in total ignorance, decision makers are not held accountable, and critical questions never get asked.

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  1. Richard Avatar

    Lot of lessons here. Who really benefits from new commuter roads in the suburbs?

    Regarding Loudoun County, all 9 of the supervisors are pro-business Republicans who have promised to reduce government restrictions on business – but the real business in Loudoun County is primarily real estate, and each of these supervisors received major financial backing from developers. The issue for these supervisors is where to spend the money, not whether to spend it – new roads (such as the North/South connector that runs through eastern Loudoun, expanded Rte. 7 ) or Metro, or both. If the Supervisors say they are not in favor of Metro in Loudoun, what they’re really saying is that they’d rather have more roads. They’re not choosing “smart development” but which of their real estate constituencies to favor.

    1. DJRippert Avatar


      There are two ways of looking at the Kincora build-out:

      1. There will be demand for the space.
      2. There won’t be demand for the space.

      Kincora is slated to have 4,000,000 sq ft of office space. At 200 sq ft per person, that’s 20,000 people working there.

      If demand is there, that’s 20,000 people working in Loudoun and probably living nearby.

      If demand is not there, that’s a lot of empty office space.

      1. Don, taking your logic one step further:

        If the demand is there, Kincora should have no trouble repaying its loan.

        If the demand is not there, it won’t build office space that it can’t sell. But it still will be saddled with a big ol’ loan without revenue coming in to pay for it. Thus, to get its money back, the Commonwealth of Virginia is depending upon a favorable outcome to a speculative venture, just as it did with the Pocahontas Parkway and seems set to do with the U.S. 460 Connector.

        1. DJRippert Avatar

          I agree with you. I don’t have a problem with government taking risks to encourage economic development. However, the risks should be carefully weighed. My suspicion is that no serious analysis has been undertaken but I would be happy to be told I am wrong about that.

          Ditto for the ports.

  2. Wait til the Loudoun land speculators and developers get their share of the bill for the added roads and non-rail transit that will be needed to support any type of dense development at the two proposed Loudoun rail stations. Fairfax DOT this week said they need to supplement Table 7 in the Comp Plan (transportation requirements) because the amount of potential density in the Comp Plan was more than FC DOT studied in 2009-10. The Tysons Partnership is lobbying against adding anything to Table 7. That’s like the time Congress tried to pass a law changing how radio waves travel.

  3. larryg Avatar

    I thought VDOT did the Pocahontas Parkway and Transurban took it over for reasons I do not understand since it was as clear as a mosquito on your nose that the infrastructure cost way more that it was going to recoup in tolls in the short term. Why would a savvy company like Transurban who analyzes toll projects on dozens of projects worldwide take over a clear loser?

    When VDOT builds a non-toll road, there has always been the question of whether they were responding to future need or if they were creating future need.

    The Toll Road does not let you play that game nearly as well because real investor money is involved not just a CTB slush fund.

    I think one thing we are finding out is that many (not all) toll roads have very long pay back periods – decades… even a generation.

    in terms of who benefits from “commuter” roads, I always thought that was a bit of a non-nonsensical framing of the question. Who else would benefit besides commuters – any more than ANY road could be said to benefit EVERYONE because it supports “commerce”. But that’s exactly how we originally got into slush funds and VDOT’s tortured logic of “need”.

    Let the people who want/need a road – pay for it. Before DJ has a hissy fit, let’s agree that the gas tax everyone pays – goes to maintain and operate all roads so that when the occasional visitor to another area uses a road, he does pay his fair share.

    But since we don’t have any more gas tax money anyhow and gas tax model itself is badly damaged from more efficient cars, let let the people who want/need new roads for their daily trips – pay for those roads – and the rest of us who occasionally use them, we’ll have our EZPasses and pay for our use also.

    I see this a a much better nexus than the gas tax as people get to make that choice everytime they use that road.

    1. DJRippert Avatar

      “Why would a savvy company like Transurban who analyzes toll projects on dozens of projects worldwide take over a clear loser?”.

      Step 1: Relieve politicians in Richmond of their glaring error.
      Step 2: Get right to rape commuters in NoVa with Beltway HOT lanes.
      Step 3: Write off bad “investment” in Richmond.
      Step 4: Restore lost profits from Pocohontas with vastly more profits from NoVa.

  4. larryg Avatar

    An exceptionally cynical perspective but likely correct.

  5. Darrell Avatar

    I’m more inclined to believe that somewhere in the fine print legalese there is a clause that socializes the loss while Transurban pockets a guaranteed profit. The Downtown tunnel project has such a thinly worded clause, with plenty of political ‘Oh that will never happen’ cop outs when someone asks about it.

  6. Peter Galuszka Avatar
    Peter Galuszka

    No major disagreement with most of these points. The basic deal is that highway planners thought eastern Henrico County was the next Short Pump and got caught. The real estate and financial crash then piled on.

    But what makes you think that a Transurban is MORE transparent than a public entity? Sure, a publicly traded company has to meet certain accounting and SEC requirements if it sells stock in this country. But it’s not exactly as if public entities are immune from the FOIA. You can’t use the FOIA with Transurban. I am afraid you might be leaping into the usual private=good; public=bad mind set without thinking it through.

    Do you have any more evidence that public highways are above scrutiny?
    Aren’t you buying in to the PP concept too much?

    1. Valid point about Transurban not being subject to FOIA. But I’m not sure how much good FOIA will do you with, say, Rt. 288. I suppose you could ask VDOT for traffic numbers and compare them to the forecasts (assuming someone even made forecasts). That would be at least one metric.

      Hmmm… come to think of it, maybe that would be a worthwhile project for Bacon’s Rebellion.

  7. Private business must diclose much more details to raise money by selling securities than does government in raising money by imposing taxes.

  8. Peter Galuszka Avatar
    Peter Galuszka

    But TMT,
    Supposedly there is Congress and the accounting agency. We can dismiss that out of hand, but they do have oversight on spending and do have power. Ditto JLARC in Richmond.

  9. DJRippert Avatar

    You own column contradicts your statement:


    There is no “Ditto JLARC in Richmond”.

    As the report you cite in the column correctly points out – Virginia was one of eight states getting an F for transparency.

  10. Peter,
    Standard disclosures by government agencies and entities lack the level of disclosure normally required of private businesses that are large enough to be covered by state and federal securities law. For example, Fairfax County DOT handed out spreadsheets at a January 25, 2012 meeting of the Planning Commission’s Tysons Committee. The spreadsheets showed the cost of transportation infrastructure needed for Tysons through 2030 and 2050. The spreadsheets included inflation, making the total 2050 cost $5.46 billion. The Committee regularly posts all documents presented to the Committee on the County’s website. These spreadsheets have not been posted and are no longer readily available to the public. There is a fear that, if residents of Fairfax County knew the costs would total $5.46 B (not really, as they are actually larger) and that the Supervisors are likely to make local taxpayers pay a significant share of those costs, rather than the landowners, there would be tremendous political pressure to reduce the density at Tysons to cut the costs of infrastructure. There is also a fear of a strong rebellion against Tysons because the public has been led to believe the Silver Line was reducing traffic congestion to the point where major road improvements would not be necessary. Public availability of the spreadsheets would cause major political problems.
    What would happen to a private company that handed out financial spreadsheets in an attempt to raise capital, but then did not make the information publicly available? Try raising capital without everything being in the prospectus.

  11. Darrell Avatar

    Oh I don’t know. Facebook sure made the insiders rich while scalping the retail investors. That seems to be the MO since long before BO took office. The SEC doesn’t even try to hide who they really work for these days.

  12. Darrell, what was not disclosed in the Facebook IPO? The SEC is not responsible for people overestimating the value of a stock so long as the required information is properly disclosed. Moreover, IPOs rarely benefit anyone other than the founding shareowners. No one made individual investors participate in the IPO. Many investors hold back to purchase stock well after the IPO has shaken out.

  13. Peter Galuszka Avatar
    Peter Galuszka

    Groveton i am so embarrassed

  14. Transirban is not and never bras been a transportation company. It is an investment banker, with a track are order of shady deals.

    For them, write offs are part of doing busness, just like many other landlords.

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