Tag Archives: Public private partnerships

I omitted from the original draft of the “Lessons from the Pocahontas Parkway Fiasco” one of the most important lessons learned. Having appended it to  the original post, I reproduce it here for the benefit of those who might otherwise miss it:

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.

— JAB

The recently published “pipeline” of 22 public-private partnership proposals does not represent a formal McDonnell administration transportation agenda. Think of it more as an inventory of ideas worth checking out.

Traffic management center in Northern Va.

by James A. Bacon

Of all the 22 public-private partnership ideas listed in a recently issued McDonnell administration document, the one that gets Tony Kinn the most stoked is a proposal to consolidate Virginia’s five regional traffic operations centers. His aspiration, says Kinn, director of the Office for Transportation Public Private Partnerships (OTP3), is to create the best traffic management system in the United States, if not the world.

Traffic operations centers do the mundane work of tracking and clearing traffic accidents, dispatching aid to stranded motorists and updating signs regarding traffic conditions. According to the Daily Press, the Hampton Roads facility in Hampton Roads, with a network of 276 closed-circuit cameras, handled more than 70,000 incidents last year and assisted 40,000 roadside motorists. And that’s just one of five around the state. The centers are run by contractors operating under four different contracts using different software platforms. The state has received 32 proposals from companies responding to a solicitation to merge them.

One advantage of a unified system, says Kinn, is that if one center goes down, others could take up the slack. Then there are the improvements that no one has thought of yet. Kinn is looking for innovation. A private-sector operator might test a new concept in one center and, if successful, roll it out to the others. Other states have dabbled with privatizing their centers, he says, but Virginia wants to take traffic operations to the next level.

Consolidation of Virginia’s traffic operations centers is one of eight ideas that have reached “candidate” status in the McDonnell administration’s P3 prospect list. The pipeline of possible projects also includes 14 projects in the “conceptual” stage. If a conceptual project survives the first cut, it goes through a more rigorous analysis as a “candidate.” Says Kinn: “All of these projects go through a high-level screening process to make sure the feasibility is there. “Does it fit the needs of the commonwealth? Can we afford it? Does it provide benefits?”

Smart Growth groups have sounded the alarm over several projects in the list, particularly a proposed North-South Corridor in Northern Virginia, as well as projects well past the “candidate” stage, such as the U.S. 460 Connector, a project estimated at $1.5 billion to $2 billion that would link Suffolk and Petersburg with an Interstate-grade highway. The McDonnell administration has “hijacked good transportation planning and prioritization in Virginia,” Stewart Schwartz, executive director of the Coalition for Smarter Growth, has said. The P3 projects are approved outside the normal process for distributing road and highway construction dollars, which gives the administration unprecedented leeway to push its own pet projects.

Kinn responds that the list was devised after extensive consultation with Metropolitan Planning Organizations and local government officials around the state, and that “candidate” projects will be elevated to actively pursued projects only after extensive local consultation. “We’re going to go to the people, and the people will have to come to us, and we’ll have to work together.”

In a Friday interview, Kinn fleshed out the thinking behind some of the projects in the pipeline.

Interstate 95 Corridor improvements. The McDonnell administration has obtained authority from the Federal Highway Administration to place tolls on I-95 south of Fredericksburg for the purpose of raising funds to make improvements to the interstate corridor. The idea here is to examine the potential for leveraging the revenue flow by means of a P3. The administration is not presupposing that a public-private partnership is a good idea, Kinn says. It is simply examining the option. “What else can we bring to the corridor?”

Interstate 64 HOV lane conversions. I-64 in Hampton Roads has under-utilized HOV lanes. Does it make sense to convert them to HOT lanes like those under construction on the Capital Beltway, in which cars are charged a toll for using a congestion-free lane but car poolers still get to use it for free? The pertinent questions, says Kinn: “Is it feasible? Can we afford it?”

Port of Richmond. APM Terminals has submitted an unsolicited bid to take over management of the Port of Virginia terminals in a deal potentially worth $3 billion to $4 billion in payments to the Commonwealth over 48 years. Says Kinn: “The Panama Canal is going to create a huge influx of business. We are sitting on the threshold of an opportunity for major business growth. … APM has submitted a proposal — we want other proposals to come in.”

Hampton Roads crossings improvements. A “third crossing” between Norfolk and the Peninsula has been a top priority of Hampton Roads planners for many years. The McDonnell administration wants to see if these projects are feasible using a P3 model.

NoVa North-South Corridor. The idea of building a north-south corridor linking Interstate 66 and Route 7 in Northern Virginia is “in the very preliminary stage,” says Kinn. The administration wants to see if P3s can be used to “do that in a profitable and efficient way.” Continue reading.

HOT lanes under construction on the 495 Beltway

by James A. Bacon

The McDonnell administration has announced a draft list of projects to be pursued by the Office of Transportation Public-Private Partnerships (OTP3). Eight projects  deemed formal “candidates” for consideration range from corridor improvements along Interstate 95 to the conversion of HOV lanes into HOT lanes in Hampton Roads. Fourteen “conceptual” projects vary from rest area enhancements and cell tower opportunities to Dulles Metro rail station air rights and Wallops Island visitor & support facilities.

“The past two years have seen the McDonnell administration take several proactive steps to meet Virginia’s transportation challenges including streamlining the PPTA implementation guidelines and creation of the OTP3 to focus on the identification, development and delivery of P3 projects across all modes of transportation in Virginia,” said Transportation Secretary Sean Connaughton in a prepared statement. “The OTP3 has been charged with creating an environment that encourages private investment and proactively identifies, assesses and implements the Commonwealth’s priority transportation projects.”

Said OTP3 Director Tony Kinn: “The pipeline is a significant step forward and reinforces why Virginia continues to be viewed as a national leader in public-private partnerships.”

However, the list did not win universal plaudits.

“We believe that the PPTA program has hijacked good transportation planning and prioritization in Virginia,” said Stewart Schwartz, executive director of the Coalition for Smarter Growth in a press release issued yesterday. “A small group of officials including the Secretary of Transportation have too much power to divert tax subsidies to private contractors for a list of projects that they alone develop. Are these mega-projects the right approaches for these corridors?  Are they where we really need transportation investments?”

Smart Growth groups identified the U.S. 460 Connector project and a proposed NOVA North-South Corridor as particularly worrisome, the former because the state is promising $750 million in state and Virginia Port Authority funds and the latter because it would advance a sprawl-inducing outer beltway around the Washington region.

“We are very concerned about the diversion of public dollars to private priorities,” said Chris Miller, President of the Piedmont Environmental Council. “I fear there is a rush to commit the last remaining transportation dollars to projects that fail to address the concerns of the public about the poor state of existing local road networks across the Commonwealth.”

Virginian-Pilot reporter Debbie Messina interviewed Connaughton about converting HOV to HOT lanes and other proposals affecting Hampton Roads.

“We need to try to get more through-put with the existing capacity,” Connaughton said. He added that building more lanes may also be considered. …

It’s no surprise that the list also includes widening I-64 between Newport News and Richmond, and expanding Hampton Roads water crossings, which is offered as a package of projects that would include the Hampton Roads Bridge-Tunnel and the Patriots Crossing/Third Crossing.

“It’s quite clear to us that when you look at the Hampton Roads crossings, you have to look at them as a complete system and develop them either incrementally or with a total approach,” Connaughton said. Tackling them individually provides only marginal improvements, he added.

I don’t have time today for anything more than this quick-and-dirty response but I will follow up with a closer analysis of the list.

An important story that I (and everyone else) missed… The Office of Transportation Public-Private Partnerships (OTP3) announced earlier this month the selection of its team of consultants to help in negotiations with complex P3 deals. (See the press release.)

Developing a bench of outside consultants is critical as the Commonwealth pursues partnerships to build billions of dollars worth of mega-transportation projects. Private infrastructure-investment firms hire top financial, legal and engineering talent to support their deal making, allowing them to run circles around career public-sector employees not trained in deal financing, risk management, traffic modeling and other arcane issues.

The outside expertise won’t come cheap but it should allow Virginia to cut better deals on multi-billion dollar P3 deals, potentially saving hundreds of millions of dollars over the life of the projects, often lasting 50 years or longer, and obviating hidden risks.

The outside teams include:

• Halcrow, a cH2M Hill company (engineering)
• Infrastructure Management Group (project finance)
• KPMG (infrastructure finance)
• Mercator Advisors (capital markets expertise)
• Public Financial Management (financial advisory services)
• Reynolds, Smith and Hill (infrastructure consulting)
• CDM Smith (transportation consulting)

— JAB

Kahneman's "loss aversion" schematic: The value of the loss is greater than the value of a comparable gain.

— James A. Bacon

In his book, “Thinking, Fast and Slow,” psychologist and Nobel Prize winner in economics Daniel Kahneman describes the phenomena of “loss aversion” and “reference points.” These deeply embedded cognitive quirks, which had survival value for hunter-gatherers, pose dilemmas for politicians in complex modern societies who try to change the status quo. The McDonnell administration’s plan to ameliorate traffic congestion in Hampton Roads is a case in point.

Loss aversion is the phenomenon in which people experience the loss of a thing with greater intensity than they experience the gain of a comparable thing. Thus, people will experience more anguish from the loss of $100 than pleasure in the gain of $100. Gains and losses are judged in relation to a reference point, which often is the status quo (but sometimes can be a goal to be achieved in the future). When there is a departure from the status quo, losers feel their pain more intensely than the winners.

These principles are well established through numerous psychological experiments conducted over several decades. There is nothing controversial about them. Now, let’s apply them to the McDonnell administration decision to pay for roughly $2 billion to make improvements to the Midtown Tunnel, Downtown  and Martin Luther King Boulevard in Norfolk and Portsmouth.

The tunnels were paid for originally by tolls, but the tolls came down a couple of decades ago, and the citizens of Hampton Roads have enjoyed the status quo of using them for free. Within half a year, Elizabeth River Crossings, the public-private partner in charge of expanding the tunnel capacity and collecting the tolls, will start charging tolls — more than $3 per day for a two-way trip — before the improvements are even made.

Not surprisingly, this has caused an outcry among Hampton Roads commuters. (I’ll defer for a later discussion the issue of whether or not people had ample warning that the tolls were coming and had sufficient opportunity to let their opinions be known.) The McDonnell administration response is that, yes, people will have to pay tolls, but the project will eliminate the half-hour congestion they experience each time they cross the Elizabeth River, and that by any rational calculation, saving an hour in stop-and-go traffic is well worth $3 or $4 in tolls.  (See Transportation Secretary Sean Connaughton’s remarks in “E-Z as Pie? Not Really?“).

From the perspective of  purely economic calculation, Connaughton’s argument is impeccable. But, as Kahneman points out, humans are not always economically rational creatures. The anticipation of paying that toll causes greater grief for many than the anticipation of spending less time stuck in traffic promises relief. As a result, the citizenry is up in arms and Gov. Bob McDonnell has a big problem on his hands.

Now, let’s compare the public reaction in Norfolk to the reaction in Northern Virginia, where people soon will begin paying HOT lane tolls on the Capital Beltway. Northern Virginians are far less upset. Why? Because the tolls are being used to add new lanes. People who place a premium on their time can pay to use the new lanes and avoid congestion. They have an option they did not have before. Those who don’t wish to pay the money can continue using the same old, congested lanes. While they devoutly may wish that money would fall out of the sky and pay for the new lanes so everyone could use them for free, their situation remains the same. They do not perceive themselves as losing anything. They do not get agitated. McDonnell does not have a problem on his hands.

There is a very important political lesson to be learned here as the McDonnell administration forges ahead with a series of high-profile public-private partnerships and other toll projects. Toll projects like the Interstate 95 HOT lane, which creates new capacity and new options for drivers without imposing tolls on roads that now are used for free, will meet relatively little political resistance. By contrast, the prospect of paying higher tolls on the Dulles Toll Road to pay for the Rail-to-Dulles project is causing an uproar. Predictably, the administration’s proposal to toll I-95 in order to raise money to pay for improvements in the corridor likely will raise a clamor as well.

You can argue economic logic all you want, but people who perceive themselves as losing something will gripe and bellyache. The politically astute path is to select toll projects that pay for themselves by creating new choices for drivers, not imposing tolls where there were none before. To put it more simply, toll projects must be structured as win-win arrangements to gain popular favor.

Ron Utt, a Virginia-based Heritage Foundation scholar, and William G. Reinhardt, publisher of Public Works Financing, have offered a balanced appraisal, from a conservative perspective, of public-private partnerships (P3s) as a solution for America’s transportation woes.

They cite Virginia’s successes with the Capital Beltway HOT lanes and Hampton Roads tunnels in their essay, “Can Public-Private Partnerships Fill the Transportation Funding Gap?”

But Utt and Reinhardt acknowledge that there is stiff public resistance to the tolls required to pay for multibillion-dollar improvements.

Policymakers should recognize that P3s are not the solution to the transportation infrastructure investment gap that threatens to undermine commerce in the United States. There are too few financially viable P3 projects to meet the national need for new highway capacity and to modernize existing roads. No amount of enabling legislation will bring private investors into projects that are not financeable, and very few highways could support themselves on tolls alone. Thus, some combination of gas taxes, sales taxes, fees, and appropriations of state funds is necessary to make a creditworthy public–private partnership. …

P3s have demonstrated the ability to raise substantial sums of money for major infrastructure projects, especially to add needed capacity in congested corridors. Experience has also demonstrated that P3 projects can be complicated and time-consuming to create and that not every transportation project is amenable to this approach. As a consequence, other innovative and traditional finance solutions will be needed to meet current and future infrastructure spending plans.

Those are all worthy points but I would append one more critical question: How do we ensure that P3s are economically justified? As Utt and Reinhardt point out, few projects can support themselves on the basis of toll revenues alone. Most P3s require public subsidies to buy down the price of the tolls. If the demand doesn’t exist to support the improvement, or if private-sector players aren’t willing to assume the risk that toll revenues may not materialize, should the project be built at all? I have yet to see a set of clearly articulated principles by which to judge when a public subsidy of a P3 project is warranted.

— JAB

Norfolk view of the MidTown Tunnel. Photo credit: Virginia Department of Transportation

The $2.1 billion Midtown-Downtown Tunnel project will alleviate some of the worst traffic congestion in Hampton Roads. But the deal raises questions about transparency and accountability in Virginia’s public-private partnership law.

By James A. Bacon

Last week state officials and their private-sector partners took the podium at the Governor’s Transportation Conference in downtown Norfolk to describe the $2.1 billion Midtown-Downtown Tunnel project that had received the final go-ahead only days before. Chris Guthkelch, Elizabeth River Crossings (ERC) project director, described the engineering feat of moving 1.5 million cubic feet of sediment and depositing eleven massive sections of tube-tunnel, barged down from Baltimore, onto the river floor so they aligned perfectly. Dennis Heuer, Hampton Roads district engineer for the Virginia Department of Transportation (VDOT), explained how upgrading the tunnels linking Norfolk and Portsmouth would reduce congestion, improve safety and boost regional productivity by between $174 million to $254 million annually.

But across the river in Portsmouth, details of the massive public-private partnership were not being received very well. Local officials expressed outrage at project financing that would impose tolls of $1.59 for cars during off-peak hours and considerably more for trucks and cars during peak hours. In future years, tolls will escalate at the annual rate of 3.5% or the Consumer Price Index, whichever is higher. Adding insult to injury, ERC will begin collecting tolls in 2012, five years before the project is even complete and the public experiences any benefit from it.

Addressing a crowd outside City Hall, Portsmouth Mayor Kenny Wright vowed to roll back the tolls. He called upon other cities in South Hampton Roads to join the effort. The state might have signed a comprehensive agreement, locking in the arrangement for 58 years, but Wright had only begun to fight. “This thing is far from over,” he said. “It is never too late, even with a signed contract, to negotiate how the tolls will be implemented.”

Public-private partnerships like the Midtown-Downtown Tunnel are incurring closer scrutiny now that the McDonnell administration has announced a series of new projects and promised a “pipeline” of other deals in 2012. As conventional sources of road-construction funds are eroded by inflation and mounting maintenance needs, McDonnell has turned to debt – his administration will borrow $4 billion for road construction – and P3s, as the public-private partnerships are known, to fill the gap. He is counting on the P3s to attract billions of dollars of toll-backed private investment to build projects the state never could afford otherwise.

In early December, the administration announced a series of major deals in quick succession. First, news broke of the $2.1 billion Midtown-Downtown Tunnel agreement. The next day, the governor announced an agreement in principle for a $940 million HOT lanes project on Interstate 95. The day after, word came that the state would invest $124 million to advance the Coalfields Expressway. Meanwhile, the newly formed Office of Transportation Public Private Partnerships (OTP3) is actively working on a deal to upgrade U.S. 460 between Petersburg and Suffolk to Interstate standards, a project that also will require significant state funding. The OTP3 is expected to release a list of other projects under consideration next month.

But even as the McDonnell administration charges ahead, making good on the governor’s campaign promise to “get Virginia moving,” critics are getting more vocal. While the critique of individual projects may differ, depending on details, several common themes are emerging:

• The P3 enabling legislation provides for little accountability. Citizens can’t see critical details of a transaction until the deal is already done, and there is no effective appeal.

• Concessions take the form of long-term agreements – 58 years in the case of the Midtown-Downtown Tunnel, 73 years for the I-95 HOT lanes – that effectively lock in transportation policy for decades to come.

• Some contracts contain clauses that either protect private-sector partners from competing projects or compensate them for lost revenue from future public investments, including mass transit service.

• P3 projects are suitable only for mega-projects that generate revenue from tolls or, possibly, special tax districts. By circumventing the usual process of review and approval by the Commonwealth Transportation Board for the expenditure of state money, projects jump to the head of the line and lay claim to scarce state dollars that could be more effectively spent elsewhere.

Transparency vs. Confidentiality

“I’m furious. The price of the tolls is too high and the governor signed this deal without consulting the mayors of the cities affected. We haven’t had a chance to weigh in and it’s not fair.”
— Portsmouth Mayor Kenny Wright

An inherent difficulty in crafting a public-private partnership law is the need to strike a balance between transparency and public involvement on the one hand and the confidentiality required to negotiate complex transactions on the other. McDonnell administration officials maintain that current law makes reasonable trade-offs.

“Our function is to deliver a completed project to the people of the commonwealth,” says Tony Kinn, the McDonnell administration’s point man on transportation public-private partnerships. “There are a lot of checks and balances.”

Those checks and balances can be seen in the process by which the Midtown-Downtown Tunnel reached final approval. VDOT solicited conceptual proposals in May 2008. When Elizabeth River Crossings submitted a proposal in September, VDOT promptly posted it for public inspection. An Independent Review Panel (IRP) held five meetings, including two public hearings, between February and June 2009 and recommended that the proposal be kicked back to VDOT for more work. During that evaluation phase, says Dwight L. Farmer, director of the Hampton Roads Metropolitan Planning Organization and member of the 12-person panel, the proposals were an “open book.”

In January 2010 VDOT and ERC executed an interim agreement to do more detailed work. Those deliberations were not open to the public. Still, as discussions progressed, VDOT released important details. In May 2010, then-acting VDOT Commissioner Gregory Whirley made a presentation to the Commonwealth Transportation Board that contained a project estimate of $1.9 billion. He also revealed that in the base case tolls would be $2.17 for cars with transponders in off-peak hours, but expressed the goal of buying down the tolls with subsidies to $1.50 per car in off-peak hours. Those numbers proved reasonably close to the figures contained in the final agreement executed a year-and-a-half later. However, many important elements, such as the length of the concession, the size of the state contribution and the toll price escalators had yet to be worked out.

In November 2010, VDOT also delivered a “Hampton Roads legislative briefing.” (Although there is a link on the VDOT website to the presentation, the document is not functioning at the moment. The link displays an error message.)

In January 2011, VDOT and ERC entered into “comprehensive agreement negotiations.” Those talks were highly confidential. A half-year later, in July 2011, however, discussions had progressed to the point where the new P3 czar, Tony Kinn, could describe “major business terms” to the Commonwealth Transportation Board. He provided information about toll rates, the toll escalation provision, the duration of the concession, the size of the state contribution and other key terms and conditions.

Throughout the process, VDOT posted studies, press releases, presentations and other documents on a Midtown-Downtown Tunnel website nested within the VDOT website. Content includes a project timeline,  procurement and environmental schedules, 14 different technical studies, seven press releases, links to Virginian-Pilot articles, a newsletter (with only one edition),  presentations made at four public meetings, minutes of the Independent Review Panel, a document library and answers to FAQs.

“The question is,” says Farmer, the MPO official, “when do you re-engage the public?” There is no easy answer. The process must respect the proprietary nature of the proposals that companies submit to VDOT, he says. Businesses can spend millions of dollars fleshing out their ideas. “You can’t reveal to your competitors what you’re thinking,” he says. Furthermore, negotiations can be protracted and contentious. It would be counter-productive to conduct delicate talks in the public arena.

Those are legitimate points, critics say. But the result is that public input effectively ceases after the Independent Review Panel. Although the CTB was informed of major developments as they played out, the statewide board has no authority to veto the project. Once McDonnell announced the comprehensive agreement, which runs 160 pages plus dozens of exhibits, the transaction was done. If someone has a problem with the contract, there is no appeal. Unless the state is willing to pay significant penalties, there is no opening the deal for renegotiation.

Experience has shown, says Trip Pollard, an attorney with the Southern Environmental Law Center, that the public-private partnership act “shifts power from the CTB and the legislature to VDOT.” The law, he contends, empowers the governor of Virginia to commit to long-term, multibillion-dollar contracts with minimal accountability or oversight. And that should worry people.

Tolls, Competition and Risk

A project like the Midtown-Downtown Tunnel will define Hampton Roads’ transportation future for the next six decades. No one disputes the desperate need for some kind of improvement. Roughly 38,000 vehicles per day pass through the narrow MidTown Tunnel and travelers routinely spend a half hour in bumper-to-bumper traffic during rush hour. Addressing the bottlenecks at the Midtown Tunnel, the Downtown Tunnel and Martin Luther King Boulevard, an inter-related set of projects, is critical, says Kinn. “The benefit of those projects is huge.” The state does not have the money. The public-private partnership gets the job done.

But does Elizabeth River Crossings offer the best long-term solution for the region?

That’s hard to say because the deal locks terms and conditions into place for 58 years. The project addresses real needs today, but no one knows what the state’s transportation needs will be 20 years from now, much less 40 or 60 years from now. No one knows what new technologies, economic trends or land use patterns might transform the transportation landscape. One could argue that a more flexible, more adaptable, arrangement would better serve the region in the future.

But not only will the deal lock in tolls for the next two or three generations, it will lock in escalating tolls. Hampton Roadsters will start out paying $1.59 for cars during off-peak hours. After years of escalating at a minimum rate of 3.5% annually, tolls will climb to $12 by 2075.

One can argue that the tolls aren’t so bad. VDOT estimates conservatively that the tolls will save drivers 15 minutes each way, a total of a half hour for a round trip. Assuming drivers value their time around $16 an hour on average (the figures used by the Texas Transportation Institute in its Urban Mobility Report) that represents a time savings valued at $8. Thus, $3.18 in tolls ($3.68 during rush hour) buys $8 in time savings. “As the economy improves,” says Kinn, “those terms will lessen.”

The contract also limits the state’s ability to make other improvements that might compete for, or siphon off, toll revenue. ERC can file for compensation if VDOT undertakes initiatives such as new bridges that divert traffic from the tunnels.

Kinn stresses that the contract does not contain a non-compete clause. The state can make any improvements it wants. However, he concedes, certain state actions could trigger “compensation events.” If after detailed study it can be shown that the state damaged ERC’s revenue stream, the concessionaire can submit to the state for compensation.

Another sticking point for regional Hampton Roads officials is the fact that the tolls won’t go just to pay for new construction but to address tens of millions of dollars in backlogged maintenance needs the state should have addressed years ago as well as maintenance going forward. In effect, Hampton Roads motorists will be paying for maintenance twice – once through the motor fuels tax, the revenue source that pays for maintenance across the state, and again through tolls.

That’s true, says Kinn, but VDOT is offsetting much of the double-taxation effect by contributing $362 million in state dollars to the project and buying down tolls.

Yet another objection is that the public has no way to judge whether VDOT drove a hard bargain. ERC will contribute $318 million in equity and borrow the rest. It is not known from public documents what profit margins ERC expects to earn. Is it the same rate as, say, a regulated electric utility? Or will ROI run higher on the grounds that the company is taking greater risks that traffic volumes and revenue might not materialize? There is no requirement in the Public Private Partnership Act for letting the public know.

Similar concerns apply to other public-private partnerships around the state.

In a draft white paper he has circulated, Pollard, the SELC attorney, raises other issues. P3s circumvent the environmental review process by advancing a project before alternatives have been evaluated, he says. Requirements for competitive bidding are inadequate, he adds: It’s too easy for the company proposing a project to establish a sole-source arrangement. Also, he says, projects can lead to more driving, sprawl and environmental damage. “Most PPTA projects built or proposed thus far,” he writes, “have been highway construction that will subsidize sprawl and increase motor vehicle dependence, destroying open space and increasing air and water pollution.”

Pollard argues that the Public Private Partnership Act needs to be amended. Projects should be limited to those already contained in state transportation plans, he says, not ideas dreamed up by a private-sector player looking for business. Among other changes he seeks: The public should be allowed to comment before a comprehensive agreement is signed, and the Commonwealth Transportation Board should be required to sign off.

“Experience with PPTA projects and proposals,” writes Pollard, “indicates that the statute is seriously flawed and raises significant doubts about how effectively it serves the public interest.”

=============

This article was made possible by a sponsorship of the Piedmont Environmental Council.

Google map shows location of major improvements in the Midtown Tunnel deal. (Click on map for larger image.)

by James A. Bacon

The McDonnell administration has entered into a public-private partnership agreement with Elizabeth River Crossings to rehabilitate the Midtown and Downtown tunnels between Norfolk and Portsmouth and to extend the Martin Luther King Freeway. Construction on the $2.1 billion project is expected to begin next year.

Of all the mega-projects under development by the McDonnell administration, this arguably offers the most clear-cut economic return on investment. The commonwealth will contribute $362 million to attract $1.7 billion in private investment, which will be repaid by means of higher tolls ranging initially from $1.59 to $1.84 per car for the tunnels and up to $1 for the MLK freeway extension.

That’s a big hit to motorists who now use the facilities for free. But the two tunnels are two of the worst transportation bottlenecks in Hampton Roads. In a prepared statement released this morning, Virginia Highway Commissioner Gregory Whirley estimated that the average round-trip user will save 30 minutes a day when the project is created. The improvements also will increase evacuation capacity in the event of a hurricane.

The agreement has been under negotiation for five months between VDOT, the new Office of Transportation Public-Private Partnerships and ERC, a joint venture between Skanska Infrastructure Development and the Macquarie Group. ERC will finance, build, operate and maintain the facilities for a 58-year concession period, and will assume risk for delivering the project on a performance-based, fixed-price, fixed data contract that protects taxpayers and users from cost overruns and delays.

The agreement calls for a slightly smaller financial contribution from the state, $362 million, than the $395 million envisioned only a few months ago. VDOT attributed the difference to lower-than-projected interest rates, buttressing the McDonnell administration’s argument that it makes sense to borrow borrowing more money now in order to take advantage of lower construction costs and interest rates in the post-recessionary economic environment.

“The Midtown Tunnel project has been at the top of the region’s priorities for many years,” said Transportation Secretary Sean T. Connaughton. “The state’s use of a public-private partnership structure will enable VDOT to attract approximately $1.7 billion in private investment to a project that yields tangible long-term benefits to the region and the state.”

Key components of the project include:

• Doubling the capacity of the Midtown Tunnel by adding a new two-lane tunnel under the Elizabeth River
• Increasing transit service between Portsmouth and Norfolk
• Rehabilitating the existing Midtown Tunnel and both Downtown tunnels
• Extending the Martin Luther King Freeway from London Boulevard to I-264, with an interchange at High Street in Portsmouth
• Modifying the interchange at Brambleton Avenue/Hampton Boulevard in Norfolk

ERC will provide financing through a $422 million TIFIA loan, and approximately $1.3 billion through equity, debt and revenue from operations. The state contribution will be used to buy down the cost of the tolls.

The press release made no note of how rapidly tolls are projected to rise or what oversight the state will exercise over future increases.