Tag Archives: U.S. 460

Closing the Books on the U.S. 460 Fiasco

us460The state will recover $46 million from US 460 Mobility Partners for work never performed on a 55-mile highway between Petersburg and Suffolk, reports the Virginian-Pilot. Under the settlement negotiated with the McAuliffe administration, US 460 will keep about $210 million of the payments it received under former Governor Bob McDonnell but waive an additional $103 million it could have been owed under the contract.

The settlement allows both sides to avoid a lengthy court fight.  The payments were made under a $1.4 billion contract to build an Interstate-quality highway on U.S. 460 to improve transportation access to Hampton Roads. Construction never commenced because the state could not obtain necessary wetlands permits from the U.S. Corps of Army Engineers. The McAuliffe administration does not dispute that US 460 billed and received the money legally, but argues that the company did not spend all money it received while waiting for the permitting issues to be resolved.

The final tally: US 460 keeps $210 million, and the state eats about $43 million spent on its own work developing the project. The total cost for a road never built: $253 million. Transportation Secretary Aubrey Layne had guesstimated that the bungled project could cost the state $300 million to $400 million.

The settlement closes the books on one of biggest contracting fiascoes in recent Virginia history. Meanwhile, the Virginia Department of Transportation has developed a scaled-down plan to build a 12-mile highway between Suffolk and Windsor and make other improvements to U.S. 460. That plan is expected to cost in the realm of $400 million.

— JAB

Coping with Risk in Highway Megaprojects

Aubrey Layne explains the concept of fiduciary risk.

Aubrey Layne explains the concept of fiduciary risk.

by James A. Bacon

As Transportation Secretary Aubrey Layne has had more time to dig into his job, he has developed an ever more nuanced appreciation of how things went wrong with the U.S. 460 Connector. There was more to the fiasco, which could cost the Commonwealth up to $300 million, than a simple failure to acquire necessary wetlands permits before opening the spending spigots and then discovering that the permits were not forthcoming. The McDonnell administration, he says, negotiated a public-private partnership deal without sufficient appreciation of risks entailed with the project.

“I can’t tell you if they didn’t know they weren’t transferring the risk [to the private-sector partner] and got out-foxed, or whether they didn’t give a damn,” Layne told Bacon’s Rebellion in an interview today. Either way, the Commonwealth was left holding the bag when plans for the 55-mile Interstate-quality highway linking Petersburg and Suffolk had to be redrawn to do less environmental damage. He still hopes to recover some of the $250 million paid to U.S. 460 Mobility Partners (over and above $50 million in sunk design and engineering costs) for pre-construction work, but that outcome is uncertain.

Layne is optimistic that public-private partnership (P3) reforms enacted with bipartisan cooperation this year will prevent recurrences of the U.S. 460 debacle and help the state negotiate better terms in future deals than it got with the Interstate 495 and Interstate 95 express lanes projects in Northern Virginia, which effectively capped bus transit on the highways for the next half century. The McAuliffe administration’s big test will be to do a better job structuring the financing and risk of $2 billion in proposed improvements to Interstate 66 in Northern Virginia.

Before 1995, the Virginia Department of Transportation (VDOT) had one way of building roads. It designed them, put construction out for competitive bids, arranged its own financing, operated them, maintained them and absorbed the risk of anything going wrong. The system got the job done but it had drawbacks. It overlooked potentially creative solutions to engineering and design problems, and it was prone to cost overruns. Then the General Assembly passed legislation enabling public-private partnerships, which provided the Commonwealth a whole new range of options for financing big projects and shifting selected risks to the private sector.

Facing a severe transportation budget crunch, the McDonnell administration made the strategic decision early on to use P3s to leverage scarce public dollars with private capital. From a high-level perspective, this made sense because the Commonwealth had limited capacity to issue road-building bonds without jeopardizing its AAA bond rating and then-Governor Bob McDonnell had not yet pushed through tax increases to bolster transportation funding. Moreover, the administration wanted to take advantage of historically low interest rates on long-term bonds.

But politics and ideology were pushing P3s as well, says Layne. There was a bias that something is always better if the private sector does it. Sometimes the private sector can do things better than VDOT, he says, and sometimes the private sector is better suited to take on certain risks than the state. But not always. The McAuliffe administration’s goal is to find the best fit — the best balance of cost and allocation of risk — on a case by case basis.

The devil is in the details. Layne, a Republican and a McDonnell supporter at the time, backed the governor’s mega-project funding priorities and voted to approve them while serving on the Commonwealth Transportation Board. Indeed, he chaired an independent bonding authority that issued bonds for the U.S. 460 project.  But now that he’s transportation secretary, he realizes the issues were far more complex than presented to him and the CTB board.

The McDonnell administration first proposed a public-private partnership for the U.S. 460 project with the hope that outsiders could devise a more creative way of building and financing the highway than VDOT could come up with. Three consortia took a look and came up with similar conclusions — there would be insufficient toll revenue to finance more than a fraction of the construction cost with bonds. The McDonnell administration then switched gears, deciding to pay for most of the project with state funds but retaining the P3 structure in order to outsource the design and construction of the project to a private-sector partner, which turned out to be U.S. 460 Mobility Partners. The state should have gone back to square one and started over, says Layne, re-defining the project and putting it up for bids instead of using the P3 structure. Instead of getting multiple bidders to compete, the state wound up negotiating with a single player, U.S. 460 Mobility Partners. Even worse, Governor McDonnell had signaled that U.S. 460 was his highest priority, and there was no back-up plan — the administration had to reach a deal with U.S. 460 Mobility Partners or the project would never get built during McDonnell’s term. U.S. 460 Mobility Partners had all the bargaining leverge.

Negotiations took place within the P3 structure, which meant that the deliberations were secret and the contract not released to the public. VDOT briefed the CTB, the state’s transportation oversight board, but failed to disclose the information that critical wetlands permits had not been obtained and might not be obtainable.

The final contract for the U.S. 460 deal was more than 700 pages long. Layne says he can’t imagine than anyone in state government read the whole thing. “I’m confident that no one person understood it all. No one person could tell you what the deal was, what risk was transferred, and what risk the state was taking. And that’s a recipe for disaster” when negotiating with sophisticated business people on the other side of the table.

The dynamic would have played out very differently, says Layne, if the McDonnell administration had set up U.S. 460 as a design-build project.  First, VDOT would have opened up the proposal to competitive bids, very likely getting a lower price even while the private contractor took on the risk of delivering the project on budget and on time. Second, VDOT guidelines would have ensured that all necessary permits were granted before the project commenced and the state started shelling out money.

Layne doesn’t blame U.S. 460 Mobility Partners for negotiating the best deal for itself that it could. It’s not a charity. The company’s managers had a fiduciary responsibility to get the best deal for its shareholders that they could. But elected officials have a fiduciary responsibility to the public. The challenge for the Commonwealth is to bring to bear an equally acute understanding of risks and rewards and to cut the best deal possible for the taxpayers. That’s where the state failed utterly with U.S. 460. If he’d had negotiated such a disastrous real estate sector when he worked in the real estate business, he says, he would have been fired.

Now it’s Layne’s turn. He has to structure a mega-project deal for I-66. Tomorrow, I’ll describe how he is approaching that task.

Injecting the "Public" Back into Public-Private Partnerships

P3sWe haven’t heard much about Public-Private Partnerships since the days of the McDonnell administration, which touted P3s as a tool for leveraging limited state transportation funding into more road and rail construction. The problem with the McDonnell team’s reliance on P3s wasn’t the grand strategy but the execution. The tolling of the Downtown-Midtown Tunnel in Norfolk proved so controversial that the state felt compelled to cough up money to buy down the cost of the tolls. Also, the U.S. 460 Connector turned into a fiasco potentially costing the state $300 million, including $250 million in payments to the concessionaire to do nothing even though the U.S. Army Corps of Engineers had balked at issuing wetland permits for the proposed route.

Trip Pollard, staff attorney with the Southern Environmental Law Center, has been one of the most outspoken critics of Virginia’s P3s. But in a recent post on the Brookings Institution blog, he says he sees them as a potentially valuable tool to supplement public funds with private capital. Rather than throw out the P3 option, he argues, we need to build more transparency, public input and government oversight into the P3 approval process. He offers several concrete suggestions.

Speaking of public engagement with P3s, here are the new  “P3 Public Engagement Guidelines” released by the Office for Virginia Public-Private Partnerships. I’m not sure it’s possible to fully reconcile the private sector’s desire to negotiate in secrecy, not in the press, and the public’s right to know. But the McAuliffe administration is making a yeoman’s effort of trying to thread that needle.

Meanwhile, occasional Bacon’s Rebellion contributor Randy Salzman is still doggedly pursuing P3s. He asks a simple question: How is it possible that so many P3s have proven to be financial disasters, and why, knowing their abominable track record, do private-sector players continue to invest in them? Do the private participants engage in behind-the-curtain financial engineering that makes P3s profitable even if revenues fall short and the projects tank? He has come up with some tantalizing leads but no definitive answers. My suspicion: Follow the TIFIA loans, federally backed loan guarantees that absorb much of the risk inherent in P3 projects. What are the underwriting standards for those loans? How many have gone bad? How much in losses has the federal government sustained?

— JAB

Injecting the “Public” Back into Public-Private Partnerships

P3sWe haven’t heard much about Public-Private Partnerships since the days of the McDonnell administration, which touted P3s as a tool for leveraging limited state transportation funding into more road and rail construction. The problem with the McDonnell team’s reliance on P3s wasn’t the grand strategy but the execution. The tolling of the Downtown-Midtown Tunnel in Norfolk proved so controversial that the state felt compelled to cough up money to buy down the cost of the tolls. Also, the U.S. 460 Connector turned into a fiasco potentially costing the state $300 million, including $250 million in payments to the concessionaire to do nothing even though the U.S. Army Corps of Engineers had balked at issuing wetland permits for the proposed route.

Trip Pollard, staff attorney with the Southern Environmental Law Center, has been one of the most outspoken critics of Virginia’s P3s. But in a recent post on the Brookings Institution blog, he says he sees them as a potentially valuable tool to supplement public funds with private capital. Rather than throw out the P3 option, he argues, we need to build more transparency, public input and government oversight into the P3 approval process. He offers several concrete suggestions.

Speaking of public engagement with P3s, here are the new  “P3 Public Engagement Guidelines” released by the Office for Virginia Public-Private Partnerships. I’m not sure it’s possible to fully reconcile the private sector’s desire to negotiate in secrecy, not in the press, and the public’s right to know. But the McAuliffe administration is making a yeoman’s effort of trying to thread that needle.

Meanwhile, occasional Bacon’s Rebellion contributor Randy Salzman is still doggedly pursuing P3s. He asks a simple question: How is it possible that so many P3s have proven to be financial disasters, and why, knowing their abominable track record, do private-sector players continue to invest in them? Do the private participants engage in behind-the-curtain financial engineering that makes P3s profitable even if revenues fall short and the projects tank? He has come up with some tantalizing leads but no definitive answers. My suspicion: Follow the TIFIA loans, federally backed loan guarantees that absorb much of the risk inherent in P3 projects. What are the underwriting standards for those loans? How many have gone bad? How much in losses has the federal government sustained?

— JAB

More Tidbits on the U.S. 460 Story…

kilpatrick

Charlie Kilpatrick, Virginia Highway Commissioner

Aubrey Layne was acutely aware of the wetlands permitting issues afflicting the U.S. 460 highway project before assuming his position as Secretary of Transportation in January 2014. As chairman of the funding corporation that sold bonds to investors, he had had to disclose in September 2013 that the Virginia Department of Transportation had not yet acquired the necessary permits from the U.S. Army Corps of Engineers to build the 55-mile highway. That’s one reason why, when he took the McAuliffe administration cabinet post, he acted so quickly to shut down the project — he’d been stewing over the matter for four months.

In an article yesterday, the Richmond Times-Dispatch gave a pretty good account of the testimony Layne gave to the House Appropriations Committee. The story made clear that the “secretary’s office” — led by former Transportation Secretary Sean Connaughton — was largely responsible for the decisions that created the debacle, which cost Virginia taxpayers roughly $300 million for work that will never be done or needed. But the T-D overlooked what I considered to be a critical topic: What role, if any, did then-deputy highway commissioner Charlie Kilpatrick play in the debacle?

I was able to glean a few more details in an interview with Layne this afternoon when, among other topics, I pressed him on Kilpatrick’s role in the policy meltdown. In a post this morning, I noted that Kilpatrick had made a presentation about U.S. 460 to the Commonwealth Transportation Board in mid-2013 that omitted the crucial fact that the project had not obtained the needed wetlands permits. Assured that there was no problem, the CTB approved the project financing.

Since then, Kilpatrick has been elevated to Virginia Highway Commissioner.

Layne defended the actions of VDOT personnel during the McDonnell administration. On multiple occasions, he said, VDOT officials went to the “secretary’s office” with issues relating to the wetlands permit. “Every time,” he said, “they got orders to keep on going.”

Without getting into specifics, Layne said that Kilpatrick and VDOT did “balk” at times at what they were told to do. “There was some pushback.” But Connaughton was determined to advance the project, which was the top transportation priority of Governor Bob McDonnell. While Kilpatrick did not inform the CTB of all the relevant facts, Layne said, he was acting as instructed. Layne is confident that Kilpatrick was not driving the decision-making process and does not bear responsibility for one of the biggest managerial screw-ups in Virginia government history.

I belabor this point only because I argued this morning that it is important to ascertain Kilpatrick’s role in the U.S. 460 fiasco. McDonnell’s people are all gone, but Kilpatrick now serves as a senior official of the McAuliffe administration. Unless new information surfaces, I consider Layne’s comments to be the final word on the matter.

— JAB

Inching Closer to Accountability on the U.S. 460 Fiasco

Aubrey Layne speaking to reporters yesterday. Photo credit: Richmond Times-Dispatch

Aubrey Layne speaking to reporters yesterday. Photo credit: Richmond Times-Dispatch

by James A. Bacon

In the year that he’s served as Secretary of Transportation, Aubrey J.  Layne Jr. has been reluctant to blame any individual or group of individuals for the U.S. 460 toll road fiasco. But he abandoned that reticence yesterday during a hearing of the House Appropriations Committee.

“All of the information was funneled through the secretary’s office, and they were clearly in charge,” Layne said, referring to the office of his predecessor Sean Connaughton. The McDonnell administration allowed “political and media” considerations to dominate its decision making when fast-tracking construction of the Interstate highway-quality connector between Petersburg and Suffolk, the Richmond Times-Dispatch quotes Layne as saying.

Layne was himself an avid supporter of the public-private partnership project, which then-Governor Bob McDonnell touted as economic development boon for Virginia ports and industrial development in Southeastern Virginia. But when when Governor Terry McAuliffe appointed him as transportation secretary last year, Layne discovered that the state had spent $300 million on the project without obtaining wetlands permits from the United States Army Corps of Engineers (USACE) and had little prospect of ever getting them. He promptly pulled the plug on the project.

A “Special Review of the U.S. Route 460 Corridor Improvements Project” ordered by Layne laid out in detail how the McDonnell administration and the Virginia Department of Transportation (VDOT) had ample warning of the USACE’s wetlands concerns but pushed them aside to get construction started on the project before McDonnell’s term ended.

But the Special Review studiously ignored the question of who drove the decision-making process and who made the decision to omit critical information in the formal presentation to the CTB when seeking the board’s approval for project financing.  As I observed last April in “Feet-to-the-Fire Time for Layne, Kilpatrick,” there were three key individuals who could plausibly be held responsible — Transportation Secretary Connaughton, then-Virginia Highway Commissioner Greg Whirley, and then-Deputy Commissioner Charlie Kilpatrick, who actually delivered the presentation. Whirley retired and Connaughton moved on to become president of the Virginia Hospital and Healthcare Association, but Kilpatrick was elevated to Virginia Highway Commissioner.

The issue died in the media but members of the General Assembly apparently were in a mood for answers yesterday. Layne pointed to the “secretary’s office” without mentioning Connaughton by name. By omitting any mention of Kilpatrick, the implication is that he holds the highway commissioner blameless. (Connaughton did not respond to media queries.)

I harp on this matter while others ignore it not to flog Connaughton, whose current job has no bearing directly or indirectly on transportation policy, but to clear Kilpatrick. Back when I was actively covering transportation issues, I had the sense that Kilpatrick was widely liked and respected. But as the chief operations guy at VDOT at the time, he was neck deep in the U.S. 460 imbroglio. He was the one who delivered the misleading presentation to the CTB.

Now that Kilpatrick is Numero Uno, the public has the right to know: Did he have a hand in crafting U.S. 460 policy? Was he just carrying out orders? Did he privately express any reservations to Connaughton about fast-tracking the project? My hunch is that Kilpatrick was acting as the loyal trooper following direct orders when he omitted mention of the permitting issue in his CTB presentation. If I were a wagering man, I’d  bet that he did express private concerns to his higher-ups. But don’t know either of those things for a fact. If I were a state legislator, I would want to know for a fact. The full truth needs to come out, if only to clear the cloud over Kilpatrick’s head.

Back to the Drawing Boards on U.S. 460

A new environmental impact study (EIS) concludes that it will cost $1.8 billion — $400 million more than estimated by the McDonnell administration — to rebuild U.S. 460 between Petersburg and Suffolk as a tolled, high-speed expressway. Upgrading the highway probably will have to be centered on the existing corridor, Transportation Secretary Aubrey Layne said yesterday.

The heart of the problem: A 2008 environmental study estimated that the route favored by the McDonnell administration would disturb 200 acres of wetlands. Subsequent investigations pushed that number to 583 acres last year. The latest study pushes the number to 613 acres, according to the Times-Dispatch.

The low-impact alternative along the existing route would  disrupt the least amount of wetlands, make the existing route safer and, at a cost of $974 million, be the least expensive to build. On the other hand, upgrading the existing route  would displace more businesses and provide the least amount of “induced growth.” Also, it would provide the least benefit in terms of travel time saved, potentially making it less valuable as a highway outlet for ports in Norfolk and Portsmouth.

Furthermore, backing out of the deal structure negotiated by the McDonnell administration creates major legal headaches for the McAuliffe administration. It is not known how much of the $300 million paid so far to U.S. Mobility Partners, the design-contractor for the project, can be recouped. Removal of the tolls also could breach the state’s warranty with owners of toll-backed bonds issued to help pay for the project.

Bacon’s bottom line: It amazes me that former Governor Bob McDonnell may go to jail for the misdeeds of Giftgate, which didn’t cost the taxpayers a single dime yet fundamental answers have yet to be answered about who was responsible for the U.S. 460 fiasco, the real scandal of his administration.

A detailed McAuliffe administration review of documents blamed a recklessly aggressive implementation of the U.S. 460 project for ignoring the deal-killer wetlands issue but never addressed who in the McDonnell administration made key decisions along the way. McDonnell? Transportation Secretary Sean Connaughton? Senior executives with the Virginia Department of Transportation? VDOT staff? As much as Layne deserves credit for laying out many of the facts to the public, he seemed satisfied with a conclusion that “mistakes were made.” The Virginia press corps, which crucified McDonnell for accepting gifts from nutraceutical entrepreneur Jonnie Williams and doing nothing in exchange, seems supinely content with that explanation.

The Great U.S. 460 Swamp

swamp

VDOT had loads of warning that wetlands could kill the U.S. 460 project but the state charged ahead with a design-build contract that everyone knew could explode. The state has spent $300 million it may never recoup.

by James A. Bacon

Weeks after the release of the “Special Review of the U.S. Route 460 Corridor Improvements Project,” submitted last month to Transportation Secretary Aubrey Layne, important questions remain about how the Commonwealth could have paid $250 million to US Mobility Partners, the design-build contractor on the $1.4 billion project, and run up another $50 million in expenses without turning a single spade of dirt. The Special Review is a dense and tangled document but one important theme comes through loud and clear: The wetlands controversy that caused the McAuliffe administration to suspend the project this March was bubbling on the front burner when the McDonnell administration put the project into overdrive two years ago. VDOT and the McDonnell transportation team had ample warning of the project’s problems and took no effective action to defuse them.

The Army Corps of Engineers (USACE) had been expressing reservations for years about the route preferred by the Virginia Department of Transportation (VDOT) for the 55-mile highway project, and it reiterated those warnings repeatedly as McDonnell’s transportation team lined up funding for the project and signed a contract with US Mobility Partners to design and build the highway. The inability of VDOT to obtain a USACE wetlands permit on a timely basis prompted the McAuliffe administration to put the project on ice in March until the differences could be resolved.

The question before the public is how did VDOT find itself paying tens of millions of dollars monthly to US Mobility Partners to mobilize for a massive construction project while knowing that the USACE was unlikely to issue the necessary wetlands permits — indeed, without even having submitted the documentation to begin a formal USACE review! Unless we know what went wrong and take appropriate corrective measures, citizens and taxpayers have no assurance that comparable fiascos will not occur again in future mega-projects.

The Special Review, prepared by VDOT and the State Inspector General’s Office, is extremely cautious in drawing conclusions. But the report does provide a wealth of documentation, primarily in the form of emails involving senior VDOT employees and members of the Office of Transportation Public Private Partnership (OTP3) staff who structured the public-private partnership and negotiated the contract. As I noted in a past post, deciphering what transpired is like peeling back the layers of an onion. For now, I am focusing upon the onion peel documenting the wetlands controversy between VDOT and the Army Corps of Engineers.

A long running disagreement. The origins of the wetlands controversy predate the McDonnell administration. VDOT had been noodling the proposed Interstate-grade highway for years, and it had identified a preferred route, one that would swing north of the existing U.S. 460 highway, a four-lane highway with top speeds of 55 miles per hour interrupted by numerous stoplights and plagued with local traffic. VDOT argued that only a limited access highway could provide the mobility that was needed for trucks serving the Virginia ports and in the event of a hurricane evacuation, and that the existing route would be impractical to upgrade. But that was not a decision it could render on its own. VDOT’s appraisal had to pass muster with the USACE, which is tasked with ensuring that any route chosen is the “Least Environmentally Damaging Practical Alternative.” The USACE preferred a route with a lower environmental impact, preferably one grafted onto the existing U.S. 460 with bypasses around the hamlets along the highway.

The Special Review correspondence between VDOT and USACE details the disagreement as far back as 2003. As the authors conclude from their review of the documentation:

The correspondence … indicates an ongoing, decade long, discussion between VDOT and the Corps over whether CBA-1 (VDOT’s preferred alternative) or CBA-2 (the Corps’ preference) was the best location for the 460 project. Although VDOT employees have indicated nothing unusual about this discussion, the length of the ongoing discussion seems unusual to us, particularly since no resolution as to an accepted route was reached.

The discussions were ongoing in 2012 when the McDonnell administration was moving heaven and earth to move the project forward. As various emails cited in the review make clear, Governor McDonnell regarded the Route 460 corridor as his “number 1 transportation priority,” and Transportation Secretary Sean Connaughton rode herd on the VDOT bureaucracy to meet the goal of closing the deal by the end of the year.

By mid-2012, Connaughton and VDOT were closing in on a deal structure for the public-private partnership but had not resolved the environmental issues. In a letter dated May 30, 2013, Kimberly Prisco-Baggett, chief of USACE’s Eastern Virginia regulatory section, wrote the following to VDOT’s environmental project manager:

We are concerned that the project has moved ahead with CBA 1 (VDOT’s preferred route alignment) as the alternative, and that although seven years have passed since we indicated that CBA 2 appears to be the [Least Environmentally Damaging Practical Alternative], neither FHWA (the Federal Highway Administration) nor VDOT has requested to meet with us to discuss this apparent conflict. It is not helpful to the public, or any potential private-public partners, not to address this critical matter before incurring additional expense and delays associated with pursuing a project that may not be permittable.

In an email chain between June 7 and July 13, 2o12, Morteza Farajian, program manager with OTP3 (the public-private partnership office) warned senior VDOT officials that the three construction consortia bidding for the project were getting nervous about the unresolved permitting issue:

I have received serious concerns from our Offerors in regard to the Comments from the Corps of Engineers on the Route 460 reevaluation. They would like to know where we stand today and how we will resolve the issue with the Corps of Engineers and FHWA. They emphasized that this is a huge risk to the procurement and they might stop working on this procurement if the issue between VDOT and COE is not resolved.

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Some Answers, More Questions about the 460 Fiasco

July2014_coverby James A. Bacon

If you’re new to the U.S. 460 Connector controversy and need a primer to bring you up to speed, I’d recommend you read the new Virginia Business cover story written by Paula Squires. She provides an digestible overview of a complex story and advances public understanding with some fresh reporting. In particular, she homes in on a central question for which I have yet to see a clear, concise explanation: How did the Virginia Department of Transportation come to pay $250 million to its public-private partner in the $1.4 billion project, US Mobility Partners, before critical wetlands permits were issued by the Army Corps of Engineers?

Squires does not provide the answer but she gets us closer to the answer. She interviewed Charlie Kilpatrick, the current highway commissioner who was deputy commissioner under the McDonnell administration.

Asked why the state signed off on such a high-risk project, Kilpatrick says, “It was a high risk if a permit was not obtained. When we went to closing [in December 2012], we believed that we had a permittable project.” However, he adds, “It was recognized from the beginning that this was going to be a complex and challenging permitting process.”

As a VDOT veteran, Kilpatrick observes “I don’t know that it has ever happened in Virginia, where a project was not ultimately permitted, after it went through the regulatory steps … I do think we will get a permit.”

According to him, pressure from the McDonnell administration played a role in how the project was handled. “This project was a clear priority of Governor McDonnell,” Kilpatrick says.  “Move it as quickly as possible … Deliver the project. Get it under construction.”

Those were VDOT’s marching orders, he recalls. “VDOT’s job here was to deliver. The project — it complied with the law.”

The state agency began to balk, though, after the original route became questionable last September because of its wetlands impact. The administration wanted to begin right-of-way proceedings and public hearings.

“We said no,” says Kilpatrick. “We’re not going to go out and acquire right of way, because we don’t have a permit … I had the potential of VDOT purchasing land that would not fit with an ultimate road alignment … To have a public hearing on a roadway that may need to shift the alignment, that’s not a prudent thing to do.”

Boiling it down: In December 2012 VDOT believed that it had a “permittable project.” In other words, there were issues but VDOT believed they could be worked out, as they always had been before. What’s still not clear to me is what happened after December 2012 to disabuse VDOT of the notion that the permitting issues could be resolved within an acceptable time frame. Did some new knowledge come to light? Did the Army Corps of Engineers become more assertive in expressing its concerns? I’m sure the answer is out there, possibly buried in the McAuliffe administration’s internal review. It just hasn’t been brought forth clearly in the media.

Public-Private Partnerships and the Allocation of Risk

risks

Oops.

by James A. Bacon

It’s easy to whack Virginia’s public-private partnership law for failing to meet expectations for transparency and public involvement. (I have done so repeatedly.) There are important issues that the legislature needs to deal with, as the controversy over the U.S. 460 Connector has made abundantly clear. But there are virtues to public-private partnerships that have gone unsung. Perhaps the most important of these is the identification and mitigation of project risks.

Virginia’s transportation public-private partnerships (P3s) have an elaborate process for identifying risks, tracking them and allocating them between the public and private partners, according to the “Special Review: US 460 Corridor Improvements Project” ordered by Transportation Secretary Aubrey Layne. The review was tasked to dig into how the state could have paid US Mobility Partners nearly $300 million under terms of the U.S. 460 partnership deal even though U.S. Army Corps of Engineers (USACE) permits had yet to be issued and construction had yet to begin.

As the Special Review explains, there are a wide variety of risks in a transportation mega-project:

  • Development risks: design conflicts, environmental permits, changes in regulation, lack of financing, right-of-way acquisition, politics.
  • Construction risks: cost overruns, design defects, unknown utilities, acts of god.
  • Operation & Maintenance risks: shortfalls in traffic demand, construction of competing facilities, design defects, political and regulatory changes.

“Under traditional public procurement of highway projects, the public agency retains most of the risks, yet these risks are not usually quantified, nor are their costs always included in the project cost estimates,” states the review. “A key component of P3 procurement involves the transfer of certain risks from the public agency procuring the project to the private sector partner. The concept of ‘transferring risks’ requires that the private partner will be responsibile for cost overruns or expenses associated with the occurrence of that risk.”

An example of a risk that might be transferred to the private sector is construction risk — the risk the the project may not be completed on budget or on time. Another is transportation demand risk — the risk that traffic and toll revenues may not materialize as forecast.

In embarking upon a P3 project, Virginia’s Office of Transportation Public Private Partnerships (OTP3) compiles a “risk register,” which systematically identifies all major risks and decides whether the state should retain the risks, mitigate them, insure against them or transfer them to the private sector partner. Risk registers are updated as new risks are spotted and old ones closed out.

In the case of the 460 project, OTP3 maintained a risk register over five years, from 2008 until 2012. The office held four risk workshops in which the project team included OTP3 and VDOT representatives, consultants and key stakeholders. The group discussed different risk items, the probability of occurrence, cost and schedule impacts and appropriate actions to manage each item.

An independent audit found that VDOT had accounted for and/or mitigated the major project risks. The audit team estimated that the present value cost of these risks ranged from $177 million to $295 million (depending upon the methodology used) above the official $1.4 billion project cost.

In the case of environmental approvals, VDOT purchased wetlands credits in the summer of 2012 in anticipation of wetland mitigation discussions with the Corps of Engineers and conducted a study to collect additional data to facilitate those discussions. Based on correspondence with the Corps, the independent auditors concluded that the risk profile for the permitting element of the project had been reduced substantially.

While all material risks were adequately identified, concluded the report to Layne, the authors concluded, “We do not believe key stakeholders, including the public, were aware of the nature and extent of risks associated with the 460 project.” The problem was not the identification of risks but the failure to share that information with the Commonwealth Transportation Board.

Bacon’s bottom line: It’s good to know that the people negotiating P3s understand risk, which is more than we can say about politicians flogging forward traditional VDOT projects. But what does all this have to do with the U.S. 460 fiasco? It narrows the scope of the problem. Whatever went wrong, it wasn’t a failure of the OTP3 office to identify the wetlands risk. I’m still not clear, however, where the project ran off the rails — how the state managed to shell out $300 million before the wetlands issue was resolved. Hopefully, I’ll get more answers as I continue wading through the report.

More Transparency, Please, Asks CTB

transparencyby James A. Bacon

Overlooked in the hoopla over the $1.4 billion Route 460 controversy, it appears that the Commonwealth Transportation Board has made an important bid to inject more transparency into decision-making affecting public-private partnerships (P3s). Desiring a “more robust discussion” of such projects, the board has asked the director of the Office of Transportation Public Private Partnerships (OT3P) to conduct a review of its processes with an eye to increasing transparency and public involvement.

That resolution, passed in the CTB’s May meeting, arose in the wake of revelations that the state had paid nearly $300 million to US Mobility Partners, the private-sector, design-build partner in the proposed 55-mile highway between Petersburg and Suffolk, even though the project had yet to receive all of its environmental permits and construction work had yet to begin. Secretary of Transportation Aubrey Layne suspended work on the project in March until a resolution could be reached with the U.S. Army Corps of Engineers over wetlands issues.

Layne also initiated a study of how such a screw-up could have occurred. That study was completed last month. The Times-Dispatch obtained the report and reported some findings last week. I now have a copy of the document in my hot little hands. There is a wealth of detail in the report that did not appear in the T-D coverage, and I will endeavor to elucidate the findings as I find time.

One objective of the report, which was conducted by the Virginia Department of Transportation’s director of Assurance and Compliance and by the Office of the State Inspector General, was to “identify the individual(s) responsible for excluding members of the Commonwealth Transportation Board from full and free access to information relating to the 460 project.”

That was a reference to the fact that when the CTB was briefed about the major business terms of the U.S. 460 project on October 17, 2012, no one bothered to inform the policy-making board about the ongoing controversy with the Army Corps of Engineers over the wetlands permitting. As the report confirms: “The presentation did not include any information regarding any environmental permitting issues or concerns.” Based on that briefing, the CTB authorized funding for the project.

The review found that the McDonnell administration provided all “statutorily required disclosures.” However, it also determined that CTB members “were not provided effective communication and/or notice of key events impacting the 460 project.”

I am still working my way through the document, but I have found no indication who made the decision to omit mention of the wetlands controversy to the CTB. Just because VDOT officials were not statutorily obligated to mention the controversy, it surely was relevant and germane to any discussion whether or not to fund the project at that point in time. Any reasonable person would surmise that someone in the McDonnell administration had made the political decision to avoid unwanted questions that might delay the project.

Regardless, it is encouraging to see the CTB assert itself in this manner. The board was exceptionally deferential to McDonnell’s transportation secretary, Sean Connaughton. The one CTB member who openly questioned the administration’s decisions, Jim Rich, was asked to resign from the board.

If the public is to trust state government to engage in public-private partnerships without rigging the results to the detriment of taxpayers, the process of negotiating contracts and approving funding needs to be far more transparent than it is now. I am confident that Doug Koelemay, director of the office of public-private partnerships, will take the request to heart. Not only is he a former CTB member himself, he reports directly to Layne — and Layne appears determined to set a more open, less intimidating tone.

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.

McAuliffe Team Continues Transportation House Cleaning

mopping_floorby James A. Bacon

I’ve been out of town attending a conference so I wasn’t able to cover the Commonwealth Transportation Board (CTB) meeting this month. But based on press coverage and press releases, it sounds like Gov. Terry McAuliffe’s transportation team is getting a good handle on things, correcting some of the more grievous policy decisions of the McDonnell administration. Hitting the highlights…

U.S. 460 probe. The state Inspector General’s Office has joined the Virginia Department of Transportation’s internal probe of the $1.4 billion U.S. 460 connector between Petersburg and Suffolk. The IG inquiry, which should be complete by the end of the month, will examine whether the state followed its own procurement rules, the Times-Dispatch reports. Transportation Secretary Aubrey Layne temporarily pulled the plug when it was clear that the U.S. Army Corps of Engineers was not yet prepared to issue permits for construction. The state racked up hundreds of millions of dollars in potential liabilities on the 55-mile route which would disrupt nearly 500 acres of wetlands.

VDOT to invest in secondary road maintenance. The highway agency admitted yesterday that only an estimated 58% of the state’s secondary roads are rated in fair or better condition, down from 65.8% in 2010, reports the Times-Dispatch. “The secondaries are deteriorating,” said chief engineer Garrett W. Moore. In years past, the state had concentrated on bringing up to standard interstates and primary roads, which together carry 78% of the state’s lane-miles of traffic. Now VDOT will focus on secondary roads. “We’re making up for nearly 20 years of not doing a lot,” Layne said.

Bacon’s Rebellion noted those same numbers in a March article about a Smart Growth America (SGA) report on the national scourge of maintenance under-funding. SGA revealed that VDOT had spent more than two-thirds of its funds on new construction between 2009 and 2011 while neglecting maintenance, allowing road conditions generally to deteriorate. SGA based its findings on Federal Highway Administration data but used a different methodology than VDOT to calculate maintenance and construction spending.

Charlottesville Bypass coming to a close. I have received word by means of a Southern Environmental Law Center (SELC) press release that the CTB allocated $230 million to fund an alternative to the proposed Charlottesville Bypass that created such a furor in Central Virginia. The project package will create improvements to the congested U.S. 29 corridor north of the city by extending parallel roads that offer alternatives for local traffic, enhancing traffic light synchronization, creating an overpass at the U.S. 29/Rio Road intersection and making other spot improvements. There is no perfect solution but this is the best one available. It will reduce travel time for everyone using the congestion zone: local travelers as well as freight trucks passing through.

Bull in a china shop. Finally, there is this tidbit tacked onto the end of one of today’s Times-Dispatch articles based on emails the T-D scooped up in a Freedom of Information Act request. The emails shed light on decision-making process in the McDonnell administration to ram through spending on the U.S. 460 project before all necessary permits were obtained.

Then-Secretary of Transportation Sean T. Connaughton urged in an email last July that VDOT get permission to hire an outside lawyer and mount a public campaign to demonstrate why a supplemental environmental impact statement “is not needed or appropriate.”

“The message must be that the (Corps of Engineers) is trying to destroy Southside Virginia along the existing 460 and destroy the environment,” Connaughton said in an email to then-Deputy Transportation Commissioner Charles Kilpatrick on July 13.

The secretary further ordered Kilpatrick to solicit the support of communities and their local and regional officials. “We need their aggressive, negative reaction to the (Corps’) desire to destroy the towns along the existing 460,” he wrote.

Finally, Connaughton sought meetings with U.S. Sens. Mark R. Warner and Timothy M. Kaine, both Democrats, and Rep. J. Randy Forbes, R-4th. “We must have them complaining to (the Corps regional office),” he said. “We need to move … quickly,” he concluded.

Continue reading

U.S. 460: Now We Know What Happened, We Just Don’t Know Who Was Responsible

We know how the 460 project ran off the road. We don't know who was driving.

We know how the 460 project ran off the road. We don’t know who was driving.

by James A. Bacon

Transportation Secretary Aubrey Layne gave yesterday a detailed timeline of the events leading up to the suspension of work on the U.S. 460 Connector after the expenditure of nearly $300 million. “From a taxpayer standpoint, there is no good explanation for why we are here today,” he told the Commonwealth Transportation Board at its May meeting.

I did not attend the meeting, so I provide no first-hand reporting, as I usually have on this issue. I rely here upon the reporting of  Cathy Grimes with the Daily News and a PowerPoint presentation bearing the name of Layne and Virginia Highway Commissioner Charlie Kilpatrick that is posted on the CTB website.

Without naming specific names, Layne placed blame yesterday on “the executive branch” of the McDonnell administration for pushing the project forward despite warnings from the U.S. Army Corps of Engineers that the proposed route for the 55-mile, Interstate-quality highway would impact roughly 500 acres of wetlands.

“The initial decision was driven by the executive branch. … There were extraordinary efforts made to get this contract closed,” Layne said. “This road was being driven hard, and the administration wanted it as soon as possible, so that was a key negotiating tactic, to front-load the contract. … Everything was geared up to get the project done as quickly as possible. … That push to get that road, that’s where we find ourselves with this amount of money out of pocket.”

While Layne’s account provides more detail than was available before, it leaves key questions unanswered, particularly, which individuals were responsible for the chain of events that put taxpayers at risk for losing $300 million. Here are key elements of the timeline:

  • December 2012: The state executes a comprehensive agreement and design-build contract with 460 Mobility Partners for the project, to be financed with $904 million in highway funding, $250 million from the Virginia Port Authority, and $240 million in tax-free bonds.
  • Spring-summer 2013: Design work commences; a wetlands survey is undertaken; the McDonnell administration pushes to advance “work packages” in the contract.
  • September 2013: VDOT submits a preliminary permit application to the Army Corps regarding impact on 486 acres of wetlands. The Army Corps indicates that additional environmental reviews are needed.
  • Fall 2013: The administration presses VDOT to buy right-of-way and “move dirt” in areas not subject to Army Corps approval.
  • Fall 2013: The administration and VDOT bring in an environmental consultant.
  • December 2013: VDOT, the Army Corps and the Federal Highway Administration negotiate a scope of Supplemental Environmental Impact Statement (SEIS)
  • December 2013: SEIS effort reviews alternative routes; while process is underway, federal funds cannot be used for construction in the corridor.
  • January 2014: The newly installed McAuliffe administration directs VDOT to limit work order under contract to work related to the Army Corps permit.
  • February-March 2014: Field work reveals that mitigation efforts on previously selected corridor will yield only minimal reductions to wetland impact.
  • March 2014: The McAuliffe administration stops work on the project.

Bacon’s bottom line: Layne has studiously avoided naming names when attributing blame for the extraordinary measures taken by the McDonnell administration to push through the 460 project. He was, after all, deeply involved in the project himself, both as a Hampton Roads representative to the CTB advocating the project and as head of the U.S. 460 Funding Corporation set up to sell the bonds. There is no indication that he was involved in making the decisions that put $300 million of state funds at risk. My sense is that he’s a decent, honest guy who wasn’t privy to the decisions that were made and that he is as dismayed as anyone by what he discovered when he became transportation secretary. But I’m also guessing that he is walking a tightrope — he does not want to implicate his former friends and allies if he can avoid doing so.

However, it is important to know not only what decisions were made but who made them. Continue reading

Feet-to-the-Fire Time for Layne, Kilpatrick

kilpatrick_layne

Virginia Highway Commissioner Charlie Kilpatrick and Secretary of Transportation Aubrey Layne. Photo credit: Times-Dispatch

by James A. Bacon

Virginia taxpayers will have to suck up a $400 million to $500 million loss if the U.S. 460 upgrade between Petersburg and Suffolk never gets built, Transportation Secretary Aubrey Layne told the House Appropriations Committee yesterday. “If everything totally went south, we … may end up with $500 [million] left of the $1.4 billion set aside,” he said, as quoted by the Times-Dispatch.

The fate of the mega-project is up in the air because the McDonnell administration signed a design-build contract with U.S. 460 Mobility Partners before obtaining all necessary environmental permits. At issue is the fate of an estimated 480 acres of wetlands along the proposed route of the interstate-quality highway. VDOT proposed to purchase wetlands credits from private mitigation banks to offset the wetlands destroyed by the project but the Corps has not yet determined whether that would be deemed an acceptable offset.

The hearings yesterday surfaced a lot of valuable information but missed perhaps the most critical issue of all: Members of the Commonwealth Transportation Board (CTB) approved crucial financing for the project in October 2012 without ever being informed that wetlands mitigation was an issue.

I attended that meeting of the CTB and wrote a lengthy story about it. Board members expressed reservations about borrowing so much money to fund the project and sought assurances that the state’s exposure was limited. As I summed up the discussion at the time: “Administration officials insisted that the deal posed little risk of exposure to the state over its already-significant contribution.

The issue of obtaining wetlands permits, and the possibility that they might derail the project, never came up. View the PowerPoint presentation made by Charlie Kilpatrick, the No. 2 man at the Virginia Department of Transportation at the time, who was since promoted to Virginia Highway Commissioner. Kilpatrick’s presentation summarized the justification for the project and provided a detailed explanation of the business terms. The document never referred to the fact that VDOT had not yet obtained necessary permits from the Corps of Engineers.

When explaining rights and obligations of the various parties under the U.S. 460 Mobility Partners contract, the PowerPoint does allude obliquely to environmental issues:

compensation_events

But Kilpatrick did not brief the CTB on the unresolved issues with the Corps of Engineers. In a slide entitled “Next Steps,” he noted the need to obtain Federal Highway Administration approval for the project but made no mention of the Army Corps of Engineers.

Based on Kilpatrick’s presentation and the discussion that followed, the CTB voted October 17, 2012, to issue up to $425 million in tax-free bonds to help underwrite the cost of constructing the 55-mile highway. Without that approval, the project could not have proceeded.

Two weeks later, on Nov. 1, 2012, Dave Forster with the Virginian-Pilot wrote an article describing how the Army Corps of Engineers was unconvinced that the route selected by VDOT was the best option to minimize wetlands destruction. Forster cited correspondence that made it clear the discussions had been underway “for months” and that VDOT knew that failure to resolve the issues could result in the “project not moving forward”:

Tom Walker, regulatory branch chief for the Corps of Engineers’ Norfolk district, said VDOT has not submitted its permit application and that the agencies have been working for months to reach an agreement. He was scheduled to meet with VDOT staff today in Richmond to continue discussions.

“We haven’t been getting the information that we’ve been asking for,” Walker said Wednesday. “But they’ve been communicating with us somewhat regularly now.”

VDOT released a one-sentence statement through a spokeswoman: “We continue to have an open dialogue with the Corps to discuss these issues.” …

VDOT tried, unsuccessfully, to convince the Corps this summer that its chosen route was the best option and that no further study was needed. In a letter dated July 20, Richard Walton, chief of policy and environment for VDOT, wrote to the Corps’ Norfolk District commander that he was concerned the Corps’ position “overlooks critical information” that “will result in this important project not moving forward.”

Despite Forster’s public revelations of these issues, VDOT charged ahead, signing the contract with U.S. 460 Mobility Partners in late December.

The confluence of events raises the possibility that the McDonnell administration — then-Secretary of Transportation Sean Connaughton, then-Virginia Highway Commissioner Gregory Whirley and then-Deputy Commissioner Kilpatrick — deliberately withheld vital information about the wetlands permits from the CTB. If the action were deliberate, it would not have been the first time. The McDonnell administration also omitted critical information in its presentation to the CTB before a vote to approve funding for the controversial Charlottesville Bypass. In that episode, senior VDOT officials neglected to inform the CTB that VDOT staff had serious reservations about the official cost estimate for that project — concerns that proved to be amply justified. (I documented that deception in a December 2011 article, “In the Dark.”)

Connaughton is no longer Secretary of Transportation. He is slated to assume the presidency of the Virginia Hospital and Healthcare Association. Whirley has retired. But Kilpatrick has assumed the top spot at VDOT. And Layne, one of the most vocal advocates of the U.S. 460 project, now serves as transportation secretary. While he was not in a position of executive authority at the time, Layne was extremely active behind the scenes as chair of the bond-issuing authority and worked closely with the administration to get the project approved.

Governor Terry McAuliffe needs to grill Layne and Kilpatrick: “Were you aware of the Army Corp’s wetlands concerns in October 2012? Did you consider those concerns germane to the CTB decision to authorize the sale of $450 million in state bonds? If so, why did you not note those concerns during the CTB deliberations that month? Do you consider the withholding of vital information from the CTB to be acceptable behavior for officials in the McAuliffe administration?”

The four years of the McDonnell administration were a dark ages for openness and transparency in government — at least in the secretariat of transportation. McAuliffe needs to make it clear to his appointees and to the public at large that he will not tolerate the practices that led to the Charlottesville Bypass and Rt. 460 fiascos.