Tag Archives: U.S. 460

In a letter dated yesterday, one day before the McDonnell administration announced the closing of the $1.4 billion U.S. 460 upgrade, Virginia’s three Democratic congressmen urged state and local officials to delay implementation of the project  to make sure it is “properly viewed and analyzed.”

The tolled highway between Suffolk and Petersburg would carry only 8,700 vehicles a day when it opens in 2018 but would have substantial impact on “valuable wetlands and other natural resources,” states the letter, signed by Rep. Gerry Connolly, D-11; Bobby Scott, D-3rd; and Jim Moran, D-8th.

VDOT’s underwhelming traffic projections for the project are of particular concern considering the transportation funding challenges we face at both the Federal and State levels. A decision to divert a significant portion of limited transportation funding to build a new Route 460, which has such low traffic congestion that it twice failed to generate private sector interest in constructing and operating the toll road in exchange for revenue, must be examined in a thorough and transparent fashion.

We believe that Virginia’s scarce transportation dollars must be prioritized and directed toward the Commonwealth’s most critical transportation needs, such as financing the third crossing of the Hampton Roads, reducing the proposed excessive tolls at the Midtown and Downtown tunnels in Norfolk, expanding I-64 between Richmond and Newport News, and numerous critical project in Northern Virginia.

The Army Corps of Engineers has not yet granted the permits for the project and “numerous” state legislators and local officials have raised questions about the project, noted Stewart Schwartz, executive director of the Coalition for Smarter Growth. “Now, with the Congressional inquiry, there may be additional and much needed scrutiny of the project, the contracts for which hopefully have contingency clauses allowing the state to cancel or withdraw from the contract.”

Bacon’s bottom line: Do three Democratic congressmen and the Army Corps of Engineers answering to a Democratic Obama administration have enough pull to delay the project? I don’t know. It will be interesting to see how this plays out.

— JAB

U.S. 460 near Disputanta

by James A. Bacon

The state of Virginia is putting $400 million more of its own cash — $1.18 billion in all — into the U.S. 460 Connector under a recently announced deal financing than it would have under a public-private partnership contemplated two years ago, writes Peter Samuel, proprietor of Toll Road News in a recent analysis of the deal.

All for what? To upgrade a stretch of highway between Suffolk and Petersburg that averages traffic flows of between 20,000 and 30,000 vehicles per day at present and, when hoped-for port traffic materializes, will support only $216 million in debt, or 15% of the capital cost..

Samuel concedes that the U.S. 460 project will have some benefits. It will reduce the pressure on highly congested Interstate 64 and the Hampton Roads Bridge-Tunnel, expedite southwest-bound port traffic using Interstate 85, and provide an alternate hurricane evacuation route.

But he notes that “for political reasons,” tolls are being set well below revenue maximizing levels, only $.06 per mile for cars and $.21 per mile for trucks. Tolls, he suggests, could generate less than $10,000 daily when the highway opens in 2018. Politics, he adds, also are evident in a promise to freeze toll rates if revenues exceed the base-case forecast by 10% to 20% over a three year period — “the inverse of business logic.”

Bacon’s bottom line: In 2010, Cintra 460, one of three business consortia bidding on the project, submitted a conceptual proposal that called for $782 million in state subsidies, $400 million less than the McDonnell administration approved this fall. As Samuel rightly characterizes it, the decision to increase the subsidy and buy down toll rates was a political one.

The McDonnell administration has justified the $1.4 billion project mainly on economic development grounds based upon (1) an expectation that Virginia ports will gain significant market share when the Panama Canal widening project is complete, and (2) a belief that Virginia economic developers can parlay the increased freight traffic into major industrial development along the U.S. 460 corridor. Neither assumption has been subjected to rigorous analysis. Moreover, no one appears to have asked, what else could the state do with $1 billion to to stimulate economic development around Virginia? Does the U.S. 460 Connector truly offer the highest risk-adjusted Return on Investment?

Remarkably, there has been zero griping from other regions about the extraordinary beneficence displayed by the McDonnell administration toward Southeast Virginia. Even more extraordinary is the fact that there has been next-to-zero push back against the administration’s planned expenditure of up to $400 billion to buy down tolls way below their revenue-optimizing level.

Virginia is projected to run out of state funding for new road construction by 2017 or 2018, barring action by the General Assembly to identify new sources of revenue. Aside from federal funds, the $3 billion raised by the McDonnell administration by borrowing money is all there is to play with. The administration’s original plan was to leverage those resources through toll-driven public-private partnerships. Now it has chosen to commit one-third of its borrowed funds to a project that will generate only $.20 in private investment per dollar of public investment.

Meanwhile, there are plenty of other places where Virginians would like to see a greater state commitment to buy down tolls. Just ask Northern Virginia riders on the Dulles Toll Road and Norfolk commuters using the Downtown and MidTown Tunnels.

I am baffled how the administration has managed to push this project through with so little controversy. I attribute the silence to a confluence of factors. This economically depressed corridor desperately seeks industrial investment, which means there is no concerted opposition. The General Assembly gave the administration carte blanche to invest the transportation debt, and the Commonwealth Transportation Board is a rubber-stamp organization where no hard questions are asked. Finally, the Suffolk-Petersburg corridor falls outside the coverage areas of the Virginian-Pilot, Daily Press and Times-Dispatch, so the news media are not giving the project the scrutiny it deserves.

Peanut fields in Southeastern Virginia

The Commonwealth Transportation Board (CTB) formally authorized today the Virginia Department of Transportation (VDOT) to set up a 63-20 corporation capable of issuing bonds for construction of the U.S. 460 Connector between Suffolk and Petersburg.

VDOT chose the quasi-state entity as the vehicle for building the interstate-grade highway, estimated to cost about $1.8 billion, because the project was untenable as a public-private partnership. Even with more than $800 million in financial support from the state and the Virginia Port Authority, the project would be hard pressed to generate sufficient revenues in its early stages to both support bond payments and give a private-sector partner a favorable return on its equity investment.

The McDonnell administration justifies the project on economic development grounds, arguing that the highway will stimulate container shipments through Virginia Ports upon the completion of the Panama Canal widening as well as to attract top-tier manufacturing investment to Southeastern Virginia.

Smart Growth advocates question whether the state should take on so much financial exposure based on projected economic growth that may or may not materialize. Virginia has many other pressing transportation priorities that could be funded with all that public money. Even many Hampton Roads government officials say they have higher priority projects locally that would relieve traffic congestion at choke points like the Hampton Roads Bridge Tunnel. However, no organized resistance to the project has emerged, and no one on the CTB spoke against it.

For a detailed discussion of the project finances, see “VDOT Restructures U.S. 460 Financing.

— JAB

James A. Davis, Staunton District representative

The Commonwealth Transportation Board approved Wednesday the granting of an $80 million line of credit for the U.S. 460 Connector project. That sum will be subordinate to any bonds issues to pay for the road, meaning that if toll revenues fail to meet projections, the state funds will be tapped to meet interest payments before bond holders suffer any losses.

The CTB decision increases the state’s potential exposure to the project, a 55-mile highway to be built to interstate standards between Suffolk and Petersburg, to more than $800 million. The McDonnell administration has already committed $500 million, while the Virginia Port Authority has pledged another $250 million.

“The credit enhancement will allow a higher level of debt to be issued at a lower interest cost,” explained John Lawson, chief financial officer of the Virginia Department of Transportation.

Although the board unanimously approved the McDonnell administration proposal for the use of Virginia Transportation Infrastructure Bank funds, several members did express concerns about the potential for state losses. The project, which is estimated to cost roughly $1.8 billion, will incur significant losses in the early years but should increase toll revenue as an anticipated port boom, triggered by a Panama Canal expansion, generates increased freight traffic out of Hampton Roads. The question is, how fast will that projected traffic materialize?

James A. Davis, representative of the Staunton district, said he favors the project but has vivid memories of when he sat on the board of the Dulles Greenway toll road. Backers of that project were enthusiastic about the traffic growth projects but did not anticipate that state-funded improvements to Route 7 in Loudoun County would divert much of the anticipated traffic. The Dulles Greenway went broke. The 460 Connector, Davis noted, also has a competing roadway — the existing U.S. 460.

W. Sheppard Miller, an urban at-large representative from Norfolk, reiterated Davis’ concern. “This is projected to save you 10 minutes [travel time]. There’s a lot of people who won’t use it.” However, Miller said he supported the project in order to support the anticipated freight growth in Virginia’s ports and the manufacturing and logistical investment that it will give rise to.

Transportation Secretary Sean Connaughton defended the 460 Connector as a less expensive alternative to other mega-projects proposed in Hampton Roads. He also described toll revenue projections as “very conservative.”

No one made mention of the recent news from Transurban, operator of the Pocahontas Parkway, which announced that it had written down $138 million of its $548 million investment because its traffic forecasts never materialized. That road opened in late 2002. Transurban took over operation in 2006 under a 99-year lease as part of a public-private partnership with the state.

MSC Roma

by James A. Bacon

In Mid-March the MSC Roma paid a stop at the Port of Virginia. Setting a record for a container ship in Virginia waters, the vessel drew 48 1/2 feet when it departed with export-bound containers. Virginia was the only port on the East Coast with channels deep enough to handle the vessel loaded that heavily.

There are a lot more vessels the size of Roma, says Joe Harris, media relations manager for the ports. “They’re all over the water — they’re just not coming to the East Coast yet.” But they will, he says, and Virginia will see them even before the Panama Canal opens its third, wider canal lock in 2014.

The Virginia Port Authority, railroads, shipping companies, logistics companies and even the state of Virginia are preparing for the boom in East Coast container traffic that will flow from the shift in the shipping industry to ever bigger vessels. The question logically arises, will the Hampton Roads transportation network be able to handle the surge, or will roads and railroads become a bottleneck that constrains growth?

Here at the Bacon’s Rebellion command bunker, we have been investigating the impact of the big-ship revolution on Virginia’s economy from a public policy perspective. How can Virginia business and government maximize the benefits of the big ships? And what public investments make sense? In particular, does the commitment of $500 million in public funds to the U.S. 460 Connector, which would provide a second Interstate-quality highway link between the ports and Interstates 95 and 85, make economic sense?

A spirited debate has taken place in previous blog posts, and Rebellion contributor Peter Galuszka posed a very good question in “Closely Watched Trains.” Norfolk Southern and CSX are investing hundreds of millions of dollars upgrading their rail systems to handle double-stacked trains out of Hampton Roads, he noted. Doesn’t that make the $1.8 billion road project unnecessary?

In answer to that question, here’s what I found: Railroads are most competitive for cargo being shipped 500 miles or more. Norfolk Southern and CSX totally dominate the movement of goods to the Midwest and other points far to the west. But trucks are more competitive for shorter hauls. While the railroads can accommodate some of the growth in container shipments, they cannot handle it all.

The ports move 1.1 million containers yearly. Rail moves about 30% of that traffic, barges 4% and trucks the balance, or about two-thirds. Harris is optimistic that railroads will grab a rising share of a growing market. Norfolk Southern and its public-sector partners have invested $320 million upgrading its Heartland Corridor route to handle double-stacked trains, effectively doubling its capacity to serve Midwest markets from Norfolk. As part of the National Gateway Freight Project, CSX Corp. is spending $165 million on a single improvement, the Virginia Avenue Tunnel in Washington, D.C., to create a double-stacking corridor to Ohio.

Harris is reluctant to forecast container traffic through the Virginia ports because the volume is so dependent upon general economic conditions over which the port has no control. Will the American public start consuming again, he asks. Will retailers continue to boost imports from the Far East? Early in the past decade, the ports showed growth rates of 8% to 9% annually. After taking a big hit during the 2007-2008 recession, the ports now are forecasting a more modest 3% yearly volume growth. That may be conservative. Ship lines and shipping alliances are testing Virginia to see how well the ports handle their big vessels.

Long-term, Harris expects the railroads to increase their inter-modal share to 40% of container traffic, an increase of 10 percentage points. That’s all the more remarkable when you consider that the Virginia ports already move a higher percentage of its containers by rail than any other East Coast port. Rail accounts for only 18% in New York and Savannah.

A rule of thumb is that rail captures the container business to markets more than 500 miles away, while the economics favor trucks for shorter distances, says Quintin Kendall, regional vice president for CSX. That means trucks will predominate in shipments to Mid-Atlantic markets, competing with Baltimore and Philadelphia in the north and Wilmington and Charleston to the south. That business will be highly competitive. As Kendall puts it, Virginia is a “discretionary market” port.

What does this all mean for our analysis of Virginia’s $500 million commitment to the U.S. 460 Connector?

• Railroads are poised to capture a growing share of the inter-model market for Virginia’s ports, from 30% currently to 40% in the indefinite future.
• Railroads are less competitive serving markets less than 500 miles away, where truck traffic will predominate.
• If container traffic increases 3% annually over the next decade, railroads will be able to handle only that portion destined for distant markets. (Barges are a negligible factor.)
• Truck traffic will increase. The rate of increase may depend upon the degree of congestion on Virginia bridges, tunnels and highways and the ability of competing ports to improve their infrastructure.

Thus, to answer Peter’s query, yes, railroads can handle some of the increase in container shipments over the next decade but only a fraction of it. For Virginia to reach its full economic potential, the commonwealth needs to increase its highway capacity serving Hampton Roads. Failing to increase that capacity could mean foregoing some economic growth, though how much is hard to say.

That still leaves open the question of whether the U.S. 460 Connector is economically justified: $1.8 billion, including $500 million in public dollars, is an immense sum. That money could be invested elsewhere or left in the hands of taxpayers. Alternative investments would have economic benefits of their own. Perhaps the most objective way to address this issue is this: Does the U.S. 460 Connector create enough economic value to support the toll structure required to finance its construction? If so, state government should find a way to make it happen. If not, perhaps the economic justification does not exist.

We’ll dig deeper in a follow-up article.