VDOT Restructures U.S. 460 Financing — Public Private Partnership Is Out

by James A. Bacon

Having concluded that the U.S. 460 Connector cannot be financed under a public-private partnership (P3) arrangement, the Virginia Department of Transportation (VDOT) has opted to pursue the $1.5 billion-to-$2 billion project as “63-20” nonprofit corporation.

U.S. 460, which would provide Hampton Roads an interstate-quality alternative to Interstate 64, would have insufficient traffic volume in the early years to cover the bond payments. “The risk is very high,” Dusty Holcombe, deputy director of the Office for Transportation P3s, told the Commonwealth Transportation Board at its May meeting in Bristol last week. To compensate for the risk, the private-sector partner would require a very high return on its equity investment.

Setting up a non-profit entity will allow the state to finance most of the project with debt, which is cheaper than equity, Holcombe explained. Under the new “design-build-finance” model, the private-sector partner still would design and build the highway, and would be expected to bring $400 million to $600 million in private financing to the table. The Virginia Port Authority would contribute $250 million over 40 years, while the state would issue GARVEE bonds (backed by future federal transportation funding) for the balance of the project. Additionally, the state would commit $80 million from the Virginia Transportation Infrastructure Bank as a reserve to draw upon in case toll revenues fell short.

As a bonus, the financing under the new structure would extend for only 40 years, in contrast to the 90-year length of the concession agreement under the original financing plan. Moreover, the state would maintain control over toll charges – a particularly sensitive issue in the financing of the Midtown-Downtown Tunnel and the use of Dulles Toll Road revenues to pay for the Rail-to-Dulles heavy rail project.

The McDonnell administration is determined to push the U.S. 460 project forward despite the fact that Hampton Roads business and civic leaders assign a higher priority to other projects. Transportation Secretary Sean Connaughton justifies the Connector as a much cheaper alternative to widening Interstate 64. Also, the project will help Virginia ports capture a bigger share of container shipping growth when the Panama Canal expansion opens in 2014, provide an alternate hurricane evacuation route and stimulate manufacturing and warehouse investment in the southeastern quadrant of the state.

Three business alliances submitted proposals for the U.S. 460 Connector. All three stressed the problem created by low traffic volumes in the early years of the project. Even though traffic and toll revenues are expected to increase as the Port of Virginia continues to grow its container business, the project will require massive state support. Cintra Infrastructuras S.A. said the state would need to contribute $783 million, while Multimodal Solutions put the figure at $500 million plus unspecified operating subsidies to get the project through the low-traffic phase. (The 460 Partners proposal called for a modest up-front state contribution but would tap state tax revenues created by economic growth attributed to the project.)

The new financing structure may be cheaper, but the state still will bear significant risk. Under the design-build part of the agreement, the winning bidder will take on the risk associated with completing the construction work on budget and on time. The state and private-sector partner will share the risk that Right of Way acquisition costs might exceed estimates. But the biggest risk to the taxpayer is that toll revenues will fall short. In a P3 deal, the concessionaire’s equity investment would take the first hit. But if this project is all debt, bond payments will be bigger and there will be no buffer between toll shortfalls and the taxpayer’s pocketbook.

At risk is the $80 million reserve funded by the state infrastructure bank, over and above the $750 million contributed by VPA and the state. On the other hand, if the project costs less and toll revenues exceed the forecast, the state may need less than $750 million and never tap the reserve.

How much will traffic have to grow to make the numbers work? Holcombe highway traffic should run around 8,000 vehicles per day when the project opens in 2018, and is projected to increase to 13,000 to 15,000 per day by 2028 as port traffic increases.

In an interview earlier today, I asked Holcombe if he had considered a scenario of delaying the project until the projected traffic volumes were closer to materializing, thus reducing the risk. His response:

“This is the governor’s number one priority. He has asked us to find ways to move this project forward. We believe that if we build this road now, there will be [industrial] growth along the corridor. … We haven’t contemplated deferring this because we think this is a good project now. We think the structure we put together will cross [the financial] hurdles and get us 55 miles of four-lane roads and get ready for the expansion of the ports.”

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  1. larryg Avatar

    re: Garvee – this is future money for the state as a whole.

    by committing this money to the 460 project, they’re pretty much saying that there will be no money for other future statewide projects.

    .. and that is… if the Feds do something about the Federal transportation trust fund which is basically broke …the Garvee money is problematic.

    I predict that NoVa will be apoplectic if this comes to be..and really for that matter.. infrastructure in Hampton.

    Looks to me that we’re set on a course of tolls to finance NoVa and HR future infrastructure as well as 460.

    I sure hope the folks in the finance dept inside of VDOT know what the heck they are doing and it’s a more enlightened crew than the ones who did the Pocahontas Parkway…

    backing up to look at things overall…. most people don’t realize it yet – but the state has given up on the gas tax and is pretty much going to use tolls and debt financing to build new roads.

    In some respects that might be good if VDOT is using sound financial analysis…. and the fact that they are saying words like “high risk” at least indicates they know there is significant risk.

  2. Why not build 460 primarily as a truck tollway?

  3. bosun Avatar

    I rarely use I-64 to go to the Tidewater area; soon-to-be-old 460 is a much more relaxing trip and generally takes about the same travel time given backups at the tunnels.
    I guess to help overcome the low revenue period on the new toll road, VDOT will have to install more traffic lights on the old highway and lower the speed limit on the entire length to 45 mph. May have to do the same with US 58. That would be one incentive needed to solve the revenue problem. Bosun

  4. larryg Avatar

    for the same reason that tolls on I-81 got whacked.. the trucking industry.

    You can see the geographic logic behind 460… since it is SOUTH of the James.

    I’m not buying that building 460 from scratch is cheaper than retro-fitting I-64 though.

    VDOT has made an internal calculation that all things considered (that we never were told) they think a new 460 is better than an expanded I-64.

    And folks.. we are going to RUE the day that we heard the phrase “buy down tolls”…. MARK MY WORDS!

  5. larryg Avatar

    re: ” I rarely use I-64 to go to the Tidewater area”

    that two-lane road is an atrocity! you have two choices. Get in the right lane and get trapped there for long periods of time or pull out in front of someone.

    or get in the left lane usually in a long ‘train” of cars and hope no one will try to pass in the right lane and then force their way in front of you.

    It’s a stressful road and like Bosun.. 460 is far more relaxing (assuming you steer clear of Officer ‘friendly’ lying in wait .

    I-64 is a no-brainer for a 3rd or 4th lane – tolled …. congestion tolled….

    you could …somewhere east of Richmond run a southwestern connector back to I-95 south.

  6. larryg Avatar

    US 58 would have been a better new road route west to I-95… if the goal of the 460 is a connect to I-95 south. 460 goes northeast and if I-95 south is the target you need a southwesterly directly and US 58 does that.

    What grumps me about VDOT is that their public participation process really is insulting to the public. And bringing PPP and variants just submerges the issues even more.

    Basically the 460 project is a secret deal between VDOT and the Gov and the public is pretty much clueless about it.. and that’s where opposition often comes from.

  7. Peter Galuszka Avatar
    Peter Galuszka


  8. Darrell Avatar

    The goal isn’t 95, it’s 85.

    Then there is the Dominion Blvd. toll project , which will give near interstate quality roads from Norfolk to Raleigh. And 95 south.

  9. larryg Avatar

    well.. 58 connects to I-85 also….

    It is CLEAR that this proposal is primarily for economic development as opposed to congestion reduction (even though I-64 is a mess most beach weekends).

    I would think that most folks and counties in the Rt 58 corridor would WELCOME a new interstate quality road that would attract more companies and jobs but the basic premise here in my mind deserve a more thorough public involvement since the proposal is going to affect all of Virginia in terms of future Federal highway money and debt – especially since it is possible according to VDOT that Va taxpayers could conceivably be on the hook if projections turn out less wonderful than hoped.

    The idea of leveraging Panamax into developing new commerce initiatives in an area of Virginia that could enormously benefit from it is worthwhile.

    Is it worth devoting most of Virginia’s future Federal funding? That merits a more public discussion rather than what is right now, essentially, a behind-the-scenes discussion between VDOT and the GOV’s office.

  10. It all depends on who is the VDOT chief in the area. Since Garrett Moore has been in charge of VDOT for NoVA, things have changed substantially. He has started a process of reaching out to, and seeking input from, the community, both businesses and individuals. VDOT has formed an informal task force to provide input to the planning to widen Route 7 west of Tysons. The group has even come up with ideas that have reduced VDOT’s costs estimates for the project.

  11. larryg Avatar

    well.. that’s good… and bad… You’d want this to be an institutional approach not individual initiatives (that vary by region and change when people do).

    Clearly what you are citing is..not entirely true in Cville and not widely true about the 460 project (although I do acknowledge VDOT reaching out to media including blogs).

    and they do have a website: http://www.route460ppta.org/

    but it looks like they’re going to have to rename it

    and I’d suggest that right on the front of that website they explain in layman’s terms what the difference is between a PPTA and the new approach.

  12. DJRippert Avatar

    Build the damn road!

    I am guessing that the community leaders in Tidewater that think other projects are more important don’t have a clue as to how Tidewater will weather the inevitable draw-down in Federal defense spending. No, they’ll wait for the crisis and then go running hat in hand to Richmond demanding subsidies for everything and anything. Kind of like most of the state does today.

    Do the community leaders in Tidewater have a plan to create jobs to replace the jobs that will be lost by reduced federal spending?

    The problem with segregating transportation from a business like the ports is the same problem you have whenever you segregate any aspects of a common business – growth and margins. If Virginia can substantially increase its market share from Panamax shipping it will bring a lot of extra money to Tidewater. However, that money will not be evenly spread across all aspects of the port business. However, the people being asked to finance the road will only benefit from the transportation segment of the business. If Virginia were really “the best place in the universe for business” it would make the whole port operation into a public company where the Commonwealth would maintain a controlling interest. The capital raised from the IPO could be used to build out the entire new port business. And please – no droning on about Facebook. The Wall Street crowd got greedy and over-priced the initial offering and then compounded the error by putting too many shares on the market in the first sale. Had it been priced properly, everybody would be talking about what a great IPO it was. Facebook is a fine business. It’s just not yet worth as much as the merchants of greed who priced the IPO thought. And, no – I didn’t buy any shares. The valuation never made sense to me (especially vs Google).

    The belief that you can constantly isolate components of an economic whole and then demand that each piece be self-sustaining is ridiculous. Why does IBM make compute, network and storage equipment in addition to having hundreds of thousands of services personnel? The margins are different in each business. Why not just focus on the high margin business? Because the whole is greater than the sum of the parts and many companies buy from IBM because it has the whole package. This simple thought seems utterly confusing to both Bob McDonnell and many of the commenters on this board.

  13. Darrell Avatar

    Well the other thing you have to worry about is when the all in one gets all high and mighty. IBM did that once, and nearly closed down in bankruptcy. Luckily for the pinstripe set, they were saved by geeks inventing personal computers.

    And the latest trend in IPOs is to overvalue the issue because no one cares whether the little guys make any money after the fact. In Facebook’s case the little guys turned out to be big players with high priced lawyers, because there are very few real little guys in stocks any more.

    Kind of like the road business these days. Little public people give their little public input to a non-caring local political elite, which then lobbies VDOT through their supporters desired 20 year transportation plan.

  14. larryg Avatar

    well.. if the build the Damn road with Garvee bonds, that’s pretty much going to leave NoVa and HR/TW to fend for themselves on infrastructure – i.e. read: tolls….. or .. possibly … a local option sales tax for transportation.

    I think it’s funny in a way that the Supreme Court ruled sales taxes for regions unconstitutional because the nexus between taxes and those who spent them would be “unelected” when, we essentially have the same system with VDOT districts….. when the State/VDOT allocate money to the regions.

    For instance, unelected VDOT is making the decision on where to spend GARVEE money – not the regions…. or ROVA.

    At any rate, they could take care of the “elected” problem for the regions – just make the MPOs direct-elected and essentially legitimize their role as the “decider” of regional priorities.

    I wonder what Darrell would think of that idea.

  15. Darrell Avatar

    Darrell would think that such an arrangement is how regional governments get started. Not only would we have the debt, but an uncontrolled regional tax machine based on referendum free revenue bonds instead of the popular supported bonding method enshrined by the Constitution. We have enough trouble with the individual cities down here without adding on an extra layer or pickpockets.

  16. larryg Avatar

    let me ask this then Darrell…

    if we assume the gas tax is either dead or are life support in terms of it being a reliable source of funding for new construction….

    how would you approach the issue of regional transportation needs?

    how would this be done? how would roads that “connect” the region be funded?

  17. Darrell Avatar

    Well first off these roads don’t connect the region. They are for moving freight and development to the outer reaches. Since the state doesn’t want to be responsible for their port’s problems, then the businesses involved should pay the bill. Toll the roads and hit the business tax button is fine with me.

  18. larryg Avatar

    well.. how about the roads that DO connect the region? What funding model ?

  19. Darrell Avatar

    The roads that do connect the region aren’t in the preferred transportation plan. What IS in the plan are the same all or nothing port projects the politicians have been pushing for 20+ years. There can be no funding model for the existing roads when every last penny is earmarked for the local politicians pet projects.

  20. larryg Avatar

    You’re starting to sound a little like TMT, guy! 🙂

    do you think if the MPO had to stand for election – to be a representative on the MPO – that enough people in the region would understand enough
    about the transportation planning to make different choices?

  21. Darrell Avatar

    Yeah, they would. Even with the MPO the way it is, there was a sizable falling out between the North side and the South side over the choice between the Third Crossing and HRBT. Even today, there isn’t a great deal of cooperation between the two areas. A great many people wanted the HRBT improvements, a redesigned I64/264 interchange that isn’t a death trap, and VAB interchange improvements. Instead we get privatized toll tunnels, Norfolk’s Patriot Crossing third crossing starter bridge, and a Virginia Beach Light Rail that the council wants to route through Laskin Road instead of on the 40 million dollar right of way they already bought. Heck, if you look at what’s transpired with VDoT and the governor, the so called MPO is not even in the transportation picture. I wonder if the Feds are going to like that.

  22. larryg Avatar

    In terms of funding…. last time I saw a poll… of your region… they asked about gas taxes, tolls and sales taxes and as I recall tolls were picked over the other two but not by much.

    It appears that for ANY major infrastructure these days that tolls are the primary means of funding. HOT lanes (now Express lanes) in Nova and tunnel/bridge tolls in HR/TW.

    Would HR/TW people choose some other method of financing in a regional referenda? like local gas tax or sales tax increase?

  23. Darrell Avatar

    No they wouldn’t choose anything as long as the same political crooks and bureaucrats are running the show. That’s the point no one seems to get. We don’t trust these people or their plans!

    You don’t hear anything about the new Jordan bridge. Why is that? Because the local politicians didn’t have anything to do with it.

    “The new bridge uses no local, state or federal money. It is a private bridge. A fully electronic tolling system will use E-Z Pass to maximize convenience for users.”

  24. larryg Avatar

    Wow. Bacon should know about this!

    1. I do know about the Jordan Bridge. It’s one of those stories I’d love to get to if I had the time. You know who the prime driver behind that bridge was? Philip Shucet. Ring a bell?

  25. larryg Avatar

    what the toll going to be? do not see it on the web page…

  26. Darrell Avatar

    Around 2 bucks.

  27. larryg Avatar

    Phillip Shucet… yes! is there something unique about this bridge that would lend itself to a private solution ?

    Why didn’t VDOT do this bridge or at least have it in one of their bogus “6-yr plans”?

    Is it possible that the likes of Shucet could build toll tunnels that the public would support down that way?

    1. I got the story from Shucet a couple of year ago but I wasn’t taking notes so I really couldn’t report on it. Suffice it to say that a private company not encumbered by the restraints that VDOT is working under can do the job a lot cheaper and faster than VDOT can. One of these days, I’ll track him down and get him on the record — it would be a great read.

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