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.”
