On May 1, 2013 the future of Virginia’s infrastructure investment plans may have suffered a change in direction when Circuit Judge James A. Cales ruled that the financial arrangements embodied in a public private partnership between VDOT and a private firm – the Elizabeth River Crossings – were unconstitutional. The project – which would provide a third tunnel under the river and rehabilitate the two existing tunnels – was ruled unconstitutional because it reimposed tolls on the two existing tunnels to fund the third, and, in effect, was a tax, not a user fee/toll. Since new taxes can be levied only by the legislature, the judge ruled that this financial arrangement was unconstitutional.
This ruling, if it stands, threatens to unravel a $2.1 billion project and potentially expose the state to significant financial liabilities from existing partners and creditors. It also threatens to discourage future P3s in the state – thereby diminishing future transportation improvements or forcing the state to rely on higher taxes to achieve them. Interestingly, it may also undermine the costly and controversial Silver Line to Dulles whose financial arrangements are similar to those of the tunnel.
But before the speculating on the potential outcomes, it is worth noting some of the benefits that have accrued to the citizens of the state as a consequence of the 1995 law that permits the state to foster and create such arrangements between VDOT, private investors and lenders.
The state’s Public – Private Transportation Act of 1995 allows and encourages VDOT to negotiate public-private partnership contracts with infrastructure investors/developers to provide, finance, build, and operate major infrastructure projects. These agreements allow governments to leverage limited public funds with private capital, including both equity and debt to embark on major infrastructure investments to alleviate congestion in urban areas. For the most part, these projects represent new road capacity and are financed by the tolls that will be charged to users of these new roads.
Virginia was among the first states to establish workable legislation to foster public-private partnerships and this has led to significant investments (completed, underway, and proposed) in several major projects including new HOT lanes on the I-495 beltway and on I-95, and most recently — and controversially –a new tunnel in Hampton Roads area, all of which will rely on tolls to service debt and provide a return on the equity investment made by the private partners.
The first major project just recently completed is the $2 billion project in the Virginia suburbs of Washington, D.C. to add four tolled express lanes in the median of the Capital Beltway (I-495) from the Springfield Interchange at I-95/I-395 to the I-495 Dulles Toll Road exit in Fairfax County. Improvements will also be made to the eight existing free lanes in that 14-mile segment.
This added capacity, completed in 2013 and now open to the public, is operated as variably priced toll lanes which allow paying customers to get a higher level of service while also reducing congestion on the free outer lanes. The innovative project was built and is regulated as a partnership between the Virginia Department of Transportation and a private company owned by a 90/10 partnership of Transurban (Australia) and Fluor (U.S.). To finance the project, the state of Virginia provided a grant of $409 million; the U.S. Department of Transportation provided a “TIFIA” loan (Transportation Infrastructure Finance and Innovation Act) of $589 million; another $589 million will be borrowed by issuing private activity bonds (PABs), while the remaining $350 million is an equity investment provided by the joint venture partners. Net revenues earned through variable rate tolls will be applied first to the PABs, then to the TIFIA loan, and any residual will accrue as profit to the private, joint venture partners.
The benefits to Virginia are obvious: For an investment of $409 million it gets $2 billion worth of new road capacity in one of the most congested regions in the nation. Area motorists will have quicker commutes, thousands of new construction and engineering jobs were created between 2008 and 2013, and more than $280 million of aging infrastructure, including more than 50 bridges and overpasses, were replaced in the process.
The second major P3 infrastructure project, now underway, is the $940-million I-95 Express HOT lanes concession in northern Virginia, marking the next phase of the state’s plans for a tolled network of managed lanes to relieve congestion in the Washington, D.C. region. The 28-mile system of reversible high-occupancy toll lanes (HOT) on I-95 is being developed by Transurban with its 10 percent partner Fluor Enterprises (same team as on the beltway P3), partly by converting and expanding existing HOV lanes into HOT toll lanes, and building new lanes from Quantico to Stafford County. This new north-south system will connect with the just completed HOT-lanes on the I-495 Capital Beltway, described above. Construction of the I-95 HOT lanes began in 2012 and will be completed in late 2014.
The funding for the I-95 HOT lanes includes $261 million in senior debt issued on July 26, 2012 as PABs at about 5 percent tax-free and fixed for 30 years. According to the offering statement for the I-95 PABs, VDOT will put in $67 million of unspent GARVEE bond proceeds towards construction, Transurban (90 percent) and Fluor (10 percent) will provide $386 million in equity.
For the remainder of the package, Transurban has applied to USDOT for a TIFIA loan of about $300 million. In the event that the $300 million TIFIA loan is not approved, VDOT has agreed to increase its capital contribution by $218 million, and Transurban by $114 million in equity.
What is important to note here is that while toll financing of these two P3s is an important component of the package, tolls will only be levied on those who use the new facilities. In the case of the beltway, motorists can continue to use the existing lanes for free, while on the I-95 express lanes (currently HOV-3 only during rush hour), HOV-3 cars will continued to ride for free, while others – who are currently excluded – can pay a toll for the privilege, or ride for free in the existing lanes as they do now. As a result, there has been little controversy (except for Arlington’s worry about economic justice), and the projects are proceeding apace.
The Portsmouth tunnel project – also underway – is the third major state P3 projects and differs from the two above in that tolls will be imposed on users of the existing two tunnels to help fund the new tunnel. Designed to reduce congestion in the Hampton Roads area, the new tunnel will supplement the two existing tunnels under the Elizabeth River. The state is contributing $408 million to fund the $2.1 billion project. In exchange, the private developers have agreed to put in $272 million in equity and carry $675 million in PAB debt and a $422 million TIFIA loan that will be repaid by toll revenues alone.
It is the provision that tolls be reimposed on existing free tunnels, that they remain in effect for 58 years and be allowed to increase by 3.5 percent per year that led to the lawsuit that Judge Cales ruled on in favor of the plaintiffs.
The state has asked the judge for a stay in the ruling (the new tolls are scheduled to take effect next February), but he has declined and complains that VDOT is raising “Chicken Little” disaster scenarios to bolster its case (though in fairness to VDOT, TollRoadsnews reports the same is being done by plaintiffs’ lawyer). In the meantime, VDOT and its partners have appealed to the Virginia Supreme Court, so this presumably is where the ultimate decision will be made, and a ruling is expected early next year.
Should the Supreme Court uphold Judge Cales’ ruling, the consequences for VDOT (and the state) could be significant and costly. The Virginian-Pilot reports that an analyst for Fitch Ratings claims that the state would then be responsible for paying the project’s debt, which is currently projected at a tad over $1 billion.
As noted earlier, a sliver of a silver lining in all of this is that it seems as if the increase in, and diversion of, Dulles Toll Road tolls to fund the construction of the Silver Line to Dulles Airport would certainly be of questionable legality under the judge’s ruling, and would constitute a tax, not a user fee. Opponents of the costly NoVa boondoggle should be looking into this.
Beyond a favorable ruling by the Virginia Supreme Court, another potential solution may be an act by the Virginia legislature to clarify the matter of tolls, user fees, taxes, VDOT authority, etc. that would avoid such uncertainties in the future and resolve the present one. But don’t hold your breath: despite promoting its market-oriented, private sector leaning, small government embrace, it is, at heart, a populist enterprise, and as such is uncomfortable with tolls and private investment, and –God forbid – profits if its constituents aren’t happy with any.
In the recent past, Republican elected officials have attempted to interfere with toll setting on the fully-private Dulles Greenway, while others have proposed its takeover by the state. Indeed, these are the same people that several months ago created the Nation’s first dedicated tax to support Amtrak. So good luck private investors, the red carpet is being rolled up.
