Virginia officials are trying to get back tens of millions of dollars from a private company that was supposed to build a 55-mile toll road in southeastern Virginia.
State officials had been sending the company multimillion-dollar installments each month to build the road. But the state lacked federal construction permits, so the road wasn’t built.
And now the commonwealth is out about $256 million.
The problems help explain why top officials in Gov. Terry McAuliffe’s administration have recently increased scrutiny of public-private partnership deals, a sharp shift in tone in a state that has for 20 years been a national leader in pushing such projects. The changing views could have a major impact on one of the most important transportation initiatives in the state: a vast project to add toll and carpool lanes along 25 miles of Interstate 66 west of the Capital Beltway in Northern Virginia.
Transportation Secretary Aubrey Layne said this month that the I-66 project should not be ceded to private investors for “ideological” reasons, as might have happened in the past. Keeping the construction of toll and carpool lanes under state control could generate hundreds of millions of dollars for additional transportation projects, he said, and avoid a repeat of cases in which the state was left “holding the bag.”
It was a road project gone bad that helped draw Layne, a Republican and former real estate broker, and McAuliffe, a Democratic deal maker, toward an unavoidable conclusion: State officials have at times failed spectacularly to protect the interests of the commonwealth and its taxpayers.
The U.S. 460 project was billed as a 55-mile lifeline that would connect Petersburg, just south of Richmond, to Suffolk, not far from Virginia’s seaboard. The proposed toll road would run parallel to U.S. 460 and was a top priority of former governor Robert F. McDonnell (R). Boosters said it would spur development, connect military facilities, provide an alternative hurricane escape route and smooth freight shipments to and from the Port of Virginia.
Virginia officials governed the project using the state’s Public-Private Transportation Act, which went into effect 20 years ago and gave officials extraordinary flexibility in pairing public projects with private firms.
The idea was to try to tap the construction expertise, business acumen and cost-consciousness of private companies, with the benefits flowing to shareholders and state taxpayers. If Virginia officials didn’t have the stomach to set aside large sums to add long stretches of highway, they could lure private investors to put up much of the money. Companies would cover project costs and company profits with the decades of toll revenues they collected.
But Layne said he discovered a major problem when he and McAuliffe came into office in January 2014: Private negotiators had often been doing a much better job than their well-meaning state counterparts.
Layne said he was not seeking to disparage state representatives, but noted that they emerged from a more “process oriented” background within state agencies and lacked the entrepreneurial and negotiating experience and resources of private firms.
“They’re not as sophisticated as the people we’re dealing with,” Layne said. “These guys are buying the best attorneys in the world.”
Layne said that the U.S. 460 project went through the procurement process as a public-private partnership. The initial concept was that a private firm would pay to build the toll road and control it for decades, a major undertaking with significant risk. The Public-Private Transportation Act allowed many of the state’s basic procurement rules to be bypassed, Layne said, a feature intended to give the state flexibility to find the best deal.
But private firms balked at taking long-term control of the road because traffic tallies and resulting toll revenues were projected to be too low.
So state officials changed course. They decided they wanted to hire a company whose primary responsibilities would be to design and build the road.
But in a quirk of the transportation act, the state’s basic procurement rules — which limit certain types of financing arrangements and require more rigorous oversight — did not kick back in, even after the nature of the project shifted radically, Layne said.
State officials then failed to invite a wider group of firms to vie for the business. That left just the three groups that had been competing for the original public-private partnership, Layne said.
Officials “continued to negotiate with a group that was really set up to do something else,” Layne said, noting that only a few large firms had the needed financial heft and inclination to finance, design, build and operate the project as it was initially envisioned.
“Had they opened it up, they would have had many more firms willing to bid on this particular project,” Layne said. “It was basically, ‘Build the road and turn it over.’ ”
And more competition could have brought a better deal, he argued.
Using the transportation act, officials also were not subject to a requirement that the state’s main transportation oversight body, the Commonwealth Transportation Board, approve the eventual $1.4 billion contract with a firm known as US 460 Mobility Partners, Layne said.
That lack of oversight allowed deep flaws in the deal to go unchecked, with major financial consequences for the state, he said.
Del. S. Chris Jones (R-Suffolk), chairman of the House Appropriations Committee, said, “I can’t think of a worse contract that I have seen in my years of public service.”
Among the critical problems, Layne said, was a sort of automatic payment plan, which sent millions to the firm monthly starting in early 2013. Those routine payments were in addition to funds sent to cover specific work that was completed.
More than $83 million was transferred to the company for construction “mobilization” as of February 2014, even though the road was far from ready for construction, Layne said. The U.S. Army Corps of Engineers had not granted the needed permits, so construction could not move forward, but the funds kept flowing, he said.
“That’s the perplexing part. Payments continued to go to the contractor for things they knew couldn’t possibly be accomplished, because they didn’t even have a permit,” Layne said. “A large part of that, in my mind, was not earned.”
Layne said that he doesn’t understand why state officials made the payments they did, or why they agreed to the contract’s terms.
Jones said that the deal was rushed to avoid political scrutiny. The McDonnell administration was “determined to have the contract signed prior to the legislature convening in January of 2013, because they felt we would have intervened and potentially stopped the project,” he said.
The McAuliffe administration ended the payments to 460 Mobility in early 2014, after the new governor took office. In April 2015, the Virginia Department of Transportation gave notice that it planned to terminate the state’s agreement with the company. Virginia has spent approximately $300 million on the effort, including the $256 million that went to 460 Mobility and about $42 million spent by VDOT, officials said.
A much shorter, 17-mile project is now being considered.
Former transportation secretary Sean T. Connaughton did not respond to interview requests. Last year, he said there was “no problem with the structure of the contract” and that the project should move forward.
Project executives with the two firms that make up 460 Mobility – Ferrovial Agroman, a major multinational construction and engineering concern with roots in Spain, and a Pennsylvania-based building firm now known as Allan Myers – declined to comment.
A spokeswoman declined to address the McAuliffe administration’s contention that 460 Mobility was given substantial sums that it did not earn.
“Our employees and contractors have been professional and accommodating throughout the commonwealth’s reconsideration of this project,” said Shannon Moody, 460 Mobility’s public relations manager. “We are currently working with VDOT to ensure the interests of all parties.”
Layne said the company negotiated in good faith. It is the commonwealth’s responsibility to protect its interests, he argued.
“I don’t think they’ve done anything that wasn’t allowed in the contract,” Layne said. But, “I’m not saying it was a good contract.”
Jones, working with McAuliffe, Layne and others, helped push through bipartisan reforms of the Public-Private Transportation Act this year to address problems that emerged with the U.S. 460 project.
They require an advisory committee made up of General Assembly staff, administration representatives and two members of the Commonwealth Transportation Board to certify that a public-private partnership would be in the public interest. That finding must be certified again later by the transportation secretary before the final deal is signed.
Negotiators with the state and 460 Mobility have a mid-June deadline to agree on the financial terms for ending their original agreement. If they fail, the case could end up in court.
“I don’t blame them for taking the money. It was a negotiated payment schedule,” Layne said. “They didn’t ask to stop getting payments. . . . If I were them, I wouldn’t either.”
But now the state wants substantial sums back.
“We’re really just asking them to prove the monies were earned,” Layne said. “A lot of money kept going out, but not a lot of things were getting done.”