Maryland Gov. Larry Hogan (R) has said the toll lanes will come at “no net cost” to taxpayers because companies will finance their construction in exchange for keeping most of the toll revenue via a 50-year public-private partnership. The state’s transportation chief reiterated that pledge on Tuesday.
However, details of the project’s first proposed contract for a private team — which involves developing the lane designs for about a year while pursuing the longer-term partnership — show the state plans to take on millions of dollars worth of early risk.
State transportation officials say coordinating with companies earlier in the process will help prevent the kinds of problems that caused extensive cost overruns and delays on its light-rail Purple Line construction and left that partnership on the brink of collapse. But critics say it will create other financial vulnerabilities sooner, before the state knows whether widening the highway is environmentally, financially and legally viable.
Del. Marc A. Korman (D-Montgomery) said he’s concerned that firms would begin to rack up reimbursable expenses before the state has the federal environmental approval in hand.
“There are a number of places where Maryland is on the hook for obligations that I want to understand because we’ve been told again and again, ‘This will come at zero net cost to taxpayers,’ ” said Korman, chairman of the House Appropriations subcommittee on transportation and the environment. “It’s not clear, from looking at this, that that’s the case.”
Critics say the Maryland Department of Transportation knows the financial damage that unforeseen problems can wreak on a mega-project partnership. In December, MDOT agreed to pay a $250 million legal settlement to salvage the $5.6 billion Purple Line contract.
Years-long cost disputes between the state and the private partner over delays stemming from a lawsuit, permitting difficulties and other problems prompted the construction contractor to quit and ensnared the project in back-and-forth lawsuits. The line’s opening is potentially several years behind schedule, and a 16-mile swath of Montgomery and Prince George’s counties has been left with torn-up roads for at least a year while the concessionaire replaces the contractor.
The Beltway and I-270 would be widened through the densely developed Washington suburbs, affecting homes and schools, enormous water and sewer mains, historic sites and preserved parkland. The Sierra Club’s Maryland chapter has said it expects to sue if the state doesn’t address numerous “flaws” in the draft environmental impact study released in the summer.
“Even with the Purple Line, where you had an environmental impact study done before the state signed any agreement, you still had all these problems,” said Del. Jared Solomon (D-Montgomery). “God only knows what could happen with the Beltway.”
Like Virginia and other states, Maryland has turned to public-private partnerships as a way to build expensive infrastructure with limited debt capacity. The deals are highly complex, negotiated by lawyers and Wall Street financiers as much as transportation experts.
Hogan has said the state can’t afford to finance his traffic-relief plan, which is expected to cost billions. Under the proposal, construction would start with replacing and expanding the American Legion Bridge, then work around the Beltway to the I-270 spur, before moving up I-270. The regular lanes, which would remain free, also would be rebuilt. The state postponed widening the top and eastern parts of the Beltway following a public outcry when a study found it would destroy up to several dozen homes and harm more public parkland.
Maryland Transportation Secretary Gregory Slater said the firms selected for the “predevelopment agreement” will work with local governments, utility companies, residents and property owners to sort through design challenges. Doing so will help prevent expensive or time-consuming changes down the line, he said.
For the state, he said, early collaboration should help to shrink the project’s footprint to limit effects on the environment and communities. In turn, he said, the private partner will be able to better estimate the construction costs and schedule.
The state plans to select among three predevelopment proposals in early February and seek approval from the state’s Board of Public Works in April or May. Slater said the state will focus more on teams’ technical expertise than their financial pitches.
“We want to find the right partner and then kind of work on those financial pieces,” Slater said. “In the end, this is a 50-year partnership. We’re going to have issues to deal with over 50 years.”
If a long-term deal is reached, the firms would recoup up to $100 million of their predevelopment costs, such as for technical and legal experts, via private debt and their own equity. The companies would then use future toll revenue to repay the debt financing and provide a return on the equity, Slater said.
If the state cancels the project before then, it would have to reimburse up to $50 million of those costs, Slater said. The state also would have to cover up to $50 million if the private team backs out for reasons deemed valid in the contract, such as if the project doesn’t receive federal or state approval.
However, in either case, the state would then own the companies’ engineering studies and designs, which it could use at another time, Slater said.
Moreover, he said, the companies will have financial incentives to negotiate in good faith to reach a longer-term partnership. If the state and private team can’t agree on a 50-year contract, Slater said, the companies won’t recover any of their predevelopment costs.
If the private team quits for an invalid reason under the predevelopment agreement, it would receive no reimbursements. It also would have to pay the state up to $145 million in a “development rights fee” that it would have agreed to for the right of first refusal on the longer-term partnership. And it would have to pay up to $10 million toward the state procuring a new partner, state officials said.
Jonathan Gifford, a professor at George Mason University and director of the Center for Transportation Public-Private Partnership Policy, said early collaboration can help governments advance projects more quickly and efficiently, while also improving the design.
“The earlier you get the contractor involved,” Gifford said, “the more options for innovation you have.”
However, experts said, partnering early also cuts short the kind of competition that typically results in better prices. Even if the private sector finances construction, experts say, having to pay off more debt can drive up toll rates and eat into any revenue shared with the state. MDOT has committed part of its share of toll proceeds to improving public transportation in Montgomery and Prince George’s counties — a key concession to some early critics, who said the state had given short shrift to mass transit.
The Virginia Department of Transportation used similar early agreements to develop public-private partnerships for toll lanes on the Beltway and Interstate 95. Transurban, the Australian company that operates those toll lanes, is also bidding on the Maryland proposal.
Susan Shaw, VDOT’s director of megaprojects in Northern Virginia, said partnering early can help align the government’s goal for the smallest footprint with the private sector’s drive for the lowest construction costs and highest return on investment.
However, Shaw said, VDOT determined more recently that it could get better deals — the Beltway and I-95 partnerships required tens of millions in state subsidies — if it had multiple bids.
“It’s tough negotiating when you’re just sitting across from one partner,” Shaw said.
For the public-private partnership being used to add toll lanes to Interstate 66 outside the Beltway, VDOT waited to select a winner until two teams had submitted detailed, long-term proposals. The state had first determined how much it would cost to publicly finance the project and challenged companies to beat it.
That resulted in the winner paying the state a $579 million upfront “concession fee,” $800 million over time to expand public transit and $350 million for other corridor improvements. The project contains no state funding.
In addition to competitive bidding, Shaw said, the I-66 project benefited from the Beltway and I-95 toll lanes having proved that Washingtonians were willing to buy their way out of backups.