Virginia’s top transportation oversight body voted earlier this month to move ahead with a major tunnel expansion. If everything goes as planned, the multibillion-dollar project could be good news for the traffic-snarled Hampton Roads region when it opens in 2024.
But the commonwealth may also be setting itself up for a major financial body blow — and demonstrating the long-term consequences of mismanaging public-private partnerships.
At issue are the highly generous terms of a tunnel deal that state officials agreed to in 2011 — and locked in for 58 years — with a Swedish construction company and a finance group. That agreement to build a new tube and rehabilitate tunnels between Norfolk and Portsmouth, and collect billions of dollars in tolls over coming decades, includes a non-compete clause.
The state agreed that if it built bridges or tunnels near the Downtown and Midtown tunnels within the next half-century, it would be on the hook to pay lost tolls that could be attributed to the projects.
Such arrangements, known as “alternative facilities” clauses, are sometimes included in public-
private partnerships. In theory, they could prevent private investors from getting unfairly blindsided by hard-to-predict or arbitrary government decisions. But under political pressure to reach a deal after the last recession, Virginia officials agreed to the clause without calculating potential future costs.
Although the bridges and tunnels had long been contemplated by transportation planners, one official involved said the chances of building them were deemed too remote to calculate with precision.
But now the consequences of the non-compete clause are becoming all too real.
The Commonwealth Transportation Board’s vote Dec. 7 to select a “preferred alternative” for making major improvements is a critical step, and it followed years of study. The body chose the I-64 Hampton Roads Bridge-Tunnel for a $3.3 billion expansion, which would include a new, parallel tunnel.
Virginia Transportation Secretary Aubrey Layne called it a “monumental” development, adding that the state now has the funding and the will to fix “one of the biggest bottlenecks in the commonwealth.”
But an expanded Hampton Roads Bridge-Tunnel is listed as one of the projects covered by the 2011 non-compete clause.
And how much might the state have to pay if the expansion is built, as promised?
Neither side will say.
Elizabeth River Crossings OpCo LLC, or ERC — a partnership between Swedish construction giant Skanska and Sydney-based finance group Macquarie — heads the Downtown/Midtown tunnel project.
Leila Rice, an ERC spokeswoman, said it would be “highly speculative” to say how much their toll revenue might fall — or even if they would seek compensation from the state.
But a 2012 analysis commissioned by ERC did provide some initial estimates. And project documents made clear that the non-compete was seen as a guarantee that the company would be “made whole.”
Expanding the Hampton Roads Bridge-Tunnel from four to eight lanes would cut ERC’s toll revenue by about 5 percent in a single year, the analysis found. If comparable losses continued through 2069, company revenue could, at least in theory, shrink by roughly $300 million. But that probably overstates the impact.
Since the actual Hampton Roads tunnel project contemplates going from four to six lanes — not four to eight — the losses would be smaller. How much smaller is unclear. The partnership has to prove actual losses based on conditions on the ground once the expanded Hampton Roads tunnel opens, the company emphasized.
Of course, the Hampton Roads tunnel is only one of several projects covered by the clause. And if the rest of those potential improvements were made, the state’s tab could reach $774 million, according to a second analysis provided to ERC’s outside investors.
“Compensation for competing facilities is a common risk allocation feature” in such deals, the company said in a Dec. 20 statement, and allows for handling developments “which cannot be predicted.”
Sean Connaughton, who was transportation secretary under Gov. Robert F. McDonnell (R) when the deal was signed, declined to comment.
But Kevin DeGood, director of infrastructure policy at the Center for American Progress, a Washington think tank with close ties to the Democratic Party, said the projects were set in motion much earlier and could easily have been anticipated.
“This is the private sector demanding that the state essentially lower their risk to near zero,” DeGood said. “I can’t think of another industry where private parties get to demand of the government that certain market conditions will hold over exceedingly long periods of time. . . . That just isn’t how business works.”
Virginia was an early pioneer in using public-private partnerships for transportation. Boosters say public-private partnerships, which are meant to bring market benefits to government projects, are the way to rebuild the country’s neglected infrastructure.
But the Downtown/Midtown tunnel deal has led to bipartisan condemnation.
The problems go far beyond the non-compete clause, critics said. Although the project was originally touted as a way to build a critical piece of infrastructure with no state money, the commonwealth ended up agreeing to spend $580 million on the project — while ceding toll revenue for decades.
Layne, a Republican appointed to Virginia’s top transportation job by Gov. Terry McAuliffe (D), joined with Del. S. Chris Jones (R-Suffolk), chairman of the Virginia House of Delegates’ Appropriations Committee, to help spearhead changes meant to bring more transparency to such deals.
All three officials are backing a major new, 50-year public-private partnership to expand Interstate 66 in Northern Virginia, which is supposed to come with a $500 million “upfront payment” from the private group for related improvements.
But some outside scholars, including Harvard infrastructure-finance expert Akash Deep, point to the Downtown/Midtown tunnel deal and question the wisdom of locking in agreements that span generations.
Layne, an accountant who had worked as a real estate broker before joining the government, said what ultimately matters is the deal officials make.
And the far-reaching non-compete clause fell short, he said.
“How they could give that provision — I don’t understand it. But they did,” Layne said. “I guess they would say that was the only way to get the deal done. I don’t know if that was true or not. But that was a heavy price to pay.”
He said he’s unwilling to put a dollar figure on what the state could potentially owe for going ahead with the Hampton Roads Bridge-Tunnel. ERC has the right to try to prove how much it has been harmed. And the state can try to knock that down, he said. That will involve intricate, and possibly dueling, traffic studies.
ERC is “not going to play their hand until they have to,” Layne said. The state should follow suit. “I wouldn’t say anything until I actually saw the numbers.”