Return to Virginia Business - October 2004

Building Virginia’s roads
As state funds dwindle, public-private partnerships keep big projects moving, but critics say policy is taking a back seat to profits.

by Lynn Waltz
Virginia Business
October 2004

To a road-builder like Rick Volk, a massive project like the widening of truck-heavy Interstate 81 is a dream job. Clearly, others thought so too. When the state in 2002 asked for proposals to fix the congested highway, two consortiums — representing dozens of Virginia companies and led by giant construction firms — stepped up.

Volk, a vice president with Koch Performance Roads, worked with the Star Solutions group, which offered an $8 billion plan to build divided truck-only toll lanes on the entire 325-mile portion in Virginia. The competing plan, led by Fluor Virginia, a subsidiary of California-based Fluor Corp., proposed adding a car-only lane in each direction.

Ultimately, it was Volk’s team that won the prize. In March, Virginia Department of Transportation Commissioner Philip Shucet selected the Star proposal, and Volk was elated. “It will be the most significant and largest transportation project ever undertaken in the Commonwealth of Virginia, and we got it,” he says.

While the scope of the I-81 project is staggering, what makes the project even more remarkable is that it has any chance of actually getting built. The state’s transportation budget has been stripped bare by budget cuts, and Virginia’s road-building companies are suffering. “Letting the industry decline and unravel is dangerous,” says Shucet. “VDOT did the worst thing possible,” he adds. “The past administration told the industry there was $10 billion worth of work. Then we had to tell them the truth, that there was only $7 billion. Now we’re down to six.”

The industry is trying to replace those lost state dollars, though, by turning to the state’s innovative Public-Private Transportation Act of 1995. The law lets private-sector firms take over the design and construction of roads, including proposals on ways to pay for them — such as tolls and tax districts — that the state is reluctant to use. Though it was at first barely used, the public-private law has lately emerged as the only effective way for getting high-priority transportation projects moving again.

Virginia has been a national leader in public-private transportation deals. At least 20 other states have passed public-private laws, many based on Virginia’s statute. The state’s first PPTA-built road was the Pocahontas Parkway near Richmond, which opened two years ago. Since then a flurry of projects has emerged: The I-81 project is a PPTA deal. So is the $693 million plan proposed by Fluor Daniel to build two high-occupancy toll lanes in each direction on the Capital Beltway. The engineering phase of the 23-mile, $4 billion extension of rail to Washington Dulles International Airport is a PPTA deal, as is the design phase of the 51-mile Coalfields Expressway in Southwest Virginia.

While the law gives hope to road-building firms, it can’t fill the hole in the state’s transportation budget, and it brings its own set of problems. It can be expensive for the bidding companies, smaller firms often can’t compete, and critics say it puts profit ahead of sound transportation policy.

But without a public-funding increase — an idea crushed by failed referendums in Hampton Roads and Northern Virginia in 2002 and by the past General Assembly session — the PPTA’s toll-heavy approach will prevail. “The state needs billions of dollars,” says former VDOT assistant commissioner James Atwell, who helped write the PPTA and is now a private consultant helping to shepherd a half-dozen proposals. “Everyone agrees something must be done, but we don’t have the money to do it. That means tolls.”

One way PPTAs differ from the traditional approach is a concept called “design-build,” in which an umbrella entity manages the entire project. It’s a much faster and leaner process. While the state can now contract design-build projects, traditionally it used a “design-bid-build” process with competitive bidding at each step. The private system is better, a state audit recently concluded, recommending that a single manager oversee all phases of state projects. The audit found that $44 million in cost overruns in Hampton Roads projects were caused by hundreds of change orders when design drawings proved unworkable. In a design-build system, designers continue refining drawings during construction.

The groups formed to manage PPTA projects are often lead by large private-sector companies with deep pockets and expertise. The Star Solutions team is headed by a Halliburton subsidiary. Fluor Daniel, which is heading the Capital Beltway project, is a subsidiary of Fluor. “These are big projects where our contractors can’t play without being brought together by somebody bigger with the wherewithal to finance, build and manage it properly,” says Dick Daugherity, executive vice president of the Virginia Road and Transportation Builders Association.

The consortiums provide formidable resources in financing, design, construction and operations. They are willing to invest millions in the projects because the returns on a big capital project can be enormous. Actual figures on returns are hard to come by, since companies are allowed to keep secret that section of the PPTA proposal, which explains how deals are financed. Ultimately, profits depend on how successful the project is. The state’s contribution helps attract private and federal dollars, and provides the companies with access to the power of eminent domain and help in clearing environmental hurdles.

Yet, the risks can be big as well. Volk points out that the proposed I-81 project still must overcome questions about environmental impact and essential federal funding. In addition, many favor rail lines along the route for cargo that could cut into truck tolls that would fund the improvements. Still, members of the Star Solutions team would hate to walk away from I-81. “We’ve invested millions of dollars on proposals for a number of projects and have not seen the return required,” Volk says.

Private firms are also more willing to take on the risks of bonds backed by tolls or tax district revenues, something the state is reluctant to do for fear it could undermine its prized AAA bond rating. Where the state is cautious, private-sector firms are willing to take chances that sometimes flop. In August the Pocahontas Parkway, for example, had to raise tolls after ridership estimates fell way short, and its bond rating was downgraded to BB-status. And rains, costing the builder money, have stalled work on the Route 288 project near Richmond. “It’s been a tough project,” says Volk of Koch Performance Roads, a partner in the Route 288 project. “It wasn’t as profitable as we had hoped going into it.” Says Daugherity: “Everybody said there’s no way they can build it that fast for that amount of money and everybody was right.”

Yet the Pocahontas project shows what’s possible. It was done for $10 million below the original $324 million contract and used just $27 million in public funds. Funded by the sale of tax-free bonds, its impressive Vietnam Veterans Memorial Bridge was profiled in national engineering magazines. “Every time I drive down I-95 and see that bridge, it gives me a great deal of personal satisfaction,” says Atwell, president of the Pocahontas Parkway Association, which represents bondholders. “It’s beautiful.”

Toll-based proposals can get complicated very quickly, though. If a third crossing is built in Hampton Roads, tolls will have to be placed on the other two crossings too, says state Sen. Marty Williams, R-Newport News, chairman of the Transportation Committee. Anything else would result in chaos as drivers sought non-tolled routes to escape a single crossing toll as high as $12. “These projects are like walking into a room and picking the biggest, meanest person to fight,” Williams says. “You don’t get many victories that way.”

Still, Shucet says the third crossing remains the highest priority for the economy of Hampton Roads. “To turn your back on the third crossing is to turn your back on the future of Hampton Roads,” he says. If all the crossings have to be tolled to build it, he says, “We should get on it as soon as possible.”
But the rise of toll-funded road-building proposals raises questions that go to the core of transportation policy. Private toll roads are nothing new. At the turn of the century their use was extensive. Today, though, roads are considered a free public service, like libraries and education. Critics say proposals like the HOT lanes proposed on the Capital Beltway, dubbed “Lexus Lanes,” are socially regressive and elitist, leaving taxpaying drivers breathing the exhaust of those who can afford the tolls.

Others argue that the roads-for-profit approach will encourage even more of the poor land-use planning that got Virginia into a budget hole in the first place. “You just can’t build your way out of congestion,” says Tripp Pollard of the Southern Environmental Law Center in Charlottesville. “You build a road, it gets junked up. You build a bypass, then another. It’s not a good use of money. As you sprawl more, you have to drive more.”

Existing roadways can be made more efficient, says Pollard, who doesn’t oppose HOT lanes. And zoning should encourage density and mixed use to mirror the success of old downtowns like Norfolk, Charlottesville and Alexandria. He cites skyrocketing property values in those areas as evidence that people want a lifestyle free of lengthy commutes.

Pollard also argues that the public-private mix makes transportation planning politically vulnerable, given the number of lobbyists and former public-sector officials involved in pushing PPTA projects. Shucet rejects any suggestion that decisions are influenced by insider connections, and with a few exceptions the projects getting built were high on the state’s priority list. What’s more, projects have been dispersed among a number of companies. Still, there’s some sensitivity. Though Atwell was originally listed as the official contact on Star’s proposal, Star has an agreement with VDOT that prohibits Atwell from media comments about I-81.

Shucet also says the availability of money for a proposed road project isn’t a factor. He says he’s not worried about a revolt from drivers who resent the rise of tolls, and he thinks drivers will be happy to have options. HOT lanes actually encourage express-bus usage and carpooling, he points out, since those vehicles ride toll-free.

Politicians, transportation experts and road builders say they fear the public will not understand that PPTA has limited application. “It’s a great opportunity, but it’s so minor in terms of overall solution,” warns Williams. “The story still hasn’t been told of how bad a shape we’re in. It’s very dire. The public doesn’t understand. They just know they’re stuck in traffic.”

The Virginia Road and Transportation Builders Association is so desperate to get that point across that it’s trying to raise $1 million for a big ad campaign. “We’re trying to convince the public to influence legislators to increase funding to transportation,” Daugherity says. Every $1 billion spent on new highways results in 42,000 jobs, according to the group, and the big projects trickle down to even the smallest firms. The recently approved projects will “provide plenty of work for a lot of people.”

Some fear that as state funding continues to dwindle, the public side may disappear completely from the public-private partnerships. “The state is in a glide path from doing billions of dollars worth of (publicly funded) construction to doing zero over six to 10 years,” says transportation consultant Ray Pelletier of Public Private Solutions, which is involved in five PPTA proposals. “They won’t even be able to match federal dollars to build projects. All they’ll be able to do is maintenance.”

Increasingly, those charged with solving the transportation crisis voice frustration over well-dressed drivers in luxury cars and SUVs who complain about bad traffic but still oppose higher taxes to fund transportation projects. “If AOL or MTV or Cox Cable sent its customers a ballot and asked how many were in favor of raising prices, would the ballot pass? I don’t think so,” says one insider. “But they raise the rate every year and people pay it.”

The public will pay one way or the other — taxes or tolls — or they’ll sit in traffic that grows worse every year. “In the 1950s, the toll on I-64 and the Hampton Roads Bridge-Tunnel was $1.25,” says consultant Pelletier. “My parents paid that much to build the tunnel and bridges we use today. But we think they’re free. If we don’t bite the bullet, we’re passing the problem on to our kids. That’s our legacy. We’ve gone from the greatest to the greediest generation.”

Some say that self-serving spirit is the key to private toll roads. If drivers have the option to pay cash for a quick ride, they say, they’ll do it every time. “That’s what makes it a true partnership,” Volk says. “At the end of the day, all the stakeholders are pleased with the outcome.” In that case, PPTAs may at least get Virginians a little further down the road.

Return to Virginia Business - October 2004