The Virginia tunnel goldmine
The battle to privatize America’s public assets had a big win when the Newport News Daily Press reported:
The governor of Virginia, Bob McDonnell announced Monday that a deal with private construction consortium Elizabeth River Crossings to build a new Midtown Tunnel tube; refurbish the existing facility along with the Downtown Tunnel; and expand the Martin Luther King Freeway has reached a financial close.
The project, which is now owned by Australian infrastructure company Macquarie, will add another tunnel under the Elizabeth River to relieve congestion in the Norfolk and Hampton Roads area. Getting control of the project will bring in rich rewards for Macquarie and its construction partner Skanska. For an equity investment of $208 million, Macquarie stands to realize over $5 billion in cash flow over the 58-year concession after repayment of bonds, loans and mandated capital expenditures.
Total building costs are estimated to be $2.1 billion. Fitch Ratings laid out who will provide the money for the cost of building the tunnel in its Apr. 5 report (page eight):
Funding sources include: equity from Macquarie and Skanska including contingent equity (12% of total sources); Private Activity Bonds (32%); Transportation Infrastructure Finance and Innovation Act (federal government) loan (22%); Virginia Department of Transportation contribution (17%); and toll revenue during construction (17.5%).
So the state of Virginia, the federal government and private activity bondholders will have 88 percent of the financial risk of building the project, while Macquarie and Skanska will enjoy 100 percent of the profit of the venture after bond and loan repayments. Macquarie is even legally required to be compensated in case of any delays. The “compensation events” include construction or expansion of an alternative facility that would drain traffic from Macquarie’s operations, any discriminatory change in the law or the discovery of archaeological or paleontological resources that would delay construction. Macquarie has basically pushed all the risk back onto the state of Virginia.
Already, a very big “compensation event” has happened. The funding expected to be generated by adding tolls to two already-existing tunnels has encountered a political firestorm. People who drive through those tunnels don’t want to start paying a toll for a tunnel they may never use in the future. According to the contract with Macquarie, the state would give the company $100 million of the toll revenue. Somehow the Virginia DOT and governor thought it smart to put tolls on tunnels that drivers had stopped paying for years ago and then give that money to Macquarie. It seems like a strange and politically unwise funding strategy. But Macquarie is legally due these tolls. So somehow the money will be found in savings, and the tolls will not be imposed on the two existing tunnels until 2014. Macquarie wins, and the taxpayers lose.
Funding for transportation projects is becoming tighter, but transferring an enormous project – and its revenues – into private hands seems the wrong way to gather resources to improve public infrastructure. Virginia’s tunnel is a goldmine. Just not for the people of Virginia.
Bond Buyer: Virginia Gets Necessary Funding to Go Ahead With P3 Bridge Project
Commonwealth of Virginia: 2012 State Ceiling Allocation for Private Activity Bonds
MSRB EMMA: Official Statement for Elizabeth River Crossings OpCo offering of private activity bonds