Virginia court strikes down toll to fund public private partnership

May 3, 2013

Officials react to tunnel toll block

In a three minute court hearing in Virginia, Portsmouth Circuit Judge James A. Cales Jr. rejected as “unconstitutional” the ability of the state’s Department of Transportation to set tolls on a Norfolk tunnel. The tolls are being collected to fund 17 percent of a new tunnel that is being built by a public private partnership (PPP). The private entity in the PPP is putting up 12 percent of the cost, but it will receive most of the cash flow over the term of the 58-year lease. I wrote about this project last year:

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.

Judge Cales did not discuss the unfair economics of the deal, rather he said the Virginia Assembly could not give the Department of Transportation unilateral power to set tolls and taxes. The judge wrote:

The General Assembly has exceeded its power by ceding the setting of toll rates and taxes in violation of Article 4, Section 14, of the Constitution of Virginia.

The Bond Buyer described the potential consequences of the ruling (emphasis mine):

A Virginia Circuit Court judge has ruled that the financing mechanism of the Elizabeth River Crossings project in the southeastern part of the state is unconstitutional, calling into question the future of the multi-billion dollar public-private partnership and other Virginia P3s.

Virginia’s Governor Bob McDonnell (R) has been bonkers for privatizing the state’s public assets, and this is a big blow to his efforts. The governor has indicated that he will appeal Judge Cales’, ruling but it is a substantial blow to his privatization efforts.

Local politicians reacted with pleasure that their constituents would not pay excessive tolls. WAVY, Fox 43 quoted VA State Senator Louise Lucas:

It just seemed so unfair for the people in the Hampton Roads area, Portsmouth in particular, to be saddled with 58 years of tolls on a tunnel they’ve already paid for and for which we’re not going to have any immediate improvement. There has to be another way to fund these road construction projects rather than tolling. I believe that the voters are willing to vote for a referendum that will increase sales tax or other levies rather than these exorbitant tolls over a 58 year period.

The Bond Buyer spoke to the national importance of this PPP:

The tunnel, scheduled for completion in 2017, is intended to help clear congestion in one of the commonwealth’s major population centers, but a group of citizens brought the lawsuit last year after the project’s agreement with VDOT specified that drivers would begin paying tolls in January to use an existing tunnel. That revenue is being covered by VDOT in the interim. While area residents celebrated the decision, state leaders expressed disappointment. Virginia has become a national leader for P3s under Gov. Bob McDonnell, with the Elizabeth River Crossing project as the crown jewel.

Last month, the project was honored as the 2012 North America Toll Road Deal of the Year by Project Finance Magazine.

A Virginia ruling does not have weight in other states, but it does raise a red flag about funding for PPP projects. You cannot tax citizens to pay for a private project that they do not use. Twitter addressed another important issue about the project:

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