WASHINGTON — Virginia is using a public-private partnership to put another tunnel under the Elizabeth River between Norfolk and Portsmouth. Including improvements to existing tunnels and some surface road building, the project is budgeted at $1.9 billion.
Private-sector partners Skanska Infrastructure Development and Macquarie Group Ltd. agreed in July to a fixed-price, design-build contract of $1.45 billion using equity, bank debt, and a loan from the Transportation Infrastructure Finance and Innovation Act. Some of that could be replaced with private-activity bonds as a financing mechanism.
The state will contribute $395 million from a $1.4 billion special fund in its transportation budget established just for P3 projects. That fund is financed primarily by $1.1 billion of planned grant anticipation revenue vehicle bonds, or Garvees.
Without a partnership, the project couldn’t have been built, according to Tony Kinn, director of Virginia’s Office of Transportation P3s. “You have to look at the entire business environment,” he said.
“The state of Virginia has limited funding. The private sector is suffering through the same economic disadvantages,” Kinn said. “I do not believe any state or any business at this time can do these jobs on their own.”
Norfolk and Portsmouth are located in Virginia’s Hampton Roads area. The region is the confluence of three rivers and one of the largest naval, shipbuilding and port complexes in the United States. The conflicts between land and water traffic are a continuing challenge to planners trying to relieve growing congestion. Half-hour delays at the existing three tunnels between the cities are almost daily events.
The river would be easy to bridge, except for the need to provide clearance above the occasional aircraft carrier sailing through. The first two-lane Downtown tunnel went under the river in 1952. A second two-lane tube added in 1987 provided a four-lane interstate. The two-lane Midtown tunnel opened in 1962. The current tube began carrying 8,400 vehicles a day and now carries 38,000. All three need rehabbing and the new tunnel will create a second four-lane freeway.
Transportation Secretary Sean Connaughton said this was “one of several projects hung up for some time” that he had made a priority to get done. Officially, it’s known as the Downtown Tunnel/Midtown Tunnel/Martin Luther King Expressway Project. In addition to the new tunnel tube, there will be improvements to the current three tubes under the river and an extension of Portsmouth’s Martin Luther King freeway to Interstate 264.
The tunnels and freeway are now toll-free but new tolling will provide the revenue stream for the project.
Skanska and Macquarie created a joint venture called Elizabeth River Crossings LLC to be the private part of the P3. In the July 20 business terms, ERC committed to $1.235 billion in financing, $318 million in equity, $495 billion in bank loans, and a $422 million loan under TIFIA. The federal loan is not a certainty but Virginia officials have strong hopes of getting it.
ERC will have a 58-year concession, after which it will return the new tunnel to the state. The concessionaires will carry the revenue and traffic risk.
Dusty Holcombe, deputy director of the P3 office, says $1.45 billion “is how much it’s going to take the private sector to come in and build all the facilities that are in the project itself.” But that’s $215 million less than the ERC commitment announced last month.
The difference, he says, will come from about $300 million in expected tolls on the current tunnels. They will go into effect in the second half of 2012, though the new tunnel isn’t expected to be completed until 2016. The $300 million will go as needed to reserves, buildings that will have to be erected for the project, equipment and operating costs.
The business-terms agreement sets the tunnel tolls at $1.59 off-peak and $1.89 peak for cars. Trucks will pay $4.77 off-peak and $7.36 peak. Tolls will be collected by E-ZPass transponders and video. Toll escalation is capped at the greater of 3.5% or the consumer price index increase each year. Virginia’s $395 million contribution is to keep toll rates down.
There also is a backup financing plan. Elizabeth River Crossings has applied for the authority to issue $1.2 billion of private-activity bonds. Holcombe says the bonds will be used if they turn out to be the best financing mechanism when the project goes to financial close.
“If, for example, the private-activity bonds give us a better weighted average for the capital, the activity bonds versus the bank debt, you’ll have a different scenario as we go along and we see what the interest rates are and we see what the different financial instruments are to us, then we’ll make a final decision for the uses,” he said.
They would not necessarily issue a full $1.2 billion. The P3 office expects final closing in late August or early September. The $395 million for the tunnels was the first commitment from the state P3 fund. On July 28, the state earmarked $500 million from the fund for a P3 to rebuild U.S. 460 from Petersburg to Suffolk and issued a request for detailed proposals.
Earlier, Cintra Infraestructuras S.A.U., 460 Partners Inc. and Multimodal Solutions LLC submitted conceptual proposals in response to a solicitation seeking private partners.
The Virginia Transportation Department now lists 11 P3 projects in various stages. Connaughton said they “are the wave of the future. The key is to have a pipeline of projects.”
“This is one of the few industry areas where the amount of capital available for investment greatly exceeds the opportunities to invest the capital,” said Macquarie managing director D. J. Gribbin.
Why are billions sitting on the sidelines looking for public-private partnerships? “Because they are complicated, they’re different and they’re difficult for governments to do,” Gribbin said.
Virginia wants its project pipeline to attract the available capital. Kinn says his office wants to be seen as a serious player.
“We are looking to establish a business-to-business relationship,” he said. “We are looking to make a commitment to build projects with the private sector. We want to meet them in as an aggressive and professional posture as we possibly can at all times.” Kinn said Virginia is fully integrating P3 possibilities in all its transportation planning.
Gov. Bob McDonnell’s plan also created a transportation infrastructure bank with an initial capitalization of $283 million to be used for grants and low-interest loans for projects such as P3s. The governor’s ultimate goal is to provide $1 billion for the TIB. VDOT officials say it is still being set up.