WASHINGTON — Standard & Poor’s issued its first public rating of a public-private partnership in the United States, a BBB-minus for a project to build a tunnel under the Elizabeth River between Norfolk, Va., and Portsmouth.
The low investment-grade rating, one level above junk, stems from the agency’s questions about whether traffic volume on the existing and new tunnels will support the project’s $1.45 billion price tag.
The agency assigned a BBB-minus with a stable outlook to both the $675 million of senior-lien revenue bonds and the $422 million federal loan under the Transportation Infrastructure Finance and Innovation Act program on Monday.
The project is a partnership between Virginia and a private venture, Elizabeth River Crossings, which comprises partners Skanska Infrastructure Development and Macquarie Group Ltd.
Under the agreement, authorized by a P3-enabling law Virginia enacted in 1995, the Virginia Department of Transportation will maintain ownership of the infrastructure and oversee ERC's activities. ERC will finance and build the facilities, then operate and maintain them for a 58-year period in exchange for the right to collect toll revenue on traffic using the tunnel.
A major concern for the project is a projected downturn in traffic volume after ERC implements tolls on the river’s existing tunnels later this year as part of a plan to fill a funding gap in the $1.45 billion project, Standard & Poor’s analyst Jodi Hecht said Tuesday during a conference call,.
Hecht said the model her agency used differed from the analysis offered by the firm hired by ERC.
“Our base case in terms of traffic is lower,” Hecht said, noting that Standard & Poor’s expects a 44% decline in traffic as motorists seek to avoid newly-implemented tolls. That compares to a more optimistic projection of a 28% decline produced by ERC.
Other risks include the complexity of the project, which would make finding a replacement contractor difficult in the event of need, Hecht said.
Hecht said that the bonds’ strength is buoyed by a strong economy in the area, which is at the intersection of three rivers and one of the largest naval, shipbuilding, and port complexes in the United States. There is also strong demand for the existing tunnels. Though alternate toll-free routes will exist, Hecht said she continues to expect strong demand for those routes because of the substantial time savings they offer.
The project is one of the largest P3 projects to date.
A Congressional Budget Office tally of P3s over the past 22 years shows an average size of $540 million for highway projects, less than half the size of the Elizabeth River project.
Virginia’s Republican Gov. Robert McDonnell and Transportation Secretary Sean Connaughton have said the project is a “priority,” but they have faced some criticism from Democrats.
Vivian Watts, a delegate to the Virginia House and a former transportation secretary, raised concerns in January about the plan to support the project through grant anticipation revenue bonds, or Garvees.
All three major rating agencies have warned that Garvees, which are backed by federal appropriations, could be downgraded in the face of federal budget cuts.
The new tunnel is slated to open to traffic in 2016.
