Greater Greater Washington

Corporate welfare and the Beltway HOT lanes, part 1: No free lunch

Beware of Australians bearing gifts, at least if those gifts are massive highway widening projects.


Image from Virginia HOT lanes.

Whether by negligence or malice, the Northern Virginia Beltway HOT Lanes project has become an increasingly expensive boondoggle. Fluor-Transurban, the private company working on the project, originally promised to build HOT lanes construction for "free" to the state, with overhead costs paid for by the company and recouped through congestion-priced tolls. With Northern Virginians desperate for road expansion and the rest of Virginia hoarding Fairfax County's tax dollars, a mere lending of public land in return for the good graces of benevolent corporate efficiency seemed like an unbeatable harnessing of the free market.

Proposed for $1.1 billion as a creative way to use free market demand to expand road capacity at no taxpayer expense, the result has been a $1.9 billion heavily subsidized profit hog, taxing citizens up front, on the back end through penalties, and regressively through user fees. While cost re-estimates should have been alarming, what should have come as even more shocking was the heavy demand for taxpayer money. Virginia provided $409 million in direct grant funding, along with $1.7 $1.17 billion in federally subsidized loans and bonds. The few media stories on the project focused on the relative novelty of how pricey the tolls the new "private" road would be, when the more substantive story was that it had almost ceased to be a privately-funded road at all.

A major argument in favor of a public-private partnership is risk. A private entity assumes the loan and bond repayment risk, and this takes the burden of repayment off the public. But the glossy advertisements on virginiahotlanes.com don't account for the risk involved in dismantling NOVA's transportation spine. The risk is not so much if the private contractor drowns, but that if he drowns he takes us with him.

If the contractor goes broke, the central community artery will be in shambles. This creates the worst of scenarios, in which the state and citizenry assume great mobility risk and ultimately financial risk if the contractor defaults. With the road ripped to bits, taxpayers will be forced to finish the job or be paralyzed. In this sense, the criticism is similar to the argument against student loan giant Sallie Mae, in that Sallie Mae makes loans and the federal government is obligated to pick up defaulted student loans. Just as the private entity in that partnership does not assume adequate risk; neither does the private entity in the case of the Beltway HOT lanes.

Next: The contractual block against carpooling.

Steve Kattula is an architecture graduate student at Virginia Tech in Old Town Alexandria, and lives and works in Fairfax City. 

Comments

Add a comment »

I am waiting eagerly for the rest of this series. This is an extremely important topic.

by Ben Ross on Nov 9, 2009 11:48 am • linkreport

Might want to fix the misspelling on the first word of your post. "Weather" vs. "whether"

by Mark P. on Nov 9, 2009 11:54 am • linkreport

So...Beltway HOT lanes price 'with a B' as well.

by James M on Nov 9, 2009 11:59 am • linkreport

Mark: Fixed, thanks for noticing that.

by David Alpert on Nov 9, 2009 12:05 pm • linkreport

It's not a bug... it's a feature!

by Cavan on Nov 9, 2009 12:07 pm • linkreport

Now that Bob McDonnell's been elected, Virginians throughout the state should expect more and more of these multibillion-dollar giveaways, from unnecessary and/or highly inefficient suburban connectors in Hampton Roads to the 95/495 HOT lane debacle. And don't think that McDo won't try to serve up more delicious sandwiches just like these over the next four years!

by J.D. Hammond on Nov 9, 2009 12:11 pm • linkreport

I don't know all the political history behind this project. Who championed the project and was naive enough to boast that public funds wouldn't be pumped into this project? Mark Warner? Tim Kaine? John Warner?

by Paul on Nov 9, 2009 12:33 pm • linkreport

I'm a bit confused. Not being snarky.

original proposal: $1.1 billion in private money
final (?) estimate: $1.9 billion

"Virginia provided $409 million in direct grant funding, along with $1.7 billion in federally subsidized loans and bonds. " -- that s is 2.1 billion

The link you have shows, cost as 1.9, with the breakdown:

$400 million in grant funds
$500 million in bonds
$500 million in FHWA loans
$349 million in private equity

So I read that as about a billion in federal loans/subsidies, and $409 in grant money -- about $1.7 of pubic money, not 1.9?

I love this quote on their FAQ:

"Why couldn't the Commonwealth just finance this project on its own?
With all the transportation needs, the Commonwealth does not have sufficient funding to dedicate to this project. This one project would consume more than a year of all construction funding available statewide. "

I"m sure the Commonwealth doesn't have $1.9 billion to spend on one year, but this is a multi-year project, no?

by charlie on Nov 9, 2009 12:51 pm • linkreport

This "hysteria" leaning view point of "what of they run out of money" really shows a fundamental lack of understanding at "how things work".

All private construction projects which this is, and even many governmental ones (sans federal) are required to be "bonded". Meaning prior to breaking ground, Flour et al had to pay to bond the work, purchasing a bond of sufficient value to pay to finish the scope of work if the company were unable to finish, much like an insurance policy. Fluor will reduce their bond as they proceed, as it would cost less and less to finish if they defaulted.

The real entity at risk is the bonding company. If Fluor defaults, VDOT simply cashes their bond which provides the money to finish but companies like Fluor with market caps of 8-9 billion dollars have enormous bonding capacity.

Secondly, VA put up 21% of the money, and is earning interest on the loans they backed because it is Fluors responsibility to service the bonds and loans.

21% (less when the loan interest is added in) for a project of that scope and size is a pretty good deal.

This "sky is falling" hysteria is really un befitting a goup of people who call themselves adults.

by nookie on Nov 9, 2009 1:14 pm • linkreport

My submittal was a bit on the wordy side and David did a good edit on the whole (great, actually). But the math got a little lost in translation. Should be about 1.1 billion in fed loans/bonds, not 1.7.

In response to JD Hammond - yes, unfortunately so. McDonnell has stated he wants to run the state "more like a corporation". It's baffling to me why that message resonated in the wake of the wall street collapse.

The public/private partnership with Haliburton also turned out swell.

"Public/Private Partnership" is an unfortunate term, because it rolls off the tongue in such a positive way. In most cases though, it turns out to be a big money grab, and corporate welfare.

Virginia is lining these HOT lanes projects up all over the state now, and McDonnell's policies accelerate the process. Other states are starting to follow. It's a HUGE problem for our democracy.

by stevek_fairfax on Nov 9, 2009 1:17 pm • linkreport

The biggest problem with this is that it will just punt the chokepoints around a little differently than they are today. Why couldn't we get them to fund a Metro ROW and give them a percentage of fares that use that portion of the line?

by NikolasM on Nov 9, 2009 1:25 pm • linkreport

@stevek_fairfax; thanks for the clarification on the numbers, just a bit confusing when adding it up yourself.

@nookie; I don't see the money being raised as "bonding"; they list it as private activity bonds which are muni bonds being issued on behalf of a company.

in addition, they are only spending $349 of their own money, which is about 15% of the project cost. the rest is being raised through the commonwealth and federal sources.

by charlie on Nov 9, 2009 1:30 pm • linkreport

SteveK: I don't think it's so much any particular message that resonated as it was Creigh Deeds' general failure to campaign on any particular issue at all. He buried his transportation plan in the middle of his economic plan and never really corrected that or brought it up much at all. What campaigning he did do was pretty much all about how McDonnell was crazy.

And yes, McDo is crazy - but Virginians don't care overmuch about crazy. Mostly they just want the trains to run on time, and while McDo has little meaningful intention of doing that, he made the right noises to that effect while Deeds thought he could coast to victory by keeping his mouth shut.

by J.D. Hammond on Nov 9, 2009 1:34 pm • linkreport

Charlie, you aren't getting it. Bonds raised to pay for a project are completely different from a performance bond.
http://en.wikipedia.org/wiki/Performance_bond

If fluor were to go bankrupt, the money would be there to finish.

And secondly, VA is backing the loans, but that also means VA is the one earning the interest (i.e. profit) on the loans and bonds.

C'mon folks...this is "build something 101".

by nookie on Nov 9, 2009 1:41 pm • linkreport

I don't think a user fee is regressive. It's a user fee. Sales taxes are regressive because they apply to everyone and, therefore, persons with lower income pay a larger percentage of their earnings to the tax. A user fee for a toll lane is simply that. No poor people have to use it.

From WikiPedia:

The term is frequently applied in reference to fixed taxes, where every person has to pay the same amount of money. The regressivity of a particular tax often depends on the propensity of the tax payers to engage in the taxed activity relative to their income. In other words, if the activity being taxed is more likely to be carried out by the poor and less likely to be carried out by the rich, then the tax may be considered regressive. To determine whether a tax is regressive, the income-elasticity of the good being taxed as well as the income-substitution effect must be considered.
http://en.wikipedia.org/wiki/Regressive_tax

by michael on Nov 9, 2009 1:54 pm • linkreport

Public infrastructure, or infrastructure created with any public dollars, grant, tax break or direct funding should be free and open to the public. Public infrastructure cannot be created for private profit.

NOVA needs to get it's head out of it's arse and sue to recover the funds already expended or open it to the public.

Public infrastructure should never be limited to those who can afford it.

by Anti-Toll on Nov 9, 2009 2:08 pm • linkreport

@nookie; actually YOU don't get it. This isn't a performance bond.

This is a bond being issued to pay for part of the project. Look at their website. IT is listed as a private activity bond.

I agree that it is not well worded. Transurban lists the price of the project as 1.4, total w/financing as 1.9, and the "private activity bond" is 500 million, so maybe they are a performance bond. But they list as a private activity, and if you bother to read the agreement you can see they specify the performance bonds are listed separately as well.

by chARlie on Nov 9, 2009 2:08 pm • linkreport

nookie, the loan is Federal, an FHWA Transportation Infrastructure Finance and Innovation Act (TIFIA) loan program which "makes possible the financing of highway projects with flexible repayment terms" (according to http://tifia.fhwa.dot.gov/about/rtc/index.cfm). It is supposed to "provide flexible, SUBSIDIZED credit assistance to projects of national significance".

Federal tax payers will not be making a profit off this loan.

Also, I never said the project would never be finished. As you know if you've ever dealth with construction, cost disagreements and bankruptcies end in lawsuits, not built projects.

by stevek_fairfax on Nov 9, 2009 2:08 pm • linkreport

The private entity assumes the risk? Ha. Corporations don't take risks that they aren't fairly certain they can profit from. Or if they lose some money from it, they want it to be very little.

The point is corporations exist for profit. That's it. If they don't profit, they find ways to. So rest assured, if there's risk, they've got it handled, and they'll profit from it.

by Tim on Nov 9, 2009 2:09 pm • linkreport

User fees aren't regressive. A tax is only regressive when it impacts the poor disproportionately. The poor don't have to use this road.

by michael on Nov 9, 2009 2:16 pm • linkreport

@michael - ther eis the dictionary and there is reality. the vdot website, fairfax county...they advertise the road as something everyone would use occasionally. to pick up your kid from daycare, make your son's baseball game. yes, no one has a gun to your head but it is the only alternative to the conjested highway being built. as i will get to in the next part, there are also "first build" clauses" in the contract.

by stevek_fairfax on Nov 9, 2009 2:29 pm • linkreport

All these comments going back and forth between members is more of a reason for a forum. I came here to read constructive comments that directly relate to this blog, not to read any of this "he said, she said" nonsense.

by Zac on Nov 9, 2009 2:37 pm • linkreport

@michael - the poor don't have to use this road, but they have to pay for it if they drive on any other road. I can't imagine what's more regressive than a tax that pays for something you can't afford to use.

by Ben Ross on Nov 9, 2009 2:38 pm • linkreport

As a supplement with regards to Federal TIFIA loans
http://tifia.fhwa.dot.gov/about/rtc/index.cfm

Read the 2008 Report to Congress, page 8, part B, paragraph 3...the TIFIA loan "provides low-cost flexible financing which made it easier for the private sector to assume the significant risks associated with the design, deployment, and operation of a complicated dynamic pricing technology".

Most people can't even get a subsidized loan to pay for college, but highway corporations receive giant subsidies in order to ensure their toll road can make a profit.

by stevek_fairfax on Nov 9, 2009 2:48 pm • linkreport

Jesus guys...you "anti anything related to cars" folks really don't improve your image much when you haughtily flaunt what ends up being a complete lack of basic knowledge about such things.

Charlie,

The bonds (i.e debt security) that Fluor used to raise money, that the government is backing and charging interest for is COMPLETELY DIFFERENT from a performance bond. I never said one replaced the other.

The initial hysteria of this article was "OMG, what if Fluor goes bankrupt, will the sky fall". My response was that Fluor, like any other construction company had to pay to performance bond the work. OK, for the cheap seats...Fluor "bought an insurance policy" to cover the work. If Fluor goes bankrupt, or was to back out, all VDOT has to do is "cash" the performance bond.

And while the road isn't able to be used by everyone, Car poolers appear to still be able to use it for free. So...tax payers write a check for ~20% of the total cost and in return tens of thousands of HOV commuters get to use the road for free, which frees up usable volume on the actual free lanes which everyone benefits from. Seems like a pretty decent trade off.

by nookie on Nov 9, 2009 3:14 pm • linkreport

@nookie;

The hysteria here is that this project was sold as getting private money, but as the facts point about only 15% of this money is being put up by private sources. The rest is coming from ill-guided federal loan money, muni bonds and direct grants. That doesn't seem like a great deal. VADOT may not have had $1.7 billion to build this, but since they are raising $1.4 already kicking in an addition $350 million in bonds doesn't seem impossible.

And yes, for the record, I am a very pro-car person who think the 5 years of headache that this construction will take will never benefit me in my lifetime. I'm already tired of the traffic jams. What NoVA needs is more investment in secondary roads, not highways.

by chARlie on Nov 9, 2009 3:24 pm • linkreport

@nookie:
You are right about performance bonds. However, in the vast majority of cases that a private entity cannot finish a large job such as this, years & years of lawsuits would ensue. Meanwhile the road is ripped apart (prior to being ...eventually... finished, as long as the state won the lawsuit...). The mobility risk for the community is huge, and was not taken into consideration in my opinion.

by stevek_fairfax on Nov 9, 2009 4:32 pm • linkreport

Jesus guys...you "anti anything related to cars" folks really don't improve your image much when you haughtily flaunt what ends up being a complete lack of basic knowledge about such things.

I think I'm going to LOL to death that someone named "nookie" is trying to lecture anyone on emotional maturity or public image.

by J.D. Hammond on Nov 9, 2009 4:36 pm • linkreport

Outside of the unquestionability of nookie's apparently very deep seriousness about this or any other issue, though, I freaking love to drive and have gotten into arguments with GGW about parking policy, freeway demolition, and other motorist issues before. And even given that caveat I think this policy of roads privatization is completely backwards and stupid.

There's something to be said for congestion pricing or tolling roads so that users benefit, provided alternatives. It's something else entirely to put the public of the entire commonwealth on the hook for the benefit of a foreign cost-plus concessionaire/contractor above and beyond any possible users of the road.

There's no need for ridiculous strawmen about anybody panicking or talking about government collapse or whatever nookie was trying to call the rest of us unserious (ha) over. It's just a certain degree of public concern for obvious and unnecessary waste during a budget crisis.

In fact, I'm kind of shocked that the Very Serious Nookie appears to be unconcerned about profiteering at all.

by J.D. Hammond on Nov 9, 2009 4:44 pm • linkreport

This HOT lane thing will be a boondoogle. That we decided to double down on highways after seeing what $4+ gas looked like (and the visible reduction in traffic) is stupid as hell, regardless of where the money comes from.

by NikolasM on Nov 9, 2009 4:45 pm • linkreport

HO/T lanes as a concept or project isn't the issue. The issue here is VDOT's application of it and the details of this lease agreement with Fluor-Transurban, which Steve said he'll go into more detail in a future post. VDOT has taken a good concept here and totally ruined it.

by Froggie on Nov 9, 2009 8:48 pm • linkreport

Well, I don't think there's anything wrong with the idea of congestion pricing - but the idea that such a project can be done effectively with new lanes, rather than using existing lanes is troubling - but more importantly, the financing aspects suggesting that we can get something for 'free' without swallowing the political pill of actually paying for it or investing in it is quite troubling.

by Alex B. on Nov 9, 2009 10:39 pm • linkreport

Both the CA 91 and I-15 Miramar experiences have shown that it CAN be done effectively with new lanes. That said, agree with you on the financing issue.

by Froggie on Nov 10, 2009 7:14 am • linkreport

I guess that depends on the meaning of 'effectively.' The whole point of congestion pricing is to price scarce assets according to their socially optimal value - to pre-suppose that more capacity is also needed not only undermines the ability of the congestion toll to raise revenue for more capacity, it's being trumpeted as an alternative financing mechanism for all incremental improvements in roads.

That's the whole point - the decision to build and the decision to toll are inexorably linked.

by Alex B. on Nov 10, 2009 8:52 am • linkreport

Congressman Connolly did a live chat on washingtonpost.com and I asked him about congestion pricing existing lanes, comparing it to congestion pricing of METRO. I also brought up the problem of the subsidies for the "privately-funded" Beltway HOT Lanes. He glossed over the subsidies part, but his response was:

Rep. Gerry Connolly: "The problem for me with congestion pricing on existing highways is that you, the taxpayer, have already paid for the construction of that highway. This is true in the case of I-66, I-395, and I-95. Why should you pay to build a road and then pay again to drive on that road?
I have supported the I-495 HOT lane project because the private sector is adding new capacity to the existing roadway. In my mind, that gives my constituents a choice they don't already have, and it is an effecacious use of congestion pricing."
http://www.washingtonpost.com/wp-dyn/content/discussion/2009/09/15/DI2009091502448.html

by stevek_fairfax on Nov 10, 2009 10:03 am • linkreport

Oh, hey, Portable Storage. Unfortunately, I think we only have control over whether you get "these kind of article" in the present.

by J.D. Hammond on Nov 17, 2009 9:58 am • linkreport

Add a Comment

Name: (will be displayed on the comments page)

Email: (must be your real address, but will be kept private)

URL: (optional, will be displayed)

Your comment:

By submitting a comment, you agree to abide by our comment policy.
Notify me of followup comments via email. (You can also subscribe without commenting.)
Save my name and email address on this computer so I don't have to enter it next time, and so I don't have to answer the anti-spam map challenge question in the future.

or