Case Study: Driving Virginia

With a solid legislative foundation in place for nearly a decade, Virginia has become something of a front-runner in the US P3 landscape. While many states in the country have been slow out of the proverbial P3 blocks, Virginia has now established a pipel

Back in 1995, the state established the Virginia Public-Private Transportation Act (PPTA), which has been updated regularly over the subsequent years to fit the deals on the table, as the pipeline has taken shape. Virginia now claims that the framework has become a model for other states looking to broaden their P3 opportunities – a frequent occurrence over the last year especially.

In addition, the PPTA has companion legislation entitled the Pubilc-Private Education Act (PPEA), established in 2002, which allows for social infrastructure such as school buildings to be developed and procured under a P3 model.

With the ability to advance both solicited and unsolicited proposals, and featuring continued political support from state government, the legislative framework has certainly played no small part in establishing a very healthy pipeline over the last year alone, noticeably in the transportation sector.

This was aided by the political support for P3s, which came in the form of the creation of a dedicated P3 office, separate from the state’s other transport agencies.

Over a decade after the creation of the PPTA, in 2010 Virginia also implemented the Office of Transportation Public-Private Partnerships (OTP3). As a result, the guidelines developed by the OTP3 have provided both the public and private sector with a predictable, consistent framework to develop and procure transportation projects.

The legislation has also allowed for project-related alterations in 2005, 2008, 2010 and 2012, which has seen a standardization of technical requirements and contract documents, with the ability to allow for alternative procurement structures to suit the relevant deals.

“[The legislation] is both consistent and flexible”, says program manager at OTP3 Jackie Cromwell.

“We’ve now completed a mixed portfolio that contains successful versions of solicited and unsolicited projects. Additionally, while milestone points within the procurement are shared with members of the General Assembly, it is not required by law to review or approve the final contract.”

As a result, the state has been forced to fall back on the reliability of its established procurement processes to ensure the best possible value on deals, Cromwell adds.

And this method is already bearing fruit. Back in late 2007, a deal was secured with construction firm Fluor for the Capital Beltway (I-495) project, after the state received an unsolicited proposal from another consortium. Following a subsequent request for counter-proposals for the project, a $1.9bn design, build, finance, operate and maintain (DBFOM) deal was rubber-stamped with the Fluor-led consortium, also featuring Australian firm Transurban.

In July 2012, commercial and financial close was reached on the state’s $925m I-95 Express Lanes P3. VDOT has entered into a partnership with the 95 Express Lanes consortium to build 29 miles of express lanes along the I-95’s Garrisonville Road in Stafford County to Edsall Road in Fairfax County.

Under the agreement, a Transurban/Fluor led team will oversee the facility for a 76-year concession period under a DBFOM framework, while VDOT maintains ownership of the infrastructure and will oversee the consortium’s activities.

In December last year, the state also reached financial close with US 460 Mobility Partners, a consortium consisting of Ferrovial Agroman, American Infrastructure and Cintra Infraestructura, for the 55-mile section of Highway 460 in southeastern Virginia.

Valued at $1.4bn, the highway P3 will receive approximately $1.1bn from public sources, with the remaining costs coming from the consortium, as well as the design and build aspects of the project.

In addition, the operation and maintenance responsibilities were handled differently than in a typical concession agreement, with the 63-20 Corporation being established by the Commonwealth to obtain bonds to finance additional parts of the concession.

And projects are continuing to be procured, with the tender for the operation and upgrade of the state’s Transportation Operations Centres currently at request for proposals stage and the June 2013 announcement of a request for information for the upgrade of the I-66 highway.

With the confirmation of 20 potential deals, included in the recently-announced PPTA Pipeline 2013, the value of the state’s transportation pipeline is now set to soar to around the $20bn mark.

But it is not all plain sailing in the state. Despite reaching financial close with private sector partners Macquarie/Skanska on the $2bn Midtown Tunnel/MLK Extension in April 2012, the deal was thrown into doubt after a profoundly negative response to the setting of toll charges.

In May 2013, Judge James Cales ruled that the general assembly had “exceeded its authority by ceding the setting of toll rates and taxes” to the state’s transportation department.

He claimed that the move had given “unfettered power to the Department of Transportation without any real or meaningful parameters”.

Despite the response to the decision to begin collecting tolls two years in advance of construction, the state argued that stakeholders failed to acknowledge the regional traffic improvements that the system would also fund.

Another deal to be hit with problems is the Pocahontas Parkway P3. The operation of Virginia’s first DBFOM deal, signed in 1997, is to change hands after failing to generate sufficient revenue to cover debt payments.

Current operator, Transurban, has confirmed that it will transfer operation of the state-owned toll road to a consortium of European banks that already hold more than $300m in debt on the toll project.

As a result, the project must also return a $150m loan from the federal government. Although the transfer has been confirmed, the future long-term operation of the road is still unknown.

The road has been blighted with financial issues since its creation and has suffered over recent years from a downturn in airport traffic and the collapse of the nearby housing market.

Whoever is next in line to assume control of the road will be subject to continued oversight by VDOT and also bound by the current schedules for levying tolls.

And there continue to be wider issues affecting other projects in procurement and in the pipeline, according to Cromwell.

“We have faced challenges with several different aspects of P3 projects,” she said. “There is still the idea that we’re selling Virginia’s assets to ‘foreign’ companies. There is also an idea that jobs are being taken away from American workers.”

In response, OTP3 has sought to establish that it will be seeking local firms to assist in design and construction of projects as it continues to expand public knowledge of P3s.

But, in fitting with the rest of the US, and despite possessing the rarity of a legislative framework that – in some ways – backs the concept, social P3s remain another hurdle for the state going forward.

In comparison to its transportation counterpart, the social P3 market in the US has seen slow progress as a whole, hit by a lack of overall legislation and exacerbated further by confusion surrounding the P3 process at government level.

However, unlike many of its counterparts, Virginia can, at least, boast a signed social deal in its pipeline.

In November last year, the University of West Virginia agreed a deal with Paradigm Development to build and leaseback a $70m complex to the university in Morgantown’s Sunnyside district.

The scheme will assist with the university’s housing masterplan, with student living spaces and transitional family housing. It will include two multi-storey buildings on three acres and two acres with parking for residents and retail customers.

But Cromwell believes transportation is still likely to remain the go-to sector for investors in Virginia.

“While the dollar value of projects advanced under the PPEA is much less, the advantages of combining design, construction and maintenance are still achieved,” she argued.

“But I would not anticipate the depth and breadth of social infrastructure delivered via P3 in Virginia on the scale seen in the UK or Canada.”

Either way, as P3 continues to rise in the US, the state is in a strong position to continue to attract the attention of investors, both nationally and internationally. With a pipeline of projects behind it that looks set to grow, there are certainly worse places to turn than Virginia.