Virginia resurrects 63-20 not-for-profit to take risk on US460, Ferrovial to do design/build
By Peter Samuel
2012-10-18: The McDonnell administration in Virginia has resurrected the 63-20 tax exempt not-for-profit financing vehicle for the $1.4 billion 55 mile US460 tollroad between Petersburg and the Norfolk Hampton Roads area. A Ferrovial-led group has been chosen to do design-build work.
The state of Virginia is providing most of the funds, although they are working on getting the Feds in also via TIFIA loans. (see chart titled Funding Source nearby)
Under the present plan tolls are only expected by VDOT to support $216m of $1,396m or 15% of the capital cost of the project which makes little economic sense. The planned toll road is located close by the existing 2x2 lane rural surface arterial standard US460 for the whole of its length. And this is a corridor with average traffic flows of only 20,000 to 30,000 a day.
It wouldn't be surprising if 460Toll got less than 10k/day.
In addition to the not-very-congested surface arterial US460, 460Toll will compete with untolled I-64 for many trips. (US460 runs parallel with I-64 and at its furthest only 25 miles from it.)
For trips to the Hampton Roads area from Richmond, Northern Virginia or points north I-64 is clearly the preferred route. But it is just 2x2 lanes so close to capacity, and difficult and expensive to widen.
A question is whether overall traffic will grow much or little or not at all. Many places in the northeast and mid-Atlantic traffic shows little or no growth or has declined a tad over the past decade.
460Toll will reduce the need for some of the longer trips to use the Hampton Roads bridge/tunnel crossings - that's a definite plus.
Its major advantage will be for Hampton Roads ports traffic headed southwest via I-85 to the western Carolinas, Atlanta and beyond.
It will be also very helpful in case of hurricane evacuation, or if Iran's ayatollahs nuke the Norfolk Naval Base.
The project is through nearly flat countryside with just overpass style bridging needed. There are seven interchanges only in 55 miles, and except for the end ones, just diamond ICs.
Lightly populated corridor
The corridor in which US460 is located is lightly populated so there is little commuter traffic. But for political reasons tolls are being set well below revenue maximizing levels at 6.7c/mile for cars and 21.3c/mile for trucks meaning for the full 55-mile trip a $3.69 toll for cars and $11.72 for trucks. Those are toll rates proposed by VDOT for the pike's opening year 2018.
Tolling will be by transponder or camera - cashless.
Toll rates will be escalated by 3.5% annually except if the project gets into financial trouble, in which case toll rates may be fixed at levels recommended by an "independent traffic consultant."
Politics is also reflected in a commitment to freeze toll rates if the pike beats the base case forecast by 10 to 20% over a three year period - the inverse of business logic.
No investment grade traffic and revenue study has been done yet but the most optimistic forecasts back in 2005 by Parsons Transportation were that tolls couldn't support more than about $850m capital cost.
In a response to a VDOT RFP 7th September 2010 Cintra - since merged with Ferrovial - estimated that as a toll concession the VA/US460 tollroad project would work with an upfront subsidy from the state of $782m.
Costs Virginia taxpayers $400m more than concession
In the agreements announced this week the state of Virginia will put up $1,180m or nearly $400m more than would have been required for the concession Cintra proposed two years ago!
And in that proposal Cintra shareholders would have taken the traffic and revenue risk, not Virginia taxpayers or the poor unrepresented souls who trust their money to a 63-20.
In this case the 63-20 not-for-profit will be titled Route 460 Funding Corporation of Virginia (R460FCV). It will collect the tolls and attempt to service the debt. It's bondholders will be the first to be stiffed if the traffic and revenue forecasts don't work out.
Consistent record of 63-20s
63-20 not-for-profits (NFPs) were all the rage for tollroads ten years ago. They established a remarkably consistent record - consistently headed to bankruptcy and involving huge legal and financing costs to reorganize.
Notable 63-20 failures were the Southern Connector in Greenville SC, the Northwest parkway in Denver CO, and not least the Pocahontas Parkway right there in Richmond, the Virginia capital. (CORRECTION: at the South Bay Expressway, Parsons Brinkerhoff had a concession, which they concluded would only work financially as a 63-20 and the lower financing costs, but it was never converted to a 63-20, and sold instead to Macquarie, and remained a concession until recently sold to SANDAG.) Not a single major success story can be cited in defense of 63-20s.
Karen Hedlund a lawyer heavily involved in "innovative financing" at the time said of 63-20s they produced "an artfully contrived lack of responsibility."
Hedlund wrote: "The responsible government agency must first recognize that although the 63-20 corporation is issuing debt on its 'behalf' the non-profit entity may not be under its direct control. Once the government unit approves the corporation and its debt it generally has no formal role in determining how the corporation carries out the project. Indeed it may not even have the power to remove and reappoint board members. And its inability to replace board members means that this entity is not really politically responsible.
"Furthermore, and perhaps even more troubling, it lacks any independent financial commitment to the project since it is a nonprofit corporation and cannot earn an equity return on any investment. What it constitutes is a group of public-spirited citizens (hopefully public spirited - editor) with a sincere interest in the success of the project, but not directly answerable to any elected official, and with no financial stake of their own in the project. How then can this entity be relied upon to act in the longterm interest of the private parties, including the developer/sponsor, contractors and bondholders) as well as the government unit?"
63-20s were constructed to serve the interests of those who made money on the planning, design, permitting, lawyering, lobbying, marketing, systems, and construction - those who were 'outtah there' as soon as the road opened. There is no representation in 63-20s for anyone with a longterm interest in the viability tollroad or even a medium term interest.
The 63-20 form puts the fly-by-night crew in charge.
Rising from the grave
Many thought the 63-20 for tollroads was thoroughly discredited following their consistent pattern of failure a decade back. But bad ideas can come back!
As Randall Holcombe of the Independent Institute wrote recently: "What often passes for policy analysis does not actually analyze government policy or behavior at all. It assumes government will do the optimal thing without analyzing whether government has sufficient information to find the optimal policy, or whether those in government have the incentive to carry it out. That is not policy analysis; it is wishful thinking."
When we pronounced the end of 63-20s and said 'Good Riddance' to them a few years back after a perfect failure score was established, clearly we were guilty of wishful thinking. In government it seems bad ideas like 63-20s get retired to the closet for a year or two, but when memories have faded a little they're brought out again.
US Gov rewards irresponsible governance, enriches fly-by-nighters
The IRS 63-20 provision is an outrage, a sorry example of government rewarding with tax-exempt status those who serve the public least - the people who invest none of their own money and have no longterm stake in longterm projects, the people most likely to promote bad projects for what they can squeeze from them in the making, and to leave losses in their wake. 63-20s are a product of the twisted leftist logic that people without a stake in a project will serve the public interest better than those who have such a stake -editor.
our earlier reports on the US460