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Sunday, May 31, 2015

Virginia's road project got PPP'd on

How Virginia paid more than $250 million for a road that never got built
The problems help explain why top officials in Gov. Terry McAuliffe’s administration have recently increased scrutiny of public-private partnership deals, a sharp shift in tone in a state that has for 20 years been a national leader in pushing such projects. Transportation Secretary Aubrey Layne said this month that the I-66 project should not be ceded to private investors for “ideological” reasons, as might have happened in the past. Keeping the construction of toll and carpool lanes under state control could generate hundreds of millions of dollars for additional transportation projects, he said, and avoid a repeat of cases in which the state was left “holding the bag.”

Virginia officials are trying to get back tens of millions of dollars from a private company that was supposed to build a 55-mile toll road in southeastern Virginia. State officials had been sending the company multimillion-dollar installments each month to build the road. But the state lacked federal construction permits, so the road wasn’t built. And now the commonwealth is out about $256 million.

Virginia officials governed the project using the state’s Public-Private Transportation Act, which went into effect 20 years ago and gave officials extraordinary flexibility in pairing public projects with private firms. The idea was to try to tap the construction expertise, business acumen and cost-consciousness of private companies, with the benefits flowing to shareholders and state taxpayers. If Virginia officials didn’t have the stomach to set aside large sums to add long stretches of highway, they could lure private investors to put up much of the money. Companies would cover project costs and company profits with the decades of toll revenues they collected.

Among the critical problems, Layne said, was a sort of automatic payment plan, which sent millions to the firm monthly starting in early 2013. Those routine payments were in addition to funds sent to cover specific work that was completed. "Payments continued to go to the contractor for things they knew couldn’t possibly be accomplished, because they didn’t even have a permit,” Layne said. Del. S. Chris Jones (R-Suffolk), chairman of the House Appropriations Committee, said, “I can’t think of a worse contract that I have seen in my years of public service.” Jones said that the deal was rushed to avoid political scrutiny.

Layne said he was not seeking to disparage state representatives, but noted that they emerged from a more “process oriented” background within state agencies and lacked the entrepreneurial and negotiating experience and resources of private firms. Private negotiators had often been doing a much better job than their well-meaning state counterparts. “These guys are buying the best attorneys in the world.”

Layne said the company negotiated in good faith. It is the commonwealth’s responsibility to protect its interests, he argued. “I don’t think they’ve done anything that wasn’t allowed in the contract,” Layne said. But, “I’m not saying it was a good contract.” “I don’t blame them for taking the money. It was a negotiated payment schedule,” Layne said. “They didn’t ask to stop getting payments. . . . If I were them, I wouldn’t either.”

The initial concept was that a private firm would pay to build the toll road and control it for decades, a major undertaking with significant risk. The Public-Private Transportation Act allowed many of the state’s basic procurement rules to be bypassed, Layne said, a feature intended to give the state flexibility to find the best deal.

But private firms balked at taking long-term control of the road because traffic tallies and resulting toll revenues were projected to be too low. So state officials changed course. They decided they wanted to hire a company whose primary responsibilities would be to design and build the road. But in a quirk of the transportation act, the state’s basic procurement rules — which limit certain types of financing arrangements and require more rigorous oversight — did not kick back in, even after the nature of the project shifted radically.

State officials then failed to invite a wider group of firms to vie for the business. That left just the three groups that had been competing for the original public-private partnership, Layne said.

Officials “continued to negotiate with a group that was really set up to do something else,” Layne said, noting that only a few large firms had the needed financial heft and inclination to finance, design, build and operate the project as it was initially envisioned. “Had they opened it up, they would have had many more firms willing to bid on this particular project,” Layne said. “It was basically, ‘Build the road and turn it over.’ ”

And more competition could have brought a better deal, he argued.

Project executives with the two firms that make up 460 Mobility – Ferrovial Agroman, a major multinational construction and engineering concern with roots in Spain, and a Pennsylvania-based building firm now known as Allan Myers – declined to comment. “Our employees and contractors have been professional and accommodating throughout the commonwealth’s reconsideration of this project,” said Shannon Moody, 460 Mobility’s public relations manager.

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