By David Baxter, senior fellow – Next week I will be presenting two workshop sessions at the Istanbul PPP Summit, which is being held between the 2nd and the 5th of November. The sessions will be focused on institutional capacity building (institutional preparedness) and risk management.
While preparing for the two workshop sessions and researching the context of PPPs in Turkey, I read about the plans under way to increase road crossings across the Bosphorus so that connectivity between European and Asian Turkey can be improved. This includes the North Marmara highway and Bosphorus Bridge project.
It was rather serendipitous that while I was doing my research that an article appeared in last Sunday’s Washington Post (18th of October) about the controversial Mid-Town Tunnel PPP project in Hampton Roads Virginia. This is an interesting case study, with lessons learned, that developers of new PPP bridges and tunnels projects that could compete with existing and future tunnels should heed, especially regarding guaranteed toll fees and difficult to project usage.
The proposal to build a new underwater tunnel in Norfolk as a 50 year PPP concession project was considered as an alternative way to fund and build a crucial piece of infrastructure in the crowded city without the Commonwealth of Virginia having to pay for it. Under the terms of the agreement in it was declared that public financial support would be in the form of low-cost federal loans and bonds for private business use and that no other subsidy or payment would be needed.”
However, since the inception of the project, costs have escalated with Virginia spending $580 million on the project, which was more than more twice the investment from the private sector partners (Skanska and Macquarie) behind the project. In addition, the project companies, which were awarded the project, without competition, were given the rights to collect billions of dollars in tolls over 58 years.
Astonishingly, Virginia agreed that Skanska (construction company) and Macquarie (financier) are entitled to large government payouts if Virginia builds or expands other competing bridges or tunnels.
Detractors of the project have also stated that:
Project details were unclear from the onset of the project and that they continue to change
Local politicians were excluded from the project
There were no checks on the dealmakers
Community leaders and politicians are now asking pointed questions on why the Commonwealth of Virginia got such a bad deal, and why the Commonwealth has spend $490 million to date, with an additional $91 million (toll fee protection clause) commitment over the lifetime of the project?
Many also want to know why the financial terms were so favorable to the private sector partners, considering that this project was a PPP.
The reason is that the concessionaires struck a hard deal with the Commonwealth, which was eager (for political and socio-economic reasons) to secure toll fees that were lower than the original proposition. Poor negotiations by public officials and complex financial terms that were not clearly understood exacerbated the outcome, it was stated in the Washington Post’s report. Negotiations on the loan agreement terms with the federal government and the Virginia Small Business Financing Authority, and the resulting allocation of projected revenue risks that absolved the concessionaires of financial responsibility were also poorly thought out.
It is felt by many that better terms could have been negotiated had the procurement been a competitive procurement. The five decade long agreement is particularly risky as no one can firmly project what will happen over time. In addition, should public priorities change in the future, renegotiation of contract terms will be extremely expensive. The Commonwealth in its haste to negotiate contractual terms to build a project, for which it felt at the time it did not have the funds for, has proven to be costly. So much so – that there is now a sense of buyer’s remorse and a feeling that it might have been better in the long run for Virginia to have spend its own money to build the tunnel project. No matter how much remorse it felt, Virginia will have to live with its decisions.
This case study is relevant for future Bosphorus bridge and tunnel projects that might be considered in the future. The following questions should be asked by the public sector when projects are considered:
Should the project be built as a PPP or is it better to use public funds to pay for the project?
Is there any value in sole-sourcing the project – is it not better to make it competitive?
Do we have the institutional capacity to negotiate complex financial terms for a costly and long-term project?
Should we allow the private sector concessionaire to tie the project terms to other competing infrastructure?
Are we fully comfortable with the use projections for the project so that we can agree to terms vis-à-vis risk mitigation of guaranteed revenues for the private sector?
Should we consider any renegotiations of contract terms once projects mover forward?
How do we engage stakeholders (political and societal) when determining toll thresholds that will be acceptable to users?
This example is a fascinating case study that should be read by all PPP public sector project teams. See the full story at:
http://hamptonroads.com/2015/10/virginia-getting-soaked-midtown-tunnel-deal
