Commentary

Bacon's Rebellion
May 15, 2006

Learning from Pocahontas
Virginia Gov. Kaine smartly granted a concession agreement for the Pocahontas Parkway; why not the Dulles Toll Road?
By Geoffrey Segal

Literally moments after Gov. Timothy M. Kaine signed SB666, which tweaked the state's Public-Private Partnership Act to authorize concession agreements with private companies, the Commonwealth inked a concession deal with Transurban, a private toll road operator that manages roads in Australia, for the nine-mile-long Pocahontas Parkway. Although the deal was relatively small compared to other recent projects, Pocahontas can teach us important lessons.

The 99-year lease does not include an upfront concession fee, which is common in most other toll road leases. Rather, the operator/concessionaire has agreed to share profits with the Commonwealth, generating a long-term revenue source that can be used to fund other transportation projects in the Richmond region.

As part of its "permit fee" (the equivalent of a concession fee), the Commonwealth will receive 40 percent of gross revenues once net cash flow yields an internal rate of return of 6.5 percent. That number increases to 80 percent once that rate hits 8.0 percent. Thus, the deal could potentially add millions in revenue to state coffers over its 99-year life. Transurban also has agreed to build a $150 million spur to the Richmond International Airport, if federal loans are approved. In addition, state loans and operating expenses will be repaid under the deal.

Despite these extensive benefits to the Commonwealth, toll rates will be capped, protecting the public from dramatic price increases. Tolls will rise in a scheduled, six-step increase reaching $4.00 by 2016. Perhaps most importantly, Transurban guarantees its product. The agreement requires Transurban to maintain acceptable levels of service and to "cure" congestion before it reaches unacceptable levels.

Though widely deemed a bailout, the concession is a sign of what Virginians could expect from similar deals around the state for existing toll facilities—private capital to support existing and new highway functions, private expertise in road management and operations, and better customer service. That's on top of any cash payment or profit sharing that could raise millions of dollars for the state's transportation treasury.

In light of the Pocahontas experience, the Dulles Toll Road would seem to offer tremendous opportunity to benefit the people of Virginia. With offers upwards of $1 billion in cash and capital upgrades on the table, the potential concession deal seemed like a classic win-win proposition. Unfortunately Gov. Kaine threw away those benefits when he signed a Memorandum of Understanding with the Metropolitan Washington Airports Authority (MWAA) to choose a public-public partnership instead of a public-private partnership.

The Governor claims that MWAA has agreed to consider the private proposals, which may be the case. However, that condition is not included in the MOU. From the Commonwealth's perspective, what is perhaps most disturbing is what happens if MWAA goes forward with a private concession deal. The Commonwealth won't reap the benefits -- MWAA will be the sole beneficiary.

Rather than utilize new resources from cash payments and tolling income to improve traffic conditions throughout the region, MWAA will use proceeds to fund the Metrorail extension. While some argue that this is needed, the facts suggest otherwise. Rail to Dulles sounds like a great idea, especially if you work at the airport. However, it will do little to relieve congestion, and it diverts limited resources into less efficient and less effective transportation modes, which will be borne almost entirely by toll road users.

While House Speaker William Howell, R-Stafford, has justifiably called for hearings and a review of this transaction, many in the transportation sector consider it a done deal. If true, that means the state learned little from the Pocahontas Parkway experience.

First, the Commonwealth should stop investing in "nice ideas" and should invest its limited resources on those programs and functions that generate the greatest return. Given its cost, Metrorail extension will produce limited benefits to commuters at a cost of some $4 billion or more.

Second, business as usual will not work and we need to seek innovative solutions. The Pocahontas Parkway deal demonstrates that innovative solutions are in fact out there. We need to be ready and willing to embrace them.

A modern transportation system is important to the future of Virginia. But "being stuck in the past" in the way we choose our projects and invest our resources will bring only disappointment and further citizen distrust in government. The Pocahontas Parkway deal is an example of the future while the rail-to-Dulles deal lacks the thoroughness and creativity required in today's world.

Geoffrey F. Segal is the director of government reform at Reason Foundation. This column was originally written for the Bacon's Rebellion. An archive of Segal's work is available here and Reason's transportation research and commentary is here.