Thursday, June 30, 2005

Public-Private Partnerships and Assumption of Risk

Finally, a transportation editorial in the (Newport News) Daily Press that I can agree with. The anonymous editorial reviews a series of mega-projects where cost estimates are escalating out of control, undermining the original justification for the projects. Two cases in point:
  • The Coalfields Expressway in Southwest Virginia: from $1.6 billion to $3.8 billion in four-and-a-half years.
  • The Northern Virginia Metrorail Extension to Tysons Corner: from $1.5 billion to $2.4 billion.

And, as a reminder of what can happen once these projects are built, the Daily Press takes note of the proposal by Australia-based Transurban to take over operation of the Pocahontas Parkway southeast of Richmond. Parkway bonds are looking shaky thanks to traffic projections that came in below forecasts. Transurban might be willing to bail out the project.

Common denominator: Each of these projects were initiated as a public-private partnership. (Thankfully, the Coalfields Expressway and Tysons Metro Extension have yet to be built.) Anyone who thinks that public-private partnerships are an easy way out of Virginia's transportation dilemma (as I once did) has to reconsider their position. Private companies pitching mega-transportation projects always use the most optimistic possible forecasts as a way to induce government into giving them huge consulting contracts to flesh out the project or, ultimately, to build and finance it. The trick is: Do they really believe the forecasts? There's an easy way to find out: Are they willing to invest their own money into the project and assume the risk that their projections might not pan out?

Public-private partnerships can be a part of the solution to Virginia's transportation woes -- but only if private investors are willing to shoulder a significant portion of the risk of the projects. State government cannot allow itself to play the patsy -- or taxpayers could be saddled with billions in debts.

5 Comments:

At 11:56 AM, Anonymous Paul said...

Don't forget the Mixing Bowl project. Originally supposed to cost $254 million. Now the costs are approaching $1 billion.

 
At 11:57 AM, Anonymous Paul said...

Jim: The way 288 was built was very successful. My understanding is that the contract was made up of incentives to complete the project on time and on cost. It worked.

 
At 12:06 PM, Anonymous SDH4VBT said...

The 288 project was really more a "design-build" project than a full PPTA, since there was no private capital involved and there are no tolls to pay off the private investment. But PPTA does allow you to get around the traditional procurement and use design-build. But all the money for 288 came from the state - and it is the biggest beneficiary of the cash the GA spent this year to pay down deficits on existing roads.

 
At 12:58 PM, Blogger Ray Hyde said...

My rule of thumb is that to adequately forecast the costs of a major project (+ or minus around 15%) the cost estimate is going to cost roughly 3% as much as the project costs.

Very seldom can you get enough concensus to spend that kind of money, let alone enough to actually construct the program.

And that is BEFORE the opposition gets involved in creating hearings, lawsuits, and delays to raise the price of the eventual project at little cost to themselves.

 
At 8:58 AM, Anonymous Informed Patriot said...

Jim,
I think you have touched on the biggest missed opportunity on PPTA thus far- the sharing of risk. No project until the HOT lanes proposals has included a real private equity stake. Before, it was companies coming in, building on the state dime, and then leaving with their pockets filled. Granted they normally could build them cheaper and faster then through normal VDOT contracting, but the real partnership ended when the ribbon was cut. Future projects that include this equity sharing, most likely in the form of concession or lease agreements, will lighten the financial burden of the state as well as establish incentives for private firms to be correct in their traffic counts. These contracts need to be very specific on their terms, but I think they are certainly of major importance and impact going forward.

 

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