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Should the private sector help rebuild American infrastructure?

As the U.S. grapples with a growing list of transportation infrastructure needs and limited public funds, more states are looking to public-private partnerships as a means of fixing and replacing aging bridges, tunnels and roads. But is there a downside for taxpayers? NewsHour Weekend's Christopher Booker reports.

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  • CHRISTOPHER BOOKER:

    Residents of Portsmouth and Norfolk, Virginia, have grown accustomed to their morning rush hour traffic.

    For commuters moving between the two port cities, there's a daily choke of cars leading into this 54-year-old tunnel with only one lane running in each direction under the Elizabeth River.

    Since it opened, the tunnel's daily traffic volume has tripled. For the past four years, Wade Watson has overseen construction of the relief valve — a new midtown tunnel with two additional lanes running parallel to the old ones. This new tunnel is on schedule to open later this year following an innovative approach to its design.

  • WADE WATSON:

    There's about 80-thousand cubic yards of concrete in this tunnel.

  • CHRISTOPHER BOOKER:

    The tunnel is designed to last 120 years, and it was less expensive than traditional steel tube construction.

    Nearly a mile long, this all concrete tunnel is only the second of its kind in the United States. Consisting of 11 different segments, each section was fabricated just outside of Baltimore, Maryland, before being shipped down the Chesapeake Bay to the Elizabeth River.

    Then, those 11 concrete sections — each as long as a football field — were submerged underwater and connected across the dredged river bed.

  • WADE WATSON:

    So actually if you went down and looked at the bottom of the river, after we finished you wouldn't see the tunnel. It's buried on the bottom.

  • CHRISTOPHER BOOKER:

    What also sets this tunnel apart is how the financial pieces were assembled. To make this project happen. The state of Virginia entered into a public-private partnership. Often called P3's these deals are contracts between governments and the private sector to produce, repair, or replace a public asset, like a road, bridge, or tunnel.

    Unlike traditional infrastructure deals, the private partners can invest equity in the project, and by taking on the risk, they can earn lucrative returns.

    Across the country, public-private partnerships now account for about 39 billion dollars of roads, bridges, and tunnels green lit between 2005 and 2014. While that's a small fraction of total U.S. infrastructure development, 31 states as well as Puerto Rico and Washington D.C, have enacted statutes allowing P3 for infrastructure projects.

    While each P3 deal is unique, the private partners can be involved every phase — finance, design, construction, maintenance, and operation. That's what happened with Virginia's new Midtown tunnel in a 58-year agreement.

    A coalition led by Sweden-based Skanska and Australian financier Macquarie formed a consortium called Elizabeth River Crossings. In addition to building the new tunnel, ERC would refurbish the old Midtown tunnel, the one with all that traffic — fix another tunnel in Norfolk, and extend a nearby expressway that connects the tunnels.

    According to the builders the budget is just over $2 billion dollars. Virginia issued $638 million in bonds. And paid another $421 million in state funds. The Federal Department of Transportation loaned $441 million dollars. Skanska and Macquarie invested about $200 million. The rest, about 310 million, would come from tolls.

  • CHRISTOPHER BOOKER:

    Richard Cavallaro is President of Skanska USA.

  • RICHARD CAVALLARO:

    So the question would be, can the state have afforded to build the project without collecting tolls based on their own budget? And the answer is no. So that's the real rub. It's not so much the process. It's how they're recouping the payment. And that exists if it was triple P or not.

  • CHRISTOPHER BOOKER:

    The original proposal called for a toll between two and three dollars, but when the deal was signed in 2011, that was lowered to a $1.84 for use during peak hours.

    Then, Elizabeth river crossings was authorized to start collecting tolls on the old tunnel while building the new one, to generate 150 million dollars during the construction phase.

    Elizabeth River Crossings agreed to a fixed price for the project and assumes the risk of higher construction costs, lower toll revenue, and unanticipated maintenance costs.

  • RICHARD CAVALLARO:

    The risk transfer in these jobs is gigantic. I mean, the state is getting a price certainty on schedule capital expenditure, operational expenditure, at a very early stage. I also, sometimes I'm not sure people really understand that risk transfer's a big, big deal.

  • TERRY MCAULIFFE:

    This was a horrible deal for taxpayers.

  • CHRISTOPHER BOOKER:

    Virginia governor Terry McAuliffe inherited the project from his predecessor.

  • TERRY MCAULIFFE:

    Exorbitant tolls to the toll riders, to the taxpayers of the commonwealth, start immediately even before any capacity was created. Created such an uproar. So I cut the tolls in half. I had to buy down the tolls.

  • CHRISTOPHER BOOKER:

    McAuliffe lowered the tunnel tolls by about 80 cents and eliminated them entirely for the new expressway. To reimburse ERC for the lost toll revenue, the state is expected to contribute close to 200 million dollars. Elizabeth River Crossings can increase future tolls up to three and half percent every year.

  • KENNETH WRIGHT:

    I mean, can you imagine what that toll's gonna look like in another five years, another ten years?

  • CHRISTOPHER BOOKER:

    Portsmouth Mayor Ken Wright says even with the reduction, the tolls hurt his constituents.

  • KENNETH WRIGHT:

    We've got a great deal of our citizens that are making minimum wage that are working in hotels and restaurants over in Norfolk and Virginia Beach. And they have to travel through those tunnels every day. And so you imagine someone only making $15,000 to $20,000 a year, which is already a depressing number, and then having to give up $1,000 of that in a toll.

  • CHRISTOPHER BOOKER:

    Mayor Wright refuses to drive the toll road. And some Portsmouth residents felt so strongly the tolls were unfair, they sued the state. In 2013, a circuit court judge deemed the tolls unconstitutional, but the Virginia Supreme Court reversed the ruling, allowing tolling to start in early 2014.

    Norfolk mayor Paul Fraim finds fault with another part of the 58-year deal — a non-compete clause saying Skanska and Macquarie are entitled to compensation if Virginia builds other roadways that reduce tunnel traffic and revenue.

  • PAUL FRAIM:

    We're working hard now to build another river crossing up at the Hampton roads. That deal tied our hands for some construction of water crossings, as far as the cost of it is concerned, for a half century. So this I mean, this is without any question the worst road deal that we've– tunnel deal that we have seen here in easily the last half-century. Or really, longer.

  • CHRISTOPHER BOOKER:

    Elizabeth River crossings is subject to penalties if it misses construction deadlines. It hasn't. And if it fails to consistently maintain the tunnels, the state can terminate its contract.

    The deal allows ERC to earn as much as 13.5 percent a year on its investment. Even with the second-guessing and political fallout over the agreement, Virginia is not ditching the P3 model.

  • AUBREY LAYNE:

    We don't blame the private parties.

  • CHRISTOPHER BOOKER:

    Aubrey Layne is governor McAuliffe's secretary of transportation.

  • AUBREY LAYNE:

    Absolutely, P3s are a big part of our procurement. The private sector, I believe, has the edge and can do it in constructing. Probably operating. But not an edge if financing so what we should've done and what we do now is, 'here's what the project should be from a public policy standpoint. Here's the infrastructure needed. Here's what we can build it for.' Now, from that project, let's go to the private sector and say, 'hey, can you improve on this? And if you can, we'd love to partner with you.'

  • CHRISTOPHER BOOKER:

    This is really getting to the heart of that question that as a citizenry we're having a louder conversation when it comes to what we pay for now and will we pay for it later.

  • AUBREY LAYNE:

    Couldn't agree more. We've been lulled into thinking that once you build infrastructure, you're done. And now we've gotten to the point, we've got tunnels and interstates that are 60 years old that, yes, you pave them once in awhile. But the infrastructures gotta be redone.

  • CHRISTOPHER BOOKER:

    Following reforms to their P3 process that increases guidelines and transparency, the state is now considering bids from the private sector to expand a section of interstate 66 outside of Washington D.C. The state is expected to announce the contract winner this fall.

    Skanska is among the bidders.Cavallaro says while the company is deeply involved in P3 projects abroad, the U.S. is a relatively new market.

  • RICHARD CAVALLARO:

    There's a real pipeline of projects now that many, many states have a solid process. They put out projects. There are more p3 projects out there to bid than we could actually bid.

  • CHRISTOPHER BOOKER:

    And with the P3, the, kind of, top line arguments are cheaper, faster, innovative?

  • RICHARD CAVALLARO:

    Definitely from inception to facility and service, there's no question, undisputable. It is quicker. And when you think about the cost of inflation and escalations over a time period, that's a significant savings.

  • CHRISTOPHER BOOKER:

    Last year Skanska was part of a group awarded a $3.6 billion dollar P3 contract to rebuild the main terminal of New York's LaGuardia airport.

    This bridge over the Ohio River connecting Jeffersonville, Indiana, to Louisville, Kentucky, and due to open later this year, is also a P3. So is Miami's tunnel, from its port to the interstate, which opened two years ago.

  • CHRISTOPHER BOOKER:

    Are you getting increased calls from other governors for advice other states that are looking to enter this space? And if so what are you telling them?

  • TERRY MCAULIFFE:

    I do start out by saying 'yes, we have been a leader on P3s.' But in fairness, we've also made our mistakes with P3s. Go into it very carefully. States are strapped for money. They think p3s are the great answer. They might be, but they might not be.

  • CHRISTOPHER BOOKER:

    Does this represent a shift within the way we govern and the way we think about government?

  • TERRY MCAULIFFE:

    I like it because you're bringing the business sector in. And I always think, you know, it's important for business to have a reasonable profit. I think it's important if you can have a business in. I think that helps. But if you can extend out and get more bang for your buck, and I can get more transportation done by bringing the private sector in, where I've protected the taxpayers on the risk piece, we've done the transfer of risk, and the private sector can make a reasonable profit, that's a win/win for everybody.

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