PWF Blog

PWF Blog (2/10/15)

Virginia DOT Launches I-66 P3 Procurement

by William G. Reinhardt, editor, Public Works Financing newsletter

An RFQ for Virginia DOT’s I-66 managed lanes project now appears likely to emerge in mid-March, starting a long process for selecting a DBFOM developer for what could be Virginia’s last big P3 for long time.

Douglas Koelemay, the governor’s appointed director, Virginia Office of Public-Private Partnerships (VAP3), says he expects as many as five teams to compete for the $2-billion demand-risk concession, which is being drafted with advice from Hunton & Williams.

Work involves adding general purpose lanes and converting HOV to managed toll lanes on a 25-mile east-west segment of I-66 in Prince William and Fairfax Counties, ending at I-495. A Bus Rapid Transit system would operate in the median. A link to Metrorail or a light rail line are also on the table.

The project may be the last big P3 transportation in Virginia for many years, partly because the entire backlog of transportation projects at the state and regional level must be reprioritized under a new screening process. Also, an engineering company executive says that the transportation funding bill just adopted “takes away a lot of executive discretion, and breaks the money out into a lot of smaller pots. It will be hard to aggregate significant public money on big P3 projects.”

For I-66, as planned now, RFQ responses will be due in May, at about the same time that VDOT expects to publish its draft EIS. The final NEPA document and an RFP would be issued by year end. A financial close is set for the end of 2016.

Issuance of an RFP now serves as a “forcing function” for public decisions on scoping, “amenities” and other matters, says Koelemay. The responses will “greatly inform the project feasibility,” he says “so we need to start that process to discover what’s truly possible. We’re almost at the point of saying conclusively what we want.”

The RFQ will set a base-case assumption that toll revenues will support at least $1.1 billion in project financing. Based on affordability limits, the state has identified “adequate funds” to provide a subsidy, says Koelemay. More subsidy may be needed, he says, depending on the kinds of amenities required in the final project.

However, he says, where government sees these add-ons as costs, the private sector may see a revenue benefit. “These firms are very creative and experienced,” he says.

Fluor Corp. and Lane Construction were the design-builders of Transurban’s 495/95 managed lanes network, just east of the I-66 corridor. They are expected to respond to the RFQ, teamed with Granite Construction.

Cintra, the most aggressive developer of demand-risk toll road P3s in the U.S., is working with its parent, Ferrovial, to negotiate severance terms on its ill-fated U.S. 460 design-build contact with VDOT. Cintra’s eagerness to compete for I-66 has led to “a spirit of partnership” that Koelemay hopes will allow the state to recoup some of the $300 million VDOT paid to Ferrovial while waiting for environmental entitlements.

The demand risk I-66 toll concession will be competitively procured by VAP3 under the old PPTA law, but using new P3 guidelines published last December, says Koelemay. With a few modifications, those untested guidelines will be codified in a new PPTA law passed by large majorities in both houses and expected to become law in mid March.

The I-66 procurement will conform to the existing PPTA law but “follow the spirit” of the new law, says Koelemay. “All in all, we see the changes in the law as completely consistent with our review and revision of Virginia’s P3 guidelines – a more open, transparent, accountable process—and as likely to encourage more competition.”

“I think the statute is manageable and it may have saved the Virginia P3 program,” says the engineering executive. “I am more worried about the effect of the 2014 guidelines. For I-66, I think it will be very difficult to meet their timelines unless they waive portions of the just-adopted guidelines,” he says.

“It’s a fluid situation,” says Koelemay. The I-66 procurement is part of the learning curve of how we move through the guidelines for the first time—who’s role is what, when and where.”

The bottom line for developers is whether, after spending millions, their RFP responses will be subject to review by politicians. “The industry view is if there’s legislative review after the process starts, that’s a deal killer,” says a likely bidder.

Koelemay says VAP3 explained that danger to lawmakers. A conference committee was working on a final version of the bill, HB 1886, in early March, so details aren’t available.

The legislature’s role is to review and approve P3 projects at the beginning of the typically long procurement process, he says. “We have suggested that we would brief members of the General Assembly before we finalize the RFP and after the selection of a preferred proposer,” says Koelemay, but the final P3 agreement can’t be changed.

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