Remarks to IPA 2014 Conference, Melbourne Australia
In Virginia, we have around eight and a half million citizens, and 70 per cent of the growth expected in Virginia is in our northern area, next to the capital, in six localities.
It’s a lot like Melbourne, where there is a central business district, but lots of area to expand, so I am very familiar with some of the challenges being faced in Melbourne’s inner city.
Our gross domestic product in Virginia is about $US426 billion -- slightly above Victoria and slightly below NSW.
We have the nation’s third largest state-maintained road network, which means we are in charge of around 130,000 miles of lanes.
And while we are the third largest network, until recently, we were the 40th ranked state for collecting revenues for transportation, so we had some challenges to deal with.
We have a $US5 billion budget in transportation, of which $US2.5 billion is for new construction and $US2.5 billion is for maintenance of the current system. Of that, around $US3.8 billion is raised by the Commonwealth of Virginia and we depend on our Federal partners for $US1.2 billion. The latter is the most significant threat to our program.
One of the things that has impressed me in Australia is that, regardless of party, it appears there is the political will for infrastructure investment.
That is not what I have found currently in the United States, particularly at the Federal level. With our budgetary issues and our ideological issues, it seems the need to invest in infrastructure has taken a backseat.
Since 2008, the Federal gas tax – the tax raised per gallon—has not been sufficient. There have been general fund appropriations that have been put in several times, six to eight months at a time, which makes it very difficult to fund long term construction projects.
Complicating this, Virginia is also lagging the nation in economic vitality. We are the most dependent state in the US on Federal spending. Our Department of Defense spending makes up almost 40 per cent of Virginia’s economy, and that is particularly debilitating as we go through the draw down from the wars in Iraq and Afghanistan and the budget crisis.
Virginia is focused on changing its economy, and quite frankly, we have to. Transportation has to play a big role in that, not only in how it supports industry and their livelihood of our citizens but also in the sheer number of jobs that it generates.
The importance of P3s
Public Private Partnerships (P3s) have been a big part of our economy. Virginia has been a leader in P3s over the years and our goal is to build a strategic program to attract private investment.
We have learnt significantly from the Australian experience, and Australia is our most significant investor in terms of foreign dollars.
Many of the large Australian firms have invested, not only in our country, but our state, and we are very grateful to share the experiences we have learnt with our Australian friends.
We realize though that the delivery of projects is changing and that global competition is increasing so that’s why we’re focusing on revising and enhancing our P3 transactions.
I’d like to talk about two P3 projects in particular, not in terms of how they were delivered, but in the public policy discussion that surrounded them.
The first is the I-95 Express Lanes project in the northern Virginia area. This project saw the introduction in the Commonwealth of Virginia of the managed lanes and dynamic pricing concept. This is a concept where tolling is used to deliver new capacity, but there is always a free alternative, so that if a motorist is driving and does not want to pay the toll, he or she always has a free alternative.
The traffic flow on the managed lanes is managed by pricing and the partner (Transurban) is encouraged, and by contract, mandated to maintain a certain flow of traffic.
As that traffic flow degrades the pricing for the road goes up. Our citizens have found this to be a great bargain for their toll dollar, in that they have a free alternative should they choose not to use the managed lanes. But if they want the efficiency of moving faster they are able to do so.
This has been a revenue generation and a traffic management model that you will see Virginia continue to encourage as we go forward in delivering these projects.
The next project I wanted to talk about is the Elizabeth River Tunnels project. This project is in the Hampton Roads region, and those familiar with Norfolk or Virginia Beach on the eastern seaboard will know that area is heavily dependent on river crossings.
That area houses the Navy’s Atlantic fleet, so it is very dependent on mission readiness.
The Elizabeth River Tunnels project cost a little over $US2 billion and it was undertaken with our partners from Macquarie and Skanska.
In this project we used a static toll, and there was no free alternative. In fact, the project also included tolling of the tunnels before the expansion actually occurred.
From a public policy standpoint, this project has not seen the acceptance of the new tolling that the project in Northern Virginia has. In fact, when we came to office in January 2014 we used transportation dollars to buy the tolls down, which quite frankly, was a fairly inefficient use of the monies, but from a public policy perspective, we didn’t think it was appropriate to charge for those tolls before the additional capacity was put on.
It’s going to be a great project, but I wanted to highlight the differences between public policy and making financing decisions in that regard. Public acceptance in this project will require us to do more as we move forward in terms of explaining how tolls will benefit the region.
Certainly it’s a very vital project that had to get done because, quite frankly, the Navy told us that if we did not increase transportation investment, they were not going to continue to put investment in the area.
So I’m glad the project was done but it is completely different use of policy in determining how to use tolling.
Another project I wanted to highlight is the intermodal improvements we are going to do to Interstate 66 outside our nation’s capital. This will be the next large P3 project in the Commonwealth of Virginia and is expected to cost between $US2 billion to $US3 billion depending on the design, and certainly managed lanes will be a component of this project moving forward.
All of these projects carry demand risk. In the Commonwealth of Virginia we do not have the ability to take availability payments. Whether the legislature will allow that in the future remains to be seen, but right now the only way we’re allowed to do P3 is through the transfer of the risk to the private sector.
Solving the revenue challenge
I’d like to talk about the historic step taken last year by Virginia to increase transportation funding in the Commonwealth. It was a programmatic approach. We believed that one silver bullet did not exist.
So we decided to use a combination of revenues generated from user fees and general fund revenues.
At the user fee level, Virginia used to charge a cents per gallon levy on its gas (fuel). We converted that to a wholesale tax per gallon, so as economic activity and driving habits increase, that particular levy on the consumer would also increase.
In addition, there were statewide taxes – sales taxes – that were also raised to fund transportation sources and projects across the state.
That was done on a revenue neutral basis because, quite frankly, it was the only way politically it could get done. But it did set us up to increase as economic activity picks up in the future.
We also adopted two other measures for the two most congested areas of our state, and that’s where the real money was put.
In Hampton Roads and in Northern Virginia – the two large urban areas – additional taxes were raised at a local level and the monies allocated to stay right in those areas to deliver critical projects. We’re talking approximately $US300 million a year in Northern Virginia, and $US200 million a year in the Hampton Roads region.
These monies are given to entities like the Hampton Roads Transportation Accountability Commission (HRTAC) and are not considered obligations of the Commonwealth, so if the monies are used to raise debt, they are not considered against our triple-A credit rating. So it’s an off-balance sheet financing for the Commonwealth by raising these revenues to deliver these projects.
The entities that also raised these monies are P3 eligible, meaning they can participate with our private parties in terms of delivering these projects.
For an organization like the HRTAC, there is approximately $12 to $15 billion worth of projects that will be delivered in that region over the next decade or so.
These are projects we have been talking about for several decades that can now come to fruition because of the steps we’ve taken in raising the revenues.
I’d like to also talk about our port. I’ve visited with some port officials in Australia and it’s been explained to me the privatization process that your ports have gone through here, and the process that the Port of Melbourne will be going through.
Privatization was attempted in Hampton Roads and it was unsuccessful. In fact, in the nation and particularly in the Commonwealth of Virginia, privatization outside of transportation is limited, and that’s one of the things I’ve enjoyed learning about in Australia.
The second issue about our port is how important it will be to our economic development and in driving the transition of our economy.
The projects I outlined before in Hampton Roads are key for this port to get the goods in and get the goods out.
Without the support of the transportation system, the economic benefit we hope to derive from the Port of Virginia will not be realized.
We are centrally located on the east coast of the United States and we are within two days’ drive of two-thirds of the US population. We are served by multiple railroads so logistically we are set up to be a significant economic driver for the Commonwealth of Virginia.
We are blessed with no overhead obstructions from the Atlantic Ocean and a 55-foot channel, so already we are deep enough to take advantage of the Post-Panamax vessels coming with the opening of the Panama Canal.
But there’s one key thing that I think will set the port up for future success. And that is if you look at coming to this part of the world through the western route, or the eastern route, we are approximately about the same distance.
So we believe now that with the opening of the Panama Canal, in times of economic or political turmoil, vessels can always reach us. And long-term that’s what is going to set us up for success, but only if we can get goods out of the port with these investments in infrastructure.
The right projects for the right reasons
Let me now turn to the future of the P3 program in the Hampton Roads area and in the Commonwealth of Virginia. The key will be about picking the right projects. And there are two components of that.
This year, legislation was passed that mandated our Commonwealth Transportation board – the agency that is charged with allocating monies in the Commonwealth – to mandate that projects that had previously been promoted for political reasons, or done with the guidance of the administration, would now have to be prioritized according to five criteria.
The first is congestion mitigation, and the law requires that in the urban areas, it has to be the most heavily weighted issue that’s determined.
The second is economic development, and the law requires that in rural areas, that has to be the most heavily weighted.
The three other criteria are mobility, environmental concerns and return on investment. The latter is not necessarily a return on equity, but an incremental benefit to the taxpayers and the Commonwealth.
All projects selected, even our P3s, will have to go through this process. And the law requires that the next incremental benefit project, the highest scoring should be the next one that is funded in the Commonwealth.
That’s a significant change to what we’ve done in the past. We have elections every four years in the gubernatorial elections, and every two years in our House of Representatives, so hopefully this will keep the political process from pulling away at the efficiencies of delivering projects, if we can get it right. We have until 1 July 2016 to get this in place, but if we can get there the benefits should be immense for our Commonwealth.
By law, if we don’t fund the project that scores the next highest in terms of the criteria, we must disclose why we didn’t, so it makes us much more transparent in explaining why we are funding these particular projects.
The second thing we are doing to pick the right projects is doing a revision of our P3 program.
We’ve had this program in place for over a decade. We’ve had similar experiences to you in Australia where some have done very well, and some we wish had done a little better.
But the key will be to improve the process to increase transparency and to increase competitiveness, while reducing political risk. That’s going to be a tall order, but we think we have ways where we’ll be able to do that.
We’ve defined political risk as something that occurs late in the process. We believe that if we can get our politicians involved early in the process, we can actually reduce political risk. Then we can go back and certify to the politicians that what we intended to do, we actually did. If we can’t do that then we have to use another procurement vehicle.
It is imperative that private industry knows that once we enter into an agreement with them, there is certainty of closure. That’s key to any type of program that will attract the type of investment from the private industry that we’re going to need to get these projects done in the Commonwealth of Virginia.
The next steps of doing this will see us rewrite our P3e guidelines. We’ll brief our General Assembly and our Commonwealth Transportation Board will adopt these new guidelines in the coming months.
We’ve learned a lot of lessons as we’ve gone through the process.
First of all, we’ve learned the importance of having a permanent office, with 16 full-time staff dedicated to being the champion for these projects.
One thing I’ve learnt in Australia is that you have a much better program of assessing these with financial input. Projects in the Commonwealth of Virginia over the years have come through the transportation secretariat. I’m one of the first transportation secretaries that is not an engineer. My background is in business, and in finance.
So it’s key, if we’re going to continue to do this, that we understand the risks that we are taking so that we can appropriately compensate the private party.
The way government, at least in Virginia, evaluated risk in the past was different to the way I evaluated it when I was working in the private sector.
In the private sector, I wanted to know how I was going to get paid and what was going to happen to me if something went bad. In the public sector I’ve learned that it’s a process, and we identify the risk and say ‘yes, we’ve identified it’, and we continue down the process.
You will see that we will act more like a business partner in working with you in innovative ways to deliver these projects. There need to be consistent and detailed guidelines, so that every time you enter, it’s going to be the same process. You don’t have to guess about what’s going to happen next.
We’re going to continuously review our assumptions to improve the process, and a big part of this is about communicating what the benefits are of these programs to the public.
Many of the public still think that a P3 is a black box; something goes in and something pops out the other side. They really don’t understand what the benefits are.
Before this role I served five years on the Commonwealth Transportation Board, and I learned that I might as well get the public involvement up front, because I’m going to get it anyway, and it’s better to deal with it upfront.
It’s the quickest way to bring these projects to fruition – to engage upfront, and not try to explain afterwards, so that’s something we’re going to focus on.
We’ve also recognized that others have a lot of good ideas. I’ve already mentioned that availability payments are being done around the world. We don’t have that ability, but we certainly recognize that the way these projects are being funded is changing.
We understand there will be some challenges. Public funds are shrinking and traditional delivery methods are more and more difficult.
In the Commonwealth of Virginia we have the traditional design, bid, build model; the design, build model; and then the P3 model. That has caused some issues with our legislators in the past. So now we have to certify that when we use a P3, it doesn’t fit these other procurement methods.
That is also to safeguard the taxpayers, because those other procurement methods have guidelines as to when payments can be made, when construction can start etcetera.
We’ve had a high profile project in the Commonwealth that was said to be a P3 that was really a design-build; that didn’t go well, and we were out $US300 million without a permit.
Now the P3 process has taken the brunt of the criticism but really it was the risk of getting the permit that wasn’t done. Had we chosen to do this as a design-build project, the law would have kept us from putting those monies out for construction until we had received the permit.
So that’s one thing that we realize getting the right procurement method is key for us.
But Governor Terry McAuliffe and I recognize that we cannot deliver the Commonwealth’s transportation projects without the help of the private sector, without using private investment.
So we will be a proponent of the process, and we look forward to working with you.