As I was driving through the Downtown Tunnel recently, I was reminded that former Gov. Terry McAuliffe labeled the financial arrangements behind this tunnel as the worst transportation deal in the history of the commonwealth.
He was referring to the agreement Virginia made in 2012 with private developers Skanska USA and the Macquarie Group to enhance the Downtown and Midtown tunnels and develop the Martin Luther King Boulevard extension to I-264. The advertised total cost of the project was $2.16 billion, of which it is reported that public entities supplied $1.66 billion and Skanska/Macquarie $500 million.
Since we are stuck with this deal until 2070, it is worth our time to review the details. First, in late 2020, Skanska and Macquarie sold their ownership basis for the tunnels for $1.25 billion to two parties — the Spanish firm Albertis and an arm of the John Hancock Insurance Company. The buyers also agreed to assume $1.13 billion in debt, making the total value of the sale to Skanska and Macquarie $2.38 billion.
Let’s assume Skanska and Macquarie spent the entire $500 million they invested already in 2012 when the deal was consummated, even though the tunnel did not open until 2014. Further, even though the non-peak time toll charged a passenger automobile traveling through either tunnel has more than doubled since 2014, let’s also assume that Skanska and Macquarie merely broke even on their operation of the tunnels.
This makes computing a rate of return on their $500 million investment much simpler. It turns out to be 18.93% — the estimated compound annual rate of return these investors realized on their $500 million contribution. This would constitute a very attractive rate of return, even if the estimate is several percentage points too high. Compare it to the 0.4% rate of return commonly being offered today on a one-year certificate of deposit at one of the region’s financial institutions.
Generously, the commonwealth guaranteed the investors a 13.5% rate of return on their invested capital, saying would make up any shortfall. Virginia also agreed that the tolls assessed vehicles that travel through the tunnels can be increased 3.5% annually between now and 2070 — and more than this if the rise in the Consumer Price Index exceeds 3.5% any year.
To their credit, Skanska and Macquarie did forego some toll increases and also threw some money into a “toll relief” pot that softened the financial blow to the region’s commuters. Nonetheless, at the end of the day, who wouldn’t like to earn anything near 18% annually on an investment guaranteed by the commonwealth?
The new owners inherit the contract that allows them to increase their tolls at 3.5% annually. The current peak congestion time toll is $2.33. This means a one-way toll for a passenger automobile could rise to $13.01 by 2070. This would constitute a body blow to a city such as Portsmouth, where on a typical workday, more than 30,000 individuals either come through the tunnels to go to work in Portsmouth, or leave Portsmouth to go east to work in Norfolk and Virginia Beach.
Public/private partnerships sometimes represent the only way for vital projects to move ahead. These improvements were sorely needed. But not at any cost. The region and especially the city of Portsmouth will continue to pay the price for this unfortunate deal for another 50 years.
James V. Koch is Board of Visitors Professor of Economics Emeritus and president emeritus at Old Dominion University. Contact him at jkoch@odu.edu.
