Public-Private Partnership Policy Casebook/Midtown Tunnel

SUMMARY

The Elizabeth River Tunnels project is Virginia’s first and largest P3 project between the Virginia Department of Transportation and Elizabeth River Crossings, OpCo LLC (ERC). ERC financed, designed, constructed, operates and maintains the project for a 58-year concession term. VDOT oversaw the project and maintains ownership of the infrastructure.

The $2.1 billion project entails four components: a new two-lane tunnel under the Elizabeth River, maintenance and safety improvements to the existing Midtown and Downtown tunnels, extension of the MLK Expressway from London Boulevard to Interstate 264, and Interchange modifications at Brambleton Avenue and Hampton Boulevard in Norfolk.

The project arose to address extreme congestion on the original Downtown and Midtown Tunnels, which were constructed in 1952 and 1962, respectively, to increase connectivity between Norfolk and Portsmouth over the Elizabeth River. It is stated that the population increased nearly 70% and tunnel usage increased by 600% since the 1950s. And, ERC found that 3.2 workdays were lost annually.

The project faced political and financial challenges due to toll opposition, a change in political leadership, and the Great Recession. Despite these hurdles, the project finished four months early and within budget.

MAP OF LOCATIONS

• Map of Elizabeth River Tunnels Project located on the Visitor Resources page of the ERT website: https://www.driveert.com/project-resources/visitor-information/

TIMELINE

1942 - the Elizabeth River Tunnel District (ERTD) – a quasi-governmental entity created by the Virginia General Assembly to build tunnels connecting both cities.

1950 – At the metropolitan areas formation, the two chief cities of Norfolk and Portsmouth, VA had a combined population of 300,000 inhabitants.

1952 - The metropolitan areas first tunnel, the 2-lane Downtown Tunnel opens as a tolled roadway.

1962 – The metropolitan areas second tunnel, the 2-lane Midtown Tunnel opens, also as a tolled roadway.

1970 – The metropolitan areas population had grown by 43%.

1986 – The ERTD removed the toll on the two tunnels as the bond that funded their construction had been repaid.

1987 - To address the traffic congestion between Norfolk and Portsmouth, a second non-tolled, 2-lane Downtown Tunnel opened in 1987 as a federally funded interstate highway project.

1989 - The Federal Highway Administration (FHWA), in partnership with the Virginia Department of Transportation (VDOT), approves a draft Environmental Impact Statement (EIS) in 1989 for developing a second, 2-lane Midtown Tunnel and constructing a corresponding approach highway, US-58, named the Martin Luther King (MLK) Freeway.

1995 - While VDOT developed the project’s [F]EIS, the Virginia General Assembly authorized the agency to procure infrastructure projects using public-private partnerships (P3s) via the Public Private Transportation Act of 1995 (PPTA).

1996 -. The final EIS (FEIS) issued which estimated that construction on the roadway could begin within two years but funding limitations would prevent the building of the second Midtown Tunnel and the MLK Freeway’s construction.

1996-99 – Two unsolicited proposals are submitted to VDOT to build the second Midtown Tunnel and MLK Expansion. The proposals are rejected and then a merged proposal is resubmitted in 1999, which also failed due to political opposition to the proposal seeking to re-apply tolls to the existing tunnel.

2003 - The Midtown Tunnel was flooded and seriously damages by Hurricane Isabel when the floodgates designed to protect the tunnel failed to close.

2004 - VDOT sought to reassess private sector interest in the second Midtown Tunnel utilizing a P3 approach, and in November issued a Request for Information and received three positive responses.

2006 - Hampton Roads Metropolitan Planning Organization undertakes study to determine if toll financing could support local transportation infrastructure projects including the expansion of the Midtown Tunnel.

2007 - VDOT also worked with FHWA to issue a Record of Decision (ROD) for the project, including both the second Midtown tunnel and the US Route 58 extension. FHWA issued the resulting ROD in May 2007.

2008 – VDOT issues Solicitation for Conceptual Proposals (SCP) in May 2008.

2008 - Elizabeth River Crossings OPCO, LLC, (ERC) a Special Purpose Vehicle company created by Skanska Infrastructure, Inc., and Macquarie Financial Holdings Limited, responds to the SCP.

2007-2008 – The United States experiences the worst financial crisis in nearly a century. The distress in the economy is likely responsible for only one proposal being submitted.

2008 - VDOT and ERC enter into a Predevelopment Agreement.

2009 - The Secretary of Transportation appoints an Independent Review Panel (IRP) to evaluate the ERC proposal and provide recommendations to the Commonwealth Transportation Board (CTB) overseeing VDOT regarding proposal rejection or acceptance. The IRP makes a positive recommendation in June 2009. The CTB subsequently gave VDOT a positive recommendation for project advancement.

2010 - Since VDOT possessed only one conceptual proposal bid, it started direct negotiations with ERC – with support from an Independent Review Panel and the Commonwealth Transportation Review Board – rather than issuing a Request for Detailed Proposals (RFDP). The parties signed an interim agreement in January 2010.

2011 - The partners enter into a final comprehensive agreement for the project in December.

2012 - Project reaches financial close in April.

2012 - On July 12, operation of the tunnel system is turned over to ERC.

2012 July, a lawsuit is filed against ERC by some affected residents and business owners backed by the Portsmouth City Council in which they alleged tolls amounted to unconstitutional taxes because users had no other choice by to use the tolled tunnels and VDOT had “unfettered power” to set the toll rates. The trial court ruled for the Plaintiffs, but the Virginia Supreme Court ultimately ruled in favor of the VDOT in October 2012.

2012- September, VDOT sought to delay the institution of tolls and renegotiated the concession at the cost to the State of $100 million to delay the start of tolling until January 2014.

2012 - October, construction of the Midtown Tunnel begins.

2014 - January, Terry McAuliffe takes office as Governor of Virginia and renegotiates the concession paying ERC $82.5 million in exchange for 50% reduction in the toll rate.

2014 - February 1, tolls on U.S. Highway 58 begin and are set to continue through April 13, 2070

2015 - July, VDOT renegotiates the concession again paying $78 million to ERC. Over the course of construction the during-construction tollings was negotiated five times, ultimately never being charged and increasing public sector contribution from $308 million to $581 million.

2016 – 2017 - The new two-lane Midtown Tunnel ultimately opened in June 2016 with the Downtown Tunnel’s rehabilitation completed two months later. MLK extension construction completed in November 2016 and the existing Midtown Tunnel’s improvements concluded in June 2017.

BACKGROUND

Geography

The project is located in a region known as Hampton Roads, which encompasses Southeastern Virginia and Northeastern North Carolina as well as a one of the largest harbors where the James, York and Elizabeth rivers empty into the Chesapeake Bay. The harbor is a historical waterway, hosting the USS Wisconsin, a ship used in World War II, Vietnam, and Desert Storm, and is still an active shipping hub.

Original Downtown & Midtown Tunnels

the Virginia boundaries, the Elizabeth River separates the Cities of Norfolk and Portsmouth. In 1942, the Commonwealth launched the Elizabeth River Tunnel District (ERTD) to construct two tunnels along the river to connect the two cities – the Downtown and Midtown Tunnels. The ERTD decided to issue construction bonds to pay for the tunnels and charge a toll on both to generate revenue to repay the bond. The two tunnels were completed a decade apart, one in 1952, one in 1962. The ERTD eliminated the tolls when it completed the bonds repayment in 1986.

A second Downtown Tunnel was constructed in 1987 in an attempt to mitigate congestion, receiving federal funding to complete it.

Evolution of P3 Approach

Hampton Roads continued to experience population growth, particularly in the neighboring areas of Virginia Beach and Chesapeake City, which contributed to the traffic increase of 600%. Further, regarding the original Midtown Tunnel, the Virginia Department of Transportation found that nearly 50,000 vehicles will access the Midtown Tunnel by 2026.

In response to the congestion concerns, in 1989, VDOT and the Federal Highway Administration (FHWA) approved the construction of a second, two-lane Midtown Tunnel and an MLK Extension through an Environmental Impact Study (EIS). However, the final EIS wasn’t issued until 1996 due to legal delays and ultimately found that the lack of public funding would limit or prevent such a project. Meanwhile, in 1995, the Commonwealth passed new legislation allowing the use of Public-Private Partnerships (P3) and the ability of private-sector actors to submit unsolicited proposals. The Commonwealth did receive unsolicited proposals, but those proposals did not come to fruition due to the opposition of re-tolling the tunnels.

VDOT issued a Request for Information in 2004, a Record of Decision in 2007, and a Solicitation for Conceptual Proposals in 2008.; Only Elizabeth River Crossings OPCO, LLC responded. The Great Recession may have been a factor in the limited response rate. An independent review board recommended the project. The Commonwealth did not issue a Request for Detailed Proposal since it only received one application.

The final comprehensive agreement was signed in late 2011.

ACTORS

The entities that made up the vast project are identified as followed: The Virginia Department of Transportation (VDOT) which developed the project’s FEIS* also acted as an operator until the project was taken over by the concessionaire. The Virginia General Assembly was responsible for authorizing VDOT to procure the project as a public-private partnership. Elizabeth River Crossing OPCO, LLC (ERC) was a Special Purpose Vehicle created to separate each other’s risk liability on Skanska Infrastructure Development, Inc and Macquerie Financial Holdings Limited (the SPV’s parent companies). The companies were equal partners in ERC. Skanska USA Civil (45%), Kiewit Construction(40%), and Weeks Marine (15%) were the general contracting companies involved in the project. Lastly, the design was performed by Parsons Brinckerhoff (lead), Volkert, and COWI. 3M was the entity that handled tolling system installation.

RISK

Risk Type	Risk Allocation
Scope Changes	Public(VDOT)
Environmental Approvals	Public(VDOT)
Permits and Approvals	Shared
Right of Way	Shared
Utilitry Relocation	Shared
Designs(Errors and Omissions)	Private (Parson Brinckerhoff/Volkert)
Ground Conditions	Shared
Environmental Contamination	Shared
Construction(Cost/Schedule Overruns)	Private(SKW Joint Venture)
Labor Disputes	Private(SKW Joint Venture)
Quality Assurance/Control	Private(ERC)
O&M Lifecycle	Private(ERC)
Financing	Private(ERC)
Changes in Law	Shared
Force Majure	Shared
Traffic & Revenue	Private(ERC)
Toll Collection	Private(ERC)

Categories of Risk associated with the assembly and construction of the tunnel:

- Watertightness - (Concrete Cooling, Element Fabrication, Element Cast. (All having to withstand hydrostatic pressures)

- Proximity to Existing Midtown Tunnel:

• The existing tunnel had deteriorated due to settlement and corrosion due to a weather event that flooded the tunnel with salt water

• Necessity for the entry/exit portals too close to existing tunnel made support of excavation and excavation activities very difficult

• Risk of damaging the existing tunnel would impact traffic/travel in the area

• Extensive monitoring of the existing tunnel during construction was required to ensure there was no additional structural settlement outside of tolerances

- Variable Slope Dredging

- Subgrade Improvements

CONTRACT TYPE

The Elizabeth River Tunnels Project is what is known as a Design Build Finance Operate Maintain project, commonly referred to by the acronym “DBFOM.” This contract type and model of delivery had several advantages over a traditional design build (“DB”) model. First the DBFOM included all of the traditional advantages of a fixed price, date certain delivery of the project, and involvement of the Operation and Maintenance Provider during the project development and design stage. Second, the DBFOM model reduced the risk of delay for the completion of the project and resulted in the new Midtown Tunnel being delivered six month head of schedule. Third, the DBFOM model allowed for preexisting VDOT tunnel employees to stay on the job and transfer seamless to the SPV that would be operating the new Midtown Tunnel, as well as allowing for all-electronic tolling to be rolled out during construction, which allowed the toll rate to be lowered.

FINANCING

The project cost totaled $2.1 billion drawing from private equity ($272 million), Private Activity Bonds ($675 million), TIFIA loan ($465 million), and public sector funds ($581 million). When the Commonwealth originally signed the agreement, the public sector committed $308 million. However, community opposition and the election of a new governor forced the Commonwealth to commit an additional $273 million to cover toll fees that ERC budgeted to cover project costs. Five re-negotiations took place with the Commonwealth contributing more funds after each discussion to reach the final public contribution amount of $581 million.

ERC will repay the TIFIA loan with toll revenue with interest payments beginning in 2022 and principal payments in 2037. The loan matures in 2047.

The contract also stipulates that VDOT will have the opportunity to claim additional revenue if gross revenue exceeds the projected amount or if the project is refinanced.

POLICY ISSUES

Political Risk

Political risk of changing over the administration of the existing tunnel from VDOT to the SPV during the course of the construction. Skanska viewed the political situation surrounding as volatile and worked with two gubernatorial administrations to adapt the contract such that public approval could be gained, without compromising the goals of the State and the requirements of the Project Team. When the DBFOM closed in April 2016, a political uproar arose over the $1.84 peak toll that ERC was allowed to collect under the agreement. From ERC’s perspective, this toll was essential to the financial structure of the deal as “17.5% of the 1.45 billions construction cost is intended to be funded by the increased tolling on the existing free tunnels during the five-year construction period.” Support for the project was sought in part through the award of $308 million dollars to Small, Women and Minority Business as well as Disadvantaged Business Enterprise.

Legal Challenge

A lawsuit was filed against ERC by some affected residents and business owners backed by the Portsmouth City Council in which they alleged tolls amounted to unconstitutional taxes because users had no other choice by to use the tolled tunnels and VDOT had “unfettered power” to set the toll rates. The trial court ruled for the Plaintiffs, but the Virginia Supreme Court ultimately ruled in favor of the VDOT in October 2012.

Shifting Political Leadership

Given the size, scope and duration of the project it was unavoidable that it might be affected by shifts in political leadership. In this case the project was originally bid and commenced under the gubernatorial leadership of Tim Kaine, then renegotiated by both Governor Bob McDonnell’s administration and then by Governor Terry McAuliffe’s administration. Governor McAuliffe and members of his cabinet have harshly criticized the McDonell Administrations negotiating of the concession and said that too much was given away to ERC. While Governor McDonnell has responded that the deal was the best that could be negotiated at the time, given the State’s budget constraints.

Shift to All-Electronic Tolling

As part of the new Midtown Tunnel, the tolling method and technology was changed to All-Electronic Tolling, commonly referred to as “AET.” Over the last fifteen years many the collection of roadway and bridge tolls has shifted decisively to electronic toll collection or ETC. ETC involves the use of an electronic vehicle transponder based electronic toll collection, including E-ZPass, to monitor and collect tolls without requiring motorist to stop or slow down as they go through the tolling plaza. This reduces roadway congestions, allows for real-time traffic monitoring, and does not require the use of human toll road attendants. In many states, ETC has reduced the number of cash-paying toll lanes, but not eliminated it. When tolling is shifted to AET all tolls are collected electronically and cash lanes and even traditional toll plazas are eliminated. This has been attractive to tolling agencies for several reasons including: Improved safety from the elimination of toll plazas Improved operations from the removal of the toll barrier; Improved customer service because of additional account functions Reduced infrastructure; and Reduced toll collection costs.

Project leaders undertook a “full scale” marketing and media campaign to educate the public regionally on how the AET tolling system would work for the Midtown Tunnel. This included educating the public on the need to obtain an electronic toll transponder (E-ZPass) and there would be conventional tolling booths or option to pay by case.

LESSONS LEARNED/ TAKEAWAYS Historically, all immersed tunnels in the United States had been traditional steel-shell immersed segments, and the Midtown Tunnel was the second to attempt a segmentized immersed concrete configuration.The design-build team created a concrete mix that would withstand a 120 life expectancy in the corrosive saltwater of the Elizabeth River. Also, the involvement of the Operator early in the design process helped foster innovation from design through delivery, but it also took 6 months off of the construction schedule.

DISCUSSION QUESTIONS

1. What do the successive renegotiations of the concession tell us about how to structure future transportation P3s? 2. Would the project have encountered less community and political recourse to the re-tolling during construction through earlier community engagement or through different efforts to engage local stakeholders in the project? 3. Did their experience with this project influences Skanska's decision to exit the U.S. P3 market?

REFERENCES