As Maryland pursues private investors to add toll lanes to the Capital Beltway and Interstate 270, some lawmakers say more scrutiny is needed before partnering with the private sector in decades-long deals worth billions.
Eight years later, critics say the law was never intended to allow a governor to seek a P3 for a controversial project like the high-occupancy toll lanes plan over the objections of many local officials.
The law, they say, also didn’t predict that a governor would begin pursuing the private sector for a 50-year deal before a project’s federally required environmental study was complete. The Purple Line’s study was done — and its potential effects on the environment and adjacent communities known — before the state began soliciting teams to build it. The $5.6 billion deal became one of the biggest P3s in the country and one of the first to include private financing for a U.S. transit project.
Attempts at changing the law have died twice in the state Senate. But the bill’s lead sponsor, Del. Jared Solomon (D-Montgomery), said he believes it has a better chance since the Purple Line partnership nearly imploded in the fall amid a court battle over a reported $800 million in cost overruns. The state salvaged the 36-year deal after it agreed to pay an additional $250 million.
Residents along the 16-mile alignment have been left with a string of mostly abandoned construction sites while the private team replaces the lead contractor.
“I think there’s been a sea change of public opinion on the issue because of the Purple Line,” Solomon said. “When you’re talking about a half-century of private control over a public good, I think that requires a little more scrutiny.”
Such partnerships have taken hold as a way for cash-strapped governments to build costly infrastructure and other projects without having to raise taxes or debt limits. Typically, a team of companies and private investors builds the project, operates it and finances the construction, in exchange for future toll revenue or regular payments from the government to pay off the debt and make a profit.
As of 2019, at least 38 states and the District had laws allowing P3s to some extent, according to the National Conference of State Legislatures.
But high-profile problems, such as the ones that have delayed the Purple Line, have made Maryland the latest state to examine whether its P3 requirements sufficiently protect taxpayers.
After Virginia paid $260 million for a P3 toll road project south of Richmond that was never built because it couldn’t obtain federal permits, the state tightened its P3 law to require more transparency, including proof that a P3 would provide the best value.
Indiana increased bonding requirements for P3 companies after the state had to take over a highway construction project because of contractor delays and financial problems. Other states have mandated cost-benefit analyses to determine whether a P3 is the best deal and have forbidden “noncompete” clauses that can require governments to reimburse a private entity for toll revenue lost due to other new or improved roads nearby.
Texas, an early leader in toll road P3s, hasn’t had a new one since 2017, when the state legislature rejected more than a dozen proposed P3 projects amid a public backlash over paying tolls.
“Across the country, we’re absolutely seeing a reconsideration of what P3 projects can deliver versus wholly public investments,” said Adie Tomer, leader of the Metropolitan Infrastructure Initiative at the Brookings Institution. “Folks are watching the market for these deals — what’s succeeding and what’s not — and putting up guardrails where they now understand they need them.”
Meanwhile, the change in White House administrations could make such arrangements less appealing for states, experts say. The Biden administration hasn’t taken a clear stance on P3s or the role they might play in its massive infrastructure plan reportedly worth trillions.
However, if states can rely on an infusion of federal funding, experts say, they might forgo private financing and the need to explain the complicated deals to an often skeptical public.
Under Solomon’s proposal, Maryland would establish a P3 “Oversight Review Board” appointed by the governor and legislature to analyze proposals. The bill also would prohibit the approval of large P3 contracts until a financial adviser chosen by the state treasurer does a “risk analysis” and assesses any impact to the state’s credit rating. A House committee dropped a provision that would have required an environmental study be complete before soliciting future P3s.
“We felt like these are good-government transparency items that should be in there,” Solomon said.
The Maryland Department of Legislative Services, which provides staff support to the General Assembly, found in 2019 the state Department of Transportation hadn’t made a “rigorous effort” to evaluate whether a P3 on the HOT lanes was in the state’s best financial interest. Any project deemed profitable for companies should be considered doable for the state to finance on its own, the analysis said.
MDOT has said it plans to seek approval to enter into a “predevelopment agreement” with Australian firms Transurban and Macquarie in May, at least four months before an environmental review is scheduled to be complete. The team would design four HOT lanes for each highway and have the right of first refusal for a 50-year contract to build the lanes and finance their construction in exchange for keeping most of the toll revenue.
Maryland Gov. Larry Hogan (R) has said the highway expansions are needed to alleviate traffic congestion and would come at “no net cost” to taxpayers. The regular lanes, which would be rebuilt, would remain free, except for carpool lanes on I-270 that would be converted to HOT lanes. Buses or vehicles with three or more people could use the HOT lanes free.
MDOT declined to make anyone available for an interview but said in written hearing testimony that Solomon’s proposal could “irreparably damage” the state’s ability to use such partnerships. A P3 review board’s scrutiny would “increase project cost and uncertainty” for the private sector, MDOT said, because “political debate” could derail projects.
In written responses to emailed questions, MDOT spokeswoman Erin Henson said the HOT lanes predevelopment firms can collaborate early on to prevent the kind of problems that increased costs and caused delays on the Purple Line before finalizing a construction price and schedule. The agency will provide “necessary oversight” on the HOT lanes, she said.
The state did not determine what it would cost for it to finance and build the lanes before it decided on a P3, as Virginia and some other states require. It wouldn’t be “practical” to assume the state could afford the billions of dollars needed to do so, MDOT said.
“This would mean these funds were not available for other critical transportation projects throughout the state for many years,” Henson wrote.
But some local officials say the process is moving too quickly, especially if the state enters into a predevelopment contract before potential effects on the environment and surrounding communities are fully explored. P3 experts say public opposition surrounding environmental studies is one of the biggest risks for project delays and, in turn, escalating costs.
Under the proposed predevelopment agreement, the state would have to reimburse Transurban and Macquarie up to $50 million of their development costs if the state cancels the project or it doesn’t secure federal environmental approval.
The planning agency for Montgomery and Prince George’s counties, as well as the Maryland chapter of the Sierra Club, have said they are considering legal action unless the state corrects what they say are flaws in the project’s draft environmental study. It was an environmental lawsuit against the Purple Line that first delayed its construction.
Maryland’s P3 law, like in other states, seeks to attract private investment by limiting the potential for political interference. States lose out on competitive bids, experts say, if companies are reluctant to spend months and millions of dollars pursuing a project at risk of being killed.
The state allows the legislature’s budget committees to review a proposed P3 contract, but lawmakers don’t get a vote. Approval comes down to two votes on the state’s Board of Public Works — the governor, who presumably supports the administration’s proposal, and either the comptroller or treasurer.
Montgomery Council President Tom Hucker (D-District 5), who supported the P3 law as a state delegate, said lawmakers considered it the only way to build the Purple Line. After years of debate, the project won the support of most local officials, local state lawmakers and then-Gov. Martin O’Malley — mostly Democrats and mass transit advocates.
“At the time, people didn’t envision a governor using [a P3] to advance a pet project over the objections of the General Assembly,” Hucker said.
Hogan announced the highway widening in 2017 before consulting officials in Montgomery and Prince George’s counties, many of whom have said the plan is too environmentally destructive and shortchanges mass transit.
Hogan spokesman Mike Ricci on Friday called criticisms of the governor’s HOT lanes plan by some Montgomery officials “astounding,” saying the county previously included fixing the American Legion Bridge and improving I-270 on its priority list for state transportation projects.
“The real question is whether a project like this that has public support from local residents has ever been so dogmatically opposed by local politicians,” Ricci said in an email. “If a governor has to get the signoff of every alderman and constable before advancing a project, we may as well go back to horses and buggies.”
Edgar Gonzalez, a former top Montgomery transportation official and now head of the pro-HOT lanes Suburban Maryland Transportation Alliance, said criticisms of the P3 rules should be vetted by a state commission, including private sector financial experts. Any necessary changes could go back to the legislature next spring, he said, before the state seeks approval of the 50-year toll lanes contract.
“We have a private group willing to risk $4 billion” to build the first phase of the HOT lanes project, Gonzalez said, adding that changes to the law in the middle of the project’s procurement could spook investors. “This won’t increase taxes by a penny. If we don’t improve our infrastructure at no cost to us, then how are we going to do it?”
Rep. Anthony G. Brown (D-Md.), who as lieutenant governor led the O’Malley administration’s push for the law, said it’s “transparent” for the public and provides certainty for the private sector. While Brown opposes the HOT lanes, he said he doesn’t think the P3 law needs to be changed.
Brown said decision-making authority on such contracts was left to the Board of Public Works because it approves all major state contracts. The General Assembly, he said, could scrutinize or stop any P3 by conducting public hearings or cutting off MDOT funding for it.
Brown said he will ask the Biden administration and Congress to skip the Maryland toll lanes project when it doles out any new infrastructure funding. He said he also will continue to encourage residents to fight the plan.
“You create a lack of certainty,” Brown said, “and then the private sector gets real skittish and they start walking away from projects.”
If passed, it’s unclear whether a bill that alters the P3 law would have enough votes to survive Hogan’s likely veto.
Michael Laris contributed to this report.
