A consortium of Australia’s Macquarie Group and Sweden’s Skanska Infrastructure Development reached financial close last Friday on a landmark US public-private partnership (PPP) project: Virginia’s $2.1 billion Downtown Tunnel/Midtown Tunnel/ MLK Extension Project.
The 58-year contract calls for the partners to build “a new two-lane, about 1,700 meter long, submerged tunnel for road transport, maintenance and safety improvements to the existing Midtown Tunnel and an extension of the MLK Freeway,” Skanska said in a statement. The current tunnels handle some 120,000 vehicles a day, Skanska added.
The project, which will take six years to build and carries a construction price tag of $1.47 billion, is being financed with the help of $663.75 million in private activity bonds, paying some 5.5 percent in interest, and a $422 million TIFIA loan. TIFIA is short for Transportation Infrastructure Finance and Innovation Act, a federal government scheme to help loan low cost, low credit funding for infrastructure.
The TIFIA loan will help shore up the senior debt through a deferred principal and interest payment structure that excludes interest payments for the first 10 years after financial close. From years 11 to 18 following close, only a portion of the interest payment is required whereas principal payments will only start 25 years after financial close, in 2037. The TIFIA loan payments come after senior debt service.
Macquarie and Skanska are contributing some $272 million in equity for the project with the remainder coming from a grant from the Virginia Department of Transportation (VDOT) and toll revenues to be collected from the existing tunnels over the construction period.
That effectively means the project is not fully funded at financial close, since it is relying on some $368 million in toll revenues to be collected over its six-year construction period. It also means the partners had to provide a $50.6 million letter of credit to backstop any potential shortfall in toll revenues.
Ratings agency Standard & Poor’s (S&P) pointed out in a note that there is some “uncertainty regarding people’s willingness to pay the toll. While tunnels and other area facilities had tolls, they were removed more than 20 years ago and the region does not have recent experience with toll facilities.” S&P added that this factor might also affect the project’s ramp-up period.
The Midtown Tunnel project is fully exposed to traffic, revenue and toll collection risk, with fares variously ranging from $0.50 to $1.84 and collected electronically.