Editor’s Note: Pete Rahn became Maryland’s secretary of transportation in 2015 after previously holding similar positions in New Mexico and Missouri. He has been the driving force behind Gov. Larry Hogan’s plan to widen I-495 and I-270, drawing on $9 billion to $11 billion in private investment. Rahn discussed that proposal and issues surrounding it at length in August with Louis Peck in conjunction with a story on traffic congestion in the November/December edition of Bethesda Magazine. Below is an edited version of the interview in Q&A format.
Click here to read an earlier transportation Q&A with Montgomery County Executive Marc Elrich.
Bethesda Beat: To widen I-495 and I-270, the state has proposed a so-called “P3” — public-private partnership — in which a private “concessionaire” finances, designs, builds, operates and maintains highway lanes with toll revenue. While this approach has become common in the U.S., one transportation expert noted recently that what is unusual here is Gov. Hogan decreed from the outset that the project would be built via the P3 route — and ruled out having the state build it on its own. By doing this, doesn’t Maryland risk undercutting its negotiating leverage with concessionaires, while ceding control over the project?
Rahn: The problem is that if we were to compare how we would do it — funding it ourselves — and how the P3 community will fund it, our proposal is that we can’t build it. We don’t have the capability of borrowing that money [or] of paying for it out of our existing funds. So, for us, P3 is our only way to undertake this project. The reason the governor has concluded that P3 is the right way to go is that it’s a P3 or nothing — and the region desperately needs a solution.
As the [Maryland Department of Transportation], we’re approaching $4.2 billion in existing debt. We have a covenant with the bondholders. We agree by policy that our capital program will be two-and-a-half times our payment on our bonds. Those covenants totally prevent us from adding $11 billion to our debt.
Even if the revenue [from tolls] was there to pay it off, we don’t have the coverage ratio. And that’s where the private sector can bring in their vast resources to satisfy the bond market that their coverages are adequate.
There has been a maturing of the marketplace, and, with the projections that the region will grow by another 1.3 million people over the next 20 years, those things combined give the concessionaires a lot of confidence. … I believe there’s going to be substantial competition for this [project]; that’s the indication we’re getting now. The interest we are seeing is literally from around the world. I think the competition between the concessionaires is what’s going to produce a good bargain for us.
BB: Would the state — and its taxpayers — be forced to step in if a concessionaire ran into financial trouble and went bankrupt?
Rahn: The answer is absolutely not. There are several examples out there where a P3 declared bankruptcy on their projects: [The] Indiana [Toll Road] being one, and Texas SR-130 [another]. (Editor’s note: A private consortium operating the toll road across northern Indiana filed for bankruptcy in 2014, while a firm that built part of SR-130 — which runs from San Antonio to north of Austin — made a similar filing in 2016.)
Those are good examples of what happens when you have a good contract. They went bankrupt — and the equity investors lost their funding, so it was a bad investment for them. The bondholders stepped in, took over the operation of the P3, and continued to deliver those services to the point where the drivers saw absolutely no difference. The bondholders had to operate the project according to the contract with the state. And the state paid zero in either case — and that’s exactly the structure we are undertaking with this project. If it turns out to be a bad deal for the concessionaire, it’s those equity investors that lose their money.
Obviously, we’re talking about substantial amounts of equity. They’re not going to put hundreds of millions of dollars at risk if they themselves don’t believe that it’s a good business proposition. So we believe it’s a good business proposition as well.
BB: You appear optimistic that the bidding competition will produce a good deal for the state, including upfront fees from concessionaires. But didn’t Transurban, a large Australian firm that has built several of the toll lanes in Virginia, say earlier this year it didn’t plan to bid on the I-495/I-270 project? How does that bode in terms of the bidding process?
Rahn: I think since that story on Transurban came out, the governor’s direction to move over to I-270 [in place of an earlier priority on widening I-495] alleviates some of the political concerns. And because there seems to be almost total agreement that 270 has to have something done, and the fact that it doesn’t really have any residential impacts, means that it’s a good place to start. It doesn’t eliminate, but it lessens, the political risk involved.
Whether Transurban will choose to come back or not, I don’t know. With Transurban or not, we still have a number of large-scale global concessionaires that are very interested in this project.
BB: As you noted, Gov. Hogan delayed moving ahead on the section of I-495 through Bethesda and Silver Spring amid controversy. The initial work on I-270 will involve the southern section of roadway from I-370 to the Beltway. This has prompted concern among elected officials along the northern, narrower portion of I-270, currently a bottleneck for commuters. What’s the status of proceeding with work there?
Rahn: The governor’s direction was that I-270 be our first phase. And he didn’t say 370 to the Beltway. He said 270. So we now have Phase 1A and 1B — 1B being north of 370. And what we’re having to deal with there is a uniqueness to I-270, particularly impacted by the Monocacy battlefield. That’s why 270 has been separated into two. We currently have [taken] the initial steps of the NEPA [National Environmental Policy Act] process for that section north. So we’re not ignoring it.
BB: Your aim is to solicit bids for work on Phase IA — I-270 from I-370 south to I-495 — in 2020. Some of your recent comments have suggested this phase is moving ahead first in part for financial reasons. Is this accurate?
Rahn: From the very beginning, our statement of goal has been net zero cost to the state. The word “net” is important here, because we know there are areas like 270 north that will have a cost that is going to exceed our projections for revenue generated by that section. That by itself would equal a subsidy or “gap funding.” … The opposite of gap funding is a concession fee.
As we have prioritized, our initial approach had been that we wanted fees [from concessionaires] first. That would allow us to meet the gap funding of the areas that were expensive to build, and had less than enough traffic to pay for [themselves].
BB: There have been concerns expressed about widening the southern section of I-270 without also doing the same to adjacent stretch of I-495 between the so-called “western spur” and the American Legion Bridge. Is adding that in this first phase potentially on the table?
Rahn: The governor’s direction to us was to focus on 270. I understand there’s a desire for connections elsewhere. I work for the governor. (smiles)
BB: Do you share the concerns of county officials that widening I-270 without doing the same to the western portion of the Beltway in Montgomery County could aggravate congestion?
Rahn: So, I’m not going to contradict the governor. I’ve been doing these jobs long enough. I’ve learned that’s not good for your employment status. (laughs)
BB: Debate over the I-495/I-270 widening proposal has been contentious since Gov. Hogan announced it in 2017 — with county officials charging they were not consulted about the plan prior to the governor’s announcement. Do these complaints have merit?
Rahn: You have to look at the actual process we’ve been under for 20 years. Our annual letters that we receive from the counties as far as what they want have, in numerous ways, said we need to address the congestion in this region. … The idea that doing something about 495 and 270 came out of the blue — I can’t believe anyone, with a straight face, can say there haven’t been wishes expressed by local governments for the state to do something about these interstates.
BB: But Montgomery County officials contend the local government never proposed widening of I-495 between Bethesda and I-95, given the difficulty of doing so without adverse impacts to public parkland and private property.
Rahn: I can understand that Montgomery County does not prioritize improvement that benefits Prince George’s County. (chuckles) This has been an ongoing conversation [with] me, [with] previous secretaries, for years about what we can do about this congestion. And the typical solution has been to just simply say, “Transit is the only way we can address this.”
But we know by itself, transit can’t fix this. We know that by itself highways can’t fix this. That’s why the governor has invested billions of dollars in transit within the region. And it’s sort of glossed over — well, the Purple Line, that $5.6 billion doesn’t count. And, oh, yeah — the additional billion dollars we’re providing to WMATA [the Washington Metropolitan Area Transit Authority] doesn’t count. So it’s a convenient memory.
And we know people are not going to abandon their cars. We can anticipate that there’s going to be changes in how vehicles operate from the standpoint of whether they’re [autonomous]. But the experts are split as to whether autonomous vehicles will increase miles traveled or decrease them.
So the idea that we can ignore cars when the COG [Metropolitan Washington Council of Governments] calculations for 2040 say the mode mix is going to be 7 percent transit and 81 percent cars? They talk about individual car operators and they talk about car sharing. Car sharing is still a car.
BB: Montgomery County officials contend the I-495/I-270 widening plan largely ignored transit. A recent letter in response from an official in your department seemed to suggest a belief that further transit options can make no more than a limited dent in the traffic congestion problem.
Rahn: I believe in a balanced transportation system; I truly do. I even said that during my introduction to media when the governor had selected me — and the governor grabbed my shoulders, pushed me to the side, and said, “He’s the best highway guy in the country.” (laughs) And so I sort of got labeled as a highway guy then.
I’ve delivered a lot of big highway projects. But I’ve always believed in a balance that was needed. Today, if you look at our budget, and our calculation of mode share for the entire state, it’s 8 percent transit, and transit produces 3 percent of our revenues and transit takes 42 percent of our resources. We are putting a huge investment into transit.
The purpose and need [section of the I-495/I-270 widening study] included that we needed to address the commercial movement of goods. The interstates obviously were designed to support our national economy, and so somehow we have to address the need for commercial movement of goods. And transit is not going to resolve that issue.
There are other reasons that transit will not work here. As well as not being able to handle the movement of goods, there is no transit that can pay for itself. And, as I’ve already said, we have no ability to invest more resources into anything.
So if a project or solution cannot pay for itself, then it also is not going to meet our needs. No matter how much we would like to do something, if we don’t have a way to pay for it, then it’s not real. There is not a transit system anywhere that does not require significant investment and subsidy every year.
BB: Speaking of subsidizing transit, under an amendment proposed by state Comptroller Peter Franchot and adopted by the Maryland Board of Public Works in June, 10 percent of the toll revenues received by the state as a result of the P3 project would go toward mass transit. There have been conflicting interpretations of how this would work. Can you clarify the situation?
Rahn: Our understanding of his motion was that 10 percent of the net total funds paid to Maryland should go towards transit. For us, what that means is we’re not going to start receiving payments from tolls until TIFIA [the Transportation Infrastructure Finance and Innovation Act] is paid off. (Editor’s note: TIFIA is a federally funded program that enables private firms involved in transportation projects to borrow funds at favorable rates.]
It’s hard to predict how quickly that’s going to get paid off. The concessionaires like to pay off TIFIA as soon as they can, because they can’t pay dividends to themselves until TIFIA is paid off. … It can be five years, it can be 10 years. So once we get to a point within the [financing] structure, there is revenue sharing for tolls that exceed projections.
If it’s more lucrative for the concessionaire than expected, there has to be a sharing of that revenue. It’s that portion of the revenue that we will then pass on to the counties for their transit … assuming there are tolls in excess of projections.
BB: Given that this will be a long-term contract with the concessionaire, could it be decades before toll revenues from a completed P3 project start generating funds for transit?
Rahn: It would be faster. I can’t tell you when, [but] it’s not 30 or 40 of 50 years. I know it won’t be 50 years, because that’s the length of the concession. But you’ve got to meet these [revenue] thresholds. Obviously, we’re anxious as well for the revenue sharing portion to kick in. We have no reason to structure something that would delay that. I would very much like to have the other 90 percent of that revenue sharing.
I think what needs to be clear is there seemed to be an interpretation by some that 10 percent of all the tolls collected were going to go to [transit]. That’s not what that is. It’s 10 percent of the revenue sharing that the state is going to get. And that still can be a substantial amount.
BB: Amid the debate over the role of transit in the I-495/I-270 widening proposal, you convened a group last spring to consider ideas along this line. Can you elaborate on its scope and purpose?
Rahn: What we want to do is to incorporate into the projects … what we can do to make them supportive of transit systems in the region. Does that mean we need to have park and ride facilities at specific locations? Does it mean how do we accommodate buses in express lanes? We’re looking to the transit experts who are running the local systems. If we can do something to help them make their systems work better, including increase their ridership, then we want to incorporate that.
This isn’t just about building roads. This is about how do we make our nation’s capital transportation system work on our side [of the Potomac River]. Virginia, on the other side, is doing a much better job — and we’re seeing economic development occurring in Virginia that is not considering Maryland. Much of it is because they can’t get around in Maryland.
BB: To expedite traffic, the proposed toll lanes would not allow cars to exit onto all arterial roads accessible from the general purpose lanes of I-495. This has raised concerns among county officials about a heavy volume of traffic being funneled onto a limited number of already congested thoroughfares — such as Connecticut Avenue and Route 29/Colesville Road. Do you see this happening?
Rahn: Our calculation so far, without seeing a design from a concessionaire, is that we should see a 2 to 3 percent reduction in traffic on these corridors. That’s not huge, but it’s a reduction.
What’s happening now is that there’s congestion on these roads trying to get onto the interstate, which is creating backups. So if traffic can get on more easily, and the traffic is flowing, then the whole mechanism is working better.
We don’t see it as dumping traffic; we’re seeing this as actually improving, slightly, the performance of those roads. We’ve responded to both [Montgomery and Prince George’s] counties that we are open to working with them for access to and from the 495/270 corridor.
And the region is paying a price for all this traffic. Almost everybody uses [Waze] because they’re trying to get around the traffic.
And what’s happening is that they’re getting around the traffic by driving through the neighborhoods. So what we would like to do is get traffic out of neighborhoods where they don’t belong, and get them back onto a functioning highway. I think that can make neighborhoods safer, and obviously it can make the whole system more efficient.
BB: How long do you envision it taking to turn the proposal for widening these interstates into reality?
Rahn: Ten years represents an aggressive delivery of the program. The danger to all of this, though, is that we know that, in five years, the traffic projections are horrible.
Do you recall a few months ago [when] the fuel tanker overturned on the American Legion Bridge? I don’t know what it did to your personal traffic, but what it did to the region is our system crashed. The overflow of traffic went into downtown Washington, D.C., to get around.
Welcome to 2035. That is our projection of the amount of traffic that our system is going to have in 2035 — with us doing nothing. 2040 is worse than that. … You talk about 2040 and that sounds like forever. Twenty years ago was 2000; I don’t know about you, but that doesn’t seem like that long ago to me. It comes fast.
BB: Three decades ago, the lower portion of I-270 was widened — and it filled up with traffic 13 years faster than was originally anticipated. Some critics blame it on “induced demand” — the idea that people will use a roadway more than they would have otherwise because it’s available, and that it will therefore fill up without ultimately providing congestion relief. What’s your view of induced demand — and dealing with it forward?
Rahn: Induced demand is actually incredibly hard to calculate when you are a growing region. With the kind of growth we have seen in the capital region and the kind of growth we’re projecting for the future, we need to be providing capacity — not for a stable population, but a growing population.
Given the region’s growth, new lanes would eventually fill up without dynamic pricing. The I-495/I-270 P3 program is focused on maintaining congestion-free lanes by using dynamic pricing. As early as 2012, the Federal Highway Administration noted that congestion pricing represents the single most viable and sustainable approach to keeping traffic moving in lanes.
Now, that should lead into the question of “Are we going to see $40 or $45 tolls [as has occurred at times on I-66 in Virginia]?” The answer is that we are not I-66 within the Beltway. They provided no additional [road] capacity and, during peak hours, I-66 [had been] high occupancy vehicles only.
And so really what they were doing in Virginia with that project was simply to price a very small piece of capacity and make it legal for single occupant vehicles to use it.
Again, this is totally voluntary. You make a choice. If your time is valuable for some specific reason, you choose to pay it.
The great thing about our calculations is that there are significant time savings even to the people in the general purpose lanes. You benefit whether you use the price-managed lanes or not. That’s a heckuva deal.