Reply to: HCC-30
Mr. James M. Whitty
Manager, Office of Innovative
Partnerships and Alternative Funding
355 Capital Street, NE., Room 135
Salem, OR 97301-3871
Dear Mr. Whitty:
The Federal Highway Administration (FHWA) has completed its review of the Oregon Innovative Partnerships Program (OIPP) Special Experimental Project No. 15 (SEP-15) application that was submitted to the FHWA Oregon Division Office (Division Office) on December 17, 2004. The Division Office forwarded the application to the SEP-15 Steering Committee which coordinated the review of the proposed OIPP with the Office of Infrastructure; Office of Planning, Environment, and Realty; Office of Policy; Office of Operations; Office of Chief Counsel; and the Division Office. Based on the comments provided by these offices, the SEP-15 Steering Committee recommended, and I concur, that the OIPP be accepted for administration under SEP-15. FHWA's response to each of the proposed experimental features for the OIPP is discussed below.
FHWA's acceptance of the OIPP for administration under SEP-15 does not commit Federal-aid funding for the project. Until there is formal FHWA project approval, FHWA retains the right to declare the project ineligible for Federal-aid funds at anytime during the SEP-15 process. If you wish to proceed with the OIPP under the SEP-15 program, the next major action will be to work with you to draft an Early Development Agreement (EDA). The EDA will contain parameters to guide such key elements as project planning and design, environmental review, right-of-way acquisition, procurement method, regulatory compliance, timelines, financing, construction, and operation. The EDA will also identify the performance measures that will be used to evaluate the success of OIPP experimental features.
The OIPP is an innovative mechanism for the planning, acquisition, financing, development, design, construction, reconstruction, replacement, improvement, maintenance, management, repair, leasing, and operation of transportation projects in Oregon. The goals of the program are to (1) develop an expedited project delivery process; (2) maximize innovation; and (3) develop partnerships with private entities and various units of government.
Three projects have been identified to date for implementation under the OIPP. The first is potential widening of a 10-mile section of I-205, an important commuter and freight corridor in Portland. General purpose and managed-lane approaches (including carpool, peak period priced lanes, and full facility tolling) will be evaluated for the corridor. The second is the Sunrise Project east of Portland that will serve existing industrial development and future residential and commercial development. The third OIPP project is called the Newberg-Dundee Transportation Improvement Project, a proposed new 11-mile freeway that will allow through traffic to bypass congested downtown areas saving considerable time for through traffic. A financing strategy will be developed as part of the design phase of the project that will identify all potential sources of funding, including Federal, State, local, and private. In addition, the financing strategy will include an economic development plan for each of the interchange areas and studies of tolling, value capture, shadow tolling, right-of-way donations, and tax increment financing for those areas.
The partnership arrangement described in the Oregon Department of Transportation (ODOT) application is different in scope and scale from the business relationship between State DOTs and private entities contemplated in most relevant provisions of title 23 of the Code of Federal Regulation (CFR). In some cases, a reasonable argument could be made that proposed experimental features are not true deviations from current regulation. FHWA treats them as deviations for purposes of providing definitive answers and predictability to ODOT.
Experimental Feature 1: ODOT requests a waiver to use a modified procurement approach. The subfeatures of the approach are discussed below, notwithstanding any conflict between the process described herein and the provisions of 23 CFR Part 636, including: (a) the ability to accept and review proposal modifications requested by ODOT; (b) the ability to enter into negotiations with the selected firm(s) prior to award; and (c) the ability to issue the Request for Proposals (RFP) and enter into OIPP Agreements without having received final National Environment and Planning Agency (NEPA) approval for the Projects.
Experimental Feature 1a: ODOT requests a waiver to be allowed to ask proposers for supplemental information that could be considered in evaluating a proposal.
Purpose: Due to the nature of the program, ODOT believes it is likely that questions may arise during the course of proposal evaluations requiring a dialog with the proposers. Additional information may be requested through a competitive negotiation process (with discussions and revised proposals), but it is possible that ODOT may determine that certain information is desirable to obtain, but does not warrant a formal discussion process. In such event, ODOT may request that the information be provided as a supplement to the initial proposal, without discussions. A decision to ask for supplemental information will be made only if ODOT determines that such request will not create an unfair competitive advantage.
Deviation from FHWA Requirement(s): FHWA's design-build rule states that "communications" may not be used to obtain revisions to proposals. Current rules allow proposers to make only minor or clerical revisions to their proposals.
FHWA Response: ODOT may conditionally proceed with this proposed experimental feature subject to FHWA approval, and publication in the RFP, of the procedures ODOT develops to obtain additional information from proposers of OIPP projects. The circumstances under which ODOT may need to ask proposers for supplemental information and procedures on how to obtain this information will be set forth in the EDA. Such procedures should include information on how ODOT will avoid creating an unfair competitive advantage to one proposer.
Experimental Feature 1b: ODOT requests a waiver to: (i) have a single procurement to address multiple projects; (ii) allow ideas submitted by unsuccessful proposers to be disclosed to the successful proposer prior to award; and (iii) expand the scope of post-selection, pre-award negotiations.
Purpose: Under ODOT's concept, the State will proceed with a two-step contracting process. The first step will involve a predevelopment contract and the second step will involve an implementation contract. In awarding contracts with this structure ODOT will utilize a single procurement, whereby ODOT would evaluate proposals for each project, including a review of the contractor's qualifications and experience and preliminary implementation plan. If ODOT decides to proceed with some or all of the proposed project(s), ODOT may proceed with one-on-one negotiations for the predevelopment contract with each selected proposer. If the negotiations with any selected proposer fail, ODOT may begin negotiations with the proposer of the next best proposal for that project.
Deviation from FHWA requirements: This process deviates from FHWA's design-build rule in that (i) the design-build rule does not contemplate a single procurement addressing multiple projects and further contemplates that price will be an element in the selection decision; (ii) ideas submitted by unsuccessful proposers would be disclosed to the successful proposer prior to award, contrary to 23 CFR 636.507; and (iii) the scope of the post-selection, pre-award negotiations will go beyond that permitted under 23 CFR 636.51. With regard to item (i), ODOT wishes to allow the selected predevelopment contractor to participate in the planning process for the project and, at the same time, wishes to obtain the maximum benefit of competition in the procurement, while allowing the proposers maximum flexibility. At the predevelopment contract stage, services to be provided under the implementation contract are not defined well enough to use price for such services as a selection factor for the predevelopment contract. ODOT believes that using a price reasonableness assessment for evaluating for the OIPP process will ensure the integrity of the process. With regard to items (ii) and (iii), ODOT is concerned regarding the loss of leverage in negotiations for the implementation contract that may result once a predevelopment contract is awarded and wishes to retain the ability to negotiate terms and conditions with the predevelopment contractor while maintaining the ability to terminate negotiations at any time and proceed to the next predevelopment contract proposer.
FHWA Response: While 23 CFR 636 does not specifically contemplate a single procurement addressing multiple projects, such an approach is allowable under current regulations; therefore, this aspect of item (i) does not require experimentation. However, allowing price negotiations after the selection of best proposer conflicts with the cost component requirements of 23 CFR 636.302, which are intended to determine the lowest evaluated price of the proposals, and thus requires experimentation approval. FHWA recognizes that one of the fundamental aspects of ODOT's SEP-15 application is the ability to experiment with the concept of contracting with a developer early in the project development process. By doing so, the developer has the ability to assist in the early stages of project development. As such, certain elements of the contract may not be well-defined at the time of soliciting and evaluating the proposals. FHWA also recognizes the potential benefits of including the same developer in the formation of project in actual implementation (design and construction). Therefore, FHWA approves item (i) of this experimental feature under SEP-15. This experimental feature is approved with the understanding that the predevelopment contract will include cancellation clauses if subsequent negotiations with the developer fail to result in a mutually agreeable cost for services.
As cited above, item (ii) is contrary to 23 CFR 636.507 and item (iii) is contrary to 23 CFR 636.513. At the predevelopment contract stage in which other proposal details will be shared with the predevelopment contractor, the implementation contractor will not actually be "selected" since a contract will not be in place at that time. While sharing other proposal details could give an advantage to the predevelopment contractor, the advantage of ODOT having leverage in negotiations is a viable experiment. As such, item (ii) and item (iii) is approved with the understanding that the EDA will provide more detail on the specifics of how the predevelopment contract evaluations and implementation contract negotiations will be carried out (i.e., notification to the proposers in the RFP about this feature of the evaluation and negotiation process, "fallback" provisions if negotiations at the implementation contract stage fail with predevelopment contractor, etc). Also, detailed evaluation criteria need to be included in the RFP.
The application indicates that FHWA could participate in the evaluation, selection, and negotiation process, but the EDA should address whether FHWA involvement should begin much earlier than this to assure that the project will retain Federal eligibility. Price would not be a factor in the selection process for initial OIPP Agreements and these agreements would not constitute FHWA project approval. Once all predevelopment work was completed, including the NEPA Record Of Decision, ODOT could negotiate a final lump-sum price for final design and construction using on open-book approach to assure price reasonableness.
Experimental Feature 1c: ODOT requests a waiver to issue an RFP and execute an OIPP agreement before NEPA approvals have been obtained.
Purpose: ODOT plans to issue an RFP in spring 2005 that will solicit proposals for pre-development services, financing, and potentially design, construction, maintenance, and/or operation of one or more of the candidate projects. The work is expected to proceed in phases, each of which may be governed by a separate agreement. The initial phase will include completion of the environmental process and other predevelopment services. The second phase (if it proceeds) would include design, construction, and other development work. A third phase may include operations and maintenance. Each individual agreement, or the set of agreements, depending on the context, is referred to as an "OIPP Agreement."
Deviation from FHWA Requirement(s): This step of the process deviates from FHWA's design-build rule in that the RFP will be issued, and the OIPP Agreement executed and delivered, before receipt of NEPA approval for the project. This step is otherwise consistent with the procurement requirements for public-private partnerships stated in Section636.119 of FHWA's design-build rule: "the contracting agency must have awarded the contract to the public-private entity through a competitive process that complies with applicable State and local laws."
FHWA Response: ODOT may conditionally proceed with this experimental feature. The RFP must not commit ODOT to a particular set of transportation improvements, but rather represent a commitment to enter into detailed negotiations with one or more prospective private partners. For each transportation improvement that meets the criteria for independent analysis in FHWA's NEPA regulation (23 CFR 771.111(f)), FHWA would expect that alternative solutions would be fully evaluated under ODOT and FHWA direct oversight and that appropriate safeguards be built into both the partnership agreement and the NEPA process to ensure that conflicts of interest were avoided.
Under the ODOT concept, a single private sector entity could propose to develop more than one project. Since each project outlined by ODOT is independent, separate agreements should be negotiated for each project. The RFP should require developers to outline the anticipated NEPA level of documentation and process, if such information is available. It should include specific expectations about the flexibility open to ODOT to implement some or all of the proposed improvements and to select from reasonable alternatives for each "project" without prejudice under the partnership agreement. The RFP should clearly state that the NEPA process may result in the selection of a no-build alternative or an alternative not originally envisioned in the EDA. FHWA will work with ODOT to ensure that the RFP and OIPPs are properly drafted to satisfy these and any additional Federal regulatory concerns.
Experimental Feature 2: ODOT requests a modified process for approval of projects advanced under the OIPP. In lieu of obtaining project authorization through FHWA's approval of the RFP as contemplated by the design-build rule, ODOT proposes an alternative procedure for project authorization. FHWA would review the procurement and contract documents associated with the OIPP Agreement, as well as the implementation and financing plans for the facility, and determine whether such documents are satisfactory for further processing. Such review and determination would be considered a preliminary action by FHWA for NEPA purposes. Project authorization for each project would be requested following completion of the NEPA analysis for the facility.
Purpose: This approach provides the flexibility to involve the private sector in project development activities prior to completion of the NEPA process.
Deviation from FHWA requirements: This approach deviates from FHWA's design-build rule in that the rule contemplates project authorization prior to issuance of the request for proposals. As a result of the plan to award the OIPP Agreement prior to final NEPA approval, an alternative methodology for project authorization is necessary.
FHWA Response: FHWA accepts this experimental feature. Authorization for construction would occur only for projects that include Federal-aid funds in the plan of finance and following NEPA approval. The approach to achieve NEPA approval and the plan of finance will be finalized in the EDA.
Experimental Feature 3: ODOT requests a waiver to include a general warranty in the OIPP Agreement that exceeds the period specified in 23 CFR 635.413(e)(1)(i) and allows the developer to undertake responsibility for routine maintenance services. The terms and conditions of the OIPP Agreement may provide for an extended warranty and/or for the developer to perform routine maintenance work, and may place restrictions on the method of procurement used by the developer in selecting subcontractors, as deemed appropriate by ODOT.
Purpose: ODOT is accepting proposals that include long-term maintenance and operations. If those activities are included in the project agreement(s), extended warranties could help reduce life cycle costs and reduce ODOT's risk. Having the ability to pay for routine maintenance under an umbrella maintenance contract would reduce administrative burdens.
Deviation from FHWA Requirements: FHWA's design-build rule contains a maximum
2-year limit on general warranties. Also, routine maintenance is not eligible for Federal-aid reimbursement. However, ODOT anticipates that toll revenues will be the source of funding for the routine maintenance. Toll revenues are not prohibited from use on routine maintenance per 23 U.S.C §129(a)(3). As such, no deviation from Federal requirements exists.
FHWA Response: Since ODOT anticipates that the OIPP projects will be toll facilities, toll revenues may be used for routine maintenance in accordance with 23 U.S.C. §129(a)(3).
Experimental Feature 4: ODOT requests FHWA concurrence that the procurement process, in combination with the proposed process for determining price reasonableness (which is to be provided at a later date) prior to project authorization, constitutes a competitive process for purposes of 23 CFR 636.119.
Purpose: Upon definition of the Project to a level allowing determination of a lump sum price, and following receipt of required deliverables and necessary environmental approvals, the arrangements for design and construction of the facility would be finalized. ODOT anticipates that the price for final design and construction will be negotiated with the developer using an "open book" approach, allowing an analysis to be performed to confirm that the price is reasonable.
Deviation from FHWA requirements: The design-build rule generally contemplates that a proposed lump sum price for design-build services will be a factor in contractor selection, thus allowing competing price proposal to be use as the basis for determining price reasonableness. ODOT's proposed procurement approach contemplates negotiation of the price for design-build services and therefore requires an alternative approach to determining price
FHWA Response: ODOT may conditionally proceed with this procurement process on the condition that ODOT certifies that the competitive process complies with all applicable State and local laws. The proposed procurement process will be discussed further during the development of the EDA.
Experimental Feature 5: The developer and/or subconsultant on the developer's team may provide NEPA support services for the Project, with the understanding that: (1) a consultant not affiliated with the developer will compile the NEPA documents; (2) all developer and consultant services will be subject to control and direction by ODOT and FHWA; and (3) ODOT and FHWA will be responsible for preparation of the NEPA documents and for determining the content and conclusions thereof.
Purpose: The scope of services to be provided by the developer under the OIPP Agreement may include provision of engineering studies and technical information in support of the NEPA process with regard to the Project(s). These efforts will be subject to management and control by ODOT and FHWA, which will exercise independent review and retain discretion over all of the information in the NEPA document. The developer would also undertake preliminary design efforts for the Project(s) and due diligence activities (such as site conditions and utility investigations) in accordance with the terms and conditions of the OIPP Agreement, prior to final NEPA approval.
This approach provides flexibility to involve the private sector in predevelopment activities prior to completion of the NEPA process. This early private sector involvement would have benefits for final design and construction activities to be conducted in the second phase of the project.
Deviation from FHWA requirements: This step deviates from FHWA's design-build rule in that the design-build rule does not contemplate award of a contract prior to final NEPA approval.
FHWA Response: FHWA accepts this experimental feature. Authorization for construction would occur only for projects that include Federal-aid funds in the plan of finance and following NEPA approval. Private entities are allowed to conduct an environmental analysis and help prepare NEPA documents for a project, however, if an Environmental Impact Statement (EIS) is required, a private entity may not prepare the document if it has a financial or other interest in the outcome of the project. (See 40 CFR 1506.5 (c)) A developer may contribute information and conduct environmental analyses, however, ODOT and FHWA must retain control and responsibility of the NEPA process, and appropriate safeguards must be built into any agreements to ensure that conflicts of interest are avoided. The NEPA process shall examine all reasonable alternatives and the no-build alternative. The selection of the preferred alternative shall remain the responsibility of the ODOT, in cooperation with FHWA. If ODOT executes a contract for a developer to prepare an EIS, this would be a violation of the Council on Environmental Quality's (CEQ) regulations.
In order to safeguard the integrity of the NEPA process and in order for the transportation improvements proposed to meet the criteria for independent analysis under FHWA's NEPA regulation (23 CFR 771.111(f)), the FHWA would expect that all reasonable alternatives be fully evaluated under ODOT and FHWA direct oversight and that appropriate safeguards be built into NEPA process to ensure that conflicts of interest are avoided. The approach to achieve NEPA approval and the plan of finance will be finalized in the EDA.
Experimental Feature 6: That ODOT may modify Form 1273, "Required Contract Provisions for Construction Projects" to strike out the portion of Section VII that requires a specified percentage of work to be self-performed.
Purpose: FHWA's design-build rule modified 23 CFR 635.116 to provide that the self-performance requirements do not apply to design-build contracts, but did not include authorization to allow State transportation departments to modify Form1273 by deleting the conflicting portions of Section VII.
In addition, 23 CFR 636.119 provides for the possibility that a developer may be treated as the agent of the awarding agency under certain circumstances, subject to the requirement to follow Federal-aid procurement requirements in selection of its subcontractors. For the OIPP, although the initial OIPP Agreement will not contain "price and an assignment of risk," the agreement will be modified to include price and assignment of risk prior to receipt of project authorization. Although ODOT may, under certain circumstances, wish to place restrictions on the process to be followed for subcontractor selection, ODOT would prefer to have flexibility to determine appropriate restrictions on a case-by-case basis. The OIPP regulations require "Major Subcontractors" (i.e., any subcontractor performing more than 10 percent of the work) to be identified in the proposal, a concept which is inconsistent with a requirement to competitively bid future work.
ODOT will include provisions in the OIPP Agreement to ensure that an appropriate approach is taken to subcontracting and will submit the planned approach to FHWA in advance of execution of the OIPP Agreement for review and a determination that it is satisfactory for further processing. FHWA would therefore have substantive input into the subcontracting requirements in the OIPP Agreement.
Deviation from FHWA requirement(s): None.
FHWA Response: Under 23 CFR 635.116(d), 30 percent self-performance requirements of paragraph (a) are not applicable to design-build contracts. Therefore, a waiver of this
section is not required. Form FHWA-1273 will be revised to reflect this change in the regulation in the near future. Until then, ODOT may include a contract provision that indicates the provisions of 23 CFR 635.116(d) have superseded the 30 percent self-performance requirements of Section VII of form FHWA-1273.
Proposed Performance Measures and Reports
ODOT included proposed factors to evaluate the experimental features of the OIPP. FHWA will fully evaluate the proposed factor, listed below, for inclusion in the EDA:
Innovation in Project Development.
Innovation in Financing.
Innovation in Design and Construction.
Quality and Warranty.
The proposed initial report, periodic updates, interim reports, and a final report, described in the ODOT application, will be reviewed during the development of the EDA and incorporated into a project timeline.
I have asked Mr. Charles Nottingham, Associate Administrator for Policy and Mr. David Cox, Division Administrator for the FHWA Oregon Division Office to serve as the co-facilitators for the OIPP. Mr. Nottingham and Mr. Cox will establish an FHWA interdisciplinary team to work with the ODOT to develop the provisions of the EDA.
An identical letter is being sent to Mr. Bruce Warner, Director of the ODOT.
J. Richard Capka