Let's Make a Deal

FEDERAL HIGHWAY PANEL DISCUSSION
Public-Private Partnerships

On Monday, January 10, 2005 FHWA Administrator Mary Peters moderated a panel at the Transportation Research Board's annual meeting titled "Let's Make a Deal." The session was structured as an open forum between the U.S. DOT and private sector players involved in project financing and delivery. The session focused on how the parties need to think creatively and strategically together to advance critical surface transportation projects, specifically addressing what flexibilities the key stakeholders need to bring to the table.

In her introductory remarks, Ms. Peters stated that the goal of the FHWA and the U.S. DOT is to help bring public/private partnerships (PPPs) into the mainstream of transportation finance. She noted that while we are seeing an increased use of PPPs around the country, the public sector, especially FHWA and U.S. DOT, has a real responsibility to create an environment that will attract, not discourage, more PPPs in the future.

Ms. Peters stated that transportation dollars could go much farther if we encourage PPPs and market forces will give us more options to deliver innovation, cost savings, and quality improvements. She observed that transportation infrastructure represents tremendous assets and they need to be looked at and managed as such. The Chicago Skyway and the Trans-Texas Toll Corridor are two deals that Ms. Peters thought could be the leading edge to transform how we finance transportation.

Ms. Peters concluded "that highways in the U.S. are traditionally government funded, government planned, government maintained. It is simply not the typical approach in America to industry. The time has come for us to unleash the power of the private sector and the free markets to meet the transportation challenges we have in the future."

The panel members included Geoffrey S. Yarema, Chair, Infrastructure Practice Group, Nossaman Guthner Knox & Elliott LLP; Jim Taylor, Managing Director, Public-Private Ventures Group, Bear Stearns; Allan Rutter, Deputy Executive Director, North Texas Tollway Authority; Bob Prieto, Senior Vice President, Fluor Corporation and D.J. Gribbin, Chief Counsel, Federal Highway Administration.

The following questions were posed to the panel members:

1. How would you define a successful public/private partnership?
2. How would you define an environment that is attractive to successful public/private partnership?
3. What is the appropriate role of the Federal government in encouraging public/private partnerships?
4. Are there areas of expertise that need to be developed in the public sector and/or private sector that can maximize the potential for successful public/private partnerships?
5. How do you choose partners in a public/private partnership so that you can make a deal?

MARY:     The title of this session is let's make a deal. And what we want to talk about today is not so much modal specific, but opportunities to put together financing packages for transportation projects and transportation infrastructure.

I'm going to challenge us all as we take on this panel this morning to use your imagination, to use your ingenuity, those God given gifts that we have to think beyond what is to what could be. And I think that will give us a great opportunity to take this panel, gentlemen, where we want to this morning.

It's the season for resolutions. I don't know about many of you, but I belong to a gym and as I've gone there right after the 1st of the year, there are lots more people there now than there normally are. And they're using my machines in the morning. That will wane toward the end of this month and certainly by the middle of next month.

But it's the time of the year when many of us make many resolutions. Well, for 2005, I have a resolution for those of us at Federal Highway Administration and the U.S. Department of Transportation: and that is for us to help bring public/private partnerships into the mainstream of thinking for transportation finance.

Now, we're already beginning to see the use of public/private partnerships around the country. But we need to create an environment where we see more of that in the future. That's why we in the public sector, and especially those of us at Federal Highway Administration and USDOT, have a real responsibility to create an environment that will attract, not discourage, public/private partnerships.

If we want to continue in this nation to have the economic growth that we've seen in the past months, we firmly believe that public/private partnerships have to be part of those solutions.

And the President is a big believer in the power of free enterprise. And much of what you're seeing the President take on, the ownership society, tax reform, regulatory reform, are all part of bringing the power of the free enterprise system to bear on the challenges that we have nationally.

Secretary Mineta and I certainly believe in this as well. We're working to make public/private partnerships and free markets a much, much bigger part of what we're doing in terms of providing solutions to the challenges that we have nationally in transportation infrastructure.

This country has benefited tremendously from private sector participation in telecommunications. And I challenge you to think maybe as recently as fifty years ago when probably your only option was a black boxy looking telephone that was owned and operated by Ma Bell. Today many of you probably have numerous telecommunication devices, most of which may be on your person today.

But in telecommunications and in many other areas, private sector involvement has helped us make great in-roads that we would not otherwise have achieved. And it really begs the question: why not roads and bridges as well? Why not in tunnels? Why not in other aspects of transportation infrastructure? Why are we not bringing this private sector mentality to bear?

When we unleash the private sector, we're going to bring innovation to our transportation system to a much greater extent. Having been a state official and now a Federal official, it seems that we in the public sector are too prescriptive in terms of what we ask for. And I believe that we temper innovation when we do that.

Transportation dollars can go much farther if we encourage public/private partnerships. Market forces will give us more options. And I think we can complete projects significantly sooner than we otherwise would. Now, Tyler Duvall, one of our fellow revolutionaries at the U.S. Department of Transportation, says that sometimes we have a failure of imagination that has caused us to think there's nothing we can do about the congestion that's choking us around the nation today.

Or there's nothing we can do about the tremendous gap between what our transportation infrastructure needs are and what available public sector revenues will help us resolve. Well, that is not the case everywhere in the nation. There are some remarkable, albeit under reported, examples of where the private sector has really come in and helped us innovate.

One of those deals I'd like to talk about could be the leading edge to transform how we finance transportation: The Chicago Skyway. How many of you saw the reports of the Chicago Skyway concession that has a 99-year lease with the City of Chicago, $1.83 billion that was paid to Chicago for the lease?

That is a tremendous, tremendous opportunity that I think has historic innovation built into it. Historic abilities to take what was done there and apply it in other places. What it says is what Dave Geiger and the folks in the asset management office at the USDOT have been saying for a while now.

Transportation infrastructure represents tremendous assets. And they need to be looked at and managed as such. Texas -- Allan, your home state ... I-35. Texas just announced that a consortium led by the Spanish bank Cintra, which has offered to pay the state $1.2 billion for the right to construct and operate a $6 billion toll facility at no cost to state or Federal taxpayers.

That's pretty innovative as well. Virginia, Florida, Oregon, Minnesota, California and Colorado are other states that are doing very good things along these lines. Now we have a few tools out there. SEP15 is FHWA's newest effort to encourage innovation and project development. It's a special experimental program to explore alternative and innovative approaches to overall project management and development process.

And it gives us a team of people who are dedicated to work with state and local governments and with the private sector to resolve issues that may come up informing private/public partnerships and to create again an environment that will attract more private sector capital to meeting the nation's transportation needs.

Now, of course, there's still this little issue of reauthorization out there. And we understand and emphasize the importance of Congress acting on that soon. However, we hope that when it is passed, it will include President Bush's proposals that will lead to more private sector involvement in transportation infrastructure, including private activity bonds which we think are just an absolute bedrock principle in terms of moving this forward. State infrastructure banks, the TIFA program and much more flexibility as it relates to tolling on state and local levels are others.

Let me close by noting that highways in the U.S. are traditionally government funded, government planned, government maintained. It is simply not the typical approach in America to industry. The time has come for us to unleash the power of the private sector and the free markets to meet the transportation challenges we have in the future.

It's time to let the free markets deliver innovation, deliver cost savings, deliver quality improvements, deliver some of the things that we've talked about within the department. Bridges that will last 100 years, pavement sections that will last fifty years. All of this is possible if we can unleash the power of the private sector.

And it's also time to allow states the flexibility to expand pricing to tolling of the highway networks. It's time to move these principles into the mainstream of highway financing and have them not be on the periphery of what we talk about.

So I resolve in 2005 as part of my New Year's resolutions, in addition to hitting the gym more often, to make sure that we do move public/private partnerships into the mainstream of what we're doing.

Let me now take an opportunity to introduce our panelists. And then we'll start with the first of a series of questions.

First of all, Allan Rutter. My good friend Allan Rutter to my far right. He's here at TRB this year in a little different role than he's been in the past few years when he represented us as the Federal Railroad Administration as part of USDOT. Allan, we're very happy to have you here as the Deputy Executive Director of the North Texas Tollway Authority.

It's a regional agency that's building on fifty years of toll road experience in the Dallas/Fort Worth area. The North Texas Tollway Authority is an agency recognized as a leader in the innovation of toll collection, project delivery and customer service. And I think you're doing a tremendous job there, Allan. I know we've had the opportunity to work with you on a few projects.

Allan returns to Texas after having worked there very successfully as a transportation policy adviser for several governors, including then governor George W. Bush, when he headed Texas.. Allan, welcome. And thank you for being part of our panel today.

To Allan's left is D.J. Gribbin. D.J. is currently chief counsel for us at Federal Highway Administration. And we're very pleased to have him in that position since July of '03. I've had the pleasure to work with him on a number of public/private ventures. And D.J. you certainly are providing the leading edge.

I asked D.J. when he came to work with me and the rest of us at DOT and Federal Highway to think and act like an entrepreneur. To not get sucked into what would we do on an everyday basis but to think and act like an entrepreneur and to ask tough questions. And he does do that. You do a tremendous job of that D.J. And I do very much appreciate it.

Prior to joining Federal Highway, D.J. served as the Director of Public Sector Business Development for Koch Industries where he worked with governors, legislators, and leaders of state highway authorities to develop public/private transportation ventures.

The knowledge and experience that he gained from that position and that he possesses from his work in the private sector have played a key role in the department's innovative financing initiatives. D.J. earned both his bachelor's in philosophy and his law degree from Georgetown University. D.J., welcome to the panel. And thank you for being here.

Bob Prieto is next. Bob is the Senior Vice President for Fluor Corporation. He's responsible for strategy and marketing for the company's infrastructure and industrial group - a 9,000 person, $2.5 billion operation. Fluor's primary infrastructure business model is built around public/private partnerships and large-scale design build projects.

Bob is also one of three presidential appointees that represent the United States on the APEC business advisory council. Previously, Bob served as the Chairman of Parson's Brinkerhoff as well as co-chairing the New York City partnership infrastructure task force following the September 11th terrorist attacks. Bob, welcome to the panel and thank you.

Now let me go to Geoff Yarema. Geoff, welcome to the panel. Geoff is Chairman of the nationally recognized Infrastructure Practice Group of Nossaman Guthner Knox & Elliott. He has more than 25 years experience in the innovative department of financing and operation of the largest public works projects throughout the United States as well as internationally.

Named by California Lawyer as one of the top 25 attorneys for the year 2000, Geoff serves State Departments of Transportation, Regional Transit Authorities and other infrastructure owners in more than twenty states.

He's a frequent lecturer and author on cutting edge issues facing policy officials charged with responsibility for large-scale project works of public development projects. He earned his J.D. from the University of Virginia and his bachelor's degree in environmental policy from the University of Florida. Thank you and welcome to the panel.

And finally, James Taylor is Managing Director for Public/Private Ventures at Bear Stearns. His particular area of expertise is developing financing strategies for transportation facilities that are supported by user fees. Mr. Taylor is one of the lead bankers on the 1995 revenue bond financing for E-470 toll project in Denver, Colorado.

This was a transaction that many of you are familiar with that was recognized by Institutional Investor magazine as the project finance deal of the year. He also helped develop and implement the financing strategy for the private consortium that was selected by the Port Authority of New York and New Jersey to develop, construct and operate a new international air passenger terminal at Kennedy International Airport.

He has served as the lead banker for two nonprofit organizations created to construct and operate toll facilities and has structured debt financing for private toll roads in Virginia, Texas and California. Prior to joining Bear Stearns in 1998, Mr. Taylor worked for six years in the public finance department at Lehman Brothers and for four years in the public finance division of Smith Barney. Welcome to the panel, Jim. Thank you for joining us today.

As I said earlier, I have a series of questions that I'm going to be asking. And I'm going to lead off with Geoff. How would you define a successful public/private partnership?

GEOFF:     Thank you, Mary. It's an honor to be here. The way I would define it is where the public sector involves the private sector in delivering sufficient added value for the sponsoring agency to justify deviating from standard procurement and contracting procedures. That added value can come in many forms - new sources of funding, creative financing techniques, operating efficiencies, accelerated project delivery, life cycle costs, and innovation in project definition.

The private sector would obtain an opportunity to offer added value where the prospective risk and reward ratio is reasonable. I would not define success as never having problems in implementation. By the very nature of these things, public/private partnerships involve the private sector in taking more project risk and the public sector in taking more political risk.

There must be an upside to the private sector for taking enhanced risk but profit is not guaranteed. They can make a higher profit than a conventional contract would contemplate if they manage well the risk they are taking. If the risks are not properly managed, the private partner can make less profit than they anticipate. But does that mean that a public/private partnership where the private sector that doesn't ultimately make as much profit as anticipated is not successful? I think the answer's no. The public agency may still meet its goals by capturing added value.

Similarly, the public sector by agreeing to bring a private partner in through a non-traditional method, takes on an enhanced role in that project. That may incur serious policy stress, public dissatisfaction with the protections that were given to the private sector and traditional stakeholder objections to deviating from standard procedures. All those things can be controversial.

If they do erupt, does that mean that the project was not successful? Not necessarily. Again, it depends upon whether the value captured from private sector achieved the agency's goals recognizing that the design-bid-build, "pay as you go" model is simply not adequate to meet all the needs that we have today. If public/private ventures can truly help fill the gap, which they can, the public and private sector each must define success in terms of progress and quicker, more efficient project delivery, not a friction free or loss free environment.

MARY:     Good answer, Geoff. Thank you. Jim, would you like to add to that?

JIM:     Not on this particular question.

MARY:     Allan?

ALLAN:     Well, I think part of the deal Geoff's mentioned is the success for whom? If not everybody makes as much money as they thought they were going to, the important part is if people get to use the facility faster than they thought it was. And that maybe the value associated with that use because of the private sector's involvement, either design or materials, delay in function, people get more out of it because the private sector was involved, that's success.

And so I think that keeping in mind somebody's going to be using this stuff for their building, that's where the definition of success is.

MARY:     The end user at the end of the day. D.J.?

D.J.:     A couple of things. The question is about success of public/private partnerships. And I agree with Geoff and Allan that success can be reviewed in various ways. But I think it's also important to realize what is a public/private partnership.

And we just recently completed a report to Congress ... USDOT did ... where we defined a public/private partnership similar to the lines that Geoff did which is it's a contract between a public agency and a private agency where the private signatory to that contract is given greater authority than a traditional model.

And I think sometimes people think of public/private partnerships purely as this is a deal where the state can get more money or financial resources from the private sector-where many of these deals, they can actually use the private sector to lower their costs, in effect getting the same type of savings if there isn't cash on the table.

I sort of enjoy reading some of the media about public/private partnerships. For example, I use the Greenway. I think it's the only privately owned toll road in America currently. There was one down in Texas. But it no longer exists.

JIM:     The road's still there.

D.J.:     The road's still there. But that's my point on the Greenway is that people look at that and, okay, the Greenway had to refinance. Is that a failure? Well, not necessarily. I mean, Virginia learned a lot from the construction of that road. I get to use it twice a day.

And if investors in that project don't do as well, meaning that people have good investments, they have bad investments that turned out to be a bad deal for the investors. But it's still a good deal for the Commonwealth of Virginia. And people are driving on it.

So when we think about success in a public/private venture, it needs to be successful on both sides, the private sector and public sector success. As Geoff mentioned, every deal is not going to be a homerun. Every deal is going to have some quirks. Sometimes the public sector will end up with a better deal than they thought.

Sometimes the private sector will end up with a better deal than they thought.

But overall, if you end up with a quality project constructed quicker and less expensively, then you have a successful project.

MARY:     Bob.

BOB:     I think there are really three attributes in my mind for a successful PPP. The first is whether it really delivers the maximum infrastructure for the lowest cost to both the taxpayer and the user. And I want to just focus on that last part. Because let's be very honest about it, for the kind of infrastructure we're talking about, it is very hard to distinguish between the user and taxpayer in many of these projects.

On some you may have a clearer definition, but I think you have to recognize in many of these projects, tolls are just another form of a tax. What we're really talking about is delivering the maximum infrastructure in the quickest amount of time for the tax that's being paid, in effect.

Now, how do you measure that? I think that's the key. And here I would probably look to some of what happens outside the U.S. as being a little better developed than what we have in the U.S. I think we need to recognize the U.S. is not the leading market in terms of defining success for PPPs.

If you look internationally, it really comes down to one of three things that really are the financial measures, if you will, of whether maximum public infrastructure's being provided. The first is what the net present value is. Or maybe another way of saying it, "what's the lowest compliant bid for the piece of infrastructure and the objectives that government has set?"

Second is affordability to the extent that there's a government subsidy or the extent that there's a user. They have to be able to afford the facility or it's really not going to be a successful public/private partnership at the end of the day.

And third, there's an interesting notion, probably a little better developed in the U.K. than elsewhere, of this public sector comparator. Now, I have yet to find comparator in a U.S. dictionary, but I have found it in a U.K. dictionary. And really what it is a comparison of what the cost is of the PPP model versus what the cost would have been under a traditional government approach to delivering the facilities all costs in.

And I think that notion of getting maximum infrastructure is the first ingredient of a successful PPP. The second and third I think are a little bit simpler. And the second is equally important to both parties. And that is appropriate risk weighted returns.

And it doesn't mean that every return and every investment will produce the kind of return you want. But both the public sector and private sector need to make those risk judgments and set return levels that make it worth taking the risk.

And the third is something that I don't think can be privatized -- to maybe pick a slightly different word for a second. And that is there are some tough decisions which must remain in the public sector. And the way I would describe those is really about protecting, I'll call it minority interests for lack of a better name.

You have to recognize that this is a public facility still at the end of the day. The pricing regimes allowed on it need to reflect the fact that you have a broader societal objective. And government has to make some tough decisions. In some cases, that may be how they buy the facility.

In other cases, it may be the kind of subsidy they're willing to come in with in order to meet these other social objectives. Those are the three things that we see in all successful private/public partnerships.

MARY:     Any other discussion among the panel members on this issue? And again, the question is how do you define a success for public/private partnership?

DJ:     I think also I'd chime in on the Federal level. As we consider the success of a project we need to ask ourselves is this deal advancing knowledge in this area overall? Mary, you mentioned the Skyway and I-35. Those are two projects where I think a number of states have looked at those projects and said, "wow." You know, we never envisioned something like that happening. So let's take a look at it and see if we can learn from that example and then apply that learning.

MARY:     Let me move to the second question now. D.J., how would you define an environment that is attractive to successful public/private partnership? I recognize that there's a little bleed over from the prior question. But, an environment that is attractive to a successful public/private partnership?

D.J.:     It's appropriate that you asked me that question. I also know this is the only time you've heard disagreement is to my question. Probably the reason Mary asked me that question is because she mentioned earlier she has asked a number of us within FHWA to challenge ourselves.

What can we do inside of Federal Highways given our role in the process? We want to remove obstacles to formation of public/private partnerships and in addition to that actually create some incentives to their formation. So we have been trying over the last year and a half to work pretty aggressively on those fronts.

We formed a public/private partnership task force inside the Federal highways which to date has done two things. First, we published a report to Congress on public/private partnerships which is available on our Web site. And second, as Mary mentioned in her introductory remarks, we created a new special experimental project category SEP 15, which gives us flexibility to work inside of Title 23, the section of the statute that applies to highways, and our regulations to be flexible on a case-by-case basis.

In answering this question, I'll look at a big picture policy approach and let Bob, Geoff, Jim, and Allan look at specific deals. But when you look at what's needed really for the first level of change, you need some significant statutory changes at the state level.

We have eighteen states that have no provision even allowing design build. There are a large number of states that either prohibit tolling outright or effectively prohibit tolling. From our standpoint, one of the biggest problems facing PPPs is the inability to price.

As Mary mentioned in her remarks to you, when we went from the black boxy phone on our grandparents' bedside table to the blackberries and cell phones and pagers and all the other kinds of telecommunication devices, we deregulated that market.

It's difficult in the case of highways, I would argue, because in some places we don't even have a market. Because there is no pricing signal at all. A user of the highway system pays the same thing if you're driving on an interstate in Wyoming on Sunday morning as you do if you're driving through LA where Geoff is on Monday morning.

And that really doesn't make much sense. And so we have talked about this. I brought a quote anticipating this question from John Tierney who wrote an article for the New York Times. And he talked about highway engineers and how they're trying to manage traffic.

And he said that they ... being highway engineers ... now see traffic jams as the equivalent of bread lines in the Soviet Union. A consequence of unimaginative monopoly run by politicians loathe to change the market price for a valuable commodity.

Then he added, which I think is kind of clever, to be fair to the Soviet politicians, however, at least they didn't blame the public for the problem that the politicians had created. They didn't promote a smart diet program urging people to eat less bread.

This was written in September of last year, in an article entitled "Automotive Manifesto." So I think that's an important concept. If we're going to create an environment to attract public/private partnerships, one of the threshold things we need to do is understand that we need prices to create a market to allow the private sector to play a larger role.

Now, the significant concerns, there's something about the American culture I've never quite been able to figure out. I mean, we led both the intellectual and military war against socialism and command and control approach to markets and successfully won those. And yet, today we embrace that same type of model when it comes to providing highway services.

We don't think of highways as a network. We think of them as something different. I remember I used to believe that somewhere in the constitution there was a provision allowing me to get in my car and drive wherever the heck I wanted to drive and not have to pay any tolls or slow down for toll booths.

And I think that's very much a part of the American personae, that we ought to be able to travel unimpeded. And yet, that line of thinking when applied to the current highway system creates a number of economic distortions that in the long run doesn't serve American drivers very well.

We're starting to see some changes in this type of thinking. I-15 and the congestion pricing that's been used around the country, like SR 91. And Minnesota I know is looking at the whole network of variable price lanes. Maryland is considering HOT lanes also. So we're starting to see the public beginning to recognize the need for pricing, and listen.

I've got coffee available in the office. I'm going to stop by Starbucks instead and pay ... I don't know how much Starbucks is charging now for a cup of coffee. But an unusually high amount given that the product's available for free in the office. Because I value that quality.

And as a culture, we put a heavy premium on consumer choices. And I think the time has come that we allow the same type of choices to be made in the provision of highway services. I think that we're seeing some American thought changing in that direction.

MARY:     Good answer.

D.J.:     But I think from my standpoint, looking at this from a Federal level and a big picture change, the most significant change that we could make is to allow the pricing of the network ... allow markets to work the way they do in every other service.

MARY:     Good observation, D.J. You know, I think probably an early mistake was someone named them freeways. They're not free, but there was that perception. Allan, do you want to jump in on this?

ALLAN:     Well, I think part of the deal on creating an environment in which this will succeed or at least happen is an understanding of what markets are and what they're not. In the marketplace, people make mistakes and people pay. There's a new Coke. There's a Ben Affleck movie.

There are things where people fall on their face. And nobody says, my gosh. Carbonated beverages will never happen again. People go on and they do things. I think that in the public sector particularly engineers grow up to be risk averse. Because we don't want things to fall apart.

But things fall apart. Pavements don't last as long. Soil behaves in weird ways. And risks are taken every day. And I think that we need within the transportation community to acknowledge that we sublimate risk. But within the marketplace, we ought to allow ourselves to make mistakes, to not fear retribution and to learn from those mistakes and fix on supply and delivery.

JIM:     I think this is where we get the resistance. Everybody agrees public/private partnerships are the answer. Not everybody agrees once they get into it what was the original question? And I think the stakes are different. Nobody's going to argue against the interstate highway system.

But there are minority communities that were completely wiped out by the way the process was designed as to where you put the interstates. You can't say, "Oops I'm sorry. We shouldn't have done that." Similarly, you make investment decisions to build highways because they can be financed and avoid transit or other options because they don't make as much money -and you come back twenty years later and say, "you know, you're right. We shouldn't have done the highway. We should have done light rail." And so I think people go too far in trying to create a good environment [public-private partnerships] and they're forgetting that the market doesn't need an incentive to find profit.

People all over the world are coming here to find opportunities. What we need to do rather than unleashing the private sector is empower the public sector. Ideas would stay at DOT all the time. We are so concerned about head count. They can only pay their lawyer so much to look at a contract.

If you really want public/private partnerships to flourish, what you need to do is empower state DOTs so that they don't have to justify their budget expenditures for pursuing a public/private partnership. In fact, they should have the resources from the Federal government or their legislature to actually go out and do it right.

That there are too many times when we have public/private negotiations where the private side has forty people, experts on everything. And there's just the one CFO on the public sector side who has been told in addition to her duties every day, she now has to respond to three unsolicited proposals. And, oh, by the way, the governor wants action by the end of the quarter. Empowering the public sector is what we need. The private sector can take care of itself.

MARY:     Jim, good observation. Geoff?

GEOFF:     We frequently have been in the position of being invited to advise state DOTs and regional transit agencies on whether or not a particular project is a good candidate for a public/private partnership. And obviously, we are very cognizant that PPPs are only one tool in the toolbox. And they don't work for every situation.

So we have our own internal checklist that we use to determine whether or not a public/private partnership should work in a given case. First of all, the community needs to want the project. A lot of PPPs have been set up to fail because the community didn't want the project at all no matter what the delivery technique was.

So that's really the first test that we apply. The second is that the project needs to be one that can be environmentally cleared in a relatively compact period of time. That's one of Federal Highway's important agendas, which I would certainly highlight.

The third test is whether the communities affected by the project are willing to have it tolled -- or to accept whatever other financial mechanisms are being used to pay for it. If people are anti-toll in this particular community, they're empowered to resist the project without ever focusing on the private sector role.

So tolling needs to have some acceptance to them.

Fourth, there needs to be solid state legislative authority for the procurement process to use public/private partnerships and reach those agreements. As was mentioned, some states have good authority and some states don't. In any view, no one state's existing legislation serves as a perfect model, although we are currently working on model legislation.

Different things work in different states. Each state has its own constitution which really are different from place-to-place. The limits on who has authority to do what are different. There needs to be bipartisan support in the legislature for the use of the legislation that's likely not to change with the next election cycle. You need to have some legislative commitment to public/private partnerships that won't die in eight months.

Fifth, the governor needs to support using a public/private partnership for a particular project. Ideally, the Governor should not be up for election a few months after the initiative is scheduled to get off the ground. Then DOT senior management needs to be truly on board. Cutting across design, construction, maintenance and finance, which are functions typically in different divisions within a state DOT, they need to have a consensus recognizing the value that PPP brings to a particular project.

The DOT needs to be clear on what it wants to achieve in applying the tool to a particular project. How will maintenance be affected? How will design be affected? There needs to be thought given to that and a consensus brought among the senior management.

The next point is that when you design the procurement approach for the public/private partnership, it needs to ensure that the selection process is fair, transparent and competitive and that it's carried out in a way that the private partner in fact delivers what the public agency is seeking.

The contract terms need to be fair, reasonable and reflect an appropriate balance between public and private concerns. And finally the process needs to have a result where when the public looks at it, they don't perceive conflicts of interest. They don't perceive any abuse of the process. They see that what they've gotten is value for the opportunity that's been offered.

MARY:     Geoff, thank you. Bob?

BOB:     Mary, I looked at the question very differently. You asked what an attractive environment for PPPs would look like. And I guess I'm the person kind of representing the development community that's actually going out and making the investments for the private sector side in terms of trying to make these projects happen. Just to give you a sense, those investments can run as high as one percent of total installed cost. So a billion dollar project, there's $10 million at-risk before financial close. And so we need to understand that there's serious money that has to come in from the private sector side.

The second comment is we are not in an opportunity poor environment. We are very much in an opportunity rich environment from where we sit right now.

So the key is picking what are the attractive environments out there? And there are four things that we look at to do that. And the first is very simple. It's political will. And that means that there is a sense that whether it's at the executive office or the legislature, that tough decisions are going to be made.

And there's a recognition on the political side that time is of the essence. And getting to financial close which is a very important milestone for us for lots of reasons is the same milestone that they have. Second, we think there has to be good legislation. And I think what you see going on at the state level right now is experimentation in the legislature. And I think that's appropriate for where we've been.

But I think as we move ahead ... and I think there's a role here for FHWA in terms of starting to look at good practices, lessons learned, standards, short of being prescriptive but at least providing some tools to the states in that regard.

From where we sit, one of the key characteristics of good legislation is the ability to submit an unsolicited proposal, because it provides for maximum innovation. And if I had to pick out one feature in the legislation that's important to us, that is probably it.

The third ... and Geoff went into this a bit ... there has to be a transparent procurement process. There are big parts of the world that we just do not pursue-there is not a transparent procurement process. But quite frankly, because of the newness of the form here in the U.S., that same risk exists here in the U.S.

You can't buy political risk insurance in the U.S. I can buy it everywhere else in the world. That is a very important statement. So political risk and the understanding of the procurement process, having a transparent procurement process, are key. But it's not just saying that. I think, it's well, what does that mean? And the first is objective criteria. And Geoff laid that out.

The second is one that I think still requires a lot of work, and that is a need for quality skilled staff on the government side. This is a different type of analysis than anything they've encountered before. It requires a different skill mix. And I think to protect the public interest, number one, and number two, to have a true partnership with the private sector, you have to have the right skills.

And the fourth aspect we look for is kind of the grind it out on the day-to-day basis, but it can kill you, and that is that the agency that's involved, whether that's the DOT or some other transportation authority, has to embrace change. And there are two considerations here.

One is they have to do it to get the full benefit out of the innovation that the private sector can bring. Last week, I had a meeting with a nameless client. And one of the questions at the end was, well, "are you better off if we give you 60 percent drawings instead of 30 percent drawings?"

I said, I would prefer a performance spec because I have a lot more opportunity to be innovative. Don't give me too much detail. You're limiting my ability to be competitive. The other is that embracing of change, that embracement of change, needs to happen at all levels of the agency.

A lot of times the head person says yes. And then you find the engineering department or some other department who wants to go through a nine-month review cycle on something that they really have little input on. And that's a big challenge for us.

MARY:     I heard a lot of discussion about risk. Any final comments from any of the panel members on this question before we move to the next one? I think you all made some excellent points. And I draw back on my experience with Arizona DOT and I hear what you are saying. We had one of the best CFOs I think in the business, Suzanne Sale who I think is in this room today. But we didn't have the depth of staff there.

And then there's the whole issue of risk, especially with a public agency. Our risk is played out in the newspapers and generally is front-page stuff. And so that's something I think we have to factor in.

BOB:     Well, Mary, one of the differences that we see is that we have a very formal risk process that we go through at each step. At the step to go into an opportunity, we make a decision whether to spend any money getting on the plane to go there by doing an initial risk step.

At the decision to begin looking at a project, we go through a risk step. We make a risk assessment before we go and commit that money. And they're looking at some of those prerequisites. And obviously, as you get further in, we're looking at issues in more detail.

But what we rarely find in the public sector side is an equivalent risk analysis. And really at the end of the day, those two risk analyses when done right tend to converge. I mean, there are certain risks that will always be only in the public sector and certain risks that will always be only in the private sector.

But quite frankly, there's a big range of shared risk. And those risk analyses have to be perceiving them the same and coming to agreement on the solutions to them. And both see it as good for themselves in terms of a step forward. And that's where I think there is a weakness out there.

MARY:     I'm reminded of when, for those of us who are parents, our children start to get a little older and want to go out and do things on their own, we tend to want to say no. Because that's the safest, easiest answer. And I think that maybe I could correlate that to the public sector in some cases.

There needs to be a mindset of change. There needs to be a willingness to change. If we as parents never took those risks, then the kids would never leave. And that's not good. On the same token, we in the public sector have to be willing to properly assess risk. And I suspect there are different risks than the public sector generally looks at in terms of these projects.

Jim, let's go to the third question. What is the appropriate role of the Federal government in encouraging public/private partnership?

JIM:     I think this is one of the key questions this panel can address. There are a number of people in the room who have spent fifteen, twenty years trying to get to this point where the Federal Highway Administrator is on a panel that's saying "let's make a deal." A lot of people are rejoicing. A lot of people are saying, well, this is our opportunity.

And they're pushing a number of things. One is the "get out of the way" school. And they're saying let the states contract however they want. You don't need to be involved. And there are others who are saying, well, you guys should really be more proactive. Environmental streamlining. You should require the states to look at tolling on any major project and stuff like that.

It's very easy to get caught up in the rhetoric when everybody is seeming to be on the same page. But there's a school of investors who believe that once everybody gets on the bandwagon, that's when you should sell. And I think their perspective might be useful here. Awhile back, everybody got on the bandwagon of the Federal role in innovative finance.

And the two schools of theory were the same. Get out of the way. Let us do GARVEE bonds. Leverage our Federal money however we want. And be proactive - actually help us. And so you have the TIFIA program. It's natural that we do something new, you need an acronym in order to define it.

But from my personal perspective as somebody who is trying to help a number of developers get going, the good intentions of innovative finance had some unintended consequences that we should think about when the Federal government starts pushing public/private partnerships.

In the late '80s, early '90s, there were a number of development efforts that not only got financing, but the projects were open. And they took a number of different forms. TCA and E-470 were governmental entities that took the initiative and formed their toll roads.

A number of private toll roads got done in California, Virginia and Texas. And then you had the nonprofit corporations. These were all bottom up initiatives where people believed there's not going to be money coming from the Feds or the state if we really want this important project. We'll find a way to get it done even if there are no private activity bonds, no special legislation. We'll find a way to get it done.

A lot of that activity stopped after TEA-21. One of the reasons is when you can issue GARVEE bonds, even if you have a project that is a perfect candidate for a public/private partnership or for tolling or anything like that, it's much easier to use the GARVEE proceeds to fund that critical project than it is to say I know I have the money or can get the money but instead I'm going to do the two years of development to do a public/private.

Similarly on TIFIA, we had a number of contractors who were willing to put money into the projects and wanted ... return, they would be at the bottom of the bucket. But when you have the Federal government saying, "No. I'll be at the bottom of the bucket. I'll lend you money at five, six percent. And I'll wait."

Why does the contractor community really need to offer any skin in the game if they can convince the DOT that, "hey, you can go get TIFIA money"? Was that the intent of GARVEEs and TIFIA? No. But what happened was I think we did have a hiccup in terms of private sector interest.

Because a number of their candidate projects that they were ready to focus on and had invested money in all of a sudden disappeared because they were financed through GARVEEs or somebody decided to take another route.

The same thing can happen I think if the Federal government goes too far on PPPs. That right now you have a lot of people jumping on the bandwagon that are the same people going to Mary's gym with good intentions. They're ready to go, but I'm not sure they're going to be there six months from now.

And one of the things that people tend to sell on is when there's some premise out there that all of a sudden is taken as fact. And one of the things that's motivating this interest in the panel and all of that is Congress will never raise the gas tax. Absolutely never.

I get concerned because those are some of the people who said the Red Sox would never win a World Series. But if for some reason there is some adjustment in the gas tax or you have a little bit more money, you'll see who is a true believer in the power of public/private partnerships and who is there because it's the thing to do.

I have too many public sector clients who say you know we haven't done TIFIA yet. Can we find a project where I can do TIFIAbecause that's where the smart CFOs are. That mindset where you need to use a tool because it's available actually I think is detrimental to true public partnerships where everybody's focused on what is the problem we want to solve and asking, "What's the best way to do that?" versus "Is there a way I can use TIFIA or use private sector money to do something to say that I've done it and that I've used every tool available to me?"

GEOFF:     I guess I agree to some extent with what James says. But I also have a different perspective - I feel strongly that we need these tools. The tools that we're all talking about - GARVEE bonds - TIFIA - private activity bonds - they have roles in the infrastructure market that are very important. If you go to Europe and talk to the major highway agencies over there and look at the tools that they have available to them and you tell them about TIFIA, they would say, we can't compete with that - that access to TIFIA would save us all kinds of money - that GARVEES would make our deals a lot more efficient. If you ask them about tax exempt debt, they will tell you they'd love to access to the tax exempt debt markets.

So the idea is to line up as many tools as possible but not use them just because they're there. You don't use the hammer when you need a screwdriver. But if you have a project, you optimize the tools that you need for a particular project.

There are plenty of projects in this country that if we could combine TIFIA, private equity and the long-term concession in the same project, we could achieve spectacular results. But you could obviously misapply those tools and not get the right results.

So to my way of thinking, the Federal role that we're dealing with under Mary's leadership and what we're achieving now is exactly right on. She's recognizing the reality of the Federal role - which is that Federal Highways provides grants, Federal credits and environmental assessments to the states.

The states expend the money. They deliver the projects in accordance with state law. So FHWA should remove procurement restrictions and allow the states significant flexibility to experiment. Those of us, who are fortunate to work with many state governments as I have the last 15 years, become very aware of how this country is really a federation of fifty different jurisdictions.

Every jurisdiction really operates in its own fiefdom. One of the beauties of the original founding fathers and mothers was to allow these states to innovate, to allow experiments to take place, to learn from them as we go and to build on them. So the flexibility that SEP15 is providing the states to innovate, to fail occasionally, and also to succeed and to learn for the future is very important.

But nevertheless, there's still a Federal regulatory role. Make sure there's competition. Make sure there's transparency and accountability. We don't have a formal-term public sector price comparator in the United States, as it is used in Canada and UK. But as we develop more deal flow, we are using techniques such as price verification and fair value opinions, which achieve a similar confidence level.

Every project we do has an engineer's estimate on an independent basis. We've done shadow bids. So there are significant parallels there. But allowing long-term private operations and warranties which Federal Highways has never really been in favor of, and allowing a combination of private equity, tax- exempt debt and long-term operations is critical.

We need to continue Administration support of private activity bonds program that was included in the Senate bill last year. We need to expand toll credits, creating more incentives for the states to implement tolls.

MARY:     Bob, Allan?

BOB:     Yes, let me maybe start by what I think the Federal role is not. I think particularly now it is not to legislate, regulate or mandate. I think that experimentation that's going on out there is absolutely essential. But I do think there are some very clear things that you can do and you've begun doing a number of them.

I want to applaud SEP 15 also. I think that's a great tool. And I think the most recent document that you released at the end of last month is also a great tool for the industry out there. But I guess my analogy here is with one of the other hats that I wear in APEC where we look at the proliferation of these free trade agreements that the U.S. is entering into.

And one of the things in the Asia Pacific that we've pushed towards is trying to develop three things to help get a better quality of free trade agreement. The first is coming up with a best practices document. And basically saying what's in there. What's good stuff that's out there? So that when the next agreement gets done, you'll start with the stuff that's good.

The second is lessons learned. Maybe retitled, it would be how to avoid the law of unintended consequences. Because there are some things done in some of these agreements, which were absolutely well intended, but had absolutely the opposite effect. And so how do you learn from that?

And the third, because at the end of the day we want all of these things to be WTO compliant, it is having some minimum standards or maybe another way of saying it is some "must haves" in a contract. And I think this has to be suggestive as opposed to mandated by Federal highways. But your suggestions get a lot of attention I think.

One specific suggestion, because I do think that anything that can be done to streamline the process or accelerate the process is good.

I guess both in the environmental area, actually a caution and a suggestion. I think the caution is that as you look at environmental streamlining, don't apply it just to PPPs because the backlash will be tremendous on PPPs. If there's going to be environmental streamlining, it should be for capital projects, full stop. Not for one particular type of flavor type of capital project.

I think that you should do it, but don't do it just for PPPs. You'll kill the PPP industry.

Second, I think as we look at some of the barriers, tactical barriers that we run into in terms of moving projects environmentally forward, we see a scenario that goes like this.

We've got a PPP. It's come in. The state loves it. We think we can make money on it. It's a great deal. But there's a little thing in the way. There's no money in the budget this year to do the environmental work that the state would normally do. And here I think you have an opportunity to create some kind of a risk weighted facility where Federal money could be used, advanced to the states in effect with repayment coming out of financial close with some kind of return on it.

And I'm not talking bank type returns, but equity type returns on that money. Recognizing that some deals will go south and not close. And there won't be repayment on it. But I think there's a huge opportunity there. And it kind of breaks the states from worrying about their annual budget cycle or you worrying about your annual appropriation cycle.

So I do think there is something there that could take ... quite frankly I think shave at least a year off the cycle on a number of these projects.

MARY:     Thank you. Allan and D.J. jump in.

ALLAN:     Well, the kind of report [FHWA Report to Congress on Public-Private Partnership] is important because it tells a story. A lot of states out there want to step up, but they're afraid to step up. But if you can give them experience and say if somebody else is attempting this like you are, and here's how I made it happen without flopping completely. Even if they're not glowing successes, just starting is a very important step. And it gets back to what these guys have talked about.

It's not scripted. It's not this has to be the way it happens. But here's a variety of approaches that weren't taken. You don't have to invent everything yourself. You have examples. If anything, the states that don't have any experiences are in the best of all positions. They can learn from everybody else's mistakes - to take and cherry pick all the best and most effective.

GEOFF:     That's a real important point to underline. So many times we've been retained by a state and found when on the ground that both the DOT and their traditional legal advisers are scared to death to use these new tools - even though they're absolutely appropriate to apply to the candidate projects. In such circumstances, we offer to introduce them to their peers in other states who have stood exactly in the same shoes before and were asked to make the same decisions.

The forerunners made the tough decisions and they were rewarded for it with successful outcomes. We ask the new trailblazers if that gives you a sense of comfort? The response typically is gee, that will be great. While TRB is a remarkable opportunity to share those experiences, unfortunately it doesn't succeed adequately enough to serve that experience-sharing role.

AASHTO is a great organization. But they focus on larger issues primarily. When it gets down to this level, we end up being a clearinghouse for such information. And it has worked very well. We turn attorney general's offices around many, many times because they've had an opportunity to meet and talk with other like attorney general office people or in-house counsel. And get comfortable with things that they would not ... that they've been saying no to for years.

DJ:     And they don't say no because it's a legal impossibility. They say no because they don't feel comfortable.

BOB:     Just if I can, Mary. If I look at the time we spend with prospective clients ... and I'll define that as the states that are trying to make the transition and take that next step. There are two things that we spend time with them on. One is I'm running over the wide range of models and saying here's twenty projects and they're all slightly different. Let's understand the differences. Kind of educating them.

The one that's more interesting and has popped up in the last several months is really coming out of the legislature ... legislators as opposed to the governor's office. They are saying, okay. Well, you know, you talked to us about the legislation in Virginia and the legislation there and the pluses and the minuses.

What would good legislation look like to you and give us something? So we actually have quite frankly taken one of the state's bills, an existing law and we marked it up with a view of if we could change it, what would we want to change? And there are only a few things. Okay? And 95 percent of it is just clarity of language that wasn't there the first time.

But we're actually out and out providing draft bills to legislatures who are wrestling with how do I go about this? What does this mean?

DJ:     I think that kind of leads into an important point of the Federal role. I wrote down a couple of things. I think there are two ways that FHWA can help the public/private process. The first is knowledge sharing and doing what Geoff said from a Federal Highways' perspective.

Currently, we have a contract that Jim March is working on that would put together draft model legislation for states, different components. And then similarly what a draft contract looks like to get an innovative project. You've got the CFO who's never negotiated one of these. If I was sitting across the table from four to five lawyers, how do I know if I got a good deal or not? And so this draft contract takes different issues states might want to address and then talks about the risks of greater private sector involvement.

BOB:     But a caution. Because as you look at each of these projects, one's an apple. One's an orange. One's a banana. Don't try to make them all apples. That I think you've got to be careful with.

MARY:     I'm going to call time on this question as important as this is. Maybe when we get to the open discussion towards the end, we can come back to it. The discussion reminds me of a comment that my friend Bruce Walter once said to me. He's the Chairman and CEO of Granite Rock in California.

And they're a two time national Baldrige Award winner. And he cautioned me when I took on this job at Federal Highway not to wait until I had 100 percent of the facts or the issues on the table because if I did, I would lose the opportunity. And he said 80 percent and go, Mary.

Allan, I'm going to go to you for the next question. Are there areas of expertise? And Jim talked a little bit about this earlier. But I'm interested in your perspective having been on both sides of the table and then the rest of the panel. Are there areas of expertise that need to be developed in the public sector and/or private sector that can maximize the potential for successful public/private partnerships?

ALLAN:     I think first it starts with kind of a rudimentary understanding of public/private. Most of the people in transportation agencies know how to develop projects. They know about the public process. But they are clueless when it comes to what a bond is or how to do project finance.

Now, they don't have to get so expert at it that they can go out and finance a bond offering. They need to understand what the terms are. So that they know the risk factors in detail. I think one of the things that we do at NTTA is we have a relatively small staff. But we have lots of people who work for us.

We have people who wear our jersey. And so agencies need to come up with a team of folks who know what they're doing, who come at it from the owner's perspective. So that when you get down to it and start negotiating, you have to understand that both sides can get something out of it.

But you need to have people with your uniform on who will help you on your side of the table. It may not mean ... and frankly for us it doesn't mean that we'll always have more lawyers than the other guys. But it means you pay more. But frankly, you get shared expertise that you can't find anywhere else.

Now, it comes with I think some acknowledgment of the potential for conflict. And we make all of our consultants pretty much sign a deal that says when you're wearing our uniform we don't want to see you on the other side of the table. And we don't want to find you informing the other side.

But we don't want to be so restrictive that we keep people from wearing other uniforms other places. These guys are into it to make money and we want them to. But I think part of the getting expertise in the public sector side is recognizing (a) a common vocabulary and (b) knowing what you don't know and (c) finding somebody who does and getting them on the team.

MARY:     Jim?

JIM: There was a panel earlier today on the Federal role in transportation. And even though there was a lot of disagreement, I thought there was one common theme. And that is the need for a vision to replace what had been creating the interstate system.

And I think that a lot of state DOTs need to develop that vision first before they can figure out how public/private partnerships fit into that. And one of the visions might be to eventually move to an alternative to the gas tax or state taxes. But no matter what it is and what particular state, if they don't have that vision in terms of "this is where we're going to head", you end up taking detours when you focus just on the let me get this project done.

And so I think one of the tools that DOTs need is a way to articulate their vision, both to the legislature but also to the general populace. So that then they can evaluate any given initiative in context of getting us closer to our ultimate goal.

MARY:     You had a comment?

GEOFF:     I focus on two aspects of your question about areas of expertise that are needed. In the public sector or in the state DOT if that's the entity we're talking about, someone's going to need to be tasked with running the project, running the program.

And I think that people have perceptions about the kind of person that might best fit that role. We have seen a whole variety of kinds of people fit that role extremely well. It doesn't need to be the chief engineer although the chief engineer could be a good one. A chief financial officer may be a good one too.

All different kinds of backgrounds have been very successful in the role. But what common features do they have? They need to be well respected within the DOT senior management. So whoever it is has to be well regarded by the different disciplines in the DOT. They need to be someone that leaders in the legislature have regard for because this is such a legislatively sensitive function. So that's an important thing. They need to be able to command the respect of the line engineers so they don't form the wall the program can't get through.

Then they must thrive outside the box. There are people who are very comfortable inside. There are people who really enjoy being outside. And the last thing they need to be, they need to be somewhat of a natural leader because almost by definition, they're going to have a newly formed team.

They're going to need to add to the team as their program grows. And the programs that are most successful are the ones with the best and the brightest in the state DOT gravitating towards that program because it's a way to move up quickly. It's because it's the most exciting thing.

Those are attributes it seems to me are the most important in staffing a program within a state DOT. As far as the private sector's concerned, we view them from the other side of the table. We don't represent major construction companies. We'll always represent the owner's side.

Yet we have great regard for the private sector. They have really truly re-engineered themselves, something Fluor and many of their competitors deserve great kudos for because frankly the private sector doesn't like to be outside the box either. They're very comfortable doing what they've done historically.

But where are the areas in which we would like to see some more response? One is ... and I'm really thinking of the next wave. Not the challenges that have been faced to date, but the challenges I see coming in the next year or two or three or four. First challenge is state DOTs are concerned that the private sector can come into local communities like a bull in the china shop.

They need to have a very soft touch when it comes to dealing with local stakeholders, public officials and community concerns. Some of them do. Some of them don't. But I think you're going to see a lot of focus on that, state DOTs looking for the private sector to the extent they can provide that.

Secondly, long-term operations and management. Rightly or wrongly in this country, we have not offered much in the way of long-term operations and management of highway facilities. So there isn't a large industry out there doing it today. There are some firms doing it in some environments.

But there's not an industry that's ready, willing and able to take on as much as we're capable of offering. Plus, I perceive some private sector reticence in providing that kind of service, at least in the design-build community. It raises cost predictability, long-term liability, balance sheet risk that is very different from the kind they are used to taking.

Asset management. We talk about making asset management services available. But there's only a couple of firms in the country which have really done much of it, at least domestically. So I think there's a new challenge ahead to see companies that are leaders in highway industry to again re-engineer themselves to pursue that. And particularly to the extent that concession opportunities are created.

In other words, is the domestic industry ready to do what's been done internationally?

And finally, the caution I would have for the private sector is conflicts of interest. As we see the PPP industry grow, as we see deal flow accelerate, engineering firms are in difficult positions sometimes because they play both sides of the field in their business. I think that's a perfectly appropriate thing for them to be able to continue to do.

But what it's doing as a consequence is sometimes getting a state DOT official in a very difficult position where he or she did not anticipate that they would see a long time owner representative on the other side of the table all of a sudden.

So thinking ahead about organizational conflicts of interest, putting those in place up front for a public/private program is really important. And the only way you can do this if you have looked around this country and seen what has happened with the kinds of organizational conflicts that have arisen.

BOB:     Let me look at it from two sets of skills, two sets of expertise. First, the public sector side. And then maybe a little more introspectively on the private sector side. On the public sector side, we really think it comes down to adding a set of skills to assess total taxpayer impact.

And this kind of goes back to the point I made before that users are taxpayers too. And I think the important thing here is this is not a financial evaluation. This is an economic calculation. It's a different set of skills. It's a different type of analysis.

And we think if PPPs are to have a long-term future at the state level, the economic benefits of them are going to have to be demonstrated. Which means they have to be anticipated.

On the private sector side, I guess one of the things I feel good about actually is our infrastructure group really doesn't have a well-defined box.

So that may be a requirement for being successful in this business . But I think there are three sets of skills. First, one that Geoff already mentioned which was strengthening maintenance skills because this was something that was done before by the public sector. And really PPPs are about life cycle costs.

So it is an important area to strengthen. And quite frankly, at least in terms of our own company, we've already done this in about half of our other businesses. Because quite frankly, the private sector in general is looking for life cycle management of assets. So it's something that I think in due course we'll extend.

Second, I think of in terms of quality talent to do project development and infrastructure finance. It's in short supply. I mean, we're constantly on the look out for quality talent who can take on a billion dollar project and make it happen. They're just not hanging out on the street corners.

The third kind of gets back to this point of life cycle cost skills and the fact that they can't be underestimated. Obviously they must understand capital costs. That's something that traditionally you would have found in a firm like Fluor.

We need people that understand O&M costs again and areas worth strengthening. I think quite frankly the industry as a whole needs to continue to strengthen. And then you need a set of financial skills, which are looking at financing in this sector very different that we would do it for a DuPont or Proctor Gamble.

Because in the U.S., we have a wonderful tool. And that's tax exempt financing. And it's a tool that's available on many of these projects. And it's the lowest cost of capital available in the market on many of these projects. And I think it's interesting just to look outside of the box here for a second that you have folks like Bob Kiley who used to run the transit system in New York years ago, now over in London on the transport for TFL.

And he is looking at how to extend into the European market the advantages of tax exempt financing that the U.S. market does. And my conversations in Europe I don't think are any different than yours. They're all looking for ways to create the equivalent of tax exempt financing. It will be some synthetic device. But they're looking to create it.

And for us that means on the private sector side you need somebody that can deal with the Bear Stearns and understand the bond issues. We need to be able to deal with the attorney on the other side of the table who's negotiating it. But in doing our own financial evaluations, we need to come in not with the answer, but say, well, here's a wide range of tools.

And whether it's GARVEE bonds, TIFIA, our own equity, what's going to provide the best risk weighted return for us. That's the equation that we have to answer. And also provide a return to our partner on the other side of the table that allows this project to move ahead.

MARY:     DJ, I'm going to give you the last word on this question.

D.J.:     Okay. Actually, I divided this question in two parts: one the public sector and one the private sector. From a public sector standpoint, I agree with Allan. It is important that the public sector understand the financial markets better because their involvement is growing significantly.

I also added understanding better performance criteria. Bob mentioned this. It's very helpful to have performance criteria. From the public sector side though, what does that mean? I mean, that's a great term. And, yes, we want to get there. But how do we use performance criteria and still protect our key stewardship responsibilities, which are the use of Federal taxpayer dollars protecting the environment?

And how are we going to ensure, at the end of the day that those performance criteria work and we're effectively carrying them out? And so I think the public sector can better define performance criteria.

On the private sector, I agree with all the prior remarks. I would underscore where I think Geoff was heading. The private sector needs to do a better job of understanding the risk that the public sector takes in these projects. When the public sector makes a decision, it doesn't make a project-by-project decision. The public sector makes decisions that affect the program across the board. And I remember when I was in the private sector; it used to frustrate me endlessly.

I would encourage the public sector to look at the facts of a project, and argue that it doesn't make complete sense to do it this way. The person from the public sector on the other side of the table may say, well, we can't. But if I'd understood better that they're saying they can't not just because of this project.

They're saying they can't because this project, and all the other projects with slightly different fact patterns, wouldn't be in the best public interest. And so I think the private sector can help by better differentiating projects and by understanding that there are actions the public sector, even though they would like to, take are going to be hesitant to take, not because of a particular project, but because of the decisions made on that project may effect many other projects in the future.

MARY:     Thanks. I'm going to go to the last question now. How do you choose partners in a public/private partnership so that you can make a deal?

BOB: Okay. And I assume the partner that we're talking about here is our public partner, not our teaming partner to deliver the work.

MARY:     It could be both.

BOB:     Well, the second answer would take entirely too long.

MARY:     Only do the first one. We're going to call this the lightening round by the way. We'll go a little further on this.

BOB:     Very simple. We need a partner on the public side who clearly understands all of his obligations in the deal and is fully able to stand behind all of his obligations. And they require the same thing of the private sector partner. I think that's a key question. They've got to be able to ... they've got to understand what they've signed up for.

And they've got to be able to deliver on what they signed up for. And all too often, we've seen deals where as you get into them, the party on one side of the table or the other has not really understood what they've signed up to. Now, in the public sector, we think that means a couple of things.

Really a fair and objective evaluation process, true political will. That goes back to the first point I tried to make today, the mandate to go forward that they're going to go ahead and do this. And really that the projects with the greatest possibility to get to financial close move quickly.

And key for us as we look at our partners is the reputation of that public sector partner. Whether you call it transparency, whether you call it the history. If it's a bad partner, it's probably still a bad partner. We'll go do something else with our money.

D.J.:     A partner perspective is a little different. Because we ... although we will regulate the competitive process that leads to partner selection, we don't directly select partners. So I'll actually pass.

MARY:     Jim, I think you were ready to jump in.

JIM:     From the financing perspective, I think the key is there're no shortcuts, that a lot of people are advised go with the balance sheet or go on experience. And if you have a transparent process, a lot of that falls away. And so I think the real point is to focus on the process that leads to a partner, not defining a category of partners that are ideal.

GEOFF:     This is a core part of our business, bread and butter, defining the kind of competition for a particular project, and how to select a partner that has the most likelihood of success. And when we look at that, we look at it with two hats. One is obviously how do we identify the most proficient partners for a particular project.

But we also try to bring a larger view to it in a sense that competitions need to be framed to engender public confidence over the long term. Expediency on a particular project isn't necessarily in the long-term interest. What we want to do in selecting partners is to contribute to a vibrant PPP future. You can get a couple of projects done. But if people perceive the selection processes used as non-transparent, as potentially biased, we will be undermining the future at the same time.

A single major public controversy could damage not only a particular project or the state program, but the national industry as well. The reason why the states all have state laws that say do low bid is because public works projects were being awarded -- at least in perception whether it was reality or not, -- on graft, corruption and favoritism. What we as an industry don't want to do is have anybody be able to even make the allegation, rightly or wrongly.

So to my mind, it's really important that we have robust competitions where no one, including unsolicited proposers, is practically guaranteed to win.

In my view we need to have competitions where a serious competitor has a realistic chance of winning over the original unsolicited proposer. The other point I would make is there is no right or wrong form of competition. The really important key is when you look at a particular project, we've got eight or ten or twelve models of competition you can bring to a project.

To decide among options, agencies should ask themselves, what are the goals for a particular project? What are its individual characteristics? How far along in the environmental process is it? Has there been any T&R work done? How much engineering has been done? What goals does the government want to achieve? Do they just want to do pricing? Is pricing what's important because they're going to issue the bonds themselves?

Or do they want to transfer revenue risk? Are they not willing to do this project unless it can be done for only a certain amount of government money because that's the only government money they have for that particular project? Those are questions that have to be asked if you're going to design a competition to get out of the private sector partner exactly what you want and to communicate well with the private sector industry. So you're not inviting them in and then changing the game on them midstream.

BOB:     Yeah, I've got to take exception to a couple of things there. I think the notion of a firm investing millions of dollars to create an unsolicited offering and then have it shopped will end unsolicited proposals instantly. And I think it's foolish to think otherwise.

Second, I think a very key point that I'll say more emphasis on the transparency of the process. And this applies equally well to an unsolicited proposal. In an unsolicited process, the state gets to make a decision whether to proceed or not proceed. And that's the risk that the unsolicited proposer takes.

If he's done his homework right, he knows that answer before he's submitted his proposal because he's worked closely with the public sector side. But in those that are competed, I think it's very important that if we win that the public, the government and our competitor all understand very clearly what our offer was and what the basis was for the government selection of our proposal.

And conversely if we lose, then ourselves, the public, and government should clearly understand why we lost. What was it that ... what did the losing bidder do that was better than us? Because quite frankly, it is to the benefit of governments that the best ideas be shared. And it's the benefit of the industry that the best ideas be shared.

Having lost on one procurement doesn't mean that I can't learn and do better on the next one. But you really need to understand ... and this comes back to the transparent process. You need to understand what the offer was clearly.

GEOFF:     Just to respond. We're not as far apart as it may sound. I think that unsolicited proposals are very valuable when a project is in the phase where new project concepts or new technological applications are needed by the project.

BOB:     Sure.

GEOFF:     And so in that particular environment, having a competition where you invite other people to make project concepts ... offer project concepts as well ... is perfectly fine. But if a project is 25 percent engineered and the money is available, then I think that you end up in an environment where price needs to be part of the competition. In order for price to be part of the competition, then you have to have a more robust environment.

BOB:     If it's 25 percent designed and you have the money, just put it out design build. Don't buy a low price. And don't call it PPP.

GEOFF:     That's exactly right, although many people consider concession agreements to be PPPs and internationally they are offered after there is significant design already completed. The other thing is that unsolicited proposals are great but agencies are sometimes concerned that proposers are using them primarily to what I call "leapfrog STIP" -- essentially seeking to reprogram money away from other projects to the private partner's favored project. But the idea by getting the unsolicited proposal in play they are trying to corner public officials by getting people who support the unsolicited proposer use it as an opportunity to take money out of the STIP from another project and put it into that project.

And so I think there's been some push back if you will from politicians about use of unsolicited proposals for that purpose.

MARY:     Allan?

ALLAN:     One other thing. Common things that appear here are the need to think through our procurement process to build and grow industry. Because one of the things that we're real concerned about when we do any one of our deals is how can we do it in such a way that somebody who doesn't get picked still wants to work with us?

And how is it that we can create the deal so that we're not beholden to one provider? Competition means there's more than one person who can do this for us so that we don't become captive to one particular body of providers. That's why when we go out for a million dollars worth of bonds and Bear Stearns is our lead, they weren't the lead on the last deal we made.

We want to create a pool of people who can do work for us. And frankly, long-term that may be better for everybody -- to create a larger group of capable people to deliver these kinds of projects.

MARY:     It's a fine line. But you have to be able to create an opportunity to win. When I worked with Arizona DOT and I would talk to our folks about this, and, of course, we had Greyhound racing in Arizona. So I could use that analogy. I said the dogs never got to catch the rabbit. And I said you have to catch the rabbit. Otherwise you won't keep running.

I'm going to move now to questions from the audience. And we'll take these in rather rapid-fire manner. I won't ask each of you individually to respond. But if you feel like responding, jump in. This is a question Secretary Mineta has asked me. So I'm glad whoever wrote this put it on the table here.

How can public/private partnerships be used to tap the benefits of transportation investment to help fund the project looking at increases in property value that accrue as a result of the project?

BOB:     A great example in New York is the proposed extension of the 7 subway train where the MTA is not financing the project. The City of New York will. And that will be done through tax increment financing. And I think that's a great example.

And quite frankly, I think as you look at transportation in the future, it's going to be a combination of user fees, tax revenues from one source or another in terms of more traditional tax revenues. But I think you're also going to find some of these other avenues such as property value increases and the like being used.

And the advantage of the public/private partnership may be to provide a vehicle by which multiple agencies of government can come and act together with a neutral project dedicated party more reasonably than they could with themselves.

SPEAKER NOT IDENTIFIED:     This is a good example of how a current system is setup in a way that didn't anticipate non-governmental funding being used in a major way in developing our projects. Because as you move forward with something like this, you run into problems like location of intersections or location of transit stations.

You have an environmental process that looks at that. But the largest contributor to the project may want that intersection somewhere else. So how do you balance between those?

BOB:     The first New York City subway was built by private developers. The location of stations was chosen by their ability to assemble enough property to capture the value that would accrue to the property by building a station and extending a line there.

GEOFF:     There's all kinds of examples about how benefit assessment districts, tax increment districts, development fee programs have been very successful in generating a lot of money for infrastructure. You've got lots of land dedications that have been used. The Las Vegas monorail is a good example.

MARY:     Harnessing market forces to advance transportation projects is a brilliant strategy where applicable. But there is generally a market failure to provide transportation infrastructure, thus creating a role for government. A study by Cambridge Systematics and Mercator Associates presented yesterday at TRB show that PPPs and innovative finance were projected to advance only a very small percentage of projects relative to needs. What is the panel's answer to projects for which public/private partnerships are inappropriate? And I'll caveat this question with do you agree with that presumption?

JIM:     One of the things the author of the report said yesterday is that when you measure success in terms of millions or billions of dollars that projects produce I think the real focus of public/private partnerships is not how many opportunities we give the contractors to design or build but really how can we harness all the resources into helping mobility, into doing more rational transportation plans?

So the goal really is not to close the funding gap of public/private partnerships. The goal really should be address mobility problems, address development issues. And we need new measurement tools in order to find out if we're being successful there. As long as we focus on contract values, I think we're missing a lot of the innovation that the private sector can bring.

MARY:     I'm going to end this question with another question that's related. What does this mean to rural America? And this is all well and good for urban areas. But what does this mean for rural America?

BOB:     I think the way that we look at the total transportation market, there is some slice of projects in that market. Whether it's five percent or fifty percent doesn't matter. There's some slice that will lend itself to some kind of innovative structure that we're talking about.

There's another sector that never will. But to the extent that we can free up government resources by taking on these other challenges, then those become resources that can be otherwise used. Quite frankly the last time I looked the infrastructure deficit in this country was a trillion and a half dollars. I may have that wrong now.

There's plenty of need out there. What there is is a shortage of funds. Every dollar we can free up then becomes a dollar available for other projects

ALLAN:     I agree with the first statement. I question the market failure to provide sufficient levels of infrastructure. The problem is if you look at the rules and regulations, laws and practices, the status quo. I think the answer is not necessarily to have a larger governmental role in deciding all of that, if your intent was to raise federal gas taxes.

I think the answer is to allow (inaudible) when you do that. Right now if you have states, a lot of states who work with Federal Highways that was heavily traffic intensive. It would take taxpayer funds to build that project. And then suggest that somebody build it with EPA (?) out in the middle of the rural area, they can't afford to get there.

That just makes no sense at all. If you turn that around and allow public/private partnerships to happen where they can be profitable ... and Bob got it right ... that frees up the funds there. And you can take care of the rural problem where you don't really have the market that's available to take care of it.

ALLAN:     I guess another way to look at that rural problem ... and it's been hinted at is the privatization of delivery of services. One of the things GASB 34 has done is that it has defined the goals and objectives of how we want our infrastructure to perform. One of the ways that's helped us is it's given us those tools of performance measurement to say here's what our road looks like.

When we have those kind of specs, then you can offer that to the private sector with predictability and with clarity about what you're going to be measuring. So the public sector and private sector both perform better when they are held to the same standards of vigorous accountability. But if you don't do the ground work to build the monitoring systems the possibility remains that you wouldn't be able to figure out what it is best for the public and private sector to perform. And then look at the private sector to do what the private sector is doing a whole lot of in the transportation field - out sourcing service delivery of all kinds.

GEOFF:     I think Allan's put his finger on it. If you look at how state and Federal transportation dollars are being spent, state DOT after state DOT is spending larger and larger percentages of their budget on maintenance. That's why we're talking about public/private partnerships for the large capital projects.

So if you're looking at how you can grow the public/private business or grow innovative business to benefit the program, you have to look at it in the maintenance arena.

If you look around the world, if you look at Canada, most of Canada's highway maintenance is being outsourced. If you look at New Zealand, almost all of it's being outsourced. If you look at performance contracting in the U.K., the DBFO and PFI models, it's primarily getting at how projects are being maintained.

Shirley Ybarra pioneered this in the United States with the Virginia's asset management contract for interstate highways. That has not been replicated widely enough. We have a very small industry that's available to respond to that opportunity if and when it will be offered.

So to my mind if you're going to try to create a tool that's going to have the largest effect on the highway program, we have to look at outsourcing maintenance and bringing public/private partnerships into the maintenance arena.

MARY:     I'm going to move to the next question. Our conversation today has focused mostly on roads, the applicability of partnerships for roads. Can you talk about or provide examples of where partnerships have been applied to other transportation modes, transit, rail, maritime, maybe aviation. Jim, you've been involved in.

BOB:     Yeah, just a couple of rail ones because Jim already mentioned the Kennedy project on the airport side which we had worked on. But we're doing a billion and a half dollar project right now, the Netherlands high-speed link with local partners. There is a state subsidy in there for basically the civil works.

And then from the track up it is really financed out of the fare box if you will. And that's how it was structured. And so we buy in effect the requirement for availability for those systems to operate. We don't run a train. And so that's one example.

Another example in the London Underground project we're in the middle of now which is called the Connect Project. Basically, it's an installation of a whole new communication and signaling system. Basically, you'll be able to use your cell phone in the London underground for which we will have a revenue stream, which does not currently exist.

And there're other revenue streams. But that's just an example. Actually, Seattle monorail, which we're working on right now, will be financed by an auto registration tax in several counties. So the problem that you run into at rail is that the level of capital investment and the level of operating costs make it very hard to get the kind of fare to support those projects fully from the private sector.

I think even on a 7 train in New York, while that was just another government agency providing the financing and using the tax increment district, I think you're going to see a lot more activity coming into that sector. I know our prospect list is growing fastest in that area now.

GEOFF:     The FTA in a sense was out in front on this. Back in 1992, Congressional action that year established the National Turnkey Demonstration Program. That gave rise to the Hudson Bergen project and the South Jersey project by New Jersey Transit. It gave rise to a number of other design-build, DBOM type contracts also.

Out of that grew the Las Vegas Monorail project, which is the first privatized fixed guideway transit system in the United States. A lot of people said, Las Vegas is unique. When we started that project seven years ago in Las Vegas, everybody said you couldn't do it in Las Vegas either.

And in fact, they didn't believe it up until the day they closed. For those of you who go to Las Vegas, check it out. It's real exciting.

When we started working with the Seattle Monorail Project, they said, well, Seattle's about as far away from Las Vegas as you can get philosophically. But they came down to look at that project. The more they looked, the more they found commonalities between what they wanted to do in Seattle and what they're doing in Las Vegas.

And so they have utilized in Seattle much of what I call the legal-contractual-financial technology of Las Vegas.

SPEAKER UNIDENTIFIED:     Just a couple of things to reinforce this. We have a $3.5 billion high-speed rail project in Florida that's stalled because of political will at the moment. Okay? But, I mean, a great example of a rail project that does scale there. And I think we need to understand, especially when we get down to the local level, that these models I think can be applied to areas outside transportation.

The traditional, the typical funding issue that you experience at the local level is roads versus schools right now in the U.S. And quite frankly, I know we're looking at a number of opportunities in the U.S. on the school side. We're involved in pursuing it in the U.K. as well. But where we think this basic model of taking the service and facility traditionally provided with finance by the public sector and delivering it in a different forum is something that we're going to see much more widely used out there.

MARY:     Of course, Allan, you're familiar with the CREATE project in Chicago.

ALLAN:     This is a freight-focused project, offering benefits to the private railroads in operating speeds that help neighborhoods, and revenues to grade-separate intersections to build quality of life.

MARY:     Thank you. There are a couple of other questions here that I think we dealt with. One was how do you promote competition? I think you all talked about that. There was a question about the Hudson Berger wide rail project that we've addressed as well.

Let me wrap up now. I'm going to give you each one minute or less ... you can take less ... to tell me what the most important take aways from this session are. Allan, do you mind if I start with you? And I didn't tell him I was going to ask him first.

ALLAN:     I'm getting a much better appreciation for the variety of value the public/private sector brings in. And to look at this don't just view the PPPs as delivering one particular type of project. There're all kinds of applicability that can be there. Our own agency is tempted to say we don't need to do that because we already do it that way. But we may go back home and say maybe that's not the only way to look at things.

MARY:     D.J.?

D.J.:     I'll make a similar comment to Allan's. I think conversations like this are extraordinarily helpful because what's happened is we're in a market that's changing pretty markedly in a relatively quick period of time for something that involves government as heavily as road building does.

And I think communications between the public/private sector and the private sector where we get to the point where we can answer together some of the questions we asked today. What's a valuable partner? What should we look for in a public/private partnership? This is very helpful.

I'm actually very encouraged by deals like the Skyway project and the I-35 project which shows that innovative deals are breaking out into whole new different directions. And I think this is an area that should be pursued.

BOB:     I think the private sector still needs to do a better job in helping government get the resources that it needs - that they need to have and that we need them to have. It's a different skill mix on the other side of the table that we need there to do business. And quite frankly, they need to do business as well. And I think we've got to be an advocate for them getting some different skills.

GEOFF:     As someone who has humbly labored in state capitols for the last twenty years on public/private, design-build and alternative delivery systems, I can tell you it's been really tough going. And the reason why we have such a sense of excitement at this particular moment in time has been in significant part due, Mary, to your and D.J.'s leadership.

I cannot thank you enough. It's made all the difference in the world. And one of the things we may not have mentioned in the Federal role earlier, certainly the Federal role is regulatory and certainly the Federal role is in technical assistance. But maybe the most important Federal role, at least as you and D.J. have been able to carry it out, is to articulate the vision, to use the bully pulpit to put the nature imprimatur of competence and propriety on this field.

So we look forward to a great future in part because of what you've done. And we appreciate it very much.

MARY:     Thank you.

JIM:     I want to build on your comment as well about people going to the gym at the beginning of the New Year. And I would hope that the people take away from here that beyond the hype and beyond the rhetoric, there's something real here. You can choose not to quit smoking or to not go to the gym this year, but inevitably you have to address your health. And this public-private partnership is one part of a healthy diet and a healthy lifestyle. And I think this discussion shows you don't have to choose one side or the other. But you do have to address it eventually.

MARY:     Please join me in thanking the panel for their presentation. If you had a question I didn't get to, I apologize.