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