Report to Congress on Public-Private Partnerships, 12/04 - United States Department of Transportation

Build-Own-Operate: a private contractor constructs and operates a facility while retaining ownership. The private sector is under no obligation to the government to purchase the facility or take title. “Public-Private Partnerships: Terms Related to Building and Facility Partnerships.” GAO/GDD-99-71, April 1999, http://www.gao.gov/special/pubs/Gg99071.pdf

Concession Benefits: rights to receive revenues and other benefits (often from tolling) for a fixed period of time.

Design-Bid-Build: the traditional project delivery method where design and construction are sequential steps in the project development process. (32 C.F.R. 636.103)

Design-build-contract: an agreement that provides for design and construction of improvements by a contractor or private developer. The term encompasses design-build-maintain, design-build-operate, design-build-finance and other contracts that include services in addition to design and construction. Franchise and concession agreements are included in the term if they provide for the franchisee or concessionaire to develop the project which is the subject of the agreement. (23 C.F.R. 636.103)

Developer Financing: a type of financing where a private party finances the construction or expansion of a public facility in exchange for the right to build residential housing, commercial stores, and/or industrial facilities on the site. This type of financing often takes the form of capacity credits, impact fees, or exactions. “Public-Private Partnerships: Terms Related to Building and Facility Partnerships.” GAO/GDD-99-71, April 1999, http://www.gao.gov/special/pubs/Gg99071.pdf

Innovative Contracting: innovative contracting practices meant to improve the efficiency and quality of roadway construction, maintenance, or operation. Examples of innovative contracting include: A+B contracting, lane rental, the use of warranties, design-build, design-build-operate, design-build-finance-operate-maintain.

Innovative Finance: innovative methods of financing construction, maintenance, or operation of transportation facilities. The term innovative finance covers a broad variety of non-traditional financing, including the use of private funds or the use of public funds in a new way, e.g., GARVEE bonds or special tax districts.

Life-Cycle Costs: the costs of a project over its entire life: from project inception to the end of a transportation facility's design life.

Public-Private Partnership: a contractual agreement formed between public and private sector partners, which allows more private sector participation than is traditional. The agreements usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or system. While the public sector usually retains ownership in the facility or system, the private party will be given additional decision rights in determining how the project or task will be completed. The term public-private partnership defines an expansive set of relationships from relatively simple contracts (e.g., A+B contracting), to development agreements that can be very complicated and technical (e.g., design-build-finance-operate-maintain). In the context of this report, the term public-private-partnership is used for any scenario under which the private sector would be more of a partner than they are under the traditional method of procurement. Further, the broad definition used for public-private partnerships includes many elements that are applied fairly regularly on appropriate projects. “Public-Private Partnerships: Terms Related to Building and Facility Partnerships.” GAO/GDD-99-71, April 1999, http://www.gao.gov/special/pubs/Gg99071.pdf

Revenue Bonds: instruments of indebtedness issued by the public sector to finance the construction or maintenance of a transportation facility. Revenue bonds, unlike general obligation bonds, are not backed by the full faith and credit of the government, but are instead dependent on revenues from the roadway they finance. Terms Related to Public-Private Partnerships, The National Council for Public-Private Partnerships: How Partnerships Work, http://ncppp.org/howpart/pppterms.html

Shadow Tolling: Shadow tolls are per vehicle amounts paid to a facility operator by a third party such as a sponsoring governmental entity. Shadow tolls are not paid by facility users. Shadow toll amounts paid to a facility operator vary by contract and are typically based upon the type of vehicle and distance traveled.

Toll Credits: toll credits are earned when a State, a toll authority, or a private entity funds a capital highway investment with toll revenues from existing facilities. States may increase the use of available eligible Federal funding on a project, up to the normal State/local matching amount, and debit the sum of the toll credits that have been earned by that same amount.

Tolling: the process of collecting revenue whereby road users are charged a fee per roadway use. Tolls may be collected on a flat-fee basis, time basis, or distance basis and may vary by type of vehicle.

Warranty: when used in public-private partnerships for the construction of roads, warranty clauses guarantee that the roadway will meet a certain level of quality or else repairs will be made at the private contractor’s expense. There are currently two types of warranties used in highway construction: (1) materials and workmanship warranties and (2) performance warranties. Under the first type, the contractor is responsible only for defects caused by poor materials and workmanship. Under the latter, the contractor is responsible for the product meeting certain agreed upon performance thresholds, regardless of whether materials and workmanship met State standards.

Executive Summary

House Report 108-243 (2003) accompanying the FY 2004 Department of Transportation Appropriations Act requested the U.S. Department of Transportation (DOT) to prepare a report identifying the impediments to the formation of large, capital-intensive highway and transit projects involving public-private partnerships. U.S. DOT was also asked to work with States and local entities to identify and eliminate existing impediments. This report addresses both of those goals by pulling from existing literature on public-private partnerships and by gathering comments from States, law firms, contractors, and trade associations with experience in these projects. These comments, gathered from stakeholders, do not necessarily represent the position of the U.S. DOT, but are included in response to the Committee on Appropriation’s request according to the direction given by the House Report.

In this report, U.S. DOT answers the questions posed by Congress and attempts to provide a resource document for States interested in using public-private partnerships as a method of procurement. The report is divided into five major sections: history and initiatives, value of public-private partnerships, impediments to their formation, stakeholder comments, and recommendations for removing those impediments. The value section is designed to help States considering public-private partnerships better understand the benefits of such an approach and some of the downsides. This report, however, is not designed to be a manual on how to use public-private partnerships as part of a State program. We have not addressed the myriad issues concerning when public-private partnerships should be used and how they should be negotiated. The report focuses on the questions posed by the House Report language and provides the background necessary to provide context for the answers to those questions.

Although not widely used today, public-private partnerships are not a new model for providing surface transportation infrastructure. For decades, the Federal Highway Administration (FHWA) and State Departments of Transportation (DOTs) have experimented with ways to increase the involvement of the private sector in financing and operating surface transportation facilities. The results of these early experiments are not widely known and many of the new partnership arrangements have not been widely adopted. For this reason, the report begins with a short history of public-private partnerships and what we have learned to date.

Rapidly increasing demand for new capacity has resulted in many States considering the benefits of public-private partnerships. U.S. DOT has encouraged this both administratively and by recommending changes to Congress. Administrative changes made by U.S. DOT include creating the Innovative Finance Program – Test and Evaluation Project (TE-045) to allow greater flexibility in the financing of transportation infrastructure and enabling greater use of innovative contracting methods through Special Experimental Project 14 – Innovative Contracting (SEP-14). Recent transportation acts have also provided tools for States interested in exploring innovative financial and contracting methods that make greater use of private sector resources, and the Administration has recommended a number of legal changes that will continue this trend.

As with many forms of government procurement, there are both legal and non-legal obstacles to reform. FHWA has engaged in a number of workshops and other educational efforts to address some of the lack of understanding and knowledge concerning public-private partnerships.

The FTA has also led finance and joint development workshops, in an effort to disseminate best practices and to provide “on-the-spot” technical assistance for specific projects. In public transportation, there are similar obstacles to reform. Only a handful of major public transportation agencies routinely use the capital markets as part of their project finance resources. Only the largest thirty systems have used overnight borrowing or short-term paper to manage cash flow. And, while more potential projects are in discussion, there remain few major projects in public transportation. On the other hand, increased Federal funding certainties have permitted public transportation agencies to better access capital markets.

Public-private partnerships can generate substantial benefits for public agencies interested in encouraging innovation and saving time and money on projects. Risk aversion and lack of experience with the private sector, however, often drive public agencies to spend considerable time and resources developing systems for soliciting projects, ensuring adequate competition, and allocating the risks associated with designing, constructing, and operating a large transportation facility. These administrative procedures limit private sector flexibility and have deterred many States from fully exploring such partnerships. These additional costs associated with developing a public-private partnership can diminish the potential value public-private partnerships may offer. This is especially true since some benefits of public-private partnerships are difficult to quantify.

Cost and time-savings associated with public-private partnerships are more readily quantifiable. Two reports and numerous case studies have found that public-private partnerships can save from 6 to 40 percent of the cost of construction and significantly limit the potential for cost overruns. The reason for these savings is that the private sector often has more appropriate incentives to limit costs than the public sector. In addition, having one entity responsible for design, construction, and operation can result in efficiencies that are not possible with traditional design-bid-build methods. Public-private partnerships help reduce the time it takes to build a project in two ways, through innovative finance and project management. The most significant time-savings generated by public-private partnerships are a result of innovative financing. By restructuring project financing and borrowing funds, public-private partnerships can cut many years off project delivery. Although frequently less dramatic, innovative project management also reduces the time it takes to finish a project, often saving months if not years.

Improvements in quality, environmental stewardship, and innovation have also been associated with public-private partnerships, but are more difficult to quantify, especially given the relatively limited number of projects that have been completed to date using this procurement method. Anecdotal evidence suggests that quality and innovation increase when the private sector becomes involved in a project earlier. This report includes some of this anecdotal information.

Despite the benefits of public-private partnerships, obstacles including legal, financial, political, and cultural hurdles are often encountered in the formation of these partnerships. This report lists impediments found in State laws and policies, local communities, the private sector, and Federal laws and regulations. Our Nation’s surface transportation programs are primarily administered by States and local authorities. As a result, State laws, regulations, and practices strongly influence the potential for public-private partnerships. Most States do not allow innovative forms of procurement, severely limiting the potential for a public-private partnership.

On the local level, concern is usually focused on how the proposed project will be financed. Localities tend to be resistant to projects with an innovative financing component that could create additional costs for the users of the facility. Communities are also increasingly reluctant to impose new taxes on themselves to finance facilities. These concerns make public-private partnerships more difficult. However, public support for tolls that pay for additional capacity or allow motorists to buy their way out of congestion appears to be increasing, and with that, so too should public-private partnership opportunities.

The private sector has concerns that limit its interest in partnering with a State or locality to form a public-private partnership. These concerns include: the availability of financing, uncertainty of revenue streams, risks associated with the environmental clearance process at both the State and Federal level, tort liability, and potential changes in political leadership. As public agencies and private sector firms become more familiar with public-private partnerships for highway and transit projects, and as more impediments are reduced, public-private partnerships and private sector interest can be expected to increase.

Finally, Federal procurement laws and regulations can also be an impediment. Like States, the Federal government has established a system of procurement and oversight built on the traditional design-bid-build model. This system has obvious benefits, but, in many cases, stifles innovation possible with public-private partnerships. The most noted example of this was FHWA’s new design-build regulations requiring a State to have completed the environmental review process before requesting project proposals. This example is discussed further in Appendix H. This restriction limits the private sector's involvement in a project early in the design phase. In addition, there are a number of Federal laws, such as Buy America and Davis-Bacon that have been enacted to advance important public policy goals. Several stakeholders noted that these requirements may increase the cost and complexity of projects.

Chapter V includes comments from a wide variety of stakeholders, including States, law firms, private companies, and trade associations about how to eliminate existing impediments. These comments, which are summarized below, do not reflect the position of the Administration, although many are worthy of further investigation. Furthermore, these comments represent a gathering of thought, rather than a consensus of opinion.

Stakeholders recommended changes to enhance project financing, including a relaxation of restrictions on tolling to finance highways, expansions of the Transportation Infrastructure Financing and Innovation Act (TIFIA) and State Infrastructure Bank (SIB) programs, and the use of Private Activity Bonds for transportation investments. They also recommended several administrative, regulatory and legislative changes to improve the environmental review process.

Stakeholders suggested a number of changes to procurement procedures to encourage the use of public-private partnerships including: Federal encouragement of State legislation to permit the use of design-build; greater flexibility in design approaches, subcontracting, and pre-award negotiations; elimination of State prohibitions on accepting unsolicited proposals; liberalization of rules for the use of proprietary products and techniques; and an expansion of the SEP-14 initiative to encourage innovative procurement practices to be used in public-private partnerships.

Chapter VI summarizes the U.S. DOT legislative proposals included in the Administration's surface transportation reauthorization proposal — the Safe, Accountable, Flexible, and Efficient Transportation Equity Act of 2003 (SAFETEA) — that should facilitate public-private partnerships.

The report concludes by noting that the U.S. DOT looks forward to continuing to work with Congress on the issue of the use of public-private partnerships in highway and transit projects.

Chapter I: Introduction

In the House Report accompanying the FY 2004 Department of Transportation (DOT) Appropriations Act, the House Committee on Appropriations requested the Secretary of Transportation prepare and submit a report on public-private partnerships. The Committee report specified the following:

The U.S. DOT has long encouraged the use of public-private partnerships. We welcome this opportunity to highlight the cost and time saving benefits that can be realized when transportation projects are built using a public-private partnership. To provide a fuller understanding of these benefits, our report includes a discussion of the history of public-private partnerships in transportation and a description of public-private partnership initiatives already undertaken by the U.S. DOT. The report is also designed to be a resource document for States that are interested in using public-private partnerships as an alternative method to the traditional procurement processes.

The report is a compilation of information collected from a variety of sources. The U.S. DOT first reviewed existing literature on the use of public-private partnerships on transportation projects. This review included reports on public-private partnerships authored by the FHWA, GAO, CBO, State governments, private sector consultants, law firms, and international scholars. Because interest in public-private partnerships has only recently reemerged, the literature available is not extensive. Consistent with the Committee report language, the U.S. DOT also invited State Departments of Transportation (State DOT) who are actively engaged in the use of public-private partnerships, as well as private stakeholders (contractors, designers, consultants, law firms, and trade associations), to share their experiences with public-private partnerships on transportation projects, identify impediments to the use of such agreements, and to provide their recommendations on how to eliminate these impediments.[3]

Consultation with local officials is a vital yet sensitive issue within the transportation planning process. Within metropolitan areas, the MPO provides the venue and policy context for this. In the development of a Statewide Transportation Improvement Plan (STIP), the MPO must consult with local officials, non-governmental organizations, businesses and other interested parties on the projects being considered for funding. Outside of metropolitan areas, FHWA and FTA are working to facilitate the most effective consultation processes within each State. FTA and FHWA will continue to ensure effective consultation between States and local officials in non-metropolitan areas in reviewing statewide planning and, specifically, in making findings in support of FTA and FHWA STIP approvals.

Chapter II defines a public-private partnership and discusses the history of public-private partnerships in both highway and transit construction. Consistent with the language in the House Report, public-private partnerships are defined broadly as a contractual agreement formed between public and private sector partners, which allows more private sector participation than is traditional. Chapter II also provides an overview of the U.S. DOT's initiatives to date to encourage the greater use of public-private partnerships within the highway and transit arena. Although public-private partnerships are often thought of as a recent innovation in public surface transportation, history shows that this is not a new concept. Chapter II examines where we have been and where we are concerning public-private partnerships. This information will help lay the foundation for understanding the value of public-private partnerships and assessing impediments to their formation.

Chapter III highlights the value of public-private partnerships and the primary benefits that may include delivering a higher quality transportation project quicker and cheaper when compared to traditional contracting methods.[4] This chapter begins with a discussion of the cost and time savings that can be realized with the use of innovative contracting methods such as design-build, warranties, and cost-plus-time bidding. It then explores additional factors that contribute to cost and time savings including: the flexibility to use private-sector financing, intellectual capital, and management resources; allocation of risk to the party best able to manage it; and the incorporation of life-cycle costs in the price of the project. It also describes some of the risks involved in using public-private partnerships.

As requested by the House Report accompanying the FY 2004 DOT Appropriation Act, Chapter IV explores the major impediments to the formation of public-private partnerships. These impediments include State laws and policies, local opposition, private sector concerns, Federal requirements attached to Federal funding, and Federal financing. This chapter serves as a compilation of the impediments that have been identified by the commenters to the report and in the information used in this report and is not necessarily suggesting changes to Federal law. The Administration's SAFETEA proposal contains recommendations that address some of these impediments. Others will require further analysis to assess the most effective way to respond. A discussion of Federal funding and financing is included because it has been cited as a possible barrier due to the requirements that must be followed when a State or locality elects to use Federal money on a project. The literature on public-private partnerships notes that the complexity of Federal laws can limit private-sector participation in highway and transit projects.

Chapter V is a compilation of the stakeholder suggestions on administrative, regulatory and legislative changes that would remove impediments to the formation of public-private partnerships. The recommendations focus primarily on changes to environmental and procurement practices and laws. The U.S. DOT’s role regarding these comments is that of a conduit for the delivery of a significant number of stakeholders’ recommendations to Congress. These comments were provided by those stakeholders with an interest in or experience with public-private partnerships. This report does not represent the views of all potential stakeholders. Furthermore, the U.S. DOT did not place a fine filter on the comments, but presented all thoughtful recommendations in this chapter. Although the Administration supports a number of changes similar to those discussed in this section, the recommendations listed in this chapter are strictly those of the submitters, not the Administration.

Chapter VI explains proposals included in SAFETEA that U.S. DOT believes will help overcome some of the impediments identified in this report. These SAFETEA proposals include: amendments to TIFIA; a commercialization of rest areas pilot program; environmental streamlining proposals; expanded tolling programs; amendments to the design-build statute; and expanding the use of private activity bonds to include highway and freight transfer facilities.

Chapter II. Public-Private Partnerships—History and Initiatives

Transportation profoundly affects our well-being, development, growth patterns, and quality of life. Improved highway and transit facilities help National, State, regional, and local economies grow by increasing productivity, attracting new businesses, and providing access to new markets. A sound transportation system must grow as our society and economy expand. It must be kept up to the modern standards and be well maintained. Unfortunately, public surface transportation needs are far outpacing delivery of transportation projects. Thus, to keep our system vibrant, new ways to build and operate the system must be found. The U.S. DOT is committed to providing a greater role for the private sector in transportation services and infrastructure investment to supplement Federal, State and local spending for capital investment in our Nation’s infrastructure. Coupling private capital and private initiatives with public transportation efforts produces more and better facilities for the traveling public.

One aspect of the transit program applies directly to this goal, by supporting joint development activities – the common use of land around a transit station for both transit purposes and related development activities. At its most advanced, this has resulted in whole neighborhoods being developed around, and depending upon, a public transportation station. In the current state of the practice, it has ranged from one-time fees for connections to major shopping centers (such as Mazza Gallerie in Washington, DC) to private construction of office buildings on top of a rail station (as with Dadeland North, in Miami). The optimal combination of public transportation investment with private sector investment results in entire corridors – such as the Ballston Corridor in Arlington, Virginia - being re-invented into places where people want to live, work, and recreate, and where the transportation system provides access and convenience for all of the traveling public.

This chapter will define a public-private partnership and will discuss the history of public-private partnerships in both highway and transit construction. Additionally, initiatives to promote public-private partnerships, undertaken by the FHWA and the FTA, will be discussed.

A. Public-Private Partnership Defined

For purposes of this report, U.S. DOT has adopted the following definition of a public-private partnership: A public-private partnership is a contractual agreement formed between public and private sector partners, which allows more private sector participation than is traditional. The agreements usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or system. While the public sector usually retains ownership in the facility or system, the private party will be given additional decision rights in determining how the project or task will be completed. The term public-private partnership defines an expansive set of relationships from relatively simple contracts, e.g., A+B contracting, to development agreements that can be very complicated and technical, e.g. design-build-finance-operate-maintain. In the context of this report, the term public-private partnership is used for any scenario under which the private sector would be more of a partner than they are under the traditional method of procurement. Further, this broad definition of public-private partnerships includes many elements that are being utilized on a more routine basis.

Traditional transportation projects financed from fuel tax and other highway user fees have the greatest public sector roles and the least private sector participation. In these projects, the role of the private sector is limited to entering into design and construction contracts with the State to build roads. Public-private partnerships usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or system. While the public sector usually retains ownership in the facility or system, the private party will bear additional risks or be given additional decision rights in determining how the project or task will be completed. The term public-private partnership defines an expansive set of relationships from relatively simple contracts, such as contracts where the private sector assumes the risks of delays in schedule through financial incentives and penalties. On the other end of the spectrum, it includes very complicated and technical development projects, where the private sector builds, owns, and operates a transportation facility. In the context of this report, the term public-private-partnership is used for any scenario under which the private sector would be more of a partner than they are under the traditional method of procurement.

Public-private partnerships generally fall into one of five categories, based on the reasons for their creation. The five key public-private partnership categories are:

Some partnership arrangements may involve several or all of these functions. Regardless of the specific functions involved, partnership arrangements are intended to provide greater flexibility to achieve transportation program objectives by altering traditional public and private sector roles to take better advantage of the skills and resources that private sector firms can provide.[7] However, even when the private sector has a high level of participation, the government will continue to play a role in granting permits, ensuring safety, verifying fulfillment of environmental requirements, or even exercising its power of eminent domain to obtain land for rights-of-way.[8]

In between the extremes of public and private provision of roads are partnerships between government and private firms for building transportation projects. The roles and responsibilities of each partner in financing the project are specified in contracts between the parties, as illustrated by Figure 2.1. In the majority of cases, the private sector risks some capital and is rewarded if the investment is successful. The partners often form a new entity—either a special-purpose government agency or a private, nonprofit corporation—to finance and oversee the project. Another nontraditional arrangement is that of a government contracting with a private firm to operate and maintain a roadway that the government has built. Great Britain is experimenting with such a form on a limited basis, but the United States has yet to explore its possibilities in any systematic way. [9]

In addition to private sector involvement in financing the project, a variety of contracting methods also can increase the level of private sector involvement in surface transportation construction. Figure 2.2 describes the name of the contracting method, the major features of the contracting methods, including the level of public and private sector involvement, and examples of projects for which the contracting method was used. These contracting methods are further discussed in Chapter III.

Sponsor	Major Features of Financing	Examples
Private Equity Investors	Finance and develop the project using primarily private resources	Dulles Greenway (Virginia) 91 Express Lanes project (California) SR-125 South Toll Road (California)
Private, Nonprofit Entity	Issues tax-exempt debt backed by tolls (and without recourse to taxes) and oversees the project under the terms of the agreement between the state and the private developer	TH 212 (Minnesota) Southern Connector (South Carolina) Interstate 895 (Virginia)
Special-Purpose Public Agency	Issues tax-exempt debt backed by tolls (and without recourse to taxes) and oversees the project under the terms of the agreement with a private developer	E-470 (Colorado) Orange County, California, transportation corridor agencies
State Agency	Issues tax-exempt debt backed by tolls (and without recourse to taxes)	Some turnpikes
State Agency	Issues tax-exempt debt backed by taxes	Most highway projects that are financed by debt
State Agency	Finances highway on a pay-as-you-go basis using state taxes and fees plus federal aid	Most highways

Contracting Method	Major Features of Contracting Method	Examples
Purely Private Project	There is virtually no involvement by the public sector in the project and no contract or other formal agreement between the public and private sectors.	Dulles Greenway (Virginia).
Design, Build, Finance, Operate (concession or franchise)	Under the DBFO contracting method the private sector is responsible for all or a major part of project financing as well as facility design, construction, operation, and maintenance. Typically the facility reverts to the State after 25+ years. Revenues to the private sector can come from direct user charges, payments from the public sector, or both. Operations typically would be covered by performance incentives, and contracts would have to include such things as maximum rate of return, non-compete clauses, and maximum toll rates, etc.	SR-91and SR-125 (California) Southern Connector Toll Road (South Carolina), Massachusetts Rt. 3, Las Vegas monorail.
Design, Build, Operate, Maintain (concession or franchise)	This is similar to the DBFO contract, but involves a lesser role by the private sector in project finance. Like the DBFO, the private sector assumes major responsibilities for project design, construction methods, operations, and maintenance. Payments from the public sector may include performance incentives/disincentives for operational performance and physical condition.	Central Texas Turnpike Project, Hudson Bergen Light Rail (New Jersey), I-15 (Utah), Seattle monorail.
Design, Build, Warrant	Based on general information concerning the type of facility desired and the performance expected from that facility, the private sector is given the responsibility for design and construction of the facility. This promotes innovation in design and efficiencies in the construction process since the same firm or group of firms are responsible for both design and construction. In many cases the private sector will provide a warranty for key components of the project. The private sector may or may not participate in project financing.	Pocahontas Parkway (Virginia), San Joaquin Hills Toll Road (California). Many States have experimented with design build for large or complex projects. Other States, like Florida, use design-build almost on a routine basis.
Asset Management Contract	This type of contract is used for long-term maintenance and/or operation of an existing facility or system of facilities. The private sector typically would be responsible for financing needed improvements and would be paid a fee by the public sector for doing so. The fee may include performance incentives or disincentives. Experience to date is that private sector management contracts can often result in substantial cost savings over traditional public sector management of the road system.	Texas, Virginia, Florida.
A+B Contracting	This is a modification of the traditional design, bid, build contract in which the private contractor bids both the project cost (A) and the time to complete the project (B). The contractor assumes the risk of not completing the project in the specified time, and bonuses for early completion or penalties for late completion typically are included.	Used most frequently for major highways where completion time is a critical element.
Traditional Design, Bid, Build Contract	Public agency designs the project and awards construction contract to private sector. Very little opportunity for innovation or efficiencies.	Most highways.

B. History of Public-Private Partnerships

Public-private partnerships are not a new concept to transportation infrastructure development. For highways, the private sector historically had an important role in highway construction operation and financing. Although the role of the private-sector in highway financing and operation declined in the mid-part of the 19^th century, in the late 1980’s, private-sector involvement in these cases remerged. As Federal and State highway funding becomes more constrained, and as the need for highly efficient surface transportation systems continue to grow, the role of the private sector will continue to reemerge. This section will discuss the history of public-private partnerships in highway and transit development.

i. Highways

The role of the private sector in public transportation dates back to the beginning of road construction in the United States. Many of the earliest major roadways in the U.S. were private toll roads. In the early years of the Republic the importance of highways for westward expansion and trade was recognized and an era of road building began. This period was marked by the development of private turnpike companies, to construct essential highways that would be operated as toll roads.

In 1792, the first turnpike was chartered and became known as the Philadelphia and Lancaster Turnpike in Pennsylvania. The boom in turnpike construction resulted in the incorporation of more than 50 turnpike companies in Connecticut, 67 in New York, and others in Massachusetts and around the country.

Over time private involvement in highway infrastructure investment and operation declined as States and the Federal government increased the pace of road construction to open new lands and increase economic development. In 1806, the Federal government passed legislation to fund the National Road, also known as the Cumberland Road. This road stretched from Maryland through Pennsylvania, over the Cumberland Mountains, to the Ohio River.

The Federal-aid Highway Act of 1916 was a landmark piece of legislation that authorized $75 million for use on highways primarily in rural areas. It required each State to have a State highway agency with engineering professionals to carry out the Federal-aid highway program. This provision led to the formation of State Highway Departments in all States and further institutionalized the role of the State in providing major highways.

The relationship between the new State Highway agencies and the Federal government that followed from the 1916 Act was strengthened by the Federal-Aid Highway Act of 1921, which created the State/Federal partnership—the hallmark of the program to this day.

Another major development was the use of fuel taxes to finance Federal and State highway programs. Beginning in the early 1900s, States and the Federal Government have increasingly relied on fuel taxes and other user fees to finance highway construction programs. The first Federal fuel tax was levied in 1932 at the rate of 1 cent per gallon. The rate varied between 1 and 2 cents per gallon until 1956 when the Highway Trust Fund was created. Since then, the Federal tax rate increased to its current level of 18.4 cents per gallon on gasoline, but the last excise tax increase was more than ten years ago. State fuel tax rates have followed a similar pattern.[11] During the era of Interstate Highway System construction, motor fuel tax increases were much easier to get approved than during the post-Interstate era when many States have had difficulty getting fuel tax increases approved by the electorate. The use of Federal user taxes like the fuel tax did not begin until July 1, 1956 (the first day of FY 1957). While the Federal fuel tax has indeed existed since 1932 and vehicle related taxes began even earlier in 1917, there was no connection between the revenue raised and highway funding.

Immediately after World War II, States increasingly recognized that modern, high quality highway systems were needed to meet growing demands for personal and commercial travel. The Pennsylvania Turnpike was the first of the modern highways to be constructed, and it was an immediate success. Between 1945 and 1955, many States, mainly located in the North and East, began to build turnpikes on their primary intercity travel corridors. These turnpikes typically were administered by public turnpike commissions or turnpike authorities that usually were not part of the State highway agency, but were separate State agencies. They were not private enterprises as many of the earlier turnpike companies had been. The tradition of publicly-provided highways had become so deeply ingrained that few thought of involving the private sector in financing and operating highways. But, States also recognized that motorists were willing to pay tolls for the comfort, convenience and speed provided by the new turnpikes. By issuing bonds and charging tolls States could construct the needed highways much sooner than if they had to finance them primarily from fuel tax revenues.

Indeed, the Federal-Aid Highway Act of 1956, although allowing 2102 miles of existing toll roads to be incorporated into the original Interstate System, prohibited the use of Federal-aid funding for the construction of new toll Interstate highways. Tolls were only permitted on new bridges, tunnels, and approaches, provided an agreement was signed that would require these facilities to become free upon collection of sufficient tolls to liquidate any outstanding debt (“free-up agreements”). Federal law has changed a number of times since 1956, with regard to the use of Federal-aid funding on the Interstate System and on other highway facilities. Currently, 23 U.S.C 301 continues to restrict tolling on federally aided facilities, except as provided under 23 U.S.C. 129 and two pilot programs.

Once construction of the Interstate System began, proposals for additional toll roads languished. By 1963, the last of the toll roads planned before Interstate System construction began opened, and few additional proposals were seriously considered for many years.

In the late 1980s some States began exploring the potential for the private sector to augment State highway construction programs. About this time, States also began exploring ways to expedite highway construction while maintaining quality and reducing the impact on the traveling public. Under the auspices of FHWA’s SEP-14, created in 1990, States began to evaluate several potential contracting options, including cost-plus-time bidding, lane rental, and the use of warranties for specific project features. States also began evaluating the use of design-build contracting, especially for the more complex projects that are being constructed today to shift cost exposure to the private sector design-build contractor. Use of alternative contracting techniques continues to grow around the country, primarily for projects with tight timetables or high impact on the traveling public.

In 1991, ISTEA was enacted and established a new vision for surface transportation in the United States. ISTEA permitted the use of tolls to a much greater degree on Federal-aid facilities, including allowing Federal-aid to be used to construct new, non-Interstate System toll highways. This expansion of the use of tolls also included a congestion pricing pilot program. For the first time, private entities were allowed to own toll facilities and States were allowed to loan the Federal share of a project's cost to another public agency or private entity constructing the project. This trend in giving States greater flexibility in utilizing innovative financing and operating methods continued with subsequent surface transportation acts. These further advances will be discussed later in this chapter.

ii. Transit

Public transportation in the United States was first developed by the private sector, starting with local and intercity coach (horse and carriage) services in the nineteenth century. Eventually it evolved into horse-drawn cars (trolleys) on rails, then electrified trolley and interurban transit systems. Many American cities initiated their electric service for homes and businesses on the spine of private trolley operations. Also, since many of the first trolley and interurban rail systems were developed to service real estate developments, the private sector had a significant hand in the creation and formation of many new towns and cities. However, by the late 1950’s most transit systems were in decline and they were taken over by their respective local governments. Today, the primary public/private partnership is in the provision of transit service under contract. The municipal entity contracts for some or all of its bus, rail or demand responsive service with a private sector provider.

Another activity that continues is the development around public transportation facilities. Congressman Andrew Young of Georgia inserted language in the National Urban Mass Transportation Act of 1974 (Public Law 93-503) that made certain kinds of transportation projects eligible for Federal reimbursement. Specifically, Section 3(a)(1)(D) provided Federal assistance for:

This kind of activity came to be known as “Joint Development” because it involved the joint use of public transportation property for development as well as public transportation service. Many communities are now using their transit stations and surrounding land for development. This may come about through a land sale to a private developer, but often it results from a partnership, where the transit agency builds part of a facility which the private developer finishes. The developer will pay the transit agency a market-based ground rent or provide a combination of rent and in-kind services.

In recent years, procurement has been an area of activity in which public-private partnerships could be fostered, as with Design-Build project development.

C. FHWA Initiatives to Promote Public-Private Partnerships

Over the last several years, interest in pursuing public-private partnerships has reemerged. The FHWA and FTA have undertaken a number of initiatives to explore the efficacy of public-private partnerships. Included in these initiatives are a number of Federal financing tools, as well as innovative contracting and management techniques. Some of these initiatives were developed within FHWA and FTA and others were developed pursuant to legislative direction. Figure 2.3 depicts these tools as a pyramid with the market-based projects appearing at the top of the pyramid (since there are fewer of these types of projects) and traditional, non-revenue transportation appearing at the bottom part of the pyramid, since most surface transportation projects fall into this category.

The types of public-private partnership mechanisms that FHWA and FTA have explored and that are described below fall generally into two categories: innovative contracting methods through which the private-sector assumes greater risks or decisionmaking roles, and financing tools through which the private sector helps provide access to sources of funding other than Federal funds. In addition, this section describes other activities undertaken, such as workshops and a task force to explore the viability of public-private partnerships.

i. Innovative Contracting–Special Experimental Project (SEP-14)

The FHWA established SEP-14 in 1990 at the recommendation of the Transportation Research Board. The purpose of SEP-14 is to identify, evaluate, and document innovative contracting practices that have the potential to reduce the life cycle cost of projects while maintaining product quality. Within the regulatory requirements of the Federal-aid highway program, there is some degree of flexibility and thus SEP-14 was developed to provide the States with a vehicle to explore new concepts in construction contracting. These concepts often involve new and expanded roles for the private sector, and many also provide strong performance incentives for the private sector. Most projects undertaken under the SEP-14 program, however, have not involved private sector financing of highway projects. Even when no private money is directly involved in the construction and operation of the SEP-14 projects, many of the special construction techniques used place far greater responsibilities on the contractor. Thus, because of the greater role assumed by the private sector, they are considered public-private partnerships in this report.

The FHWA initially approved several contracting techniques for evaluation under SEP-14:

In the early 1990s, the FHWA gave SEP-14 approval to hundreds of cost-plus-time bidding, lane rental and warranty projects. Since 1990, over 300 design-build projects have been approved under SEP-14. Most States have used at least one of the innovative practices under SEP-14. In 1995, based on the collective experience of the States, the FHWA decided that cost-plus-time bidding, lane rental, and warranty clauses were techniques suitable for use on a nonexperimental, operational basis.

On December 10, 2002, based on its experience with SEP-14 and as required by section 1307 of TEA-21, the FHWA issued a final rulemaking for the design-build contracting method. In keeping with the definition of a “qualified project” in section 1307, the FHWA Division Administrators were delegated the authority to approve design-build projects greater than $50 million on an operational basis and smaller design-build projects on an experimental basis under SEP-14. The FHWA’s 2002 final rule has two provisions that have a significant bearing on the use of Federal-aid highway funds and the Federal-aid approval process as it relates to the most innovative public-private partnerships. These two provisions are as follows:

The design-build regulations were crafted for the typical design-build project. For example, the provision contained in Section 636.109 regarding prior completion of the NEPA process is appropriate for most design-build projects where project concepts are well developed before the design-build contract is let. However, a few public-private partnerships are formed before project concepts have developed to a point where they can be analyzed in a NEPA document. In these unusual cases, the FHWA believes further flexibility may be warranted.

Therefore, in two cases, the FHWA again used SEP-14 to allow States to try alternative approaches. On February 27, 2004 the FHWA approved the Texas Department of Transportation (TxDOT) request for a waiver of many of the FHWA’s design-build requirements for the I-35 High Priority Trans-Texas Corridor Project. This waiver is significant in two important aspects. First, it will allow TxDOT to proceed with the procurement of the project developer in advance of the conclusion of the NEPA review process. To maintain an independent, unbiased NEPA review process, the TxDOT has contracted with an independent consultant to assist in the development of the NEPA document. Secondly, the I-35 waiver will also allow TxDOT to proceed with the procurement of the corridor developer at a very early stage in the project development process. It is expected that the final executed development agreement will contain provisions for the negotiation of scope and price as the project develops. Prior to executing the development agreement, the TxDOT and the FHWA Texas Division will develop formal procedures for verifying price reasonableness and developing an independent estimate. This procedure should ensure fair pricing for all work done under the development agreement. In addition, the FHWA allowed the Virginia DOT to proceed with the procurement of the I-81 corridor project subject to compliance with NEPA requirements.

It is anticipated that the use of public-private partnerships will continue to grow and the FHWA will support these projects with the appropriate SEP-14 related measures when necessary.

ii. Innovative Finance Program—Test and Evaluation Project (TE-045)

In response to Executive Order 12893 ("Principles for Federal Infrastructure Investment"), which establishes cost-effective infrastructure investment as priority for Federal agencies, and in recognition of the need to explore new financing strategies, the FHWA announced the Innovative Finance Program—Test and Evaluation Project (TE-045) in a Federal Register notice dated April 8, 1994. The term "innovative finance" describes techniques that supplement traditional highway financing methods. These techniques can provide mechanisms for the direct investment of private sector funds in a surface transportation project. They also may lay the foundation for a public-private partnership by providing a ready and secure source of funds that make a project more likely to attract private involvement. Alternatively, these financing techniques might precipitate the creation of a public-private partnership by providing funds for such a large project or number of projects that private sector involvement is needed to provide additional management and staff to supplement State resources.

The innovative financing program was established using statutory authority granted under Section 307(a) of title 23 of the U.S. Code (now 23 U.S.C. 502). Section 307(a) permits the FHWA to engage in a wide range of research projects, including those related to highway finance. As part of this research effort, the FHWA tested selected policies and procedures so that specific transportation projects could be advanced through the use of non-traditional financing concepts, many of which were later enacted into law in the National Highway System Designation Act of 1995.[12] These non-traditional funding concepts included applying private funds to the State match or allowing partial obligations on advance construction projects.

TE-045 was initially designed and subsequently implemented to give States a forum in which to propose and test those financial strategies that best met their needs to facilitate infrastructure investment. Projects advanced under TE-045 were identified by State-level decisionmakers as projects needing improvements, but facing real world barriers to financing. Since TE-045 did not make new Federal money available, its primary focus and ultimate measure of success was its ability to foster the identification and implementation of new, flexible strategies to overcome fiscal, institutional, and administrative obstacles faced in funding transportation projects.[13]

Throughout this process, the FHWA emphasized four overriding objectives: to increase investment, to accelerate projects, to improve the utility of existing financing opportunities, and to lay the groundwork for long-term programmatic changes. Two hallmark characteristics of the initiative have been to accomplish these ends through a State-driven process, and to accomplish them without the commitment of new Federal funds.[14]

Several types of financing tools were proposed by States and tested under TE-045. These include tools that provided expanded roles for the private sector in identifying and providing financing for projects, such as flexible matches and Section 129 project loans, which are discussed further in this chapter.

Although TE-045, by design, provided no new Federal funds to participating States, the initiative has nonetheless supported significant increases in investment levels. The use of investment tools such as flexible match and section 129 loans resulted in additional funding being available to accelerate high priority projects that would otherwise have been deferred, or used to advance projects that likely would never have been constructed in the absence of TE-045.[15] As of March 2004, more than 100 projects with a total construction value of $7 billion have been approved.

iii. Innovative Management of Federal Funds

This section discusses two innovative financing techniques: flexible match and toll credits. These two techniques enhance flexibility and maximize resources for highway projects that rely on grant-based funding. Although these techniques are not used exclusively for public-private partnerships, they can involve a significant role for the private sector.

1. Flexible Match

Flexible match allows a wide variety of public and private contributions to be counted toward the non-Federal match of Federal-aid projects. Flexible match allows States the opportunity to recognize the many tangible contributions made to the construction and maintenance of the highway system. States do not have to appropriate extra cash simply to use Federal-aid highway funds apportioned to them by law. The NHS Act and TEA-21 introduced new flexibility to the matching requirements for the Federal-aid program by allowing certain private donations of cash, land, materials, and services to satisfy the non-Federal matching requirement.

Flexible match provisions increase a State's ability to fund its transportation programs by:

In Maine, flexible match was used to advance the construction of an Auburn intermodal truck/rail transfer facility. The State of Maine partnered with local rail lines to build the truck-to-rail transfer facility in Auburn, about 40 miles north of Portland. The facility, now known as the Maine Intermodal Terminal, is a successful public-private partnership that was funded in large part—approximately $3 million—by the Congestion Mitigation Air Quality Improvement (CMAQ) program. The value of the private railroad's contribution of materials, equipment, and labor was credited toward the match.

2. Toll Credits

States may apply toll revenues used for capital expenditures to build or improve public highway facilities to earn toll credits. Toll credits are earned when a State, a toll authority, or a private entity funds a capital highway investment with toll revenues from existing facilities. The amount of toll revenues spent on non-Federal highway capital improvement projects earns the State an equivalent dollar amount of credits. To earn toll credits, States must pass an annual maintenance of effort test. By using toll credits to substitute for the required non-Federal share on a Federal-aid project, Federal funding can effectively be increased to 100 percent.

Toll credits provide States with more flexibility in financing projects. For example, by using toll credits, (1) Federal-aid projects can be advanced when traditional-matching funds are not available, (2) State and local funds normally required for matching may then be directed to other transportation projects, or (3) project administration may be simplified when a single funding source is used. States wishing to take advantage of the toll credit provision must apply toll revenues to capital improvements and meet the maintenance of effort test.

Toll credits are being used extensively by States with toll facilities. As of November 24, 2003, 21 States had accumulated $13.2 billion in toll credits. The credits are being applied in a variety of ways, depending on the State's needs. Missouri reserves its toll credits for situations where project matching funds are unavailable in order to effectively increase Federal funding to 100 percent of project costs. Ohio uses toll credits as a match on GARVEE projects and also shares its toll credits with local government agencies for both highway and transit projects. The Florida DOT has been applying toll credits on a statewide basis since 1993. Today Florida is using toll credits on almost every new Federal-aid project, so that most of its Federal highway program is effectively 100 percent federally funded, freeing up State dollars for State-administered projects. However, toll credits do not increase the funding available for transportation.

iv. Grant Anticipation Revenue Vehicles (GARVEEs)

A Grant Anticipation Revenue Vehicle or GARVEE is a debt financing instrument authorized under 23 U.S.C. 122. GARVEEs allow a State, a political subdivision of a State, or a public authority to pledge future Federal-aid highway funds to support the costs related to an eligible debt financing instrument, such as a bond, note, certificate, mortgage, or lease. States can utilize GARVEEs for a wide array of debt-related costs, including interest payments, retirement of principal, and any other cost incidental to the sale of an eligible debt instrument, incurred in connection with an eligible debt financing instrument. GARVEEs essentially enable debt-related expenses to be paid with future Federal-aid highway apportionments. Although not available to private entities, they can facilitate the formation of public-private partnerships by making financing available for transportation projects in a way that could attract greater private sector involvement.GARVEEs can provide an immediate and reliable source of funds that would make a project more attractive to the private sector. In addition, by providing access to this additional funding, GARVEEs can enable States to move forward on a large number of projects within a compressed time period. These projects create a short-term need for additional staff and management of these projects. Since it would not be cost-effective for most States to hire additional staff that would only be needed for a short time, the private sector can be called upon to provide these additional resources during the most active design and construction phases of the projects.

In general, projects funded with the proceeds of a GARVEE debt instrument are subject to the same requirements as other Federal-aid projects with the exception of the reimbursement process. Instead of reimbursing construction costs as they are incurred, the reimbursement of GARVEE project costs occurs when debt service is due. It is important to note that, in order to issue GARVEE bonds, States or the issuing entity must have the appropriate State authorizations related to debt issuance. States have the flexibility to tailor GARVEE financings to accommodate State fiscal and legal conditions.

The GARVEE financing mechanism generates up-front capital for major highway projects at tax-exempt rates and enables a State to construct a project earlier than it could using traditional pay-as-you-go grant resources. With projects in place sooner, costs are lower due to inflation savings and the public realizes safety, reduced congestion, and economic benefits. By paying via future Federal highway reimbursements, the cost of the facility is spread over its useful life, rather than just the construction period. GARVEEs can expand access to capital markets, as a supplement to general obligation or revenue bonds.

Candidates for GARVEE financing are typically large projects (or a program of projects) that have the following characteristics:

States are finding GARVEEs to be an attractive financing mechanism to bridge funding gaps and accelerate construction of major corridor projects. As of June 2004, 10 States and the Virgin Islands have issued just over $5 billion in GARVEE bonds. Figure 2.4 illustrates what States have issued GARVEEs, what States have the authority to issue GARVEEs, and considering or seeking the authority to issue GARVEEs as of June 2004. Ohio, the first State to leverage Federal dollars through GARVEEs, sold five GARVEE issues in the FY 1998-2004 period, totaling $439 million. The proceeds of these issues are helping to finance Spring-Sandusky corridor improvements, the new Maumee River Bridge, and the Southeast Ohio Plan.

Colorado is advancing a multi-billion dollar program of strategic statewide projects, including the multimodal Southeast Corridor project, through GARVEE financings. As of May 2004, the Colorado Department of Transportation has sold $1.5 billion in GARVEEs in five separate issues. In Arkansas, a total of $575 million in GARVEE bonds were issued in the 2000-2002 period, to help accelerate the financing of 380 miles of Interstate system highway improvements.

GARVEE financing has raised some concerns about the degree to which the commitment of future Federal-aid highway dollars is mortgaging the future. Financing large projects by borrowing against the future can be an effective element of a State’s transportation plan. However, borrowing imprudently can do damage in future years when major portions of Federal apportionments are used to pay back the GARVEE bonds and the market for smaller projects shrinks.[16] Recognizing this issue, most of the States with GARVEE enabling legislation have limits on the amount of GARVEE debt, such as a maximum amount that can be issued or coverage requirement tests.

v. Federal Credit Assistance

An increasing number of projects are being financed partially through some form of public credit assistance. Federal credit assistance programs include section 129 loans; low-interest loans, loan guarantees, and other credit enhancements from State Infrastructure Banks (SIBs); and credit assistance under the Transportation Infrastructure Finance and Innovation Act (TIFIA) program.

1. Section 129 Loans

Section 129 loans allow States to use regular Federal-aid highway apportionments to fund loans to projects with dedicated revenue streams.[17] A State may directly lend apportioned Federal-aid highway funds to toll and non-toll dedicated revenue projects. A recipient of a section 129 loan can be a public or private entity and is selected according to each State's specific laws and process. A dedicated repayment source must be identified and a repayment pledge secured. The Federal-aid loan may be for any amount, up to the maximum Federal share of 80 percent of the total eligible project costs. A loan can be made for any phase of a project, including engineering and right-of-way acquisition, but cannot include costs that were incurred prior to loan authorization. A State can obtain immediate reimbursement for the loaned funds up to the Federal share of the project cost. Loans must be repaid to the State, beginning five years after construction is completed and the project is open to traffic. Repayment must be completed within 30 years from the date Federal funds were authorized for the loan. States have the flexibility to negotiate interest rates and other terms of section 129 loans. The State is required to spend the repayment funds for a project eligible under title 23, United States Code. A section 129 loan serves as a project specific “mini-revolving loan fund” that recycles funds that are loaned to project sponsors by the State department of transportation. In all other ways, such repaid or revolving funds lose their character as Federal funds. This is a difference between section 129 funds and most SIBs.

States can use section 129 loans to assist public-private partnerships, by enhancing start-up financing for toll roads and other privately sponsored projects. Because loan repayments can be delayed until five years after the project is open to traffic, this mechanism provides flexibility during the start up period of a new toll facility.

Loans can also play an important role in improving the financial feasibility of a project by reducing the amount of debt that must be issued in the capital markets. In addition, if the section 129 loan repayment is subordinate to debt service payments on revenue bonds, the senior bonds may be able to secure higher ratings and better investor acceptance.

If a project meets the test for eligibility, a loan can be made at any time. Federal-aid funds for loans may be authorized in increments through advance construction procedures, and are obligated in conjunction with each incremental authorization. The State is considered to have incurred a cost at the time the loan, or any portion of it, is made. Federal funds will be made available to the State at the time the loan is made.

The President George Bush Turnpike Project in Texas exemplifies how a section 129 loan can play an essential role in the total financing package. This project links four freeways and the Dallas North Tollway to form the northern half of a circumferential route around the City of Dallas. Primary funding for this $940 million project included a low interest, long-term section 129 loan and revenue bonds. This $135 million loan was critical in ensuring the affordability of the project's senior bonds. Completion of this important beltway extension will be accomplished at least a decade sooner than would have been possible under traditional pay-as-you-go-financing. This project is the only project that has utilized a loan under 23 U.S.C. 129.

2. State Infrastructure Banks (SIBs)

State Infrastructure Banks (SIBs) are revolving funds administered by States that support surface transportation projects. A SIB functions much like a bank by offering loans and other credit products to public and private sponsors of title 23, United States Code, highway construction projects or title 49, United States Code, transit capital projects. Federally capitalized SIBs were first authorized under the provisions of the NHS Act.[18] The pilot program was originally available to only 10 States, and was later expanded to include 38 States and Puerto Rico (See Figure 2.5).[19] The TEA-21 established a new pilot program for the States of California, Florida, Missouri, and Rhode Island. Texas was subsequently added to the TEA-21 pilot program.[20] The initial infusion of Federal funds and State matching funds was critical to the start-up of a SIB, but States have the opportunity to contribute additional State or local funds to enhance capitalization. For the two SIBs authorized by TEA-21, Federal funds do not lose the Federal character when reused or revolved to a subsequent project. Retaining their Federal character means that Federal grant requirements apply to loans made from these reused or revolved funds. For the 39 federally-approved SIBs under the NHS Act, Federal grant requirements do not apply to reused or revolved funds.

SIB assistance may include loans (at or below market rates), loan guarantees, standby lines of credit, letters of credit, certificates of participation, debt service reserve funds, bond insurance, and other forms of non-grant assistance. As loans are repaid, a SIB's capital is replenished and can be used to support a new cycle of projects.

SIBs can also be structured to leverage additional resources. A "leveraged" SIB would issue bonds against its future revenues, increasing the amount of funds available for loans.

SIBs complement traditional funding techniques and serve as a useful tool to meet project financing demands, stretching both Federal and State dollars. The primary benefits of SIBs to transportation investment include:

Additionally, using SIB funding increases efficiency in investment because it loosens Federal constraints on a State's choice of projects, because the Federal funds used to capitalize the SIB are available to fund any project eligible under title 23, United States Code.[21] With fewer restrictions on its decisions, a State is free to choose projects with the highest overall economic returns and not just the highest returns within each category of Federal aid, as traditional financing would require.[22]

While the authorizing Federal legislation establishes basic requirements and the overall operating framework for a SIB, States have customized the structure and focus of their SIB programs to meet State-specific requirements.

A variety of types of financing assistance can be offered by a SIB, with loans being the most popular form of SIB assistance. As of March 31, 2004, 32 States had entered into 373 loan agreements with a dollar value of almost $4.8 billion.

3. Transportation Infrastructure Finance and Innovation Act (TIFIA)

The TIFIA program, which was enacted in 1998 as part of TEA-21, allows U.S. DOT to provide direct credit assistance to sponsors of major transportation projects.[23] The TIFIA credit program offers three distinct types of financial assistance—direct loans, loan guarantees, and standby lines of credits. These instruments are designed to address the varying requirements of projects throughout their life cycles. The amount of Federal credit assistance may not exceed 33 percent of total eligible project costs. The TIFIA project sponsors may be public or private entities, including State and local governments, special purpose authorities, transportation improvement districts, and private firms or consortia.

Any type of project eligible for Federal assistance through existing surface transportation programs (both highways and transit) is eligible for TIFIA assistance. In addition, the following types of projects are eligible: international bridges and tunnels; intercity passenger bus and rail facilities and vehicles; and publicly-owned intermodal freight transfer facilities on or adjacent to the National Highway System.

Projects must meet certain threshold criteria to apply for TIFIA assistance. The project's estimated eligible costs must be at least $100 million or 50 percent of the State's annual Federal-aid highway apportionments, whichever is less, or at least $30 million for intelligent transportation systems (ITS) projects. The project must be supported in whole or part from user charges or other non-Federal dedicated funding sources and be included in the State's Transportation Improvement Plan. The project is subject to all Federal requirements.

Qualified projects are evaluated and selected based on eight criteria. Before TIFIA assistance can be committed, the project must receive an investment grade rating on its senior obligations and have completed the Federal environmental review process.

TIFIA assistance provides improved access to capital markets, flexible repayment terms, and potentially more favorable interest rates than can be found in private capital markets for similar instruments. The TIFIA can help advance expensive projects that otherwise might be delayed or deferred because of size, complexity, or uncertainty over the timing of revenues. While TIFIA has been a valuable tool in developing projects, some TIFIA recipients have expressed concern that the credit approval process is too long and cumbersome.

The ability to use the TIFIA to partner with the Federal government for essential and costly projects improves access to the capital markets. Large, complex projects frequently encounter market resistance as a result of investor concerns about risk, particularly in the case of subordinate and secondary sources of capital. However, with the TIFIA, the government can be a flexible, patient investor by providing subordinate capital that may not be available through the capital markets on attractive terms. The flexibility provided by the TIFIA can then enable the senior debt to demonstrate higher coverage margins and attain investment-grade bond ratings. By facilitating the borrower's access to the capital markets through the TIFIA, major projects that might be delayed or accomplished with less efficiency can be advanced. Because TIFIA funding or credit assistance comes directly from U.S. DOT, projects built with TIFIA funding are subject to the Federal requirements applicable to regular Federal-aid projects. These Federal requirements also apply because of specific provisions in the TIFIA statute.[24]

Approved TIFIA projects range in cost from a $217 million intermodal facility improvement project to a $3.7 billion start-up toll road project. The TIFIA assistance is also being provided to transit and ferry systems, as well as bridge and rail corridor projects. Two of the approved projects are new toll facilities, including the 9.2-mile SR 125 South Toll Road in southern California and the toll road in central Texas that will span 122 miles. For these projects, the TIFIA credit assistance offers the project sponsors a way to boost debt service coverage and enhances senior obligations at an affordable cost. Also, flexible repayment terms will facilitate these toll financings, enabling a better match of loan repayments to expected revenue flows.

Because of their size, many of the approved TIFIA projects would have been either unfunded in the near term or had large funding gaps without TIFIA funding. For some projects, the TIFIA assistance enhanced market access and reduced borrowing costs; for others, it provided an alternative to grant funding, enabling the project sponsor to conserve regular Federal funds for smaller projects that could not be supported through user charges or dedicated revenue streams.

As of June 2004, $3.5 billion in TIFIA credit assistance has been made available to 11 projects, supporting over $15 billion in project costs.

vi. Workshops and Conferences

In order to educate and discuss public-private partnerships, the FHWA has periodically held workshops to bring all partners—Federal, State, local, and private—together. Not only have these workshops helped to focus attention on public-private partnerships, they also have presented an opportunity to discuss lessons-learned and to explore improvements that can be made to assist the formation and success of public-private partnerships.

In November 1991, about one month prior to the enactment of the first post-Interstate highway act, the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA), the FHWA convened a policy workshop about public-private partnerships. The purpose of the workshop was to focus attention on the broad range of issues and tradeoffs that may be associated with changes in public and private roles in the provision of transportation facilities and services.

The FHWA’s dialogue on public-private partnerships explored a very broad array of opportunities and challenges, with discussion ranging from “how-to” issues, such as the public sector’s role in overseeing subcontracts, to visionary possibilities of the private sector building and operating most projects and the public sector taking a subordinate role. Perspectives of a diverse group of workshop participants were shared with others in the FHWA’s 1992 report, “Exploring Key Issues in Public-Private Partnerships for Highway Development.”[25]

In November and December 2003, the FHWA sponsored three “Partnerships in Transportation Workshops” in Washington State, Minnesota, and Texas. A final report was issued on March 17, 2004, summarizing workshop discussions and conclusions.[26] Workshop participants included State and local elected officials, State and local transportation officials, and private sector representatives who have been involved in public private-partnerships. At the workshops, State transportation departments indicated the need for Federal leadership to forge and implement successful public-private partnerships. Despite significant experience with public-private partnerships since the 1991 workshop, some State transportation agency staff remained uncertain about public-private partnership basics, including how to select and define candidate projects, develop project solicitation documents, and negotiate with private entities. While some participants saw great revenue potential, others perceived public-private partnerships as the public sector abdicating its infrastructure responsibilities to private companies.

Given the complexities that can emerge with public-private partnerships, many felt that States should start with less complex projects involving simpler partnership and financing arrangements. Other conclusions and recommendations from workshop participants included holding additional educational workshops and training, creating a series of case studies on successful public-private partnerships, and developing model State enabling legislation for public-private partnerships.

Annually, the FHWA co-sponsors with the American Road and Transportation Builders Association the annual Public-Private Ventures in Transportation Conference. The conference includes presentations of interest to public-private partnerships, and, as part of the conference, FHWA conducts a transportation finance workshop.

The FHWA also periodically sponsors a comprehensive Transportation Finance Conference with the Transportation Research Board. To date, three conferences have been held in 1997, 2000, and 2002. The objectives of these conferences are: (1) to educate Federal, State and local officials in new transportation infrastructure and operations financing mechanisms, their structure, and the benefits and costs of implementing such techniques; and (2) to explore the development of additional new funding mechanisms and sources. As part of these conferences, the FHWA holds pre-conference workshops on the state of the practice of transportation finance. Additionally, each year the FHWA conducts a transportation finance workshop during the annual meeting of the Transportation Research Board.

vii. Safe, Accountable, Flexible, and Efficient Transportation Equity Act of 2003 (SAFETEA)

On May 14, 2003, the Administration transmitted the Safe, Accountable, Flexible, and Efficient Transportation Equity Act of 2003 (SAFETEA) to the Congress for consideration.[27] This legislation included several proposals that would encourage the formation of public-private partnerships. Subsequently, both the House of Representatives and the Senate introduced their own surface transportation reauthorization proposals.[28] These Congressional proposals included several concepts that were part of the Administration’s SAFETEA proposal. At the time of this report, Congress was still considering these surface transportation reauthorization bills. These provisions are discussed in greater detail in Chapter VI, U.S. DOT Recommendations.

viii. FHWA Public-Private Partnership Task Force

In October 2003, the FHWA formed a Public-Private Partnership Task Force, headed by the FHWA’s Chief Counsel, to explore ways the FHWA could address impediments to the formation of public-private partnerships and actions the FHWA should take to encourage their formation. The Task Force consists of representatives from FHWA program offices and the policy office, and it has explored opportunities to assist States interested in developing the use of public-private partnerships to meet growing demands for highway infrastructure.

State departments of transportation and the FHWA are structured generally to oversee highway contracts developed and bid under the traditional design-bid-build model. The vast majority of highway construction continues to be carried under this contracting model. Although this model is very efficient in monitoring traditional procurement methods, it allows little flexibility for projects that do not fall within the standard project requirements, and thus does not encourage innovation. The FHWA is rethinking its approach to innovative contracting and how it should oversee projects that are not procured under the traditional model. Issues that have been identified by the Task Force as potential impediments to public-private partnership formation that the FHWA should address include:

The Task Force continues to explore ideas for improving the FHWA’s support for public-private partnerships and plans on developing several new products by the end of 2004.

D. FTA Initiatives to Promote Public-Private Partnerships

Public-private partnerships in transit have taken three basic forms: private contracting of transit service; joint development; and turnkey procurements such as design-build or design-build-operate-maintain. Grant Anticipation Notes (GANs) or Bonds also have been used by public transit agencies to finance projects.

i. Private Contracting

Private contracting has supported public transportation service since the inception of the Urban Mass Transportation Administration (now the Federal Transit Administration (FTA)) in 1964. Although public transportation is now provided almost entirely through municipal and State funded entities, these same public transportation services could not function without the private sector. Public transportation agencies regularly contract for revenue service, vehicle and non-vehicle maintenance, administrative and support services, and systems development.

1. Revenue Service

The private sector often bids for the provision of park and ride services, particularly for start-up commuter rail or commuter bus operations. In large urban systems peak-hour express services may be contracted out. Today, most paratransit services for the elderly and persons with disabilities are provided under contract, as are van-pool services. Finally, some cities contract for their fixed-route, local service. In some cases, this includes commuter rail services, such as in Dallas/Ft. Worth or South Florida. In rural public transportation service, over 57% of obligations ($48.9 million) were expended for contracted service in 2003.

2. Vehicle Maintenance

In some transit agencies the opportunity may exist to contract out the entire vehicle maintenance function, particularly in a start-up transit service or when the number of vehicles is too low to make a full maintenance function economic. Some of the most typical contracted functions include engine and component rebuilds, rehabilitation services including seat repair and body work, tire maintenance, and routine vehicle servicing (vacuuming, washing, etc.)

3. Non-vehicle Maintenance

As non-vehicle equipment and facilities have become more sophisticated, they have required more specialized service. Also, with the advent of modularized components, off-site or contracted maintenance of these items has become economically attractive. These systems include fare collection equipment, radio and communications systems, data processing and intelligent traveler information systems.

4. Administrative and Support Services

Computerization has led to remote processing of many functions, including accounting and payroll, employee benefits management, marketing, risk management, auditing, and other support services.

5. Systems Development

Beginning with the 1970’s, some of the municipal transit agencies faced rising demand for service and had to consider system expansions and even entirely new services such as a light rail or commuter system. For even a major, multi-year project it may not be economically viable to employ and train all of the skill sets necessary to implement a new transit operation. Services that are contracted include planning, environmental analysis, architecture/engineering, and construction. In a few cases, this has included the entire range of activities—Design, Build, Operate and Maintain (DBOM). This is described further under innovative procurement mechanisms.

ii. Joint Development

Joint Development is the use of public transportation property originally acquired with Federal grant dollars for transit-related development. This may occur in the form of development in air rights above a transit station, or it may involve the use of land area adjacent to the station. A 1992 study commissioned by the Federal Transit Administration identified 117 projects nationwide, involving a combination of air-rights and ground lease arrangements.[29] These projects have generated ground rent, lease, or one-time access rights revenues for the public transportation provider. In these projects, the public transportation agency makes land or air rights available to a developer. In some instances, the agency is not able, under its charter, to participate in development activity (which would produce lease revenue), so it undertakes a cost-sharing agreement with the developer, who agrees to perform certain functions such as station maintenance, security, or access control, in exchange for the development opportunity. In most cases, however, the transit agency has collected substantial revenues. The Washington Metropolitan Area Transit Authority (WMATA) air rights agreement in Bethesda, Maryland for example, produces $1.6 million in rents annually.

A survey undertaken in 2003 by Robert Cervero for the Transportation Research Board[30] revealed that, among 29 transit systems responding, over 100 joint development projects were identified. Of the respondents, 17 were rail systems and 12 were bus only systems. While the rail system projects predominated, nevertheless, 18 joint development projects were identified around bus facilities. These included mixed-commercial development, office, institutional, residential, and civic facilities. One such example is the Center Station at John Deere Commons in downtown Moline, Illinois. Developed around the MetroLINK bus transfer center, it includes offices, a convention center, hotel, parking structure, and various pedestrian amenities. MetroLINK receives a ground rent, as well as a negotiated private contribution, and construction and operating cost sharing.

Another, more complex example, is the Memphis Area Transit Authority’s (MATA) Central Station redevelopment on South Main. This began as one of two exemplary train stations in Memphis, then a major railroad hub. However, by the end of the 1950’s one station—Union Station—had been torn down and Central Station was in severe decline. It was not until the early 1990’s that the station, the last structure designed by Daniel Burnham, finally became the focus of a major redevelopment effort. Using a combination of Federal transit grant funds, investment from a tax credit corporation, and a contribution from Amtrak, MATA undertook an historic preservation project. An integral part of the financing came from historic preservation tax credits. As a public agency, MATA could not realize these credits. It therefore created a limited liability partnership that would own and develop the station and other historic buildings on its 17-acre site. The developer for the project was the Alexander Company.

The Central Station project produced 63 one- and two-bedroom apartments, 12,000 square feet of storefront commercial space, a restored Main Hall and conference space which is offered for rent, a new station for the Main Street Trolley, and an eight-bay, canopy-covered bus transfer center for MATA. Amtrak received a new, canopy-covered platform for the City of New Orleans train, as well as state of the art ticketing and baggage facilities. The apartments were fully rented before the refurbishment was completed, and the project has led the revival of the South Main historic district. Rents and development revenues generated by the MATA subsidiary return to MATA as part of its local funding base.

The public-private partnerships do not always involve the public transportation agency directly. In Washington, DC, for example, the Union Station redevelopment took place through an act of Congress, under the leadership of the U.S. Secretary of Transportation. In 1981, Congress enacted the Union Station Redevelopment Act of 1981, which called on Transportation Secretary Elizabeth Dole to develop an ambitious plan for the commercial development of the station with the goal of making it financially self-sufficient. A unique public-private partnership was formed to faithfully restore the building to its original state and create a viable mixed use transportation center.

Following three years of renovation at a cost of $160 million, Union Station reopened on September 29, 1988. Union Station was redeveloped as a bustling retail center and intermodal transportation facility, connecting the Washington Metro with Amtrak, the Maryland Area Rail Commuter, the Virginia Railway Express, intercity buses, and Metro bus service. In addition to over 130 unique shops and restaurants, Union Station is the hub for Amtrak's headquarters and executive offices.

Today, Union Station is one of the most visited destination in the nation's Capitol with over 25 million visitors a year. World-class exhibitions and international cultural events are hosted here for the public to enjoy. Private special events such as the Presidential Inaugural Ball and citywide galas are celebrated in the grand halls. In 2003, the Union Station operation generated over $1 million in lease revenues from the retail and food establishments within its confines. WMATA’s involvement is in the form of a fee simple ownership of the ground-level entrance to the subway station, and a connection agreement from within Union Station.

AASHTO	American Association of State Highway and Transportation Officials
CBO	Congressional Budget Office
CEQ	Council on Environmental Quality
CFR	Code of Federal Regulations
CPTC	California Private Transportation Company
DOT	Department of Transportation
EIS	Environmental Impact Statement
ESA	Endangered Species Act
FHWA	Federal Highway Administration
FOIA	Freedom of Information Act
FTA	Federal Transit Administration
GAN	Grant Anticipation Notes or Bonds
GAO	General Accounting Office [1]
GARVEEs	Grant Anticipation Revenue Vehicles
HBA	Highway Beautification Act
HOV	High Occupancy Vehicle
HUD	United States Department of Housing and Urban Development
IFB	Invitation to Bid
ISTEA	Intermodal Surface Transportation Efficiency Act of 1991
LTM	Louisiana TIMED Managers
MPO	Metropolitan Planning Organization
NEPA	National Environmental Policy Act of 1969, as amended
NHS Act	National Highway System Designation Act of 1995
NHS	National Highway System
NMSHTD	New Mexico State Highway and Transportation Department
OCTA	Orange County Transit Authority
PDC	Project Development Contractor
PPTA	Public-Private Transportation Act of 1995 (Virginia)
RFP	Request for Proposal
RFQ	Request for Qualifications
RMAs	Regional Mobility Authorities
RSPA	Research and Special Programs Administration
SAFETEA	Safe, Accountable, Flexible, and Efficient Transportation Equity Act of 2003
SEP-14	Special Experimental Project
SCDOT	South Carolina Department of Transportation
SIBs	State Infrastructure Banks
STP	Surface Transportation Program
TEA-21	Transportation Equity Act for the 21^st Century, as amended
TIFIA	Transportation Infrastructure Finance and Innovation Act
TxDOT	Texas Department of Transportation
U.S.C.	United States Code
U.S.FWS	United States Fish and Wildlife Service
UDOT	Utah Department of Transportation
U.S.DOT	United States Department of Transportation
VDOT	Virginia Department of Transportation
WSDOT	Washington State Department of Transportation
WVDOT	West Virginia Department of Transportation

UNITED STATES DEPARTMENT OF TRANSPORTATION

REPORT TO CONGRESS
ON
PUBLIC-PRIVATE PARTNERSHIPS

December 2004

Table of Contents

Acronym List

Definitions