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Concept Design for an Online Information Source for Major Surface Transportation Projects: A Discussion Paper

June 2017
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2 Identifying the Projects to be Included in the Online Information Source

The primary purpose of the online information source is to document the performance outcomes of P3 and non-P3 transportation projects to enable analyses across different procurement types. To facilitate such analyses, it would be ideal to begin the assembly of the information source by obtaining parallel information on projects of comparable size and levels of complexity, noting that in some cases individual projects may be implemented through a series of procurements over time.

In order to accomplish this, it is recommended that the information source focus on highway improvements that have been designated as Major Projects by FHWA. Since 2005, FHWA has required DOTs sponsoring highway projects with a total project cost of $500 million or more to complete its Major Projects process in order to qualify to receive federal funding. Project owners must demonstrate that these projects have been carefully planned. The Major Projects process requires project sponsors to demonstrate that: 1) costs have been estimated as accurately and meticulously as possible; 2) risks have been carefully considered and mitigated; 3) funding requirements and strategies have been clearly defined; and 4) the implementation of the project has been carefully planned.

Through the different phases of project delivery, project owners are required to submit financial and project management plans and are subject to various FHWA review processes before Federal funding can be released for the project. The FHWA Major Project requirements include:

  • Cost Estimate Review
  • Financial Plan
  • Project Management Plan

Using the different data collected through the major projects process, FHWA has assembled an Active Project Status Report identifying active major projects since 2005. These projects receive federal funding and have a capital cost of $500 million or more. One-hundred-and-four of these projects were listed as active as of February 2017 and an additional 33 projects have been completed. Together, these projects represent the largest and most complex transportation improvements undertaken in the United States since 2005. They include design-bid-build procurements, design-build procurements and Design-Build-Finance-Operate-Maintain (DBFOM) P3 concession procurements. Work has not yet begun on some of the projects included in the Active Project Status Report. Therefore, the list should be reviewed to identify projects for which information on actual project outcomes may not yet be available. Some projects are being built using multiple procurements as funding becomes available.

A listing of the projects included in the FHWA Active Project Status Report is included in Appendix A of the discussion paper. General information on the three project types proposed to be included in the information source follows.

2.1 Design-Bid-Build Projects

Design-bid-build is the traditional delivery model that most DOTs have used to procure the vast majority of transportation projects in the United States. With this approach, DOTs enter into separate contracts for project design and project construction. Projects are designed to 100 percent completion as part of the design procurement. Qualified contractors then bid on the construction contract, with the project sponsor usually awarding the job to the bidder submitting the lowest cost bid. Once design-bid-build projects are completed, their public sector sponsors are responsible for their ongoing maintenance and operation. Unlike P3 concessions, design-build procurements do not involve ongoing maintenance and operations needs. Therefore, to the extent possible, it would be useful for the information source to include data on asset condition for design-build projects.

2.2 Design-Build Projects

Design-build project delivery combines design and construction functions into a single contract, rather than as two independent services performed consecutively by separate entities. With design-build procurements, owners execute a single, fixed-price contract for both architectural/engineering services and construction. The design-build entity - also known as the "constructor" - may be a single firm, a consortium, joint venture or other organization assembled for a particular project. However, highway and transit design-build teams are almost exclusively contractor led. With design-build delivery, the design-builder assumes responsibility for completing a final design for projects and undertaking construction activities for a lump-sum price. As such, the design-builder also assumes the financial risks associated with possible cost overruns. Most design-build contracts also include penalties for schedule delays and bonuses for the early completion of construction. The project sponsor remains responsible for financing the project, and operates and maintains it after construction is complete. It should be noted that nearly all P3 concessions also utilize fixed-price design-build contracts.

Given that they are fixed price agreements, design-build contracts incentivize the design-builder to innovate and identify strategies to streamline construction costs. Project completion can also be accelerated by undertaking some design and construction activities concurrently rather than sequentially, as is the case with design-bid-build projects. This has the potential to result in further cost reductions by shielding projects from the risk of inflation and commodity cost escalations and accelerating project completion. Project designs are generally 10 to 30 percent complete at the time most design-build procurements are let, and design-build procurements contain comprehensive performance requirements that the bidder's final design must meet. (The degree to which this is true may vary from project to project and state to state). This structure can provide the design-builder with the flexibility to innovate and find the most cost effective solutions both in terms of project design and construction techniques.

The award of design-build contracts is usually made on a best value basis that takes price, technical quality and the qualifications of the proposing teams into consideration. Under the right conditions, design-build procurements may result in cost reductions compared to the traditional design-bid-build approach and accelerate the completion of projects. Unlike P3 concessions, design-build procurements do not involve ongoing maintenance and operations needs. Therefore, to the extent possible, it would be useful for the information source to include data on asset condition for design-build projects.

2.3 P3 DBFOM Concession Projects

Under the right conditions, P3 procurements may be expected to provide project sponsors with the cost and acceleration benefits of design-build procurements and the added lifecycle benefits of the DFBOM approach. In addition, they are expected to transfer lifecycle performance risk to the private sector partner and provide owners with access to new sources of financing, including private sector equity and global commercial debt possibilities.

There is a great deal of variety in DBFOM arrangements in the United States, especially the degree to which financial responsibilities are actually transferred to the private sector. One commonality that cuts across all DBFOM projects is that they are financed by equity and debt leveraging revenue streams dedicated to the project.

While P3 project delivery has been the subject of extensive discussion among transportation and public policy professionals, the number of P3 projects that have been implemented in the United States is relatively small. As of December 2016 25 new-build highway and transit P3 projects have either opened to service or reached financial close in the United States. Two different revenue sources have been used to leverage financing for P3 concessions. The majority of existing P3 concessions use toll revenues to raise project financing. Since 2009, a growing number of P3 concessions have been financed using periodic availability payments paid by the project sponsor to the private partner. The financing raised from both of these revenue streams is also often supplemented by grants from project sponsors and other contributions, such as right-of-way or complementary construction projects. The two P3 concession models are discussed in further detail in the following sections.

2.3.1 Real Toll Concessions

DBFOM projects leveraging toll proceeds are commonly referred to as "real toll" concessions. To date, 14 real toll concession projects have opened to service or reached financial close in the United States. Two of these projects have since been purchased by the public sector. With these arrangements, the private sector partner has the right to collect toll revenues during the concession period but bears the risk that toll proceeds may not meet forecasted levels. It assumes the risk that the funds generated by the project will not be adequate to pay the underlying project debt and interest and make a fair return on its investments of time, expertise and equity. To protect the public sector interest in the event of robust revenue generation, some concession agreements can include a revenue-sharing provision between the private partner and public sector if revenues exceed certain specified thresholds. In some cases, minimum revenue guarantees to private partners are necessary in order for P3 projects to advance. These mechanisms can take the form of a Developer Ratio Adjustment Mechanism (DRAM), which is available to the private partner if toll revenues are insufficient to cover operational and/or debt service costs over specified periods of time.

The real toll concession model has been used to develop three greenfield toll roads in corridors that did not have highway facilities. Two real toll concessions have been used to develop water body crossings, and nine have developed priced managed lanes. This last group of real toll projects involve designated lanes within existing highway rights-of-way where the flow of traffic is managed by restricting vehicle eligibility, limiting facility access, and collecting variably priced tolls. Toll rates may vary in real time based on actual traffic conditions or according to a fixed schedule; this meters the flow of paying vehicles in order to maintain a desired level of service and predictable travel times on the priced managed lanes.

2.3.2 Availability Payment Concessions

A total of 11 P3 concession projects that have opened to service or reached financial close have been funded with availability payments made by the public sector sponsor to private development partners. The sponsor pledges availability payments to compensate the concessionaire for its role in designing, constructing, financing, operating, and maintaining the facility for a set time period during which it receives fixed annual payments, which may be indexed. Availability payments are often used for projects that are not tolled or in situations where the owner wishes to retain control over toll rates or if toll revenues are not expected to cover debt service costs. Owners make the availability payments to their private partners using public funds that are prioritized ahead of other needs throughout the concession period. Funds for the availability payments may be obtained from a revenue pledge or subject to appropriations. When they involve the construction of toll facilities, the public sponsor may apply the toll revenues to the cost of the availability payments.

The ongoing availability payments depend on the private partner meeting operational performance standards. If the private partner does not meet the required standards, the amount of the availability payment is reduced. Tiered regimes for non-compliance are typically used before payments are reduced.

The availability payment approach has been used to develop two transit projects, as well as tolled and non-tolled highways, managed lanes, major crossings, and a bridge replacement program.

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