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.
In SAFETEA, the Administration recommended:
1. Tolling: Establishing a variable toll pricing program that would permit tolling on any highway, bridge, or tunnel, including the Interstate System, to manage congestion or reduce emissions; easing the eligibility requirements for the Interstate Rehabilitation and Reconstruction Program; and allowing States to permit single occupancy vehicles on high occupancy vehicle lanes so long as time-of-day variable charges are assessed (so called HOT lanes);
2. Private Activity Bonds: Allowing State and local governments to use up to an aggregate total of $15 billion in private activity, tax-exempt bonds to pay for projects eligible under titles 23 and 49 of the United State Code that serve the general public;
3. Environmental Streamlining: Streamlining the environmental process without substantively changing environmental protection;
4. TIFIA: Lowering the project cost threshold for TIFIA projects to $50 million;
5. Design-Build: Eliminating the $50 million threshold for design-build projects;
6. Commercialization of Rest Areas: Establishing a pilot program to allow States to permit commercial operations at existing or new rest areas on Interstate System highways; and
7. Debt Service Reserve: Allowing public transportation agencies to obligate capital grant funds for a debt service reserve, to lower the cost of locally-issued bonds.
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.