In August of 1999, the Massachusetts Legislature authorized $385 million for Route 3 North to make a number of improvements to this busy highway, which stretches from Burlington, Massachusetts to the New Hampshire border. These improvements included an additional travel lane in each direction, improvements on 13 interchanges, the replacement of 40 bridges, and the addition of a median shoulder and 30-foot clear zone. The design-build-operate delivery method of the project was the first of its kind in the State.
The authorizing legislation allowed the contracting team to form "a special purpose entity" to finance the Route 3 North Project, enabling the team to secure private financing. The developer was then selected on a "best value" basis, which looked at a number of factors other than just the design-build bid price. These factors included project schedule, approach to maintenance of traffic, quality of design, approach to construction quality assurance, proposed plan of finance, and approach to addressing environmental permitting issues.
Due to Massachusetts' commitments to the Central Artery/Tunnel Project in Boston, a project of this magnitude would not have been possible through traditional financing options. Had the project been publicly financed, roughly 25 percent of the annual statewide highway budget would have had to be diverted to pay for the improvements. With the innovative design-build-operate strategy, however, the contracting firm was able to develop its own financing strategy and secured privately funded bonds to fund construction on the project. The Commonwealth also benefited from lower interest rates when the Route 3 North Transportation Improvements Associated purchased bond insurance, resulting in insured ratings of AAA by Fitch and Standard & Poor's (compared to the Commonwealth's general obligation bond rating of AA-).
The bond size was reduced by an estimated $54 million due to three components of the financing plan. First, by scheduling annual lease payment due dates well into Massachusetts' fiscal year, it was possible to eliminate the need for a liquidity debt service reserve. Second, Salomon Smith Barney, the project's senior financing partner, made an up-front payment to the Association of nearly $9 million in connection with the forward purchase agreement. Third, the developer served as co-insurer for the project risk insurance, lowering the project's insurance costs.
The project finance plan allowed for the developer to generate non-project revenues through surface, sub-surface, and air rights. The developer also shares in the sale of fiber optic rights from the miles of fiber optic cable installed during construction. Other plans for non-project revenue include the construction and sublease of a service plaza, predicted to generate $500,000 per year.
The design-build-operate system also allowed the Route 3 North project to be completed in 42 months, rather than the initially estimated nine years, cutting the delivery time by more than half. By allowing the same company to design, build, and finance the project, the project was not burdened with the usual costs of information transfer and other problems associated with multiple contractors.