States are looking toward innovative contracting as a new and more efficient approach to respond to the increase in transportation capacity causing a continuing need for maintenance of current roads and bridges and the development of new facilities. The amount of public funding available to state and local transportation agencies has failed to keep up with the increasing need to invest in highway construction, operation, and maintenance projects. This increasing demand for investment in new and existing highways has been spurred by a variety of factors, including traffic congestion, aging infrastructure, population growth, and changing development patterns. In addition, the purchasing power of the traditional public funding mechanism for highway investment-the gas tax-has de-creased as a result of the increasing fuel efficiency of motor vehicles, political resistance to increasing the gas tax, and further depletion of the Highway Trust Fund, which is used to allocate federal monies for highway investment. As a result, the use of private sector capital, expertise, and other resources to design, construct, operate, or maintain public highway projects has become a more attractive option to state and local highway officials. In situations where the private sector is willing to contribute debt or equity financing, the potential benefits include access to private capital, which can supplement or even replace the need to obtain public financing for the project.
In addition to private-sector resources, the possibility of implementing a highway improvement project through a nontraditional contractual arrangement with the private sector-namely, an arrangement other than the traditional "design-bid-build" contracting approach that has been used historically in the highway sector-offers a number of potential benefits to state and local highway agencies. These potential benefits include accelerated project completion, cost savings, and improved efficiency, quality, and system performance. These potential benefits are created by allocating project risks (such as schedule delay, material cost, or quality of workmanship) to the project participant best able to manage those risks and by rewarding the private sector for accepting those risks. In theory, all of these potential benefits should enable state and local highway officials to use their constrained public resources in a more efficient and effective manner, thereby allowing more highway projects to be completed with less public expenditure.
There have been a number of public-private partnerships (PPPs) in the highway sector in the last several years. These projects have ranged from the long-term lease of existing toll roads (such as the Chicago Skyway1 and the Indiana Toll Road transactions) to the increasing use of design-build, design-build-operate-maintain (DBOM), and other innovative project delivery methods (such as the Utah Department of Transportation's reconstruction of I-15 through the Salt Lake Valley using a design-build (D/B) contract).2 These projects have been implemented on highways built in whole or in part with federal funds (so-called "federal-aid highways"), whether they are part of the federal Interstate System, state and local highways, or bridges and tunnels.
Many but not all of the recent PPP arrangements in the U.S. highway sector have involved some form of direct user fees, particularly where the private sector participates in the financing of the project and seeks to use the revenue generated by the user fees to recoup its investment. These user fees can include flat-fee tolls or some form of congestion or variable pricing that varies by time of day (e.g., a peak-hour premium) or level of traffic congestion. Such tolling and pricing techniques can reduce traffic congestion by providing financial incentives to use alternative routes or modes of transportation (such as public transit).
Congress has established a number of programs that authorize the use of tolling, pricing, and PPPs on federal-aid highways. Moreover, the U.S. Department of Transportation (USDOT) has promoted PPPs as a significant tool available to state and local highway agencies for supplementing public funding for infrastructure and reducing traffic congestion. In light of the foregoing, there is a widespread expectation that the use of PPPs in the U.S. highway sector will increase substantially in the next few years.
However, there remain significant political and legal impediments to the successful implementation of PPPs in the highway sector. The primary "political" concerns relate to the transfer of a public asset to private control (particularly if the operator of the highway is a non-U.S. company) and the fear that the private operator will increase tolls or other user fees based on profit motives rather than public policy objectives. These concerns primarily relate to long-term lease arrangements and not necessarily to design-build or long-term operating and maintenance contracts that give the private sector less discretion over public policy matters.
Common legal issues are associated with the implementation of public-private highways. As of July 2008, 23 states have legislation authorizing PPPs. Many states do not have legislation authorizing the use of nontraditional project delivery methods for highway projects. Although the use of toll and other pricing revenues is a common way to finance private participation in highway projects, there remain significant restrictions under federal and state law on the ability to implement such direct user fees in particular circumstances. Other potential legal issues arise out of limitations on public and private financing methods, environmental review requirements, labor and employment laws, and public procurement standards. Project risks must also be allocated between the public and private sectors in the PPP agreement.
This introduction provides a broad overview of common legal issues associated with implementing highway PPPs and possible solutions implemented to comply with those legal requirements in other U.S. highway PPP projects. Section II examines in detail the different types of PPPs that can be implemented in the highway sector, and Section III presents an overview of representative projects. Section IV reviews the existing literature on highway PPPs. Section V provides a detailed analysis of the major legal issues associated with high-way PPPs, and Sections VI and VII focus on lessons learned and conclusions from this research.
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1 See http://www.chicagoskyway.org/about/.
2 See Don Kimball, Utah Dep't. of Transp., I-15 Case Study (Design-Build Contracting Strategy), Pentagon Reports, June 11, 1999, available for ordering at http://www.stormingmedia.us/53/5327/A532763.html.