California was one of the pioneers in implementing PPPs in the highway sector. In 1989, the California legislature passed Assembly Bill 680 (AB 680), which authorized the California Department of Transportation (Caltrans) to approve up to four geographically dispersed pilot projects across the state involving BOT projects that would be financed solely by the private sector. Under the legislation, a private entity that funded the development and implementation of a highway toll project was entitled to operate the facility for up to 35 years and then transfer it back to the state. The legislation established a maximum rate of return for the private entity and mandated that excess revenues collected through tolls would be used to reduce project debt or returned to the state. AB 680 also established an "absolute protection zone" in the 3-mi area adjacent to the centerline of each BOT project corridor. Within this protection zone, California was prohibited from making any capital improvements to alternate public routes. The zone served to prevent anticipated project revenues from being reduced by competing routes.
In 1991, Caltrans executed agreements with private firms for one BOT pilot project in Northern California and three BOT pilot projects in Southern California. To date, only two of these four demonstration projects have been implemented-State Route (SR) 91 Express Lanes in Orange County and SR-125 in San Diego County. The vastly different results produced by the implementation of SR-91 and SR-125 provide some instructive lessons for both public- and private-sector entities considering highway PPP arrangements.
The SR-91 Express Lanes project was the first congestion-priced highway facility to be proposed in the United States. The project consisted of four express toll lanes that were built within the median of SR-91 (an existing state highway) between the Orange/Riverside County line and the Costa Mesa Freeway (a distance of approximately 10 mi). The Express Lanes project was financed in its entirety by a private consortium at a total cost of $135 million and opened for traffic using fully automated tolling technology in December 1995. The private consortium was able to expedite the environmental review process by obtaining and supplementing the National Environmental Policy Act (NEPA) documents prepared by the Orange County Transportation Authority (OCTA) for a proposed HOV project to address the design changes and tolling arrangements required for the express lanes project. The express lanes were constructed in about 14 months, and Caltrans has estimated that the project would not have been built until 2001 without private-sector involvement.43
The SR-91 agreement between Caltrans and the private consortium provided a 35-year franchise from the date of opening, specified that the maximum rate of return to the private operator could not exceed 23 percent, stipulated that Caltrans would not build competing road capacity within a 3-mi "protection zone" adjacent to the express lanes, and provided that traffic enforcement and facility maintenance would be pro-vided by the state on a reimbursement basis. As provided in the authorizing legislation, any state expense incurred in the development and implementation of such a BOT project had to be reimbursed by the private-sector participant.
Despite the successful implementation of the SR-91 Express Lanes project, the PPP arrangement ran into problems several years later as concerns grew about the contractual restrictions on capacity improvements in the absolute protection zone and changes in the ownership of the private consortium. Several lawsuits were filed against Caltrans and the private contractor as a result of the noncompete restriction, and Caltrans ultimately was forced to make improvements to the toll free lanes on SR-91. In 2002, as a result of the lawsuits and growing public opposition, the California legislature passed Assembly Bill 1010 (AB 1010) which authorized OCTA to buy out the private franchise, eliminated the absolute protection zone, and required the facility to become toll free at the end of the 35-year term. AB 1010 prohibits OCTA from transferring the franchise and prohibits Caltrans from entering new franchise agreements without legislative approval.
Since OCTA took possession of the SR-91 express lanes in January 2003 after purchasing the franchise from the private consortium for $207.5 million, a number of changes have been made to the congestion pricing policies. In May 2003, OCTA adopted a policy allowing express lane users with three or more persons per vehicle to ride free except during "super-peak" hours, when they pay half of the posted toll rate. In addition, OCTA adopted a "congestion management" toll pricing policy in July 2003 that is designed to optimize the number of vehicles that can safely travel on the express lanes at free flow speeds by setting lane prices at a level that maintains optimal throughput. As noted above, the express lanes are fully automated, and customers pay tolls from prepaid accounts using a pocket-sized transponder mounted on the inside of their vehicle's windshield. This electronic toll collection technology eliminates the need to stop and pay tolls at traditional tollbooths, thus contributing to the free flow of traffic. OCTA estimates that the SR-91 express lanes have saved customers over 32 million hours of commuting time and produced approximately $480 million in economic productivity and quality-of-life benefits for its customers since opening at the end of 1995.44
In contrast to the SR-91 toll-lane project, SR-125 involves the construction of a new 12.5-mi highway facility between SR-905 near the Mexican border and SR-54 in San Diego County. The 35-year franchise for SR-125 was awarded in 1991 to a private consortium led by Parsons Brinckerhoff (PB). However, it took 9 years for the project to receive final environmental approval as a result of intense public reviews, various legal challenges, the identification of endangered species and anticipated loss of wildlife habitat in the project corridor, and the resistance of several federal agencies, including the Army Corps of Engineers and the Environ-mental Protection Agency. Under the agreement with Caltrans, the PB consortium assumed all risks associated with obtaining environmental clearance. Thus, the franchise holders incurred significant costs over the 9-year period overcoming various legal and institutional challenges to the project. In addition to these out-of-pocket costs, the implementation costs escalated as a result of the delay and toll revenues that could have been collected had the project stayed on schedule were lost. As a result, the original PB consortium sold its interest in the franchise to Macquarie in September 2002 before any construction had begun.
The SR-125 project consists of two segments. The first segment is the 9.5-mi southern segment (also referred to as the "South Bay Expressway) that is being constructed as a privately financed and operated toll road. Macquarie will finance the construction of the South Bay Expressway for $635 million using $400 in commercial bank loans, $140 million from TIFIA loans45 (the first ever provided to a private toll road development), and the remainder from private equity capital. The flexible repayment terms on the TIFIA financing (including deferred interest and principal) will reduce debt service pressure during the early years of the loan, and the commercial line of credit will serve as a traffic guarantee during the first 10 years of operation. Once operational, the South Bay Expressway will use an electronic toll collection system and the toll revenue will be used to repay the financing. The second segment is the 3.2-mi northern segment that will connect the South Bay Expressway with SR 54. The northern segment (also referred to as the "San Miguel Connection") is being publicly financed with $139 million in regional tax revenue and federal funds. The San Miguel Connection will operate as a non-toll freeway, without tolls.
Under the innovative DBFO contract originally executed by Caltrans in 1991, Macquarie is responsible for design, construction, and financing of the South Bay Expressway toll road and also is responsible for the design and construction of the San Miguel Connection. Upon completion of construction, ownership of both segments will transfer to the State of California. However, Macquarie has a 35-year franchise to lease back and operate the toll road and will contract with Caltrans to provide maintenance and with the California Highway Patrol to provide routine patrol services and incident management. In addition, Macquarie will establish and collect tolls on the South Bay Expressway and may retain any toll revenues remaining after expenses and debt service as a return on its investment, subject to a cap of 18.5 percent on total funds invested in the facility. The contract also provides additional financial incentives if average vehicle occupancy on the toll road increases beyond certain thresholds. 46
Macquarie has contracted with a joint venture of construction contractors (Flour Daniel and Washington Group) to design and construct both the South Bay Expressway and the San Miguel Connection. The construction is occurring under two separate D/B contracts providing fixed-price and fixed-delivery schedules. The construction began in May 2003 and the toll road was operational in November 2007. Both segments will initially have two lanes of travel in each direction, al-though the design allows for additional lanes to accommodate traffic growth, and a wide median runs the full length of the project to allow for future carpool lanes or transit. Land developers have dedicated approximately 70 percent of the right-of-way for the toll project, a value of approximately $40 million. The San Diego Regional Planning Agency (SANDAG) has estimated that public monies to fund the South Bay Expressway would not have been available until 2020 or later.47
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43 USDOT Report, supra note 5, at 50.
44 For more information on the SR-91 Express Lanes, see the Express Lanes' Web site at http://www.91expresslanes.com/learnabout/snapshot.asp.
45 Although the authorizing legislation for the SR-125 toll road project (AB 680) prohibited the use of state or federal funds, the TIFIA loan is permissible because toll revenues will be used to paid the entire debt service costs of the loan. The sole purpose of the TIFIA loan is to reduce the cost of borrowing during project development and toll revenue ramp up.
46 For additional detail on the SR-125 project, see FHWA Of fice of Policy and Governmental Affairs, Case Studies of Transportation Public-Private Partnerships in the United States(July 2007) (FHWA Case Studies), at 3-76-3-86; see also FHWA Case Study: South Bay Expressway (SR-125), available at http://www.fhwa.dot.gov/ppp/sr125.htm.
47 See Cal. Stat. & Hwy. Code § 143(A) and Cal. Gov't Code § 5956.