The environmental review process is a critical part of any highway improvement project, particularly if the project involves greenfield construction of new infrastructure. The environmental review obligations under NEPA205 or an equivalent regime under state law (such as the California Environmental Quality Act, otherwise known as CEQA)206 are often extensive and time-consuming and may threaten the viability of a project's budget if environmental challenges are raised through litigation.
Aside from environmental litigation or an inability to obtain environmental clearance of a proposed highway project, primary legal issues associated with highway PPPs arising from environmental laws relate to the sequencing of the environmental review process with the engagement of and activities conducted by a private-sector concessionaire. In other words, the two main challenges involve 1) allocating environmental clearance and permitting risk between the public and private sectors; and 2) enabling the private-sector developer to engage in certain preliminary activities prior to the completion of the environmental review process. Each of these two types of requirements is discussed in turn below.
The challenge of obtaining environmental clearance for a highway project, and the potential imposition of mitigation measures (including realignment of a preferred route) as part of that environmental review process, involves allocating sufficient time and costs for completing the environmental review. There is also the potential risk of litigation and the possibility that the most optimal conceptual design from a transportation standpoint will be unacceptable from an environmental standpoint. Final engineering and construction typically cannot commence until the environmental review process is finalized and an acceptable alignment has been identified.
The most ideal approach from a risk management perspective is not to enter into a PPP agreement until the environmental review process has been completed. However, this is not optimal in many greenfield projects, particularly where the public sector is looking to leverage the private sector's resources and expertise to assist in refining the project and appropriate environmental review. Therefore, the parties must decide who will bear the risk of obtaining environmental clearance for the project.
As a general matter, public-sector agencies are in a better position to bear the risk of obtaining environmental clearance than the private sector due to their responsibility for acting in the public interest, their long-term relationships with other participating agencies, and their focus on long-range transportation planning. Thus, most PPP arrangements allocate the risk of obtaining environmental approval to the public sector. For similar reasons, the risk of right-of-way acquisition and obtaining environmental permits typically is allocated to the public-sector partner in a PPP arrangement.207
The case study discussion above about the development of SR-125 presents some instructive lessons about the allocation of environmental risk to the private sec-tor. In the SR-125 project, the original private concessionaire agreed to assume all risk associated with obtaining an environmental record of decision from FHWA. During the 9 years that it took to obtain final environmental clearance, the initial concessionaire incurred substantial direct costs and also incurred the opportunity cost of foregone toll revenues from the extensive delay. As a result of these and other problems, the initial concessionaire ultimately had to sell its interest in the project.
The State of Oregon has taken an innovative approach to the environmental review process through the predevelopment agreements that it negotiated as part of the Innovative Partnerships Program.208 Under this arrangement, the private partner (Macquarie) is responsible for funding the up-front costs of the predevelopment work until a determination is made that a project is financially and technically viable. Macquarie preserved the ability to develop the implementation of any project that is approved by the state for implementation, and also preserved its ability to obtain reimbursement for the costs of predevelopment work (subject to a fixed cap) for any project that did not proceed.
Under this arrangement, ODOT remained responsible for any NEPA or state environmental review process that would need to be completed once a project structure was developed. The work done under the pre-development agreement certainly would be useful to ODOT in developing its environmental documentation.
The other major issue arising out of environmental laws is the limitation on activities that the private-sector developer can engage in prior to the completion of the environmental review process. As noted above, FHWA's original D/B contracting rules precluded state sponsors from issuing RFPs or RFQs or entering into a D/B contract prior to the completion of the NEPA process. As a result of SAFETEA-LU amendments,209 FHWA has modified its regulations and now permits those activities prior to the completion of the NEPA process. However, there remain significant limitations on what the D/B contractor is permitted to do in this interim period. First, the D/B contractor cannot start any final design or construction work until a locally preferred alternative has been approved. Second, none of the members of the D/B consortium may participate in the preparation of the NEPA documentation.
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205 42 U.S.C. 4321, et seq.
206 Public Resource Code 21000, et seq.
207 If the NEPA process has been completed, it may be feasible to allocate the risk of obtaining permits to the private sector partner.
208 Overview available at http://www.oregon.gov/ODOT/HWY/OIPP/.
209 See, e.g., SAFETEA-LU, § 1503.