Transit Public-Private Partnerships: Legal Issues (2014)

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5 tion and operation of transportation facilities.”22 Thus, on January 9, 2013, FHWA invited the pub- lic to provide ideas and comments by May 31, 2013, on what should be included or excluded from model PPP partnership contracts. A survey was used to determine whether in the past 10 years transit agencies have used PPPs for the purpose of acquiring, improving, constructing, developing, operating, maintaining, or financing infrastructure projects or used PPPs for transit- oriented development (TOD). The survey was not conducted for the purpose of an empirical study or analysis. Rather, the survey sought to gather in- formation on transit agencies’ PPP projects. The transit agencies’ responses to the survey are dis- cussed throughout this digest and in Appendix E. The objectives of this digest are to identify and discuss legal issues that are presented by PPPs for transit projects. The next four sections of the digest are devoted to the rationale for using PPPs (Section II); the innovative contracting and fi- nancing approaches offered by PPPs (Section III); the structuring of PPPs (Section IV); and transfer of risks from the public to the private sector through PPPs (Section V). The next two sections of the digest deal with a PPP’s compliance with federal law and regula- tions (Section VI) and with legal barriers PPPs confront in some states (Section VII). The next three sections discuss the funding of PPPs for transit projects, including the use of tax- exempt bonds, notes, and nonprofit corporations (Section VIII); federal and state credit facilities that are available to PPPs for transit projects, as well as sources of private equity or loans (Section IX); and how transit agencies use taxes dedicated to transit, assessment districts, and development impact fees to capture the value created by new or expanded transit service (Section X). The final four sections of the digest discuss long-term leasing of transit facilities and other forms of leasing (Section XI); TOD and joint de- velopment of property in close proximity to transit facilities (Section XII); the three pilot projects se- lected by FTA to demonstrate the use of PPPs for transit capital improvements (Section XIII), and, finally, some of the literature relevant to PPPs and transit projects (Section XIV) and the conclu- sions (Section XV). 22 United States Department of Transportation, Federal Highway Administration, Public-Private Partnerships Public Meeting and Request for Comment, 78 Fed. Reg. (Jan. 9, 2013), available at http://www. gpo.gov/fdsys/pkg/FR-2013-01-09/html/2013-00219.htm. The digest’s appendices analyze the structure and funding of 30 pending or completed transit PPPs in 17 states (Appendix A) and of the Canada Line in Vancouver (Appendix B). Appendix C in- cludes copies of agreements and other documents provided by 59 transit agencies that responded to a survey conducted for the digest. Appendix D provides the survey questions; Appendix E, a summary of transit agency responses to the sur- vey; and Appendix F, a list of the responding transit agencies. II. ADVANTAGES OF PPPS TO PUBLIC TRANSIT AGENCIES Assuming that the legal, regulatory, funding, and other issues discussed in the digest are over- come for a proposed particular transit project, the use of PPPs is advantageous for agencies.23 By using one of the alternative methods of project delivery discussed in Section III, PPPs may be able to deliver a project more rapidly, more effi- ciently, and at a lower price. A design-build (DB) contract, for example, allows for greater flexibility in the design and delivery of a project than is permitted by the traditional design-bid-build method of procurement.24 Proponents of PPPs maintain that PPPs use resources more efficiently because of “improved management and innovation in construction, maintenance, and operation”25; grant transit agencies greater access to private 23 For a general resource that appears to be applica- ble to all transportation agencies considering a PPP, see FHWA, USER GUIDEBOOK ON IMPLEMENTING PUBLIC- PRIVATE PARTNERSHIPS FOR TRANSPORTATION INFRASTRUCTURE PROJECTS IN THE UNITED STATES 29 (2007) (stating that a successful PPP program requires “policies, procedures, documentation, and resources” that are necessary for a PPP project), hereinafter re- ferred to as “FHWA User Guidebook on Implementing PPPs,” available at http://www.fhwa.dot.gov/ipd/pdfs/ ppp_user_guidebook_final_7-7-07.pdf. 24 FHWA, Design-Build Effectiveness Study (2006) (stating that a DB contract “is an established process for developing major capital projects used by the private sector and the armed services, which may be less con- strained by state or local regulations that limit oppor- tunities for achieving its potential benefits”), available at http://www.fhwa.dot.gov/reports/designbuild/ designbuild2.htm. 25 WILLIAM J. MALLETT, CONGRESSIONAL RESEARCH SERVICE, PUBLIC-PRIVATE PARTNERSHIPS IN HIGHWAY AND TRANSIT INFRASTRUCTURE PROVISION 20–21 (July 9, 2008), hereinafter referred to as “MALLETT,” available at http://cdm16255.contentdm.oclc.org/cdm/ref/collection p266401coll4/id/3136.

6 sources of capital; produce a higher quality end product; result in a higher level of customer satis- faction; and generally permit transit agencies “to focus on their strengths.”26 Besides accelerating project delivery, PPPs take advantage of the pri- vate sector’s expertise; attract and leverage public and private financial resources; and transfer risk and expense from the public sector to the private sector.27 Performance incentives may be included in a contract for a PPP to encourage the timely (or early) completion of a project within budget or the operation and maintenance of a facility to a tran- sit agency’s performance specifications.28 A PPP may save money for larger projects because of “economies of scale.”29 PPPs may avoid cost over- runs that occur because of “initial low bids from contractors being inflated by change orders.”30 On the other hand, because the cost of a “turnkey contract” may be higher at the outset, a public sponsor may find it necessary later to reduce the scope of a project.31 Transit agencies responding to the survey hav- ing experience with PPPs similarly reported that there are advantages in using PPPs: • The design and construction phases are shorter, and there is more risk-sharing that bene- fits the sponsor of the transit project.32 • A PPP permits “sole sourcing” of architec- tural and engineering services for projects.33 • A PPP may be used for TOD or joint devel- opment to help pay for capital projects or defray 26 FHWA User Guidebook on Implementing PPPs, supra note 23, at 5. 27 Richard Steinmann, FTA, Public-Private Partner- ships and Transit (presentation) (Oct. 2007), hereinaf- ter referred to as “Steinmann.” 28 H.R. REP. NO. 110-24, Hearings on PPPs, supra note 9, at 46. See also LARRY W. THOMAS, CONTRACTUAL MEANS OF ACHIEVING HIGH-LEVEL PERFORMANCE IN TRANSIT CONTRACTS (Legal Research Digest No. 43, Transportation Research Board, 2013). 29 YESCOMBE, supra note 1, at 20, 28. 30 Id. at 19. 31 Id. 32 Response of Connecticut Department of Transportation, hereinafter referred to as “Conn. DOT Response.” 33 Response of Milford Transit District, hereinafter referred to as “Milford Transit District Response.” operating expenses, as well as to increase rider- ship and the area tax base.34 • PPPs enable a transit agency to take advan- tage of “management efficiencies” offered by the private sector.35 • PPPs permit a transit agency to eliminate or reduce some ownership issues, costs, and risks for a project, yet still maintain significant control of a project’s design and construction.36 For example, Southeastern Pennsylvania Transportation Authority (SEPTA) reported on two PPPs, one for the construction of an energy storage system and the other for the construction of a combined heat and power plant. SEPTA stated that for both PPPs, besides benefiting from a simplified procurement process (e.g., the vendor procuring the required equipment), SEPTA ex- pects to benefit from energy savings with little or no upfront investment.37 Another example is a TOD project for Tri- County Metropolitan Transportation District of Oregon (TriMet), discussed in more detail in Ap- pendix A, that allows TriMet to make greater utilization of property owned by the agency in a way that supports the transit district but trans- fers risk to a private developer.38 Some opponents of PPPs argue, however, that PPPs may be nothing more than “false partner- ships” because “profits will be retained in the pri- vate sector, while major losses will be borne by the public sector.”39 Moreover, opponents point out, as discussed in Section VII, that PPPs con- front significant legal and regulatory challenges in some states.40 State competitive bidding may be an obstacle because of the “bundled character of public-private partnerships” presented by a single 34 Response of City of La Crosse Municipal Transit Utility, hereinafter referred to as “La Crosse Municipal Transit Utility Response.” 35 Response of New Jersey Transit, hereinafter re- ferred to as “N.J. Transit Response.” 36 Response of Pioneer Valley Transit Authority (PVTA), hereinafter referred to as “PVTA Response.” 37 Response of Southeastern Pennsylvania Transpor- tation Authority (SEPTA), hereinafter referred to as “SEPTA Response.” 38 Response of Tri-County Metropolitan Transporta- tion District of Oregon, hereinafter referred to as “TriMet Response.” 39 MALLETT, supra note 25, at 21. 40 FHWA User Guidebook on Implementing PPPs, supra note 23, at 53 (exhibit 34).