Effect of Public-Private Partnerships and Nontraditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision Making (2013)

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1Overview This study has been conducted as part of the Capacity Focus Area of the Second Strategic High- way Research Program (SHRP 2), which involves 22 different research efforts exploring how environmental, economic, and community issues can be integrated into the analysis, planning, and design of new highway capacity. The centerpiece is the Decision Guide, a four-phased struc- ture of key decisions common to the development of all transportation projects through the completion of planning and National Environmental Policy Act (NEPA) processes. The guide focuses on the principal areas of development: long-range planning, programming, corridor planning, and environmental review/permitting. The specific purpose of the SHRP 2 C12 project, Effect of Public–Private Partnerships and Nontraditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision Making, is to assess the interplay between the use of public–private partnerships (defined as P3s in this report) and transportation and environmental planning processes to identify whether P3s should be considered as a means to procure transportation improvements—and how and when they should be considered. The framework of the estab- lished Decision Guide is considered throughout this process, with special attention given to how P3 procurements interface and influence the process. (For a glossary of relevant terms, see Appendix A.) The SHRP 2 Project C12 research is based on extensive interviews conducted with state trans- portation department and metropolitan planning organization (MPO) officials and private inves- tors with hands-on experience of P3 project implementation. Study research is also based on review of relevant government laws and regulations and pertinent secondary source materials. (For a literature review and additional P3 resources, please see Appendix B.) Key Findings The research has revealed the following key findings: • The nature of highway P3 projects in the United States has evolved from smaller projects initi- ated at the local level into much larger, higher-priority, and highly visible projects. • The National Environmental Policy Act (NEPA) process is linear and involves a series of one- time decisions. This differs from the cyclical nature of the planning process. • The dichotomy between the NEPA and the planning processes can cause delay in finalizing NEPA actions, because final designs emerging from NEPA analyses must be incorporated within MPO documents before projects may gain environmental clearance. • Private development partners prefer to avoid the uncertainties of gaining NEPA approvals, and therefore they increasingly pursue P3 procurements for projects that have already attained environmental clearance. Executive Summary

2• Private-sector innovation can be inhibited for projects that have gained environmental clearance resulting from risks and delays associated with reopening the NEPA process when approved designs are revisited. • The decision to procure projects on a P3 basis may be made at any point during the planning and NEPA processes, which can, in many cases, lead to the decision being made only after com- pletion of NEPA. • There is an important distinction between a definitive decision to procure a project on a P3 basis and whether to advance the project as a P3. • Possible use of P3 procurement should be considered as early as possible in the planning and NEPA processes, and then the Decision Guide process should be used to vet that possibility. • There are steps that may be taken to facilitate the consideration of P3 procurements within the existing planning and environmental review processes, which are largely fixed and codified, including 44 Introduction of tolling and alternative funding, together with the possibility of P3 procure- ments, during NEPA and the state and regional planning processes; 44 Alignment of project definition with revenue potential and available funding; and 44 Management of NEPA and other strategies to afford greater flexibility and speed. P3 Options and Trends P3s are contractual agreements between public agencies and private entities that allow for greater private-sector responsibility in the design, delivery, financing, operation, and maintenance of transportation improvements beyond traditional design–bid–build procurements. The degree to which the private sector assumes responsibility, including financial risk, differs from project to project. P3 options range from design–build procurements, where design and construction services are bundled in a single, fixed-price agreement. The terms can include concessions, where the private investor/operator is responsible for financing, designing, constructing, operating, and maintain- ing new highway projects in exchange for the right to collect toll proceeds or receive periodic availability payments for the duration of a concession period. The number of P3 transportation projects in the United States is small. The earliest P3 projects tended to be smaller, with construction values of $30 to $350 million, and often were initiated by local regions that sought to implement projects that were not necessarily viewed as having the same priority by state departments of transportation (DOTs). Other projects were identified and initiated by private firms interested in providing access to new developments, projects that did not necessarily provide immediate congestion relief. A majority of these projects ended in bankruptcy and have been taken over by the state. Despite the mixed outcomes for the first P3 projects in the U.S. highway sector, eight new P3 projects were in construction as this research concluded, and many potential P3 projects are under study. With an average construction value of over $1.6 billion, this newer group of P3 projects represents a marked departure from the earlier P3 activity: in addition to being larger, these projects have received significant public subsidies to make them bankable. Increas- ingly, the public-sector sponsors of these initiatives have become responsible for project defi- nition and environmental clearance, with the introduction of private-sector participation occurring only after a project has been cleared to enter final design phase. Legal Issues with P3s The implementation of P3 projects raises several legal and financial issues that are uncommon in traditional public-sector procurements. P3 implementation is largely driven by statutory and regulatory frameworks that have been established by federal and state governments. To consider the implications and interaction of the P3 process with those in the Decision Guide requires a

3 concrete understanding of relevant legal issues. Furthermore, federally mandated transportation planning requirements for state DOTs and MPOs play a central role in how and when P3 projects are considered. Before a P3 alternative can be seriously considered as part of the project planning and environmental review processes, the overseeing public owner must have the authority to procure and implement P3 projects. This essential authority involves seven key legal concepts that are critical to the ultimate success of P3 procurement: 1. Permission to rely on reduced/alternative payment and performance security; 2. Authority to bundle design, construction, operation, maintenance, and other services into a single procurement; 3. For predevelopment agreement projects, the ability to contract with a private entity to assist the public owner in defining a feasible project and, if the project is deemed feasible, to negotiate an agreement to implement the project; 4. For toll projects, tolling and toll enforcement authority and the authority to compensate a private entity for losses it incurs that are directly due to the construction of previous unplanned competing facilities; 5. For availability payment projects, authority to obligate funding for multiple years; 6. Authority to use funding and financing from any available and lawful source; and 7. Authority for a private entity to receive a return on its investment. Planning requirements for all transportation projects that include P3s coincide with the first two phases of the Decision Guide: long-range planning and programming. Federal law requires states and metropolitan regions to develop and update long-range transportation plans that address needs and policy over a 20-year period. Federal law also requires the development of nearer-term transportation improvement programs (TIPs), identifying which projects in a long- range plan are to be completed within an upcoming 4-year cycle. Each of these planning docu- ments must be fiscally constrained, meaning that assumed funding sources must be “reasonably expected to be available.” These requirements have typically inhibited the consideration of P3 procurements as part of the planning process because the availability of funding sources used to support these projects (including toll proceeds or a private-sector equity contribution) is not sufficiently well known in advance of project development. However, 2009 guidance jointly issued by the Federal Highway Administration (FHWA) and the Federal Transit Association (FTA) clarifies that toll revenue sources associated with financing a P3 project may be “reasonably expected to be available.” In addition, P3 procurement may be considered “reasonable” if the state or region has a history of successful P3 implementation and if enabling legislation is in place or if efforts are under way to enact enabling legislation and there is evidence of support by a governor and/or legislature. Common Challenges with P3 Projects In addition to the need for enabling legislation, P3 project implementation raises other challenges for public-sector sponsors. The development of P3 projects is time intensive and complex, requir- ing areas of expertise beyond that of most public-sector transportation agencies. Many of these implementation activities take place outside the planning and NEPA processes and require fun- damental cultural changes in how public agencies conduct business. Some of these less-familiar areas of expertise in P3 procurement include • Financial feasibility assessments; • Financial modeling; • Preparation of detailed investment-grade toll revenue forecasts; • Risk transfer analysis; • Preparation of long-term life-cycle maintenance and operations cost forecasts;

4• Public-sector comparator analysis; • Toll collection and back-office accounting procedures; and • Legal and contractual issues that are associated with long-term concession agreements lasting 30 to 50 years or more. Private partners also have to coordinate with lenders, rating agencies, equity partners, technical advisors, and subcontractors, as well as with DOTs. The operational situation of these private partners is often much more complex than what public-sector sponsors may readily appreciate. There is also a need for greater coordination between the NEPA and planning processes to avoid costly delays that arise from the inherently different nature of the two processes. NEPA involves a series of fixed milestones as projects advance, each of which is a one-time event. However, the MPO process is updated cyclically in 4- to 5-year increments, which may cause delays if the project scope changes and the planning documents must be revised between cycles. Even though delays are not generally monetized by public-sector project sponsors, “time is money” to private project developers who operate with fixed time frames for project implementation and to derive return on investment. This is the primary reason all private-sector P3 practitioners interviewed stated that they prefer to participate in P3 procurements after the conclusion of NEPA. P3 projects transfer two of the most visible public service functions to the private sector: the building and operating of transportation improvements. Such visibility is often heightened because P3 procurements are often used on large, complex, and high-profile projects where tolling will be imposed. These dynamics inevitably raise concerns among the public, which is likely concerned with the use of tolling, the differing motivations for project sponsors and their private partners to collaborate, and the perception that P3 procurements may lead to predetermined outcomes. Agencies sponsoring P3 projects should anticipate addressing these types of concerns and be prepared to promote the many sound arguments for the use of P3 procurement. Agencies should respond clearly to concerns in discussion to support public understanding of the benefits of P3 procurement, including • Accelerated project implementation; • Access to new sources of equity and finance; • Enabling public transportation funding to be used on other needs; and • Reduced life-cycle costs (capital construction, ongoing maintenance, and operations costs) as compared with those associated with traditional public procurement. Traditionally, the NEPA process has done an excellent job of identifying anticipated project impacts, but it should also identify the benefits of projects. This extends to tolling, which is often the linchpin that allows projects to advance; in many cases, such dedicated revenue source projects would not otherwise advance. Therefore, if the P3 sponsor can clearly present a rational explana- tion for a project from the inception of the project development process, public support is more likely to be gained. The Timing of P3 Procurements It is essential to understand both when and how P3 procurement should be considered as a project develops. Addressing these considerations is the crux of the research conducted in SHRP 2 Project C12. An underlying premise of the Decision Guide is that the transportation planning and environ- mental review processes can be parsed into discrete decision points. Initially, the research envi- sioned for a project was conducted with the expectation of examining and adapting these decision points for P3s. However, as the research progressed, it was revealed that the ability to ascertain the precise juncture at which the decision was made to implement a project on a P3 basis was less significant than determining the extent to which deliberate consideration was given to P3 delivery and where that consideration occurred within Decision Guide processes.

5 The decision to procure a project on a P3 basis may be made any time during the Decision Guide processes or after the completion of NEPA. As the SHRP 2 research team has determined, projects involving early consideration stand the greatest chance for success. Similarly, assessing a set of projects on a programmatic basis may reveal the best project candidates for P3 implementation. Still, “success” is a malleable concept in these cases. In some cases, reaching financial close may define success in the short term; in other cases, success may be based on either the public or the private partner’s viewpoint. Project success for the public sector might be measured by the ability to have delivered the project sooner than anticipated without a P3 or by the ability to implement additional projects with funds not spent on the P3 project. A private partner is likely to measure success by return on investment or by the ability to secure future work. Procuring P3 Projects Before Concluding NEPA The primary advantage of a decision to implement a project as a P3 before final NEPA approval is to encourage private-sector innovation, because the ability of a private partner to play a role in the definition of alternatives, and ultimately a preferred alternative, can ensure that the part- ner’s design, constructability, and facility operations expertise are incorporated. The timing of this decision is likely to yield a better project outcome than would be produced by the public sector independently. It can be anticipated that a private partner can bring business experience from working in a diverse set of project environments and can approach project details from a life-cycle costs standpoint. The advantages that can be offered by private partners can help opti- mize alternatives development, which are similar to a value engineering exercise. There is also a downside to early private-sector involvement in the development of projects before completing NEPA analysis: a reduced field of interested participants means less competition. This can generally lead to fewer competing proposals, fewer cost comparisons, and a smaller num- ber of alternative technical concepts. There is also concern regarding the impartiality of the NEPA process and the possibility (perceived or otherwise) of private-sector influence over the selection of a preferred alternative. As a result, project sponsors must weigh the trade-offs between fostering an environment for innovation before the conclusion of NEPA and potentially restricting the num- ber of parties willing to participate in that process. Procuring P3 Projects Following NEPA One of the greatest unknowns in implementing transportation improvements is the time frame for obtaining environmental approvals. These unpredictable factors are varied: project scopes can change, litigation may arise, and sponsors must coordinate with many different stakeholders. The possibility of incurring extensive delays is greatest during implementation, and any of these occurrences can adversely affect budgets resulting from cost escalation. These risks can be greatly reduced by waiting until the conclusion of NEPA to procure P3 projects. The competitive environ- ment is also significant when conducting a P3 procurement post-NEPA, when public sponsors have a greater field from which to select a best-value proposal and can capitalize on competition to drive down cost and potentially promote technical innovation. Although the prospect of a competitive environment increases when soliciting a P3 after envi- ronmental clearance, this scenario is counterbalanced by a reduction in the ability to capitalize on private-sector innovation. When private partners become involved in project development late in the NEPA process, many opportunities to refine the design or scope of projects may become lim- ited, and opportunities can become even more limited if the environmental review process has already been completed. A private partner’s willingness to offer an alternative technical concept may also depend on how the risk of additional environmental analysis is to be allocated. Private partners may be more encouraged to propose alternative technical concepts if the public sector is willing to accept the risks. In this case, the public sector has a higher tolerance for accepting the risk of reevaluation compared with private developers because it does not operate within the same

6financial confines. Private-sector partners must operate within a time-constrained environment when arranging project financing and must consider the low tolerance for long project gestation periods and delays that occur from reevaluation. The need to address public acceptance of P3 procurements as they are advanced after the opportunity costs of committing excessive resources to a single project is important. There are also potential implications of public acceptance of P3 procurements when they are advanced after the completion of NEPA. Ongoing public outreach and awareness-building is necessary to garner support for private-sector involvement concerning the delivery of transportation improvements and any use of tolling. The window of opportunity to nurture this process becomes more limited when P3 procurements occur after completion of NEPA analysis, because the NEPA process itself sets the framework for public expectations about configuration of any facili- ties to be built and how they will be operated. If a decision is made post-NEPA to toll a project or use P3 delivery, the ability to overcome public skepticism or outright disapproval is all the more challenging. Strategies to Encourage the Consideration of P3 Procurements The SHRP 2 C12 research concludes with interpreting the findings of the study to identify steps that may be taken to incorporate the consideration of P3 procurements within the existing plan- ning and environmental review processes, which are largely fixed and codified. The resulting research from the study has identified numerous strategies that may be pursued. Incorporating Tolling and P3s in State and Regional Planning The revenue sources included in most long-range plans reflect current transportation funding patterns in the United States and rely on relatively conservative assumptions to achieve a level of certainty and predictability. The use of P3 procurements is rarely considered in long-range plan- ning because P3 projects with standalone financing require their own dedicated revenue sources. These dedicated revenue sources and the associated financing tools are not known with great certainty until much later in the project development process and often not until an agreement has already been reached with a private partner and project financing is under way. Nonetheless, P3s can be a better integrated and more viable option for project delivery if revenue sources most commonly associated with P3s (including tolls) are considered systematically during the planning process. Although there are many factors inhibiting the consideration of tolling, a primary purpose of long-range planning is to establish regional transportation goals and policies to direct future project development. These activities are mutually supportive: the long-range planning process can develop regional policies that support tolling and P3 development, and regional policies can help guide future transportation planning to better incorporate the financial considerations of toll roads and P3 development. One method that can be used to facilitate the consideration of P3s and tolling during the plan- ning process is the development of regional or state policies that encourage such consideration. This development approach allows the public sector to achieve the following three objectives: • Establish a framework for public education and debate to help raise the level of understanding for transportation needs and those that can be met with P3s. • Establish a precedent for P3 consideration to build the evidence needed to support fiscal con- straint with toll or P3-related revenue. • Shape a planning process that can help narrow the range of feasible alternatives considered during NEPA to those that require support from tolls or other nontraditional funding sources in addition to including such information in a purpose and need statement.

7 The North Central Texas Council of Governments (NCTCOG), the MPO in the Dallas–Fort Worth region, provides a prime example of an agency that has adopted a regional policy on toll- ing to help accomplish the three objectives, as identified. It should be noted that NCTCOG’s regional toll policy is not intended to dictate the application or even to mandate consideration of P3s but rather to recognize the reality that traditional transportation funding available to the region is insufficient to meet mobility needs. Incorporating Tolling and Alternative Funding in NEPA Consideration of tolling and other alternative funding sources that could be used to finance a P3 should continue into the NEPA process on a project-specific basis. Indeed, inclusion of these funding sources into statements of purpose and need and subsequent alternatives analyses is both permitted and encouraged through federal regulation and guidance that link the planning and environmental review processes. There are significant advantages to doing so because such inclusion increases public awareness and anticipates potential issues that are germane to tolled and P3 projects. Alternative funding sources, such as tolls, are critical to successful private-sector involvement in a P3. Carrying the consideration of these sources forward from long-range planning into the NEPA process positions a public sponsor to make a decision on project procurement on a P3 basis at a juncture that a sponsor deems most appropriate. In this manner, project financing, including that from a private-sector source, can be evaluated among the alternatives considered within a NEPA document. If the long-range planning process confirms that a highway improvement can only be built with a tolling system, alternatives without tolls or the provision for alternative funding sources do not need to be considered in the NEPA analysis. Even so, the federal guidance cautions against the potential public challenges faced with proposing a toll road and states that examination of nontoll alternatives may be advisable to avoid future litigation. Despite federal regulatory provisions concerning incorporation of tolls and private financing into projects’ purpose and need and NEPA alternatives, there has been limited experience in practice to judge the success of a systematic application of this strategy. Aligning Project Definition with Revenue Potential and Available Funding One of the most important findings to emerge from SHRP 2 research is the need to identify and address challenges posed by funding gaps early and to then use the Decision Guide processes to vet different options available to enable project advancement. This approach is more commonly in use within the public toll road sector, where revenue potential is assessed at the onset of the planning process and involves the forecast of future cash flows and determination of what level of debt can be supported. Once these determinations have been made, project design can be developed that adheres to future revenue streams or, in cases where such is not a component, the additional level of public subsidy needed can be identified to move into implementation. Private investors also use this same general approach when assessing whether to pursue potential P3 opportunities. Although the preparation of financial plans would be helpful in mobilizing project sponsor determination of whether different alternatives are actually affordable, project-specific cash flow models and financial plans are not required as part of the NEPA or planning processes. FHWA, however, does require that financial plans be prepared for all highway improvements receiving federal funding with implementation costs over $500 million. Although FHWA recommends preparation of an initial financial plan as early in the project development process as practical, it generally expects to receive an initial version of the plan either at the time a ROD is issued or before right-of-way acquisition.

8If project sponsors perform cash flow assessments for large and complex projects earlier in the project development process, they are able to determine sooner whether funding gaps exist. If this determination is made while projects are still in NEPA, then additional alternatives to reduce capital costs or to generate new revenues through tolling could also be assessed. Similarly, this type of analysis would help DOTs determine if particular projects have the potential to be financed largely through toll revenues, and it would also enable DOTs to readily identify projects with the potential to be developed on a P3 basis. Managing NEPA to Afford Greater Speed and Flexibility Although there is the risk of delay during the NEPA planning stage, such risk can be well managed and controlled with proactive planning at the onset of project development. Identifying Data Needs Up Front A great deal of up-front data gathering is required for an environmental evaluation. With poten- tial P3 projects, that information collection process should be expanded to include the additional data sets that will be needed to assess future P3 potential and is critical to ensure that the data emerging from the environmental review process are consistent and suitable for use in various analyses. This is particularly true with traffic data, which are used to assess environmental impacts, as well as with revenue generation estimates and the applicability of different toll rates to achieve desired operational and revenue generation goals. Study Areas in Environmental Documents In certain situations, expanding study areas in environmental documents may reduce schedule delays and enable greater design flexibility both during NEPA and afterward. This is particularly true for interchange locations, because their cost is often quite high and can vary substantially depending on their configuration. In addition, introduction of tolls frequently necessitates opera- tional improvements at interchanges. As a result, P3 partners often focus value engineering efforts on strategies to reconfigure interchanges to reduce construction costs and improve operational characteristics. If the analysis envelopes around interchange locations are not large enough to accommodate the review of different design options, additional data may be needed, which may precipitate schedule delays. This data gap can be avoided if the data are collected early on in NEPA analysis. Comprehensive baseline data are also helpful to private developers in their effort to develop alternative designs to avoid sensitive areas such as wetlands. Such alternative design plans can serve to limit any need for reevaluation. Determining the Appropriate Level of Design During NEPA The level of design performed during NEPA is another factor to consider when agencies are contemplating procuring projects on a P3 basis. A balance must be struck between the need to reach a level of design that allows the project’s impact to be properly considered and mitigated in a final environmental impact statement (EIS) and the desire to maximize the flexibility of a private partner to innovate during final design. In most cases, the level of design required to complete the NEPA process represents about 30% of the total project design. Though such designs lack detail, their importance should not be underestimated, because the design will specify the location and general project concept, both of which are often critical to the ultimate financial success of a P3 project. In environmentally sensitive areas, 70% of design may be completed to address potential impacts up front.

9 If the P3 procurement occurs after NEPA’s completion, the sponsoring agency may wish to consider completing less than 30% of the design to allow greater opportunity for the private sector to define the physical and operational characteristics of the project in a manner that capi- talizes on its design and operational expertise. A Vision for Enhancing the Decision Guide Process to Consider the Potential for P3 Development Even though an increasingly large proportion of P3 procurements move forward after project sponsors have gained environmental clearance for projects, the research reveals that several states and regions are considering the possible use of tolling and P3s early on in the Decision Guide process and are using both planning and NEPA processes as a platform to vet these possibilities. In some cases, regions and states conduct their own feasibility assessments of projects in the early stages of conceptual development to identify viable candidates for P3 development and then adapt NEPA review data to assess tolled alternatives. The research also demonstrates that state and regional policies are especially effective in encouraging or even requiring the consideration of tolling and P3 development. When regions have well-defined policies, such as the need to sustain a regional roadway system, it is possible to weave tolling and P3s into a regional vision. This has led the NCTCOG to identify $6 billion worth of priced projects in the 2035 Metropolitan Transportation Plan (MTP) for the Dallas– Fort Worth Metroplex. As NCTCOG officials note, “If these roads are not tolled, they will not be built . . . it is hard for NCTCOG to think differently.” In P3 assessment and planning, flexibility is essential, as is first developing an understanding of which projects may be feasible for P3 development. To do so, project sponsors must prepare forecasts to ascertain the revenue generation potential of projects if they are tolled, as well as the value for money assessments that include the calculation of life-cycle costs and a public-sector comparator analysis to identify the cost of the project’s implementation and maintenance on a public basis. These analyses should be prepared concurrently with the Decision Guide and be used to inform key decisions, including whether projects will be tolled; whether tolls will be implemented on a P3 basis; what detail about any type and term of concession is to be used; and what amount of public subsidy may be needed. The planning process should explore the possible use of tolling and P3 procurements from a regional policy perspective and should engage all stakeholders to determine the level of support for these options. Once candidate projects have been identified through the analyses as described, the environmental review process should compare the possible use of tolling and P3 delivery to traditional public procurement. This analysis should provide clear information on the imple- mentation time frames that can result by using different procurement and revenue options and by assessing the implications of those different time frames as part of the analyses. If these dif- ferent possibilities are debated and assessed in MPO and NEPA analyses, decision makers and their stakeholders are better able to understand what is feasible and can use the Decision Guide as a platform to decide whether tolling and P3 development are appropriate for the local region. As many interviewees in the study observed, it is better to consider the possibility of P3 develop- ment during the Decision Guide processes and to decide not to go down a path than it is to defer the decision to the end of the process and then be forced to go back to the beginning.