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

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29 Implementing projects on a P3 basis raises challenges for their sponsors and often requires fundamental change in the way that transportation agencies do business. This chapter discusses the challenges posed by the need to conduct a range of new technical analyses, the need for greater coordination between NEPA and the planning process with P3 procure- ments, and the need to manage new concerns and issues that the public may have in response to P3 procurements. Although public agencies regularly engage private-sector engineers and contractors to complete design and construc- tion activities, P3 procurements transfer the responsibility for defining, constructing, and operating large, high-profile proj- ects from the public sector to their private-sector partners. A cultural change within DOTs and buy-in and support from their stakeholders at all levels are required. P3 procurements also require different types of approvals, the development of new areas of expertise within sponsoring agencies, and coordi- nation with the planning and environmental review processes. All of these issues are discussed in this chapter. Challenges Associated with P3 Implementation Legislative Authorization There are challenges and many unknowns associated with putting any type of legislation in place (a list of seven key legal concepts required to enable P3 procurements is found in Chapter 3). The extent to which these challenges come to bear on individual projects depends on whether the required legis- lation is in place at the time that P3 procurement is first con- sidered or whether it is needed before a project can proceed on a P3 basis. There is also risk that existing legislation may need to be modified in some way to respond to unforeseen issues associated with P3 projects or procurements. As of March 2012, 32 states and Puerto Rico have enacted laws authorizing the use of P3s for the development of bridge or highway projects (Rall 2012). Ten of these states have placed certain limitations on the use of P3s or have restricted their use to specific projects. The remaining 22 states and Puerto Rico have enacted broader scope P3 authority. The legal authorization needed to advance P3 projects may be initiated in a top-down manner by state governments. This scenario may arise if legislators are interested in the use of tolling to help overcome revenue gaps, and if they are inter- ested in capturing the long-term operational value that P3s can provide. In some cases, state legislatures have put the nec- essary laws in place and also have required the DOT to assess the feasibility of proposed projects for development as tolled facilities or P3 procurements. The top-down approach does not ensure that there will be interest on the part of indi- vidual regions or transportation agencies in developing part- nership projects, but it does encourage the consideration of P3 options and removes perhaps the most fundament barrier to P3 procurements. Legislative authorization may also be put into place in a bottom-up manner. A transportation agency, MPO, or elected official may advocate for the development of a specific project on a P3 basis or perhaps for the idea of approaching P3 devel- opment on a broader programmatic basis. In this case, P3 proponents need to advocate for the use of a P3 and to obtain necessary enabling authorization. They also need to educate legislators about P3 delivery and the rationale for its use to get the needed legislation passed. Even with a strong rationale for the use of P3s or tolling with considerable interest at the local level, there is no guarantee that needed legislation will result. Gaining the necessary legislative approvals for the use of tolling and P3 procurements is a prerequisite for establishing regional or state policies on the use of these tools by MPOs, state DOTs, or by state legislatures. These types of programmatic policy positions on the use of tolling and P3s are more effective in encouraging the use of these tools than the basic legislative authorities that make them possible. C h A P t e r 4 Managing Challenges with Implementing P3s

30 Agencies considering or implementing P3 projects also rely heavily on consultant support to establish a structural approach to P3 issues and to perform the required technical analyses. In addition to design consultants, public agencies sponsoring P3 projects are likely to engage the services of management con- sultants, financial advisors, traffic and revenue advisors, and legal advisors. They may also need access to design consultants with expertise in electronic toll collection. It is essential for agencies implementing P3 projects to have access to the best possible advisors, because they will be nego- tiating with large and sophisticated private firms well versed in project finance. Moreover, when private firms engage in P3 projects, they are entering into long-term partnerships of 30 to 50 years or more to develop projects with implementation costs frequently measured in the billions, often while contrib- uting several hundred million dollars of their own equity. These firms engage world-class advisors themselves, and it is essential that sponsoring agencies do the same so that all negotiations are undertaken on an equal footing. In addition to the technical areas of expertise, the imple- mentation of P3 projects shifts responsibilities for complet- ing tasks that are normally undertaken by public agencies to the private sector. Public agencies experience a cultural shift because of this dynamic, and as one P3 practitioner who has worked in both public and private settings observes, “one of the biggest challenges for [public agencies] in implementing P3 projects is fighting the ‘this is the way we have always done it’ attitude.” As another private practitioner observes, “For every guy that is helpful, there are ten guys throwing sand in the gears. The public sector generally likes to control things, and this is especially true the lower down one goes in public organizations.” P3s Require Technical Analyses Independent of NEPA and the Planning Process Although a decision to undertake a P3 project procurement must be made usually within the framework of transportation planning and environmental approval processes (or in the postenvironmental approval period), proper P3 consideration requires special technical analyses often conducted indepen- dently from, or in addition to, the standard planning and defined NEPA processes. These range from high-level P3 fea- sibility studies, which can initially be derived from a corridor or regionwide toll feasibility examination, to project-specific P3 valuation techniques. The public entity responsible for a particular study or tech- nical analysis may vary depending on the institutional makeup of a state or region, or where within the project development cycle the study is performed. An MPO may take the lead eval- uating a metropolitan region for toll road feasibility (a single corridor or network of toll roads) that can incorporate a New and Complex Analyses and Cultural Change for P3 Sponsors The development of P3 projects is a time-intensive and com- plex process that requires areas of expertise that the majority of public-sector transportation agencies do not possess. Many of these activities take place outside the planning and NEPA processes addressed in the Decision Guide. These areas (some of which are described in greater detail in the section on P3s requiring technical analyses independent of NEPA and the planning process) 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 opera- tions cost forecasts; • Public-sector comparator analysis; • Toll collection and back-office accounting procedures; and • Numerous legal and contractual issues associated with long- term concession agreements lasting 30 to 50 years or more. The Challenge of Developing New Areas of Expertise within DOTs Implementing P3s Looking at the typical organizational structure of P3 projects, public agencies only have experience with a few of the work streams involved. Moreover, P3 transactions require highly spe- cialized skills that governmental agencies do not and cannot staff. Therefore, government project sponsors generally retain experienced consultant to advise them in areas such as legal, commercial, financial, and some technical analyses. With con- struction costs often in excess of $1 billion and involving many parties, P3 projects are also likely to be much more complex than typical DOT assignments. Private partners also have to coordinate with lenders, rating agencies, equity partners, tech- nical advisors, and subcontractors, as well as with DOTs. Their operational situation is much more complex than what public- sector sponsors may appreciate. Agencies that operate toll facilities may be familiar with some of these activities, but to implement a P3 project or to even consider possible use of P3 strategies, DOTs without experience in this area can be expected to require new staff with the necessary expertise to oversee and work with the array of consultants and parties involved in the typical P3 transaction. As a result of retaining staff with specific expertise and the time-intensive nature of P3 procurements, several states with active P3 programs have created dedicated depart- ments responsible for conducting P3 feasibility assessments and shepherding P3 procurements.

31 The Public–Private Transportation Act of 1995 Implementation Manual and Guidelines (Commonwealth of Virginia 2010) pre- scribes a formal process to identify, screen, prioritize, and select transportation projects for P3 development. It begins with a scan of various planning documents, including the common- wealth’s long-range plan (LRP) and STIP, as well as directives from the General Assembly. These documents are developed by transportation agencies’ planning staffs, modal offices, and MPOs. All selections go through a high-level screen twice per fiscal year and a detailed screen at least once every 2 years. Unsolicited proposals are screened during this process, as well. Recommendations are made by a steering committee and pri- oritized into short-, medium-, and long-term time frames by strategically analyzing anticipated project costs and benefits, as well as the overall business case. P3 implementation selec- tions are made from this prioritized list and must go through extensive public involvement, NEPA, a procurement strategy assessment, and an initial “value for money” (see definition that follows) before actual procurement. Although this P3 fea- sibility and project selection process interfaces and parallels the long-range planning, programming, and NEPA processes, it nonetheless is managed separately and requires additional specialized considerations beyond what is required of a tradi- tionally delivered program of projects. P3 Valuation P3 valuation analyses are used by project sponsors to deter- mine what the cost of developing individual projects would be if they were built and operated directly by the sponsor. These analyses serve as a base against which proposals to implement projects on a P3 basis may be compared. A recent National Cooperative Highway Research Program (NCHRP) product, NCHRP Synthesis 391 Public Sector Decision Making for Public– Private Partnerships (Buxbaum and Orti 2009) summarizes a broad spectrum of federal, state, regional, academic, and industry resources. The report identified several P3 valuation tools that have been used in the United States, each of which is designed to establish a comparative investment relationship between using a P3 and pursuing another action, often a tradi- tional project delivery method. The most widely accepted— and used extensively in other markets internationally—is value for money (VfM). Other techniques include shadow bids (the public-sector’s preparation of a detailed cost estimate and financial model to compare with solicited private-sector bids) and market valuation (quantification of the value a particular toll road might attract from a private investor), both of which have been applied in Texas. An asset valuation process was used in the long-term leases of the Chicago Skyway and Indiana Toll Road to estimate the value to the respective states associated with leases of their roadways. VfM is defined in NCHRP Synthesis 391 as a financial model that “calculates the difference between the costs and benefits preliminary analysis of financial feasibility and procurement methods. P3s can be included among analysis of potential project delivery mechanisms. Further into the project devel- opment cycle, a DOT or special office within or outside the DOT (likely with consultant support) may perform specialized valuation analyses on a candidate P3 project or set of projects. Collaboration may take place among agencies (e.g., MPOs, DOTs, toll road authorities, or transit agencies, in the case of a multimodal facility) to assess project feasibility. P3/Toll Feasibility Toll feasibility assessments are used to identify which projects may have the potential to generate a significant portion of their costs through toll revenues. Toll feasibility studies are most helpful if they are conducted while projects are in the early phases of conceptual development. These studies can be proj- ect specific or programmatic, and can range from ad hoc to formalized processes. Often P3 feasibility is addressed as part of a broader toll feasibility study. For the purposes of account- ing for special technical analyses that may occur independently of, or in parallel to, standard transportation planning pro- cesses, toll feasibility is an important consideration because all P3s require a project revenue source, typically from a toll. Sev- eral examples from the Phoenix and Washington, D.C., metro- politan areas and the Commonwealth of Virginia illustrate these types of assessment. The Maricopa Association of Governments (MAG) is explor- ing the possible development of a regional system of priced managed lanes and developing a managed lanes network devel- opment strategy. This study seeks to identify highway corridors in greater Phoenix, where the development of managed lanes may be promising, providing a framework for subsequent analyses. These analyses include an assessment of the different procurement models that could be used to implement man- aged lane projects, including P3 delivery, as well as revenue and financing options that could be used to help fund them. MAG’s intent is to use this information to help focus future assess- ments, and ultimately to inform decisions on these issues. The National Capital Region Transportation Planning Board (TPB), the MPO for greater Washington, D.C., has also completed a study to identify a network of priced high- way facilities in its region. Although only three of the projects included in the network are in its long-range plan, discus- sions with TPB planning officials revealed that they are con- fident that other pricing projects are feasible and hope the study will generate interest in advancing other pricing proj- ects, either as public procurements or private partnerships. The Commonwealth of Virginia has recently revised its guidelines for identifying P3 candidate projects under its new Office of Transportation Public–Private Partnerships (OTP3) that oversees the implementation of P3s across all modes.

32 at which time project definitions are established, typically to the level of preliminary (30% or less) design. NEPA also requires interaction with the planning process, which was described in detail in Chapter 3. Figure 4.1 illustrates that by contrast to NEPA (and corridor planning), the planning pro- cess is cyclical, involving the preparation of the short-range TIP and the long-range MTP. Alignment and Coordination with the MPO and NEPA Processes The interaction of the Decision Guide processes with P3 pro- curements may also introduce challenges to the implementa- tion of P3 projects. The issue here is primarily one of timing and coordination, and it pertains to P3 and traditional pro- curements alike. The scope of a highway project is generally refined through the NEPA process. NEPA may optionally be preceded by the more general corridor planning process to help define basic locations and extents of alternatives. The details of the scope are established through the NEPA process, including refining the alignments and cross sections of proj- ects, as well as the locations and configurations of points of access and egress. The NEPA process also involves the concep- tual design of any structures associated with highway improve- ments, such as major bridges or tunnels, overpasses and underpasses, and interchange ramps. NEPA and its optional predecessor, corridor planning, are linear processes, as shown in Figure 4.1. NEPA occurs once for each project and culminates in a categorical exclusion, FONSI, or ROD, at which time project definitions are estab- lished, typically to the level of preliminary (30% or less) design. NEPA also requires interaction with the planning process, which was described in detail in Chapter 3. Figure 4.1 illus- trates that by contrast to NEPA (and corridor planning), the MPO planning process is cyclical, involving the preparation of the short-range TIP and the long-range MTP. Coordinating Inherently Different Processes and the Risk of Delay The interplay of the NEPA and the planning processes requires close coordination, but the inherently different nature of these two requirements often causes delays. NEPA involves a series of fixed milestones as projects advance, each of which is a one- time event. The amount of time it takes to navigate NEPA var- ies based on the complexity of the analyses that need to be completed and the sensitivity of the issues being assessed. At the conclusion of the NEPA process, a preferred alternative is defined; however, final approvals can only be gained once the planning documents (MTP, TIP/STIP) and the P3 project in its final form are consistent. If the P3 project scope changes, delays may occur if the planning documents have to be revised. Although delay is accepted as part of the status quo and not associated with both traditional and [P3] procurements.” As an example, Virginia’s OTP3 has incorporated VfM into its state- wide procedures for P3 procurements. Its Public–Private Trans- portation Act (PPTA) Value for Money Guidance (OTP3 2011a) states that “VfM [is achieved] when—relative to a public-sector procurement option—[the P3 project] delivers the optimum combination of net life-cycle costs and quality that will meet the objectives of the project and the commonwealth.” It consists of a quantitative assessment that calculates “the monetary value of the benefits achieved by using a [P3] procurement process, less the higher costs of private finance, relative to public funding” and a qualitative assessment that takes into account “factors that cannot be expressed in monetary terms, such as any predicted differences in service quality between the delivery options.” Often, to apply VfM, a public-sector comparator (PSC) model is developed that attempts to capture the life-cycle proj- ect costs (construction, operations, maintenance, and addi- tional improvements) if the project were developed using traditional public resources and delivery methods. Then, “an estimate of VfM is achieved by calculating the present value of the PSC and . . . comparing it with one or more bids from private companies” (Buxbaum and Ortiz 2009). One weakness identified with the PSC approach is that elements associated with public versus private development may be too different to allow a meaningful comparison. In addition, application of the PSC and computing VfM have been criticized for repre- senting only a hypothetical scenario, with varying degrees of uncertainty associated with the necessary inputs and assump- tions. The appropriate inputs characterizing a project’s design and life-cycle operations, including refined traffic and (toll) revenue studies are only known with a degree of uncertainty that can vary depending on when the analysis is conducted. This variability in timing illustrates how this type of analysis is not easily associated with a particular project decision point or even development phase, as defined in the Decision Guide. Risk Analysis P3s may warrant additional project-specific analyses (such as risk analysis) as employed, for example, by the Virginia OTP3. Risk analysis may or may not be applied to traditionally deliv- ered projects as well and is a requirement of FHWA’s Major Projects process. Risk management is undertaken throughout a P3 project’s life cycle and begins in the early stages of project development with the creation of a risk register to track the identification and mitigation of risk items. Risk analysis includes identification of “strategies to reduce the likelihood and/or impacts of risks [and] . . . strategies to allocate risk to the par- ties best able to manage their impact” (OTP3 2011b). The abil- ity to optimize risk transfer is critical to maximizing VfM. Figure 4.1 illustrates the linear and cyclical nature of the Decision Guide processes. NEPA occurs once for each project and culminates in a categorical exclusion (CE), FONSI, or ROD,

33 in the STIP/TIP while the environmental process is under way. However, if changes in the definition of a project occur (e.g., the location or configuration of ramps and interchanges or the number of travel lanes in a given segment), those changes need to be reflected in the links and nodes coded into the regional travel demand model that is used in the conformity analysis for the TIP. If the coding in the model is not 100% consistent with the final definition of the project, then the final approval of the project would have to wait until the conformity process is next updated before gaining final clearance. FHWA state division offices are responsible for issuing final environmen- tal approvals for projects. There is a great deal of federal dis- cipline involved in confirming that funding is in place and that the conformity analysis reflects the definition of projects accurately in both the MTP and the STIP/TIP. This issue has presented concerns for several projects, including the LBJ Express project in Dallas, which had received environmental clearance some time before its P3 award was made. After the contract was awarded, the private partner identified numerous minor engineering enhancements that generally monetized by sponsors of publicly procured proj- ects, time is money to private project developers, and delays introduce the risk of cost increases due to inflation, changes in commodity prices, interest rate fluctuations, and longer periods of time before revenues become available to pay debt service. These risks pose serious challenges to private project developers who have fixed time frames for developing and operating projects and deriving a return on their investment. This is the primary reason that all private-sector P3 practi- tioners who were interviewed as part of the research effort underpinning SHRP 2 Project C12 generally stated that they far prefer to participate in post-NEPA P3 procurements. To begin a project’s environmental clearance with the use of federal funds, it must first be included in the region’s MTP. In addition, NEPA and/or preliminary engineering costs must also be identified in the STIP/TIP. When the NEPA document is complete, it can only be approved if the project is consis- tent with the MTP and STIP/TIP. The challenge here is that the timing of the conclusion of NEPA and the completion of the STIP/TIP may not align. Projects are regularly included Figure 4.1. Planning and environmental review processes. Source: Parsons Brinckerhoff.

34 The cultivation of public opinion and support for trans- portation projects typically begins as projects are defined in the early concept and planning stages. The public involve- ment process involves a number of different ways in which public agencies seek to inform and secure feedback from the public to ensure a workable degree of consensus in rela- tion to their mission and proposed activities, to improve their policies and plans, and to increase public appreciation and trust. As it applies to transportation projects, this public involve- ment phase traditionally begins during the NEPA process. NEPA requirements provide opportunities for the public to learn about and provide comment on the pros and cons and especially provide an opportunity to present trade-offs associated with a project and its alternatives. Through this give-and-take process, a clear picture of public opinion of a project emerges, resulting in collective appreciation and consent for a project, or not. Outreach Challenges with P3 Projects High Visibility Transfer of Public Service Function One of the challenges in gaining public acceptance for P3 pro- curements is that it involves the transfer of one of the most visible public service functions, the building and operating of highways, to the private sector. To gain support for this new model, project sponsors must bring the public on board with the concept throughout the process. Visibility is often height- ened with P3 procurements, because they are often used on large, complex, and high-profile projects. As one MPO official observes, “All the easy projects have been built, so the level of controversy with P3 projects is just another issue on top of the rest.” However, experience in the United States dem- onstrates that “people are generally aware of the concept of P3s, and as they have gotten better understanding of what is involved, they have become more accepting.” This is particu- larly true once P3 projects become operational. The involvement of a private-sector partner may initially draw mixed reaction from the public: some will applaud the potential efficiency, whereas others will be suspicious that the costs of the project will be inflated or the quality or con- struction, maintenance, or operation will be compromised to increase profits. It is difficult, or almost impossible, to separate the public’s reaction to increased private-sector involvement from reaction to the introduction of tolls, especially in loca- tions that do not have a tradition of tolling. Pushback from the general public regarding a potential P3 project does not focus on the private partner aspect, but rather the imposition of tolls as a method of paying for the infrastructure. Double Taxation Tolls introduce several outreach challenges. Members of the public often view tolling as a form of double taxation, and they would reduce costs and improve profit potential. However, it was not possible for the private partner simply to make changes and move on. Instead, the new design modifications had to go through the conformity process, which, as con- firmed by the North Central Texas Council of Governments, took 18 months and involved 21 public meetings. A senior official with TxDOT also reiterated that the air quality con- formity analysis has the longest cycle of all MPO activities, and noted that it is preferable to complete conformity reviews on an annual basis, although this may not be possible because of personnel resource constraints. MPOs in other regions, including TPB in Washington, D.C., do run conformity analy- ses on an annual basis and update the definition of the projects included in the process on a periodic basis as designs are refined. A senior official with TPB notes that the conformity review is not a “once and for all” process and that it is possible to mini- mize delays through good planning and collaboration and by accommodating schedules at both ends. Accommodating Postdesign Refinements with P3 Projects Identifying project design refinements is a hallmark of P3 projects. One of the primary benefits of P3 delivery is the innovation that private partners can bring to projects. P3 part- ners regularly seek out opportunities to streamline construc- tion costs and to make modifications to project designs that may result in greater use and revenue levels. Successful P3 developers are also experts in toll highway operations and often are responsible for implementing projects defined by DOTs. Therefore, P3 partners are incentivized to conduct value engi- neering reviews to seek out opportunities to enhance project performance, streamline costs, and increase overall profitabil- ity. Coordination with the NEPA and MPO processes can be an impediment to private-sector creativity and innovation. In cases when projects have already gained environmental clear- ance, private partners forgo opportunities to innovate because the delays involved and the risk of gaining approval to move forward with them outweigh the benefits of innovation. This barrier to innovation is discussed further in Chapter 5 in the section on limitations with post-NEPA P3 procurement. Overcoming Challenges and Achieving Public Acceptance Favorable public opinion is essential with P3 projects because a lack of public support increases the risk that projects can cause various sorts of unanticipated delays. The risks and the levels of public opposition to a project have the potential to translate into higher financing costs. Projects that enjoy positive public anticipation, which can often be measured by positive media coverage, broad-based political support, and/or neighborhood/community redevelopment activity, can also expect to find similar support from funders.

35 • To gain access to nontraditional finance sources, including commercial debt and private capital. • To enhance production resources for the delivery, opera- tion, and maintenance of major projects when internal staff resources are already operating at capacity. • To save time in overall project delivery by streamlining the procurement process. • To permit concurrent design, right-of-way acquisition, and construction activities in place of sequential completion of these activities. • To promote private-sector creativity and innovation in project delivery. • To permit a project to proceed as a whole, rather than in phased construction as is often required by state budgetary processes. Private-sector partner motives for advancing the P3 relation- ship include • To increase the number or size of highway construction projects in production. • To operate highways as long-term, for-profit investments (typically through a tolling component). • To direct or encourage development of properties in a given area through highway construction. • To secure a long-term commitment to their team for design, construction maintenance, and operation of a large project. Strategies for Gaining Public Support for P3 Projects Agencies sponsoring P3 projects should anticipate having to address certain types of public concerns when implementing P3 projects. They should also recognize that there are many sound reasons to help garner public support for P3 procurement. These include • Accelerated project implementation; • Access to new sources of equity and finance; • Enabling public transportation funding to be used for other needs; and • Reduced life-cycle costs—capital construction and ongoing maintenance and operations—compared with traditional public procurement. Project proponents and their partners should determine if any negative opinion is based on specific project elements or if there are policies that can be modified. Project sponsors should explore any opportunities for modifications, and, similarly, should ascertain whether negative opinion is be based on a lack of or inaccurate information, and should take steps to remedy any such conditions. Finally, project proponents should also identify other public investments and policies currently under also fear that the control over toll rates will be given to a profit- motivated private investor, who will make money by taking advantage of motorists. With public toll facilities, revenue gen- erated is used to pay for the ongoing maintenance and opera- tion of the toll facility or other specified transportation needs. However, with toll P3 projects, a portion of the revenue not needed to pay operation and maintenance costs, debt service and the funding of required reserves, if any, is retained by the P3 partner as return on investment. Certain segments of the public may also fear that P3 procurements bring about a loss of public control over important public infrastructure and can find it distasteful that private investors are being allowed to profit by doing the government’s job. These perceptions can be exacerbated if the P3 partner includes foreign investors. As one foreign P3 developer notes: “Public opinion is much more per- ception than reality with new projects. In the United States, there is a perception that the public is already paying for trans- portation. There is resistance to tolling. This dynamic is stron- ger when a P3 is involved and even stronger if the P3 project involves a foreign investor.” Confidentiality An additional outreach challenge with P3 projects is that pri- vate developers may regard some aspects of their involvement as confidential or proprietary. Even a private developer partici- pating in a predevelopment agreement may not wish to make key elements of its proposal public because it may have to com- pete for final transactions. This desire for confidentiality can be perceived as contrary to the spirit of NEPA, which is based on full disclosure and maximum transparency. Moreover, the need of the private partner for confidentiality can make the public wary of the process, with concern that the public project sponsor is trying to hide something about the project. Differing Public and Private Motivations for Participating in P3s Challenges associated with achieving public acceptance for P3s are rooted in the fact that public and private sectors have dis- tinctive reasons for P3 participation, and with those reasons come dissimilar measures of success (KCI Technologies, Inc. 2005). At the heart of these differences is that government’s val- ues reflect a responsibility to uphold and protect public interest, whereas private-sector motivators are distinctly profit-driven. Government agencies choose P3 arrangement for a variety of reasons, including • To avoid an increase in the bonded indebtedness of a state. • To construct new highway facilities with minimal initial public investment. • To reduce cost of a new highway to the general taxpayers. • To gain access to new funding sources for highway construc- tion, such as a tolls and local tax initiatives.

36 delivery of projects are germane to policy discussion. As one MPO official observes, MPOs are all about regional policies and vision. If the need and purpose of a system is documented in a plan that has well defined policies—such as being able to sustain a regional roadway system—then there is a way to weave P3’s into a loose defini- tion of a transportation plan. This is over and above the spe- cifics of a purpose and need statement—it is a regional vision. One senior private developer lauds the government of Puerto Rico’s efforts to gain public support for its multimodal P3 program, with outreach activities such as extensive radio, television, and print campaigns discussing the benefits of P3 delivery, including one of the most controversial P3 approaches: the monetization of an existing highway. As another private developer observes, Project sponsors need to establish a rational explanation for why they are considering P3s from the inception of the proj- ect development process. It’s not easy and public agencies are not used to implementing P3 projects. But given the limita- tions on fuel tax revenues, they need to be an essential part of the discussion. Outreach, P3s, and the Planning Process: Articulating the Discussion in Understandable Terms MPOs are responsible for identifying and evaluating alterna- tive transportation improvement options through the devel- opment of MTPs and TIPs, and also by involving the public and other affected constituencies in the development and maintenance of those plans. By definition, MPOs are at the forefront of the regional dialogue regarding the importance, and, perhaps even the necessity, of tolling vital transporta- tion projects. MPOs are also charged with developing policies that support that financing option. Those involved in metro- politan transportation planning are charged with talking to stakeholders about critical issues facing their region and pro- viding opportunities for stakeholders to contribute ideas and offer input. According to one MPO official, It is appropriate for a region to look at which projects in its plan would lend themselves well to P3 development. The plan- ning process involves a lot of public outreach, so it is also pos- sible to ask the community about their views on possible P3 development and get helpful feedback. This would provide the region with guidance on whether tolled alternatives should be included in environmental analysis. TIPs and STIPs must be updated every 4 years (and can be revised or amended between update cycles), so there are con- tinual opportunities to discuss tolling as one way to supplement more traditional sources of revenue to ensure that projects way within a community that may lend insight about how to mitigate public opinion. Public outreach for highway improvements is required by NEPA, and the state of practice is well documented in many different sources. The rest of this section identifies several issues that are likely to be incurred for gaining support for highway projects involving tolling and the use of P3 procurements. Public Support Begins with Policy Support Crafting and attaining approval of policies that support tolling as a method to help pay for transportation projects is the first and essential step in gaining public support. Although tolling can be used on traditionally procured projects, it is an essential component of most P3 projects. Therefore, even P3 infrastruc- ture executives believe that early on in the project development process, it is best to limit the project funding discussion to toll- ing in general and to not cloud the issue with discussion of P3s. In the words of one executive: “Early P3 discussion can spook people, and this can be destructive.” Another executive hopes that the outreach and education directed at elected officials and policy makers can instill an understanding that P3 pro- curements are not a funding option, but rather a financing option, and that this understanding can dispel the misconcep- tion that “P3’s are magic.” The fundamental benefit of P3 delivery is that it can be an effective way to develop large and complex projects because it aligns the interests of the sponsor and the P3 partners with the needs of a community. As an MPO staffer at the North Central Texas Council of Governments in the Dallas–Fort Worth region observes, Our analyses and outreach efforts do an excellent job of iden- tifying negative aspects of projects. However, we do not do a good job of identifying and selling the benefits of projects. The benefit of tolling and P3 procurements is that they are the lynchpin that allows us to advance projects that would not otherwise be able to be built. This is an enormous benefit. We need a new outcome-driven mindset that intertwines private involvement in the project development process. The outcome should be first and foremost. This culture is collid- ing with the slow and deliberate traditional public develop- ment process. One private developer echoes the “outcome-driven” approach with P3 projects, observing that “traditionally, pub- lic agencies are more focused on funding, whereas the private sector has a special interest in reducing costs. The reality is that streamlining costs is just as important as finding funding.” Because policy is crafted by elected officials and their desig- nees, the advantages and disadvantages of tolling and the asso- ciated possibility of incorporating private partners in the

37 involvement. Nonetheless, even when policies that support tolling as a financing element are in place, it appears that the consensus among both public officials and the private sector is that, from a public outreach perspective, it is advisable to wait until NEPA is near completion and tolling is deemed the desired form of paying for a substantial portion of the project before pursuing the project as a P3 opportunity. In some cases, however, there are good reasons not to wait until the comple- tion of NEPA (or near completion) to address tolling, as dis- cussed in Chapter 5. As one MPO official explains, “Investors are not interested until there is an actual project that has been defined and has secured environmental approvals, permits and right-of-way.” As an FHWA official concurs, observing, With P3 projects, most private entities do not want to be involved with projects during the NEPA process because of all the risks. As a result P3 procurements are generally put out after NEPA is completed. However, prior to that project spon- sors hire financial analysts who evaluate projects for their financial potential. Even as a state advances its preferred alternative through the NEPA process, most private firms begin developing their thoughts on how to optimize the project by reducing costs, improving operational characteristics, and increasing revenue. This allows greater understanding of opportunities and risks as the NEPA process draws to a close and a record of decision is on the horizon. As little as 10 years ago, the internal objective and approach by many private companies was to look for ways to innovate by submitting unsolicited offers. That strategy, however, has lost much appeal, as private firms have become enmeshed in pro- tracted and expensive environmental or political processes. Time is money, and the NEPA process does not enjoy a reputa- tion for swift and uncomplicated completion. Perception that Private Involvement Predetermines Outcomes A fundamental tenet of the environmental process is that it must remain objective until a final or preferred alternative is identified. Suspicion that a private developer has the oppor- tunity to bias the outcome to make a profit makes the NEPA process untenable to any resource agencies, elected officials, or the general public. Although FHWA has issued guidance that does not allow private involvement in the definition of a NEPA project, the current consensus seems to be that it is generally desirable to involve private partners only close to, and immediately following, the completion of a NEPA record of decision, with some exceptions (see further discussion in Chapter 5 on the timing of P3 procurement decision). Addi- tionally, if agencies want private involvement, they may contained within the TIP and STIP are built. Inasmuch as a region’s TIP is approved by both the MPO and a governor, the ultimate inclusion of tolling as a potential financing option carries with it at least tacit support of the governor in office. A DOT official observes, If the MPO process explores the possible implementation of P3 procurements [and tolling], it enables all involved stake- holders to see what kind of support there is for this approach. If these different possibilities are debated during the planning process, then in the end, the DOT and their stakeholders will know what is feasible. It is important for the transportation planning process to be fully disclosed to the public about the funding. For exam- ple, if there is only $200 million in public funding available for a much larger project, then that story needs to be told to help the public understand the connection between the avail- able funding and the overall cost required for a project to “make the case” for tolling (and consequently, in some cases, for P3 projects). Funding needs should be discussed early and often as a simple matter of disclosure to the public. If the policy rationale supporting tolling can be articulated in terms that the general public can readily and easily under- stand, then the use of tolling and P3 procurements stand a better chance of being accepted when the policy is applied to a specific—and real—project. For example, one rationale might be to simply provide a supplemental revenue source to enable a project to be built sooner than it would be without such funding. Another rationale might be to provide the abil- ity to manage demand on one (or more) corridors to ensure mobility. Policy objectives must be clearly articulated and justified for both decision makers and the public for a tolling project to be accepted. Important Influence of Local Policies on the Use of Tolling and P3 Procurements In Texas, the use of tolling has been codified by both state and regional policies that require all new highway capacity to be considered for tolling. Local MPO officials in Dallas–Fort Worth recalled that up until 2 years ago, FHWA would require environmental documents for highway expansions to include nontolled and tolled alternatives. However, FHWA now allows NEPA documents in Texas to include only tolled alternatives because, as one TxDOT official put it: “Given the Texas Trans- portation Commission’s policy of tolling new highway capac- ity, nontolled alternatives are not realistic.” This example illustrates how policies can affect tolling acceptability as a project moves into the NEPA process. Addi- tionally, understanding and acceptance of toll policies may help to alleviate fear among private operators worried about failing to recover any up-front costs associated with early

38 been obtained to consider the possibility of tolls, a reevalua- tion would be necessary, and reevaluations should be avoided whenever possible.” Through the NEPA process, the public and corridor stakeholders can be introduced to the project- specific advantages tolling may offer for the facility. NEPA’s open process allows and encourages people from all walks of life to ask questions, weigh the benefits and disadvantages, and perhaps alter their attitudes and opinions about a project. Although tolling cannot be included in a NEPA purpose and need statement, arbitrarily, it should and, in fact, must be included when there is a planning basis for doing so. Resolu- tions that recognize tolling, the policies that support them, and the plans that articulate them cannot be adopted without an open and concerted public vetting process. provide potential partners with an opportunity to comment on project design on an informal basis. If P3 procurement is going to be considered, it is helpful to keep the NEPA docu- ment as flexible as possible to enable private partners to look for ways to deliver the project as cost-effective as possible, without having to revisit the NEPA approval to incorporate the resulting innovations into the project. In the words of one infrastructure firm executive: “Public agencies should learn to stop design at the point when they gain environmental approvals. Then there are opportunities to innovate.” That is not to say, however, that consideration of tolls as a project revenue source should not be part of the NEPA eval- uation. In fact, opinion is quite the opposite. One MPO offi- cial stresses that “If you wait until a record of decision has