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

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47 The first five chapters of this report presented the findings of the research conducted for SHRP 2 Project C12. Chapter 6 interprets these findings to identify steps that may be taken to advance the state of the practice while considering P3s within the context of the existing planning and environmental review processes, which are largely fixed and codified. The sections that follow present strategies that arose in the research team’s dis­ cussions with both public­sector and private­sector P3 practi­ tioners throughout the United States. These strategies include • Introducing tolling and alternative funding, together with the possibility of P3 procurements, during NEPA and the state and regional planning processes. • Aligning project definition with revenue potential and available funding. • Managing NEPA and other strategies to afford greater flexibility and speed. These strategies and suggestions are also supported by proof of application gained from the research. The chapter begins with an examination of how toll reve­ nue and finance as well as the use of P3s might be considered during state and regional planning. The chapter then discusses carrying these considerations into the NEPA evaluation on a project­specific basis and examines issues concerning align­ ment of project definition with revenue potential and available funding. Several recommendations are made to build flexibil­ ity into the NEPA process, as well as post­NEPA, to facilitate the possibility of procuring a project on a P3 basis. The chapter concludes with an overall recommendation for enhancing the Decision Guide to consider the potential for P3 development. Incorporating Tolling and P3s in State and Regional Planning Systematic consideration of P3s and the revenue sources often used to help finance them (especially tolling) begins with state and regional planning activities. The interview findings support the idea that such consideration, however, should begin simply with alternative funding and financing strategies. P3 consid­ eration can come at a later point, which may or may not occur during the long­range planning phase of the Decision Guide. Advantage may be gained by addressing the feasibility of toll­ ing to support projects, in terms of both finance and public acceptance, before addressing the feasibility of P3s. In some states and under certain circumstances, equating tolls with P3s only complicates the challenges with establishing tolling as a viable, standalone strategy. It should be noted that there are different forms of P3s and alternative delivery mechanisms that do not involve tolling (see Chapter 2). If this approach is adopted and further analysis points toward a possible P3 pro­ curement, the feasibility of tolling as a revenue source will already have been assessed. In addition, consideration of both tolling and P3 delivery may occur during the planning process if complementary regional or state policies are in place. Considering Tolling and P3s During the Planning Process The revenue sources included in most long­range plans reflect 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 consid­ ered in long­range planning, because P3 projects with stand­ alone 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 a project’s development process, and often not until an agreement has been reached with a private partner and project financing is being arranged. Nonetheless, P3s can be a better integrated and viable option for project delivery if revenue sources most com­ monly associated with P3s (including tolls) are considered more systematically during the planning process. General opposition to tolling often inhibits the consideration of tolls and P3 procurements during the long­range planning C h a P T e R 6 Encouraging and Facilitating Early Consideration of P3s

48 • Establish a precedent for P3 consideration to build the evidence needed to support fiscal constraint with toll or P3­related revenue. • Shape a planning process to help narrow the range of fea­ sible alternatives to be considered during NEPA, including those that require support from tolls or other nontraditional funding sources, in addition to including such information in a purpose and need statement (see the section on incor­ porating tolling and other alternative funding into purpose and need statements). NCTCOG, the MPO in the Dallas–Fort Worth region, pro­ vides a prime example of an agency that has adopted a regional policy on tolling to help accomplish the three objectives, as identified above. It should be noted that NCTCOG’s regional toll policy is not intended to dictate the application or even mandate consideration of P3s but rather to recognize the reality that traditional transportation funding available to the region is insufficient to meet mobility needs. NCTCOG Sets an Example Among a broader set of regional policies, NCTCOG has estab­ lished 13 policies that guide its development of roadways in the Dallas–Fort Worth region. According to NCTCOG’s 2011 guidelines, the two most significant policies to the develop­ ment of toll roads (and, by extension, to the development of P3s) are evaluation of all new limited­access capacity for priced facility potential and maximization of the use of available funds where reasonable, priced facilities are developed with minimal or no federal and state funding assistance. These policies date back to the 1990s and were put in place as a means to manage congestion, to generate needed reve­ nue, and to minimize the amount of public funds required to implement projects. The policies predate state statutory authority to procure projects on a P3 basis, which itself has undergone several rounds of modification since its full incep­ tion in 2003 and is now legislated on a project­specific basis. Shortly after the state’s P3 authorization passed, the Texas Transportation Commission mandated that all statewide controlled­access mobility projects in any phase of develop­ ment or construction must be evaluated for tolling. NCTCOG has used its policies pertaining to regional toll road development as a framework for its MTP. An NCTCOG official remarked that the 2035 MTP contains $6 billion in expected revenues generated from projects that will be priced, including both traditional toll roads and priced managed lanes. The funding needed to build these projects is assumed to come from these toll proceeds and, in fact, if the proposed roadway improvements are not tolled, they will not be built. NCTCOG staff interviewed for this research point out that with these policies in place, a vision for a sustainable, regional roadway process. In this regard, while tolls are the most common rev­ enue source used for P3 projects, they are only charged in a limited number of metropolitan areas around the country. Moreover, the use of tolling is a sensitive subject that is often considered to be “off the table” in many regions. If an area has no previous history of tolling or P3s, it is not clear that use of tolling can even be counted toward an area’s fiscally constrained financial plan because of a lack of precedent. As described in Chapter 3, toll revenue, private equity, or other funding sources associated with P3 project implementation must be identified in fiscally constrained planning documents (the MTP and TIP/ STIP). They must also meet FHWA’s test of “reasonably expected to be available,” or in the case of nonattainment and mainte­ nance areas, the more strict requirement of “available” or “com­ mitted” for the first 2 years of a TIP and STIP. For toll revenue or other revenue associated with a P3 to count toward fiscal constraint, FHWA requires clear evidence of previous use or support from an appropriate decision­making body, such as a state legislature. Early P3 consideration is often difficult to obtain simply because some states still do not have legislation allowing P3 procurement and also due to the high level of uncertainty about the components of P3 financing. Sponsoring agencies would be well advised to consider P3s and tolling despite these inhibiting factors, keeping in mind that a primary pur­ pose of long­range plans is to establish regional transporta­ tion goals and policies to direct future project development, as described in the next section. Indeed, long­range planning and regional transportation policies are mutually supportive: the long­range planning process can develop regional poli­ cies supportive of tolling and P3s, and regional policies can help guide future transportation planning to better incor­ porate the financial considerations of toll roads and P3 development. Achieving this goal may require modifications to the long­ range planning process to directly explore possible use of alter­ native revenue sources and the use of innovative procurement approaches, which could provide new sources of capital and financing. This requires adopting a more flexible view of avail­ able resources. In the absence of reform to federal require­ ments, regional and state policies offer avenues to achieving improved access to funding sources. Developing Regional or State Policies One method to facilitate the consideration of P3s and toll­ ing during the planning process is through development of regional or state policies that encourage such consideration. This approach allows the public sector to • Establish a framework for public education and debate to raise the level of understanding for transportation needs and those that can be met with P3s.

49 for the MLSP (HNTB Corporation 2010) also discusses link­ ing the plan to the region’s MTP and ultimately to project­ specific NEPA analyses—important considerations that are discussed in the next section: The document is envisioned as a source for projects to be added to [the Atlanta Regional Council’s] MTP and the adop­ tion of “special funding sources” (tolls and public–private financing), which together rely on the continuity of system­ wide managed lane tolling. Analysis conducted as part of the system plan is also expected to form the basis for alter­ native evaluation in specific corridor NEPA studies. The cost of the managed lanes and the anticipated private funding required should be incorporated into the need and purpose of the NEPA document. The costs of the MLSP as part of a fiscally constrained TIP should demonstrate the amount of investment of public and private funds and help to build public understanding and trust. Nonetheless, as the section on strategies for gaining public support for P3 projects in Chapter 4 summarized, as of 2012, the P3 approach in Georgia has been curtailed at the state’s executive level, indicating that a regional toll policy is not necessarily the definitive avenue to P3 implementation. In addition, regional policies at the metropolitan level may support tolls or pricing on roadway expansion, but to be read­ ily feasible, the policies must be consistent with the expected characteristics of P3 procurements to qualify private­sector involvement. For example, the San Diego Association of Gov­ ernments (SANDAG) leads the development of a regional network of HOT lanes, but its board has established a policy requiring application of any excess revenue from the opera­ tions of a HOT lane to support transit operations within the same corridor. This regional policy discourages consideration of P3 development, because funds retained by the private sec­ tor are not available for transit operations. Washington State’s legislative requirements make P3 devel­ opment of highways highly unlikely. A full P3 procurement in Washington State requires separate legislative approvals for both tolling and the P3 procurement on a project­by­project basis. The legislature has also established other requirements that would apply to any P3 projects: the most notable is that any financings associated with P3 projects must be issued as public debt. One senior WSDOT official describes these requirements as a “P3 poison pill,” and, as a result, the department is focused on nonhighway P3 opportunities, such as the implementation of privately financed fast­charge facilities along I­5 for electric vehicles and the possible redevelopment of ferry terminals. The DOT official also was quick to point out that policies in other states and countries can take an opposite approach to P3 development, noting that in British Columbia and Ontario, for example, any transportation project over $50 million must be evaluated for implementation on a P3 basis. network is relying in part on toll roads and, to an extent, on P3s, and such financing is generally accepted by the public, stakeholders, and potential private partners. It is important to note that fiscal constraint has also been demonstrated. Taking the case project a step further, toll roads in the NCTCOG region are seen not simply as roads that pay for themselves but rather as roads that have broader impli­ cations, as the money they generate is used throughout the region to optimize financing for additional improvements. That is, these facilities are an integral component to a regional plan of finance. This approach is supported by an NCTCOG policy on excess toll revenue from nonmanaged lane facilities, whereby the revenue is allocated at the county level to fund projects selected on a cooperative basis among NCTCOG, TxDOT, cities, and counties. NCTCOG also maintains a flexible relationship with other transportation agencies in North Texas. A senior TxDOT offi­ cial reported that in 2011, the department had a new project that it wanted to get into the new MTP in Dallas. At the time, TxDOT had several projects in the old planning process and had obtained NCTCOG agreement to include the latest proj­ ect if TxDOT could demonstrate within 6 months that the environmental impacts of its projects already in the plan could be addressed with FONSIs. In the end, TxDOT succeeded in obtaining FONSIs for three of the five projects, and NCTCOG then incorporated those projects into the MTP, removing the other two. Other regions are beginning to examine NCTCOG’s model. Officials at the agency receive inquiries monthly from other agencies in Anchorage, Austin, Kansas City, Phoenix, and San Antonio, among others, about how to incorporate toll proj­ ects into financially constrained plans. Policies Must Be Supported and Complementary with Others Adopting a policy that prioritizes tolled or priced roadway expansion does not ensure that P3s will be considered, because both the Atlanta and the San Diego metropolitan regional projects have demonstrated. Support for P3s throughout all levels of government, as well as complementary and compat­ ible policies on the use of toll revenue, are also necessary for P3 implementation. In June 2007, Georgia’s state transportation board adopted a resolution stating that all new capacity within limited­access corridors in the Atlanta metropolitan region would be man­ aged, including HOV lanes, HOT lanes, and express toll lanes. Two years later, the Atlanta Regional Managed Lane System Plan (MLSP) was established to implement this policy, and P3s are an integral part of the plan’s development and are included in its financial feasibility analysis as an option assumed to be available for project delivery. The implementation strategy

50 Appendix A to 23 C.F.R. § pt. 450 (Linking the Transportation and NEPA Processes), which is nonregulatory, describes how the transportation planning process can be used to develop a project’s purpose and need statement: a. Goals and objectives from the transportation planning pro­ cess may be part of a project’s purpose and need statement. b. A general travel corridor or general mode or modes (e.g., highway, transit, or highway/transit combination) result­ ing from planning analyses may be part of a project’s pur­ pose and need statement. c. If the financial plan for a metropolitan transportation plan indicates that funding for a specific project will require spe­ cial funding sources (e.g., tolls or public–private financ­ ing), such information may be included in the purpose and need statement. d. The results of analyses from management systems (e.g., congestion, pavement, bridge, and/or safety) may shape the purpose and need statement. In particular, Item (c) is the relevant bridge between the consideration of toll and other alternative funding sources during the long­range planning and policy development pro­ cesses described in the beginning of this chapter and their continued consideration and evolution during the NEPA pro­ cess, specific to a single transportation improvement. Federal regulation also stipulates that the “use of these planning­level goals and choices must be appropriately explained during NEPA scoping and in the NEPA document.” Alternative funding sources, such as tolls, are often criti­ cal to successful private­sector involvement in a P3. Carrying their consideration forward from long­range planning into NEPA positions a public sponsor to make a decision on pro­ curing a project on a P3 basis at the juncture it deems most appropriate. In this manner project financing, including from the private sector, can be evaluated among the alternatives considered in the NEPA document, as discussed in the next section. Incorporating Tolling and Other Alternative Funding into NEPA Alternatives Analyses After the development of a project’s purpose and need, the lead agencies are responsible for developing the range of proj­ ect alternatives. An alternatives analysis develops, evaluates, and eliminates potential alternatives based on the project’s purpose and need and allows the public to understand what options are available to the project’s sponsor to satisfy the stated objectives (Center for Environmental Excellence 2012). A full range of alternatives must be considered, but this does not mean every potential alternative need be included. Appendix A to 23 C.F.R. § pt. 450 lists the nonregulatory ways Incorporating Tolling and Other alternative Funding in NePa Consideration of tolling and other alternative funding sources to be used to finance a P3 should continue into the NEPA process on a project­specific basis. Indeed, incorporation of funding sources into statements of purpose and need and subsequent alternatives analyses (as suggested, for example, in the case of Atlanta’s MLSP) are permitted and encouraged through federal regulation and guidance on linking the plan­ ning and environmental review processes. Nonetheless, chal­ lenges remain to establishing this approach as standard practice. Although a project may be implemented through a P3, it may not have to be addressed within an EIS because that determi­ nation is based on a project’s level of impact and mitigation (and not by financing). There are significant advantages to taking this approach, both because it increases public aware­ ness and anticipates potential issues that are peculiar to tolled or P3 projects that might otherwise raise questions later in a project’s development. Incorporating Tolling and Other Alternative Funding into Purpose and Need Statements According to Council on Environmental Quality regulations (40 C.F.R. § 1502.13), an environmental document’s purpose and need statement “shall briefly specify the underlying pur­ pose and need to which the agency is responding in proposing the alternatives including the proposed action.” The statement must clearly express the objectives that the proposed action is designed to achieve by making a transportation improvement. According to 23 C.F.R. § pt. 450, Appendix A, such objectives may include a. Achieving a transportation objective identified in an appli­ cable statewide or metropolitan transportation plan; b. Supporting land use, economic development, or growth objectives established in applicable federal, state, local, or tribal plans; and c. Serving national defense, national security, or other national objectives, as established in federal laws, plans, or policies. The lead agency (in the case of a highway project, typically FHWA and often a state or a local transportation agency) is responsible for development; in the case of an EIS or EA (as distinct from a CE), the lead agency must consider input from other agencies and the public. The transportation planning process is an appropriate and encouraged source for a project’s purpose and need statement. Planning regulations in 23 C.F.R. § pt. 450 allow documents or source material produced during the planning process to be incorporated directly or by reference into an NEPA document.

51 FHWA chief counsel white paper on alternatives analysis emphasizes the importance of using “sound project cost esti­ mation methods during screening to eliminate alternatives that are not economically feasible . . . lead agencies cannot make a determination about an alternative’s economic feasi­ bility without supporting cost estimates and an analysis of likely revenue (funding) sources” (FHWA 2010). When conducting an EIS, the lead agencies must provide opportunities for participating agency and public involve­ ment in developing project alternatives and must consider the input provided by these groups. The opportunity for involve­ ment may occur through “public workshops or meetings, solicitations of verbal or written input, conference calls, post­ ings on web sites, distribution of printed materials, or any other involvement technique or medium” (FHWA 2006). The development of the project’s purpose and need and range of alternatives with participating agency and public input builds awareness and consensus for the use of tolls or an alternative funding source and for the possibility of imple­ menting the project as a P3. This process of project finance consideration can continue through the evaluation of the selected alternatives in terms of their environmental impacts and options for mitigation and on through the selection of a preferred alternative. This allows public sponsors to mitigate unanticipated backlash and the potential for succumbing to the “chutes and ladders” phenomenon of needing to revisit environmental or financial analysis resulting from insufficient consideration or preparation during earlier planning and NEPA activities. Nonetheless, challenges remain when exam­ ining this approach in practice. Challenges with a Tolling Focus During Planning and NEPA Despite federal regulatory provisions concerning incorpora­ tion of tolls and private financing into project purpose and need and NEPA alternatives, there has been limited experience in practice to judge the success of a systematic application of this strategy. The Dallas–Fort Worth Metroplex experience, introduced earlier, illustrates that even in a progressive region where NCTCOG has been at the forefront of mandatorily considering toll road options for new limited­access highway capacity—as well as using P3s to implement some of these projects—focusing on toll road options during NEPA has not been without its challenges. Those interviewed at NCTCOG indicated that they have worked diligently over the past 10 years or so with the FHWA Texas Division Office to apply its mandatory toll road consid­ eration policy to NEPA documents. The Texas Division Office tends to take a conservative approach to approving purpose and need and alternative analysis strategies that narrow the focus of a project to a particular (and often potentially in which the transportation planning process can eliminate alternatives through a project’s purpose and need: 1. The transportation planning process has selected a gen­ eral travel corridor as best addressing identified transpor­ tation problems, and the rationale for the determination in the planning document is reflected in the purpose and need statement of the subsequent NEPA document. 2. The transportation planning process has selected a general mode (e.g., highway, transit, or a highway/transit combina­ tion) that accomplishes its goals and objectives, and these documented determinations are reflected in the purpose and need statement of the subsequent NEPA document. 3. The transportation planning process determines that the project needs to be funded by tolls or other nontraditional funding sources for the long­range transportation plan to be fiscally constrained or identifies goals and objectives that can only be met by toll roads or other nontraditional funding sources and that determination of those goals and objectives is reflected in the purpose and need statements of the subsequent NEPA document. These provisions are similar to those permitted when link­ ing the development of purpose and need to the planning pro­ cess. As per Item 3, if the long­range planning process confirms the need for tolls or other alternative funding to meet fiscal constraint and the plan’s objectives (as reflected in the pur­ pose and need) can only be met under such a scenario, alter­ natives, without tolls or without the provision for alternative funding sources, do not need to be considered in the NEPA analysis. The legal basis for this provision was articulated in a 2004 FHWA chief counsel memorandum responding to an inquiry from the Colorado DOT (FHWA 2004). Specifically, the memorandum concludes, If the need for a toll road comes out of the transportation planning process, then tolling could be included as part of the purpose and need statement for an environmental analysis under NEPA. Absent these circumstances, specific goals and objectives of a project, such as the urgency of the project or the need to relieve congestion, could narrow the range of reason­ able alternatives to only toll road alternatives. Finally, the eco­ nomic feasibility of a particular alternative, especially when considered in conjunction with other factors, might provide the basis for eliminating that alternative as unreasonable. Even so, the memorandum acknowledges and cautions against the potential public challenges that must be faced when proposing a toll road: “In circumstance where a public controversy exists regarding the use of tolls on a road, it may be advisable, even though not required, to examine nontoll alternatives in the NEPA document so as to help avoid future litigation.” Nonetheless, regardless of the funding strategy, an

52 compliance with other applicable environmental laws and executive orders.” An alternatives analysis to determine the “range of reasonable alternatives” is more rigorous for an EIS than for an EA, as summarized in the FHWA office of the chief counsel’s white paper on alternatives analysis, as cited earlier (FHWA 2010). The white paper states: “In cases involving EA/FONSIs, some courts have found the obligation to consider alternatives to be less than that required for an EIS, and consequently have allowed agencies to study a more limited range of alternatives, including the use of so­called ‘Build/No­Build’ or ‘Project/No­Project’ analyses.” In using a Build/No­Build EA where only one alternative is compared against taking no action, only a “brief discussion of other alternatives considered and the basis for rejecting them dur­ ing the scoping process” is required. The advantage of an EIS is that it requires comprehensive and rigorous analysis and agency coordination. The downside is that EISs are usually both resource­intensive and time­intensive. Agency and public involvement for an EA is also less encompassing than it is for an EIS. The SAFETEA­LU estab­ lished a revised process when conducting an EIS for highway projects that “requires a new public comment process on pur­ pose and need and the range of alternatives, encourages more participation from more agencies and organizations, and defines more formal roles for state, local and tribal agencies in the process.” (FHWA 2012e; 23 U.S.C. § 139). An EA is not subject to this heightened level of agency and public involve­ ment; EAs do not require participating agencies, for example, federal and nonfederal agencies that may have an interest in the project (23 U.S.C. § 139d) to be invited, nor do EAs require involvement of cooperating agencies, those that have “jurisdiction by law or special expertise” regarding the proposed action (40 C.F.R. § 1508.5). (The glossary in Appen­ dix A lists a further definition for these types of agencies.) Additionally, in its summary of FHWA regulations found in 23 C.F.R. pt. 771, the FHWA Environmental Review Toolkit states: “EAs do not need to be circulated but they must be made available to the public through notices of availability in local, state, or regional clearinghouses, newspapers and other means. Depending on the FHWA­approved state public involvement procedures, a public hearing may or may not be required” (FHWA 2012f). Overall, the involvement of inter­ ested or affected federal and nonfederal agencies and the public is far more rigorous and prescribed for an EIS than for an EA. If the level of agency and public involvement required of an EIS is not reproduced in some fashion for an EA, the opportunity may be missed to uncover potentially problem­ atic public acceptance issues. With a potential P3 project, these aspects especially include those associated with private involvement or operation, including tolling and toll rate setting. more controversial) means of implementation, in this case, for example, one that uses tolls. The office’s position is one that directly correlates to public perception, which, given the public’s opportunity for involvement in NEPA, naturally affects the kinds of alternatives they prefer to see. Over time and with the experience of five or six large high­ way projects, NCTCOG and the local TxDOT districts have been able to gain acceptance from the Division Office to elim­ inate nontolled alternatives from consideration, an achieve­ ment that only occurred in 2009 despite the basis established in FHWA’s 2004 legal determination previously referenced. The challenge was that the application of tolling is often per­ ceived as an effort simply to raise revenue. This challenge slowly had to be overcome, and again, the Division Office’s decision was heavily influenced by public opinion. Through this evo­ lutionary process, which included capitalizing on comple­ mentary and favored policies on toll rate setting and revenue distribution, NCTCOG has identified purpose and need objec­ tives potentially leading to P3 implementation with greater public buy­in, building flexibility into the NEPA process to allow a P3 option if it emerges as the most feasible. Even with­ out a single mile of priced managed lane capacity yet open at the time of this research’s completion (much of which is being implemented through DBFOM or design–build pro­ curements), NCTCOG staff highlights that a level of public trust has been built, such that project planning and develop­ ment continues in the region for additional priced roadway capacity with private­sector involvement. Environmental Impact Statements The level of public scrutiny, skepticism, and often controversy with P3s, as well as the fact that they are most often applied to projects of significant need, cost, and complexity, may mean that a P3 project would be subject to an EIS rather than to a lesser class of action, such as an EA or even a CE. This is particularly the case when a P3 is proposed for a new facility, rather than for an expansion or operational change of an existing facility. If it appears that the project may not require an EIS, an EA would be prepared to determine whether an EIS is required. In fact, there may be merit in proceeding under the assumption that an EIS is necessary for a P3 and, specifically, for one that incorporates private­sector financing (e.g., DBF and DBFOM). The decision about the type of NEPA document to be used to clear projects is ultimately made by the project sponsor and federal lead agencies. The FHWA Environmental Review Toolkit (FHWA 2012d) states that an environmental impact statement “is a full dis­ closure document that details the process through which a transportation project was developed, includes consideration of a range of reasonable alternatives, analyzes the potential impacts resulting from the alternatives, and demonstrates

53 As this experience demonstrates, one of the most important findings from the research is the need to identify and address the challenge posed by funding gaps early on, and then to use the Decision Guide processes to vet the different options to advance projects. This approach is more common in the pub­ lic toll road sector where revenue potential is assessed up front. This involves forecasting future cash flows and determining what level of debt they would be able to support. Once this is known, design can be developed that adheres to the rev­ enues the project will be able to generate and, in cases where this is not possible, the additional level of public subsidy needed to move into implementation can be identified. Pri­ vate investors use this same general approach when assess­ ing whether to pursue potential P3 opportunities. The sections that follow describe how the Decision Guide could be adapted and how to use the planning and NEPA processes to intro­ duce these analyses earlier in the development of highway improvement projects. Assessing Revenue Potential Whenever tolls are considered as a revenue source for new highway improvement projects, there is the obvious question about how much money can be generated. Traditional four­ step travel demand forecast models and the newer generation of activity based models are used regularly to generate toll revenue forecasts. However, these modeling tools may need to be adapted to be used in regions that do not have existing toll roads. Toll revenue forecasts are prepared at several different levels of resolution, with initial feasibility studies often rely­ ing on standard assumptions on the value of time and pricing elasticities that are derived from data collected on existing toll facilities. However, more detailed analyses require an increas­ ingly nuanced understanding of the local context and often extensive survey efforts. MPOs in regions that have not considered tolling or P3 procurements in the past should consider enhancing their modeling tools to be able to study the possible use of tolling. Travel demand and toll revenue forecasting models are the subject of numerous SHRP 2 and NCHRP studies, which provide excellent information on the mechanics involved. In particular, the NCHRP 08­57 publication Improved Frame- work and Tools for Highway Pricing Decisions provides exten­ sive documentation on enhancements to travel demand models to evaluate both fixed and variably priced tolls (Parsons Brinckerhoff, Inc. 2009). SHRP 2 Project C04, Improving Our Understanding of How Highway Congestion and Pric­ ing Affect Travel Demand, advances the state of the practice in modeling the effects of highway congestion and pric ing on travelers’ decisions, including the choices of facility, route, mode, and time of day. Model enhancements needed to do high­level conceptual analyses do not require extensive The I­95/I­395 HOT lanes project in Northern Virginia may offer a related example. As was mentioned in Chapter 5, the I­95 HOT Lanes, a DBFOM P3 project, no longer includes improvements to I­395 inside the Capital Beltway. Arlington County objected to expanding the managed lane capacity along I­395, seeing little merit in doing so in a dense urban environment. Instead, they advocated for dedicating any expanded right­of­way to buses. They filed a lawsuit chal­ lenging the commonwealth’s decision to clear that portion of the project using a categorical exclusion, claiming insufficient environmental analysis had been conducted. Interviews con­ ducted for this research indicate there are those who believe that if a full EIS process had been conducted for the project, rather than using a CE and EA in combination, this outcome could have been avoided. An EIS would have provided a platform for vetting and mitigating the issues raised by Arlington County. aligning Project Definition with Revenue Potential and available Funding Despite the requirement for MPOs and state DOTs to develop financial plans and demonstrate fiscal constraint on MTPs, TIPs, and STIPs in order to gain fiscal clearance, some projects receive environmental clearance and then languish due to lack of funding and the recognition that regional priorities may not justify their expense given other needs. When such situa­ tions arise, projects either are not built or they are altered to become financially feasible. This may involve breaking them into smaller pieces, scaling back the scope of the project, or introducing tolling. As was described in Chapter 5, the altera­ tion of projects is likely to require the NEPA process to be reopened. This invariably leads to delays and also subjects proj­ ects to the vagaries of inflation, changes in commodity costs, and to public skepticism. As a senior TxDOT official responsible for the implemen­ tation of P3 projects observes, There is never enough money. In order to develop a NEPA footprint that aligns with the P3 process, you need a realistic project. TxDOT was introduced to P3 development with the LBJ Managed Lane project in Dallas. As it was preparing for the procurement, the private sector asked for clarity on three fundamental issues: 1. What is the scope of the project? 2. How will the project be procured? 3. How will the private partner be paid—project revenue, up­front subsidy, or subsidy over time? These questions took TxDOT back to the environmental analysis because they needed to modify the scope of the project to align with the financial resources—both public and private— that were expected to be available.

54 The scaling of projects and the extent to which design excep­ tions are allowed have a significant impact on cost. It is not uncommon for EISs to identify a set of alternatives that are unnecessarily expensive. If this situation is not addressed through the review process, it may lead to projects gaining final environmental clearance but not being implemented because of prohibitive cost. The research has focused on two cases where overdesigned projects were advanced and then reconsidered. One of these is the Capital Beltway HOT Lanes. The March 2002 DEIS of VDOT assessed three HOV­widening alternatives, together with 15 interchange improvement con­ cepts with significant property impacts. The alternatives would have required up to 170 acres of new right­of­way and the dis­ placement of nearly 300 residences, impacts to 32 commercial properties, and impacts to eight Section 4(f) resources. The costs of the alternatives were also extremely high, ranging from $2.68 to $3.25 billion. Many local governments and residents expressed concerns over the extent and scale of the project during the public com­ ment period. However, before it had the chance to revisit the DEIS alternatives, VDOT received an unsolicited offer from a private developer who proposed to add four new HOT lanes working entirely within the existing right­of­way. The private proposal not only addressed the public’s concerns with the invasive scale of the proposed alternatives but it also reduced the estimated cost of the project by approximately $1 bil­ lion (subsequent design refinements raised the project cost to $2.0 billion, which is still significantly less than the original estimate). Several design exceptions were needed to keep the Beltway widening within the existing right­of­way, but the review process was flexible enough to accommodate making the required modifications. In so doing, the cost of the project was significantly reduced, and with a $409 million subsidy from VDOT, it became possible to implement it on a real toll DBFOM P3 basis. VDOT’s subsidy, however, has increased to over $500 million due to subsequent design changes. The Ohio River Bridges is another major project that incurred significant delay as a result of being overdesigned. As described in Chapter 5, this project gained a ROD in 2003, but with an estimated cost of over $4.0 billion, the project did not advance. The excessive cost was driven by several design elements that proved excessive and unnecessary. These included a design for the East End Bridge and its access roads in both Kentucky and Indiana with six lanes, even though the existing highways they connected are only four lanes with no plans to expand them. Moreover, the entire length of the East End component of the project had full 12­foot shoulders, including the bridge itself and a 2,000­foot tunnel passing below a historic property in Kentucky. Initial plans for the Downtown Bridge called for it to have a 17­foot pedestrian/bicycle path, as well as 12­foot shoulders. Those plans also included relocating the Kennedy Interchange of resources to be put in place and can provide local decision makers with a basic understanding of the revenue generation potential of different highway improvement projects under consideration. These forecasts are an essential first step toward the facilitation of regional decision making on the potential of tolling for meeting local transportation investment needs. Defining Reasonable Alternatives NEPA requires that EISs consider “all reasonable alternatives” (23 C.F.R. § 771.123(c) and 40 C.F.R. § 1502.14). With high­ way projects, alternatives are defined by factors, including location and alignment, the number of lanes, the use of toll­ ing, and operations strategies. Although the regulations do not specifically define the term “reasonable,” it is generally understood to mean those technically and economically fea­ sible project alternatives that would satisfy the primary objec­ tives of the project as defined in the purpose and need statement (Council on Environmental Quality 1981). Several factors drive the definition of highway improve­ ments in NEPA. One of the most fundamental is the size of a highway improvement. This involves determining the number of lanes the facility will have and the width of the shoulder. In an EIS, this is driven by the purpose and need statement, which usually identifies the volume of traffic the facility, should be designed to serve. These figures involve future year volumes that are normally derived from forecasts. Project sponsors should scrutinize any traffic volume benchmarks included in purpose and need statements to assess their reasonableness. The cost of implementing highway projects is far too great to build projects that are larger than necessary or that are too small to serve the intended purpose and need. In addition, numerous regulations require that impacts be avoided or mini­ mized. If a project is too large, consequent mitigation efforts may be more difficult and costly than necessary. Design standards are the other major factor driving the cost of alternatives that emerge from NEPA analyses. FHWA requires highway projects that receive federal funding to be designed according to the standards set forth by AASHTO in its publication, A Policy on Geometric Design of Highways and Streets, commonly referred to as the “Green Book.” Although the Green Book establishes standards for all parameters ger­ mane to highway design, it also includes exception procedures that allow certain elements of highway projects to be designed to less rigorous standards as a result of economic, physical, social, or environmental constraints. All design exceptions must be approved by FHWA, and exceptions are regularly allowed to avoid right­of­way takings or the reconstruction of existing overpasses or structures. Design exceptions may also be permitted to avoid excessive construction costs. Design exceptions are commonly associated with improvements to existing highways where rights­of­way are constrained.

55 Although the preparation of financial plans would be help­ ful in enabling project sponsors to determine if different alter­ natives are actually affordable, project­specific cash flow models and financial plans are not required as part of NEPA or the planning process. FHWA, however, requires 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 finan­ cial plan as early in the project development process as practi­ cal, it generally expects to receive an initial version of the plan either at the time a ROD is issued or before right­of­way acqui­ sition. Final financial plans must be approved before federal­ aid funding may be authorized for project construction. Financial plans are also required for projects receiving federal funding with costs over $100 million and below $500 million, but such plans do not need FHWA approval. If project sponsors were to perform cash flow assessments for large and complex projects earlier in the project develop­ ment process, they would be able to determine early on whether funding gaps exist. If this determination is made while proj­ ects are still in NEPA, then additional alternatives reducing capital costs or generating new revenues through tolling could also be assessed. Similarly, this type of analysis would help DOTs to determine if particular projects have the potential to be largely financed through toll revenues and would also enable them to identify those projects with the potential to be devel­ oped on a P3 basis. Interestingly, the federal financial plan requirements caused several regions, including Louisville/Southern Indiana, to come to the realization that projects are unaffordable and either need to be rethought or possibly dropped. Several of those interviewed expressed frustration with FHWA’s major project requirements; however, the sentiment was also expressed that the requirements do cause project sponsors to think about the fundamental underpinning of large projects. While add­ ing additional steps to a complex and time­consuming pro­ cess like NEPA has an obvious downside, there is merit to encouraging project sponsors to face the difficult question of project funding while projects are still being defined. Doing so earlier in the process would enable owners to assess the feasibility of projects and understand the interplay between streamlining costs and the ability to generate revenue. Doing so would also help owners identify projects that may be fea­ sible to implement as P3s. Managing the NePa Process to afford Greater Speed and Flexibility Gaining environmental clearance for complex highway improvements is a challenging endeavor at best. The process is full of unknowns, from design challenges to unforeseen I­64, I­65 and I­71 in downtown Louisville to the south of its existing location at a cost of over $1.0 billion. In the end, these design elements were revisited as part of a supplemental EIS. The design now reduces the East End Crossing to four lanes, removes the pedestrian/bicycle path from the Downtown Bridge, and reconstructs the Kennedy Interchange in place. These changes have reduced the cost of the project by nearly 43%. The crossings will be tolled and Kentucky will procure the new Downtown Bridge on a design– build basis while Indiana will implement the East End Bridge as an availability payment P3. Design consultants on the proj­ ect questioned the need for the large scale of the initial concept, particularly the use of 12­foot shoulders on major bridges and a tunnel and providing six lanes on the East Bridge. They report that the FHWA division offices pushed back against their sug­ gestions to reduce the scale of the project, arguing that the wide shoulders were necessary for safety purposes and the wider East End cross section was necessary to provide the desired lev­ els of traffic service on the projects. In the end, the governors of Kentucky and Indiana interjected their collective opinion that the project was too large and established a bistate commis­ sion to arrive at a sustainable solution. Assembling a Financial Plan Financial plans are the nexus where project costs and expected outlays during construction are benchmarked against the revenue generation potential of a project, the debt that such revenue can leverage, and other available funding. As such, they are an operative tool for determining whether projects are actually affordable. Financial plans distribute the esti­ mated cost of constructing projects based on the anticipated sequencing of construction activities and track when revenues being used for the project will be available, as well as any proj­ ect debt. These inputs are then imported into a pro forma cash flow model that documents the amount of money needed on an annual or monthly basis throughout the implementa­ tion period. With P3 projects, cash flow models also extend throughout the concession period and consider expected toll proceeds, debt service, toll collection, and operational costs, as well as routine and major maintenance. Cash flow models are essential tools in assessing the merits of different financing options and help private partners iden­ tify an optimal financing strategy. They are also an important tool for public agencies, enabling determination of the rate of construction that the annual available revenues will support. They also are essential in managing large construction pro­ grams that are often supported by dedicated revenues, includ­ ing state and local sales tax or motor fuel tax measures. When procuring P3 projects, public agencies use the cash flow model to develop a base case against which the offers submitted by different proposers are gauged in public­sector comparator assessments.

56 information gathering process should be expanded to include the additional data sets needed to assess future P3 potential and should ensure that the data emerging from the environ­ mental review is consistent and suitable for use in various analyses. Project sponsors should ensure that the data can support considerations that might not need to be assessed in the absence of P3 development. This is particularly true with traffic data, which is used to assess traffic, air quality, and noise impacts, among other issues. With toll projects, traffic forecasts are also used to estimate revenue generation potential and to test the ability of different toll rates needed to achieve desired operational and revenue generation goals. In many cases, extensive data collection and survey efforts are needed to enhance the ability of existing travel demand models used to assess the effects of pricing on driver behavior and revenue generation potential. Modeling can be done at different levels of resolution and it can be expected that non­NEPA traffic data needs will become more detailed as projects advance to procurement and financial close. Spon­ sors of P3 projects must coordinate closely with MPOs to iden­ tify traffic data needs up front and to consider the merits of collecting that information in one coordinated effort, rather than in piecemeal fashion as new needs become apparent. Virginia’s OTP3 takes what it refers to as a “programmatic and project­specific approach” to data collection for P3 proj­ ects. The process begins with a project­specific risk analysis to identify the greatest risks (e.g., geotechnical conditions, haz­ ardous materials, cultural and historic resources) and then involves assessments that are similar to cost­benefit analyses. These assessments are used to compare the cost of collecting the information in question and the likelihood that the infor­ mation will enable proposers to submit lower costs. Project sponsors should also consider what data or studies produced during NEPA would help proposers develop a better understanding of risks as they prepare their proposals and also reduce the risk of reevaluations as a private partner finalizes project designs after the completion of NEPA. This strategy was reiterated by a Virginia OTP3 staffer: “If you are in the field collecting data, collecting a little more is relatively easy. The schedule and budget might discourage this, but in the end there is value to undertaking this additional effort, especially for projects that may be developed on a P3 basis.” For example, geotechnical risk is a common concern among potential private­sector partners as they consider P3 oppor­ tunities. If a P3 project involves underground risk, project sponsors might want to consider undertaking a more com­ prehensive set of soil borings than needed for NEPA purposes so that bidders have access to the information and can use the data to prepare more refined cost estimates. The only prudent approach for private partners in the absence of such data is to assume that issues may arise and to prepare for them by adjust­ ing cost estimates upward to account for this possibility. existing conditions and public acceptance challenges, all of which have the potential to cause delays or require previously completed individual analyses to be revisited. This reality is even more challenging with P3 projects that may include the added element of tolling and require other ancillary studies outside NEPA to assess toll feasibility, prepare P3 procure­ ment packages, and assess P3 offers (see Chapter 4). Although the potential for delay is great, it can be man­ aged with proactive up­front planning. This section describes numerous strategies that can be used to coordinate data needs within NEPA and the other analyses that go hand in hand with P3 procurements. In addition, it also discusses strategies to afford greater flexibility for future innovation by private partners after the completion of NEPA. Although undertaking the activities that follow may require additional time and cost on the part of project sponsors, it is a valu­ able investment as the information it provides will streamline the completion of NEPA and the other assessments that are needed to advance P3 projects. Moreover, the actions described also have the potential to reduce the likelihood that environ­ mental reevaluations or supplemental EISs may be necessary after the completion of NEPA due to innovations identified by a private partner. A DOT considering the use of P3 pro­ curements should identify the shortlist of projects with the potential for P3 development during the early stages of con­ ceptual development. The strategies that follow should then be applied on a programmatic basis as those projects move through NEPA order to expedite the process and avoid the risk of revisiting earlier stages of the project planning and development process. Local planners interviewed for the research believe that the risk of revisiting earlier analyses may also be avoided by mak­ ing existing regulations more flexible. For example, if a legacy project with NEPA clearance is waiting for funding, the NEPA and MPO documents often need to be revisited before the project can be built. As staff from NCTCOG explain, While federal guidance may suggest that this is the case, it may not be needed. The rules could allow you to say that you are adding eight lanes. That could involve four general purpose lanes per direction, or three general purpose lanes and one managed lane. There is no need for protracted analysis if a little flexibility is afforded. Nonetheless, NEPA requires the lead agency to determine whether a supplemental document is necessary based on operational details. In cases where additional analysis is not necessary, the agency still has to assess that possibility. Identifying Data Needs Up Front A great deal of up­front data gathering is required for an environmental evaluation. With potential P3 projects, the

57 PPTA program in 2009. That initial procurement was canceled and the commonwealth issued a new PPTA procurement in mid­2010. It is anticipated that the $1.7 billion availability payment concession is set to reach financial close in 2012. The benefits of VDOT’s innovative approach to clearing this proj­ ect remain to be seen. The outcome of this project should be watched closely, as it may serve as a model for others to fol­ low, if the flexibility afforded by this approach proves to have been helpful. Officials at GDOT also believe that potential benefits may be derived from the use of this approach, noting that [t]here appears to be a difference in opinion as to what changes would trigger reevaluations in different FHWA Division Offices around the country. You need to be legally sufficient to comply with NEPA, but it is helpful if NEPA can be cleared in as general a way as possible so that there is flexibility for innovation down the road. It may be possible to clear a footprint without specify­ ing other aspects of the design. 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 proj­ ects on a P3 basis. A balance must be struck between the need to reach a level of design that allows the project’s impacts to be properly considered and mitigated in an FEIS and the desire to maximize the flexibility for a private partner to innovate dur­ ing final design. NEPA documentation is usually completed as part of a project’s preliminary design. In fact, FHWA regulations pro­ vide that NEPA approval constitutes approval of “general project location and concepts” [23 C.F.R. § 771.113 3(b)]. Public owners can assume the risk of successfully completing this phase of work themselves, or as was discussed in Chap­ ter 5, public owners can share this risk by entering into a pre­ development agreement P3 before NEPA completion. In most cases, the level of design required to complete the NEPA process represents approximately 30% of the total project design. Though such designs lack detail, their importance should not be underestimated, because the design will spec­ ify the location and general project concept, both of which are often critical to the ultimate financial success of a P3 project. Even though a 30% design is usually sufficient for a public owner to obtain a NEPA approval, under certain circum­ stances (e.g., projects in environmentally sensitive areas) it may be necessary to design the project to a much higher level (e.g., 70% design) to address all potential impacts adequately. Where this is the case, federal participation is available for the increased design costs. However, design to this level of detail is typically the responsibility of the private P3 partner or the Study Areas in Environmental Documents The interviews conducted for the SHRP 2 C12 study revealed that in certain situations, expansion of study areas in envi­ ronmental documents for potential impacts may reduce schedule delays and enable greater design flexibility both dur­ ing NEPA and afterward. This is particularly true for inter­ change locations, because their costs are often quite high and variable, depending on project configuration. In addition, operational improvements are often necessary at interchanges when tolls are introduced on facilities that were initially designed to be toll­free. As a result, P3 partners can be expected to focus value engineering efforts on strategies to reconfigure interchanges to reduce construction costs and improve opera­ tional characteristics. If the analysis envelopes around interchange locations are not large enough to accommodate the review of different design options (e.g., if a compressed ramp configuration was assumed in an EIS, and later analysis indicated that a clover­ leaf design may be more appropriate), additional baseline data may need to be collected. This has the potential to cause delay, particularly if the project sponsor does not have a con­ tract in place for the data collection services. The baseline data are also helpful to private developers because they can develop their alternative designs to avoid sensitive areas, such as wetlands, which in turn might have the potential to limit the need for a reevaluation. The study area’s existing condi­ tions data are also essential to the lead agency responsible for overseeing the environmental process, because it helps them to determine whether the proposed changes would warrant a reevaluation. VDOT has also taken an interesting approach in clearing the U.S. Route 460 Corridor Improvements Project, which would involve construction of a new 55­mile four­lane divided limited­access highway between Petersburg and Suffolk in Virginia’s Tidewater area. The project is being constructed in an alignment through largely undeveloped land where, as OTP3 staff described, “the alternatives were literally lines on a map.” To provide maximum flexibility to its private development partner, VDOT gained environmental clearance for the proj­ ect with an EIS assessing the impact of a 250­foot wide “devel­ opment corridor,” located anywhere within a wider 500­foot “alignment corridor.” The average cross section of U.S. Route 460 is 131 feet wide. Although this unusual approach would seem to have overstated certain impacts, it affords the devel­ oper the flexibility to locate the project anywhere within the 500­foot alignment corridor. VDOT assumed that the benefits of this flexibility outweigh the cost associated with additional mitigation measures emanating from the review of the wider build section. The U.S. 460 project achieved a ROD in September 2008, and VDOT initiated procurement for the project through its

58 is a 13­mile east­west highway extending from SR 202 in Red­ mond west to I­5 in Seattle. A critical component of the route is the existing four­lane, 1.44­mile Evergreen Point Floating Bridge across Lake Washington. This is a high­priority proj­ ect because the existing bridge is nearing the end of its useful life and is at risk of failure in the event of an extreme weather or seismic event. To expedite the completion of the project, WSDOT split the project into three components, each of which had indepen­ dent utility and was cleared with separate environmental doc­ uments. One of these components is the construction of the pontoons on which the new bridge will rest. To expedite com­ pletion of this portion of the project, WSDOT awarded a design–build contract for the fabrication of the pontoons 1 year before gaining a ROD for the bridge replacement in mid­ 2011. Among reasons for taking this approach was the ability to shorten the time required for an emergency bridge replace­ ment, if needed, from 5 years to 1.5 years by using the 33 pre­ constructed (and stored) pontoons. In addition, the pontoons will be available for use in the construction of the permanent replacement of the bridge. WSDOT awarded a design–build contract for the replacement of the bridge in 2011 to the same firm that fabricated the pontoons. WSDOT took a similar early contract approach for the replacement of the Alaskan Way Viaduct in downtown Seattle. The aging elevated structure, which separates much of down­ town Seattle from the waterfront, will be replaced with a 54­foot diameter, bilevel vehicular tunnel. The 2­mile tunnel is expected to cost $2.0 billion. WSDOT awarded a design– build contract for the project in December 2010, with the ROD gained in August 2011. This approach enabled early procurement of the tunnel­boring machine, which significantly reduced the long lead time for obtaining such equipment. This approach was made possible because it was determined that the early award of the design–build contract would not result in any significant changes to the outcome of the NEPA review. These experiences demonstrate that under the right cir­ cumstances, it is possible to expedite the implementation of projects by breaking them into component parts that can be separately cleared, and, in some cases, can help to facilitate the start of construction before the completion of NEPA. This approach may be used with P3 projects and non­P3 projects alike. Maintaining the Independence of NEPA with Early Private-Sector Involvement One common concern with early private involvement in the definition of projects is the perception that the private part­ ner’s participation will unduly influence the outcome of NEPA assessments. Private involvement can occur in two distinct design–build contractor. If the public owner delays P3 pro­ curement until the NEPA evaluation is complete, the project design will be significantly advanced before the private entity starts its work, which reduces the potential benefits a public owner can obtain from a design–build/P3 project. Such a delay may not be necessary if the public owner is willing to enter into a predevelopment agreement P3. Under predevelopment agreements, the private entity assists the public owner in defining a feasible project, which may include work related to the NEPA evaluation process. These agreements are struc­ tured for the public owner to pay the private entity for some or all of its predevelopment work expenses. If the public owner ultimately selects a viable P3 alternative for the project, then the private entity has a right of first negotiation for the project’s development phase agreement. If the P3 procurement occurs after NEPA’s completion, the sponsoring agency may wish to consider completing a less than 30% design to allow greater opportunity for the private sector to define the physical and operational characteristics of the project in a manner that capitalizes on its design exper­ tise. According to officials at the Virginia OTP3, the EIS for the commonwealth’s U.S. Route 460 project was completed based on a less than 30% design (sometimes referred to as a “10 percent design,” although such a designation does not have a precise definition). As previously described, a plan­ ning corridor of 500 feet was studied, an area within which a road approximately 200 feet wide can ultimately be sited. The expectation is that the private partner will have signi­ ficant flexibility in designating the road’s alignment and interchange configurations. This approach, though, involves certain drawbacks. OTP3 officials remarked that the lesser location specificity within the larger­width analysis corri­ dor made it more difficult to estimate costs. This scenario, in turn, caused greater uncertainty in pinpointing right­of­ way impacts (which was more of a political challenge rather than a costing challenge when attempting to satisfy prop­ erty owners’ inquiries) and did not allow for a thorough understanding of the project’s termini with respect to oper­ ational (e.g., system­to­system interchange configurations) and constructability issues. Awarding Early Construction Contracts in Strategic Instances In certain cases, some DOTs have used the award of non­ traditional procurements to accelerate project delivery. Although state law makes it difficult, if not impossible, for WSDOT to enter into P3 arrangements with private financ­ ing, the department has accelerated the implementation of needed projects by entering into early design–build contracts before the completion of NEPA for two major projects. One is the SR 520 Bridge Replacement and HOV Program. SR 520

59 Governor Perry and was a top­down project that people were generally opposed to. The Governor’s idea was to develop large highways bypassing urban areas and when TxDOT retained a private development partner early in the process to define the project the public reacted negatively because it appeared that the outcome of the process was predetermined. OTP3 officials note that ultimately any input received from private partners during NEPA must be treated like sugges­ tions offered by any other type of stakeholder. Yet, there remains a certain level of discomfort among some in consid­ ering suggestions from a private developer with a vested interest in the outcome of a NEPA action: A good idea is a good idea no matter where it comes from. It needs to be vetted just like any other concept. Regulatory agen­ cies often treat private ideas with a certain level of skepticism, but when you compare the ability of private alternatives to meet the purpose and need established for the project to that of earlier alternatives you can see the value they add. You can also get good ideas from stakeholders at public meetings. Somehow using good ideas that originate from private part­ ners is not viewed as being as robust or defendable. As demonstrated by the experience with the Capital Belt­ way HOT Lanes EIS, it is entirely possible to use NEPA as a platform to assess private­sector concepts and to incorporate them into preferred alternatives that are viewed positively and are more likely to have successful outcomes as P3 conces­ sions. However, as described in Chapter 5, there is general movement away from early private involvement during NEPA by public project sponsors and private development partners alike. An optimal outcome may be to use the NEPA process to consider the possible private development of transportation projects and inform the ultimate decision whether to proceed with a project on a P3 basis. Other Strategies to afford Flexibility after NePa After the completion of NEPA, if the decision is made to pro­ ceed with the procurement of a project on a P3 basis, there are numerous strategies to be considered to allow flexibility to accommodate private innovation. Using Alternative Technical Concepts Successful consideration and application of a P3 can benefit from a sound approach by allowing P3 proposers to incor­ porate alternative technical concepts (ATCs) into their pro­ posals. The section on procuring the P3 following NEPA in Chapter 5 introduced the advantages of a prescribed ATC process during the selection of a preferred P3 bidder. An ways. In some cases, such as the I­95 HOT Lanes in Virginia or the I­35W component of the North Tarrant Express Phase II in Fort Worth, the private­sector partner may become involved in a project before the start of NEPA analyses. In this case, the private partner plays a planning role in developing projects at a conceptual level that will then be the subject of a NEPA analysis. With the I­95 HOT Lanes, private involve­ ment was initiated through an unsolicited P3 offer, whereas with the I­35W, it was initiated as an adjunct to the solicited P3 procurement for the North Tarrant Express Phase I. With pre­NEPA private­sector proposals, the project sponsor has the ultimate responsibility for determining the merit of the offer and deciding whether to initiate a formal NEPA review. In cases where a NEPA review does ensue, the preparation of all NEPA documents is led by the public­sector project sponsor, not the private partner. The project sponsor may use input from the private partner in the analysis, but any options supported by the private sector would be weighed against other options and vetted in front of the public. Pri­ vate involvement may also arise during NEPA if an unsolic­ ited P3 offer is received or the project sponsor initiates a P3 procurement. In this case, any concepts developed by private developers would be vetted independently by the project sponsor under the lead federal agency’s review. This was the case, for example, with the Capital Beltway HOT Lanes, fol­ lowing VDOT’s receipt of an unsolicited private development offer 3 days after the close of the public comment period and after the release of the DEIS in March 2002. The private offer was then considered together with the comments received on the DEIS. However, it was not until January 2005 that the Commonwealth Transportation Board selected the pri­ vate partner’s HOT widening concept as its locally pre­ ferred alternative. As OTP3 officials explain, ultimately the locally preferred alternative for the Capital Beltway was an amalgam of public and private inputs: VDOT’s environmental process was kept separate from the PPTA process. However, VDOT’s FEIS alternative evolved Fluor’s conceptual proposal. Fluor changed VDOT’s slip ramps between the [General Purpose] and HOT lanes to direct access and also changed entrance and interchange locations. In the end, Fluor took the design concept even further after the ROD. In retrospect, VDOT and FHWA were able to incorporate Fluor’s design refinements post­ROD. As senior planning staff from NCTCOG observe, early private­sector involvement in the definition of projects dur­ ing NEPA has led to mixed results: There have been good and bad experiences with bringing a P3 developer onboard early in the project definition process. This happened with the Trans Texas Corridors. This was the idea of

60 scope calls for a system­to­system interchange, which is designed with a certain number of bridges, the private partner may come up with a different approach that involves a smaller number of bridges or different specifications and can be built at a lower cost. GDOT believes that a fair ATC process can enhance pro­ curements. With the Northwest Corridor, initially GDOT was not prepared to assume the risk for any changes arising through the ATC process that would have required a reevaluation. How­ ever, in the end, GDOT agreed to complete any reevaluation within a given time frame that might be required as a result of the ATC. The GDOT official explains the rationale behind the department’s change of approach: With P3s you need to adopt a NEPA strategy to provide for as many potential unknowns as possible. This type of approach gives private partners the flexibility they need to address unfore­ seen issues and to innovate. It is counterproductive if an inno­ vative idea is subjected to a veto. a Vision for enhancing the Decision Guide Process to Consider the Potential for P3 Development The initial intent of this study was to identify where in the Decision Guide processes the decision to procure projects on a partnership basis is made and to study the implications of that timing on the planning and NEPA processes. Although there is merit in engaging potential private partners early on in the definition of projects, the research reveals there is move­ ment away from doing so. Private developers prefer to avoid the risks associated with gaining environmental clearance, whereas public sponsors want to maximize competition and avoid the appearance that private involvement may influence the outcome of NEPA reviews. These findings suggest that most P3 procurements move forward after project sponsors have gained environmental clearance for projects and after the Decision Guide pro­ cesses are complete. However, the research also revealed that several states and regions are considering the possible use of tolling and P3s early on in the Decision Guide and then using the 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 candi­ dates for P3 development and then adapt NEPA reviews to assess tolled alternatives. The research also revealed that state and regional policies are especially effective in encouraging or even requiring the consideration of tolling and P3 development. When regions have well­defined policies, such as the need to sustain a regional effective ATC process can allow design innovations from the private sector—a primary reason for involving them on a P3 basis—to improve on the base project design requirements set forth in an RFP, from either a technical or development cost standpoint. Proposers are motivated to provide ATCs to gain technical advantage over the competition (Papernik and Farkas 2009). By permitting ATCs during bidder solicitation, public spon­ sors must recognize that their acceptance can result in changes to the RFP requirements that are exclusive to the suggesting proposer; by establishing standards that the ATC must be “equal to or better than” the RFP’s original requirements, the ability to make fair cost comparisons among proposers can be retained because the ATC cannot result in cost savings by merely reducing quantities. In addition, FHWA design–build regulations permit ATC proposals, but not as a substitute for a base proposal that responds to the RFP’s original requirements (23 C.F.R. § 636.209). Many FHWA division offices, however, have permitted incorporation of preapproved ATCs without including the base option, effectively waiving this requirement, but it is also possible to formalize this approach through a SEP­14 waiver (Papernik and Farkas 2009). A decision must also be made on whether the public spon­ sor or private entity will be responsible for additional envi­ ronmental evaluation if the proposed ATC deviates sufficiently from the design concept as cleared in the applicable NEPA document. Private entities are likely more willing to intro­ duce ATCs if the public sponsor bears this risk, but in a com­ petitive environment, a private entity may be more willing to assume the risk if it knows its ATC will significantly differentiate it from any competition. In such a case, assuming the cost of a reevaluation (as well as waiting for its completion, regardless of who pays for it) may be worth the trade­off to surpass the quality of competing proposals or to improve the bottom line. A private developer reports that in both Texas and Georgia opportunities for private partners to identify issues suitable for value engineering during the bidding process have emerged. However, when value engineering opportunities arise, the norm is for sponsors to become interested, but then transfer the risk associated with the changes to the private partner. The same developer has come across this type of situation four times within a few months but also has seen that changes can be put through if they are identified early enough in the process. Although the project was canceled at the time of this writ­ ing, the Northwest Corridor P3 in Atlanta offers an excellent example of the evolution of a public project sponsor’s approach to ATCs. As a GDOT official close to the Northwest procure­ ment explained, One key element in being able to deliver value through P3 procurements is the ability to consider alternative technical solutions proposed by private partners. For instance, if your

61 roadway system, it is possible to weave tolling and P3s into a regional vision. As a member of the planning team at NCTCOG was quick to point out, this is a relatively recent development: When NEPA and the MPO processes were first developed, financing was not incorporated into the process. The rules were developed first, but now financing and funding are pivotal to the project development process. Today major projects are required to have financial plans prior to the release of federal funding and states, including Texas, have policies that direct that projects add­ ing new capacity will be tolled. Regional policies and dialogue are perhaps the most effec­ tive tools to facilitate the consideration of P3s. This has led NCTCOG to identify $6 billion worth of priced projects in the 2035 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.” Although there is not one single way to develop the decision­making process, the way used needs to be flexible. One of the most important points is developing an under­ standing of which projects may be feasible for P3 develop­ ment. As many interviewees observed, it is better to consider the possibility of P3 development during the Decision Guide processes and to decide not to go down that path than to defer the decision to the end of the process and then have to go back to the beginning of the planning development. To iden­ tify which projects are suitable for tolling and P3 develop­ ment, project sponsors need to conduct analyses separate from the planning and NEPA processes. These include fore­ casts to ascertain the revenue generation potential of proj­ ects if they are tolled, as well as VfM assessments that include the calculation of life­cycle costs and a public­sector com­ parator analysis to identify the cost of implementing and maintaining the project on a public basis. These analyses should be prepared concurrently with the Decision Guide and be used to inform key decisions including whether proj­ ects will be tolled, if they will be implemented on a P3 basis, the type of concession to be used, the term of the concession, and the amount of any public subsidy that may be needed. Both the planning and NEPA processes should be used to gauge the viability of tolling and P3 development. The plan­ ning process should explore the possible use of tolling and P3 procurements from a regional policy perspective and should engage stakeholders to determine the level of support for these options. Once candidate projects have been identified through the analyses described, the environmental process should compare the possible use of tolling and P3 delivery to tradi­ tional public procurement. This analysis should provide clear information on the implementation time frames that would result from using the different procurement and revenue options and should assess the implications of those different time frames as part of the analyses. If these different possibili­ ties are debated and assessed in MPO and NEPA analyses, decision makers and their stakeholders will be better able to understand what is feasible and then use the Decision Guide as a platform to decide whether tolling and P3 development are appropriate for the local region. As a former high­ranking U.S. DOT official and legal advi­ sor states, We have approached the issue of P3s sideways in the United States, focusing on them using a project­by­projects basis rather than taking a programmatic approach. We have developed a culture in the United States that P3s are a “tool in the toolbox,” but only one that is used infrequently, on a restricted basis and with skepticism. Some states and territories, including Virginia, Texas, and Puerto Rico, are beginning to adopt a programmatic approach to P3 development for highway improvements—and even other modes of transportation. To be successful, forward­ thinking public administrations would have to champion the use of tolling and P3 development. P3s also need to be inte­ grated into the Decision Guide and into the different func­ tions served by MPOs and DOTs involved in the project development process. P3 projects may still be implemented without using this philosophy, but its use will be more epi­ sodic rather than programmatic.