Public Transportation
Federal Project Approval Process Remains a Barrier to Greater Private Sector Role and DOT Could Enhance Efforts to Assist Project Sponsors Gao ID: GAO-10-19 October 29, 2009As demand for transit and competition for available federal funding increases, transit project sponsors are increasingly looking to alternative approaches, such as public-private partnerships, to deliver and finance new, large-scale public transit projects more quickly and at reduced costs. GAO reviewed (1) the role of the private sector in U.S. public transit projects as compared to international projects; (2) the benefits and limitations of and barriers, if any, to greater private sector involvement in transit projects and how these barriers are addressed in the Department of Transportation's (DOT) pilot program; and (3) how project sponsors and DOT can protect the public interest when these approaches are used. GAO reviewed regulations, studies, and contracts and interviewed U.S., Canadian, and United Kingdom officials (identified by experts in the use of these approaches).
In the United States, the private sector role in delivering and financing transit projects through alternative approaches, such as public-private partnerships, has been more limited than in international projects. The private sector role in U.S. projects has focused more on how they are delivered rather than how they are financed, while the private sector role in international projects has focused on both project delivery and financing. Since 2000, seven new large- scale construction projects funded through FTA's Fixed Guideway Capital Investment Program--New Starts program--have been completed using one of two alternative project delivery approaches, and none of these projects included private sector financing. In 2005, Congress authorized FTA to establish a pilot program to demonstrate the advantages and disadvantages of these alternative approaches and how the New Starts Program could better allow for them. Alternative approaches can offer potential benefits such as a greater likelihood of completing projects on time and on budget, but also involve limitations such as less project sponsor control over operations. The sequential and phased New Starts process is a barrier because it is incompatible with alternative approaches and thus does not allow for work to be completed concurrently, which can lead to delays and increased costs. Under its pilot program, FTA can grant major streamlining modifications to the New Starts process for up to three project sponsors, but has not yet granted any such modifications because FTA has found that none of the projects has transferred enough risk, in particular financial responsibilities, to the private sector. FTA has the ability within its pilot program to further experiment with the use of long-standing existing tools that could encourage a greater private sector role while continuing to balance the need to protect the public interest. This includes forms of conditional funding approvals used by other DOT agencies and international governments. FTA also lacks an evaluation plan to accurately and reliably assess the pilot program's results, including the effect of its efforts to streamline the New Starts process for pilot project sponsors. Without such a plan, agencies and Congress will be limited in their decision making regarding the pilot program. Transit project sponsors protect the public interest in alternative approaches through, for example, the use of performance standards and financial assessments to evaluate the costs and benefits of proposed approaches. Other governments have established entities to assist project sponsors in protecting the public interest. These entities have better equipped project sponsors to implement alternative approaches by creating a uniform approach to developing project agreements and serving as a repository of institutional knowledge. DOT can serve as a valuable resource for transit project sponsors by broadening its current efforts, including providing technical assistance and encouraging the use of additional financial assessments, among other measures.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-10-19, Public Transportation: Federal Project Approval Process Remains a Barrier to Greater Private Sector Role and DOT Could Enhance Efforts to Assist Project Sponsors
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
October 2009:
Public Transportation:
Federal Project Approval Process Remains a Barrier to Greater Private
Sector Role and DOT Could Enhance Efforts to Assist Project Sponsors:
Private Sector Role in Transit Projects:
GAO-10-19:
GAO Highlights:
Highlights of [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-10-19],
a report to congressional committees.
Why GAO Did This Study:
As demand for transit and competition for available federal funding
increases, transit project sponsors are increasingly looking to
alternative approaches, such as public-private partnerships, to deliver
and finance new, large-scale public transit projects more quickly and
at reduced costs. GAO reviewed (1) the role of the private sector in
U.S. public transit projects as compared to international projects; (2)
the benefits and limitations of and barriers, if any, to greater
private sector involvement in transit projects and how these barriers
are addressed in the Department of Transportation‘s (DOT) pilot
program; and (3) how project sponsors and DOT can protect the public
interest when these approaches are used. GAO reviewed regulations,
studies, and contracts and interviewed U.S., Canadian, and United
Kingdom officials (identified by experts in the use of these
approaches).
The Federal Transit Administration (FTA) should incorporate greater
flexibility in its pilot program through the use of existing tools,
such as conditional approvals, to streamline the New Starts process,
and develop a sound evaluation plan to assess the pilot program‘s
results. DOT should increase efforts to better equip project sponsors
in using these approaches, including developing guidance and providing
technical assistance. DOT agreed to consider our recommendations.
What GAO Found:
In the United States, the private sector role in delivering and
financing transit projects through alternative approaches, such as
public-private partnerships, has been more limited than in
international projects. The private sector role in U.S. projects has
focused more on how they are delivered rather than how they are
financed, while the private sector role in international projects has
focused on both project delivery and financing. Since 2000, seven new
large-scale construction projects funded through FTA‘s Fixed Guideway
Capital Investment Program”New Starts program”have been completed using
one of two alternative project delivery approaches, and none of these
projects included private sector financing. In 2005, Congress
authorized FTA to establish a pilot program to demonstrate the
advantages and disadvantages of these alternative approaches and how
the New Starts Program could better allow for them.
Alternative approaches can offer potential benefits such as a greater
likelihood of completing projects on time and on budget, but also
involve limitations such as less project sponsor control over
operations. The sequential and phased New Starts process is a barrier
because it is incompatible with alternative approaches and thus does
not allow for work to be completed concurrently, which can lead to
delays and increased costs. Under its pilot program, FTA can grant
major streamlining modifications to the New Starts process for up to
three project sponsors, but has not yet granted any such modifications
because FTA has found that none of the projects has transferred enough
risk, in particular financial responsibilities, to the private sector.
FTA has the ability within its pilot program to further experiment with
the use of long-standing existing tools that could encourage a greater
private sector role while continuing to balance the need to protect the
public interest. This includes forms of conditional funding approvals
used by other DOT agencies and international governments. FTA also
lacks an evaluation plan to accurately and reliably assess the pilot
program‘s results, including the effect of its efforts to streamline
the New Starts process for pilot project sponsors. Without such a plan,
agencies and Congress will be limited in their decision making
regarding the pilot program.
Transit project sponsors protect the public interest in alternative
approaches through, for example, the use of performance standards and
financial assessments to evaluate the costs and benefits of proposed
approaches. Other governments have established entities to assist
project sponsors in protecting the public interest. These entities have
better equipped project sponsors to implement alternative approaches by
creating a uniform approach to developing project agreements and
serving as a repository of institutional knowledge. DOT can serve as a
valuable resource for transit project sponsors by broadening its
current efforts, including providing technical assistance and
encouraging the use of additional financial assessments, among other
measures.
View GAO-10-19 or key components.
For more information, contact Susan Fleming at (202) 512-2834 or
flemings@gao.gov.
[End of section]
Contents:
Letter:
Background:
Private Sector Roles in the Delivery and Financing of U.S. Transit
Projects Have Been Narrower Than in Some Other Countries:
While FTA's Pilot Program Is Expected to Demonstrate Potential Benefits
and Limitations in Using Alternative Approaches, New Starts Process
Remains a Barrier for Pilot Projects:
Project Sponsors Have Sought to Protect the Public Interest in Various
Ways and DOT Can Provide Guidance and Technical Assistance:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Completed U.S. New Starts Transit Projects That Have Used
Alternative Approaches:
Table 2: Selected Ongoing and Completed Transit Projects in Canada and
the United Kingdom That Have Used Alternative Approaches:
Table 3: Potential Benefits for Project Sponsors:
Table 4: Potential Limitations for Project Sponsors:
Figures:
Figure 1: Range of Private Sector Role in Transit Projects That Use
Alternative Approaches:
Figure 2: New Starts Planning and Development Process:
Abbreviations:
DOT: Department of Transportation:
FTA: Federal Transit Administration:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
October 29, 2009:
The Honorable James L. Oberstar:
Chairman:
The Honorable John L. Mica:
Ranking Republican Member:
Committee on Transportation and Infrastructure:
House of Representatives:
The Honorable Peter A. DeFazio:
Chairman:
The Honorable John J. Duncan, Jr.:
Ranking Member:
Subcommittee on Highways and Transit:
Committee on Transportation and Infrastructure:
House of Representatives:
Many Americans rely on mass transit to reach their jobs, schools, and
other activities. In 2008, passengers took over 10.7 billion trips
using public transportation, the highest level of ridership in 52 years
and a modern ridership record. As national demand for mass transit
services increases, more sponsors of transit projects are seeking
available federal funding. The Federal Transit Administration (FTA)
distributes federal funding to transit agencies for the construction of
projects through a variety of formula and discretionary grant programs,
including the New Starts grant program for new, large-scale
projects.[Footnote 1] As competition for these federal funds grows more
intense, transit project sponsors are increasingly looking for
alternative mechanisms to finance and deliver new, large-scale transit
projects. Moreover, there is a belief by some in the United States that
the conventional approach to delivering and financing infrastructure
projects--in which contracts for the design and construction of the
transit facility are awarded separately to the private sector--may not
always be the most desirable. In transportation, public sector entities
including state departments of transportation, local and regional
governments, and transit providers are seeking unconventional or
"alternative" approaches to delivering and financing their projects
that may not only reduce project costs, but also deliver the projects
more quickly and efficiently. Generally, these alternative approaches,
which can include public-private partnerships, rely on the private
sector assuming an enhanced responsibility for performing all or a
significant number of functions in connection with a project, in some
cases including financial liability. FTA defines public-private
partnerships broadly as arrangements that do not use the conventional
method of design-bid-build, and has encouraged the use of public-
private partnerships to deliver and finance transit projects.
Public-private partnerships for transit differ from those for highways
in terms of their ability to generate sufficient revenue to pay for
themselves and the need for ongoing public financial assistance.
Alternative approaches are more common worldwide for highway projects.
For example, as we described in a previous report, highway public-
private partnerships are common in France, Spain, Australia, and the
United Kingdom.[Footnote 2] Highway public-private partnerships
projects can take the form of the public sector entering into long-term
agreements with the private sector (known as "concession agreements")
in which the private sector finances and constructs a new facility and
then operates and maintains it over a specified period of time in
return for the right to collect tolls to fund operations and
maintenance and to receive a return on their investment. One key
difference between highways and transit is that at least in some cases
a private entity might be able to charge users sufficient tolls to
profitably build and operate a highway, but transit almost always
cannot pay for itself from farebox revenues. Public transit systems
typically receive government funding to supplement farebox revenues in
paying for construction as well operations and maintenance. Therefore,
it is important to safeguard the public interest in transit public-
private partnerships. In addition, whereas some highway public-private
partnership agreements have given private entities substantial
authority to set toll rates, governments often retain control of fare
levels even when entering into agreements for transit projects that use
alternative approaches because transit fare-setting considers, among
other factors, keeping fares low to increase ridership and provide an
affordable form of mobility for urban residents, including low-income
citizens.
To assist Congress as it prepares for its upcoming surface
transportation reauthorization, you asked us to identify key issues as
they relate to alternative project delivery and financing approaches,
including public-private partnerships. In response to your request,
this report addresses (1) the role of the private sector in the
delivering and financing of U.S. transit projects compared to other
countries; (2) the benefits and limitations of and the barriers, if
any, to greater private sector involvement in transit projects and how
these barriers are addressed in the Department of Transportation's
(DOT) Public-Private Partnership Pilot Program; and (3) how project
sponsors and DOT can protect the public interest in transit projects
that use alternative approaches.
To address these issues, we reviewed pertinent federal legislation and
regulations, including: Federal Register notices and guidance for FTA's
Public-Private Partnership Pilot Program and the New Starts Program;
DOT's 2007 Report to Congress on the Costs, Benefits, and Efficiencies
of Public-Private Partnerships for Fixed Guideway Capital Projects; and
other DOT reports. We also collected, summarized, and analyzed in-depth
interviews with officials from the three FTA Public-Private Partnership
Pilot Program projects--Bay Area Rapid Transit Oakland Airport
Connector, Denver Regional Transportation District East Corridor and
Gold Line, and Houston Metro North and Southeast Corridors--in addition
to Minnesota Metro Transit Hiawatha Corridor and Denver Regional
Transportation District Transportation Expansion. As part of the
review, we collected descriptions of the projects, copies of the
concession or development agreements, and documentation related to the
financial structure of such projects. These projects were selected
because they are recent examples of ongoing and completed transit
projects in the United States that incorporated greater private sector
involvement through the use of alternative project delivery or
financing approaches or both. We focused solely on projects that have
or are expected to go through FTA's New Starts process given that it is
the largest capital grant program for transit projects and that any
such projects would be reviewed to protect the public interest. In
addition to reviewing these domestic projects, we conducted extensive
interviews with financial and legal advisors, experts, and private
sector officials from Canada and the United Kingdom who are
knowledgeable about private sector participation in the delivery and
financing of transit projects. Further, we collected information on how
the following project sponsors protect the public interest in the
following international transit projects: Croydon Tramlink, Docklands
Light Railway, London Underground, Manchester Metrolink, and Nottingham
Express Transit in the United Kingdom, and the Canada Line in
Vancouver, Canada. To collect the most valuable and relevant
information for our review, these international projects were selected,
in part, because they are examples of ongoing and completed transit
public-private partnerships that incorporate a range of alternative
project delivery or financing approaches, or both, and they are in
countries that share a similar political structure to the United
States. Finally, we conducted a literature review of domestic and
international transit projects with greater private sector
participation and interviewed FTA and other federal and local officials
as well as private sector participants associated with the projects we
selected.
We conducted this performance audit from October 2008 through October
2009 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
Background:
Private sector participation and investment in transit is not new. In
the 1800s, the private sector played a central role in financing early
transportation infrastructure development in the United States. For
example, original sections of the New York City Subway were constructed
from 1899 to 1904 by a public-private partnership. New York City sought
private sector bids for the first four contracts to construct and
finance segments of the initial subway system. Ultimately, a 50-year
private sector lease to operate and maintain the system was used.
Another example is the City of Chicago's "L" transit system, which was
built from the 1880s through the 1920s and operated by the Chicago
Rapid Transit Company, a privately owned firm. The construction of the
system was financed by the private sector. In following years,
transportation infrastructure development became almost wholly publicly
funded. Conditions placed on federal transportation grants-in- aid
limited private involvement in federally funded projects. More
recently, there has been a move back towards policies that encourage
more private and public blending of funding, responsibility, and
control in transportation projects. The federal government has
progressively relaxed restrictions on private participation in highway
and transit projects serving public objectives. This change in federal
policy toward considering transit projects that use alternative
approaches has also created an opportunity for states to reexamine
their own public-private partnership policies.
Conventional transit projects generally follow a "design-bid-build"
approach whereby the project sponsor contracts with separate entities
for the discrete functions of a project, generally keeping much of the
project responsibility and risk with the public sector.[Footnote 3] FTA
defines alternative approaches, including public-private partnerships,
as those that increase the extent of private sector involvement beyond
the conventional design-bid-build project delivery approach. These
alternative approaches contemplate a single private sector entity being
responsible and financially liable for performing all or a significant
number of functions in connection with a project. In transferring
responsibility and risk for multiple project elements to the private
sector partner, the project sponsor often has less control over the
procurement and the private sector partner may have the opportunity to
earn a financial return commensurate with the risks it has assumed (see
fig. 1).
Figure 1: Range of Private Sector Role in Transit Projects That Use
Alternative Approaches:
[Refer to PDF for image: chart]
Extent of sector role: Greater private sector role (Upside of arrow) &
Lesser private sector role (Downside of arrow).
Types of alternative approach:
* Build-own-operate;
* Design-build-finance-operate-maintain;
* Design-build-finance-operate;
* Build-operate-transfer;
* Design-build-operate-maintain;
* Design-build-operate;
* Design-build.
Private sector role in project delivery and finance:
Constructs, owns, and operates the project (without transferring it to
the public sector project sponsor); fully finances the project
* Designs, constructs, operates, and maintains the project; partially
or fully finances the project
* Designs, constructs, and operates the project; partially or fully
finances the project
* Designs, constructs, and operates a project for a specified time
before transferring ownership to the public sector project sponsor
* Designs, constructs, operates, and maintains the project; does not
finance the project
* Designs, constructs, and operates the project; does not finance the
project;
* Designs and constructs the project; does not finance the project.
Source: DOT and GAO.
[End of figure]
With these alternative approaches, many of the project risks that would
normally be borne by the project sponsor in a design-bid-build approach
are transferred to or shared with the private sector. Risk transfer
involves assigning responsibility for a project risk in a contract so
that the private sector is accountable for nonperformance or errors.
Project sponsors can transfer a range of key project risks to the
private sector, including those related to design, financing,
construction performance and schedule, vehicle supply, maintenance,
operations, and ridership. For example, design risk refers to whether
an error causes delays or additional costs, or causes the project to
fail to satisfy legal or other requirements. Ridership risk refers to
whether the actual number of passengers on the transit system reaches
forecasted levels. However, some risks may not be transferable.
Much of the federal government's share of new capital investment in
mass transportation has come through FTA's New Starts program.[Footnote
4] Through the New Starts program, FTA identifies and recommends new
fixed-guideway transit projects including heavy, light, and commuter
rail, ferry, and certain bus projects for federal funding. Over the
last decade, the New Starts program has resulted in funding state and
local agencies with over $10 billion to help design and construct
transit projects throughout the country and is FTA's largest capital
grant program for transit projects. Moreover, since the early 1970s, a
significant portion of the federal government's share of new capital
investment in mass transportation has been initiated through the New
Starts process, resulting in full funding grant agreements.[Footnote 5]
FTA must prioritize transit projects for funding by evaluating, rating,
and recommending potential projects on the basis of specific financial
commitment and project justification criteria. Using criteria set by
law, FTA evaluates potential transit projects and assigns ratings to
them annually. These evaluation criteria reflect a range of benefits
and effects of the proposed project, such as cost-effectiveness, as
well as the ability of the project sponsor to fund the project and
finance the continued operation of its transit system. FTA uses the
evaluation and rating process to decide which projects to recommend to
Congress for funding. As part of the New Starts process, FTA approves
projects into three phases: preliminary engineering (in which the
designs of project proposals are refined),[Footnote 6] final design
(the end of project development in which final construction plans and
cost estimates, among other activities, are completed), and
construction (in which FTA awards the project a full funding grant
agreement, providing a federal commitment of funds subject to the
availability of appropriations)[Footnote 7] (see fig. 2).
Figure 2: New Starts Planning and Development Process:
[Refer to PDF for image: flowchart of New Starts planning and
development process]
Source: FTA.
[End of figure]
We have previously identified FTA's New Starts program as a model for
other federal transportation programs because of its use of a rigorous
and systematic evaluation process to distinguish among proposed New
Starts investments.[Footnote 8] However, we and other stakeholders and
policymakers have also identified challenges facing the program. Among
these challenges is the need to streamline the New Starts project
approval process. Our past reviews, for example, found that many
project stakeholders thought that FTA's process for evaluating New
Starts projects was too time consuming, costly, and complex.[Footnote
9] The New Starts grant process is closely aligned with the
conventional design-bid-build approach, whereby the project sponsor
contracts with separate entities for the design and construction of the
project.
In 2005, Congress authorized FTA to establish the Public-Private
Partnership Pilot Program to demonstrate (1) the advantages and
disadvantages of transit projects that use alternative approaches for
new fixed-guideway capital projects and (2) how FTA's New Starts
program can be modified or streamlined for these alternative
approaches.[Footnote 10] The pilot program allows FTA to study projects
that incorporate greater private sector involvement through alternative
project delivery and financing approaches; integrate a sharing of
project risk; and streamline design, construction, and operations and
maintenance. FTA can designate up to three project sponsors for the
pilot program. Projects selected under the pilot program will be
eligible for a simplified and accelerated review process that is
intended to substantially reduce the time and cost to the sponsors of
New Starts projects. This can include major modifications of the
requirements and oversight tools. For example, FTA may offer concurrent
project approvals into preliminary engineering and final design.
Further, FTA may modify its risk-assessment process--which aims to
identify issues that could affect a project's schedule or cost--as well
as other project reviews. The modification of any of FTA's New Starts
requirements and oversight tools will be on a case-by-case basis if FTA
determines enough risk is transferred to and equity capital is invested
by the private sector.[Footnote 11] In addition to major modifications,
FTA may also make use of other tools (not unique to the pilot program)
to expedite the review process. These include Letters of No Prejudice
that allow a project sponsor to incur costs with the understanding that
these costs may be reimbursable as eligible expenses (or eligible for
credit toward the local match) should FTA approve the project for
funding at a later date.[Footnote 12] FTA can also use Letters of
Intent to signal an intention to obligate federal funds at a later date
when funds become available.[Footnote 13] Finally, Early Systems Work
Agreements obligate a portion of a project's federal funding so that
project sponsors can begin preliminary project activities before a full
funding grant agreement is awarded. FTA has employed a contractor to
determine whether risk is effectively transferred from the public to
private sector for its pilot program projects, and will consider
private sector due diligence as a substitute for its own.
From a public perspective, an important component of analyzing the
potential benefits and limitations of greater private sector
involvement is consideration of the public interest. Although, in
transportation, no definition of public interest exists at the federal
level, nor does federal guidance identify public interest
considerations in transportation, consideration of the public interest
in transit may refer to the many stakeholders in public-private
partnerships, each of which may have its own interests. Stakeholders
include public transit authorities, transit agency employees, mass
transit users and members of the public who may be affected by
ancillary effects of a transit public-private partnership or
alternative project delivery approach, including users of bus and
highways, special interest groups, and taxpayers in general. Moreover,
defining the public interest is a function of scale and can differ
based on the range of stakeholders in addition to the geographic and
political domain considered. For the purposes of its pilot program, FTA
has stated that the public interest refers to the due diligence that
FTA typically conducts as a public entity with a financial interest in
a transit project.
Private Sector Roles in the Delivery and Financing of U.S. Transit
Projects Have Been Narrower Than in Some Other Countries:
In the United States, the private sector has played a more limited role
in the delivery and financing of transit projects than in some other
countries. Since 2000, seven New Starts projects were completed using
alternative approaches (see table 1). These projects have focused on
delivery, rather than financing, and have used either the design-build
or the design-build-operate-maintain delivery approach, in which the
private sector role is to design and construct the project or to
design, construct, operate, and maintain the project, respectively. In
addition, to date, no completed New Starts projects have been privately
financed and therefore, none of these projects have used private equity
financing.
Table 1: Completed U.S. New Starts Transit Projects That Have Used
Alternative Approaches:
Project name: New Jersey Transit Hudson Bergen Minimum Operable Segment
1;
Alternative approach used: Design-build-operate-maintain;
Year completed: 2002.
Project name: Bay Area Rapid Transit Extension to San Francisco
International Airport;
Alternative approach used: Design-build;
Year completed: 2003.
Project name: Minneapolis Metro Transit Hiawatha Light Rail;
Alternative approach used: Design-build;
Year completed: 2004.
Project name: Washington Metropolitan Area Transportation Largo
Metrorail Extension;
Alternative approach used: Design-build;
Year completed: 2004.
Project name: Denver Regional Transportation District Transportation
Expansion Light Rail;
Alternative approach used: Design-build;
Year completed: 2006.
Project name: New Jersey Transit Hudson Bergen Minimum Operable Segment
2;
Alternative approach used: Design-build-operate-maintain;
Year completed: 2006.
Project name: South Florida Commuter Rail Upgrades;
Alternative approach used: Design-build;
Year completed: 2006.
Source: FTA.
[End of table]
However, there have been very few examples of completed non-New Starts-
funded new fixed-guideway projects that have been privately financed.
One project, the Las Vegas Monorail, a 4-mile fixed-guideway system
serving the resort corridor along Las Vegas Boulevard in Nevada, was
financed with tax-exempt revenue bonds issued through the state of
Nevada and with contributions from the area resorts and
hotels.[Footnote 14]
As previously mentioned, Congress authorized FTA to establish its
Public-Private Partnership Pilot Program to demonstrate the advantages
and disadvantages of these approaches in transit. As established, the
pilot project studies those projects that use alternative approaches
that integrate a sharing of project risk and incorporate private equity
capital in order to illustrate where FTA can grant greater flexibility
of some of its New Starts requirements to projects within the pilot
program. However, to date, only one of the pilot projects is expected
to incorporate private equity capital. FTA designated three project
sponsors for its Public-Private Partnership Pilot Program in 2007:
* Bay Area Rapid Transit--The Oakland Airport Connector project is to
be a 3.2-mile system that will connect the Oakland International
Airport to the Bay Area Rapid Transit's Coliseum Station and the rest
of the transit system. In its original iteration, the Oakland Airport
Connector planned on using a design-build-finance-operate-maintain
project delivery approach that included private sector financing.
However, lower-than-expected ridership predictions due to the economic
climate, among other factors, led Bay Area Rapid Transit to move
forward with a different alternative approach for its project--now
design-build-operate-maintain--and undergo a new request for qualified
bidders and request for proposals process. According to Bay Area Rapid
Transit, a contract will be awarded in December 2009.
* Metropolitan Transit Authority of Harris County (Houston Metro)--
North and Southeast Corridor projects are to provide improved access to
Houston's Central Business District. This project was also originally
to use a design-build-finance-operate-maintain approach that included
private sector financing, but no bidders on the project proposed an
equity investment, so it is instead using a design-build-operate-
maintain approach. Issues related to price and risk transference led
Houston Metro to switch private partners and the new partner chose not
to provide financing for the project. Groundbreaking for the
construction of the two projects occurred in July 2009.
* Denver Regional Transportation District--East Corridor and Gold Line
pilot projects are to connect the city's main railway station with its
airport and other parts of the city. The project is using a design-
build-finance-operate-maintain approach, which includes financing by
the private sector partner. The private sector partner will be selected
through a competitive proposal process to deliver and operate the
project under a long-term agreement. In September 2009, Denver Regional
Transportation District released a request for proposals to
prequalified teams.
One ongoing New Starts project did not apply to be part of the pilot
program, but is using an alternative approach. The Dulles Silver Line
is using the design-build approach with partial funding of the local
share coming from area businesses generated through a tax-increment
financing district to connect Washington, D.C., metropolitan area's
transit system with one of the area's three major airports.
In contrast, international project sponsors have delivered transit
projects using a wider range of alternative approaches, including
public-private partnerships, beyond the more commonly used design-build
in the United States (see table 2). According to World Bank officials
and a World Bank-sponsored report, transit public-private partnerships
have been implemented in Australia, Brazil, Canada, France, Hong Kong,
Malaysia, the Philippines, South Africa, Thailand, and the United
Kingdom. Furthermore, international project sponsors have incorporated
private equity investment financing for some of their projects.
According to World Bank officials, the United Kingdom and Canada are
leading countries for private equity investment in transit, and the
United Kingdom has the most experience using different public-private
partnership models. International projects also generally require a
government subsidy to supplement farebox revenues for construction as
well as operations and maintenance.
Table 2: Selected Ongoing and Completed Transit Projects in Canada and
the United Kingdom That Have Used Alternative Approaches:
Project name: Docklands Light Railway Lewisham, London City Airport,
and Woolwich Arsenal Extensions;
Alternative approach used: Design- build-finance-maintain;
Year completed: 1999, 2005, and 2009.
Project name: Croydon Tramlink light rail;
Alternative approach used: Design-build-finance-operate-maintain;
Year completed: 2000.
Project name: Manchester Metrolink Phase II light rail;
Alternative approach used: Design-build-finance-operate-maintain;
Year completed: 2000.
Project name: London Underground Maintenance;
Alternative approach used: Maintain;
Year completed: 2003[A].
Project name: Nottingham Express light rail;
Alternative approach used: Design-build-finance-operate-maintain;
Year completed: 2004.
Project name: Canada Line light rail;
Alternative approach used: Design-build-finance-operate-maintain;
Year completed: 2009.
Source: World Bank and GAO.
[A] This refers to the date when the London Underground's two
maintenance contracts took effect.
[End of table]
Examples of several projects in the United Kingdom and Canada that we
reviewed include the following:
* The Docklands Light Railway serves a redevelopment area east and
southeast of London. Transport for London, the public sector project
sponsor, used three separate design-build-finance-maintain concession
agreements to construct system extensions as well as a single franchise
to operate trains over the entire system. All three extensions were
financed in part or full using private equity investment, and the
Lewisham Extension was the United Kingdom's first transportation public-
private partnership for both project delivery and financing.
* The Croydon Tramlink light rail project was a 99-year design-build-
finance-operate-maintain agreement to develop the new system. In this
project, payments to the private sector partner during operations were
based entirely on ridership revenue, but the project sponsor retained
the authority to set fares. The private sector partner faced financial
difficulties, and the concession was ultimately bought by Transport for
London.
* The Manchester Metrolink Phase II light rail project was a 17-year
concession agreement wherein the private partner had responsibility to
design, construct, finance, operate, and maintain this project. The
project was designed to expand the Metrolink System in order to connect
two of the city's existing stations. The private partner provided over
one-half of the project's funding for construction. The public sector
terminated the concession to further expand the system.
* The London Underground maintenance projects included agreements
entered into between London Underground and two private sector partners
to maintain and upgrade the system's infrastructure, including track,
tunnels, trains, and stations. In return, the private sector would
receive periodic payments based on its performance. One of the two
private sector partners subsequently went bankrupt, and the concession
agreement was then taken over by Transport for London.
* The Nottingham Express Transit light rail project used a 27-year
contract to design, build, finance, operate, and maintain a new transit
line. Payments to the private sector were based on performance and
ridership revenue, meaning that the private sector assumed some risk
that actual ridership would not reach forecasted levels. Along with
this transfer of risk, the private sector was also given the ability to
set fares. The project is in the ninth year of its contract.
* The Canada Line light rail project in the Vancouver area is a 35-year
design-build-finance-operate-maintain concession agreement developed to
link Vancouver with its international airport and neighboring
employment and population centers in anticipation of the 2010 Winter
Olympics. A separate entity was created to oversee the project's
development and the private partner provided one-third of the project's
funding, including private equity capital, in exchange for periodic
payments based on performance and ridership.
While FTA's Pilot Program Is Expected to Demonstrate Potential Benefits
and Limitations in Using Alternative Approaches, New Starts Process
Remains a Barrier for Pilot Projects:
Pilot Program to Demonstrate Potential Benefits and Limitations to
Using Alternative Approaches:
FTA's pilot program is expected to demonstrate potential benefits to
using alternative approaches in transit.[Footnote 15] Project sponsors
we interviewed cited a range of potential benefits, such as achieving
cost and time savings, as well as potential advantages to the public
sector, such as increased financing flexibility (see table 3). DOT
outlined some of these same benefits and advantages in its 2007 Report
to Congress on transit public-private partnerships and we similarly
reported on them in 2008 for highway public-private
partnerships.[Footnote 16] However, as we said then, benefits are not
assured and should be evaluated by weighing them against potential
costs and trade-offs.
Table 3: Potential Benefits for Project Sponsors:
Potential benefits: With the transference of risk, better adherence to
cost and schedule targets.
Potential benefits: Enhanced efficiencies and service improvements.
Potential benefits: Increased financial flexibility and more
predictable funding.
Source: GAO.
[End of table]
Among the benefits from using alternative approaches, project sponsors
told us that they may better meet cost and schedule targets as well as
achieve cost and time savings by transferring risks to the private
sector. With transit projects that use alternative approaches, project
sponsors can transfer a range of key project risks to the private
sector, such as those related to design and its effect on construction
that would normally be borne by the project sponsor, so that the
private sector is accountable for errors or nonperformance. By
transferring these project risks, the project sponsor creates
incentives for the private sector to keep the project on schedule and
on budget as, for example, the private sector would be responsible for
any excess costs incurred from design errors. In addition, when a
project sponsor transfers multiple project risks to the private sector,
it can potentially reduce the total cost and duration since a single
contractor can concurrently perform project activities that would
typically be carried out consecutively by multiple contractors under
the conventional design-bid-build approach.
Project sponsors, stakeholders, and transit experts we interviewed told
us that potential cost and time savings can be key incentives for using
alternative approaches. For example, FTA reported that Minnesota Metro
Transit's Hiawatha Corridor (one of the seven completed New Starts
projects that used an alternative approach) was completed 12 months
ahead of schedule compared to using the conventional design-bid-build
approach by allowing design and construction schedules to overlap. This
saved an estimated $25 million to $38 million since early completion
led to avoided administration costs using a design-build alternative
approach. Denver Regional Transportation District and the private
sector completed the Transportation Expansion project 22 months ahead
of schedule and within budget. In the United Kingdom, the three
Docklands Light Railway extensions were built using design-build-
finance-maintain approaches, and were completed 2 weeks to 2 months
ahead of schedule. However, the use of alternative approaches does not
guarantee cost and schedule benefits. For example, the design-build
approach used by the South Florida Commuter Rail Upgrades saved 4 to 6
years by completing all upgrades as a single project, but incurred
slightly higher costs than estimated for the conventional design-bid-
build approach.
Project sponsors may be able to benefit from certain efficiencies and
service improvements by transferring long-term responsibility of
transit operations and maintenance in addition to design and
construction to the private sector. DOT's 2007 Report to Congress on
transit public-private partnerships stated that the private sector may
be able to add value to transit projects through improved management
and innovation in a project's construction, maintenance, and operation.
Project sponsors and stakeholders we interviewed stated that
alternative approaches promote the use of performance measures (such as
train capacity and frequency) rather than specific design details (such
as the type of train). This allows the private sector to potentially
generate and apply innovative solutions in the design of the transit
system, adding value to the project. For example, because Denver
Regional Transportation District's Transportation Expansion Light Rail
project (another of the seven New Starts projects) used a design-build
approach, a lessons-learned report following the project's completion
stated that the project sponsor was able to incorporate 198 design
modifications identified by the private sector partner during
development to improve overall quality of the transit system while
remaining on budget. A conventional design-bid-build contract is
generally not flexible enough to allow for such design modifications
without additional costs because contracts often specify the use of
technical or other specifications.
When the long-term responsibilities of transit operations and
maintenance are transferred, the private sector potentially has a
greater incentive to make efficient design decisions. This is because
the private sector can be held responsible for the condition of a
transit project for longer durations than under the conventional design-
bid-build approach. Houston Metro officials told us that for an earlier
project that used the conventional design-bid-build approach, the
project's warranty terms did not hold the construction firm responsible
long enough to cover defects such as faulty track and concrete. As a
result, Houston Metro had to file claims to remedy these defects.
Houston Metro officials stated they chose to build its North and
Southeast Corridor pilot project using design-build-operate- maintain
contract in part to hold the private sector entity responsible for the
quality of the project's construction for a longer period of time.
A greater private sector role in transit projects can also potentially
offer certain advantages to the public sector, including increased
financial flexibility and more predictable operations and maintenance
funding. For example, Denver Regional Transportation District officials
said that they will make payments tied to operations to the private
sector over a number of years to, in part, pay for the private sector's
partial financing for the East Corridor and Gold Line pilot projects.
By using the design-build-finance-operate-maintain approach, Denver may
have more financing flexibility by potentially extending the payments
20 years longer than if a bond were used and the private sector were
not involved in financing the project. With a longer payment period,
project stakeholders told us that the transit agency could conserve
funds in the short term to help it construct other new transit projects
on time.[Footnote 17] Additionally, alternative approaches may help
ensure more predictable funding for maintenance and operations since
these activities can be subject to unpredictable public sector budget
cycles under the conventional design-bid-build approach. Because
alternative approaches for transit projects may include operations and
maintenance standards in the contract, the private sector might be
responsible to fund these activities within the overall contract price.
FTA's pilot program is also expected to demonstrate the potential
limitations to using alternative approaches in transit, including some
of those addressed in DOT's 2007 Report to Congress on transit public-
private partnerships (see table 4). One limitation is that some project
risks should not be transferred to the private sector. For example, it
may be too costly for project sponsors to transfer certain risks, such
as ridership and environmental remediation, because the private sector
may want to charge an additional premium to take them on. Ridership
risk refers to whether the actual number of passengers achieves
forecasted levels. According to officials we interviewed, environmental
remediation risk refers to whether the cleanup of hazardous materials
and other conditions at a project site leads to increased project costs
or schedule delays, and can encompass conditions that are identified as
well as those that are not identified during surveys of a project site.
Past experience in projects demonstrates the difficulty of transferring
these risks to the private sector.
Table 4: Potential Limitations for Project Sponsors:
Potential limitations: Not all risks can be transferred, including
ridership and environmental remediation risk.
Potential limitations: Reduced flexibility and control in operations.
Potential limitations: Additional public sector costs, such as
transaction costs and higher-priced financing.
Source: GAO.
[End of table]
According to officials we interviewed, ridership risk may be difficult
to transfer to the private sector if transit project sponsors are
reluctant to forfeit full fare-setting authority. For example, Denver
Regional Transportation District chose not to transfer ridership risk
for its East Corridor and Gold Line pilot projects given that it wanted
to retain the right to set fares in order to keep fares uniform
systemwide. Another example is the United Kingdom's Croydon Tramlink
project, which transferred ridership risk but not the ability to set
fares. Officials we interviewed stated that the private partner
progressively faced financial difficulties due to low ridership
revenue, which led to the collapse and ultimate buyback of the
partnership by Transport for London. Additionally, if a transit project
is built as an extension of an existing system, the private sector
partner may not want to operate a single segment of a publicly owned
system. According to officials, private investors are reluctant to
assume ridership risk of any portion of a system operated by an entity
they do not control. These officials said that in many cases, the
private sector partner would need the authority to increase or decrease
transit fares based on ridership trends and the number of transit users
to assume greater ridership risk. However, because raising fares
involves political considerations, including equity for low-income
transit users, officials told us that most project sponsors retain the
right to set fares and are unwilling to forfeit fare-setting control.
Some project sponsors that have tried to transfer ridership risk while
retaining fare-setting authority have run into difficulties. According
to project sponsors and transit experts, the Bay Area Rapid Transit's
Oakland Airport Connector project initially tried but ultimately was
unable to transfer ridership risk in part because the private sector
concessionaire (under the project's original iteration) would not have
fare-setting authority. This was also the case with the Canada Line,
where the agreement was structured to incorporate a limited transfer of
ridership risk to the private sector partner. Although the project
sponsor wanted to transfer full ridership risk to the concessionaire,
it learned that private investors would not finance a deal with full
ridership risk transfer due to their inability to control factors that
influence ridership such as transit fares. As such, the project sponsor
decided to transfer limited ridership risk to the private sector by
basing 10 percent of its payments to the private sector partner during
operations and maintenance on ridership figures.[Footnote 18] According
to project sponsors, this transfer of ridership risk was done to induce
the concessionaire to increase ridership by providing quality customer
service.
Officials we interviewed also stated that environmental remediation
risks may be difficult to transfer to the private sector because of the
additional premium the private sector charges to address unknown
factors. Denver Regional Transportation District originally planned to
transfer all environmental remediation risk for its East Corridor and
Gold Line pilot projects' long-term design-build-finance-operate-
maintain concession. This caused the private sector to estimate a $25
million charge for taking on this risk, according to Denver Regional
Transportation District officials we interviewed. When the project
sponsor decided to retain one aspect of the environmental risk related
to several unknown remediation elements, the private sector dropped the
cost estimate of transferring the remaining environmental risk from $25
million to $9 million. Moreover, as we have previously reported
regarding highway public-private partnerships, it may be inefficient
and inappropriate for certain risks to be transferred to the private
sector due to the costs and risks associated with environmental
issues.[Footnote 19] Permitting requirements and other environmental
risks may become too time-consuming and costly for the private sector
to address and may best be retained by the public sector given its
stewardship role within the government. According to officials we
interviewed, although the Canada Line's concession agreement
transferred all key construction risks (i.e., cost overruns) to the
private sector, the public authority retained risks associated with
permitting and other environmental risks such as unknown contaminated
soils. Further, for one early highway public-private partnership in
California, the project sponsor attempted to transfer environmental
permitting risk to the private sector. However, the private sector
partner spent more than $30 million dollars over a 10-year period and
never obtained final approval to proceed with construction.[Footnote
20]
Another potential limitation in transit projects that use alternative
approaches is the project sponsor's loss of control and reduced
flexibility in transit operations. Because the transit project sponsor
enters into a contractual agreement that gives the private partner a
greater decision-making role, the project sponsor may lose some control
over its ability to modify existing assets or implement plans to
accommodate changes over time such as extensions, service changes, and
technology upgrades. For example, in the United Kingdom, the project
sponsor for Manchester Metrolink had to break two existing public-
private partnership concession agreements to accommodate extensions to
its system. Consultants to the Manchester project told us that breaking
a concession agreement can be very expensive and can damage the
relationship between the project sponsor and the private sector
partner. Similarly, to accommodate increased ridership, the project
sponsor for Docklands Light Railway decided to build platform
expansions. However, the private sector partner was not willing to take
on this additional work, requiring the project sponsor to take the
extra steps to hire another party to build the platform extensions and
negotiate the handover of the platforms to the private sector partner
for maintenance.
Transit projects that use alternative approaches may also introduce
transaction costs to the project sponsor through legal, financial, and
administrative fees in addition to higher-priced financing in cases
where the transit project is privately financed. According to officials
we interviewed, transit public-private partnerships often require the
advisory services of attorneys, financial experts, and private
consultants to successfully execute the steps necessary to finalize the
project's agreement. These additional services and transaction fees
represent additional public sector costs that the conventional project
delivery approach may not necessarily require. For example, the project
sponsor for the London Underground spent the equivalent of $112 million
or approximately 1.1 percent of the concession agreement's total price
to cover legal expenses, financial services, and administrative fees.
Officials we interviewed also stated that Denver Regional
Transportation District anticipates spending $15 million in advisory
fees for its East Corridor and Gold Line pilot projects' request for
proposals submittals. In addition to transaction costs, public-private
partnerships incur added costs when the private sector provides the
financing for the project. The municipal bond market in the United
States generally provides public transit agencies a cheaper source of
funding because they can borrow more cheaply than the private sector.
Officials also stated that the effects of the recent economic recession
and failed credit markets have stymied the private sector's ability to
raise revenues and provide affordable long-term debt for large transit
projects due to tight lending conditions.
FTA New Starts Project Approval Process Is a Barrier to a Greater
Private Sector Role in Transit:
While we have previously identified FTA's New Starts grant program--
which funds new, large-scale transit projects--as a model for other
federal transportation programs because of its use of a rigorous and
systematic evaluation process to distinguish among proposed
investments, the New Starts project approval process is not entirely
compatible with transit projects that use alternative approaches in
that the process is sequential and phased with approvals granted
separately and at certain decision points. Therefore, the New Starts
process serves as a potential barrier because transit projects that use
alternative approaches often rely on the concurrent completion of
project phases to meet cost and schedule targets and to accrue savings
and other potential benefits. Congress recognized New Starts as a
potential barrier, as it authorized FTA to establish a Public-Private
Partnership Pilot Program in part to identify ways to streamline the
process. According to DOT's 2007 Report to Congress as well as project
sponsors, their advisors, and private sector partners, the New Starts
project approval process, while appropriate for the type of transit
projects that have been developed over several decades, poses
particular challenges for project sponsors using alternative approaches
for their transit projects. The challenges they raised include (1)
delays, (2) additional costs, and (3) the loss of other potential
benefits, such as enhanced efficiencies and improved quality.
Delays:
The sequential and phased New Starts project approval process can
create schedule delays as project sponsors await federal approval. The
amount of time it takes for FTA to determine whether a project can
advance can be significant. A 2007 study on the New Starts program by
Deloitte, commissioned by FTA to review the New Starts process and
identify opportunities for streamlining or simplifying the process,
found that the New Starts process is perceived by project sponsors as
intensive, lengthy, and burdensome. The Deloitte study found that FTA's
prescribed review times of 30 and 120 days for entry into the
preliminary engineering and final design phases, respectively, are
apparently arbitrary and actual review times are generally longer. In
particular, the study found that FTA's risk-assessment process delayed
project development.[Footnote 21] Consultants to the Dulles Silver Line
project sponsor told us that through the New Starts process, FTA has
complete control over a project's schedule, and project sponsors have
to put project work on hold while waiting for FTA's approval to advance
into the next project phase. They also told us that construction
activities on the Dulles Silver Line could not begin until the approval
of a full funding grant agreement--as design and construction
activities cannot be completed at the same time--and so some of the
time-savings benefits of the design-build approach were lost. For the
East Corridor and Gold Line pilot projects, Denver Regional
Transportation District officials also told us that since enough design
work will be completed during the New Starts preliminary engineering
phase to request bids from the private sector, no additional design
work is needed during final design and construction of the project.
However, Denver officials said that, as required by New Starts, they
will again prepare the design documentation for the final design and
full funding grant agreement approval phases, potentially contributing
to schedule delays. FTA officials told us that the resubmission of the
documentation is necessary because the private sector can bid to
provide something different than what was agreed upon under preliminary
engineering. Houston Metro's private sector partner told us it would
like to begin some construction activities on the North and Southeast
Corridors, but will not be able to begin until a full funding grant
agreement is awarded. As a result, the private sector partner has to
delay its work until the funding process is completed. FTA officials
responded that they allowed Houston Metro to carry out some
construction activities in advance of their receiving a full funding
grant agreement. Moreover, Houston Metro officials told us that FTA
required them to submit and resubmit entire project documents to FTA
multiple times, which led to delays. FTA officials told us the length
of time for reviews depends on a number of factors, most importantly
the completeness and accuracy of the project sponsor's submissions, and
that project sponsors could help to avoid such delays by improving
their submissions.[Footnote 22] For example, FTA officials stated that
Houston Metro's projects have changed repeatedly, thus requiring
multiple submittals.
Additional Costs:
In addition to the costs of delays, the design of the New Starts
project approval process--which is closely aligned with the
conventional design-bid-build approach--may also contribute to
additional project costs borne by the public sector when other
alternative approaches are used. Project sponsors and other
stakeholders for Denver Regional Transportation District's East
Corridor and Gold Line pilot projects told us that the private sector
must maintain its financial commitment to a project for up to several
months to allow for FTA, Office of Management and Budget, and
congressional review of the full funding grant agreement.[Footnote 23]
For example, Denver Regional Transportation District officials
anticipate adhering to the sequential and phased New Starts approach to
its project in order to accommodate delays from waiting for the
reauthorization of the existing transportation bill, the Safe,
Accountable, Flexible, Efficient Transportation Equity Act: A Legacy
for Users, and awarding a full funding grant agreement for the project.
However, Denver Regional Transportation District officials told us that
following this approach will likely increase the cost of the project.
FTA officials told us that these additional costs stem from a lack of
funding available in a surface transportation authorization period
rather than FTA's New Starts requirements. Additionally, for the Dulles
Silver Line, tax-increment financing funding--funding from incremental
tax revenue increases generated by new construction or rehabilitation
projects around the new transit line--was a major funding source for
the project, contributing up to $400 million to the $2.6 billion
project. The Duller Silver Line project consultants told us that the
project risked losing the tax increment financing funding as it took 5
years to receive a full funding grant agreement when the project
sponsor originally estimated that it would take 2 to 3 years. FTA
officials stated that several factors, including the decision to
reexamine a tunnel option, contributed to challenges surrounding the
Dulles Silver Line.
Loss of Other Potential Benefits:
FTA's New Starts project approval process may also limit other
potential benefits, such as enhanced efficiencies and design
improvements, when transit projects use alternative approaches. For
example, Denver Regional Transportation District officials told us that
the New Starts project approval process requires that specific design
details be included and that this requirement can prohibit a project
sponsor from instead leaving such design specifications to the private
sector, thus possibly limiting the ability to find innovative and cost-
effective solutions for the project. When a project sponsor specifies
the exact number of vehicles for the project, the private sector
partners must incorporate that design detail into their scope, whether
or not that exact number of vehicles is really needed. Due to the New
Starts requirements, another project sponsor told us that it had been
discouraged from using an alterative project delivery approach again
after having what it believed to be a prior successful experience that
included enhanced efficiencies and design improvements. A Minnesota
Metro Transit official told us it initially wanted to use the design-
build approach for its ongoing Central Corridor project based on the
success of previously using this approach for the Hiawatha Corridor--a
completed New Starts project that received a full funding grant
agreement in 2000. However, Minnesota Metro Transit determined that it
would have to complete 60 percent of the Central Corridor project's
design to meet FTA's New Starts requirements for final design. DOT's
2007 Report to Congress also cited a similar challenge regarding
project design requirements. These requirements are not consistent with
alternative approaches where project sponsors look to involve the
private sector after only one-third, for example, of the design work is
completed. Therefore, Minnesota Metro Transit decided to use the
conventional design-bid-build approach to construct the project. In
commenting on a draft of our report, FTA officials recognize that while
additional steps could be taken to facilitate alternative approaches to
transit projects, they also believe that other barriers beyond the
federal approval process affect the use of these approaches, including
those beyond the immediate reach of the program such as reduced
available private equity capital resulting from the recent economic
recession.
Greater Use of Existing Tools and an Evaluation Plan Can Help
Strengthen FTA's Pilot Program:
To address these challenges of the New Starts project approval process
for transit projects that use alternative approaches, Congress and FTA
have taken steps to streamline New Starts by establishing the Public-
Private Partnership Pilot Program. And to date, FTA has agreed to
provide all three of the pilot program project sponsors with some level
of relief, including expediting its risk assessment and providing
Letters of No Prejudice earlier than traditionally allowed in the New
Starts process to Houston Metro, and granting a waiver from federal
performance bonding requirements to the Bay Area Rapid Transit Oakland
Airport Connector pilot project, which FTA has also done for non-pilot
program projects.[Footnote 24] FTA has also stated its amenability to
waiving its risk assessment--which aims to identify issues that could
affect a project's schedule or cost--and financial reviews,
concurrently approving the project into the New Starts final design
phase[Footnote 25] while awarding an Early Systems Work Agreement for
Denver Regional Transportation District's East Corridor and Gold Line
pilot projects.[Footnote 26]
However, because FTA officials told us that none of the pilot projects
has demonstrated a sufficient transfer of risk or financial investment
by the private sector to enable FTA to relax its normal New Starts
evaluation requirements for such approvals, FTA has yet to grant three
pilot project sponsors any major streamlining modifications of the New
Starts project approval process, such as the awarding of concurrent
approvals into the New Starts phases. Thus far, FTA has only assessed
the Houston Metro pilot project to determine the extent to which FTA
could streamline the New Starts process. In its November 2008 report,
FTA determined that it would not relax, modify, or waive its risk
assessment and financial capacity reviews prior to advancement into
final design because Houston Metro retains risks in a number of
critical risk areas including finance since there is no equity capital
investment by the private sector partner.[Footnote 27] Houston Metro
officials said that they considered transferring more risk to the
private sector to meet FTA's threshold to waive certain New Starts
evaluation requirements, but decided against doing so because of their
concern that the private sector assuming certain risks to meet FTA's
threshold may potentially increase private sector bids and that they
would still be able to achieve some of the benefits of using an
alternative approach without equity capital investment by the private
sector.
While it may be too early for FTA to grant major streamlining
modifications with the other two pilot projects, FTA still has the
ability as part of its pilot program to further experiment with the use
of existing tools that could encourage a greater private sector role
while continuing to balance the need to protect the public interest.
FTA has the ability to use conditional approvals in the New Starts
process, such as (1) Letters of Intent that announce FTA's intention to
issue a full funding grant agreement that would in turn agree to
obligate a New Starts project's full federal share from future
available budget authority, subject to the availability of
appropriations, provided that a project meets all the terms of a full
funding grant agreement and (2) Early Systems Work Agreements that
obligate only a portion of a New Starts project's federal share for
preliminary project activities, such as land acquisition. Over the past
30 years, FTA has made very limited use of these tools by only granting
three Letters of Intent and four Early Systems Work Agreements to
transit projects. The Deloitte study noted that New Starts project
sponsors miss the opportunity to use alternative methods including
design-build and design-build-finance-operate-maintain because of the
lack of early commitment of federal funding for the projects,
suggesting that the greater use of these tools could be beneficial.
However, use of these tools is not without risk. We have previously
noted that limitations to FTA making greater use of these tools,
including Letters of Intent, could be misinterpreted as an obligation
of federal funds when they only signal FTA's intention to obligate
future funds. Furthermore, Early Systems Work Agreements require a
project to have a record of decision for the environmental review
process that must be completed under the National Environmental Policy
Act[Footnote 28] and require the Secretary to find that a full funding
grant agreement for the project will be made and that the agreement
will promote more-rapid and less-costly completion of the
project.[Footnote 29] Finally, under current statute, both of these
tools--Letters of Intent and Early Systems Work Agreement--count
against FTA's available funding for New Starts projects under the
current surface transportation authorization.
We found that the governments of the United Kingdom and Canada use
conditional approvals to help encourage a greater private sector role
in transit projects. The United Kingdom's Department for Transport
grants a conditional approval announcing the government's intent to
fund a project before it receives private sector bids provided that
cost, risk transference, and scope do not change. If those conditions
are not met, the project loses its government funding. This conditional
approval occurs after the department reviews projects, in part to
address the risk of cost increases, and thus provides a signal of
project quality to the private sector to help maintain a competitive
bidding process. Similarly, Transport Canada officials told us that it
makes a formal announcement to state its intent to provide federal
funds to a transit project after conducting its initial review of a
project and before formally committing funds that allow project
sponsors to move forward in development and engaging the private
sector. If the agreed-upon cost, schedule, and risk transference are
not met, the government withdraws its funding. United Kingdom
Department for Transport officials told us that they have experience
withdrawing funding when such conditions have not been met.
We also found that other U.S. Department of Transportation modal
administrations use similar conditional approvals to help encourage
greater private sector involvement in projects. The Federal Aviation
Administration uses Letters of Intent in its Airport Improvement
Program to establish multiyear funding schedules for projects that
officials said allow project sponsors to proceed with greater certainty
regarding future federal funding compared to the broader program and
also help prevent project stops and starts.[Footnote 30] The Federal
Aviation Administration has granted 90 of these multiyear awards since
1988. The Federal Highway Administration grants early conditional
approvals to highway project sponsors seeking Transportation
Infrastructure Finance and Innovation Act funds to streamline the
process and allow private sector bidders to incorporate these funds
into their financial plans without having to individually apply as
otherwise required. The Federal Highway Administration has also carried
out three pilot programs that have allowed projects to move more
efficiently through its grant process by modifying some of its
requirements. These pilot projects waived certain aspects of the
federal-aid highway procurement provisions, such as moving forward with
final decision prior to a National Environmental Policy Act decision,
and allowed federally funded highway projects to use alternative
approaches including design-build. One of these pilot programs is cited
by the Federal Highway Administration as having helped pave the way for
design-build to become the standard project delivery approach in
highway projects. Another pilot program allowed the Federal Highway
Administration to waive regulations and policies so project sponsors in
two states could contract with the private sector at a much earlier
point in the project development cycle than was previously allowed.
In addition to not yet granting project sponsors any major streamlining
modifications to the New Starts process, FTA does not have an
evaluation plan to accurately and reliably assess the pilot program's
results, including the effect of its efforts to streamline the New
Starts projects for pilot project sponsors. We have previously reported
that to evaluate the effectiveness of a pilot program, a sound
evaluation plan is needed and should incorporate key features
including: well-defined, clear, and measurable objectives; measures
that are directly linked to the program objectives; criteria for
determining pilot program performance; a way to isolate the effects of
the pilot program; a data analysis plan for the evaluation design; and
a detailed plan to ensure that data collection, entry, and storage are
reliable and error-free.[Footnote 31] Without such an evaluation plan,
FTA is limited in its decision making regarding its pilot program, and
Congress will be limited in its decision making about the pilot
program's potential broader application. FTA officials told us that
they have not yet developed an evaluation plan for its pilot program
given that the projects are all ongoing, far from completion, and still
working through the New Starts project approval process.
Project Sponsors Have Sought to Protect the Public Interest in Various
Ways and DOT Can Provide Guidance and Technical Assistance:
Project Sponsors Protect the Public Interest in Various Ways, Including
through Competitive Procurement Practices as Well as Performance
Specifications and Standards:
The alternative approaches we reviewed have protected the public
interest in various ways to ensure the public receives the best price
for a project and to create incentives for the private sector partner
so that the project progresses and operates based on agreed-upon
objectives.
Competitive Procurement Practices:
Project sponsors we interviewed have attempted in part to protect the
public interest in transit projects that use alternative approaches by
ensuring the use of competitive procurement practices. These practices
are not unique to alternative approaches and are sometimes used in
conventional procurements. Competitive procurement practices are
generally required to be used for federal funding. For example, federal
law and regulations generally require federal contracts to be competed
unless they fall under specific exceptions to full and open
competition. Nevertheless, project sponsors told us that maximizing the
use of these competitive procurement practices--such as encouraging
multiple bidders to value and price projects--helps to ensure that the
public sector receives the best bid when using these partnerships and
approaches. European Union countries are required to have multiple
bidders for procurements. Procurements with only one bidder are less
competitive and can result in less attractive bids. For example,
although Bay Area Rapid Transit prequalified three contractors for the
first version of its Oakland Airport Connector, two contractors
withdrew during the negotiation period due to concerns about the
project affordability. Bay Area Rapid Transit negotiated with the sole
remaining bidder on costs for nearly a year but then let the Request
for Proposals expire with no proposals submitted.[Footnote 32] To
encourage the participation of multiple bidders, Minnesota Metro
Transit Hiawatha Corridor and Denver's Regional Transportation
District's Transportation Expansion light rail offered proposal
stipends to private sector entities that submitted formal bids to help
defray the costs of developing proposals. However, while serving as an
incentive for potential private sector partners, stipends add costs
that must be weighed against the benefits they provide.
Project sponsors that we interviewed have also encouraged early and
sustained interaction with the private sector to test the project's
marketability and whether and in what form private sector participation
is advantageous. Such feedback can be obtained through bidder
information sessions and from consultants. Project sponsors then
conduct a request for qualified bidders to gain more detailed input
from the private sector on a project prior to the issuance of a request
for proposals (which solicits the formal bids). The request for
qualified bidders can establish a higher threshold of responsibility
for private partners compared to traditional procurements in which a
private partner is selected based primarily on bid price. Thus,
sustained and iterative interaction between the project sponsor and the
private sector can refine the project's scope and terms and determine
how best to include the private sector. For example, all three of FTA's
pilot projects as well as Minnesota Metro Transit's Hiawatha Corridor
project used a request for qualifications to select bidders and solicit
the private sector's review of project details. In addition, Minnesota
Metro Transit told us that input from the private sector produced
several good ideas that were incorporated into the project, such as a
shared risk fund to provide an incentive for the private sector to
reduce construction delays. Furthermore, the Canada Line project
sponsor used a list of essential elements agreed upon by the public
agencies funding the project as a basis for negotiating with potential
bidders.
Performance Specifications and Standards:
Project sponsors that we interviewed seek to protect the public
interest in alternative approaches through an emphasis on performance.
Performance specifications focus on desired project performance (such
as frequency of train arrivals at a station) and not design details
(such as the type of train). Project sponsors and consultants told us
that detailed specifications that have been in conventional project
delivery approaches can restrict what bidders can offer. When
specifications are focused on performance, bidders can offer a range of
design and technology options as well as follow best practices that
meet overall project objectives. According to Denver's Regional
Transportation District, the East Corridor and Gold Line pilot projects
initially had a 700-page design specification document for their
commuter rail vehicles. After industry review and feedback that the
specifications would lead to customized vehicles that would be
expensive and difficult to operate and maintain, the project sponsor
responded by creating a 15-page performance specifications document for
the vehicles. An advisor to the project sponsor noted that the use of
design specifications is more challenging with transit projects than in
highways and other sectors given the technology issues and
environmental concerns. The advisor also said that projects with a
range of technology options must undergo the environmental review
process at the highest possible level of design given the effect of
different technologies on the environment. In contrast, one project
sponsor noted that performance specifications should not be used when
conditions of the facility or surrounding environment, for example, are
unknown as unforeseen circumstances could occur that would require more
specific design specifications.
Project sponsors we interviewed have also sought to use performance
standards to protect the public interest. These standards are what the
private sector partner must meet to be compensated during the project's
construction, operations, and maintenance phases, helping to ensure
adequate performance. If the private sector partner does not meet the
standards, then it is penalized with no, reduced, or delayed payments,
and penalties can escalate if poor performance continues. Standards for
construction include delivering a completed project or project element
within a set schedule. For example, the Canada Line private sector
partner had 400 milestones that it needed to complete and have
certified in order to continue to receive timely payments during the
project's construction period. Performance standards for operations and
maintenance, also called key performance indicators, cover all aspects
of service including the availability, frequency, and reliability of
service and conditions of facilities. For example, the London
Underground chose to emphasize key performance indicators in four
areas--availability, capability, ambience, and service points--by
creating performance targets and to tie monthly payments to these based
on the private sector partner's actual performance. Some projects have
also incorporated standards that link to increased ridership to provide
incentives for the private sector partner to provide good customer
service. For example, Nottingham Express Transit has 20 percent of its
payments to the private sector based on ridership. Additionally, the
draft concession agreement for Denver's Regional Transportation
District East Corridor and Gold Line pilot projects incorporate levels
of payment deductions that accelerate when low performance, such as
delayed trains and littered or unclean railcars, persists. If low
performance continues over a period, the project sponsor can terminate
the concession agreement and rebid the project to another private
partner.
Financial Mechanisms:
Project sponsors we interviewed also protect the public interest in
transit public-private partnership and other alternative approaches
through the incorporation of private equity capital. When a private
sector partner finances a project using equity capital, the private
sector uses payments received from the project sponsor to repay its
costs plus provide a return on investment. Since the private sector
partner borrows to finance its costs--that is, it has equity at risk if
it does not meet standards--it will be unable to meet its financial
obligations from these milestone payments if those standards are not
met. This situation can create incentives for the private sector
partner to deliver according to the terms of the agreement. At the same
time, financial advisors to project sponsors told us that bank lenders
protect their investments by ensuring that the private sector properly
develops a concession agreement and then delivers on it. The public
interest is thus further protected by this integration of
responsibilities because the bank lender and concessionaire provide
additional project oversight through the monitoring of cost overruns
and schedule delays, among other issues. According to the Canada Line
private sector partner, it provided 17 percent equity in the project.
For the Croydon Tramlink, the private sector partner contributed 30
percent of project costs. In the case of the Canada Line, the private
sector partner did not miss any of its 400 payment milestones.
Flexibility:
To better protect the public interest, project sponsors have also
incorporated clauses into project agreements that allow for flexibility
under certain circumstances. Project sponsors that we interviewed noted
the importance of having the ability to periodically revisit agreement
terms in long-term concessions to protect the public interest given
that unforeseen circumstances may occur that make the concessionaire
unable to meet performance standards. For example, Houston Metro's
North and Southeast Corridor projects' concession agreement
incorporated this flexibility by including an operations and
maintenance agreement for the first 5 years after service begins with
the option for renewal. According to a consultant that works on the
project, this approach was chosen in part because the project sponsor
wanted an option to revisit the contract. Internationally, both of the
London Underground's maintenance 30-year concession agreements are
reviewed for scope of work and costs by a public-private partnerships
arbiter every 7.5 years. Moreover, the concessionaire has the ability
to request an extraordinary review by the arbiter if costs rise above a
specified threshold due to circumstances outside the private sector
partner's control.
Periodically revisiting terms, or shorter concession periods, can also
allow for changes such as system extension. One of the Docklands Light
Railway extensions has breakpoints at the years 2013 and 2020 in its
concession agreement that give the project sponsor an option to break
and buy back the agreement for a set price. In contrast, in the
previously mentioned example of Manchester Metrolink, concessions for
phase 2 were terminated by the project sponsor to allow for system
expansion in a third phase which was not procured as a public-private
partnership. According to consultants we interviewed, the terminations
could have been avoided if the initial concessions had been shorter.
Shorter concession periods are thus being used as a means to revisit
terms and rebid if desired.
In addition to clauses that allow project sponsors to revisit
concession agreement terms, other clauses that allow for flexibility
can also protect the public interest. For example, Denver Regional
Transportation District's draft concession agreement includes clauses
specifying both triggers that could lead to default and terms of
compensation in case of default as well as termination provisions that
detail the condition of the transit asset at the end of the concession
when it is transferred back to the project sponsor. These provisions
help to minimize disputes. Other advisors to project sponsors told us
that a clause specifying the sharing of "refinancing gains" between the
project sponsor and concessionaire could also help to protect the
public interest. Refinancing gains refer to savings that occur when the
private sector revises its repayment schedule for its equity investment
by taking advantage of better financial terms. As we have noted in our
report on highway public-private partnerships, the private sector can
potentially benefit through gains achieved in refinancing their
investments and these gains can be substantial. The governments of the
United Kingdom as well as Victoria and New South Wales, Australia,
require that any refinancing gains achieved by private concessionaires
generally be shared with the government.
Project Sponsors Also Protect the Public Interest by Using Financial
Assessments:
Some foreign governments have recognized the importance of protecting
the public interest in public-private partnerships through the use of
quantitative and qualitative public interest assessments. We have also
previously reported that more rigorous, up-front analysis could better
secure potential benefits and protect the public interest. [Footnote
33] The use of quantitative and qualitative public interest tests and
tools before entering into transit public-private partnerships can help
lay out the expected benefits, costs, and risks of the project.
Conversely, not using such tools can potentially allow aspects of the
public interest to be overlooked. For example, a Value for Money
analysis is a tool used to evaluate if entering into a project as a
public-private partnership is the best project delivery option
available. Internationally, the United Kingdom, and British Columbia in
Canada, among others, require a Value for Money analysis for all
transportation projects over a certain cost threshold. For example, all
transportation projects in the United Kingdom that exceed about $24
million must undergo a Value for Money analysis to receive project
funding, while projects in British Columbia must conduct a Value for
Money analysis if project costs total more than about $46 million.
Domestically, Florida requires a Value for Money analysis for public-
private partnerships, one of which was recently conducted on the I-595
Corridor Roadway Improvements Project in Broward County. A Value for
Money assessment was also completed for the Bay Area Rapid Transit's
Oakland Airport Connector at the request of FTA.
In general, Value for Money evaluations examine total project costs and
benefits and are used to determine if a public-private partnership
approach is in the public interest for a given project. Value for Money
tests are often done by comparing the costs of doing a proposed project
as a public-private partnership against an estimate of the costs of
procuring that project using a public delivery model.[Footnote 34]
Value for Money tests examine not only the economic value of a project
but also other factors that are hard to quantify, such as design
quality and functionality, quality in construction, and the value of
unquantifiable risks transferred to the private sector. In the United
Kingdom, Value for Money analysis includes qualitative factors such as
the viability, desirability, and achievability of the project in
addition to the quantitative factors.
Provinces such as Canada's British Columbia and Australia's Victoria
also include qualitative factors in their financial assessments,
including Value for Money analysis. Government officials stated that
including both quantitative and qualitative factors in financial
assessments such as Value for Money analysis provides a more
comprehensive project assessment. In addition to determining whether a
public-private partnership is advantageous over a publicly delivered
project, project sponsors and government officials noted that a Value
for Money analysis is also a useful management tool for considering up
front all project costs and risks that can occur during a project's
lifetime, which is not always done in a conventional procurement.
Project sponsors can also use financial assessments such as Value for
Money analysis for other reasons. For example, Value for Money analysis
can assist in determining which project delivery approach provides more
value. Project sponsors can assess if one public-private partnership
option is more advantageous than another if it is decided that private
participation in a project is beneficial. For example, Bay Area Rapid
Transit used a Value for Money analysis in its original iteration of
the Oakland Airport Connector to assess which alternative project
delivery approach (design-build-operate-maintain or design-build-
finance-operate-maintain) would be more advantageous. Project sponsors
can also use Value for Money to give a range of possible project costs
when coupled with a sensitivity analysis. For example, a sensitivity
analysis developed for the Canada Line suggested that project costs
could have varied from $47 million more to $270 million less than
expected, depending on the level of risk. A further example of how
project sponsors can use Value for Money is to enhance communication
about a project. Project sponsors noted that since Value for Money
analyses are often publicly available, such as in the United Kingdom,
they can lead to more-informed discussions and provide transparency in
the selection of the project delivery approach. Thus, they can be good
planning and communication tools for decision makers.
Government officials and consultants that perform financial
assessments, such as Value for Money analysis, cautioned that the
assessments are not without limitations. For example, officials and
consultants told us that these analyses are inherently subjective and
rely on assumptions that can introduce bias. Assessments can include
the assumption that the public sector will likely have higher
construction costs due to a history of cost overruns. In the United
Kingdom, an "optimism bias" of 15 percent is added to the public sector
comparator in part to account for this. Consultants noted that there is
subjectivity in valuing risks as detailed data on the probability of
particular project risks occurring are unavailable. Thus consultants
use data from past projects and their own professional views to conduct
the analysis. In sum, government officials and consultants noted that
Value for Money analysis should be considered as a tool rather than the
sole factor in assessing whether to do a public-private partnership.
Although Limited in the United States, Some Other Countries Further
Protect the Public Interest by Providing Guidance and Technical
Assistance:
Some countries have further protected the public interest in transit
projects that use alternative approaches by establishing quasi-
governmental entities to assist project sponsors in implementing these
arrangements. Entities such as Partnerships UK, Partnerships Victoria,
and Partnerships BC are often fee-for-service and associated with
Treasury Departments on the provincial and national levels. These quasi-
governmental entities all develop guidance such as standardized
contracts and provide technical assistance to support transit projects
that use alternative approaches. According to an advisor for project
sponsors, contracts for these partnerships and approaches generally
follow a standard model such as a framework for assigned risk between
the project sponsor and private sector, with the particularities of
local legislation and project specifics written into them. The United
Kingdom's standard contract outlines requirements as well as factors to
consider from a project's service commencement through termination,
which is periodically updated to reflect lessons learned.[Footnote 35]
For example, after the government of the United Kingdom required the
private sector to share any refinancing gains with the project sponsor,
the standard contract was subsequently updated. Furthermore, the quasi-
governmental entities provide technical assistance to support transit
projects that use alternative approaches. For example, Partnerships BC
provides project sponsors assistance on conducting a Value for Money
assessment to determine whether private sector participation in a
project is beneficial. In addition to this assistance, these entities
provide other varied services to facilitate public-private partnerships
across different sectors. For example, Partnerships UK reviews project
proposals for the government; Partnerships Victoria offers training for
the province; and Partnerships BC advises project sponsors to help
develop and close public-private partnership contracts in British
Columbia.
Quasi-governmental entities can further protect the public interest
through the benefits they provide. According to government officials in
the United Kingdom and Canada, these entities create a consistent
approach to considering public-private partnerships, such as
understanding a project's main risks, which can reduce the time and
costs incurred when negotiating a contract. Further, by using
standardized contracts developed by these entities, project sponsors
can reduce transaction costs--such as legal, financial, and
administrative fees--of implementing transit projects that use
alternative approaches. Moreover, project sponsors and consultants told
us that entities like Partnerships UK and Partnerships BC can foster
good public-private partnerships and help further protect the public
interest by ensuring consistency in contracts and serving as a
repository of institutional knowledge. Without the services provided by
these quasi-governmental entities, project sponsors that plan to or use
alternative approaches for a transit project will develop them on a
case-by-case basis because they lack institutional knowledge and a
centralized resource for assistance.
While DOT has established an office to support project sponsors of
highway-related public-private partnerships, DOT does not provide
similar support for transit projects. In a previous GAO report, we
noted that formal consideration and analysis of public interest issues
had been conducted in U.S. highway public-private partnerships, and
that DOT has done much to promote the benefits, but comparatively
little to assist states and localities weigh potential costs and trade-
offs of these partnerships.[Footnote 36] Since that report, the Federal
Highway Administration's Office of Innovative Program Delivery has been
established to provide support for highway-related public-private
partnerships by providing an easy, single-point of access for project
sponsors and other stakeholders. The office is intended to offer
outreach, professional capacity building, technical assistance, and
decision-making tools for highway-related public-private partnerships.
In addition, FTA officials told us that they have plans to develop an
online toolset for employees to help them provide technical assistance
to project sponsors on these alternative approaches. This assistance is
to include checklists to help determine whether a project should use an
alternative approach, risk matrices that provide an overview and
explanation of risks transferred using such an approach, and a
financial feasibility model that can be used to quantitatively compare
the use of an alternative approach with the conventional approach to
transit projects. Furthermore, in June 2009, the House of
Representatives' Committee on Transportation and Infrastructure's
surface transportation reauthorization blueprint proposed that an
Office of Expedited Project Delivery be created within FTA to provide
assistance to transit project sponsors much as we have outlined earlier
in this report.[Footnote 37] However, such support is not currently
available for project sponsors of transit projects that use alternative
approaches. Project sponsors and their advisors noted that as there is
little public sector institutional knowledge about public-private
partnerships in the United States, projects may be carried out without
the benefit of previous experiences. It is even more challenging to
conduct transit projects that use alternative approaches in the United
States given the variation in relevant state laws and local ordinances
that project sponsors and other stakeholders must navigate.
Furthermore, FTA's New Starts evaluation requirements for transit
projects seeking federal funding do not include an evaluation of
whether the public is receiving the best value for its money as
compared to other delivery approaches. Thus project sponsors, advisors,
and government officials noted that such an entity in the United States
could be valuable in further protecting the public interest in public-
private partnerships.
Conclusions:
FTA distributes billions of dollars of federal funding to transit
agencies for the construction of new, large-scale projects; as such, it
is critical that the public interest is protected and federal funding
is spent responsibly. Project sponsors are looking to transit projects
that use alternative approaches to deliver and finance new transit
projects, along with federal funds. However, because of its sequential
and phased structure, FTA's New Starts program is incompatible with
transit projects that use these approaches. Congress recognized this
concern when it authorized FTA to establish the Public-Private
Partnership Pilot Program to illustrate how New Starts evaluation
requirements can be streamlined to better accommodate the use of
alternative approaches in transit projects. However, the pilot program
has not yet illustrated how this can be done. This is because, on the
one hand, FTA has determined that no pilot project has demonstrated
enough of a transfer of risk--in particular a financial investment by
the private sector--for FTA to consider granting major modifications to
streamline its New Starts evaluation requirements. On the other hand,
the potential challenges posed by the New Starts requirements,
including delays and additional costs, may discourage the private
sector from assuming enhanced financial responsibility in these
alternative approaches.
Despite this apparent impasse, FTA sill has the unique opportunity to
take advantage of the fundamental characteristic of a pilot program--
flexibility--to gain valuable insight on how to streamline the New
Starts process to facilitate a greater private sector role in transit
projects through the use of alternative approaches. FTA can introduce
additional flexibility into its three pilot projects through, among
other things, the use of existing, long-standing tools, such as Letters
of Intent and Early Systems Work Agreements. Other agencies within DOT
have used such tools successfully in the past to provide flexibility to
their funding and approval processes and to advance and promulgate
alternative project finance and delivery approaches. Moreover, some
other countries have used conditional approvals to incorporate more
flexibility into their funding processes and help encourage a greater
private sector role in transit projects. FTA may want to turn to the
experiences of these other modal administrations and governments and
use existing, long-standing tools to incorporate more flexibility in
the New Starts process to help facilitate transit projects that use
alternative approaches.
Without an evaluation plan to assess the results of its pilot program,
FTA may also lose some valuable information Congress intended the
agency to obtain through the pilot program's establishment, including
how the New Starts project approval process can be further streamlined.
As more transit projects use alternative approaches, FTA may not be
able to readily accommodate these approaches, ultimately disadvantaging
transit project sponsors that seek to deliver their projects more
quickly and efficiently and at a lesser cost to the public.
In the past, DOT has done much to promote the potential benefits of
transportation public-private partnerships. While these benefits are
not assured and should be evaluated by weighing them against potential
costs and trade-offs, DOT has done comparatively little to equip
project sponsors to weigh the potential costs and trade-offs. Recently,
DOT has taken a more integrated approach to a greater private sector
role in transportation, as evidenced by its newly established Office of
Innovative Program Delivery for public-private partnerships. Congress
has taken a greater interest in facilitating alternative approaches as
well. Quasi-governmental entities established by foreign governments
have better equipped project sponsors to implement alternative
approaches, including public-private partnerships, by creating a
uniform method to considering the implications of alternative
approaches, reducing transaction costs, ensuring consistency in
contracts, and serving as a repository of institutional knowledge. FTA
could consider these international models and expand its current
efforts in transportation public-private partnerships to support a
greater private sector role in transit directly to project sponsors.
Expanded FTA efforts could facilitate the implementation of transit
projects that use alternative approaches and protect the public
interest through the use of tools such as standardized contracts,
technical assistance, and financial assessments.
Recommendations for Executive Action:
To facilitate a better understanding of the potential benefits of
alternative approaches in FTA's Public-Private Partnership Pilot
Program, if reauthorized, we recommend that the Secretary of
Transportation direct the FTA Administrator to take the following
actions:
* Incorporate greater flexibility, as warranted, in the Public-Private
Partnership Pilot Program than has occurred to date by making greater
use of existing tools such as Letters of Intent and Early Systems Work
Agreements in order to streamline the New Starts process.
* Develop a sound evaluation plan for the Public-Private Partnership
Pilot Program to accurately and reliably assess the pilot programs'
results that includes key factors such as: well-defined, clear, and
measurable objectives; measures that are directly linked to the program
objectives; criteria for determining pilot program performance; a way
to isolate the effects of the pilot program; a data analysis plan for
the evaluation design; and a detailed plan to ensure that data
collection, entry, and storage are reliable and error-free.
* Beyond its pilot program, build upon efforts underway in DOT to
better equip transit project sponsors in implementing transit projects
that use alternative approaches, including developing guidance,
providing technical assistance, and sponsoring greater use of financial
assessments to consider the potential costs and trade-offs.
Agency Comments and Our Evaluation:
We provided a draft of this report to DOT and FTA for review and
comment. DOT has agreed to consider our recommendations and provided
comments through e-mail from FTA officials. In their comments, FTA
officials stated that the agency has ongoing and planned efforts as
part of its Public-Private Partnership Pilot Program that they believe
address the intent of our recommendations. For example, FTA officials
noted that the agency has, as we reported, made use of tools such as
Letters of Intent and Early Systems Work Agreements in the past in
order to streamline the New Starts process, and that it will evaluate
the potential for greater use of these existing tools in the future to
incorporate greater flexibility into the pilot program. Additionally,
FTA officials acknowledged the need for an evaluation plan to assess
the pilot program's results and stated they will be working to develop
one. Further, FTA officials stated that FTA is working to develop
technical assistance for its staff on how to structure and evaluate
alternative approaches to transit projects; we revised our draft report
to reflect FTA's efforts. Because these efforts are either planned or
in their early stages, we are retaining our recommendations. Finally,
FTA officials provided technical comments, which we incorporated as
appropriate.
We are sending copies of this report to appropriate congressional
committees and DOT. The report also is available at no charge on the
GAO Web site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at flemings@gao.gov or (202) 512-2834. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Key contributors to this report are
listed in appendix II.
Susan A. Fleming:
Director, Physical Infrastructure Issues:
[End of section]
Appendix I: Scope and Methodology:
Our work was focused on transit projects that involve greater private
sector participation than is typical in conventional projects. In
particular, we focused on (1) the role of the private sector in the
delivering and financing of U.S. transit projects compared with other
countries; (2) the benefits and limitations of and the barriers, if
any, to greater private sector involvement in transit projects and how
these barriers are addressed in the Department of Transportation's
(DOT) Public-Private Partnership Pilot Program; and (3) how project
sponsors and DOT can protect the public interest in transit projects
that use alternative approaches. Our scope was limited to identifying
the primary issues associated with using public-private partnerships
for transit infrastructure and not in conducting a detailed financial
analysis of the specific arrangements.
In order to clearly delineate alternative delivery and financing
approaches used in transit, first we identified three categories--
traditional, innovative, and alternative--that describe the evolution
of such practices. We defined traditional financing to include federal
grants (such as New Starts program grants), state and local public
grants, taxes, and municipal bonds, and defined conventional project
delivery to refer to the design-bid-build approach. We defined
innovative financing to include loan or credit assistance such as the
Transportation Infrastructure Financing and Innovation Act, Private
Activity Bonds, Tax Increment Financing, State Infrastructure Banks,
Grant Anticipation Notes, and Revenue Bonds, and innovative project
delivery to refer to the design-build approach. Finally, we defined
alternative financing to refer to public-private partnerships that
involve private equity capital such as concession agreements and
defined alternative approaches as ones that transfer greater risk to
the private sector including: design-build, design-build-finance,
design-build-operate-maintain, build-operate-maintain, design-build-
finance-operate, design-build-finance-operate-maintain, build-operate-
own, and build-own-operate, among others.
We took several steps and considered various criteria in selecting
which domestic transit projects to study as part of our review of
alternative financing and project delivery practices. First, we
reviewed transit project information from DOT, GAO, the Congressional
Research Service, and other reports as well as conducted interviews
with DOT officials, project sponsors, industry representatives, and
academic experts to identify the potential universe of projects that
fit at least one (alternative project delivery or alternative
financing) or both of our established definitions. We also selected
projects that were either completed or had already carried out
substantial planning. The potential universe of projects contained 10
completed projects including: Denver Regional Transportation District
Transportation Expansion Light Rail (design-build), South Florida
Commuter Rail Upgrades (design-build), Minnesota Metro Transit Hiawatha
Corridor Light Rail Transit (design-build), Bay Area Rapid Transit
Extension to San Francisco International Airport (design-build),
Washington Metropolitan Area Transit Authority Largo Metrorail
Extension (design-build), Hudson-Bergen Light Rail Transit Minimum
Operating Segment 1 (design-build-operate-maintain), Hudson-Bergen
Light Rail Transit Minimum Operating Segment 2 (design-build-operate-
maintain), John F. Kennedy Airtrain (design-build-operate-maintain),
Portland MAX Airport Extension (design-build), and Las Vegas Monorail
(design-build-finance-operate-maintain). We also included 3 ongoing
transit projects as part of the universe: Bay Area Rapid Transit
Oakland Airport Connector (design-build-operate-maintain), Denver
Regional Transportation District East Corridor and Gold Line pilot
projects (design-build-finance-operate-maintain), and Houston Metro
North and Southeast Corridor pilot projects (design-build-operate-
maintain). Second, we determined that we would focus solely on projects
that have or are expected to go through the Federal Transit
Administration's (FTA) New Starts process given that this is the
largest capital grant program for transit projects and that any such
projects would be reviewed to protect the public interest (i.e.,
projects not entirely funded by the private sector). This eliminated
the John F. Kennedy Airtrain, Portland MAX Airport Extension, and Las
Vegas Monorail projects. Third, we applied three of four criteria from
FTA's Report to Congress[Footnote 38] to the remaining projects,
including (1) project costs were reduced, (2) project duration was
shortened, and (3) project quality was maintained or enhanced.[Footnote
39] This eliminated the South Florida Commuter Rail Upgrades, Hudson-
Bergen Light Rail Transit Minimum Operating Segment 1 and Minimum
Operating Segment 2, and the Bay Area Rapid Transit Extension to San
Francisco International Airport.
We decided to select all three of the ongoing pilot projects--Bay Area
Rapid Transit Oakland Airport Connector, Denver Regional Transportation
District East Corridor and Gold Line, and Houston Metro North and
Southeast Corridors--given that FTA views these projects as currently
having the most private sector potential and thus designated them as
their three Public-Private Partnership Pilot Program projects. We also
decided, given our limited resources, to select two of the remaining
three completed projects--Minnesota Metro Transit Hiawatha Corridor and
Denver Regional Transportation District Transportation Expansion--as
DOT's Report to Congress identified these two projects as having
successful collaborations with their respective departments of
transportation, including their highway counterparts, which have
greater experience than transit in using alternative project delivery
and alternative financing. This eliminated the Washington Metropolitan
Area Transit Authority Largo Metrorail Extension. These projects were
selected because they are recent examples of ongoing and completed
transit projects in the United States that incorporated greater private
sector involvement through the use of alternative project delivery or
financing approaches or both.
To select which international countries we would include as part of our
review of alternative financing and project delivery practices, we
conducted a literature review of international transit public-private
partnerships as well as conducted interviews with DOT officials,
project sponsors, industry representatives, and academic experts to
identify the potential universe of countries with significant
experience in transit public-private partnerships, including projects
that fit at least one (alternative project delivery or alternative
financing) or both of our established definitions. Second, we
determined that we would collect the most valuable and relevant
information from countries that share a similar political and cultural
structure to the United States. Third, given our limited resources, we
decided to select only two of the three remaining countries. Thus, we
ultimately identified Canada and the United Kingdom for our
international site visits. Issues discussed in the report related to
the interpretation of foreign law, including the character of public-
private partnership agreements, and their limitations, were evaluated
as questions of fact based upon interviews and other supporting
documentation.
To determine how transit projects that use alternative approaches have
been used in the United States, we collected and reviewed descriptions
of the projects, copies of the concession or development agreements,
planning documents, and documentation related to the financial
structure of the projects in addition to academic, corporate, and
government reports. We conducted, summarized, and analyzed in-depth
interviews with project sponsors and private sector participants about
their experiences with alternative financing and procurement in transit
projects. We also reviewed pertinent federal legislation and
regulations, including: Federal Register Notices and guidance for FTA's
Public-Private Partnership Pilot Program and the New Starts Program;
DOT's Report to Congress on the Costs, Benefits, and Efficiencies of
Public-Private Partnerships for Fixed Guideway Capital Projects; and
other DOT reports.
To identify the potential benefits and potential limitations of transit
projects that use alternative approaches, and what barriers project
sponsors face in the United States, we conducted, summarized, and
analyzed in-depth interviews with domestic project sponsors and private
sector participants including private investors, financial and legal
advisors, project managers, and contractors. In addition to these
domestic experts, we conducted extensive interviews with various
international stakeholders, experts, and private sector officials from
Canada and the United Kingdom that were knowledgeable in greater
private sector participation in the financing and procurement of
transit projects. We also conducted a literature review; summarized and
analyzed key benefits, limitations, and barriers to greater private
sector participation; and interviewed FTA and other federal and local
officials associated with the projects we selected as well as private
sector officials involved with United States transit public-private
partnership arrangements.
To determine how project sponsors and DOT can protect the public
interest in transit projects that use alternative approaches, we
conducted site visits of selected transit public-private partnerships
and visited the United Kingdom and Canada, which both had more
experience conducting transit public-private partnerships. We
conducted, summarized, and analyzed in-depth interviews with project
sponsors, private sector participants, international stakeholders, and
experts regarding the competitive procurement process, robust
concession agreements, and Value for Money analyses, among other
topics. We also examined international mechanisms that were implemented
for projects including Croydon Tramlink, Docklands Light Railway,
London Underground, Manchester Metrolink, and Nottingham Express
Transit in the United Kingdom and the Canada Line in Vancouver, Canada,
to provide insight on how project sponsors and DOT can protect the
public interest in transit projects that use alternative approaches. We
also held in-depth interviews with FTA on its steps to protect the
public interest in federally funded transit projects with greater
private sector participation including programs like FTA's Public-
Private Partnership Pilot Program and the New Starts Program.
We conducted this performance audit from October 2008 through October
2009 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Susan Fleming, (202) 512-2834 or FlemingS@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Steve Cohen, Assistant
Director; Jay Cherlow; Patrick Dudley; Carol Henn; Bert Japikse; Joanie
Lofgren; Maureen Luna-Long; Amanda K. Miller; Tina Paek; Amy Rosewarne;
Tina Won Sherman; and Jim Wozny made key contributions to this report.
[End of section]
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http://www.gao.gov/cgi-bin/getrpt?GAO-09-712]. Washington, D.C.: August
12, 2009.
Public Transportation: Better Data Needed to Assess Length of New
Starts Process, and Options Exist to Expedite Project Development.
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-784]. Washington,
D.C.: August 6, 2009.
Public Transportation: New Starts Program Challenges and Preliminary
Observations on Expediting Project Development. [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-09-763T]. Washington, D.C.: June
3, 2009.
High Speed Passenger Rail: Future Development Will Depend on Addressing
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[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-317]. Washington,
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http://www.gao.gov/cgi-bin/getrpt?GAO-08-844]. Washington, D.C.: July
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Analysis. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-1052T].
Washington, D.C.: July 24, 2008.
Highway Public-Private Partnerships: More Rigorous Up-front Analysis
Could Better Secure Potential Benefits and Protect the Public Interest.
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-44]. Washington,
D.C.: February 8, 2008.
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Oversight Challenges for Federal and State Officials. [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-08-198]. Washington, D.C.:
January 8, 2008.
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Oversight and Freight Infrastructure Investment Could Be Better
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Washington, D.C.: August 6, 2007.
Public Transportation: Future Demand Is Likely for New Starts and Small
Starts Programs, but Improvements Needed to the Small Starts
Application Process. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-
07-917]. Washington, D.C.: July 27, 2007.
Public Transportation: Preliminary Analysis of Changes to and Trends in
FTA's New Starts and Small Starts Programs. [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-07-812T]. Washington, D.C.: May
10, 2007.
Public Transportation: New Starts Program Is in a Period of Transition.
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-819]. Washington,
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of SAFETEA-LU Changes. [hyperlink, http://www.gao.gov/cgi-
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Improvements Needed to DOD's Evaluation Plan. [hyperlink,
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[End of section]
Footnotes:
[1] As used in this report, "New Starts program" refers generally to
that part of the Capital Investment Grants program that funds new fixed-
guideway capital projects. See 49 U.S.C. § 5309. These systems use and
occupy a separate right-of-way for the exclusive use of public
transportation services. They include fixed rail, exclusive lanes for
buses and other high-occupancy vehicles, and other systems. Selection
of a project for assistance under this program results in the signing
of a full funding grant agreement which establishes the terms and
conditions for federal funds for the project, including the maximum
amount of federal funds available, subject to available appropriations.
[2] GAO, Highway Public-Private Partnerships: More Rigorous Up-front
Analysis Could Better Secure Potential Benefits and Protect the Public
Interest, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-
44](Washington, D.C.: Feb. 8, 2008).
[3] Design-bid-build is the approach with which FTA's New Starts
project evaluation process is aligned.
[4] As used in this report, "New Starts program" refers generally to
the capital investment grants program. See 49 U.S.C. § 5309.
[5] Full funding grant agreements establish the terms and conditions
for federal funds available for the project, including the maximum
amount of federal funds available, subject to the availability of
appropriated funds.
[6] To gain approval for entry into preliminary engineering, a project
must (1) be identified through the alternatives analysis process; (2)
be included in the region's long-term transportation plan; (3) meet the
statutorily defined project justification and financial criteria; and
(4) demonstrate that the sponsors have the technical capability to
manage the project during the preliminary engineering phase.
[7] Final design is the last phase of project development before
construction and may include right-of-way acquisition, utility
relocation, and the preparation of final construction plans and cost
estimates.
[8] GAO, Public Transportation: Improvements Are Needed to More Fully
Assess Predicted Impacts of New Starts Projects, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-08-44] (Washington, D.C.: July
25, 2008).
[9] GAO, Public Transportation: Better Data Needed to Assess Length of
New Starts Process, and Options Exist to Expedite Project Development,
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-784] (Washington,
D.C.: July 31, 2009); [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-
08-44]; and GAO, Public Transportation: Future Demand Is Likely for New
Starts and Small Starts Programs, but Improvements Needed to the Small
Starts Application Process, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-07-917] (Washington, D.C.: July 27, 2007).
[10] Safe, Accountable, Flexible, Efficient Transportation Equity Act:
A Legacy for Users, Pub. L. No. 109-59, title III, § 3011 (c).
[11] Equity capital is money raised by a business by selling shares of
ownership, or potential ownership, of the business. DOT has noted that
transit public-private partnerships typically do not require the
private partner to take on certain project risks (such as ridership/
revenue) or involve a significant equity investment by the private
partner.
[12] Letters of No Prejudice also allow a project sponsor to incur
costs using nonfederal resources, with the understanding that the costs
incurred subsequent to the issuance of the letters may be reimbursable
as eligible expenses or eligible for credit toward the local match
should FTA approve the project for funding at a later date.
[13] Through a Letter of Intent, FTA announces its intention to
obligate an amount from future available budget authority to a project,
subject to the availability of appropriations.
[14] GAO, Highways and Transit: Private Sector Sponsorship of and
Investment in Major Projects Has Been Limited, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-04-419] (Washington, D.C.: Mar.
25, 2004).
[15] Department of Transportation, Report to Congress on the Costs,
Benefits, and Efficiencies of Public-Private Partnerships for Fixed
Guideway Capital Projects (December 2007).
[16] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-44].
[17] The East Corridor and Gold Line projects are part of Denver
Regional Transportation District's 12-year FasTracks initiative to
expand transit by building six new transit corridors and extending
three existing corridors.
[18] Although Canada Line structured its concession agreement to
transfer 10 percent of ridership risk to the private sector, a
financial advisor ran sensitivity tests on the ridership risk and
determined that the actual ridership risk transferred was 1 percent
once risk variance was accounted for.
[19] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-44].
[20] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-419].
[21] Deloitte Development LLC, New Starts Program Assessment (Feb. 12,
2007).
[22] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-784].
[23] FTA's funding recommendations are made in the President's budget
and are included in FTA's annual New Starts Report to Congress, which
is released each February in conjunction with the President's budget.
There is a 60-day statutory review period for Congress before the award
of a full funding grant agreement.
[24] The purpose of a performance bond is to provide project sponsor
funds to complete the project in the event the private sector partner
defaults on the contract. FTA's standard contract language requires
contractors on federally funded projects to hold performance bonds for
100 percent of the contract price to ensure the performance of the
private sector partner.
[25] As part of the New Starts process, FTA approves projects into
three phases: preliminary engineering (in which the designs of project
proposals are refined), final design (the end of project development in
which final construction plans and cost estimates, among other
activities, are completed), and construction (in which FTA awards the
project a full funding grant agreement, providing a federal commitment
of funds subject to the availability of appropriations).
[26] Because of limited funding commitment authority, FTA cannot
entertain a full funding grant agreement at this time.
[27] This report was prepared with the assistance of
PricewaterhouseCoopers.
[28] The National Environmental Policy Act requires federal agencies to
evaluate and in some instances prepare detailed statements assessing
the environmental impact of and alternatives to major federal actions
significantly affecting the environment. In the transportation context,
the National Environmental Policy Act evaluation may measure the impact
of different alternatives by the extent to which the alternative meets
the project purpose, need, and consistency with the goals and
objectives of any local urban planning.
[29] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-784].
[30] According to Federal Aviation Administration officials, the agency
annually grants a onetime, set amount of funding to project sponsors
under the broader Airport Improvement Program.
[31] Bay Area Rapid Transit is currently undertaking another request
for proposals for the project and is allowing a less-expensive cable-
propelled technology to compete.
[32] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-44].
[33] This is known as the Public Sector Comparator, which is a
hypothetical scenario that estimates the Net Present Value of the
expected life-cycle costs to the public agency if it were to pursue the
public-private partnerships project versus a traditional procurement.
[34] Her Majesty's Treasury, Standardisation of Private Finance
Initiative Contracts, Version 4 (London: March 2007).
[35] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-44].
[36] House of Representatives, Committee on Transportation and
Infrastructure, "The Surface Transportation Authorization Act of 2009:
A Blueprint for Investment and Reform" (June 18, 2009).
[37] Department of Transportation, Report to Congress on the Costs,
Benefits, and Efficiencies of Public-Private Partnerships for Fixed
Guideway Capital Projects (December 2007).
[38] FTA did not have sufficient information for most projects related
to the fourth criterion--procuring agencies funding sources were
leveraged or enhanced. Therefore, we omitted this criterion.
[End of section]
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