Cascade Policy Institute

This proposal is one of ten winning reports from the 1994 Oregon Better Government Competition. The 1994 and 1996 Competitions were organized by the Portland-based Cascade Policy Institute. Opinions expressed are those of the author(s) and not necessarily those of Cascade staff or advisors, nor should they be construed as an attempt by Cascade Policy Institute to influence any election or legislation.

Public/Private Transportation

Facility Partnerships

by David C. Haugeberg with Richard A. Perez

McMinnville, OR

Executive Summary

Many important and previously scheduled Oregon highway projects cannot be constructed due to a serious funding shortfall. The majority of gasoline tax revenues available for highways are expended on maintaining the existing network with very little funding available for major capacity improvements.

In 1991 the Federal Government passed the Intermodal Surface Transportation Efficiency Act (ISTEA) which, if enabling Oregon legislation is adopted, allows the Oregon Department of Transportation to combine Federal, State, local, private and toll funding into public/private funding partnerships to improve and expand highway infrastructure.

Numerous benefits result from a public/private partnership. A private partner can provide significant capital for large scale projects and has the advantage of efficiency in procurement, design, construction and operations. The public partner provides the integrated system requirements of planning, quality, service, and safety.

Private entities will bring projects on line faster and at less costs, which will result in a direct savings to users because of lower tolls and/or a shorter toll project payment life.

In today's environment of insufficient funding for new highway infrastructure, Oregon must develop alternate methods for the financing of its transportation infrastructure in order to meet the economic requirements for a good highway system. ISTEA provides an opportunity to create new uses of state and federal funds in combination with private funds. Such partnerships will allow much needed transportation projects to move forward.

About the authors

David C. Haugeberg is an attorney with Haugeberg, Rueter, stone, Gowell & Fredericks, P.C. in McMinnville, Oregon. Mr. Haugeberg is the Chairman of the Yamhill Parkway Committee. Co-author Richard A. Perez, a Professional Engineer, provided technical assistance on this plan.

PROPOSAL

The purpose of this project is the review and consideration of legal and public policy issues involved in the revision of Oregon law in order to authorize the construction and operation of transportation facilities by the Oregon Department of Transportation (ODOT), by private consortiums or by public/private partnerships for up to 40 years with some portion of the costs to be paid by users. At the end of 40 years the facility would be turned back to the State.

THE PROBLEM OF FUNDING

A major challenge facing state and local transportation officials has been the shortfall in financial resources to respond to increasing needs. Traditional Federal and State taxes alone cannot continue to meet the growing backlog of highway and bridge repairs as well as demands for system expansion. The problem is exacerbated by competition for funds within government and broad public resistance to tax increases. (Message by T. D. Larson, Administrator, U. S. Department of Transportation).1

Currently many important and previously scheduled Oregon highway projects, such as the 9-mile long Newberg/Dundee Bypass, cannot be constructed due to a serious funding shortfall. Gasoline taxes are not keeping up with the impact of inflation on the cost of road maintenance, mass transit needs and new facility construction. The Oregon Legislature in the last session declined to raise gasoline taxes. The increased fuel efficiency of the motor vehicle fleet has resulted in reduced funding for roadway maintenance and con-struction. The majority of gasoline tax revenues available for highways are currently expended on maintaining the existing network, with very little funding available for major capacity improve-ments, despite the fact that vehicle miles traveled is increasing over 2% per year.

[T]he most recent study of financial requirements to maintain the conditions and performance of the Nations highway system ... indicates that conventional funding from fuel - and vehicle - related taxes will still fall short of the level required to meet needs - especially in growing areas. Furthermore, the widened eligibility of uses for highway funds - such as other modes and enhancements - will make additional demands on Federal highway funds.2

Recognizing this problem, the Federal government in 1991 passed The Intermodal Surface Transportation Efficiency Act (ISTEA) 23 U.S.C. 129. In describing this legislation, T. D. Larson, Administrator, said the Act ... relaxes restrictions on the use of toll financing in the Federal-aid Program, provides for leveraging of Federal funds with private investment, and introduces potential for cost-sharing in the context of public/private partnership. Together, these measures provide States with the opportunity to expand the total resources available for transportation.3 (emphasis added).

The benefits and opportunities of ISTEA are not, however, selfenacting and require specific state enabling legislation.

ISTEA

Implementation of ISTEA would allow ODOT to combine federal, state, local and private funding into a funding partnership thereby increasing the fiscal abilities of ODOT to improve and expand our highway infrastructure.

Toll financing would result in reduced demand for gasoline tax dollars, allow for other improve-ments to the transportation network, and reduce roadway congestion and its attendant noise, air quality problems, and traffic accidents.

Fewer travel delays would improve productivity in the private sector and spur economic development in areas to be served by new and/or improved transportation facilities. An example is the Newberg, Dundee, McMinnville area. McMinnville has lost and will continue to lose industry due to inadequate access through Newberg and Dundee to the Portland metropolitan region. Newberg and Dundee businesses and residents suffer from the impacts of serious traffic congestion. Completion of the Spirit Mountain Resort by the Grand Ronde Indians will add thousands of cars per day to this congestion as will the Evergreen Air Venture Museum being planned for McMinnville.

On August 27, 1994, two McMinnville children, Aisha Aziz, 11, and Fahad Aziz, 17, died in an accident at McDougals corner (Hwy. 99W/Hwy. 18 intersection) between Dundee and McMinnville; the other car was from Vancouver, Washington.4 Such accidents may result from the mixing of through and local traffic on an overtaxed facility, traffic which desperately needs to be separated by a major facility redesign.

Implementation of ISTEA authorizes public/ private partnerships, in addition to providing for combinations of funding sources. A private alternative would allow the State to concentrate its effort toward the providing of transportation improvements where private toll facilities are not feasible.

This privatization process is envisioned as follows:

1. ODOT issues a Request For Proposals for a design/build or other appropriate project to qualified bidders.

2. The successful bidder prepares an Environmental Impact Statement and designs the highway, subject to ODOT approval.

3. ODOT acquires the right-of-way using funds provided by the successful bidder.

4. The successful bidder constructs the facility.

5. The successful bidder collects tolls, maintains and operates the facility for a set number of years.

6. At the end of the term of years, the successful bidder turns over the facility to ODOT.

PUBLIC/PRIVATE BENEFITS

Numerous benefits result from a public/private partnership. A private partner can provide significant capital for large scale projects when an adequate return on capital exists. The private sector, in seeking this return on capital, can obtain non-public financing, and has the advantage of efficiency in procurement, design, construction and operations which results from a profit motive. The public partner provides the integrated system requirements of planning, quality, service, and safety.5

Other potential benefits are the greater flexibility of the private sector to locate funding and arrange financing, and the ability to achieve significant time and cost savings because of less rigid methods of bidding and contracting for services and procurement.6 Recall, for example, the speed of the reconstruction of the Los Angeles freeways after the 1993 earthquake.

Use of the private sector would also make public manpower available for other duties and projects.

The private sector places a premium on cost saving techniques and innovations both in design and construction. In operations they will look to more efficient operating technologies such as Electronic Traffic and Toll Management (ETTM) and vehicles equipped with electronic payment devices.7

PRIVATIZATION COST SAVINGS

John Hike in a study entitled, Cost Savings From Privatizations, reported that more than 100 studies over the course of the last 20 years have demonstrated privatization/ competition cost savings in service areas from airport operation to weather forecasting.8

The wide variety of reasons for the cost savings include, for example:

1. Better management techniques

2. Better and more productive equipment

3. Greater incentives to innovate

4. Incentive pay structures

5. More efficient deployment of workers

6. Greater use of part-time and temporary employees

7. Utilization of comparative-cost information

8. More work scheduled for off-peak hours.

These benefits stem primarily from the intro- duction of competition into the bidding process to perform the service.

The U.S. Department of Transportation, Federal Highway Administration in its publication, Building A Better Partnership in the section on the advantages of Public/Private Toll partnerships contains the following statement:

Enhanced Efficiency and Speed: Competitive imperatives including opportunities to earn a return on investment in toll projects can provide private road developers with a strong incentive to aggressively seek efficient cost-cutting approaches in design and construction methods, time savings in procurement, and the installation of efficient-oriented operation technology, such as ETTM.9

OTHER STATE LEGISLATION

The states of Arizona, California, Florida, Texas, Virginia and Washington have legislation authorizing private toll projects.

LEGISLATIVE POLICY ISSUES

One focus of this study is to go beyond the discussion and consideration stage, and actually prepare proposed legislation to implement the provisions of ISTEA. This proposed legislation would authorize ODOT to combine State and Federal funds with funds of private partners, institute toll facility financing and establish the authority necessary for the ODOT to enter into agreements with private entities and local authorities for the construction and operation of toll facilities. Policy issues considered in other studies include: economic regulation, land acquisition, competing routes, project selection, environmental review, labor issues, contracting issues, loss of public control, opposition to tolls and non-ownership of highway infrastructure.10

These same policy issues which are hereafter discussed were considered in the debate, study and development of proposed Oregon legislation (a draft of which is available).11

Economic Regulation

Should the fees charged by a private partner be regulated by the state or dictated by the market- place?

One state, Virginia, has taken the approach of rate regulation in a public utility forum. This method has caused concern and hesitancy among financiers and project developers12 because of uncertainty and unpredictability of highway usage and alternate route selections by drivers.13 California allows greater flexibility and price control to deal with demand management issues.14 An important goal is to create interest among private developers. The better overall approach to accomplish this goal is allowing demand in the market place to set pricing when an alternate route exists, and to consider price reduction or mitigation where none exists.

Land Acquisition

Right-of-way acquisition, and ultimately the authority to obtain rights-of-way are critical to a project. Should this authority be delegated to a private party? Various states have taken different approaches.

This study recommends against a delegation of the power of eminent domain. The power to condemn and take a persons property is ominous. It should be used sparingly and only after patient and serious efforts at negotiation and resolution. The tempered judgment of ODOT which has and continues to deal with property condemnation on an ongoing basis would provide a more consistent approach than a project developer who has one parcel blocking its only project. The preferable alternative is for ODOT to obtain rights-of-way for all projects and then make the rights-of-way available to the private partner.

Competing Routes

What assurance does a private developer have that ODOT would not, during a project term of thirty (30) years, authorize another competing project. In the case of Newberg/Dundee it could be a significant modernization of the existing route. Given the high cost of projects, the difficulty financing a major project, and the complexity of environmental and land use regulations, the likelihood of competing projects is remote without a compelling need based upon demand.15 ODOT has many demands for other projects and private developers would not likely build a competing project without a clearly demonstrated need that would justify the expenditure. This concern can also be minimized by a project agreement which provides that the existing project must be one of the alternatives considered for expanded facility capacity.

Project Selection

Rather than the typical ODOT process of project selection, development, engineering and bidding, privatization calls for a different selection process. The Reason Foundation report on How to Enable Toll Road Development suggests a seven step process summarized as follows:16

1. Advertise for letters of intent.

2. Conduct a seminar to discuss the process.

3. Request qualifications from interested parties.

4. Select a short list of qualified developers.

5. Request For Proposals spelling out information required and requirements and standards to be met.

6. Evaluation of the proposals using predetermined criteria.

7. Franchise negotiation with the selected project developer.

The appropriate state agencies should be authorized to develop this process in a way that best facilitates a fair and efficient process.

Environmental Review

A major risk to a developer is the failure of a project to proceed for environmental reasons after expenditure of significant amounts of both time and money.17 In order to attract project developers this risk can be managed successfully by ODOTs underwriting of the environmental review expense with reimbursement to ODOT by the developer if the project proceeds.

As a revolving fund is implemented under enabling legislation, such environmental review expenses could be underwritten by this fund.

Labor Issues

Use of non-union workers or use of private projects not coming within the purview of the Oregon Little Davis Bacon Act (ORS279.348-279.365) would significantly reduce project costs. The legislature should deal with this policy issue.

Contract Issues

Private industry has used design/build methodology to save time and money in project development. Examples are Boeings 777 and Chryslers LH cars project.18

In contrast, states and municipal governments use a structured advertisement and bid method of selecting contractors. Public bidding is designed to protect public funds against waste, fraud, and cost overruns. With properly drafted project agreements between the contractor and ODOT the risks of waste, fraud and cost overruns are on the contractor risking its funds and not on the public.19 In fact, the use of a consulting systems manager by government agencies is well established for the design and construction of large complex projects. Such a model would translate well into tollway design, construction and operation.

Opposition to Tolls

A significant consideration in the development of toll facility financing is the willingness of the legislature and the public to accept this method of user-based financing for selected projects. For example, the Astoria bridge, Longview bridge and Bridge of the Gods have already demonstrated that the public will accept projects that are needed, and have a set term for debt retirement. Most toll facilities in the Northwest have retired their debt earlier than projected.

Toll facilities have not been used in Oregon because ODOT has, in the past, been generally able to accommodate new facility needs. As this ability has declined, frustrated users continue to request new facilities such as a Newberg/Dundee bypass. Their first choice is a publicly constructed free system. However, when told that this is not a viable option, their support for another alternative is very strong. Thousands have signed petitions concerning the Newberg/Dundee traffic congestion and expressing their support for ... a public and/or private highway facility (Bypass) including the creation and use of alternative methods of funding.20 When the alternative of using an existing route is present, objection is in fact minimal.

Non-ownership of Highway Infrastructure

The requirement that a projects ownership and operation will be returned to the state, after a set number of years, should answer concerns that an important transportation asset is not under ODOTs ultimate control. In fact, the state will ultimately own numerous projects, many of which probably would not, but for privatization, have been built.

Loss of Public Control

A properly structured project agreement between ODOT and the project developer should eliminate concerns that a privately operated transportation facility will result in a lack of public control over an important segment of the states transportation infrastructure.

CONCLUSION

In todays environment of insufficient funding for new highway infrastructure, Oregon must develop alternate methods for the financing of its transportation infrastructure in order to meet the economic requirements for a good highway system. ISTEA has provided an opportunity to create new uses of state and federal funds in combination with private funds. Adequate legislative provisions can be drafted to address the public policy issues that arise in public/private partnerships. Such partnerships will allow much needed projects to move forward. Those who use the projects will contribute directly to their costs, and those who do not want to contribute can continue to use alternate routes.

Private entities will bring projects on line faster and at lower cost, which will result in a direct savings to users because of lower tolls and/or a shorter toll project payment life.

Public/private partnerships are not going to replace most highway construction, but they can prove to be a vital component for the construction of significant projects at a time when the system of financing is failing to keep up with the need for a balanced transportation system. The proposed legislation could act as a starting point for debate and legislative consideration.

Endnotes

1. Building A Better Partnership: Public/Private Cost-Sharing and Toll Financing Provisions of the Intermodal Surface Transportation Efficiency Act of 1991, U.S. Dept. of Transportation, Washington, 1992, p. iii.

2. Ibid., p.1.

3. Ibid., p. iii.

4. Salem Statesman Journal, August 27, 1994, Section B, p. 1.

5. Guidance for State Implementation of ISTEA Toll Provisions in Creating Public-Private Partnerships, November 3, 1993, p. 4.

6. Ibid., p. 4.

7. Ibid., p. 4.

8. John Hilke, Cost Savings From Privatization, Reason Foundation, CA, 1993, p. Executive Summary.

9. Building A Better Partnership, p. 16.

10. Robert W. Poole, Jr., How to Enable Private Toll Road Development, Reason Foundation, CA, 1993, pp. 10-17.

11. Draft legislation developed by David C. Haugeberg, Project Chair, Richard A. Perez, Professional Engineer, Russell W. Tennant, Piper Jaffrey, Financial Advisor, Greg Sundberg, Piper Jaffrey, Financial Advisor, Richard Sjoland, District 3 Manager, ODOT, Walter R. Gowell, Haugeberg-Rueter, Legislative Advisor, and Barbara Novak, Stoel-Rives, Bond Counsel, with Barbara Novak providing major drafting responsibility.

12. Poole, How to Enable Private Toll Road Development, pp. 10-11.

13. Ibid., p.11.

14. Ibid., p. 11.

15. Ibid., p. 12.

16. Ibid., p. 13.

17. Ibid., p. 14.

18. Ibid., p.15.

19. Ibid. p. 15.

20. As a part of this project, the Newberg/Dundee and McMinnville Chambers of Commerce have distributed these petitions and are conduction a traffic survey. These petitions and the results of the survey will be delivered to the legislature in support of the proposed legislation.

Bibliography

Building a Better Partnership: Public/Private Cost-Sharing and Toll Financing Provisions of the Intermodal Surface Transportation Efficiency Act of 1991, O. S. Dept. of Transportation, Washington, D.C., 1992.

Guidance for State Implementation of ISTEA Toll Provisions in Creating Public-Private Partnerships, U. S. Dept. of Transportation, Washington, D.C., November 1993.

Hilke, John, Cost Savings From Privatization: A Compilation of Study Findings, Reason Foundation, Los Angeles, CA, March 1993.

Poole, Robert W., Jr., How to Enable Private Toll Road Development, Reason Foundation, Los Angeles, CA, May 1993.