Transit Public-Private Partnerships: Legal Issues (2014)

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23 $525,000 project currently in the design phase, the coverage includes $10 million for commercial general liability, $1 million for prod- ucts/completed operations liability, $1 million for advertising injury, and $5 million for automobile liability. The City of La Crosse Municipal Transit Utility stated that there had been no problems in working with the private developer to procure in- surance for a building and general liability (in- cluding directors’ and officers’ liability) coverage, and an umbrella policy. The Pioneer Valley Tran- sit Authority’s private partner assumed responsi- bility for insurance only for the building.257 Finally, although one agency noted the high cost of insurance for a project still in the design phase, no agency responding to the survey re- ported any particular issues or problems having to do with insurance because of the complexity of a PPP. V. TRANSFER OF RISK BETWEEN A PUBLIC AND PRIVATE PARTNER A. Risks Transferable to the Private Sector PPPs may permit a transit agency to leverage its funding and provide more transit service by transferring some responsibilities and risks to a private party. The assumption is that the private sector may be the best party to assume the risks for managing “construction cost, project delivery timeframe, maintenance cost, latent defects and project quality risk factors.”258 In the United States, however, the sharing of the risks inherent in a transportation infrastructure project is a new concept for some transit agencies.259 Legal and other impediments have slowed the implementa- tion of PPP projects and alternative methods of project delivery “even on a pilot basis.”260 PPPs differ from traditional construction con- tracts in their allocation of risk, duration, and fi- nancing.261 Transit agencies using a DB approach still retain much responsibility for the risks asso- ciated with the PPP.262 Risks assumed by the pri- vate sector under a DB contract typically include 257 See Pioneer Valley Transit Authority, Joint De- velopment Agreement, App. C, item 5, for details. 258 FHWA User Guidebook on Implementing PPPs, supra note 23, at 57. 259 Id. at 5. 260 Id. 261 Akintoye & Beck, supra note 2, at 199. 262 Public Transportation: Federal Project Approval Process Remains a Barrier, supra note 170, at 5. “the risk of compliance with the public sponsor’s technical specifications” and the risk of the com- pletion of the “facility at a fixed price and within a specific time frame.”263 However, a transit agency may transfer more risk for the design, financing, construction schedule, and performance of a pro- ject, as well as for operations and maintenance, to the private sector.264 When a contractor provides an adequate warranty or when a contractor oper- ates and maintains a facility, the contractor gen- erally accepts “all quality risk.”265 Depending on the contract, a private partner may be accepting all or part of the risk of financing and the risk of ridership and revenue.266 There may be risks that are too expensive or time-consuming for an agency to transfer to the private sector.267 Exam- ples include environmental compliance and ap- provals; permitting; acquisition by purchase or condemnation of property, including right-of-way; emergency services; and compliance with other statutory and regulatory requirements.268 An agency also may want to retain responsibility for communicating with the legislature, members of the public, stakeholders, and other government agencies. Long-term responsibilities for transit opera- tions and maintenance may be transferred to the private sector, resulting in added value because of the potential for innovation in a project’s design, construction, and management.269 The design- builder for a Denver Regional Transportation Dis- trict (RTD) light rail expansion project identified 198 design modifications that were incorporated into the project and that improved the project’s overall quality while keeping the project within budget.270 Performance measures (e.g., based on train capacity and frequency) rather than specific design details (e.g., type of train) are innovative approaches that may be conducive to a successful PPP for a transit agency.271 263 FISHMAN, supra note 11, at 33. 264 Public Transportation: Federal Project Approval Process Remains a Barrier, supra note 170, at 6. 265 FISHMAN, supra note 11, at 33. 266 Id. 267 Public Transportation: Federal Project Approval Process Remains a Barrier, supra note 170, at 20. 268 FHWA User Guidebook on Implementing PPPs, supra note 23, at 57; FISHMAN, supra note 11, at 32–33. 269 Public Transportation: Federal Project Approval Process Remains a Barrier, supra note 170, at 17. 270 Id. 271 Id.

24 As discussed in Section XII, risks may be trans- ferred to the private sector in connection with TOD and joint development.272 B. Revenue Sharing One risk that public-private partners may share is the risk associated with the amount of revenue generated by a PPP.273 However, because revenue sharing reduces income earned by a pri- vate partner, a private partner may be unwilling to make a large, up-front payment to a public partner to secure a long-term concession.274 The DOT has stated that FTA policy that is based on its interpretation of the federal common grants rule is a “substantial obstacle” to revenue sharing for PPP projects.275 FTA “generally requires that ‘Program Income’ such as fares, lease payments, or other revenues be used to reduce program costs, unless an alternative use was authorized by [the] regulations or specifically approved by FTA.”276 A private partner in a PPP needs a predictable stream of income to meet its financial and other obligations and still make a profit; however, most transit projects do not generate sufficient reve- nues.277 System revenues include fare box and non-fare box revenues, with the latter embracing fees earned from “advertising, air rights, naming rights, concessions, commercialization, parking, and outsourcing.”278 “Parking monetization” is attractive to private partners because of the abil- ity to have a stable cash flow with the potential for increases in parking revenues as a result of improvements in technology, higher parking fees, and increased utilization of the space.279 Transit agencies may be reluctant to cede their control over fare-setting because of wanting to 272 FTA grantees may use FTA financial assistance for joint development activities that incorporate private investment or enhance economic development. 273 FISHMAN, supra note 11, at 33. 274 FHWA User Guidebook on Implementing PPPs, supra note 23, at 39. 275 FTA Report to Congress on PPPs, supra note 5, at 39. 276 Id. 277 See id. at 11. 278 Infrastructure Management Group, Inc., Alterna- tive Transit Funding Sources and Finance, at 3 (Sept. 2009), hereinafter referred to as “Alternative Transit Funding Sources and Finance,” available at http://www.ncppp.org/publications/TransitBoston_0909/ Page_0909.pdf. 279 Id. at 5. keep fare levels low to increase ridership and to make transit affordable for low-income patrons.280 On the other hand, a private party may be reluc- tant to assume the risk for ridership and fare box revenue when the private party will not be in con- trol of fares or the transit system.281 For example, DBOM contractors who operate transit systems “want to be insulated from farebox risk.”282 As one source states, “[a]lthough the concept of using cash flows to repay the investors is simple, the actual negotiation and implementation of such an arrangement is fraught with controversy and complexity because of the extent of private-sector involvement in setting user fees.”283 One solution is to structure a PPP to limit risk by basing a por- tion of the transit agency’s payment (e.g., avail- ability payments discussed in Section V.C) to the private party on the number of riders or trips.284 Some of the transit agencies responding to the survey stated that they were sharing revenue with a private partner,285 but others reported that their PPPs did not include revenue sharing.286 C. Availability Payments The term “availability payment” may be de- fined as a transit agency’s payment to a private partner for making a facility available to the pub- lic for the term of a PPP contract.287 Availability payments are “an alternative, flexible way to allo- 280 Public Transportation: Federal Project Approval Process Remains a Barrier, supra note 170, at 2, 19. 281 Id. at 19. 282 FTA Public-Private 3P Program, supra note 56, at 2. 283 FISHMAN, supra note 11, at 34. 284 Public Transportation: Federal Project Approval Process Remains a Barrier, supra note 170, at 20. 285 N.J. Transit Response (regarding Weehawken Ferry Terminal project); PVTA Response; and SEPTA Response. 286 La Crosse Municipal Transit Utility Response; N.J. Transit Response (regarding River Line Light Rail project); and Milford Transit District Response. 287 AASHTO Center for Excellence in Project Fi- nance, stating that availability payments are a means of compensating a private concessionaire for its responsibility to design, construct, operate, and/or maintain a tolled or non-tolled roadway for a set period of time. These payments are made by a public project sponsor (a state DOT or authority, for example) based on particular project milestones or facility performance standards. Available at http://www.transportation-finance.org/ funding_financing/financing/other_finance_ mechanisms/availability_payments.aspx. See YESCOMBE, supra note 1, at 9.