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18 Funding.75 As part of this initiative, ODOT entered into an agreement in early 2006 with a private consortium headed by Macquarie to provide predevelopment work on three potential projectsâthe Newberg-Dundee By- pass, the Sunrise Project, and the I-205 South Corridor improvements project. The three projects were selected because they were unlikely to be constructed in the foreseeable future using solely public funds. Under the predevelopment agreements, the Mac- quarie team agreed to conduct financial, technical, and other predevelopment feasibility studies in order to ad- vise ODOT on whether any of the projects should pro- ceed to the implementation phase. If any of the projects are deemed technically and financially viable, ODOT will seek Oregon Transportation Commission approval to enter into negotiations with the Macquarie consor- tium for implementation. Macquarie also agreed to pro- vide the financing needed to build any projects deemed viable and approved by the state. This was a critical part of the arrangement because of the lack of federal or state funds to build any of the three projects. The Macquarie consortium also agreed to bear the cost of all predevelopment work up front, subject to pos- sible reimbursement from ODOT of up to $20 million for the cost of conducting those studies should ODOT or the Macquarie team decided not to proceed with any project. None of the predevelopment costs would be re- imbursed to the extent a project moved successfully into implementation. ODOTâs possible cost reimbursement obligation was capped at $20 million even though the estimated budget for the predevelopment work was over $26.5 million. Macquarie agreed to bear the overage at its own risk. This innovative arrangement enables ODOT to com- bine its planning and oversight, environmental process- ing, and right-of-way experience with the private con- sortiumâs financial resources, experience, and technical expertise. The private consortium agreed to provide up- front financing for all of the predevelopment costs and to bear the risk of any overage from the reimbursement cap in exchange for the opportunity to be the developer of any project that was approved for implementation. One of the projects that the Macquarie consortium analyzed under this arrangement was the Newbergâ Dundee Bypass Project, which is designed to provide an alternative 11-mi bypass to heavy congestion on Oregon Highway 99W. The Macquarie team explored the finan- cial viability of the project and presented a final mile- stone report to the Oregon Transportation Commission in December 2006 that outlined a variety of options but no clear solution to a large gap in funding construction. In effect, Macquarie concluded that the travel time sav- ings from using the bypass would not encourage enough drivers to pay the toll rates on the Bypass necessary to fund the capital and operating costs of the Bypass pro- ject. ODOT and Macquarie agreed to terminate their predevelopment agreement with respect to the New- 75 See program description available at http://www.oregon.gov/ODOT/HWY/OIPP/index.shtml. bergâDundee Bypass (which would have been the first toll facility in the state). It is anticipated that Mac- quarie will be entitled to reimbursement of its prede- velopment costs on this project, as provided in the con- tract with ODOT. As of January 2007, Oregon had decided not to pur- sue the Sunrise Corridor project because it determined that projected toll revenue was not enough to cover the cost of operation or construction. Rather, Oregon plans to seek traditional funding sources.76 IV. PARAMETERS OF ANALYSIS WITH RESPECT TO HIGHWAY PPP REQUIREMENTS A. Scope of Inquiry As noted above, this report is designed to focus on the major legal issues of PPPs in the highway sector that arise under federal, state, or local law or as a re- sult of contract negotiations among the parties to a par- ticular transaction. There are a number of significant requirements to the implementation of highway PPPs that are not, strictly speaking, legal issues. These nonlegal issues are not the primary focus of this report but are often equally if not more important to the suc- cessful implementation of a highway PPP arrangement. Many of the most challenging issues to such projects arise out of political and policy concerns. For example, the Indiana Toll Road lease to the Australian and Span- ish consortium led by Macquarie and Cintra was strongly opposed by various segments of the Indiana electorate as a result of public concerns about foreign investment in the stateâs public transportation assets.77 Eventually the state legislature approved the long-term lease arrangement.78 However, the episode demon- strated the importance of getting sufficient political and public support for a proposed PPP transaction involving the long-term lease of highway assets to the private sector. The widespread perception that the public sector is relinquishing âcontrolâ of a highway asset when en- tering into a long-term lease or other extensive contrac- tual agreement with the private sector, even if the pri- vate-sector entity is a U.S. company, is one of the greatest obstacles to further implementation of PPPs. Another impediment to new toll road projects is the widespread view that the public should not have to pay tolls or other user fees to access highways that pres- ently are not tolled. A project sponsor must be able to persuade the relevant constituencies of the anticipated 76 See GOVâT ACCOUNTABILITY OFFICE REPORT TO CONGRESSIONAL REQUESTERS, HIGHWAY PUBLIC-PRIVATE PARTNERSHIPS, MORE RIGOROUS UP-FRONT ANALYSIS COULD BETTER SECURE POTENTIAL BENEFITS AND PROTECT THE PUBLIC INTEREST, 63-64 (2008). 77 See Associated Press article, Foreign Group Taking Over Indiana Toll Road, Apr. 16, 2006, available at http://www.azstarnet.com/news/124820. 78 The agreement can be found at http://www.in.gov/ifa/files/TRVolume_III.pdf.
19 benefits of tolling and pricing. As the Port of Miami project illustrates, tolling may not be appropriate in all circumstances, and alternatives such as shadow tolling or availability payments should be considered. These deliberations about pricing are issues that require sub- stantial public outreach to explain the important role that user fees can play in expanding capacity and re- ducing congestion. The State of Virginia is proposing to convert and ex- tend existing HOV lanes on I-395 south of Washington, D.C., to high-occupancy toll (HOT) lanes through a PPP with a private consortium.79 The HOT lanes will be managed through congestion pricing. Opponents of the project are concerned about the level of access fees dur- ing peak periods (which, according to some reports, could reach as high as $1 a mile). In addition, there is concern that the HOT lanes (derisively referred to as âLexus Lanesâ based on the perception that only the wealthy will benefit from such arrangements) will negatively impact other current transit alternatives such as the practice of âsluggingâ a ride on the HOV lanes with a single-occupant vehicle. In addition, there are concerns that the HOV-to-HOT conversion will only worsen congestion on the free lanes and on local roads, thereby eliminating any prior environmental or conges- tion mitigation benefits from the HOV lanes. These types of public concerns have the ability to derail or stall a proposed PPP unless the project sponsors engage in a frank and open discussion with the public about potential advantages and disadvantages. The recent experience in Texas suggests that less than full disclo- sure about arrangements with private concessionaires may stir up a groundswell of opposition to such projects. A state highway or turnpike authority, particularly in states with aging infrastructure and existing toll roads operated by the state, can be a significant source of opposition to a proposed highway PPP project. In Pennsylvania, the Pennsylvania Turnpike Commission (PTC) is staunchly opposed to the lease of the Pennsyl- vania Turnpike for an up-front multi-billion-dollar payment. The PTC has asserted that it can increase the value and throughput of the highway assets in the state by operating them at a lower cost and generating equal or more revenue than the private sector because it does not have a profit motive.80Moreover, the trucking indus- try has expressed opposition in principle to the sale or lease of toll roads, bridges, or tunnels to private entities because such transactions often involve the imposition of, or an increase in, direct user fees that must be paid by motor carriers. The American Trucking Associations (ATA) has adopted a formal policy that strongly opposes transactions such as the long-term lease of the Chicago Skyway and Indiana Toll Road.81 The ATA also has pub- lished a list of conditions that it believes must be 79 See USDOT 2008 Update, at 200. 80 Id. at 15. 81 See ATA Press Release, American Trucking Associations Opposes Privatization of Nationâs Toll Facilities (Oct. 31, 2006), available at http://www.truckline.com (membership required). adopted in any such transaction in order to protect the public interest. These conditions include the following: ⢠Proceeds from any such sale or lease should be used by the government exclusively for investing in toll- free highway facilities. ⢠The toll rates on âprivatizedâ facilities should not be set at levels that allow the private operator to re- cover more than the actual cost of constructing, operat- ing, and maintaining the facility plus a reasonable re- turn on investment and debt service. ⢠Users of such facilities should be provided with a rebate of federal and state fuel taxes. ⢠The private owner or operator of any such facility should be prohibited from imposing its own restrictions or special fees on vehicle configurations (e.g., over- size/overweight vehicles) and commodities (e.g., haz- ardous materials). ⢠A sinking fund should be established to ensure that sufficient revenues are available for continued maintenance and operation of the facility. ⢠Noncompete clauses that prevent improvements to competing highways should not be included. ⢠Performance specifications should be adopted that ensure that the facility is operated and maintained adequately, provides a level of safety comparable to similar facilities, and provides for acceptable traffic flows. ⢠The public-sector participant should be allowed to terminate the sale or lease agreement if it determines that continuation of the arrangement is not in the pub- lic interest. In addition, an oversight committee repre- senting all major stakeholders (including the trucking industry) should be established to monitor the opera- tion of the facility and the need for amendment or ter- mination of the arrangement with the private-sector participant.82 In several respects, political, organizational, and other nonlegal issues such as those expressed by the ATA and other interest groups present challenges to further use of the highway PPP model. It is important to note, however, that these issues sometimes evolve into legal issues that end up being addressed through legislation or in contract negotiations between the pub- lic and private sectors. For example, during the debate in the Missouri General Assembly over the legislation authorizing a PPP pilot project for a new Mississippi River Bridge in St. Louis, there was concern about the possibility of giving control of an important public asset to a foreign investor that could be involved in sponsor- ing terrorism.83 Such fears were prompted in part by the uproar that occurred when Dubai Ports sought to buy certain U.S. port facilities. As a result of the concerns in 82 Id. 83 See Missouri House Bill, SCS HCSB HB 1380âMissouri PublicâPrivate Partnerships Transportation Act, available at http://www.house.missouri.gov/content.aspx?info=/bills061/bils um/truly/sHB1380T.htm.
