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FTA Solicits Comments and Expressions of Interest Regarding PPP Pilot Program Authorized by SAFETEA-LU


Section 3011(c) of SAFETEA-LU[1] authorizes the Secretary of Transportation (the "Secretary") to establish and implement a pilot program in which public-private partnerships (PPPs) may be used for certain new transit projects, although it does not authorize separate funding for this pilot program.  As summarized below, Section 3011(c) provides some general guidance regarding the scope and terms of this pilot program ("operative criteria"), but it is silent on a number of other matters relevant to effective implementation of the program.  By notice published in the Federal Register on March 22, 2006,[2] the Federal Transit Administration (FTA) is soliciting comments from interested parties concerning, among other things, (1) any operative criteria beyond those set forth in Section 3011(c) that the Secretary should adopt to implement the pilot program and (2) any benefits the Secretary should confer on projects participating in the pilot program.  Comments should explain how the criteria and/or benefits would realize savings for governments or otherwise improve the delivery and operation of either a particular project or of transit infrastructure in general.  Interested parties should also comment on whether it is significant that Section 3011(c) provides no special funding for the pilot program.

The FTA also is seeking from project sponsors preliminary expressions of interest in participating in the pilot program.  The deadline for any submissions (comments or expressions of interest) is June 1, 2006.

Because SAFETEA-LU did not authorize separate funding for the PPP pilot program, the advantages of participating in the pilot program would involve process improvements rather than increasing the availability of federal funding.  For this reason, we understand that FTA officials are considering incorporating the PPP Pilot Program as part of FTA's New Starts program,[3] rather than maintaining it as a separate program.

Section 3011(c) offers the following operative criteria for the pilot program:

·         The Secretary may select up to three eligible "fixed guideway capital projects," as defined in 49 U.S.C. §§ 5302(a)(1) and (a)(4), to participate in the pilot program;

·         As a condition to eligibility, the project's sponsor must submit an application that contains, at a minimum: (i) identification of a project that has not entered into a full funding grant agreement or project construction grant agreement with FTA; (ii) a schedule and finance plan for the construction and operation of the project; and (iii) an analysis of the anticipated costs, benefits and efficiencies of the proposed PPP agreement;

·         The Secretary may approve an application to participate in the pilot program if the Secretary determines that: (i) applicable State and local laws permit public-private agreements for all phases of development, construction and operation of the project; (ii) the project sponsor is otherwise unable to advance the project due to fiscal constraints; and (iii) the plan implementing the PPP is justified;

·         The term of the pilot program runs from fiscal year 2006 through fiscal year 2009.

In order to assist the FTA in developing the pilot program, the FTA is inviting interested parties to comment on the following additional matters: 

(1)                 Whether the pilot program should streamline FTA's discretionary grant-making process to promote PPPs that would realize significant savings in the procurement of eligible projects.  Specifically, the FTA would like to know how the New Starts application process, particularly its due diligence and National Environmental Policy Act[4] ("NEPA") components, might be altered to accelerate project delivery (and reduce costs) without impairing the FTA's duties to reduce taxpayer risk and protect the environment. 

(a)     FTA is seeking suggestions as to possible modifications to the level of due diligence required under the New Starts application process, which in conventional procurements evaluates the quality of cost and benefit estimates to achieve confidence in the rating assigned to the project.  In a PPP project, FTA could recognize that commercial terms between the project sponsor and contractor control for certain risks that the New Starts due diligence process otherwise would attempt to address.  For example, a contract that provides a fixed price for final design and construction and limits opportunities for change orders could reduce the need for analysis of risks that are assumed by the contractor.  Similarly, a DBOM contract that provides a fixed price for long-term operations would work to reduce concerns about maintenance of quality during the operating period.

(b)     Among the NEPA issues on which FTA is soliciting input is the question of whether the pilot program should permit contracting for engineering and design services prior to the issuance of a Record of Decision ("ROD") pursuant to Section 102 of NEPA.  FTA granted such approval for the Dulles Metrorail Extension Project, which has served to some degree as a precedent for the PPP pilot program.  It should be noted that FTA never adopted the restrictive provisions of FHWA's design-build rule[5] which were partially abrogated by Section 1503 of SAFETEA-LU.  Section 1503 provides that FHWA regulations may not require compliance with section 102 of NEPA prior to a highway agency taking any of the following actions: (a) issuing requests for proposals; (b) proceeding with awards of design-build contracts; or (c) issuing notices to proceed with preliminary design work under design-build contracts.  The former FHWA rule had proven to be a particular problem for public-private partnerships involving an expectation that the private sector partner would participate in the project definition process.

(c)     Also with respect to NEPA, the FTA is interested in learning how the pilot program should construe the Categorical Exclusion set forth in 23 CFR 771.117(d)(12), which permits project sponsors located in inflationary real estate markets to acquire rights-of-way and parcels of land prior to the issuance of a ROD for reasons of "hardship" or "protective purposes."  Respondents proposing an expansive interpretation of the Categorical Exclusion should explain why, if adopted by the FTA, it would not materially increase the risk of a legal challenge to an eligible project. 

(d)     Lastly with respect to NEPA, the FTA is inviting comment on how the pilot program should address NEPA to anticipate changes in project scope after issuance of a ROD. 

(2)                 Whether, and on what terms, the pilot program should provide grants for eligible projects relying on long-term operation or concession agreements with private enterprise.  For example, if a concession agreement to operate a transit system were to require a capital improvement, should the pilot program make available a grant to support the capital improvement if the improvement otherwise qualifies as an eligible project?  Comments should also address how the pilot program could encourage transit system sponsors to enter into PPPs that would reduce the amount of government subsidy needed for their operation. 

(3)                 With respect to the "Common Grant Rule'' codified in CFR § 18.25, the extent to which the pilot program should authorize the use of Federal grantee income generated by a federally-funded asset to support a PPP that sponsors an eligible project. 

(4)                 As to the FTA's practice of permitting the subordination of the Federal interest in an asset so long as such subordination is for an eligible transit purpose and the asset remains under the recipient's "effective continuing control,'' the degree to which this practice would be useful in structuring a PPP.  The FTA is also seeking comment on the extent to which loans, loan guarantees and other credit-enhancing devices available under the Transportation Infrastructure Financing and Innovation Act (TIFIA)[6] might be used to facilitate the financing of an eligible project. 

(5)                 The extent to which private activity bonds authorized by Section 142 of the Internal Revenue Code and Section 11143 of SAFETEA-LU might assist in financing an eligible project.

(6)                 What, if any, changes in law or new financial incentives are appropriate or necessary to promote the participation of private enterprise in the delivery and operation of transit systems.

Implementation of the pilot program has the potential to open up an array of new mechanisms to design, construct and fund transit projects in a more efficient and cost-effective manner.  Currently, transit infrastructure development is dependent on traditional methods of procurement and limited sources of funding, restricting the ability of project sponsors to deliver projects when needed.  Under the pilot program, however, project sponsors in states with PPP-enabling legislation will likely have much greater flexibility in procuring and financing transit improvements, particularly if FTA adopts concepts like those discussed in items 1-5, above.  A successful pilot program could ultimately accomplish for transit development what PPPs are accomplishing for highway development; namely, new transportation infrastructure built on time and at a compelling cost.

[1] Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, 119 Stat. 1144.

[2] Federal Register, Volume 71, Number 55, Pages 14568-14571

[3] 49 U.S.C. § 5309.

[4] 42 U.S.C. §§ 4321-4347.

[5] 23 CFR Part 636.

[6] 23 U.S.C. §§ 181-189.           

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