More Environment, Energy & Transportation Policy Plays

Traffic congestion has reached crisis proportions in many of the nation's large metropolitan areas. While improved transit and land use planning can help, expanding the capacity of roads will be a key part of any solution. But states can expect little increase in federal transportation funds for the next six years. Efforts in many states to raise the gas tax to fund transportation programs have also failed. Many state and local transportation departments have made congestion reduction a top priority, but they could do a much better job of cost-effectively building and maintaining roads.

Indeed, while much of the rest of the economy has embraced a wide array of institutional and technological innovations, the process of building and maintaining roads has changed very little in recent years. If states and localities are to effectively solve transportation problems, they will need to look to an array of innovative public-private partnerships, including new toll projects, design-build-maintain contracts, and state-level, performance-based transportation funding.

Interest in public-private partnerships in transportation has been growing in recent years. According to the 2005 final report of the Federal Highway Administration (FHWA) and the Office of the Secretary of Transportation from the Partnerships in Transportation Workshops, some of the primary reasons public agencies enter into private partnerships include "the escalating costs of highway system preservation, the ever increasing need to improve the performance of transportation infrastructure, the slowing growth of fuel taxes and other traditional highway revenue sources, and the downsizing within state transportation agencies."

Traditionally, state transportation agencies hire private contractors to build roads on the basis of the lowest bid for construction. In theory, that makes a state's limited construction funds go further, but there are often significant cost overruns. Moreover, current bidding processes save money on the front end, but often result in higher overall costs because of lower-quality pavement that is much more expensive to maintain over its useful life. In addition, traditional contracting approaches minimize the incentive for innovation and can result in long lead times between conception and completion of projects. To address these limitations, states are increasingly experimenting with new approaches to contracting, including warranties and design-build and cost-plus-time bidding. In fact, 21 states have passed legislation enabling public-private partnerships in highway transportation.

Performance-based warranties give the private contractor considerable flexibility in how to complete a project, but in exchange for an agreement to meet overall specifications and provide a long-term warranty for the work. States that have experimented with warranties are Ohio, New Mexico, Michigan, Washington, and Arizona. Aspen, Colo., has also used warranties when letting contracts for resurfacing its roads.

The key to such projects is the ability of the state to accurately and cheaply measure the quality of the road so it can assess how well the company is meeting its contractual obligations. Luckily, new technology has made this much easier. Devices known as prophilographs and prophilometers can measure the smoothness of pavement (the criterion most important to state DOTs) at highway speeds.

A related approach is design-build contracting, which assigns both design and construction responsibilities to one firm, allowing some construction work to begin before the design is completed. In traditional design-bid-build contracts, the design and construction aspects of the project are bid separately. According to the U.S. Department of Transportation, "Design-build contracting often reduces a highway agency's administration and inspection costs and can reduce or eliminate change orders and claims resulting from errors and omissions during construction. Design-build also allows contractors increased flexibility in selecting innovative designs, materials, and construction techniques." Using the design-build method, the Utah Department of Transportation completed its $1.35 billion reconstruction of Interstate 15 under budget and three months ahead of schedule. Thirty-seven states have design-build contracts in highway projects. Some states have also used incentive contracts to speed the development of new roads, where private contractors are penalized if they are late and receive bonuses for completing work ahead of time.

Some states have gone further and allowed private companies to build and own roads, and real-time collection of tolls on the fly makes tolling a viable option. Increasingly, private companies are proposing to build such projects. In the Washington, D.C., metro area, the Flour engineering company (Fluor Enterprises Inc, and Transurban (USA) Inc) have signed agreements with the Virginia Department of Transportation (VDOT). The public-private partnership advances a $1 billion plan to bring innovative high-occupancy toll (HOT) lanes to Interstates 95, 395, and the Capital Beltway (I-495). These initiatives involve the expansion of the existing two-lane, reversible HOV system on I-95/395 to a three lane, reversible Bus/HOV/HOT Lane system for 28 miles and the addition of four HOT lanes to 14 miles of the Capital Beltway. The lanes would remain free to carpools with three or more people, to van pools, and to buses, all other drivers would pay a variable toll to use the lanes. The toll revenues are expected to contribute an additional $5 million towards expanded bus service. Minnesota has already converted High Occupancy Vehicle lanes (HOV) to High Occupancy Toll lanes (HOT) (giving drivers the option of paying tolls to utilize under-used lanes), and is aiming ultimately to develop a whole network of HOT lanes (HOT network).

Texas has perhaps gone the furthest of any state in embracing public-private partnerships and performance-based programs. Legislation in 2003 made congestion relief a top priority, created a series of Regional Mobility Corporations, and formally recognized that in the future, tolling would be the way the state and localities would pay for much new road expansion and maintenance of existing highways. In passing this legislation, Texas has ensured that it will have the consistent stream of funding necessary to consistently update its transportation system and alleviate congestion. The State of Texas has entered into public-private agreements in order to develop SH 130, a 49 mile toll-way, and to design-build-operate-maintain the (proposed) Trans-Texas Corridor I-35.

Public-private partnerships can also be used to cut the cost of maintaining roads, which in many states can represent one-half of total highway budgets. Virginia granted a performance-based, fixed-price contract to VMS, Inc. for maintenance of 251 miles of interstate. The project is estimated to save the state between $16 million and $23 million over the life the contract. To encourage further public-private partnerships in Virginia, former Gov. Mark Warner passed the Transportation Partnership Act of 2005, in which he proposed a $140 million Private Partnership Revolving Fund program. Florida is also moving in this direction. Even cities are getting into the game. The District of Columbia signed a contract with VMS, Inc. to preserve and maintain more than 75 miles of major streets and highways. The five-year project is the first urban application of street maintenance outsourcing to the private sector. The maintenance contract is performance-based, the contractor is not told what to do or how to do it, but rather what to achieve.

Resources For Action

National Council for Public Private Partnerships
www.ncppp.org/councilinstitutes/index.shtml

Code of Virginia, Title 56, Chapter 22
http://leg1.state.va.us/cgi-bin/
legp504.exe?000+cod+TOC56000000022000000000000

Federal Highway Administration Public-Private Partnerships website, U.S. Department of Transportation
www.fhwa.dot.gov/ppp/

Additional Reading

Robert D. Atkinson, Getting Unstuck: Three Big Ideas To Get Americans Moving Again, Progressive Policy Institute, December 2002
www.ppionline.org/ppi_ci.cfm?contentid=251092
&knlgAreaID=107&subsecid=900034

Brian Carpenter, Edward Fekpe, and Deepak Gopalakrishna, Performance-Based Contracting for the Highway Construction Industry: An Evaluation of the Use of Innovative Contracting and Performance Specification in Highway Construction, Battelle (prepared for Koch Industries, Inc.), February 2003
www.ncppp.org/resources/papers/battellereport.pdf

Highways and Transit: Private Sector Sponsorship of and Investment in Major Projects Has Been Limited, General Accounting Office, March 2004
www.gao.gov/highlights/d04419high.pdf

Contacts

Jan Mazurek
Director
Energy & Environment Project
Progressive Policy Institute
600 Pennsylvania Ave, SE
Suite 400
Washington, DC 20003
(202) 547-0001
(202) 544-5014 (fax)
jmazurek@ppionline.org