Kentucky Rolls Out its P3 Law in Lexington

The National Council for Public Private Partnerships (NCPPP) and the Kentucky Chamber of Commerce recently concluded on October 28 a very well-attended two day conference in Lexington, Kentucky on the Commonwealth’s new public-private partnership (P3) enabling legislation, the so-called “HB-309.”  HB-309’s chief drafter, Rep. Leslie Combs, was on-hand, participating in nearly every panel discussion, either as a panelist or from the audience.  Rep. Combs reflected on HB-309 “as if she were a proud mama,” and her and fellow Kentuckians’ enthusiasm for its flexibility and broad applicability was evident.  Secretary Don Parkinson, of the Kentucky Tourism, Arts and heritage Cabinet, noted in lunchtime remarks that Kentucky’s border states each had enabling legislation for P3s, and that the time had come for Kentucky to consider this procurement tool as a means by which to grow Kentucky’s economy and solve some of Kentucky’s challenges.

The conference, subtitled “Opportunities and Obstacles,” indeed identified and discussed both.  At once a primer on P3s and collection of government decision-makers revealing their plans, the conference gathered people from all over the country to learn about P3 opportunities in the Commonwealth.  With over 200 participants, representatives from the architects/engineers, construction, development, banking, university, legal and municipal/county communities engaged in active discussions about P3s, what they are, how they work and most critically, how a P3 comes to be in Kentucky.   Active social media participation during the conference (#kyp3) recounts many discussions, insights and perspectives relevant to Kentucky.

HB-309 affords state and local governments in the Commonwealth both to initiate P3 procurements and to entertain unsolicited proposals for P3 projects. A series of processes within the legislation are drafted to support transparency in the process.  The Kentucky Finance and Administration Cabinet recently promulgated amended proposed regulations to implement the law.  On a notable panel, the general counsels from the Kentucky Finance and Administration Cabinet, the Kentucky Tourism, Arts and Heritage Cabinet and the Kentucky Transportation Cabinet discussed candidly their respective Cabinet’s efforts to create internal infrastructure capable of handling unsolicited P3 proposals and organizing for possible P3 procurements.

The Kentucky Chamber and NCPPP anticipate working together to continue to educate interested parties and citizens in the Commonwealth about P3s.

U.S. Department of Transportation Solicits Project Applications for $850 Million in FASTLANE Grants

The U.S. Department of Transportation (USDOT) is calling for project applications for $850 million in transportation infrastructure grants, representing the second opportunity for funding from a program that has already received tremendous interest from public project sponsors and the infrastructure community. The grants, announced in a Notice of Funding Opportunity posted on the USDOT website on October 28, find their genesis and funding authorization in the FAST Act (P.L. 114-94), which President Obama signed into law on December 4, 2015.

The FAST Act created a discretionary grant program, which USDOT dubbed the “FASTLANE” program, to provide additional federal funds for nationally significant highway and freight projects. Congress created this program under the rationale that in today’s fiscal climate, public sponsors of large infrastructure projects will be able to leverage existing public and non-public revenue sources more effectively with seed money in the form of a grant awarded under this program. The FAST Act authorized $800 million for the program in fiscal year (FY) 2016, $850 million in FY 2017, and nearly $3 billion more in FY 2018 through FY 2020.

USDOT conducted the competition for the FY 2016 round of FASTLANE grant funding this summer. In that first solicitation, project sponsors submitted 212 applications requesting nearly $10 billion in grant funding—over twelve times the amount available for award. USDOT ultimately awarded 18 projects a total of nearly $760 million in grants, with an estimated total project cost for all of the awarded projects of over $3.6 billion. This leveraging effect is exactly what the congressional authors of the program intended.

With that background in place, the fact that USDOT chose to release these funds today is noteworthy for several reasons. First, while the FAST Act authorized $850 million in Contract Authority for these grants in FY 2017, USDOT is not able to release those funds until the President signs a full-year appropriations bill, essentially directing the U.S. Treasury to transfer the funds made available by the FAST Act to USDOT. Currently, the federal government is operating under a Continuing Resolution that expires on December 9, 2016. So, while USDOT has provided a Notice of Funding Opportunity for the FY 2017 round of FASTLANE funds, the Department does not currently have the legal authority to release those funds. This fact has not stopped USDOT from soliciting applications in the past (see, for example, the Department’s Positive Train Control solicitation), but it raises the question why USDOT chose to release the notice before the full-year appropriation is in place. The Department addressed this issue in the Notice, stating that “the Department is now beginning the process of soliciting applications to facilitate the possibility of awards with sufficient time for grantees to obligate in advance of peak construction season.” Whether industry stakeholders will find that to be a satisfying explanation is unclear.

Second, at the risk of stating the obvious, especially in light of the foregoing facts, the optics of distributing nearly a billion dollars in discretionary grant funds days before the end of the Administration will undoubtedly raise concern in the industry. To be clear, soliciting grant applications and making grant awards are not the same, and it is unclear whether USDOT expects to make initial project selection prior to the inauguration of the next President. That being said, merely soliciting applications for such a large amount of funding will be sufficient to raise the question of political motivation in the minds of project applicants.

Third, the industry consensus is that USDOT rushed the first round selection process this summer. That process took four months from issuance of the Notice of Funding Opportunity to initial project selection. The Department’s solicitation for applications for FY 2017 grant funding indicates that the timeline to initial selection may be even quicker. The Notice stipulates that applications are due on December 15th. As stated above, it is unclear whether USDOT intends to select projects prior to the end of the Administration, but if so, this timing would leave USDOT staff a month over the holiday season to review, score, and advance applications for award.

Finally, should USDOT intend to make initial project selection during this Administration, rushing the process in this way will be bad for the program, overall. Compressing the application and selection process for such a large amount of grant funding discourages thorough, well-planned project applications and a robust Q&A process between USDOT and potential applicants.

While the timing of this Notice of Funding Opportunity gives project sponsors much to be nervous about, it also emphasizes how valuable USDOT finds the program. In an era where infrastructure funding is unable even to begin to address infrastructure needs, the FASTLANE program leverages funds to deliver infrastructure projects that would otherwise sit on the proverbial shelf for years.

New Management Contract Rules Hot Topic At NABL Conference

Over a thousand US public finance attorneys converged on the City of Chicago last week for the annual National Association of Bond Lawyers Bond Attorneys Workshop.  The conference, the oldest and largest of its kind, featured a number of breakout sessions devoted to a wide range of issues facing the public finance legal community, including the new management contract rules recently issued by the IRS, Revenue Procedure 2016-44 .  As I wrote sometime ago, NABL was a major influence proposing changes to the rules to make them less formulaic and more flexible given the range of business arrangements and asset types being explored in the US, particularly in the emerging social infrastructure P3 space.

Since the release of the new rules, which by the way are less hard and fast rules and more guidance about what types of management and operating agreements with private entities will constitute “private use”, there has been much discussion about them within the P3 community, particularly whether they will lead to a greater use of tax exempt financing for P3 social infrastructure projects.  In this blog, I’m not going to speculate on that issue (though I may comment on that topic in future blogs)—I believe before anyone can do that in an informed and thoughtful way they need to better understand the requirements of the revenue procedure.  And what better place to get clarification on the points of the revenue procedure then at the NABL conference where the leading practitioners in the area as well as representative of the Service can analyze practical issues relating to the rules and give their thoughts on how to resolve them.  Here is what I learned regarding several of the financial considerations set forth in the new rules that for me anyway raised a number of questions (NOTE:  these are not the only factors to consider under the new rules and in future blogs I may discuss the others).

Is it Safe?  As I mentioned above, these are only safe harbors, meaning contracts that comply with the requirements will not be deemed “private use” and projects that are the subject of a qualified contract could be eligible for tax exempt financing.  That said, a leading muni bond tax attorney was of the view that strict adherence to the rules may not be the end of the analysis—what’s important is to understand the principles espoused in the rules.  Therefore, slight variations from the rules (which themselves have a fair amount of flexibility by the way) may still get you to an unqualified tax opinion.  That said, a clear principle of the rules is qualified contracts must NOT be subject to characterization as long-term leases for tax purposes.

Tax Ownership.  Another key principle of the rules is that for tax purposes, ownership of the facilities must be maintained by the entity entering into the management contract with the private entity.  So private entities cannot take depreciation or otherwise take a position contrary to this characterization.

Risk Allocation.  Risk of loss relating to the bond financed facilities must be retained by the owner; however, the contract can require the private manager to purchase insurance for the facilities, though an interesting question is who has to pay the deductibles.  An important point here:  it was made perfectly clear at the conference that risk of loss for purposes of the rules relates to damage or destruction of the project, not “economic loss” or a loss in profits to the private operator if they’ve guessed wrong regarding the life cycle cost of the project or fail to maintain the project in accordance with the contract standards.

Term Limits.  The new rules drop the old formulaic approach of setting specific term limits to the contract based on the compensation method and instead, consistent with the “don’t be a lease” and tax ownership principles described above, set a limit to the term of the contract of the lesser of 80% of the useful life of the managed property or 30 years.   It’s clear in the rules that the construction period would not count against the operating term limit.  But what about projects that include not just construction and operation of buildings but the purchase and installation of equipment that may have a useful life of 10-15 years?  The panelists all agreed that the management contract rules could be used in conjunction with a separate set of tax exempt bond rules that allow for a reasonable allocation of project costs between those paid for with bond proceeds and those paid from other sources, including equity and milestone payments.

Constitutional Use of Toll Revenue the Subject of Recent Federal Court Decision

Public agencies with toll-setting authority should take note of a recent federal court decision relating to the uses of user fees and toll revenue, as well as the stated goals of the plaintiff in that case.

The U.S. District Court for the Southern District of New York recently clarified the constitutional uses of toll revenue in American Trucking Associations v. New York State Thruway Authority, 13 Civ. 8123 (CM) (S.D.N.Y. Aug. 10, 2016). In this case, commercial trucking companies and the American Trucking Associations (ATA) claimed that the New York State Thruway Authority violated the Constitution by charging inflated toll rates to cover the operations and maintenance costs of the New York State Canal System. The Court agreed.

The plaintiffs engage in interstate commerce and pay tolls to use the Thruway, the portion of the Interstate Highway System that runs from New York City to Buffalo. The Thruway Authority charges tolls that exceed the needs of the Thruway in order to cover the costs of operating and maintaining the Canal System. The Canal System serves as a recreational and tourist attraction. In her decision, Chief Judge McMahon held that the Thruway Authority’s practice of charging higher tolls to cover the costs of the Canal System unduly burdened interstate commerce in violation of the so-called Dormant Commerce Clause of the Constitution.

toll booth

 

In arriving at her decision, McMahon invoked the test set forth by the Supreme Court in Northwest Airlines, Inc. v. County of Kent, 510 U.S. 355 (1994), which finds that a user fee or toll is constitutionally permissible only if it meets three requirements. First, the toll or user fee must be “based on some fair approximation of the use of the facilities for which it is paid.” Second, the toll or user fee must not be “excessive in relation to the benefits conferred from the use of those facilities.” Third, the toll or user fee must “not discriminate against interstate commerce.”

In this case, McMahon focused her analysis on the first two elements of the Northwest Airlines test, finding that the Thruway Authority failed to satisfy both the fair approximation prong and the excessiveness prong of the test. McMahon was clear that the fair approximation requirement related to the plaintiffs’ use of the Canal System, not the Thruway itself: “to the extent that Thruway tolls are set with reference to the needs of the Canal System, there must be a rational relationship between the setting of those tolls and interstate truckers’ use of or benefit from Canal System facilities.”

McMahon explained the second prong of the Northwest Airlines test: “[t]he excessiveness prong compares the amount paid by the payer to the benefits conferred on him in his capacity as a consumer of those benefits (the benefits, in this case, being the barge canals and the associated facilities, not the New York State Thruway).” Unsurprisingly, McMahon found that diversion of toll revenue to the Canal System, from which plaintiffs receive no benefit, is unconstitutionally excessive.

The recurring theme in McMahon’s decision relates to the plaintiffs’ use or benefit from the off-system diversion of user fees or toll revenue. In this case, she found that the Thruway’s practice of using toll revenue from the Thruway to support the Canal System violated the Constitution. However, she distinguished the situation in the instant case from another federal decision relating to the use of highway toll revenue for public transit, which found that such use was permissible because transit alleviated congestion on the facilities that were being tolled, creating a “functional relationship” that conveyed a benefit to those paying the toll. Automobile Club of New York, Inc. v. Port Authority, 887 F.2d 417, 421 (2d Cir. 1989).

In the wake of the New York Thruway decision, ATA President and CEO Chris Spear said that he hopes this decision will “dissuade other states from financing their budget shortfalls on the backs of our industry.” Indeed, the Pittsburgh Post-Gazette reports that as a result of the decision, ATA plans to review similar situations in other states to ascertain what further actions the organization could take.

One of those potential actions could come in Pennsylvania, where the Pennsylvania Turnpike Commission currently pays $450 million per year to the Pennsylvania Department of Transportation to fund mass transit service in Philadelphia and Pittsburgh. Clearly, the Automobile Club of New York decision is relevant here, but that holding turned on the fact that the transit system in question alleviated congestion on the facility that was tolled. In the Pennsylvania scenario the transit systems are located at either end of the Pennsylvania Turnpike, which is hundreds of miles long.

Another potential impact could be felt in Oklahoma, where the Oklahoma Turnpike Authority is considering a 17 percent increase in toll rates to finance new construction. The ultimate legality of such an increase could also turn on the location of the projects to be funded with the Turnpike toll revenue and the relationship those projects have with the Turnpike itself.

It seems as though the tolling practices of the Port Authority of New York and New Jersey is always the subject of dispute. In fact, the Automobile Association of New York is again suing the Port Authority, arguing that the Port Authority’s recent toll increase is unconstitutional due to its intended use to fund redevelopment of the World Trade Center.

The most significant potential impact of the New York Thruway decision, though, may have nothing to do with tolls. The Northwest Airlines decision applies to user fees as well as tolls, as McMahon notes in her decision. If federal courts interpret the Dormant Commerce Clause to apply to motor fuel and other excise taxes in the same way the New York Thruway decision applies this rubric to tolls, then the potential impact could be extreme. The question of whether or not an excise tax is legally tantamount to a user fee is murky, especially when such taxes are firewalled into trust funds with specific eligible uses.

Should federal courts arrive at such an interpretation, long-standing state practices could be deemed unconstitutional. For example, article 8, section 7-a of the Texas Constitution requires that 25 percent of all revenue from the state’s motor fuel tax be used to fund education, the remainder of which must be used to acquire right of way, construct, maintain, and police public roads, and administer related laws. This provision has been the law of Texas for nearly 70 years. More and more states have recently adopted or considered fuel tax increases to improve and maintain crumbling infrastructure, and such an interpretation could materially hamper the political negotiations necessary to adopt such increases.

Furthermore, the U.S. Code allows for public agencies to use toll revenue on facilities where the toll revenue is not collected. 23 U.S.C. § 129(a)(3)(A)(v) authorizes a public authority to use toll revenue for “any other purpose for which Federal funds may be obligated” under title 23 of the U.S. Code, which includes expansive authority to construct, operate, maintain, and improve highway and transit infrastructure, so long as the agency certifies that the tolled facility is maintained.

While the ultimate ramifications of the New York Thruway decision are yet to be realized, public agencies with tolling authority would be prudent to watch how the American Trucking Associations and its legal counsel challenge tolling practices in other situations around the country.

The Regents of the University of California Reaches Commercial and Financial Close on UC Merced 2020 Project

UC Merced 2020 Project

Photo: UC Merced

The Regents of the University of California reached financial close on the UC Merced 2020 Project on August 16, 2016.  The project is the first higher education availability payment P3 project to be awarded in the United States, and may well serve as a template for future higher education capital projects, both within the UC system and nationally.

The Regents entered into the Project Agreement with Plenary Properties Merced LLC (PPM) for a 39-year contract term.  The PPM team includes Plenary Group, as sole equity member of PPM, Webcor Builders, as lead contractor, Skidmore, Owings & Merrill Inc., as lead campus planner, and Johnson Controls, Inc., as lead operations and maintenance firm.

The project involves the design, construction, financing, operation and maintenance of a broad mix of academic, residential, student life, and recreational facilities at the University of California’s youngest campus.  790,000 assigned square feet of critically needed facilities will be delivered in phases by 2020, nearly doubling the physical capacity of the campus to support projected enrollment growth from 6,700 current students to 10,000 students within five to seven years.

The Board of Regents granted final approval for the project at its July 21, 2016 meeting, voting unanimously to approve the amended project scope, budget and commercial terms, the proposed external financing, and PPM’s proposed design of the project.  The initial Board of Regents’ approval for the project was granted in November 2015.

“This project represents a major step forward for a trailblazing campus that will build on its early record of excellence to lead the way for universities across the nation as we all strive to teach, conduct research and serve the public in the most dynamic, efficient manner possible,” stated UC President Janet Napolitano.

The $1.3 billion project will be financed by the University’s external financing and campus funds, together with Plenary’s equity investment and private placement of long-term, senior notes.  Up to $585 million of monthly progress payments will be paid by the University during the construction period, which will be financed from the University’s commercial paper program (and may later be refinanced into long-term General Revenue Bonds or Limited Project Revenue Bonds).  Partial availability payments will commence upon delivery of the first set of facilities scheduled for fall 2018, with full availability payments to commence upon delivery of the full project scheduled for summer 2020.

LAX Receives Significant Interest for Automated People Mover Project

Los Angeles World Airports (LAWA) reached a milestone in its estimated $5 billion Landside Access Modernization Program (LAMP) this week when it received statements of qualifications to design, build, finance, operate and maintain an automated people mover, in response to a request for qualifications issued by LAWA on June 9, 2016.  The five statements of qualification submitted on August 11, 2016 show significant interest by the industry in this program.  LAWA’s official press release has a complete list of the five teams.

The automated people mover, which will be approximately 2.25 miles long and has an estimated cost of $2.2 billion, features an elevated dual lane guideway, six passenger stations and an off-line maintenance and storage facility.  Three stations will be located within the central terminal area at LAX and the off-airport stations will be located adjacent to a new west and east intermodal transportation facility and a new consolidated rental car center (CONRAC).  In addition to CONRAC passengers, the automated people mover will transport passengers going to/from LAX via other modes of transportation.  LAWA anticipates procuring the contract for the estimated $1.1 billion CONRAC and other elements of LAMP separately.

Public-Private Partnerships: They’re Not Just About the Money, But the Performance

The need to spend significant dollars on the repair and expansion of the nation’s public infrastructure is a major concern expressed by many.  Even the two presidential candidates for the major political parties, who don’t seem to agree on anything else, agree that a commitment to repair and rebuild the nation’s infrastructure is critical to economic productivity and opportunity for its citizens.

In a recent paper published by the Center for American Progress, a public policy and research organization, entitled “Assessing Claims About Public-Private Partnerships,” the author concludes that public-private partnerships (“P3s”) are an alternate approach to infrastructure procurement that has as a key benefit: “the ability to transfer risk…”  This is achieved by transferring “some or all of the project development, design, construction, operational and revenue risk to a private entity.”  This is particularly the case for large complex projects (though the author doesn’t specify a dollar amount or discuss what he means by complex).

I am generally in agreement with the conclusion of the paper; however, most of the article is spent taking issue with “public-private partnership supporters” who are promoting P3s not as a delivery method that appropriately allocates project risks, incentivizes high quality operation and maintenance, provides budget certainty and encourages innovation, but as a financing scheme.  Specifically, the author accuses “Wall Street” of peddling high cost equity capital as the reason to do a P3.  The author also spends a fair amount of time critical of the assertion that these so-called “P3 supporters” make about the role of public pension investors in P3 transactions.

I recognize the role of private finance in these transactions, as well as the recent involvement of public pension funds as investors in P3 transactions, but to be clear: P3 is not all about the money—it’s about the performance and the value provided to the public sector and taxpayers of the transfer of design, construction and maintenance risk to the private sector.  I would like to have seen the author spend more time writing about what he concludes are the benefits of a P3 – that it is first and foremost a delivery method.  The private financing aspect of these transactions is not a magic source of liquidity for public infrastructure but can be an important driver of the overall value to be derived from a P3 approach.

Cyber Risk and Reality – Procuring Transportation in the 21st Century

With the rapid pace of innovation and deployment of intelligent transportation systems (ITS) to enhance existing transportation infrastructure, transportation officials frequently procure and manage sophisticated systems that collect, use and maintain vast amounts of data.  Today’s transportation officials must possess considerable technological proficiency in addition to their traditional expertise in civil engineering and construction.

Highway communication system vector infographics. Road communication, highway system communication illustration

Identifying technology to optimize infrastructure, and crafting complex technical specifications to procure the same, is only half the challenge. The use of ITS systems and management of the data they require is fraught with network security and privacy risks that must be identified, understood and managed. Risks ranging from service interruption, lost revenues, loss of data, reputational damage, introduction of malicious computer code, theft of valuable electronic business assets, disclosure of sensitive information and legal liability for security and privacy breaches, to cyber terrorism and cyber extortion, require thorough risk assessment, robust security policies, and diligent management.  According to a report by the Identity Theft Resource Center, 781 data breaches in the U.S. were tracked in the year 2015, and the number and severity of breaches is ever increasing.  The question isn’t whether a transportation agency’s systems will be hacked, but rather, how will the transportation agency minimize the threat, prepare to respond to and manage incidents, and mitigate losses?

While current events highlight the risk of data breaches from network hackers, data breaches and damage to IT networks can also come from employee negligence and theft, lost or stolen laptops, mobile devices and portable discs and drives, malware, and consultant and vendor negligence or malfeasance, among other sources.  Transportation agencies need to identify vulnerabilities and assess the risks associated with the systems they procure and operate, continuously monitor their systems for suspicious activity, implement robust training and security programs, and have a plan in place to respond to breaches.  Risk assessment should begin at the procurement stage. Carefully drafted technical specifications should assign responsibility for undertaking necessary precautions, and contracts should allocate the risk of losses from data breaches to appropriate parties.

Typically transportation agencies have standard clauses requiring commercial insurance that they use as a starting point for their procurement documents.  However, most standard commercial insurance policies do not cover many cyber risks.  Fortunately, as data breaches have increased in frequency, and as awareness of the risks has grown among professionals charged with procuring and managing systems and data, growing demand for cyber liability insurance products has prompted the insurance industry to respond by offering new and expanded cyber liability products.

Transportation officials may find it appropriate to require contractors to provide network security/privacy coverage, including some or all of (a) coverage for hostile actions with the intent to affect, alter, copy, corrupt, destroy, disrupt, damage or provide unauthorized access to or use of a computer system, including exposing confidential electronic data or causing electronic data to be inaccessible, (b) computer viruses, (c) dishonest or criminal use of a computer system to affect or destroy a computer system or steal or take electronic data, (d) loss of service by the contractor resulting in inability to access a computer system and conduct normal Internet or network activities, (e) denial of service for which the contractor is responsible resulting in degradation of or loss of access to normal use of a computer system, (f) access to a computer system or resources by an unauthorized person, and (g) loss or disclosure of personally identifiable information.

Also appropriate is media liability coverage, including (a) copyright and trademark infringement, (b) plagiarism, (c) public disclosure or loss of misappropriated trade secrets or unauthorized use of material, (d) libel,  slander, disparagement or other forms of defamation, (e) unauthorized disclosure of data resulting in invasion of privacy, (f) unfair competition or violation of Section 43(a) of the Lanham Act or similar statutes, (g) breaches of contract from alleged misuse of data, and (h) errors and omissions and negligence in the production or publication of content.

The cyber insurance coverages described above may be included in a comprehensive technology errors and omissions policy covering (a) software design, (b) systems programming, (c) data processing, (d) systems integration, (e) outsourcing, (f) systems design, consulting development and modification, (g) training services related to computer software or hardware, (h) management repair and maintenance of computer products, networks, and systems, (i) servicing, distributing, installing, and maintaining computer hardware or software, and (j) data entry, modification, verification, maintenance, storage, retrieval or preparation of data output.

With these coverages, the transportation agency may recover a variety of expenses associated with the identified cyber and technology risks, including the cost of notifying persons whose information is disclosed, the cost of providing credit monitoring services, the cost of defending claims by state regulators, fines and penalties, losses resulting from identity theft, property exposure from business interruption, costs associated with data loss and destruction, fraud, funds transfer losses, and the cost of defending lawsuits alleging trademark or copyright infringement.

In addition to new insurance products, increased awareness of cyber risks is prompting expansion of resources to aid in understanding and managing the risks. As noted by Traffic Technology Today.com, “[c]ybersecurity and insurance are definitely on the A-list of discussions across almost every industry.”  A recently published comprehensive report of the National Cooperative Highway Research Program, Liability of Transportation Entity for the Unintentional Release of Secure Data or the Intentional Release of Monitoring Data on Movements or Activities of the Public, is an excellent resource for  any transportation official involved in procuring systems and handling data, or advising those who do. (Thomas, Larry W., July 2016, Transportation Research Record: Journal of the Transportation Research Board Online)  The report throws into stark relief the enormous challenge of using ITS technologies to optimize transportation resources while navigating the complex legal environment.  Transportation officials also may wish to attend the 2016 Cybersecurity Symposium “Cybersecurity, Data Breach, and Privacy:  Examining Your Risks and Legal Issues From the Inside Out” to be presented by the University of California Irvine School of Law and Nossaman LLP on December 1, 2016, at the City Club of Los Angeles.

Assessment of cyber risks should be near the top of the list in planning for transportation projects in the 21st century.  While cyber liability may not be within the traditional lexicon of transportation officials, it is the new, inescapable reality.  By recognizing the issues, transportation agencies may take steps to manage cyber risks through a combination of contract risk allocation and insurance requirements, in addition to training and consistent vigilance.

U.S. DOT Unveils Build America Bureau

U.S. Transportation Secretary Anthony Foxx, senior Department staff, and even an official from the White House gathered at U.S. Department of Transportation headquarters on July 20th to celebrate the grand opening of the Build America Bureau. After sharing a cake emblazoned with its logo, the dignitaries led a tour through the Bureau’s new office space in what used to be the library, replete with glass offices, motorized desks, and curved computer monitors. Compared to the cubical-farm offices of the modal administrations, the Bureau is clearly something different and new, and that theme made its way into many of the speeches preceding the tour.

Section 9001 of the Fixing America’s Surface Transportation (FAST) Act (P.L. 114-94) created the Build America Bureau to provide a one-stop-shop for project sponsors wishing to navigate the Department’s credit programs and environmental permitting requirements. The Bureau is located within the Office of the Secretary and serves three primary functions:

  1. Administer the application processes for the Department’s credit programs—TIFIA, RRIF, and amount allocation for PABs—and the FASTLANE grant program.
  2. Work with the Department’s modal administrations and outside stakeholders to develop and promote best practices relating to innovative financing and procurement.
  3. Accelerate environmental permitting for complex projects.

Even though the Bureau is open for business and the expectations of Administration officials are high, key issues remain unresolved.

First, how will U.S. DOT staff the Bureau? Many leadership positions in the Bureau are filled, but there is still a question as to who will take the laboring oar for the Bureau’s core functions. The FAST Act gave the Bureau authority to move relevant offices (i.e., FTEs and corresponding budgetary authority) from the modal administrations, but how much and to what extent that actually happens remains to be seen. If the modal administrators push back on an outright re-organization of the Department with the TIFIA and RRIF offices moving up to the Bureau in their entirety, that could hamper the efficacy of the Bureau, which leads to the next issue.

Second, congressional authorizers provided explicit authority for the Bureau to administer the application processes for TIFIA, RRIF, PAB allocations, and FASTLANE grants, but what will the Bureau do when it comes to overseeing and managing the portfolios of these programs? The FAST Act is specific in what authority the Bureau has on paper, but whether Secretary Foxx chooses to move the ongoing work of these credit programs to the Bureau is another issue entirely.

Third, many industry professionals are wondering how much of a difference the Bureau will actually make. The Bureau is a great concept, but could it result in an even murkier, more bureaucratic process for project sponsors to navigate? With the right vision and a dedicated staff, the Bureau could truly revolutionize the way project sponsors access federal credit programs, but implemented poorly, this office could add additional time, effort, and resources to an already protracted process.

Finally, what impact will the Presidential election have on the future of the Bureau? As a legal entity created by the FAST Act, the Bureau will still exist in the next Administration, but how the next President and Secretary of Transportation choose to use the Bureau could vary widely. One perspective could be to view the Bureau as an office with almost unprecedented statutory carte blanche to streamline, accelerate, and reform the credit programs and environmental permitting requirements administered by the Department. The next Administration could recognize how meaningful the Bureau could be and take the baton from Secretary Foxx.

On the other hand, the next Administration could view the Bureau as a layer of bureaucracy unnecessarily duplicative of the functions better served by the modal administrations. Should such be the case, the next Administration could retain the Bureau’s existence on paper while decentralizing its functions back to the modes.

The Build America Bureau provides an historic opportunity for U.S. DOT to promote the accessibility of its loan programs and to accelerate the environmental permitting process for complex infrastructure projects. The appropriate disposition of these issues will be critical to the successful fulfillment of its statutory mandate.

Structuring Successful Broadband P3s

Public entities have recently been looking for new ways to harness right of way (ROW) for broadband public-private partnership (P3) projects.  Last year, the city of Santa Cruz made history by entering into a roughly $50 million P3 with local Internet service provider Cruzio to deliver 1-gigabit broadband access to every property in the city’s jurisdiction.  Construction began this month.  San Francisco is now considering pursuit of a similar P3.  On the other side of the country, the Pennsylvania Turnpike Commission (“PTC”) recently released requests for proposals for legal and financial services for a broadband network P3 along the Turnpike right of way.  The State of Kentucky entered into a 30-year P3 in 2015 with a private consortium with the goal to build a middle-mile broadband network to promote economic development, education and research capabilities, public safety, healthcare delivery and connectivity for libraries and communities.

The Santa Cruz and PTC P3 projects offer a study in contrasts.  These two projects are using the P3 delivery model to meet different goals.  Santa Cruz is using a P3 to expand broadband service within the municipality where the public will benefit from improved internet service and the private partner will benefit from increased business.  The city plans to fund the project through a municipal bond backed by the future revenues from the service.  Santa Cruz will own the network and Cruzio will operate it, paying the city rent.

While some of the details are unclear, it appears that the PTC is pursuing a shared resource model for its broadband P3.  The PTC will make ROW available for a broadband fiber optic backbone with a WIFI overlay in exchange for dark or lit capacity (conduit alone or conduit plus service, respectively).  The public benefit from this model is the increased service and capacity of the network for agency needs, and the private benefit is the ability to build and run a major backbone fiber optic system while avoiding right of way rental fees.  In essence, the shared resource model allows a public entity to leverage private investment within its ROW to receive broadband capacity in return.

The economic beauty of the shared resource model lies in the fact that the incremental cost to the broadband provider of delivering backbone capacity to the public agency is a fraction of the value of that capacity to the agency and a fraction of the rental value for the right of way.  For this low incremental cost, the broadband provider delivers value equal to or greater than the fair market rent that the public agency would otherwise charge.  A true win-win.

As public entities continue to pursue broadband P3 projects, they must carefully assess and allocate the respective roles and responsibilities of the public and private partners.  In addition to the design, construction, finance, and operations/maintenance of the broadband infrastructure, public entities must also consider how the telecommunications service will be provided and how it will be marketed.  Unsurprisingly, how these roles and responsibilities ought to be allocated will depend on the government’s objective.  Project success depends on tailoring the delivery model to these objectives and financial constraints.

For this reason, the Santa Cruz P3 is going to allocate roles and responsibilities differently from the project the PTC is pursuing.  The PTC is not seeking to provide last-mile internet service as a utility to a broad citizenry, as Santa Cruz is.  Instead, entering into a broadband network P3 will provide the PTC and the Pennsylvania Department of Transportation improved network connectivity through lit capacity for these agencies’ own needs along the Turnpike’s 550 miles of right of way.

Under the utility model, the public agency usually owns and maintains the fiber network and the private entity usually designs, constructs, administers, and markets the project and its resulting Internet service.  Financing may be done by either or both parties.  This model can scale and fund the project in one of two ways—first, as a ubiquitous system with a corresponding basic “utility” charge to all residents to finance the project with a corresponding option for each resident to enter into an individual contract with the Internet service provider, or second, on a pay-as-you-go basis that would be less expensive initially but would not provide ubiquitous service.  San Francisco is grappling with these choices in its own quest to provided 1-gigabit services throughout the city and county.

This allocation of roles does not necessarily make sense for a broadband P3 project like the PTC’s.  The public agency does not need to own, operate or maintain the backbone system in order to attain its objectives.  It merely needs the rights to its allocated capacity from the larger system.  The broadband provider needs to finance, build, operate/maintain and market the rest of the system in order to generate revenues and profit from its capacity.

The Institute for Local Self-Reliance recently published a report addressing many of these issues, ultimately concluding that successful broadband P3s are structured in a way that provides meaningful benefits and control for both the public and the private entities involved.  Public entities interested in pursuing broadband P3s must weigh the unique risks and rewards associated with such an arrangement and carefully allocate control to deliver a project that will succeed.  As has been clear from the Santa Cruz and PTC cases, how broadband P3s are structured may vary greatly in order to tailor the P3 delivery model to different objectives and financial circumstances.

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