Infra Insight Blog : written by Nossaman LLP Infrastructure attorneys, covers infrastructure project delivery, including Public-Private Partnerships, Operations & Management Agreements, policy, and news.

On November 16, challenges to the legality of the Presidio Parkway public-private partnership (P3) contract ended with a one sentence order from the California Supreme Court: “The petition for review is denied.”  Professional Engineers in California Government (PECG), the union representing Caltrans engineers, had asked the Supreme Court to review the Aug. 8, 2011, decision of the California Court of Appeal in San Francisco (First District), which unanimously held that Phase 2 of the Presidio Parkway project can move forward as a P3.  As a result, the California Department of Transportation (Caltrans) and the San Francisco County Transportation Authority (SFCTA) will continue with Phase 2.  The project will replace the old and outmoded approach to the Golden Gate Bridge in San Francisco.  The Supreme Court’s action denying the petition comes a year after PECG filed the lawsuit in the trial court.

When the California Transportation Commission considered whether to approve use of a P3 for the project under Streets and Highways Code section 143, the California Legislative Analyst Office (LAO), and the California Attorney General’s office (AG) as counsel to the Commission, gave written opinions concluding that the project was not authorized.  Caltrans’ general counsel, along with Nossaman acting as P3 legal advisor to Caltrans, took a contrary position.  Section 143, adopted in 2009, broadens the types of P3 projects authorized in California.  The Commission approved the project for a P3, while noting the unresolved legal issue.

PECG sued Caltrans and the SFCTA to stop Phase 2 of the project, arguing, like the LAO and AG had earlier, that the project was not authorized by section 143.  The courts rejected PECG’s argument that, under section 143, Caltrans’ internal personnel must perform all the preliminary planning and design services, as opposed to being responsible only for seeing them done correctly.  The courts also rejected the argument that P3 efforts under California law must be confined to toll projects, holding that the legislation authorized much broader use of innovative financing, in this case an availability payment.  Finally, the courts also held that the project was properly characterized as supplemental to existing facilities, as required by section 143.

The Presidio Parkway Project is the first project to reach award under California’s new P3 statute.  The decision of the courts—and now the finality—is important beyond the Presidio Parkway Project.  This should ease the way to use P3s under section 143 for other projects, and also provide helpful precedent for design build projects authorized under parallel legislation passed at the same time.

At the beginning of 2011, Caltrans, in cooperation with SFCTA, signed a contract for the project to Golden Link Concessionaire, LLC, a consortium led by Hochtief  PPP Solutions North America and Meridiam Infrastructure North America. 

Nossaman represented SFCTA in the litigation and advised Caltrans during the P3 procurement.  Caltrans was represented in the litigation by its own department counsel.

For more about the Presidio Parkway Project and section 143, see Appeals Court Rules Presidio Parkway Can Move Forward as P3, Presidio Parkway Project Awarded, Preferred Proposer Selected for Presidio Parkway Project, Final RFP for the Presidio Parkway Project Released, Presidio Parkway Reaches Two Important Milestones, and Presidio Parkway Project RFQ Issued.

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At its October 27 meeting, the Texas Transportation Commission approved the issuance of a request for qualifications for the Horseshoe Project in Dallas County.  The project will be the first under new design-build legislation passed by the Texas legislature during the 2011 session.  Subchapter F, Chapter 223, of the Transportation Code prescribes the process by which the Texas Department of Transportation (TxDOT) may enter into a design-build contract with a private entity that provides for the design, construction, expansion, extension, related capital maintenance, rehabilitation, alteration, or repair of a highway project. Transportation Code §223.242 authorizes TxDOT to enter into, in each fiscal year, up to three design-build contracts for highway projects with estimated construction costs of $50 million or more.

The Horseshoe Project is part of the larger Project Pegasus, a $2.1 billion (construction only) project in downtown Dallas on two major interstates, I-35E and I-30.   All four legs of Project Pegasus are on the list of 2011 Top 100 Most Congested Roadways in the State of Texas.  The Horseshoe Project will replace two key bridges and connecting roadways crossing the Trinity River at I-30 and I-35E, as well as upgrading outdated roadway geometry.  The estimated construction cost of the Horseshoe Project is $800 million. 

The Horseshoe Project is one of several major new design-build projects in the United States, including the Gerald Desmond Bridge replacement project in Long Beach, Calif., VTA’s BART Berryessa extension project in the Silicon Valley, and New York's Tappan Zee Bridge replacement project, which is one of 14 projects chosen by the Obama administration for expedited federal review and approval.

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Moving Ahead for Progress in the 21st Century (MAP-21), the draft reauthorization bill unanimously voted out of the Senate Environment and Public Works Committee, contains major improvements to the TIFIA program that many, including those of us at Nossaman, have been advocating.  These changes, if enacted, will greatly expand availability and eliminate much of the uncertainty over whether a project will be selected.

• The bill eliminates virtually ALL of the selection criteria, converting availability from a discretionary competitive selection process to a simple objective determination of project eligibility.
• It adopts a rolling basis for applications and availability.  No more waiting for annual notices of funding availability; it is up to the project sponsor to decide when to apply.
• The bill gives applicants the right to pay the subsidy from other sources, included federal grant funds, if budget authority runs out.
• Alternatively, if budget authority runs out, the bill allows an applicant to enter into a master credit agreement to obtain budget authority in a later year when available.
• The bill increases the size of the TIFIA credit assistance from a maximum of 33 percent to a maximum of 49 percent of eligible project costs.
• The Senate EPW Committee recommends an annual TIFIA budget authority of $1 billion.

Other features of the bill's amendments include:

• Beefed up credit standards, including "an investment grade rating from at least two rating agencies on debt senior to the Federal credit instrument; and a rating from at least 2 rating agencies on the Federal credit instrument."   For small projects (up to $75 million, rural projects, and ITS), only one rating agency rating is required.
• As a requirement for project eligibility, the applicant must first submit a letter of interest (LOI), followed by an application.  Presumably, the LOI and application requirements will get a lot simpler and quicker with fewer eligibility criteria.
• The bankruptcy springing lien has an exception for senior debt that is for an agency's program and is secured by tax revenues or system revenues.
• 50 percent of unused annual budget authority (if any) can be carried forward; the balance is returned to the states via federal share.
• Administrative fees for the program are set at 1 percent of the annual budget authority.  At $1 billion of annual budget authority, annual administrative fees will be $10 million, a large increase from the $2.2 million under existing law.

There are a few issues that cause us concern.

• Project readiness is not a prerequisite for TIFIA eligibility.  Such a requirement seems especially needed given the new first-come, first-served approach to budget authority allocation.
• Improved and expedited procedures are needed to overcome the inordinate processing delays that characterize the TIFIA program.  We are quite concerned that applications, credit processing and loan documentation will get bogged down, and bureaucracy rather than budget authority will be the new constraint on TIFIA expansion.
• The exponential increase in TIFIA demand that will occur if this bill comes to fruition has real potential to overwhelm the TIFIA JPO, particularly because applicants can pay in subsidies on top of the $1 billion budget authority.  The bill’s increase in the annual administrative budget to $10 million may not be enough. Consideration should be given to increasing the administrative budget so that the TIFIA JPO can staff up to handle in a timely manner the growth in demand.
• There is no provision calling on the TIFIA JPO to process LOIs, applications, term sheets and loan documentation during the period it will be rolling out regulations for carrying out the amended program.  It would be quite detrimental to the states if things grind to a halt while USDOT goes through a long procedure to adopt regulations.

There is reason to believe that the House reauthorization bill will contain comparable improvements to this vital federal credit assistance program.

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U.S. Department of Transportation Secretary Ray LaHood plans to name Karen J. Hedlund as Deputy Administrator at the Federal Railroad Administration (FRA).  Hedlund moves to the Deputy Administrator position from her current role as Chief Counsel at FRA, replacing Karen Rae, who Gov. Cuomo recently appointed as New York State Deputy Transportation Secretary.  Before moving to FRA, Hedlund served as Federal Highway Administration Chief Counsel from June 2009-June 2010, where she helped implement the American Recovery and Reinvestment Act, including new investments in highway, intermodal and freight rail facilities.
 
Prior to joining DOT, Hedlund was a partner in the Washington, DC, office of Nossaman. She has 35 years of experience in transportation and is recognized nationally for her expertise in structuring public-private partnerships. All of us at Nossaman offer congratulations to our former partner on this new appointment.

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On October 21, I participated on a panel regarding “Successful Teaming” at the 2011 DBIA Conference & Expo in Orlando, Fla.  In the broad sense, “teaming” in the design-build context is collaboration among all project participants to help foster integration and achieve “win-win” solutions for delivering a project.  The panel addressed best practices for drafting teaming agreements and promoting communication and integration among team members.  My presentation focused on why the owner is interested in teaming and how the owner can influence teaming arrangements.  Key takeaways from the panel discussions included the following:

• Always put your teaming agreement into writing and address key terms and conditions.  Although it may take time and money, it is in the interest of all team members to memorialize the underlying basis and relationship of the teaming arrangement into writing.  The teaming agreement should address the extent the members’ relationship is exclusive, how confidential information exchanged among members should be treated, and how costs will be allocated among members.
   
• The owner is not a passive observer.  Rather, the owner is an interested party who can and does influence teaming, both in a direct and indirect way.  For example, during the pre-award phase—especially in the context of public requirements—the owner influences teaming through requirements contained in the solicitation documents.  Therefore, members need to carefully review the solicitation documents to determine the extent that their teaming arrangement needs to be tailored to fit the requirements of a particular project.
   
• Perform due diligence before entering into teaming arrangements.  It is important that members conduct a certain degree of due diligence to determine whether a prospective team member will be a good fit.  Matters to inquire about can include a prospective member’s safety record, organizational conflicts of interest, financial stability and resources, and past dealings with the owner.

It was a pleasure participating with my fellow panel members: Robynne Parkinson of the Law Offices of Robynne Thaxton Parkinson, Pat Miller of Baker & Daniels, and Craig Unger of Unger Security Solutions.  And a special thanks to our moderator, Tom Porter of Tom Porter Services, for keeping the panel focused and on topic.

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