January 2009 NATIONAL COOPERatiVE HIGHWAY RESEARCH PROGRAM Subject Areas: IA Planning and Administration; IC Transportation Law Legal Research Digest 51 MAJOR LEGAL ISSUES FOR HIGHWAY PUBLIC-PRIVatE PARTNERSHIPS This report was prepared under NCHRP Project 20-6, “Legal Problems Arising Out of Highway Programs,” for which the Transportation Research Board is the agency coordinating the research. The report was prepared by Edward Fishman, Esquire, Kirkpatrick & Lockhart Preston Gates Ellis LLP. James B. McDaniel, TRB Counsel for Legal Research Projects, was the principal investigator and content editor. CONTENTS I. Introduction 3 The Problem and Its Solution II. Different Types of Highway PPP Project State highway departments and transporta- U.S. highway sector will increase substantially Delivery Structures 4 tion agencies have a continuing need to keep in the next few years. A. Brownfield and abreast of operating practices and legal ele- Common legal issues are associated with the Greenfield Projects 4 ments of specific problems in highway law. implementation of public-private highways. As B. Innovative This report is a new paper, which continues of July 2008, 23 states have legislation authoriz- Contracting Techniques 4 NCHRP’s policy of keeping departments up-to- ing public-private partnerships. Many states do C. Innovative Financing date on laws that will affect their operations. not have legislation authorizing the use of non- Techniques 6 traditional project delivery methods for high- III. Overview of Applications way projects. Although the use of toll and other Representative Projects 9 pricing revenues is a common way to finance A. Chicago Skyway The amount of public funding available private participation in highway projects, there and Indiana Toll Road 9 to state and local transportation agencies has remain significant restrictions under federal and B. I-15 Reconstruction failed to keep up with the increasing need to state law on the ability to implement such direct in Salt Lake City 11 invest in highway construction, operation, and user fees in particular circumstances. Other po- C. SR-91 and SR-125 maintenance projects. Governmental agencies tential legal issues arise out of limitations on in California 11 are constantly searching for ways to fund or fa- public and private financing methods, environ- D. Pocahontas Parkway cilitate highway construction projects. Public- mental review requirements, labor and employ- in Virginia 13 private partnerships are viewed as one way to ment laws, and public procurement standards. E. SH-130 and TTC-35 increase the availability of funds. in Texas 14 Project risks must also be allocated between the Congress has established a number of pro- public and private sectors in the public-private F. Port of Miami grams that authorize the use of tolling, pricing, Tunnel Project 16 partnership agreement. and public-private partnerships on Federal-aid This digest is designed to provide a broad G. Oregon Predevelop- ment Agreements 17 highways. Moreover, the U.S. Department of overview of the major legal issues that are Transportation (USDOT) has promoted public- IV. Parameters of Analysis likely to arise in the implementation of public- with Respect to Highway private partnerships as a significant tool avail- private partnerships in the U.S. highway sector. PPP Requirements 18 able to state and local highway agencies for It should be helpful to transportation adminis- A. Scope of Inquiry 18 supplementing public funding for infrastructure trators, attorneys, planners, financial officials, B. Summary of Existing and reducing traffic congestion. In light of the and the private transportation investment com- Literature on Legal foregoing, there is a widespread expectation munity. Requirements 20 that the use of public-private partnerships in the TRANSPORTATION RESEARCH BOARD OF THE NATIONAL ACADEMIES CONTENTS (cont’d) V. Analysis of Major Legal Issues Associated with Highway PPP Implementation 20 A. Principal Issues Arising Out of Federal Law 20 B. Principal Issues Arising Out of State Law 25 C. State Law Procurement Issues 28 D. Environmental Review Process Requirements 31 E. Other Common Risk Allocation Requirements 32 F. Tort Liability, Condemnation, and Other Delegation Challenges 33 G. Financing Issues 34 H. Other Legal Considerations 35 I. Other Legal Issues Typically Addressed in PPP Agreements 37 VI. Summary of Lessons Learned 38 VII. Conclusion 38 3 MAJOR LEGAL ISSUES FOR HIGHWAY PUBLIC-PRIVATE PARTNERSHIPS By Edward Fishman, Esquire Kirkpatrick & Lockhart Preston Gates Ellis LLP I. INTRODUCTION years. These projects have ranged from the long-term lease of existing toll roads (such as the Chicago Skyway1 States are looking toward innovative contracting as and the Indiana Toll Road transactions) to the increas- a new and more efficient approach to respond to the ing use of design-build, design-build-operate-maintain increase in transportation capacity causing a continu- (DBOM), and other innovative project delivery methods ing need for maintenance of current roads and bridges (such as the Utah Department of Transportation’s re- and the development of new facilities. The amount of construction of I-15 through the Salt Lake Valley using public funding available to state and local transporta- a design-build (D/B) contract).2 These projects have tion agencies has failed to keep up with the increasing been implemented on highways built in whole or in part need to invest in highway construction, operation, and with federal funds (so-called “federal-aid highways”), maintenance projects. This increasing demand for whether they are part of the federal Interstate System, investment in new and existing highways has been state and local highways, or bridges and tunnels. spurred by a variety of factors, including traffic conges- Many but not all of the recent PPP arrangements in tion, aging infrastructure, population growth, and the U.S. highway sector have involved some form of changing development patterns. In addition, the pur- direct user fees, particularly where the private sector chasing power of the traditional public funding mecha- participates in the financing of the project and seeks to nism for highway investment—the gas tax—has de- use the revenue generated by the user fees to recoup its creased as a result of the increasing fuel efficiency of investment. These user fees can include flat-fee tolls or motor vehicles, political resistance to increasing the gas some form of congestion or variable pricing that varies tax, and further depletion of the Highway Trust Fund, by time of day (e.g., a peak-hour premium) or level of which is used to allocate federal monies for highway traffic congestion. Such tolling and pricing techniques investment. As a result, the use of private-sector capi- can reduce traffic congestion by providing financial in- tal, expertise, and other resources to design, construct, centives to use alternative routes or modes of transpor- operate, or maintain public highway projects has be- tation (such as public transit). come a more attractive option to state and local high- Congress has established a number of programs that way officials. In situations where the private sector is authorize the use of tolling, pricing, and PPPs on fed- willing to contribute debt or equity financing, the po- eral-aid highways. Moreover, the U.S. Department of tential benefits include access to private capital, which Transportation (USDOT) has promoted PPPs as a sig- can supplement or even replace the need to obtain pub- nificant tool available to state and local highway agen- lic financing for the project. cies for supplementing public funding for infrastructure In addition to private-sector resources, the possibil- and reducing traffic congestion. In light of the forego- ity of implementing a highway improvement project ing, there is a widespread expectation that the use of through a nontraditional contractual arrangement with PPPs in the U.S. highway sector will increase substan- the private sector—namely, an arrangement other than tially in the next few years. the traditional “design-bid-build” contracting approach However, there remain significant political and legal that has been used historically in the highway sector— impediments to the successful implementation of PPPs offers a number of potential benefits to state and local in the highway sector. The primary “political” concerns highway agencies. These potential benefits include ac- relate to the transfer of a public asset to private control celerated project completion, cost savings, and improved (particularly if the operator of the highway is a non- efficiency, quality, and system performance. These po- U.S. company) and the fear that the private operator tential benefits are created by allocating project risks will increase tolls or other user fees based on profit mo- (such as schedule delay, material cost, or quality of tives rather than public policy objectives. These con- workmanship) to the project participant best able to cerns primarily relate to long-term lease arrangements manage those risks and by rewarding the private sector and not necessarily to design–build or long-term operat- for accepting those risks. In theory, all of these poten- ing and maintenance contracts that give the private tial benefits should enable state and local highway offi- sector less discretion over public policy matters. cials to use their constrained public resources in a more efficient and effective manner, thereby allowing more 1 highway projects to be completed with less public ex- See http://www.chicagoskyway.org/about/. penditure. 2 See Don Kimball, Utah Dep’t. of Transp., I-15 Case Study There have been a number of public-private partner- (Design-Build Contracting Strategy), Pentagon Reports, June ships (PPPs) in the highway sector in the last several 11, 1999, available for ordering at http://www.stormingmedia.us/53/5327/A532763.html. 4 Common legal issues are associated with the imple- highway asset, the available PPP project structures mentation of public–private highways. As of July 2008, generally are limited to long-term operation and main- 23 states have legislation authorizing PPPs.