United States General Accounting Office

GAO Testimony

Before the Subcommittee on Transportation and

Infrastructure, Committee on Environment and Public

Works, U.S. Senate

For Release

on Delivery

Expected at

9:30 a.m. EST

Thursday

March 6, 1997

SURFACE

TRANSPORTATION

Prospects for Innovation

Through Research,

Intelligent Transportation

Systems, State

Infrastructure Banks, and

Design-Build Contracting

Statement of Phyllis F. Scheinberg,

Associate Director, Transportation Issues,

Resources, Community, and Economic

Development Division

GAO/T-RCED-97-83

Mr. Chairman and Members of the Subcommittee:

We appreciate the opportunity to testify on how innovation in federal

research, financing and contracting methods has the potential for

improving the performance of the nation’s surface transportation system.

Our testimony is based on three reports that we have recently completed

for this Committee’s deliberations on the reauthorization of the Intermodal

Surface Transportation Efficiency Act (ISTEA), as well as ongoing work for

the Committee.1

 In summary, we reported the following:

• Investments in surface transportation research have provided benefits to

users and the economy. These benefits include crash protection devices,

such as seat belts and car seats for infants and children; programs to

reduce alcohol-related deaths; and longer-lasting highway surfaces that

reduce maintenance costs. The Department of Transportation (DOT) has a

critical role to play by funding research, establishing an overall research

mission with objectives for accomplishment and priorities for allocating

funds, and acting as a focal point for technology transfer. However, DOT’s

organizational structure and lack of both a strategic plan and a

departmental focal point may limit its impact on research. Until these

issues are addressed, the Department may not be able to respond to ISTEA’s

call for an integrated framework for surface transportation research.

• Established by ISTEA, DOT’s Intelligent Transportation System (ITS) Program

has received $1.3 billion to advance the use of computer and

telecommunications technology that will enhance the safety and efficiency

of surface transportation. Although the program envisioned widespread

deployment of integrated multimodal ITS systems, this vision has not been

realized for several reasons. First, the ITS national architecture was not

completed until July 1996 and ITS technical standards will not be

completed until 2001. The ITS architecture and technical standards, which

define ITS elements and how they will work together, are prerequisites to a

large scale, integrated deployment of ITS systems. In addition, the lack of

knowledge of ITS technologies and systems integration among state and

local officials, insufficient data documenting the cost effectiveness of ITS in

solving transportation problems and competing priorities for limited

transportation dollars will further constrain widespread ITS deployment.

Before DOT can aggressively pursue widespread deployment of integrated

1

Surface Transportation: Research Funding, Federal Role, and Emerging Issues (GAO/RCED-96-233,

Sept. 6, 1996), Urban Transportation: Challenges to Widespread Deployment of ITS Technologies

(GAO/RCED-97-74, Feb. 27, 1997), State Infrastructure Banks: A Mechanism to Expand Federal

Transportation Financing (GAO/RCED-97-9, Oct. 31, 1996).

Page 1 GAO/T-RCED-97-83
ITS, it must help state and local officials overcome these obstacles.

• State Infrastructure Banks (SIBs) offer the promise of helping to close the

gap between transportation needs and available resources by sustaining

and potentially expanding a fixed sum of federal capital, often by

attracting private investment. Specifically, these banks provide states

increased flexibility to offer many types of financial assistance, such as

loans or letters of credit, tailored to fit a project’s specific needs. Benefits

include expediting project completion, recycling loan repayments to future

projects, and obtaining financial support from the private sector and local

communities. However, some state officials and industry experts that we

talked with remain skeptical that SIBs will produce the expected benefits.

Reasons for their skepticism include concern that there are (1) an

insufficient number of projects with a potential revenue stream needed to

repay the loans and (2) impediments under state law. Only time will tell.

This program is new; only one state has begun a project under its SIB

since the initial pilot states were selected for SIB participation in

April 1996. Therefore, it is too early to assess how effectively SIBs will help

to meet transportation needs.

Our ongoing work has found that

• the Federal Highway Administration (FHWA) is testing and evaluating the

use of an innovative design-build contracting method for highway

construction. This method differs from traditional contracting practice in

that it combines, rather than separates responsibility for the design and

construction phases of a highway project. Proponents of design-build see

several advantages to the approach, including better accountability for

costs and quality, less time spent coordinating designer and builder

activities, firmer knowledge of project costs, and reduced burden in

administering contracts. However, FHWA’s authority to implement

design-build is limited and 17 states have laws which, in effect, prevent the

use of design-build. Finally, while design-build may result in the faster

completion of projects, it may also require an accelerated revenue stream

to pay for construction.

DOT’s Leadership

Role in Surface

Transportation

Research

ISTEA expressed the need for a new direction in surface transportation

research, finding that despite an annual federal expenditure of more than

$10 billion on surface transportation and its infrastructure, the federal

government lacked a clear vision of the role of federally funded surface

transportation research and an integrated framework for the fragmented

Page 2 GAO/T-RCED-97-83
surface transportation research programs dispersed throughout the

government. The act recognized the federal government as a critical

sponsor and coordinator of new technologies that would provide safer,

more convenient, and more affordable future transportation systems.

Our September 1996 report on surface transportation research confirmed

what ISTEA stressed—DOT must play a critical role in surface transportation

research. DOT’s role as the leader in surface transportation research stems

from the Department’s national perspective, which transcends the

interests and limitations of nonfederal stakeholders. For example, the

states generally focus on applied research to solve specific problems;

industry funds research to develop new or expanded markets; and

universities train future transportation specialists and conduct research

that reflects the interests of their funders.

While the Department has established councils and committees to

coordinate its research, the lack of a departmental focal point and an

inadequate strategic plan may limit its leadership role. First, surface

transportation research within the Department is focused on improving

individual modes of transportation rather than on creating an integrated

framework for surface transportation research. This modal structure

makes it difficult for DOT to develop a surface transportation system

mission; accommodate the need for types of research—such as intermodal

and systems assessment research—that do not have a modal focus; and

identify and coordinate research that cuts across modes.

Second, DOT does not have a Department-level focal point to oversee its

research, such as an Assistant Secretary for Research and Development.

Instead an Associate Administrator of the Research and Special Projects

Administration (RSPA) coordinates the Department’s surface research

programs. Although RSPA was established to foster cross-cutting research,

it does not have the funding resources or the internal clout to function

effectively as a strategic planner for surface transportation research. RSPA

acts in an advisory capacity and has no control over the modal agencies’

budgets or policies.

Finally, the Department does not have an integrated framework for

surface transportation research. The three research plans that the

Department has submitted to the Congress since 1993 are useful

inventories of the five modal agencies’ research activities. However, the

plans cannot be used, as ISTEA directed, to make surface transportation

research more strategic, integrated, and focused. Until all these issues are

Page 3 GAO/T-RCED-97-83
addressed, the Department may not be able to respond to ISTEA’s call for

an integrated framework for surface transportation research and assume a

leadership role in surface research.

ITS Program Holds

Potential for

Innovation If

Deployment Obstacles

Can Be Resolved

ISTEA also reflected congressional concerns about the adequacy of the

funding for advanced transportation systems, suggesting that too little

funding would increase the nation’s dependence on foreign technologies

and equipment. The act therefore increased the funding for many existing

and new research programs, especially for the ITS program. Since 1992, the

ITS program has received through contract authority and the annual

appropriations process about $1.3 billion. This amount represents about 36

percent of the $3.5 billion the federal government provided for surface

research programs from 1992 to 1997.

Our February 1997 report examined the progress made in deploying ITS

technologies and ways in which the federal government could facilitate

further deployment. On the first issue, a 1995 DOT-funded study found that

7 of 10 larger urban areas were using some ITS technologies to help solve

their transportation problems. An example of an area that has widely

deployed ITS technologies is Minneapolis. The Minneapolis ITS program,

part of the state’s “Guidestar” program, first began operational tests in

1991. Since that time, about $64 million in public and private funds have

been invested in Guidestar projects. With these funds, Minneapolis

upgraded its traffic management center so that it could better monitor

traffic flow and roadway conditions and installed ramp meters to control

the flow of traffic entering the expressways. These improvements have

helped increase average highway speeds during rush hour by 35 percent.

Although urban areas are deploying individual ITS components, we found

that states and localities are not integrating the various ITS components so

that they work together and thereby maximize the overall efficiency of the

entire transportation system. For example, transportation officials in the

Washington, D.C., area said that local jurisdictions have installed

electronic toll collection, traveler information, and highway surveillance

systems without integrating the components into a multimodal system.

This lack of systems integration is due in part to the fact that ITS is a

relatively new program that is still evolving and has yet to fully implement

some fundamental program components such as the national architecture

and technical standards. The national architecture, which identifies the

components and functions of an ITS system, was completed in July 1996. In

addition, a five year effort to develop technical standards—which specify

Page 4 GAO/T-RCED-97-83
how system components will communicate—is planned for completion in

2001.

We also found that the lack of widespread deployment of integrated ITS

systems results from insufficient knowledge of ITS systems among state

and local transportation agencies; limited data on the costs and benefits of

ITS; and inadequate funding in light of other transportation investment

priorities. The funding issue is particularly important since DOT has

changed the program’s short-term focus to include a greater emphasis on

deploying ITS technologies rather than simply conducting research and

operational tests. The federal government’s future commitment to a

deployment program would have to balance the need to continue progress

made under the program with federal budgetary constraints. Urban

transportation officials in the nation’s 10 largest cities we interviewed had

mixed views on an appropriate federal role for funding ITS deployment.

Officials in 6 of 10 urban areas supported a large federal commitment of

$1 billion each year. Typically, these officials contended that future ITS

deployments would be limited without specific funding for this approach.

For example, a New York transportation planner said that without

large-scale funding, ITS investment would have to compete for scarce

dollars with higher-priority road and bridge rehabilitation projects. Under

such a scenario, plans for deploying ITS would be delayed. These officials

also favored new federal funding rather than a set-aside of existing

federal-aid highway dollars.

In contrast, officials from four other urban areas opposed a large-scale

federal aid program because they do not want additional federal funding

categories. Some of these officials also said that such a program could

drive unnecessary ITS investments, as decisionmakers chased ITS capital

money, even though another solution might have been more cost-effective.

One official noted that a large federal program would be very premature

since the benefits of many ITS applications have yet to be proven despite

the claims of ITS proponents. In the absence of a large federal program,

officials from 5 of the 10 urban areas supported a smaller-scale federal

seed program. They said that such a program could be used to fund

experimental ITS applications, promote better working relationships

among key agencies, or support information systems for travellers.

Deliberations on the future funding for the ITS program should include an

assessment of the current obstacles facing the program. First, the system

architecture is relatively new, and state and local officials have limited

knowledge of its importance. Second, it will take time for state and local

Page 5 GAO/T-RCED-97-83
transportation officials to understand the architecture and supplement

their traditional approach to solving transportation problems through civil

engineering strategies with the information management and

telecommunications focus envisioned by an integrated ITS approach. In

addition, widespread integrated deployment cannot occur without the

technical standards that DOT proposes to complete over the next 5 years.

Innovative Financing

Through State

Infrastructure Banks

Until recently, states have generally not been able to tailor federal highway

funding to a form other than a grant. The National Highway System

Designation Act of 1995 established a number of innovative financing

mechanisms, including the authorization of a SIB Pilot Program for up to

10 states or multistate applicants—8 states were selected in April 1996 and

2 were selected in June 1996. Under this program, states can use up to 10

percent of most of their fiscal years 1996 and 1997 federal highway funds

to establish their SIBs. This program was expanded by DOT’s fiscal year 1997

appropriations act that removed the 10-state limit and provided

$150 million in new funds.

A SIB serves essentially as an umbrella under which a variety of innovative

finance techniques can be implemented. Much like a bank, a SIB would

need equity capital to get started, and equity capital could be provided at

least in part through federal highway funds. Once capitalized, the SIB

could offer a range of loans and credit options, such as loan guarantees

and lines of credit. For example, through a revolving fund, states could

lend money to public or private sponsors of transportation projects.

Project-based revenues, such as tolls, or general revenues, such as

dedicated taxes, could be used to repay loans with interest, and the

repayments would replenish the fund so that new loans could be

supported. Thus projects with potential revenue streams will be needed to

make a SIB viable.

Expected assistance for some of the projects in the initial 10 states

selected for the pilot program include loans ranging from $60,000 to

$30 million, credit enhancement to support bonds and a line of credit. In

some cases, large projects that are already underway may be helped

through SIB financial assistance. Examples of projects states are

considering for financial assistance include:

• A $713 million project in Orange County, California, that includes

construction of a 24-mile tollway. SIB assistance in the form of a

$25 million line of credit may be used for this project to replace an existing

Page 6 GAO/T-RCED-97-83
contingency fund. If accessed, the plan is that the line of credit would be

repaid through excess toll revenues.

• A $240 million project in Orlando, Florida, will involve construction of a 6

mile-segment to complete a 56-mile beltway. A SIB project loan in the

amount of $20 million is being considered, and loan repayment would

come from a mix of project and systemwide toll receipts and state

transportation funds.

• In Myrtle Beach, South Carolina, a SIB loan is being considered to help

with the construction of a $15 million new bridge to Fantasy Harbor. The

source for repayment of the loan would be proceeds from an admission

tax at the Fantasy Harbor entertainment complex.

These examples represent but a few of the projects being considered for

SIB assistance by the initial 10 SIB pilot states.

SIB financial assistance is intended to complement, not replace, traditional

transportation grant programs and provide states increased flexibility to

offer many types of financial assistance. As a result, projects could be

completed more quickly, some projects could be built that would

otherwise be delayed or infeasible if conventional federal grants were

used, and private investment in transportation could be increased.

Furthermore, a longer-term anticipated benefit is that repaid SIB loans can

be “recycled” as a source of funds for future transportation projects. If

states choose to leverage SIB funds, DOT has estimated that $2 billion in

federal capital provided through SIBs could be expected to attract an

additional $4 billion for transportation investments.

For some states, barriers to establishing and effectively using a SIB still

remain. One example is the low number of projects that could generate

revenue and thus repay loans made by SIBs. Six of the states that we

surveyed told us that an insufficient number of projects with a potential

revenue stream would diminish the prospects that their state would

participate in the SIB pilot program. Ten of 11 states that we talked with

about this issue said they were considering tolls as a revenue source.

However, state officials also told us that they expected tolls would

generate considerable negative reaction from political officials and the

general public.

Some states expressed uncertainty regarding their legal or constitutional

authority to establish a SIB in their state or use some financing options

that would involve the private sector. Michigan, for instance, said that it

Page 7 GAO/T-RCED-97-83
does not currently have the constitutional authority to lend money to the

private sector.

Since $150 million was appropriated for fiscal year 1997 and the 10 state

restriction was lifted, DOT has received applications from 28 additional

states. DOT has not yet selected additional states for the program. In

addition, DOT has not yet developed criteria or a mechanism for

determining how the funds will be distributed to selected states.

The SIB program has been slow to start-up. Only one state—Ohio—has

actually begun a toll road project under its SIB since April 1996 when the

first states were selected for the program. The program will need time to

develop and mature.

Innovative Practices

Using Design-Build

Contracting

Innovation can also occur through different methods to design and

construct transportation projects. Of particular note is FHWA’s special

project to test and evaluate the use of design-build contracting methods

under the agency’s authority to conduct research. The project is an

outgrowth of a 1987 Transportation Research Board task force report that

identified innovative contracting practices such as design-build. The

design-build method differs from the traditional design-bid-build method

since it combines, rather than separates responsibility for the design and

construction phase of a highway project.

Proponents of design-build have identified several benefits. First, the

highway agency can hold one contractor, rather than two or more,

accountable for the quality and costs of the project. This compares to the

traditional approach where problems with the project resulted in disputes

between the design and construction firms. Second, by working together

from the beginning, the designer and builder would have a firmer

understanding of the project costs and could thereby reduce costs by

incorporating value engineering savings2

 into the design. Finally,

design-build proponents state the approach will reduce administrative

burden and expenses because fewer contracts would be needed.

State interest in the design-build contracting approach is rising. According

to FHWA, as of January 1997, 13 states have initiated at least 50 design-build

projects under the agency’s special program. The size of state projects

varies considerably, from bridge projects costing a few million dollars to

2

Value engineering is the formal technique by which contractors or independent teams identify

methods for constructing projects more economically.

Page 8 GAO/T-RCED-97-83
the $1.4 billion reconstruction of I-15 in Utah. While states are becoming

more receptive to design-build contracting, FHWA still considers the

approach experimental, and an overall assessment of the broad benefits,

costs, and applicability of design-build remains limited by the small

number of completed projects.

One difficulty in implementing design-build lies in state laws limiting its

use. A 1996 Design-Build Institute of America survey of state procurement

laws documents this problem. The survey identified 17 states that did not

permit the use of combined design and construction contracts. In addition,

a 1995 Study by the Building Futures Council noted that some states

indirectly preclude design-build by requiring separation of design and

construction services—construction services being awarded to the lowest

bidder only after the design is complete.

In addition, similar requirements applicable to state highway construction

contracts under the federal-aid highway program limit FHWA’s authority to

allow design-build contracts outside those that are part of its special

project. However, an official within FHWA’s Office of Engineering suggested

that continuing the current special project may be appropriate because no

consensus exists within the highway construction industry on the

desirability of the design-build approach.

A final consideration that may limit the use of design-build contracting is

project financing. When design-build is applied to expensive, large

infrastructure projects, financing can be more complex because the

projects are constructed faster than under conventional contracting

practices. Faster construction means that funds will be required faster,

which may pose difficulties if the project’s revenue stream does not keep

pace. For example, in our review of a large design-build transit project, the

extension of the Bay Area Rapid Transit (BART) system to the San

Francisco International Airport, we found that BART required a borrowing

program to cover cash shortfalls during construction. With design-build,

BART may save construction costs but will incur additional financing costs.

Design-build contracting, while becoming increasingly common in the

private sector for facilities such as industrial plants and refineries, does

not yet have an established track record in transportation in the United

States. However, the experiences now being gained through the 50

projects under FHWA’s special project, along with four Federal Transit

Administration funded demonstration projects, may provide sufficient

evidence of the efficacy of design-build. Early experience suggests that in

Page 9 GAO/T-RCED-97-83
instances when time is at a premium, and project revenue sources quickly

cover construction costs, design-build may provide a good fit with project

requirements. One area where these opportunities may exist is FHWA’s

Emergency Relief Program, which places emphasis on the quick

reconstruction of damaged facilities.

Mr. Chairman, this concludes our prepared statement on the potential

benefits and challenges of four examples of innovation in surface

transportation research, finance and contracting. We will be happy to

respond to any questions you might have.

(342936) Page 10 GAO/T-RCED-97-83
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