Public Transportation: Federal Project Approval Process Remains a Barrier to Greater Private Sector Role and DOT Could Enhance Efforts to Assist Project Sponsors
Published: 2009-10-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As demand for transit and competition for available federal funding increases, transit project sponsors are increasingly looking to alternative approaches, such as public-private partnerships, to deliver and finance new, large-scale public transit projects more quickly and at reduced costs. GAO reviewed (1) the role of the private sector in U.S. public transit projects as compared to international projects; (2) the benefits and limitations of and barriers, if any, to greater private sector involvement in transit projects and how these barriers are addressed in the Department of Transportation's (DOT) pilot program; and (3) how project sponsors and DOT can protect the public interest when these approaches are used. GAO reviewed regulations, studies, and contracts and interviewed U.S., Canadian, and United Kingdom officials (identified by experts in the use of these approaches).
section_title: What GAO Found
paragraphs: In the United States, the private sector role in delivering and financing transit projects through alternative approaches, such as public-private partnerships, has been more limited than in international projects. The private sector role in U.S. projects has focused more on how they are delivered rather than how they are financed, while the private sector role in international projects has focused on both project delivery and financing. Since 2000, seven new large- scale construction projects funded through FTA's Fixed Guideway Capital Investment Program--New Starts program--have been completed using one of two alternative project delivery approaches, and none of these projects included private sector financing. In 2005, Congress authorized FTA to establish a pilot program to demonstrate the advantages and disadvantages of these alternative approaches and how the New Starts Program could better allow for them. Alternative approaches can offer potential benefits such as a greater likelihood of completing projects on time and on budget, but also involve limitations such as less project sponsor control over operations. The sequential and phased New Starts process is a barrier because it is incompatible with alternative approaches and thus does not allow for work to be completed concurrently, which can lead to delays and increased costs. Under its pilot program, FTA can grant major streamlining modifications to the New Starts process for up to three project sponsors, but has not yet granted any such modifications because FTA has found that none of the projects has transferred enough risk, in particular financial responsibilities, to the private sector. FTA has the ability within its pilot program to further experiment with the use of long-standing existing tools that could encourage a greater private sector role while continuing to balance the need to protect the public interest. This includes forms of conditional funding approvals used by other DOT agencies and international governments. FTA also lacks an evaluation plan to accurately and reliably assess the pilot program's results, including the effect of its efforts to streamline the New Starts process for pilot project sponsors. Without such a plan, agencies and Congress will be limited in their decision making regarding the pilot program. Transit project sponsors protect the public interest in alternative approaches through, for example, the use of performance standards and financial assessments to evaluate the costs and benefits of proposed approaches. Other governments have established entities to assist project sponsors in protecting the public interest. These entities have better equipped project sponsors to implement alternative approaches by creating a uniform approach to developing project agreements and serving as a repository of institutional knowledge. DOT can serve as a valuable resource for transit project sponsors by broadening its current efforts, including providing technical assistance and encouraging the use of additional financial assessments, among other measures.

section_title: Letter
paragraphs: Many Americans rely on mass transit to reach their jobs, schools, and  other activities. In 2008, passengers took over 10.7 billion trips using  public transportation, the highest level of ridership in 52 years and a  modern ridership record. As national demand for mass transit services  increases, more sponsors of transit projects are seeking available federal  funding. The Federal Transit Administration (FTA) distributes federal  funding to transit agencies for the construction of projects through a  variety of formula and discretionary grant programs, including the New  Starts grant program for new, large-scale projects. As competition for  these federal funds grows more intense, transit project sponsors are  increasingly looking for alternative mechanisms to finance and deliver  new, large-scale transit projects. Moreover, there is a belief by some in the  United States that the conventional approach to delivering and financing  infrastructure projects—in which contracts for the design and  construction of the transit facility are awarded separately to the private  sector—may not always be the most desirable. In transportation, public  sector entities including state departments of transportation, local and  regional governments, and transit providers are seeking unconventional or  “alternative” approaches to delivering and financing their projects that  may not only reduce project costs, but also deliver the projects more  quickly and efficiently. Generally, these alternative approaches, which can  include public-private partnerships, rely on the private sector assuming an  enhanced responsibility for performing all or a significant number of  functions in connection with a project, in some cases including financial  liability. FTA defines public-private partnerships broadly as arrangements  that do not use the conventional method of design-bid-build, and has  encouraged the use of public-private partnerships to deliver and finance  transit projects.
Public-private partnerships for transit differ from those for highways in  terms of their ability to generate sufficient revenue to pay for themselves  and the need for ongoing public financial assistance. Alternative  approaches are more common worldwide for highway projects. For  example, as we described in a previous report, highway public-private  partnerships are common in France, Spain, Australia, and the United  Kingdom. Highway public-private partnerships projects can take the form  of the public sector entering into long-term agreements with the private  sector (known as “concession agreements”) in which the private sector  finances and constructs a new facility and then operates and maintains it  over a specified period of time in return for the right to collect tolls to fund  operations and maintenance and to receive a return on their investment.  One key difference between highways and transit is that at least in some  cases a private entity might be able to charge users sufficient tolls to  profitably build and operate a highway, but transit almost always cannot  pay for itself from farebox revenues. Public transit systems typically  receive government funding to supplement farebox revenues in paying for  construction as well operations and maintenance. Therefore, it is  important to safeguard the public interest in transit public-private  partnerships. In addition, whereas some highway public-private  partnership agreements have given private entities substantial authority to  set toll rates, governments often retain control of fare levels even when  entering into agreements for transit projects that use alternative  approaches because transit fare-setting considers, among other factors,  keeping fares low to increase ridership and provide an affordable form of  mobility for urban residents, including low-income citizens.
To assist Congress as it prepares for its upcoming surface transportation  reauthorization, you asked us to identify key issues as they relate to  alternative project delivery and financing approaches, including public- private partnerships. In response to your request, this report addresses (1)  the role of the private sector in the delivering and financing of U.S. transit  projects compared to other countries; (2) the benefits and limitations of  and the barriers, if any, to greater private sector involvement in transit  projects and how these barriers are addressed in the Department of  Transportation’s (DOT) Public-Private Partnership Pilot Program; and (3)  how project sponsors and DOT can protect the public interest in transit  projects that use alternative approaches.
To address these issues, we reviewed pertinent federal legislation and  regulations, including: Federal Register notices and guidance for FTA’s  Public-Private Partnership Pilot Program and the New Starts Program;  DOT’s 2007 Report to Congress on the Costs, Benefits, and Efficiencies of  Public-Private Partnerships for Fixed Guideway Capital Projects; and  other DOT reports. We also collected, summarized, and analyzed in-depth  interviews with officials from the three FTA Public-Private Partnership  Pilot Program projects—Bay Area Rapid Transit Oakland Airport  Connector, Denver Regional Transportation District East Corridor and  Gold Line, and Houston Metro North and Southeast Corridors—in addition  to Minnesota Metro Transit Hiawatha Corridor and Denver Regional  Transportation District Transportation Expansion. As part of the review,  we collected descriptions of the projects, copies of the concession or  development agreements, and documentation related to the financial  structure of such projects. These projects were selected because they are  recent examples of ongoing and completed transit projects in the United  States that incorporated greater private sector involvement through the  use of alternative project delivery or financing approaches or both. We  focused solely on projects that have or are expected to go through FTA’s  New Starts process given that it is the largest capital grant program for  transit projects and that any such projects would be reviewed to protect  the public interest. In addition to reviewing these domestic projects, we  conducted extensive interviews with financial and legal advisors, experts,  and private sector officials from Canada and the United Kingdom who are  knowledgeable about private sector participation in the delivery and  financing of transit projects. Further, we collected information on how the  following project sponsors protect the public interest in the following  international transit projects: Croydon Tramlink, Docklands Light Railway,  London Underground, Manchester Metrolink, and Nottingham Express  Transit in the United Kingdom, and the Canada Line in Vancouver, Canada.  To collect the most valuable and relevant information for our review,  these international projects were selected, in part, because they are  examples of ongoing and completed transit public-private partnerships  that incorporate a range of alternative project delivery or financing  approaches, or both, and they are in countries that share a similar political  structure to the United States. Finally, we conducted a literature review of  domestic and international transit projects with greater private sector  participation and interviewed FTA and other federal and local officials as  well as private sector participants associated with the projects we  selected.
We conducted this performance audit from October 2008 through October  2009 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Private sector participation and investment in transit is not new. In the  1800s, the private sector played a central role in financing early  transportation infrastructure development in the United States. For  example, original sections of the New York City Subway were constructed  from 1899 to 1904 by a public-private partnership. New York City sought  private sector bids for the first four contracts to construct and finance  segments of the initial subway system. Ultimately, a 50-year private sector  lease to operate and maintain the system was used. Another example is  the City of Chicago’s “L” transit system, which was built from the 1880s  through the 1920s and operated by the Chicago Rapid Transit Company, a  privately owned firm. The construction of the system was financed by the  private sector. In following years, transportation infrastructure  development became almost wholly publicly funded. Conditions placed on  federal transportation grants-in-aid limited private involvement in federally  funded projects. More recently, there has been a move back towards  policies that encourage more private and public blending of funding,  responsibility, and control in transportation projects. The federal  government has progressively relaxed restrictions on private participation  in highway and transit projects serving public objectives. This change in  federal policy toward considering transit projects that use alternative  approaches has also created an opportunity for states to reexamine their  own public-private partnership policies.
Conventional transit projects generally follow a “design-bid-build”  approach whereby the project sponsor contracts with separate entities for  the discrete functions of a project, generally keeping much of the project  responsibility and risk with the public sector. FTA defines alternative  approaches, including public-private partnerships, as those that increase  the extent of private sector involvement beyond the conventional design- bid-build project delivery approach. These alternative approaches  contemplate a single private sector entity being responsible and financially  liable for performing all or a significant number of functions in connection  with a project. In transferring responsibility and risk for multiple project  elements to the private sector partner, the project sponsor often has less  control over the procurement and the private sector partner may have the  opportunity to earn a financial return commensurate with the risks it has  assumed (see fig. 1).
With these alternative approaches, many of the project risks that would  normally be borne by the project sponsor in a design-bid-build approach  are transferred to or shared with the private sector. Risk transfer involves  assigning responsibility for a project risk in a contract so that the private  sector is accountable for nonperformance or errors. Project sponsors can  transfer a range of key project risks to the private sector, including those  related to design, financing, construction performance and schedule,  vehicle supply, maintenance, operations, and ridership. For example,  design risk refers to whether an error causes delays or additional costs, or  causes the project to fail to satisfy legal or other requirements. Ridership  risk refers to whether the actual number of passengers on the transit  system reaches forecasted levels. However, some risks may not be  transferable.
Much of the federal government’s share of new capital investment in mass  transportation has come through FTA’s New Starts program. Through the  New Starts program, FTA identifies and recommends new fixed-guideway  transit projects—including heavy, light, and commuter rail, ferry, and  certain bus projects—for federal funding. Over the last decade, the New  Starts program has resulted in funding state and local agencies with over  $10 billion to help design and construct transit projects throughout the  country and is FTA’s largest capital grant program for transit projects.  Moreover, since the early 1970s, a significant portion of the federal  government’s share of new capital investment in mass transportation has  been initiated through the New Starts process, resulting in full funding  grant agreements. FTA must prioritize transit projects for funding by  evaluating, rating, and recommending potential projects on the basis of  specific financial commitment and project justification criteria. Using  criteria set by law, FTA evaluates potential transit projects and assigns  ratings to them annually. These evaluation criteria reflect a range of  benefits and effects of the proposed project, such as cost-effectiveness, as  well as the ability of the project sponsor to fund the project and finance  the continued operation of its transit system. FTA uses the evaluation and  rating process to decide which projects to recommend to Congress for  funding. As part of the New Starts process, FTA approves projects into  three phases: preliminary engineering (in which the designs of project  proposals are refined), final design (the end of project development in  which final construction plans and cost estimates, among other activities,  are completed), and construction (in which FTA awards the project a full  funding grant agreement, providing a federal commitment of funds subject  to the availability of appropriations) (see fig. 2).
We have previously identified FTA’s New Starts program as a model for  other federal transportation programs because of its use of a rigorous and  systematic evaluation process to distinguish among proposed New Starts  investments. However, we and other stakeholders and policymakers have  also identified challenges facing the program. Among these challenges is  the need to streamline the New Starts project approval process. Our past  reviews, for example, found that many project stakeholders thought that  FTA’s process for evaluating New Starts projects was too time consuming,  costly, and complex. The New Starts grant process is closely aligned with  the conventional design-bid-build approach, whereby the project sponsor  contracts with separate entities for the design and construction of the  project.
In 2005, Congress authorized FTA to establish the Public-Private  Partnership Pilot Program to demonstrate (1) the advantages and  disadvantages of transit projects that use alternative approaches for new  fixed-guideway capital projects and (2) how FTA’s New Starts program  can be modified or streamlined for these alternative approaches. The  pilot program allows FTA to study projects that incorporate greater  private sector involvement through alternative project delivery and  financing approaches; integrate a sharing of project risk; and streamline  design, construction, and operations and maintenance. FTA can designate  up to three project sponsors for the pilot program. Projects selected under  the pilot program will be eligible for a simplified and accelerated review  process that is intended to substantially reduce the time and cost to the  sponsors of New Starts projects. This can include major modifications of  the requirements and oversight tools. For example, FTA may offer  concurrent project approvals into preliminary engineering and final  design. Further, FTA may modify its risk-assessment process—which aims  to identify issues that could affect a project’s schedule or cost—as well as  other project reviews. The modification of any of FTA’s New Starts  requirements and oversight tools will be on a case-by-case basis if FTA  determines enough risk is transferred to and equity capital is invested by  the private sector. In addition to major modifications, FTA may also  make use of other tools (not unique to the pilot program) to expedite the  review process. These include Letters of No Prejudice that allow a project  sponsor to incur costs with the understanding that these costs may be  reimbursable as eligible expenses (or eligible for credit toward the local  match) should FTA approve the project for funding at a later date. FTA  can also use Letters of Intent to signal an intention to obligate federal  funds at a later date when funds become available. Finally, Early Systems  Work Agreements obligate a portion of a project’s federal funding so that  project sponsors can begin preliminary project activities before a full  funding grant agreement is awarded. FTA has employed a contractor to  determine whether risk is effectively transferred from the public to private  sector for its pilot program projects, and will consider private sector due  diligence as a substitute for its own.
From a public perspective, an important component of analyzing the  potential benefits and limitations of greater private sector involvement is  consideration of the public interest. Although, in transportation, no  definition of public interest exists at the federal level, nor does federal  guidance identify public interest considerations in transportation,  consideration of the public interest in transit may refer to the many  stakeholders in public-private partnerships, each of which may have its  own interests. Stakeholders include public transit authorities, transit  agency employees, mass transit users and members of the public who may  be affected by ancillary effects of a transit public-private partnership or  alternative project delivery approach, including users of bus and highways,  special interest groups, and taxpayers in general. Moreover, defining the  public interest is a function of scale and can differ based on the range of  stakeholders in addition to the geographic and political domain  considered. For the purposes of its pilot program, FTA has stated that the  public interest refers to the due diligence that FTA typically conducts as a  public entity with a financial interest in a transit project.
section_title: Private Sector Roles in the Delivery and Financing of U.S. Transit Projects Have Been Narrower Than in Some Other Countries
paragraphs: In the United States, the private sector has played a more limited role in  the delivery and financing of transit projects than in some other countries.  Since 2000, seven New Starts projects were completed using alternative  approaches (see table 1). These projects have focused on delivery, rather  than financing, and have used either the design-build or the design-build- operate-maintain delivery approach, in which the private sector role is to  design and construct the project or to design, construct, operate, and  maintain the project, respectively. In addition, to date, no completed New  Starts projects have been privately financed and therefore, none of these  projects have used private equity financing.
However, there have been very few examples of completed non-New  Starts-funded new fixed-guideway projects that have been privately  financed. One project, the Las Vegas Monorail, a 4-mile fixed-guideway  system serving the resort corridor along Las Vegas Boulevard in Nevada,  was financed with tax-exempt revenue bonds issued through the state of  Nevada and with contributions from the area resorts and hotels.
As previously mentioned, Congress authorized FTA to establish its Public- Private Partnership Pilot Program to demonstrate the advantages and  disadvantages of these approaches in transit. As established, the pilot  project studies those projects that use alternative approaches that  integrate a sharing of project risk and incorporate private equity capital in  order to illustrate where FTA can grant greater flexibility of some of its  New Starts requirements to projects within the pilot program. However, to  date, only one of the pilot projects is expected to incorporate private  equity capital. FTA designated three project sponsors for its Public-Private  Partnership Pilot Program in 2007:    Bay Area Rapid Transit—The Oakland Airport Connector project is  to be a 3.2-mile system that will connect the Oakland International  Airport to the Bay Area Rapid Transit’s Coliseum Station and the rest  of the transit system. In its original iteration, the Oakland Airport  Connector planned on using a design-build-finance-operate-maintain  project delivery approach that included private sector financing.  However, lower-than-expected ridership predictions due to the  economic climate, among other factors, led Bay Area Rapid Transit to  move forward with a different alternative approach for its project— now design-build-operate-maintain—and undergo a new request for  qualified bidders and request for proposals process. According to Bay  Area Rapid Transit, a contract will be awarded in December 2009.
Metropolitan Transit Authority of Harris County (Houston  Metro)—North and Southeast Corridor projects are to provide  improved access to Houston’s Central Business District. This project  was also originally to use a design-build-finance-operate-maintain  approach that included private sector financing, but no bidders on the  project proposed an equity investment, so it is instead using a design- build-operate-maintain approach. Issues related to price and risk  transference led Houston Metro to switch private partners and the new  partner chose not to provide financing for the project. Groundbreaking  for the construction of the two projects occurred in July 2009.
Denver Regional Transportation District—East Corridor and Gold  Line pilot projects are to connect the city’s main railway station with  its airport and other parts of the city. The project is using a design- build-finance-operate-maintain approach, which includes financing by  the private sector partner. The private sector partner will be selected  through a competitive proposal process to deliver and operate the  project under a long-term agreement. In September 2009, Denver  Regional Transportation District released a request for proposals to  prequalified teams.
One ongoing New Starts project did not apply to be part of the pilot  program, but is using an alternative approach. The Dulles Silver Line is  using the design-build approach with partial funding of the local share  coming from area businesses generated through a tax-increment financing  district to connect Washington, D.C., metropolitan area’s transit system  with one of the area’s three major airports.
In contrast, international project sponsors have delivered transit projects  using a wider range of alternative approaches, including public-private  partnerships, beyond the more commonly used design-build in the United  States (see table 2). According to World Bank officials and a World Bank- sponsored report, transit public-private partnerships have been  implemented in Australia, Brazil, Canada, France, Hong Kong, Malaysia,  the Philippines, South Africa, Thailand, and the United Kingdom.  Furthermore, international project sponsors have incorporated private  equity investment financing for some of their projects. According to World  Bank officials, the United Kingdom and Canada are leading countries for  private equity investment in transit, and the United Kingdom has the most  experience using different public-private partnership models. International  projects also generally require a government subsidy to supplement  farebox revenues for construction as well as operations and maintenance.
Examples of several projects in the United Kingdom and Canada that we  reviewed include the following:    The Docklands Light Railway serves a redevelopment area east and  southeast of London. Transport for London, the public sector project  sponsor, used three separate design-build-finance-maintain concession  agreements to construct system extensions as well as a single  franchise to operate trains over the entire system. All three extensions  were financed in part or full using private equity investment, and the  Lewisham Extension was the United Kingdom’s first transportation  public-private partnership for both project delivery and financing.
The Croydon Tramlink light rail project was a 99-year design- build-finance-operate-maintain agreement to develop the new system.  In this project, payments to the private sector partner during  operations were based entirely on ridership revenue, but the project  sponsor retained the authority to set fares. The private sector partner  faced financial difficulties, and the concession was ultimately bought  by Transport for London.
The Manchester Metrolink Phase II light rail project was a 17- year concession agreement wherein the private partner had  responsibility to design, construct, finance, operate, and maintain this  project. The project was designed to expand the Metrolink System in  order to connect two of the city’s existing stations. The private partner  provided over one-half of the project’s funding for construction. The  public sector terminated the concession to further expand the system.
The London Underground maintenance projects included  agreements entered into between London Underground and two  private sector partners to maintain and upgrade the system’s  infrastructure, including track, tunnels, trains, and stations. In return,  the private sector would receive periodic payments based on its  performance. One of the two private sector partners subsequently  went bankrupt, and the concession agreement was then taken over by  Transport for London.
The Nottingham Express Transit light rail project used a 27-year  contract to design, build, finance, operate, and maintain a new transit  line. Payments to the private sector were based on performance and  ridership revenue, meaning that the private sector assumed some risk  that actual ridership would not reach forecasted levels. Along with this  transfer of risk, the private sector was also given the ability to set  fares. The project is in the ninth year of its contract.
The Canada Line light rail project in the Vancouver area is a 35- year design-build-finance-operate-maintain concession agreement  developed to link Vancouver with its international airport and  neighboring employment and population centers in anticipation of the  2010 Winter Olympics. A separate entity was created to oversee the  project’s development and the private partner provided one-third of  the project’s funding, including private equity capital, in exchange for  periodic payments based on performance and ridership.
section_title: While FTA’s Pilot Program Is Expected to Demonstrate Potential Benefits and Limitations in Using Alternative Approaches, New Starts Process Remains a Barrier for Pilot Projects
subsections: section_title: Pilot Program to Demonstrate Potential Benefits and Limitations to Using Alternative Approaches
paragraphs: FTA’s pilot program is expected to demonstrate potential benefits to using  alternative approaches in transit. Project sponsors we interviewed cited a  range of potential benefits, such as achieving cost and time savings, as  well as potential advantages to the public sector, such as increased  financing flexibility (see table 3). DOT outlined some of these same  benefits and advantages in its 2007 Report to Congress on transit public- private partnerships and we similarly reported on them in 2008 for  highway public-private partnerships. However, as we said then, benefits  are not assured and should be evaluated by weighing them against  potential costs and trade-offs.
Among the benefits from using alternative approaches, project sponsors  told us that they may better meet cost and schedule targets as well as  achieve cost and time savings by transferring risks to the private sector.  With transit projects that use alternative approaches, project sponsors can  transfer a range of key project risks to the private sector, such as those  related to design and its effect on construction that would normally be  borne by the project sponsor, so that the private sector is accountable for  errors or nonperformance. By transferring these project risks, the project  sponsor creates incentives for the private sector to keep the project on  schedule and on budget as, for example, the private sector would be  responsible for any excess costs incurred from design errors. In addition,  when a project sponsor transfers multiple project risks to the private  sector, it can potentially reduce the total cost and duration since a single  contractor can concurrently perform project activities that would typically  be carried out consecutively by multiple contractors under the  conventional design-bid-build approach.
Project sponsors, stakeholders, and transit experts we interviewed told us  that potential cost and time savings can be key incentives for using  alternative approaches. For example, FTA reported that Minnesota Metro  Transit’s Hiawatha Corridor (one of the seven completed New Starts  projects that used an alternative approach) was completed 12 months  ahead of schedule compared to using the conventional design-bid-build  approach by allowing design and construction schedules to overlap. This  saved an estimated $25 million to $38 million since early completion led to  avoided administration costs using a design-build alternative approach.  Denver Regional Transportation District and the private sector completed  the Transportation Expansion project 22 months ahead of schedule and  within budget. In the United Kingdom, the three Docklands Light Railway  extensions were built using design-build-finance-maintain approaches, and  were completed 2 weeks to 2 months ahead of schedule. However, the use  of alternative approaches does not guarantee cost and schedule benefits.  For example, the design-build approach used by the South Florida  Commuter Rail Upgrades saved 4 to 6 years by completing all upgrades as  a single project, but incurred slightly higher costs than estimated for the  conventional design-bid-build approach.
Project sponsors may be able to benefit from certain efficiencies and  service improvements by transferring long-term responsibility of transit  operations and maintenance in addition to design and construction to the  private sector. DOT’s 2007 Report to Congress on transit public-private  partnerships stated that the private sector may be able to add value to  transit projects through improved management and innovation in a  project’s construction, maintenance, and operation. Project sponsors and  stakeholders we interviewed stated that alternative approaches promote  the use of performance measures (such as train capacity and frequency)  rather than specific design details (such as the type of train). This allows  the private sector to potentially generate and apply innovative solutions in  the design of the transit system, adding value to the project. For example,  because Denver Regional Transportation District’s Transportation  Expansion Light Rail project (another of the seven New Starts projects)  used a design-build approach, a lessons-learned report following the  project’s completion stated that the project sponsor was able to  incorporate 198 design modifications identified by the private sector  partner during development to improve overall quality of the transit  system while remaining on budget. A conventional design-bid-build  contract is generally not flexible enough to allow for such design  modifications without additional costs because contracts often specify the  use of technical or other specifications.
When the long-term responsibilities of transit operations and maintenance  are transferred, the private sector potentially has a greater incentive to  make efficient design decisions. This is because the private sector can be  held responsible for the condition of a transit project for longer durations  than under the conventional design-bid-build approach. Houston Metro  officials told us that for an earlier project that used the conventional  design-bid-build approach, the project’s warranty terms did not hold the  construction firm responsible long enough to cover defects such as faulty  track and concrete. As a result, Houston Metro had to file claims to  remedy these defects. Houston Metro officials stated they chose to build  its North and Southeast Corridor pilot project using design-build-operate- maintain contract in part to hold the private sector entity responsible for  the quality of the project’s construction for a longer period of time.
A greater private sector role in transit projects can also potentially offer  certain advantages to the public sector, including increased financial  flexibility and more predictable operations and maintenance funding. For  example, Denver Regional Transportation District officials said that they  will make payments tied to operations to the private sector over a number  of years to, in part, pay for the private sector’s partial financing for the  East Corridor and Gold Line pilot projects. By using the design-build- finance-operate-maintain approach, Denver may have more financing  flexibility by potentially extending the payments 20 years longer than if a  bond were used and the private sector were not involved in financing the  project. With a longer payment period, project stakeholders told us that  the transit agency could conserve funds in the short term to help it  construct other new transit projects on time. Additionally, alternative  approaches may help ensure more predictable funding for maintenance  and operations since these activities can be subject to unpredictable  public sector budget cycles under the conventional design-bid-build  approach. Because alternative approaches for transit projects may include  operations and maintenance standards in the contract, the private sector  might be responsible to fund these activities within the overall contract  price.
FTA’s pilot program is also expected to demonstrate the potential  limitations to using alternative approaches in transit, including some of  those addressed in DOT’s 2007 Report to Congress on transit public- private partnerships (see table 4). One limitation is that some project risks  should not be transferred to the private sector. For example, it may be too  costly for project sponsors to transfer certain risks, such as ridership and  environmental remediation, because the private sector may want to charge  an additional premium to take them on. Ridership risk refers to whether  the actual number of passengers achieves forecasted levels. According to  officials we interviewed, environmental remediation risk refers to whether  the cleanup of hazardous materials and other conditions at a project site  leads to increased project costs or schedule delays, and can encompass  conditions that are identified as well as those that are not identified during  surveys of a project site. Past experience in projects demonstrates the  difficulty of transferring these risks to the private sector.
According to officials we interviewed, ridership risk may be difficult to  transfer to the private sector if transit project sponsors are reluctant to  forfeit full fare-setting authority. For example, Denver Regional  Transportation District chose not to transfer ridership risk for its East  Corridor and Gold Line pilot projects given that it wanted to retain the  right to set fares in order to keep fares uniform systemwide. Another  example is the United Kingdom’s Croydon Tramlink project, which  transferred ridership risk but not the ability to set fares. Officials we  interviewed stated that the private partner progressively faced financial  difficulties due to low ridership revenue, which led to the collapse and  ultimate buyback of the partnership by Transport for London.  Additionally, if a transit project is built as an extension of an existing  system, the private sector partner may not want to operate a single  segment of a publicly owned system. According to officials, private  investors are reluctant to assume ridership risk of any portion of a system  operated by an entity they do not control. These officials said that in many  cases, the private sector partner would need the authority to increase or  decrease transit fares based on ridership trends and the number of transit  users to assume greater ridership risk. However, because raising fares  involves political considerations, including equity for low-income transit  users, officials told us that most project sponsors retain the right to set  fares and are unwilling to forfeit fare-setting control.
Some project sponsors that have tried to transfer ridership risk while  retaining fare-setting authority have run into difficulties. According to  project sponsors and transit experts, the Bay Area Rapid Transit’s Oakland  Airport Connector project initially tried but ultimately was unable to  transfer ridership risk in part because the private sector concessionaire  (under the project’s original iteration) would not have fare-setting  authority. This was also the case with the Canada Line, where the  agreement was structured to incorporate a limited transfer of ridership  risk to the private sector partner. Although the project sponsor wanted to  transfer full ridership risk to the concessionaire, it learned that private  investors would not finance a deal with full ridership risk transfer due to  their inability to control factors that influence ridership such as transit  fares. As such, the project sponsor decided to transfer limited ridership  risk to the private sector by basing 10 percent of its payments to the  private sector partner during operations and maintenance on ridership  figures. According to project sponsors, this transfer of ridership risk was  done to induce the concessionaire to increase ridership by providing  quality customer service.
Officials we interviewed also stated that environmental remediation risks  may be difficult to transfer to the private sector because of the additional  premium the private sector charges to address unknown factors. Denver  Regional Transportation District originally planned to transfer all  environmental remediation risk for its East Corridor and Gold Line pilot  projects’ long-term design-build-finance-operate-maintain concession. This  caused the private sector to estimate a $25 million charge for taking on  this risk, according to Denver Regional Transportation District officials we  interviewed. When the project sponsor decided to retain one aspect of the  environmental risk related to several unknown remediation elements, the  private sector dropped the cost estimate of transferring the remaining  environmental risk from $25 million to $9 million. Moreover, as we have  previously reported regarding highway public-private partnerships, it may  be inefficient and inappropriate for certain risks to be transferred to the  private sector due to the costs and risks associated with environmental  issues. Permitting requirements and other environmental risks may  become too time-consuming and costly for the private sector to address  and may best be retained by the public sector given its stewardship role  within the government. According to officials we interviewed, although the  Canada Line’s concession agreement transferred all key construction risks  (i.e., cost overruns) to the private sector, the public authority retained  risks associated with permitting and other environmental risks such as  unknown contaminated soils. Further, for one early highway public- private partnership in California, the project sponsor attempted to transfer  environmental permitting risk to the private sector. However, the private  sector partner spent more than $30 million dollars over a 10-year period  and never obtained final approval to proceed with construction.
Another potential limitation in transit projects that use alternative  approaches is the project sponsor’s loss of control and reduced flexibility  in transit operations. Because the transit project sponsor enters into a  contractual agreement that gives the private partner a greater decision- making role, the project sponsor may lose some control over its ability to  modify existing assets or implement plans to accommodate changes over  time such as extensions, service changes, and technology upgrades. For  example, in the United Kingdom, the project sponsor for Manchester  Metrolink had to break two existing public-private partnership concession  agreements to accommodate extensions to its system. Consultants to the  Manchester project told us that breaking a concession agreement can be  very expensive and can damage the relationship between the project  sponsor and the private sector partner. Similarly, to accommodate  increased ridership, the project sponsor for Docklands Light Railway  decided to build platform expansions. However, the private sector partner  was not willing to take on this additional work, requiring the project  sponsor to take the extra steps to hire another party to build the platform  extensions and negotiate the handover of the platforms to the private  sector partner for maintenance.
Transit projects that use alternative approaches may also introduce  transaction costs to the project sponsor through legal, financial, and  administrative fees in addition to higher-priced financing in cases where  the transit project is privately financed. According to officials we  interviewed, transit public-private partnerships often require the advisory  services of attorneys, financial experts, and private consultants to  successfully execute the steps necessary to finalize the project’s  agreement. These additional services and transaction fees represent  additional public sector costs that the conventional project delivery  approach may not necessarily require. For example, the project sponsor  for the London Underground spent the equivalent of $112 million or  approximately 1.1 percent of the concession agreement’s total price to  cover legal expenses, financial services, and administrative fees. Officials  we interviewed also stated that Denver Regional Transportation District  anticipates spending $15 million in advisory fees for its East Corridor and  Gold Line pilot projects’ request for proposals submittals. In addition to  transaction costs, public-private partnerships incur added costs when the  private sector provides the financing for the project. The municipal bond  market in the United States generally provides public transit agencies a  cheaper source of funding because they can borrow more cheaply than the  private sector. Officials also stated that the effects of the recent economic  recession and failed credit markets have stymied the private sector’s  ability to raise revenues and provide affordable long-term debt for large  transit projects due to tight lending conditions.
section_title: FTA New Starts Project Approval Process Is a Barrier to a Greater Private Sector Role in Transit
paragraphs: While we have previously identified FTA’s New Starts grant program— which funds new, large-scale transit projects—as a model for other federal  transportation programs because of its use of a rigorous and systematic  evaluation process to distinguish among proposed investments, the New  Starts project approval process is not entirely compatible with transit  projects that use alternative approaches in that the process is sequential  and phased with approvals granted separately and at certain decision  points. Therefore, the New Starts process serves as a potential barrier  because transit projects that use alternative approaches often rely on the  concurrent completion of project phases to meet cost and schedule targets  and to accrue savings and other potential benefits. Congress recognized  New Starts as a potential barrier, as it authorized FTA to establish a  Public-Private Partnership Pilot Program in part to identify ways to  streamline the process. According to DOT’s 2007 Report to Congress as  well as project sponsors, their advisors, and private sector partners, the  New Starts project approval process, while appropriate for the type of  transit projects that have been developed over several decades, poses  particular challenges for project sponsors using alternative approaches for  their transit projects. The challenges they raised include (1) delays, (2)  additional costs, and (3) the loss of other potential benefits, such as  enhanced efficiencies and improved quality.
subsections: section_title: Delays
paragraphs: The sequential and phased New Starts project approval process can create  schedule delays as project sponsors await federal approval. The amount of  time it takes for FTA to determine whether a project can advance can be  significant. A 2007 study on the New Starts program by Deloitte,  commissioned by FTA to review the New Starts process and identify  opportunities for streamlining or simplifying the process, found that the  New Starts process is perceived by project sponsors as intensive, lengthy,  and burdensome. The Deloitte study found that FTA’s prescribed review  times of 30 and 120 days for entry into the preliminary engineering and  final design phases, respectively, are apparently arbitrary and actual  review times are generally longer. In particular, the study found that FTA’s  risk-assessment process delayed project development. Consultants to the  Dulles Silver Line project sponsor told us that through the New Starts  process, FTA has complete control over a project’s schedule, and project  sponsors have to put project work on hold while waiting for FTA’s  approval to advance into the next project phase. They also told us that  construction activities on the Dulles Silver Line could not begin until the  approval of a full funding grant agreement—as design and construction  activities cannot be completed at the same time—and so some of the time- savings benefits of the design-build approach were lost. For the East  Corridor and Gold Line pilot projects, Denver Regional Transportation  District officials also told us that since enough design work will be  completed during the New Starts preliminary engineering phase to request  bids from the private sector, no additional design work is needed during  final design and construction of the project. However, Denver officials  said that, as required by New Starts, they will again prepare the design  documentation for the final design and full funding grant agreement  approval phases, potentially contributing to schedule delays. FTA officials  told us that the resubmission of the documentation is necessary because  the private sector can bid to provide something different than what was  agreed upon under preliminary engineering. Houston Metro’s private  sector partner told us it would like to begin some construction activities  on the North and Southeast Corridors, but will not be able to begin until a  full funding grant agreement is awarded. As a result, the private sector  partner has to delay its work until the funding process is completed. FTA  officials responded that they allowed Houston Metro to carry out some  construction activities in advance of their receiving a full funding grant  agreement. Moreover, Houston Metro officials told us that FTA required  them to submit and resubmit entire project documents to FTA multiple  times, which led to delays. FTA officials told us the length of time for  reviews depends on a number of factors, most importantly the  completeness and accuracy of the project sponsor’s submissions, and that  project sponsors could help to avoid such delays by improving their  submissions. For example, FTA officials stated that Houston Metro’s  projects have changed repeatedly, thus requiring multiple submittals.
section_title: Additional Costs
paragraphs: In addition to the costs of delays, the design of the New Starts project  approval process—which is closely aligned with the conventional design- bid-build approach—may also contribute to additional project costs borne  by the public sector when other alternative approaches are used. Project  sponsors and other stakeholders for Denver Regional Transportation  District’s East Corridor and Gold Line pilot projects told us that the  private sector must maintain its financial commitment to a project for up  to several months to allow for FTA, Office of Management and Budget, and  congressional review of the full funding grant agreement. For example,  Denver Regional Transportation District officials anticipate adhering to  the sequential and phased New Starts approach to its project in order to  accommodate delays from waiting for the reauthorization of the existing  transportation bill, the Safe, Accountable, Flexible, Efficient  Transportation Equity Act: A Legacy for Users, and awarding a full funding  grant agreement for the project. However, Denver Regional Transportation  District officials told us that following this approach will likely increase  the cost of the project. FTA officials told us that these additional costs  stem from a lack of funding available in a surface transportation  authorization period rather than FTA’s New Starts requirements.  Additionally, for the Dulles Silver Line, tax-increment financing funding— funding from incremental tax revenue increases generated by new  construction or rehabilitation projects around the new transit line—was a  major funding source for the project, contributing up to $400 million to the  $2.6 billion project. The Duller Silver Line project consultants told us that  the project risked losing the tax increment financing funding as it took 5  years to receive a full funding grant agreement when the project sponsor  originally estimated that it would take 2 to 3 years. FTA officials stated  that several factors, including the decision to reexamine a tunnel option,  contributed to challenges surrounding the Dulles Silver Line.
section_title: Loss of Other Potential Benefits
paragraphs: FTA’s New Starts project approval process may also limit other potential  benefits, such as enhanced efficiencies and design improvements, when  transit projects use alternative approaches. For example, Denver Regional  Transportation District officials told us that the New Starts project  approval process requires that specific design details be included and that  this requirement can prohibit a project sponsor from instead leaving such  design specifications to the private sector, thus possibly limiting the ability  to find innovative and cost-effective solutions for the project. When a  project sponsor specifies the exact number of vehicles for the project, the  private sector partners must incorporate that design detail into their  scope, whether or not that exact number of vehicles is really needed. Due  to the New Starts requirements, another project sponsor told us that it had  been discouraged from using an alterative project delivery approach again  after having what it believed to be a prior successful experience that  included enhanced efficiencies and design improvements. A Minnesota  Metro Transit official told us it initially wanted to use the design-build  approach for its ongoing Central Corridor project based on the success of  previously using this approach for the Hiawatha Corridor—a completed  New Starts project that received a full funding grant agreement in 2000.  However, Minnesota Metro Transit determined that it would have to  complete 60 percent of the Central Corridor project’s design to meet FTA’s  New Starts requirements for final design. DOT’s 2007 Report to Congress  also cited a similar challenge regarding project design requirements. These  requirements are not consistent with alternative approaches where project  sponsors look to involve the private sector after only one-third, for  example, of the design work is completed. Therefore, Minnesota Metro  Transit decided to use the conventional design-bid-build approach to  construct the project. In commenting on a draft of our report, FTA officials  recognize that while additional steps could be taken to facilitate  alternative approaches to transit projects, they also believe that other  barriers beyond the federal approval process affect the use of these  approaches, including those beyond the immediate reach of the program  such as reduced available private equity capital resulting from the recent  economic recession.
section_title: Greater Use of Existing Tools and an Evaluation Plan Can Help Strengthen FTA’s Pilot Program
paragraphs: To address these challenges of the New Starts project approval process for  transit projects that use alternative approaches, Congress and FTA have  taken steps to streamline New Starts by establishing the Public-Private  Partnership Pilot Program. And to date, FTA has agreed to provide all  three of the pilot program project sponsors with some level of relief,  including expediting its risk assessment and providing Letters of No  Prejudice earlier than traditionally allowed in the New Starts process to  Houston Metro, and granting a waiver from federal performance bonding  requirements to the Bay Area Rapid Transit Oakland Airport Connector  pilot project, which FTA has also done for non-pilot program projects.
FTA has also stated its amenability to waiving its risk assessment—which  aims to identify issues that could affect a project’s schedule or cost—and  financial reviews, concurrently approving the project into the New Starts  final design phase while awarding an Early Systems Work Agreement for  Denver Regional Transportation District’s East Corridor and Gold Line  pilot projects.
However, because FTA officials told us that none of the pilot projects has  demonstrated a sufficient transfer of risk or financial investment by the  private sector to enable FTA to relax its normal New Starts evaluation  requirements for such approvals, FTA has yet to grant three pilot project  sponsors any major streamlining modifications of the New Starts project  approval process, such as the awarding of concurrent approvals into the  New Starts phases. Thus far, FTA has only assessed the Houston Metro  pilot project to determine the extent to which FTA could streamline the  New Starts process. In its November 2008 report, FTA determined that it  would not relax, modify, or waive its risk assessment and financial  capacity reviews prior to advancement into final design because Houston  Metro retains risks in a number of critical risk areas including finance  since there is no equity capital investment by the private sector partner.  Houston Metro officials said that they considered transferring more risk to  the private sector to meet FTA’s threshold to waive certain New Starts  evaluation requirements, but decided against doing so because of their  concern that the private sector assuming certain risks to meet FTA’s  threshold may potentially increase private sector bids and that they would  still be able to achieve some of the benefits of using an alternative  approach without equity capital investment by the private sector.
While it may be too early for FTA to grant major streamlining  modifications with the other two pilot projects, FTA still has the ability as  part of its pilot program to further experiment with the use of existing  tools that could encourage a greater private sector role while continuing to  balance the need to protect the public interest. FTA has the ability to use  conditional approvals in the New Starts process, such as (1) Letters of  Intent that announce FTA’s intention to issue a full funding grant  agreement that would in turn agree to obligate a New Starts project’s full  federal share from future available budget authority, subject to the  availability of appropriations, provided that a project meets all the terms  of a full funding grant agreement and (2) Early Systems Work Agreements  that obligate only a portion of a New Starts project’s federal share for  preliminary project activities, such as land acquisition. Over the past 30  years, FTA has made very limited use of these tools by only granting three  Letters of Intent and four Early Systems Work Agreements to transit  projects. The Deloitte study noted that New Starts project sponsors miss  the opportunity to use alternative methods including design-build and  design-build-finance-operate-maintain because of the lack of early  commitment of federal funding for the projects, suggesting that the greater  use of these tools could be beneficial. However, use of these tools is not  without risk. We have previously noted that limitations to FTA making  greater use of these tools, including Letters of Intent, could be  misinterpreted as an obligation of federal funds when they only signal  FTA’s intention to obligate future funds. Furthermore, Early Systems Work  Agreements require a project to have a record of decision for the  environmental review process that must be completed under the National  Environmental Policy Act and require the Secretary to find that a full  funding grant agreement for the project will be made and that the  agreement will promote more-rapid and less-costly completion of the  project. Finally, under current statute, both of these tools—Letters of  Intent and Early Systems Work Agreement—count against FTA’s available  funding for New Starts projects under the current surface transportation  authorization.
We found that the governments of the United Kingdom and Canada use  conditional approvals to help encourage a greater private sector role in  transit projects. The United Kingdom’s Department for Transport grants a  conditional approval announcing the government’s intent to fund a project  before it receives private sector bids provided that cost, risk transference,  and scope do not change. If those conditions are not met, the project loses  its government funding. This conditional approval occurs after the  department reviews projects, in part to address the risk of cost increases,  and thus provides a signal of project quality to the private sector to help  maintain a competitive bidding process. Similarly, Transport Canada  officials told us that it makes a formal announcement to state its intent to  provide federal funds to a transit project after conducting its initial review  of a project and before formally committing funds that allow project  sponsors to move forward in development and engaging the private sector.  If the agreed-upon cost, schedule, and risk transference are not met, the  government withdraws its funding. United Kingdom Department for  Transport officials told us that they have experience withdrawing funding  when such conditions have not been met.
We also found that other U.S. Department of Transportation modal  administrations use similar conditional approvals to help encourage  greater private sector involvement in projects. The Federal Aviation  Administration uses Letters of Intent in its Airport Improvement Program  to establish multiyear funding schedules for projects that officials said  allow project sponsors to proceed with greater certainty regarding future  federal funding compared to the broader program and also help prevent  project stops and starts. The Federal Aviation Administration has granted  90 of these multiyear awards since 1988. The Federal Highway  Administration grants early conditional approvals to highway project  sponsors seeking Transportation Infrastructure Finance and Innovation  Act funds to streamline the process and allow private sector bidders to  incorporate these funds into their financial plans without having to  individually apply as otherwise required. The Federal Highway  Administration has also carried out three pilot programs that have allowed  projects to move more efficiently through its grant process by modifying  some of its requirements. These pilot projects waived certain aspects of  the federal-aid highway procurement provisions, such as moving forward  with final decision prior to a National Environmental Policy Act decision,  and allowed federally funded highway projects to use alternative  approaches including design-build. One of these pilot programs is cited by  the Federal Highway Administration as having helped pave the way for  design-build to become the standard project delivery approach in highway  projects. Another pilot program allowed the Federal Highway  Administration to waive regulations and policies so project sponsors in  two states could contract with the private sector at a much earlier point in  the project development cycle than was previously allowed.
In addition to not yet granting project sponsors any major streamlining  modifications to the New Starts process, FTA does not have an evaluation  plan to accurately and reliably assess the pilot program’s results, including  the effect of its efforts to streamline the New Starts projects for pilot  project sponsors. We have previously reported that to evaluate the  effectiveness of a pilot program, a sound evaluation plan is needed and  should incorporate key features including: well-defined, clear, and  measurable objectives; measures that are directly linked to the program  objectives; criteria for determining pilot program performance; a way to  isolate the effects of the pilot program; a data analysis plan for the  evaluation design; and a detailed plan to ensure that data collection, entry,  and storage are reliable and error-free. Without such an evaluation plan,  FTA is limited in its decision making regarding its pilot program, and  Congress will be limited in its decision making about the pilot program’s  potential broader application. FTA officials told us that they have not yet  developed an evaluation plan for its pilot program given that the projects  are all ongoing, far from completion, and still working through the New  Starts project approval process.
section_title: Project Sponsors Have Sought to Protect the Public Interest in Various Ways and DOT Can Provide Guidance and Technical Assistance
subsections: section_title: Project Sponsors Protect the Public Interest in Various Ways, Including through Competitive Procurement Practices as Well as Performance Specifications and Standards
paragraphs: The alternative approaches we reviewed have protected the public interest  in various ways to ensure the public receives the best price for a project  and to create incentives for the private sector partner so that the project  progresses and operates based on agreed-upon objectives.
subsections: section_title: Competitive Procurement Practices
paragraphs: Project sponsors we interviewed have attempted in part to protect the  public interest in transit projects that use alternative approaches by  ensuring the use of competitive procurement practices. These practices  are not unique to alternative approaches and are sometimes used in  conventional procurements. Competitive procurement practices are  generally required to be used for federal funding. For example, federal law  and regulations generally require federal contracts to be competed unless  they fall under specific exceptions to full and open competition.  Nevertheless, project sponsors told us that maximizing the use of these  competitive procurement practices—such as encouraging multiple bidders  to value and price projects—helps to ensure that the public sector receives  the best bid when using these partnerships and approaches. European  Union countries are required to have multiple bidders for procurements.  Procurements with only one bidder are less competitive and can result in  less attractive bids. For example, although Bay Area Rapid Transit  prequalified three contractors for the first version of its Oakland Airport  Connector, two contractors withdrew during the negotiation period due to  concerns about the project affordability. Bay Area Rapid Transit  negotiated with the sole remaining bidder on costs for nearly a year but  then let the Request for Proposals expire with no proposals submitted.  To encourage the participation of multiple bidders, Minnesota Metro  Transit Hiawatha Corridor and Denver’s Regional Transportation District’s  Transportation Expansion light rail offered proposal stipends to private  sector entities that submitted formal bids to help defray the costs of  developing proposals. However, while serving as an incentive for potential  private sector partners, stipends add costs that must be weighed against  the benefits they provide.
Project sponsors that we interviewed have also encouraged early and  sustained interaction with the private sector to test the project’s  marketability and whether and in what form private sector participation is  advantageous. Such feedback can be obtained through bidder information  sessions and from consultants. Project sponsors then conduct a request  for qualified bidders to gain more detailed input from the private sector on  a project prior to the issuance of a request for proposals (which solicits  the formal bids). The request for qualified bidders can establish a higher  threshold of responsibility for private partners compared to traditional  procurements in which a private partner is selected based primarily on bid  price. Thus, sustained and iterative interaction between the project  sponsor and the private sector can refine the project’s scope and terms  and determine how best to include the private sector. For example, all  three of FTA’s pilot projects as well as Minnesota Metro Transit’s  Hiawatha Corridor project used a request for qualifications to select  bidders and solicit the private sector’s review of project details. In  addition, Minnesota Metro Transit told us that input from the private  sector produced several good ideas that were incorporated into the  project, such as a shared risk fund to provide an incentive for the private  sector to reduce construction delays. Furthermore, the Canada Line  project sponsor used a list of essential elements agreed upon by the public  agencies funding the project as a basis for negotiating with potential  bidders.
section_title: Performance Specifications and Standards
paragraphs: Project sponsors that we interviewed seek to protect the public interest in  alternative approaches through an emphasis on performance.  Performance specifications focus on desired project performance (such as  frequency of train arrivals at a station) and not design details (such as the  type of train). Project sponsors and consultants told us that detailed  specifications that have been in conventional project delivery approaches  can restrict what bidders can offer. When specifications are focused on  performance, bidders can offer a range of design and technology options  as well as follow best practices that meet overall project objectives.  According to Denver’s Regional Transportation District, the East Corridor  and Gold Line pilot projects initially had a 700-page design specification  document for their commuter rail vehicles. After industry review and  feedback that the specifications would lead to customized vehicles that  would be expensive and difficult to operate and maintain, the project  sponsor responded by creating a 15-page performance specifications  document for the vehicles. An advisor to the project sponsor noted that  the use of design specifications is more challenging with transit projects  than in highways and other sectors given the technology issues and  environmental concerns. The advisor also said that projects with a range  of technology options must undergo the environmental review process at  the highest possible level of design given the effect of different  technologies on the environment. In contrast, one project sponsor noted  that performance specifications should not be used when conditions of the  facility or surrounding environment, for example, are unknown as  unforeseen circumstances could occur that would require more specific  design specifications.
Project sponsors we interviewed have also sought to use performance  standards to protect the public interest. These standards are what the  private sector partner must meet to be compensated during the project’s  construction, operations, and maintenance phases, helping to ensure  adequate performance. If the private sector partner does not meet the  standards, then it is penalized with no, reduced, or delayed payments, and  penalties can escalate if poor performance continues. Standards for  construction include delivering a completed project or project element  within a set schedule. For example, the Canada Line private sector partner  had 400 milestones that it needed to complete and have certified in order  to continue to receive timely payments during the project’s construction  period. Performance standards for operations and maintenance, also  called key performance indicators, cover all aspects of service including  the availability, frequency, and reliability of service and conditions of  facilities. For example, the London Underground chose to emphasize key  performance indicators in four areas—availability, capability, ambience,  and service points—by creating performance targets and to tie monthly  payments to these based on the private sector partner’s actual  performance. Some projects have also incorporated standards that link to  increased ridership to provide incentives for the private sector partner to  provide good customer service. For example, Nottingham Express Transit  has 20 percent of its payments to the private sector based on ridership.  Additionally, the draft concession agreement for Denver’s Regional  Transportation District East Corridor and Gold Line pilot projects  incorporate levels of payment deductions that accelerate when low  performance, such as delayed trains and littered or unclean railcars,  persists. If low performance continues over a period, the project sponsor  can terminate the concession agreement and rebid the project to another  private partner.
section_title: Financial Mechanisms
paragraphs: Project sponsors we interviewed also protect the public interest in transit  public-private partnership and other alternative approaches through the  incorporation of private equity capital. When a private sector partner  finances a project using equity capital, the private sector uses payments  received from the project sponsor to repay its costs plus provide a return  on investment. Since the private sector partner borrows to finance its  costs—that is, it has equity at risk if it does not meet standards—it will be  unable to meet its financial obligations from these milestone payments if  those standards are not met. This situation can create incentives for the  private sector partner to deliver according to the terms of the agreement.  At the same time, financial advisors to project sponsors told us that bank  lenders protect their investments by ensuring that the private sector  properly develops a concession agreement and then delivers on it. The  public interest is thus further protected by this integration of  responsibilities because the bank lender and concessionaire provide  additional project oversight through the monitoring of cost overruns and  schedule delays, among other issues. According to the Canada Line private  sector partner, it provided 17 percent equity in the project. For the  Croydon Tramlink, the private sector partner contributed 30 percent of  project costs. In the case of the Canada Line, the private sector partner did  not miss any of its 400 payment milestones.
section_title: Flexibility
paragraphs: To better protect the public interest, project sponsors have also  incorporated clauses into project agreements that allow for flexibility  under certain circumstances. Project sponsors that we interviewed noted  the importance of having the ability to periodically revisit agreement terms  in long-term concessions to protect the public interest given that  unforeseen circumstances may occur that make the concessionaire unable  to meet performance standards. For example, Houston Metro’s North and  Southeast Corridor projects’ concession agreement incorporated this  flexibility by including an operations and maintenance agreement for the  first 5 years after service begins with the option for renewal. According to  a consultant that works on the project, this approach was chosen in part  because the project sponsor wanted an option to revisit the contract.
Internationally, both of the London Underground’s maintenance 30-year  concession agreements are reviewed for scope of work and costs by a  public-private partnerships arbiter every 7.5 years. Moreover, the  concessionaire has the ability to request an extraordinary review by the  arbiter if costs rise above a specified threshold due to circumstances  outside the private sector partner’s control.
Periodically revisiting terms, or shorter concession periods, can also allow  for changes such as system extension. One of the Docklands Light Railway  extensions has breakpoints at the years 2013 and 2020 in its concession  agreement that give the project sponsor an option to break and buy back  the agreement for a set price. In contrast, in the previously mentioned  example of Manchester Metrolink, concessions for phase 2 were  terminated by the project sponsor to allow for system expansion in a third  phase which was not procured as a public-private partnership. According  to consultants we interviewed, the terminations could have been avoided  if the initial concessions had been shorter. Shorter concession periods are  thus being used as a means to revisit terms and rebid if desired.
In addition to clauses that allow project sponsors to revisit concession  agreement terms, other clauses that allow for flexibility can also protect  the public interest. For example, Denver Regional Transportation District’s  draft concession agreement includes clauses specifying both triggers that  could lead to default and terms of compensation in case of default as well  as termination provisions that detail the condition of the transit asset at  the end of the concession when it is transferred back to the project  sponsor. These provisions help to minimize disputes. Other advisors to  project sponsors told us that a clause specifying the sharing of  “refinancing gains” between the project sponsor and concessionaire could  also help to protect the public interest. Refinancing gains refer to savings  that occur when the private sector revises its repayment schedule for its  equity investment by taking advantage of better financial terms. As we  have noted in our report on highway public-private partnerships, the  private sector can potentially benefit through gains achieved in refinancing  their investments and these gains can be substantial. The governments of  the United Kingdom as well as Victoria and New South Wales, Australia,  require that any refinancing gains achieved by private concessionaires  generally be shared with the government.
section_title: Project Sponsors Also Protect the Public Interest by Using Financial Assessments
paragraphs: Some foreign governments have recognized the importance of protecting  the public interest in public-private partnerships through the use of  quantitative and qualitative public interest assessments. We have also  previously reported that more rigorous, up-front analysis could better  secure potential benefits and protect the public interest.  The use of  quantitative and qualitative public interest tests and tools before entering  into transit public-private partnerships can help lay out the expected  benefits, costs, and risks of the project. Conversely, not using such tools  can potentially allow aspects of the public interest to be overlooked. For  example, a Value for Money analysis is a tool used to evaluate if entering  into a project as a public-private partnership is the best project delivery  option available. Internationally, the United Kingdom, and British  Columbia in Canada, among others, require a Value for Money analysis for  all transportation projects over a certain cost threshold. For example, all  transportation projects in the United Kingdom that exceed about $24  million must undergo a Value for Money analysis to receive project  funding, while projects in British Columbia must conduct a Value for  Money analysis if project costs total more than about $46 million.  Domestically, Florida requires a Value for Money analysis for public- private partnerships, one of which was recently conducted on the I-595  Corridor Roadway Improvements Project in Broward County. A Value for  Money assessment was also completed for the Bay Area Rapid Transit’s  Oakland Airport Connector at the request of FTA.
In general, Value for Money evaluations examine total project costs and  benefits and are used to determine if a public-private partnership  approach is in the public interest for a given project. Value for Money tests  are often done by comparing the costs of doing a proposed project as a  public-private partnership against an estimate of the costs of procuring  that project using a public delivery model. Value for Money tests examine  not only the economic value of a project but also other factors that are  hard to quantify, such as design quality and functionality, quality in  construction, and the value of unquantifiable risks transferred to the  private sector. In the United Kingdom, Value for Money analysis includes  qualitative factors such as the viability, desirability, and achievability of  the project in addition to the quantitative factors.
Provinces such as Canada’s British Columbia and Australia’s Victoria also  include qualitative factors in their financial assessments, including Value  for Money analysis. Government officials stated that including both  quantitative and qualitative factors in financial assessments such as Value  for Money analysis provides a more comprehensive project assessment. In  addition to determining whether a public-private partnership is  advantageous over a publicly delivered project, project sponsors and  government officials noted that a Value for Money analysis is also a useful  management tool for considering up front all project costs and risks that  can occur during a project’s lifetime, which is not always done in a  conventional procurement.
Project sponsors can also use financial assessments such as Value for  Money analysis for other reasons. For example, Value for Money analysis  can assist in determining which project delivery approach provides more  value. Project sponsors can assess if one public-private partnership option  is more advantageous than another if it is decided that private  participation in a project is beneficial. For example, Bay Area Rapid  Transit used a Value for Money analysis in its original iteration of the  Oakland Airport Connector to assess which alternative project delivery  approach (design-build-operate-maintain or design-build-finance-operate- maintain) would be more advantageous. Project sponsors can also use  Value for Money to give a range of possible project costs when coupled  with a sensitivity analysis. For example, a sensitivity analysis developed  for the Canada Line suggested that project costs could have varied from  $47 million more to $270 million less than expected, depending on the  level of risk. A further example of how project sponsors can use Value for  Money is to enhance communication about a project. Project sponsors  noted that since Value for Money analyses are often publicly available,  such as in the United Kingdom, they can lead to more-informed  discussions and provide transparency in the selection of the project  delivery approach. Thus, they can be good planning and communication  tools for decision makers.
Government officials and consultants that perform financial assessments,  such as Value for Money analysis, cautioned that the assessments are not  without limitations. For example, officials and consultants told us that  these analyses are inherently subjective and rely on assumptions that can  introduce bias. Assessments can include the assumption that the public  sector will likely have higher construction costs due to a history of cost  overruns. In the United Kingdom, an “optimism bias” of 15 percent is  added to the public sector comparator in part to account for this.  Consultants noted that there is subjectivity in valuing risks as detailed data  on the probability of particular project risks occurring are unavailable.  Thus consultants use data from past projects and their own professional  views to conduct the analysis. In sum, government officials and  consultants noted that Value for Money analysis should be considered as a  tool rather than the sole factor in assessing whether to do a public-private  partnership.
section_title: Although Limited in the United States, Some Other Countries Further Protect the Public Interest by Providing Guidance and Technical Assistance
paragraphs: Some countries have further protected the public interest in transit  projects that use alternative approaches by establishing quasi- governmental entities to assist project sponsors in implementing these  arrangements. Entities such as Partnerships UK, Partnerships Victoria, and  Partnerships BC are often fee-for-service and associated with Treasury  Departments on the provincial and national levels. These quasi- governmental entities all develop guidance such as standardized contracts  and provide technical assistance to support transit projects that use  alternative approaches. According to an advisor for project sponsors,  contracts for these partnerships and approaches generally follow a  standard model such as a framework for assigned risk between the project  sponsor and private sector, with the particularities of local legislation and  project specifics written into them. The United Kingdom’s standard  contract outlines requirements as well as factors to consider from a  project’s service commencement through termination, which is  periodically updated to reflect lessons learned. For example, after the  government of the United Kingdom required the private sector to share  any refinancing gains with the project sponsor, the standard contract was  subsequently updated. Furthermore, the quasi-governmental entities  provide technical assistance to support transit projects that use alternative  approaches. For example, Partnerships BC provides project sponsors  assistance on conducting a Value for Money assessment to determine  whether private sector participation in a project is beneficial. In addition  to this assistance, these entities provide other varied services to facilitate  public-private partnerships across different sectors. For example,  Partnerships UK reviews project proposals for the government;  Partnerships Victoria offers training for the province; and Partnerships BC  advises project sponsors to help develop and close public-private  partnership contracts in British Columbia.
Quasi-governmental entities can further protect the public interest through  the benefits they provide. According to government officials in the United  Kingdom and Canada, these entities create a consistent approach to  considering public-private partnerships, such as understanding a project’s  main risks, which can reduce the time and costs incurred when  negotiating a contract. Further, by using standardized contracts developed  by these entities, project sponsors can reduce transaction costs—such as  legal, financial, and administrative fees—of implementing transit projects  that use alternative approaches. Moreover, project sponsors and  consultants told us that entities like Partnerships UK and Partnerships BC  can foster good public-private partnerships and help further protect the  public interest by ensuring consistency in contracts and serving as a  repository of institutional knowledge. Without the services provided by  these quasi-governmental entities, project sponsors that plan to or use  alternative approaches for a transit project will develop them on a case-by- case basis because they lack institutional knowledge and a centralized  resource for assistance.
While DOT has established an office to support project sponsors of  highway-related public-private partnerships, DOT does not provide similar  support for transit projects. In a previous GAO report, we noted that  formal consideration and analysis of public interest issues had been  conducted in U.S. highway public-private partnerships, and that DOT has  done much to promote the benefits, but comparatively little to assist states  and localities weigh potential costs and trade-offs of these partnerships.  Since that report, the Federal Highway Administration’s Office of  Innovative Program Delivery has been established to provide support for  highway-related public-private partnerships by providing an easy, single- point of access for project sponsors and other stakeholders. The office is  intended to offer outreach, professional capacity building, technical  assistance, and decision-making tools for highway-related public-private  partnerships. In addition, FTA officials told us that they have plans to  develop an online toolset for employees to help them provide technical  assistance to project sponsors on these alternative approaches. This  assistance is to include checklists to help determine whether a project  should use an alternative approach, risk matrices that provide an overview  and explanation of risks transferred using such an approach, and a  financial feasibility model that can be used to quantitatively compare the  use of an alternative approach with the conventional approach to transit  projects. Furthermore, in June 2009, the House of Representatives’  Committee on Transportation and Infrastructure’s surface transportation  reauthorization blueprint proposed that an Office of Expedited Project  Delivery be created within FTA to provide assistance to transit project  sponsors much as we have outlined earlier in this report. However, such  support is not currently available for project sponsors of transit projects  that use alternative approaches. Project sponsors and their advisors noted  that as there is little public sector institutional knowledge about public- private partnerships in the United States, projects may be carried out  without the benefit of previous experiences. It is even more challenging to  conduct transit projects that use alternative approaches in the United  States given the variation in relevant state laws and local ordinances that  project sponsors and other stakeholders must navigate. Furthermore,  FTA’s New Starts evaluation requirements for transit projects seeking  federal funding do not include an evaluation of whether the public is  receiving the best value for its money as compared to other delivery  approaches. Thus project sponsors, advisors, and government officials  noted that such an entity in the United States could be valuable in further  protecting the public interest in public-private partnerships.
section_title: Conclusions
paragraphs: FTA distributes billions of dollars of federal funding to transit agencies for  the construction of new, large-scale projects; as such, it is critical that the  public interest is protected and federal funding is spent responsibly.  Project sponsors are looking to transit projects that use alternative  approaches to deliver and finance new transit projects, along with federal  funds. However, because of its sequential and phased structure, FTA’s  New Starts program is incompatible with transit projects that use these  approaches. Congress recognized this concern when it authorized FTA to  establish the Public-Private Partnership Pilot Program to illustrate how  New Starts evaluation requirements can be streamlined to better  accommodate the use of alternative approaches in transit projects.  However, the pilot program has not yet illustrated how this can be done.  This is because, on the one hand, FTA has determined that no pilot project  has demonstrated enough of a transfer of risk—in particular a financial  investment by the private sector—for FTA to consider granting major  modifications to streamline its New Starts evaluation requirements. On the  other hand, the potential challenges posed by the New Starts  requirements, including delays and additional costs, may discourage the  private sector from assuming enhanced financial responsibility in these  alternative approaches.
Despite this apparent impasse, FTA sill has the unique opportunity to take  advantage of the fundamental characteristic of a pilot program— flexibility—to gain valuable insight on how to streamline the New Starts  process to facilitate a greater private sector role in transit projects through  the use of alternative approaches. FTA can introduce additional flexibility  into its three pilot projects through, among other things, the use of  existing, long-standing tools, such as Letters of Intent and Early Systems  Work Agreements. Other agencies within DOT have used such tools  successfully in the past to provide flexibility to their funding and approval  processes and to advance and promulgate alternative project finance and  delivery approaches. Moreover, some other countries have used  conditional approvals to incorporate more flexibility into their funding  processes and help encourage a greater private sector role in transit  projects. FTA may want to turn to the experiences of these other modal  administrations and governments and use existing, long-standing tools to  incorporate more flexibility in the New Starts process to help facilitate  transit projects that use alternative approaches.
Without an evaluation plan to assess the results of its pilot program, FTA  may also lose some valuable information Congress intended the agency to  obtain through the pilot program’s establishment, including how the New  Starts project approval process can be further streamlined. As more transit  projects use alternative approaches, FTA may not be able to readily  accommodate these approaches, ultimately disadvantaging transit project  sponsors that seek to deliver their projects more quickly and efficiently  and at a lesser cost to the public.
In the past, DOT has done much to promote the potential benefits of  transportation public-private partnerships. While these benefits are not  assured and should be evaluated by weighing them against potential costs  and trade-offs, DOT has done comparatively little to equip project  sponsors to weigh the potential costs and trade-offs. Recently, DOT has  taken a more integrated approach to a greater private sector role in  transportation, as evidenced by its newly established Office of Innovative  Program Delivery for public-private partnerships. Congress has taken a  greater interest in facilitating alternative approaches as well. Quasi- governmental entities established by foreign governments have better  equipped project sponsors to implement alternative approaches, including  public-private partnerships, by creating a uniform method to considering  the implications of alternative approaches, reducing transaction costs,  ensuring consistency in contracts, and serving as a repository of  institutional knowledge. FTA could consider these international models  and expand its current efforts in transportation public-private partnerships  to support a greater private sector role in transit directly to project  sponsors. Expanded FTA efforts could facilitate the implementation of  transit projects that use alternative approaches and protect the public  interest through the use of tools such as standardized contracts, technical  assistance, and financial assessments.
section_title: Recommendations for Executive Action
paragraphs: To facilitate a better understanding of the potential benefits of alternative  approaches in FTA’s Public-Private Partnership Pilot Program, if  reauthorized, we recommend that the Secretary of Transportation direct  the FTA Administrator to take the following actions:  Incorporate greater flexibility, as warranted, in the Public-Private  Partnership Pilot Program than has occurred to date by making greater  use of existing tools such as Letters of Intent and Early Systems Work  Agreements in order to streamline the New Starts process.
Develop a sound evaluation plan for the Public-Private Partnership  Pilot Program to accurately and reliably assess the pilot programs’  results that includes key factors such as: well-defined, clear, and  measurable objectives; measures that are directly linked to the  program objectives; criteria for determining pilot program  performance; a way to isolate the effects of the pilot program; a data  analysis plan for the evaluation design; and a detailed plan to ensure  that data collection, entry, and storage are reliable and error-free.
Beyond its pilot program, build upon efforts underway in DOT to  better equip transit project sponsors in implementing transit projects  that use alternative approaches, including developing guidance,  providing technical assistance, and sponsoring greater use of financial  assessments to consider the potential costs and trade-offs.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOT and FTA for review and  comment. DOT has agreed to consider our recommendations and provided  comments through e-mail from FTA officials. In their comments, FTA  officials stated that the agency has ongoing and planned efforts as part of  its Public-Private Partnership Pilot Program that they believe address the  intent of our recommendations. For example, FTA officials noted that the  agency has, as we reported, made use of tools such as Letters of Intent and  Early Systems Work Agreements in the past in order to streamline the New  Starts process, and that it will evaluate the potential for greater use of  these existing tools in the future to incorporate greater flexibility into the  pilot program. Additionally, FTA officials acknowledged the need for an  evaluation plan to assess the pilot program’s results and stated they will be  working to develop one. Further, FTA officials stated that FTA is working  to develop technical assistance for its staff on how to structure and  evaluate alternative approaches to transit projects; we revised our draft  report to reflect FTA’s efforts. Because these efforts are either planned or  in their early stages, we are retaining our recommendations. Finally, FTA  officials provided technical comments, which we incorporated as  appropriate.
We are sending copies of this report to appropriate congressional  committees and DOT. The report also is available at no charge on the GAO  Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at flemings@gao.gov or (202) 512-2834. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix II.
section_title: Appendix I: Scope and Methodology
paragraphs: Our work was focused on transit projects that involve greater private  sector participation than is typical in conventional projects. In particular,  we focused on (1) the role of the private sector in the delivering and  financing of U.S. transit projects compared with other countries; (2) the  benefits and limitations of and the barriers, if any, to greater private sector  involvement in transit projects and how these barriers are addressed in the  Department of Transportation’s (DOT) Public-Private Partnership Pilot  Program; and (3) how project sponsors and DOT can protect the public  interest in transit projects that use alternative approaches. Our scope was  limited to identifying the primary issues associated with using public- private partnerships for transit infrastructure and not in conducting a  detailed financial analysis of the specific arrangements.
In order to clearly delineate alternative delivery and financing approaches  used in transit, first we identified three categories—traditional, innovative,  and alternative—that describe the evolution of such practices. We defined  traditional financing to include federal grants (such as New Starts program  grants), state and local public grants, taxes, and municipal bonds, and  defined conventional project delivery to refer to the design-bid-build  approach. We defined innovative financing to include loan or credit  assistance such as the Transportation Infrastructure Financing and  Innovation Act, Private Activity Bonds, Tax Increment Financing, State  Infrastructure Banks, Grant Anticipation Notes, and Revenue Bonds, and  innovative project delivery to refer to the design-build approach. Finally,  we defined alternative financing to refer to public-private partnerships that  involve private equity capital such as concession agreements and defined  alternative approaches as ones that transfer greater risk to the private  sector including: design-build, design-build-finance, design-build-operate- maintain, build-operate-maintain, design-build-finance-operate, design- build-finance-operate-maintain, build-operate-own, and build-own-operate,  among others.
We took several steps and considered various criteria in selecting which  domestic transit projects to study as part of our review of alternative  financing and project delivery practices. First, we reviewed transit project  information from DOT, GAO, the Congressional Research Service, and  other reports as well as conducted interviews with DOT officials, project  sponsors, industry representatives, and academic experts to identify the  potential universe of projects that fit at least one (alternative project  delivery or alternative financing) or both of our established definitions. We  also selected projects that were either completed or had already carried  out substantial planning. The potential universe of projects contained 10  completed projects including: Denver Regional Transportation District  Transportation Expansion Light Rail (design-build), South Florida  Commuter Rail Upgrades (design-build), Minnesota Metro Transit  Hiawatha Corridor Light Rail Transit (design-build), Bay Area Rapid  Transit Extension to San Francisco International Airport (design-build),  Washington Metropolitan Area Transit Authority Largo Metrorail  Extension (design-build), Hudson-Bergen Light Rail Transit Minimum  Operating Segment 1 (design-build-operate-maintain), Hudson-Bergen  Light Rail Transit Minimum Operating Segment 2 (design-build-operate- maintain), John F. Kennedy Airtrain (design-build-operate-maintain),  Portland MAX Airport Extension (design-build), and Las Vegas Monorail  (design-build-finance-operate-maintain). We also included 3 ongoing  transit projects as part of the universe: Bay Area Rapid Transit Oakland  Airport Connector (design-build-operate-maintain), Denver Regional  Transportation District East Corridor and Gold Line pilot projects (design- build-finance-operate-maintain), and Houston Metro North and Southeast  Corridor pilot projects (design-build-operate-maintain). Second, we  determined that we would focus solely on projects that have or are  expected to go through the Federal Transit Administration’s (FTA) New  Starts process given that this is the largest capital grant program for transit  projects and that any such projects would be reviewed to protect the  public interest (i.e., projects not entirely funded by the private sector).  This eliminated the John F. Kennedy Airtrain, Portland MAX Airport  Extension, and Las Vegas Monorail projects. Third, we applied three of  four criteria from FTA’s Report to Congress to the remaining projects,  including (1) project costs were reduced, (2) project duration was  shortened, and (3) project quality was maintained or enhanced. This  eliminated the South Florida Commuter Rail Upgrades, Hudson-Bergen  Light Rail Transit Minimum Operating Segment 1 and Minimum Operating  Segment 2, and the Bay Area Rapid Transit Extension to San Francisco  International Airport.
We decided to select all three of the ongoing pilot projects—Bay Area  Rapid Transit Oakland Airport Connector, Denver Regional Transportation  District East Corridor and Gold Line, and Houston Metro North and  Southeast Corridors—given that FTA views these projects as currently  having the most private sector potential and thus designated them as their  three Public-Private Partnership Pilot Program projects. We also decided,  given our limited resources, to select two of the remaining three  completed projects—Minnesota Metro Transit Hiawatha Corridor and  Denver Regional Transportation District Transportation Expansion—as  DOT’s Report to Congress identified these two projects as having  successful collaborations with their respective departments of  transportation, including their highway counterparts, which have greater  experience than transit in using alternative project delivery and alternative  financing. This eliminated the Washington Metropolitan Area Transit  Authority Largo Metrorail Extension. These projects were selected  because they are recent examples of ongoing and completed transit  projects in the United States that incorporated greater private sector  involvement through the use of alternative project delivery or financing  approaches or both.
To select which international countries we would include as part of our  review of alternative financing and project delivery practices, we  conducted a literature review of international transit public-private  partnerships as well as conducted interviews with DOT officials, project  sponsors, industry representatives, and academic experts to identify the  potential universe of countries with significant experience in transit  public-private partnerships, including projects that fit at least one  (alternative project delivery or alternative financing) or both of our  established definitions. Second, we determined that we would collect the  most valuable and relevant information from countries that share a similar  political and cultural structure to the United States. Third, given our  limited resources, we decided to select only two of the three remaining  countries. Thus, we ultimately identified Canada and the United Kingdom  for our international site visits.  Issues discussed in the report related to  the interpretation of foreign law, including the character of public-private  partnership agreements, and their limitations, were evaluated as questions  of fact based upon interviews and other supporting documentation.
To determine how transit projects that use alternative approaches have  been used in the United States, we collected and reviewed descriptions of  the projects, copies of the concession or development agreements,  planning documents, and documentation related to the financial structure  of the projects in addition to academic, corporate, and government  reports. We conducted, summarized, and analyzed in-depth interviews  with project sponsors and private sector participants about their  experiences with alternative financing and procurement in transit projects.
We also reviewed pertinent federal legislation and regulations, including:  Federal Register Notices and guidance for FTA’s Public-Private  Partnership Pilot Program and the New Starts Program; DOT’s Report to  Congress on the Costs, Benefits, and Efficiencies of Public-Private  Partnerships for Fixed Guideway Capital Projects; and other DOT reports.
To identify the potential benefits and potential limitations of transit  projects that use alternative approaches, and what barriers project  sponsors face in the United States, we conducted, summarized, and  analyzed in-depth interviews with domestic project sponsors and private  sector participants including private investors, financial and legal advisors,  project managers, and contractors. In addition to these domestic experts,  we conducted extensive interviews with various international  stakeholders, experts, and private sector officials from Canada and the  United Kingdom that were knowledgeable in greater private sector  participation in the financing and procurement of transit projects. We also  conducted a literature review; summarized and analyzed key benefits,  limitations, and barriers to greater private sector participation; and  interviewed FTA and other federal and local officials associated with the  projects we selected as well as private sector officials involved with  United States transit public-private partnership arrangements.
To determine how project sponsors and DOT can protect the public  interest in transit projects that use alternative approaches, we conducted  site visits of selected transit public-private partnerships and visited the  United Kingdom and Canada, which both had more experience conducting  transit public-private partnerships. We conducted, summarized, and  analyzed in-depth interviews with project sponsors, private sector  participants, international stakeholders, and experts regarding the  competitive procurement process, robust concession agreements, and  Value for Money analyses, among other topics. We also examined  international mechanisms that were implemented for projects including  Croydon Tramlink, Docklands Light Railway, London Underground,  Manchester Metrolink, and Nottingham Express Transit in the United  Kingdom and the Canada Line in Vancouver, Canada, to provide insight on  how project sponsors and DOT can protect the public interest in transit  projects that use alternative approaches. We also held in-depth interviews  with FTA on its steps to protect the public interest in federally funded  transit projects with greater private sector participation including  programs like FTA’s Public-Private Partnership Pilot Program and the New  Starts Program.
We conducted this performance audit from October 2008 through October  2009 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Steve Cohen, Assistant  Director; Jay Cherlow; Patrick Dudley; Carol Henn; Bert Japikse; Joanie  Lofgren; Maureen Luna-Long; Amanda K. Miller; Tina Paek; Amy  Rosewarne; Tina Won Sherman; and Jim Wozny made key contributions to  this report.
section_title: Related GAO Products
paragraphs: Equal Employment Opportunity: Pilot Projects Could Help Test  Solutions to Long-standing Concerns with the EEO Complaint Process.  GAO-09-712. Washington, D.C.: August 12, 2009.
Public Transportation: Better Data Needed to Assess Length of New  Starts Process, and Options Exist to Expedite Project Development.   GAO-09-784. Washington, D.C.: August 6, 2009.
Public Transportation: New Starts Program Challenges and Preliminary  Observations on Expediting Project Development. GAO-09-763T.  Washington, D.C.: June 3, 2009.
High Speed Passenger Rail: Future Development Will Depend on  Addressing Financial and Other Challenges and Establishing a Clear  Federal Role. GAO-09-317. Washington, D.C.: March 19, 2009.
Highway Public-Private Partnerships: More Rigorous Up-Front Analysis  Could Better Secure Potential Benefits and Protect the Public Interest.  GAO-08-1149R. Washington, D.C.: September 8, 2008.
Public Transportation: Improvements Are Needed to More Fully Assess  Predicted Impacts of New Starts Projects. GAO-08-844. Washington, D.C.:  July 25, 2008.
Highway Public-Private Partnerships: Securing Potential Benefits and  Protecting the Public Interest Could Result from More Rigorous Up-front  Analysis. GAO-08-1052T. Washington, D.C.: July 24, 2008.
Highway Public-Private Partnerships: More Rigorous Up-front Analysis  Could Better Secure Potential Benefits and Protect the Public Interest.  GAO-08-44. Washington, D.C.: February 8, 2008.
Federal-Aid Highways: Increased Reliance on Contractors Can Pose  Oversight Challenges for Federal and State Officials. GAO-08-198.  Washington, D.C.: January 8, 2008.
Railroad Bridges and Tunnels: Federal Role in Providing Safety  Oversight and Freight Infrastructure Investment Could Be Better  Targeted. GAO-07-770. Washington, D.C.: August 6, 2007.
Public Transportation: Future Demand Is Likely for New Starts and  Small Starts Programs, but Improvements Needed to the Small Starts  Application Process. GAO-07-917. Washington, D.C.: July 27, 2007.
Public Transportation: Preliminary Analysis of Changes to and Trends  in FTA’s New Starts and Small Starts Programs. GAO-07-812T.  Washington, D.C.: May 10, 2007.
Public Transportation: New Starts Program Is in a Period of Transition.  GAO-06-819. Washington, D.C.: August 30, 2006.
Public Transportation: Preliminary Information on FTA’s  Implementation of SAFETEA-LU Changes. GAO-06-910T. Washington,  D.C.: June 27, 2006.
Equal Employment Opportunity: DOD’s EEO Pilot Program Under Way,  but Improvements Needed to DOD’s Evaluation Plan. GAO-06-538.  Washington, D.C.: May 5, 2006.
Highways and Transit: Private Sector Sponsorship of and Investment in  Major Projects Has Been Limited. GAO-04-419. Washington, D.C.:   March 25, 2004.