Reducing Risk in Public-Private Partnership Contracts: Two Examples From Highway Tolling Projects

Reducing Risk in Public-Private Partnership Contracts: Two Examples From Highway Tolling Projects

Martin Mayer (Old Dominion University, USA), Juita-Elena (Wie) Yusuf (Old Dominion University, USA) and Lenahan L. O'Connell (University of Kentucky, USA)
DOI: 10.4018/978-1-5225-7396-8.ch008

Abstract

In an effort to address financial constraints and environmental concerns states have increasingly turned to a combination of un-tolled (HOV) and tolled (HOT) lanes. Public-private partnerships (3Ps) are a popular mechanism for this more sustainable approach to highway infrastructure that couples environmental sustainability (efficient utilization of existing lanes, less congestion) with financial sustainability (private investment). This chapter offers an approach to 3P contract writing for HOV/HOT facilities that is structured by a stakeholder analysis of actors in the project accountability environment. By analyzing two Virginia 3P highway projects, the chapter shows it is possible to build into a contract a set of terms and conditions to enhance the likelihood of meeting the goals of multiple stakeholders. By necessity, such contracts cannot specify precise monetary returns and other stakeholder benefits, but they can be written to include trade-offs to minimize losses to one party at the expense of another.
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Introduction

Financial constraints and environmental concerns are promoting the development of tolled highway projects that encourage less driving with a combination of (un-tolled) high occupancy vehicle (HOV) lanes and high occupancy toll (HOT) lanes. HOV/HOT projects are financially sustainable when the private sector is a partner who invests money in the project. The projects are environmentally sustainable when they add fewer lane miles of pavement than a traditional roadway expansion, consume less land, and offer drivers a choice between un-tolled lanes and a tolled lane that is faster and less congested.

Public-private partnerships (3Ps) are a popular mechanism for this more sustainable approach to new highway infrastructure. However, many 3Ps are risk-prone due to their complexity and the unpredictable nature of the revenue streams they frequently create (Urban Land Institute, 2013). The risks and uncertainties challenge accountability. This is especially the case when public infrastructure investments assume adequate returns to the parties over an extended time horizon (Hodge, 2004). Given the ambiguity of future events, it is impossible to specify all the desired results in the contract. Thus, it is difficult for the parties to hold each accountable for any failure to deliver. In this regard, 3Ps to build tolled facilities can subvert the conventional approach to accountability and fail to generate the expected financial and environmental benefits.

Public and private sector actors thus may face the prospect of a failed project. Farmer (2018) provides a classic example of a local government suffering a substantial loss from a poorly designed contract with the private sector. The City of St. Louis lost money when its NFL team, the Rams, moved to Los Angeles. The Rams owners used a loophole in their contract with the St. Louis Regional Convention and Sports Complex Authority to avoid paying the rest of the Rams’ share of the $259 million, 30-year bond used to finance the construction of a football stadium (Farmer, 2018).

The Rams were able to leave the taxpayers on the hook for the remaining financial obligation because in its leasing agreement with the team, St. Louis officials agreed that the new stadium would remain rated in the top 25 percent of all NFL stadiums. When the financially-strapped city refused to make the stadium upgrades to keep it in the top 25 percent, the team’s lease was not renewed. St. Louis officials made a simple error—they did not stipulate in the contract that the team must continue to lease the stadium so long as any of the debt remained outstanding.

This chapter offers an approach to 3P contract writing for HOV/HOT facilities that is structured by a stakeholder analysis of the interests of all the actors in the accountability environment surrounding a project’s field. Rather than specifying precise outcomes of the highway projects, the contracts analyzed were strategically designed to reduce risk by setting up a range of potential outcomes to increase the likelihood that all stakeholders in the project’s field benefit. This can be viewed as a type of emergent accountability in that the contract contains mechanisms that adjust outcomes to minimize the prospect of extreme gains and losses by the interested parties.

The objective of this chapter is to show that it is possible to build into a 3P contract a set of terms and conditions to enhance the likelihood of meeting the goals of multiple stakeholders. By necessity, such contracts cannot specify precise monetary returns and other stakeholder benefits. They can, however, be written to include trade-offs to minimize losses to one party at the expense of another. This can be done, in part, by taking into account conditions that could lead to a one-sided distribution of outcomes.

The chapter begins by discussing advantages of a stakeholder approach to devising contracts for multi-sectoral public-private partnerships. This is followed by a description of the frequent elements of two common accountability environments. The authors then describe two Virginia highway projects, highlighting the risks involved. The contracts are then analyzed with a focus on the techniques deployed to foster accountability to all stakeholders when the ultimate distribution of gains and losses from tolling is unpredictable.

Key Terms in this Chapter

Fluor-Transurban: A principal parties in the I-495 and I-95 roadway projects. Fluor Corporation provides services on a global basis in the fields of engineering, procurement, construction, operations, maintenance and project management. Transurban Group is an international toll road investor and manager with more than 10 years of experience developing and operating complex toll road infrastructure.

I-95 Express Lanes LLC: An entity formed by Fluor and Transurban to design, finance, construct, and ultimately operate the I-95 high-occupancy tolling lanes, designed to moderate and ease congestion around the nation’s capital.

High Occupancy Vehicle (HOV) Lanes: HOV lanes refer to high occupancy vehicles. HOV lanes reduce congestion by promoting carpooling and ridesharing practices. Lanes accessed by vehicles with multiple occupants (especially at high traffic times) to encourage carpooling and ridesharing, and to reduce congestion. A form of transportation demand management.

High Occupancy Toll (HOT) Lanes: Lanes accessed by vehicles with multiple occupants and charged a fee for use (especially at high traffic times) to encourage carpooling and a less congested route for the drivers while also reducing congestion on alternative routes. A form of transportation demand management that reduces congestion through dynamic tolling practices.

Contracting Out: Is a means of delivering public services and/or performing public functions where the government provides compensation to an outside party in exchange for a defined set of services or functions. Also known as outsourcing.

Emergent Accountability: The flexible accountability mechanisms built into the contractual agreements to provide recourse and contingencies that ensure a fair and equitable process for all involved parties.

Capital Beltway Express LLC: An entity formed by Fluor and Transurban to design, finance, construct, and ultimately operate the I-495 high-occupancy tolling lanes, designed to moderate and ease congestion around the nation’s capital.

Public-Private Partnership (3P): A partnership between a government agency and the private sector in the delivery of goods or services to the public. P3s have been widely implemented in the U.S.A. and across the world for services and infrastructures related to transportation, social services, and waste disposal.

Tolling: A form of road pricing in which a fee is assessed for use of the tolled facility.

Virginia Department of Transportation (VDOT): The Virginia Department of Transportation is the state agency for the Commonwealth of Virginia (USA) with the primary responsibility for building, maintaining, and operating the roads, bridges, and tunnels in the state. For transportation-related P3s in the state, VDOT represents the interests of the Commonwealth.

Express Lanes: Express Lanes are specially-designated highway lanes that allow drivers to choose to pay a toll to use the lanes and that are free to carpools, motorcycles, vanpools and other eligible vehicles during the designated hours of operation. Express lanes operate under the premise of reducing congestion by incenting and rewarding desired behaviors and/or those willing to pay a toll.

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