Highlights of Recent GAO Reports on State Contracting and PPPs

1. Highlights of Recent GAO Reports on State Contracting and PPPs NASHTU Annual Conference April 28, 2008 JayEtta Hecker Director U.S. Government Accountability Office

2. Topics • Background • Two GAO reports related to private sector involvement in highway activities and projects released this year • State Contracting Practices • Objectives, scope and methodology • Public-Private Partnerships • Objectives, scope and methodology • Findings and conclusions of these reports

3. BackgroundTraditional Procurement Model (Construction Outsourced to Private Sector) Source: GAO

4. BackgroundGrowth in Outsourcing See slide 8, bullet 1 OK Source: GAO

5. BackgroundBroader Scope of Contracting See slide 11 OK Source: GAO

6. BackgroundPublic-Private PartershipsPrivate Equity Investment Model Source: GAO

7. State DOT Contracting Practices

8. Objectives • The recent trends in contracting by state DOTs and the factors that influence contracting decisions • How state DOTs have identified and acted to protect the public interest • The federal role and potential changes in this role

9. Scope • GAO evaluated contracting practices at state DOTs related to various activities involved in highway projects, including preliminary engineering, design, construction engineering and inspection, maintenance, operations, and right-of-way activities. • GAO did not evaluate public-private partnerships arrangements, although essentially a contractual agreement, because of a concurrent GAO report discussed later in this presentation. GAO also did not evaluate construction activities, because state DOTs have contracted out virtually all construction work for decades.

10. Methodology • Literature review, including previous surveys on state DOT contracting, FHWA reports on contracting practices, and state auditor reports on contracting by DOTs in 11 states. • Interviews with • Officials from 10 state DOTs • FHWA officials in 10 states, and in Washington, D.C. • Other stakeholders and industry associations • Survey of 50 state DOTs – 100 percent response rate • Correlation analysis to examine other variables associated with state contracting decisions

11. Trends and Factors • Most state DOTs report increasing use or same level of use of consultants across all activities • In particular, increases in contracting for preliminary engineering, design, and construction inspection

12. Trends and Factors • Many states report contracting out the majority of work for some activities surveyed • Most states are not anticipating increasing the use of consultants in the next 5 years

13. Trends and Factors Factors in contracting decisions: • Major drivers are the need to supplement in-house staff and access expertise • Secondarily, often cited important factor was to increase the speed of completion for a project • To obtain cost savings was mostly reported as of little or no importance Factors in keeping work in-house: • To retain key skills and expertise • Cost of consultants perceived to be higher • Belief that work is of higher quality when performed in-house

14. How State DOTs Act To Protect The Public Interest Types of Controls Used • Contract terms • Contracting processes – such as prequalification procedures and contractor assessments • Design and construction standards and specifications • Regular monitoring – state employee always ultimately responsible • Quality assurance reviews

15. How State DOTs Act To Protect The Public InterestWeaknesses and Challenges • State auditor reports and FHWA reviews have found numerous weaknesses in controls • Prequalification not always resulting in most qualified bidder • Failure to aggressively negotiate price • Critical deficiencies in quality assurance procedures • Current contracting trends pose oversight challenges • Responsible state employee further removed from project • State DOTs unable to hire sufficient staff to replace experienced staff who are soon retiring • Erosion of in-house expertise in order to conduct effective project oversight – likely to worsen in the future

16. The Federal Role • FHWA role is to ensure state DOTs comply with federal laws regarding use of consultants and contractors • Some project level oversight • Generally focused on state process reviews • FHWA has identified many areas of risk in the increasing use of contractors and consultants • Deficiencies in state’s oversight of consultants • Particularly vulnerable area is quality assurance • Conflicts of interest and independence

17. Conclusions • State DOTs have long used contractors and consultants to augment existing workforces, but now they are used more than ever before and are given more responsibility for project delivery • Considerations of cost differences between using consultants and contractors and obtaining additional state staff are largely inconsequential as many state DOTs are now dependent on the use of consultants to deliver their program • As a result, effective oversight and monitoring of consultant and contractor workforces becomes critical to ensure that work and materials meet quality and performance standards

18. Conclusions • Risk to the highway program will increase given (1) growing potential for conflicts of interest and independence issues and (2) reality of a changing workforce at state DOTs and ensuring DOTs have key skills • FHWA oversight of state DOTs’ use of consultants and contractors generally focused on “checklist” compliance – not on performance and effectiveness of state processes to protect public interest • FHWA efforts underway to refine approach to oversight, but agency has not fully assessed how to respond to the identified areas of risk related to increasing use of consultants and contractors

19. Recommendations • DOT should work with its division offices to: • give appropriate consideration to identified areas of risk related to the increased use of consultants and contractors to target their oversight activities • develop and implement performance measures to better assess the effectiveness of state DOTs’ controls related to the use of consultants to better ensure that the public interest is protected

20. Highway Public- Private Partnerships

21. Objectives • The benefits, costs, and trade-offs associated with highway public-private partnerships • How public officials have identified and acted to protect the public interest • The federal role and potential changes in this role

22. Scope • GAO evaluated highway-related projects in which the public sector enters into a contract, lease, or concession agreement with a private sector firm or firms, and where the private sector provides transportation services such as designing, constructing, operating, and maintaining the facility, usually for an extended period of time, and receives some or all toll revenues over the life of the lease or agreement • GAO did not evaluate numerous other types of public-private partnerships arrangements in which effective ownership of a facility does not transfer to the private sector and/or there is no direct collection of a toll by the private company • The findings and conclusions of this report cannot be extrapolated to those or other types of public-private partnerships

23. Methodology • Literature review of US and overseas experiences • Interviews with • U.S. DOT and state project sponsors • Private sector concessionaires and investors • Financial and legal consultants • Market and industry analysts • Site visits/project case studies : New construction projects Leases of existing facilities Trans-Texas Corridor Chicago Skyway Oregon Innovative Partnerships Indiana Toll Road Toronto 407 ETR

24. Methodology(Cont’d) • On particular projects, reviewed: • concession agreements, terms, and contracts • guidance and documentation for partnership assessment and public interest tools • procurement documents, financial statements, and other reports. • federal (DOT) guidance, policies, and other relevant documentation. • In addition to reviewing specific projects, discussions with officials and review of documents from: • Spain • Australia • UK • Canada

25. Benefits, Costs, and Trade-offs:Advantages and Potential Benefits • Finance construction of new highways without the use of public funding. • Obtain up-front payments through the long-term lease of existing toll roads. • Transfer and sharing of project risks to the private sector. • Secure private sector efficiencies in operations and life-cycle management.

26. Benefits, Costs, and Trade-offs:Advantages and Potential Benefits (Cont’d) • Obtain a facility that better reflects the true costs of operating and maintaining the facility in setting tolls and better acknowledges the costs and impact to drivers of using the roadway system during times of peak demand. • Increase mobility through tolling, congestion pricing and more efficient decision making.

27. Benefits, Costs, and Trade-offs:Costs and Trade-Offs • Potentially higher tolls under private operation • Public may give up more than it gains if tolls over time exceed the value of up-front payments. • Use of proceeds for short term compared with long-term uses. • Intergenerational inequities—future users might potentially pay higher tolls to support current benefits.

28. Benefits, Costs, and Trade-offs:Costs and Trade-Offs (Cont’d) • Potential loss of control (e.g. noncompete provisions, toll rate setting) • Higher public sector procurement costs • Public could pay tolls that are higher than tolls based on the costs of the facilities, including a reasonable rate of return, should a private concessionaire take advantage of market power gained by control of a road for which there are few alternatives

29. How Public Officials Have Identified And Acted To Protect The Public InterestConcession Terms • Asset performance measures • operating and maintenance standards • expansion triggers • Financial mechanisms • toll rate limitations • revenue sharing • Acountability & preserving flexibility • Flexible non-compete provisions • “Rebalancing” the concession • Workforce protections • Oversight and monitoring provisions

30. How Public Officials Have Identified And Acted To Protect The Public InterestAssessment tools • Asset valuation tools and procurement processes • Qualitative and quantitative public interest tests and criteria • Public interest tests • Public sector comparators • Value for money tests • Governments in other countries have developed systematic approaches to identifying and evaluating public interest before agreements are entered into • Australia • UK • British Columbia, Canada • Use of such tools in the U.S. have been more limited

31. The Federal Role • Direct federal involvement has been limited and generally determined by whether or not federal funds were or will be used. • DOT actively encourages and promotes public-private partnerships • use of administrative flexibility (e.g. SEP-15) • model legislation • PPP website and related tools • National interests in highway public-private partnerships need to be identified

32. Conclusions • Consideration of highway public-private partnerships could benefit from more consistent, rigorous, systematic, up-front analysis • formal identification and consideration of public and national interests has been lacking • limited up-front analysis of public interest issues using established criteria has been conducted • Governments in other countries (e.g. Australia and the UK) have developed systematic approaches to evaluating public interest before PPP agreements are entered into • Using these tools can assist the public in determining expected benefits and costs • Not using such tools may lead to certain aspects of protecting public interest being overlooked

33. Conclusions • Fresh thinking is needed on the appropriate federal approach • DOT does much to promote benefits, but comparatively little to assist states weigh potential costs and trade-offs or assess national interests • Reexamining the federal role in transportation provides an opportunity to identify the emerging national public interests and determine how highway public-private partnerships fit in

34. Recommendations • Congress should direct DOT to develop objective criteria for identifying national public interests in highway public-private partnerships, including any additional legal authority, guidance, or assessment tools that would be appropriately required • potential restrictions must be carefully crafted • provides an opportunity for the Department to play a targeted role in ensuring that national interests are considered and protected