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  1. 1. FTA FEDERAL TRANSIT ADMINISTRATION New Starts Program Assessment Appendix B: Assessment of Analogous Project Delivery Processes Note: This document is intended to be read in conjunction February 12, 2007 with the New Starts Program Assessment Final Report dated February 12, 2007, and is not intended for independent review.
  2. 2. Contents • Introduction - Approach to Assessing Analogous Project Delivery Processes - Summary of Key Findings • Leading Practices in Funding/Project Approval - Federal Grants Management - Federal Capital Investment - Surety Bond Industry • Public-Private Partnerships • Alternative Project Delivery Methods Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 2
  3. 3. Approach to Assessing Analogous Delivery Processes Introduction The Approach • FTA requested analysis of analogous approaches to project development and delivery to identify relevant leading practices.  FTA directed Deloitte to examine analogous grant/funding decision-making processes to understand their evaluation of project costs and benefits and their approaches to assessing and managing project risk.  FTA also directed the Deloitte team to evaluate the benefits of alternative project delivery methods (such as Design-Build) and the degree to which the New Starts program accommodates or enables alternative delivery methods. • FTA requested that Deloitte perform the following activities during its assessment of analogous project delivery processes:  Reviewed analogous funding/project approval processes, identified relevant leading practices and their applicability and implications for implementation in the New Starts program. – Compared various federal grants management, risk management and other capital investment processes. – Identified applicable leading practices based on Deloitte‟s internal experience in the Surety Bonds industry, which shows direct relevance to FTA‟s assessment of capital investment projects. – Examined Public-Private Partnership (PPP) approaches, key legislative enablers and the implications for New Starts.  Reviewed various alternative delivery methods to determine possible improvements to the New Starts project development process that may better enable grantees to realize the benefits from such alternative delivery methods. Programs/Approaches Reviewed • Federal Grants and Capital Investment Programs  National Science Foundation: Critical Zone Observatories  Department of Homeland Security: Pre-Disaster Mitigation  Environmental Protection Agency: Watershed Grant  Department of Health and Human Services: General Grants Management  Agency for International Development: Disaster Prevention Relief  World Bank: Conflict Prevention and Reconstruction Fund  Department of Energy: Office of Engineering and Construction Management  Federal Aviation Administration: Airport Improvement Program  U.S. Army Corps of Engineers: Project Prioritization and Approval Processes • Surety Bonds Industry  Deloitte‟s best practices in Surety Bond underwriting • PPP Methodologies • Alternative Delivery Methods  Design-Build (DB), CMGC, CM At Risk Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 3
  4. 4. Introduction Key Findings From Analogous Processes Leading practices in federal grants and risk management, surety bond reviews, PPPs, and alternative project delivery methods present a number of opportunities to improve the New Starts Program. Key findings from our assessment include: • Leading agencies conduct some form of customer segmentation, determining additional or reduced monitoring and technical assistance to grantees based on varying levels of project risk and grantee capabilities. • Clear and transparent policies, coupled with effective communication to stakeholders, promote program effectiveness among leading grants management agencies. • Performance measures, such as linking program activities throughout the process to overall program goals, promote overall program effectiveness and help achieve desired program goals. • Several agencies make use of external resources, such as independent or peer review panels, to augment internal expertise with that of industry experts and practitioners. • Immediate review of grantee submissions for fulfillment of minimum requirements and formal notice of acceptance/non-acceptance enables leading agencies to clarify requirements and review timeframes for grantees, and to avoid allocating scarce resources for review of incomplete or inadequate applications. • Leading agencies use case management and web-based application submission systems to help streamline the submission and review processes while increasing program transparency. • Formalized training on management-approved guidelines and procedures enables staff to perform functions more effectively and consistently. • Leading practices in the Surety Bonds industry indicate that clearly defined roles and responsibilities, including lines of authority and approval, facilitate an effective review process. • An “early commitment” mechanism, such as a Project Development Agreement (PDA), can establish an understanding of project development expectations and can enable the early involvement of private partners. • PPPs do not introduce different kinds of risks from traditionally developed public sector projects; however, the implementing agency or authority must adopt a new approach to allocating and managing the project‟s risks. FTA can support this by incorporating risk allocation, revenue sharing models, and lessons learned from existing PPPs into periodic training sessions • Project sponsors select project delivery methods based on their experience and resources and the project‟s characteristics. Project sponsors select the system that will provide the greatest benefit in terms of cost and schedule and acceptable level of risk for all parties involved. These and other issues are discussed in more detail, along with the associated recommendations for improvement, in the following sections. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 4
  5. 5. Leading Practices in Funding/Project Approval Grants Management Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 5
  6. 6. Grants Management Selected Leading Practices in Grants Management Leading practices from selected grants programs highlight opportunities for improvement in each phase of the grants lifecycle, although the most relevant practices for New Starts were found in the Pre-Award Review phase. • Internal controls (such as training, current policies, Grants Management Lifecycle and information systems) are essential for a grant program to function effectively. • Federal guidance for grant administration (e.g., the Government Performance and Results Act, OMB Goals and circulars) emphasize performance accountability. The Measures identified leading practices are intended to improve accountability while maintaining FTA‟s ability to Pre-Award evaluate project costs and benefits effectively and to Review Training evaluate and manage risk. • Leading practices from selected programs included some things FTA is already doing while others could be Information adopted to improve the New Starts process. The Policies Systems Deloitte team examined the following organizations: Assess Results  National Science Foundation (NSF)  U.S. Dept. of Homeland Security (DHS) Manage Performance  U.S. Environmental Protection Agency (EPA)  U.S. Dept. of Health and Human Services (HHS)  U.S. Agency for International Development (USAID)  World Bank Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 6
  7. 7. Grants Management Leading Practices in Analogous Grants Programs Area Leading Practice New Starts Applications / Implications • Evaluate project risk. • FTA currently employs a Risk Assessment  HHS, DHS and EPA all use numeric scoring methodology late in the project methods to rank applicants. development process to evaluate a project‟s ability to be delivered on-  HHS completes Risk Assessments during the budget. grant review phase and uses risk factors to determine grantees‟ “High Risk” probability prior to award funding. Strategy • Perform criteria-based customer • Identify a key set of attributes/criteria & Policy segmentation. (possibly a combination of grantee,  AmeriCorps rates grantees in the following project type and rating) upon which categories to determine if continuous monitoring some segmentation rules could be is needed: Organizational, Programmatic, developed. Financial, Compliance, and Program Specific. • Based on segmentation rules, develop a  After HHS determines that a grantee qualifies as streamlined process for low-risk projects “High Risk”, the Regional Office may offer to and allocate appropriate level of PMO provide technical assistance to increase the level resources for assistance to high-risk of competence of the grantee‟s organization. projects. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 7
  8. 8. Grants Management Leading Practices in Analogous Grants Programs (continued) Area Leading Practice New Starts Applications / Implications • Clearly define policies and • FTA has a well-established process for reviewing procedures. and revising policies based on changing legislation  EPA, World Bank, USAID, NSF and and program needs. However, iterations have HHS currently develop program and been too frequent in the past. When FTA makes applicant criteria and qualifications changes, it should also make changes clearer and based on program goals and agency more transparent by better communicating the needs. changes to grantees. • Develop SOPs for NS Team Leaders and other key positions. Strategy & Policy • Define performance measures and • Develop New Starts performance measures link activities to program goals and including in-process projects, not just post-FFGA objectives. and ones that measure FTA program delivery.  USAID defines performance measures • Once program success measures are defined, incorporate them into the Annual Performance and maintains data capture plans and Plan and communicate them to stakeholders. reporting plans to link activities to program goals and ensure attainment of goals. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 8
  9. 9. Grants Management Leading Practices in Analogous Grants Programs (continued) Area Leading Practice New Starts Applications / Implications • Utilize panel of internal and external • Consider using external peer review experts in review of applications. panels in order to augment internal expertise and to alleviate burdensome  EPA selects a panel of experts from grantee caseload for FTA staff as a result of peers to assist in review of applications from understaffing. a list of recommended external reviewers.  HHS maintains a roster of reviewers and selects both internal and external subject matter experts to form their review panel. People & Organization • Provide training to staff. • FTA provides training opportunities to its staff for professional and organizational  EPA developed a long-term training plan to development. ensure that employees have the necessary skills to manage grants. • Consider establishing a more formal program specific to New Starts to  HHS developed an internal online training ensure staff receive adequate training. guide for its grant management function • Establish a formal mentor program for  USAID, NSF, DHS published online grant- New Starts coordinators and other New related manuals. Starts staff (including Mentor training). Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 9
  10. 10. Grants Management Leading Practices in Analogous Grants Programs (continued) Area Leading Practice New Starts Applications / Implications • Conduct initial application screening for • FTA currently uses checklists for review minimum requirements. and quality control of grantee  EPA, HHS, NSF, DHS and World Bank pre- submissions. This step should be screen proposals at the application level to preceded by an immediate review of determine if they meet the minimum submission completeness and a formal requirements and are eligible for further acceptance / non-acceptance response review. to grantees at the time of application submission. Process • Conduct detailed reviews of proposed capital • FTA‟s current evaluation of New Starts investment projects – in a timely manner. project development components is very  DoE‟s Office of Engineering and Construction similar (in both scope and scale) to Mgt conducts External Independent Reviews DoE‟s OECM project reviews; however, (EIR) at several points during the project FTA‟s reviews typically take significantly process. The EIR evaluates all project longer to reach final approval. management plan components (e.g., schedule, WBS, risk management, hazards analysis, EVM, etc.) and typically takes between 5 and 40 weeks. • Employ integrated information systems to • FTA needs to introduce technologies to improve operational efficiency. automate process activities, such as  NSF accepts proposals from grantees automated case/document management electronically via its Fastlane system. systems and web-based application Technology submissions.  HHS implemented the Grants Administration Tracking and Evaluation System (GATES).  DHS, HHS and EPA encourage applicants to apply for funding and submit proposals using the Grants.gov website. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 10
  11. 11. Leading Practices in Funding/Project Approval Capital Investment Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 11
  12. 12. Capital Investment Selected Leading Practices in Capital Investment A review of capital investment planning processes for several Federal programs highlighted some viable leading practices, some alternative approaches to FTA’s current processes, and areas where both the other agency and FTA can improve. • Leading practices from selected Federal programs included some things FTA is already doing; other practices could be adopted by FTA to improve the New Starts process. • Additionally, some Federal organizations have implemented innovative approaches or have implemented policies similar to FTA‟s but in a different way, providing ideas for consideration. • Finally, some of the organizations reviewed need to improve their current decision- making or prioritization process, according to third party evaluators. The results of these evaluations can be applied to the New Starts program in cases where FTA is experiencing the same issue. • The Deloitte team examined the following organizations:  Department of Energy: Office of Engineering and Construction Management (DoE OECM)  Federal Aviation Administration: Airport Improvement Program (AIP)  U.S. Army Corps of Engineers (ACE): Project Prioritization and Approval Processes Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 12
  13. 13. Capital Investment Selected Leading Practices in Capital Investment Area Leading Practice New Starts Applications / Implications • Define agency “mission” and fund only • Develop New Starts program-specific goals projects that fall clearly within that and objectives – consistent with the relevant mission. legislation and the overall Department of Transportation mission (e.g., maximize  ACE has three clear missions areas: expansion of transit to new cities; extend Commercial Navigation, Flood & Storm existing downtown transit systems to Damage Reduction, and Aquatic Ecosystem growing suburbs; favor systems willing to Restoration. In reviewing new project use non-LRT modes, etc.) requests, ACE automatically rejects any project that – while potentially a great • Communicate these program goals and project on its own merits – does not clearly objectives to all stakeholders, and consider using the goals and objectives to determine fall within one of the mission areas. New Starts eligibility for potential projects Strategy & Policy • Allow local discretion in use of funding to • Identify a key set of attributes/criteria exceed minimal Federal requirements. (possibly a combination of grantee, project  ACE defines the approved project as the type and rating) upon which some National Economic Development (NED) segmentation rules could be developed. alternative. If a local community opts to • Based on segmentation rules, develop a select a plan that exceeds the NED streamlined process for low-risk projects and requirements (e.g., build a higher levee than allocate appropriate level of PMO resources NED determines is required), that community for assistance to high-risk projects. is responsible for most or all of the additional cost – but the ACE does not disallow the project modification. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 13
  14. 14. Capital Investment Selected Leading Practices in Capital Investment (continued) Area Leading Practice New Starts Applications / Implications • Clearly define the “baseline alternative” for • Consider reducing the requirement on grantees and do not require it to fully meet grantees to fully develop a baseline the objectives of the “build” alternatives. alternative intended to meet the identified transportation need. Our case  AIP‟s guidance to grantees explains that the studies indicate that grantees would “base case represents best practices at the rarely, if ever, build that alternative, thus Strategy & airport short of a major initiative.” and that it it is not truly a feasible solution. Policy “may not accomplish, or fully accomplish, the • Consider establishing a range of values specific objective(s) of a major initiative,” for the baseline alternatives compared to such as to reduce delay from current levels. the value of the build alternative (e.g., Rather, the base case may at best hold the baseline alternative should cost average delay at a constant level… …or cause within 10%-30% of the build option) it not to worsen as severely as it would in a „do nothing‟ approach.”¥ • Optimize use of internal and external • Conduct a human capital assessment to experts in reviewing applications, identify skills gaps and opportunities for wherever they may reside. reallocation of resources, with a particular emphasis on critical skills (e.g.,  ACE typically conducts planning studies at travel forecasting, NEPA reviews) and the district offices; however, the required succession planning. expertise is scarce and not often present at • Develop a plan to leverage critical People & the required location. Several outside resources in project evaluations, Organization studies* has recommended that ACE regardless of the HQ organization or consolidate the process to draw upon the Regional Office where those individuals best expertise from within the entire agency may be assigned. – as well as from other Federal and State agencies – for each study. • Identify outside sources (contractors, grantees or Metropolitan Planning ¥ Source: Federal Register, Vol. 64, No. 240, December 15, 1999, p. 70112. Organizations) for these same skills and * Source: Committee to Assess the U.S. Army Corps of Engineers Methods of Analysis and Peer engage them to augment FTA staff as Review for Water Resources Project Planning, National Research Council; U.S. Army required. Corps of Engineers Water Resources Planning: A New Opportunity for Service, 2004. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 14
  15. 15. Capital Investment Selected Leading Practices in Capital Investment (continued) Area Leading Practice New Starts Applications / Implications • Conduct detailed reviews of proposed • OECM‟s External Independent Review of capital investment projects – in a timely projects is very similar (in both scope and manner. scale) to the reviews FTA currently  DoE OECM conducts an External Independent conducts for New Starts projects between Review (EIR) as part of its project approval entry to Preliminary Engineering (PE) and Process process. The EIR evaluates all project FFGA approval. management plan components (schedule, • While no perfect benchmark exists for the WBS, risk management, hazards analysis, New Starts project development process, EVM, etc.) and typically takes between 5 and this may be one of the most relevant for 40 weeks. FTA to consider. • Computer Aided Decision Making can • While implementing a formal computer improve both the speed and quality of the aided decision making process and system project evaluation process. may be more sophistication than FTA  In discussing ACE‟s need to implement a needs, the principles behind it are worth portfolio management approach to its project discussion. Such tools provide a capability prioritization and benefit-cost analysis, for weighting multiple criteria – including Technology several reviewers cited the potential value of quantitative and qualitative – and computer aided decision making in the evaluating multiple alternatives against process. these criteria toward the attainment of a specified objective. These systems also typically allow for multiple party “voting” on both criteria weights and alternative scoring. *Source: Committee to Assess the U.S. Army Corps of Engineers Methods of Analysis and Peer Review for Water Resources Project Planning, National Research Council; U.S. Army Corps of Engineers Water Resources Planning: A New Opportunity for Service, 2004. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 15
  16. 16. Leading Practices in Funding/Project Approval Surety Bond Underwriting Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 16
  17. 17. Surety Bonds Surety Bond Industry Best Practices Deloitte‟s experience in developing and implementing leading practices for the Surety Bond industry offers additional insights related to the New Starts process. Area Leading Practice New Starts Applications / Implications • Established financial guidelines and • FTA has a well-established process for reviewing procedures are approved by management. and revising policies based on changing The guidelines and procedures are legislation and program needs. However, periodically reviewed and re-approved by iterations have been too frequent in the past. management and compared to industry When FTA makes changes, it should also make practices. changes clearer and more transparent by better communicating the changes to grantees. • Established guidelines and procedures are • Formalized procedures for review and followed to identify missing documents and acceptance of applications could provide more communication procedures and protocols uniformity across the program. Strategy with the agents are adhered to. & Policy • Criminal background checks are performed • FTA has a well-established process for and management evaluated. Credit reports evaluating the organizational soundness of are obtained and reviewed when assessing sponsoring agencies. the moral hazard of the Surety. • There should be a contracts manager for • FTA has well-established processes for the management of bond contract developing language for and concluding FFGA guidelines, as well as for manuscript contracts. language. Active relationships with internal corporate legal department should be maintained. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 17
  18. 18. Surety Bonds Surety Bond Industry Best Practices (continued) Deloitte‟s experience in developing and implementing leading practices for the Surety Bond industry offers additional insights related to the New Starts process. Area Leading Practice New Starts Applications / Implications • Formal training on management approved • SOPs and more formalized training for New guidelines and procedures is provided to Starts Coordinators/Team Leaders and newly hired underwriting staff. Existing other staff could help FTA improve underwriting staff is monitored and trained consistency throughout the program during on an ongoing basis on management review and approval of grantee applications. approved guidelines and procedures. • Letters of approval or rejection are sent to • More clearly defined roles and People & the agent. responsibilities, including lines of approval Organization and grantee interaction, could help FTA create a more unified front for the grantee • The underwriter processes the letter of and could improve accountability in the approval or rejection based on the review and approval process. underwriter‟s level of authority to issue such a letter. Management reviews and approves all letters of approval or rejection that are not within the underwriter‟s level of authority. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 18
  19. 19. Surety Bonds Surety Bond Industry Best Practices (continued) Deloitte‟s experience in developing and implementing leading practices for the Surety Bond industry offers additional insights related to the New Starts process. Area Leading Practice New Starts Applications / Implications • Missing documents needed for evaluation • FTA currently uses checklists for review and (that address issues and concerns) are quality control of grantee submissions. This identified by the underwriter and step should be preceded by an immediate Process notification of missing documentation is review of submission completeness and a provided to the agent on a timely basis. formal acceptance/non-acceptance response to grantees at the time of application submission. • A submissions tracking system is used to • A tracking system or case management monitor the status of a case from when it system could improve accountability and is initially received, through the transparency to grantees throughout the evaluation process, to a decision, and if submission, review, and approval process. executed, into the bond administration system. Technology • Responses from agents are documented • A diary or log of review comments and related in a diary for follow-up by the correspondence can be supplemented by a Underwriting Staff. document management system or similar tool and could improve FTA‟s management of project-related information. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 19
  20. 20. Public-Private Partnerships Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 20
  21. 21. Public-Private Partnerships PPP Policy Implications for FTA Experience in PPPs around the world leads to a set of regulatory and policy leading practices favorable to PPP success; some imply change for FTA. Area Key Legislative Feature New Starts Applications / Implications • Give public entities considerable • FTA can encourage use of PPPs by incorporating flexibility in the types of agreements discussion of risk allocation and revenue they may enter into and in the specific sharing models, as well as lessons learned from procurement process. existing PPPs, into periodic training sessions and regional meetings with grantees. • Define a clear point in the project development • Allow “mixed concessions” (such as the process when the decision to pursue a PPP Strategy & reconstruction or expansion and long- should be made and the specific process Policy term operation of existing facilities). implications of such a decision. • Allow long-term leases of existing government assets. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 21
  22. 22. Public-Private Partnerships PPP Policy Implications for FTA (continued) Experience in PPPs around the world leads to a set of regulatory and policy leading practices favorable to PPP success; some imply change for FTA. Area Key Legislative Feature New Starts Applications / Implications • Allow contracts to be awarded • While contract award is a grantee decision, FTA according to best value, not just low should ensure that the Cost Effectiveness evaluation price. appropriately takes into account other measures of value to users (such as economic development, revenue generation, and outsourcing operations and maintenance functions). • Develop and authorize procedures to • FTA should support grantees‟ decision to move a receive and consider unsolicited project from an unsolicited proposal into the New proposals. Starts project development process. Strategy & • Allow mix of public and private • FTA should ensure that private equity is Policy dollars. appropriately considered when rating the grantees‟ Financial Capability. • Discuss the implications of PPPs on Federal match share and clearly communicate whether FTA intends to limit the federal share when grantees obtain private funding. • Avoid provisions that would require • New Starts process must include an “early further legislation to authorize or commitment” mechanism to enable the required finance a project, execute a franchise early involvement of private partners – consider agreement or change tool rates. incorporating such a mechanism into a redesign of project phases. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 22
  23. 23. Public-Private Partnerships Stakeholder Responsibilities The key responsibilities of each party will change under the PPP approach. Party Traditional Project Approach PPP Approach • Prepare design. • Monitor design and construction – pre-opening • Issue contract and tender. audit. • Administer construction contract. • Set toll fares. • Pay contractor on a frequent basis (i.e. • Pay contractor based on payment mechanism, as monthly). required. MTO / • Operate and maintain facility. • Provide one-time capital grant or annual Grantee • Collect revenue from toll charges (if operational grant that may be required to bridge applicable) and set toll fares. any „gap‟ between operating and life-cycle expenses (including debt service obligations) and • Provide capital funding from consolidated revenue collected from tolling operations. revenue. • Tolling revenue received by consolidated revenue. • Construct the project. • Design, construct, operate and maintain the • May operate the facility through an facility over the term of the concession. outsourced contract and may be a • Provide debt financing during construction and different party than the one that ongoing operation. Contractor / constructed the project. • Receive revenue sources from tolling during Private operations (if applicable). Partner • Provide equity capital and debt financing to cover development costs and operating expenses over the operating term. • Receive capital / operating grants to cover any funding „gap.‟ • Provide capital funding stream, typically • Same as traditional approach; however, reduced over 10 years, beginning at start of financial impact on grantees, who often don‟t pay Federal construction, even though grantees contractors until project completion. Government generally pay these costs during the 2-5 year construction period. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 23
  24. 24. Public-Private Partnerships Sample Project Controls FTA retains a level of control and ensures risk mitigation through contractual and other attributes of the PPP arrangement. Item Traditional Project Approach PPP Approach • Poor oversight and reporting procedures • Controls through a Special Purpose Vehicle often lead to significant increases in scope structure provide for added independence Governance without appropriate due-diligence checks and oversight to control the scope of the and balances. project. • Financing by public sponsor that provides • Private partner provides equity and debt ultimate “backstop.” funding leading to additional approval Construction • Usually monthly or periodic draws. requirements to increase borrowing limits Financing and/or scope changes. • No „backstop‟ by public sponsor. • Sponsor developed design. • Contractor is required to assume design Design risk. • Contractor is responsible for all construction • No change. Construction related activities. • Sponsor assumes all operation risk, • Private partner assumes all operational including maintenance, life cycle expenses risks including maintenance and life cycle Operation / and revenue/demand risk. expenses, and may accept some demand / Maintenance revenue risk. • Sponsor sets toll fares. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 24
  25. 25. Public-Private Partnerships Risk Allocation for PPPs Ideally, risk would be borne by the party best able to manage that risk. Ideal Party to Risk Retain Risk Reasoning Design / Private sector • This is a core skill of the private sector proponents. Technical Risk Land Assembly • The private sector may be unable to secure some Public sector land. Risk Environmental • Environmental approvals are public sector approvals. Public sector Approval Risk Construction Risk Private sector • This is a core skill of the private sector proponents. Operating Risk Private sector • This is a core skill of the private sector proponents. • The private sector does not control the factors that Demand Risk Mostly public sector control demand risk. • The private sector‟s financiers will fully account for Financial Risk Mostly private sector the risks inherent in the project. Environmental Private sector • This is a core skill of the private sector proponents. Risk • The private sector does not have any control over Regulatory Risk Public sector these elements. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 25
  26. 26. Public-Private Partnerships PPP Project Risks Risks for PPPs are the same ones FTA deals with under conventional procurements, however for PPPs, theses risks must be allocated to realize efficiencies. Risk Definition Design / Technical Risk • The risk of failures related to engineering or design. Land Assembly Risk • The risk that acquiring land will delay the overall project schedule. Environmental • The risk that securing environmental approvals will delay the overall project Approval Risk schedule. Construction Risk • The risk that cost escalation will occur due to faulty construction or delays. • The risk that the costs of keeping the assets in good condition (e.g., Operating Risk maintenance costs) vary from budget. • The risk that the operating costs of the budget vary from the budget. Demand Risk • Deficient revenue resulting from lower than projected demand or lower required price points. • Costs related to inadequate financial hedging and / or debt management. Financial Risk • The risk that inflation will be greater than budgeted. • The risk that the residual value of the asset at the end of the term will be lower than budgeted. Environmental • Costs related to unforeseen environmental lawsuits or mitigation costs to Risk avoid potential lawsuits. Regulatory Risk • Costs related to delays in project approvals, changed in policy or law, etc. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 26
  27. 27. Public-Private Partnerships Benefits of PPPs The statutory requirement for a PPP pilot, as well as the benefits described below, motivate FTA to encourage grantees‟ use of this approach. Benefit Description • PPPs enable public sector to spread cost of infrastructure investment over the Bring Construction lifetime of the asset. Forward • Private sector has strong incentive to complete the project ASAP because they need the stream of revenues to repay the capital costs. On-Time & On- • Payments are aligned to the delivery of project objectives - thus PPPs have a Budget Delivery solid track record of on-time or early construction completion. Proper Maintenance • Well-designed PPPs help maintain infrastructure by transferring maintenance of Assets requirements for a facility to the private partner. • Shifting long-term operation & maintenance responsibilities to the private firm creates up-front incentive to ensure long-term construction quality, as the private Cost firm is responsible for those costs many years down the road. Savings • Experience from several countries has demonstrated savings from PPPs during the construction phase of the contract. Strong Customer • Private-sector infrastructure providers rely on user fees from customers for Service Orientation revenue, creating a strong incentive to provide superior customer service. • Properly structured PPPs enable governments to focus on outcomes, instead of Enables Public Sector inputs. Focus on Outcomes & • Governments can focus leadership attention on the outcome-based public value Core Business they are trying to create. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 27
  28. 28. Public-Private Partnerships Addressing Objections to PPPs FTA may need to help grantees and state/local governments address or explain away many of the common objections to PPPs. Typical Objection Explanation / Mitigation • Comparison between the public and private sector cost of capital should Higher Cost be appropriate. of Capital • The gap between private and public costs of capital has narrowed over the years. • By allocating the risk efficiently, PPPs lower costs and bring more value for Failure to Realize money. Value for Money • Private sector efficiency generates economies that outweigh higher costs of borrowing. • Refinancing gains in early stages of PPP development; huge gains decline Windfall Profits to with market maturity. the Private Sector • Public sector can negotiate to share such gains (clauses included in contracts). Customers of the Service • Fee increases can be limited by contract to a pre-determined rate. Will End Up on the Short • Other contract mechanisms also protect customers – e.g., availability fee, End of the Stick shadow tolling, subsidies, link to ability to pay. Government Forced to Bail Out PPPs When • Private provider cannot take facility with it if it is unable to continue Demand Fails to Meet contract - government gets a free facility. Projections Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 28
  29. 29. Public-Private Partnerships Status of PPP Opportunities in States A number of states are already engaged in PPPs for large infrastructure projects, and more still have enabling legislation in place. Doing PPP deals Have enabling legislation Evaluating PPP for projects Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 29
  30. 30. Public-Private Partnerships Hybrid PPP Models A variety of PPP models are available, with choice of model dependent on the level of information certainty and other factors (see next slide). Model Description • Under this model, the public and private sector agree to jointly design, develop, Alliancing and finance the project. • In some cases they also work together to build, maintain, and operate the facility. • Contracting with one partner to provide several small-scale PPP projects in order Bundling to reduce the length of the procurement process as well as transaction costs. • Several private partners are selected, in competition with each other, to deliver Competitive different aspects of a project. Partnership • The contract allows the public sector to reallocate projects among partners at a later date, depending upon performance. • The public sector contracts with a private partner, in which certain elements of the Incremental work can be called off, or stopped, if deemed unproductive. Partnership • The public sector can commission work incrementally, and it reserves the right to use alternative partners, if suitable. • The public sector appoints a private sector partner-integrator to manage the project development. Integrator • The integrator arranges necessary delivery functions and is rewarded according to overall project outcomes wherever possible. • The public sector selects a strategic partner through a competitive process that Joint Venture includes a bid to carry out the first phase of work. • The typical contract is for 20 years. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 30
  31. 31. Public-Private Partnerships Choosing the Right Delivery Model To help grantees select the right model, FTA should ask the following questions: • How confident are you now about the type of infrastructure and services that are needed over the next 5, 10, 15, or 20 years? • How likely is it that the needs of citizens in this area will change? In what ways? • How likely is significant policy change that may affect this decision? • How easy is it to specify what will be needed? • How big is the project, and can it be separated into discrete elements? • How confident are you in the supplier of the service and how much control do you wish to retain? • Can risks be transferred or would better outcomes be achieved through risk sharing? Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 31
  32. 32. Public-Private Partnerships Approach for Selecting an Appropriate Model Based on the attributes of the specific corridor, a specific model should emerge as the optimal choice. Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 32
  33. 33. Alternative Project Delivery Methods Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 33
  34. 34. Analogous Alternative Project Delivery Methods Processes Findings from New Starts Case Studies Project Delivery FFGA % of Cited Advantages (Sponsor) Method Total Cost • CMGC was engaged towards the latter stages of design due to unknown issues (such as potential for Love Field extension as part of project.) Northwest / • DART had learned of CMGC approach through grantee round-table Southeast LRT DBB 49.8% sessions and is considering using CMGC approach on future projects. (DART) • While DB is not explicitly outlawed in Texas, it is also not clearly allowed by state legislation. Therefore CMGC provided DART with a more aggressive delivery approach versus traditional DBB. • This was GCRTA‟s first and only FFGA. They selected a traditional DBB approach to have more control over cost and schedule issues. Euclid Corridor • They also selected DBB to allow more local contractor involvement in the BRT bid process. GCRTA felt that using DB for the entire contract would limit DBB 48.8% their procurement to large, national contractors who can manage such a (GCRTA) large contract. • GCRTA had the benefit of an existing transit guideway, which lends itself to an alternative delivery method such as DB. • Since the bids were too high, LAC MTA carved out the underground tunnel-related scope and delivered this portion of the project using DBB to manage the potential for unknowns and to achieve a lower fixed cost Metro Gold Line after design was complete. A DB contract was utilized for all above-grade Eastside DBB/ work. Extension 54.6% DB Hybrid • LAC MTA was a very mature grantee, with extensive experience and (LAC MTA) resources to implement this hybrid approach. • LAC MTA may not use DB for future New Starts projects because of the late entry points for DB contractor in current FTA DB/DBOM guidance. Delivery Method Acronyms DBB = Design-Bid-Build DBOM = Design, Build, Operate, Maintain DB = Design-Build CMGC = Construction Manager / General Contractor Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 34
  35. 35. Analogous Alternative Project Delivery Methods Processes Findings from New Starts Case Studies Project Delivery FFGA % of Cited Advantages (Sponsor) Method Total Cost • First FTA/fixed guideway project for CATS, and they wanted to use a South LRT DBB 47.0% traditional approach. (CATS) • CATS is considering DB for future projects. • Valley Metro contemplated CMGC approach, but was not aware of FTA‟s position on this method and subsequently used traditional DBB approach. • Project was broken down into 5 small civil-line packages for local Central Phoenix / participation in contract. East Valley LRT DBB 41.6% • Valley Metro considering use of CM At Risk in future. (Valley Metro) • Valley Metro encourages FTA to provide grantees with a Memorandum of Understanding or PDA to establish deadlines and expectations to appease potential stakeholders involved in project. • Considered DB but used CMGC due to desire to have more control since the Weber County to project scope spanned 14 cities in 3 counties. Salt Lake City Commuter Rail CMGC 80% • CMGC selection assisted in procuring a fixed price earlier than DBB. (UTA) • UTA believes future FTA New Starts projects will use some version of DB or CMGC because of FTA‟s focus to control cost and risk issues. Delivery Method Acronyms DBB = Design-Bid-Build DBOM = Design, Build, Operate, Maintain DB = Design-Build CMGC = Construction Manager / General Contractor Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 35
  36. 36. Analogous Alternative Project Delivery Methods Processes Findings from Non-New Starts Case Studies Project Delivery FFGA % of Cited Advantages (Sponsor) Method Total Cost • NJ Transit used a lump-sum contract with a DBOM contractor with an escalation clause for the 10-year operations portion of the contract. Southern NJ • Because the project would not achieve TSUB requirements, Grantee did not River Line pursue New Starts funding and therefore had greater flexibility for selection LRT DBOM n/a of project delivery system. (NJTransit) • NJ Transit was a very mature grantee with extensive prior experience in project development. They also believe that current DB/DBOM guidance does not lend itself to achieving all advantages of a DB project. • Project was a sole-source, unsolicited proposal for a land-development exchange. The DB contractor received a long-term lease on a 120 acre Portland parcel of land in exchange for 20% of the project cost. Airport MAX • Project was not competitively bid for DB delivery because of unique Extension DB n/a circumstances proposed by contractor. (TRI-MET) • Grantee was very pleased with final product by contractor. Contractor has not achieved the return on investment it had anticipated at the time of agreement due to economic impacts. Metro Link • Metro was already in construction of the St. Clair extension through an Cross FFGA, which was using DBB. County DBB n/a Extension • While the Cross County extension was locally funded, Metro felt most comfortable choosing the traditional DBB approach for this project as well. (Metro) Delivery Method Acronyms DBB = Design-Bid-Build DBOM = Design, Build, Operate, Maintain DB = Design-Build CMGC = Construction Manager / General Contractor Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 36
  37. 37. Analogous Alternative Project Delivery Processes Processes In addition to Design-Bid-Build, the Design-Build and Construction Manager/ General Contractor approaches were utilized by several of the case study grantees. Delivery Methods Key Features New Starts Applications / Implications • Historically most often used for FTA New Starts • Typical for public sector. projects. Design–Bid-Build • Most suited for competitive bidding of contracts at each • Time-consuming, step-by-step review and phase (e.g., design, construction, material approval process does not enable grantees to procurement). achieve the time savings that accrue from simultaneous design/construction. • Grantees believed that current guidance does not allow for maximum benefit of DB. • A PDA should be considered to give a private sector entity a degree of assurance of future • Time and cost savings can be achieved by commencing project approval. construction activities prior to completion of design. Design-Build or • Grantees have to accept risks associated with • Grantee (and FTA) only has to deal with one entity for right of ways, environmental and land-use Design-Build- design/construction issues/risks. issues so as to not limit pace of DB Operate- • Suits more easily-scoped projects with lower development and construction. In light of this, Maintain design/construction risk (e.g. available existing guide project will likely be lower-risk and make ways). provision of PDA with few issues. (DB/DBOM) • In industry encourages greater transparency in • Perception of “loss of control” by the project contracting (e.g., Guaranteed Maximum Price, or GMP). sponsor implies a different oversight approach (particularly for quality assurance) than DBB; this could be provided by Project Management Oversight Contractors (PMOC) or mature grantees with more extensive resources. • Integrates construction expertise during design phase, reducing design-risk issues and integrating value • A PDA should be considered as in DB, but can Construction be executed later in Project Development for engineering. Manager/General more complicated/higher-risk projects. Contractor • After scope is defined, in most instances CM is “at risk” for cost overruns and delays. • Can be used on projects that are located in (CMGC) states where DB is not “expressly allowed” by • Encourages greater transparency in contracting (e.g., statute. Guaranteed Maximum Price, or GMP). Copyright © 2007 Deloitte Development LLC. All rights reserved. 12-Feb-07 New Starts Program Assessment - Assessment of Analogous Project Delivery Processes 37

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