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Reprinted with permission of
Metro Magazine
What Does the Future Hold
for
Rail Transit
ublicrivate
artnerships?
P
With increasingly fierce competition for a limited pool of
government funding for transportation projects, transit
agencies are turning to the private sector for
outsourcing, innovative contracting and financing,
to see rail projects realized.
By Edward J. Fishman
F
or more than 10 years, transportation planners in the
rapidly growing urban area
surrounding the cities of
Raleigh and Durham, N.C., have been
working on the development of a regional rail system.
The system would provide passenger
rail service from Duke University’s
east campus, through downtown
Durham, the technology center known
as Research Triangle Park and the
town of Cary, to various activity centers in downtown Raleigh. The Triangle Transit Authority rail project has
completed many significant milestones, including completion of the
environmental review process and the
acquisition of necessary railroad rightof-way. However, the project recently
removed itself from the FTA New Starts
pipeline because of difficulty meeting
heightened cost-effectiveness standards. Nonetheless, the rail project remains alive and active due to an innov72
METRO MAGAZINE JANUARY 2007
ative proposal to replace some portion
of public funding with private capital
investments in station development.
Triangle Transit is actively negotiating a master development agreement
with Cherokee Investment Partners,
a financial development and real estate
developer. Under the arrangement,
both Triangle Transit and Cherokee
would contribute land and money into
the transit-supportive development
that is expected around the system’s 12
planned passenger rail stations. Triangle Transit would receive a portion of
the future revenue stream from these
joint development activities. This income would defray future operating or
capital costs of the rail system, thereby
reducing the need for public funding
in the future.
Attracting private investment
Headlines in the transportation industry press and discussions among
transportation policymakers have been
Photo by Michael Rosenthal/New Jersey Transit
dominated recently by the expanding
use of such public-private partnerships
(PPPs) in various sectors. Much of the
activity has occurred in the highway
sector, where toll revenue often can
produce an income stream that is sufficient to attract private investment in
roads, tunnels and bridges. Chicago
and the state of Indiana both entered
into long-term leases on portions of
their highway infrastructure in return
for upfront payments well in excess of
$1 billion from private concessionaires.
There also have been a number of
public-private partnerships in the freight
railroad sector where the revenue generated through user fees, such as tolls,
often can be large enough to reimburse
state and local governments for funding
necessary capital improvements.
The use of PPPs in the rail transit industry is also expanding at a rapid pace
as transit agencies explore additional
ways to stretch limited federal and state
funding for new projects. New Jersey
Transit’s Hudson-Bergen light rail transit system was developed and is being
operated by a private consortium under
an innovative design-build-operatemaintain (DBOM) arrangement. Many
other transit systems, including the
Metropolitan Transit System in San
Diego, TriMet in Portland, Ore., and
Dallas Area Rapid Transit (DART), have
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ship as “a contractual agreement
formed between public- and privatesector partners, which allows more private-sector participation than is traditional” under standard procurement
methods. This broad definition can be
simplified into three project structures:
outsourcing services, innovative contracting and innovative financing.
The broad DOT definition would include the contracting out of traditional
public transit functions to private contractors. Herzog’s operation of the
South Florida Regional Transportation Authority commuter rail service
and the consortium that operates the
Massachusetts Bay Transportation
Authority commuter rail service in
Boston are two of the more prominent
examples of the outsourcing model.
Innovative contracting
used their light rail systems to attract
TOD (transit-oriented development)
projects. These projects have attracted
private capital investment and have produced significant public benefits.
There are a range of different relationships between a public transit
agency and the private sector that could
be referred to as PPPs. The most basic of
these arrangements, which involves
the contracting out of services by the
public sponsor, is widely used today.
The most interdependent arrangement,
involving the direct investment of equity capital by the private sector into a
public transit project, does not make
economic sense in all circumstances
and is unlikely to replace government
funding as the primary source of financing rail transit projects. However,
there are projects such as the Triangle
Transit proposal where private participation from an equity standpoint
through joint development may be
feasible.
Defining PPP
The term “public-private partnership” can be used loosely to define a
spectrum of different collaborations between the public sector and the private
sector. A U.S. Department of Transportation (DOT) report to Congress in
2004 defined a public-private partner-
The DOT definition of a public-private partnership encompasses designbuild, DBOM and other innovative project delivery techniques that have
become popular ways to save time and
money on construction projects by
shifting more responsibility and risk to
the private sector. These methods are
beginning to replace the traditional
“design-bid-build” method of contracting by public transit agencies.
New Jersey Transit entered into a
DBOM contract with 21st Century
Rail Corp., a consortium of contractors
led by the Washington Group, to develop the Hudson-Bergen light rail system. The Hudson-Bergen project, with
a total expected cost of at least $2.2 billion, is one of the largest public works
projects ever undertaken in New Jersey.
The initial phase of the light rail system, completed in 2000, connects Bayonne, Jersey City and other areas of
Hudson and Bergen counties with the
Hudson River waterfront and crossings
to Manhattan.
The DBOM contract required 21st
Century Rail to: (1) deliver a fleet of vehicles; (2) design and construct the light
rail system and supporting facilities; and
(3) operate and maintain the system for
a period of 15 years. This innovative
project delivery method resulted in significant project timetable savings (up to
eight years by some estimates) and has
been successful from an operations and
maintenance standpoint because of the
incentives placed on the private consortium through the contractual arrangement. Many other rail transit projects
(including the Hiawatha LRT project in
Minnesota) were recently developed
under design-build and DBOM models
instead of the traditional design-bidbuild approach.
Innovative financing
The third PPP category involves innovative approaches to financing public transit projects. The private financing of infrastructure projects is more of
a challenge in the rail transit sector because of the unlikelihood that revenues generated by the operation will
be able to cover debt-service obligations. Most rail transit capital projects,
and subsequent operations and maintenance, are subsidized heavily by
local, state and federal funds. However,
in certain circumstances, it is possible
to use a specific transaction structure
to attract private investment in rail
transit projects.
One such structure involves “availability payments” that compensate the
private participants for minimizing the
need for government subsidies. These
payments can be structured to increase
with the quality of their performance.
The performance can be measured
against standard benchmarks, such as
on-time arrivals, the availability of service or the reduction in operating and
maintenance costs.
This category of innovative financing
also covers rail transit projects that are
financed through joint-development
arrangements. Several transit agencies
have engaged in successful joint-development programs at particular locations
on their systems, including DART’s
Mockingbird Station and TriMet’s Pearl
District. These projects take advantage
of the value of appreciating land or air
rights adjacent to passenger rail stations,
which are very attractive to residential
and retail developers. These developers
may fund part of the cost of providing
rail service to that station in exchange
for exclusive development rights. TrianJANUARY 2007 METRO MAGAZINE
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Photo by Michael Rosenthal/New Jersey Transit
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New Jersey Transit entered into a DBOM contract with 21st Century Rail Corp.,a consortium
led by the Washington Group,to develop the Hudson-Bergen light rail system.
gle Transit’s proposal is particularly innovative because it would allow the
agency to participate directly in the
stream of revenue from transit-supportive development.
The Las Vegas Monorail’s 4-mile
system that runs along Las Vegas
Boulevard and serves eight major resort properties and the Las Vegas Convention Center is another example of
a PPP using innovative financing.
The Las Vegas Monorail Co., a nonprofit public benefit corporation, was
created to develop the monorail
through tax-exempt revenue bonds.
The project was the first urban-grade
fixed-guideway system in the U.S. to
be constructed with only private financing. The Las Vegas situation, however, is unique because during the
planning phase it was determined that
farebox and advertising revenue from
operations were expected to meet or
exceed the operating costs.
Potential benefits of PPPs
The primary potential benefits of innovative contracting methods include
accelerated and more cost-effective implementation of high-priority projects
and the use of the private sector’s specialized expertise and technology.
Many of these benefits are created by
establishing a single point of responsibility and shifting certain project risks
to the private sector, which may be in
a better position to manage budget
and timetable concerns if their overall
return is dependent on performance.
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METRO MAGAZINE JANUARY 2007
The primary potential benefits of innovative financing techniques include
the promotion of private equity participation in the project. The use of PPPs
potentially facilitates the development
of projects, such as the Triangle Transit
regional rail project, that may not otherwise have been built due to financial
constraints.
pate in the pilot program.
Other project proposals include California’s Bay Area Rapid Transit (BART),
which has expressed an interest in the
Penta P Program in connection with its
“E-BART” extension project to eastern
Contra Costa County. This 23-mile extension project, using diesel multiple
unit (DMU) technology instead of
BART’s traditional heavy rail service,
would involve both DBOM contracting
and transit-oriented development.
The Virginia Department of Rail
and Transportation, in connection
with a private consortium led by Bechtel and the Washington Group, is
sponsoring an extension of the Washington, D.C., Metro system from the
East Falls Church station to Dulles Airport in northern Virginia.
The Triangle Transit regional rail
project, the E-BART extension, the
D.C. Metro extension to Dulles Airport
and several other projects have expressed preliminary interest in obtaining one of the three slots available in
the Penta P Program.
Why are PPPs important?
PPPs are increasing in importance in
the rail sector for two principal reasons.
First, there is increasingly fierce competition for a limited pool of government
funding for transportation projects. Second, there is increasing demand for the
development of new transit alternatives
and the maintenance and revitalization
of mature transit networks.
Thus, with greater needs and less
available funds, public transportation
agencies are thinking more and more
about ways to encourage the private sector to participate in their infrastructure
and development projects. This dialogue is being reflected in Washington,
D.C., where Congress has directed the
FTA to develop a Public-Private-Partnership Pilot Program (referred to as “Penta
P”) designed to explore benefits of using
PPPs for rail transit and other fixedguideway capital projects.
The FTA solicited public comments
on the program earlier this year and is
expected to issue final criteria early
this year. Several transit agencies, including Triangle Transit, submitted initial expressions of interest to partici-
Looking to the future
Although we are likely to see an increase in the use of PPPs in the rail transit sector, this project structure does
not work for every situation and is unlikely to replace public funding as the
primary source of financing for rail
transit projects. There are various challenges associated with the further implementation of PPPs in the transit sector, including certain restrictive state
laws that may prevent innovative contracting and financing methods from
being used in particular states.
In addition, it will be difficult to attract direct private equity investment
in rail transit infrastructure projects unless a business case can be made. The
continued use of design-build and
DBOM project delivery structures and
the participation of private investors in
rail transit projects through joint development are the most likely forms of
PPPs that will occur in the rail transit
sector in the near term.
Edward J. Fishman is a partner in the Transportation Group of the Kirkpatrick & Lockhart Nicholson
Graham LLP law firm in Washington, D.C.