On November 7, 2006, California voters approved Proposition 1B by more than 60%. Proposition 1B provided for the issuance of $19.9 billion in general obligation bonds for transportation projects throughout California. Approximately 92% or $18.3 billion of the authorized bond funds are to be used to increase capacity on and rehabilitate state highways, local roads and public transit; make improvements to local and intercity public transit services; and facilitate goods movement and reduce emissions at ports. Unfortunately, without changing methodologies the construction will take many years and the entire cost will be borne by the State, therefore, the taxpayers. th the exception of the 405 freeway widening project (adding a northbound H.O.V. lane) where the Design-Build process was approved for use by SB 1026 (Kuehl), the manner in which transportation projects are built frequently results in delays and overruns with the taxpayers bearing the responsibility. The traditional process (Design-Bid-Build) begins with the appropriate governmental agency employing and taking responsibility for private-sector consultants who design and engineer all or part of a transportation project. Next the agency bids construction to a private-sector company. Financing is accomplished, as above, with bonds issued by the government and purchased by private-sector investors with the taxpayers being responsible for repayment of interest and principal. The government agency takes responsibility for operating and maintaining the facility by utilizing either government workers or private companies or both. The taxpayers bear responsibility for any quality defects or unexpected problems. Design-Build is a process by which a single entity provides both design and construction through the use of a single contract between the governmental agency and the Design-Build contractor. The process is used to accelerate procurement of a contract by allowing the contractor to begin some of the construction before the final design has been completed. Other benefits of Design-Build include singular responsibility and therefore a single point of contact for quality, cost and scheduling; reduction of administration and inspection costs; reduction or elimination of expensive change orders and claims due to “errors and omissions;” allowing maximum contractor flexibility in the selection of innovative designs, materials, and construction techniques; and, a warranty provision. By utilizing Public-Private Partnerships together with Design-Build, all activities (design, construction, financing, responsibility for defects and operating and maintaining) would be integrated into one long-term contract with a private-sector partner to the advantage of the taxpayer. Additional benefits of utilizing Public-Private Partnerships include project acceleration (Projects can be delivered years ahead of when they might otherwise be available. There are often stipulations that construction is completed on time and within budget, thereby protecting taxpayers from cost overruns and delays); cost-effective design and construction (The private-sector partner brings the efficiencies and innovations of the private sector to the job. Because funding is available up front, major infrastructure projects do not have to be phased in as funds become available, thus greatly reducing overall cost and time); and, the private-sector partner takes the risk and responsibility for interest rates and repayments. The long-term contract normally provides that the facility (project) shall, at all times, be owned by the government. When the facility is ready for use, it is leased to the private-sector partner, who operates and maintains it during the lease term. While operating the facility, the private-sector partner receives the revenue stream generated by the project, which could take the form of a user charge (such as a highway toll) or an annual government payment for performance (called a “shadow toll” or “availability charge”). Any increases in the user charge or payment for performance are typically stated in advance and regulated by a binding contract. Upon expiration of the lease term, the facility, together with the right to collect user fees, reverts to the government. Governor Schwarzenegger’s 2007/08 budget proposes to speed up the construction process and relieve burden from the taxpayers by authorizing the use of Design-Build and Public-Private Partnerships. The first step in the authorization process has begun with the introduction by Senator George Runner of SB 56 (1/10/07) and SB 57 (1/16/07). SB 56, if passed, would declare the intent of the Legislature to authorize a demonstration program that would allow a careful examination of the benefits and challenges of using a Design-Build method of procurement for transportation projects. It would, until January 1, 2016, authorize certain state and local transportation entities to use a Design-Build process for contracting on selected transportation projects. The projects would be selected by the California Transportation Commission. SB 61, if passed, would authorize the California Department of Transportation or regional transportation agencies to enter into Public-Private Partnerships for the construction and operation of transportation projects within those transportation corridors identified by the Transportation Commission as “high priority.” In determining which corridors are “high priority” consideration shall be given to the extent to which corridor improvements will relieve congestion within the corridor, the potential to attract private investment to finance the transportation improvements in the corridor, the technical, scientific, technological, or socioeconomic merits of transportation improvements in the corridor, and any other factors as the commission deems appropriate. If we want to accelerate the building of the desperately needed transportation projects that we voted for on November 7, 2006 we should encourage our Legislators to support Design-Build and if we want to be able to afford much needed additional transportation projects that the Proposition 1B bond proceeds will not cover, we need to encourage support of Public-Private Partnerships. These methodologies have been used successfully in numerous other States and it is time for us to reap the benefits. Gregory N. Lippe, CPA, is managing partner of the Woodland Hills-based CPA firm of Lippe, Hellie, Hoffer & Allison, LLP and Vice-chair of the Valley Industry and Commerce Assoc. (VICA).
Let’s Accelerate Transportation Projects