Public-private partnerships for transportation deals that involve concessions are likely to be held to new standards on pricing and competition, under a rule proposed last week by the Federal Highway Administration.

The fair market value and design-build amendments officially proposed on Oct. 8 by submission into the Federal Register would change regulations to require state departments of transportation and other public authorities to "negotiate for and obtain fair market value" as part of any concession deal involving facilities built or purchased using federal highway funds.

It also would allow public agencies to compete against the private sector for such concession agreements. The rule would apply to long-term public highway development, construction, and operation and maintenance agreements where a third-party concessionaire pays the government or finances infrastructure projects in exchange for the right to operate the facility and collect its revenues.

The FHWA said concessions needed to be clarified in regulations because they are increasingly attractive financing options as traditional revenues are in decline.

The 2005 Chicago Skyway concession yielded the city a $1.83 billion upfront payment from a Cintra-Macquarie joint venture, and the Indiana Toll Road deal won the state $3.8 billion from a venture also composed of Cintra and Macquarie. Under the Capital Beltway HOT lanes agreement in Virginia, Fluor-Transurban agreed to pay for most of the $1.9 billion project to widen and build new lanes on the beltway in return for tolling and operation rights for 75 years.

While the FHWA did not specify a set of criteria for establishing fair market value, it stated there would be "a presumption that fair market value is received whenever a highway agency procures a concession agreement through a competitive process."

"There really isn't any way to apply some absolute criteria on what that would be based. The burden for determining that kind of thing is on the state," said Doug Hecox, a spokesman for FHWA.

For greenfield projects, where a value is not discernible based on similar concessions, the government may need to bring in a market value expert, he said.

The rule would apply not only to state but also to local or regional departments of transportation, according to Hecox.

The second major change to concession agreements would be allowing for open competition between public and private entities. The administration noted specifically that the Texas Department of Transportation and the North Texas Turnpike Authority entered into concession agreements involving state highways 121 and 161. In the former, TxDOT chose a private developer's bid of $2.8 billion. After the state Legislature passed a law to give local toll agencies first option for projects, the department sold a 50-year concession to NTTA for $3.3 billion.

TexDOT spokesman Chris Lippincott said, "I don't think we can say for sure" whether the rule change would affect future projects.

The rule would not supersede the Texas law, according to Hecox. States would retain their ability to award concessions only to public agencies as long as they can prove they obtained fair market value for the infrastructure asset.

Hecox said it is unclear when the rule would take effect, but it would depend on the volume and nature of comments the FHWA receives. Theoretically the rule could be effective any date following the month-long comment period ending Nov. 7. It is not retroactive, he said.

"If for whatever reason somebody is not in compliance with these federal rules, then theoretically some of the highway funding that is apportioned out to them each year could be either withdrawn or redirected," Hecox said. "But it's never come to that."

Hecox also said the rule proposal was not prompted by the decision the FHWA made last month regarding a tolling proposal for the Pennsylvania Turnpike.

The FHWA considered fair-market valuation when it rejected on Sept. 11 the Pennsylvania Turnpike Commission's request to implement tolls on Interstate 80. Tolling I-80 would have enabled the PTC to lease the 311-mile roadway from the state's Department of Transportation for 50 years in return for yearly payments. Yet FHWA officials said PTC's tolling application did not include market valuation needed to best assess lease payments.

"There is simply no evidence that the lease payments are related to the actual costs of acquiring an interest in the facility," Tom Madison, FHWA administrator, said in a press release at the time the tolling proposal was rejected.

In addition, FHWA's proposed rule could affect another Pennsylvania concession-agreement initiative. Earlier this year, Gov. Edward Rendell pushed for a 75-year lease on the turnpike to a private consortium. In that public-private partnership, Citi and Abertis Infraestructuras agreed to pay the state $12.8 billion for operating rights on the 530-mile toll road and to finance the turnpike's $5.5 billion, 10-year capital program.

Legislation to allow for the concession agreement stalled in committee, with many now saying the bill will die at the end of the state's two-year legislative session on Dec. 31. After two extensions, Citi/Abertis declined to renew its turnpike bid when it expired on Sept. 30. At that time, Rendell said he plans to take up the initiative again next year, yet any new rules that the FHWA imposes could affect the administration's efforts.

"Hopefully it doesn't become prohibitive," said Rendell spokesman Chuck Ardo. "If it's just a matter of achieving a fair price for a roadway, we believe the taxpayers deserve that."

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