Massachusetts Department of Transportation (MassDOT) Route 3 South Managed Lanes Project DRAFT FOR DISCUSSION PURPOSES ONLY

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1 Massachusetts Department of Transportation (MassDOT) Project High Level P3 Project Suitability Assessment Report September 11, 2013

2 Contents Proposed Project Description Project Background and Status Commonwealth Considerations Transportation Need and Benefit Statement Assessment Criteria Potential Delivery Structures Key Findings Summary Considerations and Challenges Potential Next Steps Appendix: Market Precedents 1

3 Proposed Project Description The Project includes the construction of HOT (High Occupancy Toll) lanes, also known as managed lanes, between: I-93 / Route 3 interchange at Braintree at the north end; and Exit 14 (Route 228) in Rockland at the south end The Project would add one lane in each direction, creating 4 lanes of traffic from the I-93/Route 3 interchange to Exit 16, and 3 lanes of traffic from Exit 16 to Exit 14 The Project could also include expansion of 3 lanes continuing down to Exit 11, as MassDOT examined the widening of Route 3 South from Exit 16 to Exit 11 in 2005 Different tolling policies may be used in order to manage congestion (e.g. dynamic pricing, time of the day pricing) In 2012, MassDOT received an unsolicited proposal for the addition of managed lanes from the I-93/Route 3 intersection to Exit 14 under a P3 model 2

4 Project Background and Status This report is part of the high-level screening process used to assess the suitability of delivering a project under a Public-Private Partnership: Project Background Project Name: Sponsoring Agency: Preliminary Schedule Massachusetts DOT High level & detailed level P3 assessment Fall 2013 (anticipated) NEPA process initiation Late 2013 (anticipated) Project development Early 2014 (anticipated) Project procurement Mid 2014 (anticipated) NEPA clearance Late 2015 (anticipated) Construction commencement 2016 (construction period estimated at 2 years) (anticipated) 3

5 Commonwealth Considerations Project-specific Considerations: Reduce Congestion Reduce congestion on Route 3 South in both the north and south bound directions and improve travel times for daily commuters living in the area Environmental Allow vehicles with a certain number of riders and above to use the HOT lane free of charge to encourage carpooling and a reduction in vehicle emissions Indicative drivers for P3 delivery: Generate revenue that will be used to fund project costs Accelerate development of the project Transfer risk 4

6 Transportation Need and Benefit Statement Transportation Need and Benefit Statement To reduce congestion on Route 3, particularly during peak rush hour periods, and reduce vehicle emissions by encouraging HOV use. Description of surrounding area: The section of Route 3 South that is under consideration for managed lanes is a freeway, connecting Cambridge to Cape Cod The road is currently the only limited access highway serving the South Shore The highway was designed in the 1950s and portions were opened to traffic throughout the 1950s and completed entirely by 1962 The highway extends from the Southeast Expressway/Route 128 Braintree split in Braintree to the Rotary at the Sagamore bridge in Bourne (approximately 40 miles) The northern 4 miles of Route 3 South between Braintree and Exit 16 in Weymouth consist of three travel lanes in each direction; from Exit 16 in Weymouth to the Rotary in Bourne, the highway consists of two travel lanes in each direction (except for a ½ mile section at Exit 4 near Plymouth where there are three lanes) There are few alternate routes available for direct/long distance travel (only a few that provide local/less direct travel alternatives, such as Route 53 and Route 3A) How will the project address the existing transportation need? The Project could help alleviate congestion by adding one HOT lane in each direction along Route 3 South from the Braintree Split to Exit 14 (or Exit 11) Based on 2008 data, depending upon the segment of the project examined, the average daily traffic ranges between 70,000 and 80,000 vehicles per day in each direction These sections of Route 3 South experience extreme traffic volume and congestion, particular during the peak rush hour periods (6-9am and 4-7pm, seven days a week), that can exceed 2,000 vehicles per lane per hour. Since 1985, the shoulder of certain high volume sections are used as another lane for general traffic, due to high volume and congestion. Different tolling policies may be used to help manage congestion. For example, tolls could be set at a higher level during peak traffic hours (time of the day pricing) or could change in frequent, real-time intervals to maintain a minimum speed (dynamic pricing) MassDOT is considering High Occupancy Vehicles policies to encourage environmental friendly commuting options 5

7 Assessment Criteria Addresses Commonwealth s Considerations High-Level Screening Criteria Commonwealth Considerations The Project addresses considerations by: Adding lane capacity to reduce traffic congestion along the Route 3 South corridor (particularly during rush hour, 6-9am and 4-7pm) Allowing for the introduction of environmentally friendly policies by allowing car poolers (i.e., high occupancy vehicles) to use the HOT lanes at no or lower cost, in certain circumstances Satisfies Public Transportation Need The addition of one lane per direction will reduce congestion level and improve travel times along Route 3 HOV policies can be used to incentivize car pooling and use of public transit to reduce congestion Addresses Priorities Identified in State, Regional and / or Local Transportation Plan The project is not yet included in the state/local/regional transportation plan 6

8 Assessment Criteria (Continued) Opportunity for Private Sector Innovation Ability to Transfer Risk High-Level Screening Criteria - Opportunity for Acceleration, Innovation and Efficiencies The Project could offer an opportunity for the private sector in terms of enabling cost efficiencies in construction, operations and maintenance, and whole life costing if the private sector were to construct operate and maintain the project The level of technical complexity is similar to other P3 HOT lanes projects There are no capital expenditure estimates for the whole project scope, but typically more efficiencies can be generated for projects with a cost in excess of $ million There is an opportunity to transfer revenue risk (of the toll revenue on the HOT lanes), finance risk, construction risk, operations and maintenance risk, as well as lifecycle risk to the private sector Revenue risk transfer depends on policy objectives such as maximizing throughput versus maximizing revenue, toll and HOV policy, and minimum speed requirements Accelerated Project Development Private sector incentives, such as liquidated damages and commencement of payments after completion may be introduced to expedite project delivery In addition, currently there is no public funding budgeted for the project; hence, leveraging future tolls may allow acceleration of the project 7

9 Assessment Criteria (Continued) Ability to Raise Capital Potential to Generate Revenue and Funding Requirement High-Level Screening Criteria Funding/Financing Based on market precedent, the market can finance managed lanes projects either under an availability payments or toll revenue mechanism Due to the limited track record on the operating performance of managed lanes projects, lenders and credit rating agencies are more conservative in the assessment of projects where debt is raised against a revenue pledge Ability of to fund project is subject to market conditions, financing of any funding gap and risk allocation The Project will generate revenue through the collection of tolls from the users managed lanes How much revenue that could be generated is yet to be determined, given that no traffic studies or tolling analyses have been completed at this time Currently, there is no anticipated funding for the project Market Precedent There is extensive market precedent for projects similar to this project being pursued as a P3. Examples of such projects include: DBFOM/Toll Concession: Capital Beltway (Virginia), NTE (Texas), LBJ (Texas), I95 (Virginia), US 36 (Colorado), SR-91 (California) DBFOM/APs: I595 (Florida) 8

10 Assessment Criteria (Continued) High-Level Screening Criteria - Readiness Readiness Consistent with Federal Requirements There has been one draft environmental study completed of a section of Route 3 South (from Exit 16 to Exit 11), however no official environmental studies have been completed. Additionally, there is no funding currently identified for the project Draft EIS documentation has been developed but hasn t yet been reviewed by FHWA Environmental impact of road widening will need to be further assessed. For example a potential increase in traffic counts due decreased congestion and its relationship to the level of tolls Project not yet included in the State Transportation Improvement Program (TIP) Environmental clearance could take up to months Can Be Structured as a P3? Market precedent indicates that the project can be structured as a P3. Different payment mechanism can be used for the financing of the project, including availability payments or toll revenue 9

11 Potential Delivery Structures Potential Delivery Model Features Risk transfer: A developer will be responsible for the delivery of the project under a fixed-price, datecertain design-build contract and will be responsible for O&M during the life of the contract (typically a year contract term). Toll setting control as well as traffic and revenue risk are transferred to the developer. Tolling operations are the responsibility of the developer. Option 1: DBFOM Toll Concession Option 2: DBFOM Availability Payments Payment mechanism: The developer will pay for O&M, life-cycle costs as well the initial capital investment through the collection of tolls. Any funding gap will need to be covered by a Commonwealth contribution. Private investment: Typically, under this delivery model, projects are funded with a combination of debt and equity at a ratio between 65/35% to 80/20%. Risk transfer: A developer will be responsible for the delivery of the project under a fixed price date certain design build contract and will be responsible for O&M during the life of the contract (up to about a 35-year contract term). Traffic and revenue risk and tolling policy are retained by the Commonwealth. Specific activities may be retained by the Commonwealth (e.g. snow & ice removal), if it is deemed more cost effective. Tolling operations may be outsourced to the developer, if it is deemed more cost effective. Payment mechanism: The developer may be repaid by the Commonwealth with milestone payments during construction, construction completion payments, and/or a stream of availability payments post construction completion. Payments are additionally subject to performance deductions. The Commonwealth may fund payments though state funds and /or toll revenue. Private investment: Typically, under this delivery model, projects are funded with a combination of debt and equity at a ratio between 85 /15% to 90/10%. *Please note that these are illustrative examples. Other options or variations on these themes may exist. 10

12 Key Findings Summary High Level P3 Suitability Assessment Addresses Considerations: Yes. The project the Commonwealth s considerations by aiming to reduce congestion on highly traveled roads and reduce vehicle emissions by encouraging HOV use.. Opportunity for Acceleration, Innovation and Efficiencies Yes. This project has the potential for private sector acceleration by transferring construction risk to the private sector. This project can also allow for innovation and efficiencies by transferring operations and maintenance and long term capital maintenance to the private sector. If tolling operations were also to be transferred to the private sector, this could allow for additional potential efficiencies. Funding/Financing: TBD. Revenue levels are not know yet and there is no dedicated funding for this project from the Commonwealth. Readiness: TBD. No environmental work has been done on the project site to date. Traffic and revenue as well as tolling analyses will need to be completed on the project in order to determine necessary project funding and if the public sector can provide the funding needed. Can the project be structure das a P3? Move to the next phase for further analysis? Yes [TBD by the Commission] 11

13 Considerations and Challenges Identifying the optimal north and south limits of the project Interface issues for any improvements along the corridor beyond the managed lanes Policy consideration of maximizing throughput versus maximizing revenue Operational and commercial issues in relation to a single managed lane per direction Buffer versus barrier separation of HOT lanes from general purpose lanes Tolling policy (dynamic tolling to maintain minimum speeds, pre-determined time-of-day rates, etc.) Need for public funding will be subject to level of publicly acceptable tolls Updating environmental documents based on preferred project length HOV policy and park & ride facilities Traffic management during construction 12

14 Potential Next Steps Commission a traffic & revenue study on a segment by segment basis Consider policy objectives for tolling Conduct an operational assessment of managed lanes project (e.g., implications of a single HOT lane per direction and its limitation on throughput and revenue generation) Refine preliminary capital and O&M expenditures on a segment by segment basis Estimate cost of video/electronic tolling equipment on a segment by segment basis Perform financial analysis of implementing tolls on the Route 3 managed lanes project Identify potential Commonwealth contribution to project Assess options for various business models (delivery and payment mechanisms) and the impact to MassDOT Commence local stakeholder discussions to ensure project support and coordination 13

15 List of References Specific information in this report came from the following sources: Interview with Frank DePaola, Administrator Highway Division, on August 1, 2013 Draft Environmental Impact Study, 1/1/2005 Route 3 Traffic Volume Diagrams, 2008 Three-page unsolicited proposal presentation form unsolicited proposer regarding HOT lanes proposal on Route 3 14

16 Appendix: Market precedents

17 Market Precedent/Case Study I-95 HOV/HOT Lanes Project Characteristic Project Type Sector Project Detail Brownfield Transportation Roads Description Public sponsor Advisor Private sector partner The Project involves the conversion, expansion and extension of 29 miles of HOV/HOT lanes on I-95 from Garrisonville Road to Stafford County to Edsall Road in Fairfax County Virginia Department of Transportation KPMG 95 Express Lanes, LLC (Fluor / Transurban led consortium) Funding Details: $925 million $308.4 million TIFIA $292 million Equity $252.7 million PABs $71.1 million Public Grants $0.5 million Interest Earnings Status Financial Close July 2012 Term 76 years Public Grants 8% TIFIA 33% Project size Delivery model $924.7 million DBFOM Dynamic Toll concession PABs 27% Payment mechanism Revenue / demand risk Equity 32% 16

18 Market Precedent/Case Study I-95 HOV/HOT Lanes Project Procurement Schedule I-95 HOT Lanes Map June 2005 Proposals Received November 2005 Preferred Bidder Selected July 2012 Financial Close Lessons Learned Delivery Strategy Understand the balance between innovation and competition Be clear on the pros and cons of TIFIA, particularly under a split commercial and financial close Delivery Implementation Where it makes sense use a hard bid procurement structure to drive competition The rating agencies are taking a hard look at revenue risk transactions 17

19 Market Precedent/Case Study I-495 Capital Beltway HOT Lanes Project Characteristic Project Type Sector Project Detail Greenfield Transportation Roads Description Public sponsor Advisor Private sector partner The 14 mile Project includes construction of four new lanes and the conversion of four existing lanes to HOT lanes, refurbishment of 12 interchanges, and adds new capacity to the DC region s most congested route Virginia Department of Transportation KPMG Fluor Enterprises and Transurban Group Status Financial Close December 2007 Term Project size Delivery model Payment mechanism 80 years $1.6 billion DBFO Revenue/demand risk Funding Details: $1.6 billion $590 million PABs $590 million TIFIA $409 million Public Grants Public Grants 26% TIFIA 37% PABs 37% 18

20 Market Precedent/Case Study I-495 Capital Beltway HOT Lanes Project Procurement Schedule I-495 HOT Lanes Map April 2005 September 2007 Comprehensive agreement signed with Flour and Transurban In-principal agreement signed between Flour/Transurban and VDOT December 2007 Financial Close Lessons Learned Delivery Strategy Competition of ideas is as important as price competition Agency has a major due diligence process prior to financial close Build in-house staff capabilities Track financial trends Delivery Implementation Lead time to financial close is lengthy Design period upon financial close is short Other Concessionaire wants the road open as soon as possible 19