Final Core Toll Concessions Public-Private Partnership Model Contract Guide |
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Topics: BMW
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Gregory G. Nadeau
Federal Highway Administration
September 10, 2014
[Federal Register Volume 79, Number 175 (Wednesday, September 10, 2014)]
[Notices]
[Pages 53825-53834]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-21049]
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DEPARTMENT OF TRANSPORTATION
Federal Highway Administration
[Docket No. FHWA-2014-0006]
Final Core Toll Concessions Public-Private Partnership Model
Contract Guide
AGENCY: Federal Highway Administration (FHWA), Department of
Transportation (DOT).
ACTION: Notice.
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SUMMARY: The Moving Ahead for Progress in the 21st Century Act (MAP-21)
requires DOT and FHWA to develop public-private partnership (P3)
transaction model contracts for the most popular type of P3s for
transportation projects. Based on public input favoring an educational,
rather than prescriptive,
[[Page 53826]]
contract model, on February 6, 2014, FHWA published a draft of the Core
Toll Concession Model Contract Guide (Guide) (Docket No. FHWA-2014-
0006), requesting comments by March 10, 2014. The FHWA received a total
of 133 public comments regarding different aspects of the Guide and of
P3s in general. With this notice, FHWA publishes a revised Guide
reflecting these comments. In coming months, FHWA will publish
additional draft guides for public comment: An Addendum to the Core
Toll Concession Model Contract Guide that will address additional
contract provisions, and an Availability Payment Concession Model
Contract Guide that will cover this popular type of P3 arrangement.
The revised Core Toll Concession Model Contract Guide can be found
on the Docket (FHWA-2014-0006) and at the following link: http://
www.fhwa.dot.gov/ipd/pdfs/p3/
modelp3coretollconcessions.pdf.
FOR FURTHER INFORMATION CONTACT: Mark Sullivan, Office of Innovative
Program Delivery, 202-366-5785, mark.sullivan@dot.gov, Federal Highway
Administration, 1200 New Jersey Avenue SE., Washington DC 20590; Alla
Shaw, Office of the Chief Counsel, 202-366-1042, alla.shaw@dot.gov,
Federal Highway Administration, 1200 New Jersey Avenue SE., Washington
DC 20590; or Prabhat Diksit, 720-963-3202, prabhat.diksit@dot.gov,
12300 W. Dakota Avenue, Suite 370, Lakewood, CO 80228.
Comments Received and Addressed Regarding the Guide
On February 6, 2014, FHWA published a draft of the Model P3 Core
Toll Concession Contract Guide (Docket No. FHWA-2014-0006). The draft
requested comments on each of the substantive topics discussed in the
Guide. The FHWA received a total of 133 comments from multiple
stakeholders regarding different aspects of the Guide and in varying
degrees of detail. In particular, FHWA received 60 comments from the
Texas Department of Transportation (TxDOT), 13 comments from Ernst &
Young Infrastructure Advisors (Ernst & Young), 10 comments from
Professional Engineers in California Government (PECG), 9 comments from
the Drive Sunshine Institute, 6 comments from the Associated General
Contractors of America, 5 comments from the Commonwealth of Virginia, 5
comments from the American Road & Transportation Builders Association
(ARTBA), and 25 comments from private citizens.
A minority of comments addressed the desirability of P3s as a
matter of public policy, while the majority of comments focused on the
terms of the concession agreement described by the Guide (including
terms relating to tolling regulation, benefit sharing, supervening
events, changes in equity interest, changes in law, defaults, early
termination, and handback) without commenting on the desirability of
P3s generally.
The FHWA considered all of the comments it received on the Guide
and revised the relevant sections of the Guide as described below. In
addition, FHWA made clarifying revisions to certain sections of the
Guide as noted below.
Response to Comments
Note: The comments below, as does the Guide itself, often refer
to the ``Department''--the public authority granting rights via a
concession agreement. In all cases, this entity should be understood
to be a State or local transportation agency, not the United States
Department of Transportation.
Chapter 1: Introduction
1. The TxDOT commented that the concept of ``demand risk''
described in Section 1.1 of the Guide should be expanded to include
toll collection risk; the term ``revenue risk'' captures both demand
and toll collection risk.
The FHWA agreed with TxDOT's comment and has revised Section 1.1
accordingly.
Chapter 2: Tolling Regulation
2. The comments received on the Guide's review of tolling
regulation generally related to the setting of tolls, the
administration of toll collection, and the use of toll revenues in the
context of a concession agreement.
The TxDOT commented that the Guide should more clearly explain that
changes in User Classifications have potentially significant public
policy implications and therefore the Department often retains broad
discretion whether to approve changes. The TxDOT also commented that
the Guide should note that changes in User Classifications requested by
a Developer can also affect future toll revenues and that toll
concession agreements may contain provisions for adjusting the
Department's revenue sharing if the change is projected to increase the
Developer's revenues.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
3. Ernst & Young commented that the Guide should consider the
amount by which tolls can be raised in a given year, particularly where
the maximum allowable toll increase has not been made in prior years,
and should include a discussion of the costs and benefits of a tolling
strategy which maximizes revenue versus throughput.
The FHWA agreed with Ernst & Young's comments and has revised the
Guide accordingly.
4. The TxDOT suggested that Footnote 1 of the Guide be deleted. The
TxDOT disagreed with FHWA's suggestion in Footnote 1 that toll
concession agreements for projects with an element of public financing
might include provisions to allow lender rate covenants to control,
such that toll rates may exceed the maximum toll rates specified in the
toll concession agreement. The TxDOT noted that Footnote 1 cites
Private Activity Bonds (PAB) as the type of financing where this may be
appropriate but, according to TxDOT, including lender rate covenants on
such terms is not accepted practice for PABs financings, which are
public financings only in the sense that a public entity serves as a
conduit issuer for the benefit of a private Developer, and the Guide is
directed at toll concessions with private concessionaires. Such
provisions, TxDOT suggested, can undermine essential public policy that
supports the toll rate regulation decisions of the State or local
government, and could be abused in order to elevate private profit.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
5. The TxDOT additionally commented that the contract language set
forth in the Guide's section on Tolling Regulation misleads the reader
to think that giving the Developer sole discretion in setting and
changing toll rates is the norm. The TxDOT noted that, in its
experience, such discretion is the exception and not the norm.
Accordingly, TxDOT suggested that the Guide include sample contract
language that establishes maximum toll rates and terms for how the
maximum may change over time.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
6. The TxDOT commented that, in certain instances, a regional
tolling authority provides toll collection and administration rather
than the Department because the regional authority may have a statutory
right and obligation to provide tolling services for all tolled
facilities. The TxDOT suggested that the Guide should
[[Page 53827]]
therefore mention this potential circumstance and that the Guide should
call for working out the terms of a tolling services agreement with
such a tolling authority before proposal submission so that proposers
know what pricing, terms and conditions to expect.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
7. The TxDOT suggested deleting the statement that the agreement
with the tolling authority is ``typically known as a `Toll Enforcement
and Violation Processing Services Agreement'.'' The TxDOT felt that the
statement is not necessary and the term is not used across all
jurisdictions. The TxDOT additionally suggested that the section also
should state that such an agreement may be with the Department or may
be directly with a regional tolling authority.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
8. The TxDOT commented that FHWA should revise the sample contract
provision which implies that it is the Department that has the primary
responsibility to coordinate with law enforcement agencies to bring to
bear toll enforcement services. The TxDOT noted that, while toll
concession agreements often provide for Department assistance to the
Developer in arranging such law enforcement, they commonly state that
the Developer is primarily responsible for coordinating with law
enforcement agencies for toll enforcement.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
9. The ARTBA commented that the Guide should include additional
discussion about issues surrounding the collection and enforcement of
tolls, including the authority, responsibility and tools available to
the Department and Developer in the collection and enforcement of
tolls.
In response, FHWA notes that the Guide does address possible
approaches in a general manner in Section 2.5.2. However, given that
the rights and responsibilities of the Developer to enforce toll
collection is highly dependent on applicable State and local laws, it
is difficult to comment in great detail outside the context of a
particular project and a particular State, and such discussion is
outside the scope of the Guide.
10. The TxDOT and Ernst & Young provided related comments on the
Guide's statement that ``it is common for the uses of Toll Revenues in
the Concession Agreement and flow of funds in Financing Documents to
mirror each other.'' They suggested that the Guide overstates typical
flow of funds provisions in toll concession agreements. They further
commented that toll concession agreements tend to require first
priority use for paying operating and maintenance expenses (including
sums owing the Department) and lowest priority use for distributions to
equity (after all other project costs are covered), but otherwise leave
it to the lenders and Developer to determine the full order of priority
for use of Toll Revenues. The TxDOT and Ernst & Young commented that
the text should be revised accordingly.
The FHWA agreed with these comments from TxDOT and Ernst & Young
and has revised the Guide accordingly.
11. The PECG commented that the Guide should include language
requiring the Developer to use Toll Revenue to meet payment obligations
to the Department, operating and maintenance expenses, taxes, debt
service, and other costs, before making payments to equity.
Section 2.6 of the Guide includes these payment obligations in its
discussion of provisions designed to prevent the Developer from
diverting Toll Revenues for unauthorized purposes. The FHWA revised the
Guide to note that a Department may prescribe a list of authorized uses
of Toll Revenues, but recognizes that some Concession Agreements may
leave the decision regarding the full order of priority of payment
obligations to the Lenders and the Developer.
12. The PECG provided the following comment: The Guide should give
the Department the right to suspend tolling in case of an emergency or
for any other purpose, and the Developer should not be entitled to lost
toll revenue due to such action by the Department.
The FHWA appreciates that Concession Agreements will often include
provisions to this effect, and such provisions are expressly described
in Section 2.7.1 of the Guide.
13. The PECG commented that the Guide should not provide the
Developer with an entitlement to lost revenue if access to the project
is impeded for a beneficial public purpose.
The FHWA notes that the Developer's right to compensation is
limited to those matters defined as Compensation Events. The extent to
which a Concession Agreement may provide a Compensation Event under
these circumstances would typically be determined by the facts and
circumstances relevant to the particular project, and to the extent
that the Department is obliged to undertake certain obligations with
respect to the Project (e.g. providing ongoing access) and does not,
such a failure constitutes a Compensation Event. The FHWA does not
believe a change to the Guide is necessary.
14. The PECG commented that the Guide should not provide the
Developer with an entitlement to lost revenue if toll collection is
temporarily suspended to benefit or safeguard the public.
The FHWA appreciates that Concession Agreements will often include
provisions to this effect, and such provisions are expressly described
in Section 2.7.1 of the Guide.
15. The FHWA determined that it would be beneficial to users of the
Guide to include a table setting forth toll rate restrictions and has
included such table in Section 2.4.
Chapter 3: Benefit Sharing
The comments received on the Guide's review of benefit sharing
generally related to requests to include a broader discussion on gross
revenue-based sharing mechanisms and other types of benefit sharing in
a refinancing context.
16. The TxDOT and Ernst & Young provided similar comments to the
effect that the Guide should avoid prescribing one approach over
another in relation to triggers for revenue sharing. Instead, they
suggested that FHWA should consider including discussion of gross
revenue-based sharing triggered by absolute revenues in addition to
revenue sharing triggered by actual equity IRR. They also commented
that the Guide should include a discussion of the challenges associated
with using actual equity internal rate of return (IRR) as a trigger and
guidance on how to manage toll concession windfalls.
The FHWA agreed with these comments from TxDOT and Ernst & Young
and has revised the Guide accordingly.
17. Ernst & Young commented that FHWA should clearly highlight that
in a properly structured P3 procurement, both equity and lenders are at
risk and the public benefits from this fact. Ernst & Young also
suggested that (a) FHWA consider whether the Guide should require
lenders to share in refinancing gains, and (b) the discussion of
sharing refinancing gains in the Guide should differentiate between
gains from refinancing based on higher than expected or proven traffic
versus market movement in interest rates.
This change was not incorporated as it was determined that this
issue was
[[Page 53828]]
already addressed by the Guide as a whole.
18. In Section 3.2.2, FHWA included a table setting forth bands and
revenue payment percentages.
19. In Section 3.2.2, FHWA clarified the concept of ``deferred
amounts.''
20. In the Glossary, FHWA added a definition for the term ``caps
and floors.''
Chapter 4: Supervening Events
The comments received on the Guide's review of Supervening Events
generally related to the scope of various types of Supervening Events,
the considerations and rationale driving the allocation of risk under a
Supervening Events regime, the compensation to be paid to the Developer
in respect of a Supervening Event, and certain public policy concerns
in respect to Supervening Events.
21. The TxDOT suggested that FHWA clarify that some Delay Events
are also Compensation Events, and may affect both the cost and the
schedule of a project. They further suggested that Sections 4.1 and
4.3.3 should mention that Delay Events may allow a Developer to extend
contractual deadlines and may provide a Developer with relief from the
assessment of performance points or noncompliance points.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
22. The TxDOT suggested that the term Compensation Event should be
expanded to include events that deliver value for money by allocating
risk to the Department.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
23. The TxDOT commented that the sample definition of the term
Compensation Event should include certain additional events, including:
Department-caused delay; Department-ordered suspension of tolling;
Department releases of hazardous materials; unreasonable, unjustified
delay by permitting agencies in issuing key permits; utility owner
delay; and differing site conditions.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
24. Ernst & Young commented that Departments should be mindful that
there is a distinction between the cost of delays and lost revenue.
They suggested that, with respect to lost revenue, the calculation
options presented in the Guide should also contemplate the possibility
of paying pre-determined, liquidated damages amounts, avoiding the need
to re-open the financial model.
The FHWA acknowledges the distinction between delay costs and lost
revenue. The proposed approach to calculating lost revenue is one that
Departments may choose to consider after consultation with their
financial advisors, but it has not been adopted in the U.S. to date and
therefore has not been incorporated into the Guide. A change to the
Guide is not necessary to address this comment.
25. The TxDOT suggested that the Guide reflect the fact that a toll
concession agreement may include provisions which adjust compensation
under the agreement based on the development of revenue-enhancing
facilities which were not planned at the time the agreement was
executed.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
26. Ernst & Young highlighted the importance of the Competing
Facilities provisions, and noted that these merit significant policy
consideration by a Department.
The FHWA agrees that these clauses should be carefully considered
in light of the important public policy issues they raise and the Guide
recommends that Departments do so in light of the facts and
circumstances relevant to each individual project. A change to the
Guide is not necessary to address this comment.
27. The PECG suggested that the Guide should not include a ``non-
compete'' clause.
The FHWA acknowledges the important public policy issues raised by
competing facilities clauses, and Section 4.3.2 of the Guide describes
some of the reasons why Departments have chosen to include them in
contracts for P3 projects. A change to the Guide is not necessary to
address this comment.
28. The PECG suggested that a Department should not be required to
pay the Developer if another government agency not within the
Department's control engages a private entity to develop a project that
affects demand for the Department's project.
The FHWA acknowledges the intra-governmental issues which may arise
as a result of such provisions, and notes that Section 4.3.2 of the
Guide suggests these risks be addressed by providing protection to the
extent the Department has discretionary authority over facilities
constructed by other governmental entities. Each project will present
unique challenges in this regard, however. A change to the Guide is not
necessary to address this comment.
29. The TxDOT commented that while the Guide states that
Departments are likely to achieve optimal risk transfer regarding
geotechnical, hazardous substance, utility, and endangered species
risks by providing Compensation Event relief for unknown matters, this
allocation varies considerably from project to project, and will depend
upon particular project characteristics, the magnitude of the risk
presented on the particular project, the degree of competition, and
other factors. The TxDOT suggested that the Guide should indicate that
optimal risk allocation for these risks depends on the attributes of
each project and procurement.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
30. The TxDOT commented that while the text regarding Force Majeure
Event termination in the Guide states that providing a termination
right for extended Delay Events other than Force Majeure Events is
contrary to international best practice, it is common U.S. practice to
include specified Delay Events in addition to Force Majeure Events in
the determination of extended delay triggering a right to terminate.
The TxDOT stated that the principle supporting such termination is that
exigencies outside the control of the parties have conspired to
frustrate the fundamental purpose of the transaction. Certain Delay
Events in addition to Force Majeure Events fit within this principle
and therefore should be validated in the text as well as the sample
contract language.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
31. The TxDOT commented that the Guide should acknowledge that in
relation to a Force Majeure or Delay Event, a contract may trigger
termination rights based on a cumulative number of non-consecutive days
of delay as an alternative to a specified number of consecutive days of
delay.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
32. The TxDOT commented that the application of the ``no better and
no worse'' principle is an oversimplification of the Supervening Events
regime and FHWA should provide greater clarity regarding the
application of this concept.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
33. The PECG suggested that the Guide should explicitly transfer
all
[[Page 53829]]
Force Majeure Event risk to the Developer, to avoid the potential costs
associated with Force Majeure Events being borne by a Department.
This comment reflects a misunderstanding of the economic impact of
transferring certain risks and the rationale for P3 procurements.
Departments will not receive value for money if all risk of Force
Majeure Events is transferred to the Developer given the tools
available to Developers to mitigate the effects of such risks and the
contingencies they would have to price if asked to take such risks. As
Departments are familiar with this risk on non-P3 projects, value for
money is typically optimized by retaining the financial risk associated
with Force Majeure Events. A change to the Guide is not necessary to
address this comment.
34. A private citizen expressed concern about the allocation of
costs associated with earthquake damage to P3 projects.
The consequences of Force Majeure Events such as earthquakes are
allocated pursuant to the Delay Event regime. The Developer will be
given additional time to complete the work, but not compensation to pay
the cost of repairing the loss as such costs can be insured against.
This is described in Section 4.3.3 of the Guide.
35. The TxDOT commented that FHWA should expand its discussion of
deductibles to highlight the differences between ``aggregate'' and
``per occurrence'' deductibles, and to provide information on the
details, advantages and disadvantages of both. In addition, TxDOT
commented that the Guide should state that deductibles usually do not
apply to Compensation Events which are caused by or within the control
of the Department.
The FHWA acknowledges that deductibles may be applied to
Supervening Events in some Concession Agreements, and has revised the
Guide to include a general discussion of deductibles. However, FHWA
thinks that the value provided to the Department from including
deductibles can be overstated except in certain unique circumstances
(such as where a Compensation Event is susceptible to numerous de
minimis claims). As Departments should look to their advisors on a
case-by-case basis for advice on when this is appropriate, FHWA
believes that a more detailed discussion than the one provided is not
necessary to be included in the Guide.
36. The TxDOT suggested that the Guide mention that market
participants may elect to utilize an objective discount rate, such as
the Developer's Equity IRR or weighted average cost of capital as
indicated in the Base Case Financial Model, rather than calculating
present value using an agreed risk adjusted discount rate.
The FHWA acknowledges that there may be appropriate alternative
means to discount the relevant sums and encourages Departments to seek
advice from their financial advisors as to the appropriate method to
use in a given circumstance.
37. The TxDOT commented that FHWA should revise the model provision
regarding a Developer's obligation to obtain additional debt or equity
following a Compensation Event. The proposed revision would reflect
certain precedents which condition compensation on the Developer's
ability to meet debt coverage ratios and require the Developer to use
``diligent efforts'' to obtain additional funds to cover the cost
impacts of the Compensation Event.
The FHWA acknowledges that there are transactions in the market
that make reference to debt service coverage ratios; however, the
ultimate standard in such documents is whether or not the Developer is
able to raise funding (which will include factors broader than the
ability of the Developer to meet ratio tests). In some jurisdictions
the concept of ``diligent efforts'' is vague and may be read to suggest
a level of effort that is synonymous with ``best efforts.'' This
standard would not be in the interest of the Department or the
Developer, as it is traditionally interpreted to require a party to
spend additional funds and do all things possible, even if not
reasonable, to achieve the desired outcome. The Department's
compensation sum would have to be increased to pay for the impact of
such potentially unreasonable actions, which would not represent value
for money. A change to the Guide is not necessary to address this
comment.
38. The PECG commented that the list of events which constitute a
Compensation Event should be limited to (i) a breach of the Concession
Agreement by a Department, and (ii) the development or implementation
of any change in the Work or technical requirements applicable to the
Work that the Department has directed the Developer to perform pursuant
to a Change Order or a directive letter pursuant to the Concession
Agreement.
The proposed changes to the definition of Compensation Event are
inconsistent with the allocation of risks on the basis of value for
money. A change to the Guide is not necessary to address this comment.
39. Ernst & Young commented that FHWA should consider whether the
Guide needs to include reference to the fragmentary network.
The FHWA believes this is a useful touch-stone for Departments to
see, as it is a method that is familiar to them in the context of
design-build contracting. A change to the Guide is not necessary to
address this comment.
40. The TxDOT suggested that the discussion of toll concession
agreements in the Guide should be expanded to include noncompliance
events and points regimes, financial modeling, and the role of an
independent engineer.
Financial modeling is discussed in the Guide, and noncompliance
points and the role of the independent engineer will be addressed in
the addendum. A change to the Guide is not necessary to address this
comment.
41. The FHWA clarified the term ``fragmentary network'' as used in
Section 4.4.2.
Chapter 5: Change in Equity Interests
The comments received on the Guide's handling of changes in equity
interests generally related to the extent to which the Department
should prohibit a change in equity interests, the qualifications to
consider for approving a new owner, and related terminology.
42. The TxDOT commented that Section 5.1 should be revised to
mention that, in addition to Developer experience with similar
projects, a Department may value Developer experience which
demonstrates ability to effectively manage all aspects of future work
on a project.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
43. The TxDOT also commented that the Guide should acknowledge that
(a) a change in control over an investor can have a significant effect
on the management, staffing and funding of the investor and Developer,
and (b) Department approval should be required for any changes in the
vertical chain above the Developer. In addition, TxDOT noted that the
concept of Change in Ownership should be changed to Change in Control
to reflect the impact of voting rights and other forms of control that
may not be strictly linked to ownership.
The FHWA has revised the relevant footnote within the Guide to
clarify that approval should be required for changes in the vertical
chain between the entities that were evaluated and/or any parents of
such entities that the Department considers important to the success of
the project. However, FHWA disagrees that the term ``Change in
Control'' better indicates the intent of these provisions than the term
``Change
[[Page 53830]]
in Ownership'' since a change in ownership that does not affect a
change in control may still have a material adverse effect on the
Project, which these provisions are intended to prevent.
44. The TxDOT commented that the standard for Department approval
of a Change in Ownership should be narrowed in light of certain
precedent which uses a standard that assesses whether a potential owner
has the resources, qualifications and experience to perform the
Developer's obligations, and no conflict of interest with the
Department exists.
In FHWA's view, the factors cited in this comment do not lead to a
different result than the formulation described in the Guide, and in
fact may restrict the Department's right to reject a change in
ownership. While some Concession Agreements do cite these factors, the
evaluation mechanism provided for in the Guide will require the
Department to weigh all factors against one another, and the resulting
determination will be substantially the same as asking whether the
change will result in a material adverse effect. For these reasons,
FHWA believes a change to the Guide is not necessary to address this
comment.
45. The TxDOT also commented that the definition of Related Entity
should include all entities upstream from the Equity Investors.
The FHWA has not made any changes in response to this comment
because it is based on a misunderstanding of the entities that will
constitute the Equity Investors.
Chapter 6: Change in Law
The comments received on the Guide's review of the issues
surrounding change in law generally related to associated risk
allocation and the scope of relevant terminology and contract language.
46. The TxDOT commented that the Guide should not emphasize
foreseeability as a consideration in risk allocation in relation to a
Change in Law, and instead should focus on value for money as the most
relevant consideration in allocating risk in relation to a Change in
Law.
In FHWA's view, the concept of foreseeability is not intended to go
beyond changes in law that were foreseeable at the bid date based on
draft legislation and bills. It is not intended to suggest that because
changes in a particular category of law are inevitable at some point,
they are foreseeable. The FHWA has revised the Guide to clarify this
point.
47. The TxDOT further commented that the definition of Law should
not include permits to avoid conflation with the definition of
Governmental Approvals and, therefore, the definition of Law should be
revised to provide greater specificity to the concept.
The FHWA has incorporated this comment into the Guide. Some
Concession Agreements may treat changes in permits similarly to changes
in law generally, though this will depend on the nature of the required
permits and the jurisdiction of various Governmental Authorities in the
context of each individual project. As a result, the reference to
permits is bracketed in the example provision.
48. The PECG commented that the Guide should protect the Department
from financial claims by a Developer adversely affected by a Change in
Law promulgated by a legislature, which is not within the Department's
control.
In FHWA's view, the allocation of risk associated with changes in
law is reflective of the relative ability of each of the parties to
absorb the risks associated with changes and to mitigate against their
respective effects. A change to the Guide is not necessary to address
this comment.
Chapter 7: Defaults, Early Termination and Compensation
The comments received on the Guide's review of defaults, early
termination, and related compensation generally related to the scope
and nature of defaults covered by a Concession Agreement, the remedies
exercisable by the parties following a default, the cure periods in
respect of defaults, and the mechanisms for calculating (and valuing
the components comprising) termination compensation.
49. The TxDOT suggested that the Guide include provisions which
allow for termination due to (i) the failure or inability of the
Developer to achieve financial close, with the measure of compensation
depending on whether the failure is excused or not excused, and (ii) an
adverse court ruling which prevents the Developer from continuing
performance, with a measure of compensation similar to the one provided
following termination due to an extended Force Majeure Event.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
50. The TxDOT commented that the Guide should acknowledge that
certain precedents do not include a limitation on set-off that prevents
termination compensation being less than the outstanding project debt
as a result of such set-off.
This comment has been incorporated into the Guide, although it
should be noted that the limitation on set-off does not apply to
circumstances where the termination arises due to a Developer Default.
In those instances, full set-off is contemplated because the Lenders
have the opportunity to step in and cure the Developer Default prior to
termination.
51. The TxDOT commented that the cure period available following a
monetary default under the Guide should be shorter than the cure period
available following other types of material default. The TxDOT further
suggested that the Guide should acknowledge that some Developers and
lenders agree to cure period comity between Developer and lenders.
The suggestion that the Guide distinguish between payment defaults
and other defaults has been incorporated into the Guide. Regarding cure
period comity, a change to the Guide is not necessary because cure
period comity is not the typical approach taken.
52. The TxDOT suggested that the Guide acknowledge that in certain
precedent toll concession agreements, the Developer's termination
rights are restricted to two types of Department Defaults: (i) Uncured
failure to pay a material sum to the Developer, and (ii) Department
confiscation, condemnation, or appropriation of a material part of the
Developer's interest; performance defaults by a Department may ripen
into a failure-to-pay default.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly. The Guide introduces discussion regarding where it may be
appropriate to include performance-related defaults.
53. The TxDOT commented that the method for calculating termination
compensation in the Guide should be revised to reflect the calculation
method utilized in certain precedents which provide protection to the
lenders and market value for the Developer's equity investment (if such
investment is greater than the outstanding debt).
Though the drafting is somewhat different, there is not much
substantive difference between the calculation mechanism reflected in
the Guide and that proposed by the commenter, though it should be noted
that it is appropriate to compensate equity irrespective of how large
or small its value is as compared to the outstanding debt. A change to
the Guide is not necessary to address this comment.
54. The TxDOT suggested that the Guide mention, as one option for
valuing the equity in the Developer, that certain precedents allow the
parties to
[[Page 53831]]
produce evidence in the event of a dispute for ultimate determination
by a court or other dispute resolution forum.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
55. The TxDOT commented that the Guide should provide a
comprehensive list of Developer Defaults in acknowledgement that
different defaults have different cure periods and methods for curing.
Section 7.3.1 of the Guide includes a comprehensive list of
Developer Defaults, and Section 7.3.2 of the Guide states that cure
periods may vary depending on the nature of the Developer Default. A
change to the Guide is not necessary to address this comment.
56. The TxDOT suggested that the Guide include closure of any lane
or other portion of the Project (unless permitted under the agreement)
as a Developer Default.
The Developer Default listed at clause (a) of the definition
captures this failure by the Developer; the FHWA agrees with the
commenter that continued access is a significant objective of the
Concession Agreement (and therefore would constitute a failure to
comply with a material obligation if not provided by the Developer). A
change to the Guide is not necessary to address this comment.
57. The TxDOT commented that the Guide should acknowledge that a
particular toll concession agreement may provide for a range of
remedies for Developer Default, but limit the remedy of termination to
defaults specifically agreed to be material in nature.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
58. The TxDOT commented that the Guide should be revised to state
that even if a Developer Default is cured, the Developer may remain
liable for Department losses attributable to the default.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
59. The TxDOT commented that because many toll concession
agreements provide for termination due to accumulated delay from Delay
Events, and not just due to the narrowly defined Force Majeure Events,
the discussion regarding likelihood of termination should be revised.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
60. The TxDOT commented that the approach to termination
compensation following a Developer Default included in the Guide should
be amended to reflect an alternative approach available in the market.
In particular, TxDOT felt that the approach taken in the Guide should
ensure that equity is wholly at risk of loss and lenders face a
meaningful financial consequence if a project is terminated following a
Developer Default.
The termination calculation mechanism reflected in the Guide will
not provide equity with compensation in the event of a Developer
Default. In addition, although it is common to discount compensation
payable to lenders after completion of the project (which is reflected
in the Guide), it is often the case that such a discount is not imposed
prior to completion because of the risks otherwise inherent in
completing a project. A change to the Guide is not necessary to address
this comment.
61. The TxDOT suggested that the Guide include a discussion of
provisions in certain precedents which provide for no termination
compensation for termination due to Developer Default, including where:
(i) The Developer files for bankruptcy and rejects the toll concession
agreement; (ii) the Collateral Agent receives a replacement agreement
from the Department in accordance with the original agreement; and
(iii) the Developer wrongfully exercises a termination right.
As it has been noted in the Guide, in the context of a greenfield
project where the Department receives a new asset, some measure of
compensation is typical and necessary; otherwise, the Developer may be
entitled to assert a claim for unjust enrichment. A change to the Guide
is not necessary to address this comment.
62. The PECG commented that the Guide should provide the Department
with the ability to take over the project should the Developer become
unable to meet its obligations.
The Concession Agreement will typically include a Developer Default
for failure to pay amounts when due to the Department. This is
addressed in Section 7.3.1 of the Guide.
63. The TxDOT suggested that the Guide state that the principle
behind the measure of compensation is rescission and restitution.
This is a technical legal issue that is not relevant to the
intended audience for the Guide. A change to the Guide is not necessary
to address this comment.
64. The TxDOT commented that the discussion of termination
compensation in Section 7.4.2 should mention lender breakage costs.
This comment is captured by the first bullet point in the section,
which refers to all amounts owed to the lenders. A change to the Guide
is not necessary to address this comment.
65. The TxDOT commented that the Guide should discuss the various
legal mechanisms used in certain precedents to establish the time at
which a termination for convenience is effective.
This is a technical legal issue that is not relevant for the
intended audience of the Guide. A change to the Guide is not necessary
to address this comment.
Chapter 8: Handback
The comments received on the Guide's review of the issues
surrounding changes in equity interests generally related to the
Handback Reserve Account.
66. The TxDOT commented that the Guide should acknowledge that
certain precedents authorize the use of funds in the Handback Reserve
Account for safety compliance work.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
67. The TxDOT also suggested that the Guide should acknowledge that
certain precedents rely on a mechanism other than an independent
consultant in determining the amount necessary for the Handback Reserve
Account.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
Appendix A: Glossary
The comments received on the Glossary generally related to
clarifications on, and scope of, various defined terms.
68. The TxDOT commented that the definition of demand risk should
be expanded to include toll collection risk.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
69. The TxDOT commented that the definition of Design-Build
Contract should be revised to specifically mention design work.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
70. The TxDOT commented that the definition of Dispute Resolution
Mechanism should include disputes review boards.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
71. The TxDOT commented that the definition of Express Toll Lane
should be narrowed to limit this concept to traffic lanes subject to
tolls which vary in accordance with demand.
[[Page 53832]]
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
72. The TxDOT commented that the definition of Gross Revenue should
be revised to clarify that the insurance proceeds included in Gross
Revenue are insurance proceeds which are received in substitution for,
or to compensate for, loss of tolls or user fees.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
73. The TxDOT commented that the definition of Managed Lane
Facility should be revised to include language which references change
in demand.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
74. The TxDOT commented that the definition of Prohibited Person
should reserve the right to prohibit an individual based on a potential
investor's egregious reputation, such as suspected affiliation with
criminal organizations.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
75. The TxDOT commented that the definition of Subcontractor
Breakage Costs should include costs of demobilization.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
76. The TxDOT commented that the definition of Work should include
design work.
The FHWA agreed with TxDOT's comment and has revised the Guide
accordingly.
77. The TxDOT commented that the definition of Construction Period
should be revised to distinguish between the Service Commencement Date
and Substantial Completion.
A change to the Guide is not necessary to address this comment. For
purposes of simplification, the Guide does not distinguish between
Substantial Completion and Service Commencement, as the distinction is
not relevant to the Guide.
78. The PECG commented that the definition of Discriminatory Change
in Law should be narrowed to provide greater certainty regarding the
types of change in law captured under this concept.
A change to the Guide is not necessary to address this comment. The
example definition of Discriminatory Change in Law accords with market
practice.
Other General or Public Policy Comments
79. A private citizen commented that the Guide should state that P3
transactions include financing of all costs and liabilities incurred on
a particular project.
The FHWA appreciates the commenter's concern that P3 projects'
transfer of costs does not necessarily mean a transfer of risks;
however, a common feature of P3 projects (as reflected in the Guide) is
that the parties generally allocate risks (and costs associated with
them) to the party best positioned to manage them. It would be
incorrect to suggest that P3 projects involve the private sector
financing all costs and liabilities associated with the relevant
project. A change to the Guide is not necessary to address this
comment.
80. The Commonwealth of Virginia commented that FHWA should include
an explanation of the advantages and challenges associated with risk
allocation under a P3 procurement model in a way that is easily
understandable to public decisionmakers.
The FHWA agrees that each project is unique, and that the
circumstances of each project will determine the allocation of risk and
responsibilities for the life of the project. This aspect of P3
transactions has been highlighted throughout the Guide, though not
necessarily in the context of public funding decisions (a topic which
has not been addressed in the Guide). However, FHWA agrees that the
extent of public funding involved in any project will have an impact on
the allocation of risk associated with that project.
81. The Commonwealth of Virginia also commented that FHWA should
consider a review of Federal procurement requirements and regulations
to supplement the Guide.
A comprehensive review of the Federal procurement requirements is
not within the scope of the Guide.
82. The Commonwealth of Virginia commented that the Guide should
reflect that under an availability payment structure, the risk of
maintaining the level of service of a particular road will be
transferred to the private sector.
The FHWA will address availability payment structures and related
issues in a separate guide in due course.
83. A private citizen observed that under California law, a State
agency is responsible for monitoring compliance with environmental
regulations.
The FHWA notes that Concession Agreements cannot alter existing
State or local law mandates that require a particular entity to
maintain legal liability for a particular aspect of a project. However,
Concession Agreements may transfer the risk associated with that aspect
of the project by: (a) Allocating responsibility to one party (such as
the Developer) for paying and performing the relevant obligations on
behalf of the other party (such as the Department); and (b) requiring
that the party responsible for paying and performing thereafter
indemnify the other party for the resulting consequences. As the issues
associated with such requirements are highly dependent on applicable
State and local laws, they have not been addressed in the Guide. A
change to the Guide is not necessary to address this comment.
84. The PECG suggested that in P3 procurement the contractor should
prepare plans and specifications to meet the standards of the
Department.
The FHWA notes that the Concession Agreement will typically
prescribe technical specifications that must be followed by the
Developer, and will provide for review and approval by the Department
of various design and construction submissions in the ordinary course.
These matters are rarely contentious and will be consistent with
Departments' experiences on other non-P3 transactions, so they have not
been addressed in the Guide. A change to the Guide is not necessary to
address this comment.
85. The PECG commented that the environmental and first 30 percent
of design work should be completed by the Department and provided to
the contractor.
The FHWA notes that Concession Agreements will typically require
the Developer to construct the Project in accordance with environmental
approvals that have been obtained by the Department. These matters are
rarely contentious and will be consistent with Departments' experiences
on other non-P3 transactions, so they have not been addressed in the
Guide. A change to the Guide is not necessary to address this comment.
86. The PECG commented that construction inspection should be
conducted by the Department.
Concession Agreements include completion tests which require, among
other things, that the work is completed in accordance with the
requirements of the Concession Agreement (including the technical
specifications), and that the work must be verified by the Department.
These matters are rarely contentious and will be consistent with
Departments' experiences on other non-
[[Page 53833]]
P3 transactions, so they have not been addressed in the Guide. A change
to the Guide is not necessary to address this comment.
87. The PECG commented that the Guide should direct Departments to
specify standards of operation and maintenance if a particular P3
procurement is to include operation and maintenance.
Concession Agreements will specify the applicable operations and
maintenance standards that must be complied with. The Developer will be
required to comply with these at its own cost and expense. These
matters are rarely contentious, so they have not been addressed in the
Guide. A change to the Guide is not necessary to address this comment.
88. The PECG suggested that the Guide should reserve for the
Department the right to access the project at all times, and require
the Developer to maintain the project according to the Department's
standards.
The Concession Agreement will typically permit the Department to
have access to the Project for oversight purposes, and will include a
variety of remedies for the Department in the event the Developer fails
to meet the required operation and maintenance specifications
(including the right of the Department to perform the obligations on
behalf of the Developer). These matters are rarely contentious and will
be consistent with Departments' experiences on other non-P3
transactions, so they have not been addressed in the Guide. A change to
the Guide is not necessary to address this comment.
89. The PECG commented that the Guide should require Developer to
maintain the project at full operational capacity at all times, with
the Department able to levy fines for failure to comply with this
requirement.
The FHWA notes that it is typical for Concession Agreements to
include a requirement that the Developer must keep the Project open for
traffic 24 hours a day, 365 days a year, following Substantial
Completion. In the context of a demand risk transaction, where the
Developer's revenue depends on keeping the road open to paying users,
this obligation is not contentious and therefore has not been addressed
in the Guide. A change to the Guide is not necessary to address this
comment.
90. The ARTBA expressed support for including in the Guide a
discussion of the risks and costs associated with preparing and
submitting a proposal for a design-build project. The ARTBA also
commented that the Guide should include a discussion of risk allocation
and compensation as between the Developer and the design-build
contractor in the same way that the Guide discusses the allocation of
risk between the Department and the Developer, and that the Guide
should provide recommendations regarding the relationship between the
Developer and the design-build contractor.
The Department's contractual relationship is with the Developer,
not with the design-build contractor. The Developer's approach to
managing the risks allocated to it, whether through contracting or
otherwise, is not appropriate for the Department to regulate. A change
to the Guide is not necessary to address this comment.
91. A private citizen expressed concern about the characterization
of a Concession Agreement as a lease in the underlying asset and the
characterization of resulting revenue, and suggested that FHWA consider
alternative methods of financing infrastructure.
The FHWA acknowledges that P3 procurement may be an unfamiliar tool
for funding infrastructure investment to some members of the public.
The characterization of the Developer's interest in the project
(whether as a lease or a license) varies from one jurisdiction to
another. Some Concession Agreements include the requirement for revenue
sharing, which is similar to lease payments. The Concession Agreement
will also require the Developer to pay all costs to operate and
maintain the Project during the term of the agreement. The shouldering
of these costs is also not unlike a lease payment. A change to the
Guide is not necessary to address this comment.
92. Several private citizens provided suggestions for Departments
considering P3 procurement, including the following: parties should
adopt a statement of policies to reduce the risk of misinterpretation
of a contract; FHWA should suggest that Departments undertake a cost/
benefit analysis prior to deciding to engage in P3 procurement; in
relation to a cost/benefit analysis for an existing asset, payments
projected to a potential private operator should not exceed the cost of
public bonds or borrowing should the asset continue to be operated by
the Department. While these comments provide interesting and
potentially useful ideas, they are not within the scope of the guidance
mandated by MAP-21, and therefore, no changes to the Guide have been
made as a result of these comments.
93. Several private citizens expressed support for transparency in
P3 procurement and offered the following suggestions: P3 procurement
should be subject to public auditing and financial statement disclosure
requirements, and be approved by State and municipal elected officials;
and P3 procurement contracts and related documents should be subject to
the Federal Freedom of Information Act (FOIA) and all State and local
public records disclosure laws.
Concession Agreements will typically include regular reporting
requirements, particularly where there is a sharing requirement that
requires ongoing review of costs and revenues. To the extent a
Developer is a publicly traded company, public disclosure of financials
continues to be required. Each jurisdiction will have its own rules and
regulations regarding the procurement of P3 transactions and approvals
required to be obtained prior to executing a Concession Agreement. Such
rules and regulations are outside the scope of the Guide. Concession
Agreements are subject to FOIA-type laws and regulations in many
jurisdictions, though Developers typically have the right to specify
that certain information is proprietary or constitutes a trade secret
exempting it from disclosure in accordance with such laws. These
matters are rarely contentious and will be consistent with Departments'
experiences on other non-P3 transactions, so they have not been
addressed in the Guide.
94. A private citizen expressed a concern that the use of tax-
exempt bonds in relation to P3 procurement contradicted the stated goal
of using P3 procurements to encourage the investment of private
capital.
This comment reflects a misunderstanding of the way in which tax-
exempt bond issuances work. Although a public issuer may nominally
issue bonds for tax purposes (known as a conduit issuer), the proceeds
raised from the sale of the bonds are immediately lent to the Developer
under a separate loan agreement, and the Developer will be responsible
for paying all amounts that are ultimately due to the bondholders.
There is no public guarantee of debt when this approach is taken, and
this structure is customary in the context of non-P3 arrangements as
well. No changes have been made as a result of this comment.
95. The ARTBA commented that the Guide should address performance
bonding requirements and the potential need for legislation to address
performance security requirements for toll concessions.
[[Page 53834]]
The topic of performance security will be addressed in the addendum
to the Guide.
96. Ernst & Young commented that the Guide should include a
discussion of milestone or final acceptance payments.
The FHWA has not included a discussion of construction payments
from States within the Guide. The ability and willingness of States to
finance such payments, and the constraints associated with the sources
of funds that might be used, will vary widely from one jurisdiction,
and often one project to another. As a result, it would be difficult to
describe general principles that will be of much utility to State DOTs.
A change to the Guide is not necessary to address this comment.
97. Ernst & Young commented that FHWA should include a discussion
of independent engineers and effective strategies for efficiently
managing approvals, oversight, and disputes in the addendum.
While FHWA agrees that independent engineers and oversight
mechanisms are important topics, the addendum will not address this
topic. However, dispute resolution will be addressed in the addendum.
98. Ernst & Young commented that FHWA should consider partially
variable term lengths in its discussion of term lengths in the
addendum.
The FHWA notes that this topic may be considered in the addendum.
99. Ernst & Young commented that FHWA should consider including a
discussion of plate denial.
The FHWA considered discussing this topic in the Guide, but
ultimately did not address this issue as it may be considered
controversial in some jurisdictions.
100. Ernst & Young commented that FHWA should address incentives to
lender step-in/rectification and the role of direct agreements in the
addendum.
The FHWA notes that lenders' rights will be addressed in the
addendum.
101. The PECG commented that the Guide should include an indemnity
of the Department to be provided by the Developer.
The FHWA notes that Indemnities will be addressed in the addendum.
Final Guide & Other Model Contract P-3 Products: The FHWA is not
accepting any further comments regarding the Core Toll Concessions
Public-Private Partnership Guide. The final version can be found on the
docket (Docket No. FHWA-2014-0006) or at the following link: http://
www.fhwa.dot.gov/ipd/pdfs/p3/
modelp3coretollconcessions.pdf.
In addition to the Core Toll Concessions Public-Private Partnership
Guide above, FHWA is also developing an Addendum document that will
cover secondary, yet important provisions found in P-3 contracts. The
secondary provisions will include issues such as performance standards,
contract length, capacity triggers, consumer protections, Federal
requirements, developer indemnities, lenders rights, insurance dispute
resolution, and performance security. The provisions will be covered in
less detail than the provisions in the Core Guide.
Another type of P-3 contract is the availability payment based
contract. Funds from public sector revenues are the sources of payments
to the private contractor in these transactions. These availability
payments based transactions are increasingly popular. Many of the
provisions found in the toll concessions guide will also be germane to
the availability payments guide. The FHWA will be publishing an
Availability Payments Model P-3 Contracts Guide in 2014.
Authority: Section 1534(d) of MAP-21 (Pub. L. 112-141, 126 Stat.
405).
Dated: August 27, 2014.
Gregory G. Nadeau,
Acting Administrator, Federal Highway Administration.
[FR Doc. 2014-21049 Filed 9-9-14; 8:45 am]
BILLING CODE 4910-22-P