How do you rebuild 6 miles of freeway in 12 months with no plans and no program funds available for at least three years? Sounds improbable, but it actually happened.
The Michigan Department of Transportation (MDOT) contracted with Interstate Highway Construction Inc. (IHC) to reconstruct 6.2 miles of I-69 in St. Clair County in late 2008 under a unique contractual arrangement. The $36 million project involved the design and reconstruction of a four-lane divided freeway including the removal and replacement of the existing pavement with a new 10-in. plain concrete pavement; grading; drainage; preventive maintenance on five bridges; overlay of a rest-area pavement; permanent maintenance crossovers; signing; and landscaping.
The project was initiated by MDOT as a pilot using a design-build-finance and alternate bid strategy (DBF+A). This method of construction allows prequalified contractors to bid on projects using limited design documents. As the name implies, the contractor is then responsible for completion of the design, building and financing of the project. Contractor financing is rarely used, but in this case it allowed MDOT to advance the project immediately while delaying payment to the contractor until federal program funds were available.
All-in-one contractor
DBF+A is a construction method gaining favor for a growing number of road authorities across the U.S. Public-private partnerships (PPP) can differ considerably in the extent to which the private sector is involved.
Typically, financing on a long-term basis by private-sector interests involves a payback revenue stream such as tolls over a concession period of 30 to 50 years. While design-build projects have been frequently used, design-build-finance is rare. This method of road construction is being used more frequently as national and state road funding shrinks and infrastructure needs increase.
MDOT chose to use the I-69 project as one of its first DBF+A pilot projects. The department contracted with IHC in September 2008. The contractor was charged with the responsibility to design, engineer, construct and finance the 6.2-mile segment. IHC employed Rowe Professional Services to complete the design. Fishbeck, Thompson, Carr and Huber contracted with MDOT to do the construction inspection. Financing was provided by IHC.
Chris Youngs, MDOT program manager, said the I-69 project was an initiative intended to provide data to better assess the feasibility of future projects using the DBF+A approach.
“The department was pleased with what it learned from these projects,” Youngs said. “One of the goals of the pilot was to get the public and private sector working together on ways to make the process work efficiently. We felt our partners came up with innovative ideas that contributed a great deal to the success of the I-69 project.”
IHC altered several design components early in the process. The changes were approved by MDOT and as a result the construction period was shortened, MDOT saved money and there was less disruption to the public. One particular change involved the provision that required lane rental for ramp closures. The contractor suggested constructing concrete temporary ramps to eliminate the need for closures. It was a cost-saving change that reduced congestion.
Other changes proposed by IHC included constructing the crossovers with concrete and replacing a planned hot-mix asphalt mill-and-fill of the rest-area ramps and parking area with a 4-in. concrete overlay instead. This was MDOT’s first concrete overlay project at a rest area, but it made good sense. This change resulted in a project that was 100% concrete. The contractor further proposed modifications to the standard plans to reduce by two the number of dowel bars inserted at each joint between wheel paths. This resulted in a significant cost savings to the department without compromising the integrity of the pavement.
“The I-69 project was a win all the way around for everyone,” said Kirk Steudle, director of MDOT. The director explained that by implementing the design-build lessons learned on the I-69 project, the department was able to obligate all of the federal funds from President Barack Obama’s 2009 stimulus package that might have otherwise been left in Washington. “What we learned from the DBF+A projects helped us ensure the success of the recovery program money for Michigan,” Steudle said.
Ready to go private
From a national perspective, as traditional funding sources for roads and bridges dry up, more innovative strategies like PPP will be employed to keep up with the infrastructure funding needs of the nation. The Federal Highway Administration in 2006 reported that the cost of construction, maintenance, safety, administration and debt retirement for all U.S. highways was $161.1 billion, and only 56.3% was raised from user fees. The balance came from general-fund appropriations, property taxes, assessments and bond sales.
In Michigan, where a poor economy has resulted in a dramatic decline in the state’s population, funding roads from existing sources has become nearly impossible.
“Unless state revenue for transportation increases, Michigan will experience substantial decline in road and bridge conditions,” said Steudle. “Michigan needs to double its current investment in transportation just to provide an adequate level of service.”
With little or no political will to increase taxes, Michigan could be headed for a transportation crisis, according to Steudle. In 2007, the Michigan legislature authorized the formation of a task force to look at the adequacy of the state’s transportation funding policies. On Nov. 10, 2008, the Transportation Funding Taskforce (TF2) issued its findings to the legislature, recommending increases in user fees and efficiencies within the system. One of the recommendations from the TF2 task force was the expansion of PPPs as a means of expediting projects and increasing efficiencies. For the future, Steudle predicted that only about 10 or 15% of the MDOT construction program would likely utilize the PPP option.
“It’s a small piece, but it has the advantage of adding more flexibility to our program.” Steudle said.
However, adding this funding option to the department’s program largely depends on the passage of legislation granting the MDOT director and the State Transportation Commission broader authority to engage in this type of contracting.
A bill now pending before the Michigan legislature would provide the necessary authorization to the director and the commission to enter into public-private agreements for transportation purposes. The legislation, if passed, would expand the powers of the department and the commission to allow contracting with private entities and other agencies of government.
Public friend No. 1
Besides the benefits to the department, the proposed change in policy has private-sector benefits as well. It would create more jobs and bring efficiencies to the process. According to the U.S. DOT, the PPP approach that puts the responsibilities for designing, building and financing on the private sector is good public policy.
There are varying ways PPP can be accomplished. One commonality that cuts across all PPP projects is that they can be either partly or wholly financed by debt-leveraging revenue streams. Direct user fees (tolls) are the most common revenue source. Other types range from lease payments to shadow tolls and vehicle registration fees. Future revenues can be leveraged by issuing bonds or other indebtedness that provide necessary funding for capital and project-development costs. They can be supplemented by public-sector grants in the form of money or contributions in-kind, such as right-of-way. In certain cases, private partners may be required to make equity investments as well.
In a nutshell, for states like Michigan with an eroding tax base, innovative strategies like PPP provide quick solutions, create jobs and save money. These jobs can be turned quickly and have the added advantage of providing the department the flexibility necessary to assure all federal aid is matched and Michigan allocations are not lost to other states.
As early as 2004, the U.S. DOT stated in a report to Congress that the need for PPP will likely expand dramatically in the future. Their report concluded that the primary reason is because public surface transportation needs are simply outpacing the ability of governments to adequately maintain their systems.
Examples like the I-69 project in St. Clair County demonstrate that PPPs work. The FHWA research has shown that coupling private capital and innovative construction methods like the design-build delivery system produces more and better facilities for the traveling public. For Michigan, the success of the I-69 project was a significant event. With the necessary legislation and willing investors, PPPs will become a valuable tool for Michigan that will bring more stability and flexibility to the highway program.
