Building Pennsylvania’s Transportation Public-Private Partnership Program

Commentary

Building Pennsylvania’s Transportation Public-Private Partnership Program

Interview with Bryan Kendro, Director, Office of Policy & Public Private Partnerships, Pennsylvania Department of Transportation

Since the late 1980’s, nearly 40 states have enacted enabling legislation to authorize the use of public-private partnerships (PPPs) in transportation, allowing governments to partner with private sector firms to design, build, finance, operate, and/or maintain roads, bridges and other types of transportation infrastructure. In 2012, after many years of deliberation among policymakers, Pennsylvania became one of the more recent states to authorize transportation PPPs with the passage of Act 88.

In the two short years since Act 88 became law, the Pennsylvania Department of Transportation (PennDOT) has moved quickly to establish a robust PPP program, creating a dedicated PPP office within the department that has already taken projects to market and begun entering into contracts. It recently entered a partnership with State Farm to sponsor PennDOT highway safety patrols, and it has caught national attention for its ambitious project to use a PPP model to replace 558 deficient bridges in one contract-an initiative that is currently in procurement.

Reason Foundation Director of Government Reform Leonard Gilroy recently interviewed PennDOT Office of Policy & Public-Private Partnerships Director Bryan Kendro on the development of Pennsylvania’s PPP program, the bridge replacement and safety patrol PPP initiatives, other projects in development, and much more.


Leonard Gilroy, Reason Foundation: Pennsylvania, like many other states, is facing major challenges in terms of generating the revenue needed to maintain, much less expand, its transportation system into the future. Can you describe the financial challenges that PennDOT is facing?

Bryan Kendro, Pennsylvania Department of Transportation: Pennsylvania is in a far better position than most states following the enactment of Governor Corbett’s transportation funding plan in 2013. It’s phased in over five years and provides an additional $2.4 billion in annual revenue that is available for investment in all of the modes of infrastructure-not just roads and bridges but also ports, passenger and freight rail, airports and more.

But as significant as that funding increase is, it still doesn’t fully address the needs of a state as large as Pennsylvania, which has so many transportation facilities. At some point, we would expect the federal government to live up to its end of the bargain, particularly in adequately funding the interstate system and/or giving states more flexibility to toll the interstates to help fund the reconstruction that’s going to have to take place at some point.

Our actual funding gap is significant, but it’s a moving target, and I don’t think you’re ever going to get to a point where you can fill that gap 100%. That’s why we’re constantly trying to find ways to be more efficient and take advantage of new technologies to identify savings within our projects and within the department itself. The additional $2.4 billion we’re expecting sounds significant, but when you’re underinvesting at probably twice that level, it’s still a far cry from being able to do everything that needs to be done and still having money left over to do some of the projects that people want to see done.

A lot of that falls to the federal government and what its long-term role in funding transportation is going to be. They obviously prioritize interstate systems with their funding, but their funding has been flat for several years now, and flat funding is actually less funding when you factor in buying power, inflation, and other things. So with interstates, the gap is growing and growing, and the federal government is expecting us to step up and meet that need in one way or another.

Gilroy: Why does partnering with the private sector makes sense for PennDOT?

Kendro: Our public-private partnership (PPP) authorization is very broad, which has allowed us to look not just at your traditional road and bridge projects, but also at other ancillary services and responsibilities of the department. We feel that the private sector can provide value either as a partner or, in some cases, take over all aspects of a program or project.

A good example of that is that we’re going to be announcing a project that will allow a private partner to design, build, finance, operate and maintain compressed natural gas (CNG) fueling stations for transit agencies all across the Commonwealth. Local transit agencies don’t have the expertise or resources-or desire, frankly-to be responsible for operating and maintaining CNG filling stations. If those agencies can provide demand for the fuel-and enough demand exists-and we also allow the private partner to sell fuel to other public and private fleets in addition to those transit agencies, then it would not only allow the transit agency to shed the risk and responsibility of managing stations, but it would also allow us to share in any upside revenue that comes from those other customers that they might be selling to.

The idea of a transit agency designing and building and then continuing to operate and maintain a fueling station doesn’t make sense. This is an activity the private sector has figured out quite well. It just makes a lot of sense for the private sector to make that investment and get in a position where they can recover that investment.

Gilroy: What is the role that your office plays in PennDOT?

Kendro: I’d characterize our office as a project assessment and project delivery office. The PPP office will essentially take a project from first conception through completion over the life of a contract, using both in-house and outside resources, depending on the needs for each specific project. If something gets identified as a PPP project, we’ll identify the right mix of consultants or in-house personnel that have the expertise on that type of project, and we’ll create a project delivery group that will take over managing and delivering that project and then manage the contract throughout its life.

This extends beyond just PennDOT. Other agencies outside the department with transportation-related facilities and services are also eligible to make use of the PPP statute. So our role can be anything from advisory in nature to full-blown project delivery. For instance, if the Pennsylvania Turnpike were to pursue a PPP project, they would obviously have the expertise to run a procurement and manage a road project as part of their core mission, so our role in a project like that would be more or less advisory, making sure that they follow the PPP statute and the processes that we’ve put in place. But if it’s a local transit agency or even a PennDOT project, for instance, then our role would be soup-to-nuts project delivery.

Our office wasn’t created within the PPP legislation in 2012, but it originated from a policy decision in PennDOT. Act 88-our PPP statute-requires us to provide support and administration to the PPP Board. How we did that was a policy decision, and essentially the Secretary and I discussed the different options. We looked at the evolution of PPP programs in states like Virginia, which have a separate office reporting directly to the Secretary, and we didn’t think it would make much sense to place the office in our highways division, for example, since our PPP statute is very broad and covers all modes of transportation. Initially, the PPP office was part of the department’s office of policy as we were getting the program up and running. But now we’re a dedicated office with dedicated staff. This also allows for continuity, so whenever there are changes in administration, there will be an established office-not an ad-hoc office or an office that exists within another.

Gilroy: You recently announced the first agreement under Pennsylvania’s 2012 PPP law, a safety patrol partnership with State Farm offering free motorist assistance on certain expressways in different parts of the state. Can you describe that project and the expected benefits?

Kendro: A number of states have safety patrol programs sponsored by companies like State Farm. But what I think is unique about the approach that we took in Pennsylvania is that the public-private partnership is partially with State Farm, but it really falls more broadly within our marketing contract with Travelers Marketing. Travelers Marketing was hired to serve as our sponsorship and advertising consultant across the entire DOT. We have an agreement with Travelers that empowers them to not just look at service patrols but also rest areas, welcome centers, sponsorship of our teen driving manual, or any other opportunity that might exist across the DOT, where there might be a potential sponsor or advertiser that could help offset some of the costs of making that product or service available to the public.

That’s a unique approach that we’ve taken, so that instead of looking at it in silos-program by program-we’re taking a more holistic approach and allowing Travelers Marketing to essentially be our global marketing consultant.

We believe that safety patrols are an important service that we provide our customers in certain areas of the state-in particular, areas where there’s congestion or high volumes of traffic, places where we can not only help a motorist in need, but also get that motorist out of a lane of traffic so that we can keep everyone else moving safely and avoid secondary accidents. There’s a cost to this sort of program though, and often this is the type of service or program that would unfortunately get cut first when we’re struggling with finding enough revenue to address all of the needs out there. Our core mission is to make sure that the highways are safe, the bridges are safe, and that the road and transportation system are properly held together. So providing an additional customer service or benefit like this is often viewed more as a luxury than an essential item.

Being able to get a sponsor like State Farm to help offset some of those costs allows us to continue to ensure that that program will exist. We’re also giving State Farm the benefit of being associated with something that’s favorably viewed by the public.

Gilroy: Pennsylvania has also gained major attention over the proposed Rapid Bridge Replacement Project PPP that’s currently in procurement. Can you describe this project and the potential benefits?

Kendro: We’re going to be contracting with a private partner to fully replace 558 structurally deficient or weak bridges across the Commonwealth. We believe that the average age of most of these bridges is about 70 years old. They’re smaller, off-system bridges that lend themselves to bundling because they have a lot of similar characteristics. Most of them are single or double span, so they’re relatively smaller bridges.

A few years ago we began a bridge bundling pilot program in three counties where we took eight to ten bridges and bundled them together and delivered them as one design-build project. We saw the design costs come in with about 30-40% savings and the construction costs come in with about 10% savings. The design savings are mostly because you eliminate a number of duplicate processes in design, and you can also standardize the designs. So if you have a 22-foot bridge, a 23-foot bridge and a 25-foot bridge, you can just make them all 25 feet. That then allows for efficiencies in construction.

But when you’re only talking about doing eight to ten bridges, you’re not really triggering the economies of scale and savings that you would get by prefabricating 558 bridges across the Commonwealth. So we think that the savings we saw in the pilot program were the tip of the iceberg relative to doing it across 558 bridges statewide.

It will also allow us to accelerate the delivery of these projects because of the private financing element. As our revenues begin to increase with the transportation funding bill being enacted, we’ll be able to accelerate the delivery of these bridges, get them built in the first couple of years, and then pay off those costs over the term of the contract. Spreading out those payments also creates significant additional capacity in our program to do other projects over the next 10-12 years that we otherwise would not have been able to get to or afford. And there are very significant inflationary savings and construction cost savings to be had by delivering a project sooner rather than later, as most people understand. Some of those financing costs quickly become offset by the lower costs of constructing today, as well as all of the savings associated with bundling these structures together. So ultimately, after you add up everything we’ll be paying over the term of the contract, it’s still going to be less than what we would have paid to deliver these projects traditionally, phased in over time, on a cash flow basis, based on when we could afford to do it.

It also has a tremendous benefit to the Commonwealth in terms of improving mobility for our customers and improving the flow of traffic for commerce. A lot of our bridges across the state that are structurally deficient have been weight-restricted, so heavier trucks and vehicles cannot cross them. This project will go a long way toward opening up corridors and routes again for commercial traffic that otherwise might be taking long, circuitous routes, especially in some of the rural parts of the state. This can have a significant impact on the cost of goods that businesses can then sell to their customers, given the additional fuel costs associated with detouring around a closed bridge.

It’s a design-build-finance-maintain project, so the private partner will be designing and constructing the bridges with the life-cycle costs in mind, because they’ll be responsible for maintaining them for 25 years after construction. So the contract terms will be roughly 28.5 years.

We’re also expecting to see some new technical concepts and efficiencies, and new ways of delivering these bridge projects that we can then learn from and apply to our traditional program. So we’re fully expecting that some of the techniques that are deployed here will be techniques that we can apply elsewhere. We think there will be a lot of benefits beyond just what we can do with these 558 bridges, and these benefits will extend to what we can do with our bridge program overall.

Gilroy: PennDOT has also launched a wireless telecom partnership program. Can you describe that program?

Kendro: This is another project where we’ll be asking a private firm or consortium to come in with a turnkey contract to develop a program designed to build out towers where necessary and market those locations-on PennDOT property-to telecommunications and cellular carriers. This project came to us as an unsolicited proposal. The company SASI-which actually negotiates agreements between cellular carriers, like AT&T and Verizon, and private property owners-came to us suggesting that because of the amount of property that the department owns across the state, there would be some very attractive prospects for the cellular companies. If we negotiate a master agreement with them, then essentially it becomes a site-specific discussion as to where you can locate the tower and how it can be built. But some of the major macro-level issues are worked out in advance, which helps to streamline the process.

Typically, if these companies are going township by township or property owner by property owner, each negotiation is a new negotiation for them, and that obviously takes a lot of time and effort on their part, as well as resources. So the ability to work with one entity like PennDOT and the firm that we will hire to be our agent, so to speak, will benefit them. And in return we’ll get the revenues for allowing them to locate their equipment on towers on our property.

It’s something that makes a lot of sense, and it’s something that a DOT is not really equipped to do. So we would just prefer to not get into the nuts and bolts of it, but simply lay out the parameters by which this firm can come in and manage this program soup-to-nuts and generate revenue for us.

There’s also a significant operational benefit for us. We’re deploying more and more tablets into the field along with mobile applications that allow us to do some of the things we do electronically, which leads to a huge efficiency saving for us. For example, we have people out in the field doing bridge inspections. Instead of handwriting their notes and going back to the office and retyping them into our bridge management system, they can do that on a tablet in the field, and it automatically gets uploaded into the system. That obviously requires a certain level of connectivity, and in some parts of the state that can be a challenge. So in areas where there may not be great connectivity, this project creates an opportunity for the cellular companies to come in and locate their equipment where they’re probably looking to locate it anyway, and then we get the benefit of being able to access that network.

Gilroy: Would you have been able to deliver any of these projects without the PPP model?

Kendro: None of the projects we’ve discussed would have been possible without the PPP statute.

Gilroy: Can you describe any other potential PPP projects PennDOT is considering right now?

Kendro: We’re taking a look at the Greater Philadelphia area, which is the part of the state that has the most traffic and congestion. This provides some opportunities from a PPP perspective, if you’re looking to do something like managed lanes or performance lanes. So we’re going to take a look at the major corridors like Interstate 95, Interstate 476, Interstate 76, and U.S. 422 to see if there’s an opportunity to add new capacity. And if we add new capacity, then if it’s a managed lane type of project, we’ll see if there are opportunities to toll for that additional capacity and see what the potential benefit is for congestion and mobility in the region.

We’re at the stage of looking at what potential toll revenue estimates would be and the feasibility from an engineering standpoint for some of these projects, as well as what the cost would be. For instance, for the I-76-which is the Schuylkill Expressway-some folks have talked about a potential PPP project that might involve double-decking the expressway. While it might be a great project, when you begin to look at some of the challenges associated with double decking a facility that also happens to be wedged in between a mountain, a railroad and a river, you can imagine that there are some pretty significant engineering challenges and costs.

It might be that for the same public and private sector cost for a project like that, we could take a look at two other facilities in the region, which for less money might provide actually more benefit for congestion and mobility. So that’s why we’re taking a holistic approach to the region: to figure out what projects might deliver the most bang for the buck. And then once we have a sense of what those projects are, it becomes a dialog with the local community-with the planning partners, elected officials and other local leaders-regarding what projects make the most sense that they want to support. Unlike the bridges project-which is truly a statewide project-a regional project like this would have an impact on the regional transportation improvement plan, and the local planning partner-the Delaware Valley Regional Planning Commission-would have to allocate resources in support of it. They’d have to weigh that alongside their other needs within the region and other planned projects, and then make a decision as to where a potential managed lanes project might fit in the mix.

Also, in the Pittsburgh region, we’re working with the Pennsylvania Turnpike to take a look at whether a PPP approach might help to accelerate the delivery or make possible the completion of the Southern Beltway and the Mon-Fayette Expressway projects. They’ve looked at it previously, but in the past when they looked at it solely as a long-term concession deal, they found that the traffic wasn’t there to pay for the construction costs. But now with the passage of the transportation funding bill, the Turnpike has some additional resources that could potentially be invested in those projects. So we’re taking a fresh look at it, to see if there’s a PPP model that gets both of those projects delivered or helps to accelerate the delivery of one or the other.

Gilroy: What has PennDOT learned from other states with regard to the PPP process?

Kendro: I think we did a good job of reaching out to our peers-both in the U.S. and also Canada-as well as the private sector. We had a lot of public comment and private comment as we were developing our guidelines, which was very helpful for getting us started off on the right foot and in terms of putting together the policies and processes that will lead to a stable program. Looking back, one of the things I would have done differently would have been to advertise for consultants the day after the PPP authorization passed, because in state procurement it can sometimes take a long time to get the help you need under contract and working. That was a process that took a little longer than we would have liked, and in an ideal world we would have had some of the advisors that are working for us now on board sooner in the process to help in delivering some of the projects that we wanted to get moving on quickly. It’s important to have your ducks in a row and to put in place the pieces that you know you’ll eventually need sooner rather than later.

Gilroy: What lessons have you learned thus far in implementation that you would share with peers in other states?

Kendro: Transparency and open lines of communication are key to all of these projects. You’ll be dealing with a variety of stakeholders, some inherently supportive of what you’re doing and some inherently opposed to what you’re doing for various reasons. The more that you can engage, educate and do the outreach-even to potential critics-the better. It will pay huge dividends down the road, as you’re beginning to deliver a project, if you’ve already laid that groundwork.

If you set the stage for a successful project-you’ve done your due diligence, you have the right people in place to help you deliver it, and you have a realistic plan for delivering it-then it becomes a whole lot easier to get broad-based support. And when you inevitably hit a bump in the road, you will have that much more credibility to navigate a potential hurdle or issue-at any phase of the procurement-if you’re open and transparent from the beginning.


Bryan Kendro is the Director of the Office of Policy & Public Private Partnerships at PennDOT in charge of implementing the Commonwealth’s transportation public-private partnership program and also advising the Secretary of Transportation and Governor’s Policy Office on state and federal transportation policy, legislation and regulation. He represents the Secretary and PennDOT on various state advisory groups and commissions dealing with a wide range of public policy issues. Bryan also serves on the American Road & Transportation Builders Association (ARTBA) P3 Division Board of Directors.

Before joining the Corbett Administration and PennDOT, Bryan was a long time aide to Congressman Jim Gerlach, both in Washington D.C. and as his District Director in Pennsylvania. While in Washington he served as a senior policy advisor and liaison to the US House Transportation and Infrastructure Committee.

Other articles in Reason Foundation’s Innovators in Action 2014 series are available online here.

Leonard Gilroy is Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.