Like most states, Florida faces a significant challenge in delivering future transportation infrastructure, given the declining purchasing power of the federal gas tax, uncertain future revenues resulting from the increasing efficiency of automobiles, and other challenges that are making it increasingly difficult for most states to even maintain the infrastructure they already have, much less expand and modernize their transportation systems to meet the demands of the 21st century economy.
The Florida Department of Transportation (FDOT) has been working to meet that challenge in recent years, increasingly embracing innovations in project finance, road pricing and other areas of transportation policy that allow them to better control costs, as well as deliver major projects to reduce congestion and improve mobility amid an uncertain transportation funding future.
In November 2012, Reason Foundation Director of Government Reform Leonard Gilroy interviewed FDOT Secretary Ananth Prasad to discuss how his agency has embraced innovations like public-private partnerships, cutting-edge tolling projects, private highway maintenance and more.
Leonard Gilroy, Reason Foundation: Florida has become one of the leading states in the U.S. with regard to embracing innovations like public-private partnerships, private infrastructure financing and cutting-edge tolling projects. What challenges prompted this shift? And can you explain why partnering with the private sector makes sense for FDOT?
Ananth Prasad, Secretary, Florida Department of Transportation: As you know, Florida is a very outsourced state, and we rely on the private sector to deliver a lot of our projects. As with most states, 100% of the construction is done by the private sector in Florida, but we’re also at upwards of 80% when it comes to planning, design, engineering, inspections and the like. So in our work, we rely a significant amount on the private sector to help us deliver.
When it comes to public-private partnerships (PPPs), I think it’s just another tool in the toolbox, trying to leverage what private investment is out there, what innovations may be there when it comes to a procurement or contract management or a delivery technique. That’s basically what prompted us going into PPPs.
At the outset, Design-Build was our first foray into trying to take a traditional design function that was done by a department-either in-house or by consultants-and combine it with a construction contractor and package it together. And that evolved into “OK, if you can do design and build together, why can’t you operate and maintain together?” And that morphed into “why can’t you finance it, if it’s a long-term, corridor-type project?” It’s a natural evolution of what various departments of transportation do, and we’re just trying to make sure that we utilize all of the tools in the toolbox to deliver infrastructure improvements.
When we look at unfunded transportation needs, we estimate Florida would need in excess of $131 billion for the state’s most critical assets between now and 2040. PPPs are not going to close that gap, but they can help us deliver long corridors today by leveraging private equity and financing, and then also bringing innovations through combining the design and the operations and maintenance into a contract so that we’re designing and building a project with a holistic view rather than just designing it or just building it or just operating and maintaining it.
When it comes to tolls, we obviously have a long track record with our toll road-the [Florida] Turnpike-and in the last few decades with the various expressway authorities. Tolling allows us to diversify the revenue stream to fund transportation. As you know, the gas tax is not keeping pace and while Florida’s gas tax is indexed [to inflation], the federal gas tax is not. And with fuel efficiency standards going up and with alternative fuel vehicles, people will be driving the same amount of miles but not contributing to the upkeep and future improvements to the infrastructure. Toll roads answer that question because if you use it, you pay for it.
Gilroy: Can you briefly describe some of your notable PPP projects in the works right now? Would you have been able to deliver these projects without the PPP model?
Prasad: One is the Port of Miami tunnel, which has an estimated design and construction cost of $607 million and is financed through a federal TIFIA loan, bank loans and private equity. It’s a concession that has a 30-year operations and maintenance period after construction. This is a project that in all regards was totally a dream project, and if not for the TIFIA loan, private financing and leveraging future revenues, this project would have never been built. Thankfully, having the PPP tool, we were able to deliver that project, which will significantly enhance the state’s ability-along with the dredging and other projects we’re doing at the Port of Miami-to compete in the world trade and logistics market.
The other one is the [managed lanes and corridor improvements on Interstate] 595 in Fort Lauderdale, which is an availability payment PPP and has an estimated design and construction cost of $1.2 billion. Again, this project has 30 years of operations and maintenance following the construction period.
Compared to the traditional way of funding and piecemealing the job, we basically advanced 595 by 15 years. The corridor is already congested, so now the users of that corridor can get a facility 15 years ahead without having to wait. They won’t have to endure one construction project after another construction project because that’s how the funding was available-e.g., we’ll build 10 miles when funding is available, and when the funding is available for the next 10 miles, we’ll build another 10 miles.
The PPP allowed us to get it all done today. Otherwise, the 595 would have probably been done in 2, 3, or 4-mile segments, with 4 or 5 projects spread out over 15-20 years. The PPP allowed us to deliver all of those projects at one time in four years, and users can reap the benefit now.
Gilroy: Florida has been increasingly embracing tolling, both in its PPP projects and within the state’s many public-sector tolling enterprises. Why is tolling becoming increasingly prominent in Florida, and what kind of public reaction have you seen?
Prasad: The reason for our shift to more tolling is because of the sheer fact that gas tax revenues are not sustainable. The corporate average fuel economy standards are basically going to double in the next 4 years, so if you do the basic mathematics, a person can drive the same distance but only contribute half as much money to the trust fund. So if the tax remains the same and you get twice the number of miles per gallon, then for the same distance traveled, you’re paying half-while the costs of materials, the costs of construction and the costs of everything else are going up.
The reality is that the gas tax as a funding source is not sustainable. In the interim, until we decide what the next model is-whether that’s vehicle miles traveled charges, or raising gas taxes, which I’m not a big fan of-we’ve got to continue to bridge the gap. And the way to bridge the gap is through tolling.
Not all roads can be tolled, so until we change out of the gas tax model to some sort of mileage-based funding model, our roads will continue to have to be maintained and improved through a gas tax. This past year we asked the legislature for, and they overwhelmingly passed, a bill declaring that for limited access facilities and new bridges, the state is going to look at tolling as an option. Not necessarily to fully finance the project, but as a way to fund the gap to make that project doable.
The fact that we’ve had a Turnpike for decades and a good record of customer satisfaction, tolling makes sense to us. We have the back office operation, and we have a transponder system and we know what it takes to operate a toll road, so we know what it takes to go that route.
The public reaction is mixed. In urban areas, I think they get it, because they understand that in urban areas, the only way that you get the kind of transportation improvements, capacity improvements and congestion relief they want to see is through tolls. The frustration comes more from the rural areas as people say, “why do I need to pay a toll to cross a bridge” or “why do I need to pay a toll to use this facility, I’m already paying enough.” That’s not to say that all folks in urban areas like to pay tolls, but I think the acceptance of tolls is higher in urban areas than in rural areas.
Gilroy: FDOT is currently exploring the concept of “toll lanes within toll lanes,” in which current toll road facilities could see expansion via value-priced express lanes in which price fluctuates according to demand for the new lanes. The Illinois Tollway is also considering a similar proposal. Can you describe the concept?
Prasad: There are two corridors we’re going to be trying this on: one is the Florida 589/Veterans Expressway project in Tampa and the other is the Homestead Extension of the Florida Turnpike in Miami-Dade County. The concept is about management: traffic management and congestion management. Currently Veterans is a four-lane facility, and we’re going to eight-lanes in the ultimate buildout. Obviously, in the near term, going from four lanes to eight lanes will provide a lot of congestion relief. But our long-term plans suggest that in the next 15 to 20 years, congestion will start to build up and the eight lanes will not be enough, and we’re going to have gridlock on the system. So by implementing managed lanes, we’re providing a choice: when congestion starts to build up in the corridor 15 or 20 years from now, people will have choices. If you are running late to the doctor or to catch a plane, you can make a choice to pay extra to get on an express lane that guarantees you a travel speed reliability, like 45 or 50 miles an hour.
That’s basically what drove us. On these two facilities we’re getting to the ultimate buildout, and for the ultimate buildout and the ultimate success we need to implement managed lanes today. Initially, there will be peak times when the managed lanes will work well, and there will be other times when there will be enough non-managed lane capacity for people to use. But when there’s a wreck, for example, the express lanes can help you get there, and you can pay extra to divert it. We’re trying to implement that now to set the stage for people to change their approach in the long term, so when the congestion starts to build up much more significantly in the mid-term to long-term, then you will already have express lanes that people are used to.
With Veterans, we’re only adding one express lane in either direction, so we’re going from two general purpose toll lanes in each direction to three general purpose toll lanes and one express toll lane. But even for no extra premium, even the general purpose toll lane users will see a benefit from the express lane.
This is built on our success on I-95. As Reason Foundation has chronicled, by introduction of the express lanes, the general purpose lanes are moving faster, by roughly 20-25 miles per hour during peak hour on the general purpose lanes. So the people who want to pay a premium to get on the express lanes generate a significant amount of benefit for the people who choose not to pay a premium.
Gilroy: FDOT has also endorsed the development of regional managed lanes networks that would add value-priced express toll lanes to major urban highway systems. Can you explain the rationale for developing managed lane networks in Florida’s major metro areas?
Prasad: We actually started this concept on non-toll facilities like I-95 in the Miami area, and we’re extending the I-95 express lanes in Miami-Dade into Broward County and eventually into Palm Beach County. And when the I-595 project in Fort Lauderdale is done they’re going to have reversible express lanes in the middle. And we’re going to be building express lanes on I-75 in Broward County. Eventually we will have a complete system of express lanes and drivers can make those value-added choices in the Miami-Dade/South Florida area.
We’re doing a similar thing in Tampa Bay-on I-275, I-4 and I-75-where in the future you will see us implement managed lanes there so that as congestion builds up in the general purpose lanes during peak hours or during events, then you will have a choice.
It’s all about providing choices. If you’re not in a hurry, if you don’t have an appointment, then you can take the general purpose lane and not pay a toll. But in the instances where you need to catch a flight, have an appointment you can’t miss, have to pick up your child from day care-or if you’re a businessman and if you miss an appointment it’s going to cost you money-the users can make those value-added propositions and use the express lanes.
And as we’re adding express lanes to various interstates, it makes perfect sense for us to add express lanes to our Turnpike facilities so that there’s a seamless system for people to move from their origin to their destination.
Gilroy: FDOT has also been an early adopter of “total asset maintenance” contracting, whereby an agency hires a contractor to conduct “fence-to-fence,” comprehensive highway maintenance functions, as opposed to using many small, piecemeal contracts with vendors to for pothole repair, signage, landscaping, etc. Virginia and Texas have found success in lowering costs through this approach while maintaining a high quality of service delivery. What has Florida’s experience with “total asset maintenance” contracting been?
Prasad: We gain efficiencies in operations. We see efficiencies of scale in bundling the maintenance to make the responsibility cover “fence-line-to-fence-line,” from milepost to milepost. We don’t have to go and procure a contractor for fence work, procure a contractor to mow, procure a contractor for potholes and guardrail, etc. Now what we’re doing is bundling all of that to gain efficiencies there, and the firms can gain some efficiencies there too. The risks can be spread across all the elements.
And in return, we get a better price and we save money. And there are significant cost savings from a contract administration standpoint and significant cost savings from a contract procurement standpoint. But in the large scheme of things, it gives us cost efficiencies by bundling all of these into one contract-a long-term contract that’s a lump-sum contract-so not only do we get all of the benefits I’ve mentioned, but it also gives us a price stability. It’s a long-term, stable cost, doing routine maintenance with very low administration costs. Instead of managing 20 contracts, for example, now we’re managing four or five.
Our contracts are seven-year contracts, so we basically get a price upfront for seven years, and know what’s it’s going to cost. I don’t have to take bids, and if the costs go up, that’s a risk that the private sector is taking. In an era when we don’t know what the future revenues are going to be or what’s going on at the federal level with their program, having price stability is huge.
The other thing is that if we do a guardrail contract, the guardrail contractor is going to factor in some risk. If we do a mowing contract, there may not be a whole lot of risk but the contractor is going to factor in some risk, such as a mower breaking down. The fence contractor is going to factor in some risk. Each of these individual contracts is going to carry some risk. By combining all of that, the private company can decide, “maybe I don’t need to aggregate all of that risk,” and they can better manage the risks themselves. So we’re optimizing the risk and bringing more efficiency to the operations.
Gilroy: With the expansion of the Panama Canal, eastern port operators have an opportunity to take advantage of increasing port traffic. However, many eastern ports face significant investment and connectivity needs if they want to compete for this business. What is Florida doing to position itself to take maximum advantage of the ports opportunity?
Prasad: We’re very excited about it, and the governor [Rick Scott] and I are very focused on making sure that Florida is the trade gateway to the Americas. With the Latin American countries’ economies growing and the expansion of the Panama Canal, the Miami and State of Florida ports are going to play a big role.
We benefitted from the fact that the Port of Miami was already authorized for a 50-foot depth, but there was no funding for it. So one of the first things that Governor Scott did when he took office was to fully fund the Port of Miami dredge project. That’s a total of around $150 million, and we’re contributing about 75 percent. We didn’t want to wait for the federal government to decide winners and losers in funding projects like this. We wanted to control that ourselves. Miami will be only the second port on the eastern seaboard, after Virginia that will have a 50-foot depth.
Expanding ports is one thing, but we also have to look at logistics. We’ve got to make sure that we’re investing in intermodal logistics centers, so when containers get to the port and are offloaded, then they can go to intermodal logistics centers so they can get distributed by trucks or by rail. In this year alone, we are investing close to $530 million in port-related improvements, not only on-port, but also off-port and connectors. We’re building a $300 million connector project in Tampa that takes trucks off city roads and puts them on a connector with a direct connect to a toll road and Interstate 4. We’re also investing in an intermodal logistics center in Miami, so that the containers can leave the port and go to an intermodal logistics center and get shipped by truck or rail.
Florida’s going to be the third most populous state in a couple of years and we’re projected to have about 90 million tourists in a few years, so we consume a lot here in this state. What we want to do is make sure that what we consume comes through our ports, and we want to facilitate that.
Now there are going to be some advantages that other ports have from a logistics standpoint, but what we don’t want to do as a state is to create any more barriers. And our ports are the closest to the Panama Canal, and we have a very good highway and rail infrastructure in place. Our ports are strategically located-within about 8 hours, you can touch about 30 or 40% of the population in the East and Southeast.
So as the Panama Canal expansion nears completion, we want to make sure that we’re taking advantage of the opportunity to fully leverage what we can offer. A lot of other ports are still waiting for the federal government to authorize them to go to 50-foot depths, but we already got that and are funding it. By next month we’ll be beginning the dredging project at the Port of Miami. While others are waiting, we’re moving forward. When the Panama Canal opens, ships are going to go through there, and they’re not going to wait, hoping that ports are going to be deepened, or that you’re going to have a logistics center, or a distribution center. They’re going to places where those things are already there, and that place is going to be Florida.
Gilroy: At Governor Scott’s request, FDOT has begun to analyze the return on investment on its highway investments to get a clearer sense of the state’s infrastructure investment decision making. What have you learned from that effort?
Prasad: The governor asked me, “How do you prioritize projects? We should be building projects that deliver a high return on investment.” His focus was on building the right projects, prioritizing projects.
On the Turnpike projects and the express lanes projects, we do a return-on-investment calculation to see what return taxpayers are going to get and make sure we are building roads that are financially feasible. We don’t want to be building facilities that are barely financially feasible; we want to build facilities that are good projects.
When it comes to non-revenue projects, how do you prioritize those? I think DOTs do a very good job in prioritizing projects. When it comes to capacity, we look at level of service or volume-to-capacity ratios. When you do safety projects, we look at a benefit-cost analysis and do the projects with the highest levels of benefits relative to costs. When we look at pavement preservation, we look at projects that are not performing, and prioritize it based on the levels of performance and improve upon them.
So it’s more of a question of making sure that we’re not politically picking and choosing which projects to build, but rather that we’re picking projects that make the most sense for the state. On some projects, like revenue projects, we look at return on investment and internal rate of return. On other projects, we look at other measurable indicators on how we prioritize infrastructure projects. But in the end, we want projects that get us the most bang for the buck.
Gilroy: What lessons would you offer to another state DOT that is considering following FDOT footsteps on PPPs, tolling and other innovations? What internal culture changes are required for success? How should they approach communication with the public, media, etc.?
Prasad: Don’t be afraid of change, and surround yourself with good people. I’ve got a boss in the governor who supports change and wants to think creatively. And in this organization, we cannot continue to do things the same way we’ve been doing for the last 30 or 40 years. That’s been my theme here in the agency-that we cannot operate this agency as if we’re in the 20th century. We’re in the 21st century, and things have changed. People expect us to do different things, and there are new tools and new levels of sophistication.
You need to engage the whole agency. You’re going to have people that are going to resist the change, but you’ve got to try to get them on board and not slow down because you don’t have all of them on board.
And outside of the agency you’ve got to have support for change. You’ve got to work with your partners, whether that’s local governments or your contracting community or your consulting community. Bring them along and engage them in the discussion, so they understand what you’re trying to do. They’ll tell you where the pitfalls are. You may not always agree all of the time, but if you agree most of the time, you’ll be successful.
You also need to have credibility with your state legislature. Your legislature needs to feel like you’re an agency that can hold commitments and deliver on commitments, so when you ask them to do something different there’s a base element of trust. And obviously, you need a governor that supports you, which we have here with Governor Scott.
Ananth Prasad was named Secretary of the Florida Department of Transportation (FDOT) by Governor Rick Scott in April 2011. Prasad is responsible for managing the $7 billion agency, which oversees infrastructure projects that are vital to Governor Scott’s 7-7-7 Jobs Plan, including port dredging, highway expansion and maintenance projects. Prior to his appointment as Secretary of FDOT, Prasad served as the Assistant Secretary for Engineering and Operations for the agency. Prasad rejoined FDOT in July 2010 after a brief two-year stint as a vice president of a construction-services firm.
Prasad has a total of 21 years of experience in the transportation industry, including 19 years with FDOT where he previously held the positions of the Chief Engineer and Director of Construction. He was responsible for implementing various innovative contracting techniques, including public-private partnerships. Prasad earned a master’s degree in civil engineering from the University of Florida.
Other articles in Reason Foundation’s Innovators in Action 2012 series are available online here.