Construction and the Law in Texas
As our state continues to grow, our transportation system faces challenges from increased congestion on our roads and highways. With limited available space for significant urban roadway expansion, political leaders are giving consideration to commuter rail systems in our largest metropolitan areas. Commuter rail can be effective in efficiently moving large numbers of people into and around central business districts. However, its development is often controversial and expensive. Because of the expense involved, the use of a public private partnership (“P3”) to develop portions of a commuter rail system can be an attractive option for public owners seeking to supplement a region’s transportation system.
In the last legislative session, Senate Bill 1048 memorialized a procedure for local governmental entities to employ P3s. That bill is now codified as chapter 2267 of the Texas Government Code. The statute specifically exempts and does not apply to any highway projects owned by TxDOT or any transportation authority. Those entities have previously been able to use P3s. And, while local governmental entities have previously been able to use P3s as well, the codification of the P3 process has, to some degree, increased governmental awareness and private sector interest in P3 projects.
Using a P3, a governmental entity can take advantage of innovative financing options that are not available to it when a project is publicly financed using traditional procurement methods. Another benefit to a P3 for commuter rail is that much of the risk associated with the design, construction, and – depending on the structure of the project – operations and maintenance of the facility, can be shifted to the private partner. Furthermore, given the expense associated with some commuter rail facilities, using a P3 can extend the financing of a project further into the future than a project funded through traditional financing arrangements.
In the construction of commuter rail facilities, there are different types of P3s that can provide value to the public entity seeking to partner with a private entity or consortium. The following types of P3s offer approaches for development:
- Design-Build – the private entity provides financing , design, and construction services. The public owner operates and maintains the facility post-completion.
- Design-Build-Maintain – in this approach, the private entity maintains the facility after completion while the public owner handles its operation.
- Design-Build-Operate – rather than maintaining the facility post-completion, the private entity operates the facility while the public owner provides maintenance.
- Design-Build-Operate-Maintain – in this alternative, the private entity both operates and maintains the facility post-completion, usually under a long-term lease agreement.
Regardless of the method chosen, one key element of P3s is the manner in which the private financing component is repaid. In toll road construction projects employing P3s in Texas, the obvious answer is the collection and use of tolls by facility users. Commuter rail generates revenue from ticket sales. Additionally, should a P3 facility be a station with associated development, revenue can be generated from attached commercial and residential space that might be located on public lands but leased to and operated by the private partnership.
Even when a P3 is used to construct a commuter rail facility and the private partner maintains control of operations and maintenance, the public agency may still control important elements of the system such as performance standards and specifications, the fare structure, maintenance requirements, and service or operational standards. The statutorily required comprehensive agreement called for in section 2267.058 should contain the requirements for these types of considerations. An additional safeguard for the public entity, the comprehensive agreement should grant the entity oversight responsibilities throughout the project to ensure the private partner is meeting the stated obligations, milestones, and operational or maintenance quality. Like virtually all contracts, the public entity will have the contractual right to terminate the comprehensive agreement should a material breach occur.
The use of P3s for commuter rail provides a public owner many options for development. In 2009, Dallas Area Rapid Transit (DART) solicited proposals for the construction of the Cotton Belt Rail Line. Other cities, like Denver and Boston, have sought P3s for the construction of entire rail systems or components of an existing system such as rail stations. A city seeking commuter rail can fragment the desired system into segments, each to be built on different schedules by different P3s. This structure, while complex, allows various entities and investors to contribute to the financing of a huge endeavor, when taken in whole, would be prohibitively expensive.
Likewise, a city seeking to convert an existing Park-and- Ride bus facility to a commuter rail station can foster development and increased tax revenue by entering into a P3 for the redevelopment of a surface parking lot into a mixed use facility with commuter rail access.
Finally, private entities seeking to partner with public owners on commuter rail development may initiate the P3 process by submitting unsolicited proposals for development. The proposals, whether solicited or unsolicited, are subject to requirements and criteria of the statutory framework. The considerations in the statute are fairly detailed and provide a solid framework for structuring a proposal and an agreement.
Commuter rail requires a significant investment of capital. Because of their size and cost, P3s could prove to be a solid vehicle for the delivery of a commuter rail system to Texas’ cities.
– As seen in the July 2012 Issue of Texas Contractor.