Surface Transportation: Prospects for Innovation Through Research, Intelligent Transportation Systems, State Infrastructure Banks, and Design-Build Contracting

Published by the Government Accountability Office on 1997-03-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                   United States General Accounting Office

GAO                Testimony
                   Before the Subcommittee on Transportation and
                   Infrastructure, Committee on Environment and Public
                   Works, U.S. Senate

For Release
on Delivery
Expected at
9:30 a.m. EST
Thursday           TRANSPORTATION
March 6, 1997

                   Prospects for Innovation
                   Through Research,
                   Intelligent Transportation
                   Systems, State
                   Infrastructure Banks, and
                   Design-Build Contracting
                   Statement of Phyllis F. Scheinberg,
                   Associate Director, Transportation Issues,
                   Resources, Community, and Economic
                   Development Division

    Mr. Chairman and Members of the Subcommittee:

    We appreciate the opportunity to testify on how innovation in federal
    research, financing and contracting methods has the potential for
    improving the performance of the nation’s surface transportation system.
    Our testimony is based on three reports that we have recently completed
    for this Committee’s deliberations on the reauthorization of the Intermodal
    Surface Transportation Efficiency Act (ISTEA), as well as ongoing work for
    the Committee.1 In summary, we reported the following:

•   Investments in surface transportation research have provided benefits to
    users and the economy. These benefits include crash protection devices,
    such as seat belts and car seats for infants and children; programs to
    reduce alcohol-related deaths; and longer-lasting highway surfaces that
    reduce maintenance costs. The Department of Transportation (DOT) has a
    critical role to play by funding research, establishing an overall research
    mission with objectives for accomplishment and priorities for allocating
    funds, and acting as a focal point for technology transfer. However, DOT’s
    organizational structure and lack of both a strategic plan and a
    departmental focal point may limit its impact on research. Until these
    issues are addressed, the Department may not be able to respond to ISTEA’s
    call for an integrated framework for surface transportation research.

•   Established by ISTEA, DOT’s Intelligent Transportation System (ITS) Program
    has received $1.3 billion to advance the use of computer and
    telecommunications technology that will enhance the safety and efficiency
    of surface transportation. Although the program envisioned widespread
    deployment of integrated multimodal ITS systems, this vision has not been
    realized for several reasons. First, the ITS national architecture was not
    completed until July 1996 and ITS technical standards will not be
    completed until 2001. The ITS architecture and technical standards, which
    define ITS elements and how they will work together, are prerequisites to a
    large scale, integrated deployment of ITS systems. In addition, the lack of
    knowledge of ITS technologies and systems integration among state and
    local officials, insufficient data documenting the cost effectiveness of ITS in
    solving transportation problems and competing priorities for limited
    transportation dollars will further constrain widespread ITS deployment.
    Before DOT can aggressively pursue widespread deployment of integrated

     Surface Transportation: Research Funding, Federal Role, and Emerging Issues (GAO/RCED-96-233,
    Sept. 6, 1996), Urban Transportation: Challenges to Widespread Deployment of ITS Technologies
    (GAO/RCED-97-74, Feb. 27, 1997), State Infrastructure Banks: A Mechanism to Expand Federal
    Transportation Financing (GAO/RCED-97-9, Oct. 31, 1996).

    Page 1                                                                      GAO/T-RCED-97-83
                       ITS,   it must help state and local officials overcome these obstacles.

                   •   State Infrastructure Banks (SIBs) offer the promise of helping to close the
                       gap between transportation needs and available resources by sustaining
                       and potentially expanding a fixed sum of federal capital, often by
                       attracting private investment. Specifically, these banks provide states
                       increased flexibility to offer many types of financial assistance, such as
                       loans or letters of credit, tailored to fit a project’s specific needs. Benefits
                       include expediting project completion, recycling loan repayments to future
                       projects, and obtaining financial support from the private sector and local
                       communities. However, some state officials and industry experts that we
                       talked with remain skeptical that SIBs will produce the expected benefits.
                       Reasons for their skepticism include concern that there are (1) an
                       insufficient number of projects with a potential revenue stream needed to
                       repay the loans and (2) impediments under state law. Only time will tell.
                       This program is new; only one state has begun a project under its SIB
                       since the initial pilot states were selected for SIB participation in
                       April 1996. Therefore, it is too early to assess how effectively SIBs will help
                       to meet transportation needs.

                       Our ongoing work has found that

                   •   the Federal Highway Administration (FHWA) is testing and evaluating the
                       use of an innovative design-build contracting method for highway
                       construction. This method differs from traditional contracting practice in
                       that it combines, rather than separates responsibility for the design and
                       construction phases of a highway project. Proponents of design-build see
                       several advantages to the approach, including better accountability for
                       costs and quality, less time spent coordinating designer and builder
                       activities, firmer knowledge of project costs, and reduced burden in
                       administering contracts. However, FHWA’s authority to implement
                       design-build is limited and 17 states have laws which, in effect, prevent the
                       use of design-build. Finally, while design-build may result in the faster
                       completion of projects, it may also require an accelerated revenue stream
                       to pay for construction.

                       ISTEAexpressed the need for a new direction in surface transportation
DOT’s Leadership       research, finding that despite an annual federal expenditure of more than
Role in Surface        $10 billion on surface transportation and its infrastructure, the federal
Transportation         government lacked a clear vision of the role of federally funded surface
                       transportation research and an integrated framework for the fragmented

                       Page 2                                                         GAO/T-RCED-97-83
surface transportation research programs dispersed throughout the
government. The act recognized the federal government as a critical
sponsor and coordinator of new technologies that would provide safer,
more convenient, and more affordable future transportation systems.

Our September 1996 report on surface transportation research confirmed
what ISTEA stressed—DOT must play a critical role in surface transportation
research. DOT’s role as the leader in surface transportation research stems
from the Department’s national perspective, which transcends the
interests and limitations of nonfederal stakeholders. For example, the
states generally focus on applied research to solve specific problems;
industry funds research to develop new or expanded markets; and
universities train future transportation specialists and conduct research
that reflects the interests of their funders.

While the Department has established councils and committees to
coordinate its research, the lack of a departmental focal point and an
inadequate strategic plan may limit its leadership role. First, surface
transportation research within the Department is focused on improving
individual modes of transportation rather than on creating an integrated
framework for surface transportation research. This modal structure
makes it difficult for DOT to develop a surface transportation system
mission; accommodate the need for types of research—such as intermodal
and systems assessment research—that do not have a modal focus; and
identify and coordinate research that cuts across modes.

Second, DOT does not have a Department-level focal point to oversee its
research, such as an Assistant Secretary for Research and Development.
Instead an Associate Administrator of the Research and Special Projects
Administration (RSPA) coordinates the Department’s surface research
programs. Although RSPA was established to foster cross-cutting research,
it does not have the funding resources or the internal clout to function
effectively as a strategic planner for surface transportation research. RSPA
acts in an advisory capacity and has no control over the modal agencies’
budgets or policies.

Finally, the Department does not have an integrated framework for
surface transportation research. The three research plans that the
Department has submitted to the Congress since 1993 are useful
inventories of the five modal agencies’ research activities. However, the
plans cannot be used, as ISTEA directed, to make surface transportation
research more strategic, integrated, and focused. Until all these issues are

Page 3                                                       GAO/T-RCED-97-83
                       addressed, the Department may not be able to respond to ISTEA’s call for
                       an integrated framework for surface transportation research and assume a
                       leadership role in surface research.

                       ISTEA also reflected congressional concerns about the adequacy of the
ITS Program Holds      funding for advanced transportation systems, suggesting that too little
Potential for          funding would increase the nation’s dependence on foreign technologies
Innovation If          and equipment. The act therefore increased the funding for many existing
                       and new research programs, especially for the ITS program. Since 1992, the
Deployment Obstacles   ITS program has received through contract authority and the annual
Can Be Resolved        appropriations process about $1.3 billion. This amount represents about 36
                       percent of the $3.5 billion the federal government provided for surface
                       research programs from 1992 to 1997.

                       Our February 1997 report examined the progress made in deploying ITS
                       technologies and ways in which the federal government could facilitate
                       further deployment. On the first issue, a 1995 DOT-funded study found that
                       7 of 10 larger urban areas were using some ITS technologies to help solve
                       their transportation problems. An example of an area that has widely
                       deployed ITS technologies is Minneapolis. The Minneapolis ITS program,
                       part of the state’s “Guidestar” program, first began operational tests in
                       1991. Since that time, about $64 million in public and private funds have
                       been invested in Guidestar projects. With these funds, Minneapolis
                       upgraded its traffic management center so that it could better monitor
                       traffic flow and roadway conditions and installed ramp meters to control
                       the flow of traffic entering the expressways. These improvements have
                       helped increase average highway speeds during rush hour by 35 percent.

                       Although urban areas are deploying individual ITS components, we found
                       that states and localities are not integrating the various ITS components so
                       that they work together and thereby maximize the overall efficiency of the
                       entire transportation system. For example, transportation officials in the
                       Washington, D.C., area said that local jurisdictions have installed
                       electronic toll collection, traveler information, and highway surveillance
                       systems without integrating the components into a multimodal system.
                       This lack of systems integration is due in part to the fact that ITS is a
                       relatively new program that is still evolving and has yet to fully implement
                       some fundamental program components such as the national architecture
                       and technical standards. The national architecture, which identifies the
                       components and functions of an ITS system, was completed in July 1996. In
                       addition, a five year effort to develop technical standards—which specify

                       Page 4                                                      GAO/T-RCED-97-83
how system components will communicate—is planned for completion in

We also found that the lack of widespread deployment of integrated ITS
systems results from insufficient knowledge of ITS systems among state
and local transportation agencies; limited data on the costs and benefits of
ITS; and inadequate funding in light of other transportation investment
priorities. The funding issue is particularly important since DOT has
changed the program’s short-term focus to include a greater emphasis on
deploying ITS technologies rather than simply conducting research and
operational tests. The federal government’s future commitment to a
deployment program would have to balance the need to continue progress
made under the program with federal budgetary constraints. Urban
transportation officials in the nation’s 10 largest cities we interviewed had
mixed views on an appropriate federal role for funding ITS deployment.
Officials in 6 of 10 urban areas supported a large federal commitment of
$1 billion each year. Typically, these officials contended that future ITS
deployments would be limited without specific funding for this approach.
For example, a New York transportation planner said that without
large-scale funding, ITS investment would have to compete for scarce
dollars with higher-priority road and bridge rehabilitation projects. Under
such a scenario, plans for deploying ITS would be delayed. These officials
also favored new federal funding rather than a set-aside of existing
federal-aid highway dollars.

In contrast, officials from four other urban areas opposed a large-scale
federal aid program because they do not want additional federal funding
categories. Some of these officials also said that such a program could
drive unnecessary ITS investments, as decisionmakers chased ITS capital
money, even though another solution might have been more cost-effective.
One official noted that a large federal program would be very premature
since the benefits of many ITS applications have yet to be proven despite
the claims of ITS proponents. In the absence of a large federal program,
officials from 5 of the 10 urban areas supported a smaller-scale federal
seed program. They said that such a program could be used to fund
experimental ITS applications, promote better working relationships
among key agencies, or support information systems for travellers.

Deliberations on the future funding for the ITS program should include an
assessment of the current obstacles facing the program. First, the system
architecture is relatively new, and state and local officials have limited
knowledge of its importance. Second, it will take time for state and local

Page 5                                                       GAO/T-RCED-97-83
                           transportation officials to understand the architecture and supplement
                           their traditional approach to solving transportation problems through civil
                           engineering strategies with the information management and
                           telecommunications focus envisioned by an integrated ITS approach. In
                           addition, widespread integrated deployment cannot occur without the
                           technical standards that DOT proposes to complete over the next 5 years.

                           Until recently, states have generally not been able to tailor federal highway
Innovative Financing       funding to a form other than a grant. The National Highway System
Through State              Designation Act of 1995 established a number of innovative financing
Infrastructure Banks       mechanisms, including the authorization of a SIB Pilot Program for up to
                           10 states or multistate applicants—8 states were selected in April 1996 and
                           2 were selected in June 1996. Under this program, states can use up to 10
                           percent of most of their fiscal years 1996 and 1997 federal highway funds
                           to establish their SIBs. This program was expanded by DOT’s fiscal year 1997
                           appropriations act that removed the 10-state limit and provided
                           $150 million in new funds.

                           A SIB serves essentially as an umbrella under which a variety of innovative
                           finance techniques can be implemented. Much like a bank, a SIB would
                           need equity capital to get started, and equity capital could be provided at
                           least in part through federal highway funds. Once capitalized, the SIB
                           could offer a range of loans and credit options, such as loan guarantees
                           and lines of credit. For example, through a revolving fund, states could
                           lend money to public or private sponsors of transportation projects.
                           Project-based revenues, such as tolls, or general revenues, such as
                           dedicated taxes, could be used to repay loans with interest, and the
                           repayments would replenish the fund so that new loans could be
                           supported. Thus projects with potential revenue streams will be needed to
                           make a SIB viable.

                           Expected assistance for some of the projects in the initial 10 states
                           selected for the pilot program include loans ranging from $60,000 to
                           $30 million, credit enhancement to support bonds and a line of credit. In
                           some cases, large projects that are already underway may be helped
                           through SIB financial assistance. Examples of projects states are
                           considering for financial assistance include:

                       •   A $713 million project in Orange County, California, that includes
                           construction of a 24-mile tollway. SIB assistance in the form of a
                           $25 million line of credit may be used for this project to replace an existing

                           Page 6                                                       GAO/T-RCED-97-83
    contingency fund. If accessed, the plan is that the line of credit would be
    repaid through excess toll revenues.
•   A $240 million project in Orlando, Florida, will involve construction of a 6
    mile-segment to complete a 56-mile beltway. A SIB project loan in the
    amount of $20 million is being considered, and loan repayment would
    come from a mix of project and systemwide toll receipts and state
    transportation funds.
•   In Myrtle Beach, South Carolina, a SIB loan is being considered to help
    with the construction of a $15 million new bridge to Fantasy Harbor. The
    source for repayment of the loan would be proceeds from an admission
    tax at the Fantasy Harbor entertainment complex.

    These examples represent but a few of the projects being considered for
    SIB assistance by the initial 10 SIB pilot states.

    SIB financial assistance is intended to complement, not replace, traditional
    transportation grant programs and provide states increased flexibility to
    offer many types of financial assistance. As a result, projects could be
    completed more quickly, some projects could be built that would
    otherwise be delayed or infeasible if conventional federal grants were
    used, and private investment in transportation could be increased.
    Furthermore, a longer-term anticipated benefit is that repaid SIB loans can
    be “recycled” as a source of funds for future transportation projects. If
    states choose to leverage SIB funds, DOT has estimated that $2 billion in
    federal capital provided through SIBs could be expected to attract an
    additional $4 billion for transportation investments.

    For some states, barriers to establishing and effectively using a SIB still
    remain. One example is the low number of projects that could generate
    revenue and thus repay loans made by SIBs. Six of the states that we
    surveyed told us that an insufficient number of projects with a potential
    revenue stream would diminish the prospects that their state would
    participate in the SIB pilot program. Ten of 11 states that we talked with
    about this issue said they were considering tolls as a revenue source.
    However, state officials also told us that they expected tolls would
    generate considerable negative reaction from political officials and the
    general public.

    Some states expressed uncertainty regarding their legal or constitutional
    authority to establish a SIB in their state or use some financing options
    that would involve the private sector. Michigan, for instance, said that it

    Page 7                                                       GAO/T-RCED-97-83
                       does not currently have the constitutional authority to lend money to the
                       private sector.

                       Since $150 million was appropriated for fiscal year 1997 and the 10 state
                       restriction was lifted, DOT has received applications from 28 additional
                       states. DOT has not yet selected additional states for the program. In
                       addition, DOT has not yet developed criteria or a mechanism for
                       determining how the funds will be distributed to selected states.

                       The SIB program has been slow to start-up. Only one state—Ohio—has
                       actually begun a toll road project under its SIB since April 1996 when the
                       first states were selected for the program. The program will need time to
                       develop and mature.

                       Innovation can also occur through different methods to design and
Innovative Practices   construct transportation projects. Of particular note is FHWA’s special
Using Design-Build     project to test and evaluate the use of design-build contracting methods
Contracting            under the agency’s authority to conduct research. The project is an
                       outgrowth of a 1987 Transportation Research Board task force report that
                       identified innovative contracting practices such as design-build. The
                       design-build method differs from the traditional design-bid-build method
                       since it combines, rather than separates responsibility for the design and
                       construction phase of a highway project.

                       Proponents of design-build have identified several benefits. First, the
                       highway agency can hold one contractor, rather than two or more,
                       accountable for the quality and costs of the project. This compares to the
                       traditional approach where problems with the project resulted in disputes
                       between the design and construction firms. Second, by working together
                       from the beginning, the designer and builder would have a firmer
                       understanding of the project costs and could thereby reduce costs by
                       incorporating value engineering savings2 into the design. Finally,
                       design-build proponents state the approach will reduce administrative
                       burden and expenses because fewer contracts would be needed.

                       State interest in the design-build contracting approach is rising. According
                       to FHWA, as of January 1997, 13 states have initiated at least 50 design-build
                       projects under the agency’s special program. The size of state projects
                       varies considerably, from bridge projects costing a few million dollars to

                       Value engineering is the formal technique by which contractors or independent teams identify
                       methods for constructing projects more economically.

                       Page 8                                                                         GAO/T-RCED-97-83
the $1.4 billion reconstruction of I-15 in Utah. While states are becoming
more receptive to design-build contracting, FHWA still considers the
approach experimental, and an overall assessment of the broad benefits,
costs, and applicability of design-build remains limited by the small
number of completed projects.

One difficulty in implementing design-build lies in state laws limiting its
use. A 1996 Design-Build Institute of America survey of state procurement
laws documents this problem. The survey identified 17 states that did not
permit the use of combined design and construction contracts. In addition,
a 1995 Study by the Building Futures Council noted that some states
indirectly preclude design-build by requiring separation of design and
construction services—construction services being awarded to the lowest
bidder only after the design is complete.

In addition, similar requirements applicable to state highway construction
contracts under the federal-aid highway program limit FHWA’s authority to
allow design-build contracts outside those that are part of its special
project. However, an official within FHWA’s Office of Engineering suggested
that continuing the current special project may be appropriate because no
consensus exists within the highway construction industry on the
desirability of the design-build approach.

A final consideration that may limit the use of design-build contracting is
project financing. When design-build is applied to expensive, large
infrastructure projects, financing can be more complex because the
projects are constructed faster than under conventional contracting
practices. Faster construction means that funds will be required faster,
which may pose difficulties if the project’s revenue stream does not keep
pace. For example, in our review of a large design-build transit project, the
extension of the Bay Area Rapid Transit (BART) system to the San
Francisco International Airport, we found that BART required a borrowing
program to cover cash shortfalls during construction. With design-build,
BART may save construction costs but will incur additional financing costs.

Design-build contracting, while becoming increasingly common in the
private sector for facilities such as industrial plants and refineries, does
not yet have an established track record in transportation in the United
States. However, the experiences now being gained through the 50
projects under FHWA’s special project, along with four Federal Transit
Administration funded demonstration projects, may provide sufficient
evidence of the efficacy of design-build. Early experience suggests that in

Page 9                                                       GAO/T-RCED-97-83
           instances when time is at a premium, and project revenue sources quickly
           cover construction costs, design-build may provide a good fit with project
           requirements. One area where these opportunities may exist is FHWA’s
           Emergency Relief Program, which places emphasis on the quick
           reconstruction of damaged facilities.

           Mr. Chairman, this concludes our prepared statement on the potential
           benefits and challenges of four examples of innovation in surface
           transportation research, finance and contracting. We will be happy to
           respond to any questions you might have.

(342936)   Page 10                                                    GAO/T-RCED-97-83
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