[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
           BLIC-PRIVATE PARTNERSHIPS: INNOVATIVE CONTRACTING

=======================================================================

                                (110-24)

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                          HIGHWAYS AND TRANSIT

                                 OF THE

                              COMMITTEE ON
                   TRANSPORTATION AND INFRASTRUCTURE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                             APRIL 17, 2007

                               ----------                              

                       Printed for the use of the
             Committee on Transportation and Infrastructure


          PUBLIC-PRIVATE PARTNERSHIPS: INNOVATIVE CONTRACTING

          PUBLIC-PRIVATE PARTNERSHIPS: INNOVATIVE CONTRACTING

          PUBLIC-PRIVATE PARTNERSHIPS: INNOVATIVE CONTRACTING

          PUBLIC-PRIVATE PARTNERSHIPS: INNOVATIVE CONTRACTING

          PUBLIC-PRIVATE PARTNERSHIPS: INNOVATIVE CONTRACTING

          PUBLIC-PRIVATE PARTNERSHIPS: INNOVATIVE CONTRACTING




                     U.S. GOVERNMENT PRINTING OFFICE

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             COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

                 JAMES L. OBERSTAR, Minnesota, Chairman

NICK J. RAHALL, II, West Virginia    JOHN L. MICA, Florida
PETER A. DeFAZIO, Oregon             DON YOUNG, Alaska
JERRY F. COSTELLO, Illinois          THOMAS E. PETRI, Wisconsin
ELEANOR HOLMES NORTON, District of   HOWARD COBLE, North Carolina
Columbia                             JOHN J. DUNCAN, Jr., Tennessee
JERROLD NADLER, New York             WAYNE T. GILCHREST, Maryland
CORRINE BROWN, Florida               VERNON J. EHLERS, Michigan
BOB FILNER, California               STEVEN C. LaTOURETTE, Ohio
EDDIE BERNICE JOHNSON, Texas         RICHARD H. BAKER, Louisiana
GENE TAYLOR, Mississippi             FRANK A. LoBIONDO, New Jersey
JUANITA MILLENDER-McDONALD,          JERRY MORAN, Kansas
California                           GARY G. MILLER, California
ELIJAH E. CUMMINGS, Maryland         ROBIN HAYES, North Carolina
ELLEN O. TAUSCHER, California        HENRY E. BROWN, Jr., South 
LEONARD L. BOSWELL, Iowa             Carolina
TIM HOLDEN, Pennsylvania             TIMOTHY V. JOHNSON, Illinois
BRIAN BAIRD, Washington              TODD RUSSELL PLATTS, Pennsylvania
RICK LARSEN, Washington              SAM GRAVES, Missouri
MICHAEL E. CAPUANO, Massachusetts    BILL SHUSTER, Pennsylvania
JULIA CARSON, Indiana                JOHN BOOZMAN, Arkansas
TIMOTHY H. BISHOP, New York          SHELLEY MOORE CAPITO, West 
MICHAEL H. MICHAUD, Maine            Virginia
BRIAN HIGGINS, New York              JIM GERLACH, Pennsylvania
RUSS CARNAHAN, Missouri              MARIO DIAZ-BALART, Florida
JOHN T. SALAZAR, Colorado            CHARLES W. DENT, Pennsylvania
GRACE F. NAPOLITANO, California      TED POE, Texas
DANIEL LIPINSKI, Illinois            DAVID G. REICHERT, Washington
DORIS O. MATSUI, California          CONNIE MACK, Florida
NICK LAMPSON, Texas                  JOHN R. `RANDY' KUHL, Jr., New 
ZACHARY T. SPACE, Ohio               York
MAZIE K. HIRONO, Hawaii              LYNN A WESTMORELAND, Georgia
BRUCE L. BRALEY, Iowa                CHARLES W. BOUSTANY, Jr., 
JASON ALTMIRE, Pennsylvania          Louisiana
TIMOTHY J. WALZ, Minnesota           JEAN SCHMIDT, Ohio
HEATH SHULER, North Carolina         CANDICE S. MILLER, Michigan
MICHAEL A. ACURI, New York           THELMA D. DRAKE, Virginia
HARRY E. MITCHELL, Arizona           MARY FALLIN, Oklahoma
CHRISTOPHER P. CARNEY, Pennsylvania  VERN BUCHANAN, Florida
JOHN J. HALL, New York
STEVE KAGEN, Wisconsin
STEVE COHEN, Tennessee
JERRY McNERNEY, California

                                  (ii)



            SUBCOMMITTEE ON HIGHWAYS, TRANSIT AND PIPELINES

                        PETER A. DeFAZIO, Oregon

NICK J. RAHALL II, West Virginia     JOHN J. DUNCAN, Jr., Tennessee
JERROLD NADLER, New York             DON YOUNG, Alaska
JUANITA MILLENDER-McDONALD,          THOMAS E. PETRI, Wisconsin
California                           HOWARD COBLE, North Carolina
ELLEN O. TAUSCHER, California        RICHARD H. BAKER, Louisiana
TIM HOLDEN, Pennsylvania             GARY G. MILLER, California
MICHAEL E. CAPUANO, Massachusetts    ROBIN HAYES, North Carolina
JULIA CARSON, Indiana                HENRY E. BROWN, Jr., South 
TIMOTHY H. BISHOP, New York          Carolina
MICHAEL H. MICHAUD, Maine            TIMOTHY V. JOHNSON, Illinois
BRIAN HIGGINS, New York              TODD RUSSELL PLATTS, Pennsylvania
GRACE F. NAPOLITANO, California      JOHN BOOZMAN, Arkansas
MAZIE K. HIRONO, Hawaii              SHELLEY MOORE CAPITO, West 
JASON ALTMIRE, Pennsylvania          Virginia
TIMOTHY J. WALZ, Minnesota           JIM GERLACH, Pennsylvania
HEATH SHULER, North Carolina         MARIO DIAZ-BALART, Florida
MICHAEL A ARCURI, New York           CHARLES W. DENT, Pennsylvania
CHRISTOPHER P. CARNEY, Pennsylvania  TED POE, Texas
JERRY MCNERNEY, California           DAVID G. REICHERT, Washington
BOB FILNER, California               CHARLES W. BOUSTANY, Jr., 
ELIJAH E. CUMMINGS, Maryland         Louisiana
BRIAN BAIRD, Washington              JEAN SCHMIDT, Ohio
DANIEL LIPINSKI, Illinois            CANDICE S. MILLER, Michigan
DORIS O. MATSUI, California          THELMA D. DRAKE, Virginia
STEVE COHEN, Tennessee               MARY FALLIN, Oklahoma
ZACHARY T. SPACE, Ohio               VERN BUCHANAN, Florida
BRUCE L. BRALEY, Iowa                JOHN L. MICA, Florida
HARRY E. MITCHELL, Arizona             (Ex Officio)
JAMES L. OBERSTAR, Minnesota
  (Ex Officio)

                                 (iii)

                                CONTENTS

                                                                   Page

Summary of Subject Matter........................................    vi

                               TESTIMONY

Hansen, Fred, General Manager, Trimet, Portland, Oregon..........     2
Horner, David B., Chief Counsel, Federal Transit Administration..     2
Houlihan, Dennis, Labor Economist, American Federation of State, 
  County and Municipal Employees.................................    47
Lehman, Maria, P.E., F.Asce, Chief Operating Officer, Chazen 
  Companies......................................................    47
Njord, Hon. John R., P.E., Director, Utah Department of 
  Transportation.................................................     2
Ray, James D., Chief Counsel and Acting Deputy Administrator, 
  Federal Highway Administration.................................     2
Thomas, Richard, Director of Government Affairs, Ames 
  Construction, Inc..............................................    47
Yarossi, Paul, P.E., Office of the Chairman, Executive Vice 
  President and President, Hntb Holdings, Ltd....................    47

          PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Altmire, Hon. Jason, of Pennsylvania.............................    62
Mica, Hon. John L., of Florida...................................    63
Mitchell, Hon. Harry E., of Arizona..............................    67

               PREPARED STATEMENTS SUBMITTED BY WITNESSES

Hansen, Fred.....................................................    71
Horner, David B..................................................    79
Lehman, Maria....................................................    87
Njord, John R....................................................   110
Ray, James D.....................................................   115
Thomas, Richard..................................................   124
Yarossi, Paul....................................................   127

                       SUBMISSIONS FOR THE RECORD

Hansen, Fred, General Manager, Trimet, Portland, Oregon, visual 
  supplements....................................................    74
Horner, David B., Chief Counsel, Federal Transit Administration, 
  response to question from Rep. DeFazio.........................    14
Houlihan, Dennis, Labor Economist, American Federation of State, 
  County and Municipal Employees:

  Testimony from Bruce J. Blanning, P.E..........................    98
  Letter to National Surface Transportation Policy and Revenue 
    Study Commission from Josh Golka, representing the 
    Professional Engineers in California Government..............   101
Ray, James D., Chief Counsel and Acting Deputy Administrator, 
  Federal Highway Administration:

  Response to question from Rep. DeFazio.........................     9
  Response to question from Rep. Duncan..........................    23
  Response to question from Rep. Duncan..........................    26
  Response to question from Rep. DeFazio.........................    30
  Response to question from Rep. DeFazio.........................    36
  Response to question from Rep. Oberstar........................    39
  Design-Build Effectiveness Study: Final Report.................   133

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          PUBLIC-PRIVATE PARTNERSHIPS: INNOVATIVE CONTRACTING

                              ----------                              


                        Tuesday, April 17, 2007

                  House of Representatives,
    Committee on Transportation and Infrastructure,
                       Subcommittee on Highways and Transit
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2167, Rayburn House Office Building, the Honorable Peter 
A. DeFazio [chairman of the subcommittee] presiding.
    Mr. DeFazio. I would like to call the Highways and Transit 
Subcommittee to order.
    Today we are going to do another in our ongoing series of 
hearings about private-public partnerships. The attempt of the 
Committee is to better understand the breadth, the depth, the 
potential and the pitfalls of private-public partnerships. 
Clearly, not all private-public partnerships are alike. We want 
to understand better how they can be used by jurisdictions 
around the Country.
    We particularly want to look at the Federal Highway 
Administration's new special experimental project called SEP-
15, and also review some of the previous project, SEP-14, and 
what at least one witness will say is a very mixed outcome from 
that, although others would say that conventionally, it's an 
unqualified success.
    So with that, I would turn to the Ranking Member for any 
opening comments he might have.
    Mr. Duncan. Well, thank you, Mr. Chairman. I'm pleased that 
we're holding this hearing today on innovative contracting 
techniques.
    For over 20 years, State departments of transportation and 
local public transit authorities have been using innovative 
contracting techniques to help complete highway and transit 
projects in the most efficient way possible. By involving the 
private sector at various stages of the project delivery 
process, Government agencies are able to take advantage of 
private sector management skills, and in some cases, private 
sector capital, to complete projects on time and on budget. The 
goal of these innovative contracting techniques is to allocate 
responsibilities in the design, development, construction and 
management of a project to the different private and public 
partners in a way that will produce the best results.
    One of the key advantages to these types of contracts is 
that the private sector shoulders more of the risks associated 
with a project than in the traditional contracting process. 
Design-build contracting is an innovative contracting method 
that has become very common in highway and transit projects in 
recent years. Under this method, the transportation agency 
specifies the design criteria for a project and contractors 
that bid for the project then develop design proposals that 
optimize their individual construction capabilities.
    The design-build, operate and maintain contracting method 
is a technique that is getting a lot of attention now in the 
transit world. In a project executed under this method, the 
private sector is involved not only in designing and building 
the project, but also in operating and maintaining the project 
for several years after the project is put in service.
    These innovative methods are not without their critics. We 
need to make sure that smaller contractors and design firms are 
not adversely affected by these types of contracts. And we need 
to ensure that the public transportation agencies that are 
administering these projects are able to provide the proper 
level of oversight on each project.
    Also, I personally hope that some of this design work and 
other types of work, are not given out to companies from other 
countries, but are given to American companies and American 
workers.
    Thank you, Mr. Chairman, for holding this hearing, and I 
yield back the balance of my time.
    Mr. DeFazio. I thank the gentleman.
    If there are no other opening statements, we will go right 
to the witnesses. First will be Mr. James Ray, Acting Deputy 
Administrator, Federal Highways Administration. Mr. Ray.

  TESTIMONY OF JAMES D. RAY, CHIEF COUNSEL AND ACTING DEPUTY 
ADMINISTRATOR, FEDERAL HIGHWAY ADMINISTRATION; DAVID B. HORNER, 
 CHIEF COUNSEL, FEDERAL TRANSIT ADMINISTRATION; THE HONORABLE 
       JOHN R. NJORD, P.E., DIRECTOR, UTAH DEPARTMENT OF 
TRANSPORTATION; FRED HANSEN, GENERAL MANAGER, TRIMET, PORTLAND, 
                             OREGON

    Mr. Ray. Chairman DeFazio, Ranking Member Duncan and 
members of the Subcommittee, thank you for the opportunity to 
testify today on the topic of innovative contracting and 
public-private partnerships. I ask that my full statement be 
made part of the record for this hearing.
    Secretary Mary Peters has said, ``Congestion is endangering 
our freedom, our economy and our independence.'' With this 
alarming fact in mind, the Department of Transportation 
initiated its national strategy to reduce congestion to address 
this threat to our national well-being. We must find better, 
faster and more innovative ways to contract for needed 
transportation improvements. We must remove barriers to private 
sector participation in the construction and operation of 
transportation infrastructure.
    More flexible contracting is necessary to make this happen. 
That is why innovative contracting mechanisms pursued by FHWA 
are so critical.
    In traditional Federal aid highway construction 
contracting, cost is generally the one criterion that 
determines the winning bid. In recent years, State highway 
agencies have struggled to meet customer needs. Factors other 
than cost have emerged as important considerations in awarding 
highway construction contracts. States now take into account 
quality, delivery time, safety, road user impacts, life cycle 
costs and better use of improved technologies.
    Unfortunately, traditional procurement approaches will not 
be sufficient to address our current transportation needs or 
reverse the alarming trends developing across our system. 
Innovative contracting techniques provide States the 
flexibility to address these issues and encourage contractors 
to be more creative in addressing States' needs.
    More flexible procurement arrangements are often a key part 
of public-private partnerships. While discussion of P3s is 
focused on private financing thus far, public-private 
partnerships can be defined more broadly and include 
alternative contracting methods that increase private sector 
involvement. By employing innovative contracting techniques, 
the private sector can optimize its use of design, construction 
and materials and thereby increase the quality and timeliness 
of the final product.
    FHWA has made it possible for both States and the private 
sector to explore the use of innovative contracting techniques. 
FHWA developed SEP-14 to provide States with a vehicle to 
explore new concepts in construction contracting. Under SEP-14, 
States are allowed to test innovative contracting techniques 
within FHWA oversight. Techniques evaluated under SEP-14 
include design-build, cost plus time bidding, lane rental and 
warranty clauses, all of which have become accepted practice. 
These contracting methods not only result in time and cost 
efficiencies for traditional highway projects, but also 
facilitate greater private sector involvement in project 
delivery.
    Design-build contracting is one of the most significant 
innovations resulting from SEP-14. For the State, the use of 
design-build can result in cost savings, price certainty and 
time savings. From the private sector's perspective, design-
build gives the contractor greater flexibility to meet the 
project's purpose by utilizing a variety of methods and 
materials.
    Building on the success of SEP-14, FHWA established SEP-15 
to increase project management flexibility, encourage 
innovation and improve timely delivery of project construction. 
Like SEP-14, SEP-15 allows States to apply for conditional 
approval to test innovative approaches to the project delivery 
process.
    FHWA has long encouraged increased private sector 
participation in Federal aid projects, and SEP-15 allows FHWA 
to actively explore changes in the way we approach the delivery 
of highway projects. Our Nation faces challenges at the 
Federal, State and local levels in addressing our mobility 
needs. Innovative contracting is one method by which 
transportation agencies can address these needs in a cost-
efficient and timely way.
    The State, the private sector and road users can all 
benefit from the increased use of innovative techniques.
    Mr. Chairman, members, thank you for the opportunity to 
testify today, and I would be pleased to answer any questions 
you might have.
    Mr. DeFazio. Thank you, Mr. Ray.
    Mr. Horner, Chief Counsel, Federal Transit Administration.
    Mr. Horner. Chairman DeFazio, Ranking Member Duncan and 
members of the Subcommittee, thank you for the opportunity to 
testify about innovative contracting and public transportation.
    How we build and operate our transit infrastructure is a 
matter of increasing importance to the Nation's transportation 
system. Whether transit projects are built on time, on budget 
and realize the benefits expected from them affects the public 
support for new projects and more broadly, its view of the 
Federal transit program. Innovative contracting practices can 
harness incentives and penalties that are lacking in 
traditional procurement to assure that taxpayer-funded projects 
meet public expectations.
    Commonly referred to as public-private partnerships, 
innovative contracts are relatively recent in the world of 
public transportation investments. But there is little doubt 
that their ruse will grow over time as public agencies and 
elected officials seek to reduce large operating deficits and 
achieve better rates of on-time project delivery.
    In January of this year, pursuant to directives in SAFETEA-
LU, FTA established its public-private partnership pilot 
program. Through the pilot program, FTA has invited project 
sponsors to experiment with alternative system procurement in 
order to identify more effective ways of building new transit 
capacity for the American public. I am pleased to report that 
FTA recently received four applications to the program. Those 
applications are for major projects sponsored by the San 
Francisco Bay Area Rapid Transit District, or BART, Houston 
Metro, Denver RTD, and the Georgia Regional Transportation 
Authority.
    The questions are often asked, where is the opportunity in 
P3s for public transportation and how do transit P3s work when 
transit facilities realize significant operating deficits. 
Because substantially all transit infrastructure is currently 
operated on a cash flow negative basis, the financial 
opportunity for transit is not the proverbial cash on the 
barrelhead, but instead the avoidance of costs and opportunity 
known as subsidy minimization.
    To explain the concept of subsidy minimization, we can 
think of it this way. In the case of a transaction for an 
existing highway, a cash flow positive asset, the public agency 
asked the private sector, how large a concession payment will 
you pay me? In the case of a transaction for new transit 
capacity, a cash flow negative asset, the public agency asks 
the private sector a different question: how small a subsidy 
will I pay you?
    Private operators then compete for the opportunity to 
provide service, not by bidding up the concession payment, but 
by bidding down the subsidy. The financial return to the 
private entity is the difference between its costs to deliver 
and operate the system, on the one hand, and the system's total 
revenues, including public subsidy, on the other. The public 
agency then pays the subsidy to the private operator in the 
form of availability payments over a term of years, so long as 
the system is built and operated according to performance 
requirements approved by the public agency.
    This model has been used widely in the United Kingdom with 
great success since 1992, when that country responded to the 
challenges of project procurement that we in the United States 
are struggling with today. Under a program instituted by the 
Labor government called the Private Finance Initiative, or PFI, 
the U.K. treasury requires and has required for the past 15 
years that public agencies evaluate using P3s to procure social 
infrastructure before relying on conventional government 
contracting.
    In total, PFI has accounted for 10 to 14 percent of all 
investment in public services in the U.K. and has delivered at 
least 451 projects. The results of PFI have been impressive, 
whereas only 30 percent of conventional non-PFI projects have 
been delivered on time and only 27 percent delivered within 
budget. Over 88 percent of the PFI projects have been delivered 
on time. To the extent the same PFI projects have incurred cost 
overruns, none has been borne by the public sector.
    It is perhaps no surprise, therefore, that Standard and 
Poors recently found in a survey of public officials and 
private procurement officials that 91 percent of respondents 
agreed P3s have a better track record of project delivery than 
conventional public sector procurements. As we approach 
reauthorization, we should study the results of the PPP model 
in the U.K. to understand why innovative contracting has 
achieved such improvements over conventional improvements.
    Thanks to the SAFETEA-LU pilot program, we may expect to 
have data from the U.S. for U.S. projects to inform our 
thinking as well.
    Thank you again for the opportunity to speak with you this 
morning. I'd be happy to answer any questions you may have.
    Mr. DeFazio. Thank you, Mr. Horner.
    Now we will got to the Honorable John Njord, Utah 
Department of Transportation.
    Mr. Njord. Thank you, Chairman DeFazio, members of the 
Committee. It's a pleasure for me to be here today and to talk 
about some innovative contracting methods that we've been using 
in the State of Utah and how it has influenced our ability to 
deliver projects.
    Ten years ago, the Utah Department of Transportation 
launched into the first design-build transportation mega-
project in this Country's history. That has been 10 years ago, 
and since that time we have seen design-build spread across 
this entire Country. The project that I am referring to that 
began all this was the I-15 reconstruction in Salt Lake County, 
a $1.59 billion reconstruction project.
    Now, some of you that may have never been to my great State 
of Utah may have never seen this facility. But if you will 
think of the Springfield interchange, which is not too far by 
this building here, multiply that by three, add eight urban 
interchanges, seventeen miles of freeway, that is the I-15 
reconstruction project, a very large, complex project that 
began in 1997. This facility was on the most congested portion 
of our interstate in the State of Utah. It was in the most 
difficult location to build. Clearly, it was a location where 
the scrutiny was very high upon this project. I don't think a 
higher profile location in the intermountain west could have 
been selected to experiment under SEP-14 in the design-build 
world.
    The results of the project, there were many naysayers about 
this project as it began. There were those that said the budget 
would be busted, as many other mega-projects had been busted 
around the Country. There were those that said the schedule 
could not be kept, that we couldn't deliver this project in the 
time frame that we talked about. There were those that said 
that if you managed to build this project on time and within 
budget that the quality won't be there.
    Well, we are now six years after the completion of this 
project, and all the naysayers have gone away, because the 
project was completed ahead of schedule, four and a half years, 
where traditional design-bid-build methodologies would have 
taken at least ten years to complete. The project was completed 
in four and a half years and it was completed $32 million under 
budget, and the quality speaks for itself. Six years later, we 
have had no issues with quality on this project.
    So with this glowing review of design-build, one might ask, 
why don't you build all of your facilities under this 
technology, this design-build technology. And the answer is, 
the tried and true design-bid-build is still tried and true. It 
still works for many, many projects. We do hundreds of projects 
in the State of Utah every year. And of those hundreds of 
projects, the vast majority of them are still design-bid-build.
    However, those complex projects that have risk associated 
with them are projects that we look at design-build or other 
project delivery methods, such as CMGC, to deliver those 
projects in a timely fashion.
    Now, clearly, on I-15, the reason that we chose design-
build was schedule. Ten years was too long for the local 
economy, it was too long for our customers, it was too long for 
businesses, it was too long for the State of Utah. Accelerating 
that project to four and a half years completion was something 
that was good for us, not to mention one little thing that was 
going to happen in 2002: we were going to host the Olympic 
Games. We couldn't have this project under construction during 
the Olympic Games. We are very fortunate, we completed the 
project prior to that.
    Now, some of the other technologies that we are 
experimenting with under SEP-15 are CMGC, construction 
management general contractor. This also enables the private 
sector to unleash their creativity as they come to the table 
during the design phase of the project and help us find the 
best way to cost-effectively complete the project. We have 
completed a number of CMGC Projects and will continue to use 
that technology and other new technologies to deliver our 
projects.
    I would encourage Congress to continue to allow the States 
the flexibility to use these tools on Federal projects and 
other projects within our system, so that we're able to serve 
our customers in the very best method possible.
    It has been a pleasure to be here with you today. Thank 
you.
    Mr. DeFazio. Thank you.
    And now I am pleased to welcome Fred Hansen, the Honorable 
Fred Hansen, the General Manager of TriMet, a wonderful entity 
in my home State of Oregon, although alas, I do not represent 
Portland and do not get to ride it to the airport like some of 
my colleagues. I still enjoy it when I'm in town.
    Mr. Hansen.
    Mr. Hansen. Thank you, Mr. Chairman. And I am pleased that 
you do ride it when you are in town.
    For the record, I am Fred Hansen, General Manager of 
TriMet. I have left in front of each of you an article from the 
New York Times, yesterday, on their 36 hours in Portland. In 
it, they referenced that Portland does have an excellent public 
transportation system. I am very pleased they recognized that.
    I am here to speak to you about that, in fact, that very 
airport line that the Chairman referenced. Let me be clear on 
hat the arrangement was and the building of that line was. 
First, it was a line that had been on our master planning for 
the region for a number of years. In fact, we would not have 
expected to be able to get to it probably for somewhere in the 
15 to 20 year range. It had, however, had some of its right-of-
way set aside when an interstate freeway was constructed, I-
205.
    Second, it was on property or through property, this 
alignment for the airport light rail, that was under-utilized, 
Portland Airport property. Now, it was public property. The 
project began by receiving an unsolicited proposal from Bechtel 
Enterprises of San Francisco. In it they proposed not only 
building the alignment, that is, through a design-build 
contract, but also to be able to develop additional land for 
private development.
    At the time, the airport was considering major new 
construction for parking, very expensive parking. We were 
looking for ways to be able to minimize the amount of parking 
that would be needed, and concluded that the concept of being 
able to utilize light rail to the airport was very important.
    The actual agreement represented a 99 year lease on 120 
acres of under-utilized public property owned by the airport. 
In fact, so under-utilized that at the time of the lease there 
were still cows grazing on it. Bechtel, for the overall 
construction cost of the project, $125 million, contributed 
$28.3 million of that for the actual construction. Let me 
stress that during this whole process, all environmental 
regulations were completely complied with, NEPA, in fact, an 
environmental assessment was completed on it.
    Let me also stress that in this project, there is no public 
asset that is not totally under the control of public entities, 
in this case, TriMet, the transit agency, that is both the 
light rail alignment and the operation of that light rail 
alignment is by a public entity.
    What was at issue was the private development rights on 
that 120 acre leased area. A mixed-used proposal by Bechtel 
brought that forward.
    What about the benefits? The benefits are that we were able 
to bring this light rail alignment from plans to actual reality 
decades or years earlier, if not decades earlier than we would 
have. Number two, it was streamlined. We ended up being able to 
complete that construction from the time of the initial concept 
to opening in four and a half years, probably about two years 
shorter than it would have been had we gone through the full 
funding grant agreement processes that would have been required 
had we utilized Federal funds in this.
    Then lastly, the benefit of a major mixed use development 
was proposed for this site. But some of the lessons learned are 
that we do need to be able to make sure that the project 
manager, in this case, TriMet, was a sophisticated entity, that 
is, one that was familiar with managing large construction 
projects, which we have a long history of doing, both on time 
and on budget.
    Second, it required a sophisticated entity, in this case 
Bechtel Enterprises, to be able to be partnering with us in a 
design-build. The project itself opened for revenue service on 
September 10th of 2001, an auspicious day. Obviously, the 
recession that followed meant that this project did not 
materialize in terms of the private development as quickly as 
we would have hoped. And yet it is now being built out, and 
there is a new IKEA anchor tenant that will be opening within 
the next several months.
    Conclusions are, we were able to achieve a project years 
ahead of schedule that would have been impossible without that 
involvement. Number two, that the development risk was in fact 
shouldered by the private entity, and yet, the public asset was 
fully within public control. This is a wonderful public-private 
partnership with Bechtel. We would do it again in a second.
    Thank you. We would be happy to answer any questions.
    Mr. DeFazio. Thank you. I thank all the witnesses for 
staying within their allotted time.
    Mr. Ray, I am curious. First on SEP-14, what is the current 
status of SEP-14 in terms of design-build and other allowances? 
Do you still have to individually review and approve those 
projects, or are they now routinely approved?
    Mr. Ray. Congressman, thank you for the question. SEP-14 is 
still active. But the original intent was to look at lane 
rental, warranties, A plus B and design-build. Those have all 
been mainstreamed, they're all accepted practice now. But 
certainly, SEP-14 is still available to explore and experiment 
within innovative contracting. But those four, the intent that 
it was really created for and of course TRB suggested those 
four as the ones that we focus on, those have been mainstreamed 
and you do not need FHWA headquarters approval to move forward.
    Mr. DeFazio. Not even the warranties? I thought the 
warranties, there was some ongoing concern about warranties.
    Mr. Ray. Well, there are certain types of warranties that 
are acceptable and certain that are not. I mean, of course, the 
Federal aid program isn't meant to maintain the highway over 
long periods of time. But some warranties are acceptable, and I 
believe we have spoken about that. I can get more direct 
information on that for you for the record if you would like. 
But there are certain types of warranties that are acceptable 
now.
    [Information follows:]
    [GRAPHIC] [TIFF OMITTED] 34795.009
    
    Mr. DeFazio. Okay. So a warranty isn't implicit. I mean, 
theoretically I guess we inspect a project as it goes along, 
specifications have to be met, you inspect a project when it is 
done. If specifications have been met, there is a sign-off. 
Normally there would not be a warranty past that point.
    Mr. Ray. Under the traditional design-bid-build mechanism, 
am I understanding correctly?
    Mr. DeFazio. Well, any. I am trying to get a grasp on what 
the concern is about warranties. There seems to be a new 
concern about the need for warranties. I am wondering why 
warranties are becoming, I am wondering whether we have 
inadequacy in the inspection process, therefore people are not 
as confident that the specifications have been met and we want 
to see some performance beyond that, or we have experimental 
design, so we don't have confidence in them. I am trying to 
understand the need for warranties beyond, we met the 
standards, it was constructed, it is done.
    Mr. Ray. Congressman, I think that specifically, the 
specifications should be met. They would be inspected and to 
the best of the inspector's ability, of course, they would 
determine that those specifications had been met at the time of 
acceptance.
    However, there are certain things with regard to, let's 
take pavement, for instance, rutting and that type of thing. 
Under design-build, the contractor has more flexibility in how 
to meet the project specifications set forth by the State DOT. 
So they may determine the exact mix----
    Mr. DeFazio. So they may be using, they may not be meeting 
a certain temperature standard the State requires for mix, or 
they may be applying it in different weather. Therefore, there 
would be some sort of a warranty that would cover that, but 
doesn't add to the cost of the project and doesn't get us into 
maintenance issues.
    Mr. Ray. If I am understanding what you are saying 
correctly, I think that is right. I think basically where we 
are going is the State DOT would set forth the specifications 
on exactly how that road or how that asphalt or concrete should 
wear.
    Mr. DeFazio. Right. But you are saying you give them 
latitude in how they apply it?
    Mr. Ray. Absolutely.
    Mr. DeFazio. Okay. I don't understand SEP-15. The staff and 
I are struggling a bit with SEP-15. We are trying to 
understand. Give us a specific that you are looking at in SEP-
15.
    Mr. Ray. An example, well, SEP-15 is very broad in the 
sense that it allows experimentation with all types of project 
delivery mechanisms within Title 23. Just to be clear, we are 
only offering up experimentation within Title 23.
    Mr. DeFazio. Right. But if you have issues within Title 23, 
Title 23 is referenced for say, a number of environmental 
concerns, it is also referenced for some labor concerns. But 
their statutory authority exists outside Title 23. So you 
couldn't waive those environmental issues or those labor issues 
within Title 23, is that correct?
    Mr. Ray. Well, we believe that Section 502(b) of Title 23 
gives the Secretary the ability to experiment within the 
confines of Title 23. The goals of----
    Mr. DeFazio. But you are not answering the question. If 
something has basic statutory authority outside of Title 23, 
let's use Davis-Bacon. Always a hot button issue around here. 
Do you believe that you have some authority to somehow waive 
Davis-Bacon because it is referenced in Title 23, since it has 
statutory authority outside Title 23?
    Mr. Ray. I am sorry, sir, sorry for the confusion. You are 
absolutely right.
    Mr. DeFazio. Right.
    Mr. Ray. If it is referenced somewhere else, if it is not 
squarely within the confines of Title 23, then, no, we do not 
have the authority to experiment there. DBE is a perfect 
example of that. It is outside of Title 23 and we are not 
there. NEPA is clearly another. The Clean Water Act is another.
    And I just want to mention, the goals of SEP-15, which I 
think is kind of informative, if I may, are delivery 
flexibility, encouraging innovation and improving the timely 
project construction. Lastly, promoting P3s. We believe that it 
is an area we should be looking at and promoting. We believe 
there is value there.
    But just to be clear, SEP-14 has tons of experiments under 
it. Under SEP-15, we only have seven projects currently 
underway and an eighth letter of interest that we are 
considering. We are in a very youthful stage of SEP-15 in terms 
of the data that we know, the information that we know and 
where this is going.
    Mr. DeFazio. The FHWA under SEP-15 says here, alternative 
ways to accomplish NEPA and environmental compliance. What are 
we thinking about there?
    Mr. Ray. There are certain----
    Mr. DeFazio. Because we proposed some very far-reaching 
proposals to streamline environmental review of projects. We 
have yet to see the guidance or administrative rules come out 
to implement what Congress legislated a couple of years ago 
now. Does this mean you are going to move ahead and meet some 
of the, finally do some of the streamlining? That wouldn't need 
to be SEP-15. We mandated it by law and it hasn't yet been 
accomplished. A lot of States are not even aware we gave them 
that authority. They keep complaining to us, but we have asked 
the Bush Administration to, we put very significant 
streamlining into the bill.
    Mr. Ray. If I can address the second issue first and the 
first issue second, with regard to environmental processes, 
there are certain environmental processes that are dictated in 
Title 23 that relate to NEPA and other environmental reviews. 
Those, although I am not aware that we have experimented with 
those with SEP-15, those certainly are available for a State to 
apply to us. But clearly, going back to the original point that 
I think we made a question or two ago, if it is referenced in 
another area of the Code, then that is not within the purview 
of SEP-15.
    Mr. DeFazio. So when could we expect the rules to implement 
the streamlining that Congress envisioned statutorily a couple 
of years ago?
    Mr. Ray. Congressman, I apologize. I wanted to be clear on 
my facts.
    The five-State pilot, if that is one of the ones that we 
are talking about, is actually already out there. Some States 
have chosen to take outvoting of that and some States, we 
understand, will not. For instance, Ohio recently, I think 
formally indicated that they would not be pursuing their status 
as a member of that.
    Mr. DeFazio. I just want to direct one other question, I am 
using more than my allotted time, to the next witness, to Mr. 
Horner. Thank you for those answers. We will get back to the 
environmental issues either later or at a future date.
    In your testimony where you talk about the pilot projects 
and you list criteria, I am a bit puzzled about two things. 
Roman numeral IV, whether the project is part of a congestion 
mitigation plan that incorporates system-wide congestion 
pricing. What does that mean? You might have noticed in the 
newspapers locally where there was a little proposal here to 
have some peak pricing increases, which got stomped on so bad 
they were pulled back really quick. Are you saying we want 
other cities to experience that same wonderful public backlash? 
Because you are saying you want it mandated system-wide. Now 
what are we talking about here?
    Then the second part of the question is, over here, we are 
trying to mitigate highway congestion. Got it? Over here, we 
are trying to make people use transit. It is more efficient, 
more fuel efficient. So over here, you are talking, gee, we 
want to price people off the roads, and over here, gee, we want 
to price people out of rush hour in mass transit. These seem to 
be contradictory goals.
    Then my third observation is, people don't choose when they 
go to work. So it ultimately becomes punitive. You have to go 
to work, we are going to price you off the highway, we are 
going to price you off the mass transit. You had better live 
downtown, oh, you can't afford that, because that is where all 
the yuppies live. So I guess you had better get another job out 
in the suburbs.
    Could you address that, please?
    Mr. Horner. Sure, I would be happy to. First, and thank you 
for that question, Mr. Chairman, that three-part question.
    First, with respect to how the particular criterion 
operates in the context of the pilot program, that is a 
consideration. It is not a requirement that any applicant 
must----
    Mr. DeFazio. But how is it weighed? It looks like here, do 
we have a real formula, it is going to be 10 percent here, 20 
percent here? You can't have really subjective criteria for 
people. How much are you weighting that one?
    Mr. Horner. Thank you for that question. We have not 
assigned on the face of the document or internally particular 
weightings to those several criteria that you are referring to.
    Mr. DeFazio. Like the black box. You say to people, you 
might or might meet that one and you might or might not get 
authorized because you didn't meet that one, which doesn't have 
a specific weighting.
    Mr. Horner. That criterion is not dispositive. It is a 
factor that we take into account.
    You asked secondly whether it was a contradiction of policy 
to endorse the use of transit on the one hand and encourage 
congestion pricing of roadways on the other.
    Mr. DeFazio. And then congestion pricing of transit. So we 
have now driven you out of your car, you are on transit, that 
is what we wanted to do, but now we are going to impose it on 
you there. We are going to extort you one way or another here, 
you have to get to work, right?
    Mr. Horner. With respect to travel during to work, we have 
found that approximately 50 percent of travelers during peak 
periods are discretionary travelers, which implies that not 
everyone using the roadway during peak times is----
    Mr. DeFazio. It might depend on the definition of 
discretionary, you have to take your kids to school, but you 
are not going to work, that is discretionary?
    Mr. Horner. I would be happy to tell you how we define----
    Mr. DeFazio. Sure, I would love to hear that analysis, if 
we could have the 50 percent.
    [Information follows:]
    [GRAPHIC] [TIFF OMITTED] 34795.010
    
    Mr. Horner. I would be pleased to provide that to you, and 
the basis of that statistic, absolutely. But generally, we 
don't think it a contradiction in policy to encourage 
congestion pricing and transit in tandem as we contemplate in 
the pilot program, for the reasons that we have found around 
the world, that congestion pricing during peak periods results 
in enormous benefits to transit. Let me say that there are at 
least two. The first is dramatic increases in ridership for 
transit. We needn't look further than London, actually, to see 
how congestion charging and moreover, a rather crude form of 
congestion charging has produced not only increases in 
ridership but more frequency in service, better service, 
improved reliability and the like.
    So we think it provides ridership benefits. We also think 
it provides localities an enormous financial benefit to support 
transit, because congestion charging is based not on financial 
need per se, but on the need to manage the flow of traffic and 
achieve conditions of free flow on the facility. Congestion 
charging may produce substantial surpluses that may be 
dedicated by locality to public transportation. So we see, 
depending on your point of view, we see a virtual circle 
created by the effects of these two policies working in tandem, 
rather than a vicious one, as it were.
    Mr. DeFazio. All right, well, I don't exactly share that, 
and I think the public here locally certainly didn't share that 
view when they attempted to jack up the rates during congested 
times. I think there was an article last weekend, I wasn't 
here, but it has been referenced to me, where the experience 
now with some of these hot lanes is that some people are paying 
up to $40 one way. That sounds like sort of a Lexus lane or a 
Hummer lane to me. It doesn't sound like something for average 
people.
    I think we have to keep in mind that most workers don't 
have a tremendous amount of discretionary income. If you make 
it $40 bucks to get to work in a timely in your car, then they 
are going to go to transit. If they go to transit and we raise 
the price there, it may create a surplus or it may have 
unintended effects. So, it might create a surplus in the short 
run while these people desperately try and find another job 
that doesn't require them to go into the city.
    Thank you for that. I have gone well over my time. Mr. 
Duncan.
    Mr. Duncan. I want to yield first to Dr. Boustany. Dr. 
Boustany was here first.
    Mr. Boustany. I thank the Ranking Member and Chairman.
    Mr. Ray, the SEP-14 program has had demonstrable success. 
It appears to me that SEP-15 is going to be a very 
complementary program to SEP-14, creating additional 
flexibility, and allow for some creativity among the States to 
deal with their backlog of highway projects. My understanding 
from our memo was that seven projects have been approved in 
three States; four have gone on to the development agreements. 
What seems to be the hurdle, since the program has been in 
existence since 2004? Why haven't more States availed 
themselves of this?
    Mr. Ray. Congressman, thank you for the question. It is 
actually a wonderful question. I have had the opportunity and 
the pleasure to speak quite a bit around the Country. Almost a 
standard issue line in all my speeches is, send us your 
creative ideas. Make us sweat, really make us think about the 
program and what would be acceptable, what would be appropriate 
to experiment with and what wouldn't.
    Unfortunately, we really, as you have cited, we haven't 
gotten as many applications as we might like. So if you could 
encourage your constituents to apply, we would welcome that 
application.
    Mr. Boustany. Sir, it is not a knowledge deficit about the 
program. The State DOTs know about it. Do they find the task 
daunting? In other words, the burden is on them to come up with 
the creative approaches, looking at the existing law, trying to 
recommend waivers. Is it a matter of expertise in the State 
DOTs, do you think?
    Mr. Ray. I think maybe less that than, it is interesting, 
on one occasion, a gentleman from the State DOT came to me and 
said, well, just tell us what you want to experiment with and 
we will craft the application to look like that. And I told 
him, there really is no hidden agenda here. We are opening 
ourselves up to experimentation. We are opening ourselves up to 
your ideas. What are obstacles in the current program that you 
have, and let's look and see if this program may be available 
to you.
    So I think that is an issue that people really are 
scratching their head, trying to figure out what exactly do we 
want to experiment with. People complain about the processes 
often, but they don't always know exactly what the tweak is 
that they want to see to fix it.
    In terms of expertise, I think it may be less that. But 
certainly it requires a lot of thought before you walk down a 
new road, especially when you are holding the trust of the 
American people or given States' people and their money. So I 
think that there certainly is a fair amount of thought, do we 
have the expertise to carry out what we might be suggesting. 
But I think it is a lesser component.
    Mr. Boustany. Do you expect legal challenges down the line 
as this program gets implemented more widely? In other words, 
States come up with suggestions on waivers. After you study it, 
if you agree, let's go forward, do you expect court action or 
legal action?
    Mr. Ray. Well, Congressman, I am an attorney, so I always 
expect court action in some respect.
    [Laughter.]
    Mr. Ray. I can tell you we think very carefully about that 
when we see an application, we try to look down the road to see 
where that takes us. We are trying to be very responsible 
stewards of the laws that you give us and make sure that we are 
living within the spirit of those.
    So I think there is always that possibility, as with 
anything else in our culture today. But I would hope not.
    Mr. Boustany. Okay. And one last question unrelated to 
that, and my question is, why does it matter, can you elaborate 
on why it matters for States to begin issuing RFPs, awarding 
design-build contracts and issuing notices to proceed prior to 
the conclusion of the NEPA process? Just elaborate on why that 
is important, for the record.
    Mr. Ray. Sure. I think there is a fair amount of time 
savings involved there. When you can go forward with that, 
after you may have done your preliminaries on, but not before 
you have done your final design, there is a tremendous amount 
of time savings that can be had. Of course, as with everything 
else, time is money. So you are both reducing the impact on the 
public at large, and the amount of time that it takes to 
actually construct a project. You are also creating an 
opportunity for greater flexibility and greater innovation 
between the designer and the builder.
    There is a lot of things that go into that. But I think at 
the end of the day, and so as to not burn up a lot of your 
time, I think at the end of the day, you are talking about time 
efficiencies, and of course, time efficiencies equal cost 
savings.
    Mr. Boustany. Right. Thank you. My time is just about up. 
Thank you, Mr. Chairman. I yield back.
    Mr. DeFazio. I thank the gentleman.
    We will take members on our side in the order in which they 
came in and remained here. Mr. Walz will be first. No? Want to 
pass? Then we would move to Mrs. Napolitano.
    Mrs. Napolitano. Thank you, Mr. Chair. I am sorry I arrived 
late, so I was not quite prepared for asking the question I 
normally ask after hearing your testimony, but I will ask some 
questions that I have inherently developed through the years of 
working in transportation in California, both as an employee 
and as a member of the State assembly.
    And it goes to the issue of investments in public-private 
partnerships, especially on Highway 91 in California, if you 
are familiar with it, and the fact that the State had to buy it 
back because of a non-compete clause that was included in that, 
which then made the cost of that partnership almost triple in 
cost. That is a big issue, and I am not quite sure how the 
private sector is looking at the development of something that 
is going to be more protective of the investment of the public 
funding, the money that goes into some of these projects, as 
well as the concern for the safety, which a non-compete clause 
would then prevent for additional lanes to be able to allow 
more flow of traffic instead of having it backed up and causing 
accidents or having environmental pollution from cars lined up. 
We call it the biggest parking lot in the U.S., the State of 
California's Santa Anna freeway. But that is another story.
    But I would like for you to comment on what the industries 
or the agencies are thinking about being able to serve the 
general good and still be able to have a profit. And that would 
include, as the Chairman was alluding to, some of the 
protection of Davis-Bacon, being able to ensure that those 
other areas of concern are also included into that partnership. 
Any one of you.
    Mr. Ray. I will start first. Congresswoman, thank you very 
much for the question. I think it is very important. I am 
familiar with the project and as you noted, southern California 
and certain aspects of it are known as the largest parking lot 
in the world. The Secretary is incredibly aware of that, and 
that is actually why one of the prongs of the congestion 
initiative is focused just on southern California. Clearly it 
has the worst congestion in America and we are very concerned 
about that.
    First off, I think that the State DOTs may be outsourcing 
operations and maintenance of certain projects. But what they 
are not outsourcing is safety and the public interest. I think 
as we gain more experience in this, we will be more attuned, 
we, and I am being inclusive of the FHWA and the State 
governments, the State DOTs as the owners of the facilities, 
will become more attuned and more adept at protecting those 
public interests.
    I say this quite often to State DOT officials when they 
ask, the beauty of these P3 arrangements is that they start 
off, the agreement starts off as a blank sheet of paper. As any 
good commercial lawyer could tell you, if you present a risk, 
if you present a problem, we can then draft a clause that 
protects against it.
    Now, what impact that has on the other side of the table is 
a question. You may make the deal unattractive. But certainly 
we can protect those risks. If we identify them, we can protect 
them as lawyers.
    I would say that right now, the States are becoming much 
better at identifying those risks. I don't think anyone has 
ever said that these P3s are without risks. They certainly have 
them. But they also have tremendous benefits as well that can 
be harnessed and realized for the public good.
    As to what the private entities can do for the public good, 
and in projecting the public interest there, I think there is a 
tremendous amount that they can do. It is really just the 
synergies that are created between market forces and what 
people want on these types of facilities. They don't want to 
sit in a parking lot. And pricing can actually generate the 
capacity that is needed for free-flow conditions. It is not 
just the pricing. It is also, for instance, we have recently 
been made aware that Macquarie, on the Indiana toll road, 
drives up and down the road with a car with a large magnet 
underneath it to pick up shards of metal and nails, because 
they don't want people to have flat tires.
    Now, one might think that they don't want people to have 
flat tires because it is a good customer service, and maybe 
that is true. I would like to believe that. But in reality, I 
think the answer may actually be that they don't want people to 
have blow-outs that create accidents that create slowdowns.
    Mrs. Napolitano. But that doesn't address the issue of the 
public-private--actually, many of the issues that have arisen, 
and I sat on California Transportation for six years, are 
issues that are when we go out to bid, if they go out to bid, 
and most times they do, the change order dramatically increased 
the cost of the project. Right? And so somewhere along the 
line, there is no protection for the taxpayer who is supposedly 
putting it in the hands of the agency to go out and get the 
best bid, not necessarily the lowest, that is going to deliver 
a project that is going to stand for a long time, rather than 
like in the 105, where there was a sinking and the State had to 
come back in and do the repair.
    And things that now bother me are outsourcing to foreign 
entities and hiring people out of our United States to come in 
and do the job. And who are we going to go back and try to get 
a repair or refund or things that we normally would require of 
our own agencies that work within the United States? So those 
are issues that really, like you said, California now has this 
transportation bond that is going to attract a lot of agencies 
coming in from the outside, as well as from other States, to do 
work in California for the repair or the increase, in like 
Santa Anna, we are going to be expanding it. Yet how do we 
protect the taxpayer and the safety of the taxpayer and do it 
at a fair price, keeping in mind that this has to be done? But 
we don't want to go 10 years down the road and have to do 
repair at a cost that is exceedingly unwarranted.
    Mr. Ray. If I may, Congresswoman, it is a wonderful 
observation. I would mention that I think innovative 
contracting is actually going to do a lot to help solve that. 
Under the traditional design-bid-build mechanism, we are 
required to take the lowest bid. There isn't really any 
assessment of quality or reputation or anything, other than 
just the lowest dollar bid.
    With innovative contracting, we are allowed to take into 
account a broader array of interests, and also there is the 
opportunity as Chairman DeFazio and I discussed a moment ago 
about warranties. You mentioned whether or not there would be 
significant rutting or other things that may create problems 
for the public down the road financially. Warranties can come 
in as innovative contracting is utilized as well.
    The last point that I would like to make is that I think 
with regard to change orders, when you use design-build, it is 
a much more difficult task for the State DOT up front, because 
they have to clearly define exactly what they want at a very 
early stage, where the traditional design-bid-build mechanism 
allows them to flesh that out over a series of months. With 
design-build, it is very important that they have a very clear 
understanding of exactly what they want, because that is going 
to define the performance specifications that they give to the 
private entity, the contractor.
    In terms of the actual change orders, once the contractor 
and the designer has that clear set of specifications, it is 
assured, because they are working in tandem, versus the 
traditional method, where they are siloed apart. They are 
working in tandem under design-build, and it reduces, the data 
is very clear, it reduces the need for change orders, which of 
course reduces additional expenses.
    Mrs. Napolitano. The one question I would ask, and that is, 
why not have a public inspector rather than a building agency 
inspector actually check it out? That has been disastrous in 
some of our areas in California.
    Mr. Ray. One thing is very clear, Section 302 allows, 
Congress has spoken, and it allows States to outsource certain 
things as needed and as appropriate. But we do require that the 
State DOT be the responsible entity in charge. That means they 
need to be aware of the day to day operations, they need to be 
the one doing the inspections. Of course, we would expect the 
private entity to do their own inspections and make sure that 
they follow up behind their subs and so forth and so on, and 
make sure that they are doing that.
    But the State DOTs are the responsible entity. They are 
going to be the owner and they absolutely do need to be the 
ones out there following up and making sure that the quality is 
there.
    Mr. DeFazio. We will do a second round.
    Mrs. Napolitano. Thank you.
    Mr. DeFazio. Mr. Duncan.
    Mr. Duncan. Thank you, Mr. Chairman.
    Mr. Horner, do you agree with Mr. Hansen's statement that 
to comply with FTA rules and regulations would have added at 
least two or more years onto that project in Portland? And if 
you do agree with that, why is that? Is it not possible to 
comply with some of these rules and regulations and go through 
the process at the same time the States and cities are going 
through those procedures?
    Mr. Horner. Congressman Duncan, Ranking Member Duncan, 
thank you very much for that question. Although I am not, I 
don't know the specific about Mr. Hansen's project, I don't 
disagree that it takes a long time, indeed quite a long time, 
unfortunately, to approve some applications for full funding 
grant agreements to support transit projects in the United 
States through FTA.
    We are endeavoring in multiple ways, however, to expedite 
the process of review of applications in ways that preserve, 
indeed enhance our stewardship of the Federal dollar without 
compromising other considerations, including environmental 
considerations. I could go on in detail about why this may be 
so. But I agree with you that it takes long and FTA agrees also 
that it does take a long time. By no means do we think it 
should be longer or as long as it is now. Indeed, we think it 
should be shorter, and we are working on finding ways to 
shorten the process.
    Mr. Duncan. Well, whenever we hear people talk about the 
Chinese, for instance, who seem to be coming on like 
gangbusters in every area, they seem to be able to approve 
major, mega-projects in very short times. It seems to me that 
we are going to be in trouble if we don't speed up some of 
these things. You say you are endeavoring to speed up the 
process. Has the process quickened in recent years? Is there 
any progress in that area? For instance, 10 or 20 years ago, 
did projects take much, much longer for approval and now we are 
seeing some progress in that area?
    Mr. Horner. Sir, I don't know the exact answer to that 
question. I would be happy to provide the answer, a 
statistically based answer to your question. But it is my 
impression that we are doing better. It is also my impression 
that perhaps in the early days of the program, it took much 
less time than it does now. But sir, I will provide you an 
answer to that question on the record.
    Mr. Duncan. Director Njord, we will have a witness in the 
second panel who apparently will testify that it is very, very 
difficult for small businesses to participate in these so-
called mega-projects. There seem to be more and more mega-
projects around the Country. Did you take any steps to ensure 
that small businesses were included in the process, or do you 
think that that is just a false statement or incorrect 
statement on the part of that witness?
    Mr. Njord. Thank you for that question. I don't know what 
the witness will say, but our experience in design-build and 
innovative contracting has been that small contractors do have 
an opportunity to participate, not as a prime, obviously. You 
take a project that is over a billion dollars, you can't have a 
small contractor that can only bond for a million dollars be 
the prime contractor. However, they have participated.
    There was a lot of concern in the State of Utah when we 
launched this project that all the small contractors would be 
shoved out, they would be pushed out, they wouldn't be able to 
participate, they would be put out of business. None of that 
took place. And in fact, many of those small contractors had a 
small portion to play, a commensurate portion to play within 
the larger project.
    Now, these innovative contracts are not just for mega-
projects. You can do them on all sorts of projects. We have 
used design-build on everything down to a traffic signal, which 
is a quarter of a million dollar project, which any contractor 
can do for us.
    Mr. Duncan. Can you use both design-build and CMGC 
innovative contracting methods together? Are they mutually 
exclusive in some ways? What would be your thoughts on that?
    Mr. Njord. The two methodologies are very different. The 
approach for each one is very different. In a design-build 
world, you hire a contractor who then hires a designer to work 
with them to simultaneously design and construct the project.
    In CMGC, you hire a contractor and you hire a designer and 
then you marry those two. So they are very different.
    Mr. Duncan. Mr. Hansen, when Bechtel approached you with 
something that you were interested in, since it was 
unsolicited, did you just think it was such a great idea and 
since they were the, since it was more or less their idea, you 
just decided, did you just decide to go with them, or did you 
check with other companies to see if they might be interested 
in doing the same type of deal?
    Mr. Hansen. Thank you, Congressman Duncan. The issue for us 
has always been on unsolicited proposals that we must have an 
understanding of what else is in the marketplace that is 
interested. This particular project was an unsolicited proposal 
to our port of Portland, that is the airport owner. They do go 
through a process of making sure that there were, if there were 
other interested parties, to be able to bring forth. Our 
specific policies at TriMet require us to be able to publish 
any unsolicited proposals and give adequate time for any other 
interested parties to come forward, express interest in the 
same project before we may move forward. In this case, no other 
entities were interested in moving forward and Bechtel was 
chosen to be able to move forward.
    I might also add that on design-build, this was a design-
build. But I think it is all too easy to kind of look for that 
silver bullet, that is a particular contracting method. I like 
to think of it more as silver buckshot, that is, there are 
numerous different types of contracting methods. They must be 
adapted to the specifics of the area that are, and the type of 
contracting, the type of project that it is. Thank you.
    Mr. Duncan. All right, thank you.
    Mr. Ray, in your testimony you say that innovative 
contracting can help reduce congestion. Do you have any 
specific examples of where congestion has been alleviated and 
to what extent by some of these innovative contracting methods?
    Mr. Ray. Congressman, I appreciate the question. 
Unfortunately, I don't have the exact data at my fingertips. 
But I think from a generalization--I would be happy to get some 
data to you, for the record. But I think as a generalization, 
lane rental and A plus B, which requires the contractor to 
value the time that he is using the facility, absolutely 
lessens the impact that a given municipality or given State 
would feel from a certain project.
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    Mr. Ray. Lane rental, to be honest with you, can even go 
down to the time of day. So if you wanted to make sure that the 
facility was open and available for use during rush hour or 
peak travel times, then you can get down to that level of 
specificity and make sure that the impact is gone, or is 
mitigated in such a way that the public feels the burden less 
on a major construction project.
    Mr. Duncan. How many places do you know of that are 
actually using these lane rental procedures?
    Mr. Ray. Again, Congressman, I apologize, I would have to 
get that data for you. It has not received the type of 
attention or the embrace that I think some of us might have 
hoped. But it is being utilized, and I would be happy to get 
that data for you as well.
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    [GRAPHIC] [TIFF OMITTED] 34795.013
    
    Mr. Duncan. All right, thank you very much. Thank you, Mr. 
Chairman.
    Mr. DeFazio. Thank you.
    If there are no other first round questions--Ms. Fallin.
    Ms. Fallin. Thank you, Mr. Chairman. Just a couple of quick 
questions. In my home State in Oklahoma, it seems like it takes 
forever to get something completed. So I was interested in 
anything that we can do in Congress or if there is anything 
that the Federal Highway can do to help various States complete 
projects on time. Is there any type of rules, regulations or 
things that really hamper private sector partnerships? I know 
there are. But what can we do to help complete projects in a 
more timely manner so it doesn't cost our State so much money 
and we can ease up some of the congestion when the construction 
is going on? Mr. Ray, maybe you could help me with that.
    Mr. Ray. Absolutely. Thank you for the question, 
Congresswoman. It is obviously a problem that we hear across 
America, the timeliness with which projects are completed. It 
is a significant problem. I think that the innovative 
contracting mechanisms that we are talking about here today 
will do a lot to help. Right now I believe a lot of State DOTs 
are still beginning to just stick their toe in the water to see 
what types of mechanisms they like, how they might like to 
deploy those. It is going to take a little bit of time for the 
State DOTs to become adept at these types of contracting 
mechanisms, and where we will really start to see the 
efficiencies, I think, is downstream.
    With regard to both of our SEP programs, I would encourage 
you to encourage your State DOT and your municipalities to 
apply for those. Bring ideas to us. I think for us to be able 
to bring ideas to you, of course, we can think critically about 
our own program. But it is immensely more valuable for someone 
who is actually implementing it and living with the issues day 
in and day out, to bring those issues to us and say, we would 
like to experiment with the following. And if we experiment 
with it and it has benefit, then you are going to find us in 
front of you making requests.
    The last thing I would say is the Secretary does have the 
authority to place projects on the executive order for 
environmental streamlining. I want to be clear: that does not 
cut any corners with regard to any of our environmental 
requirements in statute or otherwise. But what it does is, as 
so often is the case, disputes will arise, even inter-agency, 
us and Fish and Wildlife or us and EPA. What the environmental 
streamlining executive order does is it elevates those decision 
points very quickly. It identifies a log jam and it elevates it 
up the chain very quickly. I can tell you, Secretary Peters 
cares very much about this program. She is willing to spend 
time on it herself. I think you will see that that program 
helps move projects along quite a bit as well.
    Ms. Fallin. Mr. Chairman, I am glad to hear that you are 
trying to get the agencies to work together, because it sure 
can cause some delays when you are trying to sort through 
several different projects.
    Also, I have always thought that the States are good 
laboratories for innovative ideas for partnerships. Do you have 
any way of disseminating information to the various States, 
when you find something that is successful? I know we have 
heard some great examples here today. But is there any way to 
get that information back to the individual States?
    Mr. Ray. Absolutely. We actually publish reports fairly 
regularly, and that of course goes out to the field. We also 
share the information with various experiments with our 
division administrators, which we have in every State. They 
should be communicating those to the State DOTs.
    Lastly, I think as a multitude of us go out and speak at 
various conferences, we are constantly highlighting new ideas 
and new concepts that are out there. It is not just in project 
delivery, though. I should mention, I guess, nearly a year ago 
when we had the ceiling collapse in the Central Artery Tunnel, 
we immediately started looking at the epoxy bolts that were 
holding that system up and immediately did a canvass of all the 
State facilities to see who else might be utilizing this 
technology and making sure that they did proper inspections, 
just to make sure that we are protecting the public as best we 
can.
    Ms. Fallin. Okay, thank you. Mr. Chairman, I yield back my 
time.
    Mr. DeFazio. I thank the gentlewoman.
    Mr. Ray, when we had your colleague, Mr. Duvall, in for a 
hearing on the subject, and similar to what Mrs. Napolitano 
raised, we found a number of problems with either gullibility 
or States that were in a big hurry, like Indiana, in terms of 
the agreements they entered into, and some jeopardy to the 
public interest, or loss of revenue or other problems. As we 
heard in the case of S.R. 91, basically, we ended up with 
almost triple the cost because of a non-compete agreement which 
became a safety issue with a conflict in interpretation of the 
contract, and then the State had to buy out the project.
    We raised a number of those issues from members on both 
sides during that hearing, and Mr. Duvall said that DOT was 
going to put up some guidance on sort of the common pitfalls 
and problems. You just said, States are becoming much better at 
detecting these problems beforehand. Well, I think guidance, 
with the overview of the Federal Government, to the 50 State 
and territory perspective would be really helpful. Staff tells 
me on their most recent visit to the web site, where there is 
still the paean to the wonders of public-private partnerships, 
there is still no guidance or cautions. I would hope that is 
going to be forthcoming soon.
    Mr. Ray. Congressman, I appreciate your raising that point. 
I thought that we might talk about it today. I assure you we 
are working very diligently on that product. I think it is 
reasonable to think that we will have that out, maybe even 
within the month. I think certainly no longer than a month and 
a half.
    What you will see is a section by section analysis of the 
model legislation that we produced. Embedded in that will be 
commentary identifying various risks as we see them. Once that 
product is out, I think we will see what the response is, and 
begin looking at what other mechanisms we might be able to use 
to both identify and educate people, interested parties on 
those risks.
    Mr. DeFazio. Excellent. We will look forward to that work 
product.
    Back to the NEPA question, I am still a little confused. We 
did essentially modify, and this was particularly Chairman 
Oberstar, then Ranking Member Oberstar, be put a tremendous 
amount of time into negotiating that section of SAFETEA-LU, and 
ultimately after initial extraordinary resistance from 
environmental groups, brought them around and made some 
modifications. We did give you the authority to promulgate new 
rules to implement those provisions, which could streamline 
NEPA and other associated environmental reviews.
    I think I sort of asked this but perhaps not explicitly. 
When can we expect the rulemaking, the legislation was passed 
now, oh, August of 2005. So it is not quite two years.
    Mr. Ray. Congressman, thank you. I didn't have this data in 
front of me earlier, and I would be happy to actually leave 
this sheet with you. It is actually a table with all the 
activities mandated by SAFETEA-LU and what the status is. 
Certainly I think there is quite a bit of guidance that is out 
there. There is also the NPRM on the five-State pilot project, 
which we discussed earlier. We are making progress, and we are 
moving through the list that you gave us absolutely as quickly 
as we possibly can.
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    [GRAPHIC] [TIFF OMITTED] 34795.014
    
    But there is a fair amount of guidance out there, and 
certainly we are in the rulemaking process. Some of them are at 
NPRM stage and we are looking at comments and some are at 
various stages of the rulemaking process. But I assure you, we 
appreciated the flexibility that you are affording the States, 
and we are working diligently to implement that.
    Mr. DeFazio. Okay. We will look forward to seeing that list 
and helping you expedite the process.
    Now, Mr. Horner, on our exchange about congestion pricing, 
and you mentioned London, and I was a bit--I want to get some 
clarification there. My understanding of the system in London 
is in fact they do have very extraordinary, which would 
probably not be tolerated here, pricing, as I believe they do 
in the old parts of Rome, to basically prohibit or price out 
passenger cars, except for the limos of the rich. They, as I 
understand it, in London, apply much of the revenue gained 
there, over to their transit system. And they don't charge a 
congestion charge on their transit system. That is the point I 
was trying to make, if you are going to price people off of the 
public highways, which I don't agree with, but if we are going 
to do that, then we would need to perhaps divert some of those 
revenues, not have those revenues taken as profits by the 
private sector as I understand will pretty much happen in 
Virginia, although there is some little recapture there, but 
have that money reinvested to facilitate the movement of people 
who were driven off the highways. That's what London does. Do 
you have a different understanding of what they are doing 
there? Because you are talking about both congestion pricing in 
transit and on roads. They have adopted it very strictly on 
roads, and they are applying it to facilitate transit. You are 
from the transit folks. You would hope they are going to 
facilitate transit.
    Mr. Horner. I am pausing to understand your question.
    Mr. DeFazio. Well, the question is pretty simple. The point 
is simple. I don't support congestion pricing on transit when 
we are trying to have a societal goal of getting people off 
roads. You have included it in your criteria here, and you are 
implying that that is what is going on in London. Do you have a 
different understanding of what is going on in London? They 
have very high congestion pricing for autos. But they don't, to 
the best of staff's knowledge or my knowledge, have any on 
transit. You are proposing a new novel model where you would 
have both. Are you aware of that, anybody who is doing both at 
the same time?
    Mr. Horner. Mr. Chairman, thank you for that question. If I 
may rephrase, are you asking whether we endorse congestion 
charging of transit vehicles that would travel in corridors----
    Mr. DeFazio. Well, of passengers on transit, yes. That is 
what your guidance here says, unless I misunderstand, whether 
the project, and you are talking about transit, is part of a 
congestion mitigation plan that incorporates system-wide 
congestion pricing. Unless you are referring to other modes as 
a system, I assume that system went to the transit mode.
    Mr. Horner. By system, reference to system-wide is a 
reference to a geographic area.
    Mr. DeFazio. You ought to clarify that, so other people 
won't get confused. I am a very simple guy, but other people 
might get confused too. System to me, since we are talking 
about transit, I think of transit systems. I don't think of 
transportation system as everything inside the beltway in 
Washington, D.C. for instance.
    Okay, well, I am glad we got that clarified. That is good.
    Here is another, I find sort of internal contradiction, 
FHWA has said, and I want to know if FTA is in accordance with 
this, that local governments and transit agencies have in part 
used CMAQ funds for start-up operations. I mean, there is, we 
are talking about risk with new transit operations. Obviously 
there is a build-up phase.
    But the FHWA has decided to eliminate that authority, and 
some of the CMAQ funds are now going unspent. I am curious, 
does the FTA support, again, since we are talking about these 
congestion issues and trying to get people to use the modes 
more efficiently, does the FTA support the prohibition on the 
use of CMAQ funds for start-up on new transit projects, new 
starts?
    Mr. Horner. Mr. Chairman, thank you for that question. The 
policy to which you are referring is a proposed policy, 
published I think in the form of guidance by FHWA recently. The 
public comment period on that guidance closed recently. FTA and 
FHWA are digesting the comments from the public and determining 
what final position to take on that question.
    Mr. DeFazio. Well, are you in accord, is the FTA in accord 
with FHWA here or are you having a little internal and quiet 
conflict over this?
    Mr. Horner. To my knowledge, there is no conflict 
internally.
    Mr. DeFazio. But you support this. The transit folks 
support prohibiting the use of CMAQ funds for start-up of new 
start transit projects. The transit people support what FHWA is 
doing. So where are you going to get the money to help these 
folks? Or is this an attempt to try and drive that privatized 
investment in the hope that if we can't have public help, we 
will get private help?
    Mr. Horner. Thank you for that question, Mr. Chairman. As I 
understand the guidance, it is a proposal and does not reflect 
the definitive view of FHWA. In publishing any guidance for 
public comment, we are obliged by law to take into account 
comments that we receive.
    Mr. DeFazio. But it is not their opinion? They just sort of 
put this proposal out there to prohibit the use of CMAQ funds 
just for yucks to see what the public thinks? That is not the 
policy of the Administration or the FHWA, to prohibit the use 
of that? They aren't proposing that in the rule and therefore 
asking for comment on their proposal to prohibit it? I mean, 
you just said that it was just sort of out there.
    Mr. Horner. Thank you, Mr. Chairman, for that question. It 
is a proposal, but it is not definitive.
    Mr. DeFazio. And you think, given your other concerns about 
congestion, that this would be a good idea, this will be a step 
forward for the United States, to say that you can't use CMAQ 
funds to help in the first few years of operation of a new 
transit project? That is going to help us get new investment, 
new transit and mitigate congestion somehow? How is that going 
to help?
    Mr. Horner. This is the very debate that we expect to have 
internally. You raise a very good policy question, Mr. 
Chairman. It is a point that has been made on the docket, also. 
We would take into account in a meaningful way points of the 
sort that you are making now.
    Mr. DeFazio. Okay. Well, Mr. Hansen, since you operate a 
transit system, do you have any comment on that?
    Mr. Hansen. We believe that the current procedures are 
appropriate, that is, that the Federal Transit Administration 
is the sole entity that ought to make the call on the proper 
use of CMAQ funding. We clearly believe that CMAQ funding is 
flexible funding to be able to assist in air quality 
mitigation, its very name, and should be utilized to be able to 
further transit, including start-up and planning for those 
transit uses.
    Mr. DeFazio. Have you commented?
    Mr. Hansen. We as a region I believe did JPAC, our normal 
JPAC process. I believe we did.
    Mr. DeFazio. Then perhaps we will hear from the Chairman on 
this, I believe the Committee would be, at least some of us on 
the Committee would be very concerned if that proposal went any 
further, other than a blue sky proposal out there. I don't 
understand the objective on how these things are internally 
consistent.
    A couple more quick questions. And I think there is an 
interesting point between Mr. Njord and Mr. Hansen. Mr. Hansen 
talked about how you had a long-term plan and you received an 
unsolicited proposal. But it fit in your plan.
    Mr. Hansen. Yes.
    Mr. DeFazio. All right. I think that is kind of key. Now, 
Mr. Njord, as I understand the new Utah PPP legislation, you 
will receive unsolicited proposals. This is one of the concerns 
many transportation planners have, since, if people are looking 
around to cherry pick something, they are not going to look for 
something that necessarily meets the greatest public need, but 
it perhaps is the most lucrative. How are you going to fit 
these unsolicited proposals into your plan? Are they going to 
trump the plan? In this case, we had an unsolicited proposal 
that was consistent with the plan. What happens when you get 
one that is not consistent with your plan?
    Mr. Njord. Mr. Chairman, we are in the process of writing 
the rules on how unsolicited proposals would be received in the 
State of Utah. It is our anticipation that projects that are 
outside of our long range plan would be considered, but they 
would not be forwarded until a change in the long range plan 
had occurred. So it doesn't trump.
    Mr. DeFazio. Okay, that is good. I think some other States 
are struggling with that issue.
    I was puzzled by one thing, the CMGC. I don't understand 
why that would require SEP exception, why having a CMGC would 
require any sort of exception. It seems to me like it could be 
something that would be done under existing law. Why do you 
think you need an exception? Mr. Hansen seems to have a comment 
on that, too.
    Mr. Njord. I agree with you, Mr. Chairman. However, for us 
to proceed, we do need to have that exception.
    Mr. DeFazio. From the Feds or in the State?
    Mr. Njord. From the Feds.
    Mr. DeFazio. You do? Okay. I am puzzled. Mr. Hansen, did 
you have a comment on that?
    Mr. Hansen. I do, Mr. Chairman. Within Oregon, the public 
contracting requirements are that, my board of directors and my 
board president, George Passadore, is here today. They are in 
fact authorized as a public contract review board to be able to 
exempt certain contracts from the low bid requirements. They 
must make findings that are subject to public hearing. It is a 
very public and transparent process, whether that entity is 
able to do it without additional requirements, to be able to 
achieve that end.
    Now, any Federal project under the FTA, obviously we must 
fully comply with FTA requirements. We inform them of those 
processes. But I am not aware of any specific exemption that is 
required under what you were just referring to.
    Mr. DeFazio. Mr. Ray, do you believe that you have to get 
an exemption just to use the CMGC? I just don't understand what 
in present law prohibits that.
    Mr. Ray. Congressman, I believe the prohibition is actually 
found in the way that the contract is actually awarded. The 
method that you are talking about actually looks at best value 
as the mechanism to select the winning bidder versus low bid. 
And of course, outside of SEP-15, low bid is the traditional 
mechanism, is the prevailing and mandatory way to select 
contractors.
    Mr. DeFazio. Okay, maybe I don't fully understand the CMGC 
concept as presented by Mr. Njord. But my thinking was that 
this was essentially someone who was at the front end of the 
project and helps you deal with these issues as you enter into 
it, as opposed to someone who is--yes, Mr. Njord?
    Mr. Njord. Under CMGC, you hire a contractor, not knowing 
what you are going to pay for the contract.
    Mr. DeFazio. Right.
    Mr. Njord. So he helps you, when you marry him with this 
designer, you go through the design phase, he is providing 
input into that design phase. Then at the end of the process, 
you lock in a price.
    Mr. DeFazio. Right.
    Mr. Njord. And it is, when we----
    Mr. DeFazio. But that is like having, you are essentially 
hiring someone, you are going to do design-build, is that what 
you are describing, but you are hiring someone else to sort of 
oversee the development of the design-build?
    Mr. Njord. That is correct. And you allow them to have 
input early on in the process that will reduce cost.
    Mr. DeFazio. Right. So that is why it seems to me this 
would be protecting the public interest, if you are going to do 
design-build, having the CMGC gives you some higher level of 
assurance of the public interest and/or the value price that is 
protected. I don't understand why if you are going to allow the 
design-build routinely, which Mr. Ray says you do now, I mean, 
you could just do a design-build, they don't even review it, 
why would they have to review that you want to hire CMGC to 
oversee the development of the design-build? Why would you do 
that? If you are exempting design-builds, why not allow people 
to have CMGCs to help them get a better value?
    Mr. Ray. Congressman, I think the roots of it are found in 
what Mr. Njord was actually referring to earlier in the way 
that this contractor is brought in at a very early stage to 
work on that. But what I would like to do, sir, just because I 
have to admit, I am not terribly familiar with the 
contracting----
    Mr. DeFazio. Sure, that would be fine, get back to us.
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    Mr. DeFazio. But I am just pointing out, you said earlier 
that the design-build is now considered routine, doesn't 
require individual review. But in order to get someone to sort 
of protect you as you go into a design-build, which is what I 
consider these positions as I understand them to be, you have 
to get special permission. That seems odd. And I mean, if you 
are going to allow the design-build routinely, they ought to be 
able to do it with this sort of additional monitoring.
    My time has expired. Mr. Duncan?
    Mr. Duncan. Mr. Horner, just going back very briefly to 
something, the FTA does not advocate congestion pricing for 
transit services, does it?
    Mr. Horner. No, sir.
    Mr. Duncan. Thank you very much.
    Mr. DeFazio. Yes, I think you need to, your little pilot 
language there, you really need to tighten up that language, 
because it sure appears that way.
    Mr. Horner. Yes, sir, I shall.
    Mr. DeFazio. So with that, I would see if the Chairman has 
questions.
    Mr. Oberstar. Thank you, Mr. Chairman.
    I think you and Mr. Duncan have been doing a fine job, and 
the other members of the Committee, asking very sharp, pointed 
questions. We are getting good, informative answers.
    Mr. Ray, I have a question, though, about the so-called 
innovative contracting techniques that go back to ISTEA and the 
autohrity that we created in ISTEA to develop innovative 
technologies and approaches to delivering highway projects 
faster. One of the issues that we have grappled with over many 
years in this Committee is that of warranty. European highway 
construction practice is to in effect say to the contractor, we 
want a three layer chocolate cake, we want it delivered on such 
and such date, you build it. We want it to last 75 years, and 
this is what we are willing to pay for it.
    So the contractor goes out and builds that project and then 
has to bond and also get insurance in order to cover himself in 
case his approach fails. It is a practice of shifting the 
responsibility onto the contractor, not onto the State. Our 
procedure is in securing that three-layer chocolate cake as to 
specify exactly all the ingredients, the time it will take to 
do it, the type of materials, ingredients to go into that cake 
and then to supervise it every inch of the way.
    What did you do, not you individually, Federal Highway 
Administration approve in the warranty? It seems to be a much 
more limited warranty in your final rule of 1996. And what do 
you envision as a next or future step for warranty?
    Mr. Ray. Congressman, I think that you actually articulated 
very clearly, warranties are really meant for those things that 
the contractor or the designer have flexibility in controlling. 
If we specify the exact mix that may be there, then certainly 
we or the State DOT should be responsible if that mix turns out 
to not meet the life cycle that we would like for it to.
    But certainly in circumstances where we are affording 
greater flexibility to the contractor, and they are developing 
the innovations or the methodology that they will use to 
deliver the project according to our general specifications, 
then we do think that some warranties are appropriate. Now, of 
course, there is a general prohibition on Federal aid funds 
being spent to maintain the facility. That is really the 
friction or the tension between wanting to advance warranties 
and of course, complying with the spirit of our program, where 
we are not paying for maintenance in a long-term framework.
    In terms of the next steps----
    Mr. Oberstar. The part of my question that I wanted you to 
answer is, warranty in the Federal Highway Administration 
rulemaking, in operation today, is very limited. It is not, in 
the European sense of, that they do in France, Belgium or 
Germany or the Netherlands, of building the entire roadway, but 
limited aspects thereof, is that correct?
    Mr. Ray. Sir, you are absolutely right. The Europeans are 
using a performance-based warranty mechanism. That is not where 
we are.
    Mr. Oberstar. Have you evaluated the European experience 
against U.S. experience?
    Mr. Ray. I know we have certainly looked at it. To what 
extent, I would have to get back to you on the record whether 
or not we have actually drafted a report or created any real 
data.
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    Mr. Ray. But I know certainly we have looked at what the 
Europeans are doing in this respect, and of course, in a 
variety of others. And you are absolutely right, that is not 
where we are right now. But I think we do believe that 
innovative contracting holds promise for expansion of warranty 
in the future. And of course, as you mentioned, that is not 
where our current rulemaking is. The limitations there, I 
think, are really based on the tension or friction that I 
mentioned earlier. Our desire to not pay for long-term 
maintenance compared to the----
    Mr. Oberstar. Yes, that is not my question, nor should we 
get into long-term maintenance. But we do have an interstate 
maintenance provision.
    Mr. Secretary of Transportation Njord, what is your thought 
about, do you see any advantage in the warranty approach over 
our very prescriptive, long-term practice, prescriptive 
approach to highway construction?
    Mr. Njord. Chairman Oberstar, thank you for that question. 
It is good to see you again.
    This issue that you brought up is a very, very powerful 
issue in the contracting world, warranties. We have talked 
about this a little bit here today, but on a standard project, 
a contractor warrants that project for a year, from the time it 
is completed until a year after, he warrants his work.
    Longer term warranties, as you have mentioned, are gaining 
speed. We have experimented with them in my own State and I 
know of other States that have also experimented with 
warranties. On the project that I talked about earlier, the I-
15 project, we had a ten-year warranty clause within the 
contract. And we had the option to exercise that clause of the 
contract up to six months before the end of the project.
    So in reality, this contractor built the project thinking 
that we would exercise that option and he would have to 
warranty that work for ten years. As it turns out, the project 
was done with exceptional quality, and we determined that it 
was unnecessary to exercise that warranty option. But by that 
time, the job was done. All the work was done, the ingredients 
to the cake were all in place, and they had been inspected. He 
was thinking that he was going to have to warranty this thing 
for a very long time.
    So it is a very powerful idea and it is something that we 
need to explore even further. Design-build, CMGC, both of these 
contracting methodologies enable warranties to work. Because 
under both of these types of project delivery methods, we do 
not specify how to build the cake. We allow them to design 
that.
    Mr. Oberstar. Do you get a product earlier? Do you get it 
with fewer delays? Do you still have to go through the 
permitting, the contractor still has to go through the 
permitting process and gain all the permits necessary to do the 
building?
    Mr. Njord. Of course. All the permitting has to take place 
prior to the construction, regardless of how the project 
delivery method occurs.
    Mr. Oberstar. Mr. Hansen, in transit, is warranty an 
applicable strategy?
    Mr. Hansen. I wanted to spend time, Mr. Chairman Oberstar, 
about that. As you know, in the Portland area, we have had 
very, very good luck with our systems. We obviously require----
    Mr. Oberstar. Not good luck. You guys have built a great 
system out there. And when you do something well, it is not 
luck. It is because it was done by design.
    Mr. Hansen. We believe it was, and we continue to be able 
to do that.
    Our requirements are the normal requirements for any kind 
of contracting, that before it is turned over to us, we have 
our normal punch list, we go through all the quality issues. 
Certainly if there is anything that is even after that turnover 
in the project that was a failure on the part of the 
contractor, it is something that we expect that contractor to 
be a part of the solution when we go back on that issue.
    But I do want to make clear that I think there are 
differences between the design-build elements and some of the 
other contracting methods that are very, very important. In 
certain areas, the design-build works very well. When you do 
have an area that isn't subject to many changes, because change 
orders are the real price killer in design-build. In our most 
recent project, I think you were out actually seeing it, our 
yellow line, Interstate MAX line, two-thirds of it was going 
through a neighborhood in the middle of a street. We knew that 
CMGC-type contract was the type of method we should be 
utilizing for that. Because the inevitability of change orders 
and how to do an intersection and what about a business that 
needed a special treatment was there.
    The last third, however, was really over an industrial 
area, much of it elevated structure. That was very appropriate 
for design-build and we did it by design-build. Again, I think 
the structure needs to be looking at the particular facility 
that is there, what needs to be done to address the type of 
contracting.
    Mr. Oberstar. Thank you.
    In all of this, moving to a warranty approach would be a 
dramatic shift in the way we carry out the Federal-Aid Highway 
program. It might in fact mean dissolution of the AASHTO 
manual. It might result in different standards in each State. 
It would be a great departure from the success we have had in 
this Country. But also, we have to be open to ways in which we 
can close the gap of time consumed in constructing projects.
    One last question that is not related to the subject matter 
at hand, Mr. Chairman, and that is, in SAFETEA, we included 
streamlining language to speed up the processing of highway 
construction projects, bridge projects and transit, that was 
intended to compress the time but not circumvent any of the 
existing laws. I wonder, Mr. Ray, if you have had any 
experience with any of the States that have actually used, we 
envisioned it would be used mainly for major projects. But of 
course that applies to any construction project.
    Mr. Ray. Mr. Chairman, thank you for the question. 
Absolutely, you did provide us with a great deal of 
flexibilities in SAFETEA-LU. We are excited about some of 
those. Chairman DeFazio and I chatted about a few of those just 
a little while ago and what the status was of some of those. We 
are going to leave some documentation as to where we are.
    As to specific examples of that, I am afraid I don't have 
any data at my fingertips. But I would be happy to respond on 
the record for you with some narratives on maybe some of the 
best cases out there.
    Mr. Oberstar. I would very much appreciate that, because 
that was, I spent an awful lot of time on that myself with 
Chairman Young and all the various players. I think we put 
together a very good process for compressing the time frame, 
still keeping all the voices intact and attending to all the 
needs.
    Thank you, Mr. Chairman.
    Mr. DeFazio. We already gave the Chairman ample credit on 
that issue earlier. I raised the question and we do look 
forward to seeing your work implemented. I pointed out how it 
was difficult in particular to bring the environmental groups 
to the table on that issue, and you did yeoman's work.
    Mr. Baird has not had a chance to ask questions, so I would 
go to Mr. Baird.
    Mr. Baird. I thank the Chairman.
    I don't know if our witnesses have had a chance to look at 
it, but a little bit later, in the second panel, we are going 
to hear some rather interesting testimony from Bruce Blanning, 
with the Professional Engineers in California. I guess he has a 
surrogate speaking. But his quote is pretty interesting: 
``Design-build and similar methods are procedures which 
shouldn't work in theory and haven't worked in practice. Using 
design-build under a public-private partnership only makes the 
problem worse, because due to private funding and the 
involvement by the public agency in the process is typically 
even less.''
    Any comments on that? We will hear from him directly, or at 
least his surrogate and then others. Any comments from your own 
experience?
    Mr. Ray. I would like to comment on it briefly and I 
imagine my fellow panelist Mr. Njord may have a few comments on 
that as well. I think we at FHWA and we in the Department of 
Transportation believe that design-build and other innovative 
contracting mechanisms have a tremendous amount of opportunity. 
One of the issues that may be preventing or hindering, rather, 
some of the efficiencies gained is actually just experience 
with the model.
    I think that is both on the contracting side, the private 
side, contractors being familiar with the bid process, what is 
expected of them, the additional responsibilities that will be 
layered on them going forward, and also with, on the State DOTs 
and their being required to have a very clear understanding of 
exactly what the project needs to look like, what their 
performance specifications will be early in the process, rather 
than kind of on an ongoing basis.
    I think that Utah Department of Transportation is really 
probably one of the best cases out there, as examples of how 
design-build can work and what efficiencies it should deliver. 
I would be happy to walk through those with you, but I think it 
is actually more appropriate for Mr. Njord to walk through 
those.
    Mr. Baird. Let me follow up just briefly, though, with you, 
Mr. Ray. I am a little circumspect because the Administration 
believes that the solution to Medicare's woes was managed care. 
Empirical data suggests that the managed care system has 
dramatically increased costs and the Administration's proposal 
to solve that is to increase funding for managed care to prove 
that it works. I don't know if Mr. Blanning is correct, I don't 
have the expertise.
    But just to say we believe something, Mr. Blanning at least 
seems to cite some evidence that there are cost overruns or 
high bidding initially and that there are significant quality 
problems inherent and just implicit in the structure of a 
design-build model.
    Mr. Ray. Well, again, I think on design-build, time will 
tell. We will get a lot more data on this as we move forward in 
the process. We submitted a report to Congress in 2006 with 
findings that to be quite honest, were a bit mixed. I attribute 
those largely to our inexperience in the marketplace here. I 
think we will become more proficient over time.
    But our report absolutely showed a time savings. It showed 
that the quality was on par. The cost savings, our data was 
mixed. I think there are numerous reports out there that show 
that there are tremendous cost savings. One note on the report 
to us, and I would be happy to get a copy up to you, the cost 
savings there did not take into account the time savings. Of 
course, in today's world, time is money. So we didn't attribute 
an actual value to that. But it is kind of an interesting 
narrative on the report generally.
    Mr. Baird. Thank you.
    Mr. Njord, as a graduate of the University of Utah, 
welcome, and also to my good friend, Mr. Hansen. Thank you for 
being here.
    Mr. Njord, you have some experience with this.
    Mr. Njord. I think that our real-life experience is 
contradictory to what you have just read. We have had 
tremendous success with design-build, accelerating the project 
from ten years plus to four and a half years. Mr. Ray talked 
about the cost savings to people. We had a study commissioned 
by the University of Utah, actually----
    Mr. Baird. Must be good, then.
    Mr. Njord. Must be accurate. That study concluded that 
there was $500 million saved by the traveling public just 
because of the accelerated process of not having to deal with 
that project for ten years. So I think, concerning quality, if 
we had a quality problem on this very large design-build 
project, it is six years old now. Don't you think we would have 
found it by now?
    There are no quality problems. This project is going to 
last us for decades into the future.
    Mr. Baird. Is that inherent in the nature of design-build, 
or was it a consequence of the quality of the construction 
companies involved and your agency's oversight? My experience 
in life is it comes down to the people. Some systems allow more 
flexibility and bad actors, I think it might be hard to suggest 
the Big Dig and some other things have been exemplars of 
effective models. Do you think it was more your agency's 
oversight and quality contractors? Or was it some other entity 
doing the work?
    Mr. Njord. Obviously we had a very professional contractor 
that did the work for us. If you, this is a misnomer that many 
people have, that somehow you can inspect quality into a job. 
It is impossible. If you don't have the person performing the 
work in a quality fashion, it will not be quality work. You 
cannot inspect quality into a project. It has to be done by the 
workers.
    Mr. Baird. Could you un-inspect a lack of quality into the 
project? Meaning, could the lack of inspection contribute to a 
poor quality?
    Mr. Njord. What you have to do is transfer the risk. If you 
want to inspect every nook and cranny of every project, you 
will transfer the risk for that failure to yourself. If you 
transfer the risk to the contractor, then it is his risk.
    Mr. Baird. Through a warranty.
    Mr. Njord. Through a warranty.
    Mr. Baird. In other words, part of what we may be hitting 
at here is that while you are referring to design-build, you 
really mean design-build plus warranty contributed to the 
outcome.
    Mr. Njord. In other words, I don't necessarily know that 
your example would say design-build per se sans inspections 
works, but design-build plus warranty may be a greater key.
    Mr. Hansen?
    Mr. Hansen. Just a couple of quick comments, Mr. Chairman, 
Congressman Baird.
    As you know, the airport light rail, which is what I was 
speaking to here, was a very successful design-build. But it 
was successful for several reasons. One was, there was first a 
real clarity as to exactly what was to be built, that the 
opportunity for change order was very, very limited. The 
ability to be able to have it determined up front was there.
    Number two, the risk that was being assumed by Bechtel was 
very clear as well. That risk was around the development at 
Cascade Station, an area I know you are well aware of, with the 
new IKEA store going in. That was a risk they assumed, not the 
risk on the contribution to the building of the light rail or 
ultimately its performance. That was the normal contracting 
process under design-build.
    Lastly, you do need to have both a sophisticated owner, in 
this case TriMet, but also a contractor, which we clearly had 
within Bechtel.
    Mr. Baird. Thank you. Thank you, Mr. Chairman.
    Mr. DeFazio. Thank you. Ms. Napolitano had another 
question, did you not?
    Mrs. Napolitano. Yes, thank you.
    First of all, I just wanted to say to Mr. Ray that I was 
very grateful to Secretary Peters, in her travel last month to 
California to oversee the issue of transportation impact, the 
congestion California highways have in southern California. She 
is very well versed and understood all the issues, as she 
already knew quite a few of them.
    In that, we were talking, you were referring to the CMGC 
and the issues there, about incentives. When 105 was built in 
California, the incentives to that contractor were, build it on 
time, you get a bonus. You build it ahead of time, you get an 
additional bonus. Guess what? He built it ahead of time.
    However, there was an issue with some area which apparently 
began to sag and they had to go and do some repair work. So if 
you do not have a warranty or if you have a warranty that is 
limited, who then is responsible? Because these projects are 
supposed to last, not just one, two, three decades, but 
hopefully five, six decades or more.
    Now, how long can some of this go into the warranty and the 
protection if the company is no longer there to be able to take 
care of that? Gentlemen?
    Mr. Ray. I would like to take the first crack at that. 
Congresswoman, I appreciate the question. I will definitely 
mention your comments about the Secretary to her when I see her 
next. I know she would appreciate that and cares very deeply 
about California.
    With regard to the warranties, I should have mentioned this 
earlier, the design-build rule, which of course we are making 
some changes, the NPRM is out. We have the comments, we have 
looked at those, and we hope to have a final rule out this 
summer. We will make some changes to warranties to allow 
greater use of those through design-build contracts. And of 
course, I have already expressed our general interest in 
advancing warranties as a mechanism available to State DOTs.
    I would also like to mention that with design-build and 
also with P3s, and when I say P3s, what I am actually speaking 
about here, because I think there is a broad array, a broad 
definition of what P3s can encompass, but the concession deals 
that we see, these long-term concession deals. This is a way of 
shifting the risk, of maintaining the facility over long 
periods of time to the private sector, where that burden 
doesn't come back if there is a mistake in contracting. I am 
not saying that that is not without its risk. It obviously has 
other issues that have to be considered by State DOT and by the 
public. But it is a benefit that should be understood.
    Mrs. Napolitano. That doesn't answer my question, sir. I am 
asking whose responsibility, who would come in then and do. Is 
it back on the taxpayer?
    Mr. Ray. Ma'am, absolutely. I think that once the warranty 
has expired, the owner of the facility is responsible. If there 
is no warranty, as is the case with a traditional design-bid-
build facility, then once you have accepted the product, once 
you have accepted the facility, short of a proving of 
negligence or fraud or some other malfeasance, then I think 
absolutely the owner of the facility would be the responsible 
entity.
    Mrs. Napolitano. Secretary Peters also was with us in Long 
Beach area, where one of the bridges, pieces of concrete are 
falling off that bridge.
    Mr. Ray. She mentioned this to us, absolutely.
    Mrs. Napolitano. And?
    Mr. Ray. As to who would be responsible for that, I am 
afraid I don't know about the facility and I don't know how 
that facility was built, how it is operated or managed. So I 
would have to get back to you on the record as to the specifics 
of that incident.
    Mrs. Napolitano. I am not particularly interested in that, 
but I am using that as an example of things that can happen 
that then fall back on the owner or the taxpayer to put funding 
to be able to rebuild or to repair.
    Mr. Ray. Absolutely, I see your point. Actually, I believe 
Mr. Horner would like to answer.
    Mr. Horner. Very briefly, Congresswoman Napolitano. You 
have raised an excellent question. It is an issue that 
routinely arises in P3 transactions, namely, what happens when 
the party giving the warranty goes away. Who then stands behind 
the warranty?
    There are two answers, typically. The first is a surety. 
The contract requires the party giving the warranty to obtain a 
bond to back up the warranty in the event of the insolvency of 
the entity that is given the warranty. Sometimes a second 
approach is used, in which the parent company of the private 
entity separately guarantees the warranties given by the 
private entity. Typically, those parent companies are 
substantially better capitalized than the private entity with 
which the public agency is dealing in respect of a specific 
deal.
    So you have raised an excellent issue. It is one that is 
dealt with frequently in the structure of P3 contracts.
    Mrs. Napolitano. And what would you suggest be an answer? 
Mr. Njord?
    Mr. DeFazio. And then we will have to move on to the next 
panel. Go ahead, Mr. Njord.
    Mr. Njord. I think you pointed out something that is very 
important. Contractors respond to incentives and they find ways 
to earn, maximize their incentive earning power. So in the 
structuring of a contract, the best way to get schedule, 
quality and budget to meet all in the center is to incentivize 
those three things. What is most important to you, is it the 
schedule of the project, is it the cost of the project, is it 
the quality of the project? You have to provide incentives for 
that contractor to give you what you want. If you provide the 
right incentives at the right juncture, they will give you what 
you are asking for.
    And in a design-build world, we are not out there 
inspecting everything. We are not inspecting every ingredient 
that Chairman Oberstar talked about in that cake. However, if 
you provide incentive for the contractor to self-inspect, he 
will self-inspect.
    Mrs. Napolitano. But what if that contractor may be using 
sub-standard material?
    Mr. Horner. Ma'am, another excellent question. As Mr. Njord 
is suggesting, if the contractor used substandard material, it 
would be liable financially and otherwise for the under-
performance of the facility. The prospect of significant 
financial liability disciplines the behavior of the contractor 
in ways that are really extraordinary and hard to create by 
other means.
    Mrs. Napolitano. That turns into litigation. Thank you, Mr. 
Chair.
    Mr. DeFazio. The lawyers will also profit.
    [Laughter.]
    Mr. DeFazio. I want to thank this panel. Thank you for your 
generous grant of time. We have a few things to follow up on 
and we will expect to hear about those. Thanks for coming 
across the Country.
    We will move on to the next panel now, panel two.
    Mrs. Napolitano. Mr. Chair, while they are coming up, may I 
request for the record that a copy of the 2006 findings, the 
design-build, be submitted, unless you already have it? I have 
already asked your counsel, so that we can see and maybe share 
with some of our agencies whatever the findings have been?
    Mr. Ray. Absolutely. The 2006 report on design-build will 
be delivered to you. We will do that. As well as, if it is 
okay, the summary document on our environmental, the SAFETEA-LU 
environmental flexibilities. We will also have that delivered 
to you.
    Mr. DeFazio. The implementation scheduled, yes. Great. 
Thank you.
    Mr. Ray. Thank you.
    Mr. DeFazio. We will begin, I want to thank the panel for 
sitting through the first panel, which went on for quite some 
time. Hopefully you found it of some interest. If you heard 
anything during the first panel that you wish to respond to, 
feel free to depart from your written testimony. I have already 
read all the testimony; I expect other members have too.
    Mr. Yarossi, if you would proceed.

   TESTIMONY OF PAUL YAROSSI, P.E., OFFICE OF THE CHAIRMAN, 
 EXECUTIVE VICE PRESIDENT AND PRESIDENT, HNTB HOLDINGS, LTD., 
     RICHARD THOMAS, DIRECTOR OF GOVERNMENT AFFAIRS, AMES 
CONSTRUCTION, INC., MARIA LEHMAN, P.E., F.ASCE, CHIEF OPERATING 
 OFFICER, CHAZEN COMPANIES; DENNIS HOULIHAN, LABOR ECONOMIST, 
  AMERICAN FEDERATION OF STATE, COUNTY AND MUNICIPAL EMPLOYEES

    Mr. Yarossi. Thank you, Mr. Chairman and Congressman 
Boozman and Chairman Oberstar and Subcommittee members. Thank 
you for the opportunity of providing testimony on how 
innovative contracting methods such as design-build are 
becoming increasingly important in maintaining and growing an 
efficient transportation system, a transportation system that 
is vital to the American quality of life and global economic 
growth and competitiveness.
    For the record, I am Paul Yarossi, President of HNTB 
Holdings, one of the Nation's leading engineering and 
architectural firms. I also serve as co-chair of ARTBA's 
SAFETEA-LU reauthorization task force, which is developing the 
association's vision for the next transportation bill.
    HNTB's viewpoint comes from information from our 3,000 
professionals in more than 60 offices. We are premier providers 
of design services to your State and toll authorities. We are 
helping our clients incorporate today's most innovative best 
practices and contracting methods.
    Our transportation system is stressed. Not since the 
inception of the interstate system have we seen, at the pace we 
see today, needs outweigh available funding. Essentially, given 
the revenue and staff available, State DOTs and transportation 
owners cannot afford to maintain their existing transportation 
system within current funding levels, let alone build new 
capacity. There is no silver bullet that will solve these 
financial problems.
    However, new and innovative ways to finance, design, build, 
operate and maintain transportation facilities must be part of 
the solution.
    We are seeing a growing number of States adopt design-build 
methods to build projects faster and often less expensively. 
The key element of design-build is that one entity assumes 
responsibility for the majority of the design and of all of the 
construction. Advantages to design-build include a simplified 
owner role which requires fewer owner resources; less cost 
escalation as a result of fewer claims; time savings, since 
design and construction are done concurrently; and increased 
possibility of innovation.
    As an example of design-build I was going to use the I-15 
project, but you heard from Secretary Njord about that. It was 
$32 million under budget and delivered significantly ahead of 
time and is a great example of how design-build can work. In 
St. Louis, Missouri, for a 12 mile reconstruction of I-64, 
Missouri DOT used an innovative design-build approach that 
essentially delivered what was estimated to be $600 million 
worth of improvements for $420 million.
    Many factors need to be considered when determining the 
best procurement method for any given project, including the 
project's goals, complexity, funding plan, design intent and 
risk allocation. The more flexible owners are in their design-
build approach, the more innovative design-builders can be, 
result in owner expectations being exceeded. However, design-
build is not a cookie cutter approach for all projects, and as 
you heard in a lot of the testimony today, each project needs 
to stand on its own merit as the correct way of contracting a 
project.
    Another trend in innovative contracting is public-private 
partnerships, or P3s. Your Committee is well versed in P3s, 
having held numerous hearings on the subject, and heard more 
about them today. P3s, along with design-build, are pieces of a 
solution of a much bigger and more complex transportation 
problem. But as we turn to P3s and design-build, we need to 
proceed in a very deliberate, systematic way with an overall 
vision of the future of the transportation system. The focus of 
P3s should be to further the overall enhancement of our 
transportation system and not simply to be a mechanism of 
balancing a budget.
    Some P3 lessons that we have learned is, for existing 
facilities, it is very important to understand the long-term 
value of the asset at hand prior to the negotiations. The 
overall vision of the entire transportation system is needed up 
front. If existing facilities are tolled, the revenue must stay 
in transportation. We should consider toll pricing based on 
traffic demand and manage flow to get the most out of the 
system. And you can consider mass transit, especially bus rapid 
transit, in the free flow of a P3 lane.
    I hope this gives you some insights into changes we are 
seeing as we go through our business in delivering 
transportation projects around the Country. Thank you for the 
opportunity.
    Mr. DeFazio. Thank you.
    Mr. Thomas, the Chairman has many good things to say about 
you, but he is going to withhold at the moment to hear from 
you. Thank you for being here.
    Mr. Thomas. Thank you, Mr. Chairman.
    My name is Richard Thomas. For the last 16 years, I have 
served as Director of Government Affairs at Ames Construction. 
I have been involved in transportation policy at the local, 
State and Federal levels.
    I am currently President of the Minnesota Transportation 
Alliance. I serve on the board of directors for Center for 
Transportation Studies at the University of Minnesota. Ames 
Construction is a heavy civil and transportation contractor 
with annual volume typically between $500 million and $600 
million. We have permanent offices in Burnsville, Minnesota, 
Denver, Colorado, Salt Lake City, Utah, Phoenix, Arizona and 
Carlin, Nevada. We build airports, roads, bridges, dams, rail 
projects for public and private owners across the United 
States.
    My stepfather, Dick Ames, started the company in 1960, and 
we are proud to say that we are still family-owned. Some of the 
projects that we have worked on are Denver Airport, Route 52, 
the Legacy Parkway and S.R. 189 in Utah.
    This morning, I have been invited to share with the 
Committee some of the challenges facing small and mid-size 
firms when public transportation agencies use non-traditional 
contracting practices. As you well know, our Nation's 
infrastructure is aging rapidly. Most States have a difficult 
time funding the backlog of transportation projects. This has 
led to a whole host of ideas to fund and deliver our projects 
in a timely fashion and add value to those projects.
    Many of the new methods have great potential to strengthen 
our transportation system. But they also bring with them new 
challenges, particularly for small and mid-size construction 
firms. One of the biggest trends in the transportation industry 
over the last decade has been the move toward larger projects 
with extended durations. These projects typically range from 
$250 million to $1.5 billion. They tend to be primarily design-
build. Some of these are public-private partnerships, while 
others are State or regional projects.
    The biggest challenge facing small and mid-size contractors 
is not performing the work on these projects; but rather, 
getting the opportunity to work on these projects. Major 
projects require contractors to get mega-bonds and few sureties 
are willing to assume the risk exposure for these large 
projects. In fact, any single surety is generally unwilling to 
accept exposure greater than $250 million under any given bond. 
But with co-surety and the right contractor team, large bonds 
can be provided. This in effect limits the bidding on these 
projects to only a few large firms.
    This is further compounded by the trend toward shifting the 
risk associated with project funding to the contractor. 
Warranties are a good example of this. Many owners want 
extended warranties on projects, anywhere from three to five 
years, and as you have heard earlier, some even up to 10 years. 
I understand that they want that security.
    However, that security comes at a price. Warranties require 
larger bonds, they drive up the cost of a project, and they 
also serve as a barrier to small and mid-size contractors who 
have less of an ability to secure these bonds.
    Major projects and public-private partnerships typically 
use the design-build method of construction. Design-build, as 
you have heard, has many advantages. It is the fastest delivery 
method; a firm cost of the project is established before 
significant financial and time commitments are made; the owner 
can make well-informed decisions regarding design, quality and 
cost throughout the design process; there is a single source of 
responsibility for the entire project; it encourages more 
innovation; and it reduces the number of claims.
    However, design-build has its limitations as well. The 
first is subjectivity. Unlike design-bid-build, which takes the 
lowest responsible bid, the design-build method will select the 
design-builder whose proposal scores the highest on evaluation 
criteria. Because the evaluation includes the human element, it 
cannot be completely free of subjectivity.
    The second design-build limitation would be the 
qualification barriers that contractors must overcome to bid on 
that project. In the States that we work in, most of our 
competitors have a lot of road and rail building experience. 
However, on most design-build projects, the only experience 
that evaluators look at is on design-build projects. So it is 
kind of a catch-22 for some contractors, because if you can't 
get on a design-build project, it is kind of difficult to get 
that experience required.
    Local contractors are often denied the opportunity to 
compete on transportation projects they would have been able to 
bid if they were awarded under the traditional system of 
design-bid-build. This is a problem even for larger firms with 
design-build experience like ours. Despite the fact that we 
have completed several large rail projects that were design-
bid-build, we have had situations where we failed to make the 
short list on design-build rail projects that were even smaller 
in scale than projects we have worked on.
    Another major obstacle for contractors on design-build 
contracts is financial net worth requirements. Those design-
build projects with net worth requirements disqualify most 
contractors from competing, regardless of their ability to 
deliver the project. I have seen cases where design-build 
projects, where contractors were disqualified from being 
selected on design-build projects due to net worth 
requirements, despite the fact that they had successfully 
completed projects that were larger in financial terms and also 
that had greater risk. Financial net worth requirements should 
not be required, provided the proposer can obtain 100 percent 
payment and performance bond and have the ability to finance 
the work.
    My final point on design-build is the relationship between 
price and projects, technical score. In Minnesota, when we 
drafted the State's design-build law, we ensured that price 
would be a major factor in awarding the project. When owners 
put too much emphasis on non-construction elements of a 
proposal, the result is a process that I would suggest is more 
akin to a beauty contest. It all too often excludes good 
proposals that would add to the cost of a project. To date, 
every design-build project in Minnesota has been awarded not 
only to the team that has had the highest technical score, but 
it has also had the best price.
    Mr. DeFazio. A good point to wrap up on, I think.
    Mr. Thomas. The last thing I would say before closing is, 
dealing with public-private partnerships, we strongly believe 
there is a place for public-private partnerships. There are 
always going to be places in the Country where they want to 
speed up, expedite a project or there are other circumstances. 
With that being said, I think we need to make it perfectly 
clear that PPPs are no substitute for a comprehensive 
transportation plan. Our fear is that we are going to become 
too reliant on PPPs in the future without increasing our 
traditional funding sources.
    Thank you.
    Mr. DeFazio. Thank you, Mr. Thomas.
    Ms. Lehman.
    Ms. Lehman. Mr. Chairman and members of the Subcommittee, 
good afternoon. My name is Maria Lehman, I am the Chief 
Operating Officer of the Chazen Companies. Chazen is a 
privately owned consulting engineering firm with more than 180 
employees in the Hudson Valley. Our principal offices are in 
Poughkeepsie, Troy, Newburg and Glens Falls, New York.
    I am pleased to appear before you today on behalf of the 
American Society of Civil Engineers to present our views as the 
Subcommittee examines new and existing methods to deliver 
transportation projects. It is important to remember the 
condition of the Nation's infrastructure when discussing the 
best way to deliver infrastructure projects. In 2005, ASCE 
released a report card for America's infrastructure, which gave 
the Nation's infrastructure a grade of D based on 15 
categories. Roads received a grade of D, bridges a C and 
transit a D plus. With so much progress to be made, Federal, 
State and local governments need all the tools available to 
deliver quality infrastructure projects.
    Public-private partnerships are contractual relationships 
between public and private sectors in infrastructure 
development. Innovation in public works contracting abounds. We 
see it across the continuum, from the traditional design-bid-
build contract to the design-build contract to the build-
operate-transfer contracts, or P3s. No matter which contract 
type is chosen, the selection of the right source, the 
designer, the contractor, the designer-builder or the 
concessionaire is the most critical element to the success of 
the acquisition. Lowest price based source selection is common 
in the public and private contracting arena. But this approach 
may not necessarily provide the most economical end results or 
desired best value.
    Small businesses have not been very supportive of P3s, as 
they feel that large engineering firms will muscle them out of 
this important market. Federal regulation could remedy this by 
set percentage of actual engineering to be done by small local 
businesses that have local expertise, both in conditions and 
regulatory expertise. For example, a candidate project in 
upstate New York might be the Grand Island bridges. While a 
major engineering firm certainly has the expertise in big 
bridge design and some elements of maintenance, without local 
expertise of geology, weather, snow and ice removal, long-term 
maintenance costs will be incorrectly calculated. Local 
expertise will tell you how to deal with removal of 7 feet of 
snow in a 48 hour period, or understand the damage to a 
structure based on heavy salt loads needed to keep the facility 
operational in severe events.
    Qualification based selection. The Federal Government has 
been using innovative contracting methods for professional 
design services since 1972, when QBS became the procurement 
method for architectural and engineering work. ASCE believes 
that the selection of professional engineers as prime 
consultants and subcontractors should be based on the 
qualifications of the engineering firm. Qualifications, 
including training, experience, capabilities, personnel and 
work loads, should be evaluated when selecting an engineering 
firm.
    Accordingly, ASCE supports QBS procedures, such as those 
specified by the Brooks Architect-Engineers Act of 1972 and the 
American Bar Association's Model Procurement Code for State and 
Local Governments for the engagement of services. Design-build 
project delivery, a client-driven innovation, initially was 
seen as a fast track solution to traditional delays in the 
construction of major public works projects. It is a delivery 
system that has been successfully implemented on many private 
sector projects and thus, many small firms are very familiar 
with its implementation.
    One note for small firms. Because of the high cost of 
preparation for design-build proposals for complex projects, it 
is imperative for a small business approach that the cost of 
presentation is reimbursed by the owner. This payment not only 
acknowledges a real value for the work performed but also gives 
the owner the right to the intellectual property.
    Use of life cycle cost analysis principles will raise the 
awareness of clients of the total cost of projects and promote 
quality engineering. Short-term design cost savings lead to 
future higher costs. ASCE encourages the use of life cycle cost 
analysis principles in the design process to evaluate the cost 
of projects. The analysis should include the initial 
construction, the operation, the maintenance, environmental, 
safety and all other costs reasonably anticipated during the 
life of the project, whether borne by the owner or otherwise 
affected.
    The lack of adequate infrastructure investment in the U.S. 
has left with a vast backlog of deteriorated structures that no 
longer meet our Nation's increasing demands. To remedy 
America's current and looming problem, ASCE has estimated in 
2005 a $1.6 trillion investment needed in all categories of 
infrastructure over the next five years, and called upon a 
renewed partnership among citizens, local, State and Federal 
governments, and the private sector.
    To accomplish the goal of rebuilding the Nation's critical 
infrastructure, engineers, architects, contractors and 
Government agencies need to expand the tools available to 
deliver quality projects. ASCE appreciates the Committee's 
willingness to address this important issue.
    Thank you for the ability to present our testimony.
    Mr. DeFazio. Thank you.
    Mr. Houlihan.
    Mr. Houlihan. Thank you, Mr. Chairman. I am Dennis 
Houlihan, I am with the American Federation of State, County 
and Municipal Employees.
    As you know, I sit before you in a somewhat awkward 
situation. Mr. Blanning tried to get here yesterday. He was 
frankly my choice, I thought he would be an excellent witness. 
He is a professional engineer. But nature intervened. We 
thought it was better to get his testimony in the record. If 
there are questions about it that I can't answer, we will 
supply.
    Mr. DeFazio. You could proceed. I have read the testimony, 
I believe other members have. We will be happy to put it in the 
record and then see how the questions go.
    Mr. Houlihan. That would be fine.
    May I add, as you asked, if there are other observations 
which I feel a little more comfortable speaking about, and I 
will be very brief.
    Mr. Duncan, in the early moments today, mentioned about one 
of the critical things we need to be considering about any kind 
of contracting as oversight. As you have heard from us before, 
we are very concerned about the staffing levels in State DOTs. 
We are worried about the overall engineering shortage, no 
matter what type of procurement system you go through.
    I want to thank Mr. Oberstar, I understand there is 
Government Accountability Office report now looking at this, 
the GAO has contacted Mr. Blanning, and indeed, that has gone 
beyond other unions. I wanted to just bring that issue up.
    The other one is on the issue of public inspection. It is 
related, it is in his testimony. I have heard it not only at 
the engineering level, but through our Association of State 
Highway and Transportation Unions, people who do everything 
from concrete inspection, all levels of inspection, feel that 
the levels of staffing in their agencies have declined.
    I don't want to put all the blame here, in conclusion, on 
the DOTs themselves. I understand some of this is a political 
problem. I think it goes across both sides, both political 
parties. When you talk to DOT directors, they say, we would 
like to have greater staffing, but we have the problem of caps 
on employment in the States, and we can't get the people, even 
though the money might be there. I don't know, we have 
discussed this before a bit and we are still thinking about 
this, is this a Federal issue? Well, yes, in the sense that the 
Federal Government has oversight, and the stewardship of the 
funds.
    But the program is operated at the local level, what is the 
appropriate role for the Feds to tell the States what to do? It 
is something we are going to have to address, but it is 
something of concern and I hope perhaps as you go through the 
oversight process we might have a chance to talk about this 
again. I will conclude with that. Thank you very much.
    Mr. DeFazio. Excellent. Thank you for summarizing. Thank 
you for standing in. I know that is often a difficult thing to 
do.
    There are a couple of questions that occur to me. And 
actually, to your last point there, Mr. Houlihan, I wondered as 
I was reading the testimony about the warranties and whether we 
are essentially, in some cases, substituting warranties for the 
degree of public oversight that might be necessary to assure 
quality control. I wonder what sorts of costs are associated 
with those warranties and whether or not it might be less 
expensive to actually hire staff to monitor the quality as we 
go along, than to assume that the contractor is going to do it 
because of the warranty requirements.
    So Mr. Houlihan or Mr. Thomas, you referenced that, or 
anybody who wants to address that issue.
    Mr. Houlihan. Well, of course I think it is a very 
interesting question. I don't have a direct answer to it, other 
than this. In trying to get a comparison of what any 
alternative to using in-house staff would be has been a 
struggle in the States.
    However, there have been some successes. I just offer one, 
a simple one we are looking at. In Wisconsin now they are 
doing, because there was a statute passed, they are doing at 
least kind of an educational piece. The legislature has asked 
the agency to compare the cost of using in-house staff versus 
using a contract design staff. It is not binding on them, but 
it does give information which over time might build a record.
    I heard your comment on this earlier, caught my ear, of 
course. I think that is something we might, if not at the 
Federal level, we may want to advocate as these warranty ideas 
come up at the State level. We are always trying to push, as 
you know, for a rigorous analysis of the alternatives. Thank 
you.
    Mr. DeFazio. Knowing the cost benefit would be helpful. We 
have been nationally, I know, contracting out at higher expense 
in many, many areas. I don't know, although there was analysis, 
I believe, in the testimony of the gentleman who you replaced, 
about the cost in California. He made the same point that the 
people that were being hired, contracted, were more expensive 
that the State employees. I assume that included a calculation 
of benefits.
    Mr. Thomas, you raised the issue of warranties. Do you want 
to address that?
    Mr. Thomas. Mr. Chairman, I would say, like others in our 
industry, we are not opposed to warranties. I think folks have 
to come into this with their eyes wide open. There is a 
warranty for a year, which is typical, that is acceptable, that 
is not a problem for the industry. I think it is when you get 
into the longer duration where you get into the problems. 
Contractors have to pay higher bond costs for that. That is 
going to be a cost that we are going to have to put into the 
project, which is going to raise the cost of the project.
    So I think that is something that DOTs have to look at, how 
important is it to have that for that particular project, and 
is that something that they are willing to pay for.
    I do, however, think that the larger warranties, it does 
have a bigger impact on your small and mid-size companies, 
because of their ability to be able to get a bond for those 
long-term projects. We have even seen them in Minnesota on 
small projects as well, which I believe at the time was more, 
the DOT was looking at it is as kind of a trial run. And they 
have kind of backed off on that a little bit.
    But I think it is more, you have to be aware that this is 
going to add cost to the project. If that is something that a 
DOT feels they are willing to take on, it is what it is.
    Mr. DeFazio. Ms. Lehman?
    Ms. Lehman. A couple of comments on that. First of all, I 
agree that the overall shortage in engineering staff is an 
issue around the Country, whether you are on the public side or 
private side. I did serve as a commissioner of public works for 
five years on the public side. So I understand it from both 
sides.
    But I think you are talking not just quantity, but also 
quality. One of the concerns that I have is in State government 
and in Federal Government, the credentialing is not as 
important as it is in the private sector. The requirement of 
having a P.E., the Office of Personnel Management on the 
Federal side does not recognize getting a P.E. as an 
appropriate event. It doesn't distinguish people working for 
Federal Government whether they have the license or not.
    My personal feeling as being someone who, on the public 
side, had to have a P.E. in my position, when I am personally 
liable for my decisions and it is my skin in the game, I was 
much more balanced and public-minded in my decision process. 
Because it is something that in the State of New York, if my 
kids see something from my inheritance, they are going to be 
liable, because there is no statute of repose in the State of 
New York. So I take it very seriously.
    As far as warranties relative to the engineering industry, 
it is problematic. Because of the complication of design-build, 
where you are part of that contracting team, and because of 
joint and several liability, warranties are not something that 
the insurance industry will allow us. It is an exclusion 
specifically in engineering, in any of the insurance mechanisms 
that are around in the United States. So it is problematic. 
There is a lot that needs to be resolved to be able to get 
there.
    The other issue of warranties that is a little problematic 
is that at some point, is it a function of bad design or bad 
contracting, or is it a function of lack of maintenance, and 
where is that continuum and where does lack of maintenance kick 
in versus faulty product in the first place. So it is a matter 
of trying to figure out and balance those two things.
    Mr. DeFazio. Interesting observation.
    Mr. Yarossi, on page 4 of your testimony was a point which 
came up at the earlier panel, but it certainly deserves some 
emphasis. You said as we turn toward P3s and design-build, we 
need to proceed in a very deliberate, systematic way with an 
overall vision of the future transportation system. And then 
you go on from there.
    How do you envision, in the States that are adopting 3P 
laws that allow unsolicited bids, how do you see they are going 
to incorporate or deal with that in their STIP, if it is 
outside their STIP?
    Mr. Yarossi. I do have a problem with that, Mr. Chairman. I 
would reinforce what Secretary Njord said, that the way we are 
going to get an efficient and a transportation system 
nationally that is going to give us what we need, higher 
quality of life, some resiliency to natural and man-made 
disasters and global competitiveness, is to have that system 
plan in place. And I am just personally, and my company is a 
firm believer in that the plan comes first. I think all that we 
have heard in all the testimony, all that you have read are all 
part of the solution. Each project that builds into that plan 
that makes the program that makes the system in my opinion 
needs to be individually analyzed. There is probably a little 
bit of right in everything we have heard. When we put all the 
little bits of right together, we are going to find the right 
way to both build and finance the system.
    Mr. DeFazio. Okay, thank you.
    With that, I would turn to Chairman Oberstar if he has some 
questions.
    Mr. Oberstar. Thank you, Mr. Chairman. I greatly appreciate 
the contribution of the panel this morning, afternoon now, for 
very thought-provoking commentary.
    I think, Mr. Yarossi, you said it well, I wish I had 
phrased it myself, that for the first time since the beginning 
of the interstate system, we see needs outweighing available 
funding. That is really what is happening. That is the dilemma. 
What futurists usually do is way overstate, way over-predict 
what is going to happen.
    In the case of transportation, however, future projections 
of needs have greatly fallen short of actual performance. In 
the decade of the 1990s to 2000, population growth in America 
was about 4 percent. But highway usage grew 19 percent. 
Aviation grew about the same, 19 to 20 percent growth over that 
period of time. Rail exploded and is continuing to grow. In 
every mode of transportation, use has outperformed by factors 
of four and five to one population growth.
    Our funding has not kept pace. We knew that was the case 
when the Commission reported to the Congress in 2003, which was 
required in TEA-21 legislation, the Department of 
Transportation established this commission, evaluate pavement 
condition, bridge needs, safety requirements, congestion. And 
recommend an investment level to the Congress for the next six 
year program. They came back with a recommendation of $375 
billion. Chairman Young at the time and I introduced that bill 
in October of 2003 and asked for, at the same time appealed for 
a 5 cent increase in the user fee.
    Gas was $1.34 a gallon at the time. It went up over a 
dollar in less than a year. It went up to over $3.20 during the 
time we were considering the follow-on legislation that became 
SAFETEA-LU. So on the one hand, yes, the needs are outweighing 
funding. But it is the policy makers that are not keeping up 
with the requirement to provide the funding. And the public is 
willing to accept and invest. They don't understand much about 
where the rest of their taxes go, but they do understand the 
highway user fee. They do know if they pay, they buy the gas at 
the pump, they are paying the fee and they drive away on better 
roads and better bridges and safer.
    So we are now forced because of these failures in the 
Executive Branch to accept an increase in funding, we are faced 
with alternative ways, imaginative ways of financing the 
transportation needs of the Country. And Mr. Thomas has been, 
Mr. Chairman, has been a leader in the State of Minnesota with 
the Transportation Alliance, with the business community, with 
the contractors, in advocating for an increased investment in 
Minnesota's transportation system.
    The legislature has responded, both house and senate 
committees have passed, each in different ways, 10 cent 
increase in the user fee. That along with other revenues that 
were generated also from transportation needs will create a 
billion, 200 million dollars in the State of Minnesota to match 
the available Federal funds. And unfortunately, we have at the 
State level a replica of the national level, a Governor who 
can't figure out a way to do what he knows needs to be done, 
and that is to make a greater investment.
    So because of the failure and the inability of the State to 
match available Federal construction dollars, we had an 
extraordinary circumstance last summer. The State of Minnesota 
Department of Transportation put up a $235 million contract to 
rebuild I-35 across town in Minneapolis and no one bid on it. 
Now, Mr. Thomas, Ames is not a small organization. Was this a 
design-build, was this a standard project? Why did contractors 
not bid on this project? I know part of the answer to that. But 
you go ahead and say it for the record.
    Mr. Thomas. Mr. Chair and Representative Oberstar, the 
problem with the Crosstown, frankly, I think was a breakdown of 
communication between and expectations between MinnDOT and the 
contractor and financial community. There were two teams that 
were prepared to bid on that project. To really simplify it, 
the problem we have with the Crosstown project is, contractors 
were willing to help finance the project. But there was no 
guarantee at the end of the day that they would get paid. The 
financing for the project was dependent upon future Federal 
funding. As you well know from the last transportation bill, 
sometimes that takes longer than what folks anticipate. And 
there was none of the bonding companies that were willing to 
finance that risk. The only precedent we had had previously in 
Minnesota was, a situation like that, was the monorail at the 
zoo, and the folks that invested the money never did get paid.
    It wasn't, the issue wasn't so much the way of delivering 
the project, but the financing, the construction community and 
the finance community had met early on with MinnDOT and 
expressed to them the issues that we had with the project. So 
for the first time in history, we did, we had a project that 
there were no bidders. Interestingly enough, the project was 
bid a couple of weeks ago, and there were only two bidders on 
that project as well. Typically, and I think that is kind of a 
sad state of affairs, too, that we are losing some of our 
competition. Because I think in that case, it was more because 
of the size of the project.
    Mr. Oberstar. Thank you for that explanation and discussion 
of it. Yes, the State really expected contractors to finance 
their own work.
    Mr. Thomas. Right.
    Mr. Oberstar. And that is just not acceptable.
    How does that, though, differ from a design-build approach? 
And you raised some very interesting questions, and I think 
others did as well, that design build includes some hidden 
costs. You have called the mega-bonds, that in the case of 
design-build, you may be shifting the risk to the contractor as 
well as the warranty approach. Warranties also, as I said, in 
discussion with the previous panel, shift the risk to the 
contractor. That will require more bonds and higher costs.
    I hadn't really thought about that higher cost. I wonder if 
other panelists have a comment on that observation, Mr. Thomas.
    Mr. Thomas. Well, I think with design-build, Mr. Chairman, 
that your costs are probably higher at the initial phase. But I 
think you can offset that with getting the project done sooner. 
Probably the example I would use would be the Lock 52 project 
in Rochester, Minnesota, which you are familiar with. Under the 
traditional method, design-bid-build, this would have been a 12 
year project. We bid the project in four and completed it in 
three. And to be quite honest with you, we got it done in three 
because there were incentives. I think one of the earlier 
speakers had spoken to that. That certainly I think is a good 
tool to get projects done faster.
    But I think there are ways, I think, that you can add cost 
to design-build projects. I think if you are, obviously, if you 
are requiring the contractors to do more things, to take on 
more risks, there is going to be more cost associated with that 
as well. There is just no getting around that.
    I think when one is deciding whether to use design-build or 
design-bid-build, I think there is a whole host of criteria 
that DOTs ought to look at first. And I think for the most 
part, at least the States we work in do a pretty good job of 
determining which projects to use for design-build and which 
projects not to use for design-build. Because there are pros 
and cons for each method.
    But yes, I think your biggest added costs are going to be 
because you have to deal with the risk involved.
    Mr. Oberstar. And there is the issue of oversight. Mr. 
Yarossi, do you have comments?
    Mr. Yarossi. Yes, I do. I think Mr. Thomas is exactly 
right. Again, every project needs to stand on its own merit as 
to what form of contracting is the right form of contracting to 
use. And it goes even into on the ability of material supplies, 
the local contracting community, what is the size of the local 
contracting community, the resources that are available to the 
local contracting community, as well as the time and cost 
savings that can be involved.
    So I would say that we hear a lot about design-build. 
Design-build has worked very well in many cases. Design-bid-
build has worked very well in many cases, and they both have 
problems in some cases. I think it is our responsibility as 
infrastructure professionals and professionals in the industry 
to advise our clients on what is the best way to use 
contracting methods. And it is the DOT's responsibility to 
determine which is the best way to put a project out.
    Mr. Oberstar. Mr. Houlihan, I suspect that AFSCME has 
concerns about oversight of such projects, public-private 
partnerships and the design-build and other devices to speed up 
the contracting and fill the gaps in financing. But eventually, 
the State has responsibility in our system, unless we go to a 
complete warranty approach to contracting, as we discussed with 
the earlier panel.
    But Ms. Lehman raised a question that I have heard great 
concerns from groups around the Country, and that is a shortage 
of engineers. Engineering schools aren't graduating enough 
personnel. There are not enough available for the private 
sector, enough for the public sector. Your organization 
represents those who are quality control, they represent the 
public interest in assuring that contracts are fully carried 
out. Do you have a comment about that aspect?
    Mr. Houlihan. One observation I have heard is that the 
salaries in the public sector are really too low in engineering 
to compete. You will hear this, I have heard this, obviously 
our members often feel this way. But also, I have heard DOT 
directors talk about their difficulties of recruiting. Or they 
can recruit for a while, and then they run into retention 
problems. They get people for a while but then they move on.
    That is the essence of what I hear. There have been a 
number of forums of which the civil engineers have been 
involved in through the TRB. We have been involved to try and 
figure out, how do you get people, what are the incentives to 
move more into engineering. I don't feel like there has been a 
particularly good solution offered there. I don't really have 
an answer to it. We are sympathetic.
    And the other area that we all observe, I think, probably 
particularly in the public sector, is the aging. We are all 
aging, obviously, but the boomer population moving through, and 
let's say the public sector in some cases has been a model 
employer, in the sense that we have had reasonable wages and 
benefits, we have had good pension plans, like everyone should 
have, every worker should have. Some of them are thinking, 
well, maybe I can retire now, but there is still a lot of 
useful time left on my skills. They may be leaving earlier than 
we might like, but they are not leaving the work force, they 
are leaving to move over into the private sector.
    There is some concern, I think, within our members and the 
unions more broadly than AFSCME about that revolving door a 
little bit. That is, the people in the senior management in the 
agencies feel sometimes they are moving from a senior 
management position as time goes on into the private industry, 
which of course is their right to do. But then they kind of, it 
begins a kind of momentum about, let's move more work into the 
private sector. That is maybe an unanticipated consequence, but 
one that we are concerned about.
    Mr. Oberstar. Ms. Lehman, you raised that issue. I would 
just make a footnote that on Friday and Saturday I was meeting 
with the Minnesota Veterans Hospital. They had the very same 
problem of attracting and retaining cardiologists and other 
specialties who in the private sector are making upwards of 
$450,000 a year and the VA is paying the same ones $125,000 or 
$135,000 a year. Can't attract them and when they do, they 
can't retain them.
    Ms. Lehman?
    Ms. Lehman. Just one comment. Looking at the perspective as 
the world is flat, India and China have more honors engineering 
graduates than we have engineering graduates in the United 
States. We put out 70,000 a year, and of that, a third are not 
U.S. citizens. That is very concerning, and we are looking at 
all kinds of different methodologies.
    One of the things that I do in my non-day job is I am a 
school board member on my local school board. Math and science 
education is really what is holding people back in the 
technologies. We have to solve it more upstream of the pipeline 
than at the end. I think engineers have been looking at it at 
the university level. The solution is probably in middle 
school, and we have to take a harder look at that.
    Mr. Oberstar. Thank you. One final observation, and I want 
a reaction on this. The State of Missouri is experimenting with 
a bridge reconstruction initiative in which the State DOT has 
proposed to let a contract to a single firm for reconstruction 
and rehabilitation of 700 bridges in the State. It will be a 
multi-billion contract over a period of maybe 10 to 20 years. 
They are still negotiating the final terms of it, in which the 
contractor will take over the total program. They will do 
rehabilitation, they will probably create a standard format for 
each bridge to be done pretty much the same way, kind of, I 
hate to use the term cookie cutter, because you are not really 
cutting cookies here, these are big bridges. And will have the 
responsibility for managing all the subcontractors. No one firm 
can do 700 bridges.
    But they are supposed to deliver those bridges within 
roughly this 10-year period. The State will monitor and 
evaluate, determine whether they are meeting the standards. 
They won't get paid until the contract time expires and then 
the State will start repaying them.
    That is really innovative financing. I wonder what your 
reaction might be.
    Mr. Yarossi. We have looked at that extensively. Our 
largest office is in Kansas City. We are trying to determine 
how a consultant engineer participates in that type of a 
program, which really is more along the lines of a developer 
type of a situation than we have normally seen, I think even in 
P3s.
    I would have to say that from my standpoint, the jury is 
out as to what I think of that. It really is revolutionary. 
There is a significant period of time where there is no money 
that flows either way except for out of the developer's pocket.
    Mr. Oberstar. And the contractor has to go out in the 
marketplace and find financial institutions willing to put up 
the money and support them.
    Mr. Yarossi. And Mr. Chairman, it appears that those 
financial institutions are there, which gives us second thought 
to take a look. Because they must see something involved in it. 
It really is a unique situation that we are studying pretty 
hard to see how we participate.
    Mr. Oberstar. Apparently it will not involve tolling, 
either, thank God.
    Mr. Yarossi. No, and it is a long-term maintenance 
contract, where you turn over the bridge in some condition. 
Don't quote me on the years, but it is long-term. It is 35 
years or 40 years contract.
    Mr. Oberstar. That is right. Do others have a comment on 
that?
    Ms. Lehman. I think you are going to pay for the risk up 
front. Someone is going to have to pay for that risk. And I 
think the financial institutions.
    I have experience in programmatics and doing a lot of small 
things in a program management cookie cutter type experience. 
There it makes a lot of sense, when you have a lot of smaller 
facilities, there is a lot of local, as a lot of local 
governments have, to be able to use that approach. But when you 
start getting into the multi-billions, you are going to pay for 
the risk. It is a matter of assessing the risk.
    Mr. Oberstar. And that will reduce the available 
competition to only a handful, two, three national firms with 
mega-fundraising capability.
    Ms. Lehman. Correct.
    Mr. Oberstar. A very, very serious concern for us.
    Mr. Chairman, this whole series of hearings on which you 
have launched is vital for the future of transportation. We 
have a huge challenge facing us in the reauthorization of 
SAFETEA-LU and the future transportation program for the 
Country. Raising the user fee is one part of it, central to it, 
in my judgment.
    But exploring other means of squeezing as much productivity 
out of the surface transportation construction delivery is our 
responsibility. We have to look at all of these options. The 
deeper we look into each one of them, the more challenges and 
the more problems and the more hidden difficulties appear.
    Thank you for your constructive, thoughtful, persistent and 
patient pursuit.
    Mr. DeFazio. I thank the Chairman for his support in this 
effort. It is going to be, as I have said previously, hopefully 
a surface transportation and transit reauthorization for the 
21st century, a major evolution from what we have done 
historically. I look forward to partnering with them in that 
effort as we go forward.
    I want to thank the witnesses for their patience, for 
contributing their expertise. With that, this hearing is 
adjourned.
    [Whereupon, at 12:53 p.m., the committee was adjourned.]
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