[Federal Register Volume 69, Number 193 (Wednesday, October 6, 2004)]
[Notices]
[Pages 59983-59986]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-21975]


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DEPARTMENT OF TRANSPORTATION

Federal Highway Administration


New Special Experimental Project (SEP-15) To Explore Alternative 
and Innovative Approaches to the Overall Project Development Process; 
Information

AGENCY: Federal Highway Administration (FHWA), DOT.

ACTION: Notice.

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SUMMARY: The FHWA is establishing a new Special Experimental Project 
(SEP-15) to encourage tests and experimentation in the entire 
development process for transportation projects. SEP-15 is aimed 
specifically at increased project management flexibility, more 
innovation, improved efficiency, timely project implementation, and new 
revenue streams. The FHWA plans to use the lessons learned from SEP-15 
to develop more effective approaches to project planning, project 
development, finance, design, construction, maintenance, and 
operations.

DATES: This new experimental project is being initiated on October 6, 
2004.

FOR FURTHER INFORMATION CONTACT: Division Offices: A complete list of 
contact information for the FHWA Division Offices may be found at: 
http://www.fhwa.dot.gov/keyfield/famc.htm. Headquarters: Mr. Dwight 
Horne, Office of Program Administration (HIPA), (202) 366-0494 or Mr. 
L. Harold Aikens, Jr., Office of the Chief Counsel (HCC-30), (202) 366-
0791, 400 Seventh Street, SW., Washington, DC 20590. Office hours are 
from 7:45 a.m. to 4:15 p.m., e.s.t., Monday through Friday, except 
Federal holidays.

SUPPLEMENTARY INFORMATION:

Electronic Access

    An electronic copy of this document may be downloaded using a modem 
and suitable communications software from the Government Printing 
Office Electronic Bulletin Board Service at (202) 512-1661. Internet 
users may reach the Office of the Federal Register's home page at 
http://www.archives.gov/fedreg and the Government Printing Office's Web 
page at http://www.gpoaccess.gpo.gov/nara.

Background

    The Federal Highway Administration (FHWA) has long encouraged 
increased private sector participation in the project development, 
finance, design, construction, maintenance, and operations of highways 
and bridges. The private sector has expertise often not available to 
the public sector that can bring innovation, flexibility, and 
efficiencies to certain types of projects.
    For some time, FHWA has conducted tests in the area of contracting 
practices under Special Experimental Project No. 14 (SEP-14)\1\. Many 
of these practices have facilitated greater private sector investment. 
Since its inception in 1990, SEP-14 has been successful in advancing 
over 300 projects, and due to SEP-14, a number of contracting practices 
previously considered experimental have become a regular part of the 
highway program, such as design-build, cost-plus-time bidding, lane 
rental, and the use warranties.
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    \1\ SEP-14 was initiated on February 13, 1990, as a result of 
recommendations from a Transportation Research Board (TRB) task 
force formed to explore innovative contracting practices. The 
memorandum initiating the SEP-14 program can be found at the 
following URL: http: www.fhwa.dot.gov/programadmin/contracts/021390.htm.
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    The FHWA has also encouraged innovations in the area of 
transportation financing. In 1994, Executive Order 12893, Principles 
for Federal Infrastructure Investment, established more cost-effective 
infrastructure investment as a priority for all Federal agencies. This 
Executive Order prompted more systematic analyses of the costs and 
benefits of proposed infrastructure investments, efficient management 
of infrastructure, greater private sector investment in infrastructure, 
and encouragement of more effective State and local programs. In 
response to that Executive Order, the U.S. Department of Transportation 
(U.S. DOT) and the FHWA undertook a major initiative in 1994 to promote 
and facilitate infrastructure investment.
    This initiative was launched with the introduction of an 
experimental ``Test and Evaluation'' program, designated as TE-045, to 
solicit ideas from the States on a range of new financial strategies 
designed to stretch limited transportation dollars by creating new,

[[Page 59984]]

more flexible ways to leverage Federal-aid highway funds. The TE-045 
initiative has generated substantial benefits in terms of building more 
projects with fewer Federal dollars and accelerating project 
construction. Many of the innovations tested were subsequently approved 
for general use through administrative action or legislative changes 
made under the National Highway System Designation (NHS) Act of 1995 
(Pub. L. 104-59; 109 Stat. 568; Nov. 28, 1995), and the Transportation 
Equity Act for the 21st Century (TEA-21) (Pub. L. 105-178; 112 Stat. 
107; June 9, 1998).
    More recently, an increasing number of States and private ventures 
have explored public-private partnerships in which the private sector 
partner could assume a greater role in project planning, project 
development, financing, construction, maintenance, and operation. 
Because these projects involve elements of project planning, 
development, environmental analysis, construction, maintenance, 
operation, and financing, they extend well beyond innovative 
contracting practices contemplated by SEP-14 and the financing tools 
encompassed by TE-045.
    State interest in public private partnerships is expected to 
increase. Private sector investment can make up some of the public 
funding shortfall, but it will require a fair return on investment. 
Tolls certainly will represent a major source of funds to support 
private sector investment, but other potential sources of income such 
as development fees and tax increment financing may also be needed. 
These features often add to the complexity of project development.
    Several States and private entities have asked for FHWA's guidance 
in implementing innovative arrangements and have queried how these new 
arrangements will be treated under Federal laws affecting highway 
projects. Some recent SEP-14 applications have sought to incorporate 
initiatives that go beyond innovative contracting, to include 
environmental compliance, right of way acquisition, and financing. 
These applications have been difficult to fit within the limits of SEP-
14. Thus, rather than continue to manage these new proposals under the 
SEP-14 umbrella, FHWA is initiating a new Special Experimental Project 
No. 15 (SEP-15) pursuant to the authority granted the Secretary by 
Congress in 23 U.S.C. 502(b). SEP-15 will not be limited to contracting 
initiatives. It will encourage tests and experimentation in the entire 
project development process, specifically aimed at attracting private 
investment, leading to increased project management flexibility, more 
innovation, improved efficiency, timely project implementation, and new 
revenue streams.
    A key element of SEP-15 will be to identify impediments in current 
laws, regulations, and practices to the greater use of public-private 
partnerships and private investment in transportation improvements and 
to develop procedures and approaches that address these impediments. Of 
course, such procedures and approaches must continue to protect the 
public interest and any public investment in the project. Moreover, 
SEP-15 projects cannot be used to modify environmental and other 
requirements external to title 23 of the United States Code. Thus, SEP-
15 will allow for innovations in project delivery while maintaining 
FHWA's stewardship responsibilities to protect taxpayers and the 
environment. The FHWA recognizes that SEP-15 proposals may include 
multi-modal components. The FHWA will coordinate the review of multi-
modal SEP-15 proposals with the appropriate modal administration(s).
    The lessons learned from SEP-15 will aid FHWA in developing more 
effective approaches to project planning, project development, finance, 
design, construction, maintenance, and operations. Our goal is to 
establish comprehensive policies and to seek future legislation to 
authorize those public-private innovations that have proved most useful 
under SEP-15.

SEP-15

    As personal and freight transportation needs continue to increase, 
public resources will fall behind the demand for investment in 
transportation infrastructure. It is unrealistic to assume that 
sufficient funding to meet this demand can be realized by increasing 
taxes or otherwise using only public funds. Additional funds must be 
obtained from other sources, such as drawing from private sector 
financing and investment. SEP-15 will allow FHWA to test project 
development approaches that provide the flexibility and timely 
decision-making often required to attract private capital while still 
exercising essential FHWA stewardship responsibilities.
    As a result, the FHWA is seeking to identify changes in current 
practices that could promote greater and more effective private sector 
involvement in the delivery of Federal-aid construction projects. 
Partnerships between private investors and public transportation 
agencies can bring not only greater funding to a project but also more 
intellectual capital and innovation. SEP-15 is designed to provide a 
mechanism by which States can facilitate public-private partnerships.
    The objective of SEP-15 is to identify for trial evaluation and 
documentation public-private partnership approaches that advance the 
efficient delivery of transportation projects while protecting the 
environment and the taxpayers. SEP-15 addresses four major components 
of project delivery--contracting, compliance with FHWA's National 
Environmental Policy Act (NEPA) process and other environmental 
requirements, right-of-way acquisition, and project finance. Given the 
scope of some of the proposals that have surfaced, elements of the 
transportation planning process may be involved as well. In order to 
meet the objective of SEP-15, proposals should describe the specific 
Federal-aid program areas of experimentation and identify proposed 
performance measures to evaluate the success of the SEP-15 project.

Contracting

    SEP-15 incorporates SEP-14's approach to innovative contracting 
practices. However, SEP-15 projects are likely to solicit conditional 
Federal approval earlier in the project development process than is 
typical for SEP-14 projects. Projects under SEP-14 usually have passed 
the initial concept stage. Hence, competition can occur around 
proposals for which cost parameters can be identified. Recently, the 
FHWA encountered a number of proposals that seek to involve the private 
sector even earlier in the process. Under these proposals, only 
generalized needs or policy initiatives that the project would serve 
have been identified.
    For this reason, State applicants under SEP-15 should provide 
detail of the following:
    (1) The procurement methods it will use over the life of the 
project to encourage adequate competition. Many of the proposals 
developed to date are an offshoot of the design-build concept. SEP-15 
proposals need not be limited by these concepts. However, given the 
very long lead-time and the large scope that a SEP-15 project might 
involve, FHWA is concerned that adequate competition is maintained and 
that qualitative and quantitative (price) evaluation factors are 
considered at key stages of the project.
    (2) Applicants should specify any title 23, U.S.C., and FHWA 
regulatory requirements that may have to be waived or modified in order 
to conduct a successful SEP-15 test, together with

[[Page 59985]]

a justification or explanation for the modification. Applicants should 
also describe how laws and other requirements that fall outside title 
23, U.S.C., and thus cannot be waived under SEP-15, would be affected 
by proposed changes in standard procedure. This includes not only the 
environmental laws discussed in the following section, but other 
requirements external to title 23, U.S.C..
    (3) Many of the controls imposed by title 23, U.S.C., and 
implementing requirements provide for oversight and control to protect 
the public interest. It is clear from the proposals the FHWA has seen 
to date that some of these controls have created real and unnecessary 
impediments to innovation and greater private investment. Thus, an 
applicant should be prepared to describe how it will ensure an 
appropriate level of public oversight and control, while also 
encouraging innovation and flexible, efficient procedures throughout 
the life of the project. The FHWA has no preconceived measures in mind. 
We are concerned about meeting quality standards, monitoring compliance 
with government-wide policies, contracting process requirements, and 
other stewardship responsibilities.
    (4) The FHWA is particularly interested in proposals that can 
successfully accomplish the goals mentioned above. The FHWA has 
considerable authority under SEP-15 to test new ideas and is prepared 
to grant considerable flexibility if it is clear that its stewardship 
responsibilities can be met.
    Applicants will be allowed maximum flexibility in determining their 
own procurement methods consistent with their State law but need to 
specify State requirements that cannot be waived.

Compliance with Environmental and Planning Laws

    SEP-15 applicants must still fully comply with all requirements of 
NEPA and other State and Federal environmental and planning laws and 
regulations. These requirements include all metropolitan and statewide 
planning provisions related to local consultation, public involvement, 
and project selection. Successful applicants, however, may be provided 
flexibility in the application of FHWA's project development and NEPA 
implementation requirements, so long as there is verifiable compliance 
of the statutory requirements and regulations promulgated by agencies 
other than FHWA. Examples of innovation in the environmental area might 
include the following.
    (1) The FHWA's design-build regulations (23 CFR Part 636) prohibit 
States from issuing a request for proposal (RFP) for a project prior to 
approval of the Record of Decision (ROD). This restriction would not 
necessarily apply under SEP-15. However, applicants will be responsible 
for demonstrating that any changes to the traditional timing of actions 
within the NEPA project development process and contracting for 
professional services, design and/or construction, will not influence 
the NEPA analysis. SEP-15 is not a blanket waiver of basic NEPA process 
requirements found in the Council on Environmental Quality (CEQ) 
Regulations (40 CFR Parts 1500-1508) or FHWA's Environmental Regulation 
(23 CFR Part 771). Applicants must also understand the risk of taking 
advantage of this flexibility. If more than preliminary design is 
performed for a specific alternative prior to the ROD or final NEPA 
document, that work may be lost if another specific alternative is 
chosen in the ROD. Under no circumstances may construction begin prior 
to completion of the NEPA process.
    (2) Under current law, a successful applicant may allow a 
contractor to conduct environmental analysis and prepare NEPA 
documents. However, the State Department of Transportation (State DOT) 
in cooperation with FHWA must provide direction and oversight during 
the NEPA process and development of NEPA documents. In all cases, the 
State DOT in cooperation with FHWA will be responsible for 
demonstrating that NEPA documents are objective by carefully reviewing 
the document with in-house experts or consultant advisors hired by the 
State DOT. For SEP-15 projects, FHWA will maintain its role as the lead 
Federal agency and will independently review and evaluate the NEPA 
documents prior to taking an approval action.
    (3) Proposals that are very large in scope or slated to be built 
over a long time period might benefit from a tiered environmental 
process. While such tiering has always been allowed, transportation 
agencies have not made extensive use of tiered environmental analyses.
    (4) The scope and nature of some of the proposals present 
particular challenges for public involvement and interagency 
coordination and consultation. Applicants are encouraged to identify 
innovative ways to include the public and other agencies in various 
phases of planning and project development.
    Improved coordination with resource agencies is a key element of 
the environmental streamlining provisions of TEA-21. These provisions 
also have been enhanced by Executive Order 13274, Environmental 
Stewardship and Transportation Infrastructure Project Reviews.\2\ 
Proposals that take advantage of these provisions in a creative manner 
could be particularly useful.
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    \2\ E.O. 13274, Environmental Stewardship and Transportation 
Infrastructure Project Reviews, issued on September 18, 2002, 
emphasizes the importance of expedited transportation project 
delivery while being good stewards of the environment.
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Right-of-Way Acquisition

    Early acquisition of right-of-way, in spite of some risk, is a 
particularly useful tool to preserve transportation corridors from 
conflicting land uses. Also, early acquisition could influence land 
uses adjoining the potential corridor in a manner that is consistent 
with the ultimate transportation project and may even be appropriate to 
preserve the possibility of identified joint development initiatives. 
Thus, FHWA anticipates that timely land acquisition, or other land use 
control methods, could well be a part of a SEP-15 proposal.
    Existing law provides project sponsors with an array of options to 
acquire right-of-way using both Federal and non-Federal funds. SEP-15 
adds to that flexibility. For example, FHWA regulations currently 
discourage the award of a construction contract prior to acquisition of 
all necessary rights-of-way (ROW) (23 CFR 635.309). Environmentally 
neutral proposals that assure that landowners and tenants are receiving 
fair compensation, relocation assistance, and benefits guaranteed by 
the Uniform Relocation Assistance and Real Property Acquisitions 
Policies Act of 1970 (42 U.S.C. 4601 et seq.) could be eligible for 
modification of the ROW certification requirements, similar to the ROW 
phasing procedures under current design-build regulations.

Project Finance

    Project financing for SEP-15 projects will likely come from a mix 
of Federal, State, local, and/or private funds. Building on the TE-045 
initiative, SEP-15 will focus on financing innovations specifically 
associated with public-private partnerships. Existing Federal law 
already has a number of provisions that encompass a considerable range 
of financial arrangements.
    The Transportation Infrastructure Finance and Innovative Act 
(TIFIA) program, (http://tifia.fhwa.dot.gov/), which facilitates a 
range of financing approaches, will continue to be a key element in 
FHWA's efforts to encourage

[[Page 59986]]

the formation of public-private partnerships. This program is designed 
specifically to encourage greater leveraging of public transportation 
funds and attract private investment to transportation projects by 
providing credit assistance in the form of direct loans, loan 
guarantees, and standby lines of credit.
    Little use has been made of the loan authority provided by 23 
U.S.C. 129(a)(7). The FHWA welcomes proposals to use this ``129(a)(7)'' 
authority, which allows highway apportionments to be used for low cost 
loans to projects with dedicated revenue sources, as part of a three-
way financing partnership between the State, the private venture 
partner, and the FHWA. By coupling ``129(a)(7) authority'' with TIFIA, 
tax-exempt bond financing, and Federal-aid grant funding as an 
integrated financing package, FHWA believes that this kind of 
partnership will serve as a catalyst for moving public-private 
partnerships quickly from concept to construction. When the State makes 
a 129(a)(7) loan to an eligible public or private entity, the State 
receives reimbursement from FHWA and is repaid the loan amount plus 
applicable interest by the borrower, which the State may then use for 
any eligible title 23 U.S.C. purpose; thus, assisting the State to 
establish a revolving loan fund for future projects.
    The FHWA will devote the internal resources necessary to evaluate 
the financing package, offer alternative financing solutions, and 
establish financial feasibility in order to move the project from 
concept to commitment of Federal funds (where applicable) and 
construction.

Joint Development Agreements

    In addition to the transportation project itself, significant 
benefit and revenue potential may be realized from joint use of the 
transportation facility. Thus, the ROW may be used both for 
transportation purposes and other uses that are compatible with the 
transportation use, such as airspace development. Even joint use of the 
airspace of Interstate and other limited access highways is favored, so 
long as the transportation purpose is not impaired. States are 
encouraged to enter into joint development agreements with private 
parties by current Federal law, 23 U.S.C. 156. Under this provision, if 
FHWA participates in the cost of acquiring real property needed for a 
proposed project, there are specific requirements that apply to the 
sale or lease of the real property acquired with Federal funds (such as 
air rights). These requirements may include such things as ensuring 
that the amount realized by sale or lease represents the fair market 
value of the interest at issue. The net realized must be dedicated to 
transportation purposes. Waivers of the requirement to charge the fair 
market value are available in limited circumstances.

Application Process

    A State DOT should submit SEP-15 proposals to the appropriate FHWA 
Division Office. Proposals may include localities and private 
transportation ventures as project sponsors. SEP-15 applications should 
provide a brief description of the project, including the innovative 
techniques proposed and the expected value of those techniques.
    Upon the completion of major milestones, the public-private 
sponsors will be responsible for submitting an independently prepared 
report that summarizes lessons learned from the SEP-15 process. These 
reports shall include the experiment undertaken, the lessons learned, 
evaluate the success of the process and its impact on the project, and 
recommend statutory and regulatory changes with an explanation of how 
the changes will improve the delivery of the Federal-aid highway 
program.

Conclusion

    The Secretary has identified public-private partnerships as being 
an important element of the Department's ability to reduce congestion 
and maintain the highway system. To this end, SEP-15 is designed to 
encourage a broad range of innovations in project planning, project 
development, finance, design, construction, maintenance, and 
operations. This notice outlines some areas in which States may 
experiment and innovate in order to help provide some framework for 
experimentation. Project proponents applying under SEP-15, however, are 
encouraged to propose innovations in all areas of title 23, U.S.C.

(Authority: 23 U.S.C. 315 and 502).

    Issued on: September 23, 2004.
Mary E. Peters,
Federal Highway Administrator.
[FR Doc. 04-21975 Filed 10-5-04; 8:45 am]
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