Surface Transportation: Prospects for Innovation Through Research,
Intelligent Transportation Systems, State Infrastructure Banks, and
Design-Build Contracting (Testimony, 03/06/97, GAO/T-RCED-97-83).

GAO discussed how innovation in federal research, financing and
contracting methods has the potential for improving the performance of
the nation's surface transportation system, focusing on three reports it
completed for the Senate Committee on Environment and Public Works'
deliberations on the reauthorization of the Intermodal Surface
Transportation Efficiency Act (ISTEA).

GAO noted that: (1) investments in surface transportation research have
provided benefits to users and the economy; (2) the Department of
Transportation (DOT) has a critical role to play by funding research,
establishing an overall research mission with objectives for
accomplishment and priorities for allocating funds, and acting as a
focal point for technology transfer; (3) DOT's organizational structure
and lack of both a strategic plan and a departmental focal point may
limit its impact on research; (4) until these issues are addressed, DOT
may not be able to respond to ISTEA's call for an integrated framework
for surface transportation research; (5) DOT's Intelligent
Transportation System (ITS) Program has received $1.3 billion to advance
the use of computer and telecommunications technology that will enhance
the safety and efficiency of surface transportation; (6) although the
program envisioned widespread deployment of integrated multimodal ITS
systems, this vision has not been realized for several reasons: (a) the
ITS national architecture was not completed until July 1996 and ITS
technical standards will not be completed until 2001; and (b) the lack
of knowledge of ITS technologies and systems integration among state and
local officials, insufficient data documenting the cost effectiveness of
ITS in solving transportation problems and competing priorities for
limited transportation dollars will further constrain widespread ITS
deployment; (7) before DOT can aggressively pursue widespread deployment
of integrated ITS, it must help state and local official overcome these
obstacles; (8) State Infrastructure Banks (SIBs) offer the promise of
helping to close the gap between transportation needs and available
resources by sustaining and potentially expanding a fixed sum of federal
capital, often by attracting private investment; (9) specifically, these
banks provide states increased flexibility to offer may types of
financial assistance; (10) some state officials and industry experts
that GAO talked with remain skeptical that SIBs will produce the
expected benefits; (11) the Federal Highway Administration (FHwA) is
testing and evaluating the use of an innovative design-build contracting
method for highway construction; (12) proponents of design-build see
several advantages to the approach; however, FHwA's authority to
implement design-build is limited and 17 states have laws which, in eff*

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-97-83
     TITLE:  Surface Transportation: Prospects for Innovation Through 
             Research, Intelligent Transportation Systems, State
             Infrastructure Banks, and Design-Build Contracting
      DATE:  03/06/97
   SUBJECT:  Ground transportation operations
             Road construction
             Public roads or highways
             Federal aid for highways
             Transportation safety
             Transportation research
             Federal/state relations
             Highway planning
IDENTIFIER:  DOT Intelligent Transportation System Program
             DOT State Infrastructure Bank Pilot Program
             FHwA Emergency Relief Program
             
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Cover
================================================================ COVER


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

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

SURFACE TRANSPORTATION - PROSPECTS
FOR INNOVATION THROUGH RESEARCH,
INTELLIGENT TRANSPORTATION
SYSTEMS, STATE INFRASTRUCTURE
BANKS, AND DESIGN-BUILD
CONTRACTING

Statement of Phyllis F.  Scheinberg,
Associate Director, Transportation Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-97-83

GAO/RCED-97-83T


(342936)


Abbreviations
=============================================================== ABBREV

  DOT -
  ISTEA -
  ITS -
  SIBs -
  FHWA -
  RSPA -
  BART -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

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

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

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

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

Our ongoing work has found that

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


--------------------
\1 Surface Transportation:  Research Funding, Federal Role, and
Emerging Issues (GAO/RCED-96-233, Sept.  6, 1996), Urban
Transportation:  Challenges to Widespread Deployment of ITS
Technologies (GAO/RCED-97-74, Feb.  27, 1997), State Infrastructure
Banks:  A Mechanism to Expand Federal Transportation Financing
(GAO/RCED-97-9, Oct.  31, 1996). 


   DOT'S LEADERSHIP ROLE IN
   SURFACE TRANSPORTATION RESEARCH
---------------------------------------------------------- Chapter 0:1

ISTEA expressed the need for a new direction in surface
transportation research, finding that despite an annual federal
expenditure of more than $10 billion on surface transportation and
its infrastructure, the federal government lacked a clear vision of
the role of federally funded surface transportation research and an
integrated framework for the fragmented surface transportation
research programs dispersed throughout the government.  The act
recognized the federal government as a critical sponsor and
coordinator of new technologies that would provide safer, more
convenient, and more affordable future transportation systems. 

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

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

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

Finally, the Department does not have an integrated framework for
surface transportation research.  The three research plans that the
Department has submitted to the Congress since 1993 are useful
inventories of the five modal agencies' research activities. 
However, the plans cannot be used, as ISTEA directed, to make surface
transportation research more strategic, integrated, and focused. 
Until all these issues are addressed, the Department may not be able
to respond to ISTEA's call for an integrated framework for surface
transportation research and assume a leadership role in surface
research. 


   ITS PROGRAM HOLDS POTENTIAL FOR
   INNOVATION IF DEPLOYMENT
   OBSTACLES CAN BE RESOLVED
---------------------------------------------------------- Chapter 0:2

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

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

Although urban areas are deploying individual ITS components, we
found that states and localities are not integrating the various ITS
components so that they work together and thereby maximize the
overall efficiency of the entire transportation system.  For example,
transportation officials in the Washington, D.C., area said that
local jurisdictions have installed electronic toll collection,
traveler information, and highway surveillance systems without
integrating the components into a multimodal system.  This lack of
systems integration is due in part to the fact that ITS is a
relatively new program that is still evolving and has yet to fully
implement some fundamental program components such as the national
architecture and technical standards.  The national architecture,
which identifies the components and functions of an ITS system, was
completed in July 1996.  In addition, a five year effort to develop
technical standards--which specify how system components will
communicate--is planned for completion in 2001. 

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

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

Deliberations on the future funding for the ITS program should
include an assessment of the current obstacles facing the program. 
First, the system architecture is relatively new, and state and local
officials have limited knowledge of its importance.  Second, it will
take time for state and local transportation officials to understand
the architecture and supplement their traditional approach to solving
transportation problems through civil engineering strategies with the
information management and telecommunications focus envisioned by an
integrated ITS approach.  In addition, widespread integrated
deployment cannot occur without the technical standards that DOT
proposes to complete over the next 5 years. 


   INNOVATIVE FINANCING THROUGH
   STATE INFRASTRUCTURE BANKS
---------------------------------------------------------- Chapter 0:3

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

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

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

  -- A $713 million project in Orange County, California, that
     includes construction of a 24-mile tollway.  SIB assistance in
     the form of a $25 million line of credit may be used for this
     project to replace an existing contingency fund.  If accessed,
     the plan is that the line of credit would be repaid through
     excess toll revenues. 

  -- A $240 million project in Orlando, Florida, will involve
     construction of a 6 mile-segment to complete a 56-mile beltway. 
     A SIB project loan in the amount of $20 million is being
     considered, and loan repayment would come from a mix of project
     and systemwide toll receipts and state transportation funds. 

  -- In Myrtle Beach, South Carolina, a SIB loan is being considered
     to help with the construction of a $15 million new bridge to
     Fantasy Harbor.  The source for repayment of the loan would be
     proceeds from an admission tax at the Fantasy Harbor
     entertainment complex. 

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

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

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

Some states expressed uncertainty regarding their legal or
constitutional authority to establish a SIB in their state or use
some financing options that would involve the private sector. 
Michigan, for instance, said that it does not currently have the
constitutional authority to lend money to the private sector. 

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

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


   INNOVATIVE PRACTICES USING
   DESIGN-BUILD CONTRACTING
---------------------------------------------------------- Chapter 0:4

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

Proponents of design-build have identified several benefits.  First,
the highway agency can hold one contractor, rather than two or more,
accountable for the quality and costs of the project.  This compares
to the traditional approach where problems with the project resulted
in disputes between the design and construction firms.  Second, by
working together from the beginning, the designer and builder would
have a firmer understanding of the project costs and could thereby
reduce costs by incorporating value engineering savings\2 into the
design.  Finally, design-build proponents state the approach will
reduce administrative burden and expenses because fewer contracts
would be needed. 

State interest in the design-build contracting approach is rising. 
According to FHWA, as of January 1997, 13 states have initiated at
least 50 design-build projects under the agency's special program. 
The size of state projects varies considerably, from bridge projects
costing a few million dollars to the $1.4 billion reconstruction of
I-15 in Utah.  While states are becoming more receptive to
design-build contracting, FHWA still considers the approach
experimental, and an overall assessment of the broad benefits, costs,
and applicability of design-build remains limited by the small number
of completed projects. 

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

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

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

Design-build contracting, while becoming increasingly common in the
private sector for facilities such as industrial plants and
refineries, does not yet have an established track record in
transportation in the United States.  However, the experiences now
being gained through the 50 projects under FHWA's special project,
along with four Federal Transit Administration funded demonstration
projects, may provide sufficient evidence of the efficacy of
design-build.  Early experience suggests that in instances when time
is at a premium, and project revenue sources quickly cover
construction costs, design-build may provide a good fit with project
requirements.  One area where these opportunities may exist is FHWA's
Emergency Relief Program, which places emphasis on the quick
reconstruction of damaged facilities. 


--------------------
\2 Value engineering is the formal technique by which contractors or
independent teams identify methods for constructing projects more
economically. 


-------------------------------------------------------- Chapter 0:4.1

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


*** End of document. ***