[Federal Register Volume 79, Number 175 (Wednesday, September 10, 2014)]
[Notices]
[Pages 53825-53834]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-21049]


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DEPARTMENT OF TRANSPORTATION

Federal Highway Administration

[Docket No. FHWA-2014-0006]


Final Core Toll Concessions Public-Private Partnership Model 
Contract Guide

AGENCY: Federal Highway Administration (FHWA), Department of 
Transportation (DOT).

ACTION: Notice.

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SUMMARY: The Moving Ahead for Progress in the 21st Century Act (MAP-21) 
requires DOT and FHWA to develop public-private partnership (P3) 
transaction model contracts for the most popular type of P3s for 
transportation projects. Based on public input favoring an educational, 
rather than prescriptive,

[[Page 53826]]

contract model, on February 6, 2014, FHWA published a draft of the Core 
Toll Concession Model Contract Guide (Guide) (Docket No. FHWA-2014-
0006), requesting comments by March 10, 2014. The FHWA received a total 
of 133 public comments regarding different aspects of the Guide and of 
P3s in general. With this notice, FHWA publishes a revised Guide 
reflecting these comments. In coming months, FHWA will publish 
additional draft guides for public comment: An Addendum to the Core 
Toll Concession Model Contract Guide that will address additional 
contract provisions, and an Availability Payment Concession Model 
Contract Guide that will cover this popular type of P3 arrangement.
    The revised Core Toll Concession Model Contract Guide can be found 
on the Docket (FHWA-2014-0006) and at the following link: http://www.fhwa.dot.gov/ipd/pdfs/p3/model_p3_core_toll_concessions.pdf.

FOR FURTHER INFORMATION CONTACT: Mark Sullivan, Office of Innovative 
Program Delivery, 202-366-5785, mark.sullivan@dot.gov, Federal Highway 
Administration, 1200 New Jersey Avenue SE., Washington DC 20590; Alla 
Shaw, Office of the Chief Counsel, 202-366-1042, alla.shaw@dot.gov, 
Federal Highway Administration, 1200 New Jersey Avenue SE., Washington 
DC 20590; or Prabhat Diksit, 720-963-3202, prabhat.diksit@dot.gov, 
12300 W. Dakota Avenue, Suite 370, Lakewood, CO 80228.

Comments Received and Addressed Regarding the Guide

    On February 6, 2014, FHWA published a draft of the Model P3 Core 
Toll Concession Contract Guide (Docket No. FHWA-2014-0006). The draft 
requested comments on each of the substantive topics discussed in the 
Guide. The FHWA received a total of 133 comments from multiple 
stakeholders regarding different aspects of the Guide and in varying 
degrees of detail. In particular, FHWA received 60 comments from the 
Texas Department of Transportation (TxDOT), 13 comments from Ernst & 
Young Infrastructure Advisors (Ernst & Young), 10 comments from 
Professional Engineers in California Government (PECG), 9 comments from 
the Drive Sunshine Institute, 6 comments from the Associated General 
Contractors of America, 5 comments from the Commonwealth of Virginia, 5 
comments from the American Road & Transportation Builders Association 
(ARTBA), and 25 comments from private citizens.
    A minority of comments addressed the desirability of P3s as a 
matter of public policy, while the majority of comments focused on the 
terms of the concession agreement described by the Guide (including 
terms relating to tolling regulation, benefit sharing, supervening 
events, changes in equity interest, changes in law, defaults, early 
termination, and handback) without commenting on the desirability of 
P3s generally.
    The FHWA considered all of the comments it received on the Guide 
and revised the relevant sections of the Guide as described below. In 
addition, FHWA made clarifying revisions to certain sections of the 
Guide as noted below.

Response to Comments

    Note:  The comments below, as does the Guide itself, often refer 
to the ``Department''--the public authority granting rights via a 
concession agreement. In all cases, this entity should be understood 
to be a State or local transportation agency, not the United States 
Department of Transportation.

Chapter 1: Introduction

    1. The TxDOT commented that the concept of ``demand risk'' 
described in Section 1.1 of the Guide should be expanded to include 
toll collection risk; the term ``revenue risk'' captures both demand 
and toll collection risk.
    The FHWA agreed with TxDOT's comment and has revised Section 1.1 
accordingly.

Chapter 2: Tolling Regulation

    2. The comments received on the Guide's review of tolling 
regulation generally related to the setting of tolls, the 
administration of toll collection, and the use of toll revenues in the 
context of a concession agreement.
    The TxDOT commented that the Guide should more clearly explain that 
changes in User Classifications have potentially significant public 
policy implications and therefore the Department often retains broad 
discretion whether to approve changes. The TxDOT also commented that 
the Guide should note that changes in User Classifications requested by 
a Developer can also affect future toll revenues and that toll 
concession agreements may contain provisions for adjusting the 
Department's revenue sharing if the change is projected to increase the 
Developer's revenues.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    3. Ernst & Young commented that the Guide should consider the 
amount by which tolls can be raised in a given year, particularly where 
the maximum allowable toll increase has not been made in prior years, 
and should include a discussion of the costs and benefits of a tolling 
strategy which maximizes revenue versus throughput.
    The FHWA agreed with Ernst & Young's comments and has revised the 
Guide accordingly.
    4. The TxDOT suggested that Footnote 1 of the Guide be deleted. The 
TxDOT disagreed with FHWA's suggestion in Footnote 1 that toll 
concession agreements for projects with an element of public financing 
might include provisions to allow lender rate covenants to control, 
such that toll rates may exceed the maximum toll rates specified in the 
toll concession agreement. The TxDOT noted that Footnote 1 cites 
Private Activity Bonds (PAB) as the type of financing where this may be 
appropriate but, according to TxDOT, including lender rate covenants on 
such terms is not accepted practice for PABs financings, which are 
public financings only in the sense that a public entity serves as a 
conduit issuer for the benefit of a private Developer, and the Guide is 
directed at toll concessions with private concessionaires. Such 
provisions, TxDOT suggested, can undermine essential public policy that 
supports the toll rate regulation decisions of the State or local 
government, and could be abused in order to elevate private profit.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    5. The TxDOT additionally commented that the contract language set 
forth in the Guide's section on Tolling Regulation misleads the reader 
to think that giving the Developer sole discretion in setting and 
changing toll rates is the norm. The TxDOT noted that, in its 
experience, such discretion is the exception and not the norm. 
Accordingly, TxDOT suggested that the Guide include sample contract 
language that establishes maximum toll rates and terms for how the 
maximum may change over time.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    6. The TxDOT commented that, in certain instances, a regional 
tolling authority provides toll collection and administration rather 
than the Department because the regional authority may have a statutory 
right and obligation to provide tolling services for all tolled 
facilities. The TxDOT suggested that the Guide should

[[Page 53827]]

therefore mention this potential circumstance and that the Guide should 
call for working out the terms of a tolling services agreement with 
such a tolling authority before proposal submission so that proposers 
know what pricing, terms and conditions to expect.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    7. The TxDOT suggested deleting the statement that the agreement 
with the tolling authority is ``typically known as a `Toll Enforcement 
and Violation Processing Services Agreement'.'' The TxDOT felt that the 
statement is not necessary and the term is not used across all 
jurisdictions. The TxDOT additionally suggested that the section also 
should state that such an agreement may be with the Department or may 
be directly with a regional tolling authority.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    8. The TxDOT commented that FHWA should revise the sample contract 
provision which implies that it is the Department that has the primary 
responsibility to coordinate with law enforcement agencies to bring to 
bear toll enforcement services. The TxDOT noted that, while toll 
concession agreements often provide for Department assistance to the 
Developer in arranging such law enforcement, they commonly state that 
the Developer is primarily responsible for coordinating with law 
enforcement agencies for toll enforcement.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    9. The ARTBA commented that the Guide should include additional 
discussion about issues surrounding the collection and enforcement of 
tolls, including the authority, responsibility and tools available to 
the Department and Developer in the collection and enforcement of 
tolls.
    In response, FHWA notes that the Guide does address possible 
approaches in a general manner in Section 2.5.2. However, given that 
the rights and responsibilities of the Developer to enforce toll 
collection is highly dependent on applicable State and local laws, it 
is difficult to comment in great detail outside the context of a 
particular project and a particular State, and such discussion is 
outside the scope of the Guide.
    10. The TxDOT and Ernst & Young provided related comments on the 
Guide's statement that ``it is common for the uses of Toll Revenues in 
the Concession Agreement and flow of funds in Financing Documents to 
mirror each other.'' They suggested that the Guide overstates typical 
flow of funds provisions in toll concession agreements. They further 
commented that toll concession agreements tend to require first 
priority use for paying operating and maintenance expenses (including 
sums owing the Department) and lowest priority use for distributions to 
equity (after all other project costs are covered), but otherwise leave 
it to the lenders and Developer to determine the full order of priority 
for use of Toll Revenues. The TxDOT and Ernst & Young commented that 
the text should be revised accordingly.
    The FHWA agreed with these comments from TxDOT and Ernst & Young 
and has revised the Guide accordingly.
    11. The PECG commented that the Guide should include language 
requiring the Developer to use Toll Revenue to meet payment obligations 
to the Department, operating and maintenance expenses, taxes, debt 
service, and other costs, before making payments to equity.
    Section 2.6 of the Guide includes these payment obligations in its 
discussion of provisions designed to prevent the Developer from 
diverting Toll Revenues for unauthorized purposes. The FHWA revised the 
Guide to note that a Department may prescribe a list of authorized uses 
of Toll Revenues, but recognizes that some Concession Agreements may 
leave the decision regarding the full order of priority of payment 
obligations to the Lenders and the Developer.
    12. The PECG provided the following comment: The Guide should give 
the Department the right to suspend tolling in case of an emergency or 
for any other purpose, and the Developer should not be entitled to lost 
toll revenue due to such action by the Department.
    The FHWA appreciates that Concession Agreements will often include 
provisions to this effect, and such provisions are expressly described 
in Section 2.7.1 of the Guide.
    13. The PECG commented that the Guide should not provide the 
Developer with an entitlement to lost revenue if access to the project 
is impeded for a beneficial public purpose.
    The FHWA notes that the Developer's right to compensation is 
limited to those matters defined as Compensation Events. The extent to 
which a Concession Agreement may provide a Compensation Event under 
these circumstances would typically be determined by the facts and 
circumstances relevant to the particular project, and to the extent 
that the Department is obliged to undertake certain obligations with 
respect to the Project (e.g. providing ongoing access) and does not, 
such a failure constitutes a Compensation Event. The FHWA does not 
believe a change to the Guide is necessary.
    14. The PECG commented that the Guide should not provide the 
Developer with an entitlement to lost revenue if toll collection is 
temporarily suspended to benefit or safeguard the public.
    The FHWA appreciates that Concession Agreements will often include 
provisions to this effect, and such provisions are expressly described 
in Section 2.7.1 of the Guide.
    15. The FHWA determined that it would be beneficial to users of the 
Guide to include a table setting forth toll rate restrictions and has 
included such table in Section 2.4.

Chapter 3: Benefit Sharing

    The comments received on the Guide's review of benefit sharing 
generally related to requests to include a broader discussion on gross 
revenue-based sharing mechanisms and other types of benefit sharing in 
a refinancing context.
    16. The TxDOT and Ernst & Young provided similar comments to the 
effect that the Guide should avoid prescribing one approach over 
another in relation to triggers for revenue sharing. Instead, they 
suggested that FHWA should consider including discussion of gross 
revenue-based sharing triggered by absolute revenues in addition to 
revenue sharing triggered by actual equity IRR. They also commented 
that the Guide should include a discussion of the challenges associated 
with using actual equity internal rate of return (IRR) as a trigger and 
guidance on how to manage toll concession windfalls.
    The FHWA agreed with these comments from TxDOT and Ernst & Young 
and has revised the Guide accordingly.
    17. Ernst & Young commented that FHWA should clearly highlight that 
in a properly structured P3 procurement, both equity and lenders are at 
risk and the public benefits from this fact. Ernst & Young also 
suggested that (a) FHWA consider whether the Guide should require 
lenders to share in refinancing gains, and (b) the discussion of 
sharing refinancing gains in the Guide should differentiate between 
gains from refinancing based on higher than expected or proven traffic 
versus market movement in interest rates.
    This change was not incorporated as it was determined that this 
issue was

[[Page 53828]]

already addressed by the Guide as a whole.
    18. In Section 3.2.2, FHWA included a table setting forth bands and 
revenue payment percentages.
    19. In Section 3.2.2, FHWA clarified the concept of ``deferred 
amounts.''
    20. In the Glossary, FHWA added a definition for the term ``caps 
and floors.''

Chapter 4: Supervening Events

    The comments received on the Guide's review of Supervening Events 
generally related to the scope of various types of Supervening Events, 
the considerations and rationale driving the allocation of risk under a 
Supervening Events regime, the compensation to be paid to the Developer 
in respect of a Supervening Event, and certain public policy concerns 
in respect to Supervening Events.
    21. The TxDOT suggested that FHWA clarify that some Delay Events 
are also Compensation Events, and may affect both the cost and the 
schedule of a project. They further suggested that Sections 4.1 and 
4.3.3 should mention that Delay Events may allow a Developer to extend 
contractual deadlines and may provide a Developer with relief from the 
assessment of performance points or noncompliance points.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    22. The TxDOT suggested that the term Compensation Event should be 
expanded to include events that deliver value for money by allocating 
risk to the Department.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    23. The TxDOT commented that the sample definition of the term 
Compensation Event should include certain additional events, including: 
Department-caused delay; Department-ordered suspension of tolling; 
Department releases of hazardous materials; unreasonable, unjustified 
delay by permitting agencies in issuing key permits; utility owner 
delay; and differing site conditions.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    24. Ernst & Young commented that Departments should be mindful that 
there is a distinction between the cost of delays and lost revenue. 
They suggested that, with respect to lost revenue, the calculation 
options presented in the Guide should also contemplate the possibility 
of paying pre-determined, liquidated damages amounts, avoiding the need 
to re-open the financial model.
    The FHWA acknowledges the distinction between delay costs and lost 
revenue. The proposed approach to calculating lost revenue is one that 
Departments may choose to consider after consultation with their 
financial advisors, but it has not been adopted in the U.S. to date and 
therefore has not been incorporated into the Guide. A change to the 
Guide is not necessary to address this comment.
    25. The TxDOT suggested that the Guide reflect the fact that a toll 
concession agreement may include provisions which adjust compensation 
under the agreement based on the development of revenue-enhancing 
facilities which were not planned at the time the agreement was 
executed.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    26. Ernst & Young highlighted the importance of the Competing 
Facilities provisions, and noted that these merit significant policy 
consideration by a Department.
    The FHWA agrees that these clauses should be carefully considered 
in light of the important public policy issues they raise and the Guide 
recommends that Departments do so in light of the facts and 
circumstances relevant to each individual project. A change to the 
Guide is not necessary to address this comment.
    27. The PECG suggested that the Guide should not include a ``non-
compete'' clause.
    The FHWA acknowledges the important public policy issues raised by 
competing facilities clauses, and Section 4.3.2 of the Guide describes 
some of the reasons why Departments have chosen to include them in 
contracts for P3 projects. A change to the Guide is not necessary to 
address this comment.
    28. The PECG suggested that a Department should not be required to 
pay the Developer if another government agency not within the 
Department's control engages a private entity to develop a project that 
affects demand for the Department's project.
    The FHWA acknowledges the intra-governmental issues which may arise 
as a result of such provisions, and notes that Section 4.3.2 of the 
Guide suggests these risks be addressed by providing protection to the 
extent the Department has discretionary authority over facilities 
constructed by other governmental entities. Each project will present 
unique challenges in this regard, however. A change to the Guide is not 
necessary to address this comment.
    29. The TxDOT commented that while the Guide states that 
Departments are likely to achieve optimal risk transfer regarding 
geotechnical, hazardous substance, utility, and endangered species 
risks by providing Compensation Event relief for unknown matters, this 
allocation varies considerably from project to project, and will depend 
upon particular project characteristics, the magnitude of the risk 
presented on the particular project, the degree of competition, and 
other factors. The TxDOT suggested that the Guide should indicate that 
optimal risk allocation for these risks depends on the attributes of 
each project and procurement.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    30. The TxDOT commented that while the text regarding Force Majeure 
Event termination in the Guide states that providing a termination 
right for extended Delay Events other than Force Majeure Events is 
contrary to international best practice, it is common U.S. practice to 
include specified Delay Events in addition to Force Majeure Events in 
the determination of extended delay triggering a right to terminate. 
The TxDOT stated that the principle supporting such termination is that 
exigencies outside the control of the parties have conspired to 
frustrate the fundamental purpose of the transaction. Certain Delay 
Events in addition to Force Majeure Events fit within this principle 
and therefore should be validated in the text as well as the sample 
contract language.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    31. The TxDOT commented that the Guide should acknowledge that in 
relation to a Force Majeure or Delay Event, a contract may trigger 
termination rights based on a cumulative number of non-consecutive days 
of delay as an alternative to a specified number of consecutive days of 
delay.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    32. The TxDOT commented that the application of the ``no better and 
no worse'' principle is an oversimplification of the Supervening Events 
regime and FHWA should provide greater clarity regarding the 
application of this concept.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    33. The PECG suggested that the Guide should explicitly transfer 
all

[[Page 53829]]

Force Majeure Event risk to the Developer, to avoid the potential costs 
associated with Force Majeure Events being borne by a Department.
    This comment reflects a misunderstanding of the economic impact of 
transferring certain risks and the rationale for P3 procurements. 
Departments will not receive value for money if all risk of Force 
Majeure Events is transferred to the Developer given the tools 
available to Developers to mitigate the effects of such risks and the 
contingencies they would have to price if asked to take such risks. As 
Departments are familiar with this risk on non-P3 projects, value for 
money is typically optimized by retaining the financial risk associated 
with Force Majeure Events. A change to the Guide is not necessary to 
address this comment.
    34. A private citizen expressed concern about the allocation of 
costs associated with earthquake damage to P3 projects.
    The consequences of Force Majeure Events such as earthquakes are 
allocated pursuant to the Delay Event regime. The Developer will be 
given additional time to complete the work, but not compensation to pay 
the cost of repairing the loss as such costs can be insured against. 
This is described in Section 4.3.3 of the Guide.
    35. The TxDOT commented that FHWA should expand its discussion of 
deductibles to highlight the differences between ``aggregate'' and 
``per occurrence'' deductibles, and to provide information on the 
details, advantages and disadvantages of both. In addition, TxDOT 
commented that the Guide should state that deductibles usually do not 
apply to Compensation Events which are caused by or within the control 
of the Department.
    The FHWA acknowledges that deductibles may be applied to 
Supervening Events in some Concession Agreements, and has revised the 
Guide to include a general discussion of deductibles. However, FHWA 
thinks that the value provided to the Department from including 
deductibles can be overstated except in certain unique circumstances 
(such as where a Compensation Event is susceptible to numerous de 
minimis claims). As Departments should look to their advisors on a 
case-by-case basis for advice on when this is appropriate, FHWA 
believes that a more detailed discussion than the one provided is not 
necessary to be included in the Guide.
    36. The TxDOT suggested that the Guide mention that market 
participants may elect to utilize an objective discount rate, such as 
the Developer's Equity IRR or weighted average cost of capital as 
indicated in the Base Case Financial Model, rather than calculating 
present value using an agreed risk adjusted discount rate.
    The FHWA acknowledges that there may be appropriate alternative 
means to discount the relevant sums and encourages Departments to seek 
advice from their financial advisors as to the appropriate method to 
use in a given circumstance.
    37. The TxDOT commented that FHWA should revise the model provision 
regarding a Developer's obligation to obtain additional debt or equity 
following a Compensation Event. The proposed revision would reflect 
certain precedents which condition compensation on the Developer's 
ability to meet debt coverage ratios and require the Developer to use 
``diligent efforts'' to obtain additional funds to cover the cost 
impacts of the Compensation Event.
    The FHWA acknowledges that there are transactions in the market 
that make reference to debt service coverage ratios; however, the 
ultimate standard in such documents is whether or not the Developer is 
able to raise funding (which will include factors broader than the 
ability of the Developer to meet ratio tests). In some jurisdictions 
the concept of ``diligent efforts'' is vague and may be read to suggest 
a level of effort that is synonymous with ``best efforts.'' This 
standard would not be in the interest of the Department or the 
Developer, as it is traditionally interpreted to require a party to 
spend additional funds and do all things possible, even if not 
reasonable, to achieve the desired outcome. The Department's 
compensation sum would have to be increased to pay for the impact of 
such potentially unreasonable actions, which would not represent value 
for money. A change to the Guide is not necessary to address this 
comment.
    38. The PECG commented that the list of events which constitute a 
Compensation Event should be limited to (i) a breach of the Concession 
Agreement by a Department, and (ii) the development or implementation 
of any change in the Work or technical requirements applicable to the 
Work that the Department has directed the Developer to perform pursuant 
to a Change Order or a directive letter pursuant to the Concession 
Agreement.
    The proposed changes to the definition of Compensation Event are 
inconsistent with the allocation of risks on the basis of value for 
money. A change to the Guide is not necessary to address this comment.
    39. Ernst & Young commented that FHWA should consider whether the 
Guide needs to include reference to the fragmentary network.
    The FHWA believes this is a useful touch-stone for Departments to 
see, as it is a method that is familiar to them in the context of 
design-build contracting. A change to the Guide is not necessary to 
address this comment.
    40. The TxDOT suggested that the discussion of toll concession 
agreements in the Guide should be expanded to include noncompliance 
events and points regimes, financial modeling, and the role of an 
independent engineer.
    Financial modeling is discussed in the Guide, and noncompliance 
points and the role of the independent engineer will be addressed in 
the addendum. A change to the Guide is not necessary to address this 
comment.
    41. The FHWA clarified the term ``fragmentary network'' as used in 
Section 4.4.2.

Chapter 5: Change in Equity Interests

    The comments received on the Guide's handling of changes in equity 
interests generally related to the extent to which the Department 
should prohibit a change in equity interests, the qualifications to 
consider for approving a new owner, and related terminology.
    42. The TxDOT commented that Section 5.1 should be revised to 
mention that, in addition to Developer experience with similar 
projects, a Department may value Developer experience which 
demonstrates ability to effectively manage all aspects of future work 
on a project.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    43. The TxDOT also commented that the Guide should acknowledge that 
(a) a change in control over an investor can have a significant effect 
on the management, staffing and funding of the investor and Developer, 
and (b) Department approval should be required for any changes in the 
vertical chain above the Developer. In addition, TxDOT noted that the 
concept of Change in Ownership should be changed to Change in Control 
to reflect the impact of voting rights and other forms of control that 
may not be strictly linked to ownership.
    The FHWA has revised the relevant footnote within the Guide to 
clarify that approval should be required for changes in the vertical 
chain between the entities that were evaluated and/or any parents of 
such entities that the Department considers important to the success of 
the project. However, FHWA disagrees that the term ``Change in 
Control'' better indicates the intent of these provisions than the term 
``Change

[[Page 53830]]

in Ownership'' since a change in ownership that does not affect a 
change in control may still have a material adverse effect on the 
Project, which these provisions are intended to prevent.
    44. The TxDOT commented that the standard for Department approval 
of a Change in Ownership should be narrowed in light of certain 
precedent which uses a standard that assesses whether a potential owner 
has the resources, qualifications and experience to perform the 
Developer's obligations, and no conflict of interest with the 
Department exists.
    In FHWA's view, the factors cited in this comment do not lead to a 
different result than the formulation described in the Guide, and in 
fact may restrict the Department's right to reject a change in 
ownership. While some Concession Agreements do cite these factors, the 
evaluation mechanism provided for in the Guide will require the 
Department to weigh all factors against one another, and the resulting 
determination will be substantially the same as asking whether the 
change will result in a material adverse effect. For these reasons, 
FHWA believes a change to the Guide is not necessary to address this 
comment.
    45. The TxDOT also commented that the definition of Related Entity 
should include all entities upstream from the Equity Investors.
    The FHWA has not made any changes in response to this comment 
because it is based on a misunderstanding of the entities that will 
constitute the Equity Investors.

Chapter 6: Change in Law

    The comments received on the Guide's review of the issues 
surrounding change in law generally related to associated risk 
allocation and the scope of relevant terminology and contract language.
    46. The TxDOT commented that the Guide should not emphasize 
foreseeability as a consideration in risk allocation in relation to a 
Change in Law, and instead should focus on value for money as the most 
relevant consideration in allocating risk in relation to a Change in 
Law.
    In FHWA's view, the concept of foreseeability is not intended to go 
beyond changes in law that were foreseeable at the bid date based on 
draft legislation and bills. It is not intended to suggest that because 
changes in a particular category of law are inevitable at some point, 
they are foreseeable. The FHWA has revised the Guide to clarify this 
point.
    47. The TxDOT further commented that the definition of Law should 
not include permits to avoid conflation with the definition of 
Governmental Approvals and, therefore, the definition of Law should be 
revised to provide greater specificity to the concept.
    The FHWA has incorporated this comment into the Guide. Some 
Concession Agreements may treat changes in permits similarly to changes 
in law generally, though this will depend on the nature of the required 
permits and the jurisdiction of various Governmental Authorities in the 
context of each individual project. As a result, the reference to 
permits is bracketed in the example provision.
    48. The PECG commented that the Guide should protect the Department 
from financial claims by a Developer adversely affected by a Change in 
Law promulgated by a legislature, which is not within the Department's 
control.
    In FHWA's view, the allocation of risk associated with changes in 
law is reflective of the relative ability of each of the parties to 
absorb the risks associated with changes and to mitigate against their 
respective effects. A change to the Guide is not necessary to address 
this comment.

Chapter 7: Defaults, Early Termination and Compensation

    The comments received on the Guide's review of defaults, early 
termination, and related compensation generally related to the scope 
and nature of defaults covered by a Concession Agreement, the remedies 
exercisable by the parties following a default, the cure periods in 
respect of defaults, and the mechanisms for calculating (and valuing 
the components comprising) termination compensation.
    49. The TxDOT suggested that the Guide include provisions which 
allow for termination due to (i) the failure or inability of the 
Developer to achieve financial close, with the measure of compensation 
depending on whether the failure is excused or not excused, and (ii) an 
adverse court ruling which prevents the Developer from continuing 
performance, with a measure of compensation similar to the one provided 
following termination due to an extended Force Majeure Event.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    50. The TxDOT commented that the Guide should acknowledge that 
certain precedents do not include a limitation on set-off that prevents 
termination compensation being less than the outstanding project debt 
as a result of such set-off.
    This comment has been incorporated into the Guide, although it 
should be noted that the limitation on set-off does not apply to 
circumstances where the termination arises due to a Developer Default. 
In those instances, full set-off is contemplated because the Lenders 
have the opportunity to step in and cure the Developer Default prior to 
termination.
    51. The TxDOT commented that the cure period available following a 
monetary default under the Guide should be shorter than the cure period 
available following other types of material default. The TxDOT further 
suggested that the Guide should acknowledge that some Developers and 
lenders agree to cure period comity between Developer and lenders.
    The suggestion that the Guide distinguish between payment defaults 
and other defaults has been incorporated into the Guide. Regarding cure 
period comity, a change to the Guide is not necessary because cure 
period comity is not the typical approach taken.
    52. The TxDOT suggested that the Guide acknowledge that in certain 
precedent toll concession agreements, the Developer's termination 
rights are restricted to two types of Department Defaults: (i) Uncured 
failure to pay a material sum to the Developer, and (ii) Department 
confiscation, condemnation, or appropriation of a material part of the 
Developer's interest; performance defaults by a Department may ripen 
into a failure-to-pay default.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly. The Guide introduces discussion regarding where it may be 
appropriate to include performance-related defaults.
    53. The TxDOT commented that the method for calculating termination 
compensation in the Guide should be revised to reflect the calculation 
method utilized in certain precedents which provide protection to the 
lenders and market value for the Developer's equity investment (if such 
investment is greater than the outstanding debt).
    Though the drafting is somewhat different, there is not much 
substantive difference between the calculation mechanism reflected in 
the Guide and that proposed by the commenter, though it should be noted 
that it is appropriate to compensate equity irrespective of how large 
or small its value is as compared to the outstanding debt. A change to 
the Guide is not necessary to address this comment.
    54. The TxDOT suggested that the Guide mention, as one option for 
valuing the equity in the Developer, that certain precedents allow the 
parties to

[[Page 53831]]

produce evidence in the event of a dispute for ultimate determination 
by a court or other dispute resolution forum.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    55. The TxDOT commented that the Guide should provide a 
comprehensive list of Developer Defaults in acknowledgement that 
different defaults have different cure periods and methods for curing.
    Section 7.3.1 of the Guide includes a comprehensive list of 
Developer Defaults, and Section 7.3.2 of the Guide states that cure 
periods may vary depending on the nature of the Developer Default. A 
change to the Guide is not necessary to address this comment.
    56. The TxDOT suggested that the Guide include closure of any lane 
or other portion of the Project (unless permitted under the agreement) 
as a Developer Default.
    The Developer Default listed at clause (a) of the definition 
captures this failure by the Developer; the FHWA agrees with the 
commenter that continued access is a significant objective of the 
Concession Agreement (and therefore would constitute a failure to 
comply with a material obligation if not provided by the Developer). A 
change to the Guide is not necessary to address this comment.
    57. The TxDOT commented that the Guide should acknowledge that a 
particular toll concession agreement may provide for a range of 
remedies for Developer Default, but limit the remedy of termination to 
defaults specifically agreed to be material in nature.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    58. The TxDOT commented that the Guide should be revised to state 
that even if a Developer Default is cured, the Developer may remain 
liable for Department losses attributable to the default.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    59. The TxDOT commented that because many toll concession 
agreements provide for termination due to accumulated delay from Delay 
Events, and not just due to the narrowly defined Force Majeure Events, 
the discussion regarding likelihood of termination should be revised.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    60. The TxDOT commented that the approach to termination 
compensation following a Developer Default included in the Guide should 
be amended to reflect an alternative approach available in the market. 
In particular, TxDOT felt that the approach taken in the Guide should 
ensure that equity is wholly at risk of loss and lenders face a 
meaningful financial consequence if a project is terminated following a 
Developer Default.
    The termination calculation mechanism reflected in the Guide will 
not provide equity with compensation in the event of a Developer 
Default. In addition, although it is common to discount compensation 
payable to lenders after completion of the project (which is reflected 
in the Guide), it is often the case that such a discount is not imposed 
prior to completion because of the risks otherwise inherent in 
completing a project. A change to the Guide is not necessary to address 
this comment.
    61. The TxDOT suggested that the Guide include a discussion of 
provisions in certain precedents which provide for no termination 
compensation for termination due to Developer Default, including where: 
(i) The Developer files for bankruptcy and rejects the toll concession 
agreement; (ii) the Collateral Agent receives a replacement agreement 
from the Department in accordance with the original agreement; and 
(iii) the Developer wrongfully exercises a termination right.
    As it has been noted in the Guide, in the context of a greenfield 
project where the Department receives a new asset, some measure of 
compensation is typical and necessary; otherwise, the Developer may be 
entitled to assert a claim for unjust enrichment. A change to the Guide 
is not necessary to address this comment.
    62. The PECG commented that the Guide should provide the Department 
with the ability to take over the project should the Developer become 
unable to meet its obligations.
    The Concession Agreement will typically include a Developer Default 
for failure to pay amounts when due to the Department. This is 
addressed in Section 7.3.1 of the Guide.
    63. The TxDOT suggested that the Guide state that the principle 
behind the measure of compensation is rescission and restitution.
    This is a technical legal issue that is not relevant to the 
intended audience for the Guide. A change to the Guide is not necessary 
to address this comment.
    64. The TxDOT commented that the discussion of termination 
compensation in Section 7.4.2 should mention lender breakage costs.
    This comment is captured by the first bullet point in the section, 
which refers to all amounts owed to the lenders. A change to the Guide 
is not necessary to address this comment.
    65. The TxDOT commented that the Guide should discuss the various 
legal mechanisms used in certain precedents to establish the time at 
which a termination for convenience is effective.
    This is a technical legal issue that is not relevant for the 
intended audience of the Guide. A change to the Guide is not necessary 
to address this comment.

Chapter 8: Handback

    The comments received on the Guide's review of the issues 
surrounding changes in equity interests generally related to the 
Handback Reserve Account.
    66. The TxDOT commented that the Guide should acknowledge that 
certain precedents authorize the use of funds in the Handback Reserve 
Account for safety compliance work.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    67. The TxDOT also suggested that the Guide should acknowledge that 
certain precedents rely on a mechanism other than an independent 
consultant in determining the amount necessary for the Handback Reserve 
Account.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.

Appendix A: Glossary

    The comments received on the Glossary generally related to 
clarifications on, and scope of, various defined terms.
    68. The TxDOT commented that the definition of demand risk should 
be expanded to include toll collection risk.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    69. The TxDOT commented that the definition of Design-Build 
Contract should be revised to specifically mention design work.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    70. The TxDOT commented that the definition of Dispute Resolution 
Mechanism should include disputes review boards.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    71. The TxDOT commented that the definition of Express Toll Lane 
should be narrowed to limit this concept to traffic lanes subject to 
tolls which vary in accordance with demand.

[[Page 53832]]

    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    72. The TxDOT commented that the definition of Gross Revenue should 
be revised to clarify that the insurance proceeds included in Gross 
Revenue are insurance proceeds which are received in substitution for, 
or to compensate for, loss of tolls or user fees.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    73. The TxDOT commented that the definition of Managed Lane 
Facility should be revised to include language which references change 
in demand.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    74. The TxDOT commented that the definition of Prohibited Person 
should reserve the right to prohibit an individual based on a potential 
investor's egregious reputation, such as suspected affiliation with 
criminal organizations.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    75. The TxDOT commented that the definition of Subcontractor 
Breakage Costs should include costs of demobilization.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    76. The TxDOT commented that the definition of Work should include 
design work.
    The FHWA agreed with TxDOT's comment and has revised the Guide 
accordingly.
    77. The TxDOT commented that the definition of Construction Period 
should be revised to distinguish between the Service Commencement Date 
and Substantial Completion.
    A change to the Guide is not necessary to address this comment. For 
purposes of simplification, the Guide does not distinguish between 
Substantial Completion and Service Commencement, as the distinction is 
not relevant to the Guide.
    78. The PECG commented that the definition of Discriminatory Change 
in Law should be narrowed to provide greater certainty regarding the 
types of change in law captured under this concept.
    A change to the Guide is not necessary to address this comment. The 
example definition of Discriminatory Change in Law accords with market 
practice.

Other General or Public Policy Comments

    79. A private citizen commented that the Guide should state that P3 
transactions include financing of all costs and liabilities incurred on 
a particular project.
    The FHWA appreciates the commenter's concern that P3 projects' 
transfer of costs does not necessarily mean a transfer of risks; 
however, a common feature of P3 projects (as reflected in the Guide) is 
that the parties generally allocate risks (and costs associated with 
them) to the party best positioned to manage them. It would be 
incorrect to suggest that P3 projects involve the private sector 
financing all costs and liabilities associated with the relevant 
project. A change to the Guide is not necessary to address this 
comment.
    80. The Commonwealth of Virginia commented that FHWA should include 
an explanation of the advantages and challenges associated with risk 
allocation under a P3 procurement model in a way that is easily 
understandable to public decisionmakers.
    The FHWA agrees that each project is unique, and that the 
circumstances of each project will determine the allocation of risk and 
responsibilities for the life of the project. This aspect of P3 
transactions has been highlighted throughout the Guide, though not 
necessarily in the context of public funding decisions (a topic which 
has not been addressed in the Guide). However, FHWA agrees that the 
extent of public funding involved in any project will have an impact on 
the allocation of risk associated with that project.
    81. The Commonwealth of Virginia also commented that FHWA should 
consider a review of Federal procurement requirements and regulations 
to supplement the Guide.
    A comprehensive review of the Federal procurement requirements is 
not within the scope of the Guide.
    82. The Commonwealth of Virginia commented that the Guide should 
reflect that under an availability payment structure, the risk of 
maintaining the level of service of a particular road will be 
transferred to the private sector.
    The FHWA will address availability payment structures and related 
issues in a separate guide in due course.
    83. A private citizen observed that under California law, a State 
agency is responsible for monitoring compliance with environmental 
regulations.
    The FHWA notes that Concession Agreements cannot alter existing 
State or local law mandates that require a particular entity to 
maintain legal liability for a particular aspect of a project. However, 
Concession Agreements may transfer the risk associated with that aspect 
of the project by: (a) Allocating responsibility to one party (such as 
the Developer) for paying and performing the relevant obligations on 
behalf of the other party (such as the Department); and (b) requiring 
that the party responsible for paying and performing thereafter 
indemnify the other party for the resulting consequences. As the issues 
associated with such requirements are highly dependent on applicable 
State and local laws, they have not been addressed in the Guide. A 
change to the Guide is not necessary to address this comment.
    84. The PECG suggested that in P3 procurement the contractor should 
prepare plans and specifications to meet the standards of the 
Department.
    The FHWA notes that the Concession Agreement will typically 
prescribe technical specifications that must be followed by the 
Developer, and will provide for review and approval by the Department 
of various design and construction submissions in the ordinary course. 
These matters are rarely contentious and will be consistent with 
Departments' experiences on other non-P3 transactions, so they have not 
been addressed in the Guide. A change to the Guide is not necessary to 
address this comment.
    85. The PECG commented that the environmental and first 30 percent 
of design work should be completed by the Department and provided to 
the contractor.
    The FHWA notes that Concession Agreements will typically require 
the Developer to construct the Project in accordance with environmental 
approvals that have been obtained by the Department. These matters are 
rarely contentious and will be consistent with Departments' experiences 
on other non-P3 transactions, so they have not been addressed in the 
Guide. A change to the Guide is not necessary to address this comment.
    86. The PECG commented that construction inspection should be 
conducted by the Department.
    Concession Agreements include completion tests which require, among 
other things, that the work is completed in accordance with the 
requirements of the Concession Agreement (including the technical 
specifications), and that the work must be verified by the Department. 
These matters are rarely contentious and will be consistent with 
Departments' experiences on other non-

[[Page 53833]]

P3 transactions, so they have not been addressed in the Guide. A change 
to the Guide is not necessary to address this comment.
    87. The PECG commented that the Guide should direct Departments to 
specify standards of operation and maintenance if a particular P3 
procurement is to include operation and maintenance.
    Concession Agreements will specify the applicable operations and 
maintenance standards that must be complied with. The Developer will be 
required to comply with these at its own cost and expense. These 
matters are rarely contentious, so they have not been addressed in the 
Guide. A change to the Guide is not necessary to address this comment.
    88. The PECG suggested that the Guide should reserve for the 
Department the right to access the project at all times, and require 
the Developer to maintain the project according to the Department's 
standards.
    The Concession Agreement will typically permit the Department to 
have access to the Project for oversight purposes, and will include a 
variety of remedies for the Department in the event the Developer fails 
to meet the required operation and maintenance specifications 
(including the right of the Department to perform the obligations on 
behalf of the Developer). These matters are rarely contentious and will 
be consistent with Departments' experiences on other non-P3 
transactions, so they have not been addressed in the Guide. A change to 
the Guide is not necessary to address this comment.
    89. The PECG commented that the Guide should require Developer to 
maintain the project at full operational capacity at all times, with 
the Department able to levy fines for failure to comply with this 
requirement.
    The FHWA notes that it is typical for Concession Agreements to 
include a requirement that the Developer must keep the Project open for 
traffic 24 hours a day, 365 days a year, following Substantial 
Completion. In the context of a demand risk transaction, where the 
Developer's revenue depends on keeping the road open to paying users, 
this obligation is not contentious and therefore has not been addressed 
in the Guide. A change to the Guide is not necessary to address this 
comment.
    90. The ARTBA expressed support for including in the Guide a 
discussion of the risks and costs associated with preparing and 
submitting a proposal for a design-build project. The ARTBA also 
commented that the Guide should include a discussion of risk allocation 
and compensation as between the Developer and the design-build 
contractor in the same way that the Guide discusses the allocation of 
risk between the Department and the Developer, and that the Guide 
should provide recommendations regarding the relationship between the 
Developer and the design-build contractor.
    The Department's contractual relationship is with the Developer, 
not with the design-build contractor. The Developer's approach to 
managing the risks allocated to it, whether through contracting or 
otherwise, is not appropriate for the Department to regulate. A change 
to the Guide is not necessary to address this comment.
    91. A private citizen expressed concern about the characterization 
of a Concession Agreement as a lease in the underlying asset and the 
characterization of resulting revenue, and suggested that FHWA consider 
alternative methods of financing infrastructure.
    The FHWA acknowledges that P3 procurement may be an unfamiliar tool 
for funding infrastructure investment to some members of the public. 
The characterization of the Developer's interest in the project 
(whether as a lease or a license) varies from one jurisdiction to 
another. Some Concession Agreements include the requirement for revenue 
sharing, which is similar to lease payments. The Concession Agreement 
will also require the Developer to pay all costs to operate and 
maintain the Project during the term of the agreement. The shouldering 
of these costs is also not unlike a lease payment. A change to the 
Guide is not necessary to address this comment.
    92. Several private citizens provided suggestions for Departments 
considering P3 procurement, including the following: parties should 
adopt a statement of policies to reduce the risk of misinterpretation 
of a contract; FHWA should suggest that Departments undertake a cost/
benefit analysis prior to deciding to engage in P3 procurement; in 
relation to a cost/benefit analysis for an existing asset, payments 
projected to a potential private operator should not exceed the cost of 
public bonds or borrowing should the asset continue to be operated by 
the Department. While these comments provide interesting and 
potentially useful ideas, they are not within the scope of the guidance 
mandated by MAP-21, and therefore, no changes to the Guide have been 
made as a result of these comments.
    93. Several private citizens expressed support for transparency in 
P3 procurement and offered the following suggestions: P3 procurement 
should be subject to public auditing and financial statement disclosure 
requirements, and be approved by State and municipal elected officials; 
and P3 procurement contracts and related documents should be subject to 
the Federal Freedom of Information Act (FOIA) and all State and local 
public records disclosure laws.
    Concession Agreements will typically include regular reporting 
requirements, particularly where there is a sharing requirement that 
requires ongoing review of costs and revenues. To the extent a 
Developer is a publicly traded company, public disclosure of financials 
continues to be required. Each jurisdiction will have its own rules and 
regulations regarding the procurement of P3 transactions and approvals 
required to be obtained prior to executing a Concession Agreement. Such 
rules and regulations are outside the scope of the Guide. Concession 
Agreements are subject to FOIA-type laws and regulations in many 
jurisdictions, though Developers typically have the right to specify 
that certain information is proprietary or constitutes a trade secret 
exempting it from disclosure in accordance with such laws. These 
matters are rarely contentious and will be consistent with Departments' 
experiences on other non-P3 transactions, so they have not been 
addressed in the Guide.
    94. A private citizen expressed a concern that the use of tax-
exempt bonds in relation to P3 procurement contradicted the stated goal 
of using P3 procurements to encourage the investment of private 
capital.
    This comment reflects a misunderstanding of the way in which tax-
exempt bond issuances work. Although a public issuer may nominally 
issue bonds for tax purposes (known as a conduit issuer), the proceeds 
raised from the sale of the bonds are immediately lent to the Developer 
under a separate loan agreement, and the Developer will be responsible 
for paying all amounts that are ultimately due to the bondholders. 
There is no public guarantee of debt when this approach is taken, and 
this structure is customary in the context of non-P3 arrangements as 
well. No changes have been made as a result of this comment.
    95. The ARTBA commented that the Guide should address performance 
bonding requirements and the potential need for legislation to address 
performance security requirements for toll concessions.

[[Page 53834]]

    The topic of performance security will be addressed in the addendum 
to the Guide.
    96. Ernst & Young commented that the Guide should include a 
discussion of milestone or final acceptance payments.
    The FHWA has not included a discussion of construction payments 
from States within the Guide. The ability and willingness of States to 
finance such payments, and the constraints associated with the sources 
of funds that might be used, will vary widely from one jurisdiction, 
and often one project to another. As a result, it would be difficult to 
describe general principles that will be of much utility to State DOTs. 
A change to the Guide is not necessary to address this comment.
    97. Ernst & Young commented that FHWA should include a discussion 
of independent engineers and effective strategies for efficiently 
managing approvals, oversight, and disputes in the addendum.
    While FHWA agrees that independent engineers and oversight 
mechanisms are important topics, the addendum will not address this 
topic. However, dispute resolution will be addressed in the addendum.
    98. Ernst & Young commented that FHWA should consider partially 
variable term lengths in its discussion of term lengths in the 
addendum.
    The FHWA notes that this topic may be considered in the addendum.
    99. Ernst & Young commented that FHWA should consider including a 
discussion of plate denial.
    The FHWA considered discussing this topic in the Guide, but 
ultimately did not address this issue as it may be considered 
controversial in some jurisdictions.
    100. Ernst & Young commented that FHWA should address incentives to 
lender step-in/rectification and the role of direct agreements in the 
addendum.
    The FHWA notes that lenders' rights will be addressed in the 
addendum.
    101. The PECG commented that the Guide should include an indemnity 
of the Department to be provided by the Developer.
    The FHWA notes that Indemnities will be addressed in the addendum.
    Final Guide & Other Model Contract P-3 Products: The FHWA is not 
accepting any further comments regarding the Core Toll Concessions 
Public-Private Partnership Guide. The final version can be found on the 
docket (Docket No. FHWA-2014-0006) or at the following link: http://www.fhwa.dot.gov/ipd/pdfs/p3/model_p3_core_toll_concessions.pdf.
    In addition to the Core Toll Concessions Public-Private Partnership 
Guide above, FHWA is also developing an Addendum document that will 
cover secondary, yet important provisions found in P-3 contracts. The 
secondary provisions will include issues such as performance standards, 
contract length, capacity triggers, consumer protections, Federal 
requirements, developer indemnities, lenders rights, insurance dispute 
resolution, and performance security. The provisions will be covered in 
less detail than the provisions in the Core Guide.
    Another type of P-3 contract is the availability payment based 
contract. Funds from public sector revenues are the sources of payments 
to the private contractor in these transactions. These availability 
payments based transactions are increasingly popular. Many of the 
provisions found in the toll concessions guide will also be germane to 
the availability payments guide. The FHWA will be publishing an 
Availability Payments Model P-3 Contracts Guide in 2014.

    Authority: Section 1534(d) of MAP-21 (Pub. L. 112-141, 126 Stat. 
405).

    Dated: August 27, 2014.
Gregory G. Nadeau,
Acting Administrator, Federal Highway Administration.
[FR Doc. 2014-21049 Filed 9-9-14; 8:45 am]
BILLING CODE 4910-22-P