Public-Private Partnership Policy Casebook/I-77 HOT Lanes (Charlotte)

This case study tries to review and analyze the Public-Private Partnership policy delivery method, which was implemented for the I-77 HOT Lanes (Charlotte) Project. It is the collaborative work of Behzad Burhanuddin, Getahun Madebo and Taylor Bonner, graduate students at George Mason University. The following casebook explores the key actors, project characteristics, policy challenges, and history associated with the I-77 HOT Lanes (Charlotte) PPP Project. It was prepared in partial fulfillment requirement for George Mason University's Public-Private Partnership graduate course, taught by Dr. Jonathan Gifford.

Abstract & Summary

A public-private partnership is a contractual agreement formed between a public owner or agency (such as a state or local government) and a private sector entity. This relationship allows for substantial private sector participation in the delivery and financing of a government-owned project. The purpose of this case study is to examine the public-private partnership between the North Carolina Department of Transportation (NCDOT) and the Spanish-based company Cintra in the development of the I-77 High Occupancy Toll (HOT) lanes in Charlotte, North Carolina.

The Charlotte Regional Transportation Planning Organization requested that the N.C. Department of Transportation develop express lanes on I-77, as well as on I-485 and U.S. 74. NCDOT determined it would approach the I-77 project as a public-private partnership to leverage private funding to build and open the project sooner than with state funding.

A few of the principal objectives of the project as set by the Charlotte Regional Transportation Planning Organization and NCDOT include:

• Ease congestion along the I-77 corridor,
• Ensure seamless integration of the project with other public works projects along the corridor,
• Establish operating speed standards on the HOT Lanes during morning and afternoon peak periods, and
• Achieve an average free-flow speed of 45 mph on the HOT Lanes (or 80 percent of the current posted speed limit for general purpose lanes that are not tolled, if higher)

The goal of the I-77 Express Lanes project is to provide more reliable travel times on 26 miles of I-77 from the Brookshire Freeway (Exit 11) in Mecklenburg County to N.C. 150 (Exit 36) in Iredell County than what is currently offered by general purpose lanes alone. The northern section of the I-77 Express Lanes from Hambright Road near I-485 to N.C. 150 opened in June 2019, while the southern section from I-277 to Hambright Road is scheduled to open later in 2019.

What the Project Will Do As planned, there will be two express lanes added in each direction between uptown Charlotte and Exit 28 in Cornelius. Between Cornelius and Exit 36 in Mooresville, there will be one express lane added in each direction.

The existing high-occupancy vehicle lanes (one in each direction) on the southern part of the project, commonly known as carpool lanes or high occupancy vehicle (HOV) lanes, are being converted to express lanes.

The existing general-purpose lanes will always remain free of charge for all users. The project is not planned to add or take away any general-purpose lanes, but the existing lanes will be resurfaced to preserve the pavement and provide motorists with a smoother ride.

Express Lanes: The Power to Choose Express lanes are the key to improving mobility along the I-77 corridor. They offer drivers a choice: pay a toll and use the express lanes to avoid travel delays or continue driving on the free general-purpose lanes.

The decision is entirely in the hands of motorists utilizing I-77. Each individual can determine how valuable his or her time is and decide if the potential time savings is worth the express lane toll cost.

Drivers who choose not to use the express lanes will also see an operational benefit: As other motorists opt to take the express lanes, there will be less congestion in the general-purpose lanes, thus making the commute more efficient for those relying on the free lanes, as well. Motorcyclists, buses (excluding school buses), and carpoolers with three or more occupants (including the driver) may use the express lanes for free.

North Carolina is not the only state investing in express lanes as a way to alleviate traffic backups. Other states such as California, Colorado, Texas, Virginia, Florida and Georgia are among those successfully implementing them in urban areas to make travel more efficient for all drivers.

Introduction

In this case study, the I-77 High Occupancy Toll (HOT) Lanes public-private partnership (P3) in Charlotte, North Carolina will be examined. This partnership consists of two major players: the North Carolina Department of Transportation (NCDOT) and Mobility Partners by Cintra, a Spanish-based company with extensive experience in design, build, finance, operate, maintain (DBFOM) toll road P3 contracts. The private investment total from Cintra came out to be $647 million with only $95 million coming from North Carolina. Tolls to use the HOT lanes will be based on a dynamic tolling system, similar to those found in Northern Virginia on I-495 and I-95. This means that tolls will likely be at their highest during peak periods in the morning and afternoon. Dynamic tolling is one of the ways that can be used to maintain traffic volumes in the HOT lanes, which then ensures that the 45 MPH average free-flow speed performance metric (set in the initial contract) is accomplished.

Following the bid acceptance and financial close, the construction was set to take roughly three years, but the project is currently in its fourth year of construction. With the project still under construction, Cintra is now facing a $10,000 fee per day for each section still incomplete. About half of the lanes (13 miles) have been opened to the public (see map above), but this controversial project is still facing much public scrutiny. Common public complaints come from concerns regarding potential high tolls, increased congestion due to the construction, and the preference towards additional general-purpose lanes rather than HOT lanes. The current concession agreement entitles Mobility Partners to operate and maintain the HOT over a 50-year term in which the lanes will then be passed back into the responsibility of NCDOT.

History

The possibility of the I-77 HOT Lane project first came about in 2007 after NCDOT, South Carolina Department of Transportation (SCDOT), and Charlotte Department of Transportation (CDOT) coordinated a joint study to determine areas where express lanes could be effective in relieving congestion. As a result of this study, I-77 North was identified as the best candidate for express lanes - specifically between exits 11 and 28. The next several years were spent conducting a feasibility study to consider converting existing HOV (High Occupancy Vehicle) lanes into tolled express lanes. Following the conclusion of the study, NCDOT decided to use a public-private partnership to design, build, finance, operate and maintain (DBFOM) the proposed I-77 HOT lanes. This would be the first-ever P3 in North Carolina. Once the project scope was refined, NCDOT vetted four potential bidders. This vigorous process took place in 2013 and included a series of meetings to assist each bidder in developing a detailed analysis of the contract requirements. Once all bids were submitted by March 2014, the proposals were examined and subject to 200 pass/fail criteria. Only twelve days later, NCDOT announced that Cintra’s limited liability corporation, Mobility Partners, had won the bid on the DBFOM contract for the I-77 HOT lanes. The winning bid entailed a $647 million investment with only $95 million coming from the state of North Carolina. Financial close was reached just over a year later in May 2015 with construction beginning in August of the same year. Originally, the project was expected to be completed by mid-2018, with a final deadline of January 7, 2019. If the project were to exceed this date, the concessionaire would have to pay a penalty of $10,000 per section per day over the deadline. However, this deadline was extended nine months by NCDOT because of the addition of I-77 pavement improvements to the scope of work. Most recently, the deadline was extended once again to November 1, 2019. Currently, the project is still under construction (November 2019), but roughly half of the express lanes have been opened between exits 23 and 36.

List of actors

After that, the North Carolina General Statute Chapter 136-18(39) authorizes DOT to utilize the public-private partnership approach as a delivery method for its highway expansion program. The I-77 Express Lanes Project (Project) was award to company called I-77 Mobility Partners LLC and the scope of the project was to provide improvements along nearly 26 miles of the I-77 corridor north of Charlotte, including the conversion of existing high occupancy vehicle (HOV) lanes to express lanes or high occupancy toll (HOT) lanes and the construction of new HOT lanes and two major interchanges.

The key actors in this project studied under two different categories:

Project Proponents

• North Carolina Department of Transportation (NCDOT): State agency responsible for building and maintaining state roads, including interstate highways. The future owner of the I-77 Express Lanes, and the public partner in this P3.
• Cintra, S.A.: Parent company of I-77 Mobility based in Madrid, Spain, and one of the world's largest developers of transportation infrastructure, mostly toll roads.
• I-77 Mobility Partners: A private special-purpose company assembled as a subsidiary of Cintra to construct, operate and collect revenue from the Express Lanes contractor with NCDOT.
• Transportation Infrastructure Finance Innovation Act (TIFIA) Federal United States Department of Transportation (USDOT) loan provider for I-77 Mobility Partner.
• Aberdeen Global Infrastructure Partners II, L.P: Equity Provider for the project.
• GCM TH Investments, LLC & GCM BD Investments, LLC : Equity providers.
• City of Charlotte, N.C: Primary players consist of City Council, which has majority support for the I-77 Express Lanes project.
• Patrick Lloyd McCrory: Former Mayor of Charlotte, who supports the Express Lanes project, although many of his fellow elected Republicans oppose the project.

Project Opponents:

• Widen I-77: An organization of citizens who oppose the project, and instead, favor adding more free general-purpose lanes to the congested section of the highway. Preventive actions go as far as suing the state to stop the implementation of the I-77 HOT lane project.
• Mecklenburg County, N.C.: This is one of two counties in which a section of I-77 with Express Lanes is crossing. The majority of the County's Board of Commissioners opposes the project.
• Town of Mooresville, N.C.: A town located in Iredell County, the northern boundary of the I-77 Express Lanes. The majority of the Town Council opposes the project.
• Town of Huntersville, N.C: This town Located in Mecklenburg County, north of Charlotte along I-77 and the majority of the Town Council opposes the project.
• Town of Davidson, North Carolina: A town from which a section of I-77 express lane cross and is located at the northern of Mecklenburg County. The majority of the Town Council opposes the project.
• Town of Cornelius, N.C.: Located at the northern end of Mecklenburg County, immediately west of Davidson, along I-77 between Charlotte and Mooresville. The majority of the Town Council opposes the project.
• John "Mac" McAlpine V: Former minister at Charlotte's Pleasant Hill Presbyterian Church who has organized other regional business leaders to lobby state legislators in opposition to the Express Lanes.

Timeline of events

A brief study of the milestones/events that occurred from the project initiation until date (November 2019) are outlined below:

• 2007-2009 - South Carolina Department of Transportation (SCDOT), North Carolina Department of Transportation (NCDOT), the Mecklenburg-Union Metropolitan Planning Organization (MUMPO) conducted research to determine where improvements of traffic could help minimize excess over a 10-county area surrounding Charlotte. As a result, the I-77 corridor was selected as a high priority.
• July 2010 - North Carolina Department of Transportation (NCDOT) conducted a feasibility study to look at converting existing I-77 HOV Lanes into Express Lanes and lengthening of existing general-purpose lanes.
• March 2011 - NCDOT announced that the I-77 Express Lanes project will be conducted under a public-private partnership (P3), quoting that the private funding would allow the project to be constructed faster than traditional public procurement. Following this announcement and in July 2011, The Charlotte Regional Transportation Planning Organization (CRTPO) amended its 2035 Long-Range Transportation Plan (LRTP) to include Express Lanes on the corridor.
• June 2012 - NCDOT explored the use of variable tolling on the Express Lanes to address long-term congestion issues and minimize public funding for the project and in May 2013, four potential bidders were shortlisted.
• March 31, 2014 – NCDOT received and review bids and on April 11, 2014 -Cintra was announced as the winner of this bidding with a total investment of $647 million.
• May 20, 2015 – After several amendments of project financing deadline , financial close was achieved on May 20, 2015.
• May 28, 2015 – The Notice to proceed (NTP) for the construction of the project was released.
• November 16, 2015 – Actual construction of the project began.
• June 01, 2019 – After nearly four years of construction, the northern section of the I-77 toll lanes near Charlotte has been opened to traffic.
• November 16, 2019 – Charlotte, NC – I-77 Mobility Partners announced that the southern section of I-77 Express from I-485 to I-277 in uptown Charlotte, will open on November 16, 2019 beginning at 8 p.m. With Saturday’s opening, drivers will now be able to use all 26-miles of I-77 Express.

Project Advisors

The advisors all had extensive experience advising public agencies on the analysis, development, procurement, and implementation of P3 projects. The key major advisors included the following:

• Nossaman LLP – P3 legal advisor. Nossaman has advised on P3 projects in over 30 states. For more firm information see http://www.nossaman.com/infrastructure.
• Hunton & Williams LLP – P3 and state legal advisor. Hunton & Williams advises on international and U.S. P3 projects. For more firm information see https://www.hunton.com/en/practices/public-private-partnerships-and-infrastructure/.
• KPMG LLP – P3 financial advisor. KPMG advisory services advise on infrastructure projects international and are one of the leading P3 financial advisors on the U.S. For more firm information see https://advisory.kpmg.us/deal-advisory/infrastructure.html.
• Parsons Brinckerhoff (now known as WSP) – technical advisor. Parsons Brinckerhoff, now known as WSP is an international engineering firm that has advised on numerous P3 and managed lanes projects

Narrative

In May 2010, the Mecklenburg-Union Metropolitan Planning Organization (MUMPO) endorsed the concept of converting the existing HOV lanes on I-77 to express lanes and extending them to at least Exit 28. This concept was taken after considering the results of NCDOT feasibility studies. The studies indicated that the express lanes could provide an incentive for increased transit use and carpooling. As a result, the HOT lanes could reduce the number of vehicles utilizing the general-purpose lanes and improve travel times in the existing general-purpose lanes. To achieve this goal, a public-private partnership (P3) was identified by NCDOT as an option to consider for a DBFOM contract. NCDOT initiated the P3 procurement by issuing a Request for Qualifications (RFQ) on February 15, 2012. Eleven major developers showed interest in the project and contractors requested one-on-one meetings with NCDOT and its advisors to discuss the proposed Express Lanes Project. From which, only four of them submitted statements of qualifications to NCDOT by the March 15, 2012 deadline. Between March 2012 and May 2013, MUMPO worked with NCDOT to evaluate numerous scenarios for converting the existing HOV lanes to express lanes, which would include extending them north, as well as constructing one or two new express lanes in certain sections of I-77. Once the Environmental Assessment (EA) was concluded in July 2013, NCDOT could solicit RFPs and begin the bidding process. On April 11, 2014, NCDOT announced the selection of Cintra as the winner of the bidding and the project was award Cintra (I-77 Mobility Partner) for 50-year concession period with a total investment of $647 million. Cintra fully disclosed their history as part of the pre-qualification process and met all criteria to be eligible and selected as vendor for this Project. Cintra was required to disclose all project history and meet eligibility criteria as part of the pre-qualification process. Also included in this process, Cintra submitted their financial model, assumptions, instructions, sensitivity capabilities, audited financial statements at or before the time and the project's vendor, and did not have a history of project defaults within the United States at the time this Project's Comprehensive Agreement in June 2014. However, there were two known Cintra projects that had financial problems after the fact, The Indiana Toll Road and the SH-130 in Austin, Texas. Both were operating and solvent toll roads when NCDOT executed this Project's Comprehensive Agreement. The Indiana Toll Road went into bankruptcy proceedings in September 2014 while the SH-130 filed for bankruptcy protection in March 2016.

Financial Overview

Project Financing

The Project Financing Deadline (01/22/2015) was established as 210 days after the Effective Date (06/26/2014) of Commercial Close. The project financing deadline was subsequently extended three times to accommodate the Transportation Infrastructure Financing and Investment Act (TIFIA) loan process. Amendments 1-3 extended the number of days from 210 to 335, as a result of delay caused by the TIFIA loan negotiation and closing process. Changes during the negotiations process required an additional commitment by the Proposer/I-77 Mobility Partners LLC and NCDOT as shown in CA Amendment 5, which increased the public share amount from $88 million to $94.7 million and to increase the equity position of the I-77 Mobility Partners LLC from $234.2 million to $247.96 million to help maintain the I-77 P3 Project finance plan and support the proposal costs to make up the reduction in the TIFIA Loan amount from $215 million original proposed to the U.S. Department of Transportation final approved TIFIA loan amount of $189 million. This section was pivotal in that the TIFIA Program Office made significant changes to the assumptions including reducing the loan amount from $215 million to $189 million. This change required multiple cross-team efforts to restructure the project financing including the need to add $13.76 million in private equity and $6.49 million in public funding to re-balance the finance plan. These efforts where supported by multiple CA amendments to the project financing deadline and to increase NCDOT funding and I-77 Mobility Partners LLC equity as described above. States the State and NCDOT shall have no obligation to pay debt service on any debt issued or incurred in connection with the Project or this Agreement.

Actors	$$ in M	%
Private Equity Contributions	248	39.1
Federal TIFIA Loan	189	29.7
Tax-Exempt Private Activity Bonds (PABs)	100	15.7
NCDOT Funding for Construction (Federal)	76	11.9
NCDOT Funding for Construction (NC Highway Trust Fund)	18	2.9
Bond Premium & Interest Bond Proceeds	4	0.6
Total Fund	636	100

The above $636 Million was allocated for the design, construction, reserve account and outlined below is the summary:

Design-Build Contract Price	$444 Million
Tolling System and other Project Costs	$ 103 Million
Right-of-Way	$ 6 Million
Interest during Construction	$16 Million
Development Fees and Financing Expenses	$ 40 Million
Deposits to Reserve Accounts	$ 25 Million
Working Capital	$ 2 Million

The financial proposal submitted by Cintra in March 2014 included $234 million of equity provided by Cintra. The final equity commitment at the financial close was $14.2 million higher with approximately 90% of the additional equity provided by Cintra. The remaining amount came from Aberdeen Global Infrastructure Partners II, L.P. Portions of Cintra’s share were subsequently acquired by other investors. Table 3 shows the equity participants as of December 31, 2016. The equity participants as of December 2016:

• Cintra I-77 Mobility Partners, LLC 50.10%
• GCM TH Investments, LLC 20.58%
• John Laing I-77 Holdco Corp 10.00%
• Aberdeen Infrastructure Investment I-77 LLC 10.00%
• GCM BD Investments, LLC 9.32%

Tolling

The state granted the I-77 Mobility Partners LLC the exclusive right to impose tolls and Incidental Charges upon the Users of the HOT Lanes.

Toll Services

NCDOT shall provide certain electronic toll collection services and I-77 Mobility Partners LLC shall pay NCDOT the charges for such services.

Toll Revenue Risk

The I-77 HOT Lanes P3 project is a greenfield toll road project, meaning that the corridor had not previously been tolled nor had the surrounding area ever been tolled. As such, there is a risk associated with drawing customers and generating sufficient revenues to support the project. NCDOT has passed this risk onto the I-77 Mobility Partners LLC in Section 3.2.2 of the Contract Agreement (CA) where it clearly states that, “ I-77 Mobility Partners LLC understands and agrees that, notwithstanding anything to the contrary in this Agreement or any other CA Document, the risk of collection of tolls and Incidental Charges that may be payable to I-77 Mobility Partners LLC remains with I-77 Mobility Partners LLC, and that NCDOT does not, and will not be deemed to, guarantee collection or collectability of such tolls and Incidental Charges to I-77 Mobility Partners LLC or any Person.”

Toll Revenues

In the Contract Agreement there were several pertinent sections:

• Section 3.6.1 grants the I-77 Mobility Partners LLC the exclusive right, title, entitlement and interest in and to the Toll Revenues,
• Section 3.6.2 outlines the I-77 Mobility Partners LLC rights to use Toll Revenues, and
• Section 3.6.3 requires Toll Revenues to be used first to pay all due and payable operations and maintenance costs, specifically including all amounts due to NCDOT.

These provisions protect the state's interest in having project debt and expenses paid before any equity distributions can be made, https://www.auditor.nc.gov/EPSWeb/Reports/Performance/PER-2018-4200.pdf,</ref>

Toll Revenue Sharing

An additional protection in the CA for the state is revenue sharing built into the agreement through the use of specific revenue performance “bands” as shown below based on the I-77 Mobility Partners LLC’s “Internal Rate of Return” (IRR) percentage whereby the state is entitled to share a predetermined share of the excess revenue should the I-77 Mobility Partners LLC’s.

Procurement and Contracting Review

The key objective here is to identify if all aspects of the formal Request for Proposal (RFP) process to ensure all rules, procedures, protocols, and guidelines were followed per state and federal laws. It is imperative to ensure no single bidder was advantaged purposefully or unintentionally over another.

Procurement Key dates

• Bid submission: March 31, 2014
• Announcement of Apparent Best Value Proposer: April 21, 2014
• Reporting to the Joint Legislative Transportation Committee: April 21, 2014
• Delivery of documents as per Section 6.2.1 of ITP: May 6, 2014
• Commercial Close: June 20, 2014
• Joint Legislative Transportation Oversight Committee Report – April 25, 2014
• Commercial Close – June 26, 2014 (62 Days post JLTOC and six days later than the I-77 Mobility Partners LLC Proposal “Commercial Close Key Dates” as identified in the I-77 Mobility Partners LLC Proposal section above) Legislative Government Commission Update – April 28, 2015 (22 days prior to Financial Close)
• Financial Close – May 20, 2015

Issues

Project Delay

CHARLOTTE, N.C. - Interstate 77 toll lane construction will continue well past the North Carolina Department of Transportation’s projected deadline, officials said Tuesday. The latest construction notice from Cintra advises possible lane closures through the end of the week. The I-77 toll lane project’s deadline is Oct. 31 and Cintra will face fines since the major project will not be completed by then. NCDOT will fine Cintra $10,000 per day, per unfinished section. There are three incomplete sections.

Liquidated Damages

The company building the Interstate 77 toll lanes project has requested more time to finish it. A spokesperson for the North Carolina Department of Transportation said the department has not decided whether the extension request will be granted. As of now, the project has to be wrapped up by Oct. 31. The delay won’t lead to fines — at least not immediately. Jen Thompson, a spokesperson at the state transportation department, said the contract calls for a financial penalty of $10,000 per day for each section that is completed after Nov. 1, 2019. The original deadline was Jan. 7, 2019.

Cost Rising

Costs for the toll lane project have risen from original estimates, according to the company. I-77 Mobility Partners has invested an additional $150 million in the project, bringing the total cost to about $800 million, Chief Operating Officer David Hannon told WFAE.

Leier said I-77 Mobility Partners, a subsidiary of Spanish construction giant Cintra, will pay the extra cost. The company, its lenders and investors are paying most of the express lanes' cost. NCDOT is putting in $95 million and could pay another $75 million in the coming years if toll revenues fall short.

Feedback from the Public

Improved Traffic Flow: Drivers have been using the lanes open so far, and the company says commuters have seen improved speeds on I-77 at rush hour. Interstate 77 is one of two toll projects to open this year in the Charlotte area. The other is the Monroe Expressway, a full toll road that takes drivers around crowded U.S. 74 in Union County. Over the past year, 153,000 NC Quick Pass toll transponders have been distributed to drivers in the Charlotte area, according to the North Carolina Turnpike Authority.

What if analysis

Canceling the contract could cost $300 million. N.C. DOT has previously said canceling the contract could cost $100 million. The State Auditor released a report Dec. 30 that said it could cost taxpayers between $82 million and the “fair market value” of the project, which a consultant said was $302 million. Kurt Naas is a spokesperson for the anti-toll lane group, Widen I-77. He said the consultant’s estimate of $300 million is based on Cintra’s own estimates of toll revenue, which he said is inflated. “It would be the highest-grossing toll road ever,” he said. The total cost of the toll lane project is about $650 million. Naas said it’s stunning the DOT negotiated a contract that would require payment of $300 million after Cintra has only spent a few weeks on construction. Regardless of how much the cancellation penalty is, Charlotte council members are fearful the General Assembly would pass legislation to make Charlotte or the Charlotte region pay. The Charlotte region would also lose $145 million in so-called “bonus” money that’s slated for north Mecklenburg to improve the roads and interchanges leading to the toll lanes. If the toll lanes are canceled, that money would be spread out across the state. In response to a complaint about Cintra, the DOT’s Office of Inspector General released a report Jan. 4 saying the process by which Cintra received the contract was fair and open.

Conclusion & Takeaways

• NCDOT expects that the benefits of the Project will include: Decreased fuel consumption and added time savings for motorists, Increased incentive for motorists to carpool and take advantage of transit options, Provide reliable, superior travel times on the HOT Lanes, especially during peak hours and Provide revenue generation to help pay for improvements along I-77.

• NCDOT established the Developer Ratio Adjustment Mechanism (DRAM) to enhance the overall credit of the project debt financing to help achieve the ratings required to issue bonds and to secure a TIFIA loan. The DRAM was developed in concert with all proposers during the RFP question and answer period. Having the DRAM in place assisted the project in being rated BBB by DBRS rating service and BBB- by Fitch Ratings rating service which were the targeted ratings needed for both Private Activity Bonds and TIFIA loans.

• While not required by state law or policy in effect during the project procurement or implementation, it should be noted that based on our review NCDOT did not prepare a Value for Money analysis which compares the P3 approach to a traditional delivery approach to help ensure that the results of the proposal from the I-77 Mobility Partners LLC provides the best value for the public owner. Value for Money or similar “Cost Benefit” analysis is required in the law or policies for other states that have extensive experience in P3 projects like Florida, Virginia and Texas