U.S. Department of Transportation
Federal Highway Administration
1200 New Jersey Avenue, SE
Washington, DC 20590
Our Nation's highway infrastructure is being challenged to meet growing consumer needs with the historical funding mechanism. As reported in the Bond Buyer, "With demand for transportation funding exceeding revenues from gas tax collections, two of the southeast's largest (Georgia/Florida) bond issuers are turning to public-private partnerships (PPP) and state-of-the-art toll systems to finance and improve roads."(1) Not only have Georgia and Florida turned to new and innovative financing schemes, but States across the Nation are entering into PPPs, some with concessions, to alleviate highway funding problems. States such as Alabama, California, Colorado, Illinois, Indiana, Nevada, Oregon, Texas, Virginia, and others are finding creative means through PPPs to fund the necessary highway infrastructure.
The current trend in road transportation projects is toward larger dollar amount contracts, innovative funding arrangements, and varying levels of private partner involvement. The U.S. Chamber of Commerce's National Chamber Foundation (NCF) agrees in its 2005 study on Future Highway and Public Transportation Finance. Phase one of the study reported that the Federal funding share falls short of what is needed to maintain and improve the Nation's transportation infrastructure. The second phase of the study lays out long-term options to fully fund the transportation system by bringing forth new ideas and transitioning to a new financing mechanism. Because of these financial arrangements and PPPs, FHWA, AASHTO, and NCHRP decided to conduct an international scan on audit stewardship and oversight of these new and nontraditional programs.
Many State DOTs are undertaking large, innovatively financed projects to meet the increasing demands in the United States for quality transportation services and highway infrastructure. These projects can include traditional design and construction, design-build, public-private partnership (PPP), and concession elements.
A public-private partnership is a contractual agreement between public and private sector partners that allows more private sector participation and/or ownership than traditional methods of procurement. PPP agreements define an expansive set of relationships from relatively simple contracts to very complicated and technical contracts.
A concession is a contract granted by the government to a private sector entity to conduct business in a particular market or geographic area.
Regardless of the type of project contract, the trend indicates that transportation contracts will be larger, both in size and dollar amounts, with greater public-private partnership participation. This is because of increases in the cost of providing these services without matching revenue streams. Simply stated, highway revenues are falling behind highway needs. A concern among Federal and State managers is the effective audit stewardship and oversight of these projects.
Several large transportation projects have been awarded to multinational firms with the PPP experience and resources to acquire large government projects. In addition, more States are using innovative financing techniques (primarily credit programs) to advance large projects. The use of new financing strategies further supports the trend of larger projects. Because the European nations have been employing innovative financing methods to meet increasing infrastructure needs, they have considerable experience in auditing large, innovative transportation projects that include design-build, PPP, and concession elements. To examine and document the programs and practices employed by the European nations in the stewardship and oversight of large and innovatively funded projects, a diverse team of financial management specialists representing Federal and State transportation agencies, academia, and the private sector traveled to Lisbon, Portugal; Madrid, Spain; Paris, France; London, England; and Dublin, Ireland. The purpose was to conduct a scanning study of these European countries to find best audit practices that could be transferable to the United States.
The Federal government recognized the gap between revenues and necessary expenditures for highway infrastructure with its Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users of 2005 (SAFETEA-LU), which will facilitate public-private partnerships.
In SAFETEA-LU, the Administration recommended the following:
The State and Federal financial management community is responsible for the audit stewardship and audit oversight of the government's use of economic resources. The increasing use of both nontraditional contract provisions and large dollar amount projects has challenged government financial managers to ensure the continuing effectiveness of audit stewardship and oversight on large and/or innovative contracts. These new types of contracts are being awarded to multinational firms with the experience and resources to acquire large government transportation projects. Consequently, the audit community must be knowledgeable within a global environment when assessing financing options, the financial viability of private partners, and actual compliance with contract provisions.
Historically, European Union members have considerably more experience than U.S. States in auditing nontraditional transportation contracts such as design-build, design-build- finance-operate, public-private partnerships, and concessions. Each European country has adopted the common audit guidance issued by the European Organization of Supreme Audit Institutions (EUROSAI) and has the resources of a national audit office. In the United States, State DOTs rely primarily on their own staffs for audit oversight. European countries, on the other hand, form unified approaches to auditing practices with organizations such as the International Organization of Supreme Audit Institutions (INTOSAI). The scan team determined that there was much to be learned from the European audit and highway transportation counterparts.
The scanning study was undertaken cooperatively with AASHTO and its Select Committee on International Activities and the Transportation Research Board's National Cooperative Highway Research Program (Panel 20-36), the private sector, and academia. Since 1990, FHWA has issued about 70 International Technology Exchange Program reports in seven subject areas: safety, planning and environment, policy and information, operations, general infrastructure, pavements, and bridges. This was the first scan to address audit stewardship and oversight.
The purpose of this scan on audit stewardship and oversight of large and innovatively funded projects was to review and document best practices of audit stewardship and oversight in Europe and to bring the transferable best practices, procedures, and methodologies back to the United States. The scan was completed in two parts. Part I, a desk scan, was completed without travel. Its purpose was to identify at least four European countries considered to be at the forefront on best practices.
The desk scan was conducted November 3–28, 2005. Two primary searches were conducted:
The co-report facilitators conducted a literature review, telephone interviews of scan team members, e-mail communications with potential European partners, telephone interviews of potential European partners, and an analysis of the data gathered.
The literature review was conducted to clarify and define terms for the purpose of the scan, gather documents that would underlie the similarities and differences between audit standards and the respective standard-setting bodies in the United States and Europe, identify European countries using large and innovatively funded road transportation projects, and identify the issues and concerns on the U.S. road system from the multiple constituents that provide or use this method of transportation. The literature was searched through research databases accessing business academic and business periodicals; news, business, legal, and reference publications; and scholarly journals. The World Wide Web was searched to obtain government documents and pronouncements from the audit standard-setting bodies in the United States and abroad. The World Wide Web was also used to search for examples of large and innovatively funded road transportation projects.
Reports that address technical specificities in a subject area require a clear and concise definition of terms. Therefore, the fundamental terms expressed in the project purpose were defined. First, to determine the scan team's working definition of audit, the following terms were considered:
The term audit is generic for the purpose of this scan and can include the three types of engagements defined above. Although most State DOTs do not perform comprehensive financial statement audits, they do perform audits of various elements of financial statements as well as a host of financial and nonfinancial (audit) attestation engagements.
Therefore, for purposes of this project, audit was defined as the following:
An audit includes the financial statement, attestation, and performance engagements conducted in accordance with generally accepted auditing standards (GAAS) and/or generally accepted government auditing standards (GAGAS).
The Federal Financial Management Improvement Act of 1996 requires each Federal agency to maintain a financial management system that applies Federal accounting standards and provides the information necessary to report whether the agency is in compliance with those statements. The system includes the definition of stewardship investments as beneficial investments of the Federal government in such items as non-Federal physical property (property financed by the Federal government but owned by State or local governments), human capital, and research and development. Therefore, the term stewardship is appropriate in describing the Federal government's role in ensuring that the investment made with the people's capital is optimized for the good of the Nation.
Stewardship is the act of managing personal property or financial affairs as an agent of another or others and oversight is the supervision or watchful care.
The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) addresses stewardship and oversight under which the State DOT will be required to perform any of the above defined audit or attestation services "to improve the value or quality of the project...to monitor the effective and efficient use of funds."
For this study, the co-chairs established the following working definitions of audit stewardship and audit oversight:
Audit stewardship includes audit practices before contract initiation, including how financial evaluations are made to obtain the best outcome for the funds invested, how the government can receive the best value for the public, whether the proposing company has the resources to perform the project, evaluation of proposal costs, the sale and valuation of State assets, and audit reporting methods used to advise agencies on the mitigation of risk in the event of project difficulties.
Audit oversight includes audit practices during contract and post-contract periods involving the evaluation of work performed, use of project costing standards, distribution of profits from concessions, compliance with contract provisions, and an evaluation of overall price and quality of services received.
Information was gathered that would support the focus of the scan on audit stewardship and audit oversight. The specific issues and objectives for this scan are summarized below.
Scan Team Objectives for the Audit Stewardship of Large and Innovatively Funded Projects
Scan Team Objectives for the Audit Oversight of Large and Innovatively Funded Projects
The project objectives are appropriate in that they address the audit practices and issues necessary to evaluate government's fulfillment of its audit stewardship and audit oversight responsibilities.
FHWA considers large projects as those equal to or greater than $500 million. In addition, FHWA has identified innovative funding to include the following:
Individual States have been using these various mechanisms over the past 10 years to make necessary road infrastructure investments. Even with these mechanisms, there is concern that sufficient funds will not be available to meet future needs. "Without a significant influx of new revenues, our Nation's transportation network will also continue to deteriorate, impacting mobility and economic well-being," according to CEO Stephen E. Sandherr of the Associated General Contractors of America.(3)
According to U.S. DOT, a public-private partnership is a contractual agreement between public and private sector partners that allows more private sector participation than is traditional. The agreements usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or system. While the public sector usually retains ownership in the facility or system, the private party is given additional decision rights in determining how the project or task will be completed.
Another definition of public-private partnership refers to an agreement between a public agency and a private sector entity under which the private sector assumes a greater role in the planning, financing, design, construction, operation, and maintenance of a transportation facility than traditionally has been the case.(4)
In December 2004, U.S. DOT issued Report to Congress on Public-Private Partnerships, in which it responded to House Report 108-243 (2004) on impediments to the formation of large, capital-intensive highway and transit projects involving public-private partnerships (PPPs). The U.S. DOT report addressed not only impediments to forming PPPs, but also PPP history and initiatives, the value of PPPs, stakeholder comments, and recommendations for removing impediments. The report stated the following:
Although not widely used today, public-private partnerships are not a new model for providing surface transportation infrastructure. For decades, the Federal Highway Administration (FHWA) and State departments of transportation (DOTs) have experimented with ways to increase the involvement of the private sector in financing and operating surface transportation facilities. The results of these early experiments are not widely known and many of the new partnership arrangements have not been widely adopted.(5)
The report acknowledged that the Safe, Accountable, Flexible, and Efficient Transportation Equity Act of 2003 (SAFETEA) provided several recommendations that should facilitate the use of public-private partnerships. These recommendations included new financing tools, such as a variable toll pricing program that would permit tolling on any highway, bridge, or tunnel, including the Interstate System. The report discussed the concept of shadow tolling, which has been used extensively in Europe.
European countries and other international governments, according to the report, have used public-private partnerships to a much greater degree than the United States. "Of all highly developed nations, the United States is among those in the earliest stages of public-private partnership implementation," the report said.(5) U.S. DOT identified the following international locations for public-private partnerships: Australia, Finland, Ireland, the Netherlands, New Zealand, Norway, Portugal, South Africa, and the United Kingdom.
A report issued by Price WaterhouseCoopers, Developing Public Private Partnerships in New Europe, identified countries using PPPs and the status of the projects undertaken by the PPPs. Table 1 summarizes that information by country and road sector.
The study classified the individual country's public-private partnerships in five categories based on the status of project completion. The highly summarized status of the country's PPPs was discussions ongoing; projects in procurement; many procured projects, some projects closed; substantial number of closed projects; and substantial number of closed projects, majority of them in operation. All European countries except Luxembourg are involved in various stages of nonroad-sector PPPs. European PPPs constitute 85 percent of PPPs worldwide.
|EU Member States||Road Sector Public-Private Partnerships||Involved in various stages of other sector PPPs|
|Discussions ongoing||Projects in procurement||Many projects procured, some closed||Substantial number of closed projects||Substantial number of closed projects, majority in operation|
|Norway (not EU)||X||X|
The scan team selected the following five countries for the scanning study:
The scan team visited government officials and private partners to governments in all five countries. The countries all had large and/or innovatively funded road transportation projects that were operating and projects that were closed. The team met with representatives of the Portuguese government, including Estradas de Portugal, Ministry of Finance, Inspectorate General for Finance, and Parpublica. Parpublica is a private corporation created by the Portuguese Parliament to handle the sale of public assets, manage all enterprise fund activity, and provide support to other ministries involved with PPPs. The team also met with two Portuguese private partners, Brisa Auto-Estradas de Portugal SA and Auto-Estradas Do Norte SA.
The scan team then met with the Spanish Ministry of Finance, the Spanish Road Association, the Association of Concessionaires, and the Madrid Area Road Infrastructure Agency. The discussions concluded with a visit to the North Tunnel Project (the Spanish "Big Dig"), an underground motorway (M30) that will move vehicles through downtown Madrid. The project required the building of the world's largest drills to bore the tunnels. In addition, extensive effort (noise barriers, dust control, etc.) has been made to protect the environment while the project is under construction.
The team then met with French officials. The team held discussions with representatives from the Ministry for Transport, Infrastructure, Tourism, and the Sea. Financial managers and auditors from the Office of General Inspector, Office of Counsel General, and the Highways General Department (Planning and Budget, Finance, and Operations) shared their experiences and processes on audit stewardship and oversight of large and/or innovatively funded projects.
London, England, was the next site visit. The team met with representatives of the English National Audit Office and the Highways Agency. The director, audit principal, value for money director, and manager of public-private partnerships provided extensive information and knowledge on the evolution and status of their stewardship and oversight processes on large and innovatively funded projects. Likewise, representatives from the Highways Agency's Internal Audit Department, Centre for Excellence, Operational Policy Division, Safety Standard and Research Department, and Engineering Department shared their expertise and experience with the U.S. delegation.
The final visit for the scan team was Ireland. The team met with representatives from the Office of the Comptroller and Auditor General, the Department of Transport, the public-private partnership officer from the Department of Finance, and the National Road Authority's senior project manager, head of program management, and head of PPP and network tolling.