United States: FHWA Declares Concession Agreements Must Be For Fair Market Value

Pursuant to Final Regulations promulgated by the Federal Highway Administration (FHWA) on December 19, 2008, concession agreements for the lease of federal interstates must meet the fair market value requirements previously deemed to apply solely to transfers of air space and excess land. The Final Regulations grant states maximum flexibility in determining what constitutes fair market value whenever the state chooses to utilize a concession. FHWA also amended its design-build regulations to permit state DOT's to incorporate the ideas of unsuccessful offerors to a design-build contract upon the acceptance of a stipend by the offeror. The Final Regulations could have the effect of encouraging public-private partnerships, or "P3s," for existing interstates.

The Final Regulations define a concession agreement as a transaction under which a public entity leases a public highway to a third party and grants the third party the authority to collect revenues in return for compensation to be paid to the public entity. According to the Final Regulations, theTEA-21 amendments expanded the application of the fair market value requirement to all transfers of real property, including concession agreements. Such an arrangement would be exempt from such an analysis if it is deemed a "relinquishment," which occurs when the primary purpose of the agreement between governmental entities is to determine governmental ownership, control, jurisdiction or other responsibilities with respect to the operation of a highway. A highway agency's determination as to whether an agreement is a relinquishment is controlling.

With respect to concession agreements, the Final Regulations proclaim, "It is important to ensure that these transactions result in a fair return for the taxpayers' investment." Since fair market value is most appropriately determined in accordance with state law, the FHWA defers to a state regarding whether fair market value has been obtained in accordance with state law. Any proposal procured through a competitive process with multiple bidders shall be deemed fair market value. If there is no competitive bid process, the highway agency must obtain an independent third-party assessment and make that assessment publicly available.

A concession agreement based on "best value" shall be deemed fair market value. The definition of "best value" is broadened to include policy considerations that are not necessarily quantifiable but that a highway agency considers important. It is the FHWA's intent that the list of factors in the definition of "best value" continue to be a flexible, open-ended list to allow state and local governments to take into account factors that they feel best fit their needs. If best value is used, the highway agency should, but is not required to, identify the criteria to be used in determining best value as well as the weight to be afforded the criteria.

Toll revenues generated from the operation of any highway operating under a federal toll program must be used consistent with the specific revenue restriction under such program. The federal toll programs generally require toll revenue to be used first for debt service, then to provide a reasonable return on investment to any private party financing a project, and for the costs that are necessary for the proper operation and maintenance of the facility. FHWA's characterization of a concession payment as an operating cost will continue. With the exception of the Interstate Reconstruction and Rehabilitation Pilot Program and the Interstate System ConstructionToll Pilot Program, toll revenues in excess of these uses may be applied to other projects eligible for assistance under Title 23, United States Code. If a lease payment is proposed that is based on factors completely unrelated to the value of the facility, such as statewide transportation funding needs, then the lease payment becomes excess toll revenue.

Any concession agreement that has already been executed prior to the January 19, 2009, effective date is grandfathered from the Final Regulations.

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