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Assessing the Effectiveness of Infrastructure PublicPrivate Partnership Programs and Projects
Michael J. Garvin and Doran Bosso Public Works Management Policy 2008 13: 162 DOI: 10.1177/1087724X08323845

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Assessing the Effectiveness of Infrastructure PublicPrivate Partnership Programs and Projects


Michael J. Garvin
Virginia Tech

Public Works Management & Policy Volume 13 Number 2 October 2008 162-178 2008 SAGE Publications 10.1177/1087724X08323845 http://pwmp.sagepub.com hosted at http://online.sagepub.com

Doran Bosso
Skanska Infrastructure Development
Publicprivate partnerships (P3) have emerged as a popular strategy for infrastructure development worldwide. Within the United States, the momentum for P3 arrangements is building as states put enabling legislation in place, public authorities search for expedient solutions for the infrastructure funding gap, and investor capital becomes increasingly attracted by the risk/return profile of infrastructure assets. Proponents of P3s tout advantages whereas detractors claim that the expected benefits rarely materialize, or they are obtained at too great an expense. Thus, the following question arises: Are P3s effective as infrastructure development strategies? A framework, which might serve to both structure and assess P3 programs and projects, is presented. The framework has evolved since its original introduction and is underpinned by the notion that P3 strategies must balance the interests of society, state, industry, and the market for ultimate success. A case study of its application is presented to illustrate its utilization and potential. Keywords: contracting; infrastructure development; procurement; program/project delivery; publicprivate partnerships

he publicprivate partnership (PPP or P3) movement is arguably the most significant, worldwide trend in the public sector. The United Kingdoms private finance initiative, which began in earnest in 1992, has facilitated the delivery of nearly 800 projects valued at more than 56 billion ranging from car parks to schools to tolled highways to power plants (HM Treasury, 2008). Similarly, in Victoria, Australias Partnerships Victoria program has contracted 18 projects representing roughly US$5.5 billion in capital investment since 2000 (State Government of Victoria, 2008). Outside the developed world, the use of private capital for infrastructure projects within emerging economies has become quite common, where financially challenged public administrations look toward the private sector to develop basic infrastructure (Esty, 2003). In fact, a survey of a dozen national governments across the globe in the late 1990s indicated that a significant majority of the respondents expected that the most successful government structure in 2010 will be one in which government focuses on policy and project/supplier management, allowing the private sector to deliver most traditional public services (Economist Intelligence Unit, 1999, p. 4). Indeed, the prediction made by the surveys respondents seems on its way toward realization.
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Within North America, Canada has seen its fair share of P3 activity within its provinces. A notable project is the Confederation Bridge, which was a design buildfinanceoperate arrangement that established a fixed link between the mainland and Prince Edward Island. Another is the lease of the 407 Express Toll Route (ETR), where in exchange for nearly Can$3 billion a private sponsor leased this facility from the government for 99 years. Within the United States, activity in this market has started to pick up. Currently, 24 states and territories have enabling legislation in place that permits some form of publicprivate initiatives on state transportation projects (US Federal Highway Administration [FHWA], 2008). In addition, the recent leases of the Chicago Skyway and the Indiana Toll Road have attracted the attention of governments to investors
Authors Note: This work is funded by grant CMMI-0629260 from the National Science Foundation, whose support is gratefully acknowledged. Any opinions, findings, conclusions, or recommendations expressed in this article are those of the authors and do not necessarily reflect the views of the National Science Foundation. Correspondence concerning this article should be addressed to Michael J. Garvin, Virginia Tech, 116 Patton Hall, Blacksburg, VA 24061-0105; e-mail: garvin@vt.edu.

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(Florian, 2006; Gribbin, 2006). Still, only a few states Florida, Indiana, Oregon, South Carolina, Texas, and Virginiaare truly active on this front. Clearly, the interplay between (a) the general reluctance of public agencies and governments to raise taxes, (b) the emergence of private sector participants, which are willing and most capable of handling the risks and delivering the services of infrastructure, and (c) the realization of pension fund and institutional investment managers of the attractiveness of privately financed infrastructure projects to the risk/return requirements of their clientele is driving the progress of this market. The P3 activity or output, though, does not provide any indication of the effectiveness of such programs or projects. Performance measurement theorists will certainly suggest that outcomes are far more important than output. Moreover, infrastructure is fundamentally a public good.1 As such, the public has a right to expect that it provides a satisfactory level of service, has a reasonable price, and allots its benefits and costs equitably. This begs the following question: Are P3 outcomes better than or at least equal to more traditional infrastructure development and management strategies? Moreover, what is necessary for this market to develop and realize its potential? A P3 equilibrium framework, which has evolved since its first introduction, is presented as a mechanism to guide and to assess P3 programs and projects. In many respects, the framework is normative, in that it suggests the qualities that are appropriate for P3 success. Foremost, the framework helps to structure perspectives of P3 arrangements and is underpinned by the notion that these strategies must balance the interests of society, state, industry, and the market for ultimate success. A detailed application of the framework to the SR 91 Express Lanes project illustrates its utilization and potential.

the infrastructure sector. In fact, most P3 guidance documents emphasize the significance of clear and enforceable partnership conditions. The Fiscal Affairs Office (2004) of the International Monetary Fund indicates that a precondition of a successful P3 arrangement is whether the quality of services is contractible. Given these circumstances, this working definition is proposed for the infrastructure community: A P3 is a long-term contractual arrangement between the public and private sectors where mutual benefits are sought and where ultimately (a) the private sector provides management and operating services and/or (b) puts private finance at risk. Perhaps, the significance of this definition is what it excludes as opposed to what it includes. Notably, this definition excludes both design-build and the transfer or sale of infrastructure assets or services to the private sector. Although presenting some unique challenges, design-build is a modest derivative of the designbid-build project delivery system, which is the dominant (and often mandated) delivery method for public works projects in the United States. The transfer of an asset or service qualifies as privatization; this distinction is more than semantic. The P3 arrangements are governed by contracts and the accompanying body of contract law. Privatizations are regulated enterprises where the governance and legal structures are quite different.

Abundant Literature
P3 initiatives worldwide have generated substantial institutional, archival, and popular literature. Although a thorough categorization of this literature is beyond the scope of this article, each class may be loosely generalized. Many institutional sources discuss the nature of P3 arrangements and provide both policy and implementation guidelines. A central proposition of many guideline documents is that P3 arrangements should always be considered for infrastructure development or service delivery, but they should only be pursued if they deliver value for money, which is loosely defined as the optimum combination of life cycle costs and quality to meet user requirements. Archival manuscripts have tended to focus on the following dimensions of P3 programs and projects: key success factors; emerging trends; risk characterization, allocation, and mitigation; and policy design and social implications. Finally, popular periodicals have generally concentrated on current events, trends, and controversies.2

Background
P3 Characterization
Any discussion regarding the P3 movement must start with an attempt to characterize and define this approach to project and/or service delivery. Unfortunately, a concise characterization is elusive. Kingsley and ONeil (2004) presented a conceptual framework and model designed to assist with the development and measurement of P3 initiatives, but their model is founded on the premise that P3 arrangements are truly partnerships where each partner has the perspective that their organizational identity and competitive advantage are enhanced through participation in the partnership. Garvin and Chiara (2006) examined definitions offered by various parties and found that this is not the type of arrangement either sought or established in

A Common and a Mounting Argument for P3 Arrangements


The P3 arrangements are often viewed by governments as a solution to infrastructure-funding shortfalls

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Figure 1 P3 Equilibrium Framework


Society

service, and net contributions to the environment. If not, their expertise is for all intents and purposes wasted. Moreover, the risks of transferring these responsibilities to the private sector could be too great.

Genesis of a P3 Equilibrium Framework


Social Interests Industry Interests

Overview
State Industry

State Interests

Market Interests

Range of Balance

Market

Revised from Garvin (2007a)

(Orr, 2006). This claim, however, is somewhat contentious as a government certainly has the capacity to utilize user fees, which are often an integral part of a P3 project, as the principal security for a projects financial package while also offering its general creditworthiness as secondary security. One would expect that the cost of capital for such an arrangement would be lower than the cost that a private sponsor could obtain, even if taxexempt status is granted. Gribbin (2006), however, has argued that innovative private financing debt-equity structures can free these assets from the conservative bond investor clientele. Indeed, he may be correct. The holders of government bonds or even private tax-exempt bonds have relatively conservative appetites for risk, which introduces fairly conservative methods for assessing value. Alternatively, an entirely private debt-equity structure introduces investors with higher tolerances for risk, which will in turn tend to generate more liberal appraisals of asset value. Although the cost of capital may indeed be higher, the perceived value of the asset under scrutiny is also likely higher. Clearly, this perception has helped drive the attraction of monetizing infrastructure assets. Indeed, the notion that infrastructure is captive capital, awaiting liberation has resonated with some though causing concern for others. Nonetheless, the state and society should demand more than an economic premium for granting the private sector the right to develop and/or operate facilities that are generally public goods. Indeed, the private players in this arena have the expertise, the agility, and the incentive to provide morehigher quality of service, reasonable price for the service, faster availability of the

The perspective that the public sector should look to the private sector for more than simply capital did not arise capriciously. Instead, it emerged from past and current research by others and the lead writers involvement in case-based research of large-scale infrastructure projects over the past decade.3 From this base, Garvin (2007a) introduced the P3 equilibrium framework, which was designed both to assess the effectiveness of and to promote structured thinking about P3 arrangements. The framework, illustrated in Figure 1, was underpinned by two fundamental propositions. Proposition I. The basic objective of a P3 program is to nurture the development of this market and to sustain its existence. To do so, a P3 program must establish equilibrium among four environments: (a) state, (b) society, (c) industry, and (d) market. Figure 1 depicts this notion conceptually. Proposition II. Projects are the operational expressions of any P3 program. As such, any particular project can either maintain the equilibrium of the overall program or distort it. Furthermore, the collective performance of all projects will determine whether the P3 program is effective as a strategy or policy for infrastructure development and management. Also, each P3 project should seek to provide a marginal improvement in one or more of the following areas: (a) quality of service, (b) price/cost of service, (c) time of service availability, (d) level of environmental impacts, and (e) equitable distribution of social benefits. Clearly, neither the framework nor the propositions were entirely original or groundbreaking. Indeed, the P3 equilibrium framework incorporated concepts presented by Lessard and Miller (2000) regarding the risks of large engineering projects and by Linder and Vaillancourt Rosenau (2000) about the terrain of P3 arrangements as well as by other fairly familiar socioeconomic notions. Still, the framework represented an important synthesis of ideas derived through grounded research, from relevant literature, and from common thought. Figure 1 shows four continuums (state, society, industry, and market), four quadrants (social interests, industry interests, market interests, and state interests), and a central

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Table 1 Excerpt From P3 Project Appraisal Template


Element Concession management Issue No-compete provisions Performance measurement Allowed and absolute Allowed with exclusions Clear and objective Absent Vague Clear and objective Absent Vague Clear and objective Absent Vague Clear and objective Absent Vague Impact

Conditions for renegotiation

Termination provisions

Facility return provisions

space dubbed the range of balance. The state is the elected or allotted body governing a jurisdiction. Society is the citizens living and working within a jurisdiction. Industry is the enterprises engaged in providing services and goods to the state and society within the jurisdiction. Finally, the market is the financial system that allows investors to exchange wealth and risk through time. The depiction in Figure 1 advocates that the longterm success of a P3 program depends heavily on establishing a balance between the interests of the state, society, industry, and market. Hence, the framework does have a normative character since it proposes the conditions necessary for beneficial P3 outcomes. More than likely, creating a discrete point is not feasible, particularly because P3 projects are likely to scatter themselves into the various quadrants as each projects conditions will vary. However, a central tenet is that the scatter of a programs projects must cluster within the range of balance. Otherwise, the program will ultimately suffer from bias toward a particular quadrant (such as a clustering in the social interests region) or from instability if no clustering is observed at all. Thus, the equilibrium framework helps to establish the boundaries for the overall program, and it provides a platform for plotting the general location of each project and evaluating a programs evolution.

Intended Utilization
Although the P3 equilibrium framework provides a general perspective, it does not provide any tools necessary for measurement. Accordingly, Garvin (2007a) suggested two analytical templates to evaluate P3 programs and projects. Each template depicted a variety of

elements and issues for consideration as well as the likely impact of each when evaluating either a program or project. The impact suggested the general direction of movement away from the frameworks origin for a given condition; judgment is still necessary to determine if the vector is correct for the case at hand. To illustrate, Table 1 depicts the element of concession management from the project appraisal template, which has several issues identified. For the issue of no-compete provisions/ allowed and absolute, an impact vector points to the right and down. This suggests that the locus of the P3 project would move right and down from the overall frameworks origin. The skew is down as this condition on balance favors the market, that is, the projects lenders and investors, as it protects the assets value. The project appraisal template also included a project performance category, which was unique among all of the elements. This category would not move the location of a project within the quadrant space. Instead, it would either reinforce or weaken the P3 strategy for infrastructure development. If a P3 programs projects do not produce tangible improvements in service quality/innovation, competitive or equitable prices for such service, and reasonable progress in service availability, then the viability of the approach itself is questionable, regardless of whether the proper balance has been struck. While designed as a tool to assess existing programs and projects, the nature of the framework and its accompanying analytical templates permits its use as a predictive instrument as well. A decision-maker can utilize the framework to forecast whether or not a potential program or project possesses the structure necessary for long-term success. This capacity is obviously derived from the frameworks normative quality.

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Table 2 Selected Case-Study Programs and Projects


Programs 1st Generation California AB680 Projects Santa Ana Viaduct Express SR 91 Express Lanes SR 125 South Mid-State Tollway Dulles Greenway SR 18 Corridor SR 520 Puget Sound congestion pricing Tacoma Narrows Bridge Chicago Skyway lease Indiana Toll Road lease Las Vegas Monorail TTC-35 I-81 improvements Pocahontas Parkway Capital Beltway HOT Lanes Route 460 improvements

Virginia Highway Corporation Act Washington public private initiatives 2nd Generation California AB 1467 Trans-Texas Corridor Virginia PPTA

the United States is limited, and though sampling would certainly help to solidify the findings of the research, to do so would require expanding the scope of the study beyond the United States. Although this is clearly possible as the worldwide use of P3 is substantial, it is not necessarily feasible in the short term if the thoroughness of the methodology is to be maintained. In addition, experience to date suggests that obtaining the cooperation of principal stakeholders for structured interviews can be difficult as often these arrangements are politically charged. This condition hinders, but does not prevent, establishing a credible chain of evidence.

Case Studies Completed


To date, the research has examined four programs (two each from the first and second generation categories): Californias AB 680 program, Virginias Highway Corporation Act, Californias AB 1467 program, and Virginias PublicPrivate Transportation Act (PPTA). It has also studied four projects (again two each from first and second generation categories): the SR 91 Express Lanes, the Dulles Greenway, the Pocahontas Parkway, and the I-81 Improvements. Synopses of each of the four project case studies are provided to highlight pertinent information and issues. See Bosso (2008) for more details regarding these particular case studies. SR 91 Express Lanes. The SR 91 Express Lanes was one of four pilot projects resulting from Californias AB 680 legislation of 1989, which asked private consortia to propose, develop, finance, and operate transportation projects for 35 years. The SR 91 Express Lanes was the only project to proceed quickly. The project represents a landmark in American toll roads as the roadway was one of the first private toll roads opened in the United States since the 1940s. A franchise to the California Private Transportation Company (CPTC) was approved in 1990, and the franchise agreement was effective as of July 16, 1993. After 29 months of construction, the facility opened on December 27, 1995 (Boarnet & Dimento, 2004). The project had installed four lanes within the median strip of 10 miles of SR 91, an existing eight-lane state route, at a cost of US$126 million. These lanes function as high occupancy toll (HOT) lanes, where passenger cars with a single driver can pay to utilize the express lanes, and high occupancy vehicles can use the lanes free of charge. The toll road was Americas first to employ variable congestion pricing, taking advantage of the concept of supply and demand to mitigate congestion. The prices are highest during rush hour in the morning and evening and drop down during off-peak hours.

NOTES: PPTA = PublicPrivate Transportation Act; HOT = high occupancy toll.

Research Application
Overview
The P3 equilibrium framework has become the basis for a longitudinal, case-based approach to examine the effectiveness of P3 programs and projects. Table 2 depicts several of the cases under investigation; they are categorized as either 1st or 2nd generation programs or projects. As with all grounded or case-based research, the importance of construct validity (establishing correct operational measures for the concept under study) and reliability (demonstrating that the operations of a study are repeatable) are paramount to this endeavor (Yin, 1994). Construct validity will be maintained by using multiple sources of evidence: (a) source documents, such as enabling legislation, program guidelines, request for proposals (RFP), and concession agreements; (b) thirdparty documents, such as periodical articles, archival literature or position studies or papers; and (c) structured interviews with the principal parties involved. These various sources of information should triangulate to produce a credible chain of evidence. Reliability is achieved by applying a consistent study protocol throughout. This approach is not, however, without its limitations. Foremost, the number of contemporary P3 initiatives in

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The base rate of return expected by the projects developers was 17%, and the concessionaire negotiated a strict absolute protection zone that forbade public agencies from increasing highway capacity within a 1.5-milewide corridor on either side of the toll lanes to protect its asset (California Department of Transportation, 1993). In the late 1990s, the noncompete clause began to come under criticism (Boarnet & Dimento, 2004). At the time of the contract, financiers thought these clauses were necessary to ensure necessary revenue. This aspect of the contract, negotiated by Caltrans, prevented the improvement and expansion of competing free roads, most notably 30 miles of the Riverside Expressway and the expansion of the regular SR 91 lanes. It also prohibited improvement of local roadways. In 1999, Caltrans moved to add more lanes in some locations on SR 91 to improve on- and off-ramp traffic flow. The CPTC and Caltrans disagreed on the perceived need for these additions and the impact on the express lanes. Caltrans attempted to justify the need for the improvements by claiming they were necessary to improve safety, which, by contract, would allow the improvements to be made. The safety analysis presented by Caltrans was disputed (FHWA, 2003). Eventually, the CPTC sued to stop the plans, and Caltrans withdrew them. Furthermore, Riverside County later sued the CPTC in an attempt to nullify the contract to operate the express lanes, stating that the agreement was an unconstitutional gift of public assets (FHWA, 2003). These legal battles with government agencies, in conjunction with rising toll prices, quickly turned public opinion against the CPTC as it became clear to commuters that congested general purpose lanes were what drove profitability in the express lanes (K. Avila, personal communication, October 2, 2007). Under a great deal of public and political pressure, the Orange County Transportation Authority (OCTA) purchased the SR 91 Express Lanes Franchise from the CPTC for US$207.5 million, as authorized by Assembly Bill 1010 Chapter 688. This included removing Article 3.2 of the franchise agreement, which contained the noncompete clause, to obtain the ability to improve the routes general purpose lanes and surrounding roads as it saw fit. The purchase came in the form of US$72.5 million in cash (borrowed from other funds and to be repaid) and OCTA assuming responsibility for the assets and liabilities of the franchise. As part of the agreement, the OCTA assumed US$135 million of taxable 7.63% senior secured bonds that mature on August 15, 2028. To refinance these bonds, the OCTA issued US$195 million in Toll Road Revenue Refunding Bonds in November of 2003 (K. Avila, personal communication, October 2,

2007). The OCTA continues to contract the operation of the road to Cofiroute, which has been the operator since the inception of the express lanes. Effective January 6, 2006, the 91 Express Lanes Fund entered into a second operating agreement with Cofiroute, effective through 2011, that pays Cofiroute US$6,160,170 per year (plus inflation adjustments) to continue operating the facility. Furthermore, the OCTA employs Caltrans for some general maintenance and cleanup of the facility, and several other private companies for day-to-day operations (K. Avila, personal communication, October 2, 2007). Ironically, no major improvements have been made to the surrounding area since the OCTA purchased the franchise agreement from the CPTC and negated the nocompete clause. Dulles Greenway. The Dulles Greenway was another highway project in the United States to be delivered by a P3 franchise arrangement. The greenway was an extension of the existing Dulles Toll Road from Dulles International Airport into primarily undeveloped reaches around Leesburg, Virginia. The extension provided a more attractive commuter route than existing state roads from northern Virginia into the Washington, D.C., metropolitan area, and it was regarded, in part, as a catalyst of property development in outlying areas. The Virginia Department of Transportation (VDOT) began planning the extension in 1987. In the following year, in the face of a US$7 billion transportation-needs deficit, the Virginia General Assembly passed the Virginia Highway Corporation Act authorizing the private development of toll roads. Thereafter, a private consortium, ultimately named TRIP II, secured the right to develop the extension as a toll road from the state. As a completely private venture, the extension (dubbed the Dulles Greenway by the development consortium) would provide some 40 years of cash flows to its investors and debt holders without public subsidies. Revenues would depend almost exclusively on toll receipts. Initial projections by the consortium forecast approximately 20,000 vehicles per day for the first year of operation at a fixed toll rate of US$1.50 with traffic increasing to 34,000 vehicles per day by 1995 at the same toll rate (Vollmer, 1989). The original agreement allowed user fees to follow a predefined schedule of escalation through 2010; thereafter, the concessionaire could escalate the fees at an annual rate of 3.2%. Estimates of total capital costs were approximately US$279 million. Equity investors contributed approximately US$40 million, and long-term fixed rate notes provided the balance of the financing. The project was originally scheduled to start

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construction in 1989 and operations in 1992, but difficulties in securing financing and environmental permits caused delay. During the 4-year schedule slip, the consortium revisited their financial model and subsequently adjusted it by increasing traffic projections for the first year of operation to the daily ridership forecast of 34,000 expected by 1995 in the original estimatethus neglecting the time actually required to build up traffic demand (Pae, 1995). In addition, the plan was to start with a toll rate of US$1.75 and to raise this rate to US$2.00 shortly thereafter. Construction finally commenced in September 1993, proceeded flawlessly, and ended 6 months ahead of schedule in September 1995. Within 6 months of opening, the project, however, was in financial distress. Average daily traffic demand was an abysmally low 10,500. The toll rate was not raised to US$2.00 but was reduced to US$1.00 in March 1996. Future toll hikes were deferred in an attempt to increase ridership. By July 1996, road usage increased to 21,000 daily travelers, averaging 1% to 2% monthly growth. However, the net effect on projected revenues was marginal, as decreased toll rates offset the increase in traffic. To make matters worse, the VDOT began improving Route 7, a competing free road, exacerbating the projects situation. Indeed, the governments commitment to the project had been marginal from the outset. Michael Crane, CEO of the private concessionaire, commented, We wouldnt do it as a totally private infrastructure project, if we had to do it again. These projects are only successful as publicprivate partnerships. The developer must have the full support of the state (Bailey, 1996, p. A19). The projects sponsors began discussions with the projects creditors in the summer of 1996 to work out a plan for deferring debt payments and restructuring loan contracts (Bailey, 1996). By 1998, TRIP II had begun filing with the Virginia State Corporation Commission (SCC) regarding refinancing of greenway debt. In 1999, it refinanced with bonds that replaced all other outstanding agreements. The US$332 million in AAA bonds were insured by MBIA and included US$35 million in current pay interest only bonds and US$297 million worth of zero coupon bonds, maturing in 2003 and 2005 with a blended interest rate of approximately 7%. In 2005, with ridership around 70,000 vehicles per day, Macquarie Infrastructure Group paid US$617.5 million for the rights to the Dulles Greenway. Macquarie paid US$533 million to acquire 87% of the greenway from TRIP II, and Kellogg, Brown, & Root was compensated in the amount of US$84.5 million for the remaining 13% of the road. This marked Macquaries third toll road purchase in the United States, having recently acquired the Chicago Skyway and Indiana Toll

Road for approximately US$1.8 and US$3.8 billion, respectively (Macquarie, 2007). Pocahontas Parkway. Virginias PPTA of 1995 led to one of the states more notable projects, the Pocahontas Parkway. Plans for the roadway began as early as 1980 when state transportation officials began considering the extension of an existing arterial roadway to provide an eastwest connection between I-95 and I-295 south of Richmond. In 1983, an alternative limited-access route, designated as Route 895, was approved by the Commonwealth Transportation Board (CTB). Concurrently, the Federal Highway Administration tentatively approved federal funding for the project as a toll-free route that allowed interstate designation. Design activities for the route began, but progress stalled in the late 1980s when both federal and state funds for the project did not materialize. Following passage of the PPTA, a joint venture team of Fluor Daniel and Morrison Knudsen submitted an unsolicited proposal to the VDOT for the development of the route. A comprehensive agreement was executed between the VDOT and the FD/MK Limited Liability Company. Ultimately, the development plan included (a) tolling the roadways users; (b) a fixed price design-build contract between the VDOT and the FD/MK Limited Liability Company; (c) the creation of 63-20 Corporation, the Pocahontas Parkway Association (PPA), to issue taxexempt bonds to finance design, construction, and operations; and (d) the VDOT assuming responsibility for operations and maintenance of the route on completion. The parkway was only the second transportation project in the United States to be financed through a 63-20 Corporation. Although the bonds provided the majority of the financing, the State Infrastructure Bank also provided a US$18 million loan and the FD/MK LLC provided a US$5 million line of credit. Toll revenue would first pay back the bond holders and then pay the VDOT for its operations and maintenance expenses. Toll rates were defined for the first 2 years in the projects comprehensive agreement. Thereafter, the VDOT would hold the right to adjust the tolls subject to covenants in the bond indenture. Demand projections expected an initial average daily traffic of 15,000 vehicles with trucks accounting for 10% of this volume. The FD/MK team agreed to complete the project by April 2002 for US$324 million, and construction commenced in October 1998. In 1998, the PPA raised US$354 million through the sale of tax-exempt bonds. The 8.8 mile route began opening in stages in May 2002 and was fully complete by September at a reported cost

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of US$314 million (Regimbal, 2004). A 2-week free usage period was granted to encourage use of the route. Once tolls were imposed, the demand expected did not materialize. By 2004, only 16,000 vehicles per day were using the route, generating half the revenue expected by that time (Artman, 2006). In 2006, after 18 months of negotiation, Transurban executed an asset purchase agreement with the PPA and entered into an amended comprehensive agreement with the VDOT to effectively lease the parkway for 99 years. Thus, Transurban had acquired its first transportation asset in the United States and obtained sole rights to enhance, manage, operate, maintain, and collect tolls on the parkway. Transurban is also expected to develop and manage an airport connector route, contingent on the receipt of a US$150 million Transportation Infrastructure Finance and Innovation Act (TIFIA) loan.4 Transurban raised approximately US$615 million in support of the arrangement, US$195 million in equity and subordinated debt provided by Transurban, and US$420 million in senior debt provided by a conglomerate of European banks (Project Finance, 2006). The capital raised (a) retired the PPAs existing debt, (b) reimbursed the VDOT for its costs to operate and maintain the parkway to date, (c) established a US$90 million reserve and contingency fund, (d) earmarked US$8 million for operational enhancements and US$2 million for a major maintenance fund, and (e) allotted the remainder for development fees and transaction costs. A specific tolling schedule is defined in the agreement through 2016. Afterwards, Transurban may increase annual toll rates based on the rise in the gross domestic product, the consumer price index, or by 2.8% (Virginia Department of Transportation, 2006). I-81 improvements. Currently, I-81 is the longest stretch of interstate in Virginia (325 miles), running along the states western boundary with 90 interchanges. I-81 is not only essential to the economic vitality of Virginia but it also serves as one of the East Coasts most important transportation facilities. Regularly listed as one of the top eight trucking routes in the United States, I-81 carries out-of-state tourists, through travelers, a growing number of intravalley commuters, and more than a third of all college and university students in Virginia. Traffic through this crucial corridor has tripled in the past 20 years, from approximately 20,000 vehicles per day to nearly 60,000 vehicles per day in the Roanoke Valley and Winchester regions. On some sections of I81, the number of trucks nearly equals the number of passenger cars (Virginia Department of Transportation, 2008). The growing amount of congestion has led the

state of Virginia to search for means of expanding capacity, without shouldering the full financial load of such a major construction project. Accepted serviceability standards for rural interstates call for a Level of Service B. Currently, 90% of I-81 achieves a grade of less than B. Projections for 2025 indicate that most of I-81 will be operating at or near failure during peak hours, whereas by 2010 about one third of I-81, especially from the Roanoke area through the Harrisonburg area, will be at level D or worse. In addition, the impact of the high level of truck traffic is exacerbated by the mountainous terrain and winding curves, which combine to form dangerous conditions. Accidents involving trucks are a major concern. A recent 18-month period saw 2,681 accidents on I-81 with 41 deaths and 1,528 injuries. Commercial trucks were involved in 825 accidents, which resulted in 15 deaths and 449 injuries (Virginia Department of Transportation, 2008). In January 2002, STAR Solutions, Inc., a consortium led by KBR, Inc., submitted an unsolicited proposal to VDOT to improve safety and reduce congestion along I81 by separating cars and trucks along all 325 miles of the interstate. As a consequence, on March 2002, the Virginia General Assembly passed legislation to allow tolling of trucks using interstates through the PPTA program. In September 2002, the VDOT issued A Solicited PublicPrivate Transportation Act Request for Conceptual Proposals for Improvements to the Interstate 81 Corridor in Virginia. The 24-page document called for proposals from private entities who wish to design, construct, improve, maintain, and/or operate all or part(s) of the Interstate 81 corridor in Virginia. The solicitation also discussed the functional needs of the state: Improvements must be developed in a fashion that equally emphasizes moving people and goods, as well as moving cars, trucks, and freight. . . . Proposals should focus on a range of short, mid, and long-term solutions, and clearly lay out the financial requirements for each. In January of 2003, STAR Solutions responded to the solicitation with a modified proposal and Fluor Virginia Inc., a consortium led by Fluor Enterprises, submitted a competing conceptual proposal. Both proposals were given to the Initial Review Committee (IRC) to assess their technical and engineering merit and financial feasibility as well as to evaluate the proposers qualifications (Phase I of the process). Subsequently, the IRC recommended to the VDOT commissioner that both proposals continue on to the CTB for further evaluation (Phase II). In March 2003, the CTB recommended that the process

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170 Public Works Management & Policy

Table 3 Comparison of STAR and Fluor Proposals


Item Cost Completion Toll Safety Financing STAR Solutions US$7.1 billion 2019 Trucks only: US$0.274/mile Separate car lanes Toll revenue bonds: 15% Federal earmarks: 12% BANs/TIFIA: 54% Other: 18% Fluor Virginia US$5.9 billion 2014 Trucks: US$0.05/mile Cars: US$0.17/mile Additional car only lane Toll revenue bonds: 92% Other: 8%

NOTES: TIFIA = Transportation Infrastructure Finance and Innovation Act; BAN = bond anticipation notes.

proceed with submission and subsequent evaluation of detailed proposals from both consortia (Phase III). In September 2003, both STAR and Fluor submitted detailed proposals to VDOT. Table 3 presents a comparative analysis of each proposal on various dimensions. Both were evaluated by the PPTA Advisory Panel, consistent with the terms of the solicitation. The panel met five times over the next several months, with one session fully devoted to public comment. In February 2004, the PPTA Advisory Panel recommended that the VDOT commissioner enter into negotiations with STAR Solutions for a comprehensive agreement for improvements to I-81 in Virginia. The panel acknowledged that both proposals met the five sets of criteria established in the solicitation, but they concluded that the STAR Solutions proposal comes closer to meeting the longterm needs of the corridor and relies on a more diversified, achievable financing program (Homer, 2004). In their recommendation to the commissioner, the advisory panel conceded that the ultimate determination of need in this corridor would hinge on compliance with federal laws such as the National Environmental Policy Act (NEPA) as this facility is obviously part of the Interstate Highway System. The VDOT and the Federal Highway Administration had initiated an I-81 Corridor Study in fall 2003. The study, titled the Tier 1 Draft Environmental Impact Statement (DEIS), considered reasonable improvements to the corridor, including separate truck lanes, rail improvements, and tolls as a funding source. The DEIS was released in early 2005, a year-and-a-half after the initial recommendation to negotiate with STAR Solutions. In October 2006, the CTB endorsed a series of actions for I-81 that were consistent with the Tier 1 DEIS. In a unanimous resolution, the CTB directed VDOT to complete the Final Environmental Impact Statement (FEIS) with a widening concept that would add not more than two general purpose lanes, only where needed.

The FEIS, released in March of 2007, made a series of recommendations that differed markedly from the STAR proposal. Most significantly, separate lanes for trucks along the entire length were deemed unnecessary, and a proposal to eliminate this concept from further study was made. Furthermore, the FEIS concluded that no corridorlength concept satisfies the capacity needs, without providing excess capacity, and therefore a concept with a variable number of lanes would most efficiently address the needs of the roadway. In June 2007, the FHWA issued a Record of Decision (ROD) on the Tier 1 FEIS. The ROD gives federal approval of the study and allows VDOT to go forward with planning improvements to I-81. The ROD confirmed the same key points about the corridor established in the Tier 1 FEIS. In January 2008, the VDOT confirmed that negotiations with STAR Solutions had officially ceased, and the STAR Solutions proposal was no longer under consideration. Thus, 6 years later, this corridor remains virtually unchanged.

Evolution of the Framework


During application of the framework and its analytical templates to the program and project case studies, several modifications were considered and a few have been adopted. Some of the modifications are simple adjustments to ease utilization of the framework though others are more substantive. First, a grid is added to the graphical display of the framework to assist in charting the impact vectors. This not only allows for more consistent placement but also guarantees that projects are placed correctly with respect to each other. Furthermore, the range of balance has been changed from a circle to a square, as part of the conversion to a grid system. Figure 2 illustrates the revised P3 equilibrium framework. Second, several elements of the P3 program and project

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Garvin, Bosso / Infrastructure PublicPrivate Partnership 171

Figure 2 Revised P3 Equilibrium Framework

appraisal templates are clarified, and new elements are also added. Tables 4 and 5 depict the modified program and project appraisal templates. For instance, in the project appraisal template, acquisition and procurement/ third party consultant involvement is a new issue within this element. Finally, the need for a new concept not originally envisioned was discovered. Clearly, one would expect that a project with fewer impact (or vector) movements would be more balanced and have a greater chance for success. While analyzing the case studies, it became apparent that a project could possibly have many impact movements, yet still end up within the range of balance. Hence, this locus is misleading because the final location indicates a high potential for success. The final mapping, however, is the result of various pushes and pulls as each and every impact vector indicates a unit of movement that most likely represents an undesirable condition of the P3 arrangement. A project (or program) with many different impact vectors or movements has a greater chance to go awry than a project (or program) with little movement. This realization introduced a new notion, that of tension. The number of impact vectors or movements of a particular project or program corresponds to the level of tension in the arrangement or strategy. To clarify the concept, imagine that a potential project rests at the origin of the framework but is attached to four ropes, one for each interest. When an appraisal issue results in an

impact vector, the project is pulled in the direction of the vector, and each rope is tensed or stressed. As additional vectors or movements are encountered, the tension or stress in all ropes increases. Anyone who has ever attempted to cut a loose rope versus a tight rope knows that the tight rope is easier to sever. Similarly, an arrangement or strategy that is tensed is more likely to unravel. This notion of tension is measured simply by counting the number of impact vectors or movements encountered during program or project appraisal. Higher numbers suggest more potential pitfalls whereas lower numbers suggest the opposite. Neither, however, promises a negative or positive outcome. Some might demand more precise measurements than the ones proposed. This is neither necessary nor likely. First, the framework is intended to serve as a guide to channel the assessment effort, not as an instrument to pinpoint an exact location. Second, quantifying all of the factors involved and establishing correlations between them would be a monumental, if not impossible, task. Moreover, its complexity could easily diminish its credibility as this would likely create a black box. The techniques employed must be accessible to all stakeholders involved. Otherwise, the impacts of the framework will not transfer as widely and as deeply as desired.

Example P3 Project Analysis


Project Appraisal
The SR 91 Express Lanes project is analyzed using the revised P3 equilibrium framework to illustrate its application. Table 6 depicts the appraisal of each project element and respective items.

Mapping the Project in Framework


Figure 3 maps the SR 91 Express Lanes project within the framework. It rests in the industry interests quadrant on the upper right corner of the range of balance. The project has high tension with 12 impact vectors (or movements). With the benefit of hindsight, this locus and level of tension correspond well with actual events and outcomes. The nature of the AB 680 Program was essentially geared to tap industry for transportation project concepts, finance, and implementation (Poole, 1988). Consequently, the mapping of this project is not surprising and appears appropriate. In many respects, the SR 91 Express Lanes project was a success. It improved the quality of service, introduced a time/cost choice to the traveler, and delivered this service in a timely manner,

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172 Public Works Management & Policy

Table 4 Modified P3 Program Appraisal Template


Element Scope of work or service Issue Addressed by legislation? Source of definition Limitations Yes No Solicited only Unsolicited allowed Mode restrictions Geographic restrictions Project delivery restrictions No such restrictions Yes No All Private only Tax-exemption allowed Diversion to public funds allowed Yes No Publicly driven Privately driven Negotiated Not addressed Escalation controls Revenue sharing with state Yes No Not addressed Required Required and process defined Undisclosed Competitive Negotiated Handled by state Handled by private sector Not addressed Addressed and allowed Not addressed Yes No Undisclosed Disclosed Disclosed and defined Undisclosed Unlimited For cause Impact

Financing

Addressed by legislation? Sources allowed Allowances or exclusions

User fees

Addressed by legislation? Method of establishment

Management

Acquisition and procurement

Addressed by legislation? Comparative analysis

Selection method

Permitting and property acquisition

Use of 3rd party consultants Contract management Addressed by legislation? Auditing process

Termination rights

which justifies its positive project performance rating overall. A major issue, though, is whether the price was right. This concern was mitigated somewhat by the market forces that would drive tolls charged and the cap on the rate of return instituted by the state. Still, competing proposals over this scope of work could have assured the state and its citizens that it was receiving the best value that industry and the market could provide. Moreover, the projects absolute protection zone proved problematic.

Lessard and Miller (2000) and Guasch (2004) have demonstrated, however, that the market or revenue risk is most pronounced in the early stages of these sorts of infrastructure projects. Thus, a more amenable strategy for the no-compete provision might have been adopted. Perhaps, a short-term (5-10 years) provision would have been sufficient to mitigate the revenue risk for the private sponsor, which might have kept a significant constraint from developing for OCTA.

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Table 5 Modified P3 Project Appraisal Template


Element Market conditions Issue Established demand Competing facilities Manageable global risks Project location Socioenvironmental conditions Project type Project scale Yes No Yes No Yes No Developed world Developing world Greenfield Brownfield Large (>US$1 billion) Medium (US$10 M-US$1 B) Small (<US$10 million) Diverse Distinct Reflect cost of service Unusually high Long-term management plan No long-term plan Positive support Opposition Yes No No Over comparable scope Based on price, technical and/or schedule Factors other than price Transparent and objective Discretionary or unclear Yes No Assigned to proper party Transferred Exist and stringent None or reasonable Clear and objective Absent Vague Clear and objective Absent Vague Clear and objective Absent Vague Clear and objective Absent Vague Readily apparent Marginal Nonexistant Readily apparent Difficult to judge Rapid and continued availability Slow or delayed availability Positive impact Marginal or negative impact Impact

Demographic impact User fees

Public and political support Acquisition and procurement Financial and technical benchmark Competition

Selection criteria and process Third party consultant involvement Contract management Risk apportionment No-compete provisions Performance measurement

Conditions for renegotiation

Termination provisions

Facility return provisions

Project performance

Quality and innovation

Price Service availability Environmental performance

Positive Negative Positive Negative Positive Negative Positive Negative

Summary Analysis of Project Case Studies


Figure 4 maps each of the four case studies presented earlier within the framework. In the instance of the

Pocahontas Parkway, the original arrangement between VDOT and the PPA and the recent lease of the Parkway to Transurban are both plotted. Likewise, each detailed proposal to VDOT for the I-81 improvements is charted. With

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Impact Established demand on congested SR 91 SR 91 Explanation Developed world New lanes within median of existing route, so more brownfield Capital cost of US$126 millionmedium scale Other routes, but this segment runs through a valley making it rather efficient for N/S travel; limits but does not eliminate competing facilities Global risks manageable Impacts local users and commuters on SR 91 but availability of free alternative minimizes distinct impact User fees reflect value of service as hot lanes provide market/choice to users Regulated rate of return implicitly manages user fees over long term Initial support positive (although this changed with time) No benchmark created by Caltrans

Table 6 Project Appraisal of SR 91

Element

Issue

Market conditions

Established demand

Competing facilities

Manageable global risks

Project location

Socioenvironmental conditions

Project type

Project scale

Demographic impact

User fees

Public and political support

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Acquisition and procurement

Financial and technical benchmark Competition

Unique proposalso without benchmark nothing to compare it against; state had no idea of value it was receiving. Proposal did compete against other noncomparable projects. Two vectorsone for lack of direct competition and one because project was judged against other proposals on factors other than price. Caltrans provided loose guidelines and selection criteria, so process was very discretionary. Caltrans did not use a 3rd party analyst/consultant during decision making

Contract management

Selection criteria and process Third party consultant involvement Risk apportionment

No-compete provisions

Franchise arrangementso construction, financing, and demand risk taken by CPTC Absolute protection zone well defined

Performance measurement

Conditions for renegotiation

Operations and maintenance overseen by Caltrans according to their standards, which were not supplied up front, so form and level of oversight not specific Article 5 states that parties should negotiate changes in good faith; Article 15 outlines the arbitration process if there is a disagreement Well defined and fair termination provisions in Article 3 Section 5

Termination provisions

Yes No Yes No Yes No Developed world Developing world Greenfield Brownfield Large (>US$1B) Medium (US$10M-US$1B) Small (<US$10M) Diverse Distinct Reflect cost of service Unaffordable or unusually high Long-term management plan No long-term plan Positive support Opposition Yes No No Of comparable scope Based on price, technical, and/or schedule Factors other than price Transparent and objective Discretionary or unclear Yes No Assigned to proper party Transferred Exist and stringent Nonexistent or reasonable Clear and objective Absent Vague Clear and objective Absent Vague Clear and objective Absent Vague

(continued)

Table 6 (continued)
Impact SR 91 Explanation Return provisions not mentioned in the agreement.

Element

Issue

Facility return provisions

Project performance

Quality and innovation

Positive

Introduction of a market for users; innovative AVI tolling system and peak and off-peak pricing of user fees provides flexibility to users

Price Positive Positive

Negative

Service availability

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Environmental performance

Clear and objective Absent Vague Readily apparent Marginal Nonexistent Readily apparent Difficult to judge Rapid and continued Slow or delayed Positive impact Positive Negative Positive Negative Positive Negative Positive

No price competition or benchmark; very slight mitigation based on cap on rate of return Rapid delivery of service, which has continued uninterrupted despite friction between CPTC and OCTA and transfer of asset Construction within existing roadways median; congestion relief provided by HOT lanes reduces vehicle emissions.

NOTES: HOT = high occupancy toll; CPTC = California private transportation company; HOT = high occupancy toll; OCTA = orange county transportation authority; AVI = automatic vehicle identification.

175

176 Public Works Management & Policy

Figure 3 Locus of SR 91 Express Lanes Project

Figure 4 Mapping of All Case Studies

SR 91 already discussed, the plots of the remaining projects are interesting to contemplate. For instance, the Dulles Greenway falls just below the origin of the framework centered between state and market interests; interestingly, this was an unsolicited project that, in many ways, pitted the state against its sponsors (Bosso, 2008). The projected demand for the roadway did not materialize, and the situation was made worse when the state began improving competing free routes. Neither party gained from this project. Its investors and lenders lost money, and though some might suggest that the state obtained a highway extension that it wanted at virtually no economic cost to itself, this perspective does not consider the importance of concession conditions and success on the long-term outlook of P3 arrangements. This market is unlikely to fully mature without cases of mutual benefit between the public and private sectors. In this circumstance, the state likely deterred market development through its actions. The location of the original Pocahontas Parkway arrangement (No. 1) is also intriguing. One of the first PPTA projects in Virginia, it was an unsolicited proposal, which made a number of allowances that benefitted its industry partners including the creation of 63-20 corporation for ownership of the facility, the award of a design-build/finance contract to the Fluor/MK team, and the assumption of operations and maintenance responsibilities by the state. Once opened, the very low demand for the road suggests a lack of need by society and a devastating outcome for the projects investors, so the only true beneficiaries were the organizations

employed to create the asset. For the sake of brevity, discussion of the remaining plots is left for another day.

Conclusion
The transition to a world where a non-trivial percentage of infrastructure services is provided by the private sector appears to be underway. Essentially, governments will become the overseers of such service rather than the service providers. Will this transition be beneficial? The revised P3 Equilibrium Framework presented is proposed as both a guide for structuring P3 programs and projects, and a tool for assessing their potential effectiveness. Applications of the framework to date have produced important revisions to the original concept, as well as, begun to substantiate its usefulness. As the research progresses, a more complete answer to the effectiveness question shall emerge, but perhaps more importantly, so shall lessons regarding the keys to P3 success for all the stakeholders be involved and impacted by these initiatives. Early results of the research indicate that the contemporary P3 movement in the United States has not produced the type of benefits expected from P3 arrangements. The cases studied, indicated structural imbalances and/or high levels of tension, which resulted in generally high transaction costs and poor outcomes. The American P3 market is still rather immature. A sub-optimal outcome, though, is not fixe. Moreover, the P3 framework, in

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Garvin, Bosso / Infrastructure PublicPrivate Partnership 177

theory, can encourage both sectors to play to their strengths, the public as policy maker and standard-bearer and the private as innovator and efficiency-expert. The means to this end depends upon balancing the interests of the state, society, industry and the market.

Notes
1. Infrastructure clearly is not a free good, as many consumers perceive, as its costs are veiled by the variety of mechanisms used to fund its development and management. 2. Examples of each classinstitutional: HM Treasury (2004); archival: Froud, J. (2003); popular: Thornton, E. (2007). See Garvin (2007a) for a more complete literature summary. 3. Many of these cases are reported in Miller (2000), Miller (2002), and Garvin (2007b). 4. Transurban closed the US$150 million Transportation Infrastructure Finance and Innovation Act (TIFIA) refinancing in June 2007. This represents the first federal debt funding for the refinancing and expansion of an existing, privately operated road under TIFIA.

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178 Public Works Management & Policy Thornton, E. (2007, May 7). Roads to riches. BusinessWeek, 4033, pp. 50-57. US Federal Highway Administration. (2003). A guide for hot lane development. Retrieved March 26, 2008, from http://www.itsdocs.fhwa.dot.gov/jpodocs/repts_te/13668.html US Federal Highway Administration. (2008). PPP legislation. Retrieved March 26, 2008, from http://www.fhwa.dot.gov/ ppp/legislation.htm Virginia Department of Transportation. (2006, June 29). Amended and restated comprehensive agreement to develop and operate the Route 895 connector. Agreement between VDOT and Transurban LLC. Virginia Department of Transportation. (2008) Interstate I-81: Overview. Retrieved February 17, 2008, from http://www.virginiadot.org/projects/constSTAN-I81-overview2.asp Vollmer Associates. (1989). Traffic and revenue forecasts for the proposed Dulles Toll Road extension project (report to the Toll Road Corporation of Virginia). Hamden, CT: Author. Yin, R. K. (1994). Case study research: Design and methods (2nd ed.). Thousand Oaks, CA: Sage. Michael J. Garvin is an associate professor in the Myers-Lawson School of Construction at Virginia Tech. His research interests include infrastructure/real asset investment, financing, and management as well as innovative project delivery systems such as public private partnerships. Doran Bosso recently completed his masters degree in the MyersLawson School of Construction at Virginia Tech. He is now employed as an analyst by Skanska Infrastructure Development in Alexandria, Virginia.

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