Innovation Paves the Way for the Massachusetts Route 3 North Project (FHWA IFQ)

On October 6, 2000, the Massachusetts Highway Department (MassHighway) broke ground on construction of the Route 3 North Project, the first design-build-finance highway construction project in the Commonwealth of Massachusetts. Route 3 North is an existing 21-mile limited access highway running north and south between the Route I-95/128 circumferential highway around Boston and the New Hampshire border. The $385 million project is designed to alleviate a number of significant transportation problems on this heavily utilized highway through the phased construction over 42 months of several major improvements, including the addition of a travel lane in each direction, the addition of a median shoulder and a 30-foot clear zone, improvements to 13 interchanges, and the replacement of 40 bridges.

This new project delivery approach was authorized by the Massachusetts Legislature in August 1999 through a bill that enabled the creation of a public-private partnership to finance, design, build, operate, and maintain the Route 3 North Project. Through a competitive process, the MassHighway selected Modern Continental as the developer to finance, design, and build the project and then operate and maintain the facility for 30 years upon its completion.

The project encompasses a number of innovative features:

  • Through the use of design-build procurement, project delivery is expedited and cost certainty is established early in the project’s development. Developer selection was made on a “best value” basis, where the design-build price bid was a significant, but not the sole, criterion for selection. Other criteria considered in the best value determination included the proposed cost of operations and maintenance over a 30-year period; project schedule; approach to maintenance of traffic; the quality of design and the approach to construction quality assurance; the proposed plan of finance; and the planned approach to addressing environmental permitting issues. Price is guaranteed and secured by the developer.
  • A special purpose, not-for-profit corporation – or 63-20 corporation – was formed by the MassHighway and the developer to issue $394.5 million in tax-exempt lease revenue bonds to finance the project on the Commonwealth’s behalf. The bonds are secured by a 34-year lease of the facility between MassHighway and the 63-20 corporation known as the Route 3 North Transportation Improvements Association (“the Association”). MassHighway’s rent payments to cover debt service and the cost of operations and maintenance are subject to an annual appropriation of the Legislature.
  • Three components of the project financing plan have reduced the Route 3 bond size by an estimated $54 million. First, the scheduling of annual lease payment due dates well into the Commonwealth’s fiscal year eliminated the need for a liquidity debt service reserve, which would otherwise have been required to address risk associated with potential delays in adoption of the state budget. Second, an up-front payment was made by the project’s senior banker (Salomon Smith Barney) to the Association of nearly $9 million in connection with an innovative forward purchase agreement. Third, project risk insurance was purchased, with the developer serving as a co-insurer. This requires the developer to establish a contingency fund to meet unexpected changes in the amount of 10 percent of the design-build price, or approximately $38 million.
  • The bonds held underlying ratings of A+ by Fitch and Aa3 by Moody’s. The Association’s purchase of bond insurance from MBIA resulted in insured ratings of AAA by Fitch, Aaa by Moody’s, and AAA by Standard & Poor’s. By comparison, the Commonwealth’s general obligation bond ratings are rated AA- by Fitch, Aa2 by Moody’s, and AA- by Standard & Poor’s. The project was thus financed at a lower interest rate than the Commonwealth could obtain on its own general obligation credit.
  • The developer may pursue surface, sub-surface, and air rights development to generate non-project revenues. Planned development includes installation of fiber optic cable during construction with the developer sharing in the sale of fiber optic rights. Other potential plans include construction and sublease of a service plaza, which is estimated to result in non-project revenues of approximately $500,000 per year, and development on land adjacent to the highway and interchanges. The developer has a strong financial incentive to pursue development rights, receiving 40 percent of ancillary development revenues under the negotiated Development Agreement.

 

The combination of innovative contracting and financing approaches implemented for the Route 3 North Project will generate significant benefits, producing measurable economic advantages, cutting the project delivery time line in half, and saving dollars. Specifically, the design-build methodology will minimize project costs by introducing construction process efficiencies, and the guaranteed price will offset inflationary increases associated with phased development. From an economic perspective, the favorable financing terms and costs and the ancillary revenue potential further demonstrate the value of Massachusetts’ innovative approach to project delivery.

The FHWA Innovative Finance Quarterly (IFQ) is published four times per year. FHWA does not maintain a mailing list for the IFQ nor does it distribute the publication direcly. The IFQ is available as an insert to the AASHTO Journal and is also available electronically through FHWA’s Home Page: http://www.fhwa.dot.gov/innovativefinance/