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Audit Stewardship and Oversight of Large and Innovatively Funded Projects in Europe

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Technical Report Documentation Page

Report No.: FHWA-PL-07-001
Government Accession No.:
Recipient's Catalog No.:
Title and Subtitle: Audit Stewardship and Oversight of Large and Innovatively Funded Projects in Europe
Report Date: March 2007
Performing Organization Code:
Author(s): John P. Jeffers, C. Lamar McDavid, John V. Broadhurst, Karen R. Grosskopf, Jerry J. Jones, Edward G. Kamnikar, Judith A. Kamnikar, Jennifer R. Mayer, Carolyn Rosti, Betsy Scott, James H. Shumock, Owen Whitworth
Performing Organization Report No.:
Performing Organization Name and Address:
American Trade Initiatives
P.O. Box 8228
Alexandria, VA 22306-8228
Work Unit No. (TRAIS):
Contract or Grant No.: DTFH61-99-C-005
Sponsoring Agency Name and Address:
Office of International Programs
Office of Policy
Federal Highway Administration
U.S. Department of Transportation
American Association of State Highway and Transportation Officials
Type of Report and Period Covered:
Sponsoring Agency Code:
Supplementary Notes: FHWA COTR: Hana Maier, Office of International Programs
Abstract:
As transportation agencies undertake nontraditional, innovatively financed infrastructure projects, a concern among State and Federal managers is the effectiveness of the audit stewardship and oversight for these projects. The Federal Highway Administration, American Association of State Highway and Transportation Officials, and National Cooperative Highway Research Program sponsored a scanning study to document best practices used in England, France, Ireland, Portugal, and Spain in the stewardship and oversight of large, innovatively funded projects.

The scan team observed that the terms of public-private partnership contracts have evolved as the European countries have gained experience in their use, and business models and evaluations have become an integral part of project selection and monitoring. To be effective, public sector project auditors in Europe need a range of skills, such as value engineering, business modeling, capital budgeting, and performance auditing.

The team's recommendations for U.S. implementation include developing a Web site on audit stewardship and oversight best practices. The team also recommends that FHWA and AASHTO provide consultation and training for auditors and other financial managers involved in major or innovative procurement contracts, including development of a project planning model and an audit procedures manual.
Key Words: audit, design-build-operate-maintain contract, innovative finance, oversight, public-private partnership, stewardship, tolling
Distribution Statement: No restrictions. This document is available to the public from the: Office of International Programs, FHWA-HPIP, Room 3325, U.S. Department of Transportation, Washington, DC 20590
international@fhwa.dot.gov
www.international.fhwa.dot.gov
Security Classify. (of this report): Unclassified
Security Classify. (of this page): Unclassified
No. of Pages: 56
Price: Free

Form DOT F 1700.7 (8-72)

Reproduction of completed page authorized

Prepared by the International Scanning Study Team:

John P. Jeffers (co-chair), FHWA
C. Lamar McDavid (co-chair), Alabama DOT
John V. Broadhurst, FHWA
Karen R. Grosskopf, FHWA
Jerry J. Jones, Michigan DOT
Edward G. Kamnikar (co-report facilitator), Troy University Montgomery
Judith A. Kamnikar (co-report facilitator), Auburn University Montgomery
Jennifer R. Mayer, FHWA
Carolyn Rosti, Idaho DOT
Betsy Scott, HNTB Corp.
James H. Shumock, Thompson Engineering, Inc.
Owen Whitworth, Texas DOT

for

Federal Highway Administration U.S. Department of Transportation
American Association of State Highway and Transportation Officials
National Cooperative Highway Research Program

March 2007

Acknowledgments

The scan team members give a special thanks to the host organizations from England, France, Ireland, Portugal, and Spain that included the following:

Public sector transportation agencies
Public sector audit agencies
Researchers
Contractors
Private firms

All international hosts gave graciously of their time, produced and delivered a myriad of documents, patiently answered our many questions, and professionally presented their organizations and transportation information with well-prepared multimedia programs. To summarize the scan team's expressions and observations, all international host hospitality and programs exceeded the team's expectations.

The team also thanks the Federal Highway Administration Office of International Programs, the National Cooperative Highway Research Program, and the American Association of State Highway and Transportation Officials for their encouragement, guidance, and support and American Trade Initiatives, Inc. for its organization and support in the planning and execution of this scanning study.

International Technology Scanning Program

The International Technology Scanning Program, sponsored by the Federal Highway Administration (FHWA), the American Association of State Highway and Transportation Officials (AASHTO), and the National Cooperative Highway Research Program (NCHRP), accesses and evaluates innovative foreign technologies and practices that could significantly benefit U.S. highway transportation systems. This approach allows for advanced technology to be adapted and put into practice much more efficiently without spending scarce research funds to re-create advances already developed by other countries.

FHWA and AASHTO, with recommendations from NCHRP, jointly determine priority topics for teams of U.S. experts to study. Teams in the specific areas being investigated are formed and sent to countries where significant advances and innovations have been made in technology, management practices, organizational structure, program delivery, and financing. Scan teams usually include representatives from FHWA, State departments of transportation, local governments, transportation trade and research groups, the private sector, and academia.

After a scan is completed, team members evaluate findings and develop comprehensive reports, including recommendations for further research and pilot projects to verify the value of adapting innovations for U.S. use. Scan reports, as well as the results of pilot programs and research, are circulated throughout the country to State and local transportation officials and the private sector. Since 1990, about 70 international scans have been organized on topics such as pavements, bridge construction and maintenance, contracting, intermodal transport, organizational management, winter road maintenance, safety, intelligent transportation systems, planning, and policy.

The International Technology Scanning Program has resulted in significant improvements and savings in road program technologies and practices throughout the United States. In some cases, scan studies have facilitated joint research and technology-sharing projects with international counterparts, further conserving resources and advancing the state of the art. Scan studies have also exposed transportation professionals to remarkable advancements and inspired implementation of hundreds of innovations. The result: large savings of research dollars and time, as well as significant improvements in the Nation's transportation system.

Scan reports can be obtained through FHWA free of charge by e-mailing international@fhwa.dot.gov. Scan reports are also available electronically and can be accessed on the FHWA Office of International Programs Web Site at www.international.fhwa.dot.gov.

International Technology Exchange Reports

International Technology Scanning Program: Bringing Global Innovations to U.S. Highways

Safety

Safety Applications of Intelligent Transportation Systems in Europe and Japan (2006)
Traffic Incident Response Practices in Europe (2006)
Underground Transportation Systems in Europe: Safety, Operations, and Emergency Response (2006)
Roadway Human Factors and Behavioral Safety in Europe (2005)
Traffic Safety Information Systems in Europe and Australia (2004)
Signalized Intersection Safety in Europe (2003)
Managing and Organizing Comprehensive Highway Safety in Europe (2003)
European Road Lighting Technologies (2001)
Commercial Vehicle Safety Technology and Practice in Europe (2000)
Methods and Procedures to Reduce Motorist Delays in European Work Zones (2000)
Innovative Traffic Control Technology and Practice in Europe (1999)
Road Safety Audits — Final Report and Case Studies (1997)
Speed Management and Enforcement Technology: Europe and Australia (1996)
Safety Management Practices in Japan, Australia, and New Zealand (1995)
Pedestrian and Bicycle Safety in England, Germany, and the Netherlands (1994)

Planning and Environment

Managing Travel Demand: Applying European Perspectives to U.S. Practice (2006)
Transportation Asset Management in Australia, Canada, England, and New Zealand (2005)
Transportation Performance Measures in Australia, Canada, Japan, and New Zealand (2004)
European Right-of-Way and Utilities Best Practices (2002)
Geometric Design Practices for European Roads (2002)
Wildlife Habitat Connectivity Across European Highways (2002)
Sustainable Transportation Practices in Europe (2001)
Recycled Materials in European Highway Environments (1999)
European Intermodal Programs: Planning, Policy, and Technology (1999)
National Travel Surveys (1994)

Policy and Information

European Practices in Transportation Workforce Development (2003)
Intelligent Transportation Systems and Winter Operations in Japan (2003)
Emerging Models for Delivering Transportation Programs and Services (1999)
National Travel Surveys (1994)
Acquiring Highway Transportation Information from Abroad (1994)
International Guide to Highway Transportation Information (1994)
International Contract Administration Techniques for Quality Enhancement (1994)
European Intermodal Programs: Planning, Policy, and Technology (1994)

Operations

Managing Travel Demand: Applying European Perspectives to U.S. Practice (2006)
Traffic Incident Response Practices in Europe (2006)
Underground Transportation Systems in Europe: Safety, Operations, and Emergency Response (2006)
Superior Materials, Advanced Test Methods, and Specifications in Europe (2004)
Freight Transportation: The Latin American Market (2003)
Meeting 21st Century Challenges of System Performance Through Better Operations (2003)
Traveler Information Systems in Europe (2003)
Freight Transportation: The European Market (2002)
European Road Lighting Technologies (2001)
Methods and Procedures to Reduce Motorist Delays in European Work Zones (2000)
Innovative Traffic Control Technology and Practice in Europe (1999)
European Winter Service Technology (1998)
Traffic Management and Traveler Information Systems (1997)
European Traffic Monitoring (1997)
Highway/Commercial Vehicle Interaction (1996)
Winter Maintenance Technology and Practices — Learning from Abroad (1995)
Advanced Transportation Technology (1994)
Snowbreak Forest Book — Highway Snowstorm Countermeasure Manual (1990)

Infrastructure-General

Audit Stewardship and Oversight of Large and Innovatively Funded Projects in Europe (2006)
Construction Management Practices in Canada and Europe (2005)
European Practices in Transportation Workforce Development (2003)
Contract Administration: Technology and Practice in Europe (2002)
European Road Lighting Technologies (2001)
Geometric Design Practices for European Roads (2001)
Geotechnical Engineering Practices in Canada and Europe (1999)
Geotechnology — Soil Nailing (1993)

Infrastructure-Pavements

Quiet Pavement Systems in Europe (2005)
Pavement Preservation Technology in France, South Africa, and Australia (2003)
Recycled Materials In European Highway Environments (1999)
South African Pavement and Other Highway Technologies and Practices (1997)
Highway/Commercial Vehicle Interaction (1996)
European Concrete Highways (1992)
European Asphalt Technology (1990)

Infrastructure-Bridges

Prefabricated Bridge Elements and Systems in Japan and Europe (2005)
Bridge Preservation and Maintenance in Europe and South Africa (2005)
Performance of Concrete Segmental and Cable-Stayed Bridges in Europe (2001)
Steel Bridge Fabrication Technologies in Europe and Japan (2001)
European Practices for Bridge Scour and Stream Instability Countermeasures (1999)
Advanced Composites in Bridges in Europe and Japan (1997)
Asian Bridge Structures (1997)
Bridge Maintenance Coatings (1997)
Northumberland Strait Crossing Project (1996)
European Bridge Structures (1995)

Abbreviations and Acronyms

AASHTO: American Association of State Highway and Transportation Officials
ACEC: American Council of Engineering Companies
AGA: Association of Government Accountants
AICPA: American Institute of Certified Public Accountants
AAA: American Accounting Association
ARTBA: American Road and Transportation Builders Association
BV: best value
CAT: Capability Assessment Toolkit
CEVP: Cost Estimate Validation Process
CM: construction management
CPR: corporate performance rating
CPSS: Consultant Performance and Selection System
DA: department agent
DB: design-build
DBB: design-bid-build
DBFO: design-build-finance-operate
DBM: design-build-maintain
DBOM: design-build-operate-maintain
DOT: department of transportation
ECI: early contractor involvement
EIB: European Investment Bank
EOI: expression of interest
ER: employer's representative
EU: European Union
EUROSAI: European Organization of Supreme Audit Institutions
FAF: Financial Accounting Foundation
FASAB: Federal Accounting Standards Advisory Board
FASB: Financial Accounting Standards Board
FHWA: Federal Highway Administration
GAAP: generally accepted accounting principles
GAAS: generally accepted auditing standards
GAGAS: generally accepted government auditing standards
GAO: Government Accountability Office
GASB: Governmental Accounting Standards Board
HA: Highways Agency (United Kingdom)
HARM: Highways Agency Risk Management
IAS: International Accounting Standards
IASB: International Accounting Standards Board
IASC: International Accounting Standards Committee
IFAC: International Federation of Accountants
IIA: Institute of Internal Auditors
IIAS: International Internal Auditing Standards
INTOSAI: International Organization of Supreme Audit Institutions
IRR: internal rate of return
ISA: International Standards on Auditing
ISO: International Organization for Standardization
KPI: key performance indicator
MAC: managing agent contractor
NCHRP: National Cooperative Highway Research Program
NHI: National Highway Institute
NPV: net present value
PCAOB: Public Companies Accounting Oversight Board
PFI: private finance initiative
PM: project manager
PPC: public-private comparator
PPP: public-private partnership
RFP: request for proposals
SAIs: supreme audit institutions
SEA: service efforts and accomplishment reporting
SIB: state infrastructure banks
STIP: scan technology implementation plan
TRB: Transportation Research Board
U.S. DOT: U.S. Department of Transportation
VFM: value for money

Executive Summary

The process and methodology for the delivery of large highway projects remained basically unchanged for the second half of the 20th century. However, increasing demands for quality transportation systems, rising costs of construction, and a relatively flat revenue stream to finance these projects led the Federal Highway Administration (FHWA) and State departments of transportation (DOTs) to look for new and innovative financing methodologies. As a result, the 21st century seemed to initiate an era of new and innovative ways of financing U.S. highway transportation needs. New methods of financing were proposed and implemented by the U.S. Congress along with private sector initiatives such as private ownership and financing of public highway infrastructure projects.

A concern among State and Federal managers is a loss of effective audit oversight and stewardship on large and nontraditional road transportation contracts. Under the auspices of FHWA's International Technology Scanning Program, the Transportation Research Board's (TRB) National Cooperative Highway Research Program (Panel 20-36), and the American Association of State Highway Transportation Officials (AASHTO), a scan team of 12 audit and financial management specialists from the Federal and State governments, the private sector, and academia visited Europe to search for best practices on audit stewardship and oversight.

During May 2006, the international technology scan team visited five European countries that have extensive experience in highway construction of large and innovatively funded projects, including public-private partnerships. Government officials from audit agencies and road transport agencies in England, France, Ireland, Portugal, and Spain welcomed the U.S. team and presented information on their:

Audit practices, both independent and internal.
Stewardship of the government's assets.
Oversight of large road projects, many of which were accomplished through public-private partnerships (PPP).
Use of tolls and concession contracts to meet service needs of multiple constituencies.

The team returned with several recommendations that have the potential to improve audit stewardship and oversight of large road projects in the United States. This summary provides a brief description of the findings and recommendations of the team. Details on the observations, findings, and recommendations are in Chapters 1, 2, and 3 of this report.

Overview

The following definitions were used for this international technology scan:

Audit—Includes financial statements, attestation, and performance engagements conducted in accordance with generally accepted auditing standards (GAAS) and/or generally accepted government auditing standards (GAGAS).
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 risk mitigation 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.

As part of its stewardship role, FHWA uses the International Technology Scanning Program to identify best practices of foreign governments that are transferable to the United States. The International Technology Scanning Program focuses on meeting the growing demands of FHWA partners at the Federal, State, and local levels for access to information on state-of-the-art technology and best practices used worldwide. This is the first scan that addresses audit stewardship and oversight. Team members gained valuable insights into audit practices during their visits with European independent and internal auditors.

General Observations About Audit Stewardship and Oversight

Responsibility for the independent audit function in the host countries rests primarily with each central government. This is similar to the U.S. model in which each State uses its own audit agency to conduct the independent (financial statement) audit function rather than a national audit agency. The responsibility for the internal audit function is also similar to the United States in that it generally resides in each agency and/or ministry. Promulgated auditing standards guide the audit practices in each host country. These governmental auditing standards are in place to ensure that governments maintain accountability to their citizenry and other constituencies. The European Union and the United States have similar audit standards.

Findings and Recommendations

The team members examined audit programs and practices employed by the host European countries that provided oversight of large and innovatively funded projects. It became obvious during the scanning study that the European community has extensive experience with nontraditional vehicles for delivering road infrastructure assets. It was also clear that the process of maintaining road infrastructure assets necessary to address European Union goals and objectives has impacted these countries and road infrastructure delivery contracts continue to be an evolving process. This is clearly demonstrated by the differences between the terms of initial PPP contracts and those now being issued. The increasing use and robustness of business models and evaluations and the sophisticated oversight processes conducted throughout the project life cycle were not as evident in initial PPP tenders. Today, they are visible and integral parts of project selection and monitoring. A summary of the team findings and recommendations is presented under the categories of audit stewardship, audit oversight, and general audit issues.

Audit Stewardship Findings and Recommendations

Auditors need a variety of skill sets. These skills involve value engineering, business modeling, capital budgeting (present value and internal rate of return applications), traditional financial problem-solving methodology, and performance auditing. New personnel with specialized skills may need to be hired. Additional training of current staff may be necessary, along with contracting for those services with the private sector, as needed.
State DOT teams need to be established for each proposed PPP highway project. This PPP team would have the necessary skill sets to develop a business model to be used to determine if the project can deliver value for money (VFM) to the State's citizens. The team would then be involved in all matters pertaining to the proposal, selection, and construction of this capital PPP project.
State DOTs should implement the use of a process auditor position for each PPP. The responsibility of the process auditor is to assure that all necessary legal, accounting, business plan, and policy issues are addressed from the development of a PPP proposal through the final bid acceptance.
Audits should be conducted throughout the project life cycle, not just of the end construction costs. Auditors should concentrate on audit processes that are value for money oriented. The project life cycle should be monitored using compliance, financial, and performance auditing techniques.
Public project comparators (comparables) should be developed for each capital construction project before a request for proposal (RFP) is issued.
Early and active involvement by internal audit staff and financial experts generally improves the quality of highway project RFP design and tender evaluation. Project performance objectives need to be established at the initiation of the project. Once established, audit techniques and performance benchmarks are developed. This allows for stewardship and oversight throughout the life of the project.
Use robust business plans/models to evaluate the capital investment of transportation projects. The models should include tools such as value for money, present value, internal rate of return, and risk assessment.
Concession contracts should call for sharing revenues with the State if toll activity exceeds a specified, predetermined base. Concession contract terms should specify the annual toll inflationary adjustment rate as well as expected traffic counts. When these expectations are exceeded, the State should share in the revenues.
Engineering specifications on design-build-operate-maintain (DBOM) contracts should be specific to the outcomes desired. The contractor should be provided with the opportunity to determine the detailed specifications to construct, maintain, or operate the project based on the outcome specifics.
The value for money (VFM) process should be used as a viable and effective methodology for selecting projects and/or the contractor.
Contracts for DBOM with concessions (PPPs) exceeding 30 to 35 years should be evaluated carefully.
Refinancing profits should be shared between the government and the PPP. This sharing arrangement is usually detailed in the original tender bid specifications.

Audit Oversight Findings and Recommendations

Critical areas for audit oversight include auditor involvement in the procurement contract, methodology and basis of establishing risk allocation between the parties in the procurement contract, and review or preparation of public comparators for the contract.
Performance and compliance audit plans should be developed from the PPP and State DOT project business plan. Poor or inadequate business planning prevents the development of adequate performance evaluation criteria.
Methodology for audits of concession counts, revenues, and expenses should be developed and included with clear contract language in the tender or RFP. With long-term contracts, future technology expectations need to be included.
Auditing a PPP requires objectives for each stage of procurement, including determining what audit questions need to be answered at each phase, building in renegotiation points, and keeping the contract financing on track by allowing for adjustments. A final performance audit should address the project efficacy.
Toll concessions and traffic counts should be available in real time to both parties with methods of surveillance and audit available. Electronic systems should allow contractors and States real-time information that is verifiable.

General Audit Issues Findings and Recommendations

The United States, through FHWA and AASHTO, should work toward development of a seamless national tolling system. The system should allow State DOTs their autonomy, but it should be 100 percent compatible and allow for interoperation capability. This would enable citizens with a single registration to access any toll scheme throughout the Nation.
Business plans should allocate risk between the PPP partners according to their ability to control and manage the risk. Risk sharing can reduce PPP financing costs and private sector profit expectations, thereby reducing user toll costs.

Implementation Strategies, Dissemination, and Recommendations

The scan team identified several strategies for disseminating and fostering the results of this scan. The following summarizes the implementation strategies:

The scan results should be disseminated as widely as possible throughout the transportation community. Presentations should be scheduled for the annual meetings of TRB, AASHTO, the American Road and Transportation Builders Association (ARTBA), and the American Council of Engineering Companies (ACEC), as well as applicable AASHTO committee and subcommittee meetings in 2006 and 2007.
Scan team members should participate in national and international PPP forums to obtain additional information and training and to document best practices on PPPs. The information learned from forum participation should be disseminated via AASHTO, TRB, ARTBA, and ACEC.
Scan team members are encouraged to write articles for publication in professional transportation trade journals and professional accounting and auditing publications.
Scan team members are encouraged to volunteer for speaking engagements at professional meetings and conferences to share the recommendations of this report.
AASHTO and FHWA should develop a best practices Web site and incorporate the scan results. Availability of the Web site should be promoted throughout the governmental auditing, finance, and transportation communities.
The specific statutory and regulatory requirements found in each of the countries scanned should be made available to the transportation community on the Web site.
AASHTO and FHWA should partner in providing consultation and training of auditors and other financial managers involved in major and/or innovative transportation procurement contracts. This consultation and training should include development of the following:
- A robust financial project planning and business model that would accommodate analysis of various financing schemes.
- A model to establish public comparables for all projects being considered.
- A model contract for concessions and PPPs.
- An audit procedures manual for concessions and PPPs.
- A database of best practice audit processes and procedures for traditional and nontraditional capital improvement highway transportation projects. The database could include concession contracts, private sector rate of return on concession contracts, national tolling charge (revenue) per mile, profit sharing arrangements on debt refinancing, and audit techniques for PPPs.
- A series of training courses on topics unique to audit and finance transportation personnel dealing with traditional and nontraditional projects.
- A national tolling model for collection of toll revenues that can operate seamlessly throughout the United States.
- A monograph on the fundamentals of PPPs.
- A dictionary of PPP and other innovative financing terminology.

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