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Code · REGISTER · 2007-08-03 · Federal Transit Administration (FTA), DOT · Notices

Notices. Notice of proposed rulemaking

102,354 words·~465 min read·/register/2007/08/03/07-3784

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BILLING CODE 4910-57-M 72 149 Friday, August 3, 2007 Proposed Rules Part II Department of Transportation Federal Transit Administration 49 CFR Part 611 Major Capital Investment Projects; Proposed Rule Notice of Availability of Proposed Policy Guidance on Evaluation Measures for New Starts/Small Starts; Notice DEPARTMENT OF TRANSPORTATION Federal Transit Administration 49 CFR Part 611 [Docket No. FTA-2006-25737] RIN 2132-AA81 Major Capital Investment Projects AGENCY: Federal Transit Administration (FTA), DOT. ACTION: Notice of proposed rulemaking. SUMMARY: This Notice of Proposed Rulemaking
(NPRM)provides interested parties with the opportunity to comment on proposed changes to the Federal Transit Administration's (FTA's) New Starts program and a new proposed Small Starts program category. The new Small Starts program category is a discretionary grant program category for public transportation capital projects that run along a dedicated corridor or a fixed guideway, have a total project cost of less than $250 million, and are seeking less than $75 million in Small Starts program funding. This NPRM addresses comments on the Advanced Notice of Proposed Rulemaking (ANPRM) on Small Starts issued on January 30, 2006 and the draft Guidance on New Starts Policy and Procedures issued on January 19, 2006, and makes proposals for the New Starts and Small Starts programs which take into account these comments. FTA is concurrently issuing policy guidance for comment that describes the factors and measures used in its evaluation process, which are not described in the NPRM. DATES: Comments must be received by November 1, 2007. ADDRESSES: *Written Comments:* Submit written comments to the Docket Management System, U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Ave., SE., Washington, DC 20590. *Comments.* You may submit comments identified by the docket number (FTA-2006-25737) by any of the following methods: • *Federal eRulemaking Portal: http://www.regulations.gov.* Follow the online instructions for submitting comments. • *Web Site: http://dms.dot.gov.* Follow the instructions for submitting comments on the DOT electronic docket site. • *Fax:* 1-202-493-2251. • *Mail:* U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Ave., SE., Washington, DC 20590. • *Hand Delivery:* To the Docket Management System; U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Ave., SE., Washington, DC 20590, between 9 a.m. and 5 p.m., Monday through Friday, except Federal Holidays. *Instructions:* All submissions must include the agency name and docket number or Regulatory Identification Number
(RIN)for this notice. For detailed instructions on submitting comments and additional information on the rulemaking process, see the Public Participation heading of the Supplementary Information section of this document. Note that all comments received will be posted without change to *http://dms.dot.gov* including any personal information provided. Please see the Privacy Act heading under Supplementary Information. *Docket:* For access to the docket to read background documents or comments received, go to *http://dms.dot.gov* at any time or to the Docket Management System (see ADDRESSES ). FOR FURTHER INFORMATION CONTACT: Ron Fisher, Office of Planning and Environment, telephone
(202)366-4033. FTA is located at 1200 New Jersey Ave., SE., East Building, Washington, DC 20590. Office hours are from 9 a.m. to 5:30 p.m., Monday through Friday, except Federal holidays. SUPPLEMENTARY INFORMATION: I. Background On August 10, 2005, President Bush signed the Safe, Accountable, Flexible, Efficient Transportation Equity Act—A Legacy for Users (SAFETEA-LU). Section 3011 of SAFETEA-LU made a number of changes to 49 U.S.C. 5309, which authorizes the Federal Transit Administration's (FTA's) fixed guideway capital investment grant program known as “New Starts.” This Notice of Proposed Rulemaking
(NPRM)implements those changes and proposes a number of other changes that FTA believes will improve the New Starts program. In addition to the changes made to the New Starts program, SAFETEA-LU amended 49 U.S.C. 5309 to add a new capital investment program category for projects requesting less than $75 million in Section 5309 Capital Investment funds and having a total project cost of less than $250 million. That new capital investment program, which will be referred to as the “Small Starts” program, is the other subject of this NPRM. Based on comments received on this NPRM, FTA plans to issue a final rule in the future that will finalize the proposed changes to the existing New Starts program, as well as proposed rules for the Small Starts program. This NPRM is the culmination of two public involvement initiatives for the New Starts and Small Starts programs—the Small Starts Advance Notice of Proposed Rulemaking (ANPRM) (71 FR 4864, Jan. 30, 2006) and the Guidance on New Starts Policies and Procedures (Notice of availability and request for comments, 71 FR 3149, Jan. 19, 2006). These separate pre-rule public involvement processes are being consolidated into this one rulemaking so that issues of overlap and coordination between these two aspects of FTA's discretionary capital investment program may be addressed. This NPRM closes the dockets for both of these pre-rule activities and creates a new docket for comments on the NPRM. FTA provided further opportunity for public involvement by holding a number of listening sessions throughout the country. Those listening sessions were held at the following dates and locations: —San Francisco, CA—February 15-16, 2006, Hyatt Regency San Francisco. —Ft. Worth, TX—March 1-2, 2006, Radisson Plaza Hotel Fort Worth. —Washington, DC—March 9-10, 2006, Wardman Park Marriott Hotel. FTA is planning to conduct similar outreach activities on both this NPRM and the policy guidance that FTA is issuing concurrently. Details on these activities will be announced in a **Federal Register** notice at a later date and on FTA's Web site. The Response to Comments section of this notice summarizes and responds to comments received on each of the questions raised in the Small Starts ANPRM and the Guidance on New Starts Policies and Procedures. It begins by restating each question, then summarizes the comments received on that question, as well as our response to the comments and concludes with FTA's proposal for addressing those comments in our proposed regulatory language. The Response to Comments portion of the Preamble is broken down by the following subjects: Eligibility, Evaluation and Ratings, and Procedures for Planning and Project Development, first with respect to the Guidance on New Starts Policies and Procedures and then with respect to the APRM on Small Starts and concludes with a section entitled “Additional Discussion Items for Comment” where FTA specifically seeks feedback on several new issues that it would like to address in the final rule. The Section-by-Section Analysis in this notice explains our rationale for the language proposed for the regulation, as well as suggesting alternative proposals to some provisions. In order to make the regulation more understandable, FTA is proposing to divide it into four subparts that will cover General Provisions, “New Starts,” “Small Starts,” and “Very Small Starts.” Subpart A would include General Provisions that apply to all projects seeking Section 5309 Capital Investment funds. Subpart B would include those provisions that apply to New Starts (projects of $250 million or more in total cost *or* requesting $75 million or more in New Starts funds). Subpart C would cover Small Starts projects (projects of less than $250 million in total cost *and* requesting less than $75 million in Small Starts funds but not qualifying as a Very Small Start). Subpart D would cover Very Small Starts (a subset of Small Starts projects which are less than $50 million in total cost and $3 million per mile (excluding vehicles) and which meet other specified characteristics). FTA has chosen this approach, even though there is a lot of similarity in the requirements of each subpart, in order to assist a project sponsor in finding all of the applicable procedures and evaluation criteria in a single subpart, depending on the size and nature of the proposed project. II. Response to Comments The following is a summary of the comments received in response to our questions raised in Part 2 of the Guidance on New Starts Policies and Procedures and in the Small Starts ANPRM, our response to the comments received and our proposal for addressing the issue raised by the questions in the proposed NPRM. Guidance on New Starts Policies and Procedures Eligibility 1. How might FTA determine whether a Bus Rapid Transit
(BRT)project is a “fixed guideway” project? *Comment:* Nine comments were received in answer to this question. The range of BRT eligibility requirements suggested in the comments highlights the inherent difficulty in determining whether a BRT project is a “fixed guideway” project. Some commenters suggested that eligible BRT projects should operate in an exclusive right-of-way
(ROW)or that certain percentages of project length should be in an exclusive ROW. Others stated that eligibility should be based on percentage of length subject to certain features or “intensity” of usage, such as ridership or vehicles per unit of time. Finally, some thought that eligibility should be determined on a case-by-case basis. *Response:* There is no statutory requirement that a fixed guideway project must operate in its entirety in a separate or exclusive ROW. The varied responses indicate the difficulty in strictly defining the parameters that should apply to BRT when it does not include a fixed guideway for its full length. FTA has previously made eligibility determinations on a case-by-case basis and has allowed eligibility for projects that include a significant fixed guideway portion, *e.g.* , a dedicated busway, but also include some mixed-traffic sections. *Proposal:* FTA proposes to define a BRT project as a “fixed guideway” if the project operates on a fixed guideway that is dedicated to transit or high occupancy vehicle use for at least 50 percent of its length during the peak period, or when congestion inhibits transit system performance. In making this determination it is not necessary that the 50 percent of its length be contiguous as long as the 50 percent that is dedicated is designed to provide significant travel times savings. In addition, for the purposes of funding design and construction of New Starts and Small Starts, FTA proposes to revise the definition of a “fixed guideway” to include projects meeting certain other conditions. FTA is asking for specific comment, under a section entitled “Additional Discussion Items for Comment” on this revised definition that would include a transportation facility that, by means of pricing and other enhancements, replicates the benefits of “free-flow” conditions for transit users historically achieved by a physically separated right-of-way available solely for transit and high-occupancy vehicles. To make such projects eligible for New Starts or Small Starts funding, FTA proposes to incorporate into the regulatory definition of “fixed guideway system” a provision that deems such a facility, subject to certain limitations, to be “a separate right-of-way reserved for the exclusive use of public transportation.” The operation of the new provision would be limited strictly to defining eligibility for discretionary funding under New Starts (49 U.S.C. 5309(d)) and Small Starts (49 U.S.C. 5309(e)), and would not alter the definition of “fixed guideway mile” for purposes of calculating the distribution of funds under formula programs administered by FTA. The practical effect of amending the definition of “fixed guideway” in this way is that it would allow FTA to fund a portion of the construction of high occupancy toll
(HOT)lanes, on which transit vehicles would run, with money from the Section 5309 Capital Investment program. This has the advantage of providing more flexibility to project sponsors with creative ideas for potentially building cost effective transit projects. Specifically, FTA proposes to revise the definition of “fixed guideway system” to include the following clause at the end of the definition: “Additionally, a transportation facility shall be deemed a fixed guideway system solely for the purposes of funding eligibility under New Starts (49 U.S.C. 5309(3) if the project is designed so that in any given month
(i)transit vehicles utilize the transportation facility on a barrier-separated right-of-way; and
(ii)by means of tolling or other enhancements, 95 percent of the transit vehicles using the facility will be able to maintain an average speed of not less than 5 miles per hour below the posted speed limit for the time they are on the facility.” In applying this definition FTA intends to limit the amount of New Starts and Small Starts funds that can be used for constructing the facility to that portion which benefits transit. FTA could calculate the “total project cost” of a fixed guideway made eligible under this proviso as follows:
(i)The total project cost of the fixed guideway in its entirety, multiplied by
(ii)a ratio,
(a)the numerator of which would be the expected peak transit vehicle-miles traveled on the fixed guideway and
(b)the denominator of which would be the expected total peak vehicle-miles traveled on the fixed guideway. The product of the calculation would be deemed the total project cost attributable to a transit project eligible for funding under New Starts or Small Starts. Eligible fixed guideway costs, in other words, would be proportionate to the transit use of the facility. Alternatively, FTA and the applicant may designate a mutually agreeable amount as the total project cost. In either case, the Federal share, if any, contributed toward such project costs would be made available subject to full compliance with the standard rating criteria for New Starts (or Small Starts) projects, as provided by applicable statutes, regulations, and FTA guidance. 2. Should FTA fund HOV projects to the degree that they provide benefits to public transit riders? *Comment:* Sixteen comments were received in answer to this question. Responses to this issue were equally mixed, with similar numbers of commenters supporting and opposing the concept. Those who favored support for HOV projects cited minimum service levels and ridership as necessary conditions. Those opposed were concerned that the already limited FTA funding for New Starts projects would be further reduced by those funds being diverted to projects traditionally funded by the FHWA. *Response and Proposal:* FTA has not participated in HOV projects through the New Starts program for the last decade and FTA does not propose to change that policy. However, as stated in the response above, FTA is considering revising the definition of a fixed guideway system, to allow for funding a portion of a new HOT facility that meets certain conditions. Project Evaluation and Ratings 3. How might the New Starts evaluation framework be changed to better support informed decision-making? Is there a preference for Option 1, Option 2, or something different? Note: Option 1 was described as an extension of the current framework with the two new criteria in SAFETEA-LU, economic development and reliability of the forecast of costs and ridership, added to the project justification criteria currently used. The project justification rating would result from weights applied to the ratings for each of the component criteria. The project justification rating described in Option 2 relied on ratings of the problem or opportunity that the New Start was intended to address, the effectiveness of the project as a response, and the project's cost effectiveness. The rating for effectiveness would be based on ratings for mobility for all users, mobility for transit dependents, environmental benefits, and economic development. The rating for reliability would be used to raise or lower ratings for project justification and local financial commitment. *Comment:* Seventeen comments were received in answer to this question. Of those commenters who chose between Options 1 and 2, the majority favored the Option 2 framework, stating that it allows FTA to more fully understand and appreciate the merits of a particular project. However, these commenters suggested some slight modifications to Option 2, specifically with regard to the treatment of land use. The commenters stated that the treatment of land use solely as a risk/uncertainty measure rather than as a benefit measure under project effectiveness is inconsistent with the intent of SAFETEA-LU. Those commenters favoring Option 1 stated that it has the benefit of continuity and keeps the rating process stable for project sponsors. One of these commenters wrote that because Option 2 involves the simultaneous introduction of numerous complex factors and includes subjective appraisals by FTA or its contractors for some of the proposed measures, it is less desirable than Option 1. Several of the commenters favoring Option 1 stated that Option 2 overemphasized the role of reliability in the evaluation of projects relative to what was intended by SAFETEA-LU. A number of commenters suggested that neither Option 1 nor Option 2 is preferred, but rather a new framework should be developed in consultation with the transit industry. However, few commenters provided specifics on how the framework could be structured. Most stated that analytical perfection should not be the goal, and that an overemphasis on quantification of measures misses the need for judgment about some factors that are important yet inherently subjective. One commenter suggested a point system be developed, similar to the one proposed in the Transit Cooperative Research Program Quick Response Project J-06 on the Small Starts program. *Response:* FTA has striven to make its evaluations understandable, consistent, and fair, and has emphasized that quantifiable measures best achieve these goals. Nevertheless, qualitative measures have been used when sufficient quantitative measures cannot be identified. Each option relies on a combination of quantitative and qualitative measures. Given the myriad of benefits associated with New Starts projects, it is difficult to create a New Starts evaluation process to effectively capture all of them. Further, it is not necessary to evaluate all the benefits in order to distinguish the merits of projects. Option 2 allows for a more complete organization of the key project evaluation factors that address different perspectives of a project's merits. These include the nature of the problem/opportunity in the area where the project has been proposed, the project's effectiveness as a response, the degree to which the project generates benefits commensurate with its costs (cost effectiveness), the strength of the local financial commitment, and the uncertainty in the evaluation measures. This organization facilitates a more coherent description of the worthiness of a project for New Starts funding in language that is more understandable to decision makers. In addition, SAFETEA-LU emphasizes the need for more reliable ridership and cost information, adding “the reliability of forecasting methods” as a new evaluation consideration, codifying the “before and after” study requirement, and requiring FTA to produce an annual report on contractor performance in the development of ridership forecasts and cost estimates. Option 2 responds to SAFETEA-LU by directly incorporating an evaluation of the reliability of the forecasts when FTA evaluates and rates proposed projects. *Proposal:* FTA proposes to advance the framework described in Option 2 into the NPRM with one exception that is discussed more fully in the next set of questions. Instead of the nature of the problem or opportunity being evaluated as one of the primary factors of project justification, along with effectiveness and cost effectiveness, FTA proposes that it will be rated and evaluated under “other factors”. The effect of this change is that the “nature of the problem/opportunity” rather than being included as a separate factor, will be considered as an “other” factor that can either raise or lower the overall rating for project justification. 4. In what ways could FTA improve the evaluation process to highlight the “case” for a proposed New Starts project rather than focus on numerical ratings? 5. Are there any other measures that might indicate and characterize the nature and extent of the problem or opportunity addressed by a proposed New Starts project? 6. How should FTA evaluate or rate projects that address significant transportation problems compared to projects that take advantage of opportunities to improve service? *Comment:* Question 4 received 4 comments, question 5 received 7 comments, and question 6 received 6 comments. Questions 4, 5, and 6 addressed FTA's proposal to include in the evaluation of project merit an examination of the nature or extent of the problem or opportunity in a corridor. FTA suggested some measures that might be used to quantify the problem or opportunity in the corridor, including current bus travel speeds, current highway speeds, vacancy rates, value of land, and others. The majority of commenters wrote that each project may have unique strengths or may be structured to meet specific local objectives. Rather than FTA dictating standard measures that might indicate and characterize the nature and extent of the problem or opportunity, these commenters felt that each sponsoring agency should be left to define the specific measures appropriate to their project. A few commenters provided specific suggestions for measures that might be included in defining the problem or opportunity such as congestion/crowding relief and maintenance of existing mode share. The majority of commenters were opposed to giving more weight to projects that seek to address demonstrated transportation problems than those projects that take advantage of opportunities. *Response:* At the heart of any planning, environmental, or transportation study is an adequate description of the nature and magnitude of the needs that are driving consideration of projects that could require significant funding and/or have significant impacts on the communities in which they are built. Because of the diversity of regional conditions in which New Starts projects are implemented, local areas are in the best position to describe the nature of the needs that a project is intended to address. It is undeniable that projects that address problems that are already severe have more benefits over the long term than those that address problems that are less severe now, but which are forecast to be worse over time. However, the New Starts process, which measures project benefits for forecast periods that are 20 to 25 years into the future, based on annualized costs and benefits, does not account for the year in which the benefits occur. The conventional approach that properly accounts for costs and benefits over time would be to determine them for each year into the future and perform a net present worth computation to today. However, to account for each year of project costs and benefits would pose a significant burden on project sponsors due to the considerable effort required for interim year forecasts of travel and transit system capital and operating and maintenance costs. Therefore, projects designed to take advantage of an opportunity to improve transportation and economic development, while serving areas that have less severe transportation problems compared to what is predicted in the future, are currently advantaged in the New Starts evaluation process compared to areas with current severe problems. Consideration of higher ratings for projects with severe problems currently can reduce this unfair advantage. *Proposal:* FTA proposes to use the current “make the case” document under “other factors” as the basis for evaluating the severity of the transportation or economic development problem that the New Starts project is to address. This document is currently part of the evaluative information that FTA requests of sponsors of New Starts projects. While FTA will not dictate specific measures to describe the nature and extent of the problem or opportunity addressed by the proposed New Start project, it will consider the nature of the problem and opportunity in the overall project justification rating. While actual rating measures will be described in policy guidance, one way to do this is to use a three-tiered rating with the highest rating given to projects with severe transportation or economic problems; the next highest rating to projects with less severe transportation or economic problems; and the lowest rating for projects which are opportunities to improve transportation or economic development. Projects in areas with demonstrable existing problems will be rated more highly than projects in areas where problems are only predicted to develop over the next 20 to 25 years, all else being equal. As congestion is one of the Nation's most daunting transportation challenges, one measure that FTA intends to consider under “other factors” is the degree to which a project is a part of an effective congestion reduction strategy. FTA will evaluate projects that are a principal element of an effective congestion reduction strategy, in general and a pricing strategy, in particular, more highly. FTA seeks comment on how it might better measure congestion in the future. FTA will also consider as an “other factor” any benefit of the project not covered under the project justification criteria or other factors that the Secretary determines to be appropriate to carry out the evaluation. The rating for “other factors” will be compared to the combined rating for effectiveness and cost effectiveness and can be used to raise or lower the overall project justification rating. 7. Is there a preference for analyzing regional economic benefits or station area economic development benefits? Could FTA utilize both perspectives in evaluating expected economic development impacts? 8. How might FTA evaluate economic development and land use as distinct and separate measures? 9. Are there any additional methods available to predict economic development impacts? If so, how might these other measures be used to evaluate proposed New Starts projects? *Comment:* Question 7 received 7 comments, question 8 received 11 comments, and question 9 received 16 comments. Four commenters expressed a preference for analyzing station area economic development benefits rather than regional economic development benefits. Reasons given for the preference included agreement with FTA's stated opinion that projections of regional benefits would be time-consuming and expensive and that a project's influence on a regional basis would be greatly diluted by other regional economic factors. Three commenters supported an evaluation of both regional and station area economic impacts. One of these commenters stated that regional forecast models tend to be more reliable than those for smaller station areas. Commenters generally supported the evaluation of both land use and economic development as distinct and separate measures, though few comments articulated a clear difference between these two measures. Many comments characterized economic development and land use factors interchangeably or stated that land use factors were a component or indicator of economic development potential. One industry association supported characterizing land use impacts as “buildings and density” while economic development would be characterized as “jobs and sales.” As a means of predicting economic development impacts, several commenters suggested that FTA focus on existing developer agreements and partnerships and the existence of local development incentives. *Response:* FTA agrees that both station area economic development and regional economic impacts are useful and valid measures of project benefits. At the current time, however, the analytical tools used to develop regional economic analyses appear to be overly costly and burdensome to impose on every project sponsor. FTA intends to continue research efforts and case studies of both the station area impacts and regional economic impacts to develop tools that can be applied to measure the economic development impacts of New Starts projects. The regulation is structured to allow new measures to be added through policy guidance, following public review and comment. Whether for land use or economic development, a common theme of the majority of respondent suggestions was to use indicators of the likelihood of increased development in areas near projects. Past research confirms that this increased development is not added to the region but that the effect of transit investments is to attract development around stations that would locate elsewhere if not for the project, in effect redistributing development within a region. Existing land use conditions, existing and planned transit-oriented plans and policies, and projections of increases in employment and revenues are all factors that help to determine whether or not a transit project is likely to have an impact on development. Indeed, it is not possible to ascertain the likelihood of a project's effect on surrounding development unless a number of factors relating to both land use and economic development are considered in combination. Land use considerations provide information about the potential for development or redevelopment and whether that development can occur in a transit-oriented way. Although these are necessary conditions, they are not in themselves sufficient to ensure that the proposed project spurs development, as the local development climate must be robust enough to provide the engine needed for development; the project must be perceived as permanent to entice developer interest; and the project must increase accessibility to the area. Because all these factors must be viewed in combination, it is critical that land use and economic evaluation criteria be combined into a single criterion. *Proposal:* Until additional research is completed, FTA proposes to implement an evaluation measure for land use and economic development impacts that focuses on the potential for station-area development impacts of the proposed projects. The best available measures of likely land use and economic development benefits can be derived from the circumstances in which the projects would be implemented rather than from actual forecasts of development. This approach is necessary because forecasts of additional development due to New Starts projects require considerable resources and contain considerable uncertainty. FTA proposes to use a single criterion to ascertain the likelihood of increased transit-oriented development resulting from a New Starts project. Given the important role that land use plays in increasing development, in developing specific measures for this criterion, FTA will draw upon many of the same factors used in its current evaluation of land use. These will be augmented with indicators that provide further incentives to development. A survey of available research on the development impacts of transit suggests two primary transit-related drivers of development
(1)increased accessibility and
(2)permanence of the transit investment. While the actual FTA proposes to evaluate whether or not the conditions necessary to support economic development exist in the project corridor by using the following specific measures:
(1)Current land-use conditions,
(2)development and land-use plans and policies,
(3)the economic development climate in the corridor and region,
(4)the project-related change in transit accessibility for developable areas in the corridor; and
(5)the economic lifespan of new transit facilities proximate to those developable areas. FTA seeks comment on how it might better measure land use/economic development in the future. 10. Are there any other measures of mobility benefits that could be used to evaluate New Starts projects? *Comment:* Ten comments were received in answer to this question. Commenters suggested that FTA should examine ways to better capture the following in the mobility benefits measure: benefits to highway users; benefits resulting from special events trips; benefits resulting from non-home-based trips; and benefits generated by automobile trips not taken due to enhanced pedestrian activity in the corridor. *Response:* FTA is committed to incorporating highway benefits into its mobility and cost effectiveness rating in every way feasible. In fact, the “SUMMIT” software used by FTA to calculate user benefits already has the ability to capture benefits to all transportation system users (including highway users). Further, the definition of user benefits included in the current regulation includes benefits to highway users. However, this function of the SUMMIT software cannot currently be used because FTA has found that most travel models around the country do not accurately predict changes in highway speeds resulting from transit improvements. This is a problem with travel models nationally. FTA does not have the resources on its own to correct the deficiencies but is working with the Federal Highway Administration to address this issue. The rule is structured in a way that once reliable forecasts of such benefits can be produced, they can easily be incorporated into the measures of mobility and cost effectiveness through the policy guidance. In addition, FTA proposes to adopt other measures on a temporary basis that would provide an indication of the congestion relief benefits to highway users. Such measures would be based on measures of current congestion in the project corridor. FTA seeks comment on how it might better measure congestion in the future. Likewise, the SUMMIT software used by FTA already captures the benefits resulting from non-home based trips to the extent they are accurately estimated in the local travel model. Typically, few areas of the country have good data on the non-home-based trip market, which affects the ability of the local model to develop accurate forecasts. If a local area is willing to put resources into a data collection effort to improve the forecasts for this market, the Summit software used by FTA to calculate user benefits will automatically capture any additional benefits that may accrue. FTA has always worked individually with various project sponsors to better capture the benefits resulting from special events markets. Local travel models are not generally structured to capture ridership/benefits for this market. Consequently, FTA has helped project sponsors in the past to include “off-model” calculations to capture these benefits and will continue to do so in the future. FTA acknowledges the value of the trip not taken in terms of reducing congestion but has not yet been able to develop methodologies capable of making reliable estimates of this benefit. *Proposal:* FTA is proposing to adopt a definition of user benefits that explicitly includes congestion relief benefits to highway users and pedestrians. FTA is supporting the Office of the Secretary of Transportation and the Federal Highway Administration to improve travel forecasts so that the transportation system user benefits to highway users can be calculated reliably and be included in the cost effectiveness calculation. The Department of Transportation expects to release a Request for Proposals/Work Statement for model improvements in Fall 2007. In the interim, as discussed below under item 4 of “Additional Discussion Items for Comment,” FTA will explore the use of surrogate measures which can assess the degree to which a proposed New Start results in congestion relief. These measures could include the current level of service, delay compared to free flow speed, or the average daily VMT on any highway facility in the project corridor. Absent any specific suggestions for other measures of mobility benefits, FTA will use its policy guidance to set specific measures for mobility. Two measures that FTA considers to have merit are user benefits per passenger mile for those using the New Starts project, and the absolute number of passengers using the project. The first would measure the magnitude of the user benefits for each traveler and whether the savings are significant, while the second would measure the number of travelers affected. 11. Does the proposed (low-income mobility) measure entail implementation difficulties for measurement, reporting, or comparison between projects? 12. Are there any other measures that FTA should consider when evaluating the benefits that accrue to transit dependent populations? *Comment:* Question 11 received 3 comments and question 12 received 6 comments. In the Guidance on New Starts Policies and Procedures, FTA proposed using a new measure for determining mobility for transit dependents—the share of user benefits accruing to passengers in the lowest income stratum or to the lowest auto ownership stratum (depending on which is used in the local travel model) compared to the regional share of the lowest income stratum or lowest auto ownership stratum. All commenters to Question 11 noted that the proposed measure may result in some inconsistencies among projects because of this difference in how local models stratify trip takers. An additional comment noted that in densely developed urban areas, transit dependency does not correlate with either income or car ownership. The comments included the following suggested alternative populations to include when calculating the benefits to transit dependent populations, but did not identify a specific way to measure the benefits to these populations: Elderly persons, persons with disabilities, and university students. One commenter suggested that FTA should include in the measure how well the overall transit system serves job centers, but there was no specific discussion of how this might be measured. *Response:* FTA acknowledges that examining the benefits that accrue to the lowest income stratum or the lowest auto ownership stratum from the local travel forecasting models is only a surrogate for determining the benefits to transit dependents. But this information is already available from all local travel models and does not require development of additional data by project sponsors. Furthermore, since the measurement relies on the change in service for that stratum in a given city, it is not necessary for every city to use the same stratum in order for the measure to allow for comparisons between cities. FTA believes that whatever measure is used, it should have a way of identifying how the project serves transit dependents rather than simply characterizing the project corridor demographics. Unfortunately, local travel models do not usually stratify trips by some of the suggested categories—elderly persons, persons with disabilities, and university students. Consequently, the benefits accruing to these populations cannot be calculated. *Proposal:* The regulation simply states that FTA will measure Mobility Benefits. The actual measures will be listed in policy guidance. One approach that FTA is considering is to utilize the share of user benefits accruing to passengers in the lowest income stratum or to the lowest auto ownership stratum (depending on which is used in the local travel model) compared to the regional share of the lowest income stratum or lowest auto ownership stratum for the region for evaluating mobility for transit dependents. 13. How could FTA improve the current method of evaluating environmental benefits to produce a more useful measure? *Comment:* Three comments were received in answer to this question. FTA currently measures environmental benefits from proposed New Starts projects by examining the projected change in regional vehicle miles traveled (VMT), various types of vehicle emissions, and energy consumption. All comments received indicated support for continuing the current measures given that other replacement measures are not readily available. One commenter expressed concern that the current measures are biased in favor of projects that help reduce highway congestion and against those projects that help relieve transit congestion. Since a project that is meant to reduce existing congestion on a transit system does not reduce VMT, no environmental benefits would be shown under the current method. The commenter stated that the rating process should make accommodations for this situation, but acknowledged that no other measures of environmental benefits are readily available to address this problem. *Response:* The current measure is limited to capturing reduced emissions, projecting the change in VMT and energy consumption as a result of automobiles being taken off the road when travelers use transit instead of driving. However, even in that case, the change is usually very small compared to emissions region wide, limiting the usefulness of the measure. *Proposal:* FTA proposes to continue to evaluate environmental impacts, with the actual measures identified in policy guidance. FTA is currently conducting research to try to develop other measures that better distinguish the environmental merits of projects. 14. Should FTA rely on the cost effectiveness evaluation to address the operating efficiency criterion? 15. If not, in what way could agency operating cost information be used to compare New Starts projects to each other? *Comment:* Question 14 received 6 comments and question 15 received 11 comments. Four comments received were in favor of eliminating the operating efficiency criterion because of the inability of the measure to distinguish in a meaningful way between projects. However, two commenters disagreed with the proposal, stating that operating efficiency can be a significant factor in comparing a single new rail line with the transit system as a whole. *Response:* In the past, FTA has used the projected system-wide change in operating cost per passenger mile to measure the impact of proposed New Starts projects on operating efficiency. However, this measure has not proven to be a meaningful way of distinguishing among proposed projects. On the other hand, FTA's evaluation of cost effectiveness has always included the annual system-wide operating and maintenance expense as a component of annualized cost. Therefore, the impact of the project on operating and maintenance costs is already captured in the calculation of cost effectiveness. *Proposal:* FTA proposes to remove the operating efficiency factor as a separate evaluation criterion, relying instead on the evaluation of cost effectiveness to address this statutory criterion. Project sponsors may still calculate operating efficiency if they find it useful for their own comparisons. 16. Is it desirable for FTA to attempt to incorporate other measures of effectiveness besides mobility when evaluating cost effectiveness? 17. If so, what measures might be incorporated and how? 18. How could FTA combine transportation system user benefits measures with economic development measures into a valid measure of cost effectiveness? *Comment:* Question 16 received 2 comments, question 17 received 1 comment, and question 18 received 8 comments. For all three of the questions, comments received were opposed to incorporating other measures of effectiveness in the evaluation of cost effectiveness. Reasons for the opposition included the potential for “double-counting” benefits and the increased complexity that would result from adding other measures. *Response:* FTA sees value in acknowledging additional benefits of transit projects when comparing benefits to costs. There are two major components of these additional benefits that are distinct from those currently calculated: Travel time saved by users of the highway system who experience less congestion as a result of fewer vehicles on the highway; and transportation benefits from more compact development patterns. For the first, FTA has discovered that current highway assignment models do not reliably predict the reductions in travel time for highway users. Research and development of improved travel models are needed to ensure that highway travel time benefits are reliable. For the second, additional development would have to be forecast with and without the New Starts project and travel models employed to ascertain the user benefits that result. The analytical analysis required to accomplish this is beyond the capabilities of the current demand forecasting models in virtually every urban area in the nation. As a result, at this time there is no analytical approach that can be implemented to determine the additional economic development benefits that should be added to those currently predicted for travel time savings. However, FTA has identified a surrogate for including economic benefits to the travel time savings calculation. The breakpoint for cost effectiveness already includes an assumption that the non-transportation benefits, including economic development, are approximately equal to the value of the travel time savings for a project. Therefore every city is given the same credit for other benefits. *Proposal:* Because of the difficulty of incorporating additional measures into its evaluation of project cost effectiveness, FTA is proposing to maintain its current cost effectiveness measure of annualized cost per hour of user benefits at this time. 19. Are there any ways that FTA could improve the evaluation of financial capability? *Comment:* Five comments were received in response to this question. Two comments were received with specific suggestions for improvements or changes to the financial evaluation process. The first comment stated FTA should consider the degree to which private sector resources are leveraged to assist with project financing (public-private initiatives) as well as the degree to which synergies between Federal funding sources are leveraged to build and operate the project. The second comment stated that FTA should consider a broader set of indicators to rate the current capital condition of an agency rather than just the average age of the fleet and the agency's bond ratings. The commenter stated that capital condition should be evaluated in the context of the project sponsor's full fleet management plan, including replacement cycles, miles between breakdowns, and budgeted purchases. Three additional comments concerned with the current evaluation methodology were received, but the commenters did not suggest ways to improve the evaluation methodology. Other points noted in the five comments indicated the policy guidance was not clear with regards to who will assess financial capability. One commenter stated that the current process examines the reliability of capital, operating, and maintenance cost estimates under both the project justification evaluation and the financial capability evaluation and requested more detail from FTA on exactly how financial capability is currently evaluated. Lastly, one commenter stated that the requirements for operating and maintenance plans are more detailed than necessary for systems with a long history of consistent performance. *Response:* Although not specifically accounted for in the financial capability evaluation process, FTA does consider the degree to which private sector resources are utilized to assist with project financing when making funding recommendations. In addition, FTA has recently initiated the Public Private Partnership Pilot Program outlined in SAFETEA-LU as a means to distinguish projects that are supported by private sector resources. Section 3011(c) of SAFETEA-LU authorizes the Secretary of Transportation to establish and implement the Pilot Program to demonstrate the advantages and disadvantages of public-private partnerships
(PPPs)for certain new fixed guideway capital projects. In particular, the Pilot Program is intended to study whether, in comparison to conventional procurements, innovative contracting arrangements, known as PPPs, better reduce and allocate risks associated with new construction of such projects, accelerate their delivery, enhance their operating performance once they are constructed and improve the reliability of projections of project costs and benefits. This Pilot Program will evaluate this view as applied to the procurement and operation of eligible projects, which may include projects funded under the Section 5309 Capital Investment program. On March 22, 2006, FTA issued a notice in the **Federal Register** (71 FR 14568), soliciting comments and requesting preliminary expressions of interest in sponsoring a project under the Pilot Program. Five potential project sponsors submitted expressions of interest. On January 19, 2007, FTA issued a notice in the **Federal Register** (72 FR 2583) establishing the Pilot Program's operating criteria and soliciting formal applications. FTA believes that the process of establishing Public-Private Partnerships, which include innovative arrangements for operating New Starts projects, can result in contractual arrangements that can reduce and/or improve the reliability of forecasts of operating costs on New Starts systems. Arrangements under which private sector interests take responsibility for the design, construction, operations, finance, and maintenance of projects can result in transferring much of the long term risk of project capital and operating costs to the private partner. Alternatively, the process of procuring such arrangements can identify changes that can produce significant improvements in the efficiency of publicly provided services through innovative contractual arrangements. As a result, projects which utilize such approaches are likely to be rated better, because operating costs will be lower (producing better ratings of cost effectiveness), and the reliability of the estimates of such costs will be higher (producing higher ratings of reliability). FTA asks for specific comments on this approach under question 5 under the section “Additional Discussion Items for Comment.” FTA has tried whenever possible to base the financial ratings on readily available information that all project sponsors consistently calculate and report. Of the additional items mentioned by one commenter for inclusion in the capital condition subfactor rating, FTA believes that two—replacement cycles and budgeted purchases—are already captured in the average fleet age calculation. Clearly the average fleet age will change from year to year as replacement vehicles are purchased and older vehicles retired. This is true for all grantees. The other item mentioned by the commenter—miles between breakdowns—is not always routinely prepared by all transit agencies or prepared with a consistent methodology. For example, different operators may classify breakdowns in a different way. Therefore, FTA feels this would not be a good measure to use. FTA believes the existing measures for capital condition are fair, easily reported, and consistently applied to all grantees. In response to the comment that more detail is needed from FTA on exactly how financial capability is evaluated, FTA would like to point out that each year as part of the New Starts Reporting Instructions and again as an appendix to the Annual Report on New Starts, FTA includes a detailed description of the entire rating process, including a discussion of the financial capability evaluation and rating process. Included in this appendix are two matrices that outline specifically what is required in the financial plan to receive each level of rating (from low to high) for each and every financial subfactor used in the evaluation. In addition, FTA has posted on its Web site the guidance that it provides to its financial contractors who help develop the financial capability ratings. This provides the industry with additional insight into exactly how the ratings are determined for those areas of the evaluation that are more subjective than quantitative. FTA feels the process is very well described, standardized, and completely transparent. *Proposal:* FTA proposes to keep the current financial capability evaluation and rating process since the requirements were not changed by SAFETEA-LU, the current process has proven to be useful for distinguishing among projects, and the process is thoroughly documented and transparent. However, FTA will continue to issue the specific measures for each factor for review and comment in its policy guidance. In addition, the proposed regulation would provide for an assessment of the degree to which project proposals include innovative contractual arrangements which produce significant reductions in operating expenses, or which improve the reliability of forecasts of operating costs. 20. Should the existing weighting factors used to develop the financial ratings be changed? *Comment:* Seven comments were received in answer to this question. Of the comments received, approximately half were in favor of maintaining the existing weights used to develop the financial ratings, and half were opposed, stating that the current weights are awkward, provide little insight, and should be changed. Of those opposed to the existing weighting scheme, one commenter proposed a simple pass/fail approach for evaluating the capital financial plan as well as a much less rigorous review of the operating financial plan. Other comments received concerned retaining the credit given on the New Starts share rating when higher local shares are proposed. *Response:* Not only does SAFETEA-LU require FTA to rate projects on both project justification and local financial commitment on a five tier scale from low to high, but also FTA sees merit in showing gradations in financial plan ratings versus employing a simple pass/fail approach, particularly with regard to making tough funding recommendation decisions. A less rigorous evaluation of the operating and maintenance financial plan, as suggested by one commenter, is inconsistent with the requirement added by SAFETEA-LU that FTA must ensure local funding is available to operate, maintain, and re-capitalize the proposed project as well as the rest of the transit system without a reduction in existing services or levels of service. The change in SAFETEA-LU to this criterion was clearly intended to strengthen, not weaken, FTA's review of the operating and maintenance financial plan. FTA believes the current financial capability evaluation methodology meets the requirements of the law. FTA agrees that project sponsors should be given credit when higher local shares are proposed. FTA proposes to maintain the non-New Starts funding share as one of the financial capability evaluation criterion. FTA proposes to continue the practice of giving project sponsors a higher rating based on a higher non-New Starts share and will set the measures for this in its policy guidance. In addition, FTA may consider the non-New Starts share during the decision to recommend a project for a Full Funding Grant Agreement (FFGA). However, consistent with SAFETEA-LU, FTA will also consider the project sponsor ability to provide only a 20 percent match and will not rate the project's local financial commitment at less than Medium, solely on the basis of a 20 percent match, so long as the project sponsor can demonstrate that the 20 percent match is based on the limited fiscal capacity of State and local governments. In this way, FTA can address the SAFETEA-LU requirement that FTA consider State and local fiscal capacity at the same time that it addresses the SAFETEA-LU requirement that it gives priority to financing projects with a higher-than-required non-New Starts/Small Starts share. *Proposal:* The NPRM proposes that the local financial commitment rating consist of equally weighting the ratings of the capital and the operating financial plan. 21. How might the FTA incorporate measures of reliability into project evaluation? *Comment:* Four comments were received in answer to this question. All comments received were opposed to incorporating measures of reliability into project evaluation, stating that the New Starts process already includes a number of mechanisms to evaluate the reliability of forecasts so that additional reviews are unnecessary. In addition, one commenter stated that peer projects are difficult, if not impossible, to identify. *Response:* Although the New Starts process certainly includes mechanisms intended to improve the quality of forecasts, reliability can vary considerably for a variety of reasons that relate to
(1)transit-orientation of existing and future land uses and land-use plans and policies, based on the degree to which project effectiveness depends upon projected changes in future land use patterns and the likelihood of those changes occurring;
(2)Project sponsor experience with implementing previous projects;
(3)Industry experience with the proposed project type;
(4)The reliability of forecasting methods used to prepare those estimates, as well as the reliability of the information provided to FTA for its evaluation of the project;
(5)How the opening year project ridership compares to that estimated for the 20 to 25 year planning horizon;
(6)Enhanced reliability of operating cost forecasts due to use of innovative contractual arrangements; and
(7)Mitigation actions the project sponsor takes to help improve the reliability of the information submitted in support of a proposed project. For example, travel forecasts made for downtown circulator projects are by their very nature less reliable than those for projects intended to attract a predominately commuter-oriented travel market. This is because travel models have traditionally been better able to predict the travel behavior of commuters, and historically have been poor predictors of travel involving the type of discretionary trips that a downtown circulator is intended to attract. Other travel markets that can be problematic to predict include suburban-to-suburban travel and park-and-ride travel in areas with few existing park-and-ride lots. In addition, capital cost estimates historically have been problematic for tunnels and elevated structures. Moreover, recent construction experience has shown that commodity prices can be volatile and that the bidding environment plays a much larger role in cost estimates compared to the past. Project sponsors of new transit projects commonly ask for peer reviews to help them assess the quality of their cost and ridership forecasts. While FTA acknowledges that no two projects are identical, drawing on past experience from a similar type of project has proven invaluable to improving the cost and ridership forecasts of the newer project because these projects often have enough features in common to gain insights that result in improved forecasts. *Proposal:* SAFETEA-LU specifically requires FTA to evaluate projects based on the reliability of their forecasts. Furthermore, FTA's experience over the past three decades indicates that there is a considerable range of reliability in forecasts based on the factors discussed above. FTA proposes to consider reliability of the costs and ridership forecasts in its evaluation and to adjust, either upward or downward, the ratings of the individual criteria that rely on these forecasts. The measures for reliability will be identified in policy guidance but are likely to be designed to address the issues addressed above, such as transit-orientation of existing and future land use plans and policies; project sponsor experience with implementing previous projects; industry experience with the proposed project type; the reliability of the forecasting methods; a comparison of the opening year ridership to that estimated for the planning horizon covering no less than 20 years; use of innovative contractual arrangements which improve the reliability of cost estimates; and mitigation actions taken by the project sponsor. 22. How should information on the reliability of forecasts be modified or updated as a proposed project advances through project development? *Comment:* Six comments were received in answer to this question. One comment was received stating that FTA and the project sponsor should work to improve reliability of forecasts as projects advance through project development. The remaining respondents addressed the unrelated topic of how and when to solidify funding sources. *Response:* FTA agrees that with more detailed information generated as the project progresses through project development the reliability of forecasts should improve over time. However, FTA's experience also shows that even with this updated information, forecasts are by their very nature predictive and that it is only through actual completion of the project that true costs and ridership are known. *Proposal:* FTA acknowledges that it is impossible to totally remove uncertainty from any stage of the process. However, the measures prescribed by FTA are written broadly enough to allow FTA to tailor its assessment of reliability to reflect the stage that the project is in. Therefore, FTA will use these measures to assess the reliability of forecasts as a proposed project advances through project development and use the most recent information available in making its assessment of reliability. 23. How should FTA help to ensure that contingencies adequately reflect the uncertainties in project design, prices, and quantities at each stage of project development? *Comment:* Three comments were received in response to this question. Four themes or suggestions emerged from the comments that relate to the treatment of uncertainties, project costs, and project contingencies. In the first theme, dealing with project uncertainties, many commenters stated that FTA's project management oversight
(PMO)program and risk assessment processes constitute a worthwhile and sufficient approach. In addition, one commenter stressed the value of peer review for cost estimates. Many commenters suggested that uncertainties could be reduced through simplification of FTA's process, specifically through implementation of policies to screen out unworthy projects earlier (i.e., at entry to preliminary engineering (PE)) and to execute FFGAs within six months of final design entry. A second theme, calling for greater collaboration between project sponsors and FTA, was seen throughout the comments. Collaborative relationships and “shirt-sleeve” working sessions were suggested as a way of establishing appropriate contingency amounts after risk assessment, improving project reviews “through a series of intense partnering sessions,” achieving greater accountability for project success, and assisting new project sponsors or sponsors with previous difficulties. The third suggestion was that FTA should use an index other than the GDP deflator to adjust cost effectiveness breakpoints given that supporting studies show that construction costs over the past five years have risen at rates up to17 percent faster than costs reflected in the GDP deflator. The fourth theme is a corollary to the third and pertains to cost management procedures. Rather than requiring project sponsors to carry extraordinarily large contingencies that may jeopardize a cost effectiveness rating, many commenters suggested an incentive approach to cost control, specifically allowing sponsors to retain remaining funds at construction completion. In addition, commenters stated that project sponsors should be allowed to incur costs, even if they exceed the FFGA amount by more than 5 percent, as long as the project sponsor is responsible for paying for the cost increases out of its own funds. The commenters did feel, however, that FTA should provide New Starts funding flexibility when a project experiences cost increases due to sudden market shifts beyond the project sponsor's control. *Response:* Although SAFETEA-LU calls for projects to include adequate contingency funds “to cover unanticipated cost increases,” the amount of contingency required depends on the amount and nature of uncertainties. FTA agrees that reducing uncertainties earlier in the process benefits everyone. FTA intends to pursue this through earlier use of its risk assessment and project management oversight programs, as well as peer reviews of cost estimates. The amount of contingency at various points can be guided by industry standard percentages but should be established for a specific project through collaboration between FTA and the project sponsor after reviews have been conducted. FTA will further study the commenters' suggestions regarding early screening of projects, rapid execution of the FFGA, institution of more collaborative processes, the makeup of the cost effectiveness breakpoints, and cost management. Nothing in the proposed regulation would preclude FTA from making changes in these areas through its policy guidance. *Proposal:* FTA proposes to add a requirement, taken directly from SAFETEA-LU, as part of the criterion on the stability of capital funding plan that takes into account the availability of contingency amounts that the Secretary determines to be reasonable to cover unanticipated cost increases. FTA will collaborate with project sponsors to ensure that project contingencies are appropriate to the specific uncertainties related to the proposed project and to the level of design. For the purpose of rating a project to address the reliability of the cost estimate, FTA will rely in large part on evaluations by its project management oversight contractors. 24. What weights should FTA apply to each measure? *Comment:* Six comments were received in answer to this question. FTA proposed to continue the equal weighting of the local financial commitment and project justification ratings when determining the overall project rating. Of the comments received on this question, there was no clear majority of opinion. One commenter agreed with FTA's equal weighting of local financial commitment and project justification. One commenter stated that local financial commitment and project justification should not be combined to arrive at an overall project rating. This commenter stated that the local financial commitment rating should merely be pass/fail, and that the project justification rating would prevail for the overall project rating if local financial commitment were found to be worthy of a passing grade. Another commenter suggested an entirely new weighting scheme: 20 percent weight each to mobility improvements, cost effectiveness, and financial capability; 15 percent weight each to land use and economic development; and, 10 percent weight to the remaining measures. The remainder of the comments focused solely on how the project justification rating is derived, stating that cost effectiveness should not be weighted greater than one third of project justification and should not be used as a project veto if it does not meet FTA's specified threshold. *Response:* SAFETEA-LU places equal emphasis on project justification (referred to as “project merit” in the January 19, 2006 Guidance on News Starts Policies and Procedures) and local financial commitment (referred to as “financial capability” in the January 19, 2006 proposed Guidance on New Starts Policies and Procedures). As stated previously, FTA feels there is merit in showing gradations in financial plan ratings (low to high) versus employing a simple pass/fail approach, particularly with regard to making tough funding recommendation decisions. Furthermore, FTA believes that moving to a pass/fail rating approach for financial commitment as suggested by one commenter would diminish its importance relative to project justification, going against the apparent intention of SAFETEA-LU. Regarding the new weighting scheme proposed by another commenter, FTA has stated previously the general difficultly in measuring economic development benefits and the concern of “double-counting” when rating and evaluating economic development versus land use. Consequently, until such time as better measures are developed for these areas, the proposed weighting scheme would be very difficult to implement. With regards to not using a cost effectiveness to veto a project, in the past there has been considerable support by the Administration to establish a minimum standard for a project's cost effectiveness in order for the project to advance through project development. *Proposal:* FTA proposes to give equal weight to both project justification and local financial commitment in calculating the project's overall rating. Within the Project Justification rating, cost effectiveness and effectiveness are proposed to be weighted equally at 50 percent. Further, the NPRM proposes that the effectiveness rating be comprised of the following criteria and weights: 40 percent to land use, 40 percent to mobility for the general population, 10 percent to environmental benefits, and 10 percent to transit dependent mobility. Finally, under the proposed regulatory text, a project would not be eligible for a funding recommendation unless it achieves a medium or better rating on cost effectiveness. 25. How can the reliability of forecast measures be used to adjust New Starts project ratings? *Comment:* Four comments were received in answer to this question. Three of these comments stated opposition to FTA's proposal to add uncertainty and risk of the forecasts as evaluation criteria or stated that additional guidance and clarification is needed before implementation. The primary reason given for opposing the proposal was that determining the uncertainties in the forecasts would require lengthy reviews that would ultimately add cost to the project. The commenters also stated that the additional analyses would not eliminate risk and uncertainty in the forecasts. The one commenter supportive of the proposal agreed with FTA's simple strategy for incorporating the uncertainty measures into the ratings process. That is, the uncertainty ratings should be used to decide the outcome for ratings at breakpoint between two ratings. *Response:* FTA is not proposing to eliminate risk and uncertainty from forecasts, which is impossible, but for project sponsors to report the nature of the uncertainty as a result of their analysis. This will allow both the project sponsor and FTA to use that information as they make decisions on whether to advance the project. More explicit representation of uncertainties is required by SAFETEA-LU because reliability of forecasts is now one of the listed criterions for project justification. An explicit representation of uncertainties is also essential if the project sponsor and FTA are to meet other requirements in SAFETEA-LU. For instance, an early discussion of uncertainties is essential if the project sponsor is to understand and explain the reasons that forecasts may change between entry into PE, entry into final design, and after opening the project to revenue operations as required for before/after studies, as well as for FTA to accurately assess contractor performance. An understanding of uncertainties also provides information to FTA as it implements SAFTETEA-LU's cost incentive provision, which allows FTA to provide more New Starts funding if project costs are no more than 110 percent, and ridership no less than 90 percent, of the estimates made when the project was admitted into PE. Current FTA guidance on capital cost estimation and travel forecasting discusses the role of uncertainty in forecasts and describes how these uncertainties could be reported. However, to ensure that uncertainties are being reported consistently by all grantees, FTA intends to issue more explicit guidance of what factors should be included in this discussion. *Proposal:* FTA believes a requirement to adjust ratings based on the reliability of the data should be included to satisfy several SAFETEA-LU requirements. Understanding uncertainty will allow FTA to better recommend funding among projects with similar costs and benefits, but with significant differences in uncertainties. A better understanding of uncertainties will facilitate a better understanding of why costs and ridership vary from predictions so that better approaches to forecasts can be developed for future projects. Additionally, because a major purpose of planning and project development studies is to disclose information for decision-making, a more explicit representation of uncertainties better informs decision-makers by providing richer information about the likelihood of achieving the project benefits and costs. FTA will consider the reliability of operating costs certainties by looking at whether there are any innovative contractual arrangements which produce significant reductions in operating expenses, or which improve the reliability of forecasts of operating costs. Project Development Procedures 26. Does the proposed requirement to have local endorsement of the financial plan address FTA's desire to enhance the degree of confidence in the likelihood of proposed funding sources to materialize? 27. Do project sponsors foresee any potential problems securing these local endorsements? *Comment:* Question 26 received 3 comments and question 27 received 7 comments. FTA proposed a requirement that all proposed sources of funding be specified in the financial plan and that each sponsoring agency provide a letter endorsing the proposed financial strategies and funding amounts. The proposal was meant to increase FTA's confidence level earlier in the project development process (prior to entry into PE) that the project has the support of the proposed funding partners. Almost all commenters misunderstood the proposal to mean that letters of commitment of local funding would be required earlier in the project development process. As a result, of the 3 comments received in response to this question, only one (an MPO) thought the proposed requirement had merit and would enhance the degree of confidence in the likelihood of funding sources materializing. The MPO also stated that the inability of a project sponsor to get the required endorsement would be most telling. All other commenters stated that requiring letters of endorsement (which they interpreted as letters of commitment) from local agencies on the financial plan early in the project development process was premature. They indicated it would be difficult to get financial commitments from local governments without a corresponding commitment at the same time from FTA. Others stated that FHWA does not require a similar endorsement from State and local governments for highway projects. *Response:* The requirement to obtain a letter of endorsement of a financial plan is not intended to be as stringent as having to obtain a firm letter of commitment of funding. FTA believes that this requirement, so clarified, should not be that difficult to address, so long as the project sponsor has worked closely with the proposed funding partners, and these partners have actually developed an understanding of their proposed roles. FTA acknowledges that, as with many of the New Starts requirements, there is not a similar requirement for highway projects. However, the great majority of Federal aid highway projects are funded through FHWA formula grants, and the selection of projects is the prerogative of the States, in cooperation with the metropolitan planning organization designated for the area per 23 U.S.C. 134 (j)(5) and (k)(4), and 49 U.S.C. 5303 (j)(5) and (k)(4); conversely, major transit capital investments are funded through the Section 5309 Capital Investment discretionary program, and projects are selected for funding on a competitive, nationwide basis. *Proposal:* FTA is proposing to require letters of endorsement for any non-grantee controlled or non-committed source of funding specified in the financial plan prior to entry into PE and with each annual New Starts submission. In the letter of endorsement, each sponsoring agency would need to give their support to pursuing whatever steps are necessary for them to ultimately commit the proposed financial strategies and funding amounts. 28. Are there any other policies or requirements that could enhance FTA's confidence in the funding plans for proposed New Starts projects? *Comment:* Four comments were received in answer to this question. Three comments were received that suggested other policies or requirements FTA might use. Two transit agencies discussed including a timeline for obtaining funding commitments in a project development agreement (PDA). The fourth comment suggested that FTA consider the degree to which the project sponsor has expended funds on the project at its own risk as an indication of the agency's commitment to the project. *Response:* FTA agrees that a PDA could be used to lay out timelines for receipt of funding commitments, but this would not provide FTA with any added confidence that the funding would actually materialize. FTA also agrees that the degree to which a project sponsor has expended funds on a project is an indication of the project sponsor's commitment to the project. However, FTA does not agree that this in and of itself reflects local political support from other potential funding partners. Too often, project sponsors have been unable to obtain sufficient local funding from outside sources, even though they have expended a considerable amount of their own resources to undertake alternatives analysis and PE. *Proposal:* Lacking any other suggestions, FTA will rely on the requirement that all proposed sources of funding be specified in the financial plan and that each sponsoring agency provide a letter endorsing the proposed financial strategies and funding amounts. Again, such a letter would not constitute a commitment on the part of a proposed funding partner, but only an indication that the funding partner understands and is willing to proceed with further development of its proposed role in funding the project. In addition, FTA would continue to require that funding commitments be provided as the project moves through the process, with 50 percent of the commitments in place as a condition of entry into final design, and 100 percent of the commitments in place prior to execution of a FFGA. 29. In what ways could FTA describe the baseline alternative more clearly? *Comment:* Twelve comments were received in answer to this question. Two commenters said the no-build should be the baseline. One commenter stated that the use of a baseline that is different than the no-build puts it in conflict with the National Environmental Policy Act (NEPA). Others stated that it should be the Transportation System Management
(TSM)alternative, defined succinctly as the best than can be done without construction of a new fixed guideway, and that it should be identified as such. Other concerns included changes to the baseline late in the project development process and the opinion that too much emphasis is placed on the baseline alternative given that in most circumstances it would not be built. *Response:* FTA believes that a properly-defined TSM constitutes an appropriate baseline for the purpose of estimating New Starts project justification criteria and that, because there are only limited circumstances in which the use of a no-build alternative is justified, referring to the baseline by its “intended” name—the TSM alternative—makes sense. FTA does not support using the no-build as the baseline because a consistently defined TSM alternative is required to ensure a level playing field when comparing projects across the country. FTA has not required that the TSM alternative be carried forward in NEPA documents when the project sponsor has adequately described its reason in the NEPA document for not carrying the alternative forward for detailed analysis. Both FTA's oversight of the technical work supporting alternatives analyses and the project sponsor's performance of the tests identified in the policy guidance prior to FTA approval of the baseline alternative are intended to obviate the need for review and adjustment of the baseline during subsequent project development stages. The fact that SAFETEA-LU establishes a Small Starts program that provides a source of capital funding for low-cost major transit investments undermines the argument that TSM-level improvements cannot be built. This undercuts the argument that it is not fair to evaluate the merits of a New Start against an “academic” TSM, because the TSM is now a viable alternative, which could receive funding through the Small Starts program category. *Proposal:* FTA is already in the process of enhancing its guidance on the development of the New Starts baseline alternative. Because FTA is only clarifying, rather than changing, its existing guidance, such clarification can be addressed as technical guidance, without affecting any of the higher-level principles articulated in the existing regulation and carried forward in the NPRM. The guidance will clarify FTA's expectations that the New Starts baseline will be identical to the TSM alternative in all but very rare cases, and will use that terminology to describe the attributes of the baseline. Since in most cases the baseline will be the TSM alternative, the guidance will describe the process for developing the TSM alternative, the appropriate tests for optimizing the TSM alternative, and the rationale for these tests. The guidance will further provide examples for the development of appropriate TSM alternatives in specific environments. 30. Should there be a way to report project benefits of the proposed New Starts project compared to the no-build alternative outside the cost effectiveness evaluation? *Comment:* Two comments were received in answer to this question. Both commenters answered in the affirmative, although neither provided suggestions on how to report benefits. *Response:* In response to comments submitted by the transit industry and in recognition of the desire to simplify the New Starts process, the December 2000 New Starts Final Rule eliminated the requirement for an evaluation comparing the New Starts criteria for the build alternative against both the no-build and the TSM alternative. Instead, the regulation promulgated the current requirement that projects be evaluated against a single “baseline” alternative, typically the TSM alternative. Permitting an alternative presentation of project benefits (build vs. no-build) would result in additional work for project sponsors and could lead to confusion over the true representation of project benefits. Nevertheless, FTA has always allowed project sponsors to use criteria and measures in their studies that depart from those used by FTA, but which address local concerns. *Proposal:* FTA will maintain the requirement as stated in the current regulation that cost effectiveness will be based solely on a comparison between the proposed project and the baseline alternative, while clarifying that the baseline in almost all cases is the TSM alternative and providing enhanced guidance on the development of the TSM alternative. 31. How recent should on-board surveys be to ensure that the information is still valid? 32. Are there cases where an on-board survey less than 5 years old could be out of date? If so, how might FTA be sure of the usefulness of on-board survey information? *Comment:* Question 31 received 5 comments and question 32 received 3 comments. One commenter believed that on-board surveys were not needed, stating that other data sources would suffice. Four commenters suggested surveys be conducted within the past 5 to 10 years. *Response:* Given the critical role that the information gleaned from on-board surveys plays in understanding the nature of the transit riding market and in ensuring that travel models can replicate current conditions, it is essential that the data on ridership patterns be as current as possible. To the extent that the data used to validate the model varies from current ridership patterns because of significant changes in population, service, or other factors, the usefulness of the data is diminished. In fact, it may be necessary to update all or a portion of the survey more frequently than every five years if an area has experienced dramatic changes in service, population, and employment or other factors during that time. For example, if the survey was taken when little park-and-ride service existed, and considerable park-and-ride service was implemented after the survey, a new survey would be necessary to understand park-and-ride behavior if the New Start project relied in large part on the park-and-ride market to generate ridership. *Proposal:* FTA proposes that, for project sponsors using traditional four-step travel forecasting procedures to estimate transportation system user benefits, the procedures be rigorously validated using an on-board survey of transit riders completed no more than five years prior to entry into PE. FTA will determine if changes in service, demographics, or other factors are significant enough to require a more recent survey to validate the model. 33. Would a clearer definition of the preliminary engineering phase for New Starts projects help project sponsors target resources expended on preliminary engineering in ways that better support the decision-making process for New Starts? *Comment:* Three comments were received in answer to this question. Two comments were received in support of this proposal, and one provided an alternative. Commenters stated that significant resources would need to be shifted from final design to preliminary engineering (PE). Commenters also stated concern about potential increases in costs. One commenter stated that an explanation of how PE relates to the NEPA process would be helpful. Another stated that all NEPA requirements should be met during PE and that a Record of Decision
(ROD)and FFGA should be issued simultaneously prior to final design. Another respondent inquired about the purpose of final design if PE is expanded to include capping of funds. That agency suggested that FTA should have clear criteria for entrance into PE. *Response:* The goal of PE is to finalize the project scope, cost estimate, and financial plan. Project scope must be defined such that all environmental impacts are identified and adequate provisions made for their mitigation in accordance with NEPA. FTA will not complete the NEPA process until a project has been approved for entry into PE. In addition, although the level of scope development may vary from project to project, it must, at a minimum, be advanced to the point where design issues are fully addressed and no significant unknown impacts to cost may result. FTA intends that the cost estimate produced at the end of PE be used as the baseline cost estimate for determining the share of Section 5309 Capital Investment funds to be awarded in the full funding grant agreement. Similarly, FTA expects that the project financial plan produced during PE (and submitted to FTA as part of its statutory evaluation to approve project entrance into final design) will demonstrate adequate financial capacity and provide support for the local financial commitment necessary before FTA can execute the FFGA. In its May 2006 New Starts Policy Guidance, FTA adopted a policy requiring that NEPA scoping be performed prior to entry into PE. Scoping prior to PE fosters informed decision-making in the New Starts process and allows for resolution of issues regarding the alternatives to be considered in the NEPA review to be made during the planning process instead of discovering them during PE and having to do additional planning analyses to address them. NEPA completion during PE facilitates performing the requisite engineering and analysis to define the project scope, cost, and financial plan, which are documented in a ROD. Final design is a statutorily prescribed phase of the New Starts project development process following PE and preceding construction. Technically, final design is the phase of project development in which the project sponsor prepares for project construction. During final design, the engineering and design products of PE are refined for the development and solicitation of construction contract packages, as well as the development and/or updating of various project management plans and risk mitigation strategies. It is, however, expected that under the definition of New Starts PE adopted in the May 2006 New Starts Policy Guidance, the duration of final design will be considerably shortened as PE would result in developing sufficient engineering and design to arrive at an accurate and reliable cost estimate. Thus, it is expected that the time between entrance into final design and negotiations on an FFGA will be reduced. *Proposal:* FTA has defined the conditions that must be met at the completion of New Starts PE. FTA believes that these conditions will help in clarifying when a New Starts project is ready to move from one step to the next. 34. How might the Project Management Oversight
(PMOC)process be designed to support the higher expectation regarding the results of preliminary engineering? *Comment:* Only one comment was received, and it favored enhanced PMOC assistance. The respondent stated that although nearly all the information needed to make a final decision on project funding should be complete at the end of PE, completion of engineering should not be a criterion for exiting PE. Design refinements and subsequent cost adjustments should be expected through the final design phase. The earlier in the process that the PMOC understands the unique challenges the project faces in terms of engineering and cost estimating, the more likely the PMOC will be able to assist in determining whether or not the contingencies are appropriate. *Response:* FTA has a number of activities underway to strengthen its project management oversight activities during PE. These include cost validation, independent cost estimates, and risk analysis and management. The PMOC reviews grantee data and corresponding engineering analysis throughout PE to determine the completeness and mechanical correctness of the baseline cost estimate. Project cost reviews are an iterative review process, whereby costs are assessed for consistency with the project scope adopted in the ROD (as amended and/or updated to the selected alignment), as well as consistency with relevant, identifiable industry or engineering practices. In this manner, FTA can determine that the project scope and costs are sufficiently complete to support the level and quality of revenue service expected. Using these tools during project development allows the grantee, with Federal oversight, to identify opportunities to improve the operation and cost effectiveness of its project. Whereas design refinements are expected during final design, significant cost adjustments should not occur. The scope and cost reviews that FTA incorporates in its risk analysis conducted during PE are intended to identify those project elements that are likely to require cost adjustments so that these potential cost adjustment may be accounted for in the resulting baseline cost estimate, as part of the contingency calculation, at the completion of PE. *Proposal:* FTA is currently reviewing its PMOC regulations and guidance with the goal of providing greater program effectiveness in New Starts project development and delivery. These changes will be discussed under a separate rulemaking to amend the Project Management Oversight regulation and are not reflected in this NPRM. 35. Does this approach significantly increase the cost of preliminary engineering? If so, is that problematic if costs are just shifted from final design? *Comment:* Two comments were received in response to this question, both generally agreeing that the cost of PE would increase. One commenter stated that the proposed requirement would result in an extended PE phase and blur the line between PE and final design. Specifically, the commenter noted that a shift in consultants between phases could result in increased costs due to the need to redesign project elements and that increased costs should not eliminate projects from the New Starts pipeline. The other stated that asking project sponsors to front load their design costs may prove to be an onerous burden. *Response:* It is not clear that costs for PE will increase in order to meet FTA's requirement for a more reliable cost estimate. This is because the nature of work performed in PE and in final design has never been well defined, and as a result the level of engineering performed varies widely among projects. Expenditures for PE in the past have not always been focused on a reliable cost estimate, but have addressed a variety of concerns, many of which did not necessarily enhance the soundness of the cost estimate. In addition, many candidate New Starts project sponsors have already undertaken “continuing/extended PE” prior to entry into final design in order to identify and resolve engineering and/or design issues. In those instances, the project's sponsors have generally been able to complete final design in a shorter timeframe. From an accounting standpoint, requiring this effort by all project sponsors may increase costs incurred during the designated PE phase but decrease costs during final design. *Proposal:* The proposed regulation clearly identifies the products of both PE and final design. With FTA clearly defining each phase of New Starts project planning and development, along with prescribed exit criteria, project sponsors can assess their resource needs and plan for them accordingly. 36. Does the proposed policy of MPO reaffirmation of the proposed project address FTA's goal of ensuring local support for implementing and financing proposed New Starts projects? 37. If FTA implements the previously mentioned local endorsement of the Financial Plan, does this separate action become redundant? *Comment:* FTA received 8 comments on question 36 and 1 comment on question 37. Five commenters noted opposition to the proposal mentioned in question 36. Those opposed who wrote this proposal would add an unnecessary step to the process that would delay final design approval and thereby add to the cost of project development. In addition, they wrote this would not help to address FTA's concern of ensuring local support for financing of the project. Lastly, commenters suggested this would create a disconnect with requirements placed on highway projects. Three comments were received stating no objection to the proposal, but also not stating strong support of it. These commenters wrote it was reasonable and in line with current local planning process requirements, but would not help address FTA's concern. Only one comment was received on whether the proposal was redundant should FTA implement its other proposal for local endorsement of financial plans. That commenter wrote it was not redundant and that it is important for the MPO as a regional entity to formally state that it supports the project in its final configuration. *Response:* FTA does not believe this proposal would add significant time or cost to the project development process. The FTA/FHWA metropolitan and statewide planning regulations require that before Federal funds may be spent on a project, it must be adopted into the MPO's financially constrained metropolitan transportation plan and transportation improvement program. FTA's proposal would ensure that the latest information on the project's cost estimate and impacts is incorporated into the region's transportation plan. *Proposal:* To verify that New Starts projects, with their final scope and costs, are supported by regional planning partners, FTA proposes to require that MPOs reaffirm their commitment to implementing and financing projects, prior to those projects advancing into final design, if significant changes have occurred in the project definition or cost. 38. Section 5309(h)(3) as amended by SAFETEA-LU accords FTA the discretion to provide a higher percentage of New Starts funding than that requested by the project sponsor as an incentive to producing reliable ridership forecasts and cost estimates. How could FTA implement this provision of SAFETEA-LU? *Comment:* Eight comments were received in total, but very few included specific ideas on how the incentive could be implemented. Two commenters were opposed to the incentive idea. Four transit agencies and one MPO were supportive of the idea. One transit agency expressed neither support nor opposition, but rather concerns with what projections would be evaluated to determine eligibility, suggesting that the proposal may result in less accurate cost and ridership forecasts. The two commenters opposed to the idea, and one of the transit agencies in support of the idea, suggested that rather than allowing grantees to reduce the local share if New Starts funding is increased under the incentive, project sponsors should instead be required to use the additional funding for betterments to the project. One transit agency suggested that incentives are acceptable only if they are kept small (2-3 percent increase) while another transit agency suggested that FTA should work with the project sponsor to determine an incentive amount that would be meaningful. Another comment stated that an FFGA should be amended before it is fully paid out to increase the New Starts share if ridership and cost estimates prove reliable over the course of the first year of operation. *Response:* Regarding the accuracy of forecasts, the concern of the commenting agency that this proposal could result in less accurate cost and ridership forecasts may be unfounded. Presumably the commenter is suggesting that grantees would overstate costs and understate ridership during project development so as to come in under budget after completion of the project and with higher ridership to be eligible for an incentive. The very nature of the New Starts rating and evaluation process would prevent this from happening, because overstating costs and understating ridership would significantly impact a project's cost effectiveness. Furthermore, FTA examines both cost and ridership projections closely throughout project development and would not accept obvious misrepresentation of costs and ridership. *Proposal:* FTA proposes to implement a new feature of FFGAs, consistent with changes made by SAFETEA-LU, that would include an incentive clause that would allow for an amendment to either increase the Federal funding contribution or allow for the addition of scope, when actual opening year ridership is no less than 90 percent of that forecast and actual capital costs, adjusted for inflation, are not more than 110 percent of that estimated, at the time the project entered PE. This standard is slightly more stringent than the wording in SAFETEA-LU, as FTA is proposing to amend the FFGA only after the project is complete and operating, rather than assessing whether forecasts have stayed within these limits prior to execution of the FFGA. FTA believes that the incentive should only be provided for actual performance not for projected performance. However, as suggested by the commenters, FTA is allowing the incentive to be used either to increase the Federal share or to add scope to the system. ANPRM on Small Starts Small Starts Eligibility SAFETEA-LU constrains eligibility of projects for Small Starts funding by imposing limits of less than $75 million in Section 5309 Capital Investment funds and less than $250 million for total project cost. However, it broadens eligibility in terms of project definition by relaxing the existing requirement that the project include a fixed guideway. With this change, a project that would not meet the fixed-guideway criterion is now eligible if it
(1)includes a substantial portion that is in a separate right-of-way, or
(2)represents a substantial investment in specific kinds of transit improvements in a defined corridor. The eligibility provisions of the statute raise several issues:
(1)How to define “substantial portion in a separate right-of-way;”;
(2)how to define “substantial investment”;
(3)the possibility that project sponsors could divide traditional New Starts projects into two or more Small Starts projects; and
(4)the possibility that a Small Starts project might be proposed as the initial transit service in a corridor. The ANPRM provided a discussion of the challenges and merits of various approaches to addressing these issues, and readers of this NPRM are encouraged to refer to it for more information. The ANPRM further posed several questions related to the eligibility of Small Starts projects with the goal of facilitating a discussion of this important topic. These questions, a summary of industry reaction to the questions, and FTA's response and proposal for the NPRM follows: 1. What portion of the project should be in a separate right-of-way to qualify for funding under the Small Starts eligibility criteria? Should this determination be based on length or on performance? 2. How might FTA interpret the requirements that a project represent a “substantial investment?” 3. How might we ensure that a Small Starts project is in a “defined corridor?” *Comments:* Questions 1 and 2 received 20 comments each, and question 3 received 11 comments. Comments were generally split on the first question of eligibility. Of the 12 comments that noted the need for a separate right-of-way for Small Starts projects, there was a consensus that 25-50 percent of the length of the project should be in exclusive right-of-way to be eligible for Small Starts funding. Reasons cited for a minimum guideway threshold included the ability to show a permanence of investment, which would better support the land use and economic development objectives of proposed transit investments, and to ensure travel time savings. But 4 of the 8 commenters not in favor of requiring a dedicated right-of-way noted similar gains in performance may be made through the use of ITS technology such as signal prioritization, queue jumping, and other operational treatments. Indeed, slightly more than half of the commenters on this question favored a performance-based determination of eligibility, with travel time savings the most commonly suggested performance criteria. All 20 of the commenters favored the inclusion in the NPRM of a definition of “substantial investment.” However, 2 comments stressed the need for flexibility and opposed either a dollar value or a specific list of criteria elements that needed to be met, as proposed in the ANPRM. Twelve comments requested that a portion of the right-of-way be dedicated, although 7 of these stated that FTA should not mandate that a separate right-of-way be an element of every Small Start. More specific comments noted that a substantial investment should be defined in terms of infrastructure investment. Fifteen commenters recommended that FTA define substantial investment as a “package” of investments listed in 49 U.S.C. 5309(e)(10), as amended by SAFETEA-LU, including hardware such as signal pre-emption, off-board fare collection, level boarding, station investment, and special vehicles. Due to the large number of potential variables associated with a “substantial investment,” 7 comments noted the need for clear, non-regulatory based guidance that should cover the majority of projects. Suggestions to the question on “defined corridor” were wide ranging. Three commenters noted that a traditional view of an arterial street or a transportation corridor may be too rigid of a definition and suggested that FTA take a flexible approach to the definition of a “corridor” for Small Starts purposes. One commenter recommended, for example, that a corridor could be defined as a combination of parallel streets, as a downtown shopping area, or as a central business district. To further define the corridor, local policies on economic development and land use should be examined and matched to the corresponding area of interest. Seven commenters suggested that a more narrow definition be used, for the reason that the modest costs of Small Starts tend to lend themselves to improvements to existing travel corridors rather than creation of more expensive new services. Two commenters expressed concern that any definition must be able to distinguish Small Starts from improvements that could be funded under the Section 5309 bus or FTA formula programs. Two commenters cited additional concerns on consideration of a Small Starts project that would cross multiple jurisdictions. To proceed on a project spanning jurisdictions, it was recommended that a number of construction and planning phases be allowed if that type of implementation approach facilitated project delivery. *Response:* FTA believes that there is significant merit to using a performance-based approach to determine whether or not the separate right-of-way is “significant.” Because all fixed guideway projects (rail projects and those with catenary, i.e., electric trolley-bus service using overhead wires for power supply) are automatically eligible for New Starts and Small Starts, the following is relevant to bus projects only. Generally, the purpose of a separate right-of-way for bus projects is to remove transit vehicles from general-purpose traffic, thereby speeding up service. Therefore, a performance-based determination would ensure that the portion of the project in a separate right-of-way actually had the intended effect of better operating performance. However, FTA has never applied a performance standard to fixed-guideway projects. Thus, in the interest of consistency among potential Section 5309 Capital Investment projects, FTA believes that using a criterion based on physical characteristics is more appropriate. Likewise, FTA believes that it is necessary to define a minimum level of transportation investment sufficient to justify the project for discretionary Small Starts funding. Otherwise, Small Starts projects would be competing for funding with many capital investments ( *e.g.* buses) that should be funded with FTA formula, bus discretionary, or Title 23 flexible funds. Thus, FTA is proposing a number of specific project components that would comprise a “substantial investment” to improve the level of transit service, yet not require a specific threshold or dollar value of improvements. It is very difficult to prescribe the dimensions of a “defined corridor” given the diversity of project contexts. Nevertheless, the principles guiding the definition should be that the project addresses a single travel shed that consists of a concentration of trip origins and destinations. While there is no rigid definition of travel corridor, routes with significant geographic separation would be considered to serve different corridor travel markets. *Proposal:* FTA proposes in this NPRM that to qualify for funding, Small Starts bus projects must either
(a)provide a dedicated right-of-way for at least 50 percent of the total project length in the peak period or when congestion inhibits transit system performance, or
(b)be a corridor-based bus project with the following minimum elements: • Substantial transit stations • Traffic signal priority/pre-emption, provided that there are traffic signals on the corridor, • Low-floor buses or level boarding, • Branding of the proposed service, and • 10-minute peak/15-minute off peak headways or better while operating at least 14 hours per weekday The first three bullets are taken directly from the statute; the fourth is a low-cost strategy for achieving a sense of the uniqueness and permanence of transit service and is thus consistent with SAFETEA-LU's requirement that a corridor-based bus capital project include “features that support long-term corridor investment.” The fifth bullet embodies the underlying concept that, to be successful transportation investments, Small Starts projects must provide for a significant level of transit service. Experience in major transit corridors across the United States suggests that 10-minute peak frequencies, in addition to representing a high level of service, is the minimum headway at which passengers' decision to take transit is not based upon route schedule information. While other project features such as park-and-ride lots and off-board fare collection are also eligible expenses under the program, they are not required elements. The regulation simply states that the project must be a corridor bus project; however, FTA intends to review proposed projects on a case-by-case basis to determine whether they are located in a “defined corridor.” A key consideration for this review will be whether the project is located in a single travel shed. 4. Should we try to prevent traditional New Starts projects from being divided into two or more Small Starts projects? If so, in what ways might we prevent this from happening? *Comments:* Twenty comments were received in answer to this question. Only three of the commenters indicated they were in favor of allowing traditional New Starts projects to be divided into two or more Small Starts projects. The main reason cited to permit this division was that any phased implementation would result in faster implementation of at least some portions of a larger proposed investment, and that any “stand-alone” segment/project should be considered by FTA so long as it is deemed worthy when evaluated against the Small Starts criteria. The remaining 17 commenters noted that the division of large New Starts projects into two or more Small Starts projects is contrary to the intent of the Small Starts program. However, 14 commenters noted that the funding of projects in the same region but on adjacent or unrelated corridors should be allowed and even encouraged. In addition, other more specific comments included limiting the amount of funding over a given time period or justifying funding on the basis of how corridor improvements are included in a region's metropolitan transportation plan. *Response:* The purpose of the simplified evaluation and project development process for Small Starts is to scale the analysis and procedures according to the complexity of the projects. Projects that are very large investments in fixed guideway transit facilities demand the full due diligence regarding the benefits, costs, and the project sponsor's capability and readiness in order to ensure that public resources are allocated to their best use. These larger projects should not be able to evade due diligence simply because they are divided into phases which individually meet the cost limits for Small Starts. *Proposal:* FTA proposes that all potential Small Starts projects (i.e., portions of a larger investment) planned in a corridor will be evaluated as a single project. If the combined cost or total requested funding amount, both expressed in year-of-expenditure dollars, is over the Small Starts limits, the project will be evaluated as traditional New Starts project. 5. Should we establish a minimum ridership requirement to ensure that Small Starts projects are used to improve the quality of service for existing transit markets rather than represent the first transit service offered to potentially new transit markets? If not, how can a project demonstrate need for an investment? *Comments:* Twenty-seven comments were received in answer to this question. Approximately two-thirds of commenters opposed the idea of instituting a minimum ridership requirement for Small Starts, citing that this would penalize communities that are in the initial stages of land development and thus currently do not have a demand for transit or communities that are trying to open up new markets to transit. The 9 commenters in favor of the minimum ridership requirements indicated that such a threshold would allow Small Starts funds to be provided only to those areas that have a demonstrated need for improved transit. It was further suggested by 8 of these 9 commenters that in these existing cases, there would be substantially less risk to a project's achievement of success because of this demonstrated need. *Response:* FTA recognizes that the implementation of high quality transit service in areas where such service does not exist today can, when combined with aggressive corridor land use development initiatives, contribute to future use of service. *Proposal:* In the interim guidance for Small Starts, FTA required, as one criterion for qualifying as a Very Small Start, that sponsors of such projects provide evidence of current corridor ridership that would benefit from the project of no less than 3,000 average weekday passengers. FTA proposes to maintain this eligibility requirement for Very Small Starts since it is an intrinsic element of FTA's ability to warrant the project as being cost effective. For all other projects, FTA proposes not to require a minimum ridership threshold. However, FTA notes that it would seem unlikely that Small Starts projects proposed in corridors with a small or non-existent transit market would be able to generate immediate transportation benefits, as required by SAFETEA-LU in its requirement that cost effectiveness be calculated for an opening, rather than design, year. In considering the reliability of ridership estimates, FTA will closely examine the justification for the ridership and travel time benefits of such projects. Consequently, sponsors of such projects must make an extremely compelling case that there is sufficient planned development to result in conditions that support a strong transit travel market. Small Starts Evaluation and Ratings As amended by SAFETEA-LU, 49 U.S.C. 5309(e)(2) allows the Secretary of Transportation to provide funding assistance to a proposed project under this new Small Starts category only if the Secretary finds that the project is:
(A)Based on the results of planning and alternatives analysis;
(B)Justified based on a review of its public transportation supportive land use policies, cost effectiveness, and effect on local economic development; and
(C)Supported by an acceptable degree of local financial commitment. The statute expands on the justification required in paragraph (B), requiring that the Secretary make the following determinations: • The degree to which the project is consistent with local land use policies and is likely to achieve local development goals; • The cost effectiveness of the project at the time of the initiation of revenue service; • The degree to which a project will have a positive effect on land use and local economic development; • The reliability of the forecasting methods used to estimate costs and ridership associated with the project; and • Any other factors that the Secretary determines appropriate to make funding decisions. The statutory provisions for the evaluation of proposed Small Starts projects raise several issues. These include the framework for the evaluation; the specific measures used in the evaluation; and scaling of the evaluation approach for Small Starts projects of different size, cost, and complexity. The ANPRM provided a discussion of the challenges and merits of various approaches to addressing these issues. Most notably, FTA proposed two potential options for organizing the Small Starts project criteria into a coherent evaluation framework. This is the same framework that is discussed in Question 3 under the Guidance on New Starts Policy and Procedures. The ANPRM further posed several specific questions related to the evaluation and rating of Small Starts projects. These questions, a summary of industry comments, and FTA's response and proposal for this NPRM follow: 6. How should the evaluation framework for New Starts be changed or adapted for Small Starts projects? *Comments:* Twenty-four comments were received in response to this question. Several commenters addressed not only the overall evaluation framework but also measures for local financial commitment and FTA's proposal that the nature of the problem or opportunity in the Small Starts project corridor be included in FTA's evaluation of Small Starts. Comments on these specific measures were addressed in our response to questions that specifically addresses these two issues. Of the two evaluation framework options presented in the ANPRM, Option 2 generated the most support, although 3 commenters strongly indicated that land use should be elevated to a benefit rather than used as a risk factor. Four commenters objected to both Options 1 and 2, and proposed an alternative approach—a “point-system” developed in a Transit Cooperative Research Program
(TCRP)quick study report. In terms of local financial commitment, 1 commenter noted that FTA should not penalize smaller Small Starts project sponsors who may not be able to generate more than a 20 percent local funding match, although another commenter hoped that FTA would continue to encourage local overmatch through its evaluation of local financial commitment. Two commenters suggested that State and local governments or private investors are unwilling to commit project revenues until they receive assurances of Federal funding, and that FTA needs to consider prior history in obtaining non-Federal commitments as a surrogate for actual commitments. There was little comment on the proposal that projects be evaluated in terms of the problems they solve or the opportunity they take advantage of. One respondent was concerned that the ANPRM couches “problems” as only being mobility related. *Response:* Based upon the comments received, FTA intends to advance the framework described in Option 2 into the NPRM with one exception that is discussed more fully in the question 3 under the Guidance on New Starts Policy and Procedures. FTA has reviewed the TCRP proposal for evaluating Small Starts projects and notes that the approach entails double counting and difficulties determining the proper weights. FTA understands the positive and negative aspects of encouraging local overmatch to Federal discretionary funding, but notes that SAFETEA-LU permits FTA to consider the degree to which the project financial plan depends upon non-New Starts funding, and FTA therefore intends to reward overmatch for Small Starts just as it does New Starts. Further it would be poor program management for FTA to make Federal funding commitments in advance of local commitments. Equally importantly, FTA expects that the demand for Small Starts funding will be great enough among projects that can demonstrate such commitments that it would be counterproductive for FTA to commit its funds in advance of local funding commitments. FTA strongly encourages project sponsors to provide an overmatch under the Small Starts program as it is likely to be as highly competitive, if not more so, as the New Starts program. *Proposal:* The NPRM advances for further review and comment the Option 2 evaluation framework first proposed in the ANPRM. However, Option 2 has been modified in three important ways. First, the “nature/extent of problem or opportunity” in the project corridor has been removed as an explicit evaluation criterion. FTA acknowledges that this factor is not specifically identified in 49 U.S.C. 5309(e)(4). However, FTA notes that 49 U.S.C. 5309(e)(4)(E) directs FTA to “consider other factors that the Secretary determines appropriate.” Therefore, whenever a project is evaluated, FTA intends to consider the degree to which the proposed Small Starts project addresses the existing and forecast problem and opportunity as an “other” factor. As congestion is one of this Nation's most daunting transportation challenges, another measure that FTA currently intends to consider under “other factors” is the degree to which a project is a part of a significant congestion reduction strategy. FTA will evaluate projects that are a principal element of a congestion reduction strategy, in general and a pricing strategy, in particular, more highly. FTA seeks comment on how it might better measure congestion in the future. FTA will also consider as an “other factor” any benefit of the project not covered under the project justification criteria or other factors that the Secretary determines to be appropriate to carry out the evaluation. This consideration could result in a project's rating being increased or decreased. Further, FTA is proposing that land use be included under both the economic development/land use criterion (under effectiveness) and the reliability criterion. FTA intends that current land use conditions, as well as land use plans and policies, be critical components of these criteria. The economic development/land use criterion will account for 60 percent of the effectiveness rating, with the remaining 40 percent of the rating comprised of mobility benefits. This should ensure that the factor is given sufficient overall attention in the rating process. FTA seeks comment on how it might better measure economic development/land use in the future. In addition to revising Option 2, FTA is asking for specific comment, under a section entitled “Additional Discussion Items for Comment” on an alternate evaluation framework for rating proposed Small Starts projects. This framework is based upon three principles that FTA espouses, which it has heard expressed by many in the transit industry. The first principle is that there are two primary reasons for implementing major transit capital investments—mobility improvements and economic development—and that these can be evaluated on a pass/fail basis. In the Small Starts program, FTA considers cost effectiveness in terms of the cost of improving mobility. The second principle is that FTA's evaluation process for Small Starts should be as simple as possible, and only needs to be sufficient to identify the best projects, ferret out the worst projects, and array those in the middle. Finally, the third principle is that whatever the merit of proposed Small Starts, lack of sufficient financial capability will prevent its implementation; therefore, financial commitment should be treated as a “minimum” or “readiness” requirement, rather than a component of an overall New Starts project rating. Figure 1 presents FTA's proposed Option 3 evaluation framework: EP03AU07.039 Under this framework, the financial commitment, as measured by the adequacy of a project's capital and operating plan (but not its proposed Small Starts share) would join technical and legal capacity, and the achievement of Federal metropolitan planning requirements, as basic “readiness” requirements for being considered for advancement in the Small Starts project development process. Once readiness is determined, projects would be subject to a “pass/fail” assessment of their cost effectiveness and economic development/land use impacts. If projects pass both assessments, they will receive an initial rating of High. If a project passes the cost effectiveness assessment but not the economic development/land use assessment, it would receive an initial rating of Medium. A project that fails both assessments, or passes the economic development assessment but not the cost effectiveness assessment, would receive an initial rating of Low and will not be considered by FTA for either advancement into project development or a funding recommendation until the rating is improved. These initial ratings are then adjusted by three factors:
(1)The reliability of the project's travel forecasts and cost estimates;
(2)the degree of Small Starts funding overmatch; and
(3)the magnitude of the problem or opportunity the project is intended to address. All of these factors are important. Based upon these adjustments, the initial project ratings may go up or down. For example, a project that received an initial rating of Medium, but that is providing a significant overmatch of Small Starts funding and/or demonstrates reliable estimates of project costs and ridership could receive a Medium-High or High overall project rating. On the other hand, a project with a similar initial rating of Medium but that does not address a severe transportation problem and/or for which ridership and cost forecasts are considered not as reliable would receive an overall rating of Medium-Low or Low. However, consistent with SAFETEA-LU, FTA will also consider the project sponsor's ability to provide only a 20 percent match and will not rate the project's local financial commitment at less than Medium, solely on the basis of a 20 percent match, so long as the project sponsor can demonstrate that the 20 percent match is based on the limited fiscal capacity of State and local governments. In this way, FTA can address the SAFETEA-LU requirement that FTA consider State and local fiscal capacity at the same time that it addresses the SAFETEA-LU requirement that it gives priority to financing projects with a higher-than-required non-New Starts/Small Starts share. 7. How should the baseline alternative be defined? *Comments:* Twenty-three comments were received in response to this question. Twenty-one commenters strongly favored the use of a “no-build” scenario as a baseline alternative for Small Starts. Expanding on this, 1 commenter suggested that the Small Starts baseline be consistent with the NEPA baseline, be locally driven, and reflect a project that is included in local transportation plans and improvement programs. It was further suggested by a commenter that the baseline no longer be carried into final design. Another commenter suggested that the Small Starts baseline should be adjusted based on the complexity of the project. For example, one commenter favored using a “no-build” scenario for smaller projects, but using the TSM for larger projects. *Response:* FTA agrees that the definition of the Small Starts baseline should be a locally driven process but disagrees that it should be identical to the NEPA “no build” in all cases. Consequently, FTA continues to require—as it does for traditional New Starts—that the alternatives analysis study be the venue for developing and evaluating a number of low- to higher-cost alternatives that meet the purpose and need for transportation improvements in a given corridor. No reasonable alternative should be excluded for consideration until an appropriate analysis determines that it does not sufficiently address locally-identified problems, commensurate with its cost and other impacts. It is through this process that a Small or New Starts baseline alternative should be defined. However, while the alternatives analysis process is the venue for identifying the baseline alternative it should be noted that FTA uses the baseline alternative not to determine whether it is reasonable to advance that alternative for further study, but as the required comparison for measuring the benefits of the project. FTA acknowledges that many Small Starts, particularly Very Small Starts, will be Transportation System Management
(TSM)improvements: that is, lower-cost, operations-oriented upgrades to existing transit services that do not require construction of a new fixed guideway. For such projects, a no-build alternative would be the appropriate Small Starts baseline. For more complex projects, including those that contemplate the implementation of a fixed guideway, a non-guideway alternative—for example, a TSM alternative that provides for similar service levels as the proposed Small Starts—would be the appropriate baseline. Whatever the baseline alternative, FTA agrees that, once a Small Starts project is approved into project development, the baseline should not change unless the scope of the Small Start project changes and will be used only as a comparison for preparing the required information for the annual New Starts Report (as necessary) and for making a recommendation on funding for a PCGA. *Proposal:* Cognizant of SAFETEA-LU's expectation that the advancement of Small Starts projects be streamlined to the extent possible, FTA has simply proposed in the NPRM that FTA must approve the baseline alternative. However, FTA intends to rely on the following simple guidelines for definition of the Small Starts baseline alternative: • A project with a dedicated right-of-way for 50 percent or more of its length in the peak period would usually have a TSM as its baseline. In general, a TSM can be satisfied by
(1)the inclusion within its scope of the physical features found in a Very Small Starts project, as defined elsewhere in this NPRM; and
(2)service levels which are comparable to the proposed Small Start. • A project that does not meet the definition above, including a Very Small Start, would use a no-build alternative as its baseline alternative. By following these guidelines, FTA believes that the process for approving the Small Starts baseline alternative will be extremely simplified in comparison with the process for FTA approval of the baseline alternative for traditional New Starts. FTA also desires to provide some flexibility in the definition of the baseline alternative for project sponsors who believe, for whatever reason, these guidelines are inappropriate for their proposed Small Starts project. Therefore, FTA will consider deviations from these guidelines. In such cases, FTA strives to make its review and determination as quickly as possible, but notes that it is the responsibility of the project sponsor to make a compelling justification for deviation from the guidelines. 8. How might FTA evaluate economic development and land use as distinct and separate measures? *Comments:* Eighteen comments were received in response to this question. In terms of land use, 2 commenters suggested comparing the current densities with the proposed densities of planned developments. In addition to density, however, it was also noted by 7 commenters that the existence or planning of transit-oriented policies would be a good measure. Economic development had a similar depth of interest and comments. For example, 4 commenters suggested measurement of the increase in employment and tax revenue, or the property values of current properties versus the selling price of future acreage/developments. In addition to these specific suggestions, other commenters noted precautions that should be taken when considering these two measures. One commenter cited concern that these should be downplayed in the initial stages of the project's development, and focus should instead be placed on mobility and cost effectiveness. *Response:* Whether referring to land use or economic development, a common theme of the majority of respondent suggestions was to use indicators of the likelihood of increased development in areas near projects. Existing land use conditions, existing and planned transit-oriented plans and policies, and projections of increases in employment and revenues are all necessary, but not sufficient conditions for inducing transit-supportive development patterns as a result of a transit project. Indeed, it is not possible to ascertain the likelihood of a project's effect on surrounding development unless a number of factors relating to both land use and economic development are considered in combination. Land use considerations provide information about the potential for development or redevelopment and whether that development can occur in a transit-oriented way. However, while these are necessary conditions, they are not sufficient in and of themselves, as the local development climate must be sufficiently robust to provide the engine needed for development; the project must be perceived as permanent to entice developer interest; and the project must increase accessibility to the area. All these factors must be viewed in combination in order to evaluate the potential economic development benefits of the project. *Proposal:* FTA proposes to use a single economic development/land use criterion based on the likelihood of increased transit-oriented development resulting from a Small Starts project. The following describes FTA's current thinking with respect to what these measures will be. Given the important role that land use plays in supporting, guiding, and often increasing development, FTA will draw upon many of the same factors used in its current evaluation of land use. These will be augmented with indicators that provide further incentives to development. Because measurement of economic development in terms of jobs or value of future development is not currently feasible, FTA proposes instead to evaluate whether or not the conditions necessary to support economic development exist in the project corridor. To accomplish this, FTA proposes to use the following specific measures:
(1)Current land-use conditions,
(2)development and land-use plans and policies,
(3)the economic development climate in the corridor and region,
(4)the project-related change in transit accessibility for developable areas in the corridor, and
(5)the economic lifespan of new transit facilities proximate to those developable areas. FTA is conducting research in this area and as more quantifiable measures are developed they will be proposed as part of any new policy guidance. FTA seeks additional comment on how it can better measure economic development/land use. 9. Are there other measures of effectiveness that should be considered? *Comments:* Thirteen comments were received in response to this question. An assessment of a project's effect on economic development was the subject of many commenters. The response to those comments was addressed as part of Question 3 above. Two commenters stated that FTA faces a challenging task when creating appropriate measures of effectiveness for Small Starts projects. For example, it was noted that one measure, changes in passenger travel time, may be difficult to capture in cities where limited ridership or bus service exists. Despite the potential challenges, several measures of effectiveness were suggested. Increased access to job centers as well as the reduction in the number of single occupancy vehicles on the roadway were two measures noted. In addition, several ideas mentioned in the ANPRM were emphasized in the comments, including: Reductions in passenger travel time, the ability to maintain a cost effective transit project, the appearance of permanence of the Small Starts project, and trends in land values and development in and near the project area. Other suggested measures included the availability of land, the success in development near transit in neighboring communities, plans, ordinances and policies that support transit-oriented development, and economic development. *Response:* Measures of effectiveness vary within each project due to its size, sponsor experience and capabilities, and location specific criteria. For the concerns relating to changes in passenger travel time and increased access to jobs, transportation user benefits provides an excellent metric that captures all the benefits of interest. Measures related to land use and economic development will be considered by FTA in its evaluation of the criterion for economic development/land use. *Proposal:* Because the primary objectives of transit projects are to improve mobility and foster economic development, FTA has chosen to use two criteria for measuring the project's effectiveness. These are mobility, which is the travel time savings calculated as part of the cost effectiveness measure, and economic development/land use, the components of which are discussed in Question 8 under Guidance on New Starts Policies and Procedures. Although FTA sees merit in identifying other measures of effectiveness, the lack of analytical methods to address many of the desirable characteristics of transit projects results in an inability to determine these benefits fairly at this time. If FTA is later able to identify additional measures, these can be added to the evaluation as part of any changes to our policy guidance, which would be subject to public review and comment. 10. Is it desirable for FTA to attempt to incorporate other measures of effectiveness besides mobility when evaluating cost effectiveness? If so, what measures might be incorporated and in what manner? *Comments:* Thirteen comments were received in response to this question. The number and variety of responses seem to indicate not only a great interest in this evaluation tool, but also provide a view of priorities in the respondent communities. Suggestions regarding cost effectiveness concerned numerous areas, including service, neighborhood revitalization, and congestion reduction. Commenters specifically suggested increased service to transit dependent users and improved connectivity to job, residential, or retail centers, and contributions to local land-use changes and economic development as measures. Specifically, 2 commenters noted that the cost effectiveness should include mobility benefits that would accrue to highway users with the increase of transit use. In addition, 2 other commenters noted that walkability should also be incorporated into cost effectiveness. In addition to the mobility-oriented measures listed previously, other suggested measures include the extent to which a community is considered livable. Other comments noted that the evaluation of effectiveness should be simplified, thus eliminating the need for additional measures of evaluation. *Response* : FTA supports a simplified cost effectiveness evaluation process. The need to maintain this simplification has been taken into account when choosing the appropriate measures and tools. Thus, specific, quantifiable, and easily attainable measures such as transportation user benefits and capital costs are necessary components of the evaluation process. More qualitative measures such as regional connectivity, neighborhood revitalization, walkability, and contributions to land-use and economic development are difficult to incorporate in a measure of cost effectiveness because they are difficult to measure reliably. As described in the response to Question 10 under New Starts, FTA is currently unable to accurately assess the mobility benefits that accrue to highway users from high-capacity transit due to the inability of local travel models to reliably determine the effect. Once travel models have been improved to reliably forecast these benefits, FTA will use them. In addition, as described under Question 4 in “Additional Discussion Item for Comment,” FTA is interested in exploring certain surrogate measures that could account for highway user benefits. *Proposal:* Because of the difficulty of incorporating additional measures into its evaluation of project cost effectiveness, FTA is proposing to maintain its current cost effectiveness measure of annualized cost per hour of user benefits. As described in Question 10 under New Starts above and Question 4 under “Additional Discussion Items for Comment,” FTA will continue to seek ways to include the benefits to highway users in the calculation of user benefits. 11. Should mode-specific constants be allowed in the travel demand forecasts? If so, how should they be applied? *Comments:* Fourteen comments were received in response to this question. All but two of the commenters favored use of an asserted modal constant in the estimation of Small Starts project ridership and mobility estimates. The two opposed cited the short timeframe for a Small Start project and that there is too little national data gathered at this time and too much variation between communities to make this worthwhile. Those in favor of utilizing a modal constant noted that in areas with a total absence of a particular transit mode, it may provide a useful assessment tool. These comments varied from using a locally-derived constant when the mode is in place to use of nationally determined constants. *Response* : FTA allows use of a mode-specific constant in forecasts that have been carefully calibrated using ridership information from the mode. Mode-specific constants play two roles in travel forecasting. The first is to represent all the attributes of the mode that are not otherwise explicitly included in the travel models. These service attributes include visibility, reliability, span of service, and comfort, as well as others. Constants also act as correction factors for all the errors that occur in the models so that model results can replicate current transit ridership. Deciding the magnitude of each of these roles is extremely difficult and the subject of current FTA-sponsored research. When this research has been completed, FTA aspires to having an approach to the application of mode-specific constants nationally that will both produce accurate representations of these omitted attributes and be fair to all projects seeking funding. In the interim, in the policy guidance issued in June 2007, FTA has allowed credits for a constant for a new transit mode to an area. The credits are based on the attributes of the project. *Proposal:* FTA's current policy allows the use of mode constants for travel models that have been carefully calibrated against travel demand for an existing transit mode, and which fall within a reasonable range established by prior experience. For areas proposing a new mode, FTA has specified credits for a constant based on the project's attributes. It should be noted that this position is not specifically addressed in the NPRM as FTA intends to treat the issue of a modal constant through policy guidance, not regulation. 12. How might FTA incorporate risk and uncertainty into project evaluation for Small Starts? *Comments:* Fifteen comments were received in response to this question. Due to the simplified nature of the Small Starts program, 7 comments related to ways in which risk and uncertainty (which FTA now describes as reliability) could be incorporated into the evaluation process without compromising this simplicity. For instance, 4 commenters indicated that peer reviews and risk analysis based on similar and previously approved projects would be a sufficient means of evaluation. Six other commenters indicated that risk analysis measures should be broad in scope such that simple travel demand models would be able to analyze these measures effectively and without costly software packages. To further simplify risk analysis, 4 commenters were in favor of creating separate Small Start and Very Small Start project analysis criteria. Specific measures of risk and uncertainty proposed by commenters include the presence or development of transit-oriented development policies and public/private funding. Three commenters stated that risk and uncertainly were adequately addressed within the financial analysis and evaluation and that additional measures of risk may overly complicate the process. Two commenters questioned the inclusion of travel forecast and cost estimate reliability as an evaluation factor, noting that
(1)the simplified nature of Small Starts projects minimizes risk and uncertainties associated with their implementation and
(2)the process for evaluating projects should be streamlined and no new measures should be introduced. *Response:* Although the Small Starts evaluation process is meant to be simpler than that used for New Starts projects, accurately weighting reliability factors remains an important task. Further, SAFETEA-LU calls for FTA to include an assessment of the reliability of forecasts for Small Starts, just as it does for New Starts. Reliability measures take into account a project sponsor's ability to manage transit projects, as well as factoring in local expertise and development conditions. Financial reliability depends on both the amount and the terms of local financial funding, as well as the size of the funding request (e.g., is it reasonable in relation to other projects of a similar size in a similar community?). In addition, measures such as forecasted ridership and peer reviews are valid means to assess reliability. *Proposal:* FTA proposes to consider reliability of the costs and ridership forecasts in its evaluation and to adjust, either upward or downward, the ratings of the individual criteria that rely on these forecasts. The measures for reliability will be identified in policy guidance and these could include a number of factors. For instance, for travel forecasts
(1)the current land use and land-use policies,
(2)the soundness of forecasting tools and data used to predict ridership and mobility benefits, including steps to reduce uncertainty through peer reviews and other quality control procedures,
(3)comparisons of ridership forecasts against peer projects—similar projects in similar settings, with particular scrutiny for projects without any peers, and
(4)the track record of the project sponsor with benefits forecasts for previous transit projects. The reliability of the cost effectiveness measure would necessarily depend on any uncertainties associated with both the effectiveness measures and the cost estimates. The effectiveness reliability could be quantified with the measures outlined above. The cost reliability measures could be based on
(1)the soundness of cost-estimating procedures, including steps to reduce risk through peer reviews and other quality-control efforts,
(2)comparisons of the cost estimates against peer projects, and
(3)the track record of the project sponsor with cost estimates for previous transit projects. In addition, since operating efficiencies are measured as part of cost effectiveness, FTA would consider any innovative contractual arrangements, especially Public Private Partnership arrangement, which produce significant reductions in operating expenses, or which improve the reliability of forecasts of operating costs in its assessment of reliability. 13. What weights should FTA apply to each measure? *Comments:* Nine comments were received in response to this question. Although the specific weights varied considerably among commenters, most agreed that the overall measures of cost effectiveness, land use, and economic development would provide an accurate assessment of the project. Those who stated that cost effectiveness is a moderate to important factor weighted it between 33 percent and 50 percent. One commenter suggested a scenario in which a project would be required to rate well in cost effectiveness, land use, and economic development, or be able to score highly in any of the three, to receive project funding. Three commenters suggested that although cost effectiveness was an important measure, the evaluation process should allow for leniency where other project benefits outweigh cost effectiveness. One additional commenter indicated that project merit and a local commitment to funding should outweigh the cost effectiveness measure. *Response:* The variety of responses indicates the difficulty in assigning weights to each measure. This difficulty is compounded by the fact that there is no research that can be used to guide a decision on the importance of each of the criteria. Therefore, the application of weights is policy driven. *Proposal:* FTA proposes in the NPRM to give equal weight to both project justification and local financial commitment for the overall project rating. Further, the project justification rating will be comprised of cost effectiveness, weighted at 50 percent and effectiveness, weighted at 50 percent. Economic development/land use will account for 60 percent of the effectiveness rating, with the remaining 40 percent of the rating comprised of mobility benefits. An alternative approach, which uses a pass/fail decision rule in lieu of weights was described in Question 6 under the ANPRM on Small Starts and is specifically called out in the “Additional Discussion Items for Comment” at the end of this section. 14. Should the FTA make a distinction in the way we evaluate Small Starts projects of different total project costs and scope? *Comments:* Thirty-three comments were received in response to this question. Twenty-seven commenters favored a scaled approach to Small Starts projects. Although some of these preferred the distinction between Small Starts and Very Small Starts as proposed in the ANPRM, others simply noted that a threshold should be created below which little modeling or intensive quantitative analysis would occur. Of the 6 commenters opposed to creating a distinction among Small Starts projects, most still saw the need for a scaled approach to evaluating Small Starts projects. This was especially true for those commenters who operated existing transit projects, and for which the proposed project was simply an extension of an existing project. *Response:* As noted in the ANPRM, several options are available for evaluation of Small Starts proposals:
(1)Application of the same evaluation methods for all projects regardless of scale;
(2)development of simplified analytical procedures for smaller projects; or
(3)defining for small projects a set of conditions, effectively “warrants” based on project scope and implementation setting, under which proposals are automatically deemed to have an acceptable level of project justification. Small Starts projects may range in size from non-guideway improvements costing $20 million, or perhaps less, to new guideways costing just under $250 million. Given this relatively wide range of project costs and the potential for complexity and risk, different approaches seem appropriate for projects of different scale. Furthermore, FTA recognizes that the effort expended by project sponsors to develop the necessary information and by FTA to ensure the reliability of that information should be matched to the size and complexity of the proposed project. Lower levels of effort, however, should result from lower levels of complexity, detail, and rigor, not from a reduced ability to address the full range of evaluation criteria. Given the relatively straightforward nature of the financial measures, most of the differences in evaluation methods should occur in the evaluation of project justification, particularly in the methods used to compute mobility benefits and, therefore, cost effectiveness. *Proposal:* FTA advances in this NPRM the very simplified evaluation process for Very Small Starts projects that was first proposed in the ANPRM and established, on an interim basis, in the Final Interim Guidance on Small Starts issued August 8, 2006. This process relies on pre-existing “warrants,” which if met set the project's justification and local financial commitment ratings at Medium. In addition, while Small Starts projects would be subject to a similar evaluation process as is used for New Starts, the forecast year and level of detail are significantly simplified. Small Starts Procedures for Planning and Project Development SAFETEA-LU specifies the use of some different planning and project development procedures for Small Starts projects from those used for traditional New Starts projects. Like the requirement for traditional New Starts, 49 U.S.C. 5309 requires that Small Starts projects be based on the results of planning and alternatives analyses but because of the short timeframe for the analysis (opening year versus the planning horizon covering no less than 20 years), it is likely that this process can be simplified. Unlike traditional New Starts, Small Starts need only be approved to advance from planning and alternatives analysis to project development and construction; no separate approval to enter final design is required. A Project Construction Grant Agreement (PCGA), which is a simplified Full Funding Grant Agreement, is used to provide a multi-year funding stream for Small Starts projects. The ANPRM included a discussion of, and asked for comment on, a number of these issues. The following summarizes the comments received, FTA's response and proposal for addressing the issue in the NPRM: 15. Should there be a distinction in the alternatives analysis requirements for Small Starts compared to traditional New Starts? 16. Should there be a distinction in the alternatives analysis requirements for Very Small Starts compared to larger projects that qualify as Small Starts? 17. Within an alternatives analysis, what other alternatives should be considered in addition to the Small Start and the existing service alternatives? 18. What should be the key elements or features of a highly simplified or simplified alternatives analysis? *Comments:* Question 15 received 18 comments, and question 16 received 12 comments. Question 17 received 7 comments, and question 18 received 8 comments. There was universal support expressed for differentiating alternatives analysis between Small Starts and New Starts. Numerous commenters suggested that letting the NEPA process fulfill the requirement for alternatives analysis would streamline the project development process. The desire for simplification was rooted in the idea that Small Starts projects, due to their small size, are inherently less risky than the larger New Starts projects, and the planning process should be correspondingly less complicated. Another suggestion was to permit the analysis of different alignments or phasing strategies of just one mode or technology, rather than to require an analysis of alternative modes. Approximately two-thirds of the commenters favored a distinction in the requirements of alternatives analysis between Very Small Starts and Small Starts. These commenters opined that the size of the Very Small Starts projects were not substantial enough to warrant an alternatives analysis. Some mentioned that this would be a redundant step that could be easily covered in the NEPA documentation process. The remaining third of commenters did not believe there should be a difference in the alternatives analysis process, because by differentiating between the two programs, some may use this as an incentive to keep projects just under the Small Starts cost thresholds in order to perform less analysis and be able to step through a streamlined process. There was a consensus from the commenters that no additional alternatives should be considered. Six commenters suggested that the alternatives analysis should be limited to a “build” and a “no build.” One commenter specified that such an analysis was appropriate in established transit markets, but that a simplified analysis might include a “build” and “improved system” for less-well-served transit markets. One commenter wrote that the consideration of other alternatives should be a matter of local discretion, so long as the process meets NEPA requirements. In terms of what constitutes a highly simplified or simplified alternatives analysis, 3 commenters again focused on the narrowing of alternatives and adherence to NEPA as the key factors that would simplify the process. One commenter noted that many Small Starts, and in particular Very Small Starts, would qualify as categorical exclusions and thus not require an analysis of alternatives. In such cases, they suggested that the NEPA determination ought to serve as meeting the requirement for alternatives analysis. *Response:* Although larger projects require a number of alternatives to be considered in an alternatives analysis to assess the numerous tradeoffs in costs, benefits, and impacts, the consideration of Small Starts often implies that fewer useful alternatives exist, and in some cases, there may only be two alternatives, one representing the Small Start and the other representing today's service levels. Nevertheless, the number of alternatives considered must continue to meet the requirements of NEPA, good planning practices, and proper identification of project costs and benefits for funding recommendations. Where an alternatives analysis is performed prior to initiation of NEPA (but consistent with NEPA principles), the subsequent NEPA process and document ought to recognize and incorporate planning analysis and decisions; this applies to both New Starts and Small Starts. A very simple alternatives analysis and subsequent evaluation process can be used when Very Small Starts are being considered. *Proposal:* In this NPRM, FTA incorporated the proposal advanced in the ANPRM and established, on an interim basis, in its Final Interim Guidance on Small Starts issued August 8, 2006. This proposal acknowledges that a very limited number of alternatives are permissible and that use of the no-build alternative as the baseline is appropriate if the project does not include a new fixed guideway. For Small Starts, the level of analysis for an alternatives analysis may be considerably simpler than that for New Starts if issues associated with the projects being considered are less complex. For Very Small Starts only minimal information needs to be developed relating to a clear description and assessment of the problem or opportunity in the corridor, a clear description of the project and how it addresses the problem or opportunity, determination of the project sponsor's ability to support the costs of building and operating the project, and a plan for implementing the project. 19. Should Small Starts projects also be required to perform a “before and after” study? *Comments:* Nineteen comments were received in answer to this question. Approximately two-thirds of the commenters indicated a “before and after” study should not be required of Small Starts projects. Of those opposed to requiring the study, reasons cited included the cost relative to the project funding allotment, as well as the need for greater consistency in reporting requirements. Others opposed to requiring the study noted that while data collection and analysis is a useful process, and one that should be included in the project funding, it should not be a requirement. For the one-third of the commenters who supported a requirement for a “before and after” study, the need for a solid base of data and analysis of Small Starts projects nationwide was consistently cited as a reason. However, another commenter noted the need for simplicity with regard to data requirements and analysis methods. It was further suggested that the “before and after” study be cost effective and in line with the project size and scope, with little or no analysis required for Very Small Starts projects. Specific measures that were noted as potentially useful included projected versus actual ridership; annual report of ridership; projected versus actual costs (operations and maintenance, capital); project scope; and projected service levels versus actual service levels. *Response:* The objectives of the “before and after” study are two-fold:
(1)To expand insights into the costs and impacts of major transit investments; and
(2)to improve the technical methods and procedures used in the planning and development of those investments. These objectives are equally important to both large-scale and smaller-scale transit projects. Small Starts projects have a unique opportunity to affect a greater number of transit agencies with the results provided from a “before and after” study. *Proposal:* FTA proposes to require a “before and after” study for all Small Starts projects. Support for this approach can be found in 49 U.S.C. 5309(g)(2)(C), which applies to all Section 5309 Capital Investments, not just to those funded under 49 U.S.C. 5309(d). However, FTA is cognizant of the need to simplify this process and therefore the FTA guidance on “before and after” studies for New Starts will be modified to allow for a simplified study approach for Small Starts. In addition, for Very Small Starts, the requirements for the Before and After Study in the NPRM have been extremely simplified since the project sponsor is required to submit project information that is generally available. 20. Should FTA mandate an early scoping approach for those alternative analyses that are not being conducted concurrently with the formal NEPA process? *Comments:* Fifteen comments were received in answer to this question. In order to better address environmental requirements for alternatives analyses, the ANPRM proposed an “early scoping” procedure. That procedure is described in Council on Environmental Quality's
(CEQ)guidance. It allows for a scoping process in advance of the Notice of Intent to prepare an Environmental Impact Statement. Response to this proposal was mixed with 6 commenters supporting the approach and 9 commenters opposing it. However, it should be noted that more experienced entities and those representing the largest transit operators were opposed to the proposal due primarily to the fact that scoping is likely to not be required for the majority of Small Starts projects under the National Environmental Policy Act
(NEPA)regulations. Those entities stated that because the requirement will often be more stringent than what NEPA requires, it should not be imposed. *Response:* Early scoping, undertaken by sponsors, could assist FTA in making a well-reasoned class of action determination for each Small Starts project. If, in advance of any informal early scoping process, it appears that, based on established facts and circumstances, a particular project proposal qualifies for a categorical exclusion, then early scoping by the project sponsor need not be undertaken; otherwise, early scoping is the best means of determining the appropriate class of action for purposes of the NEPA process. However, because of the likelihood that a vast majority of proposed projects will not be required to engage in formal scoping, this additional effort outweighs its limited value. *Proposal:* FTA is not proposing that early scoping, as defined by CEQ guidance, be required for Small Starts projects. Instead, for projects requiring an Environmental Impact Statement, FTA is proposing to require that the project has progressed beyond the NEPA scoping phase before FTA will approve entry into project development. This requirement is identical to that currently applied to New Starts. Additional Discussion Items for Comment A few additional issues have been raised since publication and comment on the Guidance on New Starts Policies and Procedures and the ANPRM on Small Starts. FTA specifically requests feedback on these issues, which are identified below and are also discussed in either the Response to Comments or in the Section-by-Section Analysis. FTA will consider comments received on these issues during future stages of the rulemaking process. 1. FTA has revised the definition of a fixed guideway system in section 611.5 to reflect the changes included in SAFETEA-LU. In addition, however, FTA has included in that definition facilities, such as HOT lanes, that replicate the kind of free-flow conditions expected of a traditional fixed guideway system through pricing or other enhancements. This proposal is more fully described under the proposal for Question 1 in the Eligibility section of the Guidance on New Starts Policies and Procedures. 2. In sections 611.13(b), 611.23(b), and 611.33(b) of the regulatory text, of the NPRM FTA is proposing that the costs of all “essential project elements” must be included in the capital cost estimates that lead to a project's cost effectiveness rating. Cost estimates that do not include all of these elements will be considered incomplete and will not be accepted for rating. FTA requests industry input as to which “essential project elements” should be required for inclusion. There has been much discussion in the past as to what constitutes an essential element of the project versus a project betterment, which can and should be funded entirely with local funds. In addition, in the interest of “right-sizing” some project sponsors have excluded improvements needed in the latter years of the planning horizon from the scope of the FFGA, even though such costs are always required for cost effectiveness calculations. This has led to some confusion as to whether the project sponsor is required to provide these improvements, since they are necessary to generate the benefits used in the cost effectiveness calculation. One way this problem has been addressed is that the project sponsor has included these improvements in the 20 year financial plan but has shown that they will be funded with non-Section 5309 Fixed Guideway funds. FTA seeks the industry views on how these various concepts, “essential project elements”, “betterments” and “right-sizing” should be addressed in the New Starts/Small Starts process. 3. FTA is considering whether an extremely simplified alternative evaluation framework should be allowed for Small Starts projects. The framework would allow for a “pass/fail” rating for economic development/land use and cost effectiveness, which, when combined with a reliability factor, would translate into the five levels (high, medium-high, medium, medium-low, and low) for the overall rating. This framework could simplify the rating process, while identifying the projects with the most potential. It would not, however, provide as much information on the variations between projects. This proposal is more fully described in the Response to Comments section under the proposal for Question 6 in the Small Starts Evaluation and Ratings section. 4. Relief of congestion is a top priority of the Department of Transportation, as reflected in its recently announced Congestion Initiative. The proposals made in this Notice include several features which are designed to assure that Major Investment projects contribute to reducing congestion. For example, as noted below, FTA intends to take account of, as a part of its review of “other factors,” the degree to which a project is supported by an effective congestion relief strategy including variable pricing. Second, FTA proposes to continue to include highway user transportation benefits, such as travel time savings from reduced demand on the highway system, as part of its measure of transportation system user benefits used to calculate mobility improvements and cost effectiveness. However, while this factor has been included in the definition of user benefits for some time, as described above in response to Question 10 under New Starts, reliable estimation of these benefits has been problematic. FTA intends to continue to work closely with the Federal Highway Administration to address the improvements needed in travel models to assure that reliable estimates can be developed and included in the measurement of transportation system user benefits. However, until such estimates are uniformly available on a reliable basis, FTA believes it is appropriate to use alternative measures that could provide some indication of the congestion relief benefits of New Starts projects. One such measure could be the reduction in highway vehicle miles of travel between the New Start and baseline alternative, weighted by a factor of highway congestion (e.g., daily vehicle miles of travel per lane mile in the New Starts project corridor). Such a measure, while imperfect, would allow for consideration of the amount of reduced highway demand to be assessed in the context of the severity of congestion in the corridor. Accordingly, as the third way in which congestion would be addressed in evaluating projects, FTA is proposing to include “congestion relief” as one of the features of “mobility improvements” evaluated as part of establishing project justification. FTA is interested in comment on the implications for the New Starts program of taking into account the congestion reduction benefits of transit projects, the measure of congestion relief proposed above, other possible measures of congestion relief, and the methods by which the current travel models could be used to produce better and nationally consistent estimates of highway system user benefits. 5. FTA is seeking feedback on how to provide additional incentives to increase the role of public/private partnerships in Section 5309 Capital Investment projects. FTA is proposing to explicitly address the role of public/private partnerships as part of an assessment of the role that innovative contractual arrangements can play in reducing and/or improving the operating costs both as a measure of the reliability of estimates of operating costs and in its assessment of the operating plan under local financial commitment. However, there may be additional steps that FTA could take. In addition, FTA is looking at ways that public/private partnerships can enhance the capital plan under local financial commitment as well as measure cost effectiveness. For purposes of this question, a public/private partnership assumes that the private sector invests its own financial capital (as opposed to an in-kind contribution) in the project. One possible approach would be to allow “betterments” funded by private entities to be excluded from the cost effectiveness calculation. This would allow private entities to invest in particular elements of a project that they viewed to be of particular benefit to them without jeopardizing an acceptable cost effectiveness rating. This approach would be available to a project with an acceptable cost effectiveness rating calculated without taking into account such betterments. To the extent that the addition of the betterments to the project's design would result in the project's cost effectiveness becoming unacceptable, FTA would exclude such costs from the calculation of cost effectiveness if they were borne by private entities. Examples of such improvements, or betterments, could include additional station entrances to subway stations, substantial improvements to a station's design beyond the design standards used for other stations in the system, and changes in the vertical or horizontal alignment of the project. Alternatively, FTA could exclude from the calculation of the cost effectiveness rating those project costs paid for by private capital—whether such costs are for betterments or otherwise—and calculate a project's cost effectiveness based only on costs borne by the public. 6. FTA has chosen to publish the weights used to calculate the Project Justification and local financial commitment ratings for New and Small Starts projects in the final rule. Previously, these weights as well as measures used to determine New or Small Starts Project Justification and Local Financial Commitment ratings have been published in the Annual Report on Funding Recommendations and separately in other FTA publications. FTA seeks comment on whether to publish both the weights and the measures in the final rule, or to preserve a degree of flexibility and maintain the measures in a separate document. 7. FTA is seeking comment on how it might develop a methodology to better quantify the user benefits attributable to a project. First, FTA seeks comment on a methodology for quantifying the user benefits that would accrue from the interaction of the proposed New Start or Small Start project and road pricing included in an effective congestion management strategy. Second, FTA seeks a methodology for quantifying the benefits attributable to the economic development/land use changes that occur as a result of a proposed New Start or Small Start project. Those changes in economic development/land use may provide benefits that are not otherwise included in FTA's current estimation of user benefits. FTA seeks comment on how to quantify this difference in economic development/land use attributable to the project, as well as how to measure the benefits that result. III. Section-by-Section Analysis Reorganization In order to make the regulation more understandable, FTA is proposing to divide it into four subparts that will cover General Provisions, “New Starts,” “Small Starts,” and “Very Small Starts.” Subpart A would include General Provisions that apply to all projects seeking Section 5309 Capital Investment funds. Subpart B would include those provisions that apply to New Starts (projects of over $250 million in total cost *or* requesting more than $75 million in New Starts funds). Subpart C would cover Small Starts projects (projects of under $250 million in total cost *and* requesting less than $75 million in Small Starts funds but not qualifying as a Very Small Start). Subpart D would cover Very Small Starts (a subset of Small Starts projects which are less than $50 million in total cost and $3 million per mile (excluding vehicles) and which meet other specified characteristics). FTA has chosen this approach, even though there is a lot of similarity in the requirements of each subpart, in order to assist a project sponsor in finding all of the applicable procedures and evaluation criteria in a single subpart, depending on the size and nature of the proposed project. Subpart A includes a general statement of purpose and contents, statements on applicability of the regulation, and a section on definitions. These sections are similar to section in the current regulation, but include certain amendments, which are described below. This is followed by a new section on measures of reliability, which applies to all projects seeking Section 5309 Capital Investment funds, no matter the size. Subparts B, C, and D each include separate provisions on eligibility, the project justification criteria, the local financial commitment criteria, overall project development ratings, and the project development process, as they apply to New Starts, Small Starts, and Very Small Starts, respectively. These subparts build on the sections in the existing regulations that cover these subjects, amended as described below, and tailored to the size and complexity of the projects being considered. Distribution Table For ease of reference, the following distribution table indicates proposed changes in section numbering and titles from the current version of the regulations in 49 CFR part 611. Current part 611 Proposed part 611 611.1 Purposes and Contents Subpart A—611.1 Purpose and Contents. 611.2 Applicability Subpart A—611.3 Applicability. Subpart B—611.9 New Starts—Eligibility. Subpart C—611.19 Small Starts—Eligibility. Subpart D—611.29 Very Small Starts—Eligibility. 611.5 Definitions Subpart A—611.5 Definitions. 611.7 Relation to planning and project development processes Subpart B—611.17 New Starts—Project development process. Subpart C—611.27 Small Starts—Project development process. Subpart D—611.37 Very Small Starts—Project development process. 611.9 Project justification criteria for grants and loans for fixed guideway systems Subpart B—611.11 New Starts—Project justification criteria. Subpart C—611.21 Small Starts—Project justification criteria. Subpart D—611.31 Very Small Starts—Project justification criteria. 611.11 Local financial commitment criteria Subpart B—611.13 New Starts—Local financial commitment criteria. Subpart C—611.23 Small Starts—Local financial commitment criteria. Subpart D—611.33 Very Small Starts—Local financial commitment criteria. 611.13 Overall project ratings Subpart A—611.7 Measures of reliability in the Section 5309 capital investment evaluation and rating process. Subpart B—611.15 New Starts—Overall project ratings. Subpart C—611.25 Small Starts—Overall project ratings. Subpart D—611.35 Very Small Starts—Overall project ratings. Subpart A—General Provisions Section 611.1: Purpose and Contents This section describes the purpose of the proposed rule, which is to implement the requirements of Title 49, United States Code (U.S.C.), sections 5309(d) and
(e)and 5328(a). As is the case with the current regulation, the proposed rule establishes the methodology by which FTA will evaluate candidate projects for Section 5309 Capital Investment funding. Applicants must follow these rules to be considered eligible for discretionary capital investment grants for new fixed guideway systems, including substantial corridor-based bus systems or extensions to existing systems. As in the current regulation, data collected as part of the planning and project development process and related regulations, conducted under 23 CFR part 450 and 23 CFR part 771, provide the basis for evaluating projects seeking to proceed under the New Starts, Small Starts, or Very Small Starts programs. As in the current regulation, the results of these evaluations will be used by FTA to make the findings required to advance a project into preliminary engineering
(PE)and final design for New Starts, and into project development for Small Starts and Very Small Starts. They also will be used to make recommendations, as required under 49 U.S.C. 5309(k)(1), for inclusion in the President's annual budget request, and to determine which projects are eligible for funding commitments under Full Funding Grant Agreements, in the case of New Starts, or Project Construction Grant Agreements, in the case of Small Starts and Very Small Starts. The annual report was previously called the New Starts Report, but will now be retitled because it will include funding recommendations for both New Starts and Small Starts. In contrast to the current regulation, information will not be needed for an annual Supplemental Report on New Starts, formerly required by 49 U.S.C. 5309(o)(2), as it was dropped by the amendments made to 49 U.S.C. Chapter 53 by SAFETEA-LU. Section 611.3: Applicability This section states that this rule, as in the current regulation, applies only to the evaluation of projects seeking Federal capital investment funds (New Starts and Small Starts) for new fixed guideway systems and extensions to existing systems under 49 U.S.C. 5309. However, in contrast to the current regulation, “substantial capital investments in new corridor-based bus projects” are added to the eligible activities for Small Starts, implementing additional eligibility provided by SAFETEA-LU. New Starts projects must continue to include a fixed guideway component, as will be described below in more detail. As in the current regulation, this section also states that the rule does not apply to projects already in final design or under a Full Funding Grant Agreement. The proposed rule, consistent with SAFETEA-LU, does not continue the current exemption from the requirements of this rule for projects seeking less than $25 million in Section 5309 Capital Investment funds. However, the proposed rule would permit projects which had been exempt and which had already been approved into project development (PE or final design) to use funds that have already been made available through the appropriations process and to receive those funds without being rated and evaluated under the proposed rule. However, to receive additional Section 5309 Capital Investment (New Starts and Small Starts) funds from FTA, previously exempt projects would have to be rated and evaluated in accordance with the provisions of the rule. Section 611.5: Definitions As in the current regulation, this section defines key terms used in 49 CFR part 611. Many of the definitions would remain unchanged from the current regulation. However, several definitions have been changed to provide more detail or specificity or to be consistent with changes proposed to be made elsewhere in the rule. Key changes include the following. The definition of “alternatives analysis” is proposed to be expanded to include a requirement that an alternatives analysis must “include sufficient key information to enable the Secretary to make the findings * * * required under section 5309.” This was added to be consistent with the definition of alternatives analysis added to 49 U.S.C. 5309 by SAFETEA-LU. The definition of “baseline alternative” is proposed to be changed slightly to modify the reference to alternatives that have a better ratio of measures of mobility to cost than the no build alternative by explicitly stating the condition that the cost effectiveness of the baseline alternative must meet. This is consistent with long standing FTA guidance. Specific reference to Transportation System Management or Very Small Start-like alternatives as typical baseline alternatives is proposed to be added. A definition of “metropolitan transportation plan” is proposed to be added, which is based on the requirements in 49 U.S.C. 5303. The term “Project Construction Grant Agreement (PCGA)” is proposed to be defined as a document similar in concept to a Full Funding Grant Agreement (FFGA), but for Small Starts (including Very Small Starts) projects. The term “project development” is proposed to be defined as steps taken during PE and final design, prior to award of a FFGA or a PCGA. A definition is provided for the term “Section 5309 Capital Investments Program” which includes funding for New Starts and Small Starts projects under Section 5309(b)(1), (b)(4), and (m)(2)(A). While the title for all of Section 5309 is “Capital Investment Grants,” this rule applies only to projects seeking discretionary grants for New Starts and Small Starts funding under subsections (b)(1), (b)(4) and (m)(2)(A) and not to funding for Fixed Guideway Modernization under subsections (b)(2) and (m)(2)(B) or discretionary bus grants under subsections (b)(3) and (m)(2)(C). FTA is proposing a definition of “Project Development Agreement” (PDA), which is an agreement between FTA and the project sponsor that must be executed before the project is approved for entry into PE. The terms and conditions of a model PDA are set forth in Appendix A to the proposed rule. The term “Section 5309 Capital Investment” is proposed to be defined as those projects eligible for assistance with funds from the discretionary Section 5309 Capital Investment Program. This includes new fixed guideway systems and extensions, as in the current regulation, but also an expanded definition of this term. First, FTA has proposed that the definition include a transportation facility that, by means of pricing or other enhancements, replicates the benefits of “free-flow” conditions for transit. Second, in response to SAFETEA-LU for Small Starts funding, the definition includes corridor-based bus projects with at least 50 percent of the project operating in a guideway dedicated to transit or high occupancy vehicle use during peak periods, or a substantial investment in a defined corridor which includes certain key elements. The key elements proposed are substantial transit stations, traffic signal priority/pre-emption, low floor buses or level boarding, branding of the proposed service, and 10 minute peak and 15 minute off-peak headways or better for at least 14 hours per day. The definition also would provide for a categorization of projects into three categories (New Starts, Small Starts, and Very Small Starts), depending on the size of the project and certain project features. New Starts projects would be defined as those requesting $75 million or more in Section 5309 Capital Investment funds, or a total project cost of $250 million or more. Small Starts projects would be projects requesting less than $75 million in Section 5309 Capital Investment funds and a total project cost of less than $250 million. Very Small Starts projects would be defined as meeting Small Starts requirements, but in addition having a total cost of less than $3 million per mile (not including vehicles), a total project cost of less than $50 million, and including demonstrably effective and cost-effective project elements. For the purpose of categorizing projects, costs would be expressed in year-of-expenditure dollars. A definition of “Transportation System Management (TSM)” would be added that is drawn from long-standing use of the term in the planning process. In essence, it is defined as the best than can be done without construction of a new fixed guideway. At a minimum it must be more cost effective as compared to the no build alternative than the New or Small Starts project compared to the no build alternative. This could include upgrades to transit service through operational and small physical changes, selected highway improvements, minor widenings, and other focused traffic engineering improvements. A definition of “user benefit” has been added. The term is defined as transportation system user benefits accruing to all travelers affected by the proposed Section 5309 Capital Investment improvement, compared to a baseline alternative. User benefits include travel time savings, reduced out-of-pocket travel costs, improvements in comfort, convenience, and reliability, and other benefits that accrue to users of specific travel modes, where such benefits are supported by verifiable data. The definition explicitly includes highway users, transit users, and pedestrians as users of the transportation system. Section 611.7: Measures of Reliability in the Section 5309 Capital Investment Evaluation and Rating Process This section, which is completely new compared to the existing regulation, would provide that FTA would evaluate and rate the reliability of the forecasts of ridership and costs estimated and proposed for a Section 5309 Capital Investment project. SAFETEA-LU amended 49 U.S.C. 5309 to add new provisions (49 U.S.C. 5309(d)(3)(B) and 49 U.S.C. 5309 (e)(4)(D)) that require FTA to evaluate the reliability of these forecasts and proposals. However, as stated in the NPRM, the specific measures that will be used to evaluate and rate reliability will be established in policy guidance. It is likely that these measures would address the transit orientation of existing and future land uses in the environment of the proposed project, the experience of the project sponsor in implementing previous major projects similar to that being proposed, industry experience with implementation of projects of a similar nature, the reliability of forecasting methods used by the project sponsor and of the information provided by the project sponsor in support of the evaluation process, a comparison of opening year project ridership to that estimated for the planning horizon covering no less than 20 years, the degree to which innovative contractual arrangements are in place or planned which reduce the uncertainty of operating cost estimates, and mitigation efforts by the project sponsor to improve the reliability of forecasts. Once a project's reliability of forecasts has been established, the proposed rule would allow FTA to adjust, upward or downward, specific ratings that would otherwise be applied to the specific project justification or local financial commitment criteria that would be affected by the uncertainties associated with the area of estimation reliability determined in the evaluation of the factors outlined above. FTA is considering an alternative structure for developing overall project ratings for Small Starts projects. This proposal is more fully described in the Response to Comments section under the Proposal for Question 6 under the Small Starts Evaluation and Ratings section. Should the alternative approach be adopted, FTA would also consider the amount of funding proposed to come from outside the Section 5309 Capital Investment program as an indication of the reliability of the financial commitment to the proposed Small Starts project. Subpart B—New Starts Section 611.9: Eligibility for Section 5309 Capital Investments Funds (New Starts) This section would establish the eligibility for New Starts funding. New Starts are defined, in section 611.5, as those projects requesting $75 million or more in New Starts funds or having a total project cost of $250 million or more. As in the current regulation, New Starts projects must be the result of planning and alternatives analysis. Codifying current FTA practice, projects must have at least 50 percent of the project length (not necessarily contiguous) operating on a fixed guideway that is dedicated to transit or high occupancy vehicle use during the peak period or when congestion inhibits transit system performance. Projects which qualify as a New Start project due to their cost or requested New Starts share must be evaluated under the criteria and procedures provided for in Subpart B; they may not be subdivided for the purpose of analysis, rating, and evaluation into a series of Small Starts or Very Small Starts projects covered by Subparts C or D. Section 611.11: Project Justification Criteria (New Starts) The approach taken in the proposed rule for evaluation of the justification for New Starts projects builds on the approach in section 611.9 of the current regulation. As required by 49 U.S.C. 5309(d)(2)(B), FTA must find that a project is “justified” based on a comprehensive review of a series of criteria. Many of these criteria were unchanged by SAFETEA-LU, but several were added or were given added emphasis. As under the current regulation, FTA will evaluate and rate a proposed project based on information coming from locally-conducted alternatives analyses and project development processes. Also as in the current regulation, FTA will use a “multiple measure” approach to determine the overall justification of a proposed project, combining the ratings made against a series of criteria. As in the current regulation, ratings for each of the specified criteria will be expressed in terms of five levels of descriptive indicators ranging from “high” to “low.” Subsection (a)(2) provides that the specific measures for each of the project justification criteria will be published in policy guidance and may be changed from time to time. However, as required by SAFETEA-LU, such changes will be subject to notice and comment before they are finalized and will be published at least every two years or when substantial changes occur. As proposed in the January 2006 Guidance on New Starts Policy and Procedures, FTA is proposing to adopt a new approach to classify the criteria used for project justification. Mobility improvements (including mobility for transit dependents and congestion relief), economic development/land use, and environmental benefits will be classified as measures of project effectiveness. Cost effectiveness is proposed to be evaluated separately, measured as annualized capital and operating costs divided by transportation system user benefits. The capital cost used for cost effectiveness must include all essential project elements necessary for completion of the project. Transportation system user benefits are explicitly defined elsewhere to incorporate benefits to all transportation system users, including transit riders, highway users, and pedestrians. In the long run, it is expected that the measure will count highway user benefits explicitly, once transportation models are capable of providing reliable and nationally consistent estimates of their value. “Operating efficiencies” is no longer included as a separate evaluation criteria, even though it is called out in 49 U.S.C. 5309(d)(2)(B) as one of the factors to be assessed by FTA in finding that a project is “justified.” Instead, FTA proposes to address this factor through the cost effectiveness measure, which already includes operating costs in the annualized costs, because experience has shown that a separate measure of operating efficiencies does not meaningfully distinguish between projects. FTA expects that operating efficiencies resulting from innovative contractual arrangements will result in lower operating expenses and hence higher cost effectiveness ratings. FTA will consider any innovative contractual arrangements, including public private partnerships, as a measure of operating efficiencies in its evaluation of both reliability and the operating plan as part of local financial commitment. Consistent with the changes made by SAFETEA-LU, which explicitly added “economic development” to the list of justification factors, and which elevated “public transportation supportive land use policies and future patterns” from a consideration to a justification factor, “economic development/land use” is included as a measure of effectiveness. As described above in the Questions 7 and 8 of the response to comments received on the Guidance on New Starts Policies and Procedures and Question 8 of the ANPRM on Small Starts, it is difficult to separately evaluate these two factors. Nonetheless, recognizing the importance that SAFETEA-LU provided by including both these factors, FTA will use this combined measure as an important part of the evaluation of project justification. Thus, the rating of cost effectiveness and of effective will be weighted equally in computing the project justification rating. Economic development/land use will comprise 40 percent of the effectiveness measure, with an additional 40 percent given to mobility for the general population (including congestion relief), 10 percent to environmental benefits, and the final 10 percent to transit dependent mobility. As in the current regulation, effectiveness and cost effectiveness are evaluated by comparing the project to the baseline alternative and “other factors” will be considered in setting the overall rating for project justification. Although FTA is not proposing, as was proposed in the January 19, 2006 draft Guidance on New Starts Policies and Procedures, to explicitly assess the case for the project as a separate measure, FTA intends to evaluate this issue for all projects as part of its assessment of “other factors.” As part of its policy guidance FTA will identify which additional factors will be considered as “other factors.” One measure that FTA currently intends to consider under “other factor” is the degree to which a project is a part of a significant congestion reduction strategy that incorporates pricing. Others could include multimodal emphasis of the locally preferred investment strategy, including the proposed New Starts project as one element; environmental justice considerations and equity issues; consideration of innovative financing, procurement and construction techniques, including design-build turnkey applications; and additional factors relevant to local and national priorities and to the success of the project. In the current regulation, a series of “considerations” specified in 49 U.S.C. 5309(d) are laid out. The proposed rule does not explicitly include these considerations as specific criteria. However, the measures which will be used to support the criteria that are explicitly identified do implicitly cover the considerations included in 49 U.S.C. 5309(d). Specifically, congestion relief (49 U.S.C. 5309(d)(3)(D)(i)) and improved mobility (49 U.S.C. 5309(d)(3)(D)(ii)) are incorporated in the measures of mobility and transportation system user benefits; air pollution (49 U.S.C. 5309(d)(3)(D)(iii)), noise pollution (49 U.S.C. 5309(d)(3)(D)(iv), and energy consumption (49 U.S.C. 5309(d)(3)(D)(v) are addressed in the measure for environmental benefits; and, finally, ancillary and mitigation costs (49 U.S.C. 5309(d)(3)(D)(vi)) and local land, construction, and operating costs (49 U.S.C. 5309(d)(3)(J)) are included in the costs used to calculate cost effectiveness. As noted earlier, measures of congestion relief could also include measures of reduced highway travel weighted by severity of congestion, as well as being included in the measure of transportation system user benefits used to calculate cost effectiveness. Further, infrastructure costs and other [land use] benefits (49 U.S.C. 5309(d)(3)(E)) and the cost of suburban sprawl (49 U.S.C. 5309(d)(3)(F)) are addressed in the measure of economic development/land use. The mobility of the public transportation dependent population (49 U.S.C. 5309(d)(3)(G)) is, in fact, a key part of the mobility measure of effectiveness, and economic development (also in 49 U.S.C. 5309(d)(3)(G)) is part of the economic development/land use measure of effectiveness. Population density (49 U.S.C. 5309(d)(3)(H)) is addressed as part of the economic development/land use measure of effectiveness and current transit ridership (also in 49 U.S.C. 5309(d)(3)(H)) forms an important part of the new measure of reliability. Finally, the technical capacity of the grant recipient (49 U.S.C. 5309(d)(3)(I) is addressed in the measures of reliability, as well as forming an important part of the assessment of readiness to proceed to through project development. Subsection
(c)is essentially unchanged from the existing regulation and requires the New Starts project to be compared to the baseline alternative and that a greater degree of certainty with respect to the scope, level of commitment and the plans and policies that support land use and economic development are required as the project moves through the process. A new subsection
(d)is added that indicates that while project sponsors are expected to use the traditional four-step model to estimate mobility benefits, alternative, simpler methods may be applied with FTA approval. Finally, as in the current regulation, subsection
(e)states that the ratings for each of the criteria will be combined into an overall rating of project justification. As in the current regulation, the overall rating for project justification will range on a five level scale from “high” to “low.” “Other factors” will be considered in setting the overall rating. The proposed rule explicitly indicates that applying these “other factors” can result in an adjustment, upward or downward, in the overall rating of project justification. Section 611.13: Local Financial Commitment Criteria (New Starts) The approach taken to evaluate local financial commitment is proposed to be largely unchanged from the current regulation. This includes an assessment of the amount of non-Section 5309 Capital Investment funds being requested, and the stability and reliability of the funding proposed to be used to cover both the capital costs of the project and the operating costs of the entire transit system, including the project. As in the current regulation, the capital and operating financing plans will be rated over the planning horizon covering no less than 20 years for the project. The measures for rating the stability of the funding to cover operating costs will include an assessment of the degree to which innovative contractual arrangements are in place to assure the reliability of operating cost estimates. The provision which calls for FTA to assess the degree to which planning and PE have been carried out with other than Section 5309 Capital Investment funds has been dropped, as this requirement was deleted by SAFETEA-LU. In addition, as required by SAFETEA-LU, a provision is proposed that would provide that FTA would give priority to financing projects that require less New Starts funds, while at the same time considering the fiscal capacity of State and local governments to provide more New Starts funds in determining whether to rate the project's overall local financial commitment below “medium.” As in the current regulation, ratings of the percentage of Federal funds sought from the New Starts program and the capital and operating financial commitments will be made on a five level scale ranging from “low” to “high.” These ratings will be combined, as in the current regulation, into an overall rating of financial commitment on a five level scale ranging from “low” to “high.” Section 611.15: Overall Project Ratings (New Starts) As in the current regulation, the ratings on project justification and local financial commitment will be combined into an overall project rating. In contrast to the current regulation, which, as provided for in Transportation Equity Act for the 21st Century (TEA-21), called for overall project ratings to be expressed as “highly recommended,” “recommended,” or “not recommended,” the proposed rule calls for, consistent with SAFETEA-LU, projects to be assigned overall ratings on a five level scale of “high,” “medium-high,” “medium,” “medium-low,” and “low.” In addition, in response to the requirement in SAFETEA-LU, the proposed rule calls for the summary rating to take into account the degree of the reliability of the estimates of ridership and costs. As in the current regulation, ratings will be made at the time a project seeks to move from one step in the project development process to another, and annually for the purposes of the annual report on funding recommendations required by 49 U.S.C. 5309(k)(1). The proposed rule does not specify how the ratings of project justification and local financial commitment will be translated into the overall project ratings, except to indicate, similar to the current regulation, that a project must be rated at least “medium” on project justification, and local financial commitment to be rated “medium” overall. Since, as required by SAFETEA-LU, a five level scale will now be used, FTA proposed to apply a similar decision rule to determining the rating of “medium-high” and “high” as is used in the current regulation which required ratings of at least “medium” on both local financial commitment and project justification to achieve a rating of “recommended,” which is now a rating of “medium.” In other words, both project justification and local financial commitment would have to be rated “high, medium-high or medium” in order to achieve an overall rating of “high, medium-high or medium.” Consistent with SAFETEA-LU, the proposed rule continues to require an overall project rating of at least “medium” for a project to advance to a subsequent step in the project development process or to be recommended for funding. Section 611.17: Project Development Process (New Starts) This section provides for the procedures by which New Starts projects are to advance through the project development process. For New Starts, this process is largely consistent with the project planning and development procedures in section 611.7 of the current regulation. All projects must emerge from the metropolitan and Statewide planning processes. Projects must proceed through both the PE and final design stages of the project development process before being eligible to be recommended for New Starts funding. As in the current regulation, project sponsors must perform an alternatives analysis. The proposed rule indicates that this analysis must be consistent with FTA guidance and NEPA requirements. The alternatives analysis must cover a range of alternatives and result in selection of a locally preferred alternative that is formally adopted and included in the region's metropolitan transportation plan. The proposed rule defines project development to include PE and final design. The proposed rule includes more detail on the definition of the activities that are included in PE which are then translated into entry criteria for final design. It indicates that PE includes completion of the NEPA process, design of all major project elements to the extent that no significant cost-related issues remain, and cost estimation that permits development of a financial plan that establishes the maximum amount of New Starts funding which FTA will provide if the project were to receive a full funding grant agreement. As in the current regulation, minimum readiness criteria for entry into PE are provided. Along with the previous requirement that FTA approve the baseline alternative, new features of these criteria include a requirement that the NEPA scoping process has been completed before FTA approves entry into PE, that independent endorsement has been received from potential funding partners of the proposed financing strategy, and that the travel demand forecasting methods have been validated against a survey of transit riders no more that five years old. In addition, approval to enter PE will also require development of a preliminary plan to conduct the “before and after study” that is required by the amendment to 49 U.S.C. 5309(g)(2)(C) added by SAFETEA-LU. Such studies are already required by the current regulation. This added requirement to enter PE is designed to assure that the process of conducting such studies is facilitated. An overall rating of “medium” is required to receive approval to enter PE; this is consistent with the current regulation's requirement that the project have an overall rating of “recommended.” As in the current regulation, project sponsors approved to enter PE are granted pre-award authority to conduct all PE activities prior to grant approval. In a new subsection (2(H)) FTA is proposing to require the execution of a Project Development Agreement
(PDA)before approval of entry into PE. The PDA would set forth the mutual understandings of FTA and the project sponsor regarding the steps and schedule to ensure the satisfactory completion of the NEPA process, the steps and schedule to complete preliminary engineering and final design, including development of reliable cost estimates and ridership forecasts, a discussion of all significant uncertainties in the development of costs, benefits and financial information, and the steps and schedule to secure funding commitments. The terms and conditions of a model PDA between FTA and a project sponsor are set forth in Appendix A to the proposed rule. Final design entry criteria are also proposed in subsection (d), similar to those in the current regulation. New readiness criteria include a requirement that the project be reaffirmed in the region's metropolitan transportation plan if there are any significant cost or scope changes during PE, and a requirement for an agreement between FTA and the project sponsor as to the maximum amount of New Starts funding that will be sought for the project. However, as stated in subsection (d)(2)(D), FTA will entertain requests for increases above this amount in an FFGA for the project if it is determined that costs have increased outside of the project sponsor's control. As in the current regulation, approval to enter final design will require further development of the plan to conduct the “before and after” study. However, the proposed rule requires that data on the project through the end of PE must be collected and submitted to FTA as part of the final design submittal. Again, analogous to the current regulation's requirement for a rating of “recommended,” a project must receive an overall rating of at least “medium” to advance into final design. Further, as in the current regulation, project sponsors approved to enter final design are granted pre-award authority to conduct final design activities, right-of-way acquisition and utility relocation prior to grant approval. Other project activities would require a Letter of No Prejudice. As stated in subsection (d)(7), projects that are approved into final design will be exempt from any changes in New Starts policy or guidance. As in the current regulation, criteria are provided for execution of Full Funding Grant Agreements (FFGAs) in subsection (e). Projects must be rated “medium” or better, project sponsors must be determined to have the technical capacity to carry out the project, and no outstanding issues may remain. The proposed rule notes in subsection (e)(2) that FTA's funding decision is distinct from project evaluation and rating process. Projects that meet or exceed the criteria described in this section are eligible, but are not guaranteed, to be recommended for funding. FTA will recommend projects for funding in the annual Report on Funding Recommendations and President's Budget only if the project is rated at least “medium” overall and has a cost-effectiveness rating of at least “medium.” As noted earlier, it is intended that the maximum New Starts share of the project be established at entry into final design. However, FTA will entertain requests for additional New Starts funds, on a case-by-case basis where costs have increased outside the control of project sponsors. FFGAs are proposed to continue to specify the cost and scope of the project, the schedule that the project sponsor must meet, and the schedule of Federal funding amounts (subject to appropriations). Consistent with changes made by SAFETEA-LU, in subsection (e)(7), FTA proposes to add a new feature of FFGAs, which would be an incentive clause that would allow for an amendment to increase the Federal funding contribution when actual opening year ridership is no less than 90 percent of that forecast and actual capital costs are not more than 110 percent of that estimated at the time the project entered PE, compared in constant dollars. The standard being set for ridership and cost is slightly more stringent than provided for in SAFETEA-LU, as FTA is proposing to process an amendment for these additional incentive funds only after the project is complete and operating, rather than providing an immediate incentive based on whether forecasts stayed within these limits after entry into PE but prior to execution of the FFGA. FTA believes that the incentive should only be provided for actual performance, not for projected performance. As in the current regulation, FTA is limited in the amount of FFGA commitments it can make during a given reauthorization cycle by the amount authorized, plus a statutory limit on contingent commitments, which are subject to future authorizations. Finally, consistent with the current regulation, a “before and after” study must be completed within 30 months of project opening that assesses the costs of the project and actual ridership two years after opening compared with the estimated costs and forecast ridership at entry into PE, final design, and the FFGA. Subpart C—Small Starts Subpart C provides for the eligibility, criteria, and process requirements that will be applied to Small Starts projects that do not meet the requirements for Very Small Starts. As required by 49 U.S.C. 5309(e), as amended by SAFETEA-LU, it is based on a simplified process but similar to that used for the larger, New Starts projects covered by Subpart B. Section 611.19: Eligibility for Section 5309 Capital Investment Funds (Small Starts) Section 611.19 provides the eligibility criteria for Small Starts. First, as defined in section 611.3, a Small Starts project must have a total project cost of less than $250 million and seek no more than $75 million in Section 5309 Capital Investment funds. To be eligible as a fixed guideway, as with New Starts, the project must involve operation for at least 50 percent of its total length (not necessarily contiguous) on a facility dedicated to transit and other high occupancy vehicles during peak periods (or other congested periods). However, in contrast to New Starts, a Small Starts project may also involve a corridor bus project with certain design features. The proposed rule requires substantial transit stations, traffic signal priority or preemption, low floor buses or level boarding, branding of the service, and 10 minute peak/15 minute off peak headways at least 14 hours per day. New Starts projects may not be subdivided to meet Small Starts eligibility. Larger projects must follow the requirements of Subpart B. Section 611.21: Project Justification Criteria (Small Starts) This section provides the justification criteria for Small Starts. Although similar to the criteria for New Starts in section 611.11, there are some significant simplifications. Small starts projects must still be rated based on the results of an alternatives analysis, but, given the reduced amount of justification information required, it is likely that such analysis may be simpler. A multiple measure approach is again specified, but the number of criteria is reduced. Specific measures for each criterion are not specified in the regulation but will be published and changed, upon notice and comment as part of the process of developing policy guidance. The project justification criteria for Small Starts are classified into those related to effectiveness, contributing to 50 percent of the project justification rating and cost effectiveness contributing 50 percent of the project justification rating. For Small Starts, the effectiveness criteria are mobility improvements for the general population and economic development/land use. The mobility measure would include a calculation of the travel time savings for highway users as discussed under New Starts above and provides 40 percent of the effectiveness rating. As with New Starts, economic development and land use will be evaluated together as a measure of effectiveness. But under Small Starts, economic development/land use will contribute to 60 percent of the effectiveness rating. As described above in the Response to Comments under Question 7 and 8 on the Guidance on New Starts Policies and Procedures and under Question 8 on the ANPRM on Small Starts, it is difficult to evaluate these two factors separately. Nonetheless, recognizing the importance that SAFETEA-LU provided by including both these factors, FTA has incorporated a combined criterion as an important part of the evaluation of project justification. As with New Starts, cost effectiveness is proposed to be defined as annualized costs divided by user benefits. As with New Starts, “other factors” will be used to assess those features not included in the explicit criteria for effectiveness and cost effectiveness, and will be used to adjust the overall project rating. Other factors will always include a rating for the problem or opportunity in the project corridor. Another measure that FTA intends to consider as an “other factor” is the degree to which a project is a part of a significant congestion reduction strategy. FTA will evaluate projects that are a principal element of a significant congestion reduction strategy, in general and a pricing strategy, in particular, more highly. FTA will also consider as an “other factor” any benefit of the project not covered under the project justification criteria or other factors that the Secretary determines to be appropriate to carry out the evaluation. Measures of effectiveness and cost effectiveness will be based on comparing the proposed project with a baseline alternative and will be assessed using opening year forecasts (rather than the forecasts for the planning horizon covering no less than 20 years, as is the case for New Starts). There is likely to be a significant difference between the analytical procedures used for Small Starts and New Starts projects. As opening year forecasts will be the basis for evaluation, simplified methods for projecting user benefits may be used, but are subject to FTA approval. As with New Starts, an overall rating on a five level scale ranging from “high” to “low” will be applied to the measures for each criterion that make up the Small Starts project justification rating. Section 611.23: Local Financial Commitment Criteria (Small Starts) Section 611.23, covering local financial commitment criteria for Small Starts, is almost identical to section 611.13, which covers these criteria for New Starts. Project financial plans for capital and operating costs must be rated to determine their stability and reliability. The rating of the stability of operating costs will take into account the degree to which innovative contractual arrangements, especially public private partnerships, are in place which can improve the reliability of estimates of operating costs. Based on the amount of non-Section 5309 Capital Investment funding proposed, the capital plan and the operating plan will each be rated on a five level scale from “high” to “low.” An overall rating of “high” to “low,” also on a five level scale, will be assigned based on the ratings of the capital and operating plans and proposed New Starts share. The only significant difference in the regulation is that projects will be rated based on plans which go through the year of opening, rather than for the planning horizon covering no less than 20 years. Detailed measures will be provided in the policy guidance that will identify simplified information that can be used to satisfy the financial plan requirement. Furthermore, while FTA will give priority to projects that include more than required Small Starts funds it will not rate projects that propose a funding strategy based on an 80 percent Section 5309 funding share below “medium” so long as the amount of Section 5039 funding requested is consistent with the fiscal capacity of State and local governments. FTA strongly encourages all project sponsors to request the lowest amount of Section 5309 funding reasonable. Like New Starts, the Small Starts program is likely to be extremely competitive. While FTA will not use the Section 5309 funding request to reduce the overall local financial commitment rating below “medium,” it is likely in its policy guidance to propose a process that rewards projects for requesting a lower than 80 percent Section 5309 share. In addition, as noted in section 611.27(c)(2) just because a project is rated Medium, there is no guarantee that the project will be recommended for funding. Section 611.25: Overall Project Ratings (Small Starts) The approach taken in section 611.25 for developing the overall project ratings for Small Starts projects is essentially identical to the approach used in section 611.15 for New Starts. Projects will be assigned an overall project rating on a five level scale ranging from “high” to “low” that will combine the ratings made for project justification and local financial commitment. Projects must be rated at least “medium, medium-high or high” on both project justification and local financial commitment to receive an overall rating of “medium, medium-high or high,” respectively. Projects must have an overall rating of “medium” to advance from one step in the project development process to the next. The only significant differences are that there is no requirement for a separate approval for PE and final design in project development and the commitment document is a simpler Project Construction Grant Agreement (PCGA), rather than an FFGA. Section 611.27: Project Development Process (Small Starts) The initial steps in the project planning and development process for Small Starts are identical to the process required under section 611.17 for New Starts. On the other hand, due to the smaller scale of these projects, the type and detail of the analysis that must be conducted is likely to be somewhat simpler. Projects must be the result of alternatives analyses and must be included in the local metropolitan transportation plan. The alternatives analysis must address a range of alternatives (albeit, a shorter list), including a TSM alternative as the baseline alternative. However, where no fixed guideway alternative is being considered, the no-build alternative may serve as the baseline. For Small Starts, the second step in the process is “project development,” which combines PE and final design. The steps which must be undertaken for entry into project development are essentially the same as those required under section 611.17 for New Starts PE and final design, but combined and tailored to the smaller scale of the proposed Small Starts project. The NEPA process must be completed before final design can begin and before a funding recommendation can be made. During the project development, costs must be established and uncertainties mitigated, but the Federal contribution of Small Starts will not be set until negotiation of the PCGA. The criteria for entry into Small Starts project development are essentially the same as those for entry into New Starts PE, again scaled to the project's size:
(1)Alternatives analysis must be completed;
(2)the NEPA scoping process must be completed unless a categorical exclusion has been granted;
(3)the project must be in the metropolitan transportation plan;
(4)financing strategies must be endorsed by prospective funding partners;
(5)the travel demand forecasting process must be validated; and
(6)the project sponsor must have adequate technical capacity to carry out the project. A project must be rated at least “medium” to advance into project development. A “before and after” study is required for Small Starts, and the plan for developing the study must be completed during project development. Pre-award authority is provided for all preliminary engineering activities upon approval to enter project development. In addition, once the environmental process is completed, as represented by a signed ROD or FONSI or a finding that the project is a categorically excluded under 23 CFR 777.117, the project sponsor also has automatic pre-award authority for final design, right of way acquisition and utility relocation. For Small Starts, the commitment document is a PCGA. As with the FFGA for New Starts, the PCGA specifies the amount and schedule of Federal funding, which can include a commitment of future funds, and the project cost, scope, and schedule, and commits the grantee to complete the project based on these parameters. To be eligible for a PCGA, FTA must find that the environmental process is complete, the project is based on the evaluations and ratings required, the project has an overall rating of “medium” or better, the sponsor has the technical capacity to carry out the project, and there are no major outstanding issues interfering with successful completion of the project. The PCGA will include a requirement for completion of the “before and after” study. In the case of Small Starts, “after” is defined as one year after service commences, rather than two years as is the case with New Starts. Data on the progress of the project to date must be submitted before the PCGA will be awarded. FTA's funding decision is distinct from project evaluation and rating process. Projects that meet or exceed the criteria described in this section are eligible, but are not guaranteed, to be recommended for funding. FTA will recommend projects for funding in the annual Report on Funding Recommendations and President's Budget only if the project is rated at least “medium” overall and has a cost-effectiveness rating of at least “medium.” The total amount of funding committed in PCGAs cannot exceed the amount of funding for Small Starts authorized in law, plus a statutorily limited amount of contingent commitments, subject to future authorizations. Subpart D—Very Small Starts Subpart D provides for the eligibility, evaluation criteria, and procedural requirements that will be applied to Very Small Starts projects. It is essentially identical to Subpart C, but provides for an even more simplified approach to project development and uses “warrants” for determining project justification for Very Small Starts projects, which are a subset of Small Starts projects that have a set of defined characteristics. These very simple, smaller projects can be found to be justified solely on the basis of these project characteristics. This process is also based on, but now highly simplified from, the requirements for the larger, New Starts projects covered by Subpart B. Section 611.29: Eligibility for Section 5309 Capital Investment Funds (Very Small Starts) Section 611.29 provides the eligibility criteria for Very Small Starts. First, as defined in section 611.3, a Very Small Starts project must have a total project cost of less than $50 million and a project cost of less than $3 million per mile (not including vehicles) and serve a corridor where at least 3,000 existing riders per day will benefit from the project. Projects that do not meet these criteria, but which still are small enough to qualify as a Small Start, must follow the procedures and criteria set out in Subpart C. To be eligible as a fixed guideway, as with New Starts, a Very Small Starts project must involve operation for at least 50 percent of its total length (not necessarily contiguous) on a facility dedicated to transit and other high occupancy vehicles during peak periods (or other congested periods). However, in contrast to New Starts, and similar to a Small Starts project, a Very Small Start project may also involve a corridor bus project with certain design features. The proposed rule requires substantial transit stations, traffic signal priority or preemption, low floor buses or level boarding, branding of the service, and 10 minute peak/15 minute off peak headways at least 14 hours per day. As with New Starts, projects may not be subdivided to meet Very Small Starts eligibility. Larger projects must follow the requirements of Subpart B or C. Section 611.31: Project Justification Criteria (Very Small Starts) This section provides the justification criteria for Very Small Starts. Although similar to the criteria for Small Starts in section 611.21, there is a major simplification. While Very Small Starts projects must still be based on the results of an alternatives analysis, the justification information required is related to the predefined characteristics of the Very Small Starts project. Because Very Small Starts projects are made eligible based on a set of project characteristics that assures that they are effective and cost-effective, rather than rate these projects on the basis of an evaluation of information, FTA will simply assign an overall project justification rating of “medium” to these projects if they meet the predefined characteristics, although “other factors” can be used to increase this rating. “Other factors” include whether a project is a principal element of a significant congestion reduction strategy, in general and a pricing strategy, in particular. FTA will also consider as an “other factor” any benefit of the project not covered under the project justification criteria or other factors that the Secretary determines to be appropriate to carry out the evaluation. Another significant difference between Very Small Starts and Small/New Starts will be in the analytical procedures used. No forecasts are required; the sponsor need only provide counts of existing ridership in the corridor and the cost per mile. Section 611.33: Local Financial Commitment Criteria (Very Small Starts) Section 611.33, covering local financial commitment criteria for Very Small Starts, is identical to section 611.23, which covers these criteria for Small Starts. Financial plans for capital and operating costs must be rated to determine their stability and reliability. FTA intends to issue very simplified information to support the capital and operating plan requirements as part of its Policy Guidance. The rating of the stability of operating costs will take into account the degree to which innovative contractual arrangements, especially public private partnerships, are in place which can improve the reliability of estimates of operating costs. Furthermore, while FTA will give priority to projects that include more than required Small Starts funds, it will not rate projects that propose a funding strategy based on an 80 percent Section 5309 funding share below “medium” so long as the amount of Section 5039 funding requested is consistent with the fiscal capacity of State and local governments. FTA strongly encourages all project sponsors to request the lowest amount of 5309 funding that is financially feasible. Like New Starts, the Very Small Starts program is likely to be extremely competitive. While FTA will not use the 5309 funding request to reduce the overall local financial commitment rating below “medium,” it is likely in its policy guidance to propose a process that rewards projects for requesting a lower than 80 percent 5309 share. In addition, as noted in section 611.27(c)(2), just because a project is rated Medium, there is no guarantee that the project will be recommended for funding. The capital plan and operating plan and the proposed Section 5309 Capital Investment share will each be rated on a five level scale from “high” to “low.” An overall rating of “high” to “low,” also on a five level scale, will be assigned based on the ratings of the capital and operating plans and proposed Section 5309 Capital Investments share. Projects will be rated based on plans that go through the year of opening. Section 611.35: Overall Project Ratings (Very Small Starts) The approach taken in section 611.35 for developing the overall project ratings for Very Small Starts projects is similar to the approach used in section 611.25 for Small Starts. Projects will be assigned an overall project rating on a five level scale ranging from “high” to “low,” which will combine the ratings made for project justification and local financial commitment. Since projects which qualify as a Very Small Start by their nature automatically are granted a rating of “medium” for project justification, a project must have a rating of at least “medium” on local financial commitment to receive an overall rating of “medium.” It should be noted that a project can receive a rating higher than “medium” for project justification only through the use of “other factors” or the application of the reliability measures. Projects must be rated at least “medium” overall to enter the project development process or to be recommended for funding and receive a PCGA. Section 611.37: Project Development Process (Very Small Starts) The initial steps in the project planning and development process for Very Small Starts are identical to the process required under section 611.17 for New Starts and under Section 611.27 for Small Starts. However, due to the even smaller scale of these projects, the type and detail of the analysis that must be conducted is simpler. For instance, no baseline alternative is required as the project sponsor does not prepare specific information on effectiveness and cost effectiveness but simply provides existing data that supports the rating for the project. However, projects must be the result of alternatives analyses and must be included in the local metropolitan transportation plans. For Very Small Starts, as with Small Starts, the second step in the process is “project development,” which combines PE and final design. The steps that must be undertaken are essentially the same as those required under section 611.17 for New Starts PE and final design, but again combined and tailored to the much smaller scale of the proposed Very Small Starts project. The NEPA process must be completed during project development, which for a Very Small Start, might involve only documentation of a categorical exclusion. During project development, costs must be established and uncertainties mitigated but the Federal contribution of Small Starts will not be set until negotiation of the PCGA. As with Small Starts, the criteria for entry into Very Small Starts project development are essentially the same as those for entry into New Starts PE, again scaled to the project's much smaller size:
(1)Alternatives analysis must be completed;
(2)the NEPA scoping process must be completed unless a categorical exclusion has already been granted;
(3)the project must be in the metropolitan transportation plan;
(4)financing strategies must be endorsed by prospective funding partners; and
(5)the project sponsor must have adequate technical capacity to carry out the project. A project must be rated at least “medium” to advance into project development. A very simplified “before and after” study is required for Very Small Starts and the plan for developing the study must be complete before a PCGA is executed. Pre-award authority is provided for preliminary engineering upon approval to enter project development. In addition, once the environmental process is completed, as represented by a signed ROD or FONSI or a finding that the project is categorically excluded under 23 CFR 117.17, the project sponsor also has automatic pre-award authority for final design, right of way acquisition and utility relocation. For Very Small Starts, the commitment document is a PCGA. As with the FFGA for New Starts, the PCGA specifies the amount and schedule of Federal funding, which can include a commitment of future funds, and the project cost, scope, and schedule, and commits the grantee to complete the project based on these parameters. To be eligible for a PCGA, FTA must find that the environmental process is complete, the project is based on the evaluations and ratings required, the project has an overall rating of “medium” or better, the sponsor has the technical capacity to carry out the project, and there are no major outstanding issues interfering with successful completion of the project. The PCGA will include a requirement for completion of the “before and after” study. In the case of Very Small Starts, “after” is defined as one year after service commences, rather than two years as is the case with New Starts. The NPRM notes again in subsection 611.37(d)(2) that a sufficient rating under the proposals contained in this NPRM is not a guarantee that a PCGA will be recommended. The total amount of funding committed in PCGA's cannot exceed the amount of funding for Small Starts authorized in law plus a statutorily limited amount of contingent commitments, subject to future authorizations. IV. Regulatory Analysis and Notices A. Executive Order 12866 FTA has determined that this is a significant rule under E.O. 12866 because it will affect transfers (i.e., grant payments) of more than $100 million or more annually. This NPRM implements a grant program, and as such, it only imposes regulatory requirements upon applicants requesting funding under the program. The rating criteria that are the subject of this NPRM are Congressionally-mandated. The proposed rule is not intended to address a market failure, rather it is intended to both make the regulation consistent with the recent changes to 49 U.S.C. 5309 and change the way projects are currently evaluated. Under the existing regulation, all non-exempt New Starts projects are evaulated using the same process without regard to the size of the investment. This results in a more rigorous evaluation of smaller projects than is needed given the size of the Federal investment. Thus, this proposed rule would vary the level of evaluation based on the size of the project and the size of the Federal investment based on the changes recently made to 49 U.S.C. 5309. B. Regulatory Evaluation FTA performed a regulatory evaluation of this NPRM, but did so in a qualitative manner due to the difficulty of evaluating the industry-wide costs and benefits of the program this NPRM would implement. This NPRM proposes a process that FTA will use to evaluate and rate major capital investments under the statutory criteria in 49 U.S.C. 5309. This includes smaller capital projects requesting less than $75 million in Section 5309 Capital Investment program funds and that have a total cost of less than $250 million. Given the discretionary nature of the program and the fact that FTA cannot anticipate in advance which projects will be submitted for evaluation and funding, it is impossible to determine with accuracy the industry-wide costs and benefits of this rule. Based on its past experience though, FTA has qualitatively evaluated the financial impact the NPRM would place on applicants if the adopted as proposed. The grant application requirements specified in law are substantial, but the major capital grant program makes available funds to defray project development costs. For example, 49 U.S.C. 5309(m)(5) allows up to 8 percent of funds allocated for New Starts and Small Starts to be available for project development costs. Additionally, 49 U.S.C. 5339, as amended by SAFETEA-LU, makes funding available for the alternatives analysis phase of project development. Finally, the transit formula program under 49 U.S.C. 5303 and 5307 and flexible funds under Title 23 may also be used for planning and project development activities. Thus, the financial impact of this rule on the applicants is minimal given that a portion of their project development costs can be reimbursed with Federal funds. C. Departmental Significance This rule is a “significant regulation” as defined by the Department's Regulatory Policies and Procedures, because it involves an important departmental policy and will probably generate a great deal of public interest. The purpose of this NPRM is to propose how FTA will process, rate and recommend for funding various major public transportation capital investment projects. D. Regulatory Flexibility Act When an agency issues a rulemaking proposal, the Regulatory Flexibility Act
(RFA)requires the agency to “prepare and make available for public comment an initial regulatory flexibility analysis,” which will “describe the impact of the proposed rule on small entities.” (5 U.S.C. 603(a)). Section 605 of the RFA allows an agency to certify a rule, in lieu of preparing an analysis, if the proposed rulemaking is not expected to have a significant economic impact on a substantial number of small entities. As noted earlier, it is difficult for FTA to estimate the number and types of applications it may receive for major capital investment funds. Based on FTA's experience, however, major capital investments are not undertaken by small municipal entities. Even so, if small municipal entities were to apply for funding under this regulatory proposal, they would likely do so under the Small Starts program or the Very Small Starts program, for which the requirements have been streamlined. Based on this evaluation, FTA hereby certifies that the proposals for the New Starts program contained in this NPRM, if adopted, would not have a significant economic impact on a substantial number of small entities. FTA invites comment from members of the public who believe there will be a significant impact on small municipal entities. E. Paperwork Reduction Act This NPRM proposes information collection requirements subject to the Paperwork Reduction Act. The calculation of the paperwork burden of this NPRM is provided in the docket. The agency has submitted a request for a Paperwork Reduction Act approval. FTA currently collects information under an approved Paperwork Reduction Act request (control #2132-0529). F. Executive Order 13132 This action has been analyzed in accordance with the principles and criteria contained in Executive Order 13132. The proposed regulations would implement a discretionary grant program that would make funds available, on a competitive basis, to States, local governments, and transit agencies. The requirements only apply to those entities seeking funds under this chapter, and thus this action would have not substantial direct effects on the States, on the relationship between the Federal government and the States, or on the distribution of power and responsibilities among the various levels of government. FTA has also determined that this proposed action would not preempt any State law or regulation or affect the States' ability to discharge traditional State governmental functions. Based on this analysis, it has been determined that the proposed rule does not have sufficient Federalism implications to warrant the preparation of a Federalism Assessment. Comment is solicited specifically on the Federalism implications of this proposal. G. National Environmental Policy Act FTA has analyzed this proposed action for the purpose of the National Environmental Policy Act of 1969 (42 U.S.C. 4321), and has determined that this proposed action would not have any effect on the quality of the environment. This action qualifies for a categorical exclusion under FTA's NEPA regulations at 771.117(c)(20), which covers the “[p]romulgation of rules, regulations, and directives.” H. Energy Act Implications The proposals contained in this NPRM would likely have a positive effect on energy consumption because, through the Federal investment in public transportation projects, these projects would increase the use of public transportation. I. Executive Order 13175: Consultation and Coordination With Indian Tribal Governments Executive Order 13175 requires agencies to ensure meaningful and timely input from Indian tribal government representatives in the development of rules that “significantly or uniquely affect” Indian communities and that impose “substantial and direct compliance costs” on such communities. We invite Indian tribal governments to provide comments on the effect that adoption of specific proposals in this NPRM may have on Indian communities. J. Unfunded Mandates Reform Act This rule will result in the expenditure by State, local, and tribal governments, in the aggregate, of $100,000,000 or more in any one year. However, this expenditure is voluntary, and not the result of a Federal, unfunded mandate. K. Statutory/Legal Authority for This Rulemaking This rulemaking is issued under authority of section 3011 of the Safe, Accountable, Flexible, Efficient Transportation Equity Act—A Legacy for Users (SAFETEA-LU), which requires the Secretary of Transportation to prescribe regulations for Small Starts capital investment projects funded under 49 U.S.C. 5309 with a Federal share of less than $75,000,000 and a total cost of less than $250,000,000. In addition, this NPRM implements changes made by section 3011 to the New Starts program for funding capital investment projects with a higher Federal share or total cost than that specified for the Small Starts program. L. Regulation Identifier Number
(RIN)The Department of Transportation assigns a regulation identifier number
(RIN)to each regulatory action listed in the Unified Agenda of Federal Regulations. The Regulatory Information Service Center publishes the Unified Agenda in April and October of each year. The RIN number contained in the heading of this document may be used to cross-reference this action with the Unified Agenda. M. Privacy Act Anyone is able to search the electronic form for all comments received into any of our dockets by the name of the individual submitting the comments (or signing the comment, if submitted on behalf of an association, business, labor union, etc.). You may review DOT's complete Privacy Act Statement in the **Federal Register** published on April 11, 2000 (65 FR 19477) or you may visit *http://dms.dot.gov* . List of Subjects in 49 CFR Part 611 Government contracts; Grant programs—Transportation; Public Transportation. For the reasons stated in the preamble, the Federal Transit Administration proposes to revise 49 CFR part 611 to read as follows: PART 611—MAJOR CAPITAL INVESTMENT PROJECTS Subpart A—General Provisions Sec. 611.1 Purpose and contents. 611.3 Applicability. 611.5 Definitions. 611.7 Measures of reliability in the Section 5309 Capital Investment evaluation and rating process. Subpart B—New Starts 611.9 Eligibility. 611.11 Project justification criteria. 611.13 Local financial commitment criteria. 611.15 Overall project ratings. 611.17 Project development process. Subpart C—Small Starts 611.19 Eligibility. 611.21 Project justification criteria. 611.23 Local financial commitment criteria. 611.25 Overall project ratings. 611.27 Project development process. Subpart D—Very Small Starts 611.29 Eligibility. 611.31 Project justification criteria. 611.33 Local financial commitment criteria. 611.35 Overall project ratings. 611.37 Project development process. Appendix A to Part 611—Model Project Development Agreement Appendix B to Part 611—Project Evaluation Framework Appendix C to Part 611—Section 5309 Capital Investment Program Categories Authority: 49 U.S.C. 5309; 49 CFR 1.51. Subpart A—General Provisions § 611.1 Purpose and contents.
(a)This part prescribes the process that applicants must follow to be considered eligible for capital investment funds for new fixed guideway systems, substantial investments in corridor-based bus systems, or extensions to existing systems under 49 U.S.C. 5309(d) and (e). Also, this part prescribes the rules that will be used by FTA to evaluate proposed Section 5309 Capital Investment projects as required by 49 U.S.C. 5309(d) and (e), and the scheduling of project reviews required by 49 U.S.C. 5328(a).
(b)This part defines how the results of the evaluation described in paragraph
(a)of this section will be used to:
(1)Approve entry into preliminary engineering and final design, as required by 49 U.S.C. 5309(d)(5), for New Starts, or into project development as required by 49 U.S.C. 5309(e)(6), for Small Starts;
(2)Rate projects as “high,” “medium-high,” “medium,” “medium-low,” or “low,” as required by 49 U.S.C. 5309(d)(5) and 49 U.S.C. 5309(e)(6);
(3)Assign individual ratings for each of the project justification and local financial commitment criteria specified in 49 U.S.C. 5309(d)(2)(B) and
(C)and 49 U.S.C. 5309(e)(2)(B) and (C);
(4)Determine project eligibility for Federal funding commitments, in the form of Full Funding Grant Agreements as specified in 49 U.S.C. 5309(g)(2) or Project Construction Grant Agreements as specified in 49 U.S.C. 5309(e)(7);
(5)Support funding recommendations for this program for the Administration's annual budget request; and
(6)Fulfill the reporting requirements under 49 U.S.C. 5309(k)(1), Annual Report on Funding Recommendations. § 611.3 Applicability.
(a)This part applies to all proposals for Federal Section 5309 Capital Investment funds for new fixed guideway systems and extensions to existing fixed guideway systems, including substantial capital investments in corridor-based bus projects.
(b)This part does not apply to projects approved into final design prior to [the effective date of final rule] unless the sponsor proposes project changes that warrant the project's return to preliminary engineering. Such projects will continue to be rated under the regulatory provisions in effect at the time the project was approved into final design until the Full Funding Grant Agreement is executed.
(c)Projects that were exempt from the project evaluation and rating process (requesting under $25 million in Section 5309 Capital Investment funding), and were approved into project development prior to [the effective date of final rule], will receive the Section 5309 Capital Investment funds that have been appropriated before [the effective date of final rule] without being evaluated and rated under the provisions of this part, as long as all grant requirements are met. To receive additional Section 5309 Capital Investment funds after [the effective date of the final rule], projects must be evaluated and rated according to the process defined in this part. § 611.5 Definitions. The definitions established by Titles 12 and 49 of the United States Code, the Council on Environmental Quality's regulation at 40 CFR parts 1500-1508, and FHWA/FTA regulations at 23 CFR parts 450 and 771 are applicable, unless a different definition is described below, in which case, the definition in this section will apply for purposes of this part. In addition, the following definitions apply: *Alternatives analysis* means a study conducted as part of the transportation planning process required under 49 U.S.C. sections 5303 and 5304, that evaluates all reasonable mode and alignment alternatives for addressing a transportation problem in a corridor or subarea, and results in the selection of a locally preferred alternative by the chief executive officers or official boards of the sponsoring governmental agency(ies) and the metropolitan planning organization(s) with jurisdiction through a public process. An alternatives analysis also provides sufficient information to enable FTA to evaluate and rate the project justification and local financial commitment criteria as required by this regulation. *Baseline Alternative* means the alternative against which the proposed Section 5309 Capital Investment project is compared to develop project justification measures. Relative to the no-build alternative, it should include transit improvements lower in cost than the proposed Section 5309 Capital Investment project that represent the best that can be done to address mobility problems in the corridor without constructing a new fixed guideway. The baseline alternative is typically the Transportation System Management alternative or a Very Small Starts arterial bus project. *Bus Rapid Transit (BRT)* means a series of coordinated improvements in a transit system's infrastructure, equipment, operations, and technology that give preferential treatment to buses on urban roadways. The intention of BRT is to reduce bus travel time, improve service reliability, increase the convenience of users, and increase transit ridership. *Fixed guideway system* means a public transportation facility that utilizes and occupies a separate right-of-way or rail for the exclusive use of public transportation and other high occupancy vehicles for at least 50 percent of the length of the project, or uses a fixed catenary system and a right-of-way usable by other forms of transportation, or in the case of Small Starts, a corridor-based bus project where at least 50 percent of the project operates in a separate right-of-way during the peak period or the project represents a substantial investment in a defined corridor that includes at least the following elements: substantial transit stations; traffic signal priority/pre-emption; low-floor buses or level boarding; branding of the proposed service; and 10 minute peak/15 minute off-peak headways or better for at least 14 hours per day. This includes, but is not limited to, rapid rail, light rail, commuter rail, automated guideway transit, people movers, ferry boat service, and dedicated facilities for buses (such as BRT) and other high occupancy vehicles. Additionally, a transportation facility shall be deemed a fixed guideway system solely for the purposes of funding eligibility under New Starts (49 U.S.C. 5309(d)) and Small Starts (49 U.S.C. 5309(e)) if the project is designed so that in any given month: transit vehicles utilize the transportation facility on a barrier-separated right-of-way; and by means of tolling or other enhancements, 95 percent of the transit vehicles using the facility will be able to maintain an average speed of not less than 5 miles per hour below the posted speed limit for the time they are on the facility. This definition does not alter the definition of “fixed guideway mile” for purposes of calculating eligibility for formula programs administered by FTA, including Urbanized Area Formula Grants (49 U.S.C. 5307(b)) and Fixed Guideway Modernization. *FTA* means the Federal Transit Administration. *Full Funding Grant Agreement (FFGA)* means an instrument that defines the scope of a project, the Federal financial contribution, and other terms and conditions for funding New Starts projects as required by 49 U.S.C. 5309(d)(1) and (g)(2). *Metropolitan transportation plan* means the official multimodal transportation plan covering a period of no less than 20 years that is developed, adopted and updated by the metropolitan planning organization through the metropolitan transportation planning process under 23 CFR part 450. *NEPA process* means those procedures necessary to meet the requirements of the National Environmental Policy Act of 1969, as amended (NEPA), found at 23 CFR part 771. The NEPA process is completed when a Record of Decision
(ROD)or Finding of No Significant Impact (FONSI) is issued by FTA, or when FTA agrees that the project is categorically excluded under 23 CFR part 771. Requirements under other Federal environmental laws should be integrated into the environmental review process per FTA's NEPA regulations at 23 CFR 771.113(a) and 23 CFR 771.133. *Planning horizon* means the period used for forecasting costs and benefits. For New Starts the planning horizon must be at least 20 years. For Small Starts the planning horizon is opening year. *Project Construction Grant Agreement (PCGA)* means an instrument that defines the scope of a project, the Federal financial contribution, and other terms and conditions for funding Small Starts projects as required by 49 U.S.C. 5309(e)(7). *Project development* refers to the activities and procedures that are to be conducted during preliminary engineering and final design before FTA can execute a Full Funding Grant Agreement or Project Construction Grant Agreement. *Project Development Agreement* means a signed agreement between FTA and a project sponsor for a New Starts project that sets forth the principal issues to be resolved, products to be completed, all significant cost and ridership uncertainties and the strategies to address them, and the schedule for reaching significant milestones during the course of project development The terms and conditions of a model PDA are set forth in Appendix A to this part. *Secretary* means the Secretary of Transportation. *Section 5309 Capital Investment program* means a program of assistance for new fixed guideway and certain corridor-based bus systems and extensions to such systems eligible for assistance under 49 U.S.C. 5309(b)(1), (b)(4), (d), (e), and (m)(2)(A) and this part. *Section 5309 Capital Investment* means a new fixed guideway system or an extension to an existing fixed guideway system, but does not include rail modernization or non-corridor bus capital projects funded under 49 U.S.C. 5309. Projects eligible for Section 5309 Capital Investment program funding will be categorized as follows:
(1)*New Starts* project refers to a project requesting Section 5309 Capital Investment program funds of $75 million or more in Section 5309 Capital Investment program funds or that has a total cost of $250 million or more, both in year of expenditure dollars.
(2)*Small Starts* project refers to a project requesting less than $75 million in Section 5309 Capital Investment program funds and that has a total cost of less than $250 million, both in year of expenditure dollars.
(3)*Very Small Starts* project refers to a subset of Small Starts projects that cost less than $3 million per mile (excluding vehicles) and have a total cost of less than $50 million in year of expenditure dollars, and are composed entirely of demonstrably effective and cost-effective project elements. *Transportation System Management (TSM)* alternative is a low-cost alternative compared to the fixed guideway alternatives considered. It represents the best low-cost strategies that can be applied in a corridor to address identified problems without the construction of a fixed guideway system. At a minimum it must be more cost effective as compared to the no build alternative than the New or Small Start project compared to the no build alternative. It is usually the baseline against which all of the guideway alternatives are evaluated. Generally, the TSM alternative emphasizes upgrades in transit service through operational and small physical improvements, plus selected highway upgrades through intersection improvements, minor widenings, and other focused traffic engineering actions. *User benefits* refers to the transportation system benefits, expressed in hours of perceived travel time (travelers perceive wait and walk time as more onerous than in-vehicle time, so that perceived travel time converts wait and walk time into equivalent minutes of in-vehicle time), that accrue to all travelers affected by the proposed Section 5309 Capital Investment project compared to a baseline alternative. User benefits include travel-time savings, out-of-pocket travel and parking costs, convenience, comfort, reliability, and other benefits that accrue to users of specific travel modes over the planning horizon forecast. Travelers include transit riders, highway users and pedestrians. § 611.7 Measures of reliability in the Section 5309 Capital Investment evaluation and rating process. In the evaluation of project justification and local financial commitment for Section 5309 Capital Investment projects, FTA shall consider the reliability of the estimates of ridership and costs as required by 49 U.S.C. 5309(d)(3)(B) and (4)(B)(i), as well as 49 U.S.C. 5309(e)(4)(D).
(a)The measures of reliability in the forecasts used to support the measures of project justification and local financial commitment will be published, subject to notice and comment, in policy guidance at least every two years or when substantial changes are made
(b)Reliability measures will be applied by adjusting, either upward or downward, ratings for the specific project justification and local financial commitment criteria affected by the associated uncertainties. Subpart B—New Starts § 611.9 Eligibility.
(a)To be eligible for New Starts funding, a proposed project must meet the following prerequisites:
(1)Be based on the results of planning and alternatives analysis as described in § 611.17.
(2)Have at least 50 percent or more of the total project length as a fixed guideway during the peak period or when congestion inhibits transit system performance.
(3)Have a total project cost of $250 million or more or a requested Section 5309 Capital Investment share of $75 million or more, both in year of expenditure funds.
(b)Projects that would otherwise qualify for funding as a New Starts project may not be subdivided into several Small Starts projects. Projects may be built in phases or a series of minimum operable segments, but all projects envisioned for a single corridor, for the purposes of establishing Small Starts program eligibility, will be evaluated together as a single project. If the combined cost or total requested funding amount, both expressed in year-of-expenditure dollars, is over the Small Starts limits, the projects will be evaluated as New Starts projects. § 611.11 Project justification criteria. In order to approve a grant for a proposed New Starts project and to approve entry into the preliminary engineering and final design phases as required by 49 U.S.C. 5309(d)(5), FTA must find that the proposed project is meritorious as described in 49 U.S.C. 5309(d)(3).
(a)To make the statutory evaluations and assign ratings for project justification, FTA will evaluate information developed locally through alternatives analyses and refined through the project development phases.
(1)The method used to make this determination will be a multiple measure approach in which the merits of candidate projects will be evaluated in terms of each of the criteria specified by this section.
(2)The ratings for each of the criteria will be expressed in terms of descriptive indicators, as follows: “high,” “medium-high,” “medium,” “medium-low,” or “low.” The application of these descriptors to each of these criteria will be published, subject to notice and comment, in policy guidance at least every two years or when substantial changes are made.
(b)The evaluation criteria and weights assigned to each for New Starts project justification are as follows:
(1)Effectiveness criteria (50 percent of the summary rating for project justification):
(i)Mobility improvements for the general population (40 percent of the ratings for effectiveness), including congestion relief. Congestion relief shall be measured based on the degree to which the project reduces highway travel demand and the relative level of congestion in the corridor based on estimated delay.
(ii)Economic development/land use (40 percent of the ratings for effectiveness). Economic development/land use shall be measured using factors that address the additional development expected around project stations as a result of the New Start project. These factors include the extent to which current land use is ripe for development, transit-oriented plans and policies, the economic development climate in the project corridor, the increase in transit accessibility offered by the project, and the economic lifespan of the project.
(iii)Environmental benefits (10 percent of the ratings for effectiveness).
(iv)Mobility improvements for transit dependents (10 percent).
(2)Cost effectiveness (50 percent of the summary rating for project justification) shall be calculated by dividing annualized capital and operating costs by transportation system user benefits. Cost effectiveness for New Starts will be evaluated based on the forecast made over the planning horizon. Annualized cost shall include all elements necessary for completion of the project with contingency amounts that are reasonable to cover unanticipated cost increases plus annual operating and maintenance costs. The breakpoints corresponding to the cost effectiveness ratings will be adjusted for inflation annually as part of the Reporting Instructions.
(3)Other factors will be considered under the authority provided by 49 U.S.C. 5309(d)(3)(K).
(i)All projects will be evaluated and rated on the severity of the transportation and economic development problem or opportunity in the corridor and consideration of the appropriateness of the proposed project as a response.
(ii)Depending upon the applicability, also considered will be the following factors:
(A)Identification of the project as a principal element of a congestion reduction strategy, in general and a pricing strategy, in particular;
(B)Any factor which the New Start project sponsor believes articulates the benefits of the proposed major capital investment but which is not captured within the other project justification criteria; and
(C)Other factors that the Secretary determines to be appropriate to carry out the evaluation.
(c)In evaluating proposed New Starts projects under these criteria:
(1)For the effectiveness and cost effectiveness criteria, the proposed New Starts project will be compared to the baseline alternative.
(2)As a candidate project proceeds through project development, a greater degree of certainty is expected with respect to the scope of the project and a greater level of commitment is expected with respect to the funding strategy and the plans and policies intended to support economic development and transit supportive land use.
(d)New Starts project sponsors will generally use traditional methods to estimate mobility benefits (user benefits and ridership). These methods are based on the traditional four-step regional travel demand modeling procedures, and project sponsors shall follow FTA guidelines in defining alternatives, operating plans, and other assumptions used to develop travel forecasts. Project sponsors that wish to use alternative technical methods to develop forecasts of ridership and project benefits must receive prior written approval from FTA.
(e)The individual ratings for each of the criteria described in this section will be combined into a summary rating of “high,” “medium-high,” “medium,” “medium-low,” or “low” for project justification using the weights provided for above. “Other factors” will be considered and applied by adjusting, either upward or downward, the summary project justification rating. § 611.13 Local financial commitment criteria. In order to approve a grant for a New Starts project under 49 U.S.C. 5309, and to approve entry into the preliminary engineering and final design phases as required by 49 U.S.C. 5309(d)(5), FTA must find that the proposed project is supported by an acceptable degree of local financial commitment, as required by 49 U.S.C. 5309(d)(4).
(a)The financial capability of the project sponsor to build, operate, and maintain the proposed project as well as the existing and planned system will be evaluated according to the following measures:
(1)The proposed share of project capital costs to be met using funds from sources other than the Section 5309 Capital Investment program, including both the non-Federal match required by Federal law and any additional local, State or non-Section 5309 Capital Investment Federal funding (“overmatch”). Unless otherwise specified in Federal law, FTA will not take into account the non-Federal funds expended on a project other than the New Starts project being evaluated when computing the non-Federal share of that New Starts project. However, FTA will give priority to financing projects that include more non-5309 funds than are required as local match under 5309(h). At the same time, FTA will take into consideration the fiscal capacity of State and local governments by not reducing the overall local financial commitment rating below “medium,” for projects that, due to state or local fiscal capacity constraints, propose a funding strategy with an 80 percent Section 5309 Capital Investment funding.
(2)The stability and reliability of the proposed capital funding plan for constructing all essential elements of the New Starts project and transit system, including the availability of contingency amounts that the Secretary determines to be reasonable to cover unanticipated cost increases.
(3)The stability and reliability of the proposed operating funding plan to operate and maintain the entire transit system as planned, including local resources to recapitalize and operate the overall proposed public transportation system, including essential feeder bus and other services necessary to achieve the projected ridership levels without requiring a reduction in existing public transportation services or level of service to operate the proposed project, and including the existence of contractual arrangements that are designed to reduce and/or make more predictable the annualized cost of operations.
(b)The capital and operating plans specified in paragraphs (a)(2) and
(3)of this section will be evaluated over the planning horizon, consistent with the planning horizon used for travel forecasting purposes.
(c)For each proposed project, ratings for paragraphs (a)(1), (2), and
(3)of this section will be reported in terms of descriptive indicators, as follows: “high,” “medium-high,” “medium,” “medium-low,” or “low.” The application of these descriptors to each of these criteria will be published, subject to notice and comment, in policy guidance at least every two years or when substantial changes are made.
(d)The individual ratings for each measure described in this section will be combined into a summary rating of “high,” “medium-high,” “medium,” “medium-low,” or “low” for local financial commitment. To develop the summary ratings, the rating for capital and operating financial plans will be given equal weights. The rating for the proposed share from other than the Section 5309 Capital Investments program will be used to assign a higher or lower rating should the weighting of the capital and operating financial plan ratings produce a rating which would otherwise fall between the summary rating levels specified in this section. § 611.15 Overall project ratings.
(a)The summary ratings developed for project justification and local financial commitment, adjusted by the degree of reliability of estimates of ridership, costs, and funding sources (§§ 611.7, 611.11, and 611.13), will form the basis for the overall rating for each project.
(b)FTA will assign overall ratings of “high,” “medium-high,” “medium,” “medium-low,” or “low” as required by 49 U.S.C. 5309(d)(5)(B) to each proposed project. To obtain an overall rating of “medium,” a project must have at least a “medium” rating for project justification and local financial commitment. To obtain an overall rating of “medium-high,” a project must have at least a rating of “medium-high” for both project justification and for local financial commitment. To obtain a rating of “high,” a project must have a rating of “high” for both project justification and for local financial commitment.
(1)These ratings will indicate the overall merit of a proposed project at the time of evaluation.
(2)Ratings for individual projects will be updated annually for purposes of the annual report on funding levels and allocations of funds required by 49 U.S.C. 5309(k)(1), and as required for FTA approvals during the following project development steps:
(i)Advancement of proposed New Starts projects into both preliminary engineering and final design;
(ii)Decision to recommend New Starts projects for Full Funding Grant Agreements; and
(iii)Projects that achieve an overall rating of “medium” or better will be allowed to advance into and through project development, and may be recommended for funding. § 611.17 Project development process. All New Starts projects must emerge from the metropolitan and statewide planning process, consistent with 23 CFR part 450, and be included in the metropolitan transportation plan. Proposed projects must be based on the results of alternatives analysis and proceed through the phases of project development before being recommended for New Starts program funding.
(a)Alternatives Analysis. To be eligible for project funding under the New Starts program, local project sponsors must perform an alternatives analysis consistent with FTA guidance.
(1)The alternatives analysis must develop information on the benefits, costs, and impacts of alternative strategies to address a transportation problem or opportunity in a given corridor, leading to the adoption of a locally preferred alternative.
(2)The alternative strategies evaluated in an alternatives analysis should include a no-build alternative, at least one TSM alternative that is able to serve as the New Starts project baseline alternative, and a number of build alternatives that represent the full range of reasonable responses to the transportation problem or opportunity. The project baseline alternative represents the best that can be done without building a fixed guideway system. This generally means a bus alternative that addresses as effectively and cost-effectively as possible the same transportation problem or opportunity as the build alternative. FTA will determine whether to require a separate baseline alternative on a case-by-case basis, if a project sponsor provides information intended to demonstrate that the no-build alternative (i.e., a continuation of existing transit service policies in the study area) fulfills the requirements for a baseline alternative (indicated by very high levels of existing transit service),
(3)The locally preferred alternative must be selected from among the evaluated alternative strategies and formally adopted and included in the metropolitan transportation plan.
(b)Project Development. Consistent with 49 U.S.C. 5309(d)(5) and 49 U.S.C. 5328(a)(2), FTA will approve entry of proposed projects into project development. Project development will include FTA approval points for preliminary engineering and final design. Preliminary engineering and final design will proceed as described in paragraphs
(c)and
(d)of this section.
(1)Consistent with 49 U.S.C. 5328(a)(2), FTA will complete the evaluation of a proposed project for approval into preliminary engineering within 30 days of receipt of a complete formal request from the project sponsor(s).
(2)Consistent with 49 U.S.C. 5328(a)(3), FTA will complete the evaluation of a proposed project for approval into final design within 120 days of receipt of a complete formal request from the project sponsor(s).
(c)Preliminary Engineering.
(1)The preliminary engineering phase of New Starts project development is the process of finalizing the project scope, cost, and the financial plan such that:
(i)All environmental and community impacts are identified and adequate provisions made for their mitigation in accordance with 49 U.S.C. 5324(b) and NEPA, with issuance of a Record of Decision
(ROD)or Finding of No Significant Impact (FONSI);
(ii)All major or critical project elements are designed to the level that no significant unknown impacts relative to their costs are likely; and
(iii)All cost estimating is complete to the level of confidence necessary for the project sponsor to implement the financing strategy, including establishing the maximum dollar amount of the New Starts program financial contribution needed to implement the project.
(iv)The project sponsor has used credible, relevant, identifiable and cost-effective industry or engineering practices that are uniformly and consistently applied in preparing for and making these determinations. The cost estimating process during preliminary engineering would specifically identify the main components of the project as identified in FTA's Standardized cost categories, including all essential project elements, and add sufficient contingencies to cover the remaining design and cost uncertainties that will be addressed in final design.
(2)A proposed project can be considered for advancement into preliminary engineering only if:
(i)Alternatives analysis has been completed;
(ii)FTA has approved the alternative that will serve as the baseline alternative against which the proposed project will be compared in the evaluation and rating process;
(iii)The NEPA scoping process has been completed or the project has been granted a categorical exclusion;
(iv)The proposed project has been adopted as the locally preferred alternative in the metropolitan transportation plan;
(v)The proposed financial strategies, planned funding sources, and amounts have been independently endorsed by those agencies identified as responsible for providing or approving the funding. Where future State and/or local government action or public referendum is required to establish (and commit) the proposed funding source, a letter of endorsement and a timeframe for implementation and commitment is required from the appropriate policy-making or decision-making body responsible for providing or approving the proposed funding;
(vi)For project sponsors using traditional travel forecasting procedures (commonly referred to as four-step models) to estimate transportation system user benefits and ridership, the procedures have been rigorously validated using a survey of transit riders that has been completed not more than five years prior to a request to enter preliminary engineering;
(vii)Project sponsors have demonstrated adequate technical capability to carry out preliminary engineering for the proposed project;
(viii)FTA and the project sponsor have signed a Project Development Agreement
(PDA)that identifies principal issues to be resolved, products to be completed during project development, all significant uncertainties and the strategies to address them, and schedules for reaching significant milestones during the course of project development. At a minimum, a PDA will include the steps and schedule to ensure the satisfactory completion of the NEPA process, the steps and schedule to complete preliminary engineering and final design including development of reliable cost estimates and ridership forecasts, a discussion of all significant uncertainties in the development of cost, benefit, and financial information, and the steps and schedule to secure funding commitments; and
(ix)All other applicable Federal and FTA program requirements have been met.
(3)Consistent with 49 U.S.C. 5309(g)(2)(C), project sponsors shall submit a preliminary plan for collection and analysis of information to identify the “before and after” impacts of the New Starts project and the accuracy of the forecasts prepared during development of the project. The project sponsor will also submit the initial information on project scope, service levels, capital costs, operating costs, and ridership of the project produced during alternatives analysis, identify the entity responsible for each in order to facilitate FTA's compliance with preparation of the Contractor Performance Assessment Report required by 49 U.S.C. 5309(l)(2), and provide a discussion of the key uncertainties that may affect achievement of the forecasts.
(4)FTA's approval will be based on the results of its evaluation as described in §§ 611.11 through 611.15.
(5)At a minimum, a proposed project must receive an overall rating of “medium” and be reasonably expected to continue to meet the requirements of this section to be approved for entry into preliminary engineering.
(6)This part does not in any way revoke FTA approvals to enter preliminary engineering made prior to [effective date of the final rule]; however, in order to advance to final design, the project would be subject to the requirements of this part.
(7)New Starts projects approved to advance into preliminary engineering receive blanket pre-award authority to incur project costs for preliminary engineering activities prior to grant approval.
(i)This pre-award authority does not constitute a commitment by FTA that future Federal funds will be approved for the project.
(ii)All Federal requirements must be met prior to incurring costs in order to retain eligibility of the costs for future FTA grant assistance.
(d)Final Design. Consistent with 49 U.S.C. 5309(d)(5), FTA will evaluate a proposed New Starts project prior to approval into final design.
(1)Final Design is the phase of project development during which the significant remaining uncertainties in the construction cost estimate that were specified at the end of preliminary engineering are mitigated, detailed specifications and bid documents are produced, all significant third party and relocation agreements are signed, all funding commitments needed to complete the project are finalized, and all remaining technical and regulatory issues relating to readiness to begin construction are completed.
(2)A proposed project can be considered for advancement into final design only if:
(i)The NEPA process has been completed with FTA's issuance of a ROD or FONSI, or FTA's concurrence in a categorical exclusion;
(ii)All of the conditions described in § 611.17(c)(1) and as further defined in FTA's policy guidance for completion of preliminary engineering have been met.
(iii)The project is reaffirmed in its final configuration and costs (after NEPA and preliminary engineering) in the metropolitan transportation plan if significant changes have occurred in the project definition or cost compared to the project that was approved to enter preliminary engineering;
(iv)FTA and the project sponsor have agreed on the final New Starts program funding amount that generally may not be exceeded in any subsequent Full Funding Grant Agreement. FTA will entertain requests for higher levels of New Starts funding when, during final design but prior to execution of the Full Funding Grant Agreement, FTA determines that the increase in costs is beyond the project sponsor's control. These cost increases are expected to be limited to unforeseen cost increases due to unusual occurrences. FTA will decide on a case-by-case basis whether these circumstances apply to a given project and what dollar amount is attributable to these occurrences. FTA would participate in these cost increases proportionate to the previously agreed-to percentage share between FTA and the project sponsor; likewise FTA would participate in any cost reductions identified during final design proportionate to the previously agreed-to percentage share between FTA and the project sponsor.
(v)Project sponsors have demonstrated adequate technical capability to carry out final design for the proposed project; and
(vi)All other applicable Federal and FTA program requirements have been met.
(3)FTA's approval will be based on the results of its evaluation as described in §§ 611.11 through 611.15.
(4)At a minimum, a proposed project must receive an overall rating of “medium” and be reasonably expected to continue to meet the requirements of this section to be approved for entry into final design.
(5)Consistent with 49 U.S.C. 5309(g)(2)(C), project sponsors seeking Full Funding Grant Agreements shall submit a complete plan for collection and analysis of information to identify the “before and after” impacts of the New Starts project and the accuracy of the forecasts prepared during development of the project. The project sponsor will also submit updated information on project scope, service levels, capital costs, operating and maintenance costs, and ridership of the project produced during preliminary engineering; identify the entity responsible for each in order to facilitate FTA's compliance with preparation of the Contractor Performance Assessment Report required by 49 U.S.C. 5309(l)(2); prepare an analysis of the changes between the current project information and the information prepared during alternatives analysis; and discuss the key remaining uncertainties that may affect achievement of the forecasts.
(i)The plan shall finalize the preliminary “before and after” plan developed prior to entry into preliminary engineering. The plan will provide for: Collection of “before” data on the current transit system; documentation of the “predicted” scope, service levels, capital costs, operating and maintenance costs, and ridership of the project; collection of “after” data on the transit system two years after opening of the New Starts project; and analysis of the consistency of “predicted” project characteristics with the “after” data.
(ii)The “before” data collection shall obtain information on transit service levels and ridership patterns, including origins and destinations, access modes, trip purposes, and rider characteristics. The “after” data collection shall consist of information comparable to the before data on transit service levels and ridership patterns, plus information on the as-built scope and capital costs of the New Starts project.
(iii)The analysis of this information shall describe the impacts of the New Starts project on transit services and transit ridership, evaluate the consistency of “predicted” and actual project characteristics and performance, and identify sources of differences between “predicted” and actual outcomes.
(iv)For funding purposes, preparation of the plan for collection and analysis of data is an eligible part of the proposed project.
(6)Project sponsors shall collect data on the current system, according to the plan required under § 611.17(c)(3) as approved by FTA, prior to the beginning of construction of the proposed New Starts project. Collection of this data is an eligible part of the proposed project for funding purposes.
(7)Projects that are approved into final design are exempt from any changes in New Starts policy, guidance, and procedures.
(8)This part does not in any way revoke prior FTA approvals to enter final design that were made prior to [the effective date of the final rule]; however, if the project has not already been recommended for a Full Funding Grant Agreement, in order to be so recommended the project would be subject to the requirements of this part.
(9)Projects approved to advance into final design receive blanket pre-award authority to incur project costs for final design activities prior to grant approval. Pre-award authority to acquire real property and to relocate residents and businesses in accordance with the Uniform Relocation and Real Property Acquisition Policies Act is granted upon completion of the NEPA process.
(i)All other activities must receive a Letter of No Prejudice
(LONP)to be eligible for Federal reimbursement.
(ii)All Federal requirements must be met prior to incurring costs in order to retain eligibility of the costs for future FTA grant assistance.
(e)Full-Funding Grant Agreements (FFGAs).
(1)FTA will determine whether to execute an FFGA for proposed New Starts projects based on:
(i)The evaluations and ratings established by this regulation;
(ii)The technical capability of project sponsors to complete the proposed New Starts project; and
(iii)A determination by FTA that no outstanding issues exist that could interfere with successful implementation of the proposed New Starts project.
(2)FTA's funding decision is distinct from project evaluation and rating process. Projects that meet or exceed the criteria described in this section are eligible, but are not guaranteed, to be recommended for funding. FTA will recommend projects for funding in the annual Report on Funding Recommendations and President's Budget only if the project is rated at least “medium” overall and has a cost-effectiveness rating of at least “medium.”
(3)An FFGA shall not be executed for a project that is not authorized for final design and construction in accordance with Federal law.
(4)FFGAs may be executed only for those projects that:
(i)Have an overall rating of “medium” or better;
(ii)Have completed the appropriate steps in the project development process;
(iii)Meet all applicable Federal and FTA program requirements; and
(iv)Are ready to utilize New Starts funds, consistent with available program authorization.
(5)In any instance in which FTA decides to provide financial assistance under the Section 5309 Capital Investment program for construction of a New Starts project, FTA will negotiate an FFGA with the grantee during final design of that project. Pursuant to the terms and conditions of the FFGA:
(i)The maximum level of Federal financial contribution under the Section 5309 Capital Investment program will be consistent with the maximum New Starts share determined at the time the project entered final design as provided in paragraph (d)(2)(iv) of this section;
(ii)The grantee will be required to complete construction of the project, as defined in the scope, to the point of initiation of revenue operations, and to absorb any additional costs incurred or necessitated using non-Section 5309 Capital Investment funds;
(iii)FTA and the grantee will establish a schedule for anticipating Federal contributions; and
(iv)Specific annual contributions under the FFGA will be subject to the availability of overall budget authority, Congressional appropriations, and the ability of the grantee to use the funds effectively.
(6)If a project is completed using less than the total funding authorized in the FFGA, the project sponsor may request a grant amendment to spend the remaining funds on other system capital improvements.
(7)Consistent with 49 U.S.C. 5309(h)(3), the FFGA may include an incentive clause that will provide a specified higher than requested New Starts funding share, not to exceed 80 percent, under the following conditions:
(i)Actual opening year ridership is not less than 90 percent of the opening year ridership estimated at the time the project entered preliminary engineering for a project of equivalent scope; and
(ii)The actual scope and construction cost of the project is not more than 10 percent higher than the construction cost estimated at the time the project entered preliminary engineering. The construction costs will be compared in constant dollars for the year the project entered preliminary engineering.
(iii)The higher New Starts share will be in the form of an amendment to the FFGA to be used either to increase the Federal share for costs incurred in completing the project as agreed to in the FFGA, or for other agreed to system capital improvements, prior to closing out the FFGA.
(8)The total amount of Federal obligations under FFGAs and potential obligations under Letters of Intent will not exceed the amount authorized for New Starts under 49 U.S.C. 5309.
(9)FTA may also make a “contingent commitment,” which is subject to future congressional authorizations and appropriations, pursuant to 49 U.S.C. 5309(g)(B) 5338(c), and 5338(f).
(10)Consistent with 49 U.S.C. 5309(g)(2)(C), the FFGA will require implementation of the data collection plan prepared in accordance with § 611.17(d)(5):
(i)Prior to the beginning of construction activities the grantee shall collect the “before” data on the existing system, if such data has not already been collected as part of final design, and document the predicted characteristics and performance of the project.
(ii)Two years after the project opens for revenue service, the grantee shall collect the “after” data on the transit system and the New Starts project, determine the impacts of the project, and analyze the consistency of the “predicted” performance of the project with the “after” data. A report on the findings and supporting data will be submitted to FTA no later than 30 months after the project opens for revenue service.
(iii)For funding purposes, collection of the “before” data, collection of the “after” data, and the development and reporting of findings are eligible parts of the proposed project.
(11)This part does not in any way alter, revoke, or require re-evaluation of existing FFGAs that were issued prior to [the effective date of the final rule]. Subpart C—Small Starts § 611.19 Eligibility.
(a)To be eligible for Small Starts funding, a proposed project must meet the following prerequisites:
(1)Be based on the results of planning and alternatives analysis as described in § 611.27.
(2)Must include at least 50 percent of the total project in a fixed guideway during the peak period or when congestion inhibits transit system performance, or be a corridor bus project that includes at least the following elements:
(i)Substantial transit stations;
(ii)Traffic signal priority/pre-emption;
(iii)Low-floor buses or level boarding;
(iv)Branding of the proposed service; and
(v)10 minute peak/15 minute off peak headways or better for at least 14 hours per day.
(3)Must have a total project cost of under $250 million and request less than $75 million in Section 5309 Capital Investment funds, both in year of expenditure funds. If the project exceeds either of these limits, it shall be considered and evaluated as a New Start under subpart B of this part.
(b)Projects that would otherwise qualify for funding as a New Starts project may not be subdivided into several Small Starts projects. Projects may be built in phases or a series of minimum operable segments, but all potential Small Starts projects envisioned for a single corridor will be considered together as a single project for the purpose of determining Small Starts eligibility. If the combined cost or total requested funding amount, both expressed in year-of-expenditure dollars, is over the Small Starts limits, the projects will be evaluated as New Starts projects. § 611.21 Project justification criteria. In order to approve a grant for a proposed Small Starts project, and to approve entry into the project development phase as required by 49 U.S.C. 5309(e)(6), FTA must find that the proposed project is meritorious as described in 49 U.S.C. 5309(e)(4).
(a)To make the statutory evaluations and assign ratings for project justification, FTA will evaluate information developed locally through alternatives analyses and refined through the project development phase.
(1)The method used to make this determination will be a multiple measure approach in which the merits of candidate projects will be evaluated in terms of each of the criteria specified by this section.
(2)The ratings for each of the criteria will be expressed in terms of descriptive indicators, as follows: “high,” “medium-high,” “medium,” “medium-low,” or “low.” The application of these descriptors to each of these criteria will be published as policy guidance, subject to notice and comment, at least every two years or when substantial changes are made.
(b)The evaluation criteria and weights assigned to each for Small Starts project justification are as follows:
(1)Effectiveness criteria (50 percent of the summary rating for project justification):
(i)Mobility improvements for the general population (40 percent of the ratings for effectiveness), including congestion relief. Congestion relief shall be measured based on the degree to which the project reduces highway travel demand and the relative level of congestion in the corridor based on estimated delay.
(ii)Economic development/land use (60 percent of the ratings for effectiveness). Economic development/land use shall be measured using factors that address the additional development expected around project stations as a result of the New Start project. Such factors include the extent to which current land use is ripe for development, transit-oriented plans and policies, the economic development climate in the project corridor, the increase in transit accessibility offered by the project, and the economic lifespan of the project.
(2)Cost effectiveness (50 percent of the summary rating for project justification) shall be calculated by dividing annualized capital and operating costs by transportation system user benefits. Cost effectiveness for New Starts will be evaluated based on the forecast made over the planning horizon. Annualized cost shall include all elements necessary for completion of the project with contingency amounts that are reasonable to cover unanticipated cost increases plus annual operating and maintenance costs. The breakpoints corresponding to the cost effectiveness ratings will be adjusted for inflation annually as part of the Reporting Instructions.
(3)Other factors will be considered under the authority provided by 49 U.S.C. 5309(d)(3)(K).
(i)All projects will be evaluated and rated on the severity of the transportation and economic development problem or opportunity in the corridor and consideration of the appropriateness of the proposed project as a response.
(ii)Depending upon the applicability, also considered will be the following factors:
(A)Identification of the project as a principal element of a congestion reduction strategy, in general and a pricing strategy, in particular;
(B)Any factor which the Small Start project sponsor believes articulates the benefits of the proposed project but which is not captured within the other project justification criteria; and
(C)Other factors that the Secretary determines to be appropriate to carry out the evaluation.
(c)In evaluating proposed Small Starts projects under these criteria:
(1)For the effectiveness and cost effectiveness criteria, the proposed Small Starts project will be compared to the baseline alternative.
(2)As a candidate project proceeds through project development, a greater degree of certainty is expected with respect to the scope of the project and a greater level of commitment is expected with respect to the funding strategy and the plans and policies intended to support economic development and transit supportive land use.
(d)Simplified methods may be used for Small Starts projects with prior written approval from FTA. Depending on the scope and complexity of the proposed Small Starts project, information regarding user benefits and ridership could be estimated based on existing ridership, on-board surveys, calculations of stop-to-stop running time improvements, peer project experience, pivot-point and elasticity based methods, or other methods of estimating ridership and user benefits consistent with FTA guidance and industry practice.
(e)The individual ratings for each of the criteria described in this section will be combined into a summary rating of “high,” “medium-high,” “medium,” “medium-low,” or “low” for project justification using the weights provided for above. “Other factors” will be considered and applied by adjusting, either upward or downward, the summary project justification rating. § 611.23 Local financial commitment criteria. In order to approve a grant for a Small Starts project under 49 U.S.C. 5309, and to approve entry into project development as required by 49 U.S.C. 5309(e)(6), FTA must find that the proposed project is supported by an acceptable degree of local financial commitment, as required by 49 U.S.C. 5309(e)(5). The financial capability of the project sponsor to build, operate and maintain the proposed project as well as the existing and planned system will be evaluated according to the following measures:
(a)The proposed share of project capital costs to be met using funds from sources other than the Section 5309 Capital Investment Program, including both the non-Federal match required by Federal law and any additional local, State or non-Section 5309 Capital Investment Federal funding (“overmatch”). However, FTA will give priority to financing projects that include more non-Section 5309 Capital Investment funds than are required as local match under section 5309(h). At the same time, FTA will take into consideration the fiscal capacity of State and local governments by not reducing the overall local financial commitment rating below “medium,” for projects that, due to state or local fiscal capacity constraints, propose a funding strategy with an 80 percent Section 5309 Capital Investment funding. Unless otherwise specified in Federal law, FTA will not take into account the non-Federal funds expended on a project other than the Small Starts project being evaluated when computing the non-Federal share of the Small Starts project.
(b)The stability and reliability of the proposed capital funding plan for constructing all essential elements of the Small Starts project and transit system, including the availability of contingency amounts that the Secretary determines to be reasonable to cover unanticipated cost increases.
(c)The stability and reliability of the proposed operating funding plan to operate and maintain the entire transit system as planned, and including the existence of contractual arrangements, including public private partnership arrangements, that are designed to reduce and/or make more predictable the annualized cost of operations.
(d)The capital and operating plans specified in paragraphs
(b)and
(c)of this section must include costs and revenues up to and including opening year.
(e)For each proposed project, ratings for paragraphs (a),
(b)and
(c)of this section will be reported in terms of descriptive indicators, as follows: “high,” “medium-high,” “medium,” “medium-low,” or “low.” The application of these descriptors to each of these criteria will be published, subject to notice and comment, in policy guidance at least every two years or when substantial changes are made.
(f)The individual ratings for each measure described in this section will be combined into a summary rating of “high,” “medium-high,” “medium,” “medium-low,” or “low” for local financial commitment. To develop the summary ratings, the rating for capital and operating financial plans will be given equal weights. The rating for the proposed share from other than the Section 5309 Capital Investments program will be used to assign a higher or lower rating should the weighting of the capital and operating financial plan ratings produce a rating which would otherwise fall between the summary rating levels specified above. § 611.25 Overall project ratings.
(a)The summary ratings developed for project justification and local financial commitment, adjusted by the degree of reliability of estimates of ridership and costs, as provided in §§ 611.7, 611.21, and 611.23, will form the basis for the overall rating for each project.
(b)FTA will assign overall ratings of “high,” “medium-high,” “medium,” “medium-low,” or “low” as required by 49 U.S.C. 5309(e)(6)(B), to each proposed project. To obtain an overall rating of “medium,” a project must have at least a “medium” rating for project justification, and local financial commitment. To obtain an overall rating of “medium-high,” a project must have at least a rating of “medium-high” for both project justification and for local financial commitment. To obtain a rating of “high,” a project must have a rating of “high” for both project justification and for local financial commitment.
(1)These ratings will indicate the overall merit of a proposed project at the time of evaluation.
(2)Ratings for individual projects will be updated annually for purposes of the annual report on funding levels and allocations of funds required by 49 U.S.C. 5309(k)(1), and as required for FTA approvals during the following project development steps:
(i)Advancement of proposed Small Starts projects into project development;
(ii)Decision to recommend Small Starts projects for Project Construction Grant Agreements.
(c)Projects that achieve an overall rating of “medium” or better will be allowed to advance into project development and may be recommended for funding. § 611.27 Project development process. All Small Starts projects must emerge from the metropolitan and statewide planning process, consistent with 23 CFR part 450, and be included in the metropolitan transportation plan. Proposed projects must be based on the results of alternatives analysis and proceed through project development before being recommended for Small Starts program funding.
(a)Alternatives analysis. To be eligible for project funding under the Small Starts program, local project sponsors must perform an alternatives analysis consistent with FTA guidance.
(1)The alternatives analysis must develop information on the benefits, costs, and impacts of alternative strategies to address a transportation problem or opportunity in a given corridor, leading to the adoption of a locally preferred alternative.
(2)The alternative strategies evaluated in an alternatives analysis must include a no-build alternative, at least one Transportation System Management
(TSM)alternative that is able to serve as the Small Starts project baseline alternative, and an appropriate number of build alternatives. If the alternatives analysis only considers projects that would qualify as Small Starts projects and does not include a new fixed guideway alternative, the Small Starts project already fits the definition of a TSM alternative. In this case, the no-build alternative will serve as the baseline in both the alternatives analysis and in the Small Starts evaluation and rating process.
(3)The locally preferred alternative must be selected from among the evaluated alternative strategies and formally adopted and included in the metropolitan transportation plan.
(b)Project development. Consistent with 49 U.S.C. 5309(e)(6) and 5328(a)(2), FTA will evaluate proposed Small Starts projects for approval into project development. For Small Starts projects, project development combines the goals and activities of preliminary engineering and final design into a single phase with a single FTA approval point. However, under NEPA regulations (23 CFR part 771), final design activities may not commence prior to completion of the NEPA process.
(1)The project development phase of Small Starts is the process of finalizing the project scope, cost, and the financial plan such that:
(i)All environmental and community impacts are identified and adequate provisions made for their mitigation in accordance with 49 U.S.C. 5324(b) and NEPA, with FTA's issuance of a Record of Decision
(ROD)or Finding of No Significant Impact (FONSI), unless the project is found to be categorically excluded from the NEPA process by FTA under 23 CFR 771.117;
(ii)All major or critical project elements are designed to the level that no significant unknown impacts relative to their costs will result; and
(iii)All cost estimating is complete to the level of confidence necessary for the project sponsor to implement the financing strategy, including establishing the maximum dollar amount of the Small Starts program financial contribution needed to implement the project.
(iv)The project sponsor has used credible, relevant, identifiable, and cost-effective industry or engineering practices that are uniformly and consistently applied in preparing for and making these determinations. The cost estimating process would specifically identify the main components of the project as identified in FTA's standardized cost categories, including all essential project elements, and add sufficient contingencies to cover unanticipated cost increases.
(v)Detailed specifications and bid documents are produced, all funding commitments needed to complete the project are finalized, and all remaining technical and regulatory issues relating to readiness to begin construction are completed.
(2)A proposed project can be considered for advancement into project development only if:
(i)Alternatives analysis has been completed;
(ii)FTA has approved the alternative that will serve as the baseline alternative against which the proposed project will be compared in the evaluation and rating process;
(iii)The NEPA scoping process has been completed or the project has been granted a categorical exclusion;
(iv)The proposed project has been adopted as the locally preferred alternative in the metropolitan transportation plan;
(v)The proposed financial strategies, planned funding sources, and amounts have been independently endorsed by those agencies identified as responsible for providing or approving the funding. Where future State and/or local government action or public referendum is required to establish (and commit) the proposed funding source, a letter of endorsement and a timeframe for implementation and commitment is required from the appropriate policy-making or decision-making body responsible for providing or approving the proposed funding;
(vi)For project sponsors using traditional travel forecasting procedures (commonly referred to as four-step models) to estimate transportation system user benefits and ridership, the procedures have been rigorously validated using a survey of transit riders that has been completed not more than five years prior to a request to enter project development;
(vii)Project sponsors have demonstrated adequate technical capability to carry out project development for the proposed project; and
(viii)All other applicable Federal and FTA program requirements have been met.
(3)Consistent with 49 U.S.C. 5309(g)(2)(C), project sponsors shall submit a preliminary plan for collection and analysis of information to identify the “before and after” impacts of the Small Starts project and the accuracy of the forecasts prepared during development of the project. The project sponsor will also submit the initial information on project scope, service levels, capital costs, operating and maintenance costs, and ridership of the project produced during alternatives analysis, identify the entity responsible for each in order to facilitate FTA's compliance with preparation of the Contractor Performance Assessment Report required by 49 U.S.C. 5309(l)(2), and provide a discussion of the key uncertainties that may affect achievement of the forecasts.
(4)FTA's approval will be based on the results of its evaluation as described in §§ 611.7 and 611.21 through 611.25.
(5)At a minimum, a proposed project must receive an overall rating of “medium” and be reasonably expected to continue to meet the requirements of this section to be approved for entry into project development.
(6)This part does not in any way revoke prior FTA approvals to enter project development made prior to [the effective date of the final rule].
(7)Small Starts projects entering project development receive blanket pre-award authority to incur project costs for preliminary engineering prior to grant approval. Pre-award authority for final design and to acquire real estate and to relocate residents and businesses in accordance with the Uniform Relocation and Real Property Acquisition Policies Act is automatically granted upon completion of the NEPA process as evidenced by FTA's issuance of a ROD or FONSI, or FTA's concurrence in a categorical exclusion. All other activities must receive a Letter of No Prejudice
(LONP)to be eligible for Federal reimbursement.
(i)This pre-award authority does not constitute a commitment by FTA that future Federal funds will be approved for the project.
(ii)All Federal requirements must be met prior to incurring costs in order to retain eligibility of the costs for future FTA grant assistance.
(c)Project Construction Grant Agreements (PCGAs).
(1)FTA will determine whether to execute a PCGA for Small Starts projects based on:
(i)The results of the evaluations and ratings process contained in this part;
(ii)The technical capability of the project sponsor to complete the proposed Small Starts project;
(iii)The NEPA process has been completed with FTA's issuance of a ROD or FONSI or FTA's concurrent in a categorical exclusion;
(iv)The project is reaffirmed in its final configuration and costs (after NEPA and project development) in the metropolitan transportation plan if significant changes have occurred in the project definition or cost compared to the project that was approved to enter into project development; and
(v)A determination by FTA that no outstanding issues exist that could interfere with successful implementation of the proposed Small Starts project.
(vi)Consistent with 49 U.S.C. 5309(g)(2)(C), project sponsors seeking PCGAs shall submit a complete plan for collection and analysis of information to identify the “before and after” impacts of the Small Starts project and the accuracy of the forecasts prepared during development of the project. The project sponsor will also submit updated information on project scope, service levels, capital costs, operating and maintenance costs, and ridership of the project produced during project development, an analysis of the changes between the current project information and the information prepared during alternatives analysis, and a discussion of the key remaining uncertainties that may affect achievement of the forecasts.
(A)The plan shall finalize the preliminary plan developed prior to entering project development as required by § 611.27(c)(3). The plan will provide for: Collection of “before” data on the current transit system; documentation of the “predicted” scope, service levels, capital costs, operating costs, and ridership of the project; collection of “after” data on the transit system one year after opening of the Small Starts project; and analysis of the consistency of “predicted” project characteristics with the “after” data.
(B)The “before” data collection shall obtain information on transit service levels and ridership patterns, including origins and destinations, access modes, trip purposes, and rider characteristics. The “after” data collection shall consist of comparable information on transit service levels and ridership patterns, plus information on the as-built scope and capital and operation and maintenance costs of the Small Starts project.
(C)The analysis of this information shall describe the impacts of the Small Starts project on transit services and transit ridership, evaluate the consistency of “predicted” and actual project characteristics and performance, and identify sources of differences between “predicted” and actual outcomes.
(D)For funding purposes, preparation of the plan for collection and analysis of data is an eligible part of the proposed project.
(vii)Project sponsors shall collect data on the current system, according to the plan required under § 611.27(b)(3) as approved by FTA, prior to the beginning of construction of the proposed Small Starts project. Collection of this data is an eligible part of the proposed project for funding purposes.
(2)FTA's funding decision is distinct from project evaluation and rating process. Projects that meet or exceed the criteria described in this section are eligible, but are not guaranteed, to be recommended for funding. FTA will recommend projects for funding in the annual Report on Funding Recommendations and President's Budget only if the project is rated at least “medium” overall and has a cost-effectiveness rating of at least “medium.”
(3)A PCGA shall not be executed for a project that is not authorized for construction by Federal law.
(4)PCGAs may be executed only for those projects that:
(i)Have an overall rating of “medium” or better;
(ii)Have completed the appropriate steps in the project development process;
(iii)Meet all applicable Federal and FTA program requirements; and
(iv)Are ready to utilize Small Starts funds, consistent with available program authorization.
(5)In any instance in which FTA decides to provide financial assistance under the Section 5309 Capital Investment program for construction of a Small Starts project, FTA will negotiate a PCGA with the grantee during project development. Pursuant to the terms and conditions of the PCGA:
(i)The grantee will be required to complete construction of the project, as defined, to the point of initiation of revenue operations and to absorb any additional costs incurred or necessitated with local or other non-Section 5309 Capital Investment funds;
(ii)FTA and the grantee will establish a schedule for anticipating Federal contributions; and
(iii)Specific annual contributions under the PCGA will be subject to the availability of overall budget, authority, Congressional appropriations, and the ability of the grantee to use the funds effectively.
(6)The total amount of Federal obligations under PCGAs and potential obligations under Letters of Intent will not exceed the amount authorized for Small Starts under 49 U.S.C. 5309.
(7)FTA may also make a “contingent commitment,” which is subject to future congressional authorizations and appropriations, pursuant to 49 U.S.C. 5309(g)(B) 5338(c), and 5338(f).
(8)The PCGA will require implementation of the data collection plan prepared in accordance with paragraph (c)(1)(vi) of this section:
(i)Prior to the beginning of construction activities, the grantee shall collect the “before” data on the existing system, if such data has not already been collected during project development, and document the predicted characteristics and performance of the project.
(ii)One year after the project opens for revenue service, the grantee shall collect the “after” data on the transit system and the Small Starts project, determine the impacts of the project, analyze the consistency of the “predicted” performance of the project with the “after” data, and report the findings and supporting data to FTA no later than 18 months after the project opens for revenue service.
(iii)For funding purposes, collection of the “before” data, collection of the “after” data, and the development and reporting of findings are eligible parts of the proposed project. Subpart D—Very Small Starts § 611.29 Eligibility.
(a)To be eligible for Section 5309 Capital Investment funding for a Very Small Start, a proposed project must meet the following prerequisites:
(1)Be based on the results of planning and alternatives analysis as described in § 611.37.
(2)Have at least 50 percent of the project in a fixed guideway during the peak period or when congestion inhibits transit system performance, or be a corridor bus project that includes at least the following elements:
(i)Substantial transit stations;
(ii)Traffic signal priority/pre-emption;
(iii)Low-floor buses or level boarding;
(iv)Branding of the proposed service; and
(v)10 minute peak/15 minute off peak headways or better for at least 14 hours per day.
(3)Must have the following characteristics to qualify for pre-approval of the project justification criteria:
(i)Be in a corridor with a minimum of 3,000 existing transit riders who will benefit from the proposed project.
(ii)Have a total project cost of less than $50 million and an average cost of less than $3 million per mile (exclusive of rolling stock). Projects that exceed the limits provided for in paragraph (a)(3) of this section will be considered and evaluated as a Small Starts project, described in Subpart C of this part.
(b)Projects that would otherwise qualify for funding as a New Starts or Small Starts project may not be subdivided into several Very Small Starts projects. Projects may be built in phases or a series of minimum operable segments, but all projects envisioned for a single corridor will be considered together as a single project for the purpose of determining eligibility as a Very Small Starts project. If the combined cost or total requested funding amount, both expressed in year-of-expenditure dollars, is over the Very Small Starts limits, the projects will be evaluated as a New Starts or Small Starts project. § 611.31 Project justification criteria. In order to approve a grant for a proposed Very Small Starts project, and to approve entry into the project development phase as required by 49 U.S.C. 5309(e)(6), FTA must find that the proposed project is meritorious as described in 49 U.S.C. 5309(e)(4).
(a)To make the statutory evaluations and assign ratings for project justification, FTA will evaluate information developed locally through alternatives analyses and refined through the project development phase.
(b)For Very Small Starts projects, a single summary rating of project justification will be provided, based on the project's ability to meet the requirements in § 611.29(a)(3) that takes into account the project's mobility improvements, economic development, land use impacts, and cost effectiveness.
(c)Other factors will be considered under the authority provided by 49 U.S.C. 5309(d)(3)(K).
(1)All projects will be evaluated and rated on the severity of the transportation and economic development problem or opportunity in the corridor and consideration of the appropriateness of the proposed project as a response.
(2)Depending upon the applicability, also considered will be the following factors:
(i)Identification of the project as a principal element of a congestion reduction strategy, in general and a pricing strategy, in particular;
(ii)Any factor which the Very Small Start project sponsor believes articulates the benefits of the proposed project but which is not captured within the other project justification criteria; and
(iii)Other factors that the Secretary determines to be appropriate to carry out the evaluation.
(d)The procedures used to produce the information to support the project justification rating for Very Small Starts will be based on data supporting the existing ridership and average cost per mile required under § 611.29(a)(3) .
(e)Very Small Starts projects are composed of project elements described in § 611.29(a)(3) that are warranted as both effective and cost-effective and shall be rated “medium” for project justification. Projects not composed of such elements do not qualify for evaluation as a Very Small Start, and are subject to the requirements of subpart C of this part. § 611.33 Local financial commitment criteria. In order to approve a Very Small Starts project into project development or for a grant under 49 U.S.C. 5309, FTA must find that the proposed project is supported by an acceptable degree of local financial commitment, as required by 49 U.S.C. 5309(e)(5). The financial capability of the project sponsor to build, operate and maintain the proposed project, as well as the existing and planned system will be evaluated according to the following measures:
(a)The proposed share of project capital costs to be met using funds from sources other than the Section 5309 Capital Investment program, including both the non-Federal match required by Federal law and any local, state or additional non-Section 5309 Capital Investment Federal funding (“overmatch”). However, FTA will give priority to financing projects that include more non-5309 funds than are required as local match under 5309(h). At the same time, FTA will take into consideration the fiscal capacity of State and local governments by not reducing the overall local financial commitment rating below “medium,” for projects that, due to state or local fiscal capacity constraints, propose a funding strategy with an 80 percent Section 5309 Capital Investment funding. Unless otherwise specified in Federal law, FTA will not take into account the non-Federal funds expended on a project other than the Very Small Starts project being evaluated when computing the non-Federal share of the Very Small Starts project.
(b)The stability and reliability of the proposed capital funding plan for constructing all essential elements of the Very Small Starts project and transit system, including the availability of contingency amounts that the Secretary determines to be reasonable to cover unanticipated cost increases; and
(c)The stability and reliability of the proposed operating funding plan to operate and maintain the entire transit system as planned and including the existence of contractual arrangements that are designed to reduce and/or make more predictable the annualized cost of operations.
(d)The capital and operating plans specified in paragraphs (a),
(b)and
(c)of this section must include annual costs and revenues through opening year.
(e)For each proposed project, ratings for paragraphs (a),
(b)and
(c)of this section will be reported in terms of descriptive indicators, as follows: “high,” “medium-high,” “medium,” “medium-low,” or “low.” The application of these descriptors to each of these criteria, and the weights given to each criterion, will be published, subject to notice and comment, in policy guidance at least every two years or when substantial changes are made.
(f)The individual ratings for each measure described in this section will be combined into a summary rating of “high,” “medium-high,” “medium,” “medium-low,” or “low” for local financial commitment. § 611.35 Overall project ratings.
(a)The summary ratings developed for project justification and local financial commitment, adjusted by the degree of reliability of estimates of ridership and costs (as described in §§ 611.7, 611.31, and 611.33), will form the basis for the overall rating for each project.
(b)FTA will assign overall ratings of “high,” “medium-high,” “medium,” “medium-low,” or “low,” as required by 49 U.S.C. 5309(e)(6)(B), to each proposed project. To obtain an overall rating of “medium,” a project must have at least a “medium” rating for both project justification and local financial commitment.
(1)These ratings will indicate the overall merit of a proposed project at the time of evaluation.
(2)Ratings for individual projects will be updated annually for purposes of the annual report on funding levels and allocations of funds required by 49 U.S.C. 5309(k)(1), and as required for FTA approvals during the following project development steps:
(i)Advancement of proposed Very Small Starts projects into project development; and
(ii)Decision to recommend Very Small Starts projects for Project Construction Grant Agreements.
(c)Projects that achieve an overall rating of “medium” or better will be allowed to advance into project development and may be recommended for funding. § 611.37 Project development process. All Very Small Starts projects must emerge from the metropolitan and statewide planning process, consistent with 23 CFR part 450, and be included in the metropolitan transportation plan. Proposed projects must be based on the results of alternatives analysis and proceed through project development before being recommended for Section 5309 Capital Investment program funding.
(a)Alternatives analysis. To be eligible for project funding under the Section 5309 Capital Investment program, local project sponsors must perform an alternatives analysis consistent with FTA guidance.
(1)The alternatives analysis must develop information on the benefits, costs, and impacts of alternative strategies to address a transportation problem or opportunity in a given corridor, leading to the adoption of a locally preferred alternative.
(2)The alternative strategies evaluated in an alternatives analysis must include a no-build alternative and at least one Very Small Start alternative.
(3)The locally preferred alternative must be selected from among the evaluated alternative strategies and formally adopted and included in the metropolitan transportation plan.
(b)Project development. Consistent with 49 U.S.C. 5309(e)(6) and 49 U.S.C. 5328(a)(2), FTA will evaluate proposed Very Small Starts projects for approval into project development. For Very Small Starts projects, project development combines the goals and activities of preliminary engineering and final design into a single phase with a single FTA approval point. However, under NEPA regulations (23 CFR Part 771), final design activities may not commence prior to completion of the NEPA process.
(c)Project Development.
(1)The project development phase of Small Starts, including Very Small Starts, is the process of finalizing the project scope, cost, and the financial plan such that:
(i)All environmental and community impacts are identified and adequate provisions made for their mitigation in accordance with 49 U.S.C. 5324(b) and NEPA, which results in FTA's issuance of a Record of Decision
(ROD)or Finding of No Significant Impact (FONSI), unless the project is found to be categorically excluded from the NEPA process by FTA under 23 CFR 771.17;
(ii)All major or critical project elements are designed to the level that no significant unknown impacts relative to their costs will result; and
(iii)All cost estimating is complete to the level of confidence necessary for the project sponsor to implement the financing strategy, including establishing the maximum dollar amount of the Small Starts program financial contribution needed to implement the project.
(iv)The project sponsor has used credible, relevant, identifiable and cost-effective industry or engineering practices that are uniformly and consistently applied in preparing for and making these determinations. The cost estimating process would specifically identify the main components of the project as identified in FTA's standardized cost categories, including all essential project elements, and add sufficient contingencies to cover unanticipated cost increases.
(v)Detailed specifications and bid documents are produced, all funding commitments needed to complete the project are finalized, and all remaining technical and regulatory issues relating to readiness to begin construction are completed.
(2)A proposed project can be considered for advancement into project development only if:
(i)Alternatives analysis has been completed;
(ii)The NEPA scoping process has been completed, or the project has been granted a categorical exclusion;
(iii)The proposed project has been adopted as the locally preferred alternative in the metropolitan transportation plan;
(iv)The proposed financial strategies, planned funding sources, and amounts have been independently endorsed by those agencies identified as responsible for providing or approving the funding. Where future State and/or local government action or public referendum is required to establish (and commit) the proposed funding source, a letter of endorsement and a timeframe for implementation and commitment is required from the appropriate policy-making or decision-making body responsible for providing or approving the proposed funding;
(v)Project sponsors have demonstrated adequate technical capability to carry out project development for the proposed project; and
(vi)All other applicable Federal and FTA program requirements have been met.
(3)Consistent with 49 U.S.C. 5309(g)(2)(C), project sponsors shall submit a preliminary plan for collection and analysis of information to identify the “before and after” impacts of the Very Small Starts project and the accuracy of the forecasts prepared during development of the project. The project sponsor will also submit the initial information on project scope, service levels, capital costs, operating and maintenance costs, and ridership of the project produced during alternatives analysis, as well as a discussion of the key uncertainties that may affect achievement of the forecasts.
(4)FTA's approval will be based on the results of its evaluation as described in §§ 611.21 through 611.25.
(5)At a minimum, a proposed project must receive an overall rating of “medium” and be reasonably expected to continue to meet the requirements of this section to be approved for entry into project development.
(6)This part does not in any way revoke prior FTA approvals to enter project development made prior to [the effective date of the final rule].
(7)Very Small Starts projects entering project development receive blanket pre-award authority to incur project costs for preliminary engineering prior to grant approval. Pre-award authority for final design, to acquire real estate and to relocate residents and businesses in accordance with the Uniform Relocation and Real Property Acquisition Policies Act, is automatically granted upon completion of the NEPA process as evidenced by FTA's issuance of a ROD or FONSI or FTA's concurrence in a categorical exclusion. All other activities must receive a Letter of No Prejudice
(LONP)to be eligible for Federal reimbursement.
(i)This pre-award authority does not constitute a commitment by FTA that future Federal funds will be approved for the project.
(ii)All Federal requirements must be met prior to incurring costs in order to retain eligibility of the costs for future FTA grant assistance.
(d)Project Construction Grant Agreements (PCGAs).
(1)FTA will determine whether to execute a PCGA for Very Small Starts projects based on:
(i)The results of the evaluations and ratings process contained in this part;
(ii)The technical capability of the project sponsor to complete the proposed Very Small Starts project;
(iii)The NEPA process has been completed with FTA's issuance of a ROD or FONSI or FTA's concurrence in a categorical exclusion;
(iv)The project is reaffirmed in its final configuration and costs (after NEPA and project development) in the metropolitan transportation plan if significant changes have occurred in the project definition or cost compared to the project that was approved to enter into project development; and
(v)A determination by FTA that no outstanding issues exist that could interfere with successful implementation of the proposed Small Starts project.
(2)FTA's funding decision is distinct from project evaluation and rating process. Projects that meet or exceed the criteria described in this section are eligible, but are not guaranteed, to be recommended for funding.
(3)A PCGA shall not be executed for a project that is not authorized for construction by Federal law.
(4)PCGAs may be executed only for those projects that:
(i)Have an overall rating of “medium” or better;
(ii)Have completed the appropriate steps in the project development process;
(iii)Meet all applicable Federal and FTA program requirements; and
(iv)Are ready to utilize Small Starts funds, consistent with available program authorization.
(5)In any instance in which FTA decides to provide Section 5309 Capital Investment funding for construction of a Very Small Starts project, FTA will negotiate a PCGA with the grantee during project development. Pursuant to the terms and conditions of the PCGA:
(i)The grantee will be required to complete construction of the project, as defined, to the point of initiation of revenue operations, and to absorb any additional costs incurred or necessitated with local or other non-Section 5309 Capital Investment funds;
(ii)FTA and the grantee will establish a schedule for anticipating Federal contributions; and
(iii)Specific annual contributions under the PCGA will be subject to the availability of budget authority and the ability of the grantee to use the funds effectively.
(6)The total amount of Federal obligations under PCGAs and potential obligations under Letters of Intent will not exceed the amount authorized for Small Starts under 49 U.S.C. 5309.
(7)FTA may also make a “contingent commitment,” which is subject to future congressional authorizations and appropriations, pursuant to 49 U.S.C. 5309(g)(B), 5338(c), and 5338(f).
(8)The PCGA will require implementation of the data collection plan prepared in accordance with paragraph 611.37(c)(3) of this section:
(i)Prior to the beginning of construction activities, the grantee shall collect the “before” data on the existing system if such data has not already been collected during project development, and document the predicted characteristics and performance of the project.
(ii)One year after the project opens for revenue service, the grantee shall collect the “after” data on the transit system and the Very Small Starts project, determine the impacts of the project, analyze the consistency of the “predicted” performance of the project with the “after” data, and report the findings and supporting data to FTA within eighteen months after the project opens for revenue.
(A)The Before-and-After Study will consist of a very simple analysis of: A post-construction cost summary in FTA standardized cost categories compared to the cost estimate at the time of entry into project development; a comparison of actual ridership (on's and off's) in the corridor provided in the application to enter project development and new counts done one year after opening; and a comparison of transit schedules and frequencies between the transit services in the corridor as it existed at the time of entry into project development and one year after opening. The results of this study shall be submitted within eighteen months after project opening.
(B)For funding purposes, collection of the “before” data, collection of the “after” data, and the development and reporting of findings are eligible parts of the proposed project. Appendix A to Part 611—Model Project Development Agreement Project Development Agreement Between the Federal Transit Administration and the [Sponsor] for the [Name of Project] 1.0 Purpose The Federal Transit Administration
(FTA)and the [Sponsor] are executing this Project Development Agreement (“Agreement”) to set forth their intentions for compliance with NEPA, the Metropolitan Planning requirements, and the Major Capital Investment (“New Starts”) requirements that will govern the [name of project]. FTA and [Sponsor] acknowledge that this Agreement may be modified from time to time to accommodate statutory or regulatory changes, changes to the project, or changes to [the Sponsor's] project management or financing plans, as necessary or appropriate. 2.0 Applicable Statutes, Regulations, and Program Requirements The [name of project] is a “major federal action” subject to the National Environmental Policy Act (NEPA), 42 U.S.C. 4321 *et seq.* , and FTA's regulations at 23 CFR Part 771; a “major metropolitan transportation investment” subject to the Metropolitan Planning requirements at 23 CFR Part 450; a “new fixed guideway system or extension of an existing fixed guideway system” subject to the Major Capital Investment (“New Starts”) requirements at 49 U.S.C. 5309 and 49 CFR Part 611; and a “major capital project” subject to the Project Management Oversight requirements at 49 U.S.C. 5327 and 49 CFR Part 633. 3.0 Project Readiness for Preliminary Engineering As a prerequisite for FTA's approval of entry into Preliminary Engineering, [Sponsor] has identified an operable segment of fixed guideway that will be its candidate for Section 5309 New Starts funds under a Full Funding Grant Agreement. This operable segment is the product of an Alternatives Analysis that considered an appropriate range of alternative modes, alignments, and termini in terms of their likely costs, benefits, and environmental impacts. Specifically: 3.1 Alternatives Analysis In [month and year] [Sponsor] completed an Alternatives Analysis (“AA”) [or title of the study] consistent with FTA guidance, good practice, and the requirements of 49 CFR part 611, for the purpose of [* * * describe the transportation problem and name the corridor]. This AA evaluated a range of reasonable alternatives for that purpose: [* * * describe the number of alternatives, the modes considered, their varying alignments and lengths, and the range of costs]. FTA is satisfied that this AA presents reliable information on the benefits, costs, and impacts of these alternatives. Further, FTA is satisfied that all interested parties and the general public had ample opportunity to participate in this AA. 3.2 The Candidate Project for New Starts Funds As the result of this AA, [Sponsor] has identified a project that will be a candidate for Federal financial assistance for final design and construction under 49 U.S.C. 5309 (hereafter, [name of project] or the “ *candidate project* ”). [Name of project] is a [* * * describe the project in terms of mode, length, location, and number of stations and rolling stock.] The *candidate project* is described in more detail in Attachment 8.1 to this Agreement (“Scope of the Project”). As of the date of this Agreement, the estimated total cost of the *candidate project* is $___, and [Sponsor] intends to seek $___ in Federal financial assistance under the Section 5309 New Starts program for Final Design and Construction of the *candidate project* . The estimated total cost is set forth in more detail in Attachment 8.2 to this Agreement (“Cost Estimate”). The anticipated sources of financing and relevant amounts of that financing are set forth in Attachment 8.3 to this Agreement (“Budget”). 3.3 Baseline Alternative In accordance with the requirements of 49 CFR part 611, FTA has approved a baseline alternative for further study that will be used for purposes of comparison during the NEPA and New Starts processes: [describe the *baseline* alternative]. 3.4 Metropolitan Planning Organization's Plan and TIP The [name of MPO], the Metropolitan Planning Organization for metropolitan [name of city], has adopted a financially constrained long range metropolitan transportation plan (hereafter, the “Plan” or [name of the Plan]), and a four-year Transportation Improvement Program, (hereafter, the “TIP” or [name of the TIP]), in accordance with 23 CFR part 450. The [Sponsor's] [name of project] has been incorporated into [MPO's] Plan, and [describe the project activities to be accomplished during the four-year TIP] have been incorporated into [MPO's] TIP. Consistent with [MPO's] Plan, [Sponsor's] financial plan for the *candidate project* anticipates that [identify the funding sources other than the New Starts program and the relevant amounts]. 3.5 Sponsor's Technical Capacity As a prerequisite to the execution of this Agreement, [Sponsor] has demonstrated its technical capacity and capabilities to carry out Preliminary Engineering for the *candidate project* in accordance with the milestones identified in Section 5.0 of this Agreement. Specifically, [describe whether the Sponsor will perform Preliminary Engineering with its in-house staff and resources or procure the necessary engineering expertise from consulting contractors or some combination thereof.] 4.0 Approach Towards Project Development As a prerequisite for FTA's approval of entry into Preliminary Engineering, [Sponsor] has agreed to take an approach towards project development that will ensure consistency in project scope and New Starts funding expectations throughout the successive phases of Preliminary Engineering, Final Design, and Construction. To expedite [Sponsor's] efforts, FTA will take a number of steps to help [Sponsor] comply with the pertinent Federal requirements. Specifically, 4.1 Environmental Impacts *[Option One:* If the *candidate project* has been identified prior to the preparation of a DEIS, use the following paragraph.] FTA and [Sponsor] will prepare an Environmental Impact Statement
(EIS)[or Environmental Assessment (EA] that will evaluate a No Build alternative, a Baseline alternative described in Section 3.3 of this Agreement, the *candidate project,* and the following modal or alignment alternatives deemed worthy of study as a result of the scoping meeting held on [date]: [Describe the other alternatives.] FTA and [Sponsor] agree that the EIS [or EA] may incorporate by reference the AA data and information that support the elimination of certain other alternatives from further study. Should [Sponsor] retain consultants to assist in the preparation of the EIS [or EA], [Sponsor] will obtain and retain a statement from each such consultant that the consultant has no financial or other interest in the outcome of the alternatives under study. The EIS [or EA] will cover [specify whether the document will cover only the *candidate project* or potential extensions to the *candidate project* that lie within the same corridor]. Consistent with both NEPA and Federal transit law, the public will be given every opportunity to assist in the preparation of the EIS [or EA]. [Sponsor] acknowledges, however, that the EIS [or EA] will not be published unless and until FTA determines that the information to be presented on the costs, benefits, and impacts of the various alternatives is reliable. *[Option Two:* If the *candidate project* has been identified as the result of a combined AA/DEIS, use the following paragraph.] FTA and [Sponsor] published a Draft EIS [or EA] on [date] that led to the selection of the *candidate project* as *the locally preferred alternative* in accordance with the requirements of 49 CFR Part 611. FTA and [Sponsor] will now prepare a Final EIS that will complete the evaluation of the No Build alternative, the Baseline alternative described in Section 3.3 of this Agreement, the *candidate project,* and [identify any other modal or alignment alternatives to be carried forward]. The Final EIS will cover [specify whether the document will be limited to the *candidate project* or potential extensions to the *candidate project* that lie within the same corridor]. Currently, FTA and [Sponsor] expect to publish the Final EIS in or about [month, year] and FTA expects to issue a Record of Decision [or Finding of No Significant Impact] for the *candidate project* in or about [month, year]. [Sponsor] acknowledges, however, that the Final EIS will not be published unless and until FTA determines that the information to be presented on the costs, benefits, and impacts of the various alternatives is reliable. 4.2 Project Scope, Cost Estimate, and Budget The fundamental purpose of Preliminary Engineering will be [Sponsor's] development of a definitive project scope, a reliable estimate of total project costs, and a viable financing plan for the *candidate project* which will be used to strictly limits the amount of Section 5309 New Starts funds that will be available at the time the project is approved for entry into Final Design. Attached to this Agreement are a preliminary project scope, a preliminary estimate of total project costs, and a preliminary budget for the *candidate project* (Attachments 8.1, 8.2, and 8.3, respectively). [Use the following paragraph if the NEPA document will cover both the *candidate project* and potential extensions to the *candidate project* that lie within the same corridor.] [Sponsor] acknowledges that only the *candidate project* is being approved for entry into Preliminary Engineering pursuant to 49 CFR part 611. [Sponsor] will perform engineering for potential extensions to the *candidate project* so far as necessary for compliance with NEPA—including the study of cumulative impacts and necessary mitigation—to disclose the implications of those extensions for Federal and local decisions on the *candidate project* and allow for acquisition of right-of-way upon completion of compliance with NEPA. At the conclusion of Preliminary Engineering—and as a condition precedent to FTA's approval of the *candidate project* for entry into Final Design—[Sponsor] will produce a Baseline Cost Estimate for the *candidate project* in Year Of Expenditure dollars in a level of detail sufficient for validation by FTA, its Project Management Oversight consultant, [MPO], and state and local agencies. [Sponsor] acknowledges that the maximum 5309 New Starts share will be set upon entry into final design. 4.3 Travel Forecasting During the course of Preliminary Engineering [Sponsor] will continually revise its travel forecasts to reflect any changes to the project scope and the most recent information on any matter pertinent to travel demand, such as newly adopted population and employment forecasts. [Sponsor] will be expected to use the most recent model enhancements available for travel forecasting. Any revisions to [Sponsor's] forecasts will be made consistent with good professional practice and FTA guidance. 4.4 Project Management Plan Critical to the success of [Sponsor's] further development of the *candidate project* will be [Sponsor's] own plan for managing that development, including, specifically, [Sponsor's] management of its contractors, budget, and schedule for Preliminary Engineering. [Sponsor's] draft Project Management Plan for Preliminary Engineering is set forth in Attachment 8.4 to this Agreement. [Sponsor] will revise and refine this Project Management Plan, as necessary or appropriate, throughout the course of Preliminary Engineering and again upon FTA's approval of the *candidate project* for entry into Final Design. 4.5 Project Financing Plan Consistent with Sections 4.2 of this Agreement, during the course of Preliminary Engineering [Sponsor] will develop a financing plan that supports the award of a maximum amount of Federal financial assistance under the Section 5309 New Starts program for Final Design and Construction of the *candidate project.* This Financing Plan will specify a schedule for securing the commitment of additional State, local, and private funding for the *candidate project,* as necessary or appropriate. This Financing Plan will also reflect the endorsement of any State, local, or private entity whose approval is necessary for securing the commitment of the funding sources identified by that schedule. 4.6 FTA Oversight As soon as practicable after the execution of this Agreement FTA will retain the services of a Project Management Oversight Contractor
(PMOC)to assist FTA in its oversight of the *candidate project* . FTA will use the services of its PMOC during Preliminary Engineering and any subsequent phases of project development. In its discretion, FTA may also retain the services of a Financial Management Oversight Contractor
(FMOC)during any phase of project development, for the purposes of obtaining an objective, independent evaluation of [Sponsor's] plans for financing both the capital costs of constructing the *candidate project* and the continuing operation and maintenance of [Sponsor's] bus and rail services. Additionally, in its discretion, FTA may retain the services of consultants in land use, financing, procurement systems management, environmental mitigation and monitoring, and other fields related to the development of transportation infrastructure, for the purposes of evaluating the *candidate project* and the other alternatives under study. [Sponsor] pledges its utmost cooperation in enabling FTA and its PMOC and FMOC to monitor [Sponsor's] adherence to its project management and financing plans, and to provide FTA and its PMOC and FMOC all records, data, and access to property as may be reasonably required for that purpose. 4.7 Risk Assessments Both [Sponsor] and FTA intend to assess the risks inherent in the *candidate project* during Preliminary Engineering and any subsequent phase of project development. Principally, [Sponsor] and FTA intend to assess the risks inherent in constructing the *candidate project* on schedule and within budget. Such risks may include, but are not limited to, property acquisitions, property and utility relocations, differing and unknown field and subsurface conditions, integration of pre-existing buildings and structures, availability of labor and materials, environmental impacts, adverse impacts on historic resources, and transactions of third party agreements. In its discretion, FTA may also choose to conduct baseline reviews of [Sponsor's] financial and procurement systems for the purpose of determining whether [Sponsor] has protocols in place to adequately manage the *candidate project* in compliance with applicable Federal law and regulation. [Sponsor] agrees that specific risks identified and prioritized by either [Sponsor] or FTA will be reported to FTA, mitigated, monitored, and updated on a continuous basis, as the *candidate project* progresses through Preliminary Engineering and any subsequent phase of project development. [Sponsor] also pledges its utmost cooperation in enabling FTA and its consulting contractors both to critique [Sponsor's] risk assessments and perform any separate risk assessments FTA may deem appropriate during the course of the *candidate project.* 4.8 Best Available Documents The project scope, cost estimate, and budget and the draft Project Management Plan attached to this Agreement are the best available documents at this stage of the *candidate project* . [Sponsor] expects to continually revise and refine these documents, however, as the *candidate project* progresses through Preliminary Engineering and any subsequent phase of project development. [Sponsor] pledges to promptly provide FTA and its consulting contractors all successive iterations of each of these documents throughout the course of the *candidate project* . 4.9 Review and Comment FTA and [Sponsor] will expedite one another's review and comment on the administrative drafts of NEPA documents, project management and financing plans, risk assessments, scopes of work, budgets, schedules, and the like by forwarding those documents to the appropriate persons in both agencies to allow for timely responses. FTA and [Sponsor] will make every reasonable effort to complete their reviews of study deliverables, technical reports, and the like, within thirty days of receiving the material for review. 4.10 Private Sector Participation FTA recognizes that [Sponsor] may choose to seek private sector participation in the engineering, design, construction, operation, maintenance, or financing of the *candidate project.* FTA will make every effort to facilitate [Sponsor's] public-private partnerships in the development of the *candidate project.* 4.11 Pre-Award Authority Upon the execution of this Agreement and FTA's approval of the *candidate project* for entry into Preliminary Engineering [Sponsor] will have pre-award authority for all reasonable and allocable costs of Preliminary Engineering for the *candidate project.* [Sponsor] acknowledges, however, that the pre-award authority to acquire real property that accompanies FTA's issuance of a Record of Decision is not an administrative, contractual, implied, or moral commitment of any kind towards the *candidate project,* nor is it any commitment to reimburse [Sponsor] for any associated costs or to participate in any project on the acquired property. [Sponsor] will use its pre-award authority with discretion and with full knowledge of the risks in doing so. 4.12 Contacts FTA and [Sponsor] will each designate a contact person who has the authority to speak for and represent that person during Preliminary Engineering on the *candidate project* . The contact persons will be available, upon adequate notice, to attend and participate in coordination meetings or otherwise provide timely input into the preparation and review of all documents necessary to the development of the *candidate project* . 5.0 Milestones [Sponsor] intends to accomplish Preliminary Engineering as expeditiously as possible. FTA will measure [Sponsor's] progress in Preliminary Engineering against the following milestones: • [Date]: FTA validation of [Sponsor's] travel demand and ridership forecast methodologies • [Date]: Expected publication of a draft EIS or EA • [Date]: Expected publication of a final EIS or EA • [Date]: Expected issuance of a ROD or FONSI • [Date]: FTA approval of [Sponsor's] Project Management Plan • [Date]: PMO's completion of risk assessment • [Date]: [Sponsor's] adoption of a definitive scope of work for the *candidate project* that will be the basis of [Sponsor's] request for entry into Final Design • [Date]: [Sponsor's] adoption of a Baseline Cost Estimate for the *candidate project,* in Year of Expenditure dollars, which will be the basis for [Sponsor's] request for entry into Final Design • [Date]: [Sponsor's] adoption of a Financing Plan for the *candidate project* that will be the basis of [Sponsor's] request for entry into Final Design • [Date]: [State and local agency] commitments to help finance the *candidate project* • [Date]: [Sponsor's] request for entry into Final Design 6.0 Rescission or Suspension of Preliminary Engineering [Sponsor] acknowledges that, in its discretion, FTA may rescind or suspend the *candidate project's* status in Preliminary Engineering if [Sponsor] fails to make adequate progress towards a request for entry into Final Design; there is any significant change to the scope or cost estimate for the *candidate project* ; or the *candidate project* is not rated or rated “not recommended” in FTA's Annual Report on New Starts for two consecutive years. 7.0 Modifications Modifications to this Agreement may be proposed at any time during Preliminary Engineering on the *candidate project* and will become effective upon approval by both FTA and [Sponsor]. 8.0 Attachments Each and every Attachment to this Agreement is incorporated by reference and made a part of this Agreement. Dated: [Name] Regional Administrator [Title] Federal Transit Administration Dated: [Name] [Title] [Sponsor] Attachment 8.1 Scope Attachment 8.2 Cost Estimate Attachment 8.3 Budget Attachment 8.4 Draft Project Management Plan Appendix B to Part 611—Project Evaluation Framework EP03AU07.040 Appendix C to Part 611: Section 5309 Capital Investment Program Categories New starts Small starts Very small starts Project Cost ≥$250 million <$250 million <$50 million ($3 million/mile excluding vehicles). New Starts Funding Amount Or ≥$75 million And <$75 million <$40 million. Eligible Project Types New or expanded fixed guideway New or expanded fixed guideway or arterial bus with: Small as Small Starts. —Transit stations. —Signal priority/pre-emption. —Level boarding or low floor vehicles. —Branded service. —10 min peak/15 min off-peak service for at least 14 hours/day. Minimum Benefiting Riders None None 3,000 per average weekday. Project Development Steps 2-Steps 1-Step 1-Step —Preliminary Engineering. —Project development. —Project development. —Final Design. Funding Mechanism FFGA PCGA PCGA. Issued in Washington, DC this 19th day of July, 2007. James S. Simpson, Administrator, Federal Transit Administration. [FR Doc. E7-14285 Filed 8-2-07; 8:45 am] BILLING CODE 4910-57-P 72 149 Friday, August 3, 2007 Notices DEPARTMENT OF TRANSPORTATION Federal Transit Administration [Docket Number: FTA-2007-28780] Notice of Availability of Proposed Policy Guidance on Evaluation Measures for New Starts/Small Starts AGENCY: Federal Transit Administration (FTA), DOT. ACTION: Notice of availability; request for comments. SUMMARY: This notice announces the availability of the Federal Transit Administration's
(FTA)Proposed Policy Guidance on Evaluation Measures for New Starts/Small Starts and requests your comments on it. This document complements the Notice of Proposed Rulemaking for Major Capital Investments by describing the detailed measures proposed for evaluation of projects seeking New and Small Starts funding and the way these measures will be used in project ratings. The Proposed Evaluation Measures for New Starts/Small Starts is available in DOT's electronic docket and on FTA's Web site. FTA requests comment on the proposed detailed measures and associated policy in the Proposed Policy Guidance on Evaluation Measures for New Starts/Small Starts. After receiving and considering public input on the proposed guidance, FTA will respond to the comments it has received and issue final guidance concurrently with a final rule for Major Capital Investments. DATES: Comments must be received by November 1, 2007. Late filed comments will be considered to the extent practicable. ADDRESSES: *Comments:* You may submit comments [identified by the DOT DMS Docket number FTA-2007-28780] by any of the following methods: *Web site: http://dms.dot.gov* . Follow the instructions for submitting comments on the DOT electronic docket site. *Fax:* 202-493-2251. *Mail:* Docket Management Facility; U.S. Department of Transportation, 1200 New Jersey Avenue, SE., W12-140, Washington, DC 20590-0001. *Hand Delivery:* Room W12-140 on the first floor of the West Building, 1200 New Jersey Avenue, SE., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. *Instructions:* You must include the agency name (Federal Transit Administration) and the docket number (FTA-2007-28780). You should submit two copies of your comments if you submit them by mail. If you wish to receive confirmation that FTA received your comments, you must include a self-addressed stamped postcard. Note that all comments received will be posted without change to the Department Docket Management System
(DMS)Web site located at *http://dms.dot.gov.* This means that if your comment includes any personal identifying information, such information will be made available to users of DMS. FOR FURTHER INFORMATION CONTACT: Ron Fisher, Office of Planning and Environment, telephone
(202)366-4033, Federal Transit Administration, U.S. Department of Transportation, 1200 New Jersey Avenue, SE., Washington, DC 20590 or *Ronald.Fisher@dot.gov* . SUPPLEMENTARY INFORMATION: On August 10, 2005, President Bush signed the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU). Section 3011 of SAFETEA-LU made a number of changes to 49 U.S.C. 5309, which authorizes the Federal Transit Administration's
(FTA)fixed guideway capital investment program known as ”New Starts”, and created a new program category known as ”Small Starts”. FTA is responding to changes made by the SAFETEA-LU provisions in a Notice of Proposed Rulemaking
(NPRM)for Major Capital Investments, which is being issued concurrently. The NPRM addresses the eligibility, project justification and local financial commitment criteria, overall project ratings and project development process for New Starts, Small Starts and Very Small Starts. While the NPRM provides the framework and criteria weights for project justification and local financial commitment, the document that is the subject of this notice complements the NPRM by providing detailed descriptions of the measures for project justification and local financial commitment and the way they will be used in the ratings for project evaluation. This notice announces the availability of FTA's Proposed Policy Guidance on Evaluation Measures for New Starts/Small Starts and requests your comment as described below. The document is available in the docket, which can be accessed by going to *http://dms.dot.gov* at any time, or you can view the document on FTA's Web site at *http://www.fta.dot.gov/15052_ENGHTML.html* . The evaluation measures, once announced as final, will apply to all New and Small Starts submittals received after the effective date announced in the Notice of Availability published in the **Federal Register** for Policy Guidance on Evaluation Measures for New Starts/Small Starts. FTA intends to publish the final Policy Guidance on Evaluation Measures for New Starts/Small Starts concurrently with the final rule for Major Capital Investments. Comments received will be used to develop the detailed measures and evaluations for projects seeking funds from the New and Small Starts programs. FTA will respond to comments received in response to this Notice in a second **Federal Register** notice to be published after the close of the comment period. The notice will announce the availability of the Policy Guidance on Evaluation Measures for New Starts/Small Starts, reflecting the changes implemented as a result of the comments received thereon. Issued in Washington, DC this 19th day of July, 2007. James S. Simpson, Administrator, Federal Transit Administration. [FR Doc. E7-14279 Filed 8-2-07; 8:45 am] BILLING CODE 4910-57-P 72 149 Friday, August 3, 2007 Notices Part III Millennium Challenge Corporation Notice of Entering Into a Compact With the Government of the Kingdom of Lesotho; Notice MILLENNIUM CHALLENGE CORPORATION [MCC FR 07-07] Notice of Entering Into a Compact With the Government of the Kingdom of Lesotho AGENCY: Millennium Challenge Corporation. ACTION: Notice. SUMMARY: In accordance with Section 610(b)(2) of the Millennium Challenge Act of 2003 (Pub. L. 108-199, Division D), the Millennium Challenge Corporation
(MCC)is publishing a summary and the complete text of the Millennium Challenge Compact between the United States of America, acting through the Millennium Challenge Corporation, and the Government of the Kingdom of Lesotho. Representatives of the United States Government and the Government of the Kingdom of Lesotho executed the Compact documents on July 23, 2007. Dated: July 26, 2007. William G. Anderson Jr., Vice President & General Counsel, Millennium Challenge Corporation. Summary of Millennium Challenge Compact With the Government of the Kingdom of Lesotho A. Introduction Lesotho is strategically located within the rapidly growing Southern African Development Community which will become a common market in 2008. It could benefit greatly from the expected economic upsurge in the region led by the private sector, but it will miss this opportunity if it is unable to unlock the potential of its two greatest resources—its water and its people. Without immediate and sustainable interventions to harness its abundant water resources and to improve the health of the productive workforce, Lesotho has limited prospects of achieving economic growth. Another critical element to Lesotho's future economic growth is a dynamic private sector. In recent years, the Government of Lesotho (“GoL”) has embarked on a major reform program developed jointly with the World Bank and other bilateral donors, to remove legal and regulatory impediments to private sector growth, improve access to credit and increase the participation of women in the economy. B. Program 1. Goal and Objectives The $362.6 million Compact focuses on water, health and private sector development (the “Program”), as summarized in the table below. The Program is focused on improving the provision of water supplies for industrial and domestic use, improving health outcomes and productivity through strengthening the health infrastructure, and removing barriers to foreign and local private sector investment. The Compact is designed to have a high economic growth impact, and its potential impact on poverty reduction is significant and widespread due to its broad geographical scope. Multi-year financial plan (by project) Totals including contingencies (in millions USD) CIF Year 1 Year 2 Year 3 Year 4 Year 5 Total 1. Water Sector Project 4.913 21.092 24.233 49.074 47.878 16.838 164.028 2. Health Sector Project 4.436 17.961 27.927 37.616 24.846 9.612 122.398 3. Private Sector Development Project 0.710 7.142 10.906 8.525 5.47 3.352 36.105 4. Monitoring & Evaluation 0.5 2.605 0.684 0.755 0.664 2.6 7.808 5. Program Management and Oversight 5.109 4.173 5.395 6.196 6.926 4.413 32.212 Total MCC Contribution 15.668 52.973 69.145 102.166 85.784 36.815 362.551 C. Program Description 1. Water Sector Project ($164 million) The Water Sector Project is aimed at improving water supply for industrial and domestic needs. With respect to the industrial sector, the Project will provide infrastructure to deliver water to garment and textile operations. Domestic users in selected urban and rural areas will benefit from water system upgrades and expansion to achieve better sanitation and a reliable supply of water. Finally, the Project is designed to enhance rural livelihoods through improved watershed management. The Water Sector Project activities include:
(a)Construction of a bulk water conveyance system and establishment of a program management unit for the Metolong Dam construction activity;
(b)extension and rehabilitation of the urban and peri-urban water network;
(c)provision of improved sanitation services to rural households through construction of ventilated improved pit latrines and water systems; and
(d)restoration of degraded wetlands at three areas in the highland pastures and preparation of a strategic environmental assessment to support development of a national watershed management and wetlands conservation plan. 2. Health Sector Project ($122 million) Approximately 24 percent of adults ages 15-49 in Lesotho are Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome (“HIV/AIDS”) positive, the third highest prevalence rate in the world. The Health Sector Project is designed to mitigate the negative economic impacts of poor maternal health, HIV/AIDS, tuberculosis (“TB”) and other diseases by substantially strengthening the country's health care infrastructure. MCC funding will support the GoL's efforts to significantly increase access to life-extending anti-retroviral therapy (“ART”) by providing a sustainable platform to deliver this and other essential health services throughout the country. This has the potential to result in a measurable extension of productive life-years for people living with HIV/AIDS, TB and other debilitating diseases. A major issue in Lesotho, as in the rest of southern Africa, is the crisis in human health resources. The country has difficulty retaining nurses and clinicians due to opportunities outside the country and poor working conditions in Lesotho. Extensive studies have been conducted on improving the retention of health care workers. Top concerns are salary levels, physical working conditions and supervision and career management structures. Together with the GoL, the President's Emergency Plan for AIDS Relief (“PEPFAR”), and other donor efforts, the Health Sector Project is designed to address these issues. Currently the GoL is proposing salary reforms and PEPFAR is providing assistance to improve training curricula and programs, reduce red tape in hiring new graduates, and rationalize Ministry of Health and Social Welfare (“MoHSW”) staff positions. The Project is designed to improve health sector infrastructure, including residences for rural health staff, improve supervision and management of staff, increase the number of nurses and allied health professionals trained, and provide opportunities for staff to build skills and competencies through continuing education. These efforts are designed to increase production and retention of health workers for delivery of essential health services. The Health Sector Project activities include:
(a)Renovation of up to 150 health centers in order to establish a national stock of health centers that achieve a common standard;
(b)establishment of ART clinics in and improved management of up to 14 hospital out-patient departments (“OPDs”);
(c)construction and equipping of a new central laboratory and training laboratory staff;
(d)construction of a dedicated, central facility for collecting and processing blood and provision of mobile blood collection and storage equipment;
(e)an increase in the number of dormitories and staff residences at Lesotho's National Health Training College (“NHTC”);
(f)strengthened health systems through increased capacity for pre-service and in-service nurse training and improved district-level public human health care resources management; and
(g)improved occupational health and safety and medical waste management practices. 3. Private Sector Development (“PSD”) Project ($36 million) The PSD Project is designed to increase private sector economic activity in Lesotho by improving access to credit, reducing transaction costs and increasing the participation of women in the economy. The activities within the PSD Project represent an essential component of the GoL's major policy reform program and are designed to contribute to the broader efforts to attract foreign investment and stimulate growth of Basotho-owned companies. The PSD Project activities include:
(a)Reform of the civil legal system through the development of the Commercial Court, including creation of case management systems for courts, and promotion of alternative dispute resolution;
(b)support for the production and issuance costs of national identification cards as well as establishment of the necessary legal and regulatory reforms for data privacy and establishment and operations of a cross-border credit bureau;
(c)support for implementation of a new payments and settlement system in Lesotho;
(d)technical assistance to the GoL in the development of land policy in Lesotho, and funding for the implementation of a systematic land regularization program for urban and peri-urban areas and development of a new land administration authority; and
(e)implementation of a training and public awareness program dedicated to implementing gender equality in economic rights and building of local capacity to continue advocacy. D. Impacts The Program, if successfully implemented, could nearly double GDP growth by the end of the Compact implementation period (using a baseline of 2.6 percent). The acceleration of GDP growth is expected to continue beyond Compact completion, propelling growth towards seven percent per annum within five years after Compact completion. This acceleration is required to reduce poverty significantly in line with the objectives of the GoL's Poverty Reduction Strategy Papers (“PRSP”). The Water Sector Project is expected to benefit urban and rural communities through each of the four activities:
(1)The Metolong Dam—Bulk Water Conveyance System activity is expected to preserve existing industrial production and 28,000 jobs and create an additional 6,000 jobs by the end of the Compact;
(2)The Urban and Peri-Urban Water Network activity has the potential to benefit approximately 304,000 people or 50,700 households by Compact end;
(3)The Rural Water Supply and Sanitation activity has the potential to directly benefit approximately 150,000 people or 25,000 households; and
(4)The Wetlands Restoration and Conservation activity has the potential to improve rangeland productivity and benefit rural livelihoods for an estimated 55,000 people who live within a 16 kilometer radius of the three target wetland sites. The Health Sector Project is designed to directly improve delivery of health care services to the entire population. The health center activity is designed to improve service quality and availability for health center clients, including: Most of the 90 percent of pregnant women who seek prenatal care; the more than 90 percent of infants and young children who are immunized against childhood infectious diseases; the approximately 9,000 TB patients treated at the health center level each year; and the 34,000 persons expected to have ART services follow up at the health center during the life of the Project. The ART clinic activity is designed to reduce waiting times and TB co-infection of clients seeking care at an OPD, particularly the predicted additional 17,000 new clients seeking ART services during the Compact, the 80 percent of those clients expected to be co-infected with TB, and the clients of other OPD services in these 14 hospitals. This activity is designed to complete national coverage of ART services at the hospital level. The central laboratory and blood transfusion activities are designed to benefit all Basotho by expanding the capacity of the MoHSW to conduct needed laboratory tests and assuring access to safe blood. The NHTC activity is designed to expand the number of graduates in the health field, filling some of the numerous vacancies in rural areas for community nurses and allied health professionals. As a result, more than 1.3 million individuals in the rural areas are more likely to have an adequate level of service provision at the local health center level. The health systems strengthening and medical waste management activities are designed to impact the quality and level of services provided, particularly at the health center level and improve environmental health and safety conditions throughout the health sector. All activities focus on improving physical working conditions and safety for health workers and on human resources management. The Private Sector Development Project has the potential to benefit approximately 2,000 persons and companies operating in the formal sector through more efficient commercial court procedures. Through the Land Administration Reform activity, potentially up to 55,000 urban households may benefit from having formally recognized titles. The National ID activity has the potential to directly benefit the entire national population by providing an identification card and/or unique identification number to every citizen within the country, improving the availability of credit and other financial services to a wider cross-section of the population. Finally, the Payments and Settlements system has the potential to directly benefit more than 86,000 government pensioners and more than 98,000 employed outside Lesotho by lowering the costs of receiving and sending money. E. Program Management 1. Governance Structure The GoL will establish an autonomous body within the Ministry of Finance and Development Planning known as MCA-Lesotho that will serve as the accountable entity responsible for the implementation of the Program. The MCA-Lesotho board of directors will be made up of government officials representing each of the GoL ministries associated with the Program as well as private sector and civil society members representing constituencies impacted by the Program. This board will have independent decision making authority and will be the final authority with respect to implementation of the Compact. It will provide oversight and be responsible for the success or failure of the Program. A management unit will support the board of directors in implementing the Program and will be responsible for the day-to-day management and operations of MCA-Lesotho. A stakeholders committee will inform the various constituent groups about Program implementation, provide advice and input to MCA-Lesotho concerning the Program, and select the private sector members of the board of directors. External procurement and fiscal agents will be used during Compact implementation. A procurement process is currently underway with a target date of August 2007 to sign contracts for these services. 2. Implementation Arrangements Line ministries, project implementation units and the Central Bank of Lesotho will serve as implementing entities (“IEs”) and service providers for the various projects related to the Compact under contractual relationships with MCA-Lesotho. IEs will be responsible for developing the operational requirements for the Projects and performance monitoring of contractors. Teams will be located within the IEs to ensure institutional strengthening and close collaboration and communication. To help ensure Program success, the Compact has budgeted nearly $75 million for technical assistance, capacity building, and institutional strengthening. In addition, competitively selected external service providers will perform the Procurement and Fiscal Agent functions. MCA-Lesotho will remain ultimately responsible for the successful implementation of the Program. F. Other Highlights 1. Transformational Change The Program has the potential for significant transformational change to help unlock the economic potential of the country by providing additional water supplies for industrial and domestic use, improving health outcomes and productivity and by removing barriers to foreign and domestic investment. Overall the Program is expected to impact a broad cross-section of the country through its various activities. In additional, the Compact is designed to have a substantive impact on extending full economic rights to women in Lesotho. 2. Consultative Process The Program builds upon the GoL's PRSP and the Lesotho Vision 2020. The consultative processes associated with these two initiatives identified the following as top priorities for poverty reduction and economic growth:
(a)Private sector development;
(b)provision of infrastructure;
(c)natural resource management; and
(d)improved access to health care. Shortly after Lesotho was selected as an MCC-eligible country in 2004, the GoL established a consultative proposal development process that included the private sector, non-governmental organizations (“NGOs”) and civil society organizations. Recognizing that consultations are ongoing and must be meaningful, timely and participatory, the MCA-Lesotho Core Team within the Ministry of Finance and Development Planning was proactive in developing an outreach and consultative process strategy in early 2007 to plan for consultations and outreach activities beyond Compact signing and into implementation. 3. Government Commitment and Effectiveness The 2006 enactment of the Legal Capacity of Married Persons Act was a strong signal of the GoL's commitment to remove barriers to married women's full participation in the economy, thereby enhancing the Program's prospects of successful implementation and sustainability. This significant commitment to gender equality was recently acknowledged by resolutions adopted by both the U.S. Senate and the U.S. House of Representatives. Prior to first disbursement of Compact funds, the GoL will submit to its Parliament legal reforms designed to assure that economic rights achieved in the Legal Capacity of Married Persons Act are not contradicted in other laws. The GoL has agreed with the World Bank on a comprehensive water sector reform program. In the rural water and sanitation sub-sectors, the GoL—consistent with its policy on decentralization—is divesting financial management, project planning, supervisory services and asset ownership to locally elected water committees. In 2000, the GoL embarked on a ten year plan to improve health service delivery. The GoL has successfully piloted decentralized health services in three districts and is expanding decentralized management to the remaining seven districts. New financial management and procurement systems have been put in place, and a new human resources system is being developed. The Health Sector Project is designed to complement other donor funded activities. Despite the HIV/AIDS epidemic, Lesotho has met both MCC eligibility indicators on immunization and health expenditure which signals the GoL's commitment to good performance in the health sector. The GoL, as chair of the Southern Africa Development Community, has committed to regional integration of financial systems. They also have initiated the process of implementing policy reforms to improve the business and investment climate with the support of donors such as the World Bank. In order to realize the maximum economic benefits for the PSD Project activities, the GoL must continue this policy reform momentum and harmonize its legislation with other Common Monetary Area countries, especially South Africa. G. Sustainability The Program is designed to enhance the sustainability of its benefits by:
(a)Supporting policy reforms in relevant sectors;
(b)ensuring adequate funding will be allocated to fully cover additional recurrent costs;
(c)requiring adherence to environmental and social standards;
(d)building capacity within the GoL to facilitate implementation of the Program and to develop long-term management capabilities of GoL institutions;
(e)assuring improved maintenance programs to maintain the economic life of assets; and
(f)promoting participation of a large cross section of Basotho, especially women and the poor. 1. Water Sector The sustainability of the Water Sector Project activities depends on the GoL's pace of implementation of sector policy reforms and its commitment to ensure that tariff levels provide for cost recovery of operations and maintenance costs. Disbursements of Compact funding will be tied to agreed progress on implementing water sector reforms. 2. Health Sector The sustainability of health services is a critical issue, particularly given the increase of donor-supported provision of ART. In partnership with donors, the GoL is developing a national health financing strategy to identify the costs of the essential health services package, including ART, and gaps and potential sources of funds. This strategy will be jointly monitored by MCC and other health donors. 3. Private Sector Development The sustainability of several PSD Project activities is expected to be enhanced because they will be carried out with the assistance of established private sector entities with a successful track record in the Southern African region. Compact funding also is designed to help establish sustainable improvements in land administration through an active capacity building, training, and public education effort. 4. Environmental and Social Impacts The assessment, management, and monitoring of potential environmental and social impacts is an integral part of the Compact. The Compact will fund several measures to:
(a)Mitigate the adverse effects of infrastructure construction or rehabilitation;
(b)promote natural resource management and environmental conservation consistent with the priorities of the GoL's PRSP;
(c)assure women's participation in the economy and as beneficiaries in the Compact; and
(d)integrate HIV/AIDS awareness programs into all construction contracts. The Compact will also support measures to strengthen the regulatory framework and build institutional capacity required to improve occupational health and safety and waste management practices in the health sector. The Metolong Dam activity is a Category A project under MCC's Environmental Guidelines due primarily to the potential environmental and social risks associated with the project, which include loss of communal resources, loss of traditional access routes across the river, inundation of cultural resources and alteration of downstream surface water hydrology. The entities funding the dam have agreed that the entire project, including advanced infrastructure, the dam and reservoir and downstream bulk water conveyance system, will be designed and constructed according to common standards that meet MCC's Environmental Guidelines, the MCC Gender Policy, GoL law, and World Bank Operational Policy 4.12 on Involuntary Resettlement. Compact funding for the bulk water conveyance system will be conditioned on strict adherence with the larger project's environmental management plan (“EMP”) and resettlement action plan (“RAP”), completed earlier this year with World Bank funding. The urban, peri-urban and rural water activities are considered Category B and Category C projects under MCC's Environmental Guidelines and do not pose significant adverse environmental and social impacts. Standard EMPs will be developed for each activity to assure compliance with MCC's Environmental Guidelines and GoL laws. The wetlands restoration and conservation activity is expected to result in mostly positive environmental and socioeconomic impacts by rehabilitating three severely degraded wetland areas which support livestock grazing and other rural livelihood benefits. The Health Sector Project consists of both Category A and Category B projects under MCC's Environmental Guidelines due to greenfield construction and concerns regarding current medical waste management practices in Lesotho. To make long-term improvements to the current situation and assure that MCC-funded facilities comply with MCC's Environmental Guidelines, Compact funds will be used to update Lesotho's 2005 National Health Care Waste Management Plan, develop medical waste management regulations and standards, prepare a financial plan and provide technical assistance to the relevant GoL agencies. Additionally, all proposed health infrastructure activities must comply with MCC's Environmental Guidelines and applicable GoL environmental permitting requirements. The PSD Project, a Category C project, is not likely to have adverse environmental or social impacts. The MCA-Lesotho social-gender specialist will work to ensure that social safeguards are integrated into project design, implementation and monitoring to ensure that the activities do not, unnecessarily or unlawfully, infringe upon rights or privacy. H. Donor Coordination The design and technical aspects of many of the Compact Program activities have benefited significantly from the experiences of other donors working in Lesotho. The MCA-Lesotho Core Team has engaged the donor community frequently in all phases of the consultative process and has coordinated with donors to refine Compact activities, collaborate on shared objectives to prevent duplication of efforts, and ensure complementary activities throughout Compact implementation. In the various Health Sector Project activities, including those associated with HIV/AIDS, MCC has maintained regular communications and participated in joint donor reviews. These donors include: PEPFAR; Irish Aid; World Bank; African Development Bank; United Nations agencies; and the Global Fund for AIDS, Tuberculosis and Malaria. These and other donors provided design support to the MoHSW and assisted MCC in the due diligence process. The Compact's Health Sector Project is designed to support the GoL's reform efforts and fits within the combined donor strategy for the health sector. In particular, the MCC Health Sector Project and planned PEPFAR activities are mutually reinforcing. As MCC has moved forward with the proposed Health Sector Project, PEPFAR has provided encouragement and support at central and country level. In-country PEPFAR staff has grown from one person in 2006 to a staff of seven professionals by end of 2007, with an expected concomitant increase in resources. Together, MCC and PEPFAR inputs are expected to result in a major increase in the quality and quantity of ART services and in the production and retention of human resources for health. The Metolong Dam activity is being developed in coordination with several donors, including the OPEC Fund for International Development, the Kuwait Fund for Arab Economic Development, the Arab Bank for Economic Development in Africa and the Saudi Fund for Development. The European Union also has a sustained presence in Lesotho's water sector and is currently funding detailed designs for components of the Metolong Dam bulk water conveyance system, as well as components of the larger lowlands water supply system. Irish Aid is also a significant donor in the water sector. MCC has also been actively collaborating with other donors on the PSD Project. These donors include: the World Bank with respect to the national identification card; the United Kingdom's Department for International Development on matters concerning civil legal reform and land administration reform; the German development agency Deutsche Gesellschaft fu Technische Zusammenarbeit
(GTZ)on land administration reform; and USAID through its Women's Legal Rights Initiative project. Millennium Challenge Compact Between The United States of America Acting Through the Millennium Challenge Corporation And The Government of The Kingdom of Lesotho Table of Contents Article 1. Goal and Objectives Section 1.1 Compact Goal Section 1.2 Program Objectives Article 2. Funding and Resources Section 2.1 MCC Funding Section 2.2 Compact Implementation Funding Section 2.3 Disbursement Section 2.4 Interest Section 2.5 Government Resources; Budget Section 2.6 Limitations on the Use of MCC Funding Section 2.7 Taxes Article 3. Implementation Section 3.1 Program Implementation Agreement Section 3.2 Government Responsibilities Section 3.3 Policy Performance Section 3.4 Government Assurances Section 3.5 Implementation Letters Section 3.6 Procurement Section 3.7 Records; Accounting; Covered Providers; Access Section 3.8 Audits; Reviews Article 4. Communications Section 4.1 Communications Section 4.2 Representatives Section 4.3 Signatures Article 5. Termination; Suspension; Refunds Section 5.1 Termination; Suspension Section 5.2 Refunds; Violation Section 5.3 Survival Article 6. Compact Annexes; Amendments; Governing Law Section 6.1 Annexes Section 6.2 Inconsistencies Section 6.3 Amendments Section 6.4 Governing Law Section 6.5 Additional Instruments Section 6.6 References to MCC Web site Section 6.7 References to Law, Regulations, Policies and Guidelines Article 7. Entry Into Force Section 7.1 Domestic Requirements Section 7.2 Conditions Precedent Section 7.3 Date of Entry into Force Section 7.4 Compact Term Annex I: Program Description Annex II: Summary of Multi-Year Financial Plan Annex III: Description of the Monitoring and Evaluation Plan Millennium Challenge Compact Preamble This Millennium Challenge Compact (this “Compact”) is between the United States of America, acting through the Millennium Challenge Corporation, a United States government corporation (“MCC”), and the Government of the Kingdom of Lesotho (the “Government”) (individually a “Party” and collectively, the “Parties”). Recalling that the Government consulted with the private sector and civil society of the Kingdom of Lesotho (“Lesotho”) to determine the priorities for the use of Millennium Challenge Account assistance and developed and submitted to MCC a proposal focused on providing water supplies for industrial and domestic use and improving watershed management, improving health outcomes and productivity through strengthening the health system, and removing barriers to foreign and local private sector investment; and Recognizing that MCC wishes to help Lesotho implement a program to achieve the goal and objectives described herein (the “Program”); The Parties hereby agree as follows: Article 1. Goal and Objectives Section 1.1 Compact Goal. The goal of this Compact is to reduce poverty in Lesotho through economic growth (the “Compact Goal”). Section 1.2 Program Objectives. The objectives of this Program (as further described in Annex I) (the “Objectives”) are to:
(a)Improve the water supply for industrial and domestic needs and enhance urban and rural livelihoods through improved watershed management;
(b)Increase access to life-extending anti-retroviral therapy and essential health services by providing a sustainable delivery platform; and
(c)Stimulate investment by improving access to credit, reducing transaction costs and increasing the participation of women in the economy. The Government will take all the steps necessary or appropriate to achieve the Objectives during the term of this Compact. Article 2. Funding and Resources Section 2.1 MCC Funding.
(a)MCC grants to the Government, under the terms of this Compact, an amount not to exceed Three Hundred Sixty-Two Million, Five Hundred Fifty-One Thousand United States dollars (US$362,551,000) (“MCC Funding”) to help the Government implement the Program.
(b)Annex II of this Compact describes the use of MCC Funding. Section 2.2 Compact Implementation Funding
(a)Of the total amount of MCC Funding, MCC will make up to Fifteen Million Six Hundred and Sixty-Nine Thousand United States dollars (US$15,669,000) (“Compact Implementation Funding”) available to the Government under Section 609(g) of the Millennium Challenge Act of 2003, as amended, to support:
(i)provision of fiscal and procurement agent services;
(ii)start-up costs including staff salaries and administrative support and related goods and services;
(iii)baseline surveys for monitoring and evaluation and administrative support for the surveys as appropriate;
(iv)initiation of environmental and social assessments and design work in conjunction with certain water and health sector activities;
(v)additional gender assessment and input for project design;
(vi)additional work with respect to activities to remove forms of discrimination, in laws or policies, affecting the economic rights of women;
(vii)additional work with respect to clarifying roles and responsibilities for decentralized health services at the central and district levels, and in developing a training plan for health sector project activities;
(viii)technical assistance to support development of terms of reference for consultants, including, without limitation, health system strengthening, capacity building, and medical waste management;
(ix)procurement of field monitoring equipment and initiation of environmental baseline studies for the wetlands conservation project;
(x)a study of land administration services in Lesotho and recommendations for modernization and improvement of those services;
(xi)a review of existing payments and settlements and cross-border financial transactions legislation and related regulations;
(xii)a review of existing legislation authorizing credit bureaus and a national identification card and any related regulations;
(xiii)a review of data privacy legislation and regulations;
(xiv)establishment of Project Implementation Units (as defined in Annex I) and related start-up costs including recruitment of key personnel, staff salaries and administrative support and related goods and services; and
(xv)other Compact implementation expenses approved by MCC.
(b)Notwithstanding anything to the contrary in this Compact, this Section 2.2 will provisionally apply, after MCC and the Government sign this Compact, without regard to whether this Compact has entered into force under Section 7.3.
(c)Compact Implementation Funding is subject to:
(i)The limitations on the use or treatment of MCC Funding set forth in Sections 2.6 and 2.7 as if such provisions were in full force and effect, and
(ii)any other requirements and limitations as may be required by MCC in writing. Section 2.3 Disbursement In accordance with this Compact and the Program Implementation Agreement (as defined in Section 3.1), MCC will disburse MCC Funding for expenditures incurred in furtherance of the Program (each instance, a “Disbursement”). The proceeds of such Disbursements will be made available to the Government, at MCC's sole election,
(a)by deposit to a bank account established by the Government and acceptable to MCC (a “Permitted Account”) or
(b)through direct payment to a provider of goods, works or services under this Compact. MCC Funding may be expended only to cover Program expenditures as provided in this Compact and the Program Implementation Agreement. Section 2.4 Interest The Government will pay to MCC any interest or other earnings that accrue on MCC Funding in accordance with the Program Implementation Agreement. Section 2.5 Government Resources; Budget
(a)The Government will provide all funds and other resources, and will take all actions, that are necessary to carry out the Government's responsibilities and obligations under this Compact.
(b)The Government will use its best efforts during each year it receives MCC Funding to ensure that all MCC Funding it receives or is projected to receive in such year is fully accounted for in the annual budget of Lesotho. To the extent feasible under the budgeting processes of Lesotho, MCC Funding will be accounted for on a multi-year basis.
(c)The Government will not reduce the normal and expected resources that it would otherwise receive or budget from sources other than MCC for the activities contemplated under this Compact.
(d)Unless the Government discloses otherwise to MCC in writing, MCC Funding will be in addition to the resources that the Government would otherwise receive or budget for the activities contemplated for the Program. Section 2.6 Limitations on the Use of MCC Funding The Government will ensure that MCC Funding will not be used for any purpose that would violate United States law or policy, as specified in this Compact or as further notified to the Government in writing or by posting on the MCC Web site ( *http://www.mcc.gov* ) (the “MCC Web site”), including but not limited to the following purposes:
(a)For assistance to, or training of, the military, police, militia, national guard or other quasi-military organization or unit;
(b)For any activity that is likely to cause a substantial loss of United States jobs or a substantial displacement of United States production;
(c)To undertake, fund or otherwise support any activity that is likely to cause a significant environmental, health, or safety hazard, where the phrase “likely to cause a significant environmental, health, or safety hazard” has the meaning set forth in environmental guidelines delivered by MCC to the Government or posted by MCC on the MCC Web site or otherwise publicly made available, as the guidelines may be amended from time to time (the “MCC Environmental Guidelines”); or
(d)To pay for the performance of abortions as a method of family planning or to motivate or coerce any person to practice abortions, to pay for the performance of involuntary sterilizations as a method of family planning or to coerce or provide any financial incentive to any person to undergo sterilizations or to pay for any biomedical research which relates, in whole or in part, to methods of, or the performance of, abortions or involuntary sterilization as a means of family planning. Section 2.7 Taxes
(a)Unless the Parties otherwise specifically agree in writing, the Government will not impose, and will not permit any other governmental or taxing authority to impose any taxes, duties, levies, contributions or other charges (“Taxes”) in Lesotho on the Program, MCC Funding, interest or earnings on MCC Funding, any Project or activity implemented under the Program, goods, works, services and other assets and activities related to the Program or any Project, persons and entities that provide such goods, works, services and assets or perform such activities, and income, profits and payments with respect thereto. The Government will exempt from Taxes, inter alia, value added and other transfers (including exemption therefrom with credit), property and ad valorem items, import and export of goods (including exemptions for goods imported and re-exported for personal use of expatriate employees and their family members) and income and profit.
(b)Before the initial Disbursement is made, the Government and MCC may, at MCC's discretion, enter into one or more agreements setting forth the mechanisms for implementing this Section 2.7, including exemptions from filing and compliance requirements relating to Taxes. If entered into, it is expected that such agreement(s) will provide that the Government may impose:
(i)Taxes on certain individuals who are nationals or permanent residents of Lesotho;
(ii)Taxes other than transfer Taxes and import and export Taxes on certain entities that are organized in Lesotho; and
(iii)fees or charges for services that are generally applicable in Lesotho, reasonable in amount and imposed on a non-discriminatory basis. Article 3. Implementation Section 3.1 Program Implementation Agreement The Government will implement the Program in accordance with this Compact and as further specified in an agreement to be entered into by MCC and the Government and dealing with, among other matters, implementation arrangements, fiscal accountability, disbursement and use of MCC Funding, procurement and applicable tax exemptions (the “Program Implementation Agreement”). Section 3.2 Government Responsibilities
(a)The Government has principal responsibility to oversee and manage the implementation of the Program.
(b)With the prior written consent of MCC, the Government may designate an entity to implement some or all of the Government's obligations or to exercise any rights of the Government under this Compact or the Program Implementation Agreement. Such a designation will not relieve the Government of any designated obligations and rights, for which the Government will retain full responsibility.
(c)The Government will ensure that no law or regulation in Lesotho now or hereinafter in effect makes or will make unlawful or otherwise prevent or hinder the performance of any obligation under this Compact, the Program Implementation Agreement or any other agreement related thereto or any transaction contemplated thereunder.
(d)The Government will ensure that any assets or services funded in whole or in part (directly or indirectly) by MCC Funding will be used solely in furtherance of this Compact and the Program unless otherwise agreed by MCC in writing. Section 3.3 Policy Performance In addition to the specific policy and legal reform commitments identified in Annex I, the Government will seek to maintain and to improve its level of performance under the policy criteria identified in Section 607 of the Millennium Challenge Act of 2003, as amended, and the selection criteria and methodology used by MCC. Section 3.4 Government Assurances The Government assures MCC that:
(a)As of the date this Compact is signed by the Government, the information provided to MCC by or on behalf of the Government in the course of reaching agreement with MCC on this Compact is true, correct and complete in all material respects;
(b)This Compact does not, and will not, conflict with any other international agreement or obligation of the Government or any of the laws of Lesotho; and
(c)The Government will not invoke any of the provisions of its internal law to justify or excuse a failure to perform its duties or responsibilities under this Compact. Section 3.5 Implementation Letters From time to time, MCC may provide guidance to the Government through implementation letters on the frequency, form or content of requests for Disbursements or on any other matter relating to MCC Funding, this Compact or implementation of the Program (each, an “Implementation Letter”). The Government will apply such guidance in implementing this Compact. Section 3.6 Procurement The Government will ensure that the procurement of all goods, works and services by the Government or any Provider (as defined in Section 3.7(c)) in furtherance of this Compact will be consistent with the program procurement guidelines of which MCC will inform the Government in writing or by posting on the MCC Web site or otherwise make publicly available, as the guidelines may be amended from time to time (the “MCC Program Procurement Guidelines”), which MCC Program Procurement Guidelines will include but will not be limited to the following requirements:
(a)open, fair and competitive procedures must be used in a transparent manner to solicit, award and administer contracts and to procure goods, works and services;
(b)solicitations for goods, works and services must be based upon a clear and accurate description of the goods, works and services to be acquired;
(c)contracts must be awarded only to qualified contractors that have the capability to perform the contracts in accordance with their terms on a cost effective and timely basis; and
(d)no more than a commercially reasonable price, as determined, for example, by a comparison of price quotations and market prices, will be paid to procure goods, works and services. Section 3.7 Records; Accounting; Covered Providers; Access.
(a)Government Books and Records. The Government will maintain, and will use its best efforts to ensure that all Covered Providers (as defined in clause
(c)below) maintain, accounting books, records, documents and other evidence relating to this Compact adequate to show to MCC's satisfaction the use of all MCC Funding (“Compact Records”). In addition, the Government will furnish or cause to be furnished to MCC upon its request all Compact Records.
(b)Accounting. The Government will maintain, and will use its best efforts to ensure that all Covered Providers maintain, Compact Records in accordance with generally accepted accounting principles prevailing in the United States, or at the Government's option and with MCC's prior written approval, other accounting principles, such as those
(i)prescribed by the International Accounting Standards Committee (an affiliate of the International Federation of Accountants) or
(ii)then prevailing in Lesotho. Compact Records must be maintained for at least five
(5)years after the end of the Compact Term (as defined in Section 7.4) or for such longer period, if any, required to resolve any litigation, claims or audit findings or any statutory requirements.
(c)Covered Provider. Unless the Parties agree otherwise in writing, a “Provider” is
(i)any entity of the Government that receives or uses MCC Funding or any other Program asset in carrying out activities in furtherance of this Compact or
(ii)any third party that receives at least US$50,000 in the aggregate of MCC Funding (other than as salary or compensation as an employee of an entity of the Government) during the Compact Term. A “Covered Provider” is
(1)a non-United States Provider that receives (other than pursuant to a direct contract or agreement with MCC) US$300,000 or more of MCC Funding in any Government fiscal year or any other non-United States person or entity that receives, directly or indirectly, US$300,000 or more of MCC Funding from any Provider in such fiscal year or
(2)any United States Provider that receives (other than pursuant to a direct contract or agreement with MCC) US$500,000 or more of MCC Funding in any Government fiscal year or any other United States person or entity that receives, directly or indirectly, US$500,000 or more of MCC Funding from any Provider in such fiscal year.
(d)Access. Upon MCC's request, the Government, at all reasonable times, will permit, or cause to be permitted, authorized representatives of MCC, an authorized United States inspector general, the United States Government Accountability Office, any auditor responsible for an audit contemplated herein or otherwise conducted in furtherance of this Compact, and any agents or representatives engaged by MCC or the Government to conduct any assessment, review or evaluation of the Program, the opportunity to audit, review, evaluate or inspect facilities and activities funded in whole or in part by MCC Funding. Section 3.8 Audits; Reviews.
(a)Government Audits. Except as the Parties may otherwise agree in writing, the Government will, on at least a semi-annual basis, conduct, or cause to be conducted, financial audits of all disbursements of MCC Funding covering the period from signing of this Compact until the earlier of the following December 31 or June 30 and covering each six-month period thereafter ending December 31 and June 30, through the end of the Compact Term, in accordance with the terms of the Program Implementation Agreement. As requested by MCC in writing, the Government will use, or cause to be used, to conduct such audits an auditor approved by MCC and named on the list of local auditors approved by the Inspector General of the Millennium Challenge Corporation (the “Inspector General”) or a United States-based Certified Public Accounting firm selected in accordance with the “Guidelines for Financial Audits Contracted by MCA” (the “Audit Guidelines”) issued and revised from time to time by the Inspector General. Audits will be performed in accordance with the Audit Guidelines and be subject to quality assurance oversight by the Inspector General. An audit must be completed and the audit report delivered to MCC no later than ninety
(90)days after the first period to be audited and no later than ninety
(90)days after each June 30 and December 31 thereafter, or such other period as the Parties may otherwise agree in writing.
(b)Audits of United States Entities. The Government will ensure that agreements between the Government or any Provider, on the one hand, and a United States nonprofit organization, on the other hand, that are financed with MCC Funding state that the United States organization is subject to the applicable audit requirements contained in OMB Circular A-133. The Government will ensure that agreements between the Government or any Provider, on the one hand, and a United States for-profit Covered Provider, on the other hand, that are financed with MCC Funding state that the United States organization is subject to audit by the cognizant United States Government agency, unless the Government and MCC agree otherwise in writing.
(c)Corrective Actions. The Government will use its best efforts to ensure that Covered Providers take, where necessary, appropriate and timely corrective actions in response to audits, consider whether a Covered Provider's audit necessitates adjustment of the Government's records, and require each such Covered Provider to permit independent auditors to have access to its records and financial statements as necessary.
(d)Audit by MCC. MCC will have the right to arrange for audits of the Government's use of MCC Funding.
(e)Cost of Audits, Reviews or Evaluations. MCC Funding may be used to fund the costs of any audits, reviews or evaluations required under this Compact, including as reflected on Annex II. Article 4. Communications Section 4.1 Communications. Any document or communication required or submitted by either Party to the other under this Compact must be in writing and, except as otherwise agreed with MCC, in English. For this purpose, the address of each Party is set forth below. To MCC Millennium Challenge Corporation, Attention: Vice President for Operations (with a copy to the Vice President and General Counsel), 875 Fifteenth Street, N.W., Washington, D.C. 20005, United States of America, Facsimile: +1
(202)521-3700, Phone:+1
(202)521-3600, E-mail: *VPOperations@mcc.gov* (Vice President for Operations), *VPGeneralCounsel@mcc.gov* (Vice President and General Counsel) To the Government Government of the Kingdom of Lesotho, Attention: Minister of Finance and Development Planning, (with a copy to the Principal Secretary), Address: P.O. Box 395, Maseru—100, The Kingdom of Lesotho, Facsimile: +266 223 10622/223 10157, Phone: +266 223 23703/223 16304/223 11101, E-mail: *ps@finance.gov.ls.* Section 4.2 Representatives For all purposes of this Compact, the Government will be represented by the individual holding the position of, or acting as, the Minister of Finance and Development Planning of the Kingdom of Lesotho, and MCC will be represented by the individual holding the position of, or acting as, Vice President for Operations (each, a “Principal Representative”), each of whom, by written notice to the other Party, may designate one or more additional representatives for all purposes other than signing amendments to this Compact. A Party may change its Principal Representative to a new representative that holds a position of equal or higher rank upon written notice to the other Party. Section 4.3 Signatures With respect to all documents other than this Compact or an amendment to this Compact, a signature delivered by facsimile or electronic mail will be binding on the Party delivering such signature to the same extent as an original signature would be. Article 5. Termination; Suspension; Refunds Section 5.1 Termination; Suspension
(a)Subject to Section 5.2, either Party may terminate this Compact in its entirety by giving the other Party thirty
(30)days written notice.
(b)MCC may, upon written notice to the Government, suspend or terminate this Compact or MCC Funding, in whole or in part, and any obligation related thereto, if MCC determines that any circumstance identified by MCC as a basis for suspension or termination (whether such circumstance is notified in writing to the Government or by posting on the MCC Web site) has occurred, which circumstances include but are not limited to the following:
(i)The Government fails to comply with its obligations under this Compact, the Program Implementation Agreement or any other agreement or arrangement entered into by the Government in connection with this Compact or the Program;
(ii)An event has occurred that MCC determines makes it improbable that the Objectives will be achieved during the term of this Compact or that the Government will be able to perform its obligations under this Compact;
(iii)A use of MCC Funding or continued implementation of this Compact would violate applicable law or United States Government policy, whether now or hereafter in effect;
(iv)The Government or any other person or entity receiving MCC Funding or using assets acquired in whole or in part with MCC Funding is engaged in activities that are contrary to the national security interests of the United States;
(v)An act has been committed or an omission or an event has occurred that would render Lesotho ineligible to receive United States economic assistance under Part I of the Foreign Assistance Act of 1961, as amended (22 U.S.C. 2151 *et seq.* ), by reason of the application of any provision of the Foreign Assistance Act of 1961 or any other provision of law;
(vi)The Government has engaged in a pattern of actions inconsistent with the criteria used to determine the eligibility of Lesotho for assistance under the Millennium Challenge Act of 2003, as amended; and
(vii)The Government or another person or entity receiving MCC Funding or using assets acquired in whole or in part with MCC Funding is found to have been convicted of a narcotics offense or to have been engaged in drug trafficking.
(c)All Disbursements will cease upon expiration, suspension, or termination of this Compact; provided, however, that MCC Funding may be used, in compliance with the Program Implementation Agreement, to pay for
(i)reasonable expenditures for goods, works and services that are properly incurred under or in furtherance of this Compact before expiration, suspension or termination of this Compact, and
(ii)reasonable expenditures (including administrative expenses) properly incurred in connection with the winding up of the Program within 120 days after the expiration, suspension or termination of this Compact.
(d)Subject to clause
(c)of this Section 5.1, upon the expiration, suspension or termination of this Compact,
(i)any amounts of MCC Funding not disbursed by MCC to the Government will be automatically released from any obligation in connection with this Compact, and
(ii)any amounts of MCC Funding disbursed by MCC but not expended under Section 2.3 before the expiration, suspension or termination of this Compact, plus accrued interest thereon will be returned to MCC within thirty
(30)days after the Government receives MCC's request for such return; provided, however, that if this Compact is suspended or terminated in part, MCC may request a refund for only the amount of MCC Funding allocated to the suspended or terminated portion.
(e)MCC may reinstate any suspended or terminated MCC Funding under this Compact if MCC determines that the Government or other relevant person or entity has committed to correct each condition for which MCC Funding was suspended or terminated. Section 5.2 Refunds; Violation
(a)If any MCC Funding, any interest or earnings thereon, or any asset acquired in whole or in part with MCC Funding is used for any purpose in violation of the terms of this Compact, then MCC may require the Government to repay to MCC in United States Dollars the value of the misused MCC Funding, interest, earnings or asset, plus interest within thirty
(30)days after the Government's receipt of MCC's request for repayment. The Government must use national funds (and no assets of the Program) to make such payment.
(b)Notwithstanding any other provision in this Compact or any other agreement to the contrary, MCC's right under this Section 5.2 for a refund will continue during the term of this Compact and for a period of
(i)five years thereafter or
(ii)one year after MCC receives actual knowledge of such violation, whichever is later. Section 5.3 Survival The Government's responsibilities under Sections 2.4, 2.5, 2.6, 2.7, 3.2, 3.4(a), 3.5, 3.7, 3.8, 4.1, 4.2, 4.3, 5.1, 5.2, 5.3, 6.1, 6.2, 6.3, 6.4 and 6.5 of this Compact will survive the expiration, suspension or termination of this Compact. Article 6. Compact Annexes; Amendments; Governing Law Section 6.1 Annexes Each annex attached hereto constitutes an integral part of this Compact. Section 6.2 Inconsistencies In the event of any conflict or inconsistency between:
(a)Any annex to this Compact and any of Articles 1 through 7, such Articles 1 through 7 will prevail; or
(b)This Compact and any other agreement between the Parties regarding the Program, this Compact will prevail. Section 6.3 Amendments The Parties may amend this Compact only by a written agreement signed by the Principal Representatives and subject to the respective domestic approval requirements to which this Compact was subject. Section 6.4 Governing Law This Compact is an international agreement and as such will be governed by the principles of international law. Section 6.5 Additional Instruments Any reference to activities, obligations or rights undertaken or existing under or in furtherance of this Compact or similar language will include activities, obligations and rights undertaken by or existing under any agreement, document or instrument related to this Compact and the Program. Section 6.6 References to MCC Web site Each reference in this Compact, the Program Implementation Agreement, or any other agreement entered into in connection with this Compact, to a document or information available on, or notified by posting on, the MCC Web site will be deemed a reference to such document or information as updated or substituted on the MCC Web site by MCC from time to time, and will be deemed to be incorporated by reference into, and to constitute an integral part of, this Compact, the Program Implementation Agreement or such other agreement entered into in connection with this Compact. Section 6.7 References to Laws, Regulations, Policies and Guidelines Each reference in this Compact, the Program Implementation Agreement, or any other agreement entered into in connection with this Compact, to a law, regulation, policy, guidelines or similar document shall be construed as a reference to such law, regulation, policy, guidelines or similar document as it may, from time to time, be amended, revised, replaced or extended and shall include any law, regulation, policy, guidelines or similar document issued under or otherwise applicable or related to such law, regulation, policy, guidelines or similar document. Article 7. Entry Into Force Section 7.1 Domestic Requirements The Government will take all steps necessary to ensure that:
(a)This Compact and the Program Implementation Agreement and all of the provisions of this Compact and the Program Implementation Agreement are valid and binding and are in full force and effect under the laws of Lesotho;
(b)this Compact, the Program Implementation Agreement and any other agreement entered into in connection with this Compact to which the Government and MCC are parties will be given the status of an international agreement; and
(c)no laws of Lesotho, other than the Constitution of Lesotho, whether now or hereafter in effect, will take precedence or prevail over the terms of this Compact or the Program Implementation Agreement. Section 7.2 Conditions Precedent Before this Compact enters into force:
(a)The Government and MCC must have executed the Program Implementation Agreement and it must be effective;
(b)The Government will have delivered to MCC:
(i)A certificate signed and dated by the Principal Representative of the Government, or such other duly authorized representative of the Government acceptable to MCC, certifying that the Government has completed all of its domestic requirements in order that the requirements of Section 7.1 have been satisfied;
(ii)A legal opinion from the Attorney General of Lesotho (or other legal opinion acceptable to MCC), in form and substance satisfactory to MCC; and
(iii)Complete, certified copies of all decrees, legislation, regulations or other governmental documents relating to its domestic requirements for this Compact to enter into force and the satisfaction of Section 7.1, which MCC may post on its Web site or otherwise make publicly available; and
(c)MCC must determine that after signature of this Compact, the Government has not engaged in any action or omission that is inconsistent with the eligibility criteria for MCC Funding. Section 7.3 Date of Entry into Force This Compact will enter into force on the later of
(a)the date of the last letter in an exchange of letters between the Principal Representatives confirming that each Party has completed its domestic requirements for entry into force of this Compact and
(b)the date that all conditions set forth in Section 7.2 have been satisfied. Section 7.4 Compact Term This Compact will remain in force for five years after its entry into force, unless terminated earlier under Section 5.1 (the “Compact Term”). In Witness Whereof, the undersigned, duly authorized by their respective governments, have signed this Compact this 23rd day of July, 2007. Done at Washington, D.C. For Millennium Challenge Corporation, on behalf of the United States of America, *Name:* John J. Danilovich, *Title:* Chief Executive Officer. For the Government of the Kingdom of Lesotho, *Name:* Mohlabi Kenneth Tsekoa, *Title:* Minister of Foreign Affairs and International Relations. Annex I Program Description A. Overview This Annex I describes the Program that MCC Funding will support in Lesotho during the term of this Compact and the results to be achieved using MCC Funding. In all cases, an activity described herein will be carried out subject to any relevant approvals on the part of MCC and to the extent funds are made available under this Compact for purposes of that activity. 1. The Program and Its Projects The Program will include the Water Sector Project, the Health Sector Project, and the Private Sector Development Project as further described in this *Annex I* (the “Projects”). The Parties may agree to modify, amend, terminate or suspend these Projects or to create a new project by written agreement signed by the Principal Representative of each Party without amending this Compact; provided, however, that any such modification or amendment of a Project or creation of a new project does not
(a)cause the amount of MCC Funding to exceed the aggregate amount specified in Section 2.1(a) of this Compact,
(b)cause the Government's responsibilities or contribution of resources to be less than specified in this Compact, or
(c)extend the term of this Compact. 2. Program Implementation The implementation framework for the use of MCC Funding is summarized in this Annex I.
(a)MCC and the Government will sign the Program Implementation Agreement, and may sign other agreements contemplated by this Compact, all of which, together with this Compact, will set out certain rights, responsibilities, duties and other terms relating to the implementation of this Compact and the Program.
(b)The Government will:
(i)Enact or cause to be enacted an act of Parliament to form the entity empowered to implement some or all of the Government's obligations or to exercise any rights of the Government as provided under the terms of this Compact and the Program Implementation Agreement (“MCA-Lesotho”); and
(ii)Take all necessary and appropriate actions to carry out each of the other Government responsibilities in connection with this Compact and the Program Implementation Agreement, including, but not limited to, the actions necessary to ensure
(1)this Compact, the Program Implementation Agreement and any other agreement entered into in connection with this Compact to which the Government and MCC are parties will be given the status of an international agreement and
(2)no laws of Lesotho, other than the Constitution of Lesotho, whether now or hereafter in effect, will take precedence or prevail over the terms of this Compact, the Program Implementation Agreement or such other agreement.
(c)MCC will take all necessary and appropriate actions to carry out each of its responsibilities in connection with this Compact and the Program Implementation Agreement, including the exercise of its various approval rights in connection with the implementation of this Compact and the Program.
(d)MCA-Lesotho will take all necessary and appropriate actions to implement this Compact and the Program, including the performance of the rights and responsibilities designated to it by the Government pursuant to the Program Implementation Agreement. 3. Fiscal Accountability
(a)Fiscal Agent. The Government will ensure that a fiscal agent (“Fiscal Agent”) is appointed in accordance with the terms of this Compact and the Program Implementation Agreement. The Fiscal Agent will provide a broad range of financial management services required by MCA-Lesotho to implement this Compact and the Program. The Government and MCA-Lesotho will take all necessary and appropriate actions to ensure the Fiscal Agent performs these services in accordance with the terms of this Compact, the Program Implementation Agreement and any agreements to which the Fiscal Agent is a party and in accordance with internationally accepted standards of accounting and financial management. This will include, but not be limited to, the Fiscal Agent's responsibilities to collect and report information useful to the governing board and senior management of MCA-Lesotho, managers charged with supervision of the Projects, MCC and certain other entities responsible for the verification of the manner in which MCC Funding is used. The roles and responsibilities of the Fiscal Agent will be set out in a Fiscal Agent Agreement to be entered into between MCA-Lesotho and the Fiscal Agent (the “Fiscal Agent Agreement”). The role of the Fiscal Agent and the terms of the Fiscal Agent Agreement are more fully described in the Program Implementation Agreement.
(b)Permitted Accounts. The Government will ensure that the Permitted Accounts are established, and banking services provided, in accordance with the terms of this Compact, the Program Implementation Agreement and any other agreements related to the Permitted Accounts. The Central Bank of Lesotho will not provide banking services to MCA-Lesotho or otherwise in connection with MCC Funding.
(c)Procurement Agent. The Government will ensure that a procurement agent (the “Procurement Agent”) is appointed in accordance with the terms of this Compact and the Program Implementation Agreement. The Procurement Agent will act on behalf of MCA-Lesotho to provide specified procurement activities required by MCA-Lesotho to implement this Compact and the Program. The Government and MCA-Lesotho will take all necessary and appropriate actions to ensure the Procurement Agent performs these services in accordance with the terms of this Compact, the Program Implementation Agreement, the MCC Program Procurement Guidelines and any agreements to which the Procurement Agent is a party. The roles and responsibilities of the Procurement Agent will be set out in a Procurement Agent Agreement to be entered into between MCA-Lesotho and the Procurement Agent.
(d)Proposals for Goods, Works and Services. Public solicitations for proposals are anticipated to procure goods, works and services, as appropriate, to implement the Program and its Projects. All such procurements will be conducted in accordance with Section 3.6 of this Compact. MCA-Lesotho may also consider, using a process approved by MCC in writing, any unsolicited proposals it might receive. 4. Management and Consultation Arrangements of MCA-Lesotho
(a)Board of Directors. MCA-Lesotho will be governed by a board of directors that will have independent decision making authority and will be the final authority with respect to implementation of this Compact. It will make strategic decisions, provide oversight and be responsible for the success or failure of the Program. The initial board of directors will be comprised of 11 voting members, representing:
(i)The Ministry of Finance and Development Planning;
(ii)the Ministry of Foreign Affairs;
(iii)the Ministry of Health and Social Welfare;
(iv)the Ministry of Local Government;
(v)the Ministry of Natural Resources;
(vi)the Ministry of Justice, Human Rights and Rehabilitation;
(vii)three members from the private sector; and
(viii)two members from the Lesotho Council of Non-Governmental Organizations (“LCNGO”). The members of the board of directors representing the private sector will be selected by the stakeholders committee (described in clause
(c)below) and the members of the board of directors representing the LCNGO will be selected by the LCNGO through the stakeholders committee, in each case in accordance with a process agreed upon by the Government and MCC. A representative of MCC and the chief executive officer of MCA-Lesotho will serve as non-voting members of the MCA-Lesotho board of directors.
(b)Management Unit. A management unit will support the board of directors in implementing the Program. A chief executive officer will manage the day-to-day activities of MCA-Lesotho and will be supported by key officers, to include a:
(i)Chief financial officer;
(ii)head of administration;
(iii)head of procurement;
(iv)head of infrastructure;
(v)head of environment and social assessment;
(vi)head of monitoring and evaluation;
(vii)head of operations;
(viii)legal officer;
(ix)communications and public outreach specialist; and
(x)such other key officers as may be agreed upon by the Government and MCC. The key officers will be supported by appropriate administrative and other personnel deemed to be necessary for implementing the Program. The CEO will be selected and hired by the board of directors following an open and competitive recruitment and selection process. The other key officers and staff will be selected and hired by the CEO following an open and competitive recruitment and selection process. The appointment of the CEO and all other MCA-Lesotho management unit personnel will be subject to MCC's prior approval.
(c)Stakeholders Committee. A stakeholders committee, in form satisfactory to MCC, will be created to represent the constituencies of the various Projects. MCA-Lesotho will use the stakeholders committee to continue the consultative process throughout Compact implementation. The stakeholders committee will be used primarily to inform the various constituent groups about Program implementation, provide advice and input to MCA-Lesotho concerning the Program, and select the private sector members and civil society members of the board of directors. 5. Gender Integration Plan MCA-Lesotho will draft, implement and monitor a Program-wide gender integration plan (“Gender Integration Plan”) to ensure compliance, optimum program design and maximum beneficiary impact across all Compact Project activities. This Gender Integration Plan will include, as appropriate, recommendations for meaningful and inclusive consultations with women and other vulnerable and underrepresented groups; project-specific gender analyses; and strategies for incorporating findings of the gender analyses into final Project designs. MCA-Lesotho will also hire a full-time, dedicated social/gender specialist for the entire term of this Compact to ensure that social safeguards are fully integrated into the design, terms of references, work plans and monitoring and evaluation plans, and to ensure that all Project activities in every aspect of the Program are compliant with the gender policy delivered by MCC to the Government or posted by MCC on its Web site or otherwise publicly made available, as the policy may be amended from time to time (the “MCC Gender Policy”), and with the rights afforded to married women in the 2006 Legal Capacity of Married Persons Act. 6. HIV/AIDS Risk Mitigation Plans MCA-Lesotho will assure that all construction contractors develop, implement and monitor an HIV/AIDS awareness program acceptable to MCC that includes, but is not limited to, the following elements:
(a)Activities directed to construction laborers and all associated formal and informal sector workers engaged in building and supporting construction works, including components for those who provide food, laundry and any other services providers and sub-contractors;
(b)Activities directed to the communities affected by the construction works;
(c)Activities designed to be gender and age-appropriate in content and delivery, reflecting an analysis of gender differences and inequalities to ensure the most effective program to reach various stakeholders;
(d)A component for independent monitoring of contractor compliance;
(e)Testing made available on or near construction sites; and
(f)Components necessary to ensure the contractor's program is coordinated with other HIV/AIDS awareness and prevention programs being implemented in Lesotho during the time of construction works. B. Water Sector Project 1. Summary of Project and Related Activities This Project is designed to provide additional access to improved water supplies and sanitation facilities for rural and urban domestic, commercial and industrial users. In its design, funding under the Water Sector Project will be used to
(a)construct a conveyance system from the Metolong Dam and establish a project management unit to manage the implementation,
(b)rehabilitate existing infrastructure returning it to a functional state and expand the reticulated network to unconnected urban and peri-urban areas,
(c)provide additional access to improved water supply and sanitation facilities in remote, rural areas through the rehabilitation and/or construction of up to 250 water supply points and up to 10,000 ventilated improved pit (“VIP”) latrines and
(d)execute a pilot-scale wetlands restoration and conservation program at three project areas in the Lesotho highlands. In the industrial sector, the Project will provide the critical infrastructure necessary to provide additional water to support the growth of garment and textile operations—the country's principal engine of economic growth and poverty reduction. Currently, Lesotho's textile sector accounts for approximately 40 percent of the country's gross domestic product and employs nearly 50,000 individuals, many of whom support extended families. Expansion and rehabilitation of rural water supply and sanitation facilities, coupled with public health and hygiene awareness training for rural communities, supports the goals of Lesotho's 2004 Poverty Reduction Strategy Paper (“PRSP”), which highlights the need for investment in rural infrastructure to help foster conditions for economic growth and poverty reduction. The wetlands restoration activity also supports the goals of the PRSP by helping Lesotho conserve and manage natural resources that are vital to sustainable development and directly contribute to the livelihoods and well-being of Lesotho's poorest people. In connection with the Water Sector Project activities, MCA-Lesotho will assist and take all necessary steps to ensure that, where and when required by MCC Environmental Guidelines, MCC Gender Policy and/or Lesotho laws, an environmental impact assessment (each, an “EIA”) or, as applicable, environmental assessment (each, an “EA”), an environmental management plan (each, an “EMP”), an HIV/AIDS awareness plan, and a resettlement action plan (each, a “RAP”) or resettlement policy framework (each, a “RPF”) (consistent with World Bank Operational Policy 4.12 on Involuntary Resettlement) are prepared to the satisfaction of MCC and in accordance with the Lesotho National Environment Act of 2001 and Lesotho Guidelines for Environmental Impact Assessment, in each case as the same may be amended from time to time. MCA-Lesotho shall also ensure that, for each activity requiring an environmental license under the Lesotho National Environment Act of 2001, a “Project Brief” (as defined in the Lesotho National Environment Act of 2001) and any necessary supporting studies will be submitted to, and approved by, the Government's environmental authorities prior to the initiation of construction activities, and that such environmental license will be maintained in good standing throughout the Compact Term. MCC Funding will support implementation of the environmental and social mitigation measures identified in the EIA(s) and/or EA(s), EMP(s), and RAP/RPF(s). The following summarizes each Project activity under the Water Sector Project:
(a)Metolong Dam—Bulk Water Conveyance System and Metolong Program Management Unit. The Metolong Dam bulk water conveyance system activity involves the construction of downstream works for the supply of water to Maseru and the neighboring towns of Mazenod, Roma and Morija. Furthermore, MCC Funding will support the establishment of an independent project management unit, the Metolong Program Management Unit (the “Metolong Program Management Unit” or “MPMU”), which will act as a dedicated project management unit for the Metolong Dam activity, as well as a portion of the estimated costs for environmental and social mitigation associated with the Metolong Dam project. The construction of downstream works relating to the Metolong Dam project includes the following:
(i)An 800m, 700mm diameter raw water transmission main from the dam to a downstream water treatment facility;
(ii)A 75 ML/day water treatment plant with a peak capacity of 93.8 ML/day;
(iii)A transmission system to Maseru that includes:
(1)A pump station (Ha Seeiso PS) at the WTP with an average pumping capacity of 859 l/s (74.25 ML/day) and a peak discharge capacity of 1,088 L/S (94 ML/day),
(2)A break pressure tank on a high ground near the Village of Ha Nchela with a capacity of 4ML or 4,000m 3 ,
(3)A 7.54km-700mm transmission main from Ha Seeiso PS (at WTP) to the Ha Nchela break pressure tank,
(4)A 23.5km-800mm gravity main from Ha Nchela break pressure tank to the High South Reservoir (“HSR”) outside of Maseru, and
(5)Expansion of the HSR with two additional storage units, each with a capacity of 27ML or 27,000m 3 ;
(iv)Bulk water supply components for Roma and Mazenod, which include:
(1)A 29 l/s booster pump station at Roma,
(2)A 300mm diameter transmission main toward Roma & Mazenod,
(3)A 13.5 km, 160mm diameter transmission line for Roma,
(4)An 8.8 km, 250mm diameter transmission line for Mazenod, and
(5)3 ML reservoirs for each town;
(v)Bulk water supply components for Morija, which include:
(1)A 25 km, 160mm diameter transmission main between Mazenod & Morija,
(2)A 19 l/s Booster Pump Station at Morija, and
(3)A 0.5 to 1.0 ML reservoir at Morija;
(vi)Detailed designs for the Teyateyaneng (“TY”) conveyance system, pending successful completion of feasibility studies for TY water supply from Metolong (funded by the European Union ); and
(vii)Implementation of environmental and social mitigation measures, including preparation of supplemental studies and management plans pertaining to the construction and operation of the bulk water conveyance system funded under this Compact, in accordance with the requirements of the Metolong Dam Environmental and Social Impact Assessment (“ESIA”), EMP, RAP and the MCC Environmental Guidelines.
(b)Urban and Peri-Urban Water Network Activity. The Urban and Peri-Urban Water Network activity involves reticulation extensions and infrastructure rehabilitation of the urban and peri-urban water network, including reticulation extension to the towns of Semonkong and augmented supply to the town of Mazenod. This activity includes the following components:
(i)Infrastructure rehabilitation including the following:
(1)Reservoir rehabilitation; including repair and replacement of existing reservoirs,
(2)Pipeline rehabilitation; including repair and replacement of existing pipelines,
(3)Water treatment works rehabilitation; including rehabilitation and/or replacement of sand filters, pre-settlement tanks and water treatment facilities, and
(4)Other rehabilitation works; including rehabilitation of a limited number of boreholes, pump houses and sewer pipes;
(ii)Reticulation extensions including the following:
(1)Extensions in Maseru, Mohales' Hoek, Mafeteng, Maputsoe, Mokhotlong and Butha-Buthe, and
(2)Rising main extensions in Mafeteng-Thabaneng;
(iii)The Semonkong water supply system including the following:
(1)Rehabilitation of the existing distribution system,
(2)15.75 km of transmission pipelines diameter 90 mm PVC,
(3)18.4 km of distribution network diameter 32 mm-90 mm PVC,
(4)Two reservoirs of 990 m 3 and 424 m 3 storage capacity,
(5)Water kiosks,
(6)One office building and three staff houses,
(7)Chlorination and nitrates treatment facility,
(8)Service roads,
(9)Nine borehole pumps,
(10)Nine spring pumps,
(11)604 house connections, and
(12)Allowance for additional abstraction with boreholes;
(iv)Mazenod Reticulation:
(1)Extension of the existing distribution 250mm pipeline from the existing 5ML High South Reservoir that is serving the Maseru southeast reticulation system, to a 1ML reservoir in Mazenod for approximately 5.8km,
(2)Connection of the airport pump station to an extended pipeline,
(3)Connection of the Mazenod Reservoir to the existing pipeline between the airport pump station and the airport reservoir, and
(4)Construction of the reticulation system for Mazenod. MCC Funding will also support the following preparation activities for the urban water supply components:
(v)Development of detailed design, and specifications that can be procured through tendering; and
(vi)Preparation of environmental “Project Briefs” and any supporting EA/EIA, EMP, and/or RAP/RPF required to meet MCC Environmental Guidelines and environmental licensing requirements under the Lesotho National Environment Act of 2001. The activity will also support the following components:
(vii)Implementation of environmental and social mitigation measures pertaining to the construction and operation of urban water supply projects funded under this Compact per the requirements of the EA/EIA(s), EMP(s), and RAP/RPF(s) referenced above; and
(viii)Establishment of a small, dedicated project implementation unit for the activity (the “WASA PIU”) within the Lesotho Water and Sewerage Authority (“WASA”).
(c)Rural Water Supply and Sanitation Activity. MCC Funding will assist the Government in meeting its goal of providing improved water and sanitary services to the entire rural population. The total target population impacted by this project is 150,000 persons. The VIP latrine construction approach is based on training and employing local artisans in latrine construction, and then providing materials and support to construct latrines with input, both in kind and financial, on an individual basis. The activity will be managed by an existing project implementation unit, and MCC will provide funding for the enhancement of capacity and capability of that project implementation unit. Specifically, MCC Funding will support the following:
(i)Construction, rehabilitation, and/or expansion of up to 250 water systems;
(ii)Construction of up to 10,000 VIP latrines; and
(iii)Public health and hygiene awareness training and support. MCC Funding will support the following preparation activities for the rural water supply and sanitation projects:
(iv)Preparation of feasibility studies, detailed design, and tender documents; and
(v)Preparation of environmental “Project Briefs” and any supporting EA/EIA, EMP, and/or RAP/RPF required to meet MCC Environmental Guidelines and environmental licensing requirements under the Lesotho National Environment Act of 2001. Additionally, MCC Funding will support the following:
(vi)Implementation of environmental and social mitigation measures pertaining to the construction and operation of rural water supply and sanitation projects funded under this Compact, per the requirements of the EA/EIA(s), EMP(s), and RAP/RPF(s) referenced above; and
(vii)Strengthening of the existing project implementation unit for the activity (the “DRWS PIU”) within the Department of Rural Water Supply (“DRWS”) and appointing project coordinators to manage the public health and hygiene programs.
(d)Wetlands Restoration and Conservation Activity. The wetlands restoration and conservation activity will help Lesotho address widespread overgrazing and degradation of alpine wetlands, which are prevalent throughout the highlands of Lesotho and are an important ecological and economic resource that naturally regulates flow in the Senqu/Orange River Basin and provides livestock pasture, medicinal plants, thatch, and other rural livelihood benefits. Using MCC Funding, a pilot-scale project will be implemented to design and apply restoration measures and examine alternative land management prescriptions at three target study areas, including wetlands at Khalong-la-Lithunya (Oxbow area), Kotisephola (Sani Pass area), and Lets eng-la-Letsie (an internationally protected Ramsar site near Quithing). In conjunction with the pilot studies, a broad-based assessment of Lesotho's wetlands will be undertaken to characterize the environmental, social, and economic implications of current management practices and to identify potential economic opportunities beyond herding. Based on the results of the pilot studies and environmental and socio-economic assessment, a strategic action plan will be developed that outlines requirements for establishing a national watershed management and wetlands conservation program, focusing on specific measures to restore degraded wetlands, protect water resources, improve and maintain the productivity of highland pastures, and promote expanded economic development through community-based resource management and conservation programs. Specifically, MCC Funding will support the following tasks:
(i)Establishment of a project implementation unit within the Lesotho Department of Water Affairs (i.e., the DWA PIU referred to in Section B.2(d) of this Annex I) that will be responsible for executing the MCC wetlands restoration and conservation activity;
(ii)Environmental and social baseline data collection and monitoring at each of the three target wetland areas, including purchase and installation of field monitoring equipment;
(iii)Restoration of degraded wetlands and assessment of alternative long-term management prescriptions at each of the three target wetland areas; and
(iv)Preparation of a strategic environmental and socio-economic assessment (“SEA”) of Lesotho's wetlands that will, as part of its primary objectives, provide a basis for establishing a national watershed management and wetlands conservation program. 2. Project Implementation
(a)Metolong Dam—Bulk Water Conveyance Activity. The preferred institutional arrangement for delivering the Metolong Dam project is within the MPMU with the appropriate staffing, structure and business processes to deliver the entire project within the costs and schedule objectives of the Government. The MPMU chief executive will report through a responsible Government agency project director to a Metolong project advisory board representing other donors and key stakeholders. The Government's project director will obtain independent input from expert panels on dam safety and environmental and social responsibility, and report on compliance with donor covenants to the funding agencies. The MPMU will house the capability and responsibility for delivering both the ancillary bulk water supply components and the Metolong Dam itself. In the interest of time and resource effectiveness, the MPMU function will be outsourced to a private program management or construction management firm, with prior successful experience in Africa. An international competitive bidding process, using a qualifications and cost-based selection protocol will be employed to select this firm.
(b)Urban and Peri-Urban Water Network Activity. WASA will have primary responsibility for the implementation of this activity. WASA is a parastatal public corporation which reports to the Lesotho Commissioner of Water under the Ministry of Natural Resources. The primary responsibility of WASA is to provide potable water supplies and sewerage treatment and disposal facilities to the urban areas in both the lowlands and the highlands. The WASA PIU will be responsible for implementation of this activity.
(c)Rural Water Supply and Sanitation Activity. The DRWS will be responsible for the implementation of this activity. Water system design, construction and operation is built around the DRWS “project life cycle” which is a revolving and continuous implementation methodology by which rural water system designs are continuously developed at the district level through the coordinated efforts of the target community, through their water committee and chief and from the DRWS village affairs coordinator, district project officer and district engineer. Historically, the Ministry of Health and Social Welfare has had the primary responsibility for implementing sanitation initiatives, including the provision of VIP latrines. However, in line with the Government's policy on decentralization, the DRWS will retain responsibility for this activity as well.
(d)Wetlands Restoration and Conservation Activity. The wetlands restoration and conservation activity will be implemented by the Department of Water Affairs (“DWA”). Compact funds will be allocated to staffing a dedicated project implementation unit (the “DWA PIU”) that will work on behalf of, and report to, the head of the wetlands management unit within the DWA. The DWA PIU will be responsible for managing procurements, coordinating work activities, and assuring the work meets the cost, schedule and technical objectives of the project. The DWA PIU will work closely with DWA district project officers to execute project activities at each of the three target wetland sites and will assist the DWA, as necessary, with inter-agency coordination, stakeholder engagement, and performance monitoring and reporting. International consultants working with local partners will be procured to carry out the wetlands restoration and SEA activities. The National Wetlands Committee (“NWC”), which consists of representatives from various Government agencies, will play an advisory role in the implementation of the wetlands restoration and conservation activity. 3. Beneficiaries The Metolong Dam and Urban Water project activities will include a reduction in unaccounted-for-water, increased connections to the urban water supply system, and expanded employment in industries that depend on a reliable water supply. At the household level, results are expected to include a reduction in water-borne diseases through increased availability of clean water and sanitation facilities for domestic use. The project also will contribute to time savings, which could allow time to be used more productively than for collecting water. The wetlands restoration activity is expected to improve livestock productivity and benefit rural livelihoods in communities in the vicinity of the three target wetland areas, while also providing a basis for implementation of a national watershed management plan that would have much broader environmental, social and economic benefits to the country as a whole over the long-term. 4. Donor Coordination; Role of Private Sector and Civil Society The Metolong Dam project is being developed in coordination with several donors, including the OPEC Fund for International Development, the Kuwait Fund for Arab Economic Development, the Arab Bank for Economic Development in Africa (BADEA), the Saudi Fund for Development, and the World Bank. The European Union has a sustained presence in Lesotho's water sector. The European Union is currently funding detailed designs for components of the Metolong bulk water conveyance system, as well as components of the larger lowlands water supply system. The European Investment Bank is currently funding the Greater Maseru wastewater improvement project. The World Bank has been an active development partner in Lesotho's water sector, primarily through the 2004 Lesotho Water Sector Improvement Project. Performance benchmarks, as defined in the Water Sector Improvement Project, will be monitored against, and in some cases will be linked to, Disbursements for this activity. Irish Aid has been the only active donor in Lesotho's rural water supply and sanitation sub-sectors. Through Irish Aid, a total of €2.35 million was disbursed during 2005 for continued implementation of the DRWS five-year strategic plan. Outputs included the maintenance of 626 hand pumps and over 15 villages were provided with new tapped water sources. Fifty-five more sources were designed and are now under construction. Finally, the DRWS's new maintenance strategy was implemented over the course of the year with the inspection of 1,786 existing waster systems. 5. USAID USAID currently has no water sector projects within Lesotho. 6. Sustainability Sustainability of the Water Sector Project activities is dependent upon the Government's pace of implementation of water sector policy reforms. Institutional reform and establishment of a regulatory regime, both of which are critical to sustainability, are expected to be completed in the second year of the Compact Term. Disbursements of MCC Funding will be tied to agreed progress on specific salient components of the water sector reforms. The estimated additional annual budget requirement to meet the increase in operations and maintenance cost is: US$2,850,000 for the Metolong Dam Project activity and US$820,000 for the Urban and Peri-Urban Water Network activity. Financial sustainability, at a minimum, will depend on the ability of WASA to independently cover the incremental budget requirement for the additional operations and maintenance. With an effective annual tariff increase of five percent, revenues generated by WASA are expected to fully cover operations and maintenance cost and the assumed costs of Metolong raw water within the period of this Compact. This Compact provides funding for capacity building and technical assistance to WASA, DRWS and the DWA to facilitate the implementation and long-term management capabilities of these institutions. The most critical component of environmental and social sustainability of the Water Sector Project is implementation of long-term environmental management and monitoring plans, including on-going public outreach and other social impact mitigation measures, in accordance with project-specific EIAs, EMPs, and, where necessary, RAPs or RPFs. Disbursements of MCC Funding will be conditioned on the Government completing each of these studies to the satisfaction of MCC prior to construction and then demonstrating continued compliance with applicable EMPs and RAPs throughout the life of the Project. Environmental sustainability also depends on WASA maintaining an environmental management unit which will be responsible for environmental compliance of the urban water supply and Metolong bulk water conveyance systems. The DWA, which will
(a)implement the wetlands restoration activity,
(b)in conjunction with the DRWS, monitor performance of rural water supply systems and
(c)in conjunction with the Ministry of Health and Social Welfare (“MoHSW”), monitor performance of rural sanitation systems, must continue to expand field staff in its district offices to strengthen its monitoring and oversight capabilities. Technical assistance will be provided to the DWA through the course of this Compact to assure sufficient resources to implement Compact activities. C. Health Sector Project 1. Summary of Project and Related Activities The latest demographic and health survey estimated that 24 percent of adults ages 15-49 in Lesotho are HIV/AIDS positive; the third highest prevalence rate in the world. This has the potential to severely hamper the country's efforts to reduce poverty and promote economic growth. This Project is designed to mitigate the negative economic impacts of poor maternal health, HIV/AIDS, tuberculosis (“TB”) and other diseases by strengthening the country's health care system. The primary Project activities include: rehabilitating health centers, rehabilitating and constructing anti-retroviral therapy (“ART”) clinics in selected hospital out-patient departments, constructing a central laboratory and blood transfusion center and strengthening key complementary inputs to the health care system (including training, medical waste management, health management information systems and decentralized management). MCC Funding will support the Government's efforts to significantly increase access to life-extending ART by providing a sustainable platform to deliver this and other essential health services throughout the country. This has the potential to result in a measurable extension of productive life-years for people living with HIV/AIDS, TB and other debilitating diseases. In-country staff of the President's Emergency Plan for AIDS Relief (“PEPFAR”) and other donors have worked with the Government and MCC staff in the design and assessment of this Project activity. In connection with the Health Sector Project activities, MCA-Lesotho will assist and take all necessary steps to ensure that where and when required by the MCC Environmental Guidelines, the MCC Gender Policy or the laws of Lesotho, an EIA or EA, an EMP, an HIV/AIDS awareness plan, and, if necessary, a RAP or RPF (consistent with World Bank Operational Policy 4.12 on Involuntary Resettlement) are prepared to the satisfaction of MCC and in accordance with the Lesotho National Environment Act of 2001 and Lesotho Guidelines for Environmental Impact Assessment, in each case as the same may be amended from time to time. MCA-Lesotho also will ensure that, for each activity requiring an environmental license under the Lesotho National Environment Act of 2001, a “Project Brief” (as defined in the Lesotho National Environment Act of 2001) and any necessary supporting studies will be submitted to, and approved by, the Government's environmental authorities prior to the initiation of construction activities, and that such environmental license will be maintained in good standing throughout the Compact Term. MCC Funding will support implementation of the environmental and social mitigation measures identified in the EIA(s) or EA(s), EMP(s), and RAP/RPF(s). The following summarizes each Project activity under the Health Sector Project:
(a)Health Centers Activity. This Project activity focuses on renovation and rehabilitation of up to 150 health centers, to bring the national stock of health centers up to a common standard. These centers play a primary role in the provision of HIV/AIDS prevention, TB treatment and maternal and child health services. Renovations are timely given the devolution of responsibility for these centers to districts and communities. The MoHSW and the Ministry of Local Government can use this visible opportunity of renovated health services to empower local leaders with revitalizing community health services. The renovation of associated staff housing and improvement of water, power and communications will also improve retention of nurses and health personnel at these facilities. The 150 health centers are owned by MoHSW, the Christian Health Association of Lesotho (“CHAL”), and the Red Cross of Lesotho. Eighteen of these facilities will be enlarged due to current and projected patient loads and facility conditions, and six health centers will be relocated. Construction and rehabilitation contracts will include capital project maintenance for the life of this Compact. In addition, during years two and three of the term of this Compact, MCC Funding will support technical assistance to work with the MoHSW in developing maintenance systems options for decentralized services. Specifically, MCC Funding will support the following:
(i)The design and construction supervision for up to 150 health centers;
(ii)The rehabilitation and/or construction of these health centers, including, but not limited to, the rehabilitation of related staff housing where appropriate;
(iii)Preparation of environmental “Project Briefs” and any supporting EA or EIA, EMP, and/or RAP or RPF required to meet MCC Environmental Guidelines and environmental licensing requirements under the Lesotho National Environment Act of 2001, as the same may be amended from time to time;
(iv)Implementation of environmental and social mitigation measures pertaining to the rehabilitation and/or construction of health centers funded under this Compact per the requirements of the EA/EIA(s), EMP(s), and RAP/RPF(s) referred to in clause
(iii)above;
(v)Power, water, telecommunications equipment as needed to reach MoHSW standards for these health centers; and
(vi)Medical equipment and instruments and clinical furniture as required to meet MoHSW clinic standards.
(b)ART Clinics Activity. This Project activity will improve infrastructure in up to 14 hospital out-patient departments (“OPDs”) and provide management training to support extension of ART. This will complete national coverage of ART at the hospital level. Designs for reconfiguring the current OPD to include adequate space and appropriate patient flow for incorporating ART services will be tailored to each hospital. The status of OPD facilities for managing TB co-infection will also be addressed in the design. Specifically, MCC funding will support the following:
(i)The design and construction supervision to incorporate ART services for up to 14 hospital out-patient departments;
(ii)The rehabilitation and/or construction of up to 14 expanded hospital out-patient departments;
(iii)Preparation of environmental “Project Briefs” and any supporting EA or EIA, EMP, and/or RAP or RPF required to meet MCC Environmental Guidelines and environmental licensing requirements under the Lesotho National Environment Act of 2001, as the same may be amended from time to time;
(iv)Implementation of environmental and social mitigation measures pertaining to the rehabilitation and/or construction of ART clinics funded under this Compact per the requirements of the EA/EIA(s), EMP(s), and RAP/RPF(s) referred to in clause
(iii)above;
(v)Power, water and telecommunications equipment as needed to reach MoHSW standards for hospital OPDs;
(vi)Medical equipment and instruments, clinical furniture, and office equipment and furniture as required to meet MoHSW ART standards; and
(vii)Training for medical and administrative personnel on OPD management.
(c)Central Laboratory Activity. The central laboratory to be constructed with MCC Funding is critical to the national HIV/AIDS prevention, ART and TB programs. The current laboratory is too small to house the current level of testing, and has no room for expansion. It is also slated for decommissioning when the new National Reference Hospital is developed. In-country and short-term external training for laboratory staff also will be supported through this Project activity. Specifically, MCC Funding will support the following:
(i)design and construction of the new central laboratory;
(ii)equipping of the new central laboratory;
(iii)preparation of environmental “Project Briefs” and any supporting EA or EIA, EMP, and/or RAP or RPF required to meet MCC Environmental Guidelines and environmental licensing requirements under the Lesotho National Environment Act of 2001, as the same may be amended from time to time;
(iv)implementation of environmental and social mitigation measures pertaining to the rehabilitation and/or construction of the central laboratory funded under this Compact per the requirements of the EA/EIA(s), EMP(s), and RAP/RPF(s) referred to in clause
(iii)above; and
(v)training for new equipment, service expansion and quality assurance associated with the new central laboratory.
(d)Blood Transfusion Service Activity. Safe blood for transfusions is an important element of a health system. A more formal system of blood supplies is needed. Countries that have expanded ART services have also seen the need for transfusions increase, as severely anemic patients are able to recover when on medication. A dedicated, central facility for collecting and processing blood, two mobile collection units, and blood storage equipment for two Government-owned and operated regional centers will be funded by this Project activity. The central blood collection and processing facility will be developed at Botsabelo, in Maseru. Specifically, MCC Funding will support the following:
(i)the design and construction of the new central blood collection and processing facility;
(ii)equipping of the new central blood collection and processing facility;
(iii)preparation of environmental “Project Briefs” and any supporting EA or EIA, EMP, and/or RAP or RPF required to meet MCC Environmental Guidelines and environmental licensing requirements under the Lesotho National Environment Act of 2001, as the same may be amended from time to time;
(iv)implementation of environmental and social mitigation measures pertaining to the rehabilitation and/or construction of the blood transfusion service activity funded under this Compact per the requirements of the EA/EIA(s), EMP(s), and RAP/RPF(s) referred to in clause
(iii)above;
(v)training for new equipment, service expansion and quality assurance;
(vi)two mobile blood collection vehicles;
(vii)one blood transportation vehicle; and
(viii)refrigeration equipment for blood storage and limited blood collection furniture for two Government owned collection sites operated by the Blood Transfusion Service at Leribe and Mohales' Hoek.
(e)National Health Training College Activity. The human resources situation has deteriorated over the past decade in all the countries of Southern Africa. Lesotho has undertaken a number of initiatives to reverse this trend. This Program activity will support efforts to increase the number of graduates from nursing and allied health (for example, pharmacy and lab technicians) programs by developing additional dormitories and staff residences at Lesotho's National Health Training College (“NHTC”). Other inputs, discussed in the Health Systems Strengthening Activity section below, will strengthen tutor and mentoring capacities. Specifically, MCC Funding will support the following:
(i)the design and construction of 120 dormitory spaces and 6 apartment residences at the NHTC, which apartments will be initially allocated for use on a priority basis by tutors and international technical staff working in connection with the Project;
(ii)preparation of environmental “Project Briefs” and any supporting EA or EIA, EMP, and/or RAP or RPF required to meet MCC Environmental Guidelines and environmental licensing requirements under the Lesotho National Environment Act of 2001, as the same may be amended from time to time;
(iii)implementation of environmental and social mitigation measures pertaining to the rehabilitation and/or construction of NHTC dormitories and staff residences funded under this Compact per the requirements of the EA/EIA(s), EMP(s), and RAP/RPF(s) referred to in clause
(ii)above; and
(iv)furniture, appliances, and furnishings for these new dormitories and staff residences.
(f)Health Systems Strengthening Activity. The overall success of this Project hinges upon improved delivery of the national essential health services package, including HIV/AIDS prevention and treatment. In the context of Lesotho, the poor quality of infrastructure was identified by the Government as a constraint to improved and expanded service delivery. In addition, key health systems areas have been identified for Program support. These key interventions are necessary to ensure that improved, vital services are cost-effectively provided at the community level. Training This Project activity will strengthen pre-service and in-service training capacities. Currently, a large number of qualified applicants are rejected by the training institutions due to a lack of tutors for the program; this, in turn, results in too few graduates to fill MoHSW and CHAL vacancies resulting from retirement, death, and out-migration. This Project activity will assist in developing qualified tutors, mentoring programs, and improved curricula for preparing a consistently larger cadre of nurses to provide health services at the community level. In-service training is a vital element of job satisfaction, professional growth, and quality assurance. Currently, there is no plan for continuing education of MoHSW and CHAL professionals. The Project will assist the Government in developing an in-service training plan within the context of devolved services, and assist in implementing the most critical elements of the plan. This is likely to include health center level training of health center staff, local administrations, and communities regarding the new roles and responsibilities of each. Decentralization The Government is in the process of devolving service delivery to the district level. The MoHSW is one of the first ministries to implement the new plan. To date, three districts have piloted decentralized health services. Between 2007 and 2010, this is to be expanded to the remaining seven districts. In Lesotho, as well as in other countries, there is evidence that the process of decentralization—particularly if not well-managed—can disrupt health services delivery. This is a critical point for health status and health services in Lesotho. This Project activity will provide additional support, in collaboration with the World Bank, to ensure that decentralization is rapidly and sustainably effected in the health sector. Areas of particular attention include health information systems, district health management, TB surveillance and infection control, health services quality, health facility maintenance, communications and public outreach. Research and Development Unit within MoHSW Medicine is strongly evidence-based and research plays a vital role in developing interventions and assessing practices. The MoHSW has a two person health research unit with a mandate to provide oversight to research activities in the health sector. This team will be supported through MCC Funding to increase their capacity to coordinate research activities and to share vital lessons learned from Lesotho-specific health research. Specifically, MCC Funding will support the following:
(i)expatriate tutors and mentors;
(ii)in-service, in-country and limited short-term external training of nurse and allied professional tutors;
(iii)incentives for current tutors to increase the number of students trained;
(iv)consulting services in continuing education and decentralization;
(v)in-service training on health center management, decentralization, research and infection control;
(vi)office equipment and computers for program management, district health information offices and the research unit; and
(vii)limited funding for external travel for Program related activities.
(g)Medical Waste Management Activity. MCC funding will be used to help the Government improve occupational health and safety and medical waste management practices, which at present pose significant environmental, health, and safety hazards and do not comply with MCC Environmental Guidelines. In 2005, in conjunction with a World Bank health sector reform project, the Government conducted a comprehensive assessment of its medical waste management practices and prepared a National Health Care Waste Management Plan (“WMP”), though little progress has been made in its implementation. The primary objective of this activity will be to update and implement the WMP, provide institutional strengthening of Government agencies that will be responsible for implementing, monitoring, and enforcing the policies and standards established under the new WMP, and support public outreach and awareness campaigns. All work conducted under this activity will be closely coordinated with the World Bank and other donors involved in health sector reform. This activity is critical to ensuring that health sector interventions under this Compact comply with MCC Environmental Guidelines. Moreover, meaningful improvements in medical waste management and occupational health and safety are considered an important factor in the environmental and social sustainability of the health sector overall. Specifically, MCC Funding will support the following activities:
(i)supplement previous studies (including the 2005 WMP) with new field investigations and literature reviews in order to characterize baseline conditions and identify the environmental, health, and safety risks of current occupational health and safety and medical waste management practices;
(ii)based on the results of supplemental studies, update the 2005 WMP and the estimated capital and recurrent costs for implementing the plan;
(iii)develop a comprehensive finance plan for funding capital and recurrent costs;
(iv)develop new hazardous waste management policies, regulations, standards, and operating procedures, per the recommendations in the updated WMP;
(v)develop an environmental management and monitoring system, per the recommendations in the updated WMP;
(vi)develop occupational health and safety and waste management licensing and accreditation procedures, per the recommendations of the updated WMP;
(vii)provide technical assistance and capacity building to Government agencies pertinent to the implementation and sustainability of the updated WMP; and
(viii)support and/or conduct public awareness and training programs. 2. Project Implementation. The Government and the donor community have collaborated to build capacity to undertake donor-financed programs in the health sector. Currently, a large portion of the total health resources are provided through bilateral and multilateral donors. The Health Sector Project's implementation structure has been developed in an effort to take advantage of and build on current capacities and structures, while being careful not to overwhelm them. Specifically, the major elements of the Health Sector Project's implementation structure consist of:
(a)MCA-Lesotho. MCA-Lesotho will include a full-time health sector project manager who reports to the director of operations. This person will be responsible for overseeing smooth Project implementation across all activities. He or she will ensure that critical milestones are met and activities progress as planned. This program manager will be responsible for ensuring that implementation problems are resolved and alerting the Government of any constraints. The manager will ensure that Procurement Agent actions for the Health Sector Project are prioritized based on the Project's implementation plan. This person will also serve as MCA-Lesotho's liaison to the Health Sector PIU (as defined below) and to health donors' forums.
(b)MoHSW. The MoHSW has overall responsibility for oversight of implementation of the Health Sector Project. The MoHSW also will be responsible for technical quality, timeliness of implementation, and integration into MoHSW of Project activities. The MoHSW will coordinate activities in relation to the Ministry of Local Government, and with CHAL and the Lesotho Red Cross Society. A dedicated Health Sector Project Implementation Unit (“Health Sector PIU”) will be established within the MoHSW to administer the Project. The establishment of the Health Sector PIU will be the responsibility of the MoHSW with assistance from MCA-Lesotho. The MoHSW will be responsible for integrating Project activities within the framework of the MoHSW as appropriate. For purposes of this Compact, the Health Sector PIU, the MPMU, the DRWS PIU, the DWA PIU and the WASA PIU, may each be referred to as a “Project Implementation Unit” and, collectively as the “Project Implementation Units.” The Health Sector PIU will draft technical specifications and terms of reference for the following:
(i)design and construction supervision of health clinics and related staff accommodation including the supply of equipment and furniture for renovation, relocation or rebuild of up to 150 health centers;
(ii)design and construction supervision of the Botsabelo complex activities, including the Blood Transfusion Services center, the Central Laboratory, and NHTC dormitories and residences, including laboratory equipment, furnishings, furniture and IT equipment;
(iii)design and construction supervision of ART centers in 14 hospitals including the supply of equipment, instruments and furniture per region;
(iv)preparation of EA(s) or EIA(s), EMP(s), and if necessary RAP(s) or RPF(s) for the above infrastructure activities in accordance with MCC Environmental Guidelines and the National Environment Act of 2001;
(v)engagement of technical assistance contracts/contractors for capacity building in human resources, decentralization and waste management; and
(vi)Project-related training activities. The Health Sector PIU will be responsible for the above-listed activities which include, but are not limited to, design reviews, tender document reviews, environmental management and compliance, and public outreach and stakeholder engagement. Rehabilitation of the health centers will require participation of the local government structures, CHAL and the Lesotho Red Cross Society. The MoHSW is responsible for developing formal agreements with CHAL and the Lesotho Red Cross Society with respect to MCA-funded infrastructure improvements. The Ministry of Local Government, CHAL and the Lesotho Red Cross Society will each identify a main counterpart to represent the organization on Compact activities. These individuals will have responsibility and authority for coordination and implementation of Program activities within their respective organizations. In addition, consultations will be conducted with affected parties and other stakeholders in support of preparation of any EA (or EIA as applicable), EMP, and, if necessary, RAP (or RPF as applicable) for the Health Sector Project activities in accordance with MCC Environmental Guidelines and Government environmental regulations. 3. Beneficiaries The immediate primary beneficiaries of the Health Sector Project are the 17,000 HIV positive persons in need of ART that are not currently receiving it, who will be able to access these expanded clinic and laboratory services from the Government, CHAL and the Lesotho Red Cross Society. Additionally, many of the 17,000 persons already enrolled in ART services will be able to access medication and follow-up from a local health center, rather than having to wait hours in line at a hospital-based center, with much higher risk of exposure to TB and other co-infectious diseases. Services will also benefit the additional 38,000 Basotho who are estimated to need ART services in the coming ten years. The majority of these beneficiaries are adults, aged 15-49. Currently, more women than men seek services, as expected given that HIV rates are higher for women than for men. Program statistics will be periodically reviewed to ensure that age, gender, income, or geographic biases are not reflected in client statistics. Mitigation efforts will be instituted if needed. Other primary beneficiaries of this Project include poor urban and rural citizens who seek and receive improved health services from the nearest Government, CHAL, or Lesotho Red Cross Society health centers. These persons will have the opportunity to learn of life-saving programs; locally obtain referrals, medical follow-up and medications; and have a resource to protect the health of mothers and newborns. More than one million visits are made to health facilities per year—with Project success, this number will increase, especially at lower levels of facilities. This will result in cost-savings, time-savings, and improved health status and longevity, and ultimately in improved productivity and incomes. In particular, services that reduce co-infection with TB and improve maternal health and safe delivery will benefit the poor. Secondary beneficiaries include those who, because of the Project activities, are less exposed to infectious TB, particularly multi-drug and extreme drug resistant TB, from other patients and from the population at large due to improved facility design and management, and better disease management. Secondary beneficiaries also include nurses and medical workers who will have the skills and materials to lower their risk of infection from hazardous wastes in the workplace. Communities will also benefit with reduced risks of infection from improper disposal of hazardous wastes by health personnel. 4. Donor Coordination; Role of Private Sector and Civil Society. Other donors and health partners are working together on health systems issues. MCC inputs in these areas are coordinated with these donors and with Government programs. In 2000, the Government embarked on a 10-year reform of the health sector with donor assistance, particularly Irish Aid and the World Bank. The reform program is oriented to improving health services delivery, financial management and accountability, monitoring and evaluation, and donor coordination. Key features include decentralization of public and primary health services to the district level, greater involvement of local administrations and communities in health decision making, new financial management systems, improved medical waste management, increased partnerships for health delivery, and better planning and management of infrastructure and human resources. The Project activities are also in concordance with broader public administration and financial reforms being undertaken across ministries and sectors by the Government. As part of this reform process, a sector-wide approach
(SWAP)mechanism for health is being developed, with the World Bank and others likely to contribute to basket funding by 2009. Participating donors have already agreed to common health sector indicators based on the 10-year reform program and participate in annual joint reviews. This Project's activities have been designed within this coordinated context. The Project will strengthen the infrastructure for integrated delivery of services and will provide HR strengthening. Major donors of particular relevance to the Health Sector Project include the United States government (through PEPFAR), Irish Aid, the World Bank, the African Development Bank, United Nations agencies and the Global Fund for AIDS, Tuberculosis and Malaria (“GFATM”). Multiple consultations have been undertaken by MCC with each of these parties. In addition, donor relations in the health sector are coordinated by the MoHSW and through two consortia: the Health Partners who provide assistance more broadly to the health sector, and the UN Expanded Theme Group on HIV/AIDS. Both fora meet monthly, and there is overlap between the groups. There is also an AIDS Country Coordinating Mechanism for the GFATM, currently chaired by the Principal Secretary of MoHSW, that meets monthly, or as needed, and includes national organizations involved in AIDS prevention and outreach, and major donors in these efforts. The United States government also has monthly meetings of all US-based partners working on HIV/AIDS. MCA-Lesotho is expected to become an active participant in these fora as appropriate. In Lesotho, the major non-government providers of health services are the mission and church-related providers under the umbrella organization, CHAL. CHAL provides roughly half of the health services in Lesotho, with the MoHSW the main provider of the remaining fifty percent. CHAL operates health centers and hospitals, and for the past decade, has received subvention from the Government for providing basic services. The relationship between the public and non-government sectors has recently been strengthened by signing of a formal Memorandum of Understanding between the MoHSW and CHAL. Under this Project, MCA funding will be made available for renovation of health infrastructure under CHAL auspices. Civil society organizations that will influence and participate in Project activities include the Lesotho Red Cross Society, the Lesotho Nurses Association, the Lesotho Association of People Living with AIDS, and community-based organizations with interests in community health. International NGOs, including Medecins Sans Frontiers, Partners In Health, and others have been consulted in program development and assessment. An extensive consultative process was undertaken in designing this activity. The World Bank has taken the lead in providing funding for the initial waste management assessment for the health sector in 2005. As the World Bank's program has been defined for the next five years, MCC and MCA-Lesotho have and will continue to collaborate with the World Bank team to ensure that our respective interventions in waste management have complementary short and long-term objectives and a mutually agreed upon strategy for action. MCC has closely coordinated with other donors in the health sector to ensure that the Project supports national health priorities and does not duplicate other donor efforts. MCC has maintained regular communications and participated in joint reviews with the donors most involved in HIV/AIDS and health. These and other donors provided design support to the MoHSW, and assisted MCC in the due diligence process. In addition, MCC periodically met with and briefed the donor coordinating groups for the health sector: the Health Partners, chaired jointly by the World Health Organization Representative and Irish Aid, the UN Expanded Theme Group on HIV/AIDS and US-based partners working on HIV/AIDS with the support of PEPFAR funding. The proposed project strengthens the infrastructure for integrated delivery of services and would provide support to augment human resources. It supports the Government's reform efforts and fits within the combined donor strategy for the health sector. The U.S. Government does not have a large bi-lateral program with Lesotho. The only agency which has a significant program with a presence in Lesotho is PEPFAR, focused on HIV/AIDS. The U.S. Government's HIV/AIDS Coordinator based in Lesotho has provided guidance to MCC in undertaking due diligence on the health sector project since May 2006. The Project has been designed partially with support from PEPFAR Regional HIV/AIDS Program partners, including the Centers for Disease Control and Prevention, Southern Africa Regional Office, the Capacity Project, and Safe Blood for Africa. In addition, the Clinton Foundation, Partners in Health, the African Development Bank, and other MoHSW health partners have contributed. 5. USAID Current USAID involvement in health in Lesotho is through support for and oversight of PEPFAR activities. The Health Sector Project was designed and will be implemented in close coordination with United States government efforts relating to HIV/AIDS, including PEPFAR interventions. Formal mechanisms, including joint meetings, for in-country coordination already exist and will be utilized. 6. Sustainability Sustainability of health services is a critical issue, particularly given the rapid increase of donor-supported ART. In partnership with the World Bank and other donors, the Government is developing a national health financing strategy to identify the costs of the essential health services package, including ART, and to identify gaps and potential sources of funds. This strategy will include means of regular dialogue with health donors in order to ensure continued financing and identify potential commitment gaps early. Implementation of the critical elements of this strategy will be jointly monitored by MCC and other health donors. In other areas, the relationship between CHAL and the MoHSW has been formalized through a January 2007 Memorandum of Understanding in an effort to improve the quality of service delivery throughout the country. The Government is working with the International Finance Corporation to replace the current national referral hospital through a public-private partnership arrangement, hoping to free up a portion of the 26 percent of the health budget utilized for that hospital. The Health Sector Project was designed with an eye toward containing incremental recurrent costs. Facilities were slated for rehabilitation or development where the use of incremental staff and financial resources could provide the most impact and only where staff and budget increments were deemed manageable and within the framework of the Government's “Medium Term Expenditure Framework” for health. Architectural and engineering briefs for all facilities aim to reduce long-term maintenance and utility costs. Decentralization of health services management to the district level will increase the local voice in assuring that quality health services are delivered. Training activities will largely be undertaken in Lesotho, to reduce potential staff migration. Capacity building activities in the areas of district health management, outpatient department management, laboratory quality assurance, and in-service training of district health providers will increase program sustainability. The environmental and social sustainability of the Health Sector Project is dependent on the implementation of a national medical waste management plan. This activity is both an immediate safeguard against infection and environmental risk with MCC investments in the heath sector and also an opportunity for MCC to contribute to a sustainable regulatory structure that will last beyond MCC's five-year Compact schedule. MCC will also require political and financial assurances that the plan be institutionalized within the regulatory framework, funded by the recurrent budget and overseen by a qualified government entity by the completion of the five-year program. In addition, long-term environmental management and monitoring plans, including on-going public outreach and other social impact mitigation measures, will be implemented in accordance with project-specific EIAs, EMPs, and, where necessary, RAPs or RPFs. Disbursements of MCC Funding will be conditioned on the Government completing each of these studies to the satisfaction of MCC prior to construction and then demonstrating continued compliance with applicable EMPs and RAPs throughout the life of the Project. Special efforts will be undertaken to attract male rural health care workers through the human resources nurse outreach training program. This should encourage more men in the rural areas to seek out medical assistance, to discuss sexual histories and to address ongoing risky behavior which puts all Basotho at risk. D. Private Sector Development Project 1. Summary of Project and Related Activities This Project is designed to increase private sector activity in Lesotho by improving access to credit, reducing transaction costs and increasing the participation of women in the economy. The activities include improving land administration, modernizing the commercial legal system, strengthening payment and settlement systems, supporting the provision of credit bureau services, including assisting the roll-out of a national ID scheme, and training and outreach to support gender equality in economic rights. These Project activities are an essential component of the Government's major policy reform program and will contribute to the broader efforts to attract foreign investment and stimulate growth of Basotho-owned companies. The Government has already obtained funding for several components related to the Private Sector Development Project from the World Bank, which recently approved a private sector competitiveness and economic diversification credit. The following summarizes each Project activity under the Private Sector Development Project:
(a)Credit Bureau and National Identification Card Activity. The main objective of the credit bureau activity is to establish a register that facilitates the exchange of information and the screening of prospective debtors. Establishing a credit bureau has been cited by credit grantors as a prerequisite to expanding access to financial services, especially credit, to poor and rural populations. The Government has opted to link with one or more private credit bureaus now operating outside of Lesotho. Several South African credit bureau operators have expressed an interest in extending existing infrastructure and expertise into Lesotho to support its credit bureau needs. The cross-border solution selected is less expensive and more comprehensive than a “Lesotho only” credit bureau. In addition to cost savings, linking with a South African credit bureau will allow members to track the heavy volume of cross-border borrowing. In order to implement a cross-border credit bureau, the Government will have to undertake a legal and regulatory review and update its legislation and regulations as needed to ensure harmonization with South African privacy and information protection principles and relevant provisions of the South African National Credit Act. Development of a national identification card (“NIDC”) is a necessary step in the process of establishing a credit bureau. The NIDC will restrict all citizens and lawful residents to a single unique identity number that can be used to recognize individuals in multiple information technology (“IT”) systems. MCC will collaborate with the World Bank, which has approved the engagement of an international consultant to conduct a feasibility study that will determine the most effective and cost efficient approach to launch the NIDC, in the final design of this activity. The NIDC will be implemented by a third party and managed by the Lesotho Ministry of Home Affairs (“MoHA”), with oversight provided by the Public-Private Steering Committee, an existing ministerial committee chaired by the Deputy Prime Minister. MCC Funding will support training and capacity building for MoHA employees to assure sustainability. The social/gender specialist employed by MCA-Lesotho will review the World Bank's feasibility study and provide inputs to assure that the NIDC program is safeguarded against human rights abuses and is compliant with the MCC Gender Policy. This system should help protect against gender, HIV and marital status discrimination in banking and credit schemes by providing lenders accurate and objective information on an individual's credit history regardless of gender or HIV/AIDS status. In addition, human rights groups will be consulted during the course of the development and implementation of the scheme to prevent potential human rights abuses or infringements on individuals' private lives. Specifically, MCC Funding will support the following:
(i)Production and issuance costs for NIDC cards, including hardware, software, data capture, staff training and development for the MoHA;
(ii)Consultation in respect of necessary legal and regulatory reforms; and
(iii)Development and execution of a public awareness campaign with respect to the NIDC.
(b)Payments and Settlement Systems Activity. The main objectives of the payment system modernization Project activity are the introduction of automated clearing and alternative payment options that will reduce payment and settlement times and lessen the use of cash and checks. Automated clearing and additional payment options should facilitate trade and improve clearing times for all payment streams, decrease costs associated with funds transfer, reduce fraud, widen access to financial services and reduce poverty by increasing economic growth. Another objective is to strengthen Lesotho's financial infrastructure and promote further integration of its payment and settlement systems with those of its neighbor, South Africa. A large percentage of the population of Lesotho is “unbanked,” including an estimated 85 percent of businesses. In many parts of the country, people travel up to 120 kilometers to access banking services. One of the primary focuses of this activity is to expand the reach of, and institutional participation in, the payments system by, among other things, adding functionality for telephone and other smart card transactions. Another focus is to include the Post Bank in the payments system, which will greatly expand its reach and will provide benefits to rural populations relatively quickly. Adding payment options and channels, such as payments through remote, battery or crank operated point-of-sale terminals will make access more convenient and economical for much of the unbanked population. *Specifically, MCC funding will support the following:*
(i)Reviewing the legal and regulatory structure governing domestic and cross-border payments;
(ii)Harmonizing laws regarding cross-border payments and currency controls;
(iii)Paying for the initial year of the Automated Clearing House (“ACH”) provider's fee for implementation, consultation, training and contract execution in connection with making multiple payment streams available in Lesotho;
(iv)Paying for the costs associated with two imaging machines and ancillary hardware, software and training for operations at the Central Bank of Lesotho if the Central Bank of Lesotho and financial institutions agree to a system for delivering checks directly to the Central Bank of Lesotho from all bank branches for imaging and subsequent forwarding to the ACH provider;
(v)Paying for the costs associated with the distribution of payment options and channels, such as point of sales terminals; and
(vi)Implementing a public awareness campaign for banks and consumers with respect to this Project activity.
(c)Land Administration Reform Activity. Policy and Legal Reform Under this Project activity, MCC Funding will support technical assistance to the Government to revise land reform legislation currently in draft form and to develop its land policy, thereby promoting the use of land as an economic asset. Gender analysis will ensure that revisions to the draft Land Bill are congruent with the Legal Capacity of Married Persons Act and other gender equality reforms and principles. MCC Funding will permit the Government to obtain technical assistance to draft laws and related implementing regulations as needed to realize land policy reforms. Finally, MCC Funding will support the education and training of land administration officials, community councils and the public on land administration issues and the formalization of rights to land. The expected outcomes of this Project activity include adopting a new land policy reinforced by the passage of a new Land Act and the promulgation of its implementing regulations and spreading a wider understanding and awareness of the new land policy among officials and citizens. Systematic Regularization of Land in Urban Areas and Improvement of Rural Land Allocation Processes This Project activity will fund the systematic regularization and upgrading of informal settlements in urban and peri-urban areas, beginning in Maseru and extending to other cities and towns to the extent MCC Funding is available. As part of systematic regularization, local adjudication teams and surveyors will work with occupants to define the boundaries of parcels and establish cadastral plans, design access roads and utility rights of way as needed, and issue leases to the legally recognized title holders. Registration of existing land occupants will be based on inclusive adjudication provisions enacted as part of the legal and regulatory framework. Activities related to systematic regularization of land and improvement of the land allocation process will be designed to increase gender equity through mandatory joint titling of rights to married couples. A public outreach and training program will support the activity by informing occupants of regularization activities and encouraging their cooperation with adjudication teams. Special efforts will be made to ensure that training, public awareness and access to information is available to women and socially vulnerable individuals. MCC Funding will also assist community councils to improve their records of rural land allocations and to support the Government's efforts to train community councils and traditional authorities on the land allocation process. This Project will help train district land teams to complete an inventory of existing land allocations and establish improved record keeping procedures. MCC Funding will also support the Government's (and other donors') ongoing efforts to train community councils and traditional authorities on their roles in land allocation and land management. The expected outcomes of these activities include the formalization and registration of the rights to over 55,000 parcels of informally occupied land in Maseru and other cities of Lesotho; the improvement of records on rural land allocations maintained by community councils; and the training of community councils, traditional authorities, and rural citizens on land allocation and management procedures. Modernization and Improvement of Land Administration Services This Project activity will fund the simplification of land administration procedures and the development of a new land administration authority (“LAA”) that will be:
(i)Professionally managed and operated;
(ii)Operated in a largely autonomous manner in accordance with its objectives;
(iii)Capable of providing cost-effective and efficient services to the public and land information users (including the poor);
(iv)Able to hire and retain qualified managerial and technical staff; and
(v)Self-sustaining. The LAA will be modeled after the Lesotho Revenue Authority, an autonomous parastatal body that collects taxes for the Government. MCC Funding will support the establishment of the technical platform for operation of the LAA, support hiring and training of managerial and technical staff, and provide material resources for the initial operation of the LAA. The expected outcomes of this Project activity include the adoption of a legal basis for the LAA; establishment of the LAA with qualified managerial and technical staff; and development of an appropriate technical platform (e.g., the appropriate land information systems and internal culture) for delivery of streamlined, cost effective and efficient land administration services to the public. Public Outreach and Training This Project activity will fund public outreach and awareness activities in support of all of the land administration reform activities. MCC Funding will support training of land administration staff, community councils and traditional authorities as needed to implement land administration reform in Lesotho. The expected outcomes for this activity are greater public awareness of land matters and the benefits of formal title to land (i.e., a lease) and well-trained land administration staff and community councils. Gender analysis to ensure that revisions of the new Land Act are congruent with the Legal Capacity of Married Persons Act and other gender equality reforms and gender-responsive methodologies and approaches for training, such as separate meetings and training sessions, will be undertaken to ensure that women are included in all education and training for public officials and the public.
(d)Civil Legal Reform Activity. This Project activity is an element of a broader Government program of legal reform and will provide faster, fairer and less expensive resolution of commercial disputes, whether large or small. According to the World Bank “Doing Business” survey, it takes nearly 700 days to resolve a dispute in the courts. This Project activity aims to cut the time and cost required to resolve a commercial dispute in half. This activity will promote an improved investment environment for businesses of all sizes, and will afford ordinary citizens better access to courts for economic disputes. Specifically, MCC funding will support the following:
(i)The development of the Commercial Court, including the drafting and promulgation of procedures, capacity building, and—eventually—reconstruction of a currently unused court building to house the Commercial Court. The court's focus will be on larger commercial disputes;
(ii)The creation of modern case management procedures. All the courts of Lesotho suffer from a lack of modern case management procedures and technology. Modern case management will be introduced to the High Court, the new Commercial Court, and the Magistrate Court of Maseru;
(iii)Promotion of alternative dispute resolution (“ADR”). The focus of this sub-activity will be a program of court-annexed mediation for commercial disputes. Increased use of private ADR will also be promoted; and
(iv)The development of a simplified and expedited small claims process. Smaller commercial claims may have limited recourse to the judicial system. Introduction of a small claims process seeks to provide inexpensive and rapid resolution of the smallest commercial disputes. Any potential gender-based constraints to participation in the Project will be explored during the development of the Program-wide Gender Integration Plan. This Plan will include, as appropriate, recommendations for meaningful and inclusive consultations with women and other vulnerable/underrepresented groups, project-specific gender analyses and strategies for incorporating findings of the gender analyses into final Project designs.
(e)Training and Public Awareness to Support Gender Equality in Economic Rights. MCC and the Government of Lesotho recognize that gender inequality can be a significant constraint to economic growth and poverty reduction. In December 2006, the Government passed into law the Legal Capacity of Married Persons Act which removes the minority status of married women. With assistance from MCC, the Government has already contracted for two related activities: A gender review of laws and policies with recommendations for reform, and the development of a training and public outreach program to realize in practice gender equality in economic rights. The gender review of laws and policies and additional due diligence on the effects of the Legal Capacity of Married Persons Act have revealed contradictions in Lesotho law. Removing these contradictions is important to assure the application of rights in the judiciary and also because poor, rural women do not usually have the resources to initiate an appeal if the conflicting law is the basis for a legal decision. Prior to the first Disbursement, the Government will undertake additional legal reform efforts to assure that the following economic rights are not contradicted by laws enacted prior to the Legal Capacity of Married Persons Act, including the right to:
(i)Enter into a contract, including incurring indebtedness;
(ii)Sue or be sued;
(iii)Register immovable property in her name;
(iv)Act as an executor of a decedent's estate;
(v)Act as a director of a company;
(vi)Act as a trustee of an estate;
(vii)Bind oneself as a surety; and
(viii)Buy, sell and use property as collateral for loans. The PSD Project includes a training and public awareness activity designed to realize gender equality in economic rights and promote enhanced access to credit for women. The first sub-activity is a training program to promulgate the Legal Capacity of Married Persons Act and other reforms aimed at gender equality in the economy. Specifically, MCC Funding will support:
(ix)training the legal community, including judges, magistrates, lawyers, prosecutors, and police, and inclusive of the local and central courts that handle most of the matrimonial disputes;
(x)training and training-of-trainers for relevant government ministries; and
(xi)sector-specific training with special attention to the banking industry, potential women borrowers and those Government entities responsible for regulation and oversight. The second sub-activity is a public awareness and outreach program designed to develop knowledge, awareness and practices in support of these economic rights. This sub-activity will involve traditional authorities, religious leadership, civil society organizations, local government, churches, NGOs, and community-based organizations, including support groups, as stakeholders, and it will be implemented in all ten districts of Lesotho. Specifically, MCC funding will support the following:
(xii)a five-year public awareness campaign dedicated to implementing gender equality in economic rights;
(xiii)activities designed to be appropriate for specific stakeholder groups; and
(xiv)The building of local capacity to continue advocacy for equality in economic rights following the MCC interventions. 2. Project Implementation
(a)Credit Bureau and National Identification Card Activity. Implementation of the credit bureau activity will be managed by the Central Bank of Lesotho with oversight provided by the Public-Private Steering Committee, an existing ministerial committee chaired by the Deputy Prime Minister. The Public-Private Steering Committee's membership will include representation from the Central Bank of Lesotho, which will also have regulatory responsibility for the credit bureau, and the MoHA, which will have regulatory responsibility for the National Identification Card. MCC Funding will pay for the related legal and regulatory review and the consultation needed to ensure harmonization with South African privacy and information protection principles (as well as other relevant provisions of the South African National Credit Act) and will support training for the Central Bank as the credit bureau regulator. The credit bureau will be privately owned and funded and the private credit bureau operator will be responsible for soliciting credit bureau membership and gathering the information needed to populate the credit bureau data base. MCC Funding will assist the roll-out of the NIDC in support of the launching and operation of the credit bureau. MoHA will manage the NIDC implementation with oversight provided by the Public-Private Steering Committee. It is expected that the World Bank will engage the services of an international consultant to determine the most effective and cost efficient approach to launch the NIDC. Recommendations will include card design and implementation processes, as well as the appropriate ID card production system and long-term support systems best suited for Lesotho. Additionally, the consultant will design an advertisement and a public awareness campaign and detail final development processes and costs.
(b)Payments and Settlement Systems Activity. The Government, as the current chair of the South African Development Community, has committed to regional integration of financial systems. In line with that commitment, the Government has opted to implement its payment system improvement by linking with a South African payment system provider rather than developing a standalone, proprietary system with the Central Bank of Lesotho. Implementation of the payments and settlement systems activity will be managed by the Central Bank of Lesotho with oversight by the Public-Private Steering Committee referenced in subsection
(a)above. Representation from the Central Bank of Lesotho, which will have regulatory responsibility for the credit bureau, will be added to this committee to address issues related to both the Credit Bureau activity and the Payments and Settlement System Improvement activity. MCC Funding will pay for the related legal and regulatory review and the consultation needed to ensure harmonization with other countries in the region.
(c)Land Administration Reform Activity. Implementation of the land administration reform activity will require that a project implementation unit (“Land Administration Reform PIU”) be established. The Land Administration Reform PIU will provide technical assistance to the Department of Lands, Surveys, and Physical Planning (“LSPP”) and the new LAA during the course of the Project, but will be more specifically focused on supporting the land administration bodies to meet Compact-related requirements for documentation (for example, project work plans, budgets and quarterly reports), procurements (drafting terms of reference for private sector providers) and performance monitoring and coordination of the activities of various implementers as necessary to achieve component objectives. The LSPP and the new LAA are expected to concentrate on day-to-day business and implementation of the changes in land policy expected during the term of this Compact. The Land Administration Reform PIU, although a separate entity, will be located within the LSPP offices or nearby to ensure close collaboration and communication on subjects related to project implementation. The four sub-activities under this Project activity and the implementing arrangement for each are as follows. Policy and Legal Reform The main implementer of this sub-activity is to be a legal consulting team made up of a legal specialist familiar with international best practices and lawyers with knowledge of legal practices in Lesotho. The legal consulting team will support the LSPP/LAA in the formation of new land policy, drafting laws and regulations implementing the policy, advocating in support of the adoption and broad acceptance of the new land policy, and implementing the land administration reforms (including, for example, training and public outreach, procedural analysis and reform). The legal team will interact and cooperate with other implementers selected to work on land administration reform, supporting their efforts to implement new land policy and assisting in problem resolution. Systematic Regularization and Registration of Urban Land and Improvement of Rural Land Allocation Procedures This sub-activity will be implemented jointly by the LSPP/LAA and a land registration consulting firm that will support the efforts to conduct systematic regularization and registration of urban land rights (focusing on rights to land in informal settlements). The land registration consultant will provide the LSPP/LAA with technical assistance and material resources support (for example, temporary human resource and financial assistance) necessary to complete the systematic regularization and registration task in a timely manner. The LSPP/LAA will also develop and implement improvements in the procedures for recording rural land allocations and the maintenance of such records with technical assistance from the land registration consultant. The consultant, in cooperation with the public outreach consultant and other donor projects, will support the Ministry of Local Government's program for training of community councils and traditional authorities on land allocation procedures under the Law on Local Government of 1997 and new procedures established as part of this activity. Modernize and Improve Land Administration Procedures The main implementer of this sub-activity will be a land information systems consulting firm (“LIS Consultant”), which will work with the current land administration authorities and the Director of the new LAA to establish the LAA. Based on a study of land administration services and needs in Lesotho carried out with MCC Funding, the LIS Consultant will develop appropriate business processes, implement necessary software and hardware solutions, train LAA staff and management on new systems, and monitor the implementation of the new procedures and systems to ensure their efficiency and effectiveness in providing land administration services to private and public users. The LIS Consultant will cooperate closely with the land registration consultant and the legal consulting team to ensure that new processes meet the needs of public and private users and are properly established in the regulatory framework. Public Outreach and Training The main implementer of this sub-activity will be an outreach and training consultant (an NGO), supported by a public education consultant. The consultants will be responsible for organizing all public outreach activities in support of the various activity implementers, including community councils and the LSPP/LAA. The consultants will draft an outreach and training strategy that meets the needs of the LAA and the implementers of each activity. For example, the consultants will cooperate with the LSPP/LAA to form a strategy for raising public awareness of the new LAA, the new simplified procedures and reduced costs for formalizing one's rights to land, and the benefits of formalizing land rights.
(d)Civil Legal Reform Activity. The High Court will be the primary implementer of the civil legal reform Project activity, and will coordinate with the Ministry of Justice as appropriate. A consulting firm will be hired to provide a resident advisor for the first two years of the Project, and other short-term experts and support as required. The High Court will also involve other courts, the Law Society of Lesotho, representatives of the private sector and NGOs—in each case, in an advisory capacity—in planning and implementing all aspects of the Project. Compact Implementation Funding will be used to hire a consultant to develop a detailed implementation plan and to draft a scope of work for the consulting firm.
(e)Training and Public Awareness to Support Gender Equality in Economic Rights. The training and public awareness to support gender equality in economic rights Project activities will be coordinated by the Ministry of Gender, Youth, Sports and Recreation as appropriate. Implementation will be carried out by one or two firms, with partners who have deep knowledge and experience of the context. This firm, or firms, will be selected after an international competition managed by MCA-Lesotho and tendered with the approval of MCC. The social/gender specialist employed by MCA-Lesotho will be charged with providing oversight and general guidance throughout the life of the contract. The social/gender specialist employed by MCA-Lesotho will meet regularly with the representative of the Ministry of Gender, Youth, Sports and Recreation to ensure that benchmarks are being met, the work plan is being followed and that results of the training and public awareness activities are being monitored. 3. Beneficiaries
(a)Credit Bureau, National Identification Card and Payment and Settlement Systems Activity. All economically active (formal sector and informal sector) citizens and legal residents, including married women, are potential beneficiaries of these Project activities. The activities combine to improve the availability of credit and other financial services. There will be a significant reduction in transaction costs for financial institutions both in gathering the information needed to evaluate credit decisions and the cost of payments and settlement, which should result in a reduction in fees for these services to clients. The payment and settlement system will likely put competitive pressures on the bank and non-bank service providers since many of the transactions for which they are now charging high fees (such as remittances) can eventually be provided by other parties unless they remain competitive in pricing and service provision.
(b)Land Administration Reform Activity. The targeted beneficiaries of these Project activities are informal land occupants who now lack formalized rights to land and the security and economic benefits that derive from registered rights in land. All land occupants and right holders will benefit from the adoption of a new land policy that improves access to land and security of land rights. Improvements in land allocation and land record keeping procedures will also benefit all rural land occupants. These improvements will lead to the increased marketability of land, incentives to invest in land and the ability of land to be used to obtain credit. Private business will also benefit from these improvements by generating jobs and increased economic activity in sectors such as mortgage lending, construction, and real property related services (for example, estate agents, property valuers, and land surveyors).
(c)Civil Legal Reform Activity. All active participants in the formal economy of Lesotho are intended beneficiaries of the civil legal reform Project activity. Initially, those economic actors most greatly impacted by the current backlog of High Court cases, such as banks, will benefit most directly. In addition, those individual citizens who now suffer from limited recourse to courts to settle their economic disputes will also be direct beneficiaries. With increasing access to formal justice, it is hoped that fewer individuals will simply accept unfair results from economic transactions or “take the law into their own hands” to settle disputes. Individual Basotho will also benefit by increased access to credit when banks are able to offer increased access to credit, as a result of easier processes developed to collect unpaid debts.
(d)Training and Public Awareness to Support Gender Equality in Economic Rights. Because gender inequality can be a significant constraint to growth and poverty reduction, reducing the barriers to women's full participation as economic actors will benefit all members of Basotho society. 4. Donor Coordination; Role of Private Sector and Civil Society MCC has been actively collaborating with other donors on the NIDC system and the legal reform activities. MCC will work with the World Bank in the roll-out of the NIDC sub-activity. The World Bank has approved the engagement of an international consultant to determine the most effective and cost efficient approach to launch the NIDC. MCC will, upon approval of design and cost elements, assist with funding the roll-out. The development of the private sector development project relied on stakeholder steering committees and consultations with chambers of commerce, textile, and garment industry associations to provide feedback on the impediments to private sector growth and proposed solutions to improving the business and investment climate. In particular, there has been extensive consultation with the banking sector at all stages in establishing the need for and in designing the NIDC, credit bureau and payments and settlement systems sub-activities. The land administration reform activity has been discussed and continues to be discussed with the United Kingdom's Department for International Development (“DfID”) and the German development agency, Deutsche Gesellschaft fr Technische Zusammenarbeit (“GTZ”). These donors are currently active in Lesotho and have experience addressing land administration reform activities and related activities. In particular, project activities on improvement of land allocation practices in rural areas will be coordinated with GTZ and the establishment of the new LAA will be done in consultation with DfID. The land administration reform activities also include a significant role for the private sector and civil society. Private land surveyors will conduct land surveys as part of mass regularization and registration or urban land and public education and outreach activities will largely be implemented by an NGO. 5. USAID USAID does not currently have any financial and private sector development initiatives that focus specifically on the areas identified by MCC for funding in this Project. 6. Sustainability The credit bureau will be privately owned and private sector funded. Formation of a credit bureau has been consistently identified by credit grantors as a prerequisite to granting credit and the cross-border solution selected is less expensive and more comprehensive than a “Lesotho only” credit bureau. The banks have indicated that they will become paying members of the credit bureau. The NIDC activity will be implemented by a third party and managed by the MoHA. A significant portion of the cost will be allocated to hiring experienced (third party) consulting experts to manage the implementation, providing technical expertise (hardware and software) and for training and capacity building for MoHA employees in an effort to assure sustainability. Sustainability is dependent largely on the participation of the four largest banks in Lesotho, three of which have South African parents and already send much of their clearing information to the South African ACH that would likely provide services to Lesotho. The fourth bank is the Post Bank, which is owned by the Government. As a result of the Government's choice to link with a regional payments provider and the consequential reduction in cost and broadening of payment options, the Central Bank of Lesotho has received assurances from each of the banks that they will be a participating (and paying) member of the ACH over the long term. It is also the Central Bank of Lesotho's intent to allow participation of indigenous financial institutions as they become credit worthy and have the capacity to become contributing members. A primary focus to ensure sustainability in the private sector development Project activities will be to fully realize the rights afforded to women under the Legal Capacity of Married Persons Act in each private sector development component. This will be done by integrating women and other individuals with no formal financial history or access to credit, land or litigation experience into each of the activities through targeted outreach and training. In addition, MCA-Lesotho will ensure that all activities are compliant with The Labor Code of 1992 which establishes the minimum age for employment at 15. MCC funding will help establish sustainable improvements in land administration reform through an active capacity building, training, and public education effort. Each activity helps improve local capacity by training local stakeholders on all aspects of land administration and educating the public on processes involved in formalizing land rights and transferring rights to land using formal mechanisms. Establishment of a new land administration authority, with the characteristics described in paragraph D1(c) of this *Annex I* , will raise capacity in land administration, ensuring that the LAA is capable of serving both private and public users of land information efficiently and cost effectively. Social safeguards and gender integration will be reviewed and monitored by the Social/Gender specialist in coordination with the MCA-Lesotho officer responsible for environmental and social impact assessment (the “ESI Officer”). The private sector development Project activity is not expected to result in adverse environmental impacts. However, the MCA-Lesotho ESI Officer will review terms of reference and work plans for all projects and activities to verify that potential environmental impacts are not anticipated. If necessary, the ESI Officer will act in accordance with the MCC Environmental Guidelines and applicable environmental laws and requirements in Lesotho to assess potential impacts, acquire the necessary environmental license and ensure the adequate mitigation is completed during implementation. The Government will be responsible for any environmental mitigation cost not included in the activity budgets. Annex II Summary of Multi-Year Financial Plan 1. General The Multi-Year Financial Plan Summary below sets forth the estimated annual contribution of MCC Funding for Program administration, Program monitoring and evaluation, and implementing each Project. The Government's contribution of resources will consist of “in-kind” and other contributions or amounts required effectively to satisfy the requirements of Section 2.5(a) of this Compact. In accordance with the Program Implementation Agreement, the Government will develop and adopt on a quarterly basis a detailed financial plan (as approved by MCC) setting forth annual and quarterly funding requirements for the Program (including administrative costs) and for each project, projected both on a commitment and cash requirement basis. 2. Modifications To preserve administrative flexibility, the Parties may by written agreement (or as otherwise provided in the Program Implementation Agreement), without amending this Compact, change the designations and allocations of funds among the Projects, the Project activities, or any activity under Program administration or monitoring and evaluation, or between a Project identified as of Entry into Force and a new project; provided, however, that any such change
(a)is consistent with the Objectives and the Program Implementation Agreement,
(b)does not materially adversely affect the applicable Project or any activity under Program administration or monitoring and evaluation,
(c)does not cause the amount of MCC Funding to exceed the aggregate amount specified in Section 2.1(a) of this Compact and
(d)does not cause the Government's obligations or responsibilities or overall contribution of resources to be less than that specified in Section 2.5(a) of this Compact. MULTI-YEAR FINANCIAL PLAN SUMMARY [Totals including Contingencies (US$)] Project CIF funding Year 1 Year 2 Year 3 Year 4 Year 5 Total 1. Water Sector Project A. Metolong Dam Bulk Water Conveyance System 1,490,000 5,840,000 5,700,000 21,540,000 32,300,000 5,590,000 72,460,000 B. Metolong Dam Program Management Unit Activity 1,390,000 1,590,000 1,590,000 3,160,000 3,250,000 3,330,000 14,310,000 C. Urban and Peri-Urban Water Infrastructure Activity 1,250,000 6,520,000 6,450,000 16,690,000 5,540,000 1,010,000 37,460,000 D. WASA Project Implementation Unit 459,000 459,000 918,000 918,000 918,000 918,000 4,590,000 E. Rural Water Supply and Sanitation Infrastructure Activity 5,900,000 7,550,000 5,740,000 5,330,000 5,720,000 30,240,000 F. Wetlands Restoration and Conservation Activity 324,000 783,000 2,025,000 1,026,000 540,000 270,000 4,968,000 Subtotal 4,913,000 21,092,000 24,233,000 49,074,000 47,878,000 16,838,000 164,028,000 2. Health Sector Project A. Health Care Centers Infrastructure Activity 1,023,000 10,770,000 16,008,000 24,688,000 16,155,000 4,290,000 72,934,000 B. ART Clinic Infrastructure Activity 238,000 922,000 1,393,000 1,393,000 696,000 4,642,000 C. Central Lab Infrastructure 305,000 1,221,000 1,221,000 305,000 3,052,000 D. Blood Transfusion Center 538,000 672,000 1,076,000 403,000 2,689,000 E. National Health Training College Dormitory Infrastructure Activity 741,000 3,336,000 2,966,000 371,000 7,414,000 F. Health System Interventions Activity 500,000 2,650,000 3,100,000 3,000,000 3,000,000 2,750,000 15,000,000 G. Medical Waste Management 87,000 1,046,000 1,172,000 684,000 412,000 326,000 3,727,000 H. Health PIU 2,588,000 1,294,000 1,941,000 2,588,000 2,588,000 1,941,000 12,940,000 Subtotal 4,436,000 17,961,000 27,927,000 37,616,000 24,846,000 9,612,000 122,398,000 3. Private Sector Development Project A. Civil Legal Reform Activity 70,000 600,000 775,000 925,000 315,000 185,000 2,870,000 B. National ID/Credit Bureau 95,000 2,977,000 2,481,000 1,900,000 1,455,000 1,092,000 10,000,000 C. Land Administration Reform Activity 510,000 2,415,000 6,800,000 5,200,000 3,600,000 1,975,000 20,500,000 D. Payment and Settlement System Activity 800,000 600,000 300,000 1,700,000 E. Gender Equality in Economic Rights Activity 35,000 350,000 250,000 200,000 100,000 100,000 1,035,000 Subtotal 710,000 7,142,000 10,906,000 8,525,000 5,470,000 3,352,000 36,105,000 4. Monitoring and Evaluation Monitoring and Evaluation 500,000 2,605,000 684,000 755,000 664,000 2,600,000 7,808,000 Subtotal 500,000 2,605,000 684,000 755,000 664,000 2,600,000 7,808,000 5. Program Management and Oversight A. MCA Lesotho 1,981,000 1,905,000 2,142,000 2,323,000 3,423,000 2,660,000 14,434,000 B. Fiscal Agent 1 1,250,000 740,000 1,250,000 1,570,000 1,375,000 475,000 6,660,000 C. Procurement Agent 2 1,250,000 700,000 1,175,000 1,475,000 1,300,000 450,000 6,350,000 D. Bank Contract 5,000 5,000 5,000 5,000 5,000 5,000 30,000 E. Auditing 623,000 623,000 623,000 623,000 623,000 623,000 3,738,000 F. Environmental/Social Oversight (consultants) 200,000 200,000 200,000 200,000 200,000 1,000,000 Subtotal 5,109,000 4,173,000 5,395,000 6,196,000 6,926,000 4,413,000 32,212,000 Total Estimated MCC Contribution 15,668,000 52,973,000 69,145,000 102,166,000 85,784,000 36,815,000 362,551,000 *Note:* Health and Water Sector infrastructure costs include estimated costs for environmental/social studies and mitigation. Annex III. Description of the Monitoring and Evaluation Plan This Annex III to this Compact (the “M&E Annex”) generally describes the components of the plan to measure and evaluate progress toward achievement of the Compact Goal and the Objectives (the “M&E Plan”). Except as defined in this M&E Annex, each capitalized term in this M&E Annex will have the same meaning given such term elsewhere in this Compact. 1. Overview MCC and the Government (or a mutually acceptable Government affiliate or a permitted designee of the Government) will formulate, agree to and the Government will implement, or cause to be implemented, an M&E Plan that specifies
(a)how progress toward the Compact Goal, Objectives, and the intermediate results of each Project and Project activity set forth in this M&E Annex (the “Outcomes”) will be monitored (the “Monitoring Component”);
(b)a methodology, process and timeline for the evaluation of planned, ongoing, or completed Projects and Project activities to determine their efficiency, effectiveness, impact and sustainability (the “Evaluation Component”); and
(c)other components of the M&E Plan described below. Information regarding the Program's performance, including the M&E Plan, and any amendments or modifications thereto, as well as periodically generated reports, will be made publicly available on the MCA-Lesotho Web site and elsewhere. The Compact Goal, Objectives, and Outcomes of the Program can be summarized as follows: EN03AU07.041 2. Monitoring Component To monitor progress toward the achievement of the Compact Goal, Objectives, and Outcomes, the Monitoring Component of the M&E Plan will identify
(a)the Indicators (as defined below);
(b)the party or parties responsible, the timeline, and the instrument for collecting data and reporting on each Indicator to MCA-Lesotho; and
(c)the method by which the reported data will be validated.
(a)Indicators. The M&E Plan will measure the impacts of the Program using objective and reliable information (“Indicators”). Each Indicator will have one or more expected values that specify the expected results and expected time for the impacts to be achieved (“Target”). The M&E Plan will measure and report on Indicators at four levels. First, the Indicator(s) at the Compact Goal level (“Goal Indicator”) will measure the impact of the overall Program and each Project. Second, the Indicators at the Objective level (“Objective Indicator”) will measure the final results of each of the Projects, including impacts on the intended beneficiaries identified in Annex I (collectively, the “Beneficiaries”). Third, Indicators at the intermediate level (“Outcome Indicator”) will measure the results achieved under each of the Project activities and will provide an early measure of the likely impact under each of the Projects. A fourth level of Indicators (“Output Indicator”) will be included in the M&E Plan to measure the direct outputs of Project activities. Indicators will be disaggregated by sex, income level and age, to the extent practicable. Subject to prior written approval from MCC, MCA-Lesotho may add Indicators or modify the Targets of existing Indicators. Compact Goal Indicators, Baselines and Targets 3 Indicator Baseline Year 5 Year 10 GDP growth (annual percent) 1.4 5.1 6.75 GDP per capita (US$) 688 788 1040 3 November 2006 International Monetary Fund Article IV Consultation Paper. Water Project Indicators and Definitions 4 Objective: “Improve water supply for industrial and domestic needs, and enhance rural livelihoods through improved watershed management” Objective-level result Indicator Definition of Indicator Morbidity due to water borne diseases is decreased Incidence of water and sanitation related diseases, nationally (number) Cases of diarrhea reported to health facilities. 5 Jobs in garment industry are retained/expanded Employment (in water related industries) (number) Total factory workers employed in Thetsane and Tikoe industrial parks. Outcome-level Result Urban domestic water supply is improved Urban access to potable water supply (percent) Proportion of urban customers within 150 meters from a water supply. 6 Bulk water supply to lowlands is increased Flow delivered after treatment at Metolong site (m 3 /year) The m 3 /year of water after treatment at Metolong site. WASA operations are improved Unaccounted for urban water (percent) The percentage of urban water that is not accounted for (non-revenue losses plus physical losses). 7 Rural water supply is expanded Number of people covered with MCC rural water supply (number) New people covered per year in rural areas. Covered: within 150m walking distance, 30l/person/day. Rural sanitation is improved Number of new VIP latrines provided to households (number) Total number of new VIP latrines provided to households. 8 4 Note: the wetlands project will be monitored at the output level. 5 Diarrhea will serve as a proxy for all water borne diseases. This information will be disaggregated by urban and rural communities receiving intervention from MCC. 6 This will be disaggregated by WASA center. 7 Ibid. 8 This information will be disaggregated by District. Water Project Indicators and Targets Objective: “Improve water supply for industrial and domestic needs, and enhance rural livelihoods through improved watershed management” Objective-level indicator Baseline Year 5 Incidence of water and sanitation related diseases (number) 55,045 40,000. Employment (in water related industries) (number) 22,700 40,000. Outcome-level Indicator Baseline Year 5. Urban access to potable water supply (percent) 55% 70%. Flow delivered after treatment at Metolong site (m 3 /year) 0 7,640. Unaccounted for urban water (percent) 27% 22%. Number of people covered with MCC rural water supply (number) 0 100,000. Number of new VIP latrines provided to households (number) 0 10,000. Health Project Indicators and Definitions Objective: Increase access to life-extending ART and essential health services by providing a sustainable delivery platform Objective-level result Indicator Mortality rate (per 1000) Definition of Indicator Number of deaths per 1000. 9 Lives are extended People with HIV still alive 12 months after initiation of treatment (percent) Numerator: Number of individuals still alive and on therapy after initiating treatment after 12 months. Denominator: Number of individuals initiating treatment at the same time. Prevalence of TB (per 100,000) Annual notification of all forms of TB per 100,000 population. 10 Outcome-level result Quality of health service delivery is improved Essential health services available (percent) Percentage of facilities providing full package of standard services for level of center disaggregated by ownership. 11 TB treatment success rate (percent) Numerator: Number of patients smear positive declared cured + Number of smear positive patients who completed treatment. Denominator: Total number of TB positive smear cases (national figures). Facilities staffed with standard number and type of qualified staff (percent) Percentage of facilities staffed with standard number and type of qualified staff according to level of facility standard. 12 Usage of health services is increased Total patient visits (number) Total number of patients treated in health centers in Lesotho. Immunization rate (percent) Percent of children under one year of age receiving measles antigen nationwide. Health centers deliveries TBD. 13 Total number of people receiving ARV treatment (number) Total number with advanced HIV/AIDS receiving ARV treatment per year. 14 Health centers are equipped and maintained at standards Utility availability (percent) Percent of health facilities with functioning utilities. 15 Health professionals are trained and retained Total annual enrollment at NHTC (number) Number of students enrolled. 16 Laboratory services are improved Referred tests performed per quarter (number) Average referred tests performed at the central laboratory per quarter during the past year. 17 Blood transfusion services are improved Blood units collected per quarter (number) Average number of blood units collected per quarter during the past year. 9 This information will be disaggregated by age and gender. 10 This information will be disaggregated by district, age and gender. 11 This information will be disaggregated by type of facility-MOHSW and CHAL. The summary statistic is the simple average. 12 Ibid. 13 This indicator definition still requires confirmation. 14 This information will be disaggregated by age and gender and health facility (health centers and hospitals). 15 This information will be disaggregated by electricity, water and communications. 16 This information will be disaggregated by gender and by area of study (e.g., general nursing, lab science, pharmacy technology, and midwifery). 17 This information will be disaggregated by test type: clinical chemistry, cytologty, histology (summary statistic is sum of types). Health Project Indicators and Targets Objective: Increase access to life-extending ART and essential health services by providing a sustainable delivery platform Objective-level result Baseline Year 5 Mortality rate (per 1000) Under 5 = 113 F:15-49 = 9.9 M:15-49 = 12.3 Same as baseline. 18 People with HIV still alive 12 months after initiation of treatment (percent) 82% 90%. Prevalence of TB (per 100,000) 592 400. Outcome-level result Essential health services available (percent) TBD 19 80%. TB treatment success rate (percent) 64% 85%. Facilities staffed with standard number and type of qualified staff (percent) 5% 60%. Total patient visits (number) 800,000 1,000,000. Immunization rate (percent) 78% 90%. Number of people receiving ARV treatment (number) 17,966 35,000. Health centers deliveries TBD TBD. Utility availability (percent) TBD 20 90%. Total annual enrollment at NHTC (number) 350 938. Referred tests performed per quarter (number) 885 1,800. Blood units collected per quarter (number) 700 1,500. 18 Mortality rates would increase in the absence of MCC's intervention. 19 Baseline should be available with the results of the accreditation exercise—expected to be completed by August 2007. 20 Ibid. PSD Project Indicators and Definitions Objective: “Stimulate investment by improving access to credit, reducing transaction costs and increasing the participation of women in the economy” Objective-level result Indicator Definition of Indicator 21 Increased private sector economic activity Value of investment (million maluti) Value of credit extended (million maluti) Outcome-level Results Access to credit is expanded Private credit bureau coverage (percent) The percentage of the adult population listed by a private credit bureau with current information on repayment history, unpaid debts or credit outstanding. Utilization of electronic funds transfer is increased Domestic electronic funds transfers (number) Total number of payments associated with salaries and pensions made through EFT per year. 22 Use of land as collateral is increased Land used as collateral (number) Total annual number of mortgage bonds registered. Land transactions costs (percent of property value) Official costs required by law for businesses to purchase land and a building to transfer the property title from the seller to the buyer so that the buyer can use the property for expanding its business, as collateral in taking new loans or, if necessary, to sell to another business. Use of land as collateral is increased Land transactions times
(days)The median duration that property lawyers or registry officials indicate is necessary to complete a procedure. Commercial dispute resolution is increased Pending civil cases (number) Total number of pending civil cases in the High Court. Knowledge, attitudes, and practices of women's economic rights are improved Gender equality index Percent change in index of knowledge, attitudes, and practices for supporting gender equality in economic rights. 21 These indicator definitions still require confirmation. 22 This number will be disaggregated by salaries and pensions paid by government agencies. PSD Project Indicators and Targets Objective: “Stimulate investment by improving access to credit, reducing transaction costs and increasing the participation of women in the economy” Objective level indicators Baseline 23 Year 5 Value of investment (million maluti) TBD TBD. Value of credit extended (million maluti) TBD TBD. Outcome Level Indicators Private credit bureau coverage (percent) 0% 13%. Domestic electronic funds transfers (number) 0 200,000. Land used as collateral (number) 108 430. Land transactions costs (percent of property value) 8.40% 4.20%. Land transactions times
(days)101 24 30. Pending civil cases (number) 1031 600. Gender equality index TBD 25 TBD. 23 These indicator baselines and targets still require confirmation. 24 This baseline figure is based on the World Bank's “Doing Business” report. As the deeds registry improves its data management, the baseline will be revised according to deeds registry figures. 25 A baseline survey is planned before the end of Year 1.
(b)Data Collection and Reporting. The M&E Plan will establish guidelines for data collection and a reporting framework, including a schedule of Program reporting and responsible parties. The management of MCA-Lesotho will conduct regular assessments of Program performance to inform the MCA-Lesotho board of directors and MCC of progress under the Program and to alert these parties to any problems. These assessments will report the actual results compared to the Targets on the Indicators referenced in the Monitoring Component, explain deviations between these actual results and Targets, and in general, serve as a management tool for implementation of the Program. With respect to any data or reports received by MCA-Lesotho, MCA-Lesotho will promptly deliver such reports to MCC along with any other related documents, as specified in the M&E Plan or as may be requested from time to time by MCC.
(c)Data Quality Reviews. As determined in the M&E Plan or as otherwise requested by MCC, the quality of the data gathered through the M&E Plan will be reviewed to ensure that data reported are as reliable, timely and valid as resources will allow. The objective of any data quality review will be to verify the quality and the consistency of performance data, across different implementation units and reporting institutions. Such data quality reviews also will serve to identify where consistent levels of quality are not possible, given in-country capacity or other constraints. MCA-Lesotho will enter into an agreement (in a form acceptable to MCC) with the Reviewer to fulfill the provisions set forth in Section 1 of this Annex III and this clause (c). 3. Evaluation Component The Program will be evaluated on the extent to which the interventions contribute to the Compact Goal. The Evaluation Component of the M&E Plan will contain a methodology, process and timeline for collecting and analyzing data in order to assess planned, ongoing, or completed Project activities to determine their efficiency, effectiveness, impact and sustainability. The evaluations should use state-of-the-art methods for addressing selection bias. The Government will implement, or cause to be implemented, surveys to collect longitudinal data on both Beneficiary and non-Beneficiary households. The Evaluation Component will contain two types of reports: Final Evaluations and Ad Hoc Evaluations (each as defined below), and will be finalized before any Disbursement for specific Project activities or the Program.
(a)Final Evaluation. MCA-Lesotho will engage an independent evaluator to conduct a program evaluation at the expiration or termination of the Program (“Final Evaluation”). The evaluation methodology, timeline, data collection, and analysis requirements will be finalized and detailed in the M&E Plan. The Final Evaluations must at a minimum
(i)estimate quantitatively and in a statistically valid way, the causal relationship between the Compact Goals (to the extent possible), the Objectives and Outcomes;
(ii)determine if and analyze the reasons why the Compact Goals, Objectives and Outcomes were or were not achieved; and
(iii)assess the overlapping benefits of the Projects.
(b)Ad Hoc Evaluations or Special Studies. Either MCC or MCA-Lesotho may request ad hoc or interim evaluations or special studies of Projects, Project activities, or the Program as a whole prior to the expiration of the Compact Term (each, an “Ad Hoc Evaluation”). If MCA-Lesotho engages an evaluator for an Ad Hoc Evaluation, the evaluator will be an externally contracted independent source selected by MCA-Lesotho, subject to the prior written approval of MCC, following a tender in accordance with the MCC Program Procurement Guidelines, and otherwise in accordance with any relevant Implementation Letter, the Program Implementation Agreement or any other agreement or arrangement entered into by the Government in connection with this Compact or the Program. If MCA-Lesotho requires an ad hoc independent evaluation or special study at the request of the Government for any reason, including for the purpose of contesting an MCC determination with respect to a Project or Project activity or seeking funding from other donors, no MCC Funding or MCA-Lesotho resources may be applied to such evaluation or special study without MCC's prior written approval. 4. Other Components of the M&E Plan In addition to the Monitoring Components and the Evaluation Components, the M&E Plan will include the following components for the Program, Projects and Project activities, including, where appropriate, roles and responsibilities of the relevant parties and Providers:
(a)Costs. A detailed annual budget estimate for all components of the M&E Plan.
(b)Assumptions and Risks. Any assumptions and risks external to the Program that underlie the accomplishment of the Objectives and Outcomes; provided such assumptions and risks will not excuse performance of the Parties, unless otherwise expressly agreed to in writing by the Parties. 5. Implementation of the M&E Plan
(a)Approval and Implementation. The approval and implementation of the M&E Plan, as amended from time to time, will be in accordance with this M&E Annex, the Program Implementation Agreement or any other agreement or arrangement entered into by the Government in connection with this Compact or the Program.
(b)Stakeholders Committee. The completed portions of the M&E Plan will be presented to the stakeholders committee formed in accordance with the Guidelines for Accountable Entities and Implementation Structures provided on the MCC Web site at such stakeholders committee's initial meeting, and any amendments or modifications to and any additional components of the M&E Plan will be presented to such stakeholders committee at appropriate subsequent meetings of such committee. Such stakeholders committee will have the opportunity to present its suggestions to the M&E Plan, which the board of directors of MCA-Lesotho will take into consideration in its review of any amendments to the M&E Plan during the Compact Term.
(c)Disbursement for a Project Activity. As a condition to each Disbursement there will be satisfactory progress on the M&E Plan for the relevant Project or Project activity, and substantial compliance with the M&E Plan, including any reporting requirements. In addition, for certain activities, collection of baseline data may be a condition precedent for specified Disbursements.
(d)Modifications. Notwithstanding anything to the contrary contained in this Compact, including the requirements of this M&E Annex, the Parties may modify or amend the M&E Plan or any component thereof, including those elements described herein, without amending this Compact; provided, however, that any such modification or amendment of the M&E Plan is reviewed by the stakeholders committee referenced in clause
(b)above and has been approved by MCC in writing and is otherwise consistent with the requirements of this Compact and its Objectives, the Program Implementation Agreement and any other relevant agreement or arrangement entered into by the Government in connection with this Compact or the Program. [FR Doc. E7-14812 Filed 8-2-07; 8:45 am] BILLING CODE 9211-03-P 72 149 Friday, August 3, 2007 Rules and Regulations Part IV Department of Health and Human Services Centers for Medicare & Medicaid Services 42 CFR Part 409 Medicare Program; Prospective Payment System and Consolidated Billing for Skilled Nursing Facilities for FY 2008; Final Rule DEPARTMENT OF HEALTH AND HUMAN SERVICES Centers for Medicare & Medicaid Services 42 CFR Part 409 [CMS-1545-F] RIN 0938-AO64 Medicare Program; Prospective Payment System and Consolidated Billing for Skilled Nursing Facilities for FY 2008 AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS. ACTION: Final rule. SUMMARY: This final rule updates the payment rates used under the prospective payment system
(PPS)for skilled nursing facilities
(SNFs)for fiscal year
(FY)2008. In addition, this final rule revises and rebases the SNF market basket, and modifies the threshold for the adjustment to account for market basket forecast error. This final rule also responds to public comments submitted on the proposed rule and makes a technical correction in the regulations text. DATES: This final rule becomes effective on October 1, 2007. FOR FURTHER INFORMATION CONTACT: Ellen Berry,
(410)786-4528 (for information related to the case-mix classification methodology). Mollie Knight,
(410)786-7948 (for information related to the SNF market basket and labor-related share). Jeanette Kranacs,
(410)786-9385 (for information related to the development of the payment rates). Bill Ullman,
(410)786-5667 (for information related to level of care determinations, consolidated billing, and general information). SUPPLEMENTARY INFORMATION: To assist readers in referencing sections contained in this document, we are providing the following Table of Contents. Table of Contents I. Background A. Current System for Payment of Skilled Nursing Facility Services Under Part A of the Medicare Program B. Requirements of the Balanced Budget Act of 1997
(BBA)for Updating the Prospective Payment System for Skilled Nursing Facilities C. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999
(BBRA)D. The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000
(BIPA)E. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA)F. Skilled Nursing Facility Prospective Payment System—General Overview 1. Payment Provisions—Federal Rate 2. Rate Updates Using the Skilled Nursing Facility Market Basket Index II. Summary of the Provisions of the FY 2008 Proposed Rule III. Analysis of and Response to Public Comments on the FY 2008 Proposed Rule A. General Comments on the FY 2008 Proposed Rule B. Annual Update of Payment Rates Under the Prospective Payment System for Skilled Nursing Facilities 1. Federal Prospective Payment System a. Costs and Services Covered by the Federal Rates b. Methodology Used for the Calculation of the Federal Rates 2. Case-Mix Refinements 3. Wage Index Adjustment to Federal Rates 4. Updates to Federal Rates 5. Relationship of RUG-III Classification System to Existing Skilled Nursing Facility Level-of-Care Criteria 6. Example of Computation of Adjusted PPS Rates and SNF Payment C. The Skilled Nursing Facility Market Basket Index 1. Use of the Skilled Nursing Facility Market Basket Percentage 2. Market Basket Forecast Error Adjustment 3. Federal Rate Update Factor D. Revising and Rebasing the Skilled Nursing Facility Market Basket Index E. Consolidated Billing F. Application of the SNF PPS to SNF Services Furnished by Swing-Bed Hospitals IV. Provisions of the Final Rule V. Waiver of Proposed Rulemaking VI. Collection of Information Requirements VII. Regulatory Impact Analysis A. Overall Impact B. Anticipated Effects C. Accounting Statement D. Alternatives Considered E. Conclusion Addendum: FY 2008 CBSA Wage Index Tables (Tables 8 & 9) Abbreviations In addition, because of the many terms to which we refer by abbreviation in this final rule, we are listing these abbreviations and their corresponding terms in alphabetical order below: AIDS Acquired Immune Deficiency Syndrome BBA Balanced Budget Act of 1997, Pub. L. 105-33 BBRA Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999, Pub. L. 106-113 BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, Pub. L. 106-554 CAH Critical Access Hospital CBSA Core-Based Statistical Area CFR Code of Federal Regulations CMS Centers for Medicare & Medicaid Services ECI Employment Cost Index FLSA Fair Labor Standards Act, Pub. L. 75-718 FQHC Federally Qualified Health Center FR **Federal Register** FY Fiscal Year GAO Government Accountability Office GII Global Insight, Inc. HCPCS Healthcare Common Procedure Coding System MCR Medicare Cost Report MDS Minimum Data Set MEDPAC Medicare Payment Advisory Commission MEDPAR Medicare Provider Analysis and Review File MIEA Medicare Improvements and Extension Act of 2006, Pub. L. 109-432 MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. 108-173 MSA Metropolitan Statistical Area OMB Office of Management and Budget PPI Producer Price Index PPS Prospective Payment System RFA Regulatory Flexibility Act, Pub. L. 96-354 RHC Rural Health Clinic RIA Regulatory Impact Analysis RUG-III Resource Utilization Groups, Version III RUG-53 Refined 53-Group RUG-III Case-Mix Classification System SCHIP State Children's Health Insurance Program SNF Skilled Nursing Facility STM Staff Time Measurement UMRA Unfunded Mandates Reform Act, Pub. L. 104-4 I. Background On May 4, 2007, we published a proposed rule in the **Federal Register** (72 FR 25526, hereafter referred to as the FY 2008 proposed rule), setting forth the proposed updates to the payment rates used under the prospective payment system
(PPS)for skilled nursing facilities
(SNFs)for FY 2008. Annual updates to the prospective payment system
(PPS)rates for skilled nursing facilities
(SNFs)are required by section 1888(e) of the Social Security Act (the Act), as added by section 4432 of the Balanced Budget Act of 1997 (BBA), and amended by the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA), the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA), and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). Our most recent annual update occurred in an update notice (71 FR 43158, July 31, 2006) that set forth updates to the SNF PPS payment rates for fiscal year
(FY)2007. We subsequently published a correction notice (71 FR 57519, September 29, 2006) with respect to those payment rate updates. A. Current System for Payment of Skilled Nursing Facility Services Under Part A of the Medicare Program Section 4432 of the Balanced Budget Act of 1997
(BBA)amended section 1888 of the Act to provide for the implementation of a per diem PPS for SNFs, covering all costs (routine, ancillary, and capital-related) of covered SNF services furnished to beneficiaries under Part A of the Medicare program, effective for cost reporting periods beginning on or after July 1, 1998. In this final rule, we are updating the per diem payment rates for SNFs for FY 2008. Major elements of the SNF PPS include: • *Rates.* As discussed in section I.F.1 of the FY 2008 proposed rule, we established per diem Federal rates for urban and rural areas using allowable costs from FY 1995 cost reports. These rates also included an estimate of the cost of services that, before July 1, 1998, had been paid under Part B but furnished to Medicare beneficiaries in a SNF during a Part A covered stay. We update the rates annually using a SNF market basket index, and we adjust them by the hospital inpatient wage index to account for geographic variation in wages. We also apply a case-mix adjustment to account for the relative resource utilization of different patient types. This adjustment utilizes a refined, 53-group version of the Resource Utilization Groups, version III (RUG-III) case-mix classification system, based on information obtained from the required resident assessments using the Minimum Data Set
(MDS)2.0. Additionally, as noted in the August 4, 2005 final rule (70 FR 45028), the payment rates at various times have also reflected specific legislative provisions, including section 101 of the BBRA, sections 311, 312, and 314 of the BIPA, and section 511 of the MMA. • *Transition.* Under sections 1888(e)(1)(A) and (e)(11) of the Act, the SNF PPS included an initial, three-phase transition that blended a facility-specific rate (reflecting the individual facility's historical cost experience) with the Federal case-mix adjusted rate. The transition extended through the facility's first three cost reporting periods under the PPS, up to and including the one that began in FY 2001. Thus, the SNF PPS is no longer operating under the transition, as all facilities have been paid at the full Federal rate effective with cost reporting periods beginning in FY 2002. As we now base payments entirely on the adjusted Federal per diem rates, we no longer include adjustment factors related to facility-specific rates for the coming fiscal year. • *Coverage.* The establishment of the SNF PPS did not change Medicare's fundamental requirements for SNF coverage. However, because the RUG-III classification is based, in part, on the beneficiary's need for skilled nursing care and therapy, we have attempted, where possible, to coordinate claims review procedures with the output of beneficiary assessment and RUG-III classifying activities. This approach includes an administrative presumption that utilizes a beneficiary's initial classification in one of the upper 35 RUGs of the refined 53-group system to assist in making certain SNF level of care determinations, as was discussed in greater detail in section II.E. of the FY 2008 proposed rule. • *Consolidated Billing.* The SNF PPS includes a consolidated billing provision that requires a SNF to submit consolidated Medicare bills to its fiscal intermediary for almost all of the services that its residents receive during the course of a covered Part A stay. While section 313 of the BIPA repealed the Part B aspect of the consolidated billing requirement, SNFs maintain responsibility for submitting consolidated Medicare bills to the fiscal intermediary for physical, occupational, and speech-language therapy that residents receive during a noncovered stay. The statute excludes a small list of services from the consolidated billing provision (primarily those of physicians and certain other types of practitioners), which remain separately billable under Part B when furnished to a SNF's Part A resident. A more detailed discussion of this provision appeared in section V. of the FY 2008 proposed rule. • *Application of the SNF PPS to SNF Services Furnished by Swing-bed Hospitals.* Section 1883 of the Act permits certain small, rural hospitals to enter into a Medicare swing-bed agreement, under which the hospital can use its beds to provide either acute or SNF care, as needed. For critical access hospitals (CAHs), Part A pays on a reasonable cost basis for SNF services furnished under a swing-bed agreement. However, in accordance with section 1888(e)(7) of the Act, these services furnished by non-CAH rural hospitals are paid under the SNF PPS, effective with cost reporting periods beginning on or after July 1, 2002. A more detailed discussion of this provision can be found in section VI. of the FY 2008 proposed rule. • *Technical Correction.* We are also taking this opportunity to make a technical correction in the text of the regulations, as discussed in greater detail in section IV of this final rule. B. Requirements of the Balanced Budget Act of 1997
(BBA)for Updating the Prospective Payment System for Skilled Nursing Facilities Section 1888(e)(4)(H) of the Act requires that we publish annually in the **Federal Register:** 1. The unadjusted Federal per diem rates to be applied to days of covered SNF services furnished during the FY. 2. The case-mix classification system to be applied with respect to these services during the FY. 3. The factors to be applied in making the area wage adjustment with respect to these services. In the July 30, 1999 final rule (64 FR 41670), we indicated that we would announce any changes to the guidelines for Medicare level of care determinations related to modifications in the RUG-III classification structure (see section II.E of the FY 2008 proposed rule for a discussion of the relationship between the case-mix classification system and SNF level of care determinations). Along with a number of other revisions outlined later in this preamble, this final rule provides the annual updates to the Federal rates as mandated by the Act. C. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999
(BBRA)There were several provisions in the BBRA that resulted in adjustments to the SNF PPS. We described these provisions in detail in the final rule that we published in the **Federal Register** on July 31, 2000 (65 FR 46770). In particular, section 101(a) of the BBRA provided for a temporary 20 percent increase in the per diem adjusted payment rates for 15 specified RUG-III groups. In accordance with section 101(c)(2) of the BBRA, this temporary payment adjustment expired on January 1, 2006, with the implementation of case-mix refinements (see section I.F.1. of this final rule). We included further information on BBRA provisions that affected the SNF PPS in Program Memorandums A-99-53 and A-99-61 (December 1999). Also, section 103 of the BBRA designated certain additional services for exclusion from the consolidated billing requirement, as discussed in section V. of the FY 2008 proposed rule and in Program Memorandum AB-00-18 (Change Request #1070), issued March 2000, which is available online at *http://www.cms.hhs.gov/transmittals/downloads/AB001860.pdf.* Further, for swing-bed hospitals with more than 49 (but less than 100) beds, section 408 of the BBRA provided for the repeal of certain statutory restrictions on length of stay and aggregate payment for patient days, effective with the end of the SNF PPS transition period described in section 1888(e)(2)(E) of the Act. In the July 31, 2001 final rule (66 FR 39562), we made conforming changes to the regulations at § 413.114(d), effective for services furnished in cost reporting periods beginning on or after July 1, 2002, to reflect section 408 of the BBRA. D. The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000
(BIPA)The BIPA also included several provisions that resulted in adjustments to the SNF PPS. We described these provisions in detail in the final rule that we published in the **Federal Register** on July 31, 2001 (66 FR 39562). In particular: • Section 203 of the BIPA exempted CAH swing-beds from the SNF PPS. We included further information on this provision in Program Memorandum A-01-09 (Change Request #1509), issued January 16, 2001, which is available online at *http://www.cms.hhs.gov/transmittals/downloads/a0109.pdf.* • Section 311 of the BIPA revised the statutory update formula for the SNF market basket, and also directed us to conduct a study of alternative case-mix classification systems for the SNF PPS. In 2006, we submitted a report to the Congress on this study, which is available online at *http://www.cms.hhs.gov/snfpps/downloads/rc_2006_pc-ppssnf.pdf.* • Section 312 of the BIPA provided for a temporary increase of 16.66 percent in the nursing component of the case-mix adjusted Federal rate for services furnished on or after April 1, 2001, and before October 1, 2002. The add-on is no longer in effect. This section also directed the Government Accountability Office
(GAO)to conduct an audit of SNF nursing staff ratios and submit a report to the Congress on whether the temporary increase in the nursing component should be continued. The report (GAO-03-176), which GAO issued in November 2002, is available online at *http://www.gao.gov/new.items/d03176.pdf.* • Section 313 of the BIPA repealed the consolidated billing requirement for services (other than physical, occupational, and speech-language therapy) furnished to SNF residents during noncovered stays, effective January 1, 2001. (A more detailed discussion of this provision appears in section V. of the FY 2008 proposed rule.) • Section 314 of the BIPA corrected an anomaly involving three of the RUGs that the BBRA had designated to receive the temporary payment adjustment discussed above in section I.C. of this final rule. (As noted previously, in accordance with section 101(c)(2) of the BBRA, this temporary payment adjustment expired with the implementation of case-mix refinements on January 1, 2006.) • Section 315 of the BIPA authorized us to establish a geographic reclassification procedure that is specific to SNFs, but only after collecting the data necessary to establish a SNF wage index that is based on wage data from nursing homes. As discussed in section III.B.3 of this final rule, this has proven not to be feasible due to the volatility of existing SNF wage data and the significant amount of resources that would be required to improve the quality of such data. We included further information on several of the BIPA provisions in Program Memorandum A-01-08 (Change Request #1510), issued January 16, 2001, which is available online at *http://www.cms.hhs.gov/transmittals/downloads/a0108.pdf.* E. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA)The MMA included a provision that results in a further adjustment to the SNF PPS. Specifically, section 511 of the MMA amended section 1888(e)(12) of the Act to provide for a temporary increase of 128 percent in the PPS per diem payment for any SNF resident with Acquired Immune Deficiency Syndrome (AIDS), effective with services furnished on or after October 1, 2004. This special AIDS add-on was to remain in effect until “* * * such date as the Secretary certifies that there is an appropriate adjustment in the case mix * * *.” The AIDS add-on is also discussed in Program Transmittal #160 (Change Request #3291), issued on April 30, 2004, which is available online at *http://www.cms.hhs.gov/transmittals/downloads/r160cp.pdf.* As discussed in the SNF PPS final rule for FY 2006 (70 FR 45028, August 4, 2005), we did not address the certification of the AIDs add-on with the implementation of the case-mix refinements, thus allowing the temporary add-on payment created by section 511 of the MMA to continue in effect. For the limited number of SNF residents that qualify for the AIDS add-on, implementation of this provision results in a significant increase in payment. For example, using fiscal year 2006 data, we identified 2,590 SNF residents with a principal or secondary diagnosis code of 042 (“Human Immunodeficiency Virus
(HIV)Infection”). For FY 2008, an urban facility with a resident with AIDS in RUG group “SSA” would have a case-mix adjusted payment of almost $250.65 (see Table 4) before the application of the MMA adjustment. After an increase of 128 percent, this urban facility would receive a case-mix adjusted payment of approximately $571.48. In addition, section 410 of the MMA contained a provision that excluded from consolidated billing certain practitioner and other services furnished to SNF residents by rural health clinics
(RHCs)and Federally Qualified Health Centers (FQHCs). (A more detailed discussion of this provision appears in section V. of the FY 2008 proposed rule, as well as in Program Transmittal #390 (Change Request #3575), issued December 10, 2004, which is available online at *http://www.cms.hhs.gov/transmittals/downloads/r390cp.pdf.* ) F. Skilled Nursing Facility Prospective Payment System—General Overview We implemented the Medicare SNF PPS effective with cost reporting periods beginning on or after July 1, 1998. This PPS pays SNFs through prospective, case-mix adjusted per diem payment rates applicable to all covered SNF services. These payment rates cover all costs of furnishing covered skilled nursing services (routine, ancillary, and capital-related costs) other than costs associated with approved educational activities. Covered SNF services include post-hospital services for which benefits are provided under Part A and all items and services that, before July 1, 1998, had been paid under Part B (other than physician and certain other services specifically excluded under the BBA) but were furnished to Medicare beneficiaries in a SNF during a covered Part A stay. A complete discussion of these provisions appears in the May 12, 1998 interim final rule (63 FR 26252). 1. Payment Provisions—Federal Rate The PPS uses per diem Federal payment rates based on mean SNF costs in a base year updated for inflation to the first effective period of the PPS. We developed the Federal payment rates using allowable costs from hospital-based and freestanding SNF cost reports for reporting periods beginning in FY 1995. The data used in developing the Federal rates also incorporated an estimate of the amounts that would be payable under Part B for covered SNF services furnished to individuals during the course of a covered Part A stay in a SNF. In developing the rates for the initial period, we updated costs to the first effective year of the PPS (the 15-month period beginning July 1, 1998) using a SNF market basket index, and then standardized for the costs of facility differences in case-mix and for geographic variations in wages. In compiling the database used to compute the Federal payment rates, we excluded those providers that received new provider exemptions from the routine cost limits, as well as costs related to payments for exceptions to the routine cost limits. Using the formula that the BBA prescribed, we set the Federal rates at a level equal to the weighted mean of freestanding costs plus 50 percent of the difference between the freestanding mean and weighted mean of all SNF costs (hospital-based and freestanding) combined. We computed and applied separately the payment rates for facilities located in urban and rural areas. In addition, we adjusted the portion of the Federal rate attributable to wage-related costs by a wage index. The Federal rate also incorporates adjustments to account for facility case-mix, using a classification system that accounts for the relative resource utilization of different patient types. The RUG-III classification system uses beneficiary assessment data from the Minimum Data Set
(MDS)completed by SNFs to assign beneficiaries to one of 53 RUG-III groups. The original RUG-III case-mix classification system included 44 groups. However, under refinements that became effective on January 1, 2006, we added nine new groups—comprising a new Rehabilitation plus Extensive Services category—at the top of the RUG hierarchy. The May 12, 1998 interim final rule (63 FR 26252) included a complete and detailed description of the original 44-group RUG-III case-mix classification system. A comprehensive description of the refined 53-group RUG-III case-mix classification system (RUG-53) appeared in the proposed and final rules for FY 2006 (70 FR 29070, May 19, 2005, and 70 FR 45026, August 4, 2005). Further, in accordance with section 1888(e)(4)(E)(ii)(IV) of the Act, the Federal rates in this final rule reflect an update to the rates that we published in the July 31, 2006 final rule for FY 2007 (71 FR 43158) and the associated correction notice (71 FR 57519, September 29, 2006), equal to the full change in the SNF market basket index. A more detailed discussion of the SNF market basket index and related issues appears in sections I.F.2. and III.C of the FY 2008 proposed rule. 2. Rate Updates Using the Skilled Nursing Facility Market Basket Index Section 1888(e)(5) of the Act requires us to establish a SNF market basket index that reflects changes over time in the prices of an appropriate mix of goods and services included in covered SNF services. We use the SNF market basket index to update the Federal rates on an annual basis. In the FY 2008 proposed rule, we proposed to revise and rebase the market basket to reflect 2004 Medicare-allowable cost data, as detailed in section III.A of that proposed rule. The proposed FY 2008 market basket increase was 3.3 percent. (However, we also noted that both the President's budget and the recommendations of the Medicare Payment Advisory Commission (MedPAC) included a proposal for a zero percent update in the SNF market basket for FY 2008, and that the provisions outlined in the proposed rule would need to reflect any legislation that the Congress might enact to adopt this proposal.) In the FY 2008 proposed rule, we also proposed to revise the threshold percentage that serves to trigger an adjustment to account for market basket forecast error, which we discuss in greater detail in section III.C.2 of this final rule. Table 1 below shows the forecasted and actual market basket amount for FY 2006. Table 1.—Difference Between the Forecasted and Actual Market Basket Increases for FY 2006 Index Forecasted actual FY 2006 increase* Actual FY 2006 increase** FY 2006 difference SNF 3.1 3.4 0.3 *Published in Federal Register ; based on the second quarter 2005 Global Insight Inc. forecast (97 index). **Based on the second quarter 2007 Global Insight forecast (97 index). II. Summary of the Provisions of the FY 2008 Proposed Rule The FY 2008 proposed rule included proposed updates to the Federal payment rates used under the SNF PPS. In accordance with section 1888(e)(4)(E)(ii)(IV) of the Act, the updates reflect the full SNF market basket percentage change for the fiscal year. We also proposed to revise and rebase the SNF market basket (which would include updating the base year from FY 1997 to FY 2004), and to modify the threshold that serves to trigger an adjustment to account for market basket forecast error. In addition, we proposed to specify an area wage adjustment methodology for those geographic areas that lack hospital wage index data. Further, we invited public comments on additional HCPCS codes that could represent the type of “high-cost, low probability” services within certain designated service categories (that is, chemotherapy and its administration, radioisotope services, and customized prosthetic devices) that section 103 of the BBRA has authorized us to exclude from the SNF consolidated billing provision. More detailed information on each of these issues, to the extent that we received public comments on them, appears in the discussion contained in the following sections of this final rule. III. Analysis of and Response to Public Comments on the FY 2008 Proposed Rule In response to the publication of the May 4, 2007 proposed rule for FY 2008, we received 17 timely items of correspondence from the public. The comments originated primarily from various trade associations and major organizations, but also from individual providers, corporations, and government agencies. Brief summaries of each proposed provision, a summary of the public comments we received and our responses to the comments are set forth below. A. General Comments on the FY 2008 Proposed Rule In addition to the comments that we received on the proposed rule's discussion of specific aspects of the SNF PPS (which we address later in this final rule), commenters also submitted the following, more general observations on the payment system. *Comment:* Some commenters asked us to consider modifications to the SNF PPS payment system that would better recognize the specialized care provided in hospital-based SNFs. A few commenters encouraged us to create a SNF outlier policy. Other commenters requested that we address perceived inadequacies in payment for non-therapy ancillary services, including those services relating to the provision of ventilator care in SNFs. *Response:* As noted previously in section I.F.1 of this final rule, the SNF PPS final rule for FY 2006 (70 FR 45034, August 4, 2005) introduced a refined case-mix classification system as of January 1, 2006, which added nine new Rehabilitation plus Extensive Service groups to the RUG hierarchy to account more accurately for patients with both rehabilitation needs and extensive services. At that time, we described the FY 2006 refinements as a first step in updating the SNF PPS. We described our intent to perform a staff time measurement study, in which we would survey SNFs and collect data that better reflects current practice patterns and resource use. We are concerned that incentives of the SNF PPS and the public reporting of nursing home quality measures likely have altered industry practices, and have had a significant impact on the nursing resources required to treat different types of patients. The Staff Time and Resource Intensity Verification (STRIVE) project started onsite facility data collection in the spring of 2006, and will continue to collect data through the summer of 2007. When complete, the study will have collected data from approximately 200 facilities from approximately 15 States. While facilities were selected largely based on random sampling techniques, targeted sampling was also performed to ensure adequate representation of special populations, such as residents in hospital-based facilities. In addition to providing us with data to analyze and evaluate how current industry practices have affected the Federal classification system, the data will enable us to analyze non-therapy ancillary usage more thoroughly, assess the need for a SNF outlier policy, and gain a better understanding of the resource usage of residents in hospital-based SNFs. We plan to make available some preliminary analysis results in 2008, which should aid us in reviewing and addressing some of the concerns expressed by the commenters. B. Annual Update of Payment Rates Under the Prospective Payment System for Skilled Nursing Facilities 1. Federal Prospective Payment System This final rule sets forth a schedule of Federal prospective payment rates applicable to Medicare Part A SNF services beginning October 1, 2007. The schedule incorporates per diem Federal rates that provide Part A payment for all costs of services furnished to a beneficiary in a SNF during a Medicare-covered stay. a. Costs and Services Covered by the Federal Rates The Federal rates apply to all costs (routine, ancillary, and capital-related) of covered SNF services other than costs associated with approved educational activities as defined in § 413.85. Under section 1888(e)(2) of the Act, covered SNF services include post-hospital SNF services for which benefits are provided under Part A (the hospital insurance program), as well as all items and services (other than those services excluded by statute) that, before July 1, 1998, were paid under Part B (the supplementary medical insurance program) but furnished to Medicare beneficiaries in a SNF during a Part A covered stay. (These excluded service categories are discussed in greater detail in section V.B.2. of the May 12, 1998 interim final rule (63 FR 26295-97)). b. Methodology Used for the Calculation of the Federal Rates The FY 2008 rates reflect an update using the full amount of the latest market basket index. The FY 2008 market basket increase factor is 3.3 percent. A complete description of the multi-step process initially appeared in the May 12, 1998 interim final rule (63 FR 26252), as further revised in subsequent rules. We note that in accordance with section 101(c)(2) of the BBRA, the previous, temporary increases in the per diem adjusted payment rates for certain designated RUGs, as specified in section 101(a) of the BBRA and section 314 of the BIPA, are no longer in effect due to the implementation of case-mix refinements as of January 1, 2006. However, the temporary increase of 128 percent in the per diem adjusted payment rates for SNF residents with AIDS, enacted by section 511 of the MMA, remains in effect. We used the SNF market basket to adjust each per diem component of the Federal rates forward to reflect cost increases occurring between the midpoint of the Federal fiscal year beginning October 1, 2006, and ending September 30, 2007, and the midpoint of the Federal fiscal year beginning October 1, 2007, and ending September 30, 2008, to which the payment rates apply. In accordance with section 1888(e)(4)(E)(ii)(IV) of the Act, we update the payment rates for FY 2008 by a factor equal to the full market basket index percentage increase. We further adjusted the rates by a wage index budget neutrality factor, described later in this section. Tables 2 and 3 reflect the updated components of the unadjusted Federal rates for FY 2008. Table 2.—FY 2008 Unadjusted Federal Rate Per Diem Urban Rate component Nursing-case-mix Therapy-case-mix Therapy-non-case-mix Non-case-mix Per Diem Amount $146.62 $110.44 $14.54 $74.83 Table 3.—FY 2008 Unadjusted Federal Rate Per Diem Rural Rate component Nursing-case-mix Therapy-case-mix Therapy-non-case-mix Non-case-mix Per Diem Amount $140.08 $127.35 $15.54 $76.21 2. Case-Mix Refinements Under the BBA, each update of the SNF PPS payment rates must include the case-mix classification methodology applicable for the coming Federal fiscal year. As indicated previously in section I.F.1, the payment rates set forth in this final rule reflect the use of the refined RUG-53 classification system that we discussed in detail in the proposed and final rules for FY 2006 (70 FR 29070, May 19, 2005, and 70 FR 45026, August 4, 2005). As noted in the FY 2006 final rule, we deferred RUG-53 implementation from the beginning of FY 2006 (October 1, 2005) until January 1, 2006, in order to allow sufficient time to prepare for and ease the transition to the refinements (70 FR 45034). We list the case-mix adjusted payment rates separately for urban and rural SNFs in Tables 4 and 5, with the corresponding case-mix values. These tables do not reflect the AIDS add-on enacted by section 511 of the MMA, which we apply only after making all other adjustments (wage and case-mix). BILLING CODE 4120-01-P ER03AU07.000 ER03AU07.001 BILLING CODE 4120-01-C 3. Wage Index Adjustment to Federal Rates Section 1888(e)(4)(G)(ii) of the Act requires that we adjust the Federal rates to account for differences in area wage levels, using a wage index that we find appropriate. Since the inception of a PPS for SNFs, we have used hospital wage data in developing a wage index to be applied to SNFs. We proposed and are finalizing that practice for FY 2008, as we continue to believe that in the absence of SNF-specific wage data, using the hospital inpatient wage data is appropriate and reasonable for the SNF PPS. As explained in the update notice for FY 2005 (69 FR 45786, July 30, 2004), the SNF PPS does not use the hospital area wage index's occupational mix adjustment, as this adjustment serves specifically to define the occupational categories more clearly in a hospital setting; moreover, the collection of the occupational wage data also excludes any wage data related to SNFs. Therefore, we believe that using the updated wage data exclusive of the occupational mix adjustment continues to be appropriate for SNF payments. *Comment:* A few commenters requested that we develop a SNF-specific wage index and subsequently allow geographic reclassification. *Response:* The regulations that govern the SNF PPS currently do not provide a mechanism for allowing providers to seek geographic reclassification. Moreover, as we have explained on numerous occasions in the past (most recently, in the SNF PPS final rule for FY 2006, 70 FR 45040-45041, August 4, 2005), while section 315 of the BIPA does authorize us to establish such a reclassification methodology under the SNF PPS, it additionally stipulates that such reclassification cannot be implemented until we have collected the data necessary to establish a SNF-specific wage index. This, in turn, has proven not to be feasible due to “. . . the volatility of existing SNF wage data and the significant amount of resources that would be required to improve the quality of that data” (70 FR 45041). We continue to believe that these factors make it unlikely for such an approach to yield meaningful improvements in our ability to determine facility payments, or to justify the significant increase in administrative resources as well as burden on providers that this type of data collection would involve. We plan to monitor current research efforts on wage index issues nonetheless. Section 106(b)(1)(A) of the Medicare Improvements and Extension Act of 2006 (MIEA, Pub. L. 109-432) requires MedPAC to submit a report to the Congress on the wage index not later than June 30, 2007. MIEA requires the report to include any alternatives the Commission recommends to the method to compute the wage index. MedPAC discusses this issue in its Report to the Congress entitled “Promoting Greater Efficiency in Medicare” (June 2007), which is available online at *http://www.medpac.gov/documents/Jun07_EntireReport.pdf.* The Secretary is required to consider MedPAC's recommendations and nine specific aspects of the wage index as part of making one or more proposals in the Hospital Inpatient PPS
(IPPS)proposed rule for FY 2009. *Comment:* One commenter suggested that CMS provide an adjustment to certain States due to the impact of the new Federal minimum wage on the wage index. *Response:* On May 25, 2007, the President signed the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007 (Pub. L. 110-28) that, among other things, amended the Fair Labor Standards Act (FLSA, Pub. L. 75-718) to increase the Federal minimum wage in three steps: to $5.85 per hour effective July 24, 2007; to $6.55 per hour effective July 24, 2008; and to $7.25 per hour effective July 24, 2009. Wage data reflecting the new Federal minimum wage will not be available for the FY 2008 SNF PPS. We plan to monitor current research efforts on all wage index issues, including the MIEA-required MedPAC report and the IPPS proposed rule for FY 2009. In this final rule, we apply the wage index adjustment to the labor-related portion of the Federal rate, which is 70.152 percent of the total rate. This percentage reflects the labor-related relative importance for FY 2008, using the revised and rebased FY 2004-based market basket. The labor-related relative importance for FY 2007 was 75.839, using the FY 1997-based market basket, as shown in Table 13. We calculate the labor-related relative importance from the SNF market basket, and it approximates the labor-related portion of the total costs after taking into account historical and projected price changes between the base year and FY 2008. The price proxies that move the different cost categories in the market basket do not necessarily change at the same rate, and the relative importance captures these changes. Accordingly, the relative importance figure more closely reflects the cost share weights for FY 2008 than the base year weights from the SNF market basket. We calculate the labor-related relative importance for FY 2008 in four steps. First, we compute the FY 2008 price index level for the total market basket and each cost category of the market basket. Second, we calculate a ratio for each cost category by dividing the FY 2008 price index level for that cost category by the total market basket price index level. Third, we determine the FY 2008 relative importance for each cost category by multiplying this ratio by the base year (FY 1997) weight. Finally, we add the FY 2008 relative importance for each of the labor-related cost categories (wages and salaries, employee benefits, nonmedical professional fees, labor-intensive services, and a portion of capital-related expenses) to produce the FY 2008 labor-related relative importance. Tables 6 and 7 show the Federal rates by labor-related and non-labor-related components. BILLING CODE 4120-01-P ER03AU07.002 ER03AU07.003 BILLING CODE 4120-01-C Section 1888(e)(4)(G)(ii) of the Act also requires that we apply this wage index in a manner that does not result in aggregate payments that are greater or less than would otherwise be made in the absence of the wage adjustment. For FY 2008 (Federal rates effective October 1, 2007), we apply the most recent wage index using the hospital inpatient wage data, and also apply an adjustment to fulfill the budget neutrality requirement. We meet this requirement by multiplying each of the components of the unadjusted Federal rates by a factor equal to the ratio of the volume weighted mean wage adjustment factor (using the wage index from the previous year) to the volume weighted mean wage adjustment factor, using the wage index for the FY beginning October 1, 2007. We use the same volume weights in both the numerator and denominator, and derive them from the 1997 Medicare Provider Analysis and Review File (MEDPAR) data. We define the wage adjustment factor used in this calculation as the labor share of the rate component multiplied by the wage index plus the non-labor share. The budget neutrality factor for this year is 0.9993. The wage index applicable to FY 2008 appears in Tables 8 and 9 of this final rule, which are attached as an addendum. In the SNF PPS final rule for FY 2006 (70 FR 45026, August 4, 2005), we adopted the changes discussed in the Office of Management and Budget
(OMB)Bulletin No. 03-04 (June 6, 2003), available online at *http://www.whitehouse.gov/omb/bulletins/b03-04.html,* which announced revised definitions for Metropolitan Statistical Areas (MSAs), and the creation of Micropolitan Statistical Areas and Combined Statistical Areas. In addition, OMB published subsequent bulletins regarding CBSA changes, including changes in CBSA numbers and titles. We clarified that this and all subsequent SNF PPS rules and notices are considered to incorporate the CBSA changes published in the most recent OMB bulletin that applies to the hospital wage data used to determine the current SNF PPS wage index. The OMB bulletins are available online at *http://www.whitehouse.gov/omb/bulletins/index.html.* In adopting the OMB Core-Based Statistical Area
(CBSA)geographic designations, we provided for a 1-year transition with a blended wage index for all providers. For FY 2006, the wage index for each provider consisted of a blend of 50 percent of the FY 2006 MSA-based wage index and 50 percent of the FY 2006 CBSA-based wage index (both using FY 2002 hospital data). We referred to the blended wage index as the FY 2006 SNF PPS transition wage index. As discussed in the SNF PPS final rule for FY 2006 (70 FR 45041, August 4, 2005), subsequent to the expiration of this 1-year transition on September 30, 2006, we use the full CBSA-based wage index values, as presented in Tables 8 and 9 of this final rule. When adopting OMB's new labor market designations, we identified some geographic areas where there were no hospitals and, thus, no hospital wage index data on which to base the calculation of the SNF PPS wage index (70 FR 29095, May 19, 2005). As in the SNF PPS final rule for FY 2006 (70 FR 45041) and in the SNF PPS update notice for FY 2007 (71 FR 43170, July 31, 2006), we proposed to address two situations concerning the wage index in the FY 2008 proposed rule. First, we proposed a minor change in the wage index for rural geographic areas that do not have hospitals and, therefore, lack hospital wage data on which to base an area wage adjustment. We proposed to use the average wage index from all contiguous CBSAs as a reasonable proxy for the rural area, consistent with the policy adopted in the CY 2007 Home Health final rule. We note that Massachusetts is the only State that this change would affect; we did not propose to apply this methodology to rural Puerto Rico due to the distinct economic circumstances that exist there, but instead proposed to continue using the most recent wage index (0.4047) previously available for that area. *Comment:* One commenter supported our proposal to use the average wage index from all contiguous CBSAs as a reasonable proxy for rural Massachusetts. *Response:* We agree that the use of the average wage index from all contiguous CBSAs is a reasonable proxy for rural Massachusetts, which is a rural geographic area that does not have hospitals and, therefore, lacks hospital wage data on which to base an area wage adjustment for use in the SNF PPS. We believe it is appropriate at this point to update our methodology. By using the average wage index from all contiguous CBSAs as a reasonable proxy for those rural areas without hospital wage data, we are able to meet our goals of using pre-floor, pre-reclassified hospital wage data that is easy to evaluate, updateable from year-to-year, and uses the most local data available. Therefore, we are adopting our proposed policy of using the average wage index from all contiguous CBSAs as a reasonable proxy for rural geographic areas that do not have hospitals and, therefore, lack hospital wage data on which to base an area wage adjustment. We note that, at this time, Massachusetts is the only State that this change would affect; we are not applying this methodology to rural Puerto Rico due to the distinct economic circumstances that exist there. The second situation involved the urban CBSA (25980) Hinesville-Fort Stewart, GA. Again, under CBSA designations there are no urban hospitals within that CBSA. For FY 2006 and FY 2007, we used the average wage indexes of all of the urban areas within the State to serve as a reasonable proxy for the urban area without specific hospital wage index data in determining the SNF PPS wage index for that urban CBSA. In the FY 2008 proposed rule, we proposed to continue this approach for urban areas without specific hospital wage index data. Therefore, we would calculate the wage index for urban CBSA (25980) Hinesville-Fort Stewart, GA as the average wage index of all urban areas in Georgia. We received no comments on this particular aspect of the proposed rule, and we will continue to use the approach that we adopted in FYs 2006 and 2007. We are finalizing the wage index and associated policies as proposed for the SNF PPS for FY 2008. In addition, we note that we plan to evaluate any policies adopted in the FY 2008 IPPS final rule that affect the wage index, including how we treat certain New England hospitals under § 601(g) of the Social Security Amendments of 1983 (Pub. L. 98-21). 4. Updates to the Federal Rates In accordance with section 1888(e)(4)(E) of the Act as amended by section 311 of the BIPA, the payment rates in this final rule reflect an update equal to the full SNF market basket, estimated at 3.3 percentage points. We will continue to disseminate the rates, wage index, and case-mix classification methodology through the **Federal Register** before the August 1 that precedes the start of each succeeding fiscal year. 5. *Relationship of RUG-III Classification System to Existing Skilled Nursing Facility Level-of-Care Criteria* As discussed in § 413.345, we include in each update of the Federal payment rates in the **Federal Register** the designation of those specific RUGs under the classification system that represent the required SNF level of care, as provided in § 409.30. This designation reflects an administrative presumption under the refined RUG-53 classification system that beneficiaries who are correctly assigned to one of the upper 35 of the RUG-53 groups on the initial 5-day, Medicare-required assessment are automatically classified as meeting the SNF level of care definition up to and including the assessment reference date on the 5-day Medicare required assessment. A beneficiary assigned to any of the lower 18 groups is not automatically classified as either meeting or not meeting the definition, but instead receives an individual level of care determination using the existing administrative criteria. This presumption recognizes the strong likelihood that beneficiaries assigned to one of the upper 35 groups during the immediate post-hospital period require a covered level of care, which would be significantly less likely for those beneficiaries assigned to one of the lower 18 groups. In this final rule, we continue the designation of the upper 35 groups for purposes of this administrative presumption, consisting of the following RUG-53 classifications: All groups within the Rehabilitation plus Extensive Services category; all groups within the Ultra High Rehabilitation category; all groups within the Very High Rehabilitation category; all groups within the High Rehabilitation category; all groups within the Medium Rehabilitation category; all groups within the Low Rehabilitation category; all groups within the Extensive Services category; all groups within the Special Care category; and, all groups within the Clinically Complex category. 6. Example of Computation of Adjusted PPS Rates and SNF Payment Using the hypothetical example of SNF XYZ described in Table 10, the following shows the adjustments made to the Federal per diem rate to compute the provider's actual per diem PPS payment. SNF XYZ's total PPS payment would equal $29,758. The Labor and Non-labor columns are derived from Table 6. Table 10.—RUG-53 SNF XYZ: Located in Cedar Rapids, IA (Urban CBSA 16300) Wage Index: 0.8852 RUG Group Labor Wage index Adj. Labor Non-Labor Adj. Rate Percent Adj Medicare Days Payment RVX $320.13 0.8852 $283.38 $136.21 $419.59 $419.59 14 $5,874.00 RLX 220.55 0.8852 195.23 93.84 289.07 289.07 30 8,672.00 RHA 222.00 0.8852 196.51 94.46 290.97 290.97 16 4,656.00 CC2 188.18 0.8852 166.58 80.07 246.65 562.36* 10 5,624.00 IA2 125.44 0.8852 111.04 53.37 164.41 164.41 30 4,932.00 100 29,758.00 *Reflects a 128 percent adjustment from section 511 of the MMA. C. The Skilled Nursing Facility Market Basket Index Section 1888(e)(5)(A) of the Act requires the establishment of a SNF market basket index (input price index) that reflects changes over time in the prices of an appropriate mix of goods and services included in the SNF PPS. We are incorporating into this final rule updated projections based on the latest available projections at the time of publication. Accordingly, we have developed a 2004-based SNF market basket index that encompasses the most commonly used cost categories for SNF routine services, ancillary services, and capital-related expenses. A detailed discussion of our proposal to revise and rebase the SNF market basket appears in section IV. of the FY 2008 proposed rule (72 FR 25540-25554, May 4, 2007), and our response to the comments that we received on this proposal appears in section III.D of this final rule. *Comment:* Several commenters asked us to develop an adjustment to the SNF PPS that would prospectively adjust for forthcoming major program and policy changes, such as the increase in the Federal minimum wage, that affect Medicare reimbursement to affected providers. They state that the market basket update factor for the SNF PPS will not reflect the increase in costs associated with the Federally-mandated minimum wage increase. *Response:* We do not agree with the commenter's suggestion to make additional adjustments to the market basket update factor to account for the increase in the minimum wage. The update factor is based on the Global Insight, Inc.
(GII)second quarter 2007 (2007q2) forecast with historical data through the first quarter of 2007 (2007q1) for this final rule. GII is a nationally recognized economic and financial forecasting firm that contracts with CMS to forecast the components of CMS's market baskets. Accordingly, the SNF market basket forecast already reflects inflationary pressures, including those associated with increases in the minimum wage. Use of the Skilled Nursing Facility Market Basket Percentage Section 1888(e)(5)(B) of the Act defines the SNF market basket percentage as the percentage change in the SNF market basket index, as described in the previous section, from the average of the prior fiscal year to the average of the current fiscal year. For the Federal rates established in this final rule, we use the percentage increase in the SNF market basket index to compute the update factor for FY 2008. We use the Global Insight, Inc. (GII, formerly DRI-WEFA), 1st quarter 2007 (2007q2) forecasted percentage increase in the FY 2004-based SNF market basket index for routine, ancillary, and capital-related expenses, described in the previous section, to compute the update factor. Finally, as discussed previously in section I.A. of this final rule, we no longer compute update factors to adjust a facility-specific portion of the SNF PPS rates, because the initial three-phase transition period from facility-specific to full Federal rates that started with cost reporting periods beginning in July 1998 has expired. 2. Market Basket Forecast Error Adjustment As discussed in the June 10, 2003, supplemental proposed rule (68 FR 34768) and finalized in the August 4, 2003, final rule (68 FR 46067), the regulations at 42 CFR 413.337(d)(2) currently provide for an adjustment to account for market basket forecast error. The initial adjustment applied to the update of the FY 2003 rate for FY 2004, and took into account the cumulative forecast error for the period from FY 2000 through FY 2002. Subsequent adjustments in succeeding FYs take into account the forecast error from the most recently available fiscal year for which there is final data, and apply whenever the difference between the forecasted and actual change in the market basket exceeds a 0.25 percentage point threshold. As discussed in section I.F.2. of the FY 2008 proposed rule (72 FR 25530), in order to help distinguish between the significant forecast errors that gave rise to this policy initially and the far more typical minor variances that have consistently occurred in each of the succeeding years (which we view as an inherent aspect of this type of statistical measurement), we proposed to raise the 0.25 percentage point threshold for forecast error adjustments under the SNF PPS to 0.5 percentage point, effective with FY 2008. We invited comments on various aspects of this issue, including the proposed effective date. As also discussed in that section, the proposed payment rates for FY 2008 did not include a forecast error adjustment, as the difference between the estimated and actual amounts of increase in the market basket index for FY 2006 (the most recently available fiscal year for which there is final data) does not exceed the proposed 0.5 percentage point threshold. *Comment:* Several commenters expressed concern about the proposal to raise the forecast error threshold percentage from 0.25 percentage point to 0.5 percentage point. Some commenters suggested maintaining the 0.25 percentage point threshold. Some commenters stated that we should delay the implementation of a higher threshold. Other commenters maintained that every forecast error, however small, should be corrected, and that the effect of using any threshold would build over time, resulting in increasing inaccuracies in the rates. One commenter added that the existence of any minimum threshold for triggering the adjustment forces SNFs to face inflation with inadequate payment levels. Another commenter did not support making adjustments on an automatic basis—particularly when coupled with automatic market basket increases—but agreed that such adjustments, when made, should focus on correcting major errors. *Response:* For FY 2004, CMS applied a one-time, cumulative forecast error correction of 3.26 percent (68 FR 46036). Since that time, the forecast errors have been relatively small and clustered near zero. We believe the forecast error correction should be applied only when the forecast error in any given year reflects a percentage such that the SNF PPS base payment rate does not adequately reflect the historical price changes faced by SNFs. We believe that a threshold of 0.5 percent represents an appropriate amount to draw a distinction between the kind of exceptional, unanticipated major increases in wages and benefits that initially gave rise to this policy, and the more typical minor variances that are inherent in statistical measurements. The 0.5 percentage point threshold for triggering a forecast error adjustment represents an amount that is sufficiently high to screen out these expected minor variances in a projected statistical methodology, while at the same time appropriately serving to trigger an adjustment in those instances where it is clear that the historical price changes are not being adequately reflected, as was the case with the initial, cumulative 3.26 percent adjustment. We believe the existing 0.25 percentage point threshold is too low for this purpose, as values that only slightly exceed it may still inappropriately capture the minor variations that are inherently associated with measuring statistics. Moreover, our experience suggests that the forecast errors are relatively small, and generally clustered around zero. MedPAC analysis suggests that freestanding SNFs (which represent more than 80 percent of all SNFs) have received Medicare payments that exceed costs by 10.8 percent or more since 2001, and margins are projected to be 11 percent in 2007. In the March 2007 MedPAC report, MedPAC stated that SNF payments appear more than adequate. We believe that raising the threshold from 0.25 percentage point to 0.5 percentage point effective for the FY 2008 SNF PPS and subsequent years furthers our overarching Medicare integrity objective of paying the appropriate amount at the right time. By delaying the implementation, we would continue to pay for minor variations which would further delay accurate payment. Moreover, we continue to believe that the forecast error adjustment mechanism should appropriately be reserved for the type of major, unexpected change that initially gave rise to this policy, rather than the minor variances that are a routine and inherent aspect of this type of statistical measurement. We note that the objections to the proposed higher threshold primarily concerned its projected effect specifically on payment in the coming year rather than the appropriate role of a forecast error adjustment in general. However, we believe that delays in implementing changes are usually justified by establishing that immediate implementation would result in severe short-term hardship—for example, due to inadequate lead time to prepare for an administratively complex change. We note that we delayed the effective date of case-mix refinements from October 1, 2005, until January 1, 2006 for precisely that reason (see the FY 2006 final rule at 70 FR 45034, August 4, 2005); however, no such conditions apply with regard to the revised forecast error adjustment threshold. Further, we believe that the industry's continued strong profit margins (in the neighborhood of 10 percent) should help to dampen any potential short-term financial effects of immediate implementation. Therefore, we will use the 0.5 percentage point threshold to determine whether a forecast error adjustment is appropriate, effective for FY 2008 and subsequent years. We note, as we did in our original proposal of the forecast error adjustment methodology (68 FR 34769), that this threshold is applied uniformly: Not only in those instances where the forecasted percent change is lower than the actual percent change (as has been the case up to this point under the SNF PPS), but also in those instances where the forecasted percent change is higher than the actual percent change. We [further] note that the latter circumstance would result in SNFs receiving lower than expected payments. 3. Federal Rate Update Factor Section 1888(e)(4)(E)(ii)(IV) of the Act requires that the update factor used to establish the FY 2008 Federal rates be at a level equal to the full market basket percentage change. Accordingly, to establish the update factor, we determined the total growth from the average market basket level for the period of October 1, 2006 through September 30, 2007 to the average market basket level for the period of October 1, 2007 through September 30, 2008. Using this process, the market basket update factor for FY 2008 SNF Federal rates is 3.3 percent. We use this update factor to compute the Federal portion of the SNF PPS rate shown in Tables 2 and 3. D. Revising and Rebasing the Skilled Nursing Facility Market Basket Index As discussed in greater detail in section IV. of the FY 2008 proposed rule (72 FR 25541-25555), we proposed to make a number of changes in connection with the SNF market basket. We proposed to update the base year from FY 1997 to FY 2004, and to update the market basket inputs as well. In addition, we proposed using Medicare-allowable total cost data to derive the market basket cost weights. This represented a change from the existing policy of using total facility cost data. We also proposed to create two new cost categories: Professional liability insurance and postage. *Comment:* One commenter supported the rebasing and revising of the SNF market basket, but suggested that it should occur more frequently. *Response:* Typically, we rebase and revise the market basket about every five years, as we have found that the cost weights do not change substantially between one year and the next. However, we will continue to monitor the appropriateness of the SNF market basket and rebase more frequently if necessary. *Comment:* Several commenters suggested that we treat the market basket methodology in this year's final rule as an interim methodology. They asserted that a full 60 days to analyze the data and prepare comments was not available due to the CMS data set problems. Similarly, they argued that CMS would have only a short time to analyze and react to the comments. They added that viewing the proposed market basket methodology as an interim methodology would give CMS and other stakeholders the opportunity over the next year to further refine and improve the market basket component methodologies and the wage price proxies for the SNF setting without locking in the methodology for several years. Further, they proposed that the nursing home industry and CMS should agree to revisit the cost reports to improve their utility for a future revision of the market basket. *Response:* We do not agree with the commenters who asserted that a full 60 days was not available to analyze the proposed market basket methodology and that, therefore, we should publish an interim final rule rather than a final rule. In fact, the FY 2008 proposed rule included a detailed discussion of our proposal, and the “CMS data set problems” that these commenters cite pertain solely to the SNF Medicare cost report
(MCR)public use files that we posted on the CMS Web site. These public use files, in turn, are not an integral part of the proposal itself, but merely represent an additional package of customized technical information that we provide in an effort to accommodate the industry. We agree that we should continually review the market basket methodologies, including alternative methodologies proposed by the various stakeholders. However, we believe that it is necessary to rebase the market basket to reflect the changes in the average SNF's cost structure from 1997 to 2004, as well as to revise the market basket to reflect more appropriate, industry-specific price proxies (such as the blended compensation and chemical price proxies). We believe our current Medicare-allowable methodology, now adjusted to include an estimate of Medicaid drug expenses (as explained in more detail below), represents the best available technical methodology at this time. However, we will continue to work with the industry stakeholders and consider their suggestions for improvements to further refine and revise our market basket methodology, as appropriate. We also welcome suggestions from the SNF community on how the SNF Medicare cost report forms can be improved to better capture data needed for the market basket rebasing and revising process. *Comment:* Several commenters stated that if CMS's “total allowable cost” methodology is utilized, either nursing labor costs for the entire facility should be included in the computation for the nursing labor weight, or labor costs for the support service departments should only include the portion allocated to the SNF unit and ancillary cost centers (after step-down). *Response:* The labor costs for the support service departments (as reported in the general service cost centers, otherwise referred to as “overhead cost centers”) did reflect only the portion allocated to the SNF unit and ancillary cost centers (i.e., Medicare-allowable cost centers). Specifically, we calculated overhead salaries attributable to the non-Medicare allowable departments by multiplying the ratio of total overhead salaries to total facility salaries by total non-Medicare allowable salaries. The Medicare-allowable wages and salary cost weight prior to excluding these non-Medicare allowable overhead salaries was one percentage point higher. *Comment:* Several commenters requested that rather than using the proposed CMS total allowable Medicare cost methodology for the calculation of the pharmacy weight of the market basket, we should review, replicate, analyze, and adopt the commenter's alternative Medicare-specific reimbursable pharmacy cost methodology. They noted that the proposed pharmaceutical methodology assumes that total pharmaceutical costs for the facility are captured by the cost reports, and claimed this is not accurate, because the vast majority of nursing facility patients consists of dual-eligibles whose FY 2004 pharmaceutical costs were directly reimbursed by Medicaid. Nursing facilities did not submit Medicaid claims for these pharmaceuticals because such claims were submitted by the dispensing local pharmacies instead. *Response:* We acknowledge the commenters' point that Medicaid drug expenses are not represented in the Medicare-allowable drug cost weight. Further, we note that with the exception of drug expenses, all of the other cost category weights reflect all payers, including Medicaid. This is because the MCR does not specifically break out Medicare expenses by cost category (i.e., salaries, benefits, contract labor), but rather, reports costs for all patients, regardless of payer. In view of this, we have adjusted drug expenses and total expenses to include an estimate of total Medicaid drug costs. (For purposes of recalculating the market basket weights, because we added Medicaid drug expenses—which are not reported in the MCR—into the drug costs, we then added those same Medicaid drug expenses into the market basket total costs.) We believe this is technically appropriate and achieves greater consistency, as all of the other cost weights already reflect Medicaid-related expenses. As a result of adjusting the market basket to include an estimate for Medicaid drug expenses, we have revised all of the cost weights in the proposed 2004-based SNF market basket. Our estimate of Medicaid drug expenses is based on the average Medicaid drug expense per day times the number of Medicare-allowable Medicaid days (as reported on the MCR). We examined two primary data sources to derive the average Medicaid drug expense per beneficiary per day: The Medicare Analytic Extract
(MAX)data and the Medicare Current Beneficiary Survey
(MCBS)data. The MAX data is a set of person-level data files on Medicaid eligibility, service utilization, and payments extracted from the Medicaid Statistical Information System (MSIS). The MCBS is a survey of a representative sample of the Medicare population that CMS conducts through a contract with Westat, Inc. To calculate the institutionalized Medicaid drug costs per beneficiary per day from the MAX data, we used a nationally-representative sample of records of Medicaid drug costs for nursing home residents for 2003 during their institutionalizations. We summed the records and then divided by the number of resident days to produce a cost per day estimate. We then extrapolated this result by the PPI for prescription drugs to obtain a 2004 institutionalized Medicaid drug cost per beneficiary per day estimate of $13.65. We also calculated a community-based Medicaid drug cost per beneficiary per day estimate from the MCBS data. First, we took a community-based Medicaid drug cost per capita estimate from 2002 (adjusted for under-reporting as described in the Health Care Financing Review article “Reporting of Drug Expenditures in the MCBS,” Volume 25, page 23) and converted it to a cost per day measure. We then adjusted the cost per day figure to add Medicaid drug rebates back into the estimate. Finally, we extrapolated this result by the PPI for prescription drugs to produce a 2004 community-based Medicaid drug cost per beneficiary per day estimate of $9.41. As the MCBS does not capture drug expenditures for beneficiaries while they are institutionalized, we used the drug cost per beneficiary per day estimate generated from the MCBS ($9.41) as a consistency check for the estimate that we derived from the MAX data. The adjusted pharmaceutical cost weight, representing drug expenditures for all patients (Medicare, Medicaid, and private payer), is 7.894 percent. This is more than twice as large as the proposed pharmaceutical cost weight of 3.209 percent. The inclusion of Medicaid drugs into the 2004 market basket total costs has an impact on all of the cost weights and, therefore, the 2004-based cost weights presented in Table 12 reflect all of the revised cost weights. We did not make any methodological changes to any of the individual cost category weights, except those made to the drug cost weight described above. As additional drug data becomes available (such as Medicare Part D drug data), we will analyze how this data may affect our estimates of Medicare and Medicaid drug costs for institutionalized dually-eligible Medicare and Medicaid beneficiaries and how these estimates may affect the weights for the SNF market basket. *Comment:* Several commenters requested that we adopt a Medicare-specific market basket methodology. This methodology relies on the ratio of Medicare to total days and cost-to-charge ratios to derive the Medicare-specific cost weights. *Response:* Ideally, we would prefer to construct a market basket that is specific to the treatment of Medicare beneficiaries. We are uncertain whether the use of cost-to-charge ratios to develop Medicare-specific cost category weights is a technically-viable option at this time. We will continue to research and examine the feasibility and appropriateness of using cost-to-charge ratios to develop a Medicare-specific market basket. We believe our proposed Medicare-allowable methodology reflects the cost structures of SNFs serving Medicare beneficiaries. *Comment:* Several commenters recommended that we reexamine and reconsider the alternative CMS cost-to-charge ratio-based methodology for the calculation of the pharmacy component of the market basket. We had cited the inconsistencies between the cost-to-charge ratios of freestanding and hospital-based SNFs as the reason for not adopting this alternative method. The commenters contended that the primary reason for this difference is related to the allocation of overhead. *Response:* As stated in the proposed rule, we explored alternative methods for calculating the SNF market basket drug cost weight. Specifically, we researched the viability of calculating a Medicare-specific drug cost weight based on Medicare drug costs as a percent of Medicare total costs. In the proposed rule, we inadvertently misstated the explanation of the methodology used to calculate Medicare drugs. The non-salary, non-overhead costs from the Drugs Charged to Patients cost center was not multiplied by the cost-to-charge ratio as stated in the proposed rule. Rather, these latter costs were multiplied by the ratio of Medicare charges to total charges. Following publication of the proposed regulation, we published the detailed formula on the CMS Web site, at *http://www.cms.hhs.gov/SNFPPS/Downloads/IndustryData.zip.* We continue to believe our proposed Medicare-allowable methodology adjusted to include an estimate of Medicaid drugs is the best available technical methodology to develop the pharmaceutical cost weight. As stated above, we are reluctant to rely on cost-to-charge ratios to develop cost weights. This is especially true for the pharmaceutical cost weight, given the difference between the freestanding and hospital-based facilities' overhead cost-to-charge ratios for the Drugs Charged to Patient Cost center. It is possible that the difference between the hospital-based and freestanding SNF cost-to-charge ratios is the result of overhead allocation and, therefore, we plan to continue to examine this area. *Comment:* Several commenters suggested that we continue efforts to identify and develop more appropriate and accurate price indexes for tracking price changes in the SNF setting, particularly as they relate to SNF wages and salaries, benefits, professional liability insurance, and capital. *Response:* We agree with the commenters' suggestion and plan to continually monitor the appropriateness of the price proxies used in all of the CMS market baskets, including the one for SNFs. *Comment:* One commenter recommended that we revise our approach to the capital weight. *Response:* Although the commenter was not specific about which capital cost-weight methodology we should revise, we assume based on other comments from the industry that the commenter was referring to the interest cost weight methodology and the use of Worksheet A, line 53 of the SNF Medicare cost report (MCR). The MCR instructions do not specify which interest expenses are reported in that cost center. Although some of these interest expenses could represent non-capital-related expenses, we believe that the majority of the interest expenses reported in this line are capital-related. We are unable to find any alternative data sources for capital-related interest expenses. We did research the feasibility of developing a capital-related interest cost weight based on the depreciation cost weight (which comes directly from the MCR). To develop the alternative interest cost weight, we first determined separate interest schedules (that is, the interest expenses for each year over the useful life of an asset) for fixed and movable equipment. We constructed these interest schedules (which included both not-for-profit and for-profit debt) by multiplying the weighted averages of the average yield for Moody's AAA Corporate Bonds and the average yield for Municipal Bonds from the Bond Buyer Index by a fixed asset amount. We then calculated separate accumulated depreciation schedules for fixed and movable equipment. The accumulated depreciation schedules reflected the different useful lives of fixed versus movable equipment (22 and 9 years) and a double-declining balance method, a generally accepted depreciation practice. For each year, for both fixed equipment and moveable equipment, we calculated an interest-to-depreciation expense ratio. We then averaged these ratios over the useful life period. Next, we weighted the average interest-to-depreciation ratios for fixed and movable equipment by the fixed and movable equipment split (derived from the MCR), to create a final weighted ratio. We then multiplied this ratio by the depreciation cost weight to produce an interest cost weight. The result was a capital-related interest cost weight of 2.88, less than 0.3 percentage points different from our proposed methodology of 2.59. We note that the capital-related interest cost weight presented in Table 13 of the FY 2008 SNF proposed rule (72 FR 25544) reflected interest expenses with allocated leasing expenses. We also determined an average interest-to-depreciation expense ratio using depreciation expenses based on a straight-line depreciation method, also a generally accepted depreciation practice. This resulted in an interest cost weight of 3.51, which is almost one percentage point higher than our proposed interest cost weight of 2.59. Given that our current methodology uses the MCR, our lack of other data sources, and the variability of our alternative methodology results, we believe our current methodology is the most technically appropriate methodology for calculating the capital-related interest cost weight. Therefore, we are adopting our proposed methodology to derive the capital-related interest cost weight. As stated in the proposed rule, we researched the feasibility and appropriateness of using the ratio of total ancillary costs (that is, therapy and non-therapy ancillary costs) to routine costs to develop the movable equipment vintage weights (72 FR 25546). We found that incorporating therapy costs was somewhat problematic because of the dramatic decrease in therapy expenses between 1998 and 1999. Therapy ancillary costs decreased approximately 40 percent from 1998 to 1999—a likely impact of implementation of the SNF PPS. However, we still believe that the vintage weights should reflect therapy equipment purchases and, therefore, we are going to adopt the use of this ratio of total ancillary costs to total routine costs as the proxy for changes in intensity of SNF services that would cause SNFs to purchase movable equipment. We believe the drop in therapy expenses from 1998 to 1999 does not necessarily indicate a drop in movable equipment purchases, but rather, reflects other behavioral changes as a result of the then-new Medicare policies enacted in the BBA. As a result, we are going to begin incorporating the data on a best percent change-basis beginning with 2000 data. (The best percent change-basis method involves several steps. First, we apply the percent change of the ratio of total ancillary to routine costs for 2000 to the ratio of non-therapy ancillary to routine costs for 1999. Then, we apply the 2001 percent change of the ratio of total ancillary costs to routine costs to the 2000 ratio produced in Step 1. We then repeat this latter step for the 2002 through 2004 time period.) Again, we believe it is necessary to incorporate therapy costs into the vintage weight methodology in order to reflect therapy equipment purchases. The revision to the movable equipment vintage weights in the nine-year useful life period due to the incorporation of therapy costs does not exceed one-hundredth of a percentage point. Below is a table presenting the vintage weights for 2004-based SNF PPS capital-related price proxies, including the revised moveable-equipment vintage weights. Table 11.—Vintage Weights for 2004-Based SNF PPS Capital-Related Price Proxies Year Building and fixed equipment Movable equipment Interest 1 0.078 0.136 0.039 2 0.073 0.155 0.039 3 0.071 0.134 0.04 4 0.066 0.080 0.04 5 0.06 0.077 0.042 6 0.05 0.092 0.043 7 0.046 0.102 0.045 8 0.042 0.105 0.047 9 0.037 0.120 0.049 10 0.034 0.052 11 0.035 0.055 12 0.037 0.057 13 0.037 0.058 14 0.036 0.057 15 0.035 0.054 16 0.035 0.054 17 0.035 0.055 18 0.036 0.056 19 0.037 0.057 20 0.039 0.059 21 0.04 22 0.042 Total * 1.000 * 1.000 * 1.000 Sources: 2004 SNF Medicare Cost Reports; CMS. * Note: Totals may not sum to 1.000 due to rounding. *Comment:* One commenter suggested that we reconsider our policy of using only data from freestanding SNFs to calculate the SNF market basket. The commenter recommended that we apply a percentage, proportionate to hospital-based SNFs' percentage of total cost, of the actual costs experienced by hospital-based SNFs. *Response:* While the commenter was not more specific in what was being sought, we believe the commenter is suggesting that CMS develop separate cost weights for hospital-based and freestanding SNFs, and then combine them together (based upon hospital-based SNFs' and freestanding SNFs' share of total SNF costs) to create a unified set of SNF cost weights. As stated in the proposed rule (72 FR 25542, May 4, 2007), we maintain our policy of using data from freestanding SNFs because freestanding SNF data reflect the actual cost structure faced by the SNF itself. In contrast, expense data for a hospital-based SNF reflect the allocation of overhead over the entire institution. Due to this method of allocation, total expenses will be correct, but the individual components' expenses may be skewed. If data from hospital-based SNFs were included, the resultant cost structure might be unrepresentative of the costs that we believe a typical SNF experiences. Table 12 presents the final 2004-based SNF Market Basket Index. BILLING CODE 4120-01-P ER03AU07.004 BILLING CODE 4120-01-C Each year, we calculate a revised labor-related share based on the relative importance of labor-related cost categories in the input price index. Table 13 summarizes the updated labor-related share for FY 2008, which is based on the final rebased and revised SNF market basket. ER03AU07.005 Note: In Table 17 of the proposed rule (72 FR 25549), the cost weights for the for-profit and not-for-profit interest were inadvertently mislabeled. The for-profit interest cost weight was displayed as the not-for-profit cost weight. We have corrected this in the final rule, and the 2004-based SNF market basket update factor reflects this revision. E. Consolidated Billing As established by section 4432(b) of the BBA, the consolidated billing requirement places with the SNF the Medicare billing responsibility for virtually all of the services that the SNF's residents receive, except for a small number of services that the statute specifically identifies as being excluded from this provision. Section 103 of the BBRA amended this provision by further excluding a number of high-cost, low probability services (identified by Healthcare Common Procedure Coding System (HCPCS) codes) within several broader categories that otherwise remained subject to the provision. Section 313 of the BIPA further amended this provision by repealing its Part B aspect, that is, its applicability to services furnished to a resident during a SNF stay that Medicare does not cover. (However, physical and occupational therapy, and speech-language pathology services remain subject to consolidated billing, regardless of whether the resident who receives these services is in a covered Part A stay.) In addition, section 313 of the BIPA specified that consolidated billing applies only to services furnished to those individuals residing in an institution (or portion of an institution) that is actually certified by Medicare as a SNF. Further, as noted in section I.E. of this final rule, section 410 of the MMA revised the SNF consolidated billing requirement as it relates to certain services furnished on or after January 1, 2005, by rural health clinics
(RHCs)and Federally qualified health centers (FQHCs). To date, the Congress has enacted no further legislation affecting the consolidated billing provision. However, as we noted in the April 10, 2000 proposed rule (65 FR 19232), section 1888(e)(2)(A)(iii) of the Act, as added by section 103 of the BBRA, not only identified for exclusion from this provision a number of particular service codes within four specified categories (that is, chemotherapy items, chemotherapy administration services, radioisotope services, and customized prosthetic devices), but “ * * * also gives the Secretary the authority to designate additional, individual services for exclusion within each of the specified service categories.” In the FY 2001 proposed rule, we also noted that the BBRA Conference Report (H.R. Conf. Rep. No. 106-479 at 854) characterizes the individual services that this legislation targets for exclusion as “* * * high-cost, low probability events that could have devastating financial impacts because their costs far exceed the payment [SNFs] receive under the prospective payment system * * *.” According to the conferees, section 103(a) “is an attempt to exclude from the PPS certain services and costly items that are provided infrequently in SNFs * * *.” By contrast, we noted that the Congress declined to designate for exclusion any of the remaining services within those four categories (thus leaving all of those services subject to SNF consolidated billing), because they are relatively inexpensive and are furnished routinely in SNFs. As we further explained in the July 31, 2000 final rule (65 FR 46790), any additional service codes that we might designate for exclusion under our discretionary authority must meet the same criteria that the Congress used in identifying the original codes excluded from consolidated billing under section 103(a) of the BBRA: They must fall within one of the four service categories specified in the BBRA, and they also must meet the same standards of high cost and low probability in the SNF setting. Accordingly, we characterized this statutory authority to identify additional service codes for exclusion “* * * as essentially affording the flexibility to revise the list of excluded codes in response to changes of major significance that may occur over time (for example, the development of new medical technologies or other advances in the state of medical practice)” (65 FR 46791). In view of the amount of time that has elapsed since we last invited comments on this issue, we invited public comments in the FY 2008 SNF PPS proposed rule on codes in any of these four service categories which represent recent medical advances that might meet the BBRA criteria for exclusion from SNF consolidated billing (72 FR 25556). *Comment:* In response to our invitation in the proposed rule, some commenters submitted lists of additional chemotherapy codes that they recommended for exclusion from consolidated billing. *Response:* We note that the law (at section 1888(e)(2)(A)(iii)(II) of the Act) describes the chemotherapy code ranges that the BBRA identified for exclusion in terms of the version of the HCPCS codes that was in existence “as of July 1, 1999.” In the SNF PPS final rule for FY 2006 (70 FR 45048, August 4, 2005), we reiterated our belief that the authority granted by the BBRA to identify additional codes for exclusion within this category was “* * * essentially affording the flexibility to revise the list of excluded codes in response to changes of major significance *that may occur over time* (for example, the development of new medical technologies or other advances in the state of medical practice)” (emphasis added). Accordingly, we view this discretionary authority as applying *only* to codes that were created subsequent to that point, and not to those codes that were in existence as of July 1, 1999. A review of the particular chemotherapy codes that commenters submitted in response to the proposed rule's invitation revealed that one of the codes, J9180 (Epirubicin hydrochloride (HCL), 50 mg), has been discontinued as of December 31, 2003 (we note that J9178 (Epirubicin HCL, 2 mg), a currently-existing code for the same medication in a different quantity, is in fact excluded). Another code that commenters submitted, J9219 (Leuprolide acetate implant, 65 mg), is a hormonal agent which is clinically analogous to other existing codes that have not been designated for exclusion; moreover, as this drug is used in treating the commonly-occurring condition of prostate cancer, we believe that it is unlikely to meet the criterion of “low probability” specified in the BBRA. Moreover, the rest of the codes that commenters submitted were themselves already in existence as of July 1, 1999, but did not fall within the specific code ranges statutorily designated for exclusion in the BBRA. As the statute does not specifically exclude these already-existing codes, we are not adding them to the exclusion list. *Comment:* Although the FY 2008 SNF PPS proposed rule specifically invited comments on possible exclusions *within* the particular service categories identified in the BBRA legislation, a number of commenters took this opportunity to reiterate concerns about other aspects of consolidated billing. For example, some commenters reiterated past suggestions that we unbundle additional service categories, such as specialized wound care procedures (including hyperbaric oxygen therapy) and ambulance services. *Response:* As we have consistently stated (see, for example, the SNF PPS final rule for FY 2006, at 70 FR 45049 (August 4, 2005)), the BBRA authorizes us to identify additional services for exclusion *only within* those particular service categories—chemotherapy and its administration; radioisotope services; and, customized prosthetic devices—that it has designated for this purpose, and does not give us the authority to create additional categories of excluded services beyond those specified in the law. Accordingly, as the particular services that these commenters recommended for exclusion do not fall within one of the specific service categories designated for this purpose in the statute itself, these services remain subject to consolidated billing. *Comment:* Other commenters took this opportunity to revisit the existing set of administrative exclusions for certain high-intensity outpatient hospital services under the regulations in 42 CFR 411.15(p)(3)(iii), and once again expressed the view that these exclusions should not be limited to only those services that actually occur in the hospital setting, but rather, should also encompass services performed in other, non-hospital settings as well. As examples, they cited services such as magnetic resonance imaging
(MRIs)and computerized axial tomography
(CT)scans furnished in freestanding imaging centers, and radiation therapy furnished in physicians' clinics or ambulatory care centers, all of which may be less expensive and more accessible in certain particular localities (such as rural areas) than those furnished by hospitals. A few commenters additionally described certain instances in which MRIs and CT scans failed to qualify for exclusion even when they actually did occur in the hospital setting, because the hospital chose to have them performed under contract with an independent supplier that submitted the Medicare bill. *Response:* We believe the comments that reflect previous suggestions for expanding this administrative exclusion to encompass services furnished in non-hospital settings indicate a continued misunderstanding of the underlying purpose of this provision. As we have consistently noted in response to comments on this issue in previous years (most recently, in the SNF PPS final rule for FY 2006 at 70 FR 45049 (August 4, 2005)), and as also explained in Medicare Learning Network
(MLN)Matters article SE0432 (available online at *http://www.cms.hhs.gov/MLNMattersArticles/downloads/SE0432.pdf* ), the rationale for establishing this exclusion was to address those types of services that are so far beyond the normal scope of SNF care *that they require the intensity of the hospital setting* in order to be furnished safely and effectively. Moreover, we note that in the legislative history accompanying the MMA, the Conferees characterized these exclusions as specifically limited to “* * * certain outpatient services * from a Medicare-participating hospital or critical access hospital* * * *” (emphasis added). (See the House Ways and Means Committee Report (H. Rep. No. 108-178, Part 2 at 209), and the Conference Report (H. Conf. Rep. No. 108-391 at 641).) Therefore, these services are excluded from SNF consolidated billing *only* when furnished in the outpatient hospital or CAH setting, and not when furnished in other, freestanding (non-hospital or non-CAH) settings. Further, this underlying concept of service intensity also affects the manner in which a hospital can involve another entity in the actual performance of an excluded outpatient hospital service. Sections 1832(a)(2)(B) and 1861(s)(2)(C) of the Act authorize a hospital to furnish outpatient diagnostic procedures under arrangements with another entity; moreover, MRIs or CT scans that are furnished in this manner are excluded from SNF consolidated billing, and would be separately billable *by the hospital* under Part B. However, in order for the hospital's “arrangement” with the other entity to be a valid one, the hospital cannot act merely as a billing conduit, but must actually exercise professional responsibility and control over the arranged-for service, as specified in the guidelines on arrangements that appear in the CMS Internet-Only Manual, Pub. 100-1, Chapter 5, section 10.3, available online at *http://www.cms.hhs.gov/Manuals/IOM/list.asp.* Therefore, in a situation where the other, non-hospital entity assumes the Medicare billing role, a valid arrangement between the hospital and that entity would no longer exist, so that the hospital effectively relinquishes its professional responsibility and control over the service to the other entity. In this situation, because the service is no longer being furnished by the hospital itself—either directly, or under a valid arrangement with another entity—it would not qualify for the administrative exclusion from consolidated billing as a high-intensity outpatient *hospital* service, and the billing responsibility for the service would remain with the SNF. *Comment:* Some other commenters reiterated previous suggestions on expanding the existing chemotherapy exclusion to encompass related drugs that are commonly administered in conjunction with chemotherapy in order to treat the side effects of the chemotherapy drugs. The commenters cited examples such as anti-emetics (anti-nausea drugs) and erythropoietin (EPO). *Response:* As we have noted previously in this final rule and in response to comments on this issue in the past (most recently, in the SNF PPS final rule for FY 2006 at 70 FR 45049 (August 4, 2005)), the BBRA authorizes us to identify additional services for exclusion *only within* those particular service categories—chemotherapy and its administration; radioisotope services; and, customized prosthetic devices—that it has designated for this purpose, and does not give us the authority to exclude other services which, though they may be related, fall outside of the specified service categories themselves. Thus, while anti-emetics, for example, are commonly administered in conjunction with chemotherapy, they are not themselves inherently chemotherapeutic in nature and, consequently, do not fall within the excluded chemotherapy category designated in the BBRA. With regard to EPO, we additionally note that among the service categories that section 1888(e)(2)(A)(ii) of the Act already specifies as being excluded from SNF consolidated billing are items and services described in section 1861(s)(2)(O) of the Act—that is, those items and services that meet the requirements for coverage under the separate Part B EPO benefit. This means that the scope of coverage under the Part B EPO benefit effectively serves as well to determine the scope of the EPO exclusion under the consolidated billing provision. However, section 1861(s)(2)(O) of the Act, in turn, specifically limits coverage under this benefit to EPO that is furnished to dialysis patients, and does not provide for coverage in any other, non-dialysis situations such as chemotherapy. *Comment:* Another commenter indicated that we should make it “financially feasible” for patients to receive dialysis that is performed at bedside in the SNF, either by a dialysis facility or by the SNF itself—presumably, by expanding the consolidated billing provision's existing dialysis exclusion to encompass such services. *Response:* As with the EPO services discussed above, the Part B dialysis services described in section 1861(s)(2)(F) of the Act are included among the service categories that section 1888(e)(2)(A)(ii) of the Act specifies as being excluded from SNF consolidated billing. Once again, this means that the scope of coverage under the Part B dialysis benefit effectively serves as well to determine the scope of the dialysis exclusion under the consolidated billing provision. Thus, the commenter's suggestion regarding the further unbundling of dialysis services actually represents a request to expand existing coverage under the Part B dialysis benefit, an issue that is beyond the scope of this final rule. *Comment:* An additional commenter recommended that we exclude Reclast, a new osteoporosis drug that is administered via a once-yearly infusion. The commenter noted that several of the criteria (such as high cost, infrequent use, and inelastic demand) that historically have served to identify certain exceptionally intensive outpatient hospital services for exclusion would apply to Reclast as well, but also indicated that while the Food and Drug Administration
(FDA)approved Reclast for the treatment of Paget's disease in April 2007, it has not yet announced its determination regarding the use of this drug in treating osteoporosis. *Response:* We note that even if the FDA were to grant Reclast approval for this additional application, excluding such osteoporosis drugs from consolidated billing cannot be accomplished administratively under our existing authority. As we have noted previously, the BBRA's existing authority for excluding certain “high-cost, low probability” services from SNF consolidated billing applies *solely* to the types of services specified in the legislation itself (see, for example, the discussion in the SNF PPS final rule for FY 2006 (70 FR 45048, August 4, 2005)). With regard to drugs, this authority would encompass only the categories of chemotherapy and radioisotope services. As osteoporosis drugs such as Reclast do not fall within either of those two categories, we cannot administratively exclude them under this authority as it is currently constituted. Moreover, we again note that the outpatient hospital exclusion that the commenter cited applies exclusively to those types of services that are so far beyond the normal scope of SNF care plans as to require the intensity of the hospital setting in order to be furnished safely and effectively; by contrast, it would be medically feasible to administer drugs such as Reclast in the SNF itself. Further, in contrast to the SNF PPS, we note that in the context of Medicare's home health benefit, the statute specifically addresses the treatment of osteoporosis drugs under a PPS. For purposes of the home health PPS, section 1861(kk) of the Act provides Part B coverage for injectable osteoporosis drugs, and section 4603(c)(2) of the BBA specifically amended section 1833(a)(2) of the Act to make such drugs separately payable outside the home health PPS's bundled payment for an episode of care. Accordingly, we believe that in terms of the SNF PPS, excluding drugs such as Reclast from the bundled per diem payment would require a similar statutory framework—first, to establish Part B coverage specifically for those osteoporosis drugs that are administered through infusion rather than injection, and additionally, to exclude such drugs from the SNF PPS's bundled per diem payment. F. Application of the SNF PPS to SNF Services Furnished by Swing-Bed Hospitals In accordance with section 1888(e)(7) of the Act as amended by section 203 of the BIPA, Part A pays CAHs on a reasonable cost basis for SNF services furnished under a swing-bed agreement, as indicated in sections I.A. and I.D. of this final rule. However, effective with cost reporting periods beginning on or after July 1, 2002, the swing-bed services of non-CAH rural hospitals are paid under the SNF PPS. As explained in the final rule for FY 2002 (66 FR 39562, July 31, 2001), we selected this effective date consistent with the statutory provision to integrate non-CAH swing-bed rural hospitals into the SNF PPS by the end of the SNF transition period, June 30, 2002. Accordingly, all non-CAH swing-bed rural hospitals have come under the SNF PPS as of June 30, 2003. Therefore, all rates and wage indexes outlined in this final rule for the SNF PPS also apply to all non-CAH swing-bed rural hospitals. A complete discussion of assessment schedules, the MDS and the transmission software (Raven-SB for Swing Beds) appears in the final rule for FY 2002 (66 FR 39562, July 31, 2001). The latest changes in the MDS for non-CAH swing-bed rural hospitals appear on our SNF PPS Web site, *http://www.cms.hhs.gov/snfpps.* We received no comments on this aspect of the proposed rule. IV. Provisions of the Final Rule In this final rule, we are adopting the provisions as set forth in the May 4, 2007 proposed rule, with one change. We are changing our approach to the calculation of the market basket's pharmaceutical cost weight by including an adjustment for Medicaid drug expenditures, as discussed in section III.D of this final rule. In addition, as noted previously in section I.A of this final rule, we are taking this opportunity to make a technical correction in the regulations text. The correction involves § 409.30(a)(2), which originally stipulated that in order for a hospital stay to qualify a beneficiary for coverage of posthospital SNF care, discharge from the hospital stay must occur in or after the month that the beneficiary becomes eligible for “hospital insurance benefits”—the statutory term for Medicare Part A. However, on May 26, 1993 (58 FR 30666), we made a global revision of the word “hospital” in this provision and elsewhere in the regulations by adding a reference to rural primary care hospitals (RPCHs), and in the process, we inadvertently revised the term “hospital insurance benefits” in this section so that it incorrectly read “hospital or RPCH insurance benefits.” When RPCHs subsequently became known as critical access hospitals (CAHs), we once again made a global revision in order to revise “RPCH” to read “CAH” wherever it appeared (62 FR 46037, August 29, 1997), so that this term now incorrectly reads “hospital or CAH insurance benefits.” In this final rule, we are revising the regulations text at § 409.30(a)(2) in order to restore the original, correct wording of this term, which is “hospital insurance benefits.” V. Waiver of Proposed Rulemaking Regarding the technical correction to Part 409 of the regulations that we discuss in the preceding section, we note that we would ordinarily publish a notice of proposed rulemaking in the **Federal Register** to provide a period for public comment before a revision in the regulations text would take effect; however, we can waive this procedure if we find good cause that a notice and comment procedure is impracticable, unnecessary, or contrary to the public interest and incorporate a statement of the finding and its reasons in the notice issued. We find it unnecessary to undertake notice and comment rulemaking in connection with this particular revision, as it merely provides a technical correction to the regulations, without making any substantive changes. Therefore, for good cause, we waive notice and comment procedures for the revision that we are making to the regulations text in Part 409. VI. Collection of Information Requirements This document does not impose any information collection and recordkeeping requirements. Consequently, it need not be reviewed by the Office of Management and Budget under the authority of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501). VII. Regulatory Impact Analysis A. Overall Impact We have examined the impacts of this final rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review), the Regulatory Flexibility Act (RFA, Pub. L. 96-354, September 16, 1980), section 1102(b) of the Social Security Act (the Act), the Unfunded Mandates Reform Act of 1995 (UMRA, Pub. L. 104-4), and Executive Order 13132. Executive Order 12866 (as amended by Executive Order 13258, which only reassigns responsibility of duties) directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis
(RIA)must be prepared for major rules with economically significant effects ($100 million or more in any one year). This final rule is major, as defined in Title 5, United States Code, section 804(2), because we estimate the impact of the standard update will be to increase payments to SNFs by approximately $690 million. The update set forth in this final rule would apply to payments in FY 2008. Accordingly, the analysis that follows describes the impact of this one year only. In accordance with the requirements of the Act, we will publish a notice for each subsequent FY that will provide for an update to the payment rates and include an associated impact analysis. The RFA requires agencies to analyze options for regulatory relief of small businesses. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and government agencies. Most SNFs and most other providers and suppliers are small entities, either by their nonprofit status or by having revenues of $11.5 million or less in any one year. For purposes of the RFA, approximately 53 percent of SNFs are considered small businesses according to the Small Business Administration's latest size standards, with total revenues of $11.5 million or less in any one year (for further information, see 65 FR 69432, November 17, 2000). Individuals and States are not included in the definition of a small entity. In addition, approximately 29 percent of SNFs are nonprofit organizations. This final rule updates the SNF PPS rates published in the update notice for FY 2007 (71 FR 43158, July 31, 2006) and the associated correction notice (71 FR 57519, September 29, 2006), thereby increasing aggregate payments by an estimated $690 million. As indicated in Table 14 of this final rule, the effect on facilities will be an aggregate positive impact of 3.3 percent. We note that some individual providers may experience larger increases in payments than others due to the distributional impact of the FY 2008 wage indexes and the degree of Medicare utilization. While this final rule is considered major, its overall impact is extremely small; that is, less than 3 percent of total SNF revenues from all payor sources. In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 603 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Metropolitan Statistical Area and has fewer than 100 beds. Because the increase in SNF payment rates set forth in this final rule also applies to rural non-CAH hospital swing-bed services, we believe that this final rule would have a positive fiscal impact on non-CAH swing-bed rural hospitals. Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. That threshold level is currently approximately $120 million. This final rule would not have a substantial effect on State, local, or tribal governments, or on private sector costs. Executive Order 13132 establishes certain requirements that an agency must meet when it issues regulations that impose substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications. As stated above, this final rule would have no substantial effect on State and local governments. B. Anticipated Effects This final rule sets forth updates of the SNF PPS rates contained in the update notice for FY 2007 (71 FR 43158, July 31, 2006) and the associated correction notice (71 FR 57519, September 29, 2006). Based on the above, we estimate the FY 2008 impact will be a net increase of $690 million in payments to SNF providers. The impact analysis of this final rule represents the projected effects of the changes in the SNF PPS from FY 2007 to FY 2008. We estimate the effects by estimating payments while holding all other payment variables constant. We use the best data available, but we do not attempt to predict behavioral responses to these changes, and we do not make adjustments for future changes in such variables as days or case-mix. We note that certain events may combine to limit the scope or accuracy of our impact analysis, because such an analysis is future-oriented and, thus, very susceptible to forecasting errors due to other changes in the forecasted impact time period. Some examples of such possible events include new legislation requiring funding changes to the Medicare program, or legislative changes that specifically affect SNFs. In addition, changes to the Medicare program may continue to be made as a result of the BBA, the BBRA, the BIPA, the MMA, or new statutory provisions. Although these changes may not be specific to the SNF PPS, the nature of the Medicare program is such that the changes may interact, and the complexity of the interaction of these changes could make it difficult to predict accurately the full scope of the impact upon SNFs. In accordance with section 1888(e)(4)(E) of the Act, we update the payment rates for FY 2008 by a factor equal to the full market basket index percentage increase to determine the payment rates for FY 2008. The special AIDS add-on established by section 511 of the MMA remains in effect until “* * * such date as the Secretary certifies that there is an appropriate adjustment in the case mix * * *.” We have not provided a separate impact analysis for the MMA provision. As noted previously in section I.E of this final rule, FY 2006 data indicate that there are less than 2,600 SNF residents overall with a principal or secondary diagnosis of 042 (HIV Infection). The impact to Medicare is included in the “total” column of Table 14. In updating the rates for FY 2008, we made a number of standard annual revisions and clarifications mentioned elsewhere in this final rule (for example, the update to the wage and market basket indexes used for adjusting the Federal rates). These revisions increase payments to SNFs by approximately $690 million. The impacts are shown in Table 14. The breakdown of the various categories of data in the table follows. The first column shows the breakdown of all SNFs by urban or rural status, hospital-based or freestanding status, and census region. The first row of figures in the first column describes the estimated effects of the various changes on all facilities. The next six rows show the effects on facilities split by hospital-based, freestanding, urban, and rural categories. The urban and rural designations are based on the location of the facility under the CBSA designation. The next twenty-six rows show the effects on urban versus rural status by census region. The second column in the table shows the number of facilities in the impact database. The third column of the table shows the effect of the annual update to the wage index. This represents the effect of using the most recent wage data available. The total impact of this change is zero percent; however, there are distributional effects of the change. The fourth column shows the effect of all of the changes on the FY 2008 payments. The market basket increase of 3.3 percentage points is constant for all providers and, though not shown individually, is included in the total column. It is projected that aggregate payments will increase by 3.3 percent in total, assuming facilities do not change their care delivery and billing practices in response. As can be seen from this table, the combined effects of all of the changes vary by specific types of providers and by location. For example, though facilities in the rural Outlying region receive no change in payment, some providers (such as those in the urban Outlying region) show a significant increase of 9.6 percent. Payment increases for facilities in the urban Outlying area of the country are the highest for any provider category. However, we note that as there are only a small number of providers in both the rural and urban Outlying areas, changes to just a few providers can have a large impact on the region as a whole. BILLING CODE 4120-01-P ER03AU07.006 BILLING CODE 4120-01-C C. Accounting Statement As required by OMB Circular A-4 (available at *http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf* ), in Table 15 below, we have prepared an accounting statement showing the classification of the expenditures associated with the provisions of this final rule. This table provides our best estimate of the change in Medicare payments under the SNF PPS as a result of the policies in this final rule based on the data for 15,271 SNFs in our database. All expenditures are classified as transfers to Medicare providers (that is, SNFs). Table 15.—Accounting Statement: Classification of Estimated Expenditures, From the 2007 SNF PPS Rate Year to the 2008 SNF PPS Rate Year (in Millions) Category Transfers Annualized Monetized Transfers $690 From Whom To Whom? Federal Government to SNF Medicare Providers. D. Alternatives Considered Section 1888(e) of the Act establishes the SNF PPS for the payment of Medicare SNF services for cost reporting periods beginning on or after July 1, 1998. This section of the statute prescribes a detailed formula for calculating payment rates under the SNF PPS, and does not provide for the use of any alternative methodology. It specifies that the base year cost data to be used for computing the SNF PPS payment rates must be from FY 1995 (October 1, 1994, through September 30, 1995.) In accordance with the statute, we also incorporated a number of elements into the SNF PPS, such as case-mix classification methodology, the MDS assessment schedule, a market basket index, a wage index, and the urban and rural distinction used in the development or adjustment of the Federal rates. Further, section 1888(e)(4)(H) of the Act specifically requires us to disseminate the payment rates for each new fiscal year through the **Federal Register** , and to do so before the August 1 that precedes the start of the new fiscal year. Accordingly, we are not pursuing alternatives with respect to the payment methodology as discussed above. Because we have determined that this final rule will have a significant impact on SNFs, we will discuss the alternatives we considered. We reviewed the options considered in the proposed rule and took into consideration comments received during the public comment period as discussed in the preamble. The final rule raises the threshold for triggering a forecast error adjustment under the SNF PPS from the current 0.25 percentage point to 0.5 percentage point, effective for FY 2008 and subsequent years. However, as discussed in sections I.F.2 and III.B of the FY 2008 proposed rule, we also considered a higher threshold for the forecast error adjustment (up to 1.0 percentage point), as well as delaying implementation of this change until FY 2009. Recalibrating the specified threshold for a forecast error adjustment from 0.25 percentage point to 0.5 percentage point should help to distinguish between the major forecast errors that gave rise to this policy initially and the far more typical minor variances that occur in a projected statistical measurement. We believe that raising the threshold from 0.25 percentage point to 0.5 percentage point for FY 2008 and subsequent years furthers our overarching Medicare integrity objective of paying the appropriate amount at the right time. This final rule also revises and rebases the SNF Market Basket. As an alternative, we could have considered delaying rebasing and/or revising the market basket. However, we believe that it is necessary to rebase the market basket to reflect the changes in the average SNF's cost structure from 1997 to 2004, as well as to revise the market basket to reflect more appropriate, industry-specific price proxies (such as the blended compensation and chemical price proxies). We believe our current Medicare-allowable methodology, adjusted to include an estimate of Medicaid drug expenses, represents the best available technical methodology at this time. E. Conclusion Overall, estimated payments for SNFs in FY 2008 are projected to increase by 3.3 percent compared with those in FY 2007. We estimate that SNFs in urban areas would experience a 3.1 percent increase in estimated payments compared with FY 2007. We estimate that SNFs in rural areas would experience a 4.3 percent increase in estimated payments compared with FY 2007. Facilities in the rural Outlying region are the only providers that do not experience a payment increase, payments for these facilities remain the same. This is due to the changes in the wage index compared to FY 2007. Facilities in the urban Outlying region show the largest payment increase, 9.6 percent. We did not receive public comments on the impact analysis methodology. Finally, in accordance with the provisions of Executive Order 12866, this regulation was reviewed by the Office of Management and Budget. List of Subjects in 42 CFR Part 409 Health facilities, Medicare. For the reasons set forth in the preamble, the Centers for Medicare & Medicaid Services amends 42 CFR chapter IV as follows: PART 409—HOSPITAL INSURANCE BENEFITS 1. The authority citation for part 409 continues to read as follows: Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh). Subpart D—Requirements for Coverage of Posthospital SNF Care § 409.30 [Amended] 2. In § 409.30(a)(2), the term “hospital or CAH insurance benefits” is revised to read “hospital insurance benefits”. (Catalog of Federal Domestic Assistance Program No. 93.773, Medicare-Hospital Insurance Program; and No. 93.774, Medicare-Supplementary Medical Insurance Program) Dated: July 18, 2007. Leslie V. Norwalk, Acting Administrator, Centers for Medicare & Medicaid Services. Dated: July 24, 2007. Michael O. Leavitt, Secretary. Note: The following addendum will not appear in the Code of Federal Regulations. BILLING CODE 4120-01-P ER03AU07.007 ER03AU07.008 ER03AU07.009 ER03AU07.010 ER03AU07.011 ER03AU07.012 ER03AU07.013 ER03AU07.014 ER03AU07.015 ER03AU07.016 ER03AU07.017 ER03AU07.018 ER03AU07.019 ER03AU07.020 ER03AU07.021 ER03AU07.022 ER03AU07.023 ER03AU07.024 ER03AU07.025 ER03AU07.026 ER03AU07.027 ER03AU07.028 ER03AU07.029 ER03AU07.030 ER03AU07.031 ER03AU07.032 ER03AU07.033 [FR Doc. 07-3784 Filed 7-31-07; 4:00 pm]
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22 references not yet in our index
  • 49 CFR 611
  • 23 CFR 450
  • 23 CFR 771
  • 23 CFR 777.117
  • 23 CFR 117.17
  • 49 CFR 1.51
  • 23 CFR 771.17
  • 49 CFR 633
  • Pub. L. 108-199
  • 42 CFR 409
  • Pub. L. 105-33
  • Pub. L. 106-113
  • Pub. L. 106-554
  • Pub. L. 75-718
  • Pub. L. 109-432
  • Pub. L. 108-173
  • Pub. L. 96-354
  • Pub. L. 104-4
  • Pub. L. 110-28
  • Pub. L. 98-21
  • 42 CFR 413.337(d)(2)
  • 42 CFR 411.15(p)(3)(iii)
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Notices
Notice of proposed rulemaking
U.S.C.§ 5309
U.S.C.§ 134
U.S.C.§ 5303
Fed. Reg.Notices
U.S.C.§ 5339
U.S.C.§ 603
Fed. Reg.Proposed Rules
U.S.C.§ 4321
Fed. Reg.Notices
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Cite23 CFR 450
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