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Benefits of P3 Model – Rebuttal of Ontario Auditor General’s Report

Posted in News

Guest post by Mark Romoff, President and CEO, The Canadian Council for Public-Private Partnerships

On December 9, 2014, Ontario’s Auditor General released her 2014 Annual Report, sharply criticizing Ontario’s Alternative Financing and Procurement (AFP or P3) program and suggesting a return to using the traditional method of delivering public infrastructure to achieve savings in taxpayer money.  The report expresses skepticism about the cost-saving benefits of the P3 delivery model, directly contradicting what is widely viewed by P3 players and the Canadian public generally as a powerful tool for delivering much needed public infrastructure in a cost-effective and timely manner.

In particular, the Auditor General’s report paints an inaccurate representation of the P3 model and makes assumptions about the cost of traditional project delivery methods that are not backed by any empirical evidence.

Canada’s track record on P3s has demonstrated that the transfer of risks to the private sector under the P3 model has real value.  Ontario has over 100 AFP projects in procurement or implementation phases, and a total of 220 P3/AFP projects have been brought to market across Canada.  Managed by Infrastructure Ontario, Ontario’s AFP program is internationally renowned as the “gold standard” for P3 programs.  An independent study recently completed by InterVISTAS Consulting Inc. confirmed the impressive economic impact that P3s have had on the Canadian economy over the past decade, including $9.9 billion in cost savings for tax payers over the traditional procurement method, $7.5 billion in tax revenue to government, and 517,430 total full-time equivalent jobs.

On the other hand, to believe that the public sector can deliver every project on-time and on-budget or even has the capacity to manage multiple, complex projects at the same time, is simply unrealistic.  Taxpayers are tired of projects costing far more than initially budgeted, deficient in design and construction, and depreciation from deferred maintenance, which is why governments have turned to P3s.

However, I do whole-heartedly agree with one recommendation in particular made by the Auditor General, which calls on the government to begin collecting data on the cost of delivering infrastructure under the traditional model.  Traditional procurements should be held to the same high standard of scrutiny as P3s.  I am confident that with full information, the benefits of P3s will be clearly evident.

Emerging Trends in Project Delivery: Design-Build-Maintain Contracting for Surface Transportation Projects

Posted in PPPs

In the modern U.S. history of public-private partnerships, the prevailing project delivery models have been the toll concession and the availability payment contract.  In both cases, the private party raises equity and debt financing and takes responsibility and risk for completing design, constructing and providing long-term operations and maintenance.  The major difference between the two is that in the toll concession the private party takes the revenue risk and secures its debt with project toll revenues, while the public owner takes the project revenue risk under an availability payment contract and gives a contract covenant to pay that becomes the security for the private party’s debt and return on equity.

There are signs, however, that we are witnessing some second thoughts by public owners about entering into long-term toll concessions and availability payment P3s.  The response to this scrutiny is taking the form of what we believe to be the next trend in US P3s – design-build-maintain and design-build-operate-maintain project delivery.  We saw a bit of this type of contracting before toll concessions emerged, such as the DBOM contract for the Hudson-Bergen Line in New Jersey in the 1990s.  But DBM and DBOM remained a pretty quiet tool until recently.  That has all changed with a slew of TxDOT projects deploying DBM project delivery, and it is catching on in other jurisdictions as well.

It started out with TxDOT’s SH 130, Segments 1-4.  After a hiatus of several years, in quick succession, TxDOT procured or is in the process of procuring DBM contracts for the I-35E, SH183, Grand Parkway Segments H, I1 & I2, Harbor Bridge Replacement Project in Corpus Christie, and SH360.  Arizona has followed suit with its Loop 202 South Mountain Freeway project.

Maybe no project exemplifies this evolution more than the Knik Arm Crossing in Anchorage.  A single purpose agency, Knik Arm Bridge and Toll Authority, first sought to deliver the project as a toll concession using tolls as the sole source of revenue.  KABATA abandoned its toll concession procurement in favor of an availability payment P3 when it became clear that the short listed proposers would not proceed without state subsidies of the tolls due to the significant revenue risk in the early years.  The availability payment procurement depended upon further legislation to establish a sound state source for payments subject to appropriations.  While KABATA’s detailed risk-adjusted cost estimates and financial analysis indicated that this was the state’s most beneficial way to deliver and finance the project, the Alaska Department of Revenue had different ideas and prevailed with legislation and appropriations that paved the way for public financing.  The Knik Arm Crossing is now likely to proceed under a DBM delivery model, the third procurement for the project.

So what explains this trend?  We think three principal forces are at play.  The first is value for money.  The cost of funds with tax-exempt public financing is generally lower than the interest rate and rate of return on private sector borrowings and equity investment.  This introduces an important distinction when financial analysts compare the anticipated whole life costs of the DBM delivery method to the whole life cost of a toll concession or availability payment delivery method.  While the latter have their own advantage in terms of private sector efficiencies driven by the transfer of risk to equity, this advantage does do not always make up the difference in the higher financing costs vs. tax exempt bonds, at least in the eyes of public sector CFOs.  There is a growing view that marrying a long-term maintenance obligation with the design and construction obligation, all backed by performance bonds and parent guarantees, provides sufficient motivation for the private sector to focus on life cycle cost efficiency and project performance without the need for an equity investment.  As a result, quantitative cost comparisons between DBFOM P3s and DBOM/DBM P3s sometimes do not produce meaningful differences in risk-adjusted costs to design, construct, operate and maintain.  Any narrow difference in favor of DBFOM is sometimes reversed when the cost of money is factored into the calculation.

The second force at play is a perception of greater public owner flexibility under the DBM method as compared to availability payment P3s.  Public owners are effectively locked into long term payment obligations with availability payments that reflect a required level of performance by the private party higher than what the public owner would typically do.  The cost to exit early is enormous, because the termination compensation must be enough to retire the private party’s outstanding debt and breakage costs and provide a rate of return on the equity investment.  DBM termination compensation is insignificant by comparison.  At a time when public owners are seeing stagnant or declining revenues at both the federal and state levels to pay for highway operations and maintenance, they are reluctant to take on long term payment obligations that can only be cancelled at the price of paying off debt and equity early.

The third factor is apparent private sector acceptance of DBM procurements.  TxDOT first put its toe in the water with optional maintenance terms of five years each up to a total of 15 years.  Subsequently, TxDOT has moved to mandatory maintenance terms as long as 25 years, with termination for convenience rights.  ADOT may push the envelope to 30 years for the South Mountain Freeway DBM contract, as indicated in its RFQ for the project.  ADOT has received five statements of qualifications.

All three factors drove ADOT’s decision to pursue DBM project delivery for South Mountain.  The quantitative part of its value for money analysis slightly favored DBM over a DBFM availability payment alternative.  On a qualitative basis, ADOT could not justify the level of year-in, year-out expenditures that the DBFM model would bind it to on a project that is a lower maintenance priority than the I-10 and other major freeways in the Phoenix area.  Finally, two states away, TxDOT was getting excellent competition and bid results for its DBM projects.

In noting this trend and its possible reasons, we are not implying that DBM is a better project delivery tool than toll concessions and availability payment P3s.  The comparative advantages and disadvantages of each are certainly open to debate and will vary by project.  But it is equally certain that those who believe strongly in the benefits to government from private financing and equity participation will have to sharpen their analytical and persuasive skills if they want to forestall this emerging trend. And only time will tell whether the value to be realized from the incentives created by the toll concession and availability payment P3’s to deliver projects on time and with a high level of performance will be realized in way that makes these tools more attractive than the DBM approach.

Preferred Offeror Named on Marion County Consolidated Justice Center Project

Posted in Social Infrastructure

City of Indianapolis Mayor Greg Ballard announced today that WMB Heartland Justice Partners was selected as the Preferred Offeror to design, build, finance, operate and maintain the new Marion County Consolidated Justice Facility.  WMB Heartland Justice Partners is comprised of equity members Walsh Investors, LLC, Meridiam Infrastructure Indy Justice, LLC, and Balfour Beatty Investments, Inc.

In making the announcement, Mayor Ballard said of the project: “It will solve so many problems, so many problems that contribute to our existing facilities being outdated, inefficient and unsafe.”  And in touting the delivery method, he said: “It is important to know that this payment is performance based, meaning WMB Heartland Justice Partners will be measured on a monthly basis on their ability to meet the agreed upon service, performance and availability standards.”

The 35 year DBFOM project is at the vanguard of municipal availability payment deals in the United States and is the currently the largest social infrastructure availability payment project in North America.  The facility will include:

  • A new criminal courthouse facility for the Marion County superior court, including 28 new courtrooms and 10 hearing rooms.
  • A Marion County detention center with a total of 3,000 beds, including medical and mental health accommodations.
  • A community corrections facility with a total of 960 beds.
  • Office Space to house the Marion County Sheriff’s Office operations.

The estimated cost of construction of the justice center is $408 million, considerably lower than previously speculated construction costs ranging from $500 – $700 million.  The annual service fee is just over $3 million below the City’s affordability limit.  Commercial close is anticipated for March 2015. Project substantial completion is scheduled for May 2018.

The new facility will be sited on 46 acres of brownfield redevelopment land on the western half of the former General Motors stamping plant.

The other two Offerors on the project were:

  • Indy Justice Partners, with equity members Fengate Capital Management Ltd. and AECOM Global Fund I LP
  • Plenary Edgemoor Justice Partners, with equity members Plenary Group USA Ltd. and Edgemoor Infrastructure & Real Estate LLC

More information about the project is available at the project website.

Renderings of the proposed Marion County Justice Center can be found here.

The project’s stakeholders, including the Indianapolis Mayor’s Office, the Marion County Sheriff Office and the Marion County Circuit Court, selected WMB Heartland Justice Partners as the preferred bidding team for the project.

Women’s Transportation Seminar-DC Chapter Recognizes Industry Leaders and Awards Scholarships

Posted in News

On December 9, the DC Chapter of the Women’s Transportation Seminar (WTS) held its annual holiday party and awards ceremony at the Goethe-Institut in Washington, DC.  Attending the event was U.S. Secretary of Transportation Anthony Foxx who received the Rosa Parks Diversity Leadership Award for his advocacy of the White House’s Ladders of Opportunity initiative.  In accepting the award, Secretary Foxx emphasized the importance of infrastructure to connect communities together and improve the quality of life for all Americans.

Receiving the first “Man of the Year Award” presented by the WTS-DC Chapter was Richard Sarles, General Manager and Chief Executive Officer of the Washington Metropolitan Area Transit Authority.  Mr. Sarles recognized and thanked the WTS-DC Chapter for giving him the opportunity and forum to exchange ideas and thoughts with respect to transportation issues affecting the DC area.  Other individuals receiving awards were Avital Barnea (Member of the Year) who is a Policy Analyst with the Office of the Secretary, U.S. Department of Transportation and Patricia Hendren (Woman of the Year) who is a consultant specializing in transportation performance management.

The WTS-DC Chapter also awarded four scholarships to assist DC-area graduate and undergraduate students in the transportation field.  Presenting the scholarship awards was Beverley Swaim-Staley, President and CEO of the Union Station Redevelopment Corporation and former Secretary of Transportation for the State of Maryland.

WTS is an international organization with a mission to build the future of transportation through the global advancement of women.  Nossaman is one of 11 corporate members supporting the WTS-DC Chapter.

South Mountain Freeway Project Receives Five Statements of Qualifications

Posted in PPPs

The Arizona Department of Transportation received on December 10 statements of qualifications from five teams vying for a design-build-maintain contract for the $1.9 billion Loop 202 South Mountain Freeway Project.  The submitting teams are:

1.  Connect 202 Partners

  • Fluor Entreprises Inc.
  • Granite Construction Co.
  • Ames Construction Inc.
  • Parsons Brinckerhoff Inc.
  • DBi Services LLC

2.  South Mountain Mobility Group

  • Dragados USA, Inc.
  • Flatiron Constructors, Inc.
  • Pulice Construction Inc.
  • AECOM Infrastructure Inc.
  • AECOM Technical Services
  • ACS Infrastructure Development, Inc.
  • Dragdos S.A.
  • Flatiron Construction Co.
  • AECOM Technical Services, Inc.
  • Iridium Concesiones de Infraestructuras, S.A.
  • AECOM Technology Corporation

3.  Salini Impregilo/Fisher JV

  • Salini Impregilo S.p.A.
  • Fisher Sand & Gravel Company
  • Arup North America, Ltd.

4.  South Mountain Development Group

  • Kiewit Development Company
  • Sundt Construction, Inc.
  • Kiewit Infrastructure West Co.
  • Parsons Transportation Group Inc.
  • Miller Infrastructures Inc.
  • Kiewit Infrastructure Group Inc.
  • Gannett Fleming, Inc.
  • Kimley-Horn and Associates, Inc.
  • TY Lin
  • Logan Simpson Design, Inc.
  • Terracon Consultants, Inc.
  • Sunland Asphalt
  • Combs Construction Co., Inc.
  • Vastco, Inc.
  • Central Creative, LLC

5.  South Mountain Freeway Partners

  • Ferrovial Agroman US Corp.
  • Webber, LLC
  • Cintra Infraestructuras Internacional, S.L.
  • The Louis Berger Group, Inc.
  • OTHON, INC.
  • Stantec Consulting Services Inc.
  • Ferrovial, S.A,
  • Civil & Environmental Consultants, Inc.
  • Project Engineering Consultants, Ltd.
  • Gordley Group

The South Mountain Freeway is the largest project that ADOT has pursued under a single procurement.  It is one of the last major highway projects in the Maricopa Association of Governments Regional Transportation Plan, and will be a 22-mile, eight lane freeway, including two HOV lanes, in the southwest quadrant of the Phoenix metropolitan area.

Using its public-private partnership statutory authority for the first time on a major highway project, ADOT aims to complete evaluations and establish a short list of qualified teams in early February and then proceed into the proposal stage of the procurement.  The short-listing decision will be made after the record of decision is issued for the project.  The winning proposer, to be selected on a best value basis, will enter into a contract to complete the design and construct the project, followed by maintenance services for up to 30 years.  ADOT will fund the project capital costs with a combination of available public funds from sales tax revenues and tax-exempt bonds.

Contact projects@azdot.gov for inquiries about the project and the procurement process.

CalPERS’ Commitment to Infrastructure (Real Assets Annual Program Review, November 2014)

Posted in News

On November 17, 2014, the California Public Employees’ Retirement System (CalPERS), the largest U.S. public pension fund with approximately $300 billion in assets, conducted its annual real assets program review. CalPERS’ real assets program includes real estate, infrastructure and forestland. According to the presentation by its investment staff, real assets’ 13.4% return outperformed the policy benchmark by 160 bps in 2013-2014 fiscal year. CalPERS’ infrastructure program has focused on both public and private infrastructure primarily in transportation, power, energy and water sectors.

Given the plan’s strong infrastructure returns which have outperformed across measured periods, CalPERS announced that it will add another $4 billion through the next three years to its infrastructure program. CalPERS appears to view an increase in infrastructure investments as one way to achieve its return goal of 7.5%. According to the minutes from the board’s September 17, 2014 meeting, as of July 31, 2014, the total fund has returned 14.05%, outperforming the policy benchmark period by 41 bps. The 3-year return is 10.2% and the 5-year return is at 11.2%. The 10-year return is at 7.3% and the 20-year return of the total fund is 8.3%.

CalPERS sees the role of infrastructure in its portfolio as providing the plan with an ownership risk in essential infrastructure assets and providing predictable returns with moderate long-term inflation protection. In addition, CalPERS believes that infrastructure acts as an economic diversifier of equity risk. Since inception of the program, the IRR has been 17.1%. Strong performance has been driven by all investment modes including direct, separate account investments, and select commingled funds. Its NAV grew 55% from $1.1 billion to $1.8 billion. According to CalPERS, the infrastructure market will continue to be highly competitive for available capital, multi-modal capabilities and cost when it comes to infrastructure investments.

According to the presentation materials, CalPERS’ infrastructure portfolio had a NAV of $1.8 billion as of March 31, 2014, representing 0.6% of the total fund. CalPERS hopes to increase its NAV by 1% interim and 2% long-term.  CalPERS’ recent confirmation of the value of investing in the infrastructure asset class comes on the heels of the board’s September 2014 decision to adopt a new asset allocation mix that reduced risk in its portfolio by eliminating its hedge fund program worth approximately $4 billion.

Emerging Trends in Project Delivery: A New Series for the New Year

Posted in News

As part of its continuing effort to help inform and contribute to the design-build and P3 industry in the U.S., Nossaman is launching an on-going series of blog posts on “Emerging Trends in Project Delivery.”

Our blog posts for the industry generally are geared toward keeping our readers up to date on current developments regarding projects, programs, laws and regulations.  The Emerging Trends series will add another dimension – a look just over the horizon at what we and our guest bloggers predict may be coming, informed by prior patterns, opinions and results.  If by doing this we can provoke serious thought and discussion about the future of our industry, together we all may better serve it.

The first blog in the series will take a look at what we think is an emerging trend toward design-build-maintain contracting for surface transportation projects.”

Access to Jobs by Way of Public Transit

Posted in Rail and Transit

In the Reason Foundation’s recent Surface Transportation News #132, Robert Poole authored a blog post that discusses a report by Andrew Owen and David Levinson of the University of Minnesota Civil Engineering Department called “Access Across America: Transit 2014.” Their report is concerned with data on how many jobs are accessible by transit within certain time periods in 46 of the 50 largest metropolitan areas in the US.

Poole’s post analyzes both the percentage of jobs in a metropolitan area that one can reach within a given travel time, as well as the percentage of commuters using public transit as their method of commuting. His findings indicate that some metropolitan areas have surprisingly high ratios of percentages of commuters using public transit compared to the percentage of jobs reachable within 60 minutes of travel time. Other cities have similarly surprising low ratios. The post concludes by suggesting that this data may be used by transportation planners in determining where and what kind of new transit investments should be made.

Phillip Washington, General Manager and CEO at the Denver Regional Transportation District, agrees, noting that it is important for transit systems to review “their existing base system services at least three times per year.” Washington explained that “Reviewing the services an agency has on the street at least three times per year and making adjustments based on ridership, new development, etc., ensures that an agency provides service where it is most needed.”

Best Practices for Public Building P3 Projects: What Works and What Doesn’t?

Posted in Social Infrastructure

The Performance Based Building Coalition (PBBC) and the National Council for Public-Private Partnerships (NCPPP) together hosted the P3s for Public Buildings Summit in Miami on November 17 and 18, 2014.

One of the panels formed for the Summit reviewed Best Practices for Public Building P3 Projects: What Works and What Doesn’t? The panel was skillfully moderated by Mark Romoff, President & CEO of the Canadian Council for Public-Private Partnerships.  The panelists were  Orion Fulton, Senior Manager at Arup, Bill Maginas, Vice President at Honeywell, Douglas Scott, Senior Counsel at Fasken Martineau LLP and Andrée Blais, Of Counsel at Nossaman LLP.

The panelists, representing a variety of perspectives and backgrounds in public building P3s, covered several factors that public sector owners should consider at the early stages of project development.

The panel reviewed the value proposition presented by a P3 delivery, including the benefits, in terms of facility quality, that arise from aligning design-build with long term operations.  The panel addressed the importance of assessing, at the earliest stages of project development, whether the public sector owner has the necessary legislative authority to procure and finance public buildings using a P3 model.  Elements to consider in developing P3 enabling legislation for public buildings were discussed.

Mr. Romoff asked the panelists to identify, based on the panel’s Canadian, US and international experience, best practices in P3 procurement that could benefit the further development of P3s for public buildings in the US. The panelists provided various suggestions, including the merits of engaging in business case development and a value assessment when comparing delivery models for a project; developing processes that allow for approvals to be obtained in an efficient and timely fashion to ensure that a P3 deal can be closed promptly; and the utility of engaging fairness advisors.