Infra Insight Blog : written by Nossaman LLP Infrastructure attorneys, covers infrastructure project delivery, including Public-Private Partnerships, Operations & Management Agreements, policy, and news.

Over the past 10 years, California lawmakers have made tremendous strides in providing express design-build procurement authority to pubic agencies in the state. This authority, however, has not been applied evenly across all project types or agencies.

As matters stand in 2011, much broader design-build authority exists for public buildings or “vertical” projects than for transportation or “horizontal” projects.  Within the realm of horizontal projects, projects on the state highway system are subject to a number of constraints that do not apply to other types of projects.  And the express authority provided to a limited number of agencies under California’s Design-Build Demonstration Program and Design-Build Transit law is temporary and set to expire within the next decade.  In general, most public agencies still face an uphill battle if they wish to use design-build for transportation projects.

To reap the full benefits of design-build, the California Legislature would be well-advised to adopt permanent, general legislation that allows public agencies to use design-build on a wider range of projects, leaving the details of the procurement to be determined by the agencies as appropriate for their needs. 

See Nossaman’s article "California Public Contracting Laws: Design Build Authority for Transportation Projects" for more information on California’s most recently enacted transportation-specific design-build laws and on options available to public agencies who do not have express design-build authority but may nonetheless wish to combine design and construction services under a single contract for a transportation project.

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Brian Papernik also contributed to this post.

Yesterday, the Metro Gold Line Foothill Extension Construction Authority awarded a $486 million design-build contract to a Kiewit/Parsons joint venture. The contract is for the 11.5 mile extension of the Metro Gold Line light rail from the Sierra Madre Villa station in the City of Pasadena to Citrus Avenue near the boundary of the City of Azusa and the City of Glendora.  The Authority previously awarded a separate design-build contract to Skanska for the Iconic Freeway Structure within the same alignment. 

The Authority made the award decision for the Foothill Extension project using a best value selection methodology, considering both price and technical factors. For this project, the most highly rated proposal had both the lowest price and the highest technical rating. Although not always the case, this result is not uncommon for best value procurements, since the proposer with the highest technical rating is likely to have a better understanding of the project and therefore able to figure out ways to reduce costs and manage risks without adversely impacting quality.

The procurement process started in early in January 2010 with a request for interested teams to submit statements of qualifications. The Authority shortlisted three teams and went through a pre-RFP industry review process, issuing the request for proposals in August 2010.  The Authority received initial proposals in January 2011, entered into discussions with the proposers and obtained final proposals from all three teams in June 2011.

Instead of basing its best value determination on a pre-set formula, the Authority used a "qualitative price/technical tradeoff" methodology--an approach that is generally recommended by procurement experts. Federal agencies have moved toward the tradeoff methodology in part due to concerns that use of point scoring and formulas increases the risk of protests, and also based on a belief that it is appropriate for the selection official to have responsibility for making the selection decision. The selection official is required to analyze the differences between the competing proposals and to make a rational selection decision based on the facts and circumstances of the specific acquisition, consistent with the evaluation factors and subfactors stated in the solicitation documents. A number of state and local transportation agencies have used a tradeoff approach for their design-build contracts, including the Maryland State Highway Administration with respect to its Intercounty Connector contracts, although many state and local agencies remain more comfortable using formulas.

The authors assisted the Authority in this procurement as well as the contracts for the initial "Arroyo Seco" operating segment.

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During a July 20, 2011 presentation before the Commonwealth Transportation Board, the Virginia Department of Transportation reported that VDOT reached agreement on major business terms with Elizabeth River Crossings LLC for the design, construction, financing, operations and maintenance of the Midtown Tunnel Project in the Portsmouth and Norfolk area.  As a result of this major milestone, VDOT is targeting to reach financial close on the Midtown Tunnel Project by the end of 2011.  

The Midtown Tunnel Project will involve the construction of a new two-lane tunnel under the Elizabeth River, extension of the Martin Luther King Freeway, and certain improvements to the existing Midtown Tunnel and Downtown Tunnels.  The capital costs of the Midtown Tunnel Project is approximately $1.45 billion.  Construction is scheduled to start in 2012 and to be completed in 2017.

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On July 19, 2011, the Georgia Department of Transportation issued a press release stating that GDOT was invited to apply for a TIFIA loan in the amount of $270 million for the Northwest Corridor Project – a project to add managed lanes along I-75 and I-575 in the metro Atlanta region with approximately $968 million in capital costs.  The press release followed an announcement by Governor Nathan Deal that the procurement of the Northwest Corridor Project will proceed to the next phase through the issuance of a final Request for Proposals.  Three consortia – consisting of major national and international companies – have been shortlisted to submit proposals to design, build, finance, operate and maintain the Northwest Corridor Project.

The Northwest Corridor Project will be the largest transportation infrastructure project in Georgia to date and is expected to generate over 9,700 jobs statewide.  The Northwest Corridor Project is the cornerstone of GDOT’s Managed Lanes System Plan, which is a plan to construction a $16.2 billion managed lanes network in the metro Atlanta region.

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If you want to know what a mature, effective federal and state P3 policy can look like, we need not look very far beyond our U.S. borders.  Two Canadian provinces, Ontario and British Columbia, provide us a road map for building successful, sustainable P3 programs and policies.

At the International Bridge Conference in Pittsburgh last month, panelists for a workshop on P3s, including Len Kozachuk with Infrastructure Ontario (IO), described the essential features of this agency and its “alternative financing and procurement” program.  The contrast with how our federal and state policy makers view P3s was striking:

• All three major political parties in Ontario support the use of P3s.  They do so because the track record proves the benefits of P3s. The woeful experience in the U.S. is that if one party supports it in a particular state, usually the other party opposes it.
   
• IO has plenary province-level authority over P3 procurements for all forms of transportation and social infrastructure.  It is a center of expertise.  We are aware of no state entity with comparable procurement powers or expertise.  Virginia is making an effort in this direction with its recently announced Office of Transportation Public-Private Partnerships.
   
• IO handles a wide range of project types, from transportation to social infrastructure such as hospitals, courts, schools and water projects.   It is a rarity in the U.S. to find any state even considering use of P3s for social infrastructure, and only a handful of states have transportation projects under active consideration for P3s.
   
• IO is staffed with a strong group of financial, technical and legal professionals and analysts.  IO carefully screen projects for P3 suitability and does not hesitate to reject those that are not ready or suitable.  They then run the procurement, and negotiate and administer the contracts.  In most states, we witness P3 offices in state DOT’s formed as an afterthought, often understaffed, with insufficient prior training and experience and inadequate support from other DOT divisions.
   
• IO is dedicated to maintaining a pipeline of P3 projects - over 50, worth $23 billion, since 2005.  Compare this to 96 projects throughout the entire U.S., worth $54.3 billion in transportation P3 contracts, over the past 22 years, a bunch of which are design-build only (see Public Works Financing, May 2011 issue, p. 4-5).  And IO has something like 20 more projects concurrently under active procurements, dwarfing any U.S. state effort. 
   
• When IO folks commence a P3 procurement, they finish it, because they have the political support, authority, analysis, staffing and funding to do so.  This track record has bred credibility for the IO in the P3 industry.  In most states, the use of P3s is decided on a project-by-project basis, with little promise of a steady stream of opportunity.  Delayed, prolonged procurements, and too many failed procurements, undercut acceptance of P3s and industry confidence.
   
• Every Ontario infrastructure project with estimated capital costs of $50 million or more must be analyzed for P3 suitability.  This is the law for any project seeking Canadian federal support.  Indeed, IO’s working presumption is that P3 will be the preferred method of project delivery for such projects.  In the U.S., nowhere do we find a presumption in favor of P3s for significant projects, much less a standing policy to evaluate for P3 suitability.  P3s are usually viewed as a last resort, when no other means to close a funding gap can be identified.
   
• The driver behind the presumption favoring P3s in Ontario is life cycle cost efficiency.  “We believe this model — with the inherent private-sector efficiencies — will create an overall lower cost for taxpayers than if the government financed projects directly.” [From website]  Time and again IO has found that P3s produce the best value for money over the useful life of large, complex projects.  While cost effectiveness should be the central reason for using a P3 (see Public Works Financing, May 2011 issue, p. 24), the driver for using P3s in the U.S. is lack of traditional financing.  If the necessary capital can be raised through any non-P3 means, that is usually the choice, even though a P3 approach can delivery quality assets and performance at a lower life cycle cost.

The story is the same in British Columbia, where Partnerships British Columbia has successfully pursued P3s for dozens of transportation and social infrastructure projects.  It analyzes projects for P3 suitability and manages the P3 procurements for provincial and municipal government owners.  All projects of $50+ million are “considered first … to be built as public-private partnerships (PPPs) unless there is a compelling reason to do otherwise.” It delivered 35 PPP projects between 2002 and 2010, worth $12.5 billion. P3s are expected to meet 10-20% of the province’s infrastructure capital needs.  P3 market share in the U.S. since 2008 is about 2% (see Public Works Financing, May 2011 issue, p. 6).

In a nutshell, the Ontario and B.C. governments champion P3s, because they know they produce the best value for the public when applied to the right projects in the right way.   We need many more states with well-positioned elected and executive officials steadfastly advocating a change from episodic to programmatic P3 decision making (see TR News Magazine May-June 2011, p.23).  Our northern cousins are showing us how.

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We all know that our infrastructure is aging.  Considering how hot the issue of transportation funding (or lack thereof) has become, it is almost impossible not to see or hear something on this topic daily.  That being said, Transportation for America has provided a new way for us to fixate on the state of disrepair of our nation’s bridges – an interactive map. 

The map is color-coded and uses green to mark states that are more-or-less maintaining their bridges.  A special hats off to Florida and Nevada, which rank 50th and 51st respectively in the list of disrepair.  In contrast, the map uses a deep, ominous red – something akin to a scarlet letter - to mark states whose transportation dollars just aren’t going far enough.  Pennsylvania and Oklahoma get the dubious honor of being coded red, with 26.5% and 22.0% of their bridges being deficient respectively.

Once you have taken a look at how the states stack up against each other, you may want to click on the “Near You” button above the map.  This allows you to insert any address and locate deficient bridges within a 10-mile radius.  Depending on where you look, this can be relatively shocking.

Whether you are looking at the interactive map or using the “Near You” function, you should note that if you scroll down Transportation for America has provided a more detailed chart showing the percent of bridge traffic going over deficient bridges.  This twist on the information can be quite interesting.  For example, though California is only in 18th place on the overall list of deficient bridges, the chart shows that California has the 3rd highest rate of total bridge traffic going over deficient bridges (indicating that California’s deficient bridges are in high demand).

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Posted by guest blogger Ryan J. Orr

A recently published paper analyzes returns on infrastructure investments and produces some rather surprising findings. The paper, “Risk, Return and Cash Flow Characteristics of Infrastructure Fund Investments” by Florian Bitsch, Axel Buchner, and Christoph Kaserer, examines an extensive dataset of infrastructure and non-infrastructure deals and finds that the data does not back up the conventional wisdom that infrastructure investments offer “long-term, stable and predictable, inflation-linked returns with low correlation to other assets.”  Unfortunately, while the study was an ambitious effort by the Center for Private Equity Research (CEPRES), the authors’ dataset of “infrastructure deals” fails to consider the distinction between asset classes and therefore, we believe, one can hardly argue that it is an accurate representation of the global infrastructure asset class as it has been defined by most institutional investors.

The authors draw from what is perhaps the most complete dataset of infrastructure investment performance ever assembled—that of CEPRES, a private consulting spin-out of the University of Frankfurt that is also supported by Technische Universität München and Deutsche Bank Group.  The 363 infrastructure deals and 11,223 non-infrastructure deals studied are all unlisted pure equity deals done by private equity firms with an initial investment and ultimate exit between 1971 and 2009.  Uniquely, the authors had access to the full history of cash flows for each. Through a series of regressions, they compare the infrastructure and non-infrastructure deals. Among their most interesting findings: infrastructure deals do not have a longer time horizon, do not provide stable cash flows, do not have inflation-linked returns, do correlate with other kinds of assets, and are also somehow low risk and high return.

What’s going on here? If these findings are true, they turn the entire world of infrastructure investing on its head.

Looking closer at the data, drawn primarily from North America (43%) and Europe (43%), the dataset is largely telecommunications (58.7%) and natural resources (24.8%). This is a heavy skewing. Typically, both natural resources and telecom investments have full demand risk and lack contractual and regulatory protections that give infrastructure its hallmark downside protection. Social infrastructure is absent from the sample, and it is unclear what is included in “natural resources.” (Do oil and gas exploration and production count as infrastructure?) Additionally, 52.9% of the deals are labeled as venture capital, which clearly diverges from the risk/return profile of mature operating infrastructure companies. On the whole, we conclude that this dataset of “infrastructure deals” is poorly circumscribed.

Admittedly, the industry’s lack of a universal definition of “infrastructure” is partially at fault for this. Still—to paraphrase Justice Potter Stewart’s 1964 concurring opinion in Jacobellis vs. Idaho—“I know infrastructure when I see it, and it is not this.” A more focused cross-section of investment performance might suggest a conclusion more in line with the traditional investment profile of infrastructure assets.

Ultimately, the most significant legacy of this paper could be broader awareness of the dataset behind it. Future researchers should be able to carry out more segmented and nuanced investigations of performance of subsets of the infrastructure asset class, which should yield more precise conclusions.

Dr. Ryan Orr is Executive Director of the Collaboratory for Research on Global Projects at Stanford University. He teaches Global Project Finance and Infrastructure Investment to students in the university's Engineering School and Graduate School of Business.

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On June 15, House Transportation and Infrastructure Committee Chairman John Mica and Rep. Bill Shuster, Chairman of the Railroads, Pipelines and Hazardous Material Subcommittee, introduced the Competition for Intercity Passenger Rail in America Act.

Chairman Mica said: “After 40 years of costly and wasteful Soviet-style operations under Amtrak, this proposal encourages private sector competition, investment and operations in U.S. passenger rail service.” The legislation would force Amtrak to sell the Northeast Corridor (“NEC”) to the U.S. government, establish a committee to manage NEC assets, privatize NEC operations, set performance standards for a 2-hour trip from Washington, D.C. to New York City, double train frequency and require the “highest level of private sector participation and financing” and the “lowest level of federal funding” with full implementation in 10 years.  The legislation also would set the ground work for privatizing what are now state-sponsored Amtrak routes as well as the Amtrak transcontinental long-distance trains.

This brings me back to the “go-go” 1980s, when President Reagan and Budget Director David Stockman tried to kill Amtrak.  (I passed the bar and had a job…Sure was glad I didn't go to work for Amtrak; that would have been a short first “real” job.) That effort died in the Senate.

Then there was the Republican Revolution (version 1), the Amtrak Reform and Accountability Act of 1997 and Newt Gingrich’s proposed shuttering of Amtrak. (I had friends that went to work for Amtrak…Couldn't they see the writing on the wall?) The Amtrak Reform Council eventually recommended that Amtrak’s assets be purchased by the government, but that idea was not implemented.

Then on two separate occasions in 2003 and 2005, President George W. Bush and Transportation Secretary Norman Mineta tried to reform or abolish Amtrak.  These efforts also came to nothing.

Is there a role for the private sector in the improvement of U.S. intercity passenger rail service?  Almost certainly.

Is there political support for the proposition that eliminating Amtrak is the best way to improve U.S. intercity passenger rail service on the Northeast Corridor?  On four prior occasions the answer has been “No.”

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As discussed in our previous blog post, the U.S. Department of Transportation (“USDOT”) announced this week the availability of nearly $527 million in FY 2011 funds for the third round of USDOT’s wildly popular TIGER Discretionary Grant program.

Pre-applications for the funds are due by October 3, 2011, and final applications are due by October 31, 2011.  USDOT will host a half-day seminar and webcast providing information and guidance on the TIGER application process on July 18, 2011.

The TIGER program awards funds on a competitive basis to projects that will have a significant impact on the nation, a metropolitan area, or a region.  Unlike previous rounds, this third TIGER round does not provide funding for planning grants.  Additionally, TIGER applicants are now limited to three applications submitted as lead applicant this round.  Otherwise, all other material requirements and details of the two earlier TIGER funding rounds, including selection criteria, have not changed in this third round.

While USDOT will apportion the majority of these funds as discretionary grants, USDOT can use up to $150 million of this funding round to pay the subsidy and administrative costs of the TIFIA credit assistance program.  This $150 million could support approximately $1.5 billion in credit assistance under the TIFIA program.

USDOT requires applicants for TIGER TIFIA funds to both submit an application for this round of TIGER funding and a separate TIFIA letter of interest.  Additionally, USDOT reserves the right to offer TIFIA credit assistance to TIGER applicants who did not specifically request TIFIA funds.  Therefore, USDOT strongly recommends all TIGER applicants to consider the viability of their project for TIFIA credit assistance in addition to traditional discretionary grants.

More detailed information can be found in USDOT’s Interim Notice of Funding Availability, published in the July 1, 2011 Federal Register.

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