Infrastructure In Crisis: P3 Event Offers Answers

Infrastructure In Crisis: P3 Event Offers Answers

BW Studio: Our new event space debuted Feb. 18 with a quartet of excellent speakers engaged in compelling debate. From left: Jeremy Shulman of Aconex; Jessica Platko, Aon; Peter Skosey, MPC; and Rick Adcock of MWH Global.

by JOHN GREGERSON | Feb 23, 2016

At long last, it is time to start rebuilding – and rethinking – big.

As we all must know by now, U.S. infrastructure — roads, bridges, rail, airports, energy distribution, water & wastewater systems, etc. — all are crumbling today at an alarming rate. At the same time, a tax-weary public no longer can bear the sole burden of returning it to world-class status. The needs are simply too great, and the projects too large and complex, says Jeremy Shulman, regional director with San Francisco-based Aconex USA, a supplier of collaboration software for all manner of infrastructure projects, including power, mining, oil and gas, etc.

Shulman is well-versed on the subject, given that the Aconex platform supports 20,000 such projects worldwide. Last week, he called on that expertise as moderator of a special evening event here at BuiltWorlds, APD/P3 Infrastructure, the latest iteration in our SmartWorlds series, and the first of a three-part series on alternative project delivery (APD). It also marked the first event in BuiltWorlds' big new home at 1260 W. Madison St. in Chicago's West Loop. By all accounts, the evening was a success.

"The speakers were excellent and did a great job of setting the stage for the next two parts in this series," said Jared Gonsky, director of SmartWorlds. "This was actually my first event since joining BW last month, so I was very impressed with the level of dialogue and the quality of networking and Q&A that it generated," he added.

But the evening's lively networking and the roomy venue could hardly distract attendees from the seriousness of the challenges at hand. Conservative estimates say the U.S. must spend $100 billion per year just to maintain its aging infrastructure systems. So, cash-strapped states, municipalities, and even federal agencies have long debated the potential for public/private partnerships (P3) to bridge the gap. To date, however, their use in the U.S. has been spotty, at best, in delivering results. Even so, many are more motivated now to do whatever is necessary to push the needle forward.

Adcock: MWH saw that the move of private money to support infrastructure was inevitable.

That observation was shared by event panelists Rick Adcock, managing director of MWH Infrastructure Development; Jessica Platko, associate director of global construction and infrastructure with Aon, and Peter Skosey, executive vice president with Chicago's Metropolitan Planning Council (MPC).

As typically executed, P3s shift responsibility for financing, constructing, operating and maintaining a project to a private development team that recoups its investment from revenues the project generates, such as proceeds from tollways.

“In addition to helping to finance critical projects that might not otherwise proceed, one of the strongest benefits of P3s that we at SmartWorlds appreciate is that they bring all the relevant project stakeholders together at the onset of a project to ensure that they’re set up for success," noted Gonsky.

“The P3 also becomes a legal contract outlining requirements for project delivery, maintenance and turnover to the public entity following a specified period,” said Skosey, who assisted in crafting policy authorizing use of the delivery method in Illinois.

Accordingly, “contracts transfer risk from public entity to private entity, since all aspects of project scope, including project development agreements, project finance agreements, and project execution agreements are established from the outset,” said Adcock.

Our new space brought dozens of architects, engineers, consultants, owners and entrepreneurs to the White Box.

Lt. Col. Kevin Lovell, Deputy District Commander, U.S. Army Corps of Engineers, asked about project alternatives.

“Anything that goes wrong is up to the developer to fix,” Platko noted. “As a result, projects are more likely to be completed on time and under budget because equity is on the line.” Penalties can be imposed in the event operations and maintenance fall short of specifications,” Adcock added.

As a result, Shulman says P3s typically result in measurable savings and efficiency gains, acceleration of bid packages by six days per package, and reductions in reviews from 8 hours to just 10 minutes.

Oh Canada: More than a third went P3 in '15.

Yet, stark disparities remain. In the U.S., a mere 1% of projects are executed as P3s, the majority involving infrastructure, according to Aon's Caitlin Ghoshal. In Canada – the “poster child for P3s”  – some 36% of projects employ the concept, and not just for infrastructure, but also hospitals, schools, defense, culture, justice, and corrections.

Additionally, any Canadian infrastructure project valued at $100 million or greater, must undergo an evaluation by Crown Corp. P3 Canada, which actually issues decisions on whether the project must be executed as a public-private partnership. Other regions of the world have engaged in P3s for decades. “The UK was executing them during the Thatcher era,” Adcock noted.

Despite apparent reservations, “We believe the U.S. will be the next big market for P3s,” said Shulman, whose sentiments were echoed by Adcock. Although MWH Global, a 7,000-employee firm based in Broomfield CO, is best known for its engineering and construction services, the firm established its infrastructure division because “we saw that the move of private money to support infrastructure was inevitable and wanted to be ahead of that.” The enterprise has succeeded, having secured contracts for P3 water projects in California, Colorado, Texas and Florida. It also has participated in bringing private financing to Alaska's Northern Gas Supply Plant (NGSP) project.

Panelists agreed that, among U.S. states, Colorado has been at the vanguard of implementing P3s.

In 2009, amid considerable rancor, state legislators created the High-Performance Transportation Enterprise (HPTE), authorizing the Colorado Dept. of Transportation to execute P3s and other innovative financing techniques. Since then, the concept has supported countless projects. “It takes political leadership – and not simply understanding the viability of P3s, but communicating its advantages to the public,” said Adcock. “That takes courage, and you see more of it in some places than others.”

“It takes political leadership – and not simply understanding the viability of P3, but communicating its advantages to the public. That takes courage...”

— Rick Adcock, MWH Global

To date, some 34 U.S. states have authorized use of P3s as a procurement method. In addition to Colorado, a recent study by Aon Infrastructure Solutions identified Texas, Florida, Georgia, and Maryland as the nation's most “P3-friendly states.”

To hedge their bets, many states won't authorize P3s without certain safeguards in place. Illinois, for instance, requires its General Assembly to approve all potential P3 projects before RFQs and RFPs are issued, according to Skosey. The state further requires that RFPs undergo analysis by the state's non-partisan Commission on Government Forecasting and Accountability to ensure they serve public interest, he added.

Assuming P3s are authorized, “many local governments are intrigued, but still don't get it,” Skosey said. “One typical response is, 'It's still cheaper to float a bond.' Well, that may or may not be, but it terms of risk, what happens when that roof caves in?”

Public benefits, private risks

Pushback can assume other forms. Failure of big-ticket plans, such as Illinois' and Indiana's recently proposed Illiana Expressway, can get attention in a manner detrimental to public perception of P3s, Platko noted. “Cancellations or delays also make it difficult for firms that spent the time and money to assemble teams required to be shortlisted,” she added.

Illiana, a pet project of former IL Gov. Pat Quinn (D), would have created a 47-mile east-west tollway extending through portions of Illinois and Indiana. As planned by Quinn and IN Gov. Mike Pence (R), the $1.1-billion, 47-mile project would have connected Indiana's I-65 to Illinois' I-55, allowing truck drivers to bypass busy Interstate 80. State officials anticipated Illiana would generate tolls sufficient over the life of the development contract for a select developer to recoup its investment in funding, constructing operating and maintaining the expressway.

For others, including MPC, the numbers just didn't add up. In an ironic twist, “It was the first project to come out of a bill that I and many others worked on for five years, and yet the Council didn't support it,” Skosey said. Assuming fares of $6 to $12 per toll, depending on whether the vehicle was a car or truck, and with an average ridership of 20,000 vehicles per day, “the project would have generated $400 million [for its development team], leaving the state to make up for the remaining $900 million,” he said. Not surprisingly, that math led to a cold reception in the local media.

The proposal received relentless pounding from the Chicago Tribune, Crain's Chicago Business and other media in the region. Following Quinn's departure, current Illinois Gov. Bruce Rauner mothballed the project upon assuming office in 2015. But last month, Rauner dusted off the idea for a $425-million P3 project intended to ease congestion on Chicago's Adlai E. Stevenson I-55 Expressway. Assuming it proceeds, the project would emerge as the state's first greenfield P3.

“The state owns existing right of way, eliminating the need for land acquisition,” Skosey noted. “The project also promises toll lanes would always accommodate travel speeds of 55 miles per hour.”

Rauner has indicated the project is critical to continuing advancing economic growth in Illinois.

The foundation for any successful P3 project is need, panelists agreed. And, as Skosey pointed out, need is sometimes greatest in states where gasoline taxes and other traditional funding sources can no longer support infrastructure upgrades.

“As Winston Churchill once put it, 'We've run out of money. Now it's time to think',” Skosey said.

To help spur that thinking, Aon next month will release P3 POINT, a new tool it says will help owners, contractors, and investors understand the political and regulatory climate for P3 projects in the U.S. and Canada. The tool is a model that captures 16 separate measures in each state and province. "As a result, we’re able to better describe and assess the political risks (involved)," explained Aon's Ghoshal.

So, what's next?

On May 5, our second event in this important series "will dig deeper into developing shovel-ready P3 projects," noted Gonsky. Already lined up are speakers from The Walsh Group and KPMG --both of which are currently working on a massive P3 project in NYC, the $4-billion new LaGuardia Airport.