Every four years, the American Society of Civil Engineers (ASCE) releases a “Report Card for American Infrastructure” showing the condition and performance of the nation’s infrastructure in the familiar form of a school report card, assigning letter grades to each type of infrastructure.
The 2013 ASCE Report Card gives the US an overall average grade of D+, based on assessments of “poor” in 11 of the 16 categories. As any parent will understand, this is a classic example of the bright, but underperforming student—it is a result that is unacceptable for a country with such talent and resources. The full ASCE Report Card can be found at www.infrastructurereportcard.org.
Fixing the problem will be expensive
To bring the average grade of US infrastructure up to a mere B, ASCE estimates an investment of US$3.6 trillion in new infrastructure will be needed by 2020. This is the price of years of neglect.
And this is not just a US problem. A recent report by the World Economic Forum finds global spending on basic infrastructure currently amounts to $2.7 trillion a year, when it ought to be $3.7 trillion. To bridge this gap, governments need to find new sources of revenue as well as creative ways to attract private investment.
Infrastructure drives economic growth, real estate development
The role played by infrastructure in economic growth and the aims of those who plan and build communities are addressed in the annual global infrastructure report released by the Urban Land Institute and Ernst & Young (ULI/EY), Infrastructure 2014: Shaping the Competitive City (www.uil.org/ infrastructurereport and www. ey.com/realestate). Nearly 250 public sector leaders and over 200 senior-level private developers, investors and advisers were surveyed, resulting in these findings:
Good infrastructure is a key driver of where real estate investment dollars go;
Improving the quality of public transit, roads and bridges, and pedestrian infrastructure are the highest priorities;
The public’s willingness to pay for infrastructure is a key driver;
Funding and financing for infrastructure depend on cooperation between developers and local governments; and
Long-term maintenance and operation of infrastructure are often neglected, which concerns public and private leaders.
International P3 Model— an important new tool for the US
The ULI/EY survey findings present challenges and opportunities for real estate developers and investors and public entities worldwide. The US can learn from the way other countries finance, construct, operate and manage infrastructure.
In the 1980s, a new type of P3 structure was developed in the UK, referred to as the Private Finance Initiative (PFI), which soon spread across Europe, Australia, Canada, South Africa and various countries in Asia. Those countries have seen benefits including timely completion of projects, transfer of risks to the most appropriate stakeholders and adequate provision for long-term operations and maintenance.
While the International P3 Model has so far proven difficult to implement in the US, there are signs it could become an important new tool to tackle the American infrastructure problem.
ULI Vancouver meeting: Canada makes it work; can the US?
In April 2014, more than 3,000 members of the ULI, a nonprofit research and education organization, gathered in Vancouver for ULI’s first semi- annual meeting outside the US. In the past 10 years, Canada has used the International P3 Model to construct over 200 infrastructure projects at a cost of CA$64 billion. Can this be replicated in the US?
A new name for the International P3 Model: Performance Guaranteed Facility
At the ULI meeting, Mike Marasco, CEO of Plenary Concessions, acknowledged that the term “public-private partnership” is not well understood in the US. Marasco and others have coined a new term, “Performance Guaranteed Facility” (PGF) to describe a long-term partnership where:
A single entity (the project company) accepts responsibility to design, build, finance, maintain and in some cases operate a public facility, ie “DBFM” or “DBFOM”.
The public entity (the sponsor) contracts with the project company, which in turn contracts with other members of the consortium.
The facility is managed over a long-term concession (25–35 years) with pre-defined hand- back conditions.
Payment from the sponsor— an “availability payment”— only begins on completion of construction.
Special attention is given to long-term maintenance and capital improvements.
Ongoing availability payments are subject to deduction for failures in service delivery.
There is a firm price for the term of the concession.
Ownership of the facility remains with the sponsor.
The chart below illustrates the PGF structure:
SponsorDesign & ConstructionDBFM/OAgreementSenior DebtAgreementAvailabilityPaymentSub ContractsDBAFMSAFM & Life CycleSenior
US prototype: Long Beach Courthouse
At Vancouver, Jeffrey Fullerton, Director of Edgemoor Infrastructure and Real Estate, presented a chart illustrating the risk continuum, from the traditional Design-Bid-Build structure where the public agency has the primary risk, to the turnkey DBFOM structure where the private sector takes on most of the risk. With the DBFOM structure, the public sector sponsor has, in Fullerton’s words, “one throat to choke”.
DBBTDB DESIGN-BID-BUILDTraditional DBB RisksIn traditional DBB, the Agency retains all risk of development, design and construction, nancing and operations & maintenance/life cicle costsTURNKEY-DESIGN-BUILDDevelopment, Design and Construction Risks Transferred Under Turnkey ApproachTURNKEY-Entitlement Delays• Permit Delays• Utilities (Cost & Schedule) • Site Issues• Attracting Third Part Tenants• Change Orders• Schedule Delays• Scope Creep• Code Compliance
• Alternative Private Financing
• Limited Debt Capacity
• Baseline Operation Costs
• Uncontrolled Operating Cost
• Deferred Maintenance
• Deferral of Major Equipment and
Edgemoor and its parent company, Clark Construction Company were part of the consortium for the Long Beach Courthouse, officially the “Governor George Deukmejian Courthouse”.
This US$490 million California project is the first Performance Guaranteed Facility/DBFOM project in the US. DLA Piper served as lenders’ counsel for the project, and its lawyers in the US and UK used their experience with the International P3 Model to advise US lenders on this form of risk allocation.
This project has been carefully studied as a prototype for a P3 model in the US. Real estate developers and investors in the US have been watching as it could open up new opportunities for them to use their experience in designing, building, financing, operating and maintaining many types of much-needed public facilities. So far, 33 states have passed P3-enabling legislation. Nevertheless, there continues to be widespread confusion about the benefits of this structure, as well as a reluctance to engage among public officials.
Public officials often have a short-sighted focus on infrastructure project costs. Many believe that it costs less for a public agency to construct a facility using traditional funding sources. They fail to take into account the much more significant lifetime costs of operating and maintaining the facility. As Marasco explained, “If a hospital has to choose between bandages and maintenance, bandages are going to win. Maintenance is deferred, with costly implications for long-run costs.”
To provide a longer term perspective, P3 advisers can perform a Value for Money (VfM) assessment including these components:
Public sector comparator to assess the public sector cost of traditional delivery and compare it to a PGF option
Full life-cycle cost and revenue analysis for each option
Determination of the most appropriate risk sharing analysis
Assessment of public opinion and maintenance of transparency
The National Council for Public-Private Partnerships has prepared a white paper concerning the Value for Money assessment, Testing Tradition: Assessing the Added Value of Public-Private Partnerships, that can be found at www.ncppp.org.
Canada’s Centers of Excellence—coming to the US?
In Canada, several regional “Centers of Excellence,” such as Partnerships BC and Infrastructure Ontario, have provided the professionalism, transparency and credibility that have been important factors in the Canadian success with the PGF structure. They act as facilitators between the public and private sectors; promote best practices; improve the public sector pipeline; and provide support and technical assistance to public agencies.
Chris Taylor is Executive Director of the West Coast Infrastructure Exchange (WCX), a nonprofit association governed by a board of directors representing California, Oregon, Washington state and British Columbia. At the ULI meeting in Vancouver, Taylor talked about their pioneering efforts to introduce the Canadian Centers of Excellence model into the US to facilitate the use of the PGF structure by public agencies. With organizations such as these Taylor said “public officials can have faith that someone smart is on their side”.
Adapting the International P3 Model to particular US needs
The governmental structure, laws, business culture, political environment and other circumstances in the US are very different from those in Canada and other countries that have successfully adopted the International P3 Model. In the US, there are a multitude of overlapping local, state and federal agencies dealing with infrastructure. Each of them has its own set of laws and regulations, and they are led by public officials who are typically very skeptical about private sector participation. The historical reliance on tax-exempt bonds to finance infrastructure seems to be a safer, less expensive choice, if the long-term costs of operations and maintenance are not considered.
But the situation is dire, and there is a great need to overcome such barriers to the repair of our neglected infrastructure. Most likely, the US will move toward flexible P3 models rather than a one-size- fits-all approach. We hope that the WCX prototype will lead to the creation of other Centers of Excellence across the country, to help states and regions adapt the International P3 Model to their particular needs.