3,200 Bed Hospitals Anyone?

New York Presbytarian Hospital/Weil Cornell Medical Center is the largest medical facility in the United States, with 2,236 beds.  The largest hospital west of the Mississipi is Babtist Medical Center in San Antonio with 1,414 beds.  The largest hospital in California is Ceder Sinai in Los Angeles at 947 beds.  The big project in the offing in San Francisco--will they or won't they come to terms with the city!--is Sutter's 555 bed Cathedral Hill project.  The venerable Walter Reed Hospital reached a maximum size of 2,500 beds during World War I.

These projects in the United States are dwarfed by the hospital construction program currently under way in Turkey, with less than 1/4 of U.S. population.  The Turkish Ministry of Health has launched a major PPP procurement program to deliver a new wave of healthcare campuses and hospitals for the country.  In an interview, Federico Ferrari, Partner at DLA Piper Istanbul, who is acting as PPP legal advisor to the Ministry, reports that 16 projects have been tendered, including two with more than 3,000 beds.  All of them are larger than projects currently on the books in the U.S. 

The consortia bidding on these projects are predominantly from Italy and Spain.  Some American consulting companies are involved, but not, apparently, any U.S. general contractors.  Ferrari describes that these PPP proposals proceed on parallel tracks, with the final decision being based predominantly on price.  The price is driven down during a final head-to-head auction, which has included as many as 200 rounds of bidding.  The last consortium standing gets the job. 

Kayseri, Turkey, will build a new 3,200 bed hospital

Ferrari discusses currency and inflation risks, which are shared by the Ministry and the successful consortium up to 25% fluctuation; thereafter the ministry takes the risk. 

Apparently the ministry would like to see additional consortia compete for these projects.  Of the 16 projects tendered, 8 have been awarded to date, with six of these still in negotiation and two having reached commercial close. 

So, Turkey anyone? I hear it's a nice place. 

What's the Best Delivery Method for Road Projects?

In an article entitled in Financial analysis of road project delivery systems, 14 Journal of Financial Management and Construction 61 (2009), two authors from the VTT Technical Research Centre of Finland, Pertti Lahdenpera and Tiina Koppinen, expanded on an earlier study they performed to identify the most cost effective manner to commission a road.  In the earlier study, the authors did not consider financing issues, including the option to use private-financing; in the instant study, they did.

The authors analyzed five different delivery methods:  Construction Management-Agency ("CMA"; a.k.a. CM-at-fee or CM-not-at-risk), Design-Build ("DB"), Design-Bid-Build ("DBB"), and Design-Build-Operate ("DBO") and Design-Build-Finance-Operate ("DBFO" -- a form of public-private partnership or P3).  Interestingly, especially given some of the conclusions, the authors did not consider CM-at-risk, where, unlike CMA, the construction manager is contractually obligated and responsible for delivering the project.

The authors utilized a DCF or Discounted Cash Flow analysis to determine and compare the various project delivery methods' present costs.  They considered the cost to the owner and the cost to society, the latter including an estimate of €1 million for each month of delay in commissioning a road.  Among other various assumptions and estimates, they excluded taxes and assumed all work was out-sourced.  The assumption that all services are out-sourced raises an interesting question of whether a comparison of CMA, DBB, and DB with operation and maintenance being performed in-house changes the outcome.  The authors also performed sensitivity analyses to determine what impact a change in estimates had on a procurement's present costs (e.g. a change in interest rates).

Based on the results, the authors ranked the procurement methods where public financing is used.  DBO was "clearly" the most efficient in terms of an owner's costs, followed in order by DB, CMA, and DBB (i.e. DBB costs the most).  DBFO's competitive position was not absolutely clear, but it seemed to be in the middle with DB and less costly than DBB and CMA.  With CMA being the fastest to commissioning, the need for early commissioning can render CMA superior to DBFO.  Not surprisingly, the authors further found that DBFO was affected the most when performing sensitivity analyses; changes in assumptions affected the others in a similar fashion.    

With austerity measures necessarily in place in many regions of the world, one must wonder if DBFO will become more prevalent for commissioning roads than DBO and other procurement methods notwithstanding DBFO may according to this study be more expensive.

CBO Report on Infrastructure Bank for Surface Transportation

President Obama has proposed a federal infrastructure bank in his budget for 2013.  On July 12, 2012 the Congressional Budget Office (CBO) released its report outlining the parameters of such an infrastructure bank.

For each of the past three years the country has spent approximately $200 billion on surface transportation infrastructure--highways, mass transit, and passenger rail .  Of this, about $50 billion has come from the federal government, with the bulk coming from state and local government.  Private rail investment has contributed about $12 billion annually.  This is not enough.  We need additional funding to maintain our current systems, and we need significantly more to meet future needs.  How will this infrastructure be funded?

The proposed federal infrastructure bank is designed to close the gap of needed financing for major surface transportation projects that will primarily be  funded with user fees, such as tolls, and value capture (e.g. tax increment financing).  A perceived benefit is that a federal infrastructure bank could make decisions of funding based on merit from a pool of applicants, relatively isolated from political pressures, and it could focus on projects that cross jurisdictional boundaries.

The report compares funding under the currently enacted Department of Transportation Infrastructure Finance and Innovation Act (TIFIA) program.  The main difference is that TIFIA money is primarily handed out in the form of grants.  The source of TIFIA money is federal gas taxes and other federal tax revenues.  The report notes that the most recent authorization for federal transportation programs includes an expansion of the TIFIA program.  The infrastructure bank would be targeted on projects with a dedicated revenue stream.

To the extent that a public infrastructure bank could depoliticize the funding of programs and work across multi-jurisdictional lines, that would seem to be a good development.  While they are at it, efforts should be made to streamline EIR review for multi-jursidictional projects.  Do it once, do it right, and build it!

Las Vegas McCarren Field: Terminal 3

As if we needed extra reasons to go to Las Vegas.  You and 53 million of your best friends!

Several recent articles have marked the successful on time and on budget completion of the $2.4 billion  Las Vegas Airport McCarren field Terminal 3.  This five year project was managed by Bechtel and constructed by Perini Building Co. and a cast of thousands. 

Here is ENR Southwest:

The five-year undertaking employed 1,800 people working more than 9.5 million man-hours. "It's a bit of a letdown to see it done," says Sean Stewart, executive vice president, Associated General Contractors, Las Vegas chapter. "There aren't any billion-dollar projects on the horizon."

Bechtel Infrastructure Corp. was the program manager; Perini Building Co. was general contractor for the three-level, 1.9-million-sq-ft terminal building under a $1.2-billion contract. The terminal is joined by several other projects that were completed at different times: a 5,954-space, 2.3-million-sq-ft, $121.7-million garage built by McCarthy Building Cos.; an eight-mile elevated roadway system built by Las Vegas Paving Corp.; a 100,000-sq-ft central plant built by Penta Building Group; and a 900-ft-long automated connecting tram. McCarthy also constructed the $153.7-million early civil site improvements.

Touted as the state’s largest public works job ever, construction proved tricky with more than 100 contracting companies working simultaneously on multiple phases in close vicinity around a fully operating airport. Despite the size and complexity, the project still finished on time and on budget. All told, it was the largest expansion in the airport’s 64-year history, and brings the four-runway, 2,800-acre McCarran to final build-out at 117 gates.

...and the Las Vegas Review Journal:

Air carriers objected to awarding the general contract for Terminal 3 in July 2008, as the economy plunged into recession and oil prices soared above $140 a barrel. Because of the difficult economic outlook, they argued for putting the project on hold after a decade of planning. The county went ahead anyway with Perini Building Co. of Henderson as the main contractor and PGAL of Houston as the architect. ....

In the short run, airlines will pay the price for Terminal 3. Cost per enplanement, the industry benchmark that calculates how much a carrier pays in airport fees and rent for each passenger, is estimated to hit a record high of $12.06 at McCarran during the coming fiscal year, a 160 percent increase from 2006.

Many airports, including McCarran, are largely self-supporting. They receive funding from federal ticket taxes, but no operating subsidy from local governments. Airline use fees, parking garage revenue, rent from tenants such as gift shops, restaurants and rental car companies pay the bulk of terminal construction and operating costs.

...and the Las Vegas Business Press: 

It's the largest expansion project in McCarran's 64-year history and one of the most challenging, said Michael Kerchner, project executive for Perini Building Co., a division of Tutor Perini Corp....

"Just bringing everyone together ... you had the utility plant, the roadways, the parking garage and the apron. If you consider putting a half-mile structure in the middle of that and the contractors working in the same yard ... so just the logistics of it," Kerchner said.

He started every day with meetings at 6 a.m. to keep everyone abreast of what was going on. They followed a "critical path" method for scheduling, reaching 18 milestones through the course of the contract.  "We knew the only way to make it work is to allow everybody to accomplish their goal. So the challenges were interfacing with other contractors. We started coordinating with PGAL (architects), the structural engineer and steel contractor even before the notice to proceed," Kerchner said.

At the peak of construction, Terminal 3 employed about 1,800 workers from four primary contractors and more than 70 subcontractors. More than 9.5 million manhours of labor were logged since construction started in June 2007.

All of the related projects had to be linked together not only with technical aspects, but with site logistics, said Dan Wright, project manager for San Francisco-based Bechtel Infrastructure Corp., construction management firm for Clark County Department of Aviation.

"As you can imagine, these are lump-sum projects on a low-bid basis, so it's critical that each contractor had the opportunity to get their work done," he said. "The planning we did on the front end, that was critical. And just very close management of the project and trying to avoid changes that would affect the cost of the project."

...More on CA High Speed Rail

Pillsbury's Robert James has a good post at their Gravel2Gavel site explaining some of the opportunities forthcoming. 

The early High Speed Rail funding focus is on the Initial Operating Section (IOS), which runs down the Central Valley from Merced to the San Fernando Valley (about 130 miles of initial segments and about 300 miles in total). Design-build package HSR11-16 has already been shortlisted to five bidders; this is for 23-29 miles of infrastructure around Fresno (including a major river crossing and many grade crossings) and is estimated at $1.2-1.8 billion. According to the Request for Proposal, award is scheduled for December of this year.

Further design-build packages for infrastructure connecting Fresno with Bakersfield, and for stations and track along all of these segments, would be expected to follow. There would also be associated architect/engineer and construction management contracts, and two design-bid-build contracts for multiple-use crossings. Additional design-build packages for infrastructure, stations and track connecting Merced with Fresno, and Bakersfield with the San Fernando Valley, are expected in the future. A procurement package for the trains would then ensue.

.... Opportunities for public-private partnerships (PPPs), such as DBFOM contracts and concessions, are expected to be available for the urban sections closer to San Francisco, LA and San Diego, and for operating phases. However, the High Speed Rail Authority says unsolicited proposals for private financing may be considered.

The Challenge of Funding Big Infrastructure Projects

The California high speed rail project continues to chug along slowly.  Last week the California legislature narrowly approved $4.3 billion in state funding to be added to $3.2 billion in federal funds previously authorized.  This represents a 10% downpayment on the currently estimated construction cost. 

The California High-Speed Rail Authority (Authority), established in 1996, has a statutory mandate to plan, build, and operate a high-speed rail system to be coordinated with California’s existing transportation networks.  Five design-build ventures have been pre-qualified for the first 29 mile segment starting in Fresno, heading north. 

Any such infrastructure project faces big political hurdles.  The Erie canal system was built with bonds issued by the State of New York after the federal government refused to get involved.  The project was a huge success:  tolls soon paid off the  bonds obtained and the state derived a substantial profit before the canal was replaced by railroads for commercial purposes. 

The transconinental railroad was authorized and funded by Congress in the middle of the Civil War as a public private partnership.  This was accomplished with outright bribes of Congressmen.  The result was the government overpaid for construction of the line, gave away much more land than what was needed to build the railroad, and did not get to participate in any of the profits.  Yet, the transcontinental railroad was a huge success in opening up the West more quickly than would have occurred without government help, moving populations out West, and increasing the taxable base of commerce.  As bad a bargain as the government struck, in the long run it was surely a good investment for the country.  


Today, high speed rail has no shortage of political enemies.  There are the farmers through whose lands the new line will travel.  There are the communities in urban areas concerned about noise.  There are those who believe it's too expensive and will be a drag on the public fisc for decades to come.  There are those who don't live near the high speed rail or near a station, and wouldn't use it if they did, and wonder what's in it for them?  On the other hand, there are the environmentalists who claim high speed rail travel will be greener than expanding airplane travel, there are those who warn that with an additional 20 million people expected in California in the next 40 years, we won't be able to build enough roads and airports to accommodate the need.  There are the 100,000 man year construction jobs that are promised for the central valley, which can surely use those jobs.  Then there are dreamers who envision walking to the train station in downtown LA and walking to a meeting in downtown San Francisco 2 hours and 40 minutes later--all this with comfortable legroom and no TSA gauntlet to run.  


The opponents have the upper hand.  They appear to have public opinion on their side.  They have no shortage of places where they can take a stand:  in Congress where Congressional Republicans have vowed to block further funding for high speed rail;  in the state legislature, where expenditures require a 2/3 majority; in the courts where they can repeatedly mount challenges under the California Environmental Quality Act; and in the courts fighting eminent domain actions.  


Me, I'm a dreamer.  And I'm getting mighty sick of airplane travel.  

Alternative Project Delivery: The Problem of Metrics

Here is an interesting article written by David Gehrig and Lisa Dal Gallo (Hanson Bridgett, SF) surveying the status of design-build in California. 

The legislature first dipped its toe in to the design-build pool for public agencies in 2001 with the passage of AB 598, which authorized “transit operators” to award contracts for transit projects of at least $10 million on a design-build basis. Since then, a variety of statutes have been enacted expanding design-build authority to other agencies, lowering the dollar threshold for specific design-build legislation, and extending the date of applicable sunset provisions. Currently, the following public agencies have some form of design-build authority: 1) transit operators; 2) cities; 3) Sonoma County Health Care District; 4) school districts; 5) community college districts; 6) counties; 7) Director of General Services for the State of California; 8) Los Angeles County Metropolitan Transportation Authority; 9) select public agencies pursuing wastewater or solid waste facilites; and most recently 10) local tranportation agencies.

These enabling statutes have included requierments to provide information on design-build projects to the California Legislative Analyst's Office in order to keep some metrics of succes.  The Legislative Analyst's Office issued a report in January 2010   entitled "Counties and Design Build."  Here is the summary of this January 8, 2010 report. 

Summary

As part of legislation extending design-build authority to county governments, counties were required to report to our offi ce on construction projects that they completed with the design-build delivery method. This report provides a summary of the counties’ responses to our offi ce. Although it was diffi cult to draw conclusions from the reports received about the effectiveness of design-build compared to other project delivery methods, we do not think that the reports provide any evidence that would discourage the Legislature from granting design-build authority to local agencies on an ongoing basis. In doing so, however, we recommend the Legislature consider some changes such as creating uniform design-build statute, eliminating cost limitations, and requiring project cost to be a larger factor in awarding the design-build contract.

"Difficult to draw conclusions ..." is not exactly an overwhelming metric endorsement.  Notably Dal Gallo and Gehrig are unaware of any follow up to the LAO's report.  It would be nice if the LAO, or some other centralized body, could continue to gather reliable and objective metrics comparing the relative success of different project delivery models. 

Can Conditions of Approval turn a Project into a Public Private Partnership?

In a recent California Daily Journal article ("Builders win big with San Jose Jury Verdict,"  CDJ, June 11, 2012), Jason Armstrong reports on a $6.1 million jury verdict in favor of a developer against the City of San Jose.  The jury found that that the city had failed to timely rezone a 200 acre parcel causing harm to the developer, and that the city had promised to fast-track the approval process in exchange for the developer's agreement to pay for certain infrastructure improvements. 

The developers contended they put up more than $8 million and committed $250 million more to fund city infrasturcter at the site with the understanding San Jose would expedite their application, but the approvals never happened and the project never materialized. 

Shiraz Tangri, a partner with Alston & Bird LLP who handles development and infrasturcture issues and isn't involved in the litigation, said the issues in the case are important for developers because cash strapped municaplietes are increasingly forging agreements with with developers to help fund sidewalks, curbs, street lights, parks, and other improvements for building projects.  He said the case could give some developers pause about risking money in such an agreement but that it could also give companies some comfort knowing that a court forced a city to uphold its end of the bargain. 

"Cities are increasingly looking to the private sector for help" Tangri said ... "The jury in this case is saying, 'Wait a minute.  The municipality is asking the private sector to step in and go above and beyond.  The partnership deal has to be upheld.'" 

In this case, the developers had agreed to upgrade nearby freeway offramps, and construction of a school.  The city contended, in part, that approvals were not given due to staffing shortages which delayed the review. 

The case raises the question, when does the normal extraction of conditions for approval ("build this sidewalk, install that traffic light, fund this school, or build this ballfield, and we'll approve your project") become a binding public private partnership?  At which point does a public entity move from a regulatory approval role to a partnership role? 

The city has promised to appeal.   

Design-Build in Highway Construction Reauthorization Bill

In our March Division 4 presentation, Julie Muller, presented an article "Realized Economic Efficiency of Road Project Delivery Systems" by Tina Koppinen and Peti Lahdenpera (2007).  Koppinen and Lahdenpera advocate increased use of design-build in road construction.
... and here we have the DBIA reporting that the Transportation Reauthorization Bill that just passed through Congress has several provisions that will encourage the use of design-build in U.S. highway projects:

In addition to authorizing the funding of surface transportation through FY 2014 at inflation-adjusted current levels of spending, MAP-21 singled out design-build as an innovative contracting method, making design-build projects eligible for increased Federal dollars. At the discretion of the Secretary of Transportation, design-build projects may receive Federal share payable up to 100 percent. The law also promotes the use of contract incentive payments for early completion of projects, as long as incentives are accounted for in the financial plan of the project.

Hat Tip to Lisa Dal Gallo.  Thanks, Lisa.

I= Kr + Te + De: Innovations in Project Finance

Milton Bevington, a lecturer at U Mass, and closely associated with the Clinton climate initiative has an intriguing post at the Sustainable Business Forum site.  He takes note of the fact that the greenest, most efficient energy is the energy we don't use, yet despite much progress by engineers in developing energy efficient building technologies, adoption of some of these technologies has lagged rational expectations. 

The article discusses a path to sustainable financing of these technologies. 

Question: What is the significance of innovation in energy efficiency project finance? Answer:

 I=K_r +T_e +D_e

Innovation in building energy efficiency results from the interplay of Knowledge from research, Technology from engineering, and Delivery to market from enlightened entrepreneurship. A common problem arises when a promising idea reaches a stage known as the “Valley of Death” — that is, when the idea is not yet perceived as workable in practice or at scale and is therefore considered too risky by traditional investors (read building owners and real estate lenders in the case of energy efficiency). Crossing the valley requires some kind of convincing demonstration of economic feasibility which in turn requires financial resources, hence the dilemma.

Suzanne Harness has an article, here on the Triclium (June 15), looking at the risk transfers inherent in performance contracting.  The Bevington article covers performance contracing from the other side:

Energy performance lending

For mortgaged properties with limited refinancing options, a new form of collateral and underwriting process for energy efficiency projects. Common real estate lending practice complicates energy efficiency projects because it can be difficult to add debt without refinancing a property completely. As proponents of PACE finance (both residential and commercial) have learned, the rights of first mortgage holders cannot be easily ignored.

Energy performance lending uses underwriting criteria which lean on energy efficiency project cash flows to secure loans. An analogy is the way that a drilling project is secured using the expected cash flows from oil. When used in conjunction with an enhanced contracting model, projects underwritten in this way can coexist with senior debt without affecting prior security interests

The ideas discussed have broader application to new project delivery methods like IPD as well.  Innovation in project delivery requires (Kr) knowledge from research (gathering of metrics, is IPD really more efficient, cheaper, and less litigious), (Te) techonology from engineering (BIM, enhanced pull scheduling, etc), and finally (De) enlightended entrepeneureship.

Celebrating July 4--Each in His or Her Way

Over at Brad DeLong's site (Berkeley Macroeconomist), Brad celebrates with an address to the nation given by FDR on July 4, 1942:  

For 166 years this Fourth Day of July has been a symbol to the people of our country of the democratic freedom which our citizens claim as their precious birthright. On this grim anniversary its meaning has spread over the entire globe--focusing the attention of the world upon the modern freedoms for which all the United Nations are now engaged in deadly war. ...

Never since it first was created in Philadelphia, has this anniversary come in times so dangerous to everything for which it stands. We celebrate it this year, not in the fireworks of make-believe but in the death-dealing reality of tanks and planes and guns and ships. We celebrate it also by running without interruption the assembly lines which turn out these weapons to be shipped to all the embattled points of the globe. Not to waste one hour, not to stop one shot, not to hold back one blow--that is the way to mark our great national holiday in this year of 1942.

To the weary, hungry, unequipped Army of the American Revolution, the Fourth of July was a tonic of hope and inspiration. So is it now. The tough, grim men who fight for freedom in this dark hour take heart in its message--the assurance of the right to liberty under God--for all peoples and races and groups and nations, everywhere in the world. 

Over at Volokh Conspiracy (conservative law professor blog) Randy Barnett--he the architect of the challenge to the health care law-- celebrates with a paean to  liberty and natural law: 

The assumption of natural rights expressed in the Declaration of Independence can be summed up by the following proposition:  “first comes rights, then comes government.”  According to this view: (1) the rights of individuals do not originate with any government, but preexist its formation;  (2) The protection of these rights is the first duty of government; and (3) Even after government is formed, these rights provide a standard by which its performance is measured and, in extreme cases, its systemic failure to protect rights — or its systematice violation of rights — can justify its alteration or abolition; (4) At least some of these rights are so fundamental that they are “inalienable,” meaning they are so intimately connected to one’s nature as a human being that they cannot be transferred to another even if one consents to do so.  This is powerful stuff.

Bobbi is off at music camp, so here at home, I celebrate with an appreciation of our living constitution.

Randy Barnett, unlike strict constructionists, is not troubled by unenumerated rights.  Here is Barnett on Lawrence and Griswold in 2003.  [Lawrence v. Connecticut, which found a right of privacy in the penumbra of the enumerated rights and struck down a prohibition of contraceptives; Lawrence v. Texas, wherein Justice Kennedy relied heavily on the concept of liberty to strike down sodomy laws]

Barnett takes a keen interest in justice Kennedy's development on the issue of liberty, and argues that  liberty would have been a better basis for Griswold than privacy and the substantive due process formulation.  Substantive due process has been used by the court to make most of the provisions of the Bill of Rights binding on the states.  Substantive due process holds that the constitution protects fundamental rights, even if they are not enumerated in the constitution, if they are a) grounded in our history and traditions, and b) implicit in a concept of ordered liberty.

Griswold expresses the idea of a living constitution that is adaptable over time.  Our traditions and our concept of ordered liberty change over time, and our constitution can change along with them.  This idea of a living constitution, of course, has been under attack for some time by the Federalist Society movement, scholars, judges and lawyers in many quarters.  This debate plays a big role in the current split on the Supreme Court. 

Randy Barnett is not advocating a "living constitution," but he is encouraging the court to reach outside of the constitution to natural law rights.  Barnett, a libertarian, may want to limit this to liberty interests.  All liberty interests should be protected by the court, it seems, without regard to whether the liberty interest is fundamental or not.  He points to the 9th Amendment for this proposition.  However, the 9th Amendment does not mention "liberty."  It generically refers to "other rights."   Once the court reaches outside the constitution, whether living or dead, where does it stop?

So Barnett has a line drawing problem.  How does the court decide what are natural rights, and how they should be protected?  The concept of a living constitution constrained in its interpretation by  being grounded in our history and tradition, and a concept of ordered liberty, and further constrained by stare decisis would seem to me to be a preferable program.

Long live the constitution, long live America, long live liberty.  Happy 4th of July.