Evaluation of Project Agreement for PPP--Long Beach Courthouse

In light of the political fracas currently roiling over funding of the 35-year PPP lease payments for the Long Beach Courthouse, the detailed report of the CA Adminstrative Office of the Courts (AOC) regarding their selection of this delivery model makes particularly interesting reading. 

Back in 2007, the legislature authoried the AOC to investigate PPP as a delivery method, and Gov. Code 70391.5 specifically authorized a PPP for Long Beach Courthouse.  In response, the AOC embarked on an evaluation of various delivery models attempting to determine the value for money entailed with different delivery models, including traditional design-bid-build, design-build, design-build-operate, and design-build-operate-maintain-and finance ("DBFOM").  

The report is billed as a neutral investigation into which delivery method was best, but, perhaps betraying a certain outcome bias, the project team adopted the term “performance based infrastructure” for its DBFOM model.  

The report describes how the risk-adjusted whole life cycle cost of DBFOM compared to traditional DBB (Public Sector Comparator).  The team then compared the net present value of these methods, with assistance from Ernst & Young and Davis Langdon Construction cost consultants.

As a negotiating tool, the project team shared its Public Sector Comparator (DBB) cost with the selected proposer to show them what they had to measure against.  The efficacy of this strategy for future projects will be interesting to explore. 

A separate risk analysis and quantification was conducted for each method.  Mean value of each risk was quantified through computer Monte Carlo simulation modeling.  Risk duration was measured for each project delivery method for planning, construction, operation.  Adjustment is made for fact that under DBB not all construction risk is factored into the price.  Under the selected Performance Based Infrastructure model (DBFOM) most of the design, construction, and operational risk for the project was transferred to the successful team.  

The AOC acquired the property, developed design criteria, and the request for proposals.

The report asserts three main reasons for adopting PBI: 1)  Speed  [D-B and don’t need to wait for committed state funding]; 2) Location and size would attract the market; and 3) DBFOM would free up construction funds for other projects.  [This last factor is now seriously in question, see prior post] 

The Department of Finance found there wold be no negative impact on credit rating of state and approved the project.  Although it involved higher fiance cost than DBB, the anticipated savings in development and operation were deemed to justify the selection of DBFOM.

The report details some incompatibilities between tax-exempt financing and PPP, in particular:  1) The need to separate project company from owner risk;  2) the fact that risk capital or equity cannot reside in project company; and 3) that tax exempt bonds are limited to 15 years and thus cannot readily be reconciled with a 35 year operate and maintain contract.

The report notes that steel erection proceeded 1 year after NTP;  would be 2 years with DBB. 

Anybody with an interest in PPP projects would be well served by taking a look at this unusaully exhaustive and detailed report.  It will offer up many lessons and ideas.

Judges in Revolt, and a Balking Legislature Reveal a Fourth P in PPP: Politics!

A judges' revolt, and a balking legislature, have singled out for criticism the selection of a PPP delivery method for construction for the new $725 milllion Long Beach courthouse.  The Honorable David Lempe, a director of the Alliance of California Judges, takes the California Administrative Office of the Courts (AOC)to task.

The trial courts of our state are in crisis. The problem is not simply lack of money.  Budget shortfalls have hurt the courts, but poor management by the Judicial Council and the (AOC) has significantly contirbuted to catastrophic reductions.  The Legislature enacts the annual budget for trial court operations, but gives oversight of the funds ot the Judicial Council and the AOC.  However, the Judicial Council has historically not fully delivereed all of the money the Legislature has appropriated for the trial courts.  And the AOC has been a bloated and impenetrable bureaucracy, which has lost its principal mission to serve the courts and has wasted hundreds of millions of dollars....The AOC has responded with unrestrained growth and spending, unstructured organizational decision-making, and a lack of transparency and accountability. ...

The high cost of courthouses designed and built through the AOC's office of Construction and Maintnance raises doubts about the AOC's ability to responsibly design and build courthouses with the needs of the commnity in mind.  Excessive spending, exorbitant and unnecessary features, square footage and numbers-of courtrooms disproportionate to the populations served, and a lack of concern for taxpayer dollars, have all been demonstrated.  ...

The 'poster child' example of AOC construction blundering may well be the much-needed Long Beach courthouse, still more than a year away from completion.  This crucial project is in jeopardy because the AOC failed to plan adequately for its cost. 

What the judge is alluding to in his broadside against the AOC, among other things, is that the AOC selected a design-build-finance-operate-maintain (PPP) project delivery model for construction of the new Long Beach courthouse, despite somewhat higher financing costs.  A key factor in the decision was a desire to preserve an existing construction fund that the Legislature had allocated for new construction of courts. 

It is, of course, a common rationale offered up by PPP proponents that it allows construction of needed public facilities without public entities having to do the heavy political lifting to raise revenue. Private financing can be paid for with operating revenues from assets like toll bridges, toll roads, or in this case the lease of a mixed use court facility.  In the case of the Long Beach courthouse, it appears the AOC anticipated funding would come in part from annual California Legislature appropriations for lease payments .  There may have been winks and nods under the Schwartzenegger adminstration (big fans of PPP).  But different winds may be blowing now.

In 2007, the legislature authoried the AOC  to investigate PPP's, and Gov. Code 70391.5 specifically authorized a PPP form of Contract for Long Beach Courthouse.  The definitive Project Agreement for the courthouse was signed at the tail end of the Schwartzenegger adminstration in December 2010.  Design started promptly in January of 2011, and construction proceeded on a fast pace, with steel erection taking place in January 2012, estimated to be a full year ahead of a normal design-bid-build schedule. 

Initial lease payments on the 35 year agreement fall due upon the state taking possession of the completed facility, currently scheduled for the fall of 2013.  However, it now appearsthat anticipated funds from the Legislature may not be forthcoming.  Earlier this month the Senate Budget Committee Chairman of the newly dominant Democratic Legislature  told judiciary leaders not to count on any money coming from the overburdened general fund. The AOC should instead rely on an internal judiciary construction fund.  This "internal fund", however, was slated to construct 23 other needed court projects throughout the State.  Now it looks like this money may not be available.  OOPS! 

Holiday Reading List

Here is the Division 4 Reading list for the Holidays.  Because you never know when you're snowed in at the cabin ...or stuck at Denver airport for 36 hours ...  Happy Holidays!

1.  Nate Silver’s book “The Signal and the Noise: Why so many predictions fail, but some don’t.”    Someone should review this from a litigation perspective, i.e. how do we predict the outcome of cases, and how can we do better. 

2.  Jane Jacobs  “The Death and Life of Great American Cities.”   Jacobs reminds us that the way space is configured—from organization cities to the layout of individual apartments, alters the path of human interaction in profound ways.  I would like someone to review this with an eye to how contracts are laid out and configured can profoundly affect human interaction in project delivery.

  

3.  Brett Frischmann “Infrastructure: The Social Value of Shared Resources.”  Explores how society benefits from infrastructure resources and how managmenet decisions affect a wide variety of interests.  Links infrastructure with commons, a resource principle by which a resource is shared within a community. 

4.  Edward Merrow, “Industrial Megaprojects.”   Among other things, it explains why industrial megaprojects fail.   This is recommended by Andy Ness. 

5.  The Forum’s new Infrastructure Book:  Beltzer, Gerhardt, Kubes, Smith

... please add yours.

Nullum Tempus Occurrit Regi (No Time Runs Against the King)

The Connecticut Supreme Court recently handed down a decision that serves as a reminder of how the playing field is not always level when it comes to lawsuits involving state and local governments.  In State of Connecticut v. Lombardo Brothers Mason Contractors, Inc., 307 Conn. 412 (2012), the Supreme Court of Connecticut issued a ruling that exempts state, quasi-government agencies and municipalities from the statute of limitations and repose.

In State of Connecticut v. Lombardo Brothers Mason Contractors, the State of Connecticut brought suit against a contractor, architect and over twenty other defendants for the alleged defective design and construction of the University of Connecticut School of Law.  The defendants filed various motions to strike and motions for summary judgment seeking the dismissal of the State’s lawsuit based upon the statute of limitations and repose.  The Connecticut Supreme Court agreed with the State that the doctrine of nullum tempus occurrit regi exempted the State from the statute of limitations and repose for tort actions, product liability actions, negligence actions and other actions against design professionals, contractors and land surveyors.

The Connecticut Supreme Court reasoned that the doctrine of nullum tempus occurrit regi was no different from and shared the same philosophical origin as the better known doctrine of sovereign immunity.  The difference, of course, is that sovereign immunity is used by the states as a shield to liability, whereas the doctrine of nullum tempus occurrit regi is used as a sword to initiate litigation.  Much to my surprise, Connecticut is not in the minority of jurisdictions recognizing the doctrine of nullum tempus occurrit regi.  The majority of jurisdictions appear to recognize the nullum tempus exemption as a surviving element from English law. 

Guess it is time for use to pull out our white barristers’ wigs.