Sid Scott of Hill International Expresses Optimism for U.S. P3 Market

Here is Sid Scott's presentation to Division 4, on Tuesday, March 25, 2013.   Sid Scott is a Senior Vice President in the Construction Claims Group of Hill International. He is based in Philadelphia.  He has more than 25 years of experience in engineering and construction with a strong focus in transportation.  He is a nationally-recognized expert in procurement and contracting methods for the construction industry, particularly in the areas of specifications for highway construction, design-build and innovative contracting. Scott has also researched and developed best practices for the planning, management, and administration for some of the nation's largest transportation projects. 

He noted that there are currently 11 states in the U.S. with Public Private Partnership projects in development.  He reported that based on current trends and deal flows, the U.S. may become the larges market in the world for P3 over the next ten years.  

Risks & Advantages of P3 Projects by Sid Scott, Hill International from Roland_Nikles

Congressional Budget Office Publishes Testimony Regarding Economics of Transportation P3s

On March 5, Joseph Kile, Assistant Director for Microeconomic Studies for the Congressional Budget Office (CBO), testified before the U.S. House of Representatives Panel on Public-Private Partnerships (part of the Committee on Transportation and Infrastructure).  A copy of the testimony can be found here.  The main topics of the testimony were (1) private financing of P3 projects and (2) private provision of design, operation, and maintenance for P3 projects. I include an overview of the testimony and key takeaways below.

The CBO testimony adds to a prior report from the CBO in January 2012 called "Using Public-Private Partnerships to Carry Out Highway Projects."  CBO notes that vehicle miles traveled in the United States continues to rise and outpace the addition of miles of public roads.  Among the 4 million miles of public roads in the United States, federal, state, and local government expenditures totaled $155 billion in 2012 for building, operation, and maintenance.  CBO points out that the vast majority of these expenditures are performed using a traditional public procurement model of design-bid-build.  While public-private partnerships (or P3) are becoming a popular topic of discussion in the construction industry and appear to be growing in terms of actual use for procuring transportation projects, CBO states that a mere 1.5% of all projects from 1989 to 2013 exceeding $50 million were P3--across just 29 projects (not including 69 design-build projects).

Regardless of the limited history to analyze, the CBO testimony suggests P3 presents significant opportunities for transportation projects.  The benefits, risks, and structures of P3 have shifted in recent years, with the CBO testimony highlighting the following points:

• The overall cost of privately financing a highway project is roughly equal to the cost of financing using traditional public mechanisms (e.g., bonds, revenues, grants)
• The availability of incentives (such as having private entities hold equity in the project or contracting for payments or penalties based on contingent milestones) may encourage reduction of project costs and/or schedule
• Current P3 transportation projects are relying less on toll revenue to repay project debt (based on several early failures such as the South Bay Expressway in San Diego) and more on compensation during the concession period from state general revenue
• Recent P3 projects have less private partner debt service and more state or local financing utilizing the TIFIA program and municipal tax-exempt private activity bonds
• Compared to traditional design-bid-build, P3 transportation projects have delivered new assets with a "slightly" reduced time for design and construction and a "small amount" of cost savings
• A concession contract that consolidates design, construction, operations, and maintenance may better align contractor incentives with long-term project goals
• Loss of public control over a P3 project can raise overall public costs--most notably, private authority to set tolls and projected costs to renegotiate contract terms in the future

The biggest takeaway from the CBO testimony is that the current slate of P3 projects (both completed and ongoing) simply provide too small of a sample size to adequately conclude the cost and time benefits of P3 procurement models for highway projects.  Even so, where state and local governments have chosen to restrict transportation spending based on legal or budgetary constraints, the private financing options of P3 provide additional funding availability.  This reality suggests continued exploration of P3 for U.S. transportation projects.

Unknown Unknowns

Harvey Bernstein and Donna Laquidara-Carr of McGraw Hill Construction write about the growth of Lean, and lack thereof, in the February 17 issue of ENR.

A striking statistic:  "two-thirds (62%) of the fims using lean construction, or at least one of the lean practices measured in the survey, recognize that current, standard construction processes are inefficient.  In contrast, only 14% of the firms not practicing lean regard current construction processes to be inefficient."

Unkonwn unknowns, as Rumsfeld would say.

Trade contractors, it seems, suffer more from unknown unknowns:

55% of trade contractors report they are not familiar with any of the lean practices measured in the survey, compared with 38% of general contractors.  This 17-point gap is considerably larger than the 7-point gap between general contractors and trade firms that have adopted at least one lean practice.

But it's not because trade contractors are Luddites.  More of them use global positioning systems to track their materials, equipment and tools, more of them optimize crew sizes, more of them conduct studies of worker ergonomics and and activities, and more of them use preparatory tools and materials to train worker for specific tasks.

The study suggests that 80% of trade firms that do adopt lean practices see greater profits and reduced costs.  

Checklists and the Construction Industry

Following up on Roland’s January 4 post, for an interesting discussion of the use of checklists in the construction industry readers should pick up The Checklist Manifesto:  How to Get Things Right, by Atul Gawande (the author of the article referred to in Roland’s post).  In a chapter entitled The End of the Master Builder, Gawande points to the construction industry as a validating example of checklist success.

Gawande, a doctor, was prompted to investigate the construction industry further when observing the construction of a skyscraper and reflecting on how the workers could be sure they were properly constructing such a complex building.  Gawande asks the following questions, “First, how could [the workers] be sure that they had the right knowledge in hand? Second, how could they be sure that they were applying this knowledge correctly?”  As Gawande describes it, the problem of construction complexity is daunting.

 

In designing a building, experts must take into account a disconcertingly vast range of factors:  The makeup of local soil, the desired height of the individual structure, the strength of the materials available, and the geometry, to name just a few.  Then, to turn the paper plans into reality, they presumably face equally byzantine difficulties making sure that all the different tradesmen and machinery do their job the right way, in the right sequence, while also maintaining the flexibility to adjust for unexpected difficulties and changes.  

Yet builders clearly succeed. 

With these questions in mind, Gawande set out to learn how architects, engineers, and contractors construct complex buildings.  He talks with engineers, project managers, and other personnel involved in the construction of a medical center near his office in Boston.  In the course of his research, he learns that historically building were built by a “Master Builder,” a single individual who was responsible to design, engineer, and then oversee all the details of construction.  The “Master Builder” concept largely relied on the judgment and expertise of that one person.  But according to Gawande, by the middle of the 20^th century “[t]he variety and sophistication of advancements in every stage of the construction process had overwhelmed the abilities of any individual to master them.” 

In Gawande’s telling, what emerged to replace the “Master Builder” model was increased specialization combined with the use of modern construction and submittal schedules, essentially checklists that ensure that the dispersed knowledge of all the different construction specialists gets considered and incorporated into the project.  Gawande states, “What results is remarkable:  a succession of day-by-day checks that guide how the building is constructed and ensure that the knowledge of hundreds, perhaps thousands, is put to use in the right place at the right time in the right way.”  Gawande focuses in particular on how the construction and submittal schedules are flexible enough to deal with even the most complex construction problems.  Many problems are not amenable to a simple checklist solution.  Construction projects often involve complex engineering questions that require individual judgment under uncertain conditions.  In these uncertain situations, Gawande points out that the schedules didn’t dictate specific construction tasks, instead they specified “communication tasks.”

 

According to Gawande:

For the way the project managers dealt with the unexpected and the uncertain was by making sure the experts spoke to one another – on X date regarding Y process.  The experts could make their individual judgments, but they had to do so as part of a team that took one another’s concerns into account, discussed unplanned developments, and agreed on the way forward….  

In the face of the unknown – the always nagging uncertainty about whether, under complex circumstances, things will really be okay – the builders trusted in the power of communication.

While conceding that the process is not always perfect, Gawande praises the construction industry, pointing out that its “record of success has been astonishing,” building millions of complex commercial and residential buildings with very low rates of failure.  Gawande attributes this success to the power of the construction planning process to integrate the specialized knowledge of architects, engineers, manufacturers, and skilled trades into the project and to ensure that all of these specialists communicate on complex problems. 

As construction lawyers who often dwell on the things that go wrong on construction projects, it is useful to step back and consider how often things go right, and why.  Gawande’s book is aimed primarily at promoting the use of checklists to reduce medical errors.  He encourages the medical field to adopt some of the processes used by the construction industry to build complex buildings.  The construction industry, in turn, can benefit from his book by asking how to further improve these checklists to avoid persistent defects and quality issues.  

Is Lolo School Circumventing Competition?

Lolo, Montana, is a community of 4,000 residents situated just south of Missoula, at the northern edge of the Bitterroot Mountain Range.  There, the local school board has created quite a stir by awarding a guaranteed maximum price design-build contract for construction of its new school building, without competitive bidding. 

The Missoulian, the daily newspaper just up the road, casts a skeptical eye:  

Is this the direction Montana wants to proceed when bidding public construction jobs? Will all of our public construction projects start picking whatever proposals they want without putting them out for bid? Is this opening a pathway for circumventing competition by not allowing other capable contractors (who are very interested) to bid on the new Lolo School?

Lolo School violated open bidding laws when building the lunch room in the ’90s.

The Lolo School District #7 is building its new school using GMP Design-Build contract without competitive bidding.  Project savings, if any, are returned to the Owner (the school, not taxpayers) as per Montana Code Annotated §§7-5-4302 & 18-1-102. M.C.A. § 7-5-4302 provides the requirement for public works projects above $80,0000 to have open bidding and the process for advertising the project, and § 18-1-102 requires that public works projects go to the lowest responsible bidder regardless of residency although Montana residents are given preference.

Will this decision lead to similar public construction projects being performed without competitive bidding? Is this kind of project delivery method more beneficial for public construction projects? Click the link below for more information and feel free discuss the potential ramifications of Lolo's decision.

Is Lolo School Circumventing Competition?

A New York Times I-W35 Retrospective, and Digging Out of Our Infrastructure Hole?

The New York Times has a good video report on the I-W35 bridge collapse in Minneapolis and our ongoing need to invest in bridge infrastructure.

How the United States allowed some of its most precious assets to decay so badly may say something about both its character and its leadership. This is a nation ever in the thrall of innovation. We like to build new things. We’re not so crazy about the drudgery of keeping the old in decent shape. Most bridges are meant to last 50 years; those classified as structurally deficient are, on average, a good deal older than that. As for political leaders, spending time and money on essential maintenance holds scant sex appeal. How many elected officials are just dying to preside over a ribbon-cutting ceremony for a new gusset plate? 

In the end, it all boils down to money. There’s not nearly enough. The Federal Highway Trust Fund, the principal financing source for transportation projects, is practically kiting checks. That’s how close it is to insolvency. Part of the problem is that it depends heavily on a federal tax on gasoline, which provides about $39 billion a year. That tax, 18.4 cents a gallon, has not changed since 1993. Because of inflation, it has lost 40 percent of its value over the years.

Obama recently proposed raising about 10 percent of what's needed through the the closure of a series of business tax loopholes.

As the nation’s economic struggles continue, Americans are driving less. Pumping less gas leads to reduced tax revenues. There is, too, an ironic twist in the national goal of improving vehicles’ fuel efficiency. The less gas a car needs, the smaller the yield from that tax. 

With all this as a backdrop, Mr. Obama has now turned to an altered business-tax structure as a way to raise his desired $302 billion. Even if he gets what he wants, the money is still far short of what the civil engineers society has said is needed to stop the infrastructure decay: $3.6 trillion.

Should we be charging toll on more bridges?  We travel free of charge across a lot of these old bridges that need retrofitting or replacement.  Installing tolls can provide a funding stream that opens the panoply of project financing options: traditional bond revenue financing, public private partnership financing, or supplementing general revenue tax financing.

There are lots of tools available to finance these projects ... we have no excuse to continue to procrastinate.