Bundles of Joy

15 June 2017 Project bundling is an exciting but complex concept for many governments in North America. Dan Colombini reports on why this approach has been slow to gain traction across the region

Over the past few years, the US market has seen its fair share of landmark achievements as it continues its journey away from emerging market status.

From the ongoing passing of various state legislation through to the recent announcement of President Donald Trump’s latest infrastructure proposals, there are a number of key moments that have contributed to growth in the US.

But it has long been acknowledged that it will be the delivery of projects that will be the real driver of growth in the future.

So, with that in mind, when considering what deals could have had the greatest impact on the market so far in the relatively young life of US P3s, it is difficult to look beyond Pennsylvania’s Rapid Bridge Replacement Project.

This is not to take away from the significance of other deals that have been agreed in the country, but the Penn Bridges deal is interesting on many levels. Firstly, it marked the state’s first project to utilize the private sector, but also because of the unique structuring of the contract – namely, bundling.

As part of the deal, Plenary Walsh Keystone Partners will manage the 558 bridges’ design, construction and maintenance for 25 years after construction has been completed. It will also be responsible for securing the capital necessary for construction, which began in the summer of 2015.

Bundling has long been touted as a real game changer for many jurisdictions looking to utilize P3s, chiefly as it gives lower levels of government an opportunity to create the kind of deals that make it financially viable for the private sector to jump on board.

“The project is helping PennDOT significantly reduce the number of structurally deficient bridges by investing $899m in our transportation network,” says Michael Bonini, director of PennDOT’s P3 Office.

“We utilized P3 project delivery for this contract because it allows the department a quick and efficient solution to replace bridges. This contracting mechanism leverages private investment in a way that simply would not be possible without enabling P3 legislation.”

Many of the bridges replaced through the project are small structures on rural roads that provide an important and essential link to the communities they serve.

Penn Bridges is something of a trailblazer, having proved to many in the US that developing a contract of this nature is not only possible conceptually, but also in practice. There is therefore no doubting the potential influence of this deal going forward as more jurisdictions look to establish this kind of approach.

By bundling the replacement of the 558 bridges into a single contract, PennDOT was able to increase private sector interest and efficiency.

This approach then allows for the private sector to accelerate the replacement of the bridges and facilitate efficiencies in design and construction of bridge components.

“The benefits of bundling provide a means for smaller projects to be delivered that may not otherwise attract sufficient attention to qualify for a P3 procurement,” explains Stuart Marks, senior vice president at Plenary Group. “It also allows for increased efficiencies, economies of scale and opportunities for innovation. You can also harness diversification of certain project risks across the bundled assets.”

And it is not just the US that has its eye on the merits of bundling. Canada has the successful Saskatchewan Joint-Use Schools P3 to showcase, which also reached financial close in 2015.

As a result, talk of bundling has been a hot topic in both countries. But over the past few years, progress has been slow. Despite the right noises coming from various jurisdictions, the number of deals that have hit the market has not matched the level of enthusiasm.

“This may be due to the extra planning and coordination efforts required and the potentially large number of agencies that need to come together in order to define the project requirements and the procurement process for a bundled project,” says Marks.

“I don’t believe you should bundle just for the sake of creating a pipeline, you should always bundle to get value for money,” adds Steve Hobbs, director of strategic planning and partnerships at the Canadian Council of Public-Private Partnerships (CCPPP).

“However, I think the speed of the dealflow is truly a factor of how difficult it can sometimes be to coordinate these projects. If you are dealing with assets spread across a geographic region, you are likely dealing with multiple jurisdictions, which can be a challenge.”

“Finding projects which have enough elements in common and are proximate enough in time and location to generate efficiencies and economies of scale is not easy,” continues Marks. “For example, it may not make sense to bundle different types of assets or assets located at vast distances from each other.”

Despite the model’s potential, bundling is not a silver bullet for agencies looking to take their first step into P3.

If not considered properly, the complex nature of the deals can, in some cases, increase the chances of a project failing, which can quickly see P3 progress spiral into a vicious circle.

If the public sector hasn’t sufficiently thought through the impacts of procuring numerous projects, it can easily lead to delay, for example, which then leads to increased costs. This in itself defeats the object of bundling in the first place, as the increased cost of financing can lead to a real dilution of the value proposition, the very reason for procuring the deal in first place.

This only heightens the need to select the right deal for the right project. “There is a sweet spot to right-sizing a bundled project,” says Hobbs. “Market soundings will prepare an agency for potential issues, but the size of the project matters. Even though projects can be done over multiple geographic sites, industry believes that the dispersion of sites has its limits. Agencies should keep sites close enough where the private sector can utilize equipment and human resources over multiple sites.”

It is clear then that bundling is far from a simple task. “When considering a P3 project, strong project management and communication are critical,” explains PennDOT’s Bonini. “We have developed a multi-discipline internal project team that combines experts in our central office and district offices.

“We have supplemented our internal team with consultant support to provide the oversight necessary for a project of this size. This is critical when reviewing design submissions and environmental documentation for a project of this scope and complexity.

“The department has built strong relationships with our resource agency partners and the communities that we serve. Through this project, we are working with the private entity to ensure that our standards for environmental documentation, design and community coordination are met. We have also deployed a construction quality assurance team, which is working with the private entity to ensure that quality expectations are met on every project site. This process allows us to identify challenges and immediately deploy corrective action.”

Another reason for the slow progress is the ongoing lack of P3 experience among the governments that are interested in developing plans of this nature. This is not just an issue in the US, either. Canada has long touted the benefits of bundling, but despite a more sophisticated and mature market has yet to see many tangible examples.

In recent years, the cities of New Brunswick, Saskatoon and Barrie have all been vocal supporters of the concept. A new deal in Manitoba is also now in the market, with a request for proposals (RFP) issued in May to develop a P3 business case and provide advisory services for four school projects.

The RFP will determine whether the project is suitable for P3 procurement by conducting the appropriate analyses and developing a business case and value for money report. So, once again, still a fledgling proposal at this stage.

In the US, the Arizona Department of Transportation is looking at alternative financing methods to carry out improvements to the SR 189 highway, which have been valued at around $75m.

The department has confirmed that a P3 would be considered for the plans, providing additional options for building the remaining improvements, including bundling both phases into a single job and adding a long-term maintenance program to better manage ongoing costs.

Various other cities in the US, including Los Angeles and the District of Columbia, have spoken about the benefits of bundling, but it remains at a very early stage for many jurisdictions.

So where does this leave the US market? As with so many other issues impacting US P3s, the need to educate the public sector as to how these deals can benefit them remains paramount.

One area the private sector is keen to explore further is for local government agencies to truly assess exactly what they want from a deal and identify other potential development opportunities into a bundled contract. This will allow for a government to maximize its assets and attract the investment it needs from the private sector.

“There is currently excess valuable land that cities and counties own across the US that can be swapped in a deal to stand up new infrastructure,” explains Frank Rapaport, senior partner at law firm Peckar & Abramson and chief strategy advisor at the Association for the Improvement of American Infrastructure (AIAI).

“In order to get reasonable prices, the government can inventory its excess land and make that available so that a concessionaire can team with real estate developers to build additional infrastructure.

“The returns on that commercial development are so much better. Government officials just need to state what it is they need from a deal and what else they can put into play to monetize the proposal so that availability payments become lower.”

While this clearly differs from the PennDOT deal, it highlights the opportunities that are there for local governments should they wish to proceed with their plans.

One example that Rapaport cites is the potential development of the Miami-Dade courthouse project. Expressions of interest were sought in May for the project, which could include mixed use retail, office, hotel, residential, educational facilities, recreation and entertainment, medical, parking, and any other appropriate use on a development area in excess of 19 million gross square feet.

The arrangement may then include an equity partnership, with Miami-Dade County providing land and capital to the project, a full P3, or any variation thereof.

So, while the Penn Bridges deal has succeeded in showcasing how bundling can work in the US, one size clearly does not always fit all. This means that the scope for more opportunities is widening.

“Highway pumping stations have also been discussed as possible bundled deals, though none have yet to reach the market,” adds Marks. “Rest stop deals might also qualify. Depending on how widely you define ‘bundled’ projects, highway lighting or wireless deals could also be considered bundled deals.

“Finally, the water sector has talked a lot about the value of bundling projects, but the issues around control, coordination, and politics have made it difficult to see how they will move forward.”

It’s inevitable that politics will come into the equation at some point. But the US market is showing potential with PennDOT, and perhaps the Miami courthouse deal, providing a point of reference for others looking to take a similar path. These projects alone can go a long way to combating political naysayers. The same goes for Canada too, with the Manitoba deal primed to go.

With both countries serving up examples of successful bundling, it surely cannot be long before the region really comes to terms with the opportunities on the horizon.

This page was last updated on:
22 September 2017.

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