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June 30, 2020
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Fundamental reset

P3 Bulletin’s David Keniry speaks to leading industry figures about how public officials can avoid hard-fought projects falling victim to uncertainty.
Fundamental reset

The post-Covid world has tested the business case for even the most thoroughly studied transportation and social infrastructure projects, with fundamental norms about how people travel and work certainly paused, if not consigned to history. Understanding what the ‘new normal’ will mean has given rise to daily theoretical discussions about the future of infrastructure within the industry.

Unfortunately for public sector officials there is no time for theoretical debates as they need to quickly equip their policymakers with the best possible information available so they can make decisions on region-shaping projects that have taken years to get to a point when multi-million dollar investment decisions can be made. 

A sharp drop in revenue and the value of real estate has affected all public agencies’ ability to plan and budget for capital projects. Technology has presented solutions to many challenges in the post-Covid world, but how agencies adapt it to new technology is also a key challenge.

KPMG US head of infrastructure Andy Garbutt says that even with “piles of cash” that may come from an Infrastructure stimulus, many major infrastructure projects still won’t be able to get going quickly because of for example, outstanding environmental and/or design progress. Garbutt notes there are a lot of people looking at plans that appeared to be the right idea a year ago, but now need to be reviewed. 

He points to the prospects for commercial real estate as a prime example: “If we are going to have a good proportion of the population working from home for the foreseeable future and become a more permanent trend, what does that do to your demand for real estate in the future and if you were looking to expand your real estate footprint pre-Covid, is that still the case now?”

Mixed demand

Over the last 12 months an increasing number of municipalities and agencies have proposed mixed-use development projects to leverage real estate in order to get public infrastructure built and generate economic activity.

Last month the City of Los Angeles and the County of Los Angeles launched a RFP for the West Los Angeles Civic Center and Courthouse Development Project. The project is a major mixed-use use development with several city assets to be retained and redeveloped, at no cost to the city.  

City officials are evaluating the merits of this real estate risk model instead of the availability payment design-build-finance-operate maintain (DBFOM) model for this and other projects.

Despite the perceived risks of a rigid long-term DBFOM availability payment contract, there is broad consensus that demand risk contracts are now vaccine-dependent. The challenges faced by Los Angeles officials are emblematic of the difficult decisions facing municipal officials across the country between budget strains, supply chain pressures, and funding susceptible to a fluctuating real estate market. 

The City and County of Denver has already ‘paused’ the Triangle P3 mixed-use project at the National Western Center, as its funding was tied to tourism tax. It is unlikely to be the only authority pausing a P3 procurement that relies on people gathering or traveling.

Kerrigan Partners principal Richard Kerrigan explains some of the challenges in procuring private sector partners for mixed-use projects: “In general, there are three very different markets in terms of funding sources, risk profile and market capability/interest: infrastructure, real estate, and affordable housing.

“What we see is governments trying to bundle them together and hope that the real estate elements can offset the costs of the infrastructure, the economics of such deals typically struggle and this approach adds a lot more complexity to the transaction and teaming thus reducing competition. 

Given the credit characteristics, these distinct markets are really at odds with each other, so what you want to do is go to the market in a more efficient way to get the best value out of each of those markets instead of bundling them all together because typically you only get one shot at getting the project right with the market, elected officials and local community. ”

“Howard County Courthouse was very clear with the scope of the project tailored to the infrastructure market; here are the repayments sources. As a result, they have a lot of interest and got strong competitive bids.”

RS&H’s senior program management consultant, Bryan Kendro notes there are certain policy decisions that become important for public agencies to sort out before they ask bidders to invest a lot of time, energy and money into procurements. 

The more refined the scope is, the more settled you are on what types of technology you are looking for, therefore the better the quality of the responses, and the greater likelihood that you are going to be able move forward successfully. 

He concludes: “I tend to be of the belief it is better to try to understand what the possibilities are and what the options are through less formal procurement processes. Things like RFIs, market soundings, hiring advisors to help work with you to understand the pros and cons of various technology solutions, I think is going to lead to a much more successful procurement and a successful project.”

Counting the cost

Kerrigan highlights that public sector officials are busy understanding their financial condition, as budget hearings for most governments in the US start in June. “The next month is going to shed a lot of light on where people are at financially and liquidity wise. And what they are going to do moving forward in the new normal. Those that rely more heavily on demand based revenues such as sales tax and user fees are going to obviously hit the hardest.”

Dale Bonner, executive chairman, Plenary Concessions agrees. “It seems cost cutting may dominate state and local decision-making for the balance of this year and into next. Next year we may see policymakers in a better position to focus on rebuilding the economy and this should include more infrastructure investment.”

Garbutt believes a key issue will also be around how people get to work. 

“For somewhere like Austin where the vast majority drive to work, it becomes that single issue of when is the right time to open the office because the threat level in that location is deemed acceptable and the safeguards you can prescribe around office capacity to ensure social distancing. But if you are in the middle of New York, where the vast majority of the population in our offices have to get to work by mass transit, “You can still put the same social distancing protective measures in the offices but it is the front end and back end of your day that causes the potential health risk problem when you are crammed into a transit facility.”

And right now, transit facilities are at the sharp end when it comes to dealing with the pandemic. Virtually all have seen their ridership plummet, taking huge chunks out of their revenues.

“The immediate thing you [as a transit agency] are looking at is trying to stabilize your business the best you can,” suggests Garbutt. “Then you have still got to run a level of service, so how do you ensure social distancing and protect your workforce?

“The next stage is what is this business going to look like? Is it a business that is going to bounce back to business as usual? Is it something that is going to surge? Or is it something that is going to need a fundamental reset. If you look at transit, until a Covid-19 vaccination becomes available for all, then you are likely in that fundamental reset territory.”

Kendro, agrees. “The realm of possibilities has changed for everyone. For instance if it is going to be months or years until everything will be truly normal in terms of mobility, there are going to be ramifications to revenue and service and I don’t think you can wait to make certain decisions about that. 

“You need to come to the recognition that it is going to be a while before things return to normal.”

And then there is the more aspirational planning associated with what the ‘new normal’ will look like. Kendro suggests flexibility is key. “Anyone who is looking at mobility, transit and transportation right now you need to put yourself in a position of being flexible to adapt to what continues and what is going to happen.”

Distant solutions

Kendro notes Uber or Lyft might also lose some of their ridership, with people unwilling to get into a vehicle that several other people have been in that day. For shorter trips especially in Urban areas they may instead look more to micro mobility solutions like scooters and bicycles. 

San Francisco-based autonomous mobility system developer Glydways has been accentuating the social distancing benefits of its new technology to authorities in the Bay Area of California. It has signed a memorandum of understanding with the City of Oakley to deliver a pilot project. In May, Oakley’s Mayor Kevin Romick confirmed that P3 is being considered for the fixed guideway transit system. 

Conceived as ‘Dynamic Personal Mass Transportation’, Glydcars are reserved on-demand, and passengers are picked up at boarding zones to be taken directly to their destinations.

Glydways vice president, Eliot Temple, says: “We believe that our solution will be instrumental in accelerating the return of public transit ridership and likability of taking public transportation.

“Our efforts will especially counter the trend of collapsing public transit ridership due to Covid-19.”

The San Mateo County Transit District (SamTrans) is considering this approach as one of many various technology solutions for the Dumbarton Rail Corridor project, which it is planning to redevelop alongside a joint venture led by Plenary. Like agencies across the country, SamTrans is re-evaluating capital plans following a drop in ridership, including the redevelopment of its own headquarters in San Carlos under a P3.

New mobility solutions are a clear opportunity for transportation authorities to think about a ‘fundamental reset’.

However Kerrigan, who has studied a similar system for the City of San Jose, warns that most vendors are looking for a project to prove it works at scale. Unless proven, public agencies are limited in their ability to take on such risks given the potential liability and regulatory requirements that they are held accountable to for such systems. 

The infrastructure costs for such project can be significant given they need to be integrated into existing communities that have the user demand, so the funding sources and business case and any users fees for such systems needs to be studied carefully along with the goals the project is intended to achieve to ensure it is the right path forward for that community.

Pushing on

Bonner states: “With the strong potential to create near-term jobs and long-term savings, it makes sense to move forward with P3 projects that were moving through some stage of planning or procurement prior to the pandemic. In some cases delays or postponements may be necessary, but that would be preferred to, and in some cases, less costly than cancellation.

“Public agencies facing these tough decisions should work with the market to identify potential cost savings and efficiencies and get these projects ready for procurement and delivery as resources become available.”

He suggests that while prospects of a major federal infrastructure investment program remain uncertain, the federal government should continue efforts to modernize the federal permitting process. To maximize the economic benefits, this might include efforts to complete early works packages for major projects that are already in procurement.

Bonner concludes: “Public sector owners now have more P3 options than ever before. And they can benefit from more innovative funding and financing strategies, risk-sharing, and certainty of costs and delivery schedules.”

This article appears in the latest edition of P3 Bulletin magazine which is available to view here.

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P3 Bulletin’s David Keniry speaks to leading industry figures about how public officials can avoid hard-fought projects falling victim to uncertainty.

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