The Fundamental Elements of a Stable Public/Private Infrastructure Strategy in North America

  • John B. Miller
Chapter
Part of the The Springer International Series in Infrastructure Systems: Delivery and Finance book series (ISDF, volume 101)

Chapter Summary

Simultaneous use of the delivery methods in Quadrants I, II, and IV gives government endless opportunities to acquire private sector technology, equipment, expertise, and investment. These opportunities cross the entire spectrum of an infrastructure portfolio. If governments package these opportunities in ways that make them widely visible to private sector firms, much of the government’s task in acquisition is already complete. Private sector firms will structure their services, products, and systems to meet demand from both private and public infrastructure owners.1 Flexible use of these delivery methods gives infrastructure strategists a real chance to pursue the same goals American governments have been pursuing since 1789: to produce generation after generation of technologically advanced infrastructure systems and networks that powers a competitive economy.

America’s experiments with public private partnerships in the 1990’s confirm what our ancestors knew in the one hundred and fifty (150) years preceding the Great Depression. There are a number of essential principles that must be incorporated into infrastructure development to properly balance the respective interests of governments, taxpayers, users, and industry. Although different formulations of these essential principles can be created, research and case study work to date leads to ten (10) essential principles, which are hereafter referred to as the Fundamental Elements.

Fundamental Elements. The goal is a stable, competitive infrastructure strategy that produces better services, higher quality, and lower costs to users and taxpayers. The fundamental elements are these:

Government-Defined Scope: not vendor defined scope;

Head-to-Head Competition: on price, on qualifications, or, in Quadrants I and II, combinations of qualifications, price, and other factors;

Fair Treatment of Actual Competitors: a framework for competition that is published in advance and applied during the competition;

Transparency [or Fair Treatment of Potential Competitors]: a system that attracts potential competitors to support head-to-head competition;

Safety Confirmed: an independent engineering peer review when design and construction are integrated in a single project delivery method;

Open to Technological Change: strategies that permit and encourage new technologies where proven technologies are also available;

Financial Analyses Over the Project Life Cycle: a shift in financial analysis from “initial delivery” to “life cycle ”, in which condition assessment and activity based costs provide a complete picture of present and future infrastructure requirements, and in which repair and maintenance projects “compete” with new projects for scarce public and private resources;

Restoration of a Dual Track Strategy: simultaneous use of direct and indirect financing strategies to consistently integrate public and private sector technology, expertise, and financial resources;

A Scenario Approach to Capital Programming: a new focus, made possible by the capacity of computers to generate and compare alternative combinations of projects, delivery methods, and financial structure, to produce the most effective combination of infrastructure facilities and services within established public financial constraints.

Pace: a new focus upon the level of investment (or rate) at which governments support infrastructure renewal, replacement, and expansion.

Thirteen Case Studies. The importance of each of these elements is described using thirteen (13) case studies of the most significant recent projects in North America where Design-Build-Operate and Design-Build-Finance-Operate were used. Eight of these case studies are in the transportation field:
  • State Road 91 in California;

  • State Road 57, also in California;

  • Dulles Greenway in Virginia;

  • Highway 407 ETR Project in Toronto;

  • Northumberland Strait Crossing [Confederation Bridge] between New Brunswick and Prince Edward Island, Canada;

  • JFK International Arrivals Building in New York City;

  • Washington State Department of Transportation Public Private Partnership Program; and

  • Minnesota Department of Transportation Public Private Partnership Program.

Five of these case studies are in the water and wastewater field:
  • Franklin, Ohio Wastewater Treatment Plant;

  • Charlotte-Mecklenberg, North Carolina Wastewater Treatment Plant;

  • Indianapolis, Indiana Wastewater Treatment Facilities;

  • Wilmington, Delaware Wastewater Treatment Plant;

  • Tolt Water Treatment Plant, Seattle, Washington.

Troubling Patterns. The case studies illustrate a number of troubling patterns in the way governments: (a) select infrastructure projects, (b) choose delivery and finance strategies, and (c) interact with private sector producers of infrastructure services. The case studies show little commitment by governments to particular projects, most commonly illustrated by vague (or even “no”) scope of work. Governments, taxpayers, and users cannot realistically rely on strong competition for projects to which the government has little commitment. The case studies also illustrate that infrastructure planning is primarily focused at the project level, with little commitment to the incremental effect of each project on the overall performance of the entire portfolio. Without an approach that considers both projects and the portfolio, it is unrealistic for governments, taxpayers, or users to expect better quality and cost performance of transportation, water, or wastewater networks.

The case studies also confirm that the anecdotal use of Quadrant I and II delivery methods is time consuming and very costly to private sector proposers. Each of these experiments presented potential bidders with very different, very detailed requirements in the analysis and preparation of proposals. The costs incurred by private sector firms in understanding and complying with widely different proposal requirements for each and every experimental use of these delivery methods (called “transaction costs”) is not only expensive, but is ultimately borne by governments, taxpayers, and users as a cost of doing business. Standard statutory and regulatory approaches for each of the key project delivery and finance methods, such as that proposed by the ABA Model Procurement Code Revision Project in 1999 (See Appendix E), offer an important solution for reducing wasteful “transaction costs” in Design-Build, Design-Build-Operate, and Design-Build-Finance-Operate procurements. Unnecessarily high transaction costs do more than drive the cost of infrastructure up. High transaction costs also reduce the level of competition by raising substantial barriers to firms who might otherwise compete for projects.

The case studies also demonstrate substantial confusion by both governments and private sector firms in how to incorporate head-to-head competition in every acquisition of infrastructure facilities and services. Finally, the case studies amply demonstrate how procurement strategies can be either effective or ineffective in attracting and deploying new technologies.

Bright Spots. The case studies present a number of very promising possibilities for integrating project delivery and finance strategies into measurable, incremental improvements in the cost and quality of infrastructure portfolio. The Tolt Water Treatment Project in Seattle used Design-Bid-Build as a baseline project delivery method to establish benchmarks for schedule, quality, and life-cycle cost. Seattle’s procurement strategy was to then used Design-Build-Operate as the project delivery and finance method with the requirement that each proposal not only meet stated schedule and quality specifications, but that each proposal beat Seattle’s life-cycle cost benchmark by at least 15%. Seattle’s procurement strategy guaranteed an incremental saving of at least 15% over Design-Bid-Build, producing substantial political support for this approach.

The Northumberland Bridge case is an extraordinary example of how a strong signal that government is committed to a project, in this case, legislation, reduced the costs of private sector financing to levels very close to tax-exempt government financing. The JFK International Arrivals Building case demonstrates how an owner’s flexibility in handling project cash flows, in this case, ongoing concession and gate revenues of an existing terminal, led the private sector to assume all of the financing burden for an infrastructure project.

The case studies also confirm that head-to-head competition and the technological innovations driven by head-to-head competition regularly produce life-cycle cost-savings for taxpayers and users. In the case study examples, these savings were on the order of 40%, a result that can and should attract substantial political support.

Keywords

Ozone Income Chlorine Diesel Sewage 

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Notes

  1. 3.
    One of these projects, Highway 407ETR was planned to be delivered as a DBFO project in Quadrant II, but a change in procurement method occurred in the middle of the competitive process. Recently, however, the project was “sold” in a 99-year lease transaction to a private consortium whose responsibility includes the design, construction of significant extensions to the project and the operation of the entire facility throughout this period.Google Scholar
  2. 5.
    During the second half of the 20st century, these opportunities have been “segmented” ones in Quadrant I because the statutory mechanisms for procuring infrastructure facilities and services were segmented: namely, design opportunities for architects and engineers, and construction opportunities for general contractors, subcontractors, material and equipment suppliers. In the coming century, government will be required to match procurement processes to “combined” business opportunities, particularly where new technologies, methods, and controls offer 40 — 60% savings in the cost of infrastructure operations. These new opportunities must include the “combined,” i.e. “integrated” delivery methods: design-build, designbuild-operate, and design-build-finance-operate. A statutory framework that authorizes government to simultaneously use “segmented,” “combined,” “direct,” and “indirect” project delivery methods is presented in Appendix E. (The ABA 2000 Model Procurement Code).Google Scholar
  3. 9.
    The ABA Model Procurement Code for State and Local Governments, Published by the Sections of Public Contract Law and the Urban State and Local Government Law, 1980, American Bar Association, Washington, D.C.; The Armed Services Procurement Act of 1947, 62 St 21, 2/19/1948; The Federal Property and Administrative Services Act of 1949, 63 St 377, 6/30/1949. For example, the absence of objective competitive criteria for the award of infrastructure contracts produced the Credit Mobilier scandal of the 1880’s, in which the franchisee for the Union Pacific Railroad contracted with an affiliate controlled by the franchisee. The scandal brought down many officials of the American government, particularly in Congress, when the contractor became insolvent. The reverse occurred more than one hundred years later on the Channel Tunnel project between Britain and France, when the franchisee for the project was formed by the contractors performing the work, and the franchisee, rather than the contractors, became insolvent during performance of the work. In exchange for objectivity in the selection and award process, the awarding entity receives something of immense value from each proposer - independent multiple confirmations of the technical and financial feasibility of the project.Google Scholar
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    The ABA Model Procurement Code for State and Local Governments, Published by the Sections of Public Contract Law and the Urban State and Local Government Law, 1980, American Bar Association, Washington, D.C.; The Armed Services Procurement Act of 1947, 62 St 21, 2/19/1948; The Federal Property and Administrative Services Act of 1949, 63 St 377, 6/30/1949. See, also the 2000 Model Procurement Code, excerpts of which are included in Appendix E.Google Scholar
  5. The Highway 407 ETR project in Toronto provides a good example of overly specific evaluation factors by the government. Over twenty different evaluation factors, none of which were ranked in importance, and one of which was “and any other evaluation factor the government decides to include” sends exactly the wrong message to potential competitors. The message sent is that the contract will be awarded b in terms ofGoogle Scholar
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    Indianapolis, Indiana is the twelfth largest city in America. Indianapolis was founded in 1820 and became the state capital officially in 1825. Its growth was spurred by the opening of the National Road in 1827 (described in Chapter 2) and later by the development of the railroad industry. Indianapolis was incorporated as a city in 1847. In the late 1800s, natural gas was introduced and the new cheap fuel attracted much industry to the city. From these beginnings, the city has grown to 352 square miles and a population of over 700,000 within the city limits and 1.4 million people in the nine-county metropolitan area. The largest employer is the local government with 62,700 employees, followed by state and federal government with a total of 47,000. Other major employers are Eli Lilly and Company (7,500 employees), Marsh Supermarkets (7,000), St. Vincent Hospitals (6,000), Delphi Interior & Lighting (4,425), and Allison Transmissions/ GMC (4,200). The government of Indianapolis and surrounding Marion County were consolidated in 1970 and are headed by a mayor and city-county council.Google Scholar
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    The assistance of The Honorable Stephen Goldsmith, Mayor of the City of Indianapolis, and Robert Hawkinson, III in the preparation of this case is gratefully acknowledged. Mayor Goldsmith has been the mayor since November, 1991, and is well known in national politics and often cited by the media for his innovative approaches to managing government. National interest in debt reduction and streamlining government operations was growing and Indianapolis was often hailed as a model for others to emulate.Google Scholar
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    Wheelabrator EOS had been selected as a private contractor-operator of the sludge dewatering facility in 1985. Good operating track records led to its selection in 1989 for plant engineering and maintenance services for the entire wastewater treatment facility.Google Scholar
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    Irritated by this possibility, the county first responded by offering to buy the plant from the city, instead of allowing Wilmington to complete the deal with Wheelabrator. The city refused this offer and the political turmoil continued along with delays in the procurement. Finally, in June 1996, with the beginning of the preelection season, the state Assembly passed a resolution prohibiting contract signing until the new city and county representatives were installed in January 1997.Google Scholar
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    The Wilmington competition was costly to both the public and private sides of the negotiations. Over the course of the three-year procurement, the city of Wilmington spent approximately $1 and U.S. Filter EOS spent at least $500,000. In 1997, Robert Joseph, EOS’s project manager for the deal, maintained that despite the costs and delays, the contract still offered good returns for his company. Ownership of the asset was not the most important issue. Rather, a 20-year operations period and the ability to invest private capital early for long-term efficiencies were. He did, however, summarize his frustrations with the complicated procurement process: Background Issue Paper as Prepared for City Council, November 1995, p.7.Google Scholar
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    Philip Environmental Inc. is a publicly traded Canadian company that provides a wide range of environmental services, including management, to municipalities and industry. Camp, Dresser and McKee Inc. celebrated its 50th anniversary in 1997, and is a recognized leader in environmental engineering. These two companies joined forces with Dillingham Construction N.A. Inc., a 120 year old construction firm that began by building Pearl Harbor in the late 1800’s and by laying the first of California’s paved highways in 1920.Google Scholar

Copyright information

© Springer Science+Business Media New York 2000

Authors and Affiliations

  • John B. Miller
    • 1
  1. 1.Massachusetts Institute of TechnologyCambridgeUSA

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