P3 for Marion County justice complex in doubt

A report by the Marion County City-County Council has found traditional financing to be more cost effective than the P3 method, three months after a preferred bidder was announced.

Procuring the Marion County Justice Complex in Indianapolis as a public-private partnership (PPP; P3) has been called into question following a financial analysis recently released by the Marion County City-County Council (city council), which found that traditional financing would be more cost effective, saving the city an estimated $516 million.

“We have not reached a final decision,” Bart Brown, the city council's chief financial officer told Infrastructure Investor, adding that the city council is expected to make a decision on April 20.

“Council staff has concluded that, based on its own VfM [Value for Money Assessment] that corrects these points of disagreement, the proposed DBFOM [design-build-finance-operate-maintain] project delivery method is not the most cost effective way to finance, build, operate and maintain a new justice center facility,” the city council wrote in its report, estimating that a city-financed design-build method would save the city $516 million.

Before procuring the project as a P3, the office of Indianapolis Mayor Gregory Ballard hired KPMG, HOK and law firms Nossaman and Bingham Greenebaum Doll to conduct financial analyses on the best way to deliver a new justice complex in Marion County that would include 37 criminal court/hearing rooms, offices for the Marion County Sheriff's Office, a 3,000-bed detention facility with onsite medical and mental health units, a 960-bed community corrections facility, and above-ground parking.

The city council found that the KPMG analysis was unjustifiably favourable to the P3 option and disagreed with it on several points, including overestimated savings of $9.2 million; an unsubstantiated discount rate of 5 percent in calculating the net present value of the City's costs under the proposed agreement; a highly-unfavourable assumption that the city would need to raise money using A- rated bonds, when the city's existing credit rating is AAA; and a state tax adjustment that does not apply given that local governments do not receive any state corporate tax revenue.

In addition, the VfM process and analysis can “be influenced by politics when the consultants retained by the public entity to prepare the initial VfM evaluation have contingency or 'success' payments riding on the ultimate success of the P3 project,” the city council said in its report.

The findings come at a late stage of the procurement process. Last December, the Mayor's office announced WMB Heartland Partners – a consortium teaming Paris-based fund manager Meridiam Infrastructure with Walsh Investors and Balfour Beatty Investments – as preferred bidder for the project. In addition to financing the construction of the facility, the consortium would operate and maintain it for a period of 35 years.

Asked whether the procurement costs incurred so far as well as the compensation the city would have to pay the winning team for withdrawing from the agreement at this stage had been calculated in the $516 million the city would save by pursuing a traditional delivery method, Brown said it had not but would certainly not absorb the entire amount.

“The City has spent $6 million to date on all consultant fees and probably another $7 million is due at the end of the process,” Brown said, adding that should the project not move forward as a P3 the city would have to pay WMB $750,000. That would still result in a savings of around $500 million based on the city council's estimates.

“The issue is clearly political,” one source told Infrastructure Investor, an observation which was confirmed by another report issued a few days earlier by Adam Collins, Indianapolis' Deputy Mayor for Economic Development.

According to Collins, the P3 method, which he calls Performance Based Infrastructure (PBI), was the best way to deliver the project when compared to the traditional design-bid-build model and lease delivery.

“The City chose the PBI approach as it holds the developer accountable for the long-term performance and maintenance (both regular and major) of the justice complex. If the City's partner does not meet clear targets related to schedule, building performance, or operations and maintenance, it will suffer significant financial deductions to the payments it receives,” he wrote.

“Based on the foregoing, the proposal from WMB meets or exceeds all requirements set forth by the City for the design, build, finance, operation and maintenance of the Marion County Justice Complex and is the only proposal committing to an annual service fee below the affordability limit established by the City,” he concluded, recommending that the Marion County Justice Complex Board approve the public-private partnership agreement with WMB.

Meridiam declined to comment, while Walsh Investors referred Infrastructure Investor back to Meridiam. Balfour Beatty Investments did not respond to a request for comments before press time.