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The good, the bad and the ugly

The most populous state and the third-largest in size, California is also the largest state economy in the US. Its size, however, seems to be one of the reasons why the delivery of public-private partnerships (PPP; P3) for infrastructure development has been so fragmented.

“When you think about it, the P3 in California is a multi-headed animal,” observes Michael Barz, a partner at Dentons law firm. “It’s such a large state, it’s a really big economy and so the state itself is a little different than looking at Illinois or Virginia,” he continues, referring to two states that have been quite successful in P3 terms.

While various state entities have the ability to procure projects using the P3 delivery method, the state does not have broad enabling legislation.

The most recent law, passed in February 2009, allows the California Department of Transportation – Caltrans – and other transportation agencies to enter into P3 agreements for certain transportation projects. This amended a previous piece of legislation that required the California state legislature to approve a P3 agreement before it could go into effect.

The California High Speed Rail Authority (HSRA) is a state agency tasked with planning, designing, building and operating the first high-speed rail system in the country. It also has the authority to procure projects as P3s but has not yet done so.

To date, HSRA has awarded a design-build contract for a 29-mile segment of a project that will eventually total 800 miles, connecting San Francisco with Los Angeles when it is completed in 2029. In April, the Authority issued a Request for Proposals (RFP) for another 60-mile section, Construction Package 2-3. This is also being procured as a design-build contract.

According to HSRA spokeswoman Lisa Marie Alley, the agency will procure an initial five packages totaling 130 miles of the high-speed rail system as design-build contracts but will procure the rest of the project using the P3 model.

Asked why the agency did not seek private capital from the beginning, Alley replied that there were a number of reasons for not doing so, including the fact that “we are federally funded and we have the money”.

Dentons’ Barz says that many of the firm’s foreign clients have expressed interest in the HSR project, which is estimated to cost $98 billion, asking whether the opportunity is real.

“It’s hard to say ‘no, it’s not real,’ but you also have to be realistic – it’s not going to happen tomorrow,” he says.

A ‘black eye’ for P3s

Another setback for P3s in California was the cancellation of the Accelerated Regional Transportation Improvements, also known as the ARTI project, consisting of six components totaling about 40 miles and estimated to cost around $750 million.

In 2012, Caltrans and the Los Angeles County Metropolitan Transportation Authority (LA Metro) began working together to accelerate delivery of certain highway improvements within the county utilising P3s.

In May 2013, LA Metro issued a Request for Qualifications (RFQ) and in September it announced a list of shortlisted teams. This past April, however, the agency announced the cancellation of the project.

“Over the years, certain things occurred,” LA Metro spokesman Paul Gonzales told Infrastructure Investor. “The economy got better, so it became a better option to publicly finance the project.”

According to Gonzales, LA Metro has the cash in hand to complete parts of ARTI now without a P3. Part of the reason is that LA Metro receives all revenues generated through Measure R, a half cent sales tax passed in 2008.

There is a specific list of transportation projects defined in the Measure R programme which must be funded with these sales tax-generated proceeds. The funds cannot be used for other projects.

There was another factor that led LA Metro to cancel the ARTI project. “If we were to go out and do a P3 then the money collected from the tolls could be used in another corridor. It is our board’s policy that money collected from a corridor stays in that corridor,” Gonzales explains.

Still the cancellation of the project gives California “a black eye”, one source says, “because people spent a lot of money getting shortlisted; these bidders could have been putting their efforts elsewhere”.

A look at the positive

Despite these false starts and the ARTI cancellation, there are projects that have successfully advanced. One such project is the Presidio Parkway, which involved replacing the existing south access road to San Francisco’s Golden Gate Bridge, Doyle Drive. The project was executed in two phases. The first phase was completed in April 2012 under a design-bid-build contract, while the second phase began in mid-2011 as a P3 – California’s first, according to the Presidio Parkway website. The project is expected to be completed in 2016.

Another bright spot for California P3s was the Long Beach Courthouse, the first social infrastructure P3 project to be undertaken in the state and in the country.

A consortium led by French fund manager Meridiam Infrastructure, which was also the lead company of the group awarded the Presidio Parkway project, was chosen to design, build, operate and maintain the courthouse over a 35-year period. The project was successfully completed and began operating in September 2013. It has been recognised with a number of awards in categories ranging from architecture to innovative financing.

Another project currently under procurement is again in Long Beach. Three shortlisted firms had until June 2 to submit proposals for the Long Beach Civic Centre, which would include City Hall, the Main Library, Lincoln Park, and possibly a port headquarters for the Port of Long Beach, according to the RFP issued on February 28. A preferred bidder is expected to be announced in July.

More activity is expected in the social infrastructure space involving a new facility for the San Francisco Veterans Administration (VA) Medical Center.

“They are one of the top five VA hospitals in terms of patients administered and they are in an old space that is woefully inadequate,” Barz explains.

In March, the Bay Area Council Economic Institute presented its analysis which it carried out on behalf of the San Francisco VA Medical Center’s research affiliate, the Veterans Health Research Institute.

According to the study’s findings, developing the project as a P3, which is estimated to cost more than $100 million, could result in the accelerated availability of a new facility that can better meet the needs of the medical centre and the veterans it serves as well as achieve cost savings of at least 20 percent compared with conventional federal government procurement methods.

“So the San Francisco VA hospital is looking at doing this and I think that will be actively pursued by them over the next year or two,” says Barz who, together with Dentons partner Philip White, was part of a group that reviewed the initial drafts of the report and provided advice on P3 structuring.

Can social infra lead the way?

Several industry insiders expressed a lack of optimism regarding the progress of P3s in California. “There are certain political players that want things to happen but the political will is not completely there yet for P3 projects,” a source says.

Projects still get done but not through private funding.

“I think where we do see some progress is in the social infrastructure sector,” the same person says.

Indeed it is interesting that social infrastructure P3s, which have been the slowest in taking off in the US as a whole compared with the transportation sector for example, seem to be gaining such momentum in California.

If one is more inclined to see the glass as half-full rather than half-empty, then perhaps the headway social infrastructure seems to be making in the state will spill over to other infrastructure sub-sectors as an increasing number of projects are successfully completed.