When a consortium teaming the Plenary Group and The Walsh Group reached a deal in 2014 with Pennsylvania’s Department of Transportation to repair 558 structurally deficient bridges, the public-private partnership drew wide attention.
For one, no project bundling this many assets had been undertaken in the US. The bridges are spread throughout Pennsylvania, a state nearly as big as England, with each bridge posing its own set of challenges. If executed successfully, the Rapid Bridge Replacement project stood to serve as a model for other states – and nations – to follow. A boondoggle, on the other hand, would turn it into a cautionary tale and dissuade others.
The project has fallen somewhere between these two extremes. The goal of completing all 558 bridges by the end of this year proved overly optimistic, as the timeline has been pushed back to the end of 2018. While 295 bridges are finished, the original proposal expected 500 completed by the end of October. A reworked contract added $43.5 million to PennDOT’s price tag, with Plenary Walsh Keystone Partners also seeing “significant additional costs”.
For all its challenges, though, the project now looks to be on track, and both Plenary and the state expect completion by the end of 2018. The added costs for PennDOT are within the savings expected compared with completing the bridges under traditional procurement methods. And Standard & Poor’s has kept private activity bonds on the project rated BBB with a stable outlook.
A NEW APPROACH
The Rapid Bridge Replacement programme was launched in 2013, a year after Pennsylvania Governor Tom Corbett signed PPP-enabling legislation into law. Roughly 18 percent of the state’s bridges – around 4,500 of more than 25,000 – were structurally deficient, more than twice the national rate. That these bridges were spread across the state, with many standing in sparsely populated rural areas, only added to the challenges.
“While these 558 bridges are critical, they may not have been gotten to for 10 to 15 years because of the limited funds we have available,” Michael Bonini, the director of PennDOT’s PPP office, tells Infrastructure Investor. “So the P3 was a way to accelerate the delivery of 558 bridges in all parts of the commonwealth.”
The agency issued a request for qualifications for the project in December 2013, with five teams responding and four ultimately invited to submit bids. In October 2014, Plenary Walsh Keystone Partners – which also includes Granite Construction, HDR Engineering and 11 local subcontractors – was picked for the project. PWKP would be reimbursed through availability payments, set to total $1.5 billion, and tasked with maintaining and operating each bridge for 25 years after its completion. To date, PennDOT has paid $200 million in availability payments to PWKP, between $5 million and $8 million less than expected, due to project delays.
The state set an ambitious target, looking to complete all bridges by December 2017. The cost was projected at around $1.6 million per bridge, while traditional procurement would have seen each bridge run upwards of $2 million.
The project broke ground in June 2015 and quickly fell behind schedule. By the end of that year, just 22 of an expected 58 bridges were complete. A year later, the group had finished 148 bridges compared with 297 envisioned in the proposal.
Many of the bridges ran into unexpected permitting, environmental or engineering issues, but this was not out of the ordinary. Dealing with these issues on scores of sites throughout the state simultaneously posed a greater-than-expected challenge. And with no history of bundled projects of this scale, there was little to look towards for guidance.
“If you have one major bridge project, everybody is generally co-located and communication is a lot easier,” explains Ed Dice, the project delivery manager. If issues arise, he continues, they can be quickly identified, corrected and prevented from recurring.
But on a bundled project with hundreds of different sites, “a bridge under construction 400 miles away with a completely different management and crew, are initially unaware of the issues we are encountering on other sites. Effective communication and trust between all partners across all sites is key to making this project a success and ensuring that lessons learned are implemented across the board”.
In June 2017, PennDOT and the PWKP team agreed to rework the contract, with the state incurring $43.5 million in additional costs. A PennDOT spokeswoman called this revision “not unusual and not unexpected when a complicated large project such as this moves through construction” and noted it amounted to less than 5 percent of the project’s costs.
PWKP also took on additional costs, though it would not disclose this total. The delays postponed availability payments, which do not begin on any given bridge until that bridge is complete.
After the slow start, the project’s stakeholders sat down together this winter to get the project on track. Dice sees this as a turning point, as construction of the bridges has picked up since spring. Both parties now expect the project to be completed by the end of 2018 – a year later than planned, but earlier than it seemed on track to finish a year ago.
“Yes, the project is late, but the lateness is explained and managed,” says S&P analyst Trevor D’Olier-Lees, the ratings agency’s primary credit analyst for the bridge replacement project, explaining why there has been no change in the project’s rating. “Essentially, Penn Bridges is a notable example of risk management.”
BUNDLE OR BUST?
The Rapid Bridge Replacement project is not only relevant for Pennsylvania’s drivers. One much-discussed obstacle to the PPP model penetrating the US market is its limited appeal to rural residents, since the private sector is unlikely to show much interest in patching up small country roads. Bundle dozens or, as in this case, hundreds of these projects together into a single procurement, and it’s a different story.
Interest in PPP bundling is “gaining momentum”, according to S&P. D’Olier-Lees attributed this growth to two factors. First, governments under fiscal pressure are looking towards alternative approaches over traditional funding methods. Second, the growth of interest in infrastructure as an asset class has forced investors to look beyond the low-hanging fruit.
“There are only so many naturally big projects,” D’Olier-Lees notes.
So, is bundling the solution for bringing the benefits of private capital to thousands of small projects throughout the country? Not so fast, experts say. Todd Van Hoose, chief executive of the Farm Credit Council, says that, while bundling may be a solution to the problem of scale, it does not change the fact that most rural projects lack profitability.
“In true P3s, usually there is a way to make money on it, and bundling small projects that make money might make some sense,” Van Hoose tells Infrastructure Investor. “Bundling small projects that don’t make money probably would not attract a lot of investors.”
The Rapid Bridge Replacement project relies on performance-based availability payments rather than built-in revenue streams such as tolls or user fees, so investors are not harmed by low traffic levels. There have been a handful of bundled projects in the US energy space, while water projects are seen as well-suited for such an approach.
Canada, which has a more advanced PPP market than the US, has also had a bit more experience with bundling – there, it has been utilised particularly for social infrastructure, including schools in Alberta and Saskatchewan and police facilities in Ontario. Even in Canada, though, this market is viewed as underdeveloped.
“There is a general sense that bundling is underutilised by governments at large,” Stephen Hobbs, a director at the Canadian Council for Public Private Partnerships, tells Infrastructure Investor. “There is a lot more opportunity to bundle but there is no co-ordinating body that is actually bringing these projects together.”
Both PennDOT and the Plenary-Walsh team call the project a learning experience, and those lessons stand to benefit future bundling deals. Looking back, Dice now believes the teams would have benefited from additional time for planning and co-ordination.
“It seemed like a firestorm from the onset because we were all so eager to get started,” Dice says. “In unprecedented projects of this size, scope, and geographic diversity, I would recommend setting aside a significant amount of time to start laying out a foundation, performing design work, getting permitting, right-of-way and utilities in order before jumping out and starting building.”
While the project has been trickier than either side bargained for, PennDOT’s P3 chief says other states should not be discouraged by its difficulties.
“A bundled P3 is a potential approach that all governmental agencies should consider when they’re really trying to accelerate the delivery of an asset,” Bonini concludes.