As we prepare to go to press, Maryland’s Purple Line light rail project is careening towards disaster. By mid-August, government officials and the project’s financial backers had received a judge-ordered extension up to 14 September for negotiations to settle $755 million of cost overruns that the $2.2 billion public-private partnership has incurred.

That court extension effectively forces Purple Line Transit Partners, a private consortium, and the administration of governor Larry Hogan, a Republican, to keep negotiating, after the construction companies in the consortium threatened to pull out of the contract signed with the Maryland Department of Transportation. So it is entirely possible that, by the time you are reading this, years of disputes and delays will finally have been sorted out.

Yet, for a deal that was once heralded as a landmark approach to financing US infrastructure, the Purple Line now stands on the precipice of infamy.

“Clearly, they are far apart in terms of delays, responsibility and dollar amounts,” explains Scott Zuchorski, head of North America Infrastructure at Fitch Ratings. “But we think there are incentives for both parties to work through to some type of settlement that can allow the project to proceed. I don’t think anybody wants a half-finished train line.”

$2.2bn
Original cost of the Purple Line PPP

$755m
Amount incurred in cost overruns

266 days
Delay caused by Friends of the Capital Crescent Trail environmental lawsuit

 

Politics, budget constraints and environmental concerns have plagued the development from its procurement phase to the unfinished tracks carving up communities in Prince George’s and Montgomery counties. And although the proposal emerged from the intention to provide a new public service, the special interests of certain stakeholders have also played a part in the Purple Line’s derailment.

It sometimes happens with infrastructure that the community a project is supposed to benefit plays a role in bringing about the development’s untimely conclusion. With the Purple Line, vocal opposition to the project exacerbated an already shaky agreement between the public and private sectors.

Now, as years of impasse approach a conclusion, the industry must take stock of what happens when governments and investors find themselves face-to-face with a difficult public stakeholder.

‘Are the arguments sensible?’

Outside the US, PPPs have been a successful framework for investing private capital in government-owned infrastructure projects – even if, as we wrote in our February cover story, the framework is facing significant headwinds these days.

“There are incentives for both parties to work through to some type of settlement. I don’t think anybody wants a half-finished train line”

Scott Zuchorski
Fitch Ratings

However, the model has taken longer to adopt Stateside, explains DJ Gribbin, who was President Donald Trump’s senior infrastructure advisor until 2018. Gribbin, who now runs a project consulting firm called Madrus, says “robust community involvement” in the country’s PPP developments has been one of the biggest roadblocks to more projects getting done. “Anytime you’re building infrastructure, there’s always pushback because, while it benefits a community as a whole, it’s also going to disadvantage whichever property owners are in the right of way,” Gribbin says. “As a result, local communities have significant ability to slow or stop projects.”

He adds that an unhelpful reflex from the private sector towards pushback from public stakeholders has been to overlook their concerns: “Quite frequently, I see investors dismissing opponents of a project, as opposed to stopping to ask, ‘What arguments are they making? Are the arguments sensible? What can I do to address them?’”

Sometimes, though, the private sector is willing to engage but may be on the receiving end of demands that are impossible to satisfy. According to two sources familiar with the private side of the Purple Line procurement, and who asked to remain anonymous to discuss sensitive details about the project, that is exactly what happened in Maryland.

“The Purple Line was a popular project that a small group of people did not like,” one source explains. This source adds that special interest groups wield a “cookbook” of tools to stop or slow down developments.

Representatives from the development consortium Purple Line Transit Partners declined to comment on the project when approached by Infrastructure Investor.

The procurement of the 16.2-mile light rail project was put into motion in 2013 by then governor Martin O’Malley, a Democrat. The plan was, and continues to be, to build 21 stations running east to west from Bethesda to New Carrollton and to provide connections to Washington, DC’s metro system and Amtrak’s Northeast Corridor. The project was proposed to stimulate the local economy and revitalise regional transport infrastructure.

Almost immediately, in 2014, a special interest group called Friends of the Capital Crescent Trail filed a lawsuit to block the procurement’s advancement. The group claimed that the Purple Line’s proposed path would destroy a creek that was home to an endangered species of shrimp-like crustaceans. While the case was being litigated, MDOT moved the project forward.

In 2015, when Hogan took office, the new governor favoured highway developments over mass transit systems and moved to reduce the amount allocated to the project from the state’s budget from $700 million to $168 million. A year later, MDOT awarded PLTP – which consists of Meridiam, Star America and construction company Fluor Enterprises – the contract to develop the Purple Line and a 30-year concession to manage it.

“Often, you see lawsuits that are brought, not necessarily to stop the project but to get better results for the stakeholders that brought the lawsuit”

Mike Pikiel
Winston & Strawn

“When we first rated the Purple Line project, we looked at it as having two good parties: a highly rated state entity putting a proposal together and a consortium of experienced companies that had worked on something like this before,” Zuchorski says. “However, we followed this development from the beginning and knew there were delays that had gone through as part of the procurement process.”

Amanda Baxter, development director for North America at toll-road developer Transurban, says that when the road gets rocky in PPP procurements, it is necessary to have someone who acts as a “translator” between private sector priorities, government requirements and public stakeholder needs.

Baxter, who worked for Whitman, Requardt and Associates while the engineering firm represented MDOT in its Purple Line lawsuits, has also served in “translator” roles for Virginia’s transportation department and now in the private sector for Transurban. She says that risk is too often viewed as “dollars and cents” instead of getting the “right people to secure support from a government entity or private developer”.

“In building a long-term PPP relationship, it’s important for both sides to establish a person who will be a conduit to conversations that manage risk allocation appropriately,” Baxter says. “Without that person, and consistent communication, priorities for the project are advanced that, ultimately, make it not feasible to be implemented.”

Financial wrinkles

More important than a PPP mediator, Baxter adds, is underlying trust in counterparties. When Transurban was negotiating extensions to express toll lanes on the I-495 highway in Virginia, Baxter says the developer committed not to take public subsidies for the project. But during the procurement, public stakeholders began advocating for a new walking trail parallel to one the project would run through.

To accommodate the stakeholders, Transurban agreed to incorporate $5 million new trail into the project scope.

“This was a financial wrinkle, but also a solution which came out of direct coordination with public stakeholders,” Baxter says. “As a developer, you have to have a contingency plan for how you deal with these things. Contingencies generally aren’t developed to cover existing scope but to help when things cost more than what you’ve anticipated.”

Community should be onside

According to Jeff Jenkins, co-founder of Bernhard Capital Partners, a PPP-focused investment firm based in Baton Rouge, Louisiana, not building trust with the community is a certain way to ensure a procurement fails.

Last year, his firm was in the running to privatise JEA – a wastewater treatment facility in Jacksonville, Florida, where the city government was seeking to raise capital by offloading assets to the private sector. The entire privatisation was eventually shot down by what Jenkins describes as a city council unconvinced that the private sector should be trusted with the management of such a vital asset.

“In many cases, local stakeholders and elected officials are not yet comfortable with privatisation that, in many ways, is becoming increasingly necessary,” Jenkins says. “If there’s no consensus within a community, it’s unlikely these projects will receive approval.”

After a federal judge cleared the Purple Line’s development from the environmental lawsuit – a delay that PLTP says lasted 266 days – another legal challenge was presented shortly before the project was set to break ground.

In August 2016, a US district judge ruled in favour of another lawsuit stating the Purple Line’s projected ridership had been inaccurately forecast, with lower projections meaning less federal funding to support the public transit system.

Joseph Seliga, a PPP specialist at law firm Mayer Brown, says lawsuits against infrastructure developments are brought in two ways: as a challenge to project-specific issues like environmental concerns; or as a challenge to the authority of the government procurement because the project is being undertaken as a PPP.

“It’s common in project agreements to address legal and commercial risks that come with legal challenges,” Seliga says. “Part of the goal of structuring legal documentation is to create a mechanism for adjusting to challenges in a context where you may not know what the challenge may be.”

An example he describes is that many environmental approval processes come with a 150-day statute of limitations, which limits the timeframe in which challenges can be raised after a public review for the project has been held.

Another PPP lawyer, Mike Pikiel, from Winston & Strawn, calls lawsuits the “biggest hammer” in the public stakeholder’s toolkit to stopping a development from going forward, even if that is not the overall goal.

He points to a PPP in California, the Presidio Parkway, that in 2011 faced a legal challenge by the union group Professional Engineers in California Government. The latter argued that the contract arrangement unfairly left state workers out of jobs in favour of private companies selected to build a highway extension outside San Francisco.

“In building a long-term PPP relationship, it’s important for both sides to establish a person who will be a conduit to conversations that manage risk allocation appropriately”

Amanda Baxter
Transurban

“Often, you see lawsuits that are brought, not necessarily to stop the project but to get better results for the stakeholders that brought the lawsuit,” Pikiel explains.

For the Purple Line, the project faced multiple lawsuits that eventually ended in MDOT and PLTP’s favour. But those delays had costs attached that played a part in the development’s unravelling.

Infra on the ballot

With state and local governments increasingly cash-strapped, it seems like PPPs are bound to be used more often in the US.

Even if construction on the Purple Line proceeds, though, the negative attention this dispute has caused will serve as yet another warning to other developers attempting to engage public stakeholders in potential developments: riding the wave of enthusiasm around infrastructure will only get developers so far.

If they are to have a better chance of avoiding the costs and delays of the Purple Line’s procurement and construction, engagement and public approval should play a larger role in whether a project moves forward, according to Seliga.

He says procurements should be approached in a similar way to recent referendums on tax increases to fund infrastructure.

“Given that those are public-ballot measures, there is a natural need to educate the public and influence thinking toward the benefits of voting in favour of such measures, such as tax increases for infrastructure,” Seliga explains. “Public entities that are sponsoring PPP projects should think about a similar approach as it relates to educating the public.”

Whether wider engagement would have been enough to dissuade “the small group of people” who did not like the project from trying to stop it will remain an open question.

Even if a deal emerges from the negotiations between MDOT and PLTP, the Purple Line stands as another stark reminder that the people outside the conference room can cost those inside it dearly.

How the Purple Line came together and fell apart

2013
April
Release of the RFP

The Maryland Department of Transportation and Maryland Transit Authority formally begin the procurement of the 16-mile, $2.2 billion Purple Line light-rail project

2014
August
The lawsuits begin

Friends of the Capital Crescent Trail files a lawsuit against the MDOT seeking to halt construction. The Maryland environmental advocacy group states that the development of the transit line would destroy two species of crustaceans only found in a local creek bed

November
Hogan wins election

Republican candidate Larry Hogan wins Maryland’s gubernatorial election. At first an opponent of the Purple Line, the new governor eventually moves to reduce the $700 million allocated to the project from the state’s budget to $168 million

2016
March
The winner is…

After political and legal wrangling, the MDOT selects an investment group consisting of Meridiam, Star America and construction company Fluor Enterprises to develop the Purple Line and manage it for 30 years

June
Cheques signed

Purple Line Transit Partners reaches financial close on what amounts to a $5.6 billion project, including $874.6 million in federal funding from the US Department of Transportation

November
Another setback

A US federal judge rules that the Federal Transit Administration must redo a study about how Washington, DC’s Metro ridership issues might affect how many people use Maryland’s Purple Line. The analysis throws the financial close milestone into question and stalls federal financing and construction of the project

2017
August
Shovel ready

With financing secured and legal challenges seemingly at bay, the MDOT and PLTP break ground on the long-awaited mass transit system, which is still under construction today

2020

May
The wheel’s final cog?

Purple Line Transit Constructors – the development group building the project – issues a notice stating that it plans to leave the public-private partnership if a dispute concerning $755 million in cost overruns cannot be resolved

August
Court order

A judge issues a temporary restraining order forcing Purple Line construction companies to stay on the job until 14 September while the cost overrun dispute continues to be resolved