Public-Private Partnership Policy Casebook/Pennsylvania Rapid Bridge Replacement Project

  • Summary
    • Pennsylvania has the highest proportion of structurally deficient bridges of any state and faces a significant challenge in financing the repairs that are necessary to these bridges. In recent years, the political leaders of Pennsylvania have seen the potential opportunities that public-private partnerships (P3s) can provide. In 2012, the state passed legislation that allowed for a common framework for transportation P3s and, in 2013, subsequent legislation was passed to allocate funding to this priority. Pennsylvania’s Department of Transportation chose to apply the P3 approach to the structurally deficient bridges across the state by bundling 558 bridges into one agreement, which is the largest such bundling P3 attempted in the United States. Following a bidding period between 4 teams, Plenary Walsh Keystone Partners were selected to be awarded the 28 year, Design-Build-Finance-Maintain P3 contract for the Pennsylvania Rapid Bridge Replacement Project.
  • Actors
    • U.S. Department of Transportation
      • The United States Department provided the Commonwealth of Pennsylvania with private activity bonds and because of that, the Pennsylvania Department of Transportation had to comply with all of the federal aid requirements. USDOT worked with PennDOT to federalize the Pennsylvania Rapid Bridge Replacement Project, using the federal government’s new P3 policy. [1]
    • Pennsylvania Department of Transportation (PennDOT)
      • Public agency that is responsible for 25,000 bridges and regulating transportation in Pennsylvania. PennDOT was also responsible for awarding the bid for the Pennsylvania Rapid Bridge Replacement Project.
    • Plenary Walsh Keystone Partners (PWKP): Selected as the winning bid for the Pennsylvania Rapid Bridge Replacement Project and will design, finance, construct and maintain the bridges for a 28-year term. 
      • Plenary Group: Australian infrastructure investment group that was the project sponsor and primary investor when they invested 80% of the equity for the project.
      • Walsh Investors: Chicago-based company that provided the remaining 20% of the equity for the project.
      • Fasken Martineau: International business law firm that acted as the lead legal advisor for the consortium Plenary Walsh Keystone Partners 
      • Intech Risk Management- Canadian-based firm that was an insurance advisor for PWKP.
    • Lenders:
      • Ashurst: Provided legal advice for Wells Fargo and J.P. Morgan, who were he bond underwriters for the project.
    • Construct and Maintain:
      • Walsh/Granite Construction: Joint venture group responsible for the construction of the bridges.
      • Walsh Infrastructure Management: Will provide maintenance for a 25-year period when the construction of the bridge is completing.
      • HDR: Nebraska-based company that served as the lead design firm for the Pennsylvania Bridge Rapid Replacement project. Approximately 500 HDR employees made contributions to the project and 300 served as sub-consultant staff. [2]
  • Timeline of Events
    • July 5, 2012: the Pennsylvania P3 Act was signed into law, allowing for the creation of public-private partnerships to be formed to address transportation related projects in the state. 
    • November 25, 2013: The Comprehensive Transportation Funding Plan was signed into law, authorizing the initial funding authority for the state-based funding portion of the bridge project and incentivizing the participation of local municipalities. 
    • December 12, 2013: State of Pennsylvania issues a Request for Quote (RFQ)
    • February 2014: Five teams submit statements of qualifications for Rapid Bridge Replacement P3.[3] 
    • March 2014: PennDOT announced a four team short list for the project.[4]
    • April 4, 2014: Issuance of Industry Review Draft of Request for Proposal (RFP) Documents.
    • July 3, 2014: Issuance of Draft Final RFP.
    • August 12, 2014: Last Addendum of Final RFP.
    • September 29, 2014: Proposal Due Date.
    • October 24, 2014: PennDOT announced that Plenary Walsh Keystone Partners was selected as the preferred proposer for the Project.[5]
    • January 8, 2014: Commercial Close.
    • March 18, 2015: Notice to Proceed with Design and Construction.
    • June 30, 2018: Substantial Project Completion.[6]
  • Map of Locations
    • Interactive map of bridges.[7]
  • Background
    • Act 88 of 2012
      • The Pennsylvania P3 Act, or Act 88 of 2012, was signed into law by Pennsylvania Governor Tom Corbett on July 5, 2012. This legislation was a first step to authorizing P3 projects for transportation related projects on new and existing infrastructure. The General Assembly estimated that they would be able to facilitate an additional $3.5 billion in additional investment per year through P3 style arrangements. This act also authorizes the creation or improvement of a “transportation facility,” which “includes typical transportation structures such as bridges, roads and parking lots, but also includes multimodal facilities, airports, terminals and ports, together with their associated structures. The term also includes intelligent transportation systems and other property needed to operate or related to the operation of the transportation facility”. Under the Act, a P3 term can be as long as 99 years and the agreement can be comprised of the certain transportation related services, including operations and  maintenance, revenue collection, user fee collection or enforcement, design, construction, development and other activities that enhance traffic throughput, reduce congestion, improve safety or otherwise manage or improve a transportation facility, and financing. This Act also created the so-called Public-Private Transportation Partnership Board, which is comprised of the following seven members: the Secretary of Transportation, the Secretary of the Budget, a member appointed by the Governor and four legislative appointees. PennDOT also retains a significant oversight and regulatory role under this Act.[8]
    • Act 89 of 2013
      • The Comprehensive Transportation Funding Plan, or Act 89 of 2013, was signed into law on November 25, 2013, provided the basis of the government funding that was incorporated into the bridge-bundling P3 initiative, along with addressing other transportation funding needs for the state. This legislation pledged an overall funding amount of $2.3 – 2.4 billion over 5 years, with approximately $1.3 billion of that being earmarked for state roads and bridges. Additionally, the law provided for a 100 percent match for local municipalities that participated in the bridge-bundling program.[9]
  • Bidding and Selection Process
    • On February 2, 2014, PennDOT began to issue Request for Qualifications for parties that were interested in designing, building, financing and maintaining bridges in Pennsylvania.[10]
    • On March 31st 2014, PennDOT invited four companies to submit their proposals for the Rapid Bridge Replacement Project. The four teams were Plenary Walsh Keystone Partners, Keystone Bridge Partners, Commonwealth Bridge Partners, and Pennsylvania Crossings.[11] 
    • The four companies were scored based on their financial capability to carry out the project; their background and experience in managing comparable projects; and each team’s ability to understand the project.
    • On October 24. 2014, the PennDOT Secretary Barry Schoch announces that Plenary Walsh Keystone Partners won the bid to design, finance, construct and maintain the bridges that were part of the Pennsylvania Bridge Rapid Replacement Project.
    • The final scores and rankings show that the bidding process was competitive with Plenary Walsh Keystone Group earning a final score of 95.14; Keystone Bridge Partners had a final score of 94.77; Commonwealth Bridge Partners earned a score of 89.48, and Pennsylvania Crossings came in last place with a score of 78.72.[12]
  • Financial Structure and Bond Rating
    • When considering the value obtained by pursuing a P3 arrangement, the average cost of each bridge is expected to cost $1.6 in this arrangement versus over $2 million through the standard processes of PennDOT. According to the financial plan prepared by Plenary Walsh Keystone Partners for PennDOT, several financing structures were considered in the lead up to this project. These structures included a public capital markets solution (including Private Activities Bonds (PABS) and taxable securities), a Section 4(2) private placement solution, a bank debt solution, and an insured bond solution. Per PWKP’s financial executive summary: “Based on a thorough analysis of each of these options, including current pricing levels, capacity, rating agency feedback, risk to PennDOT and the ability to reach Financial Close, we have determined that a PABs structure is the most competitive financing solution for the Project.”[13]  
    • PennDOT agreed to pursue the PAB financing route and the resulting project is the largest PAB financing venture to date. The overall financing structure of the project is as follows:
      • PABs Proceeds (Series 2015): $721.5 million
      • PAB Sale Premium: $71.9 million
      • Equity (Plenary/Walsh): $59.4 million
        • Plenary Group USA Ltd. (80%)
        • Walsh Investors, LLC (20%)
      • Mobilization and Milestone Payments: $224.7 million
      • Availability Payments: $35.8 million
      • Interest Earned: $4.9 million [14]
    • The PABs are rated BBB and are structured to amortize from 2018-2042 (approximate 17 year average life). They have yields ranging between 1.5% and 4.3%, with resulting all-in interest cost of 4.10%.[15] 
    • During the construction phase of the project, the developer with receive a mobilization payment, milestone payments, and availability payments from PennDOT. The mobilization payment is a one-time, $15 million payment after the initial commercial close that is designed to allow for a start in the initial work of the project. There are 6 planned milestone payments throughout the project that are designed to reduce financing costs. These payments are subject to spending at least equal amounts of private funds on design-build activities. Milestone payments are subject to deductions for noncompliance and unavailability. The Maximum Availability Payment (MAP) is available to the developer only when all of the bridges are completed. The per bridge availability payment amount is equal to the MAP divided by the total number of bridges in the project. Following the substantial completion of the first 50 bridges, a one-time lump sum availability payment is made. Availability payments are subject to reductions due to noncompliance and unavailability due to maintenance work. These payments begin to step down at the end of the 25 year term as the bridges are handed back to PennDOT.[16]  
    • The project has received numerous awards from investor groups, including:
      • Infrastructure Investor’s “North America PPP Deal of the Year” in 2014
      • P3 Bulletin’s “Best Transport Project of the Year” in 2015
      • The Bond Buyer’s “Northeast Region’s Deal of the Year” in 2015
      • IJGlobal “Best PPP in North America” in 2015.[17]
  • Risk Analysis
  • Issues
    • Bridge selection process 
      • Of Pennsylvania’s 25,000 bridges, approximately 4,500 (or 18%) of them were considered to be “structurally deficient.” This is well above the nationwide average of 7.3% of statewide bridges meeting this classification. Bundling of these bridges is an efficient way to process through the repair process using economies of scale, but the standard federal approval process for these individual bridges presented an efficiency reducing problem to PennDOT.[18]  
      • Therefore, they requested a Special Experimental Project (SEP-15) in order to obtain exemptions from 3 federal environmental requirements:
        • Clause (6) – Bars a developer in a design-build project that receives federal assistance from preparing documentation required by the National Environment Policy Act of 1969 (NEPA) or having any decision-making responsibility with respect to the NEPA process.
        • Clause (7) – Requires any consultants who prepare NEPA documents for such projects to be selected by and subject to exclusive control of the procuring authority.
          • These two previous requirements are designed to prevent the developer from prejudicing NEPA analysis.
        • Clause (9) – Requiring termination provisions in the event that the no-build alternative is selected as the “preferred alternative” under NEPA.  
          • When an individual bridge becomes a problem, PennDOT can remove that bridge, rather than canceling the overall project outright, avoiding a conflict of interest for the developer who is filling out the paperwork. 
          • This allows the developer to be no better or worse off in the event a bridge is removed. 
          • PennDOT will compensate the Developer separately for the cost of NEPA-related environmental mitigation actions.[19] 
      • Prior to the issuance of the final Request for Proposals, PennDOT screened more than 2,000 structurally deficient bridges. A variety of factors went to determining which structurally deficient bridges were to be selected, such as the age of the bridge, the length, the number or lanes, average daily traffic, the impact on utilities, railroads, and a wide range of potential environmental impacts.
      • In order to accelerate the progress of the project, PennDOT indentified “early completion bridges,” which were batches of bridges selected in two regions of the state to advance preparation for construction in 2015. PennDot secured permitting approvals for the early completion bridges to ensure the replacement of the bridges began soon after the awarding of the contract.
    • Current Progress 
      • The initial goal of the project was to have all 558 bridges replaced by the end of 2018. As of November 13, 2017, construction has been completed on 345 bridges, 56 are currently under construction, 6 more bridges are expected to undergo construction in 2017 and 151 are planned for construction in 2018. [20]
      • While the Pennsylvania Rapid Bridge Replacement Project has been mostly successful, there have been some hiccups in the form of delays. The Lovedale Road bridge in Alleghany County was scheduled to begin construction on August 01,2017 and be completed in early September, but because of unforeseen circumstances at the bridge site, the completion date of the bridge was pushed back to mid-November. [21]
      • The Pa. 274 Bridge in Doylesburg was supposed to undergo construction on July 18th but it was postponed because the contractor was waiting for approval from the Department of Environmental Protection for a waterways permit modification.[22]
  • Discussion Questions
    • What lessons can other states learn from the seeming efficiency and coordination demonstrated from the Pennsylvania Rapid Bridge Replacement Project
    • Aside from bridges, what other smaller projects can achieve economy of scale benefits from bundling those projects into a larger P3 arrangement?
    • Is the efficiency achieved through the SEP-15 federal waiver sufficient to outweigh the potential environmental risks?