Oops.
by James A. Bacon
It’s easy to whack Virginia’s public-private partnership law for failing to meet expectations for transparency and public involvement. (I have done so repeatedly.) There are important issues that the legislature needs to deal with, as the controversy over the U.S. 460 Connector has made abundantly clear. But there are virtues to public-private partnerships that have gone unsung. Perhaps the most important of these is the identification and mitigation of project risks.
Virginia’s transportation public-private partnerships (P3s) have an elaborate process for identifying risks, tracking them and allocating them between the public and private partners, according to the “Special Review: US 460 Corridor Improvements Project” ordered by Transportation Secretary Aubrey Layne. The review was tasked to dig into how the state could have paid US Mobility Partners nearly $300 million under terms of the U.S. 460 partnership deal even though U.S. Army Corps of Engineers (USACE) permits had yet to be issued and construction had yet to begin.
As the Special Review explains, there are a wide variety of risks in a transportation mega-project:
- Development risks: design conflicts, environmental permits, changes in regulation, lack of financing, right-of-way acquisition, politics.
- Construction risks: cost overruns, design defects, unknown utilities, acts of god.
- Operation & Maintenance risks: shortfalls in traffic demand, construction of competing facilities, design defects, political and regulatory changes.
“Under traditional public procurement of highway projects, the public agency retains most of the risks, yet these risks are not usually quantified, nor are their costs always included in the project cost estimates,” states the review. “A key component of P3 procurement involves the transfer of certain risks from the public agency procuring the project to the private sector partner. The concept of ‘transferring risks’ requires that the private partner will be responsibile for cost overruns or expenses associated with the occurrence of that risk.”
An example of a risk that might be transferred to the private sector is construction risk — the risk the the project may not be completed on budget or on time. Another is transportation demand risk — the risk that traffic and toll revenues may not materialize as forecast.
In embarking upon a P3 project, Virginia’s Office of Transportation Public Private Partnerships (OTP3) compiles a “risk register,” which systematically identifies all major risks and decides whether the state should retain the risks, mitigate them, insure against them or transfer them to the private sector partner. Risk registers are updated as new risks are spotted and old ones closed out.
In the case of the 460 project, OTP3 maintained a risk register over five years, from 2008 until 2012. The office held four risk workshops in which the project team included OTP3 and VDOT representatives, consultants and key stakeholders. The group discussed different risk items, the probability of occurrence, cost and schedule impacts and appropriate actions to manage each item.
An independent audit found that VDOT had accounted for and/or mitigated the major project risks. The audit team estimated that the present value cost of these risks ranged from $177 million to $295 million (depending upon the methodology used) above the official $1.4 billion project cost.
In the case of environmental approvals, VDOT purchased wetlands credits in the summer of 2012 in anticipation of wetland mitigation discussions with the Corps of Engineers and conducted a study to collect additional data to facilitate those discussions. Based on correspondence with the Corps, the independent auditors concluded that the risk profile for the permitting element of the project had been reduced substantially.
While all material risks were adequately identified, concluded the report to Layne, the authors concluded, “We do not believe key stakeholders, including the public, were aware of the nature and extent of risks associated with the 460 project.” The problem was not the identification of risks but the failure to share that information with the Commonwealth Transportation Board.
Bacon’s bottom line: It’s good to know that the people negotiating P3s understand risk, which is more than we can say about politicians flogging forward traditional VDOT projects. But what does all this have to do with the U.S. 460 fiasco? It narrows the scope of the problem. Whatever went wrong, it wasn’t a failure of the OTP3 office to identify the wetlands risk. I’m still not clear, however, where the project ran off the rails — how the state managed to shell out $300 million before the wetlands issue was resolved. Hopefully, I’ll get more answers as I continue wading through the report.
