Virginia Procurement Process Needs Reform

Complex projects from transportation to IT need risk management.

Complex projects from transportation to IT need risk management.

by James A. Bacon

The Commonwealth of Virginia needs to reform its procedures for contracting and administering billions of dollars of contracts, the Joint Legislative Audit and Review Commission (JLARC) has found in a new study.

In 2015 Virginia spent more than $6 billion through contracts, including for transportation projects, information technology, and building construction, noted JLARC. The process for managing the contracts is decentralized, with each agency handling its own work. State procurement staff are insufficiently schooled in risk management, and the state pays insufficient attention to monitoring and enforcing the contracts.

Even though contracts account for a significant portion of state spending, the state does not maintain comprehensive information on how contracts are performing. This prevents individual agencies and state-level decision makers from assessing whether their investments in individual contracts have provided value to the state. It also prevents agency staff from avoiding problematic vendors and developing and administering contracts in a way that takes into account previous “lessons learned” at their own agency or other agencies.

JLARC embarked upon the study in 2014 after the maladministration of the U.S. 460 superhighway project resulted in a $250 million loss to the state without any ground being cleared or asphalt laid. The state has been embroiled in other high–profile contractual disputes involving the provision of IT services and the explosion of a rocket at the Wallop’s Island space port.

“Risk management isn’t on the radar,” said Tracey Smith, study project leader, in a presentation to lawmakers Monday. Writes Michael Martz in the Richmond Times-Dispatch:

Legislators on the commission, particularly the lawyers, expressed shock that state agencies routinely enter into big, often risky contracts without legal advice from the Attorney General’s Office.

Del. David B. Albo, R-Fairfax, chairman of the House Courts of Justice Committee, called it “ludicrous” that agencies would draft major contracts without lawyers.

Bacon’s bottom line: State procurement laws reformed corrupt practices of an era in which politicians routinely gave contracts to their friends and supporters. The laws emphasized putting contracts out for competitive bids, procuring the lowest price and making the process transparent. The nature of business has changed over the decades, but with one important exception, the state procurement process has not kept pace.

Unless you’re procuring commodity products like office supplies or janitorial services, the lowest price is almost meaningless. The quality of work is often a critical but hard-to-define variable. Another is the allocation of risk — who pays when something goes wrong? Identifying and allocating risk is why we have lawyers. Sometimes the lawyers get carried away, picking at nits, but they perform a critical business function because things often do go wrong. Accidents occur. Disagreement arise. Unanticipated events throw everyone for a loop.

Government employees are not trained to think about risk. Politicians aren’t inclined to worry about risks that might explode on someone else’s watch.But as contracts grow increasingly complex with the trends to outsourcing and public-private partnerships, the allocation of risk can be as important as the price.

There is one outfit in state government that has been acquiring the competencies to engage in sophisticated risk management — the Office of Public-Private Partnerships (OP3), which oversees contracts for some of the state’s most complex transportation projects. As I recall, OP3 raised red flags relating to the infamous U.S. 460 project but its warnings were overruled for political reasons. The office has developed a network of contacts it can call upon to supplement the skills of its in-house staff. Virginia’s Secretary of Technology and the head of the Department of General Services should have comparable capabilities.

Good management doesn’t excite the electorate like, say, banning guns or restricting bathroom options for transexuals. But billions of taxpayer dollars are at stake. And that makes it a sexy topic for me.

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9 responses to “Virginia Procurement Process Needs Reform

  1. I think it depends on where you work and who is the boss. I’ve seen a previous boss in a state procurement area and that guy was talking who he could get discounts from, anything IT could dig up for him so he could market to get discounts, and SWaM businesses that were over and above the percentages required by the govt.
    That being said, I saw this in another area and as usual, the executive branch doesn’t answer to any one. I’ve got a string of emails where 1 person in the LT GOV area will talk to me but otherwise they ignore and refuse to answer questions AND legitimate FOIA issues.

  2. I have built built and renovated large private commercial real estate projects as a principal. In so doing one learns by experience the complexity, ubiquity and persistence of large scale construction risk. How such risk is assessed and bid and then managed and controlled so as to bring it to completion on time and budget. This not a game won by politicians, dabblers, fixers or the faint of heart. For decades the state of Virginia enjoyed an excellent reputation in this most serious of games. Its track record showed its ability to judge and control with integrity the financial risk inherent in building public infrastructure, and do it on time and budget.

    Thus I was shocked and dismayed when I looked in depth at the lack of cost controls and disciplined management in the public interest in a number of high profile public works projects in Virginia. This included numerous aspects of the post 2000 expansion of Dulles Airport and other road and rail debacles that have taken place in Northern Virginia and elsewhere since 2000.

    There is no doubt in my mind that a virulent form of rot, sloppiness, irresponsibility, and corruption, a gaming of the system, one that milks projects for undue private gain rather than efficiently building them per original plans, specs, and cost projections, has infected the system.

    Evidence of this is everywhere despite the concurrent evidence that fine public servants and professionals do their best to resist these trends. In short, the Million Dollar Bus Stop became a chronic habit writ large. Now it is everywhere, infecting all levels of government – state, local, Federal – bad habits so deeply ingrained culturally that they are extremely hard to shake. Hence for example, due diligence reports now often Cook the Books from the Project’s very inception, ruining its chances of success from the start. The first 16 years of the 21 first century will surely become known as one of the most thoroughly corrupt in our nation’s history of public procurement.

    • A number of years ago when the Silver Line was just a proposal, supporters, including representatives from state and local government, met with the Budget & Taxation Committee of the McLean Citizens Association. The Committee asked about cost overruns for the Silver Line, and was assured there would be no such things.

      But it’s transit oriented development, smart growth, producing additional tax revenues so residential taxes don’t increase, etc. The possibility that fairy tales can come true crony capitalism have pushed out good management and sound fiscal controls.

      And it’s not just transportation. Look at public schools, higher education, the Departments of Defense and Homeland Security, healthcare reform. Government’s ability to spend money needs to be restricted. We need a constitutional amendment that requires a 3/4 majority for any budget or change in taxes.

    • These very same issues are discussed in greater depth at the article and comments to that article found on this website at:

      https://www.baconsrebellion.com/2015/11/p3-mirage.html

  3. per the link Reed provided – maybe recycle the Va P3 program office response to see if it still “fits” :

    Virginia P3 Office | November 20, 2015 at 4:34 pm | Reply

    Thank you, Jim, for helping prompt a robust discussion on this piece by Mr. Salzman (“P3 Mirage) about the value of delivering transportation improvements through public-private partnerships. VAP3 answers similar questions every day in our own exploration of how to gain the greatest value for a priority improvement done when traditional tax and bond strategies can’t get it done. So we’d like to put a few things in perspective to further a better understanding of P3s.

    Public-private partnerships are not privatization of public infrastructure.
    In the case of transportation P3s, for example, the Commonwealth always retains ownership. Through project Comprehensive Agreements, the Commonwealth has detailed performance requirements and clear provisions for the Concessionaire handing the operations and maintenance back to VDOT at the end of the concession period. The Commonwealth uses private firms and vendors for all types of services, including design, construction and maintenance of VDOT facilities and roads. This relationship between the public and private sectors has been active for centuries in Virginia.

    Public-private partnerships allow sharing and transfer of risks.
    We have insurance and credit rating industries precisely to identify, measure, allocate and manage risks. Transferring the risks of design flaws, construction cost overruns or anemic revenues to a private partner puts private equity providers and privately held debt holders on the hook, not taxpayers. Two Virginia examples discussed (Pocahontas Parkway and Capital Beltway) both had powerful financial consequences for the private partners, but Virginia taxpayers saw no additional costs and no reduction in services provided under those Agreements.

    The Transform66 Outside-the-Beltway Project will proceed as a public-private partnership only if a P3 delivery method provides more value to the Commonwealth over the project life cycle than traditional design-build or design-bid-build methods. A decision on the delivery method will be made in December after a full public hearing and a meeting of the Commonwealth Transportation Board in Alexandria. The public already can view the draft term sheets that are starting points for any final agreement at both the project website and the VAP3 website.

    The evaluation being made is on identifying the best value over the life of the project, including operations and maintenance over decades, not just the lowest cost of design and construction upfront. P3s succeed when the life-cycle cost savings and efficiencies of combining design, construction, financing, operations and maintenance outweigh the lower cost financing advantage of a publicly-financed traditional procurement. Facility users, not general taxpayers, pay for the operations and maintenance costs.

    Triple-A bonds issued by the Commonwealth always are the lowest cost of finance, but Virginia carefully limits its Triple-A issuances to maintain that rating and taxpayers are on the hook for debt service. Revenue bonds backed by tolls do carry more risk (they usually are rated Triple B-), but in P3 projects the bonds can be issued by the private partner and do not count against the Commonwealth’s debt capacity. Because Triple B- bonds pay a higher interest rate, they attract investors looking for higher yields. Private investors in those bonds, not taxpayers, take the risk of not being repaid (see risk allocation below).

    A year ago the Ontario Auditor-General also found on average, P3 projects were delivered 27 percent less expensively than original estimates because of the integration and efficiencies of design, build, finance, operations and maintenance services. The province’s Infrastructure Ontario organization was formed in response to a series of schedule delays and large cost overruns on projects delivered through traditional procurements. Despite higher financing costs, Infrastructure Ontario P3s are documented as delivering higher quality, faster delivery and more value for public dollars.

    Toll concession projects do have to contend with all the economic and political forces that every business faces, including the prospect of financial restructurings and even bankruptcy. Realistic assumptions about use and revenues drive success. But well informed investors looking for investments in the infrastructure asset class are used to taking risks in anticipation of higher returns. In the end, the bankruptcy and financial restructurings belong to the private partner, not the Commonwealth. Transferring those risks provides a major value to the public.

    Public-private partnerships are not a substitute for strong, predictable public funding for infrastructure improvements and repair. But as needs continue to grow more quickly than traditional tax revenues and bond capacity grow, P3s can help fill the gap for priority projects. We are building better data on both traditional procurements and public-private partnerships. More questions and more discussions ultimately will further our understanding of what constitutes best value for Virginia taxpayers and transportation service consumers.

    Please contact me directly at [email protected] as additional questions occur.”

    I’m defending the response – only pointing out that they have a view also.

    my impression is that people today – question government – all 3 branches – executive, legislative and judicial – and in both the Federal and State.

    and too be honest – I don’t know how it gets fixed because too many just want it shut down all together – take the money away, get rid of the folks running it … and not give it back until they “promise to be good or honest” or some such.

    😉

    I’m not sure ‘crooked’ is a recent phenomena or just a US one –

    The US is actually considered one of the less corrupt nations.

  4. As concerns that quote, its nothing more than Government PR.

    Lets get real and focus on facts, not spin and public relations, trying to fool taxpaying citizens, and avoid responsibility for gross violations of the public trust. The record to date speaks for itself.

    • The issues discussed here and within the p3-mirage article and comments on this website, however large in and of themselves, are only a part of a larger web of corruption and dysfunction in our nations public and private institutions.

      For some of that larger perspective please see the following article and extensive follow on commentary that is found therein on this website at:

      https://www.baconsrebellion.com/2016/04/here-piggy-piggy-piggy.html

      The results bred by these corruptions manifest themselves in a myriad of ways that are large and small, obvious and subtle.

      For example, the State of Virginia’s refusal to comply with Freedom of Information Act laws that would tell its citizens the results of the State’s voluminous and costly studies on the impacts of Dynamic tolls the State wants to impose on its citizens, and the citizens of other states passing through Interstate and intrastate Highways in Northern Virginia.

      Another words the citizens subject to these ever changing tolls will pay those tolls in unknown amounts now and long into the future (as well as much of the costs the state incurs to impose those tolls on its citizens), yet the State refuses in violation of the law to tell all those afflicted citizens what the consequences of these Dynamic tolls will be on their daily lives, their livelihoods, and financial well being, and indeed their ability to afford to continue to live where they now live and/or work where they now work.

      Nor will the State tell its citizens the terms of the State’s contracts with private companies that will operate those tolls and impose their costs on its citizens far into the future. Nor will the State tell its citizens who are the major beneficiaries of these tolls, and what those beneficiaries will gain from those tolls financially, and that risks they are undertaking, if any, to “earn” these private gains at public expense.

      Another iteration of this corruption of the State’s grant to public monies to private companies that enrich those private companies while at the same time the State refuses to tell its taxpayers footing the bill for these grants what the monies are being spent for, why they are being spent, what is the quid pro quo gained by public officials, if any, much less what is the public benefit gained by such expenditure by public officials of public money.

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