Infrastructure is hard to do.

 Waste! Design errors! NIMBY complaints! Construction SNAFUs! Government incompetence!

This is the golden moment of infrastructure, when we contemplate the finished projects and the jobs to build them.

The worst of the problems and political fallout will come later.

John Coster has led teams building massive construction projects. He got his start as a journeyman electrician coming right out of a technical high school in Massachusetts--one of those schools where supposed-non-college-suitable type kids went to learn a trade. That work quickly evolved to his being an electrical contractor, then a bigger one, and then jobs leading huge design-and-build teams for Microsoft, CenturyLink, Skanska USA and others. He knows something about the problems ahead if and when projects get going.

Click: Big Dig, What went wrong?

Things go wrong. If hundreds of projects are started, some in every state and congressional district, the headlines will change in every state and congressional district because there will be disputes among the various parties over who is at fault for the delays, over-runs, and design errors sure to be alleged. Someone--everyone--is potentially to blame for something--the contractor, a sub-contractor, the architects, the unions, the material suppliers, logistical people getting things to the job site, or the government agency that thought the project was a good idea in the first place. No project is non-controversial, as observers of the Keystone Pipeline know--as do Southern Oregon observers of the proposed Jordan Cove project and associated pipeline. Some people will be thrilled the project is not being built on schedule. It is no-win.

Biden and Democrats need to understand what is coming and try now to inoculate themselves from what could be a very bad set of stories in 2024. They need to set expectations.

Guest Post by John Coster

John Coster

A lot has been written about the trillions of dollars being proposed for investment in building new and replacing old public infrastructure. It is almost always assumed that these must be funded, built, and operated by “the Government” – which include Federal, state, and regional governments. Most large-scale public projects are financed by bonds which are repaid by a combination of taxes and use-fees, like tolls, gas taxes, or those airport fees you see when you buy a ticket. People often think about successful mega-projects the Federal government has pulled off, like Grand Coulee and Hoover dams, or the Interstate highway system. But we also know countless failures – like Boston’s Big Dig that was 10 years late and 190% over budget that also had countless quality issues. Or the infamous WPPSS nuclear plant construction program, one of the largest municipal bond defaults in US history. WPPSS Bondholders eventually received on average, about 40% of their investment and expected interest, and the Federal Government (i.e. U.S. taxpayers) absorbed the rest of the costs. 

Even on a smaller scale here in Washington State, the errors by state Department of Transportation engineers resulted in over $100 Million dollars in cost overruns on the SR520 floating bridge project. State Route 520 is the northern floating bridge crossing Lake Washington from Seattle to Bellevue. It’s about 2 miles long and made of hollow concrete pontoons. The state made the foolish mistake of letting state employee engineers perform the design. The contractors built it exactly as it was designed and the pontoons developed cracks and leaks. Forensics determined it was a design flaw. The employees were fired but the fix was over $100 million. If the state had wisely hired an external engineering firm with standard Errors and Omissions insurance (like engineering malpractice) - the state could have pushed the cost of the fix onto them. This was an amateur error by State employees with big egos who wanted their names on the project.  Those of us in the industry rolled our eyes. Tolls to cover the additional debt will be extended much longer and state-wide gas taxes have been raised 11 cents to cover these and other cost overruns on transportation projects in the state. 

Governments do not seem to have a good track record for successfully managing large and complex projects. The costs for mismanagement end up being paid by everyone but those who are responsible. So, Biden’s announcement about spending trillions on infrastructure seems like both good news and bad news. More jobs and much needed infrastructure, but also more waste from mismanagement.

The good news is that another way to deliver at least some of these projects is through public-private-partnerships, or “P3” projects. Here is the difference. In a conventional project, the Government contracts with an engineering firm for a design. The Government then awards the contract to the lowest construction bidder, who immediately finds reasons to claim for delays and change-orders because of design errors or differing site conditions. There is a lot of finger-pointing and in the end the attorneys are the main winners. In a P3 project, investors, engineers, contractors, and operators create a Partnership and compete to finance, design, build and operate whatever asset needs to be built. It is basically a performance contract. The Partnerships must do all the due diligence on their own, and they are responsible for performance of the asset for a defined period of time. Here’s an example. The main airport terminal at LaGuardia needed a major uplift and the Port of NY and NJ decided to go P3. Their requirements were straight forward. Bidders would agree to Finance, design, construct and then operate the new terminal for 35 years and then hand it back to the Port. The successful Partnership would need to complete the project while the airport was operating without disruptions to existing flight volume. The Partnership would need to negotiate leases with each airline and services concessions like stores and restaurants as the only way to service the debt from their investment and cover operating expenses. I was on the team that was successful. The proposal took almost year to prepare, involved over hundred people and the partners spent millions of dollars, all for the opportunity to bid with no guarantee of award. We were responsible for every kind of risk from design, construction, cost, weather, labor, regulatory, supply-chain and commercial. And we had to compete on the design. The Port’s need for expertise and the risk they would take was essentially pushed to the P3 Partner.

These kinds of deals usually include buy-out options, where if the asset (bridge, toll-road, airport, etc.) is successfully performing financially, the Public (i.e. Government) partner can buy out the Private partner at some predetermined valuation. The Private partners generally favor this, as this is where they see the highest returns, and it frees up capital to pursue what they are good at doing: developing more projects.

P3s are not risk-free of course, and any Internet search on troubled P3 projects will provide examples where they did not turn out well. But many believe with the abundance of private capital looking for solid investment-grade assets, combined with the pent up demand of new and improved infrastructure, make P3s an attractive alternative to traditional government mega-projects that end up mostly feeding attorney’s coffers.