Delay and Derailment: A Problem that Can Be Solved

P3 Bulletin

Delay and Derailment: A Problem that Can Be Solved

 

Michael Likosky

Turmoil in Asia, uncertainty in Europe, political risk in Africa and Latin America, and largely saturated markets in Australia, Canada and the UK will increasingly drive investors to our shores. Plummeting oil and gas prices, too, make our P3 market a safe haven where decent rates of inflation-adjusted returns can be had.

However, the P3 market is increasingly plagued by project delays and cancellations. The problem can be the transition from one governor to another, as happened with the ARC Tunnel, the Purple Line, Illiana, and US 460. At other times, it can be labor groups, as has been the case with a number of projects including Presidio Parkway, Pennsylvania Turnpike, and Alligator Alley, as well as the prospects of P3s in states like New York, New Jersey and Illinois. Often, we hear talk of budgets impeding projects such as with California’s ARTI and High Speed rail, as well as Project Neon in Vegas.

Surprisingly, efforts to embrace public interest concerns can itself cause its own difficulties and this development is obviously an industry-wide concern.

A path to successfully closing on politically troubled and complex projects exists. Nonetheless, when it comes to the fiercely competitive expensive world of P3 bidding, I, as a firm seeking to win the deal, am under no obligation to unclog a political artery so that another bidder can secure the deal.

The trick then, from a commercial standpoint, is to solve these recurring challenges of delay and threatened cancellation in a way that advances a firm’s own commercial interests rather than those of its competitors.

Over the last 17 years, I have been doing just that for clients, advising all sides of the table on advancing their interests within contested projects.

Unfortunately, some groups have been out hunting for projects, seeking to delay or kill them. Others want reforms, many simply want to weather the storm. Some try to accelerate projects facing headwinds.

I can say from first-hand experience that not only can project backers successfully defend against attacks, they can arrive at mutually advantageous solutions with groups targeting projects.

Many of these challenges were faced in my role as P3 expert to the Clinton Global Initiative. The country’s leading labor unions, the American Federation of Labor and Congress of Industrial Organizations and American Federation of Teachers, had made a commitment to President Clinton to move $10bn into American projects. All but $2.4bn has been placed.

Successful engagement with stakeholders also requires boots on the ground. However, nearly all outside groups active locally on projects have formal or informal links to national networks or organizations.

For this reason, finding mutually advantageous arrangements for overcoming bumps means having a sophisticated understanding of these interlocking groups as well as deep relationships.

Addressing the risk that a governor or mayor, who has been a political champion of a project, will lose office is another recurring situation. Oft en his or her successor may either run on a platform against the project or simply seek to stop a tunnel, for instance, or other project in its tracks.

Like other political complexities which lead to a stalling or a cancellation of a project, this one is entirely predictable. It requires proactive outreach before such a politician takes office. This underscores the need to not only view a local political champion as a precondition, but an appreciation that the current political champion may not be the ultimate one that gets the project done.

Having advised the Governor of New Jersey on projects, I can appreciate this dynamic when it is poorly handled, as happened with the ARC Tunnel. My experience advising the California Governor tells the exact opposite story, especially tied to the high-speed rail project. Sponsors must have a strategy in place that productively engages in scenario planning and, importantly, makes life easier on a fresh politician who might be inclined to back a project but finds themselves backed into a corner.

All of the problems that threaten to derail projects are entirely predictable. They can be solved. Understandably, industry leaders are, however, simply throwing up their hands in frustration. They turn to the local governor or mayor spearheading the project for relief. This approach has rarely produced results. Too frequently, P3 players ask public officials to deliver on something outside their control.

Infrastructure funds, design/engineering, construction and law firms are like spectators in luxury box seats at a ball game cheering on the local public agency team – often against labor, environmental or transparency groups. Oftentimes it is incumbent governors keen to kill the pet project of their predecessor. Local legislators frequently come after projects on dollar and cents grounds, sometimes other interests are also at play.

We should join the fray: mutually advantageous solutions can be had, especially because our P3 community excels at solving some of the world’s most complex financial and engineering challenges.

This prevailing approach by bidders and concessionaires, to sit on our hands and watch while investments are vulnerable, is ineffective. It makes bad business sense, again for such sophisticated effective investors and some of the best design/engineers in the world. Especially when effective off the shelf and bespoke solutions produce bottom line results.

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