Roundtable



More for Less: Project Delivery in a Challenging Economic Environment

Roundtable features senior practitioners engaging in open discussion on the most pertinent issues facing the infrastructure industry both today and tomorrow. This edition features perspectives from David Earley (North America), Simon Lawrence (UK), Ian Scholey (UK), and Phil Williams (Australia) on project delivery in challenging economic environments.

Rolando Amaya (RA): Over the last 10 to 15 years, how have funding mechanisms for transportation infrastructure evolved or changed in your respective regions? In that same time period, what changes have you seen in public perception regarding the need for allocating resources towards transportation infrastructure?

David Earley (DE): In the U.S. market over the last 10 to 15 years the primary source of transportation funding has been the gas tax, both at the federal level and at the state level. The gas tax over that time period has dramatically underperformed. Revenues for the Highway Trust Fund (HTF), the federal transportation fund fed primarily by the federal gas tax, have not been sufficient to fund the current federal transportation programs and, as a result, the federal government has had to supplement the HTF with general funds. Needless to say, there is much demand for new revenue sources. 

The projects being built these days tend to be from regions or states that have stepped up and created new revenue sources. The current trend focuses on packaging a new local sales tax with a comprehensive infrastructure program. Using the sales tax these regions have been able to create programs that are not dependent on federal funding. This is important given the uncertainties surrounding the future of federal funding and resistance to gas tax increases. 

Ian Scholey (IS): The gas tax in the UK is larger than that in the U.S. Also, the gas tax goes into a general tax fund with no link between what’s spent on transport infrastructure and gas tax revenues. Another major difference is we don’t have the concept of state funding. As a small nation, that wouldn’t work here. For infrastructure projects, there’s no regional or local government funding of major infrastructure projects. Local funding may happen at a very small level, but that typically serves as a set up for major infrastructure.

Phil Williams (PW): In Australia we’ve got a similar situation to the UK. Taxes go into the general revenue fund. The funds are then allocated at the state level. The specific allocations of funds vary greatly by state. As for the wider aspect of transportation funding, we’ve got the usual separations between state projects and federal projects. In the past, there has been a focus on state based funding of infrastructure. Recently the states have faced funding pressures similar to those mentioned by Dave. Federal funding has increased to offset the decreases in state spending. 

DE: Another trend that we’re seeing is the growing appetite to link economic development to the infrastructure that would promote that development. This is done through value capture either through tax incremental funding (TIF) or a dedicated contribution up front based on a development fee or a special surcharge. A variety of different mechanisms are being used to do that. We’ve helped a number of cities and transit agencies to negotiate funding from the developers for projects includinga $50 million contribution to a metro rail project in the Washington, DC area. Value capture is actively being looked at now in a variety of rail corridors particularly as a means to create a local matching source of federal funds. The concept of value capture is gaining popularity. I understand that we’re gauging the feasibility of using value capture schemes for some of the work that we’re doing in the Middle East as well. 

IS: A number of large businesses are currently contributing towards the funding of the Crossrail Project here in London, so you can say that we have our own value capture scheme here.

Simon Lawrence (SL): The business funding for the Crossrail Project is actually helping the project through the change in government as it is very difficult to backtrack on that funding scheme.

IS: Yes, that’s right. In the UK, when you have a change of government, you can stop schemes in their tracks. The business funding for the Crossrail Project has helped because a large sum of money has been put forward by the businesses that are going to benefit from the scheme. This helps to keep the momentum going through the aftermath of the elections.

PW: In Australia, recently we’ve had a change of government in several states (who are largely responsible for infrastructure spending) and we’re seeing the same thing happening. In some areas, programs are halted while in others we see the initiation of significant infrastructure programs. For example, an election promise has expedited the North West Rail Link in Sydney. So yes, it’s the same issue. Often infrastructure programs don’t survive with the change of government.

Conversely, we are also seeing efforts to coordinate federal/state funding with Infrastructure Australia, requiring the states to submit detailed proposals before priorities and funds are determined.

SL: We have quite a large number of private finance initiative (PFI) projects in the UK that have to do with transport, and the majority of them are roads. They have been quite successful for us.

IS: Yes. PFI projects in the UK are equivalent to public-private partnership (P3) projects in the U.S. However, PFI is slightly different here because U.S. schemes tend to include state or the government funding along with a long-term construction, and then operation and maintenance contracts. We have the same long-term contracts but there’s not normally any state grant that goes into it. So funding for PFI projects is strictly private. 

Since the onset of the recession of 2008 there’s been a lot of criticism of the number of types of PFI contracts that are now out there and there’s been some scare stories here about hospital trusts. We’ve had quite a number of large hospitals being built under the PFI model and some people have calculated how much of the health budget is now being spent on repaying the loans on these major schemes. So PFI projects have been under a fair amount of criticism. However, our new government seems to be still quite keen on them and we’re hopeful that there may be a resurgence because it’s probably seen in the UK as being one of the few ways of bringing major schemes through to construction at the moment.

PW: In Australia we’ve had some experience with that, but not so much the P in the PFI. Currently, our P3s are more like those in the U.S. In prior days our P3s resembled PFI, however, we’ve seen a shift towards government financing that has created a mix of public and private funds. That’s been a general trend in Australia. Our experience with P3 has been very mixed. This is largely because of differing state government preferences for P3s, although the market is now maturing across most states and being designed to be appropriate in each sector. There is ongoing interest from superannuation funds to invest in stable assets with predictable revenues, which are generally older established assets. This offers government the option of supporting the initial development of infrastructure followed by the sale or lease of established assets.  

IS: Another major difference between the U.S. and the UK is that you (U.S.) have quite a history with toll roads. In the UK, we have one toll motorway, the M6 toll. We have a small number of toll bridges. As such, we don’t have schemes that can fund themselves from toll revenues.

DE: I think that’s an excellent point. Tolling is something that we’re going to see more and more of. You do have the congestion pricing vehicle in the UK.

IS: Yes, but that only covers the London area. So while it has quite a high profile, it covers a very small area. We don’t have any of that on our major motorway or trunk road networks.

SL: It appears that in the UK people can accept paying for a crossing toll. People don’t mind paying a small value to go over a bridge. We haven’t come so far regarding general roads charging. Paying for a general journey seems to be something that they feel they’ve already paid for through their gas tax or annual tax on their vehicle.

DE: We’re seeing a broad increase in the interest of tolling and utility pricing for transportation infrastructure. Over time that will continue to increase. Right now we’re working with one state to help them get the approval from the federal government to toll an existing interstate freeway, something that has been free since its inception. Also, there are a number of managed lane projects, which essentially put a toll on that last bit of capacity in a corridor and price it based on the amount of throughput or congesting on that facility. Those have been successful within the U.S. as P3 projects, with both Florida and Texas using a revenue stream to leverage private capital, while transferring the risk of delivery and some of the revenue risk to the private sector. Our practice has had the good fortune of working with a number of different states on that, including Washington which is starting a broad ranging toll program. Recently in Maryland they have increased the tolls to help them pay not only for necessary new capacity but also to cover a capital preservation program to rehab their facilities.

That brings me to a point on the public perception regarding the allocation of funding to infrastructure. I believe that the public has some understanding of the initial capital costs that go into these facilities, however, I believe that they have a very poor understanding of how much it costs to actually maintain and operate these facilities. Feeding Simon’s point regarding users believing they’ve already paid for the facility, upon initial completion, the public believes the facility is done and shouldn’t be paid for again. What we’re seeing is that with these assets growing older, the cost of maintaining, rehabbing, and restoring them is becoming an increasing percentage of our limited financial resources. The public really doesn’t have the understanding of that. As was the case in Maryland, the more that we’re able to communicate with the stakeholders as to how much it actually costs to provide this infrastructure, then we are going to get acceptance to increasing and changing the revenue models.

IS: There has been a problem with that over here as well. The construction industry in the UK is getting beaten up quite regularly regarding the high costs to build and maintain assets. As previously stated, our gas tax is very high. And everybody pays an annual license fee for their vehicle. So their view is they are paying every time they drive a mile because they’re paying a high tax and they expect that. Unfortunately, that money doesn’t go to infrastructure, instead it goes to fund health service and education and all those other things. So there is, you know, quite a lot of resentment that the money they have to pay out in order to drive vehicles isn’t then being recycled into infrastructure.

PW: We’ve had similar experiences here in Australia as well. Here, people do feel that they’ve already paid for a whole range of government programs. The general tax level in Australia is pretty high, 40 to 50 percent at the higher rates. A lot of people are covered in that. The public has the general feeling that they’ve already paid for a whole range of stuff. That being said, we’ve got a larger number of examples of toll roads and utility pricing than in the UK. However, we probably still haven’t made the connection between what users pay and what it really costs to use these facilities. Thus, the public has a very distorted view of the way it all really works. One probably can’t blame the users for this as it is also complicated by the many different layers of government. Also, often there’s no real alignment between the governments when it comes to measuring infrastructure projects. In the end, it encourages us all to wonder whether we’re getting our dollar well spent. The Federal Government, via the Henry Tax Review, has floated a national road pricing model, which is not expected to be implemented any time soon.

It does however raise the prospect of raising a broad based tax on usage, which would achieve greater scale to revenues. There is also discussion about network pricing for Sydney’s orbital network, where revenues would be raised from across the network. 

(RA): What challenges are you currently facing from a funding and public perception standpoint? How can we, as consultants, help get past those challenges to get projects delivered? 

IS: In the UK, there is a view from the government that the road network is fine. The government is trying to encourage people not to drive and to utilize public transport or work from home. So there is a bit of a pullback from the government saying we don’t need to build new roads or add capacity because we are trying to cut back on car use, be it for environmental or other reasons. There’s also a push from members of the public who still need to drive reliably to their workplace. There is a lot of tension between those sides. We’d be interested to know if the other regions are experiencing the same tension between the government and environmentalist and the road users. And are there any new ways to deal with that or to raise the issues in an easily understandable way while trying to drive forward some solutions?

 

PW: Those are really good points and generally we’re experiencing the same here in Australia. While we’ve got common things at issue, I’d like to come from a different angle. In large cities, congestion is always an issue. In Australia it’s no different. Our larger cities are generally very large in the sense that they have quite a large footprint. They also have growing congestion problems. This is a major issue in Melbourne, Brisbane, and Sydney. While this conversation has focused widely on roads, I think we’ve got a real opportunity to help government clients satisfy their congestion problems by looking at intermodal transportation solutions. This is quite important for Sydney because one of the potential solutions there is managing their congestion with a combination of heavy trucks, container and freight logistics. This has not been something that’s been easy to tackle in any state in Australia, but the growth in export markets for Australia is very significant (in resources and in container freight).Container growth in Australia is very significant. This is increasing the number of large trucks impacting passenger traffic in local areas. The integration of major truck routes with rail transport and freight is one of the larger issues that we’re looking at right now. This also involves some of the relationships between state and federal funding and their respective infrastructure programs. This is a great opportunity to bring a number of those programs together and one that we’ve been involved in at some level and are looking at helping further. By looking at some of the intermodal activities, you can take the pressure off road funding by utilizing rail transport or intermodal transportation. The NSW Transport Minister emphasizes ‘corridor planning,’ rather than specific mode planning, which is an attempt to coordinate between modes throughout the network. Transport for NSW will coordinate the whole of network planning for the first time in Sydney and NSW.

SL: There’s an issue in the UK regarding infrastructure investment to drive growth. I don’t think it’s particularly clear in the government’s mind what sort of growth they get if they spend money on transport infrastructure or other public infrastructure. Therefore it’s difficult for them to trade off those spending benefits and that’s potentially something we could try to help them with.

DE: We’ve been using tools to do just that. We’re helping regions understand the economic impacts of their investment programs, both on a construction basis and on an ongoing basis. Cost benefit tools have been increasingly required to justify funding from government sources. We’re seeing a trend moving toward a competitive federal funding approval process. For better or worse it seems to be a direction that we’re going in. A couple years ago we had a major stimulus effort. Some of the methods that were part of the stimulus program from a few years ago have stuck around and seem to be becoming an important part of the ongoing transportation funding program, including a competitive grant program based on measures of performance and benefits. Another thing we’re trying to do is get involved in the policy debates both in the industry and also directly with the stakeholders. Some of our team members have been participating on national panels at the highest levels regarding transportation policy. We’ve been supporting research efforts in new areas of funding like mileage based user fees. That’s something that we’ll continue to do. We’ll continue to try to help clients learn from best practices of other places. That’s one of the reasons why clients like to hire consultants because they can bring ideas, kind of seed them from other places within the market place. With 50 different states here and many different regions, there are many different models that we can use. That really supports the concept of having a consultant on the team.

(RA): Dave mentioned the trend of using economic and performance based criteria to prioritize projects in the U.S. Are you seeing that trend in the UK and in Australia as well?

IS: On the roads side, there isn’t really much activity aside from adding lanes to existing motorways, so it’s a bit hard to say. For rail we have a plan to build a new high-speed rail line to stimulate growth in the northern part of the UK. They are currently trying to build a model that will justify why we should construct a major new rail network up the spine of the country.

PW: We’ve got quite a long-term plan that we’re doing. At the moment we’re particularly focused on the government’s shovel-ready projects. The focus is more on what they can spend if they do spend and how quickly it will flow through into the economy. That’s been a long time in the planning process. There will be a number of smaller projects that are easier to promote quickly that will face little opposition. The Federal Government is however promoting high-speed rail as a solution to national productivity, a project which is unlikely to be built any time soon but may serve to promote regional development.

IS: Agreed. I think they will hone in towards what we’ve termed quick win projects. The motorway widening program that they’re taking forward at the moment is one of those they’re seeing as something that could be done relatively easily and cheaply but should bring significant benefits.

PW: I think Australia will experience what the UK experienced in terms of different governments and varying levels of support. Currently in Australia we’ve got a multi-tiered economy. Consider our growing mining resources sector. On the East Coast you’ve got metallurgical coal for export. And on the West Coast you’ve got iron ore, which is a massive market for Australia. We’ve got great pressure on government funding programs, infrastructure programs in particular. Thus, what we’re seeing here is a shift towards private funding of infrastructure for those needs. The demand from the miners, which translates through their capital programs, is absolutely enormous. As a result, it’s not a question of funding for the miners from the private sector. It’s more a question of how quickly they can get things done to meet demand. That’s had a spillover effect on the economy and there’s been a big debate on a mining tax which is effectively looking to redistribute profits back into the public sector. That has highlighted the differences between private and public sector funding and where the prioritiesare and then its broader benefit back into the growth of the economy. This really highlights the stresses that are occurring where you’ve got a rapidly growing resources market, which is just not matched by the rest of the economy. Mining certainly has big multiplier effects back into the economy, but we’re not seeing that in terms of infrastructure built outside the mining area. Where we want to help our clients more is linking our infrastructure expertise to the resources market. It’s a big challenge for us and I think it’s a great area where we can help in this huge demand.

(RA):  As a worldwide consultancy, Parsons Brinckerhoff is in the unique position of having expertise in a great number of international markets. What lessons learned would you share with other markets? Are there any international lessons learned that can/should be applied to your particular market?

DE: Let me just say that that last example of linking the resource industries to the infrastructure development is something that we’re seeing a need for in the U.S. market. There have been a couple of examples in the U.S. where coal resource companies arranged for and funded expressways. I recently learned of an example in Alaska of a similar nature and once had the opportunity to advise on a project there, which would serve the resource industries in Alaska. I think there’s some interesting lessons that we might be able to take from Australia to help us there.

SL: I think in the UK the pressure is currently on trying to reduce the cost of construction. When we looked into that we found that the available data was quite poor. Sharing international construction benchmarks is something that would be very useful to us. Drilling down to understanding the differences in unit costs for road and rail projects would also be very beneficial to use. High speed rail is a good example of that. The aforementioned high-speed rail project costs seem to be quite high in this country when even compared to Europe—we’d like to know why. While that seems pretty fairly basic, it’s not as easy to do as one might think.

IS: We’ve been in discussions with one of the contractors who just won a concession to build a new high speed rail line in France. This is being done as a P3 project with a 60-year contract. This is far longer than the PFI contacts we have in the UK, which tend to be 25-year, maximum 30-year, contracts. It’s an interesting model because they’re able to sell the fact that they are there for the long term and will take an interest in the environment surrounding the project. We’re quite keen to see whether we can explore that over here

DE: Until recently, in the U.S., the P3 model has been very long term. There’s one deal that’s 99 years. We’ve just published the business plan for the California high-speed rail program. The whole concept there is something that we should all think about in terms of implementing a comprehensive business planning approach to a project. As we all work within a very large engineering firm, sometimes the engineering element gets a little farther in front and the project development needs to catch up. However, I think we’re increasingly seeing recognition from clients that it takes more than just smart engineering solutions to get a project built  As we mentioned earlier the politics can get in the way of projects sometimes. That happened in New York when they canceled the ARC project. A lesson that we took away from the ARC project is that we needed to be more active and involved with the strategic issues around projects much earlier. Once we got on the wrong side of the strategic issues, we were powerless to help and the project went down. The whole concept of strategic business planning, taking a comprehensive look at the entire enterprise as a project, and then linking it to stakeholder needs is something that we believe can make an impact.

SL: Moving back to long-term concessions, I’d be interested to understand if there was resistance to going to such a long-term concession arrangement and how you overcame that. It will be an issue if we were to try and promote that model in the UK.

DE: There has been resistance. In the U.S. the concession terms have arranged from 50 to 99 years for road projects. I think the 99 years is a one off and won’t happen again. The Indiana toll road is leased for 75 years. I think that is longer than most governments are comfortable with. Even 50 years is very long term, some people are a little more comfortable with that. They realize that it takes time for that to go. In the past, there’s been a fair number of water P3s that are in the 20- to 30-year range. The U.S. has a municipal debt market that’s very comfortable with long-term obligations in the 30- to 35-year range. Once you get past that, you’re moving past the norm.

IS: One of the big problems in Europe has been the fact that lenders aren’t interested in long-term lending. It’s currently all short term. We even struggled sorting out a 25-year concession a few years ago. Lenders were looking for very short-term lending—six to eight years. It has been a very difficult market over here and with the news on the eurozone at the moment, I won’t say it’s improving.

PW: Back in Australia another way of privatizing is to issue 99-year leases. It’s essentially privatization. But ultimately the lease is in the government’s hands. I think we’re going to see a bit more of that in the infrastructure sector. It is possible that we’re going to see an extension of the P3 from, say, the utilities into transportation and infrastructure generally.

Regarding strategic business planning, I couldn’t agree with Dave more. The ability to connect our dots with strategic insights is an opportunity for Parsons Brinckerhoff generally in its drive to be even more client focused. We’ve got a lot to bring to the table for our clients. We can stimulate new insights and actually piece together ideas because we have multiple insights and perspectives that are lost when you look purely at a problem in isolation. For example, consider the delivery phase, which is pretty significant, where you can miss a lot of the value aspects right up front. This is where a lot of the opportunities break down when finance gets tight or risk aversion increases. The ability to sell the bigger picture is going to be key for us to engage with clients. It’s a great opportunity for us.

(RA): In your region what changes do you foresee in the way we fund transportation projects over the next 10 to 15 years? And do you anticipate more private sector participation in funding transportation infrastructure?  

IS: Despite the recent bad press, I think we will see more private sector participation in the UK over the next four or five years. Ten to fifteen years are more difficult to predict.

SL: I don’t think we’ll see a road-charging scheme in the UK in 10 years. That’s not consistent with the government’s current view. With roads it’ll be more of what we see at the moment. In rail I think we might see High Speed Two come to market in that term and we’re quite optimistic that they may use a concession to deliver that project, although that’s not the current plan. In that case, we would certainly want to get some learning from the projects in the U.S. in terms of their longer-term concessions.

PW: We’re going to see more private sector funding in Australia. The feeling is that P3 will be coming back in the short term. We’re going to see that private sector funding is in other sectors, for example, utilities and other infrastructure areas and use that model for transportation in Australia. We’re going to feel the pressure for that because tax rates are already fairly high. There’s going to be a battle to look to extra government funding for infrastructure spending. This will force innovation in our funding mechanisms. Obtaining capital doesn’t seem to be an issue, depending on which sector you’re looking at. There is apparently a reasonable amount of private sector capital around. The issue is with our confidence in the private sector. In addition, government, particularly in the states, is looking at introducing competition in the operational aspect of public service provision, a move designed to reduce the fiscal burden of supporting public sector monopolies. Contestability aims to reduce the cost of services into these sectors and encourage new participants in the market. It’s an interesting aspect because it changes the context in which CAPEX P3s are bought to market, opening up opportunities for owner/operate/maintenance leases within government owned networks.

DE: In the U.S. I think we’ll definitely see an increase in a user-based funding, primarily through tolls and managed lanes. That will provide the opportunity for additional private investment in infrastructure when there’s a risk allocation that’s appropriate to that investor. In the U.S., we have a pretty well established tax exempt funding mechanism that provides capital to government agencies at low cost relative to the private debt markets. Therefore, there has to be some sort of risk allocation that creates value to the public sector to welcome that private sector investment.

The other thing that’s happening in the U.S. is broader legislative approvals. Now approximately 60 percent of the states have some sort of P3 framework in place. Generally, they’re each unique. Over time we’ll see the evolution of standard documents, standard processes, more experienced advisors, and more experienced bidders in the U.S. market. While we lack the single market like you have in the UK, over time I think it’ll start to behave a little more regularly across the country. That should facilitate additional investment because it’ll reduce the cost and risk associated with each procurement. There’s a long way to go to get there, but I do think the primary vehicle to get there will be tolling. In transit, we’ll continue to see more connection between real estate/economic development and transit funding. Lastly is regional cooperation. That’s an area that we can help with. Some of the solutions that are not driven by the federal government need to be driven by multiple states or multiple jurisdictions at the junior government level. That’s something that is difficult and provides an opportunity for us to help them out in order to bring to bear, you know, a larger revenue base for a project. That’s something I think will happen in the various jurisdictions around the country. 

 

Image Header Source: WSDOT (Creative Commons)