Introduction to I-70 East Value for Money Report, December 2013

Macquarie Capital conducted an extensive Value for Money (VFM) analysis on the I-70 East Corridor Redevelopment Project.  The analysis looked at the total cost of delivering various alignments and scopes as well as three different procurement methods.  The purpose was to identify the scope and delivery method that fit within CDOT’s funding envelope and that which represents the best public policy.

Macquarie is recommending that CDOT pursue a “Public-Private Partnership” (P3) to achieve the maximum project scope possible.  The key benefits of a P3 are cost savings, the introduction of lifecycle analysis and the ability to achieve significant risk transfer.

Cost Savings

Cost savings are achieved with greater design flexibility and greater innovation, whole of life cost optimization and schedule efficiencies.  Additionally, Macquarie believes that a P3 will generate significantly more competition as international contractors will participate for a P3 but not a DB.  A P3 will have a broader, more innovative and more competitive procurement process which should lead to more aggressive bids and prices.

On average P3 projects in the US are approximately 15% less expensive than traditional procurements.  Indeed, the Denver FasTracks P3 generated savings of $300 million or 13% of what RTD estimated a DB contract to cost.

The VFM anticipates a 16.6% construction cost saving from a P3 procurement.  These savings can be used to build more scope – perhaps taking the project out to I-225 or be diverted to other critical projects.

Lifecycle Perspective

Under a P3 the private sector partner brings together an integrated consortium which is responsible for the long-term performance of the system. The contract performance payment mechanism is the key to providing a stronger, more effective means of optimizing the Project’s lifecycle costs in a way that meets program and performance requirements.  Performance specifications are designed to encourage the private sector partner to develop and operate a system that is well-operated and maintained, a highway which functions smoothly and offers reliable transportation service.

In a P3, the public sector interacts with bidders on a one-on-one basis, allowing for the bidders to optimize proposals. Additionally, bidders are encouraged to put forth Alternative Technical Concepts (ATC’s), providing an opportunity for project innovation and cost savings not found in a traditional DB procurement.

As an example, the Denver FasTracks Eagle P3 incorporated 17 ATC’s into the project’s scope that saved the RTD significant costs and further reduced overall operations and maintenance expenses.

Risk Transfer

In a P3, operations, maintenance and rehabilitation are fully funded in the P3 agreement.  Asset performance is guaranteed with a performance payment mechanism providing a stronger, more effective means of ensuring performance.  Experience suggests that without a dedicated and committed funding source, there is often pressure to defer maintenance and rehabilitation work in periods of budgetary pressure. Such deferral will typically result in higher and less predictable overall lifecycle costs which could put pressure on affordability.  This is especially important given annual budget constraints that CDOT faces and the goal of preventing further deterioration of the I-70 corridor.

A P3 will result in a fixed price, date certain project delivery.  This enables CDOT to eliminate cost contingency because P3 project teams bear the risks of any cost overruns or scheduled delays.  Because a DB will not guarantee a lump sum date certain price in the same way as a P3, the DB model will need to carry a specific cost contingency in addition to shared and retained risks.  Bid teams will submit completion support packages comprising of letters of credit and performance bonding that is significantly stronger than what is found in traditional procurements.  As a result, P3 projects rarely, if ever, experience cost overruns and are rarely delayed in completion.  In the event there are overruns or delays, the costs are born the P3 team, not the state.

In addition, greater risk transfer can be achieved by transferring risk across a broader range of activities. For example, in a P3, the private sector partner would assume risk across key areas including design, construction, finance, operations, maintenance, and rehabilitation, whereas a DB arrangement would transfer mainly design risk through a more limited range of activities over a shorter term warranty.

Improved value from this type of risk transfer is achieved when the party taking responsibility for a particular activity is better able to manage the associated risks (i.e., the likelihood of the risk occurring is reduced, or the expected cost if the risk does occur is reduced), and when the ability to manage the risk is supported by the added incentive of a long-term, fixed-price, performance-based contract, which includes a payment mechanism with clauses to specifically transfer identified risks to a private sector partner. Establishing a maximum payment, contingent on effective management of these risks by the private sector partner, also adds value by providing greater planning certainty for CDOT.

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