Much has been made about the new model on the block - and for good reason. From sharper pricing, through better risk distribution, to enhancing capacity across the industry, those in favor of progressive P3s have a lot to sell the model on.
But with so few actually out of the gate, some in the industry are flagging up concerns - if not as detractors then as refiners.
“My one concern is sticker shock,” says Robert Alfert, partner at Nelson Mullins, who is, for the record, a proponent of the model as one of many options along the P3 spectrum. “By the time you get to the point of progression, where you are seeking the actual GMP [guaranteed maximum price], you could have been working on this project for six, 12, 24 months - guess who has all the leverage there.”
Those delivering the project need to be aware of this disparity, and while an open book approach does aim to alleviate these concerns, the system isn’t perfect. If the leverage is used, even just for less than a percent premium, on a billion dollar project that's a lot to the taxpayer.
“Once you get to that point of pricing the proposal, you’re committed,” he says. “For the authority to walk at that point could be disastrous, and the contractor knows that. You’re may be paying more for it.”
Interestingly, there is the same concern in the industry, albeit from a converse angle: what happens if a partner really does want to leave that project at a late stage?
“You want to win the project and share some risk, but not work for free,” says one contractor, urging progressive P3s to include a worthwhile pay-off in these circumstances.
An authority will have to strike a balance here that will potentially be difficult, and possibly much more expensive - and this strikes at another potential problem: getting buy-in.
“Selling progressives is an interesting exercise because government likes certainty,” says Alfert. “They want to know what they’re building, what’s the schedule and at what price. When they ask how much it's going to cost, your answer is: ‘I don’t know yet.’”
Concerns around the ability to sell progressive P3s like these are found in different sectors, with P3 Bulletin understanding that that some senior leaderships in public authorities have warned that progressives could set back the usage of any P3-variant.
“In terms of progressive P3s, collaboratives, alliancing, the industry is doing a disservice because you’re throwing labels out there, with no common understanding of definition or intent, to politicians and are muddying the water and confusing people who are responsible for determining project pipeline and implementation models,” says Derron Bain, managing director of Concert Infrastructure, noting that public sector can require new or increased skill sets to manage the new processes and projects. “In terms of social infrastructure, the P3 DBFM model ticks so many boxes and meets so many objectives for both the public and private sectors, with a strong track record too. Progressives are for all intent and purpose unproven in the Canadian context.”
Industry bodies such as the Canadian Council of Public Private Partnerships (CCPPP) are putting in the hard yards in trying to decipher and define what each of the models mean and do. This has been welcomed by all corners of the industry and could alleviate the fogginess of the new models.
However, there are others who disagree with the model on an entirely different basis, anxious about its impact on the industry’s reputation as a whole.
One of the major concerns is that progressives may increase the risk of firms putting in lowball offers to win work - putting overall project success, and reputation, at risk. P3s have always been vulnerable to accusations that bidders are incentivized to make the lowest bid possible, regardless of their ability to deliver for that price (see the collapse of Carillion, for example). But enabling the private sector to put in bids before anyone has come up with a reasonable figure of what the overall final costs might be, could potentially encourage that practice, rather than stamp it out.
“We work hard to make sure that P3s continue to be a strong alternative to deliver much needed infrastructure and that they are structured efficiently,” says Ricardo Bosch, Cintra’s North American business development director. “When they fail, it has negative repercussions for the entire industry, almost regardless of the actual reasons for the failure. For that reason, we see an inherent risks on progressive P3s due to the lack of firm commitment.”
He argues that evidence demonstrates how the competitive element inherent in the traditional hard bid model can drive savings.
“When you see the difference between first and second bidders on a complex project, it is typically in the hundreds of millions range,” he says, pointing to the successfully completed I-66 in Virginia, which saw Cintra’s winning bid come in over a billion dollars under the next bidder and the administration's estimates.
“The I-66 outcome was a success for the public sector,” he says. “If you remove the competition, you eliminate the true need for innovation. And as evidenced by the differences with second bids in past P3 projects, the value of innovation is very substantial. If you had a PDA, the incentives to innovate disappear.”
The competition question is a hot one, with the other side of the debate arguing that the sharpest pricing, and therefore cost, comes if you compete at the latest moment possible - an opportunity that a progressive P3 opens up.
But with more and more entrants joining the market, the traditional competition and innovation argument might actually be heating up further. For example, Acciona bidding on Pennsylvania DOT’s Major Bridge P3 program, Sacyr’s renewed focus on P3, Invesis’ US push and EllisDon’s drive south are all likely to result in significant increases in competition on projects over the coming years - even as the federal infrastructure cash is expected to increase the number of projects coming to market.
Furthermore, Bosch is concerned that some developer-led P3s have run into difficulty when, having promised to deliver a project, they have had issues attracting or retaining contractors - adding that this weak spot could become even more prevalent in progressive P3s.
If contractors are brought on after the project agreements are signed and on a fee basis with no firm commitments for the bid submitted, they aren’t beholden to the success of the project in the same way - a set-up that some believe creates an eventual pressure point that could lead to project failures, as the developers and contractors do not have the same incentives to resolve project issues.
Developer-led progressives are promising to deliver something which they, solely by themselves, cannot deliver - and again the leverage is resting in the contractors’ hands, which could result in less due diligence, less need to truly innovate and less competitive tension in the D&C scope.
Many have pointed to this flaw in the I-495 PDA project, which contractor Transurban exited last year after long delays in onboarding a design & construct (D&C) contractor. The delays and costs have caused a lot of damage to balance sheets of both the consortium and administration - but also the reputation of P3s, which the general public does not differentiate between PDA or hard bid – so the failure of one impacts all.
Instead, Ricardo urges developers to bring contractors in early, have a firm commitment from them, and work proactively as an integrated group to effectively identify and address risks before and during the bid stage.
“You need certain alignment to find the right solutions,” Bosch says. “If you have an already developed working relationship, you find better solutions that minimize issues and maximize opportunities. What we need is to focus on developing strong relationships with contractors, with agreements where all team members have skin in the game. This will drive parties to deploy multidisciplinary due diligence to ensure that Value For Money is maximized and risk minimized.”
There are many factors that will weigh on an authority’s mind when deciding what model to use to deliver their infrastructure. The more the public sector and private sector can understand the mechanics of these models, the more effectively they can be deployed.
Essentially, if the industry is going to live up to one of its most cliched idioms that “P3s are not a panacea”, the same rules will likely apply to progressives too.