State report finds many positives, some limitations to Presidio Parkway Project

In its December 9, 2010 letter on the Presidio Parkway public-private partnership (P3) project in San Francisco, the state Legislative Analyst’s Office (LAO) concludes that the project has many valuable features. Specifically the LAO finds that this P3 project, which will dramatically improve the southern approach to the Golden Gate Bridge:

1. Makes significant public safety improvements,

2. Provides environmental benefits,

3. Provides aesthetic benefits,

4. Saves the state millions of dollars in upfront costs, thereby freeing up transportation funds for other needed projects,

5. Shifts substantial liability from the state to a private entity (concessionaire), which is contractually responsible to promptly design and build the project. If the concessionaire fails to perform on-time or to specified standards, the concessionaire will suffer penalties,

6. Gives the concessionaire the flexibility to solve construction problems quickly. Here the LAO is rightly contrasting this P3 with Caltrans’ normal non-P3 system for delivering transportation projects, a system in which resolving construction problems can be a time consuming, bureaucratic process.

7. Gives the state more certainty over the project schedule,

8. Gives the state more certainty over the project’s cost, and

9. Assures maintenance of the project by the concessionaire for 30 years. This is important, because in the annual state budget fight the legislature regularly gives low priority to maintenance of our state highway system. In contrast, under the P3 agreement Presidio Parkway will be well maintained regardless of what happens in the annual state budget fights.

The LAO finds some limitations to the Presidio Parkway P3 project, but those limitations are because in the LAO’s view, the P3 arrangements do not go far enough. There are four areas where the LAO makes this type of comment:

First, the LAO notes that Presidio Parkway does not rely on toll revenue financing. Since the project already relies on toll revenue for part of its financing (i.e. that portion of the financing provided by the Golden Gate Transportation District), the LAO is really saying that the project should rely more on toll revenue. That’s OK to say, but the fact is that with other revenue already available for this project, there was simply no need to charge more tolls.

Second, the LAO notes that under the P3 arrangement the state retains some risk (that there may be unknown environmental, hazardous waste and archeological findings), but the concessionaire is assuming risk—as a practical matter a much higher risk—for any disagreements or conflicts in the interface between design and construction.

Third, the LAO recognizes that under the P3 the state gains more certainty over the project schedule but notes that it is not absolute certainty. There are still some events—events beyond the control of the concessionaire—which could extend the project schedule. That’s true, but it is also true that there is simply no such thing on the face of the earth as a contract, which eliminates every conceivable risk that could delay a project.

Fourth, the LAO recognizes that under the P3 the state gains more certainty over the project’s cost but notes that it is not an absolute cost guarantee. So although the LAO is correct that there are still some events that could increase costs, it is also true that with the P3 there are fewer potential events of that sort, than if there were no P3.

So in these four areas the LAO comments that the P3 should be greater than it is. However, there are good reasons why P3 agreements (which are now being used more and more throughout the world) only go as far as they do: In any contractual arrangement to deliver a complex, billion dollar project, there will always be an allocation of some contingencies to the state and an allocation of other contingencies to a concessionaire. The state still has and must have ownership and control of the state highway system (Presidio Parkway will be a part of that system), and the state should never relinquish its fundamental responsibility to oversee and control our basic infrastructure. Of necessity P3 agreements reflect those divisions of responsibilities and also those unknown contingencies in the world, which are impossible to completely eliminate in advance.

Right at the very end of its letter the LAO makes a brief comment on the alleged value of “a more traditional procurement approach.” However, that comment is of questionable value, because the LAO makes its comment without discussing at all the tremendous risks associated with Caltrans’ traditional ways of delivering projects: project delays, cost overruns, slow decision making, lack of accountability in the civil service system, lack of maintenance, more liability exposure, more overhead costs, no private entity to hold accountable and the long term cost of state staffing commitments.

So in summary, the LAO perceives many public benefits to using a P3 on the Presidio Parkway Project, in four areas comments that the P3 should be greater than it is and at the end makes a brief unfortunate comment about “a more traditional procurement approach” without discussing the many drawbacks associated with that approach.

By Paul Meyer
Executive Director of ACEC California
December 21, 2010

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