Alternative Project Delivery: iPod or New Coke?

In August 2014, I presented a contrarian view of “Alternative Project Delivery” focusing much of my skepticism on large Public Private Partnerships (aka P3 or PPP or Mega P3) at the ASCE Pipelines conference in Portland Oregon. The proceedings of that conference included a summation of my presentation published in the form of a scholarly paper, with the assistance of Alex Gibson. (While the paper is available at many libraries who keep such scholarship in the “racks,” it can also be downloaded by clicking here). My paper has since been cited by others who have expanded on the necessity of carefully selecting the project delivery mechanism. In light of the ever favorite topic of infrastructure construction “stimulus” and the use of P3’s to deliver that kick in rear (click here or here or here for the latest round of such headlines), what follows is my take, mostly repeating what I was saying back in 2014 and what I believe remains just as true today:

In 1985, Coca-Cola introduced a “new” formulation of its trademark beverage: New Coke. New Coke was introduced after Pepsi–a sweeter formula of soft drink–began to take market share from the iconic Coca-Cola. Exactly seventy nine days later, executives at Coca-Cola announced the return to the original formula after its utter failure and the appropriate (in this author’s opinion) revolt of Coke loyalists. New Coke, it turns out, should have been named Bad Coke. Forevermore, New Coke lives in business schools around the world as an example of a day that will live in marketing infamy.

In 2001, Apple introduced “the Walkman of the twenty-first century” when it unveiled its iPod. The iPod was introduced to solve the problems other mp3 players had, namely the functionality and ease of use. The iPod, it turns out, was undersold by Apple as the next Walkman. Not only did the iPod revolutionize how people around the world listen to music, but it lead to the development of the smart phone we all have today. The iPod, in my humble opinion, may well be the most impactful consumer device ever delivered to the market.

Alternative project delivery mechanisms, such as P3’s, have and continue to receive disproportionate amount of coverage in both scholarly journals and the press when compared to the total value of projects

brought to market via those mechanisms. Moreover, their record, whether measured by claims, bankruptcy filings, or cost per unit of product delivered, does not support the proponents claims that these alternative delivery mechanisms are the cure to what ales America’s infrastructure.

Moreover, in the author’s opinion, there is remarkably inconclusive data on the long term success of the “mega P3’s.” Many of the so called Mega P3’s are only a few years into 20, 30, or even 50 years concessionaire agreements. And already we have seen numerous participants in this market leave it. (See here for example). And before proponents of P3’s start to bombard the author’s email or comment section below with criticism of my position, consider that the World Bank has published similar concerns and taken the same position as I do here … albeit four years after I gave my talk at the ASCE Pipelines conference in 2014. (Click here for an example of the World Bank’s position).

If the reader will allow the author a little healthy skepticism, one should wonder whether the pro-P3 propaganda is driven more by the merits of the delivery model or more by consultants, investment bankers, and, yes, even lawyers who generate many, many times more in fees putting “novel” P3’s together instead of more traditional design-build or even the oft criticized but time tested design-bid-build project. But surely, I digress.

To be sure, there are examples of P3 successes … so far … and their are scenarios where P3’s make complete sense–perhaps even more scenarios where P3’s make sense for the builder or design consultant who does not have to either pay the exorbitant transaction costs or hold a 30 or 50 year concessionaire agreement. And in these cases, the author has no objection to P3’s or any other creative solution to a very real problem. But in these cases, it should not be lost on the public or the agents implementing these measures that, in the end, the cost of improving infrastructure is what it is: labor + equipment + materials + a return to those who own those assets. And in most cases, what P3’s really represent is not a solution to improve the process by which we deliver infrastructure projects, but a financing mechanism that bypasses many otherwise stringent requirements (put in place for one reason or the other over many years) that are seen as impediments to progress.

There is no doubt that some financial road blocks to otherwise good projects need to be bypassed. There are great arguments that one reason for a failed infrastructure involves the political half-life of our decision makers. The fact that we generally hold state level decision makers accountable every four years makes expensive infrastructure projects designed to generate returns to the public (though, not always in dollars and cents) over the course of a half century or longer great cannon fodder for opponents to make noise about. Accordingly, the promise of infrastructure delivered at reduced or no-cost to the public coffer makes for effective political rhetoric. Enter the P3.

As a financing mechanism, the P3 is often the difference between a 36 month car note or an 84 month note. Just like a car note, the longer the term, typically, the higher the interest. (I recognize that on occasion, short term term bonds yield more than long term) Moreover, the longer you pay that interest, the more you ultimately pay for the car. In fact, the only rationale reason for financing a car for 84 months (if there ever is one) is the lower monthly payment–cash flow. In my opinion, P3’s are no different, as a financing mechanism. The only rationale reason to use a P3 as financing mechanism is to cash flow a needed and otherwise viable project. By extending the period for which the public pays for the project, the decision makers can select the materials and design of the project based on something other than its immediate price tag. The hope is, that by doing so we can bypass the political half-life of political stake holders and deliver a “better” project to the public.

In the end, whether P3’s or other derivative alternative project delivery mechanisms represent something more akin to New Coke or to the iPod remains to be seen. What is clear, however, is that being creative for the sake of being creative is a road to no where.

If you need assistance evaluating potential delivery mechanisms, drafting project documents, or negotiating an agreement, or are on the failed or failing end of a P3, Jones Law might be able to help. Our attorneys have drafted, negotiated, and handled claims on any number of large infrastructure projects, including P3’s.

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