P3 Model in Action

Speed and Savings

A $1 billion bridge rebuild is boosted by new surety claims and liquidity elements. 
By: | November 2, 2015 • 7 min read

The dilemma of limited public sector budgets and crumbling infrastructure may have found a cure. The state of Pennsylvania took advantage of recent developments by surety bond underwriters to help secure an aggressive program to replace bridges around the state.

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Surety bonds are required for work done by government entities, but this is a public-private partnership, so letters of credit were an option. But the sponsor, the state Department of Transportation (PennDOT), decided to use a surety bond program using new elements that included a fixed claims-determination process, and also liquidity provisions to ensure that work could continue during a claim.

The Rapid Bridge Replacement Project (RBR) is addressing 558 structurally deficient bridges across the commonwealth under a design-build-finance-maintain public-private partnership (P3) arrangement between PennDOT and Plenary Walsh Keystone Partners — the joint venture concessionaire, owned 80 percent by Plenary Group USA and 20 percent by Walsh Investors.

“This feature, which is more seen with contractor performance bonds in Europe, reduces the period of uncertainty in relation to a claim from a surety and for that reason it is assessed in a positive way from rating agencies and lenders.” — Michael R. Bonini, director, Public-Private Transportation Partnership Office, PennDOT.

Plenary Walsh is responsible for demolishing the existing bridges, maintaining traffic during construction, and then maintaining the new bridges for 25 years following construction. PennDOT will retain ownership of the bridges throughout.

It is the largest road project in Pennsylvania history.

Most of the bridges included in the program range from 40 to 75 feet in length and are located in rural regions on the state highway system.

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The RBR is the first project to be completed under Pennsylvania’s 2012 P3-enabling legislation.

PennDOT said it chose the P3 structure to accelerate the replacement of the bridges and facilitate efficiencies in design and the construction of bridge components. This has resulted in a 20 percent cost savings over the life of the concession period, compared to PennDOT’s replacing the bridges itself, according to the agency.

Substantial completion of the project is expected on Dec. 31, 2017. Total cost is $1.119 billion; the design-build contract is for $899 million.

PennDOT said the batching of the projects will allow the bridges to be replaced and maintained at an average cost of $1.6 million each versus $2 million each if completed by PennDOT.

Commercial close occurred on Jan. 9, financial was March 18. Construction on the first bridges began this summer, and the bridges will be completed in batches. Substantial completion of the project is expected on Dec. 31, 2017. Total cost is $1.119 billion; the design-build contract is for $899 million.

“The key feature of the performance bond used for the Rapid Bridge Replacement project that is different from more traditional ones is that it spells out a specific process about accepting claims, dispute resolution and how long such a process can take,” said Michael R. Bonini, director of the Public-Private Transportation Partnership Office at PennDOT.

“This feature, which is more seen with contractor performance bonds in Europe, reduces the period of uncertainty in relation to a claim from a surety and for that reason it is assessed in a positive way from rating agencies and lenders.

“For PennDOT, this means a more streamlined process in relation to timely completion of the project and access to this mechanism if the contract is terminated and the design-build contract is assigned to PennDOT.”

New Delivery Method

Surety bonding is “in a state of rapid development,” said Michael Bond, head of surety for Zurich, which was a participating surety in the RBR. “This is a new delivery method in the U.S.

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“The enabling legislation for P3 programs does not necessarily specify surety as opposed to letters of credit or other forms of performance security. Letters of credit have been used worldwide to provide liquidity to a project, but they don’t protect subcontractors.

“Performance bonds also cover payments for labor and materials. That ensures workers and suppliers are covered.”

“The Pennsylvania program is a very creative example of how the public works and surety industries are responding to current needs.” Michael Bond, head of surety,  Zurich

Bond said that the innovations in the RBR program address some of the prevailing concerns about surety, namely the uncertainty of the claims process, and the possibility of untimely payments, that could cause a liquidity problem for the project.

“The Pennsylvania program is a very creative example of how the public works and surety industries are responding to current needs,” said Bond.

To be clear, the surety bonds are different from the public-works bonds or funding bonds that are issued by the state authority and actually pay for the project.

The surety bonds provide performance security that the concessionaire, Plenary Walsh in this case, will complete the project satisfactorily. If there is a default, there would be a call on the bond and the surety would step in to work with the authority and the contractors to complete the project.

“What is new and different is that in a traditional public-works project the government is the owner and counterparty to the contractor,” said Bond. “In the P3 model, the counterparty is a private entity created to execute the project.”

Doug Wheeler, regional managing director for construction services, Aon Infrastructure Solutions

Doug Wheeler, regional managing director for construction services, Aon Infrastructure Solutions

He added that while such a special-purpose entity has some advantages over traditional public-works operations, it also has some proscriptions. Notably, the project is funded on a limited-recourse basis, so if there are cost escalations or unforeseen expenses, the concessionaire cannot dip into the government pockets to cover. There is some contingency, but it is limited.

“This is the next level in construction [risk management],” said Doug Wheeler, regional managing director for construction services at Aon Infrastructure Solutions. Aon was the broker for the contractor.

A European Model

“This alternative project delivery model came out of Europe and into Canada, then into the U.S. There is more legwork up-front, but there are dozens of projects already on board. Pennsylvania is a big proponent, New Jersey is almost there [with enabling legislation], but Governor Christie vetoed the most recent proposal. In New York, there has been a push.”

This is a very exciting time in public works and surety, said Aon’s Grace Drinker, senior analyst of infrastructure.

She stressed that even though the P3 process is different than the traditional design-bid-build approach, “there are still checks and balances aplenty in P3. There have been P3 contracts cancelled because of oversight and scrutiny.

Grace Drinker, senior analyst of infrastructure, Aon

Grace Drinker, senior analyst of infrastructure, Aon

“There is no risk to public safety or the public purse in the P3 process,” Drinker said. “What it does is bring operating efficiency to infrastructure.”

With the P3 approach, she said, “it is possible to have a higher initial cost, but the operating efficiency over the 30-year lifecycle of a project is a net savings. There is a real value for money in this.”

Drinker added that “contractors prefer to use surety capacity to letters of credit capacity to meet lender requirements on projects.”

Wheeler concurred that contractor preference is a big piece of the puzzle. “Surety is more efficient for the construction industry.” He added that capacity in surety is finite, but not a concern.

“Bundling the bridges allows them to be replaced faster and cheaper,” said Steve T. Park, senior associate with Ballard Spahr in Philadelphia, the bond counsel to PennDOT.

Lynn Schubert, president, Surety & Fidelity Association of America

Lynn Schubert, president, Surety & Fidelity Association of America

“The typical design-bid-build process would have taken longer. They selected bridges that could be easily bundled, designs that were similar, so they could fix the most in one program.”

There was equal diligence on the other side of the table.

“We spent a lot of time de-risking the program,” said Sarah Roberts, president of Intech Risk Management, insurance advisers to the concessionaire.

“We spent a lot of time de-risking the program.” — Sarah Roberts, president, Intech Risk Management

“When people hear 558 bridges, the initial perception is that they were not certain it could succeed. But the project is actually easier to manage with a lot of bridges than it would be for a single project of the same size.

“With a single project, if there is a delay, the whole timeline is thrown off. With so many bridges, it is possible to swap out one for another and work around delays to keep the whole project on schedule.”

She is sanguine about the growth potential for P3 projects in the U.S., at least in the long term.

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“I don’t think we are there yet in P3 in the U.S.; there is still a lot of coming of age to do. In this case, the P3 model had a direct benefit to the owner, PennDOT, and indirectly to the taxpayers of the state.”

Lynn Schubert, president of the Surety & Fidelity Association of America, confirmed that P3s, and most public construction in Europe are protected by letters of credit.

“In the U.S., our public construction prefers performance bonds for completion and payment. But the concern of the ratings agencies is the speed with which surety bonds are called upon.

“In the Pennsylvania [project], the contracts include a quick-resolution process. It is a little extra piece, but it is very exciting.”

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Catastrophe Risk

Material Resiliency

New materials, methods and ideas are empowering property owners to rein in their catastrophe risks.
By: | October 12, 2017 • 11 min read

The 2017 hurricane season is one for the record books. Rebuilding efforts are underway, with builders working to make insureds whole again as soon as possible … at least until the next storm comes along.

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And therein lies the problem with recovery in disaster-prone regions. It evokes the oft-quoted definition of insanity: Doing the same thing over and over again and expecting a different result.

So what if we did it differently? What if instead of rebuilding to make structures “like new,” we rebuilt to make them better, more resilient, less prone to damage?

The reality is, we don’t really have a choice. Climate change is ushering in weather systems that are increasingly volatile. Wildfires are raging like never before. Sea-level rise is threatening our coasts, and there’s no way to dial any of it back.

Nevertheless, people will continue to build homes and businesses along the coast. Real estate developers will continue to nestle luxury homes into wooded foothills.

That means communities need to come to terms with the risk and plan for it intelligently.

Michael Brown, vice president and property manager, Golden Bear Insurance

“Natural disasters are going to happen,” said Michael Brown, vice president and property manager with Golden Bear Insurance. “But if we plan and build communities around the idea that something bad may happen someday, then that community can bounce back faster afterward.”

In any natural disaster, he added, “the property damage is extreme. But the biggest portion of the losses, both insured and uninsured, are the time element pieces. How long was the business closed? How long were homeowners unable to occupy their homes? Those are the pieces that drag on for months — years in some cases — and really drive the economic loss.”

That’s the motivation behind new materials, designs and strategies being implemented in the construction and repair of at-risk residential and commercial properties.

Powerful Flood Solutions

Newer building products move the needle significantly in terms of efficacy.

For new or restored structures in flood-prone regions, Georgia Pacific produces gypsum panels that incorporate fiberglass mats instead of paper facings and comply with the latest FEMA requirements for flood damage resistance and mold resistance. Wall boards made from magnesium oxide (MgO) don’t absorb water at all and have the added benefits of being environmentally friendly and non-flammable.

In the UK, advanced flood-resilient structures built with water-resilient concrete-block partitions are being fitted with not only MgO wallboards, but also wood-look porcelain or ceramic flooring that’s non-permeable and fire-resistant — without sacrificing aesthetics. Drains are installed in the flooring, along with sub-flooring gullies and submersible pumps that push the water back outside. Outlets and appliance motors are all situated above expected flood levels. Doors are equipped with sliding flood panels.

In the event of flooding that exceeds a depth of two feet, automatic opening window panels (flood inlets) are triggered by sensors to allow flood water to enter the property slowly, to reduce external pressure that could damage the structure.

Carl Solly, vice president and chief engineer, FM Global

Controlled inflow buys time for a homeowner to raise furniture up on blocks, or for a business owner to raise pallets of goods up to higher shelves or move equipment to a higher elevation.

Water intrusion is reduced dramatically, and even when it happens, there is little to no damage. Water is pushed into the floor drains, surfaces are allowed to dry, and then it’s back to business as usual in days rather than months — likely with no insurance claim filed.

Dramatic improvements are happening on this side of the pond as well. For entities that need permanent on-site flood solutions, barriers like flood gates and retractable flood walls are the most sophisticated they’ve ever been.

After suffering $4 billion in damage during Superstorm Sandy, New York’s Metropolitan Transit Authority invested heavily in flexible fabric flood panels that are made with Kevlar® and can be unrolled quickly and easily. Additional flood gates hinged to air grates are passively activated by the weight of incoming water entering the grates.

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The transit authority is also testing a prototype “resilient tunnel plug” — essentially a giant air bag that can be deployed quickly to seal off sections of subway tunnel. The plug is designed to withstand not only flood but also biochemical attack.

Even temporary solutions are leaps and bounds beyond the days when sandbagging was typically the best option. New as-needed barrier methods include inflatable bladders that can be placed around a building’s perimeter and filled with water to keep floodwater and flood debris at bay.

“People have always said, ‘Well, I’m in a flood plain, it’s inevitable. It’s an act of God,’ ” said Carl Solly, vice president and chief engineer, FM Global. “In the last several years, we’ve really been trying to deliver the message that you can do something about your flood risk.”

Shake, Pummel and Burn

Flood is far from the only problem benefiting from smart engineering. FM Global is working with manufacturers to develop and certify roofing material designed to better withstand the localized hailstorms that often plague southeastern and midwestern states.

Current materials rated for severe hail can withstand hailstones up to 1 ¾ inches in diameter. The new product, rated for “very severe” hail can tolerate hailstones up to 2 ½ inches. The difference sounds small, but it’s far from it.

“It’s about three times the amount of impact energy when it hits the roof [compared to a 1 ¾ hailstone],” explained Solly. “That’s a big difference.”

As for “bouncing back” after a catastrophic fire, Solly said that’s a fairly tall order. But even there, technology is helping to reduce the severity of fires so that disruption is minimal.

FM Global researchers recently pioneered the concept of SMART sprinklers — shorthand for Simultaneous Monitoring and Assessment Response Technology — which can sense a fire earlier than traditional systems and activate targeted sprinkler heads when needed and shut off once the fire is out.

“You’ll catch it with less water, so from a water usage perspective, a water damage perspective and a smoke damage perspective, we think that has an opportunity to be a big difference-maker in the fire protection industry, particular with high-challenge fires,” said Solly.

“You’ve got a better chance of stopping what normally would be a really tough fire to catch.”

In addition, added Brown, smarter sprinkler systems, much like burglar alarms, could be programmed to notify the fire department instantly, even when a structure is unoccupied.

For earthquake risk, said Brown, resilient building efforts are less about new materials than they are about more strategic ways of using traditional materials.

“Here in California we wrap homes in stucco around the wood frame to help the whole building move as a unit. Stucco is concrete so it does crack. I end up with a building that’s got some cosmetic damage … but you don’t have to rebuild the building. It does its job in terms of absorbing a lot of the ground motion before it pushes the building beyond its design tolerances.”

Using stronger, larger steel brackets where the walls meet the roof or the floor or each other, said Brown, “keeps the north wall from moving in one direction while the west wall moves a different direction.”

Those kinds of stress points can push modest earthquake damage to catastrophic levels, he said.

One earthquake innovation still in the beta phase is a project out of the U.C. Berkeley Seismological lab, using the accelerometers in smartphones as virtual seismometers. Participating phones have an app that detects certain types of ground motion. As phones pick up earthquake wave patterns, they ping the server which checks nearby smartphones to see if they sensed the same pattern, all in microseconds. If an earthquake pattern can be confirmed, an alarm will be sent to every cellphone within a logical radius.

That might only buy people an extra two to five minutes before the event, said Brown, “but if you are the operators of Bay Area Rapid Transit commuter trains, that’s enough time to slow all the trains down to five miles an hour. If you are Google, that’s enough time to park a bunch of hard drives in your server farm so that they’re better able to resist shaking and not be damaged too badly.”

Raising Standards

Cost, of course, will impact the take-up of resilient materials and tools. If it’s three times more expensive to build a home out of the resilient materials, a lot of builders aren’t going to want to because the home will be tougher to sell.

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FM Global’s Approvals division tests and certifies a variety of products aimed at mitigating disaster peril. That can help increase property owner confidence in these materials, particularly for commercial structures.

“When you’re betting millions of dollars and the future of your business — or at least the near-term future of your business — you really need to know that it’s going to work,” said Solly.

With just-in-time manufacturing, a company may have a few days’ worth of stock on hand rather than three months’ worth.

“So you can’t afford to be out of business for weeks, because your customers are going to go somewhere else for your product,” he said.

Building standards and codes can help drive adoption of resilient measures in both commercial and residential construction. But more work needs to be done to raise standards to meet the goal of resilience.

Effecting real resilience is something leaders across the spectrum should be talking about, including brokers and carriers, government and research agencies, building products manufacturers, and corporate executives.

If lives are saved in an earthquake, but a building is still damaged to the point where it needs to be torn down, said Brown “that building owner, that community, is going to have a much longer path to full recovery. We want the building codes strengthened to an immediate occupancy [goal] — we want people to be able to move right back into that building so there’s a much shorter window of disruption.

“It’s certainly better for me as the insurer,” he said, “but it’s even better for the guy that owns the building or runs his business out of it because now his employees still have a place to come to work and they can still get paid.”

Every single business able to minimize its downtime in this way helps the entire community be more resilient, he added. It creates that snowball effect in a good way. When businesses are able to stay open or reopen quickly, he said, workers don’t lose a meaningful amount of pay. Everybody’s in a better position to continue shopping and supporting the local economy.

“If you just shorten the line of people who are looking for some sort of federal aid, or state aid because they’ve had a massive financial disaster — maybe we can turn those into moderate to small financial disasters. That’s the key, I think, to communities being more resilient.”

Driving Demand

As the likelihood increases that property owners will experience a second loss or even third loss, some insurers are looking at ways to invest in resilience — a smarter long-term business plan than paying to rebuild again and again.

One new initiative is Lex Flood Ready, the product of a partnership between Lexington Insurance and The Flood Insurance Agency (TFIA). Flood Ready is a coverage enhancement for Lexington Private Market Flood clients that will not only indemnify property owners that suffer flood damage but will also provide the funds to rebuild them to a higher standard of resiliency when replacing floors and walls.

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Resilience proponents advocate a variety of approaches to encourage take-up, including tax credits, resilience grants, insurance incentives and other partnerships, as well as encouraging lenders to engage borrowers by making the flood risk assessments part of the mortgage process.

A certification scheme similar to LEED could also help drive resilience efforts. The UK is currently beta-testing a certification program called Home Quality Mark, developed by the Building Research Establishment (BRE). Properties are rated on stringent criteria that considers not just disaster resilience, but energy performance and cost, durability and environmental impact.

“Getting people from diverse perspectives thinking about it and talking about it is going to be the avenue to finding the right answers.” — Michael Brown, VP and property manager, Golden Bear Insurance

That’s something builders would be able to use to add value to their properties, offsetting the cost of building in resilience and driving consumer demand for properties built to the highest standards.

With increased resilience will come questions for insurers, said Brown. “It will open up a can of worms.”

It will create something of an arms race among insurance companies, he said. “Who’s going to be the first one to figure out what’s the right way to insure that? What’s the right price? What are the right terms and conditions?” Admittedly, it’s a good problem to have.

Effecting real resilience is something leaders across the spectrum should be talking about, including brokers and carriers, government and research agencies, building products manufacturers, and corporate executives.

“Getting people from diverse perspectives thinking about it and talking about it is going to be the avenue to finding the right answers,” said Brown.

“That kind of mentality top to bottom in the industry is going to be necessary. It’s not the first time we’ve dealt with disruptive things and we will continue doing it. It’s what keeps the game interesting.” &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]