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.

Advertisement




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.

Advertisement




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.

Advertisement




“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.

Advertisement




“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

Risk Manager Focus

Better Together

Risk managers reveal what they value in their brokers.
By: | June 1, 2017 • 11 min read

Michael K. Sheehan, (left) Managing Director, Marsh and Grant Barkey, Director of Risk Management, Motivate International Inc.

Ask a broker what they can do for you and they will tell you. But let’s ask the risk manager.

What do risk managers really need in a broker? And what do the best brokers do to help risk managers succeed in their jobs?

Chet Porembski, system vice president and deputy general counsel, OhioHealth Corp.

Risk managers say it’s a broker who helps them look knowledgeable and prepared to their bosses. It’s someone who sweeps in like a superhero with an ingenious solution to a difficult problem.

Risk managers want to see brokers bring forth better products year after year. They want a broker who shows up at renewal time with new ideas, not just a rubber stamp.

Great brokers embed with the risk management team and learn everything they can about the company and its leaders. They help risk managers prepare and keep tabs throughout the year on changes at the organization with an eye towards planning the future.

“There’s the broker that sees themselves as just a hired ‘vendor,’ or I should say, somebody that basically just does the job at hand,” said Chet Porembski, system vice president and deputy general counsel at OhioHealth Corp.

“And then there’s the broker that views themselves very much as a business partner.  They truly bring added value to the relationship.”

These brokers look at the tough issues the risk manager is facing and bring in the resources to try to help their client in ways even the client might not have thought about yet. They also do advanced planning that makes the risk manager’s job easier when a problem arises.

“That’s the kind of broker I want.” Porembski said.

And that’s the kind of broker many risk managers need more than ever.

“The only way that the relationship is going to be successful is if you build a tremendous amount of trust.” — Frances Clark, director of risk management and insurance, Sentara Healthcare

That’s because risk managers are under increasing pressure these days. They carry more weight as corporations shrink their departments to cut costs.

Advertisement




Climate change, cyber threats and geopolitical shifts are turning what were once unthinkable losses into risks that are almost commonplace. And this is all happening in an under-insured risk environment, according a study by PwC entitled Broking 2020: Leading from the Front in a New Era of Risk.

Thankfully there are good brokers out there, risk managers say, who can bring more value to a client today than ever before and help ease that fear.

Brokers — the traditional intermediary in the risk transfer chain — do in fact have a tangible and growing role in developing viable and innovative solutions for the risk manager, according to PwC’s study.

They are the “global risk facilitation leaders.”

“[Whatever] organizations are doing in the short term — be this dealing with market instability or just going about day to-day business — they need to be looking at how to keep pace with the sweeping social, technological, economic, environmental and political (STEEP) developments that are transforming the world,” PwC said in the report.

Advisors That Are Getting It Done

Cyber risks are just one growing challenge that all organizations grapple with.

Frances Clark, director of risk management and insurance at Sentara Healthcare, remembers when her broker first suggested that she hold a leadership tabletop cyber drill.

Clark said her broker kept saying, “I know this is going to be a painful experience, but you are going to come out so much better in the long run.”

Frances Clark, director of risk management and insurance, Sentara Healthcare

Her broker was right, and went so far as to help arrange a system-wide drill that included representatives from the legal, finance, security, communications, marketing and medical teams.

They reviewed the many ways a cyber attack can happen and then practiced a response.

“We benefitted greatly from that exercise,” Clark said.

When Doctors on Demand developed a telemedicine app to offer mental health services through mobile devices, the company ran up against insurance limitations across state lines. All states require that the physician giving the advice be licensed in the same state where the patient is located.

The concern was for patient encounters where the patient actually crossed state boundaries during the encounter, due to the utilization of a mobile phone. The patient may have started with a properly licensed physician in the original state, but then crossed into a neighboring state where the physician was not licensed.

Larry Hansard, a regional managing director at Arthur J. Gallagher & Co., and a 2017 Power Broker®, worked to secure medical professional liability coverage without the traditional licensure exclusions placed on medical professionals by insurance carriers.

Advertisement




The initiative he helped develop actually changes how health care can be delivered to patients. It allows the emerging telemedicine sector to now offer services around the world.

Two-thirds of the risk managers in the PwC Broker 2020 survey labeled their brokers as “trusted advisors.” But the same survey found that some participants see their broker as more of a straightforward service provider rather than as a source for solutions.

The survey results indicate there is plenty of room for brokers to bring more value to clients.

OhioHealth’s brokers meet each year with OhioHealth’s risk management team to review insurance coverages.  And when the health system holds quarterly risk management retreats, the brokers attend. They bring with them education and insights on a broad range of topics, from property insurance markets to cyber solutions.

Porembski’s brokers also collaborate with the risk managers when there’s an upcoming presentation on risk issues to senior management. Sometimes the brokers help prepare the presentation, he said.

“We end up looking exceptionally good to our senior leaders and our board,” he said.

Involving the broker in interactions with leaders outside the traditional risk management team has benefits beyond selling products, he said. It extends the relationship circle.

Clark tries not to think of her brokers as outside vendors just providing a service. She wants them to be as committed and knowledgeable about the organization as she is.

“The only way that the relationship is going to be successful is if you build a tremendous amount of trust,” Clark said.

“You have to be completely open and honest about everything, no matter how bad it is, or how bad it may look to the market or underwriters.”

“Once you establish that trusting relationship, I think everything else falls into place,” she adds.

Sentara underwent significant growth recently, acquiring five hospitals in about six years. The expansion required a vast amount of integration on insurance programs and a merger of risk management departments and claims.

Clark said her brokers rolled up their sleeves and expertly navigated her through the consolidation.

“I can’t reiterate enough how most risk managers don’t know how to deal with an M&A unless you’ve gone through it.”

She said she wouldn’t have been able to manage the risk of the mergers without her broker’s counsel.

Grading the Broker

Mike Lubben, director of global risk management at Henry Crown & Co. in Chicago, sets standard expectations of his insurance brokers: know the exposures, understand how a risk manager has to sell ideas internally and understand the urgency of requests.

He lets his brokers know his expectations with regular report cards, complete with letter grades. And he isn’t shy about giving out Fs.

  • How did the broker service the EPLI coverage?
  • Did the broker provide expertise and coverage analysis?
  • Was there anything creative?
  • Did the broker recommend new endorsements based on the previous exposure?
  • Did the broker recommend any risk mitigation programs?
  • How well did he communicate and help with presentations?

“A good broker will think this is fantastic,” Lubben said.

This method starts the conversation. It helps Lubben establish long relationships with some stellar brokers.  But if the broker misses the mark, Lubben can have a talk with them about ways to do better in the future. Some brokers he has sent away.

Recently a broker failed on what Lubben calls “blocking and tackling,” the basics like returning phone calls within one day and responding promptly to emails.

Advertisement




Lubben gave him an “F” on those subjects and told him why. The broker still didn’t improve his game and was eventually replaced.

For many people, insurance can seem very routine from renewal to renewal. But a really good broker will break from routine and come back with some kind of enhancement or improvement.

If the renewal is flat with no change in premium, then Clark says she’ll ask, “What are you going to do for me this year?”

The best brokers are always striving for better, she said.

“Without the brokering community, you would be hard pressed to do your job. I really appreciate what the brokers do, they bring a level of expertise that we can’t possibly have on all lines of coverage.” — Mike Lubben, director of global risk management at Henry Crown & Co.

Motivate International Inc., which operates more than half of the bike share fleets in North America, went through a recent renewal.

Their broker, Marsh, explored more than 10 options with different strategies and programs. In the end, after all of that, they decided the expiring coverage was the best fit.

“Those exercises are very valuable for risk managers,” said Grant Barkey, Motivate’s director of risk management.

“As an innovative company committed to delivering best-in-class services, we believe thorough exploration leads to informed decision-making.”

A good broker understands that a company’s day-to-day operations and a highly effective risk management program have implications for what type of policy should be procured, he said.

Brokers need to partner with risk managers to figure out what those options are, and what the markets are saying and then succinctly relay the information to management.
They also need to have the tact and curiosity to inquire about future plans and figure out what resources might be needed to better serve their client.

When PwC surveyed risk managers, most put their insurance carriers and industry groups ahead of their brokers as the primary source of cyber and supply chain risk solutions; yet these areas are still cited as risk managers’ top concerns.

“Becoming the go-to partners for developing and coordinating innovative and effective solutions in these priority risk areas is at the heart of the commercial opportunity for brokers.” PwC said in its report.

“Yet, our survey suggests that these are important areas where brokers are falling short of the market’s demands and therefore need to adapt.

For example, less than a third of respondents are very satisfied with brokers’ analytical and modelling services across a range of areas.”

When participants were asked how their brokers could be more efficient, respondents put risk analysis at the top of PwC’s survey list. Significantly, more than a third also cited ‘big data’ analysis.

Finding the Right Fit

Paul Kim, Co-CBO of U.S. Retail at Aon Risk Solutions, helps match brokers to risk managers. He keeps in mind that insurance companies tend to sell product, while the clients are looking to manage risks. The right broker assists in mapping risks to existing products and also customizing broad solutions, he said.

“The risk manager’s job has become more complex in the current environment, but there are so many tools available for those individuals to make better informed decisions that truly help protect the overall risk profile of their companies,” Kim said.

Paul Kim, Co-CBO of U.S. Retail, Aon Risk Solutions

That’s why finding the right broker should be first and foremost, he said. Look for an individual with strong industry knowledge, product expertise and market relationships. A strong broker is able to effectively communicate what the risk manager’s goals are to the marketplace to be able to execute and achieve those goals.

“Not every broker can do that,” Kim said.

“Not every broker is the right broker.”

PwC said those brokers who quickly master the art and science of identifying ambiguous threats and then mobilize a broad private/public stakeholder pool to economically manage those risks over time will pull ahead of their competition.

“We’re really generalist,” Lubben said.

“Without the brokering community, you would be hard pressed to do your job. I really appreciate what the brokers do, they bring a level of expertise that we can’t possibly have on all lines of coverage.”

When selecting a broker, the risk manager should also take into account the entire organization behind the broker. Ask about the additional support systems that are available to the broker’s clients.

The company should have a deep bench so when the primary broker is out of the office there’s someone else to rely on who is almost as knowledgeable. The broker organization should also be able to assist you with your budgeting and forecasting from a financial risk perspective.

In PwC’s survey of risk managers, nearly three-quarters want analytics from their broker to help inform their decisionmaking, with concerns over new and emerging risks being a strong driver for this demand.

Clark also thinks it is vitally important for a broker to offer a claims advocate, somebody on the outside, when you are dealing with a carrier on a complicated claim.

“Otherwise you are vulnerable to what the carrier says,” Clark said.

Advertisement




To lead in this new era of risk, it’s also important that brokers forge close relationships with a broader set of stakeholders that includes governments, academia, specialist risk consultancies and even their industry peers, PwC said in the report.

It’s also going to be important to develop shared databases and research capabilities.

In turn, brokers need to assure this diverse stakeholder group that they are the right party to lead.

Clark, at Sentara Healthcare, said she knows what her risk exposures are today, but she’d like her brokers to anticipate her needs before she does.

“It’s kind of crazy, but amazingly some of them do it,” Clark said.

The broker will also use past experience and industry knowledge to anticipate where policy terms and conditions can be tweaked and improved upon.

“They will, say, advise us that we need to change this policy language, and then a year later you have a claim on that and you thank your lucky stars that they changed it,” Clark said.

“It is amazing to me every time it happens.”  &

Juliann Walsh is a staff writer at Risk & Insurance. She can be reached at [email protected]