A High-Profile PPP Comes Apart

October 2020

Earlier this month in Maryland, the state government took over the $5 billion-dollar Purple Line mass-transit project.  Running 2 ½ years behind schedule, close to $1 billion over budget, and still with some $1 billion of work to go, the takeover officially brands as a failure one of the most ambitious and largest Public-Private Partnerships under implementation across the world, let alone the United States.

The high-profile flop comes at an important time for Public-Private Partnerships (PPPs) across the United States.  A widely used method for building infrastructure in Europe, Canada, and increasingly in Emerging Markets, PPPs have never fully caught on in the US.  Some parts of the US see PPPs as central to state or municipal-level infrastructure development: Virginia, across the Potomac River and next-door from Maryland, is a notable example.  PPPs were also central in the (brief) discussions about a “trillion-dollar infrastructure initiative” in the first year of the current US administration.  Yet suspicion about the use of the private sector in infrastructure remains politically strong, especially though not only in democratic circles.  With the continued federal policy inaction and deterioration of infrastructure across the country, the likelihood of a major infrastructure plan coming forward in 2021 to finally address the situation is growing.  How much such a plan turns to the private sector and to PPPs may well be affected by the Purple Line saga.

Purple becomes Black and Blue

The Purple Line is the latest color-coded line addition for the Washington DC subway network.  The 16-mile East-West line is intended to use light-rail to connect a number of suburbs in the state of Maryland, from New Carrollton to Bethesda, complementing existing lines which mostly flow in and out of central Washington.  The project is designed as a 36-year build-finance-operate-maintain Public-Private Partnership, administered by the state of Maryland’s Transit Administration (MTA), with service originally slated to begin in 2022.  In 2016, Purple Line Transit Partners, a consortium headed by Fluor Enterprises, was announced as the winning bidder selected to partner with MTA on developing the project.  The consortium members also included Star America and Meridiam, a leading infrastructure investment fund which is the largest equity partner in the project.  The partners beat out three competing bidders led respectively by Vinci/Alstom, Macquarie/Skanska, and Edgemoor/RATP (the development arm of the Paris metro).  With a $5.6 billion contract, the project is believed to be Maryland’s most expensive government contract ever, and is one of the largest PPPs anywhere.

Problems began early for the Purple Line.  Construction began only in August 2017, delayed by a lawsuit over environmental impacts.  More disputes followed – over timing of right-of-way acquisitions and further environmental permits, and the contractors began filing major time extensions.  Relations between the MTA and the consortium deteriorated, and by the Spring of 2020 the project was over two years behind schedule and overruns had topped $750 million.  In parallel, consortium-leader and construction contractor Fluor began experiencing significant financial pressures, driven by cost overruns on multiple projects and an SEC investigation.  The MTA and the Purple Line Transit Partners spent several months arguing over the growing financial gap, without coming to agreement, and in August Fluor announced it would quit the project over the cost overruns.  The MTA this month took over hundreds of subcontracts to continue construction, and over $1 billion worth of project bonds have been downgraded to junk bond status. 

Purple Line Construction in Maryland

Whether the project ever reaches closure, or Maryland is left with a string of partially-completed stations and rail lines, is highly uncertain at present.  The state is now managing the project in the short-term while the MTA figures out a longer-term plan for finishing — and paying for — the remaining $1 billion worth of construction.  The contracts that the state has assumed include the manufacturing of the light-rail vehicles, the eventual operations and maintenance of the rail line, erosion and sediment control, relocating overhead electrical wires and underground utilities.  Officials say they will decide in the coming months whether they will continue managing the project, seek a new construction contractor or procure another public-private partnership.  It is unclear how much the various options would cost or how the state would pay for them at a difficult time for the state budget (see the Washington Post’s “Maryland likely to be on the hook for millions”).

Implications for PPPs

The troubles of the Purple Line are likely to have an impact on Public-Private Partnerships across the United States.  The Purple Line has received national attention as one of the first U.S. transit projects to be built via a public-private partnership, including private financing.  Public-private partnerships have begun to gain popularity with cash-strapped governments.  Now, from a rail project once touted as a national model of how governments could partner with the private sector to build expensive infrastructure, it is now receiving much less attractive national attention.  The risk of the Purple Line being abandoned mid-construction comes at a time when the likelihood of a major push soon on infrastructure investment in the US is growing more likely.  Leaders on infrastructure on both sides of the aisle in the US Senate, Tim Kaine and Rob Portman, have been signaling that they expect a major infrastructure bill to go forward in 2021, irrespective of the outcome of the November election.

PPPs as a whole generally have achieved positive results.  A World Bank study found some 2/3 of PPPs reviewed achieved intended development outcomes, as did over 80% of PPPs supported by the International Finance Corporation (IFC).  When well-designed and executed, PPPs can balance the public policy objectives of governments and the financial and construction capabilities of the private sector.  They can facilitate tapping private capital when government funds are scarce, and can improve and make more consistent delivery of key services.  Studies have shown that failures, cost overruns and delays tend to be more common in purely public-sector managed projects than in PPPs.  Yet PPPs are no guarantors of success – things do go wrong, and they tend to have one very large area of vulnerability: they are often highly visible, and easily politicized.  So individual project failures for PPPs gain far greater visibility than those of “normal” infrastructure projects, and are more easily turned into emblems of a particular administration’s “failure” than are problems with state-run infrastructure, or even the inability to deliver new infrastructure investment or improved services.  Virginia, for example, has many successful PPPs in operation, yet a lot of political attention focuses on the failure of a PPP tunnel in Norfolk.  Miami-Dade County officials only last week postponed consideration of a planned monorail project led by Meridiam Partners and also involving Fluor, citing among other things the experience of the DC area’s Purple Line project.

By contrast, what often separates successful from unsuccessful PPPs is neither glamorous, nor highly visible.  Attention to detail, both in design and administration of PPPs, is the single most important element of success.  Attention to detail can avoid mistakes in agreement on arcane provisions in risk-management, like the ones that bankrupted the city of Harrisburg years ago on a contract for a new incinerator.  The Purple Line’s PPP contract is over 800 pages long, and yet those 800 pages failed to clearly delineate the responsibilities now being argued over between the state and the consortium.  Indeed, the most common factor in PPP problems has tended to be a rush to get deals done on the part of government officials.  A rush tends to push toward simplification, which is in principle fine but often translated into making bidding by potential partners only an issue of lowest cost, without enough attention to contract provisions for delivery, quality and dispute resolution.  The Purple Line bidding process was done on a pure low-bid basis, and there were early rumblings that Maryland pushed the bid too fast, and left too many issues open – in spite of the 800-page contract.

We’ll see what the future holds for light-rail service in the Maryland suburbs, for Fluor and the project partners, and for lessons drawn from the government’s takeover of the Purple Line.  Two things for sure: you can expect plenty of discussion about infrastructure in the US in 2021, and every time PPPs come up as part of the solution, the Purple Line will be part of the discussion.

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