A PPP Saga, Part II – Back from the Brink

November 2020

Earlier this week came a major announcement concerning one of the world’s largest Public-Private Partnerships (PPPs).  The State of Maryland announced it had reached agreement with Meridiam Investments and Star America to restart the $5 billion Purple Line mass transit project, which had been declared terminated less than two months before (see Infrastructure Ideas’ previous “A High-Profile PPP comes apart”).  The agreement calls for Maryland to pay an additional $250 million to the consortium to partially address cost overruns, and the consortium will resume work on completing the 16-mile light rail line, while replacing the main construction contractor, Fluor Corporation.  Lawsuits going in both directions will be dropped.

This announcement has some significant implications, which we’ll recap here.

First, this is really, really good news for residents of Maryland, especially those living in the vicinity of the construction.  While bad enough that their streets had been torn up to make way for the project, many along the project route were facing the prospect of several years of looking at half-finished structures and blocked streets, while the state would have sought some other way forward for completing – or at least cleaning up – the project route. 

It is good news for public transportation in the Washington DC area, and by extension for other urban areas across the country looking at improving mass transit options.  A high-profile failure in the Washington metro area would have been a damper on plans for other large-scale projects; instead, the agreement signals it is possible to negotiate one’s way out of a very messy situation forward at a reasonable cost.  The added bill of $250 million for the contracting authority comes to less than 5% of total project costs; while this is still a lot of money, a cost overrun of only about 5% is not so bad for a massive infrastructure project.  The average purely public infrastructure project will have higher cost overruns than this. 

This is very good news for the State of Maryland: escaping the situation, with its already extensive delays, at a far lower cost than might have been.  The contractors had been seeking over $800 million in extra funds for cost overruns, more than triple what Maryland has now agreed to pay, and had the state had to assume the cost of completing the project itself without the consortium, it would likely have faced yet higher overruns.  On top of that, Maryland avoids the potential liability of having to make termination payments to the project’s bondholders.  Those bondholders, mainly pension funds and insurance companies, provided some $313 million to the project, funds which were to be repaid either through project revenues, or termination payments underwritten by the state.  Arguably Maryland could have been on the hook for as much, if not more, than the $250 million it has now agreed to pay the Purple Line consortium, and that without getting the project completed.

This is also good news for Meridiam and Star America, the remaining Purple Line Partners, for whom a full write-down of the equity invested in the project would have severely dented their reputation and financial status.  Both have a lot at stake here: Paris-based Meridiam is pursuing a role in planned multibillion projects to add tolling to the Capital Beltway and Interstate 270 in the Washington DC area, while Star America’s selling point is its expertise in Public-Private Partnerships.  It is also good news for the holders of the project’s $313 million in private activity bonds.  While these bonds were secured by termination payments underwritten by the state of Maryland, bondholders were still at considerable risk of facing write-downs of their principal on the bonds in bankruptcy court, should the project have reached that stage.  The custodian for the bonds, US Bank, earlier this month agreed to forebear from collecting or declaring default on the bonds for a period, giving the two sides some space to reach an agreement – which appears to have been a wise decision.

The agreement may finally be good news as well for private infrastructure investors and lenders generally.  As a new administration comes to office in the US, and looks to address the country’s perennial infrastructure problems, PPPs will not have quite the black eye they would have.  This has implications for the potential role of PPPs in the US, and the potential demand for private capital in infrastructure in the US.  While the progressive wing of the Democratic party has generally shown limited enthusiasm for involving the private sector in infrastructure, at least PPPs will remain as a not-quite-as-strongly discredited option for policy-makers.

On the other hand, the good news in this new Purple Line PPP compromise does have some limits.  This new agreement, with the government agreeing to pay more than it had substantially agreed to pay for the project, will to an extent play to one negative aspect of the reputation of PPPs:  that they’re at frequent risk of renegotiation.  Latin America saw one of the earliest waves of PPPs, in the 1980s – many for toll roads in Mexico; these became over time frequently criticized for their cost overruns – and the attendant corruption that turned out to be involved in contract renegotiations.  So while PPPs will be “less discredited,” the saga will not exactly be an advertisement for PPPs.  Coupled with the ongoing problems of the Silver Line metro extension across the Potomac River from the Purple Line, the Washington DC’s flagship mass transit investments – some of the largest in the country today – will not warm the hearts of urban public transport expansion advocates.  One could argue that “winners” here will eventually include those advocates for forms of public transport which are less-capital intensive than light-rail and subways, notably high-speed bus lines.

One lesson which we hope will come out of the saga will be a simple one: mind the details.  Simple, even though it involves more lawyers, at least at the outset of large PPP projects.  It appears in retrospect that, if Maryland’s planners had taken a bit more time at the outset to mind the details in the Purple Line contracts — to make arrangements for monitoring progress on the project, and to assess potential right-of-way problems, they might now not be “celebrating” a major renegotiation.  They might instead be celebrating the opening of service across the Washington suburbs.

And, oh yes: Maryland now needs to come up with another $250 million.  It’s not yet clear where this will come from.  The new transport service opening?  Maybe in 2024.

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