Public-Private Partnership Policy Casebook/Presidio

Summary
The Presidio Parkway project is also known as Doyle Drive Replacement project. Doyle Drive is a 1.6 mile segment of Route 101 in San Francisco that provides access to the Golden Gate Bridge from the south; it connects Marin and San Francisco counties and links the peninsula and North Bay Area counties. The Presidio Parkway project is divided into two phases. Phase I was delivered by the California Department of Transportation (Caltrans) through a traditional design-bid-build process. The Phase I construction began in late 2009 and was completed in April 2012. The Phase II of this project is delivered through a public-private partnership. This case study will examine the history, project planning, proposal solicitation, concession agreement, financing, and risk allocation of this project.



Annotated List of Actors

 * The Presidio Trust (Land Owner)
 * National Park Service (Land Owner)
 * California Department of Veterans Affairs (Land Owner)
 * U.S. Department of Transportation / Federal Highway Administration
 * Environmental Protection Agency (EIS/R)
 * Golden Gate Bridge Highway Transportation District (Operates Golden Gate Bridge)
 * Metropolitan Transportation Commission (CA Gov Finance/Planning)
 * Transportation Authority of Marin (CA Gov Finance)
 * California Transportation Commission (Decides on P3 use)
 * Public Infrastructure Advisory Commission (Decide on to Proceed with Project)

Timeline of Events

 * December 2008:	        Passed the environmental assessment
 * Late 2009-April 2012:	 Completed Presidio Parkway project—Phase I
 * February 2010:	        Issued RFQ; Submitted the project proposal to the California Transportation Commission (CTC)
 * May 2010:	                The California Transportation Commission approved the proposal;Issued draft RFP
 * October 2010	 :              Three bidders shortlisted; Notice of intent to award
 * January 2011:	                Awarded contract to Golden Link Concessionaire
 * Spring 2012:	                Started Phase II
 * June 2012:                     Financial close
 * 2016 :	                        Project expected to be completed

Map of Locations
The Presidio Parkway Project will replace the existing Doyle Drive Freeway, in Presidio of San Francisco, California. The 1.6 miles of Route 101, the south connection of the Golden Gate Bridge, will be replaced with a six-lane roadway. The current roadway serves an increasing average of 120,000 trips per day.



Clear Identification of Policy Issues
P3 approach. There was a debate about whether the Presidio Parkway project is a good fit for P3 approach. As discussed in the Section Narrative of the Case, the California Legislative Analyst’s Office (LAO) and the union believe that the traditional public sector procurement approach is a better option for this project, while state officials assert that the state can benefit significantly from the P3 arrangement by transferring the construction and maintenance risks to the private sector developer.

Value for Money Analysis (VfM). The LAO pointed out that results of the VfM analysis conducted by Caltrans were unreliable, as the analysis is based on a number of assumptions that favor the P3 approach (see Section Proposal Analysis). There are no best practices for conducting VfM analysis, and it is difficult to produce a generally acceptable result.

Availability Payment Plan. The use of availability payment is controversial. Under this model, private investors receive a guaranteed annual payment if they meet the agreed upon performance measures and standards. The purpose of the Availability Payment model is to provide a useful tool to attract private investors; on the other hand, availability payments come from government accounts, and governments retain significant demand/ revenue risks.

Economic and Political Context
California experienced a significant budget crisis from 2008 to 2012. The state faced approximate $42 billion dollar deficit in 2009. As the public sources of money were limited, public-private partnerships became a potential alternative to support the state’s transportation and infrastructure development.

To encourage the use of P3, Governor Schwarzenegger approved the Senate Bill Second Extraordinary Session 4 in February, 2009. This new legislation authorizes the California Department of Transportation (Caltrans) and regional transportation agencies (RTA) to “enter into an unlimited number of P3s and deleted the restrictions on the number and type of projects that may be undertaken.” The law created the Public Infrastructure Advisory Commission to assist Caltrans and RTAs in developing their P3 projects and grants the California Transportation Commission the authority to select and approve P3 projects. The Presidio Parkway project is the first transportation P3 project under this new law.

Planning, Proposal, and Solicitation
The purpose of the Presidio Parkway project is to “improve the seismic, structural, and traffic safety of the Doyle Drive.” The Doyle Drive was originally constructed in 1936 and became a state highway in 1945. This road has served as a main traffic linkage in the San Francisco Bay Area and is now nearing the end of its useful life.

Project Proposal History
The first project proposal request for changes to Doyle Drive was issued in 1955, only 19 years after the road was opened. The original request called for a wider roadway to help handle increasing congestion. A second more specific request came in 1962 for a eight-lane divided roadway, that was to be apart of the Golden Gate Freeway. This proposal was not pursued due to public objections.

In 1970 two vehicles crashed head-on with each other, resulting in ten deaths. This accident was due to there not being a median barrier on Doyle Drive. Immediately after the National Transportation Safety Board recommended the roadway be upgraded to current freeway design standards, which includes a roadway median. In 1973 a Draft Environmental Impact Statement was completed for the reconstruction of Doyle Drive as an eight-lane highway with a fixed median barrier. This proposal was objected to by the public, and in 1974 the California State legislator passed a Bill prohibited the widening of Doyle Drive to more than six lanes without the approval from the San Francisco Board of Supervisors.

It was not until 1985 the San Francisco Board of Supervisors recommended changes to Doyle drive to improve safety, without widening the road for more vehicles to use. Caltrans responded with two recommendations, a six-lane and an eight-lane roadway design. However issues surrounding these designs were never resolved, and no solution was decided upon. It was not until 1991 when the San Francisco Board of Supervisors created the 'Doyle Drive Task Force' to reevaluate road improvement designs. The task force was comprised of representatives from local governments, as well as local public and private organizations. They reviewed new design alternatives, and in 1993 agreed on a new six-lane parkway through Presidio. On October 1, 1994 Presidio was officially closed as an active military base, through the Defense Base Closure and Realignment Commission. Management of Presidio was transferred to the National Park Service and the Presidio Trust, with the goal to make Presidio financially self-sufficient by the year 2013.

Also in 1994 the San Francisco County Transportation Authority (the Authority) initiated the Doyle Drive Intermodal Study "to further the development and ultimate implementation of a realistic and fundable replacement for Doyle Drive." The study's results were released in 1996 and supported the 'Doyle Drive Task Force' recommendations for more multi-modal and direct vehicle access through Presidio. The study also concluded that Doyle Drive should be redesigned as a parkway.

As a result of the Doyle Drive Intermodal Study an environmental assessment began in 2000, and the Draft Environmental Impact Statement/Report was subsequently released in 2005. The Presidio Parkway was selected by the San Francisco Transportation Authority's Board of Commissioners on September 26, 2006, and the Final Environmental Impact Statement/ Report was certified on December 16, 2008. The Presidio Parkway project is divided into two phases. Phase I was delivered by the Caltrans through a traditional design-bid-build process, and the Phase II of this project is delivered through a public-private partnership.

Phase II Proposal
The Public Infrastructure Advisory Commission unanimously agreed to begin the procurement option for the Presidio Parkway on January 21, 2010. On February 2, 2010 the Caltrans and the Authority issued a request for private firms to submit qualifications for Phase 2 of the Presidio Parkway project. Caltrans and the Authority hired the Arup/PB Joint Venture to conduct a review of the life-cycle costs of the Phase II construction and evaluate three service delivery options, including the traditional Design-Bid-Build (DBB) option and two P3 options—the Design-Build-Finance (DBF) option and Design-Build-Finance-Operate-Maintain (DBFOM).

Value for Money Analysis (VfM)
The DBB option is used as the Public Sector Comparator (PSC), against which the DBF and DBFOM options are assessed. Arup/PB issued a report Analysis of Delivery Options for the Presidio Parkway Project in February 2010, and this report concludes that DBFOM would be a better option for the Presidio Parkway project. Arup/PB’s analysis is consisted of both qualitative and quantitative assessments.


 * Quantitative Analysis. Arup/PB states in the report that its VfM analysis follows international VfM best practices. The analysis used a net present value (NPV) approach to compare the life cycle costs of P3 options (DBF and DBFOM) and the DBB approach. The calculation was based on a base discount rate of 8.5 percent. According to VfM analysis, the DBFOM option appears to be a better service delivery method for this project. The DBFOM approach would cost $147 million (23%) less than the traditional public sector approach (DBB) and achieve greater VfM through the project life cycle.

Table 1 Net Present Value (NPV) 2009$, Million; 8.5%


 * Qualitative Analysis. Some issues are not easily expressed in monetary terms, and therefore, Arup/PB also conducted qualitative assessment of these three service delivery options. The qualitative assessment focused on four issues—risk transfer, construction cost and schedule certainty, use of public funds, and operations and maintenance service. The assessment concludes that “the DBFOM option provides greater cost, schedule, and funding certainty; integrates a life-cycle operations and maintenance (O&M) approach and improves level of service; and improves the State’s ability to fund additional statewide transportation projects more quickly.”

Solicitation Process
The Caltrans announced three companies as being qualified for the potential public-private partnership on April 14, 2010. These companies--Royal Presidio San Francisco Partners, Golden Link Partners, and Golden Access Group--demonstrated successful experience on similar sized projects in the past.

Caltrans and the Authority proposed the DBFOM approach for the Phase II of the Presidio Parkway project to the California Transportation Commission (the Commission). This proposal includes a 33-year contract between the government and a private developer to design, build, finance, operate, and maintain the Presidio Parkway. The Concessionaire would receive a payment at the end of the construction phase and availability payments for 30 years (The agreement will be described in detail in Section Concession Agreement). The Commission approved the project on May 20, 2010 (despite the recommendation from its staff to reject the proposal). Caltrans and the Authority announced their decision to award the P3 project to the Golden Link Partners in October 2010.

The proposed P3 approach was controversial. The Professional Engineers in California Government (PECG), a state-employed engineers union, strongly criticized the proposal and argued that 1) tolls and user fees are required by law for P3 transportation projects; and 2) the proposed P3 project does not go through the normal procedures developed to ensure public funding accountability. State officials responded that the state law does not prohibit the government from using availability payments for P3 projects and the state can benefit from the P3 arrangement by transferring risks to the Concessionaire.

The California Legislative Analyst’s Office (LAO) reviewed the Caltrans’ P3 agreement and also recommended that the state not take the P3 approach. LAO argues that the state would not receive the all of the benefits identified in the agreement. According to LAO, the state’s VfM analysis result is based on some assumptions that favor the P3 option. The 8.5% discount rate used by Caltrans is too high, and a 5% discount rate is more reasonable. In addition, LAO states that this project is not a good fit for a P3 service delivery, because “it is already very far along in its schedule and it does not rely on a toll or user fee to fund the work.” In response to LAO comments, the Authority asserted that its VfM result was valid and the analysis process was robust. The VfM report had been reviewed and approved by a number of agency stakeholders, including Caltrans, the Authority, California legislature, FHWA, etc.

On November 2, 2010, the PECG filed a lawsuit to block the government’s P3 deal and claimed that the process was illegal. A Superior Court Judge in the Alameda Country granted a temporary restraining order (TRO) to restrain Caltrans from awarding the contract on December 22, 2010. The TRO was lifted on January 3, 2011, and Caltrans and the Authority signed the P3 contract with the Golden Link Concessionaire for Phase II of the Presidio Parkway project.

Concession Agreement
The proposed Public-Private partnership agreement is for 33 years, three years to construct the parkway and 30 years of operation and management. During the term of the concession agreement and handback at the end of the partnership, the developer will be required to conform to the Caltran's maintenance schedules and standards as outlined in the Department's Maintenance Manual. Based on this agreement the Presidio Parkway will have a significantly longer useful life then the 33 year term of the partnership. The Parkway pavement on the U.S. 101 corridor is expected to have a 40 year useful life, while the supporting structures and tunnels will have a 75 year useful life.

Caltrans will review and monitor the developer's maintenance for compliance. Any renewal work, which includes activities beyond routine maintenance, must meet the agreed upon performance measures and standards, as outlined in the technical requirements of the project. To ensure renewal work is accomplished the developer must fund a renewal work reserve account. Finally, the developer must achieve handback requirements that assure the stated infrastructure useful life is accomplished.

Financing
The estimated total cost to complete the Project is $928.8 million

Funding Sources
The cost of Phase I is $486.9 million. This was achieve through $70.8 million in Federal funds, $83.3 million from American Recovery and Reinvestment Act (ARRA) grant, $229.0 million from state funds, and $103.9 million from local funds; local funding organizations included the Metropolitan Transportation Commission (MTC), the Golden Gate Bridge, Highway and Transportation District (GGBHTD), the Sonoma County Transportation Authority (SCTA), and the Transportation Authority of Marin County (TAM).

The cost of Phase II is $364.7 million. This was achieved through $166.6 million in bank loans, $89.8 million from TIFIA Tranche A loan, $60.2 million from TIFIA Tranche B loan, $2.6 million from the parent company contribution, $43.0 million from private equity, and $2.5 million from TIFIA capitalized interest.

Project Contract Method
The project partners in Phase II include: Construction Joint Venture (design-build members):
 * Golden Link Partners, LLC
 * HOCHTIEFF PPP Solutions North America
 * Meridiam Infrastructure
 * Flatiron West, Inc.
 * Kiewit Infrastructure West, Co.

The lenders were banks and USDOT TIFIA.

Credit assistance from TIFIA consisted of a direct loan of $150 million. This assistance is divided into two portions in order to set apart the two different sources of repayment and state and local funding limitations. Tranche A is an $89.8 million loan to be repaid fully after significant completion in the form of a milestone payment. Tranche B is a $60.2 million long-term loan to be repaid using non-Federal portion of the quarterly availability payments to GLC during a 28-year period.

The credit agreement (TIFIA) was executed on June 14, 2012. The first interest payment is due on June 2016. Principal repayments are to begin in December 2018. Level debt service payments are scheduled to begin in 2019. The maturity loan date is December 2045.

This was California’s first P3 transaction under the new legislation passed in 2009. This project was also the first availability payment contract for transportation infrastructure. First TIFIA loan to be repaid in part with a milestone payment following substantial completion.

Risk Allocation
In order to transfer risk, the DBFOM option was chosen to allow the best partner to take on certain risks. As discussed previously, this option, when compared to traditional procurement methods, Design-Bid-Build, and compared to other P3 options such as Design-Build-Finance showed the highest Value-for Money results. The DBFOM option offered a way of appropriately transferring more risk to the private sector and allowing the public sector to manage some risks as well.
 * Design and Construction Risks: these include interface between design and construction, methods of design and construction, quality control and assurance, unknown utility lines, management of archeological, cultural resources, hazardous materials or endangered species, assume responsibility for previously completed portions (Contract 3 and 4), traffic management and operations.
 * Operation and Maintenance Risks: facility could require more maintenance required than planned, higher operating costs than planned.
 * Cost: escalation assumption agreed upon by Caltrans and FHWA was 3.0% for the entire duration of the project. If the economy changes drastically, or many large construction projects start due to Federal ARRA stimulus funding, unit prices could shift, and any delays will have a ripple effect on overall project schedule and cost.
 * Right of way costs: estimated to be $135.9 million – as project construction continues, this number might change depending on cost and scope changes as well.
 * Proposition K Funds: downturns in the economy could cause a decrease in the San Francisco County sales tax collection, compared to what was forecasted.
 * Availability of Local Funding: some of the local funding authorities did not commit their funding until the final year of construction. If the schedule accelerates, these agencies would have less to determine where to get the funds from and how to allocate them.

Overview
Schedule:
 * Phase I - Construction to be completed late 2014/early 2015
 * Phase II: the P3 agreement with Golden Link Concessionaire was signed on January 3, 2011. Pre-construction started in mid-2011. Financial close was on June 14, 2012. Notice to Proceed 3 (NTP3) was issued by Caltrans on November 6, 2012 which had conditions to be met before major construction of the project started. The expected completion date is October 2015 with a duration of 30-years of concession.

Construction Contract Packages:
Phase I Summary: from Late 2009 to Spring 2012 – traffic on existing roadway and construction adjacent to existing roadway. The main goal is to transfer traffic on to the temporary detour.
 * Phase I: Caltrans was responsible for design, financing and construction of Phase I (Contracts 1-4), which was delivered through a traditional design-bid-build process. Phase I consists of a bridge replacement at the Park Presidio Interchange, a new southbound Presidio Viaduct, the southbound Battery Tunnel, and a temporary bypass east of the Main Post, in order to construct the Main post Tunnels and roadways to Richardson Avenue. Activities for contracts 1 and 2 began in 2009, which included the advanced environmental mitigation, and utility relocation.

Phase II Summary: Spring 2012 to 2016 – traffic on new roadway and temporary detour, and construction of new roadway, demolition of existing Doyle Drive. The main goal is to transfer traffic onto the final roadway.
 * Phase 2: Caltrans selected a private consortium, the Golden Link Concessionaire, to deliver the second Phase as a design, build, finance, operate, and maintain (DBFOM) availability-pay concession. (Contracts 5-8) The P3 project Agreement with GLC was executed on January 3, 2011. GLC is to receive availability payments through the concession period, based on performance. Phase II construction consists of the construction of northbound Battery Tunnel, northbound High Viaduct, two Main Post Tunnels, Main Post Electrical Substation, Low Viaduct, and a new interchange to the Marina and the Presidio. Completion of these major project elements is expected in late 2015, and final completion in 2016 including landscaping.

Operations and Maintenance:
The concessionaire is to ensure a safe, durable and appropriate facility. There is responsibility for operation and maintenance of all Project facilities, including those in both Phase I and Phase II of the Project. Preventative maintenance avoids the need to have to spend large sums in the future for maintenance; including operations and maintenance as part of the process creates an incentive to properly manage the operations and maintenance throughout the entire period of the contract in order to reach optimal levels of service and appropriate management of the facility.



Discussion Questions

 * Is the Presidio Parkway project a good fit for the P3 approach?
 * Would toll concession work better for this project?

Additional Readings

 * California Department of Transportation, San Francisco County Transportation Authority, Project Proposal Report: http://www.catc.ca.gov/programs/DB-P3/P3/Presidio_Prkwy_Prjct_Prpsl_Rprt_May4.pdf
 * Analysis of Delivery Options for the Presidio Parkway Project: http://www.presidioparkway.org/project_docs/files/presidio_prkwy_prjct_bsnss_case.pdf