When Indiana began looking in March 2012 for private partners to design, build, finance, operate and maintain its part of the East End Crossing of the Ohio River Bridges project, the market responded immediately. Dozens of interested firms quickly coalesced into six teams. The financial close on the project was reached last month -- almost speed-of-light time for transactions on this scale -- with costs and timetables well under expectations.
I recently asked the two top Indiana officials involved in the transaction -- Kendra York, public finance director for the Indiana Finance Authority (IFA), and Michael Cline, commissioner of the Indiana Department of Transportation (INDOT) -- what they thought made this such a successful project. I’ve summarized their thoughts below:
Executive sponsorship: Then-Gov. Mitch Daniels took ownership and led the process, insisting on results at each juncture. There was no doubt throughout the state's administration, legislature or market that the governor meant business. In 2006, he had completed a highly controversial leasing of the Indiana Toll Road and had stood firm against the naysayers. By the time the Ohio River Bridge opportunity emerged, the opposition that had rallied against the toll road concession had dissipated and the billions of dollars worth of projects funded through that initiative's proceeds had appeared, fostering a much more positive context.
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Process and leadership: The IFA ran the transaction with technical support from INDOT. I asked Cline what he thought about INDOT ceding control of a highway project to the finance agency. He responded in an amazingly refreshing way: "My department is terrific at building, maintaining and overseeing the construction of infrastructure. This was a financial transaction. Why would we want to divert our attention to claiming expertise outside of our core?"
I then asked Cline and his project manager, Jim Stark, if they ever disagreed with York's agency during the process, when design and finance issues intersected. Cline responded: "Of course, all the time, and we worked through them expeditiously and in a professional way that actually improved the result." Complicated public-private partnership projects should be managed by an agency with financial transactional experience, well advised by outside bankers and lawyers and supported by the technical skills of the relevant administering agency. Each agency leading its appropriate function but working together provides the secret sauce.
Risk allocation: These projects often become bogged down by endless efforts to negotiate and allocate risk. Governments try to shift every possible risk to the private partner, no matter how much that risk gets priced back to the taxpayers in the transaction. Indiana attempted a more balanced approach, shouldering, for example, the risk of ongoing environmental litigation, related work stoppages and possible shifting of project schedules as well as other risks over which it had more control and experience, such as those dealing with right-of-way acquisition and utility relocation.
A unique feature of the transaction is a "relief events allowance" account funded by $45 million from INDOT. The account was designed to provide a mechanism to handle compensation for unexpected events that could arise during construction, such as labor disputes or fires. Upon completion, any remaining funds will be split 50-50 between IFA and the developer, providing an incentive for the developer to minimize claims against the account.
Speeding up the process: Gov. Daniels insisted on an impressively tight procurement timeline, aiming to bring the transaction to a close while he was still in office. Indiana also benefitted from faster negotiations by involving the principals, not just the lawyers. As negotiations progressed, no one had to leave the room to get authority over an issue. Escaping responsibility became impossible and unnecessary.
Incentives for innovation: Indiana's goal in its procurement process was to encourage innovation. Technical specifications were written as non-prescriptively as possible to give ample leeway for creative solutions. Government officials asked the private sector to provide creative design solutions that were equal to or better than the specifications. This alternative technical concepts process was expanded by requiring that ideas be submitted not just with the dollar value of savings attached but also with a narrative explaining why the proposed concept met specifications or improved on them. More communication helped ideas evolve and improve.
Kentucky's part of the Ohio River Bridges project will be built using a more traditional approach than the one being used by Indiana. Because legal barriers effectively split the project into two halves, a natural experiment has been set in motion, providing an exciting opportunity for a rich future case study on the real value of funding infrastructure development through public-private partnerships versus more traditional approaches.