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Life Cycle Methods Will Remain After the GFC

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There are at least four (4) durable reasons that responsible governments will continue to be pushed to reposition their infrastructure portfolios toward a higher proportion of Life Cycle Delivery Projects.

1 Near Exclusive Use of Initial Delivery Methods Cannot Succeed Financially

Over one typical "life cycle" of a facility, for every One Dollar $1 spent on Design, at least Ten Dollars $10 are spent on Construction and At Least One Hundred Dollars $100 are spent on OM&R. The decision to design and build is inexorably tied to the resulting obligation to operate, repair, and maintain – a consequence that is largely lost on policy makers. Figure 1 shows what a typical "expense" line looks like for one life cycle of a long life asset. The relative costs of Design, Construction, and OM&R are illustrated by the relative areas of these portions of the cost curve.

b2ap3_thumbnail_typical-life-cycle-costs.jpgFigure 1 Typical Life Cycle Costs: 1:10:100 Ratio of Design/Constr./OM&R

The 1:10:100 ratio of Design:Construction:OM&R can only be avoided through improper performance of the individual functions. Practically, governments can only "save" required "expense" along this curve by "deferring" routine maintenance, repair, and replacements.

The public paradigm for near exclusive reliance on "Initial Delivery" methods has been one in which the general government provides a substantial subsidy for Design and Construction, leaving local governments, transit authorities, housing authorities, and the like responsible for the balance of the cost of "Initial Delivery" and long term "OM&R" costs.

The fundamental problem that local governments face is the ongoing nature of most of these public infrastructure assets.

The "road" or the "water plant" or the "solid waste plant" CANNOT go out of service, whether or not maintenance or repairs are "deferred" or the end of its Life Cycle has been reached. Even when a new "cycle" is required the "road" or the "water plant" or the "solid waste plant" must be demolished and replaced (or expanded). The practical result has been nearly fatal to local governments in many parts of the world. This paradigm is, in essence, a "Ponzi" approach to public investing in infrastructure. It cannot succeed unless governments are sufficiently disciplined to set aside sufficient financial resources to properly and timely perform OM&R.

The practical effect of near exclusive reliance on "Initial Delivery" methods has been to obscure the actual costs of designing, building, operating, and maintaining public infrastructure facilities, and to encourage a substantially incomplete public understanding of how these systems degrade over time. In the US and UK, in particular, it has been very difficult to acquire and sustain ongoing public support for timely OM&R of public infrastructure systems – particularly in the face of rising competitive demands on limited public resources for other social programs such as health care and retirement. The 2009 American Society of Civil Engineers "Report Card" for infrastructure networks in the US – is a direct reflection of the failure of the infrastructure sector to acquire and sustain support for OM&R of existing infrastructure. (see Inset.)

2 Deferring Maintenance and Repair Digs an Even Deeper Hole

In 1990, the US Army Corps of Engineers developed a practical tool highlighting the close connection between "timely" and "deferred" maintenance and repair. BOTH life cycle cost and level of service (LOS) are dramatically affected. One of these tools is the pavement degradation curve in Figure 2 advising public owners on the effects of deferring pavement maintenance.

Based on extensive data, the Corps shows the relationship between LOS and the timeliness of proper maintenance and repair. The cost to repair pavement from Fair to Good is ¼ of the cost to restore from Serious to Good. A typical pavement life cycle is 7-8 years. Figure 2 shows that deferring M&R for a year or two will quadruple the cost of restoring a Good level of service. Moreover, during the time the pavement is in Poor to Very Poor to Serious condition, users are absorbing (literally) the consequences of an inadequate level of service in their vehicles.

Figure 2 US Army Pavement Degradation Curve – Cost of Rehabilitation

Excessive reliance on INITIAL DELIVERY methods has created a crushing burden on local governments in highly developed industrial economies.

3 (If Properly Procured) Life Cycle Delivery Produces 30-40% Savings

In the 1990’s, before the advent of "PPPs" and so-called "Asset Monetization" deals, extensive research was underway in many of the world’s established academic programs that explained and characterized the advantages and disadvantages of:

  • Design-Bid-Build
  • Design-Build
  • Pure Operations & Maintenance
  • Design Build Operate Maintain (All Public and Mixed Public/Private Funding)
  • Design Build Finance Operate Maintain (or BOT)

Life Cycle Delivery methods were understood to extend beyond Design Build to include long term Operations and Maintenance as part of a "head to head" competitive procurement. Engineering and construction professionals had confirmed that flexibility in project delivery and finance methods would create attractive opportunities:

  1. to save costs and time in INITIAL DELIVERY, or
  2. to save substantial money (and time to initial delivery) through LIFE CYCLE DELIVERY.

The opportunity to save time and money appeared to arise primarily from the "integration" of the "design" function with succeeding phases in the life cycle of an infrastructure facility – an "integration" that fundamentally altered the overall scope and purpose of design. The very essence of the task a designer faces in a Design-Bid-Build procurement is fundamentally different than that faced by a designer who is part of an integrated team responsible to build, operate, repair, and maintain a facility in accordance with a financial plan that will unfold of 25 to 30 years. The "design" function in each of the Initial Delivery and Life Cycle Delivery methods is fundamentally different, provided that the procurement process requires and enforces this kind of "Integration."

To engineering and construction professionals, this kind of functional integration of Design with one of more of the remaining Basic Functions – namely, Construction; Operation & Maintenance; Repair, Rehabilitation, and Replacement; and Financing – changes the entire life cycle of a project by fundamentally changing the nature of the "design" task itself. This fact is best demonstrated through the Cost Influence Curve developed by Stanford Professor Boyd Paulson in 1978. See Figure 3.

Figure 3 Paulson’s Cost Influence Curve

Paulson’s Cost Influence Curve describes the dwindling ability to influence project cost results as the project moves out of the planning and design phases and into the construction phase.

In 1978, before the revival of Life Cycle Delivery, Paulson’s research focused only on Initial Delivery. But, Paulson’s logic extends even more powerfully to OM&R over the life cycle. By the time any project moves out of the planning and design phases, and into the construction and O&M phases, there is very little remaining opportunity to influence cumulative life cycle cost.

Typical Time and Money Gains as "Design" Moves Deeper Into the Life Cycle

Design Integrated with Construction: Case study based research at MIT repeatedly indicated that cost savings of 10% in INITIAL DELIVERY were available through the effective, competitive use of DESIGN-BUILD when compared to DESIGN-BID-BUILD, along with improvement in the overall time for delivery of projects of 12%.

Figure 4 Life Cycle Obligations Matched to Life Cycle Costs

Design Integrated Through Construction and OM&R: Greater savings in costs (30% to 40%) and time for delivery (25%) were available through the effective, competitive use of the LIFE CYCLE DELIVERY approaches (DESIGN-BUILD-FINANCE-OPERATE-MAINTAIN and DESIGN-BUILD-OPERATE-MAINTAIN).

Producers and Clients that have implemented effective Life Cycle Delivery procurements appreciate the advantages of competitive contract mechanisms in which technical requirements, level of service, and financial obligations have been appropriately matched to resources, as indicated in Figure 4, right. 

4 The Global Financial Crisis – Public "Creditworthiness" & Influence

The Global Financial Crisis has demonstrated that there is a practical limit to the "Creditworthiness" of Government(s). Financial instability within the EC, within the US, and in other nations indicates that the unlimited willingness of governments to print money and/or issue sovereign debt will encounter increasing skepticism in international financial markets.

A mundane example of the OM&R funding problem local governments face in the current climate is the MBTA in Boston, MA, the local transit authority. Originally formulated as the Massachusetts Transit Authority(MTA) in the first half of the 20th century, O&M deficits were shifted from the MTA to the four cities in which it operated, and when deficits could no longer be borne by these cities, seriatim to: (i) the surrounding 28 cities and towns, (ii) to the 50+ cities and towns in Eastern Massachusetts; (iii) to the entire Commonwealth of Massachusetts; and (iv) (temporarily) to the US Federal Government (through the first stimulus package). The MBTA may not be able to "kick this can" much further down the road.

The US government’s 2009 response to the GFC focused upon a Keynesian style $159 billion stimulus program for "shovel ready" projects in infrastructure. In September, 2010, the administration proposed a further $50 billion investment to renew public infrastructure across the country. For a variety of reasons, the effectiveness of these measures is in doubt. First, the amount expended by the US Government is very small in view of the overall size of the public infrastructure portfolio in the US. Assuming that a Keynesian supply side stimulus program could be effective, the amount and the nature of this investment would be wholly incapable of repositioning even a small portion of the nation’s infrastructure assets. Further subsidy of Initial Delivery increases the long-term obligation of state and local government for OM&R. Partial (and temporary) funding for reducing the OM&R backlog is an intervention that helps in the very short term – but using the Paulson Influence Curve – will be largely ineffective in reducing or repositioning long term life cycle costs.

Figure 5 Application of USA Stimulus Funds

As illustrated in Figure 5 above, "stimulus" funds have been applied to "Initial Delivery" on new "shovel-ready" projects and to long overdue deferred maintenance and repair of existing facilities. In the author’s view, neither tactic can be effective in improving the long-term positioning of the nation’s infrastructure assets. These tactics continue the practice of over-reliance on Initial Delivery and don’t substantially alter chronic under-funding of OM&R. Government’s commitment to Initial Delivery remains unmatched by a corresponding real commitment to OM&R.  

Toward A Long-Term Solution – Increased Use of "PPP" (Life Cycle Delivery).

The Global Financial Crisis has, in the short term, slowed the rate at which Life Cycle Delivery projects have gone forward. Common sources of funding for Public Infrastructure Facilities are illustrated in Figure 6, tied to each of the Six Basic Delivery Methods. As a result of the GFC, funds available through debt and through private equity have been relatively restricted since 2008. Large-scale "stimulus" programs have temporarily supplied "cash" to this system, which has also had the effect of crowding out Life Cycle Delivery projects that are competing for government cash.

Figure 6 Sources of Funding for Public Infrastructure Facilities

Procurement Structure Can and Should Drive Improvements in Life Cycle Cost and LOS Performance

Once the current programs of "stimulus" have run their course in the USA and in portions of the EC, the author believes governments will have little choice but to examine more durable strategies aimed at capturing the 30-40% savings that are available through head to head competition over the entire life cycle. Such strategies are now being implemented, for example, in Canada, aimed at capturing life cycle cost savings that come from head to head competition over Design; Construction; Operation & Maintenance; Repair, Rehabilitation, and Replacement; and Financing. Canada is successfully using all of the Six Key Delivery Methods simultaneously to provide durable solutions to public infrastructure needs. Thirty-five (35) Canadian projects are currently registered in the Barchan Foundation web application.

The Kicking Horse Canyon Bridge project along Highway 1 in British Columbia (see inset) is an example of solid Canadian procurement practices that drove improvements in LCC and LOS. The competition leading to the award of a 25 year contract to design, build, maintain, and operate a replacement bridge over the Kicking Horse Canyon was accompanied by an advance commitment by the government to contribute 50% of the capital cost for Phase 2 of the project (up to a maximum of $62.5 million CDN).

b2ap3_thumbnail_kicking-horse-canyon-bridge.jpgThe competitive award was based on which DBOM team would accept the lowest amount of net revenue (in terms of initial delivery costs and long term O&M costs) over the 25 year team. The procurement structure required the DBOM team’s design and financing plan to be fully integrated with the team’s approach to construction, operations, repair, and maintenance. The winning proposal had to be great architecturally, easy to build, operate, maintain, and repair, with predictable and reliable requirements for ongoing OM&R.

The 1997 Confederation Bridge Project between Prince Edward Island and New Brunswick (across the Northumberland Strait) provides a similarly strong example of Canadian procurement practices designed to force proposers to integrate "design" fully across the construction, b2ap3_thumbnail_confederation-bridge.jpgoperation, repair, and ongoing maintenance of a new facility that demonstrated, upon award of the resulting contract, a $750 million CDN life cycle savings to the federal government over the ferry operations that the new bridge replaced. The winning proposer included detailed working plans for how the bridge would be manufactured, transported, and erected from an "outdoor" manufacturing facility immediately adjacent to the site.

Figures 7, below, is a screen shot from the Barchan web application, showing one portion of the project registration process that is focused on procurement structure. We are trying to capture procurement structure in each of the projects registered in the Barchan web application. For example, we are trying to answer these questions about procurement structure:

Figure 7 Excerpt from the Barchan Project Registration Process
  • Is the competitive process structured to force real integration of "design" broadly over both construction AND OM&R, or is the competition loosely applied to the separate functions of "construction" and "O&M" (i.e. no "real" integration across OM&R)?
  • Is the "price" submitted by proposers "final" – i.e. the product of tough "head to head competition"?
  • Is negotiation of scope – the other side of "price" – permitted after selection of the winner?
  • Are users protected through "head to head competition" of fees/tolls/charges over the life cycle?

There are many other examples of solid procurement practices in the Barchan project database – the Hong Kong Harbor Crossings, the Hong Kong Container Port, and the 1987 to 1997 Airport Core Program.

The Tolt Water Treatment Plant project (Seattle, WA) is an interesting example of a procurement structure that required specified improvements in Level of Service (LOS) and at least a 15% improvement in Life Cycle Costs performance as a pre-requisite for acceptance and award based on any of the submitted proposals.

Conclusion and Predictions

PPP’s have a future, despite the current perception of inactivity, and despite the incredible confusion generated by the acronym PPP. Governments will increasingly have few durable options other than to focus on "Head to Head Competition" over required improvements in Life Cycle Cost and Level of Service performance as the primary evaluation factors for Contract Award. A 30-40% life-cycle cost savings – primarily through savings in energy, controls, and repair costs will be increasingly difficult to ignore. The futility of over-reliance on Initial Delivery methods will continue to become apparent.b2ap3_thumbnail_six-key-delivery-methods.jpg
Figure 8 What a Future Steady State Might Look Like

Design Build, Design-Bid-Build, and Pure O&M will continue to have important roles in the delivery of infrastructure facilities – especially for those Architectural Projects in which a significant design focus is required on inhabited space.

Figure 8 represents the author’s current prediction at how the distribution of delivery methods and expenditures might appear at the end of the next decade – when we all have 2020 hindsight. 

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