Chapter Summary
The re-emergence of alternative project delivery and project finance methods in the United States has generated a great deal of activity that can best be described as “self-promotion.” The Design Build Institute of America pushes design-build. The American Society of Civil Engineers pushes DesignBid-Build. The National Council of Public Private Partnerships pushes “Public Private Partnerships” or “PPP,” an undefined “delivery method” that often means restructuring public entities into public “corporations” or publicly controlled monopolies. The Reason Foundation advocates “privatization” often as a synonym for Design-Build-Operate and DesignBuild-Finance-Operate. Each organization and each approach to project delivery and finance has great merit. But, not one of these delivery methods offers a durable or a complete solution to long term infrastructure delivery and finance problems. At no time has America relied on a single project delivery method to produce the entire portfolio of infrastructure. (Chapter 3) The “competition” among groups to establish just one delivery method as “best” is just as futile and wasteful as the competition among Virginia, Maryland, Pennsylvania, and New York to be the “first”, “best”, and “only” productive route across the Appalachian Mountains. In fact, any infrastructure strategy that relies solely on a single project delivery method is sure to be inadequate in the long term.
Chapter 5 describes how another path through the current confusion can be established through a slightly different approach to the use of multiple project delivery and finance methods in an infrastructure portfolio. Rather than choosing among alternative delivery methods one project at a time, this chapter explores a better way to apply multiple project delivery methods across a network of projects. The example is Hong Kong, and how it assigned project delivery methods to each project with the entire portfolio of projects in mind. There are two keys to Hong Kong’s successful use of multiple project delivery and finance alternatives. First, the government (in our public and private lexicon, the Client) kept the basic responsibility of establishing at least a functional scope of work for every project in the collection. Second, the Client made its choice of delivery and finance method with the performance of the overall collection of infrastructure projects in mind.
These two principles — Client-defined scope and choice of delivery method in the context of the portfolio — are at the heart of the recommendations in Chapter 6 and 7.1 These principles also provide the foundation for continuing objections to the enactment of special legislation (or private procurement policies) that define Design-Bid-Build, Design-Build, Design-Build-Operate, or Design-Build-Finance-Operate in ways that prevent public and private Clients from freely mixing and matching project delivery and finance methods across an entire infrastructure portfolio.2 Private Clients, fortunately, are typically under no such statutory constraints.
Chapter 5 describes Hong Kong’s experience in the ten years between 1987 and 1997 with simultaneous use of multiple project delivery and finance methods to a portfolio of infrastructure projects. Hong Kong’s use of Design-Bid-Build, Design-Build, Design-Build-Operate, Design-Build?Finance-Operate, and Pure Operations and Maintenance was important in implementing a fast paced, large investment program to upgrade transportation systems at the same time that water supply, wastewater treatment, and solid waste disposal facilities were substantially extended and upgraded. Hong Kong followed the same Dual-Track Strategy3 to directly finance a group of transportation and waste projects, while simultaneously using an indirect approach to finance and deliver other elements of the transportation system (primarily tunnels and crossings), container facilities, and key elements of the subway system.
Hong Kong’s strategy between 1987 and 1997 is consistent with all the ten key elements set forth in Chapter 4. Pace was driven by the historical situation (turnover of the colony to the People’s Republic of China in 1997) and a crystal clear government commitment to strategic planning, to transparency (all projects were jointly reviewed and approved by the British, Chinese, and Hong Kong governments), and to competition. Privately financed projects (Design-Build-Finance-Operate) were generally large in dollar value. Competition for these contracts was conducted in ways consistent with the fundamental principles set forth in Chapter 4. The government, through private sector competition, confirmed both the technical and financial viability of projects. This competition was based upon a functional description of the project defined by the government in the Request for Proposals. The competition took place at a later point in project development, after the proposers prepared conceptual designs and drawings sufficient to establish fixed priced proposals for the entire contract scope. Life cycle costs, overall quality of service, and the qualifications of the proposing teams were the basis of the government’s strategy for producing “best value” on each project and “best value” across the entire portfolio.
Hong Kong’s experience demonstrates that simultaneous application of multiple project delivery methods is a powerful tool for Clients who need to find innovative ways to step up the pace of infrastructure renewal, maintenance, and replacement. Hong Kong adopted this successful, flexible strategy in response to a specific public crisis. The United States government used a similar strategy throughout the first 150 years of the Republic. Private Clients can make effective use of this strategy today. Chapter 5 ends with a basic question: is crisis a prerequisite to good infrastructure strategy?
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Notes
These principles are at the heart of the author’s research, writing, and teaching efforts at MIT.
There are numerous additional rationales for the kind of open procurement system advocated in this book. Such a strategy is stable over long periods of time, and not only rewards, but also demands, steady incremental improvements in the cost and quality of infrastructure services. The simultaneous application of multiple project delivery methods is a prerequisite for an infrastructure strategy that attracts and rewards innovation in technology, materials, and methods. One of the great strengths of a strategy that relies on multiple project delivery methods is that each innovation is instantly available for use on subsequent projects, irrespective of delivery method that produced the innovation.
The strategy implemented in Hong Kong is very similar to that employed in the United States prior to 1933 (as described in Chapter 3), with key differences that the experience of pre-Depression America undoubtedly shaped. There were no sole-source procurements in Hong Kong’s strategy. Instead, only highly competitive processes were used, in which winners were determined using pre-established evaluation criteria.
Tuesday is not Design-Build day. We hope the Design-Bid-Build is not the procurement method of choice on rainy days, either. Design-Build-Operate shouldn’t be chosen as the delivery method of choice in even years, and Design-Build-FinanceOperate isn’t best in the Summer.
The American Bar Association’s (ABA) Section of Public Contract Law and Section of State and Local Government Law approved a redraft of the ABA Model Procurement Code in April, 2000, which contains language that would preserve all of the project delivery and project finance options in Quadrants I, II, and IV. The 2000 ABA Model Procurement Code is included as Appendix E. The American Consulting Engineers Council, at its May, 1999 Annual Meeting in Seattle, Washington adopted Value Based Delivery Systems as a long term goal. ACEC’s Value Based Delivery Systems is premised upon the basic notion that different delivery and finance methods must specifically be evaluated in order for consulting engineers to assist their clients achieve best value in the procurement of infrastructure facilities and services.
This process could certainly be effective in the private sector, where a CLIENT is free to select among proposers based on any combination of quality, price, and time it wishes, or, in appropriate circumstances, for any other reason. In the private sector, long-term relationships are routinely structured, or desired by both parties to a transaction, which provides additional incentives for PROVIDERS to carefully consider the prospect of such long-term relationships in their dealings with CLIENTS.
With the benefit of hindsight, we might label these decisions to be wise or not. In general, however, they were made in good faith in the political, social, and economic climate of the day, and based on the best technological and engineering knowledge then available.
The pace of infrastructure renewal, replacement, and expansion direct affects construction industry crafts, not merely the businesses hired to construct, repair, or replace infrastructure facilities. The most troubling problem associated with under-investment in infrastructure is reduced demand for skilled crafts. The availability of skilled craftsmen and women, capable of properly installing and operating ever more complicated elements of modern infrastructure facilities is a pre-requisite for any stable strategy.
PADS. (1991). “Hong Kong’s ‘Port and Airport Development Strategy’: A Foundation for Growth.” Hong-Kong.
Department of Planning, (1994). “Territorial Development Strategy Review,” Hong Kong Government.
Treating this collection of needs as a portfolio of infrastructure investments, the Hong Kong government arranged for the delivery of nearly the entire list in the interval between the decision to return the Colony to the People’s Republic of China and the date of the transfer of sovereignty. The government used the alternative delivery methods described in Chapter 2 and the dual-track strategy described in Chapter 3 to accomplish these results.
PADS. (1991). “Hong Kong’s ‘Port and Airport Development Strategy’: A Foundation for Growth.” Hong-Kong.
Patten, G. C. “Hong Kong: A Thousand Days and Beyond.” Opening of the 1994/95 Session of the Legislative Council, Hong Kong, 35.
PADS. (1991). “Hong Kong’s ‘Port and Airport Development Strategy’: A Foundation for Growth.” Hong Kong Government.
One of Mr. Wu’s proposals for port and airport development, Scheme C, is presented at page 40 of the PADS report. PADS. (1991). “Hong Kong’s ‘Port and Airport Development Strategy’: A Foundation for Growth.” Hong-Kong.
PADS. (1991). “Hong Kong’s ‘Port and Airport Development Strategy’: A Foundation for Growth.” Hong-Kong, at page 48.
Department of Planning (1994). “Territorial Development Strategy Review,” Hong Kong Government, Figure 3, at page 15.
Patten, G. C. “Hong Kong: A Thousand Days and Beyond.” Opening of the 1994/95 Session of the Legislative Council, Hong Kong, 35. Rather than “running” from 1997, Hong Kong’s strategic plan seems to have allowed many to move toward 1997 with surprising calm. In October of 1994, the governor cited a number of statistics compiled by the government which compare 1984 to 1994 and illustrate the tenacity with which Hong Kong has been able to approach 1997: a 79% growth in Total GDP in real terms; growth in GDP per person from 28th in the world in 1984 to 17th in the world; a 350% increase in the value of foreign trade in real terms; growth of Hong Kong’s trading economy from the 13th largest in the world to the 8th largest in the world; a 54% increase in labor productivity; a planned transition from a manufacturing based economy to that of an international business center, with the service sector providing 75% of GDP and 70% of total employment; a rise in real earnings per person of 66%; a decline in unemployment from 4% to 2%; a rise in owner occupied flats from 31% to 48%; and growth in trade with China of over 500% in real terms.
PADS. (1991). “Hong Kong’s ‘Port and Airport Development Strategy’: A Foundation for Growth.” Hong-Kong.
Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors, The Free Press, A Division of Macmillan, Inc., New York.
An interesting question follows. Are “watershed” events, such as the coming change in sovereignty for Hong Kong, required for a state such as Massachusetts, a region such as New England, or a nation such as the USA, to conduct the kind of strategic planning exercise achieved by Hong Kong. If so, the answer doesn’t say much for the future of innovation in infrastructure.
Increased capacity to move goods, information, and people is often achieved through the combination of new technology and improved methods, not exclusively through expansion of existing technologies and methods. Each person interviewed assumed as “proven” that a positive relationship exists between improved infrastructure facilities and increased economic activity. Each interviewee believed that economic and infrastructure variables are not independent, but positively and strongly correlated with one another. Although the correlation between infrastructure and economic activity is harder to see in industrialized countries like Hong Kong, the United States, the United Kingdom, or Germany, financiers in Hong Kong are convinced that the basic relationship exists and forms a reliable basis for investment.
Aschauer, D. A. (1991) “Why is Infrastructure Important?” Is There a Shortfall in Public Capital Investment? Harwichport, Massachusetts, 250; Aschauer, D. A. (1993). “Public Capital and Economic Growth.” Public Infrastructure Investment: A Bridge to Productivity Growth?, D. B. Papadimitriou, ed., The Jerome Levy Economics Institute of Bard College, Annandale-on-Hudson, NY, 47; Gomez-Ibanez, J. A., Meyer, J. R., and Luberoff, D. E. (1991) “What Are the Prospects for Privatizing Infrastructure? Lessons from U.S. Roads and Solid Waste.” Is There a Shortfall in Public Capital Investment?, Harwichport, Massachusetts, 250; Gomez-Ibanez, J. A., Meyer, J. R., (1993). Going Private, The Brookings Institution, Washington D.C.; Gramlich, E. M. (1991) “How Should Public Infrastructure Be Financed?” Is There a Shortfall in Public Capital Investment?, Harwichport, Massachusetts, 250; Holtz-Eakin, D. (1993). “New Federal Spending for Infrastructure: Should We Let This Genie Out of the Bottle?” Public Infrastructure Investment: A Bridge to Productivity Growth?, D. B. Papadimitriou, ed., The Jerome Levy Economics Institute of Bard College, Annandale-on-Hudson, NY, 47; Munnell, A. H. (1991) “How Does Public Infrastructure Affect Regional Economic Performance?” Is There a Shortfall in Public Capital Investment?, Harwichport, Massachusetts, 250; Munnell, A. H., and Cook, L. M. (1991). “Financing Capital Expenditures in Massachusetts.” New England Economic Review(March/April 1991), 79; Peterson, G. E. (1991) “Is Public Infrastructure Undersupplied?” Is Public Infrastructure Undersupplied?, Harwichport, Massachusetts, 250; Winston, C. M. (1991) “How Efficient is Current Infrastructure Spending and Pricing?” Is There a Shortfall in Public Capital Investment?, Harwichport, Massachusetts, 250.
Conzen, M. P. and K. J. Carr. (1988). The Illinois & Michigan Canal National Heritage Corridor: A Guide to its History and Sources., Northern Illinois University Press, DeKalb, Il.; Goodrich, C. (1960). Government Promotion of American Canals and Railroads, 1800–1890, Columbia University Press, New York, New York; Goodrich, C. (1961). “Canals and American Economic Development.”, Columbia University Press, New York and London; Goodrich, C. (1967). “The Government and the Economy, 1783–1861.” The American Heritage Series, L. W. L. a. A. Young, ed., The Bobbs-Merrill Company, Inc., Indianapolis, New York, Kansas City, 544; Hood, C. (1993). 722 Miles: The Building of the Subways and How They Transformed New York, Simon & Schuster, New York; McCullough, D. (1972). The Great Bridge, Simon and Schuster, New York; McCullough, D. (1977). The Path Between The Seas, Simon & Schuster, New York; Putnam, J. W. (1918). The Illinois and Michigan Canal: A Study in Economic History, University of Chicago Press, Chicago.
Short term financing of initial construction is often accomplished through Design-Build-Operate contracts in Quadrant I. Long term, life-cycle financing of design, construction, and operations is often accomplished through Design-BuildFinance-Operate contracts in Quadrant II (called BOT or Build Operate Transfer in Southeast Asia).
These three prerequisites were met for a number of mega-projects in Hong Kong. These projects include each of the three major roadway tunnels across Victoria Harbor, two transit tunnels across the harbor, the Tate’s Cairn Tunnel to the New Territories, the Route 3 highway tunnel northward from Kowloon toward the old Chinese border. Major components of the new airport at Chek Lap Kok met these requirements and were privately financed. Still other mega-projects, predominantly commercial and residential structures integrated with mass transit stations, have been privately financed and developed. These same requirements have been applied in arranging for private financing of large environmental projects throughout Hong Kong, including land fills and hazardous waste treatment facilities, based upon minimum income streams guaranteed by the government for materials handled.
Bailey, C. P. (1994), Personal Interview, Wardley Capital Limited, Hong Kong. Private financing has typically required at least one, and usually many, investors to prefer the risk/reward structure of infrastructure projects to other private investment opportunities. Unlike tax revenues, the stream of private investments in Hong Kong’s infrastructure projects is in competition with other investment opportunities, such as domestic and foreign stock markets, money markets, and bond markets. Hong Kong offers all these investment opportunities, yet a number of large projects have been privately financed. Billions of private dollars have been invested in infrastructure development based on the investors’ expectations that the rate of return would equal or exceed returns available from other investments.
Hong Kong’s approach to competition is reminiscent of pre-Depression American.
Chapter 6 and Appendix E describe how the American competitive sealed proposal process for the procurement of complex systems can and should be adapted to combined project delivery methods in Quadrants I and II.
Consultants are frequently used by the government to supplement existing public employees in defining these requirements, including design and construction feasibility, financial feasibility, fare structures, scheduling of construction, selection of franchise period, conceptual design, schematic design, and possibly preliminary design. The government remains in control of the process by which the basic elements of the project are chosen and described in documents, which become the basis upon which competition takes place on the project.
This delivery method is Design-Build-Finance-Operate in the parlance of this text.
Throughout this period, the infrastructure strategy was inextricably tied to Hong Kong’s overall economic strategy. The common elements of this process are those described in Chapter 2. The technological, competitive, and economic drivers for Hong Kong’s procurement strategy are those described in Chapter 3.
Measurement problems arise because most projects are built using one of the two methods, making comparison with the other method largely hypothetical.
In 1994, when the interviews forming the basis of this chapter were conducted, the government was pushing very hard to expand the frequency with which design/build processes were used throughout the colony, primarily with time savings in mind, but with the expectation that cost savings would necessarily follow.
Climas, J. (1994), Personal Interview, Government Secretariat Works Branch, Hong Kong.
Ibid.
Ibid.
Ibid.
Rockey, J. (1994), Personal Interview, Environmental Protection Department, Hong Kong.
Environment Hong Kong 1994, page 137.
Actual financial performance on these projects is private information, since only the public side of the transaction, that is, the quantity of waste disposed and the dollars paid for tipping fees, is public information. Operators are betting that these income streams are more than sufficient to cover all expenses and liabilities such as bank financing, and provide sufficient return to consortia participants.
Environment Hong Kong 1994, page 137.
Rockey, J. (1994), Personal Interview, supra.
Environment Hong Kong 1994, pages 62 through 65.
Rockey, J. (1994), Personal Interview, supra.
Much of the information presented in this section is from Kumagai-Gumi. “New Hong Kong Tunnel Company Ltd., Eastern Harbor Crossing Project.”: Kumagai Gumi Company Limited, 1986, confirmed through personal interview with Robert Lloyd.
Lloyd, R. H. (1994), Personal Interview, Highways Department, Hong Kong.
Climas, J. (1994), Personal Interview, Government Secretariat Works Branch, Hong Kong.
Much of the information in this section is from the Tate’s Cairn Tunnel Company’s brochure describing the project, confirmed through personal interviews with Robert Lloyd and Albert J. Bast. “Tate’s Cairn Tunnel Project,” Gammon/Nishimatsu Joint Venture, 1988.
Bast, A. J. (1994), Personal Interview, Parsons Brinckerhoff (Asia) Ltd., Hong Kong; Lloyd, R. H. (1994), Personal Interview, Highways Department, Hong Kong.
Lloyd, R. H. (1994), Personal Interview, supra.
A number of issues arise when particular features of one proposal are communicated to other proposers for subsequent inclusion and pricing in revised proposals. “Technical leveling” is the term used in the United States to describe this problem.
Lloyd, R. H. (1994), Personal Interview, supra.
Americans might describe these arrangements as public private “partnerships,” but this term implies a joint liability that simply does not exist. Others would call this joint development.
Bailey, E. (1996). “Driving Up the Learning Curve.” Infrastructure Finance, 9–10.
MTRC. (1993). “Mass Transit Railway Corporation Annual Report 1993.” Mass Transit Railway Corporation, Hong Kong.
NAPCOO. (1994). “Hong Kong Airport Core Programme: The Vision Takes Shape.” New Airports Projects Coordination Office.
See, National Council on Public Works Improvement, Fragile Foundations: A Report on America’s Public Works: Final Report to the President and the Congress„ Washington, February, 1988; USDOT, The Status of the Nation’s Highways, Bridges, and Transit: Conditions and Performance, Report of the Secretary of Transportation to the United States, January, 1993. Both the EPA Construction Grants Program and the Interstate Highway System (IHS) program, described in Chapters 2 and 3, have “crisis” in their background as well. The IHS program was described as one important response to the Cold War that would substantially increase capacity to move military equipment and troops in support of national defense. The EPA grants program was described as a critical element of the nation’s response to polluted waterways and drinking water sources throughout the country.
These variables will be revisited in Chapter 7. Hong Kong provides an opportunity to see them in action together.
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Miller, J.B. (2000). A Path Through the Current Confusion: Re-Establishing an Open Framework for Project Delivery and Finance in the United States. In: Principles of Public and Private Infrastructure Delivery. The Springer International Series in Infrastructure Systems: Delivery and Finance, vol 101. Springer, Boston, MA. https://doi.org/10.1007/978-1-4757-6278-5_5
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