For years, engineers have warned that New Jersey’s infrastructure is crumbling and in dire need of repair, but Hurricane Sandy brought this lesson home like nothing else. The full scope of the damage is not yet known, but it was of historic proportions. Apart from the thousands of downed power lines, the storm washed out bridges at the Jersey shore; ruptured natural gas pipelines, which caught fire and burned down houses; and caused wastewater treatment plants to malfunction, spilling raw sewage into waterways. The havoc wreaked by Sandy has galvanized a public outcry demanding infrastructure improvements, but no one knows where the money needed to rebuild will come from.
Even before Hurricane Sandy hit the state, New Jersey faced staggering costs to modernize its aging infrastructure. A 2009 study by the American Society of Civil Engineers found that 36 percent of New Jersey’s bridges were structurally deficient; the state had 213 high-hazard dams, meaning that a failure could lead to a significant loss of life; and 78 percent of New Jersey’s roads were in either poor or mediocre condition. The study also concluded that the state needs to invest nearly $7 billion over the next two decades to meet drinking water needs, and another $9 billion upgrading wastewater treatment plants.
The rebuilding effort provides an opportunity to utilize innovative financing and procurement techniques, and 21st century technology, to deliver more public infrastructure projects than ever before, and to build them faster, cheaper and better.
Alternative Financing Techniques
One way to encourage public infrastructure development is the use of alternative financing techniques, such as certificates of participation or COPs.
• Inadequacy of Traditional Bond Financing. General obligation bonds, which historically have financed local public infrastructure, have proven insufficient to meet the public need. General obligation debt typically requires voter and state approvals. These requirements often stymie new projects, and the prolonged development process makes projects more expensive as construction costs escalate.
• Lease Financing Using Certificates of Participation. One way for local governments to finance projects without voter approval is by utilizing COPs. In this financing model, the local government forms a nonprofit entity to facilitate the development or renovation of public facilities. A long-term lease from this entity to the local government then is executed for use of the improvement, usually ranging from 20-30 years. Interests in the lease are sold, with the proceeds used to finance the project. Rights to payment under the lease are assigned to a trustee. COPs provide investors with the right to a pro-rata share of the government’s lease payments. COP financing can be structured so that voter approval is not required because the underlying lease payments are subject to annual appropriations and the government’s taxing authority is not pledged to secure the payments. Because the lease payments are subject to annual appropriations, the COPs are not considered “debt” for state law purposes and are subject to fewer state level approval requirements than general obligation bonds. The interest portion of the COP issue is typically exempt from state and federal income tax, which significantly reduces the cost of debt. Generally, ownership of the facility is assumed by the local government after the lease expires and all COP payments have been made.
• Occupancy Cost Reductions Through Intensified Use. Private sector involvement in developing public infrastructure also can reduce local government’s occupancy costs through intensified use. Infrastructure costs are reduced by allowing the developer to lease a facility (e.g., a school) to other approved users when unoccupied and/or incorporating the government use into mixed-use projects such as residential subdivisions or commercial facilities. The additional use provides revenue that offsets the government’s occupancy costs.
• Other States’ Use of Alternative Financing Techniques. Other states have successfully used alternative financing techniques to facilitate development of local infrastructure projects without the burdens of bond financing.
Virginia adopted the Public-Private Education Facilities and Infrastructure Act (PPEA) in 2002, and this law has become a model for other states. This legislation allows for both solicited and unsolicited proposals for development and operation of qualifying projects and permits design-build project delivery (which provides additional benefits, as discussed below). Where unsolicited proposals are received, the law requires an open competition period, with all competing proposals considered. Public notification and hearings are required. Under the PPEA, Virginia has initiated or completed over 100 projects, with individual projects ranging in size from $1.5 million to over $5 billion.
Maryland’s Public School Facilities Act, enacted in 2004, authorizes local governments to use a number of alternative development methods. Design-build procurement and lease financing are both allowed. The legislation also allows cooperative use agreements for school property, which permit a developer to reduce the school’s lease payments by generating revenue from third-party tenants. Similar to Virginia’s legislation, competitive negotiation and unsolicited proposals also are authorized.
In 2006, North Carolina passed the Public-Private Partnerships for Schools Act, which authorizes lease financing transactions and build-to-suit capital leases with private developers for the construction of school facilities. North Carolina currently is considering Senate Bill 822, which allows local and state government to solicit proposals for project development and operation, allows for use of design-build and permits innovative financing tools.
In 2011, Texas passed the Texas Public and Private Facilities and Infrastructure Act, which authorizes public-private partnerships to construct schools, water and wastewater projects, transit, ports, power generation sites and other public facilities.
• New Jersey’s Restrictive Statutory Scheme. In contrast to these other states, New Jersey restricts local governments from fully utilizing lease financing to develop public infrastructure. Different statutes govern leases by different types of local governmental entities, making use of COP financing complex and difficult. For example: (a) lease purchase agreements for schools require Department of Education approval and are subject to a five-year maximum (N.J.S.A. 18A:20-4.2(f)), and (b) all lease purchase agreements involving school construction contracts must be competitively bid (N.J.A.C. 6A:26-10.4(a)(2)). In a step in the right direction, in August, New Jersey enacted S2501, which allows a state or county college to enter into a public-private partnership that would utilize revenue from already existing buildings, like dormitories, to build academic facilities; prior law only allowed partnerships for revenue-generating facilities.
Cost and Time Savings Using Design-Build Project Delivery
Another way to save time and money in rebuilding public infrastructure is use of the “design-build” project delivery format.
Local government construction typically is conducted using the “design-bid-build” procurement process. The government first enters into a contract with a qualified architectural/engineering firm to design the new facility and then awards a separate construction contract through competitive bidding. Separating architectural and construction services makes project costs uncertain, because actual costs are not known until the project is put out for bid. The traditional “design-bid-build” procurement approach also is notorious for causing project delays, increasing costs and generating conflicts.
In contrast, the “design-build” project delivery format involves a single contract for both design and construction. In this model, budgetary constraints are addressed in advance. Combining the design and construction functions greatly shortens the time needed to deliver a project, and reduces costs by eliminating overlapping functions, encouraging collaboration between the designer and contractor and avoiding disputes. Also, the negotiation of “turn-key” design-build construction contracts can allow government to transfer virtually all risk to the private sector in the construction phase.
Using 21st Century Construction Technology
Building information modeling (BIM) is a powerful new technology which is revolutionizing construction by reducing costs, shortening project delivery times, increasing quality and reducing conflicts on construction projects. BIM uses construction information to form a three-dimensional digital simulation of a construction project. BIM is fundamentally different from traditional design tools, which depict construction elements with lines that define a structure’s geometry. Using BIM, each element of a structure is an “intelligent” object containing a broad array of information in addition to physical dimensions. Designers can use BIM to explore alternative concepts and optimize their designs. Contractors can use BIM to “rehearse” construction, coordinate plans and prepare shop and fabrication drawings. Owners can use BIM to optimize building maintenance, renovations and energy efficiency, as well as to monitor life cycle costs. BIM allows for collaboration among designers, constructors and owners in ways the construction industry has never known before.
BIM promises to exponentially improve design and construction. BIM allows design optimization, fewer construction errors, fewer design coordination issues, and thus, fewer claims. Contractors benefit through less coordination and engineering effort, reduced fabrication costs and more accurate costing data. Owners can use BIM to improve management and operation of a facility. In short, BIM offers the promise to actually accomplish what the construction industry has always sought to achieve — increased productivity coupled with decreased costs, shorter project delivery times and fewer disputes.
BIM is quickly expanding beyond vertical construction into public infrastructure projects. BIM designs are mandatory for many projects procured by the federal General Services Administration and Army Corps of Engineers. The New York City Department of Design and Construction is the latest regional agency to issue BIM technology standards, which require BIM on new projects valued between $15 million and $50 million. In so acting, the agency joined the New York City Department of Buildings and the Dormitory Authority of the State of New York that have BIM-based standards. The Wisconsin Department of Transportation (WisDOT) plans to include civil three-dimensional models as part of standard design for all new projects starting in 2014. At that time, WisDOT also will deliver a three-dimensional surface model for any project involving earthwork so that contractors can import the design files into their survey and excavation equipment. According to a recent study, nearly half of North American owners, designers and contractors engaged in civil works are actively using BIM.
Hurricane Sandy has made rebuilding New Jersey’s infrastructure more important than ever. The rebuilding effort provides an opportunity to utilize innovative financing and procurement techniques, and 21st century technology, to deliver public infrastructure projects faster, cheaper and with higher quality than ever before.■