Meeting_Body
EXECUTIVE MANAGEMENT COMMITTEE
JULY 18, 2024
Subject
SUBJECT: SOUTHEAST GATEWAY LINE P3 ASSESSMENT UPDATE
Action
ACTION: RECEIVE AND FILE
Heading
RECOMMENDATION
Title
RECEIVE AND FILE report on the Southeast Gateway Line P3 Assessment Business Case (Attachment A).
Issue
ISSUE
Metro conducted a Public-Private Partnership (P3) Assessment of the Southeast Gateway Line (SGL) (formerly West Santa Ana Branch) Project (Project) to determine if Metro can benefit from advancing a P3 delivery model for the Project. A qualitative assessment, risk analysis, and Value for Money (VfM) were developed to form the overall P3 Business Case. The P3 Business Case is a comprehensive approach utilized as a best practice worldwide by public agencies for major capital investments to identify, assess, and make a determination on the appropriate procurement option for a project that aligns with project objectives. The P3 Business Case has concluded a P3 delivery is not the right approach for the Project based on the relatively low Value for Money (VfM) cost savings opportunity compared to the added risks, interfaces, and challenges that would be introduced under a P3 model.
Background
BACKGROUND
In 2016, Metro received two Unsolicited Proposals suggesting P3 delivery approaches were viable for the Project. In seeking to improve service to advance innovative delivery alternatives for the 19+ miles from DTLA to the Los Angeles/Orange County line, Metro decided to further explore options for project delivery, including the potential for a P3 delivery. Metro issued a P3 Technical Bench contract task order in February 2018 and a follow-up one in March 2022 to a team led by Sperry Capital to assess the potential benefits of advancing a P3 delivery model for the Project.
In January 2022, the Board selected the Locally Preferred Alternative (LPA) for the Project. This led to the advancement of a 14.5-mile LRT line with nine (9) stations, from a northern terminus at the Slauson/A Line Station located in the City of Los Angeles/Florence-Firestone unincorporated area of LA County to a southern terminus at the Pioneer Station located in the City of Artesia, and a new C Line infill station at the I-105 Freeway.
The Project will connect the ten cities and communities of Artesia, Cerritos, Bellflower, Paramount, Downey, South Gate, Cudahy, Bell, Huntington Park, Vernon, unincorporated Florence-Firestone, and downtown Los Angeles. The Project will also connect this area to Metro’s emerging rail network, including the C Line to LAX, the A-Line to Los Angeles Union Station (LAUS), Pasadena, and Azusa through the Regional Connector. The Project will provide alternatives to driving and create more access to regional opportunities. The Project also includes five parking facilities and a Maintenance and Storage Facility (MSF) in the City of Bellflower.
The Board also selected LAUS as the northern terminus for the full 19+ mile corridor project. Metro staff is conducting a separate study to evaluate options for connecting from Slauson/A Line to LAUS.
Discussion
DISCUSSION
Metro has been exploring innovative solutions to project delivery across its portfolio. This due diligence has resulted in assessing alternative delivery models, including P3. This initiative, along with the Unsolicited Proposals, led Metro to look at P3 as a potential delivery model for the Project.
Early in the process, Metro reached out to the industry via 3 market soundings (in June 2018, October 2018, and September 2021) with over 15 private firms, including contractors, equity investors, operators, and rolling stock suppliers to discuss key questions related to a P3 procurement and commercial structuring. The goals of the market sounding sessions were to gauge industry interest in the Project and to identify elements for potential evaluation as part of the Project Agreement / procurement development processes. The results of the market soundings showed strong interest in the Project and support of a P3 delivery, so Metro decided to further pursue the potential benefits of a P3 model for the delivery of the Project.
In addition to the market soundings, Metro conducted internal workshops to evaluate potential P3 delivery approaches to consider how a P3 could support Metro’s objectives for the Project. Metro and its consultants first assessed options for P3 contracts to determine the one that best fits the Project. Three options were considered: Design-Build-Finance (DBF), Design-Build-Finance-Maintain (DBFM) and Design-Build-Finance-Operate-Maintain (DBFOM).
Under a DBF delivery model, Metro would retain responsibility for Operations and Maintenance (O&M) and major maintenance including capital renewal. This is similar to a Design Build (DB) delivery method but includes private sector financing of certain project costs. Under this approach, the potential for risk transfer benefits beyond Metro’s current DB approach may be limited as the underlying DB component is the same. In addition, Metro has significant debt capacity and can access the capital markets at lower costs of finance than a private developer incurs. The benefit of risk transfer was unlikely to outweigh the cost of financing in this approach which would mean that value for money was also unlikely. As a result, the DBF option was not taken further in this analysis.
Under a typical DBFM delivery model, Metro would retain responsibility for operations and routine maintenance. The P3 developer would be responsible for designing the system, constructing it, procuring LRT vehicles, performing major maintenance and providing private financing. When exploring the option of DBFM, the need to divide out preventative maintenance and repair of assets during the Project life presented challenges that could result in contractual disputes. Metro determined that an all or nothing approach to the O&M would reduce complexity, reduce the risk of finger pointing, and reduce the potential for breakdowns in the partnership intention of a P3 delivery. As a result, a DBFM was determined to be less desirable than a DBFOM delivery model and was not taken further in this analysis.
Finally, for a DBFOM delivery model, Metro would transfer all O&M and major maintenance responsibilities to the P3 developer. The P3 developer would be responsible for designing the system, constructing it, procuring LRT vehicles, performing all operations and major maintenance and raising financing. To assess the maximum potential benefits of a P3 delivery model, it was determined DBFOM was the appropriate model to use in the progression of the P3 assessment.
Both quantitative and qualitative work were advanced to then compare DBFOM with a more traditional Design-Build (DB) delivery method. This work is described in more detail below and within Attachment A - SGL P3 Assessment Business Case.
Quantitative Analysis:
The quantitative effort included development of cost data sets for both DB and DBFOM, performing risk assessments and incorporating risk-based contingency, and performing financial modeling to determine total transaction costs and a VfM by comparing life-cycle costs for DBFOM and DB delivery methods.
Risk Assessment
The risk assessment for the Project included the identification, consideration and quantification of risks based on the process outlined in Attachment A - SGL P3 Assessment Business Case.
Approximately 30 workshops were held with subject matter experts from Metro departments over a period of 5 years. Most of the workshops were conducted during 2018 and 2019, with a refresh occurring via 7 workshops in April-June 2024 after the certification of the FEIR by the Metro Board in April 2024. This refresh allowed for a refinement of risks for the Project based on a number of factors, including scope refinements, updated market conditions, consideration of the Advanced Works Package being procured separately, and accounting for updated practices resulting from previous lessons learned on other major projects at Metro.
This quantitative risk assessment resulted in the identification of key specific risk drivers for the Project. Tables 1 and 2 show the top cost and schedule risks that were identified for the DB and DBFOM delivery models, independently.
Table 1 - Top Cost Impact Risks
The top cost risks associated with a DB execution of the Project are related to long-term state of good repair. DBFOM contracts are structured to incentivize a developer to perform lifecycle / long-term capital maintenance. However, this requires a commitment of dedicated funding for the contractual O&M term up-front to make Availability Payments which lead to challenges on other agency assets outside of the Project as less funding would be available for potentially more urgent and critical maintenance of agency operated and maintained systems during times of budgetary constraint.
The top cost risk for a DBFOM delivery model is identified as Metro-initiated scope changes. In a DBFOM, any delays caused by the public agency will have a much greater cost impact compared to a DB. This is because in a DBFOM, the private partner takes on more financial risk, including financing a portion of the project, making the penalty of delays much more significant.
Table 2 - Top Schedule Impact Risks
The top schedule risk for DB and DBFOM is related to interfaces. Under any delivery method, interfaces will exist, and proper management and mitigation need to be in place to ensure the on-time delivery of a project. Table 3 below shows the quantified results of the potential schedule delay in months for DB and DBFOM, as well as the associated cost impact.
Table 3 - Schedule Risk
It’s important to note that the quantitative risk assessment did not factor in any mitigation strategies that could lower probabilities and impacts due to the timing of this assessment in conjunction with the level of completion of project development. As the development of the Project progresses and throughout its life cycle, the project team will continue to develop these strategies as an ongoing effort to reduce or eliminate potential risks and optimize execution efficiency.
Value for Money
The identified risks were quantified for DBFOM and DB deliveries to calculate unmitigated risk-adjusted contingencies. These contingencies were added to the base cost estimates for each delivery method, along with financial modeling, to determine total transaction costs. The VfM was calculated by comparing the transaction costs of the DBFOM and DB models.
The VfM analysis for the Project indicated that there is a range of potential life-cycle savings if pursuing a DBFOM model for the Project of between 0.77% to 6.69% (or between $60 million to $407 million in total in Net Present Value), which is shown in Figure 1 below.
Figure 1 - Range of Estimated Costs and VfM Results
A range of potential savings is provided because of the variability of the factors that can influence a realized outcome. Some of those factors are:
• Changes in inflation between today’s analysis and commercial/financial close
• Competition and market appetite for either delivery method that can impact the number of bids and corresponding cost of bids received
• Key risk outcomes and potential mitigations not included in the analysis
• External factors outside of the analysis scope that can impact the VfM, such as:
o Progress under the Advanced Works Package impacting schedule and funding available
o Changes in Project scope
o Programmatic considerations such as changes in allocation of resources and labor terms
Based on an available range of results from other North American public agencies that have conducted VfM analyses as part of their decision-making process for project delivery, the VfM range presented for the Project is at the lower end of the results for other projects that have proceeded as a DBFOM. While each agency and project will have its own unique set of circumstances, this would suggest that the case for DBFOM delivery for the Project based on the VfM result is much less robust.
Affordability Analysis
Upon completion of the VfM, an affordability analysis was performed for the DBFOM scenario. However, given the relatively low VfM over the life of the Project, and Metro’s capacity to finance the necessary portions of the design and construction phase, the affordability of the DBFOM is similar to the DB scenario. Metro staff is in the process of securing needed funding sources in the overall Project funding plan.
Budget certainty can be an advantage to a DBFOM due to the structure of predictable Availability Payments throughout the O&M phase. However, as stated earlier, committed funding during the O&M phase for the Project under a DBFOM could present challenges to the flexibility of performing maintenance needs on Metro’s systemwide assets during times of budgetary constraint.
Qualitative Assessment
Qualitative assessments complement the quantitative analyses by providing insights into non-financial aspects that contribute to the overall success and viability of a project. Metro used this qualitative assessment to balance financial considerations with broader strategic goals, risk management, stakeholder engagement and long-term sustainability. Below are a few of the qualitative considerations Metro examined as part of the comprehensive assessment, which are discussed in more detail within Attachment A - SGL P3 Assessment Business Case.
Schedule: A main factor in the schedule benefit projected for a DBFOM is centered on the contractual incentives of the private partner to achieve construction completion as efficiently as possible. The incentive to complete construction expeditiously to provide mobility to the residents along this corridor already exists, and through early identification and mitigation of risks, similar schedule certainty can be achieved via either a DBFOM or DB delivery model.
Future Extension to Union Station: If Metro opts for a DB delivery model for the Project, a new design and construction contract would be needed for the extension to LAUS. Metro's Operations would then extend service to the northern terminus after the extension is completed. Alternatively, under a DBFOM approach, Metro could include in the Project Agreement a framework where the DBFOM developer would be given Right of First Refusal to collaborate with Metro to define and implement the extension while maintaining operational continuity, akin to progressive contracting elements in P3s.
However, if Metro proceeds with a DBFOM for the Project, but chooses to procure the extension to LAUS with a different delivery method, complexities arise in managing the Project Key Performance Indicators (KPIs) related to operations and maintenance, and ensuring developer performance becomes more challenging.
Innovation: DBFOMs can be structured to encourage innovation as they often involve risk sharing and incentives for achieving project goals efficiently and innovatively. Technology constantly evolves and the private sector is naturally incentivized to find cost savings and opportunities for greater efficiencies. In addition to assessing P3 models, Metro has recently advanced other alternative delivery methods (e.g., progressive design build, and construction manager/general contractor) vs. traditional DB that also provide opportunities to tap into private sector innovation.
Labor: When the Metro team conducted market soundings with contractors, developers and private operators, it was indicated that such parties would be willing to employ unionized labor. If Metro were to implement the Project utilizing the DBFOM method, then Metro would meet and confer with its affected unions to negotiate agreements on how operation and maintenance of the Project would be transferred to the DBFOM developer based on a set of baseline key terms offering 'aggregate equivalency' in terms of pay and benefits. The labor resources needed to operate and maintain the Project would be substantially the same regardless of whether it’s operated by a contractor through a DBFOM agreement or by Metro.
Roles and Responsibilities: To ensure Metro’s objectives around public safety and customer experience are maintained, Metro must maintain direct operational control over significant parts of safety and security, fare collection, and customer service, which would dilute the benefits under a DBFOM. With this maintained responsibility, interfaces with the DBFOM partner would exist throughout the O&M term. Interfaces between the public and private partners have proven to be a main source of contractual contention on DBFOMs in the U.S. Additionally, a DBFOM would span several decades, in which changes to needs and priorities to support overall customer experience could occur. The long-term commitment could limit flexibility in responding to these changing needs and priorities.
P3 Assessment Conclusion:
At the completion of the P3 Assessment, Metro reviewed the quantitative and qualitative results. This resulted in agreement that the analysis did not show enough potential cost savings to overcome the risks and challenges that would exist, and therefore concluded a DBFOM delivery model is not the right solution for the Project. Some of the most significant risks and challenges identified during the P3 Assessment are:
• Funds committed to the Project through Availability Payments could limit Metro’s flexibility of systemwide maintenance expenditures
• Safety and security roles and responsibilities assigned to Metro and a developer will create interfaces that could impact proper incident response and lead to future disputes
• A long-term commitment from both Metro and a developer can limit flexibility in responding to changing needs or priorities for customer service
However, there are positive takeaways from the P3 Assessment effort that will support the next phases of development and execution of the Project. Some of the benefits are listed below:
• Consensus and support from the private sector that the Advanced Works Package would help de-risk the Project
• Early understanding of Project risks and the advancement of discussions to develop innovative mitigation strategies that will reduce potential cost and schedule impacts
Equity_Platform
EQUITY PLATFORM
The Project is consistent with the goals and objectives outlined in the Metro
Equity Platform Framework that identified the Project traverses through Equity Focus
Communities (EFCs) in Southeast Los Angeles County, where access to premium transit service is limited. The Project is also comprised largely of Environmental Justice (EJ) communities, which are defined from the demographic and socioeconomic data of the U.S. Census. Black, Indigenous, and other People of Color (BIPOC) are 65% of the total study area population, and Hispanic/Latino groups alone account for 51% of the study area population. In addition, 44% of study area residents live below the poverty level, compared with the county average of 33%. The Project will benefit communities through the addition of a new high-quality reliable transit service that will increase mobility and connectivity for the historically underserved communities in the corridor and helps to address mobility disparities and provide residents with increased access to employment, health, and education opportunities, which otherwise would be difficult to reach by transit.
The P3 Assessment for the Project did not take into account any additional equity considerations since the requirements would be similar whether the Project is executed as a DB or DBFOM. Under the procurement of a DBFOM, Metro would make it clear to value a potential partner that would highlight inclusivity initiatives that are consistent with Metro’s Diversity & Economic Opportunity Department (DEOD) programs (e.g., small business engagement and workforce initiatives).
Implementation_of_Strategic_Plan_Goals
IMPLEMENTATION OF STRATEGIC PLAN GOALS
The Project supports the following strategic plan goals identified in Vision 2028:
• Goal 1: Provide high-quality mobility options that enable people to spend less time traveling;
• Goal 3: Enhance communities and lives through mobility and access to opportunity; and
• Goal 5: Provide responsive, accountable, and trustworthy governance within the Metro organization.
Next_Steps
NEXT STEPS
Based on the results of the P3 Assessment, Metro determined a DBFOM delivery is not appropriate for the Project. A parallel effort to study non-P3 delivery methods is currently ongoing and is slated to be completed in 3Q 2024.
Attachments
ATTACHMENTS
Attachment A - SGL P3 Assessment Business Case
Prepared_by
Prepared by: Greg Miller, Deputy Executive Officer, P3 & Capital Program Initiatives, (213) 922-4948
David Davies, Executive Officer, Project Control & Admin, (213) 264-0557
Craig Hoshijima, Executive Officer, Countywide Planning & Development, (213) 547-4290
Reviewed_By
Reviewed by: Sharon Gookin, Deputy Chief Executive Officer, (213) 418-3101
