The Purple Line PPP Project – A Cautionary Tale of Missed Opportunities?

“PLTC still firmly believes in the goals and mission of the Purple Line Project and the important benefits it will deliver to Maryland,” said Scott Risley, PLTC project director. “Unfortunately, due to circumstances outside of PLTC’s control, there were multiple delays on the project and PLTC was unable to obtain the time and cost relief to which it is entitled from MDOT/MTA. Regretfully, PLTC simply cannot complete the project under these circumstances.”

“PLTC entered into the project in good faith and was committed to bringing the Purple Line Project to Maryland communities,” Risley said. “We did not make this decision lightly and did everything we could to work with MDOT/MTA to attempt to come to an agreeable framework for us to complete the Project.” InfraPPP

A Project Gone Wrong

I am a strong proponent of PPPs if their project proponents can prove value for money, value for people, value for the future; consult widely with stakeholders; avoid political interference: and embrace transparent and competitive procurements.  Especially now in the pandemic era, sustainable and resilient collaborative PPP projects require public sector institutions that have the institutional capacity to proactively manage contracts with private sector partners – vis-a-viz project risks and deliverables - and private sector parties who are able to manage risks and the delivery expectations of their public sector counterparts.

This article reviews developments on the Purple Line PPP Project in Maryland (USA) which have caused considerable controversy and which have made national headline new for months.

Purple Line Project Background

The Purple line is a 16.2-mile light rail project in Maryland that was launched as a 36-year PPP by the Maryland Department of Transportation (MDOT) and the Maryland Transit Administration (MTA).  The 21-station project connecting New Carrolton and Bethesda, was envisioned as a loop connector that would improve connectivity for public transportation users of already existing public transit systems such as the Metropolitan Metro System.  The project was also seen as a contributor to the economic success of Montgomery and Prince George’s counties and enjoyed political support from these counties. The completion date was set for 2022 for the eastern sector of the project.

Due to the shortage of public funds for the project it was decided that a PPP procurement would be an acceptable alternative infrastructure delivery system that would benefit from alternative private sector financing and innovative delivery that would result in an on-time delivery of the two-billion-dollar construction project.  Although there was some opposition from residents, and environmental and financial concerns, the project was launched.   From the beginning of the project there were two camps of stakeholders; those who strongly supported the project for its traffic alleviating values and those who strongly opposed it mainly for environmental concerns.

The competitively bid contract was awarded to a construction consortium called the Purple Line Transit Constructors (PLTC) - a partnership of Flour, Lane Contraction, and Taylor Brothers.  Under the PPP agreement, PLTC holds the larger $5.6 billion Purple Line design-build, and operating contract with the PPP consortium partners PLTP (Purple Line Transit Partners - not to be confused with PLTC) which includes Meridiam, Flour, and Star America Infrastructure Partners.

Even before the project was launched, there were detractors who felt that the project contract was flawed and that the project was doomed from the start. Risk may have been disproportionately been assumed by the state when it was agreed that the private entity was only required to put up less than 7% of the cost while Maryland funded the rest.  Because of this flaw, there was a real danger that if the project failed, the private entity could walk away because it had less at stake than the government. The acceptance of a low-bid construction contract selection - due to state pressure - might have left the Purple Line project vulnerable from the onset. The reasons for the low-bid selection of the project team was despite that the state was focused on a “best value contract”, the state’s transportation secretary had a laser focus on project cost.

Emerging Challenges between PLTC and MDOT / MTA

Typical of projects this size, it was not long before problems surfaced that should have been immediately addressed by both the public and private sector partners.  Project delays, environmental challenges, construction costs overruns, and delays in resolving responsibility, led to poor communication of challenges and an adversarial approach to emerging challenges.  Many opportunities to resolve disputes and to mitigate challenges were missed. By the end of December 2019, the magnitude of challenges and the resulting disputes led to negotiations breaking down.

At the beginning of 2020, serious disagreements between PLTC and MDOT / MTA threatened the project’s completion and PLTC sought ways to exit the project. Legal actions were launched which focused on ways to mitigate the impacts of litigation and ongoing change order requests on project schedule delays and costs. The aforementioned causes for the delays, inclusive of difficulties in receiving environmental approvals had caused a 2.5-year delay and added $519 million to the overall project costs, it was asserted by PLTC.  

Mixed Messages and Breaking Point

PLTC continued to assert that it was committed to negotiations focused on completing the projects and getting it operational.  MDOT / MTA stated that although delays in change order requests, project schedule and costs had occurred, they also remained committed to negotiations on a settlement. However a breaking point between party negotiations – that had taken place behind closed doors - was reached in May. 

In May, PLTC stated in its defense of its consideration to withdraw from the project that it had experienced 976 days in delays caused by legal battles, right-of-way (ROW) acquisition challenges, and ongoing design changes. It firmly stated that it was unable to complete the project under current circumstance as it was unable to obtain the time and cost relief to which it felt it was entitled to from MDOT / MTA - which was refusing to pay.  In April PLTC had notified MDOT / MTA that it needed an additional $187.7 millions and an extra-five months was needed to complete construction of the east phase. Because of continuing breakdown in negotiations PLTC then announced that it would vacate the projects construction sites on a 16-mile stretch of the project after a 60 to 90 days orderly transition. This it felt was its contractual right. The primary decision given for this decision was - that without state compensation - PLTC would be faced with hundreds of millions of dollars in additional costs, which was financially unsustainable for PLTC.  

Additionally, the decision to withdraw would place the PPP consortium partners PLPT  - which include Meriam, Flour, and Star America Infrastructure Partners - in a difficult position as they would have to scramble to find new construction firms to replace PLTC. The construction team also stated said it would exercise a consortium contractual clause with the umbrella group that allows either party to terminate the agreement if delays exceed 365 days.

Bad PPP PR

The possible withdrawal of PLTC would herald a spectacular breakdown of a major PPP which has been under national focus as one of the most extensive U.S. Transit Projects. The focus on the Purple Line project - which is one of the largest transit projects in North America - had also become political in nature when the Governor of Maryland committed to the project’s completion. Failure of this PPP is of great concern as it has greater ramifications for the private sector and the willingness of Wall Street investors to respond to other state PPP solicitations to finance and build additional PPP transportation projects that are expected to have a value of between $9 and $11 billion. In addition, project failure would impact Prince George’s and Montgomery Counties investments of hundreds of millions of dollars in the project to revitalize economic growth in older suburbs bordering on the project’s alignment. The prospect of project failure was causing considerable dismay among elected public officials who had supported the project.

Force-Majeure Claims due to Covid-19

To add to the challenges facing the project, PLTC also informed the state that it might need to file a force-majeure claim with MDOT / MTA due to additional project slowdowns caused by construction teams having to self-quarantine after one if its utility inspectors tested positive for Covid-19 in April. 

Stop Throwing Good Money at the Project?

Since the onset of the project in 2015 experts warned that the Purple Line project would most likely face the prospect of cost overruns.  Concern was rising when by May 2020 cost overruns had reached 25% and the project was still far from completion. This development is not uncommon in mega-projects. Typical average cost overruns in the US are around 44% average according to a study completed by the Maryland Public Policy Institute.  Additionally, there were concerns that ridership predictions and cost effectiveness studies had been too optimistic during the feasibility study.  

It was against this background that impacted parties started asking what the solution was.  Scenarios were considered which included cancelling the project (and face the reality of having incomplete infrastructure that would create an even greater problem), the state taking over the project and becoming the de facto operator (with expected operational and maintenance costs of $150 million annually),  finding a new private partner who could take over the project (which would result in additional costs due to demobilization, new procurement costs, and then reactivation cost), or reaching an agreement with PLTC. No matter the which scenario was followed, this state would still have to throw extra unbudgeted money at the distressed project, without a clear understanding of the outcome.  The question whether it made sense to throw any more money at the project was being widely asked.

Ongoing Lawsuits Further Challenge the Project

In the 13th of May edition of the Washington Post it was reported that opponents of the Purple Line project were appealing a federal judge’s decision to throw out their third lawsuit against the project. This ongoing legal action driven by environmental concerns added further challenges to the deteriorating situation.  The concern raised in the three lawsuits argued that the U.S. Army Corp of Engineers had violated the Clean Water Act by allowing the constructors to negatively impact water streams within the project area. This ongoing environmental lawsuit had on its own delayed construction on the project by almost a year and was a major concern that PLTC was raising in its attempts to quit the project.

Trying to Keep Builders on the Job – The Project Shouldn't Fail

On May the 21 Maryland’s transportation chief said he was negotiating with the Purple Line companies to try and keep them from quitting.  Stakes were high for both parties at this stage as the project delays and threats of withdrawal were receiving national media attention.  In addition, the reputational damage for the PLTC construction consortium members has the potential to negatively impact other large transportation project tenders they were pursuing in Maryland.  If negotiations were to fail, the PPP umbrella partners of the project company would have to look for new construction partners, an action which in itself would have to look for new ways to complete and finance the project on an already cost and time plagued project. 

Although none of the scenarios that was playing out particularly pleasant, the state felt compelled to keep the project partners on board.  There was a realization that project failure was not an option – because if the project failed all stakeholders and partners would be losers.

A sticking point that was blocking resolution was the states did not agree with the contractor’s assessment of $519 million in cost overruns.  Furthermore, the state asserted that the project, which was 30% complete in May would still be completed by late 2022, and ignored the reality - that in 2020 - the project had already been delayed by 2 ? years. The contractor was now saying that the project would only be completed by mid-2025. 

Lack of Project Oversight?

Project delay concerns were further exacerbated by the realization that the extent of the delays and cost overruns could have potentially been avoided if there had been sufficient oversight by the state. County political leadership in the project’s impact area were concerned that the lack of oversight that had led to delays and cost overruns being ignored - until it was too late - and that the economic implications would have a negative impact on tax payers who had provided hundreds of millions of contributions to the project.  In light of concern over the allegations of lack of oversight, the political establishment felt that local taxpayers had every right to know how their funds were being used on the project. They demanded greater oversight and transparency.

MDOT / MTA on the Hook for Millions?

In June 2020 the Washington Post reported that the lead construction company – Flour – was under considerable financial pressure and that it might walk off the job rather than racking up additional costs. The situation become more serious it was learned that the Securities and Exchange Commission might be investigating Fluor’s cost overruns.  Fluor’s financial stability was further exacerbated by the outbreak of the Corona Virus.  No matter the outcome, it was announced that resolution had to be reached by June 20 otherwise the umbrella group of companies (PLTP) would have to find new construction companies to complete the project.  The ramifications of this scenario were forbidding as it would require up to a year to find new companies, would see the continuing hemorrhaging of costs, and lead to legal battles with the original construction firms over unpaid costs.  No matter what happened, all partners, including the State of Maryland would have to dig deep into their pockets to cover additional costs. It would also mean that costs would escalate if the worst-case scenario occurred and additional delays occurred.

Finding a Way to Finish – An Uncertain Future?

Fluor at this stage remained tightlipped about its course of action and still insisted that it would consider pulling out of the project.  Stakeholders agreed on the need to clarify the details of a reasonable settlement and to determine the best path forward to project completion.

The State of Maryland was in a difficult position as contractors typically have the upper hand in negotiations.  The possibility of the state having to pay up would most likely leave Maryland with a budget deficit for yours to come and could also lead to political and reputational damage for elected officials. The private sector partners would also face reputational damage, which would take many years to overcome. The future of the project remained in balance.

Escalation of Tension

Problems escalated when the Purple Line Transit Partners (not to be confused with PLTC) filed a notice saying that it would terminate the PPP unless a financial agreement was reached.  Meanwhile, PLTC announced that it would lay off workers on August the 23rd, one day after the deadline for an agreement being reached. MDOGT / MTA simultaneously announced that it was holding the Purple Line partners to their contractual obligations and would pursue all legal options available to the state. 

Maryland Managing the Purple Line?

By August the 5th Maryland transit authorities were preparing to face the reality of managing the Purple Line themselves if the PPP dissolved.  The state sent a letter to 171 project companies stating that it was willing to exercise its step-in rights to take over the project if no deal on cost overruns was reached.  According to the state, this would mean that they would keep construction going while they exercised their rights and mitigation actions. Takeover would be a huge undertaking for the state as it would have to manage this very complex 16-mile-long project.  With the complexities and challenges facing the state - if this option was to be pursued - Maryland’s transit authorities indicated that a favorable resolution with the private sector partners was preferable.  However, by the beginning of August an impasse had been reached.

Judge Orders Construction to Continue

On the 11th of August, a judge in Maryland issued a temporary restraining order requiring project construction companies to stay on the job while negotiations continued.  Faced with allegations that the consortium was unlawfully planning an illegal action, legal actions were underway to ensure that irreparable damage did not happened. Additionally, reports that the construction companies had already started dismantling equipment led to fears that further project delays would result if equipment had to be reassembled and reinstalled in the future.  This temporary restraining order further escalated tension between the parties and this did not bode well for solving the dispute.

The impasse continues and the next few weeks will be critical – it will be interesting to see who blinks first.

What Could have been done better?

Although it is easy as an outsider to be retrospectively critical, the readers of this saga - I am sure – would agree that several slip-ups occurred.  It is my suggestion that the following actions could have prevented the current situation – 

• Avoiding political procurement interference and deference by MDOT/MTA to pressure from the state regarding project cost would not have resulted in a “low bid” being accepted, an action that jeopardized the project from the beginning.
• More reliable light rail passenger ridership projections could have ensured that there would be less fear that the project would not be financially viable.
• Environmental concerns should have been addressed before the project even started.  This is a risk that the state should have managed and been held accountable for.
• Better stakeholder consultation would have helped alleviate tensions and accusations of a lack of transparency in decision making.
• Early solution seeking, partner trust building, better conflict resolution protocols, and acceptance of realities on the ground would have resulted in proactive actions that would have prevented the escalation of ill will that exists between all parties.
• MDOT/MTA should have been more assertive in its project monitoring.  It is inexcusable that the magnitude of delays and cost escalations took so long to address.
• Breaking the project into two pieces with awards to two different project companies (consortia) could have mitigated the risk even further.
• The consortia members should have formed a more cohesive team.
• MDOT/MCA should have been advised against exercising its step-in-rights before negotiations completely failed. This should have been an action of absolute last resort.
• Legal action should have been avoided if possible.  Once litigation is launched, all parties find themselves at the mercy of the courts, which usually means that one party wins and one loses.
• The impact of the pandemic, is no one’s fault. Every effort should be made to prevent this force majeure event from becoming a cudgel to beat each other up with.
• Project risks should have been more astutely allocated.

Conclusion

The preventative action list could be exhaustive.  I will leave you to reach your own conclusions.  However, we can only hope that this project is saved otherwise the future of PPPs in Maryland will be iffy at best.

Article Sources:

Washington Business Journal - May 1, 2020 - Purple Line Builder Prepares to Walk off the Job Due to Cost Overruns, Delays – Michael Neibauer

The Washington Post – May 1, 2020 – Firms Building Maryland Purple Line Say the Plan to Quit the Job over Disputes with the State – Katherine Shaver

The Washington Post – May 7th, 2020 – Stop Throwing Good Taxpayer Money after the Purple Line – Carol Park & Sean Kennedy

InfraPPP – May 10th, 2020 - Design-build team to exit $2bn LRT project in USA

The Washington Post – May 13th, 2020 - Purple line Opponents File Appeal in Lawsuit Against Maryland Light-Rail Project – Katherine Shaver

The Washington Post – May 21st, 2020 – Maryland Transportation Chief Says He’s Trying to Keep Purple Line Builders on the Job - Katherine Shaver

The Washington Post – June 13th, 2020 – Maryland Likely to be on the Hook for Millions if it wants to save the Purple Line Project, analysts say.  Katherine Shaver

The Washington Post – June 19th, 2020 – The Purple Line was Doomed from the Start – Frank Lysy

The Washington Post – July 18th, 2020 – Purple Line Project Delays, Cost Overruns Reveal Long-Brewing Problems – Katherine Shaver / Eddy Palanzo

The Washington Post – August 4th, 2020 – Maryland will Manage the Purple Line Construction if Partnerships fall through, State Officials say – Katherine Shaver

The Washington Post – August 11th, 2020 – Judge Orders Firms to Continue Building Purple Line Amid Cost Disputes with Maryland – Katherine Shaver