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Rechler preaches infrastructure risk and reward in public-private partnerships

With doubts rising that the federal government will pitch in to fund major infrastructure projects, New York power brokers are examining other options to get badly needed projects completed.

RXR CEO and chairman Scott Rechler, who advised President Trump on infrastructure during the transition period last year, said at a ULI panel last week that he’s convinced federal funding isn’t going to happen, despite what the President said during his State of the Union address.

“It’s not a reality,” said Rechler. “The trillion and a half dollars isn’t possible. The money that we would have used for infrastructure was the repatriation dollars that have been used for the tax reform.”

Pictured at the ULI 2018 Outlook event: Tom McKnight, EDC; Sanara Barend, AECOM; Rick Cotton, PANY/NJ; Janno Lieber, MTA and; Edward Pallesen, Goldman Sachs

Absent the federal money, Rechler touted public-private partnerships instead, saying that when it comes down to the government versus the private sector, its all about the risk involved.

“The difference is you transfer the risk,” said Rechler. “The private sector comes in and says, ‘I’ll accept this risk, but it means I need to figure everything out and I’ll deliver it on time and if I don’t, I’ll be responsible for the delays and punitive damages for any cost overruns.’ It is a mode that will work in the future.”

Rchler pointed to two New Jersey bridge projects as an example — the Bayonne Bridge and the Goethals Bridge. While the Bayonne Bridge ended up being hundreds of millions over budget and years delayed, the Goethals Bridge, which was a public-private partnership, was finished on time and on budget.

“The biggest thing is, the private sector isn’t going to accept the risk until things are thought out and, generally what happens on these large infrastructure projects, is politics get in the way,” he said.

As problems with the MTA reached fever pitch over the last few months, questions over priorities have been raised.
With a growing population and the need to expand, is it possible to fix ongoing problems and still expand?

“I think the fairly obvious answer is we have to do both,” said Rick Cotton, executive director of the Port Authority of New York and New Jersey, at the same ULI 2018 Real Estate Outlook event.

“The shortcomings of the infrastructure, it is very significant, but the fact is, the region is growing, the population is growing,” said Cotton. “If you’re not trying to address those and find ways to expand, you’re really not serving the agency’s purpose. There’s not a way you can do one versus the other. You have to do both, but it comes back to funding challenge.”

When the private sector brings financing to the table, it doesn’t necessarily bring funding sources to the table, said Cotton. “The challenge as you think of state of good repair is where is the funding going to come from and how much of a constraint is that?”

Edward Pallesen, a managing director in the infrastructure investment group at Goldman Sachs, said the private sector is where risks should be taken, rather than within government.

“At the end of the day, the federal government and state governments can finance projects more cheaply, even though the infrastructure cost to capital is relatively inexpensive compared to other kinds of investment capital,” said Pallesen.

“Nonetheless, for the private sector to be having a role that’s sustainable, there really should be real risk transfer…I think that’s something government should be very eager to try and push, that risk to the private sector.”

One thing most in the industry agree on is the use of Design-Build, an approach to construction that consolidates the number of contractors, greatly simplifying the process.

“There’s one bedrock pillar at this point, which is using design-build as the default approach to a project of almost any size,” said Cotton. “On multiple fronts, it has huge advantages.”

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