Keith Hennessy, who joined Bechtel in 2012 as CFO of its power division, took on the role of running its new dedicated P3 division last year. “The company made a strategic decision to set up a dedicated business for the P3 market, and they asked me to start it and run it,” says Hennessy, an experienced investment banker expert who visited ENR this spring.
What spurred the decision to pursue transportation P3 deals?
We realized that, particularly in North America, large transportation projects were increasingly becoming procured under the P3 model. If you look at Bechtel’s long history as an EPC company, we’ve been very interested and keen to do the full engineering procurement and construction for large complex projects–that’s really what we’re known for. In the P3 market, we’re looking to do the full design-build, the full EPC if you will. That’s really what motivates us.
How does that experience translate into potential successful P3s?
Increasingly in the government-related markets, whether it’s state or municipal, not only do you have to have the service capability, the engineer and construction capability; you have to bring the money with you. And so we realized that was where the market was going, i.e. larger, more technically complex projects. And then you have to bring the money. We’ve worked in Canada for years and we’ve worked in our home core market here in the U.S. for more than a century. To not have a presence in our home core market was just not right.
How will Bechtel’s P3 team stand out from other firms’?
We’re organized a little differently than a lot of other contractors in this. I manage our equity investing and financing activity, as well as our design-build/EPC part of the business, and the operations/maintenance component. We thought it would be a big benefit to have all three main components integrated under one organizational structure. The benefit to customers going to the P3 model is to optimize the entire life-cycle costs, capital costs as well as operational costs, of whatever infrastructure asset they are looking to construct. So having that all under one roof—we thought would be the best way to do it. We’ve been at it as integrated team since June of last year.
What is Bechtel’s history in this type of work?
The company has a long history as a developer of all kinds of different assets. Going back to the ‘80s and ‘90s, the company developed airports, lots of power projects, participated in the large rail tube lines in the UK and Portland’s light rail in the U.S. So we’re not new to the development business or to P3s for that matter.
It seems to me that Bechtel in recent years has not been so visible in the US transportation market in general. Why?
In the last 10-15 years, we were pursuing transportation projects globally. There were a lot of attractive opportunities around the world. We’ve done a lot of rail business, for instance, in the UK. We’re currently the lead for the design-build of the largest segment of the Riyadh metro project, which is a $10-billion turnkey, lump-sum project. We built the airport in Doha in Qatar. We’re doing the airport in Muscat in Oman. We had some smaller projects in the U.S, and we did Dulles. I think it’s as simple as the various markets we participate in ebb and flow. But we do believe there is a trend, globally, and you can see it in North America, that countries are going to invest more in basic infrastructure: transportation, water, ports, power, transmissions, communications.
Are there long-term banking or lending partners in the financial side of your new division?
There are lots of banks and other financial partners that we work with. I wouldn’t say that we have a formal partnership with anyone. We recently reached financial close on the Edmonton Valley Line Light Rail project. That’s a light rail project from a suburban area into downtown Edmonton. It’s a $1.8 billion (Canadian) project. We’re working there with FenGate, which is a well-known infrastructure fund in Canada. We’re also partnered with them on a large bridge project. We’re working with Cintra and Ferrovial on the Denver 1-70 design-build project, a P3, where we’re shortlisted. We’re shortlisted for three P3s, all in procurement: Denver I-70 highway, on Finch West light rail and on the Gordie Howe International Bridge project—the roughly $2 billion bridge running from Detroit, Michigan and Windsor, Canada. It’s a very large complex bridge…and it’s a border crossing and you’re literally working in two different countries.
For light rail–unlike highways where you can have tolls or performance management–how do you make your money?
Ticket sales. It can be procured as a revenue risk, where the concession company is taking the ridership and revenue risk. Or it can be procured as an availability payment, where the municipality is taking that risk and is paying a fixed amount. The ones in Canada tend to be availability payments. It would be just the ridership and ticket sales. The ones we’ve been looking at so fa, we’ve really just been sticking with availability payment structures. We really haven’t had to deal with estimating ridership and fares from a risk perspective. We look at ridership more from a usage and maintenance perspective.
Do you see any major difference between the Canadian P3 world and the American?
The first thing is that Canada has probably done more. They have a national regime. There’s funding availability. And there’s some level of standardization, from a documentation and process standpoint. From a large project standpoint, they need to evaluate –on a value-for-money basis —whether a P3 approach makes sense or not. You have, for example, Infrastructure Ontario. They have a standard procurement process, they understand how these projects are financed, they have a clear pipeline of projects, and a pretty good track record of finishing procurement.
In the U.S., you have to go state by state. There’s really not a national standard. The procurements tend to be longer. More costs get built up in that…ultimately that shows up in prices. In any given market, in any given state, there’s really not that many P3s, not quite as much critical mass. Changing to an alternative model will be slow. But it’s changing.
So would you say, $500 million and up, or a billion and up?
We’re targeting a billion and up. But Finch West Light Rail will be circa U.S. $800 million. We’re flexible. We’ve always felt that where the company really adds value and has a competitive advantage is on technically complex projects. And sometimes size creates complexity. From a project-management and logistics perspective, we feel we have those skills, capabilities and the experience. It’s a very different exercise to manage and execute a $2 billion project versus a $200 million project…just the scale of it.
In going after big P3 deals, will you go in as just Bechtel?
Given the way the market is, we’ll continue to partner with other contractors. I think the customer base is really looking for redundancy and they’re looking for broad sets of skills and capabilities. Bechtel, from a technical sense, has the capability to execute these types of projects on its own, but I think the market is really structured around these partnerships. And we’re very comfortable with that.
What about La Guardia terminal-type P3s? Are you interested in pursuing these?
Airports are definitely something we’re looking at. We have done work in the past in New York area. It just comes down to, at a given point in time, what are our resources and availability. But, yes, we would be definitely interested. We haven’t done anything in the past couple of years in terms of P3s with airports. But, internationally, we’ve been doing a lot with airports.
So how big is the new P3 group?
It’s roughly 30 people.
Would you ever engage in brownfield P3 projects, like in Chicago?
Yes. I would put Denver I-70 into that category. There is a highway there and hopefully we will upgrade it. Denver I-70 is a great example of a situation where it’s a heavily-used highway; the traffic management element is a big challenge. You’ll need lots of communication and outreach to the local community. People need to know what is happening—there’s a big responsibility there.