Skanska set industry tongues wagging late last month when the company announced that it would no longer pursue major design-build transportation public-private partnerships in which it held an equity stake after taking a $100 million write-down on its P3 business. The company said it plans to give more details during its third-quarter earnings call on Nov. 8 about the decision and about which projects took such a hit, but the big industry questions right now revolve around how this will affect the relatively fledgling U.S. P3 market going forward.
As it turns out, not much.
Skanska’s exit announcement is really about a small piece of the overall U.S. P3 market and a narrow slice of the company’s business, said John Medina, vice president at Moody’s Investors Service. “Skanska is a very large, global company,” he said. “It’s not like these [P3] projects are the only ones they work on.”
In a June report, Moody’s changed its outlook on the $2.3 billion I-4 Ultimate project through Orlando — a P3 with the Florida Department of Transportation captained by Skanska Infrastructure Development and John Laing — from stable to negative. Skanska is also part of a separate entity, SGL Constructors, that is acting as prime contractor on the project.
Moody's said it based its decision on extra cost claims of $100 million — mostly related to drilled shaft failures and flooding — submitted to the FDOT and the potential fallout from a projected 245-day delay. Moody’s did, however, affirm the Baa1, moderate-risk rating on Skanska and Laing’s $1.4 million of construction loans through their P3 entity I-4 Mobility Partners.
Moody’s left the door open for an outlook upgrade if the FDOT makes good on I-4 Mobility’s claims or if the team can complete the construction, operations and maintenance phases successfully. The investment research firm noted the financial stability of the companies involved in I-4 Mobility Partners and reported that they could reduce the delay by as much as 100 days through other strategies, a nod to Skanska's and its partners’ experience.
So, as on the I-4 project, sharing an equity position means sharing a risk that a company focused solely on construction doesn’t have to worry about. Skanska, said William Eliopoulos, partner at Rutan & Tucker, is likely reevaluating the risk it’s willing to assume.
In the time it takes to see a major transportation P3 through the development process, he said, they could be bidding on and winning other projects.
P3s, Medina said, often take years of development and procurement, including building relationships with local contractor partners and a lot of resources. And still, there’s no guarantee that the project won’t be canceled or incur significant delays waiting for construction to begin, especially in the U.S.
In Maryland, Purple Line Constructors started development of the $5.6 billion Purple Line light-rail project underway in the Bethesda area during the bidding phase in 2014 only to have a federal judge withdraw approval a few days before the project was scheduled to receive full federal funding of almost $1 billion in Aug. 2016. That project is now underway after an almost one-year court battle, but, in the meantime, the project incurred significant delay-related costs.
So, Skanska’s potential avoidance of high-risk-high-reward projects in favor of lower-risk-lower-reward ones is understandable, Eliopolous said. “Why swing for a home run,” he asked, “when they can make lots of doubles and triples?”
As for the effect of Skanska’s move on other contractors, Medina said other firms that have been thinking about pursuing transportation P3s in which they would have an equity stake might welcome the move as it reduces competition. “The market is deep enough that it won’t have an effect on bidding and teaming,” he said. “If anything, we’re seeing more new entrants.”
There are likely plenty of contractors, Eliopoulos said, that are willing to jump into Skanska’s position and take the risk, especially given that the liquidity requirements — usually around 10% for a contractor — aren’t prohibitive.
“It’s hard to imagine it having major ripple effect,” Medina said. This is particularly true given the scope of Skanska’s announcement, which left the door wide open for future participation in design-build and other alternative delivery projects, including transportation P3s outside of those in which the company has an equity position.
"I don’t believe Skanska’s decision is a setback, said attorney Keith Poliakoff, partner in the Fort Lauderdale, Florida, office of Saul Ewing Arnstein & Lehr. "I do believe that it’s a wake-up call for other contractors to be more careful of the opportunities presented and to make sure they can perform at the numbers quoted."