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the massive new Bay Bridge project- a snapshot of America today....
Unparalleled bridge, unprecedented cost
By
Patricia Decker and Robert Porterfield
McSweeney's San Francisco Panorama/SF Public Press
— Dec 8 2009 - 12:50pm
It’s being built in China.
It’s taken twice as long as expected.
And it will cost double what you’ve been told.//
When completed, the new east span of the San Francisco-Oakland Bay Bridge will be not only the most complex engineering feat in California history, but also the most expensive, with a cost never subjected to public scrutiny.
Although today’s price tag stands at $6.3 billion, the figure accounts for only salaries and hard materials—things like concrete and steel and cranes. When all is said and done, the new Bay Bridge will wind up costing tax- and toll-payers more than $12 billion—a figure that leaves even the officials in charge “staggered.”
Much of the difference comes from interest and other financing charges—money that commuters will be paying off until at least 2049. Little attention has been paid to billions of dollars not included in the direct construction cost projections published in glossy public reports.
Why the price has skyrocketed is a tale of politics, bureaucratic bumbling, and unforeseen construction problems—all classic ingredients of California public works projects. It is a tale of obscure but powerful agencies, legislative bickering, and four successive governors grappling with a project so massive and complex that one consultant suggested the human mind might be unable to grasp, or accept, “the magnitude of the undertaking and the time and resources required to complete it.”
While public attention is focused on something new and grand, replacing the aging and increasingly unreliable existing east span with an iconic edifice that will define the San Francisco Bay into the next century, it is easy to overlook other aspects of the Bay Bridge project that contribute to spiraling costs. Caltrans officials are expected to announce this week that problems in Asia, where the majority of the bridge is being manufactured, will push those costs even higher. Among those are problems with fabrication and shipping of critical steel components in China that could add $100 million or more to the final price tag, and international bickering over design drawings and blueprints that could ultimately cost tens of millions more.
It is impossible at this point to account for every dollar spent on the Bay Bridge project so far. While nearly $500 million has been paid for seismic retrofitting of the west span and construction of a new west
approach—work already completed—bills continue to roll in for the east span which is expected to take until 2013 to complete. Public records show that through September, $3.8 billion in expenses have been incurred on the east span construction and at least $1.9 billion more in expenses are expected soon.
Since 2005, when the state auditor completed the last examination of Bay Bridge spending requested by the Legislature, there has been no independent fiscal oversight of the project. What audits there have been are internal examinations conducted by the various agencies involved in managing the project.
Some of the most expensive overhead involves keeping qualified Caltrans engineers and contractors on the ground overseas to ensure bridge components can stand the test of time and the next big earthquake. Much of the steel fabrication and know-how for the self-anchored suspension span—the project’s crown jewel—has been outsourced to at least seven countries: Canada, China, England, Japan, Norway, South Korea and Taiwan. In previous eras it would seem inconceivable that the major steel components for such a project would be built in China, but that is exactly what is happening.
Building the bay’s signature span
By
Patricia Decker
McSweeney's San Francisco Panorama/SF Public Press
— Dec 8 2009 - 12:48pm
On the ground in Shanghai with the men who are tackling, weld by complicated weld, the largest public works project in Bay Area history//
When all the pieces are finally welded together and tethered by the main suspension cable, the Bay Bridge east span will be not just a new American icon, but also a truly global monument.
From the enormous solid steel castings of cable saddles, brackets and bands being forged in Japan and England to the gigantic bearings and hinges being manufactured in South Korea and Pennsylvania, fabrication of the bridge is under way in seven foreign countries and in more than two dozen American cities, including 12 in California.
Sections of the steel tower, shown above, are made from plates as thick as four inches and can weigh up to 1,000 tons. To work on them, crews must rotate them on ZPMC-designed rotisseries.
Unparalleled bridge, unprecedented cost
By
Patricia Decker and Robert Porterfield
McSweeney's San Francisco Panorama/SF Public Press
— Dec 8 2009 - 12:50pm
It’s being built in China.
It’s taken twice as long as expected.
And it will cost double what you’ve been told.//
When completed, the new east span of the San Francisco-Oakland Bay Bridge will be not only the most complex engineering feat in California history, but also the most expensive, with a cost never subjected to public scrutiny.
Although today’s price tag stands at $6.3 billion, the figure accounts for only salaries and hard materials—things like concrete and steel and cranes. When all is said and done, the new Bay Bridge will wind up costing tax- and toll-payers more than $12 billion—a figure that leaves even the officials in charge “staggered.”
Much of the difference comes from interest and other financing charges—money that commuters will be paying off until at least 2049. Little attention has been paid to billions of dollars not included in the direct construction cost projections published in glossy public reports.
Why the price has skyrocketed is a tale of politics, bureaucratic bumbling, and unforeseen construction problems—all classic ingredients of California public works projects. It is a tale of obscure but powerful agencies, legislative bickering, and four successive governors grappling with a project so massive and complex that one consultant suggested the human mind might be unable to grasp, or accept, “the magnitude of the undertaking and the time and resources required to complete it.”
While public attention is focused on something new and grand, replacing the aging and increasingly unreliable existing east span with an iconic edifice that will define the San Francisco Bay into the next century, it is easy to overlook other aspects of the Bay Bridge project that contribute to spiraling costs. Caltrans officials are expected to announce this week that problems in Asia, where the majority of the bridge is being manufactured, will push those costs even higher. Among those are problems with fabrication and shipping of critical steel components in China that could add $100 million or more to the final price tag, and international bickering over design drawings and blueprints that could ultimately cost tens of millions more.
It is impossible at this point to account for every dollar spent on the Bay Bridge project so far. While nearly $500 million has been paid for seismic retrofitting of the west span and construction of a new west
approach—work already completed—bills continue to roll in for the east span which is expected to take until 2013 to complete. Public records show that through September, $3.8 billion in expenses have been incurred on the east span construction and at least $1.9 billion more in expenses are expected soon.
Since 2005, when the state auditor completed the last examination of Bay Bridge spending requested by the Legislature, there has been no independent fiscal oversight of the project. What audits there have been are internal examinations conducted by the various agencies involved in managing the project.
Some of the most expensive overhead involves keeping qualified Caltrans engineers and contractors on the ground overseas to ensure bridge components can stand the test of time and the next big earthquake. Much of the steel fabrication and know-how for the self-anchored suspension span—the project’s crown jewel—has been outsourced to at least seven countries: Canada, China, England, Japan, Norway, South Korea and Taiwan. In previous eras it would seem inconceivable that the major steel components for such a project would be built in China, but that is exactly what is happening.
Building the bay’s signature span
By
Patricia Decker
McSweeney's San Francisco Panorama/SF Public Press
— Dec 8 2009 - 12:48pm
On the ground in Shanghai with the men who are tackling, weld by complicated weld, the largest public works project in Bay Area history//
When all the pieces are finally welded together and tethered by the main suspension cable, the Bay Bridge east span will be not just a new American icon, but also a truly global monument.
From the enormous solid steel castings of cable saddles, brackets and bands being forged in Japan and England to the gigantic bearings and hinges being manufactured in South Korea and Pennsylvania, fabrication of the bridge is under way in seven foreign countries and in more than two dozen American cities, including 12 in California.
Sections of the steel tower, shown above, are made from plates as thick as four inches and can weigh up to 1,000 tons. To work on them, crews must rotate them on ZPMC-designed rotisseries.
No foreign country is contributing more in terms of labor and critical components than the People’s Republic of China, where Shanghai’s Zhenhua Port Machinery Co. (ZPMC) is fabricating the heart and soul of the new Bay Bridge.
A subsidiary of China Communications Construction Co. Ltd, a major international infrastructure design and construction firm partially owned by the Chinese government, ZPMC is relatively new to the bridge-building industry but has a prolific history of producing immense steel structures.
Best known for its dominant global role in producing container cranes, such as the bevy of dinosaur-like structures grazing in the Port of Oakland, ZPMC is poised to expand its share of global steel production if it can deliver on Caltrans’ demanding expectations for the east span.
In April 2006, when Caltrans awarded the contract for the most complex and ambitious part of the east span replacement to the lowest bidder, American Bridge/Fluor (ABF), it was the inclusion of ZPMC that provided a critical price advantage: Chinese steel and labor was $400 million cheaper than it was for domestic steel fabrication.
ZPMC had its manufacturing capabilities in place, eliminating the need for expensive and time-consuming construction of a domestic fabrication facility. American Bridge’s working relationship with the company was established when ZPMC provided steel deck plates for the new Carquinez Bridge that opened in 2003.
Sprawling across more than two square miles along the southern shore of the city-size Changxing Island, in the mouth of the Yangtze River Delta, the ZPMC facility is the largest of its kind in the world. The fabrication yards set aside for the Bay Bridge project are just a patch in the quilt of warehouses where 20,000 people work, forging 80 percent of the world’s container cranes and other gargantuan steel structures, including the 67,000 tons of steel destined for the east span decks and tower legs.
Seventy years ago, when American Bridge engineered the Bay Bridge structure being replaced today, ironworkers slung hot metal rivets from buckets as they fastened steel plates together hundreds of feet in the air.
Today, the components are manufactured in huge yards and then shipped on a month-long journey across the Pacific before being lifted into place with the largest floating crane on the West Coast, named the “Left Coast Lifter”—also built by ZPMC.
While subcontracting with ZMPC and using foreign steel was expected to save hundreds of millions overall, manufacturing problems have gnawed away at the potential benefits, with tens of millions needed to pay for performance incentives, reforming inspection procedures, and keeping quality engineers overseas and on the job.
The project has required scores of American workers from ABF, Caltrans, and its subcontractor to relocate to China for extended periods, especially as the inspection staff grew to respond to weld-quality issues.
In addition to the inspectors from ABF, Caltrans, and its subcontractor—currently Caltrop, which began project oversight last December—ZPMC maintains its own quality-control staff. And there are at least 250 inspectors—about 200 from the prime contractor and 45 from Caltrans—working with ZPMC inspectors to ensure the millions of welds are up to par.
In an effort to correct the chronic welding problems, an expensive “green tagging” process was devised whereby small green tags were attached to components as they passed quality control testing. That process will cost at least $17 million by the time Chinese fabrication is completed.
Delays related to a June 2009 shipping date undermined the confidence in the green tagging process, which was supposed to prevent this type of slowdown in the inspection chain. That confidence continued to erode as target dates for shipments from Shanghai slipped ever further into autumn.
American Bridge estimates that the barge carrying the first shipment of the 500-ton deck sections from Shanghai will sail by the end of the year—so, weather permitting, we can expect to see them passing through the Golden Gate by January or February.
Pieces of the tower, which are fabricated in smaller sections roughly 100 feet high, aren’t scheduled to arrive until late spring or early summer.
By the time all the bridge pieces are delivered, fabrication costs will have ballooned by $100 million, and probably millions more.
Still, the bridge’s overseers believe that building in China will turn out to be a good deal for Californians.
“The simple fact is, despite the fact that we got a bid for domestic steel, I’m not sure that there is a domestic steel fabricator that could do what ZPMC is doing” in terms of scale and their capability for the “massivity of this project,” said MTC executive director Steve Heminger.
The fine print: Interest doubles total price tag
By
Robert Porterfield
McSweeney's San Francisco Panorama/SF Public Press
— Dec 8 2009 - 12:47pm
Why the cost of the new east span of the Bay Bridge could exceed $12 billion paid off over 40 years//
Overall cost estimates have been presented to the public in annual reports and press briefings, but the cost of interest on money borrowed to pay for construction has not been included.
When asked whether debt service had been included in the price quoted to the public, Brian Mayhew, chief financial officer of the Bay Area Toll Authority (and of the Metropolitan Transportation Commission), conceded that it had not.
This is not surprising, because few, if any, government agencies will include that factor in major capital projects when discussing them publicly. As Mayhew underscores, it’s not an underhanded practice to exclude debt service interest in Bay Bridge costs estimates. All the numbers necessary to do the math are broken down in agency financial reports—although few taxpayers bother to read them—giving BATA a strong defense if anyone were to accuse it of trying to hide something. It’s there in black and white.
Mayhew was asked, “Does BATA have an internal formula for apportioning interest to specific toll bridge projects?” He said the agency did not.
Without a closer examination of intra-agency correspondence and finance records, this statement is difficult to verify independently. Municipal finance consultants say that all major capital projects have cost-benefit analyses made. But no such analysis has yet emerged from the records for the Bay Bridge east span.
But there are means to externally calculate the range of possible total costs of the project. They can be defended if properly qualified. Mayhew said our numbers sounded right to him.
Our assessment—that the ultimate cost of the east span could exceed $12 billion—is conservative. It could be overly conservative, if construction costs increase even more during the coming four years, before the new span is scheduled to open.
Here’s how we’ve based our calculations on information published by the Toll Bridge Program Oversight Committee:
DIRECT COSTS: In July 2009, the projected budget for the Bay Bridge’s east span was:
ALL SEISMIC RETROFITTING & REPLACEMENT (R&R)—DIRECT COSTS: It is important to note that the east span is an integral part of the overall seismic retrofitting and replacement program for all seven Bay Area toll bridges under BATA’s purview (the Golden Gate excepted). In July 2009, the latest information available, the total estimated direct cost for the entire program—which includes the Bay Bridge east span—was $8,685,000,000.
ALL SEISMIC R&R—PROJECTED INTEREST: According to the latest numbers in November 2009, the interest to be paid on the outstanding money borrowed for the seismic retrofitting and replacement project is projected to be $7,991,193,147 between 2010 and 2049, when the currently outstanding bonds are paid off.
ALL SEISMIC R&R—PAID INTEREST: The interest already paid between 2006 (when the first contracts were awarded for the east span) and June 30, 2009, is $601,259,036.
ALL SEISMIC R&R—TOTAL INTEREST: Thus, the total of interest paid and interest projected to be paid on the outstanding debt since 2006 is $8,592,452,183.
INTEREST ON THE BAY BRIDGE EAST SPAN: When we consider that the Bay Bridge east span construction costs account for 73 percent of the total overall seismic retrofitting and replacement program, 73 percent of the total interest paid and projected to be paid is $6,272,490,093.
Ergo, the sum of the July 2009 forecast east span construction costs of $6,319,900,000 plus the $6,272,490,093 (73 percent proportionate share of interest) totals $12,592,390,093.
How Wall Street profits from bridge building
By
Robert Porterfield
McSweeney's San Francisco Panorama/SF Public Press
— Dec 8 2009 - 12:49pm
The Bay Area Toll Authority passes on the cost of mounting bond debt by raising tolls again and again //
In the alphabet soup of government agencies responsible for the region’s bridges, one body stands out for its unique, far-reaching powers of the purse—the Bay Area Toll Authority.
BATA is the financial lynchpin of what amounts to a multimillion-dollar business charging motorists to cross bridges. Like much of the bureaucratic infrastructure surrounding toll bridge operations, BATA is a creature of the state Legislature, formed by politicians in 1997 to pay for their expensive promises to motorists.
BATA’s primary responsibility is funding the Bay Bridge east-span replacement and other massive seismic-retrofitting programs. Since 2005, lawmakers have greatly expanded the agency’s role as the rich uncle to Caltrans, which owns and operates seven of the Bay Area’s eight toll bridges—the San Francisco–Oakland Bay Bridge, the Antioch Bridge, the Benicia-Martinez Bridge, the Carquinez Bridge, the Dumbarton Bridge, the Richmond–San Rafael Bridge, and the San Mateo Bridge. BATA also provides substantial funding for the Metropolitan Transportation Commission, the lead planning agency that has its fingers in almost every mode of transportation within the nine counties that make up the Bay Area. Previously, tolls could only be increased with approval of the Legislature; now, the agency can raise them at will.
The borrowing binge
It is BATA’s ability to unilaterally raise tolls in support of its continued borrowing that makes the agency particularly attractive to Wall Street—BATA is anything but a subprime borrower. In November, Standard & Poor’s, one of the nation’s three largest rating agencies, gave BATA’s bond issue its second-highest investment-grade rating, justifying its decision by pointing out that BATA had “no limits” when it came to raising tolls to repay debt—and “no requirement of legislative approval.”
Although BATA itself has borrowed the lion’s share of all money raised for California toll-bridge seismic retrofitting and replacement projects, as well as for other voter-mandated undertakings, its role as prime borrower didn’t emerge until 2005. It was then that state lawmakers, unhappy with Caltrans missteps in managing costs for Bay Area bridge work, gave BATA primary responsibility for bankrolling the ambitious toll bridge retrofitting program.
Of the $2.2 billion borrowed during the initial phase of retrofit work between 2001 and 2004—focused on retrofitting the west span, constructing a new west approach, and retrofitting other bridges—BATA’s borrowings totaled just $987 million. Most of the money borrowed for these early projects came from a bond issue by the California Infrastructure and Economic Development Bank, one of myriad state and local agencies created for the sole purpose of borrowing money without having the debt reflected on California’s financial statements, something that would adversely impact the state’s credit rating. In 2003 the Infrastructure Bank sold $1.2 billion in bonds and loaned $1 billion of the proceeds to Caltrans, which used $765.6 million to pay for the Bay Bridge west span retrofit and construction of the new west approach.
It wasn’t until Caltrans started awarding construction contracts for replacing the east span in April 2006 that BATA embarked on a borrowing binge. Coupled with the earlier borrowing, the current projected debt service—the principal and interest payments on all bonds outstanding to fund the entire Bay Area seismic retrofitting program, including the Bay Bridge—now exceeds $13.6 billion, saddling motorists with principal and interest payments for the next forty years. BATA projects that of this amount, interest payments alone will be nearly $8 billion by 2049. And that figure doesn’t include the $697 million in interest already paid.
Investment bankers cash in
BATA has managed to meet contractor paydays by performing an intricate financial ballet choreographed by Brian Mayhew, the agency’s chief financial officer. Mayhew plays all the angles to keep interest rates low, protects investors to maintain BATA’s high credit ratings, and hedges some of its bets using complex financial derivatives.
Not all of the money that BATA has borrowed has gone to construction. Millions of dollars have gone into the pockets of Wall Street investment bankers, lawyers, and financial consultants who put the deals together. Since 2006, BATA has paid at least $122 million in fees and other costs associated with issuing bonds. According to BATA records, between 2007 and last August, $75.7 million in fees were paid to two dozen firms, for a variety of services ranging from financial and legal advice to sales of bonds to investors. The largest recipient was Wall Street powerhouse JPMorgan Chase, which collected $50.5 million. Like closing costs on a conventional home mortgage, many of these fees are included in the amount upon which interest is paid.
//At least $122 million has gone into the pockets of Wall Street investment bankers, lawyers, and financial consultants who put the deals together.//
Although BATA is the primary borrower, there has been one departure from its standard practice of borrowing money directly. In December 2006, when additional funds were needed, BATA and its parent, the Metropolitan Transportation Commission, raised the extra cash by creating the Bay Area Infrastructure Financing Authority (BAIFA) — a Joint Powers Authority which allowed the two public agencies to operate collectively. This new entity was used to obtain $888 million in what amounted to a “cash advance” from Wall Street, a loan that was secured by $1.3 billion in future toll-bridge project payments the state Legislature promised to make between 2006 and 2014. (The BAIFA structure was necessary to circumvent legal restrictions prohibiting BATA, which can only borrow against toll-bridge revenues, from borrowing the money itself.)
Of the total $9.1 billion borrowed since 2001, $6.4 billion has gone into Caltrans’ project-construction fund. The rest was used to pay off earlier bonds, refinance existing debt at lower interest rates, pay the upfront costs of issuing the bonds, or maintain required cash reserves. By continuing to finance toll-bridge projects with revenue bonds, BATA ensures most of the debt will be repaid from what amounts to motorist user fees, not taxes—continuing to keep billions in debt off state balance sheets.
The variable-rate gamble
Historically, BATA has relied heavily on bonds with variable interest rates, which can make it hard to accurately predict financing costs. Some of those rates were established by auctions conducted on a weekly or monthly basis, with investors bidding on the interest they were willing to pay until the next auction. Since 2006, BATA has sold about $4.3 billion in bonds with variable interest rates, and another $570 million with rates at auction.
To stabilize interest payments on the variable and auction-rate bonds, BATA engaged in a sophisticated form of gambling called interest rate swaps. These financial derivates create “synthetic” or artificial interest rates by converting variable rates into fixed rates, and fixed rates into variable rates pegged to a predetermined index. The swaps themselves are contracts with financial institutions requiring one party to pay the other—depending upon which underlying interest rate is involved.
In essence, in an attempt to save money, BATA was betting which way interest rates would go. If a BATA swap involved a variable-rate-to-a-fixed-rate contract, and the variable interest rate rose above the fixed interest rate during the contract period, BATA would be required to pay the difference to its financial-institution partner. If the fixed rate exceeded the variable rate, the financial institution would pay BATA.
Many public agencies in California use these swaps, but in doing so take the risk interest rates won’t do what’s expected, or that one of the financial institutions that is a party to the swaps will somehow experience an event that forces a termination of the agreement, resulting in substantial penalty payments.
Earlier this year BATA was forced to pay one of its swap partners $104.6 million to terminate its swap agreements. The financial ratings of that partner, Ambac Financial Services, were downgraded, and BATA terminated the swaps because that downgrade not only increased the agency’s risk, but also because the downgrade pushed Ambac’s ratings below the levels the BATA board had mandated for its swap partners. Despite the termination payment, in August Ambac sued BATA in New York federal court, claiming the agency owed an additional $50 million. That lawsuit is pending.
In addition, Mayhew said BATA suffered losses of between $20 and $25 million due to the global financial problems of 2008, which caused the variable-rate auction market to cease functioning.
Since then, BATA has engaged in a series of refinancings and new bond issues designed to convert much of its outstanding variable-interest-rate debt to fixed rate. As of last month, the agency had $4.2 billion of its outstanding debt in fixed-rate bonds and just $1.4 billion in variable-rate securities. Prior to the refinancings, BATA had about $2.9 billion in variable-rate debt outstanding.
Uncle Sam lends a hand
One move made by Mayhew to reduce the amount of interest BATA itself will have to pay came last month, when the agency issued $1.3 billion in fixed-rate Build America Bonds, a growing trend among government agencies across the country. Mayhew says this program, where interest on the bonds is taxable, has given BATA access to a whole new range of investors that have never purchased the agency’s bonds before, including insurance funds, pension funds, and long-term liability funds.
“For once they”—investors—“have an asset that will match that liability,” Mayhew said. “They’re in heaven.”
Mayhew said the Build America Bond program, which is available until the end of 2011, is a “very powerful market,” and that he would have been remiss if he had not gone to the BATA board and presented this opportunity to wrap up the seismic financing (excluding the Antioch and Dumbarton bridges) at interest rates below five percent. “For forty-year debt, that’s an incredible number,” he said.
Although total interest due on the Build America Bonds between 2010 and 2049, when they’re retired, will be almost $3 billion, BATA’s actual share of interest payments will be slightly over $1.9 billion—with the difference being paid by the federal government in the form of a 35 percent rebate on interest. Every time BATA makes an interest payment to investors, the government sends a rebate check.
Mayhew said that’s a great deal. “The state of California pays far more in taxes than it gets back, so I don’t mind getting some of that back.” But Mayhew also recognizes BATA’s conflicting role in delivering to the state its largest civil-works project while at the same time delivering returns to investors.
“The way this is structured, the state takes a tremendous risk,” Mayhew said. “My obligation legally, is to the bondholders. My obligation contractually is to build these bridges. My purpose is to build bridges and safety features. My law says the first responsibility is to the bondholders. Caltrans takes a tremendous risk that we will honor our responsibilities."
http://sfpublicpress.org/
A subsidiary of China Communications Construction Co. Ltd, a major international infrastructure design and construction firm partially owned by the Chinese government, ZPMC is relatively new to the bridge-building industry but has a prolific history of producing immense steel structures.
Best known for its dominant global role in producing container cranes, such as the bevy of dinosaur-like structures grazing in the Port of Oakland, ZPMC is poised to expand its share of global steel production if it can deliver on Caltrans’ demanding expectations for the east span.
In April 2006, when Caltrans awarded the contract for the most complex and ambitious part of the east span replacement to the lowest bidder, American Bridge/Fluor (ABF), it was the inclusion of ZPMC that provided a critical price advantage: Chinese steel and labor was $400 million cheaper than it was for domestic steel fabrication.
ZPMC had its manufacturing capabilities in place, eliminating the need for expensive and time-consuming construction of a domestic fabrication facility. American Bridge’s working relationship with the company was established when ZPMC provided steel deck plates for the new Carquinez Bridge that opened in 2003.
Sprawling across more than two square miles along the southern shore of the city-size Changxing Island, in the mouth of the Yangtze River Delta, the ZPMC facility is the largest of its kind in the world. The fabrication yards set aside for the Bay Bridge project are just a patch in the quilt of warehouses where 20,000 people work, forging 80 percent of the world’s container cranes and other gargantuan steel structures, including the 67,000 tons of steel destined for the east span decks and tower legs.
Seventy years ago, when American Bridge engineered the Bay Bridge structure being replaced today, ironworkers slung hot metal rivets from buckets as they fastened steel plates together hundreds of feet in the air.
Today, the components are manufactured in huge yards and then shipped on a month-long journey across the Pacific before being lifted into place with the largest floating crane on the West Coast, named the “Left Coast Lifter”—also built by ZPMC.
While subcontracting with ZMPC and using foreign steel was expected to save hundreds of millions overall, manufacturing problems have gnawed away at the potential benefits, with tens of millions needed to pay for performance incentives, reforming inspection procedures, and keeping quality engineers overseas and on the job.
The project has required scores of American workers from ABF, Caltrans, and its subcontractor to relocate to China for extended periods, especially as the inspection staff grew to respond to weld-quality issues.
In addition to the inspectors from ABF, Caltrans, and its subcontractor—currently Caltrop, which began project oversight last December—ZPMC maintains its own quality-control staff. And there are at least 250 inspectors—about 200 from the prime contractor and 45 from Caltrans—working with ZPMC inspectors to ensure the millions of welds are up to par.
In an effort to correct the chronic welding problems, an expensive “green tagging” process was devised whereby small green tags were attached to components as they passed quality control testing. That process will cost at least $17 million by the time Chinese fabrication is completed.
Delays related to a June 2009 shipping date undermined the confidence in the green tagging process, which was supposed to prevent this type of slowdown in the inspection chain. That confidence continued to erode as target dates for shipments from Shanghai slipped ever further into autumn.
American Bridge estimates that the barge carrying the first shipment of the 500-ton deck sections from Shanghai will sail by the end of the year—so, weather permitting, we can expect to see them passing through the Golden Gate by January or February.
Pieces of the tower, which are fabricated in smaller sections roughly 100 feet high, aren’t scheduled to arrive until late spring or early summer.
By the time all the bridge pieces are delivered, fabrication costs will have ballooned by $100 million, and probably millions more.
Still, the bridge’s overseers believe that building in China will turn out to be a good deal for Californians.
“The simple fact is, despite the fact that we got a bid for domestic steel, I’m not sure that there is a domestic steel fabricator that could do what ZPMC is doing” in terms of scale and their capability for the “massivity of this project,” said MTC executive director Steve Heminger.
The fine print: Interest doubles total price tag
By
Robert Porterfield
McSweeney's San Francisco Panorama/SF Public Press
— Dec 8 2009 - 12:47pm
Why the cost of the new east span of the Bay Bridge could exceed $12 billion paid off over 40 years//
Overall cost estimates have been presented to the public in annual reports and press briefings, but the cost of interest on money borrowed to pay for construction has not been included.
When asked whether debt service had been included in the price quoted to the public, Brian Mayhew, chief financial officer of the Bay Area Toll Authority (and of the Metropolitan Transportation Commission), conceded that it had not.
This is not surprising, because few, if any, government agencies will include that factor in major capital projects when discussing them publicly. As Mayhew underscores, it’s not an underhanded practice to exclude debt service interest in Bay Bridge costs estimates. All the numbers necessary to do the math are broken down in agency financial reports—although few taxpayers bother to read them—giving BATA a strong defense if anyone were to accuse it of trying to hide something. It’s there in black and white.
Mayhew was asked, “Does BATA have an internal formula for apportioning interest to specific toll bridge projects?” He said the agency did not.
Without a closer examination of intra-agency correspondence and finance records, this statement is difficult to verify independently. Municipal finance consultants say that all major capital projects have cost-benefit analyses made. But no such analysis has yet emerged from the records for the Bay Bridge east span.
But there are means to externally calculate the range of possible total costs of the project. They can be defended if properly qualified. Mayhew said our numbers sounded right to him.
Our assessment—that the ultimate cost of the east span could exceed $12 billion—is conservative. It could be overly conservative, if construction costs increase even more during the coming four years, before the new span is scheduled to open.
Here’s how we’ve based our calculations on information published by the Toll Bridge Program Oversight Committee:
DIRECT COSTS: In July 2009, the projected budget for the Bay Bridge’s east span was:
| Overhead | $1,203,100,000 |
| Construction | $5,109,100,000 |
| Contingencies and overruns | $7,700,000 |
| Total | $6,319,900,000 |
ALL SEISMIC RETROFITTING & REPLACEMENT (R&R)—DIRECT COSTS: It is important to note that the east span is an integral part of the overall seismic retrofitting and replacement program for all seven Bay Area toll bridges under BATA’s purview (the Golden Gate excepted). In July 2009, the latest information available, the total estimated direct cost for the entire program—which includes the Bay Bridge east span—was $8,685,000,000.
ALL SEISMIC R&R—PROJECTED INTEREST: According to the latest numbers in November 2009, the interest to be paid on the outstanding money borrowed for the seismic retrofitting and replacement project is projected to be $7,991,193,147 between 2010 and 2049, when the currently outstanding bonds are paid off.
ALL SEISMIC R&R—PAID INTEREST: The interest already paid between 2006 (when the first contracts were awarded for the east span) and June 30, 2009, is $601,259,036.
ALL SEISMIC R&R—TOTAL INTEREST: Thus, the total of interest paid and interest projected to be paid on the outstanding debt since 2006 is $8,592,452,183.
INTEREST ON THE BAY BRIDGE EAST SPAN: When we consider that the Bay Bridge east span construction costs account for 73 percent of the total overall seismic retrofitting and replacement program, 73 percent of the total interest paid and projected to be paid is $6,272,490,093.
Ergo, the sum of the July 2009 forecast east span construction costs of $6,319,900,000 plus the $6,272,490,093 (73 percent proportionate share of interest) totals $12,592,390,093.
How Wall Street profits from bridge building
By
Robert Porterfield
McSweeney's San Francisco Panorama/SF Public Press
— Dec 8 2009 - 12:49pm
The Bay Area Toll Authority passes on the cost of mounting bond debt by raising tolls again and again //
In the alphabet soup of government agencies responsible for the region’s bridges, one body stands out for its unique, far-reaching powers of the purse—the Bay Area Toll Authority.
BATA is the financial lynchpin of what amounts to a multimillion-dollar business charging motorists to cross bridges. Like much of the bureaucratic infrastructure surrounding toll bridge operations, BATA is a creature of the state Legislature, formed by politicians in 1997 to pay for their expensive promises to motorists.
BATA’s primary responsibility is funding the Bay Bridge east-span replacement and other massive seismic-retrofitting programs. Since 2005, lawmakers have greatly expanded the agency’s role as the rich uncle to Caltrans, which owns and operates seven of the Bay Area’s eight toll bridges—the San Francisco–Oakland Bay Bridge, the Antioch Bridge, the Benicia-Martinez Bridge, the Carquinez Bridge, the Dumbarton Bridge, the Richmond–San Rafael Bridge, and the San Mateo Bridge. BATA also provides substantial funding for the Metropolitan Transportation Commission, the lead planning agency that has its fingers in almost every mode of transportation within the nine counties that make up the Bay Area. Previously, tolls could only be increased with approval of the Legislature; now, the agency can raise them at will.
The borrowing binge
It is BATA’s ability to unilaterally raise tolls in support of its continued borrowing that makes the agency particularly attractive to Wall Street—BATA is anything but a subprime borrower. In November, Standard & Poor’s, one of the nation’s three largest rating agencies, gave BATA’s bond issue its second-highest investment-grade rating, justifying its decision by pointing out that BATA had “no limits” when it came to raising tolls to repay debt—and “no requirement of legislative approval.”
Although BATA itself has borrowed the lion’s share of all money raised for California toll-bridge seismic retrofitting and replacement projects, as well as for other voter-mandated undertakings, its role as prime borrower didn’t emerge until 2005. It was then that state lawmakers, unhappy with Caltrans missteps in managing costs for Bay Area bridge work, gave BATA primary responsibility for bankrolling the ambitious toll bridge retrofitting program.
Of the $2.2 billion borrowed during the initial phase of retrofit work between 2001 and 2004—focused on retrofitting the west span, constructing a new west approach, and retrofitting other bridges—BATA’s borrowings totaled just $987 million. Most of the money borrowed for these early projects came from a bond issue by the California Infrastructure and Economic Development Bank, one of myriad state and local agencies created for the sole purpose of borrowing money without having the debt reflected on California’s financial statements, something that would adversely impact the state’s credit rating. In 2003 the Infrastructure Bank sold $1.2 billion in bonds and loaned $1 billion of the proceeds to Caltrans, which used $765.6 million to pay for the Bay Bridge west span retrofit and construction of the new west approach.
It wasn’t until Caltrans started awarding construction contracts for replacing the east span in April 2006 that BATA embarked on a borrowing binge. Coupled with the earlier borrowing, the current projected debt service—the principal and interest payments on all bonds outstanding to fund the entire Bay Area seismic retrofitting program, including the Bay Bridge—now exceeds $13.6 billion, saddling motorists with principal and interest payments for the next forty years. BATA projects that of this amount, interest payments alone will be nearly $8 billion by 2049. And that figure doesn’t include the $697 million in interest already paid.
Investment bankers cash in
BATA has managed to meet contractor paydays by performing an intricate financial ballet choreographed by Brian Mayhew, the agency’s chief financial officer. Mayhew plays all the angles to keep interest rates low, protects investors to maintain BATA’s high credit ratings, and hedges some of its bets using complex financial derivatives.
Not all of the money that BATA has borrowed has gone to construction. Millions of dollars have gone into the pockets of Wall Street investment bankers, lawyers, and financial consultants who put the deals together. Since 2006, BATA has paid at least $122 million in fees and other costs associated with issuing bonds. According to BATA records, between 2007 and last August, $75.7 million in fees were paid to two dozen firms, for a variety of services ranging from financial and legal advice to sales of bonds to investors. The largest recipient was Wall Street powerhouse JPMorgan Chase, which collected $50.5 million. Like closing costs on a conventional home mortgage, many of these fees are included in the amount upon which interest is paid.
//At least $122 million has gone into the pockets of Wall Street investment bankers, lawyers, and financial consultants who put the deals together.//
Although BATA is the primary borrower, there has been one departure from its standard practice of borrowing money directly. In December 2006, when additional funds were needed, BATA and its parent, the Metropolitan Transportation Commission, raised the extra cash by creating the Bay Area Infrastructure Financing Authority (BAIFA) — a Joint Powers Authority which allowed the two public agencies to operate collectively. This new entity was used to obtain $888 million in what amounted to a “cash advance” from Wall Street, a loan that was secured by $1.3 billion in future toll-bridge project payments the state Legislature promised to make between 2006 and 2014. (The BAIFA structure was necessary to circumvent legal restrictions prohibiting BATA, which can only borrow against toll-bridge revenues, from borrowing the money itself.)
Of the total $9.1 billion borrowed since 2001, $6.4 billion has gone into Caltrans’ project-construction fund. The rest was used to pay off earlier bonds, refinance existing debt at lower interest rates, pay the upfront costs of issuing the bonds, or maintain required cash reserves. By continuing to finance toll-bridge projects with revenue bonds, BATA ensures most of the debt will be repaid from what amounts to motorist user fees, not taxes—continuing to keep billions in debt off state balance sheets.
The variable-rate gamble
Historically, BATA has relied heavily on bonds with variable interest rates, which can make it hard to accurately predict financing costs. Some of those rates were established by auctions conducted on a weekly or monthly basis, with investors bidding on the interest they were willing to pay until the next auction. Since 2006, BATA has sold about $4.3 billion in bonds with variable interest rates, and another $570 million with rates at auction.
To stabilize interest payments on the variable and auction-rate bonds, BATA engaged in a sophisticated form of gambling called interest rate swaps. These financial derivates create “synthetic” or artificial interest rates by converting variable rates into fixed rates, and fixed rates into variable rates pegged to a predetermined index. The swaps themselves are contracts with financial institutions requiring one party to pay the other—depending upon which underlying interest rate is involved.
In essence, in an attempt to save money, BATA was betting which way interest rates would go. If a BATA swap involved a variable-rate-to-a-fixed-rate contract, and the variable interest rate rose above the fixed interest rate during the contract period, BATA would be required to pay the difference to its financial-institution partner. If the fixed rate exceeded the variable rate, the financial institution would pay BATA.
Many public agencies in California use these swaps, but in doing so take the risk interest rates won’t do what’s expected, or that one of the financial institutions that is a party to the swaps will somehow experience an event that forces a termination of the agreement, resulting in substantial penalty payments.
Earlier this year BATA was forced to pay one of its swap partners $104.6 million to terminate its swap agreements. The financial ratings of that partner, Ambac Financial Services, were downgraded, and BATA terminated the swaps because that downgrade not only increased the agency’s risk, but also because the downgrade pushed Ambac’s ratings below the levels the BATA board had mandated for its swap partners. Despite the termination payment, in August Ambac sued BATA in New York federal court, claiming the agency owed an additional $50 million. That lawsuit is pending.
In addition, Mayhew said BATA suffered losses of between $20 and $25 million due to the global financial problems of 2008, which caused the variable-rate auction market to cease functioning.
Since then, BATA has engaged in a series of refinancings and new bond issues designed to convert much of its outstanding variable-interest-rate debt to fixed rate. As of last month, the agency had $4.2 billion of its outstanding debt in fixed-rate bonds and just $1.4 billion in variable-rate securities. Prior to the refinancings, BATA had about $2.9 billion in variable-rate debt outstanding.
Uncle Sam lends a hand
One move made by Mayhew to reduce the amount of interest BATA itself will have to pay came last month, when the agency issued $1.3 billion in fixed-rate Build America Bonds, a growing trend among government agencies across the country. Mayhew says this program, where interest on the bonds is taxable, has given BATA access to a whole new range of investors that have never purchased the agency’s bonds before, including insurance funds, pension funds, and long-term liability funds.
“For once they”—investors—“have an asset that will match that liability,” Mayhew said. “They’re in heaven.”
Mayhew said the Build America Bond program, which is available until the end of 2011, is a “very powerful market,” and that he would have been remiss if he had not gone to the BATA board and presented this opportunity to wrap up the seismic financing (excluding the Antioch and Dumbarton bridges) at interest rates below five percent. “For forty-year debt, that’s an incredible number,” he said.
Although total interest due on the Build America Bonds between 2010 and 2049, when they’re retired, will be almost $3 billion, BATA’s actual share of interest payments will be slightly over $1.9 billion—with the difference being paid by the federal government in the form of a 35 percent rebate on interest. Every time BATA makes an interest payment to investors, the government sends a rebate check.
Mayhew said that’s a great deal. “The state of California pays far more in taxes than it gets back, so I don’t mind getting some of that back.” But Mayhew also recognizes BATA’s conflicting role in delivering to the state its largest civil-works project while at the same time delivering returns to investors.
“The way this is structured, the state takes a tremendous risk,” Mayhew said. “My obligation legally, is to the bondholders. My obligation contractually is to build these bridges. My purpose is to build bridges and safety features. My law says the first responsibility is to the bondholders. Caltrans takes a tremendous risk that we will honor our responsibilities."
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]. The magic of "outsourcing" has reached its limits. Just ask the Boeing Bad-Dream.liner team. Time to bring it home boys, time to bring it home...
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