BILL ANALYSIS �
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: SB 969
SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: desaulnier
VERSION: 2/10/14
Analysis by: Eric Thronson FISCAL: yes
Hearing date: April 29, 2014
SUBJECT:
Transportation megaproject oversight
DESCRIPTION:
This bill requires an agency administering a transportation
megaproject to develop a comprehensive risk management plan and
to establish a peer review group to review plans and finances of
the megaproject.
ANALYSIS:
In 2013, the Legislature passed and the governor signed SB 425
(DeSaulnier), Chapter 252, also known as the Public Works
Project Peer Review Act of 2013. SB 425 required administering
agencies wishing to establish a peer review group to first
develop a transparent process for selecting members of the
group, and then draft and post on the Internet a charter for the
group that contains, among other things:
The names of the group's members and their fields of
expertise;
The group's objective, scope, and description of duties;
and
Whether or not the group members signed a conflict of
interest disclosure form.
Further, SB 425 defined an administering agency, for its
purposes, as a public agency principally tasked with
administering, planning, developing, and operating a public
works project. Finally, SB 425 defined a peer review group as a
panel of people qualified by training and experience who give
expert advice on the scientific and technical aspects of a
public works project.
SB 969 (DESAULNIER) Page 2
This bill :
1.Changes the name of the Public Works Project Peer Review Act
to the Public Works Project Oversight Improvement Act.
2.Defines a megaproject, for purposes of this act, as a
transportation project with total estimated development and
construction costs exceeding one billion dollars.
3.Requires an administering agency to establish a peer review
group to review the planning, engineering, financing, and
other plans, unless the agency has a statutorily created peer
review group as of January 1, 2014.
4.Requires an administering agency to manage the risks
associated with a transportation megaproject by doing the
following:
Establishing a comprehensive risk management plan with a
process to identify and quantify risks to the project,
track responses, and control risks throughout the life of
the project.
Qualifying risks in financial terms.
Developing documents to track identified risks and
related mitigation steps.
Regularly updating cost estimates.
Regularly reassessing its reserves for potential claims
and unknown risks.
Regularly reporting risks and integrating updated
estimates for costs and contingency reserves.
COMMENTS:
1.Purpose . According to the author, this bill furthers the
Legislature's work of improving the state's delivery of large
projects by applying to future transportation projects the
best-practice principles identified in the Senate
Transportation and Housing Committee informational hearing on
November 13, 2013. The author's previous legislation, SB 425
described above, enacted a framework for legitimizing the use
of peer review on public works projects. This bill, based on
SB 969 (DESAULNIER) Page 3
recommendations by worldwide experts on the delivery of
megaprojects, requires governmental entities overseeing large
transportation projects to apply peer review principles to
improve the outcome of those projects. Further, this bill
requires comprehensive risk management for megaprojects, as
research shows that risk grows exponentially as project costs
increase and therefore managing risk from the beginning is a
critical component of improving project delivery. The author
contends that this bill can help save the state billions of
dollars by ensuring that large-scale, costly transportation
projects are better overseen and managed.
2.Improving megaproject outcomes is critical . Improving the
state's performance in delivery of megaprojects is a critical
and timely topic. Many of the state's challenges today
require grand, visionary, expansive solutions. While
megaproject development is often first associated with
transportation, this topic truly touches nearly every realm of
public infrastructure. As essential projects grow in size and
complexity, so does the challenge for the state to properly
select and deliver these projects in a responsible, honest
manner.
This committee has spent significant time researching and
learning about transportation megaproject best practices.
This research finds that among the first to document a
systemic pattern of extreme cost growth and schedule delay on
transportation megaprojects was Danish economist Bent
Flyvbjerg. In his seminal work, Megaprojects and Risk (2003),
Flyvbjerg asserts that large-scale delays and cost overruns
are more the norm than the exception on transportation
megaprojects. He references multiple studies, the largest of
which examined 258 projects in 20 different countries, which
together document cost overruns on 90 percent of these large
projects. Cost growth averaged 20 percent for road projects,
34 percent for bridge/tunnel projects, and 45 percent for rail
projects. He observed, however, that overruns of 80 percent
were not uncommon.
Flyvbjerg cites a lack of realism in initial cost estimates as
the primary driver of cost overruns on transportation
megaprojects. He asserts that initial cost estimates for
transportation megaprojects routinely underestimate, downplay,
or otherwise fail to account for the level of risk associated
with a transportation megaproject, including political,
economic, environmental, and geological uncertainties.
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Failure to adequately account for such risks up front - or in
some cases to acknowledge them at all - inevitably leads to
costly delays and expensive mitigation or design changes later
in the project. Flyvbjerg attributes these failures largely
to a phenomenon he calls "appraisal optimism," the idea that
project developers typically base projections on a best-case
scenario even though such an outcome is rarely realistic,
especially on large, complex endeavors. Moreover, he suggests
that such unfounded optimism is frequently intentional -
elsewhere he calls it strategic misrepresentation - on the
part of those with a vested interest in seeing that the
project moves forward, whether for self-interested or more
altruistic motives.
Due to the sheer size of these projects, taking steps such as
setting up governance and management structures in ways that
control risk and avoid escalating costs and extended timelines
can save the state billions of dollars. Flyvbjerg argues that
the antidote to strategic misrepresentation is comprehensive
and rigorous risk analysis, done in conjunction with
appropriate peer review of underlying assumptions and
analyses. This bill appears to incorporate both of
Flyvbjerg's recommendations by requiring administering
agencies overseeing all future transportation megaprojects to
develop comprehensive risk management plans from the
beginning, and to incorporate honest peer review into the
project development process.
3.Technical amendments .
On page 2, lines 6 and 11, change Overview to Oversight.
On page 3, line 20, change both instances of capitol to
capital.
POSITIONS: (Communicated to the committee before noon on
Wednesday, April 23,
2014.)
SUPPORT: None received.
OPPOSED: None received.
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