BILL ANALYSIS �
-----------------------------------------------------------------
|SENATE RULES COMMITTEE | SB 969|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524 | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
-----------------------------------------------------------------
THIRD READING
Bill No: SB 969
Author: DeSaulnier (D), et al.
Amended: 5/27/14
Vote: 21
SENATE TRANSPORTATION & HOUSING COMMITTEE : 11-0, 04/29/14
AYES: DeSaulnier, Gaines, Beall, Cannella, Galgiani, Hueso,
Lara, Liu, Pavley, Roth, Wyland
SENATE APPROPRIATIONS COMMITTEE : 7-0, 5/23/14
AYES: De Le�n, Walters, Gaines, Hill, Lara, Padilla, Steinberg
SUBJECT : Public works
SOURCE : Author
DIGEST : 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
CONTINUED
SB 969
Page
2
expertise;
The group's objective, scope, and description of duties; and
Whether or not the group members signed a conflict of interest
disclosure form.
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.
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 $2.5 billion.
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.
CONTINUED
SB 969
Page
3
Regularly reporting risks and integrating updated
estimates for costs and contingency reserves.
Background
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.
The Senate Transportation and Housing 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% of these large projects.
Cost growth averaged 20% for road projects, 34% for
bridge/tunnel projects, and 45% for rail projects. He observed,
however, that overruns of 80% 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. 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
CONTINUED
SB 969
Page
4
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.
Comments
According to the author's office, 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
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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
CONTINUED
SB 969
Page
5
According to the Senate Appropriations Committee:
Likely minor, absorbable costs to the Department of
Transportation. It is rare that the Department has
jurisdiction over projects of this size, and the Department
currently performs the activities specified in this bill.
(State Highway Account)
Potential reimbursable mandate costs for local
transportation entities that administer megaprojects to
establish peer review groups and risk management plans.
Costs are unknown, but could be up to $100,000 to $200,000
(General Fund) per megaproject, if a local entity
successfully filed a mandate claim with the Commission on
State Mandates. It is unlikely that many projects would
exceed the $2.5 billion cost threshold, and some local
entities would not have standing to bring a claim before the
Commission.
JA:nl 5/27/14 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
**** END ****
CONTINUED