Innovative Public-Private Financing Brings Warrantied New Highway to New Mexico
In July 1998, New Mexico’s governor, Gary Johnson, announced an innovative partnership with Koch Industries. The New Mexico Corridor 44 Project includes the design, construction, warranty, and (at the option of the state) partial financing of the project—the expansion of a 121-mile section of two-lane
highway to four lanes.132 months.
The project came about rapidly—moving from concept to contract in only 15
Construction will be fast compared to traditional programs. Had it been built in traditional four-mile increments, it would have taken 27 years. Under the contract, the project is scheduled to be finished in 3.5 years. If it is not finished by then, Koch will pay a penalty of $7,000 per day.133 Furthermore, the contractor
will forgo payment until the job is done, creating a significant incentive to finish fast.134 exposure is over $50 million.
Koch’s total risk
The most significant aspect of the contract is the warranty from the developer. “In addition to assuming subbase-to-surface risk for a major asphalt highway, Koch has guaranteed to pay for the up-keep and repair of a public asset for 20 years without recourse to public funds.”135 Koch will maintain the road to meet specific performance criteria based on industry guidelines. “The $62 million long-term warranty will save the taxpayers $89 million,” since the maintenance cost was projected to be $151 million.136
One major factor allowed for success. “The state is not telling [Koch] how to build the road.”137 Avoiding micromanagement allows the contractor to use innovative practices often not available to the public sector. In this case, Koch will utilize a unique and innovative pavement design. The extremely durable design uses very strict specifications for materials in the asphalt mix but has the benefit of needing 20 percent less pavement and will cost at least $20 million less to use.138
We will discuss below the methodological problems that make cost-saving estimates suspect, but the point to take away now is that both studies showed that outsourcing achieved specific, well-defined goals. Also, recall that DOTs themselves report that planning and design cost is not a major factor when compared to other factors and that cost data for internal operations, especially overhead charges, are not sufficiently accurate to
make meaningful comparisons.139
In addition, these studies focus only on direct costs, overlooking how
interrelated budgets and expenditures are in government. A University of North Texas study of infrastructure outsourcing concludes that while immediate direct cost savings from outsourcing are often small, indirect savings in transaction costs in non-core areas are significant over time, and that satisfaction with outsourcing increases after a three-to-five year period.140
New Mexico Highway and Transportation Department (NMHTD), New Mexico Corridor 44 Project (Las Cruces, NM: author, 1998), p. 2.
Ibid., p. 3.
Danielle Beaugureau, “Developer Delivers Warranty for 140-Mile New Mexico Route,” Engineering News Record (June 29, 1998), p. 26.
“NM Highway 44 Warranty Project,”Public Works Financing (July/August 1998), p. 1. NMHTD, New Mexico Corridor 44 Project, p. 3; and Koch Industries, News Release, July 20, 1998, p. 1.
Beaugureau, “Developer Delivers Warranty,” p. 26. NMHTD, New Mexico Corridor 44 Project, p. 2; and Public Works Financing, p. 1. Wilmot et al., “In-House Versus Consultant,” p. 158.
J. Lynn Johnson and Louis Ponthieu, The Long-term Impact and Cost Effectiveness of Outsourcing (Denton, Tx: University of North Texas, 1999).