More From the Public-Private Partnerships Infrastructure Forum
I have an article in this week’s edition of the Capitol Ideas E-Newsletter that recaps last week’s InfraAmericas U.S. P3 Infrastructure Forum in New York City, which brought together state and federal transportation officials, representatives of global infrastructure investment firms and others to discuss the present and future of public-private partnerships in the United States. I encourage you to check it out. But there is plenty more I wasn’t able to squeeze into the article. Here’s some more interesting stuff gleaned from the two-day conference.
Virginia’s New P3 Office Brings Order to Process
As I write about in the article, Virginia recently took the major step of establishing an independent office of transportation public-private partnerships. Transportation Secretary Sean Connaughton talked about why the state felt the need to change its P3 program:
“There were some challenges in our program,” Connaughton said. “What was state of the art 15 years ago is not state of the art today. We listened very much to our stakeholders—those who are involved in our P3 projects currently in Virginia—and we looked to them as well as others to find out ways we could actually make our program even stronger. We brought in (global infrastructure advisory firm) KPMG. KPMG actually did a very comprehensive review right after we came into office last year to outline how we could make our program even stronger.”
The review said that the state’s P3 program lacked a standardized bidding process and involved too many state workers with competing priorities. KPMG examined the program’s leadership structure, project screening, service delivery and funding sources and compared the Virginia program to similar ones in Georgia and Texas.
Among KPMG’s recommendations were not only the establishment of the independent office, but also the development of standard processes and methodologies for project screening and prioritization, the development of a programmatic approach to procurement and delivery of P3 projects, a streamlining of the procurement process and the establishment of a dedicated funding source for the program office.
Connaughton cited another problem with the program as it existed prior to the creation of the new office.
“We started to get to the point where we were constantly relying on unsolicited P3s,” he recalled. “Nothing against unsolicited P3s; we support unsolicited P3s. But what it meant was the state was always trying to catch up either looking for funding or doing the necessary required studies. And so we were always getting bogged down in unsolicited P3s. And we moved some of them forward but unfortunately that process took years to bring projects actually to fruition.”
Dusty Holcombe, the Deputy Director of the Virginia Office of Transportation Public-Private Partnerships, told conference delegates how things will be different now as the new office takes shape:
“I would suggest that it is a dramatic departure in the sense that the new office has three focus areas: the first is the identification, prioritization and selection of P3s. That way we can do our upfront analysis and we can identify a pipeline. That way the private sector can look at our pipeline of projects, identify where they want to put their resources and the timing (of where) they want to put their resources… The second part is associated with project development… It’s an important fact that in the past there have been a lot of procurements where the private sector has come into the commonwealth and spent a lot of money and sometimes the project went forward, sometimes the project didn’t go forward. We want to change that and we want to develop projects. We want to do a value for money analysis. We want to do the business case ahead of time. We want to mature the project ahead of time before we go into procurement so that our resources are utilized efficiently. We create a project that has gone out to the public with our public outreach and has been identified through our business case development that it is a good P3 model project. And when we do go to procurement, it’s something that we can move forward with in a very timely manner and bring the private sector in, let them bring their innovations and ideas associated with it and then through the procurement itself, make it very efficient, move forward, get a contract, get a project going.”
Colorado Also Has Agency Focused on P3s
But Virginia isn’t alone in establishing a separate government entity to work on P3s.
“The High Performance Transportation Enterprise … was created several years ago by the state legislature as a discrete unit of government to focus on the transportation system of the state, which was at that point without funds (and) remains without funds,” the enterprise’s director Michael Cheroutes told attendees. “The state was in 2009, as was the case around the United States, in deep financial trouble. The legislature created this unit to specifically pursue public-private partnerships and other innovative means of financing for certain strategic corridor improvements within the state. We wanted to make sure that we were prioritizing those projects properly. We needed to get them out the door as quickly as we could.”
While the HPTE is a division of the Colorado Department of Transportation, it is governed by its own board, which includes three transportation commissioners and four others appointed by the Governor.
Cheroutes said state law allows the enterprise to undertake a wide range of P3 agreements.
“Operating concessions, building concessions, the whole range,” he said. “We can do bonds. We can toll not only new capacity but existing capacity – an important step forward in Colorado. We’ve got the ability to use availability payments as a means of supporting some of the less attractive projects. We’re into a major design-build contracting project currently … We’re about to be able to receive unsolicited proposals.”
Availability payments were first used in Europe. Under this P3 model, a private company designs, constructs and manages a transportation asset while the government continues to own it (and usually continues to receive revenues from tolls). The government compensates the private partner for the risks and responsibilities it undertakes based on specific performance standards. The model is often used for toll facilities that aren’t expected to generate adequate revenues to pay for themselves. It was used in the expansion of Florida’s I-595 Expressway.
Texas Starts Anew With P3s
Texas was also in the spotlight at the InfraAmericas forum. State lawmakers recently voted to lift a partial moratorium on new P3 toll road projects in place since 2007 in order to move forward on a series of already identified projects.
James Bass, the Chief Financial Officer of the Texas Department of Transportation (TxDOT), talked about what the legislation does and doesn’t do and how the state will rely on Requests for Information (RFI) from potential private sector investors:
“Senate Bill 1420 laid out the authority for TxDOT to develop the toll roads that are listed in there … There is another piece of legislation—Senate Bill 19—that described a more streamlined primacy process as to which entity—TxDOT or one of the local toll project entities—would advance the project. What’s not in the legislation is what will be the ultimate delivery method for those projects. If you talk to some of the local stakeholders, I think they would point out to you that TxDOT does not have all the answers. We have some answers. We think we have some indication as to what would be an appropriate delivery method for these projects. But we obviously don’t want to go into meetings with stakeholders and say ‘hey, we’ve already looked at it and thought all about it and this is the way to go.’ Through the RFI process, we hope to get input from the private sector and then subsequent to that some additional information through one-on-one meetings with those who have submitted to the RFI for ideas on which delivery method is going to offer the greatest form of competition and then the greatest value for money for the state. Once we have that information, we think that will serve us well when we start meeting with local stakeholders … In the legislation, there is a total of 11 projects and…the first deadline really is the environmental clearance by August 31 of 2013 and then to have a contract executed by August 31, 2015. There’s a reason why all of these projects are on the list—because they’re not financially viable through the traditional municipal toll bond revenue project system. So that’s the challenge—how many of those will be executed I think in part (will depend on) how innovative, how creative is the private sector going to be in finding ways to make these projects financially feasible. Some of them are going to have more challenges than others on that list. And so we’re going through the process. The top two on the priority from TxDOT’s perspective are the ones not surprisingly that we’ve gone out with the RFI on for Grand Parkway and I-35E. I think next in line to come out with the RFI is going to be the 183 project. First is going to be clearing that environmental hurdle by 2013 and then seeing what innovation, what ideas the private sector can bring to the table.”
Ted Houghton, who sits on the Texas Transportation Commission, said one reason the state is moving back in the direction of public-private partnerships (which are called Comprehensive Development Agreements in Texas) is that traditional sources of highway funding can no longer be counted on:
“We’ve come to the realization and the legislature has come to the realization that there’s not going to be any (gas tax increase) for awhile… Why would the state of Texas, our legislature, approve a gas tax increase when our federal gas tax right now we get back only 70 cents on every dollar. I don’t think we’re really interested any longer in subsidizing Pennsylvania and Massachusetts with Texas dollars. So I don’t think that our state legislature has any interest in raising the gas tax. So with that, what’s left? And what’s left are public-private partnerships and innovative financing … And I think everything is on the table and I look forward to seeing those proposals.”
But Texas officials acknowledged for the private sector audience that things will be different in the state under the new legislation.
“Whatever your preconceived notions have been about what’s gone on in the past in the state of Texas in terms of what’s disappointed you, put those away,” said Mike Heiligenstein, Executive Director of the Central Texas Regional Mobility Authority. “Let’s start over. Let’s get fresh and get ready to sit across the table and hear some serious proposals. I think it’s time.”
Newcomer Arizona Moving Forward on P3s
Also on the agenda in New York was Arizona, which is relatively new to the world of P3s, having only legalized them in 2009. Gail Lewis, the Director of the Arizona Department of Transportation, said her state plans to take a programmatic approach to P3s with no one-off projects (there is more about Arizona’s P3 program on the state DOT website).
She described the factors in Arizona that have led them to pursue public-private partnerships.
“For the last 50 years or so, Arizona has been the fastest growing state in the country,” Lewis told the conference. “It isn’t anymore…but it will continue to grow again and the limited private land that we have tells us that growth is going to occur in a fairly concentrated manner and we know exactly where the transportation is going to be needed and we don’t have the funds to do what is going to be needed. So even though it has slowed down, it hasn’t stopped. And people want options. They don’t want to go the same way. They don’t want to sit in traffic. They want to have transportation options and they want to have driving options.”
The problem, Lewis said, is declining revenues.
“Our funding picture is like everybody else’s in the country,” she said. “We have declining revenue from gas taxes. We have declining revenue from vehicle license and registration taxes. We receive no general fund money but the legislature is very good at reaching out and taking our funds from us in support of the general fund, especially for the highway patrol. We fund the highway patrol almost exclusively now out of highway funds. And the long term trends are working against us as well: the diversion to hybrid and electric vehicles, more fuel-efficient driving, more moderately priced vehicles, which brings down the sales and vehicle license taxes.”
The state’s declining revenues have necessitated budget cuts, which have not always been met with support, Lewis said.
“We made a brief-lived attempt in 2009 to close rest areas,” she recalled. “It was not a happy event. We closed all but five rest areas around the state and promised that we would re-open them very soon. We got an extremely negative response from drivers and from truckers who were just outraged that we had done this… So in the fall of 2010, we re-opened 14 of the 18 that we had previously closed.”
Indeed, as the AASHTO Journal Weekly Transportation Report recently pointed out, several state DOTs have struggled in recent years with how to continue to maintain and operate non-commercialized highway rest areas as they faced austere budgets. Connecticut’s Department of Transportation just this month was forced to drop plans to close all seven of the state’s rest areas for two years after legislators balked. The closings were expected to save $1.3 million per year in staff and maintenance. Virginia, which had closed 19 rest areas in 2009 before reopening them last year, will soon be using prison labor to maintain some of the state’s 42 highway rest areas. Officials there also will seek to sell naming rights for rest areas to help defray operating costs.
Arizona’s Lewis also described some of the adversity the nascent P3 program has already faced. She said opposition from truckers to potential new tolls has been high. There has also been a learning curve among Arizona drivers, who aren’t used to modern toll facilities. Finally, elected officials have expressed fear that voters will view new tolls as tax increases.
Public Opinion on P3s
Also getting some attention at the New York conference was how the public now views private investment in public infrastructure. The financial advisory and asset management firm Lazard has been conducting a telephone survey for the last five years.
Tom Suozzi, Senior Infrastructure Advisor for Lazard, explained some of the findings in the most recent survey.
“Happily, for those of us that support P3s and follow this industry, there’s growing favorability toward private investment in public assets,” he told conference delegates. “We’ve seen a trending over the past five years more and more favorable towards private investment in public infrastructure.”
Suozzi said the shift has been significant. In 2007, survey respondents identified “spending cuts” as their favored approach to addressing the nation’s problems. It was favored over private investment, tax increases and increased debt.
“Fast forward to March of 2011 (when the latest survey was conducted), people really having been through a lot of cuts, having seen a lot of reduction in programs, you see an actual flip with more people supporting private investment—45.3 percent—and less people than in 2007—about half as many people—supporting cutting spending.”
But the latest survey does provide a few notes of caution for P3 supporters and public officials, Suozzi said.
“Opposition to foreign ownership remains high and we have to be conscious of that when trying to sell different projects,” he said. “Voters support private investment in some asset classes over others. The shorter the lease or concession term, the more likely it will be favored by the public. The public certainly does not like the idea of selling an asset—selling the family jewels ... And the public cares about the structure and terms of any P3 transaction.”
There's a September 2010 Lazard presentation on last year's National Infrastructure Poll and what it could mean for the future of P3s here.
New Jersey Seeks Partners to Manage Existing Transportation Assets
New Jersey Department of Transportation Commissioner James Simpson said public opinion has played a big role in influencing the direction of his state’s P3 program.
“Voters matter and the voters don’t like selling assets,” he said. “From where I come from in the Garden State, we’re not going to be selling any roads or doing anything like that. We may do some management.”
Simpson said he can envision having private companies manage a highway operation, a toll road or a transit system in the state.
On rail and transit in particular, he believes there may be great opportunities for P3s because the state desperately needs to reduce congestion. Simpson estimated the state has $4 billion worth of rail projects that they don’t have funding for.
“We had a privatization task force as soon as (Gov. Chris) Christie took office and they identified a bunch of scenarios for P3s,” he recalled. “A lot of them are on the management side. I know that a lot of folks in here are really looking for the big deal, the big transaction, the heavy infrastructure, not the management because management is really, really hard work.”
Simpson advised state officials and others involved in P3s to not be so transaction-oriented but to focus on how a public-private partnership can solve a transportation problem and better meet the needs of the travelling public.
The New Jersey Privatization Task Force’s Report can be read here.
Success of Indiana Toll Road on the Minds of Many Conference Participants
One public-private partnership that frequently came up during the InfraAmericas forum was the Indiana Toll Road, which was one of the first long-term concession agreements in the United States. The 2006 deal under which a Spanish/Australian consortium paid an upfront fee to operate and maintain the road for 75 years is now touted among the P3 community as one of its biggest successes and perhaps a selling point to win further public support for such deals down the road.
“(Indiana Governor Mitch) Daniels did a $3.8 billion Indiana Toll Road deal and didn’t spend all the money up front on social programs or budget needs,” said Robert Collins, Managing Director and Head of Americas Infrastructure Banking for investment banking firm Greenhill. “He did it to invest in transportation… People have been tracking actual job growth. They’ve created over 60,000 jobs just since 2006, which is really proof positive that (as U.S. Department of Transportation estimates contend) every $1 billion (spent on) infrastructure generates around 30,000 jobs, both direct and indirect. So I think as that deal matures, people see the benefits of it. They like the condition of the road, they like the fact that it’s all electronic tolling. Those are the types of things that I think will get … more acceptance of it.”
John Veech agrees. He’s the Managing Director and Head of the Americas Region for Morgan Stanley Infrastructure Partners.
“I think these things have to be designed so that there’s some demonstrable and tangible benefit to the guy on the street,” Veech told the conference. “And it can be as simple as use of proceeds… If you look at Indiana and the toll road, now that thing passed (by a slim margin) but folks were generally happy because (state officials said) ‘we’re going to take those proceeds and fix a ton of things that need to be fixed and you’re going to see tangible progress.’ If you compare and contrast that with utilizing the proceeds just putting them into the general budget, even if that (allows you to avoid) things like layoffs or cutbacks in services, it tends to get lost in the sauce as people wake up two or three years later and kind of scratch their heads and say ‘what did we get out of this?’ So I think it’s going to be increasingly important to have the use of proceeds as well as some level of enhanced service to the customer even if that’s on an existing asset whether it’s repaving it, whether there are bridges that need resurfacing or structural repairs. But I think even in the privatization of ongoing assets, there needs to be some tangible element that people can look to that they view as beneficial.”
The Future of Public-Private Partnerships
There was no shortage of opinions in New York about what the future may hold for P3s. D.J. Gribbin, Managing Director of the infrastructure investment firm Macquarie Capital, saluted what he sees as a diversification of P3 models and purposes.
“One of the very exciting things in the last year in this industry is that we’ve moved away from just toll roads to transit,” she said. “We’ve moved away from just tolling to availability payments. What we’re seeing is an increasing sophistication in terms of governments being able to use P3s. I think that’s critical. For a long time in this country, when we said P3, we were really just talking about roads and it’s quickly becoming the case that’s no longer the fact.”
But Gribbin cautioned that P3s may not be a valid solution for every state or every project and it’s incumbent on state officials to ask the right questions to determine if it is.
“What public service are you trying to accomplish? Start there,” he said. “What are your options for accomplishing and providing that service? And then, what is the best of those options moving forward. And there are times where someone wants to procure something that just doesn’t make sense as a P3. Lots of times state DOTs will say ‘we can afford this project and this project. Ooh, this one’s really hard, it’s in a rural area and no one would use it. Let’s throw that out as a P3.’”
Gribbin said it’s also important for the state legislature to understand where it fits into the procurement process.
“There’s a bill before Ohio where the legislature would come back in at the end of the process and give a thumbs up or thumbs down (on a project),” he said. “That’s a political risk investors are just not going to take.”
Instead Gribbin recommends that states set up a committee or other entity that looks at the public service being fulfilled and why it is a P3 would fit. The legislature can weigh in during that part of the process but then hand it off to the executive branch to commit to the deal.
Some investors believe P3s have been inhibited in the United States by an unfavorable political dynamic and some common misconceptions among the public.
“I think one of the key misunderstandings is that probably most folks in the street equate privatization with rate increases,” said Morgan Stanley’s Veech. “One of the key misconceptions is control over rates in many of these deals remains with the governmental entities under these concessions and the private operators in most instances have zero control over rates. That simple fact kind of tends to get lost in the ether.”
Veech said turning that political dynamic around will likely require dividing the risks and rewards more equitably between the public and private sectors.
“I do think deals where it’s more of a partnership and a sharing, participating in the revenue growth, whether that’s from inflation or just increased usage … can make these transactions politically more palatable.”
Ultimately, Veech and many of his colleagues remain cautiously optimistic that the years ahead may see an increased number of public-private partnerships in the United States.
“I think when we look at the U.S. market, there’s been a torrent of activity two years off for the last ten years,” Veech said. “Every two years, it’s two years away but we never quite get there. I do think this time around the stage may be set for somewhat increased volume. I also think when you look at P3s as a solution… there’s times when it is a solution and times when it’s arguably not a solution at all. And I think my hope is going forward that… P3s will get looked at as kind of a tool in the toolbox, an arrow in the quiver but will be looked at as a range of solutions that can work in some instances and not work in others.”
PowerPoint Presentations from InfraAmericas Forum
For more on the InfraAmericas U.S. P3 Infrastructure Forum, you can read PowerPoint presentations on this website from some of the speakers at the New York conference. Among those included:
Michael Cheroutes, Director of the Colorado High Performance Transportation Enterprise.
Steve Schultz, Executive Director of the Louisville and Southern Indiana Bridges Authority, who discussed the Ohio River Bridges Project, a plan to build two new bridges over the Ohio and reconstruct a major interchange where three interstates come together in Louisville.
Sean Connaughton, Virginia Secretary of Transportation
Christopher Lee, Managing Partner of Highstar Capital and Beverley Swaim-Staley, Maryland Secretary of Transportation, who discuss a public-private partnership to upgrade the Seagirt Marine terminal in Baltimore Harbor in anticipation of the widening of the Panama Canal.
Mark Foster, Chief Financial Officer for the North Carolina Department of Transportation, who discussed that state’s approach to P3s and projects in the works.
Regina McElroy, Director of the Office of Innovative Program Delivery at the Federal Highway Administration, who discussed the federal Transportation Infrastructure Finance and Innovation Act (TIFIA) program that provides credit assistance to undertake transportation projects. She also examined various proposals for a National Infrastructure Bank and how they might complement the TIFIA program.
P3 Transportation Projects in the U.S. and Canada
By the way, if you’d like to get a sense of the use of public-private partnerships in the U.S. and Canada, Public Works Financing magazine has a scorecard of projects that’s current through late last year. For the United States, it lists more than 90 projects in more than 20 states and the District of Columbia totaling investments of more than $51 billion. You can see the type of private risk for each project (lease, design/build, etc.), the private company involved with the project, and the contract amount.
Additional P3 News & Resources
- As I also highlighted in this week’s Capital Ideas E-Newsletter, Puerto Rico is making a big push into P3s. This week Goldman Sachs Infrastructure Partners and Spain’s largest toll road operator, Abertis, agreed to pay $1.08 billion to lease two of the U.S. territory’s toll roads for 40 years. The first such deal since 2007, it’s the fourth-largest P3 involving an existing toll road in North America. There is more on the deal this week from Land Line Magazine and Tollroads News.
- The International Bridge, Tunnel and Turnpike Association (IBTTA) this week hosted a panel discussion on options for Rebuilding America’s Interstate Highway System. Among the presenters was Edward Regan, Executive Vice President of transportation consulting firm Wilbur Smith Associates. Regan’s presentation, based on a recent article in the IBTTA Journal Tollways, lays out the case for giving states flexibility to toll existing interstates. Tollroads News also looked at Regan’s arguments this week. Earlier this month, Stateline’s Dan Vock reported on how many state officials support the idea of tolling the interstates.
All photos courtesy of InfraAmericas. Special thanks to Amanda Creasey, Kate Salkeld and everyone at InfraAmericas.