New Projects, Deal Structures Mark Busy Year for Public-Private Partnerships but Federal Uncertainty Clouds Future for States
As states continue to experience infrastructure deficits and uncertainty about how those needs will be met going forward, public-private partnerships (P3s) have become an important tool in the toolbox for some when it comes to project finance and delivery. But the types of projects being pursued and the types of agreements states are entering into with the private sector have evolved considerably in recent years. Past experiences have made both states and private investors more discerning and deliberative partners. Federal tools such as the TIFIA loan guarantee program have helped many large P3 projects advance but doubts about the future of the federal transportation program overall have prompted some states to hesitate in pursuing many large, long-term projects.
Those were just some of the themes touched on at the InfraAmericas U.S. P3 Infrastructure Forum 2014, held June 17-18 at the Grand Hyatt in New York City. CSG was a supporting organization for the event, which brings together state and federal transportation officials, infrastructure developers, investors, financiers and regional transportation authorities for a variety of panel discussions on the state of the P3 industry. This year’s public sector speakers included U.S. Secretary of Transportation Anthony Foxx, two sitting members of Congress, and transportation officials from such key P3 states as Arizona, Colorado, Florida, Indiana, Illinois, Maryland, Massachusetts, Michigan, North Carolina, Ohio, Pennsylvania, Texas and Virginia.
“2014 has been a year of real momentum for P3 in America,” noted Hana Askren, Editor of InfraAmericas, at the outset of the conference. “Many states have closed deals in the last year or two.”
But while 33 states and Puerto Rico currently have legislation that allows them to pursue P3s, many of them have yet to close any deals, Askren said. Those states that have pursued deals are now seeking to create P3 programs to ensure greater consistency in the future. Colorado and Virginia for example have dedicated offices to pursue P3s. Largely as a result of the deals pursued by the most enthusiastic P3 states, a significant pipeline of projects has developed.
“The industry has $16.5 billion in deals in active procurement right now with about $5 billion in deals expected to reach financial close this year,” Askren said. “Almost half of those in procurement are roads projects. Bridges and tunnels, airports and light rail make up another third with water and sewer infrastructure emerging in importance. … Looking to the future, the number and variety and total value of projects in pre-launch is very encouraging. While not all of these deals will go into procurement next year, the total value of $57 billion means that the future pipeline looks very strong.”
The State of the North American P3 Market in 2014
A panel of infrastructure investors told the InfraAmericas audience 2014 has been an active year for public-private partnerships for a number of reasons including a still growing infrastructure deficit around the country and the continuing evolution of TIFIA, the federal credit assistance program that was beefed up considerably under MAP-21 and that has doled out billions in loans for some key P3 projects around the country. But one other factor has also been at work.
“A number of states are becoming much more familiar with the (P3) model and the value that can be brought to bear and demonstrating the political will to use it,” said Dale Bonner, Chairman of U.S. Operations for Plenary Group USA, an investor, developer and operator of public infrastructure with projects in the United States, Canada and Australia.
“That was something we’ve been waiting for to sort of see the pipeline that we’ve been talking about for a long time actually start to bear fruit and we can now see a solid list of states that are understanding how P3s can be used and also now applying them,” said Nuria Haltiwanger, CEO for ACS Infrastructure Development and ACS Infrastructure Canada, which have invested more than $9 billion in North America in just the last six years. “More and more states having legislation and actually using it and knowing what a P3 is and what it isn’t.”
Sylvia Garcia, Chief Financial Officer and Assistant Secretary for Budget and Programs at the U.S. Department of Transportation, said an infusion of cash into the TIFIA program has helped build the project pipeline.
“MAP-21 was great in that we had an increase in TIFIA and that really helps the ability to do (P3) projects,” she said. TIFIA-backed deals jumped from one or two a year to nine or 10 as a result.
For states, public-private partnerships have been a learning experience but now that education has started to pay off and to influence the evolution of the industry in the United States, speakers at the conference said. States are doing the groundwork and advance work with the private sector needed to advance P3 projects. They’re revising how they do public outreach to build support for a project and thinking about how they can be more transparent in developing P3 deals.
While five to seven years ago, some states might have been under the impression that a P3 transaction constituted “free money,” today state transportation officials are much more knowledgeable about the actual benefits of P3s, which include the transfer of risk and the acceleration of projects they would not otherwise be able to complete on their own.
“States now have a very clear idea of what they want to achieve through a P3,” said Christopher Voyce, Managing Director at Macquarie, which provides banking, financial, advisory, investment and funds management services. “I think a little bit of realism, a little bit of preparedness and a little more sophistication about what it takes for a program to be successful are … the main factors in moving the market forward as quickly as it has.”
Bonner said states are increasingly seeking private sector partners with experience not only with specific types of projects but also specific types of financial structures. Fortunately, he said, they now have a number of world class design-build firms to choose from with operations in the United States and abroad.
One P3 financial structure many expect to see more of in the years ahead is the availability payment model, under which the project sponsor (often the state DOT) retains the underlying revenue risk associated with a project rather than the private partner.
“Some states don’t have authority to actually do availabilities so we’ll continue to see tolling revenue projects there,” Haltiwanger noted. “Some states don’t have the ability to actually toll certain facilities. … I think states are starting to understand what an availability project is and the value they can get for that in terms of risk transfer. So they’re starting to learn that and I think we’ll start to see more of those projects happening as the states are valuing the P3 model as a risk transfer delivery model and long-term life-cycle type model.”
Haltiwanger said the availability payments model can sometimes help states pursue policy objectives on a project. That was certainly the case, she said, with a recent P3 project to make improvements to I-595, the main East-West corridor in Broward County, Florida.
“(The state department of transportation was) very concerned with throughput,” she said. “They didn’t care about revenue necessarily but they wanted to make sure that there was mobility on the corridor. So the whole procurement, the whole project, the whole concept of it was structured around ensuring mobility. So the performance requirements were structured around that and the fact that they decided to do this as an availability-based project vs. doing a traditional toll revenue (deal) [which most of the previous managed lane projects in the state had been] … was based upon that policy objective. And I think for the state having the ability to control the toll rates was important to them in terms of getting the project forward and important ultimately as well in terms of moving their objective forward. So when we’re looking at projects to invest in, we’re also trying to see and make sure that we understand what the objective is that the state has. So I think they did a great job with that and we’ll start to see that analysis hopefully happening more and more with states when they’re analyzing (a project).”
But the proliferation of P3s has also produced added scrutiny in some states and in some cases a reassessment of how they are pursued. Public outcry about what was perceived by some as a lack of public input on a P3 to widen U.S. 36 in Colorado resulted in legislation that sought greater transparency in future projects that was ultimately vetoed by Gov. John Hickenlooper. The legislation would have required the disclosure of information on the costs and alternatives to such deals, public participation at three stages in the development of any deal and more communication with state legislators. It also would have required legislative approval for contracts longer than 35 years and would have banned non-compete clauses that opponents said undermined local decision-making. In vetoing the legislation, Hickenlooper said he supported its provisions to improve transparency, accountability and openness but he said “it also inappropriately constrains the business terms of future P3 agreements. These constraints on business terms would create a chilling component on future transactions, making investors unlikely or unwilling to bid on Colorado projects due to the increased risks this process would generate.” Hickenlooper did end up issuing an executive order aimed at increasing transparency around P3 projects and urging lawmakers to consider creating a “Center for Excellence” to determine best practices for future projects.
At the InfraAmericas conference, Plenary Group USA’s Bonner said it was important that an “amend it not end it” approach ultimately prevailed in Colorado. There was never any talk of completely doing away with P3s, Bonner said. He now sees a bright future for P3 projects in the state.
The issue of transparency also came up recently in Virginia, where a review by the Virginia Department of Transportation’s Assurance and Compliance Division and the Office of the State Inspector General found that the process was not transparent enough as the administration of then-Gov. Bob McDonnell explored building a $1.4 billion toll expressway along U.S. 460. While the review said the state had not broken any rules in pushing the P3 project, it said the process was not transparent in dealing with project risks, particularly in getting federal permits to build the road through environmentally sensitive areas or assessing the effects of changes in road design. Current Gov. Terry McAuliffe shut the project down in March. That has prompted some to wonder whether the state could take a step back from the aggressive pursuit of P3 deals the state has been known for in recent years.
“There’s been an examination of how the new administration is going to pursue P3s,” said Macquarie’s Voyce. “We understand that Virginia continues to be supportive of P3s. I think Virginia is facing the same sort of challenges that Colorado is frankly: how do you make the procurement process and how do you make the political process more transparent to the public to ensure that those who are working on behalf of the project—the public officials—get that public support as they’re going through a project? I think there’s been some criticism of the way deals have been done in the past—not that they shouldn’t have been done but just the way they were done in the past.”
Incentivizing Private Investment in Infrastructure
Maryland Democratic Congressman John Delaney is the sponsor of legislation introduced last year to create a $50 billion federal infrastructure fund capitalized through infrastructure bonds purchased by private corporations, who would be incentivized to do so because they would be given the ability to repatriate some of their overseas earnings tax free. Under the Partnership to Build America Act, at least 25 percent of the projects financed through the fund would have to be public-private partnerships with at least 20 percent of the project’s financing coming from private capital.
Delaney told the InfraAmericas audience why the legislation has won bipartisan co-sponsors in both chambers of Congress.
“It brings together two pieces of public policy that each side of the aisle has been pushing for for decades and they’ve each been 100 percent right,” he said. “We Democrats have been making the case for increasing our investment in infrastructure for 20 years. … It’s stimulative to the economy in the short term—in other words, it creates jobs. It makes us more competitive in the long term and it’s a really good investment. … My Republican colleagues have been pushing another piece of public policy for almost as long and they’ve been 100 percent right and what they’ve been focused on is flaws in our international tax system. The United States is one of the only major, developed, competitive nations that does not have something called a territorial tax system, which means for a corporation, if you work in a territorial system, it you create earnings overseas, you pay tax locally where you earn the money and then when you bring the money back to the homeland, you don’t have to pay any additional tax. The reason people have these territorial systems is to encourage money to flow back to their home country. The United States does not have a territorial system. … Almost half of U.S. corporate cash sits overseas. … It’s a terrible system. We should fix it.”
Delaney said his bill would do exactly that and provide a significant amount of financing for infrastructure projects. He explained how his concept is different from previous proposals to create a national infrastructure bank.
“What we do with the Partnership to Build America Act is we launch something called the American Infrastructure Fund, which is designed to be a large-scale, highly flexible, long-term infrastructure financing entity—part insurance company, part bank—to be used only by states and local governments,” he said. “So it’s entirely focused on local needs. It’s not to be used by the federal government. The American Infrastructure Fund is capitalized up front with $50 billion of capital, which stays in there for 50 years. So it never needs any more funding from the federal government. We believe that capital base can be leveraged 10 or 15-to-1. So potentially up to $750 billion and that will revolve a couple times over 50 years so we’re talking about a trillion and a half to $2 trillion of infrastructure financing, which we believe will create over 3 million American jobs. All focused on states and local governments, all designed to be highly flexible and evolving in terms of the programs that it creates. So it’s not program-specific. It’s more mission and entity-specific.”
Update from the Transportation Task Force on P3s
New York Democratic Congressman Sean Maloney is a member of a special task force on public-private partnerships created by the House Transportation and Infrastructure Committee earlier this year. He provided InfraAmericas attendees an update on the task force’s work and some ways the federal government might help incentivize more P3 activity in the United States.
“I believe the first thing we should do is create a unit within (the U.S. Department of Transportation) that has real expertise and real capacity to assist local entities in going about these projects,” Maloney said. “There’s an enormous information gap and an enormous uncertainty out there among policymakers and bureaucrats on how to do this and what it means and what it would look like and we ought to centralize that expertise and we ought to fund it and we ought to do it at DOT.”
Maloney said another key to encourage more private investment might be greater public accountability.
“What I would do is I would put an additional layer on top of (TIFIA) that would be available to states and projects where they had correct types of authorizing legislation in place and where they had certain other conditions met in terms of intelligent use of proceeds so that the public can start to feel confident that if the state’s pursuing one of these programs through the federal DOT along certain lines accessing certain resources that are available only to those with best practices, that those deals will be in the public interest,” he said. “And I think that would accomplish something very important, which is to increase the deal flow in this country so that we have a more routinized and regularized P3 market so that public-private partnerships can take their place alongside traditional municipal finance as a project delivery method.”
The Extending Reach of Newest P3 Adopters
Among the newest adopters of public-private partnerships are the states of Arizona, Massachusetts, Michigan, North Carolina and Pennsylvania. Transportation officials from those five states were featured on another panel at the InfraAmericas conference.
Massachusetts Transportation Secretary Richard Davey told attendees his state’s exploration of P3s is part of a broader focus on transportation investment that included a major funding package in 2013.
“The tag line that we’ve used in Massachusetts is ‘the current transportation system we can’t afford and the one you all want, we absolutely can’t afford’ under at least the current financing structure, which is why we raised taxes, we’re raising some fees, and we’re getting a lot more openness to this question of public-private partnerships,” he said. “This is not a panacea. This isn’t free money.”
Massachusetts is considering three P3 projects for the immediate future including a third bridge over Cape Cod Canal, a high-occupancy toll lane on Rte. 3 south of Boston, and a possible private concession to update the state’s highway rest areas. Longer term, Davey said, the state is looking at a concession for port management at the Conley Port terminal in Boston and a project to reinvigorate the city’s South Station railroad and bus hub.
Pennsylvania enacted P3 authorizing legislation in 2012 and has since then worked to develop a pipeline of projects and a stable P3 program. State officials say they used a failed 2007 effort to privatize the Pennsylvania Turnpike as a valuable lesson and consulted experienced P3 states including Virginia as they were creating their program.
For one of their first P3 projects, Pennsylvania officials chose to pursue tackling what has become a major infrastructure concern in the state: the large number of structurally deficient bridges. Bryan Kendro, who directs the Office of Policy and P3s in the Pennsylvania Department of Transportation, said the selection has allowed the state to avoid some of the political controversies that occasionally surround P3 projects these days.
“In a state with 4,500 structurally deficient bridges, I think it was a natural that for the first project we did a big 560-bridge bundle project addressing a huge, glaring problem that everyone (on a bipartisan basis) understands and knows that it’s something we have to address quickly,” Kendro said. “I think that’s why this approach makes a lot of sense. I think that’s taken a lot of the politics out of it for now. I think if we’d done a toll road project or something with a little more controversy as a first project, (we’d have some additional challenges).”
Pennsylvania has other big plans for P3s as well. They’re looking at corridors that may be ripe for managed lane projects in the Philadelphia area and at train station redevelopment along the Amtrak Keystone line. Another project might involve tapping the state’s booming natural gas industry to build infrastructure that could help cut costs for transit providers in Pennsylvania, Kendro said.
“I think folks know the Marcellus Shale and the opportunities that represents to the Commonwealth but also provides a lot of opportunities for our transit providers,” he said. “By converting their fleets to CNG (compressed natural gas), they lower their operating costs. We’re going to look at what the private sector can do to invest in that infrastructure and from the perspective of the drilling companies that are in Pennsylvania, they obviously have a lot of desire to develop the market for their product. So we think the timing is right.”
Elsewhere, Arizona has been able to jumpstart a project that has been on the books for 30 years: the South Mountain Freeway, an east-west route that would connect to I-10 in the Phoenix area. Michigan is pursuing a freeway lighting procurement as a P3, looking at the rail sector for potential projects and developing an intermodal passenger center in Detroit among other things. And North Carolina expects to reach financial close on its first true P3 project by the end of the year. Just days after the InfraAmericas meeting, North Carolina Department of Transportation officials signed an agreement with Cintra to improve traffic flow along 26 miles of I-77 in the Charlotte area. The project includes converting existing HOV lanes to HOT lanes and adding new lanes to provide additional capacity.
TIFIA and a New Transportation Bill: Funding Needs for the P3 Industry
As the InfraAmericas conference convened, many remained concerned about the pending insolvency of the federal Highway Trust Fund and the upcoming expiration of MAP-21, the 2012 federal surface transportation authorization measure. Speakers said the uncertainty these two factors have produced combined with the short-term extensions, general fund transfers and brinksmanship that have defined federal transportation policy in recent years have taken a toll on the list of projects being pursued—whether as P3s or not—around the country.
Adam Sheets, the Deputy Director of Innovative Delivery at the Ohio Department of Transportation, was asked how his state is preparing for the possibility that the USDOT would begin slowing reimbursements to states if the Highway Trust Fund was allowed to simply run down.
“The short answer is we’re not,” he said. “I mean you can’t. We’re facing a crisis and we fully expect, given the consequences, that our federal partners will do the right thing and find a solution to the (Highway Trust Fund) shortfall. For Ohio, we have sufficient revenue to fund the program for three to four weeks if they stop reimbursements and after that we will have to shut down projects.”
The uncertainty about the trust fund couldn’t come at a worse time, said John Porcari, a former U.S. Deputy Transportation Secretary and Maryland Transportation Secretary, who now serves as a Senior Vice President at engineering and design firm Parsons Brinckerhoff.
“This is really a breach of faith in the sense that states … rely on reimbursements,” he said. “It’s a long, established relationship. … The other reality of this is for large portions of the country, this is the peak of the construction season. They can’t build 12 months of the year and right in the middle of the peak of construction season, you introduce an uncertainty at the worst possible time.”
Porcari said the uncertainty has had a chilling effect on some key projects around the country, some of which could be undertaken as P3s.
“If you’re a state DOT director or secretary, you’re not going to take these big, multi-year, expensive projects—the ones that are regionally and nationally significant—and put them out to bid; you can’t,” said Porcari. “The roles have been completely reversed in the last four or five years. Where there used to be a stable federal funding source and the states would scrape together the match however they had to, now the federal government is the unreliable partner … and there are projects that today aren’t going out to bid that probably should.”
Even complex projects that have long been in the works are getting additional scrutiny at this time. That was the case with Project Neon, the massive effort to reconstruct highways and streets south of a hugely congested freeway interchange near downtown Las Vegas, said Barney Allison, a partner at the Nossaman law firm, which specializes in infrastructure and other areas.
“The (state) department of transportation expressed a concern at its June meeting over taking on a big project like this even under an availability payment structure, where they’re looking at reimbursements of the capital costs over 30-odd years for a project of this size, (and) expressed some concern over the availability of federal funding,” he said. “It’s just one example of state DOTs looking very closely at whether they need to defer projects until (the federal situation) gets sorted out before they take on large commitments like this. Because if you don’t have the federal funds and you’re committing to make an availability payment for 35 years, it’s got to come from state money. And state funds are those precious dollars for state DOTs because they fund (administrative and operational costs), whatever can’t be paid for with federal funding. And so I think you are seeing some states look very closely at taking on large projects with a commitment to an extended period of time.”
But Porcari said the inertia in the Nation’s Capital has had at least one positive effect.
“I would point out that in contrast to the inaction at the federal level, at the state level, a number of governors have significantly raised revenues including (raising and indexing) the gas tax,” he said. “Not one of them has been thrown out of office. If you make the kind of linkage between projects and you deliver on them, (the voters are) generally supportive.”
Still, Allison said the key reason a long-term transportation reauthorization doesn’t appear to be in the cards this year is that no innovative ways to fund it are even being discussed.
“The greatest gift that we could give the transportation program is consistency and predictability and (those are) the very things we don’t have right now,” he said.
Allison was pleased to see expanded tolling mentioned in relation to the GROW AMERICA Act, the transportation proposal put forward by the Obama administration earlier this year. But he noted there is significant opposition to tolling from groups like the American Trucking Associations, AAA and environmental justice advocates. Due to their effectiveness in improving mobility, P3 projects that involve tolled managed lanes have proven to be at least somewhat politically acceptable, Allison said.
“The Dallas-Fort Worth area is probably the shining example of how you can invest tens of billions of dollars in infrastructure to improve mobility … and get people to their daycare, get people to their work, get people out on holidays if they’re willing to pay the fee,” he said. “So I think managed lanes have proven to be among the more successful of the tolling projects from a political acceptance standpoint.”
But Allison said the recent recession had a significant impact on toll roads and the private firms often enlisted to operate them and that may have prompted a shift in the structure of many P3 deals.
“We just had projects that didn’t do so well because the economy was down,” he said. “People aren’t commuting to a job, they’re not going on vacations, their vehicle miles traveled dropped and they’re not paying the tolls. They have less discretionary income to pay the tolls. That’s part of the reason I think you’ve seen more of a shift to availability payments in terms of P3s in the last few years. (It’s) a reluctance on the part of both private equity and lenders to take the traffic revenue risk.”
Others have concerns about what might happen if the federal government were to allow states to toll existing interstates and other facilities.
“I think a larger risk quite frankly … is the more they open up tolling, the less they’re going to feel inclined to find another revenue source and if this turns into an avoidance strategy, we’re all in trouble,” Porcari said.
The “GROW AMERICA Act” and Beyond
U.S. Secretary of Transportation Anthony Foxx used his appearance at the InfraAmericas conference to again tout the GROW AMERICA Act, a $302 billion transportation reauthorization bill put forward by the administration earlier this year. Foxx explained why he thinks infrastructure investment is needed.
“It’s been estimated by the American Society of Civil Engineers that the infrastructure deficit in the U.S. is north of $3 trillion,” he said. “There’s an awful lot that needs to be done in the U.S. to not only better maintain what is currently out there but also in terms of helping to build the new capacity needed. Because over the next 25 years, this country will have 100 million net new people to move around and we’ll have to almost double our freight capacity and so the challenges of this infrastructure deficit are substantial and the country has to tackle them.”
Foxx said the GROW AMERICA Act (it’s an acronym for Generating Renewal, Opportunity and Work with Accelerated Mobility, Efficiency and Rebuilding of Infrastructure and Communities throughout America) would help provide greater certainty by injecting both maintenance of effort capital and growing it by $90 billion over four years.
“We believe this is an important marker for the country, an important moment in the country because over the last five years, we’ve seen a series of short-term measures that have started to weaken the predictability and the certainty within the system,” he said. “In fact over the last five years Congress has passed 18 continuing resolutions and nine extensions of transportation bills and the net cumulative effect of that short-term thinking has been that at the state and local level, where these projects are actually designed and engineered and built, the confidence level has started to recede.”
Foxx also spoke about what may be needed to bring the country back from the brink of Highway Trust Fund insolvency.
“We’re at a crisis point because the Highway Trust Fund is going to run out of money as soon as August,” he said. “It’s going to have an impact on state construction schedules, on projects potentially slowing some down, potentially stopping some altogether. …We … have to figure out a way to create a moment for Congress to act rationally on this issue. The built in crisis—the Highway Trust Fund going over the cliff, authorization is expiring at the end of September—those may be enough to get Congress to do enough to prevent us from doing something bad for the short term but how much good can be accomplished is going to be a function of how well we’re able to talk to the American people about this issue and how it impacts them. And the states frankly are in many cases in a better position to articulate the trade-offs that have to be taken into account over the next few weeks and over the longer term if they continue to be walking a bit in the dark as it relates to how much federal investment they can expect and what the rules of the road are.”
Foxx said he believes the case for infrastructure investment must ultimately be made at a project by project level.
“You go to any community in this country and every community can tell you what the two or three big infrastructure projects are in those areas that they want to get done and they can actually tell you what those projects will do to improve either business, quality of life or whatever,” he said. “And it’s got to get that granular I think before we see the kind of action we really need. It’s got to get down to the level of where people live and what the difference between investing at lower levels and investing at higher levels will mean for them. So I would tell (state DOT leaders) we’ve really got to make this case in a much different way. Otherwise we’re going to continue to see short-term measures. … We can’t do that.”
Private investment too may be a key part of the equation going forward, said Foxx, who also touted the success of federal programs like TIFIA and TIGER in moving P3 projects along.
“We are very bullish on public-private partnerships and the opportunity to take these trillions of dollars that are on the sidelines and put them to work to build the infrastructure we need as a country,” he said.
Blueprint for a Successful Procurement Process
The procurement process for P3 projects was the focus of another panel discussion at the InfraAmericas forum. In areas like outreach to the industry and ensuring competitive bids, state officials and private sector firms are becoming aware of best practices that can help to make the process run more smoothly.
While giving the P3 industry high grades for accelerating projects, Parsons Brinckerhoff Global CEO Gregory Kelly said reinventing the wheel for each new project has proven somewhat counterproductive.
“Projects that would otherwise have not gotten started are happening,” he said. “On cost effectiveness, I give a much lower score. … The industry is spending tens of millions of dollars on individual procurement and I think the procurement process perhaps needs to get streamlined a little bit to make it more cost effective.”
Others say the learning curve faced by public officials with regards to P3s remains steep for some.
“I think the problems we’ve got in the public sector involve the process, sure, but as importantly, we’re not building on the public sector side the competence to deal with these kinds of procurements,” said Michael Cheroutes, who directs the Colorado High Performance Transportation Enterprise, the agency that oversees P3 development in the state. “That bothers me a little bit that we’ve got to speed that development.”
Cheroutes believes creating an independent office for dealing with P3s like the one he runs can be key in providing consistency, educating policymakers and developing best practices.
“I’m a big advocate of the earmarked, focused enterprise that deals only with P3 kinds of financing in part because of what I said before about building competence,” he said. “But also it takes a mighty effort to change the course of some of those DOT ships of state and unless you have that consistent impact from a somewhat independent enterprise, you don’t get that kind of change.”
But even when transportation officials appear to have done their due diligence with the powers that be and the public, there can be complications. Case in point: the aforementioned U.S. 36 project in Colorado.
“The legislature enacted (Colorado’s P3) legislation, created the (High Performance Transportation Enterprise) and then apparently forgot about it until we got close to closing our first transaction—the U.S. 36 transaction,” said Cheroutes. “One of the state Senators—for reasons that are still not clear to me—decided that he had not heard about this project although we’d been working on it for three years and had publicized it, I thought, quite nicely. He was able to spin up some of his constituents, which overlapped into the legislature. The DOT made a decision to try to compromise on the bill—probably a mistake—and we ended up in a situation where the governor, who is a strong advocate of public-private partnerships as a delivery alternative, stepped in and vetoed that measure.”
Cheroutes said the post-mortem on the legislation is that it could have a lingering effect on the state’s P3 process and his agency going forward.
“Not that we didn’t before but we will I think have to take the legislature much more seriously as a part of the development of these projects,” he said. “It’s not optimal to have the legislators negotiating deals for you but it is important that we keep them advised and I think that will be one of the new approaches of my enterprise—working with the legislature, making sure that we’ve got as much understanding with that body of representatives as possible. We did a lot of work with the local governments. They were alright. They understood. It was that state entity that apparently fell off our radar screen.”
Private sector participants on the panel weighed in on what calls for increased transparency on P3 projects could mean.
“If you have a legislature negotiating a deal for you, that’s too much transparency in my mind,” said James Riley, Managing Director at the audit, tax and advisory services firm KPMG and a former state DOT official in Ohio. “But we absolutely have to be transparent. I mean you’re dealing with right-of-way, environmental impacts, tolling. … But there is a limit to it. You be as transparent as you can and I find the best way to manage that is just to accelerate your projects and keep them on schedule as best you can.”
Texas is currently the only state that has the legislature approve a pipeline of projects for P3 consideration. Philip Russell spent 28 years at the Texas Department of Transportation and oversaw the state’s first long-term concession P3 project before joining the Lochner MMM Group infrastructure firm.
“At the end of the day, I think we would all agree that the last thing you need is to inject political approval towards the end of the project,” Russell said. “You don’t want the legislature coming in and saying ‘well, we agree with this, with this contract we don’t.’ But you have to get some ownership and you have to get them involved. So I think the Texas model at least at this point is if you can at least get the legislature to sign off on the list of projects—the 10 projects or 12 or 15—at least there’s some ownership. They feel like they’ve been involved in that. They’ve looked at the pros and cons. And then after that point, let the professionals do what they do best. Let them go through and procure the project, go through and negotiate the deal and then move forward. That’s at least one approach to getting the legislature involved. If they want approval authority, I would much rather they do that very, very, very early in the process rather than trying to get into the process late in the game. Politics obviously creates uncertainty and uncertainty creates risk and that costs everyone more money.”
Russell said before states even begin to reach out to the private sector, they need to demonstrate they have all their ducks in a row, politically and otherwise.
“I think you need to have already built a political consensus,” he said. “We want some confidence that the environmental process isn’t going to drag on. We want confidence that the political support is there and it’s not going to languish for months on end. So I think we have to have a pretty good sense that the project’s ripe, it’s ready to go, it’s environmentally clear, it’s close, public consensus is there, everybody is saying ‘that’s the project we’ve got to have and we’ve got to figure out a way to deliver it.’ All of those to me suggest the project is ready to go.”
West Coast Infrastructure Exchange
The West Coast Infrastructure Exchange is a regional platform for infrastructure investment that received initial funding from the Rockefeller Foundation in 2012 and as of this year is being sustained with funds from the three participating states (California, Oregon and Washington) and one Canadian province (British Columbia). The exchange provides support and technical assistance to procurement agencies and acts as a translator between public sector projects and private capital interests.
The exchange’s Executive Director Chris Taylor told the InfraAmericas audience it was the realization that the West Coast alone faced an infrastructure bill of $1 trillion that prompted the participants to band together.
“The scope of the problem that we now face is beyond our current abilities to deal with it and a recognition that while our governors and treasurers—like every other governor and treasurer—would like to see a stronger role from the federal government in helping solve these problems, nobody’s holding their breath that that’s going to happen anytime soon or soon enough and with enough significant resources to solve the problem,” he said. “We’ve also got a lot of jurisdictions—although it’s very diverse across the three states—that don’t have the capacity to borrow all of the money that they would need to solve all these problems. You’ve got different credit quality across different jurisdictions but by and large you couldn’t solve this problem directly with just public debt even if you wanted to.”
The participants in the exchange committed to pilot projects in 2013 with a target for getting them underway by next year.
Next Steps for the P3 Pioneers
The states of Florida, Indiana, Texas and Virginia are all old hands when it comes to public-private partnerships and now have a wealth of experience in getting projects across the finish line. During the InfraAmericas forum, officials from those states assessed the road traveled so far and how the next generation of projects in their states might look a little different.
Douglas Koelemay is the Director of Virginia’s Office of Transportation Public-Private Partnerships. He said his state’s approach to and view of P3s has changed considerably over time.
“As sort of one of the cutting edge states that took on the P3 agenda back in the mid-90s, our first few projects were unique,” he recalled. “We did them one at a time. We didn’t think too much about it being a set of program activities that were connected. And the lesson we learned was actually you have to be more organized. You have to be more consistent in your processes, in your organizational structure, in your decision making matrix and so forth if you’re going to continue to deliver projects over time. So the lesson we learned is this is a systems approach to a set of problems. We now view P3s as a project delivery vehicle not necessarily primarily as a financing mechanism and that’s given new purpose.”
As an example of the systems approach Koelemay cited the already successful I-495 Express Lanes and the soon to open I-95 Express Lanes, both P3s that will form the backbone of a regional managed lane system in and around the Washington, DC area.
Koelemay said the nature of P3 projects has also prompted his department to reconsider the nature of public engagement as a project is working its way through the process.
“Departments of transportation for years have had a pretty sterile public hearing process,” he said. “I know in Virginia for many years, VDOT really hoped nobody would come to the public hearing, if they did come that they wouldn’t say anything and if they said something it was ‘wow, you guys are so smart. We hope you do it like you drew it up on the wall.’ Well this process is very different. I mean if you’re talking about a toll concession, you’re trying to grow a customer base that’s going to use a service over decades. And so the approach has to be very different. There’s continuous marketing of why it’s beneficial. Not just a one-time you got the approval to build it. It’s a different type of communications. I know in our state we’re about to refine and revise our procedures so that we encourage public comment and engagement all the way through the process including a website that will capture comments continuously as opposed to ‘you have a 30-day period or you have two hours or you have three minutes at a public hearing.’ So it’s a different type of communication definitely.”
Communication with and education of stakeholders and policy makers is a key takeaway to ensure success, P3 veteran James Bass of the Texas Department of Transportation agreed.
“Even though you as a state DOT know you and your team have done the analysis and you know that the appropriate delivery model for a particular project is x or y—it is what it is—you have to realize that members of the legislature, members of local metropolitan planning organizations, county officials and city officials haven’t gone through that diligent analysis process that you have and so being able to get them comfortable with the diligence that has been performed and how the contract will work I think is very important to help (ensure) hopefully a smooth process from procurement into delivery,” he said. “As we all know, these (P3) contracts are very complex—several hundred to 1000-plus pages—and being able to distill that down in kind of layman-speak—not dumb it down but distill it down—so people can understand the concepts and the risks that are either being transferred or being retained by the government sponsor is very important.”
Building the right kind of team to tackle a project across all stages is also important, Bass said.
“Make sure that your internal team is in place and that’s both state employees and advisers … not only for the procurement aspects … but also … (looking) forward to the operations stage of the project and give some thought to how you’re going to manage this project because as a state DOT, we’re very used to managing construction projects for two, three, four-year periods,” he said. “Historically, we haven’t had a whole lot of experience managing 30 to 50 year contracts.”
But when it comes to teams, leadership is also an essential consideration said Kendra York, Public Finance Director for the Indiana Finance Authority.
“I think it’s critical for the states as they’re organizing their team for these projects that they have a key, executive-level decision maker who is integrally involved in the process from beginning to end and is there on the ground making decisions, pushing the project forward,” she said. “This really isn’t a process that can be pushed down to lower-level folks in state government.”
A P3 project in Indiana to make upgrades to I-69 recently went from RFQ to commercial close in just under a year. York believes keeping promises and delivering on timetables can be a terrific resume builder and selling point in the P3 industry.
“We’ve been successful on our projects in putting forth a schedule that is perhaps a little bit aggressive … and then sticking to it and meeting the milestones, meeting the deliverables as you work through a project,” she said.
York and others say some standardization of the P3 processes among states could benefit the market and allow more projects to take off. But many are uncertain how much of that is actually possible.
“The way our states are built … we’re all so different, the credit behind each of these deals is going to be so different, each state approval process is so different, each project is going to be so different,” she said. “I think standardization is probably going to be tough from a document perspective. But I do think we can start getting a base kind of standard understanding of these projects and risk transfer and the like.”
“Probably we do need to get to a standard set of practices and expectations that ease the transaction costs and speed the delivery,” he said. “We won’t probably get to standard form contracts that may exist in other industries. But at least when we start a new project discussion, we’re usually using an existing contract from a similar project as a starting point and 80 percent of the terms are likely to come out very close and then you work in the idiosyncratic factors of that particular project. But you get there much more quickly. I think we’re aware we need to do this more quickly. We need to shorten some of these timelines and that would be one way to do it.”
Some of the P3 pioneers expect to see growing pains in the next few years as the next wave of projects come down the pike. Texas, for example, currently doesn’t have the ability to enter into pure availability payment deals, the P3 financing structure that is growing in popularity elsewhere around the country. While Bass expects to see legislation introduced next year to give the state that authority, its success is by no means guaranteed.
“One of the challenges I think in Texas for availability payments may be that we have a broad array of financial tools that our legislature has provided to us and if the state is going to retain the traffic and revenue risk on a project, we have other tools that appear to be more efficient to deliver that project,” he said. “We’ve delivered some using them and they’ve been in the double AA category. My understanding on availability payments as an observer to date is a lot of them so far are rated in the triple B category. So we’re able we believe to deliver them more efficiently. And we don’t get all of the benefits that come with the availability payment and the longer life-cycle costs but the balance of being able to deliver it cheaper I think may be a discussion point in Texas if it does indeed get debated next year.”
York said one issue that has concerned her is how rating agencies will view availability payments in terms of how they add to a state’s overall debt.
“I’ve had numerous conversations with all three of the major (rating) agencies and there really isn’t a consistency across the agencies at this point,” she said. “I think they’re all working hard to get their heads around these AP deals and understand them. I will say that it does feel like at this point there is going to be an addition to the state debt load for an AP deal. So for a particular state, it does look at this point like the agencies are likely to take some calculation of the APs—perhaps the present value of the streamed availability payments over the 35-year term of the contract—and add that on as debt to your state debt profile. How they treat toll revenues for tolled facilities is another unknown. One of the agencies has indicated that they may be willing to give the state some sort of credit for toll revenues. Other agencies have not indicated a willingness to do so, especially in the early years of a greenfield project where they don’t really know and there’s no operating history.”
Whatever the rating agencies decide may play a factor in whether availability payment deals remain a popular option in the years ahead, York said.
“I think that this is a big deal for our industry and I think we need to understand this and understand how the agencies are going to treat this,” she said. “From Indiana’s perspective, we are obviously a very low debt state and so the impact to us isn’t going to be as significant as it would be to another state that perhaps has a higher debt burden. But I can tell you if you are one of those states and you know the agencies are going to add this on to your debt profile, that’s not going to be an appealing quality of moving forward with an AP structure for sure.”
Despite their successes so far in the P3 arena, even the P3 pioneer states remain concerned about how a lack of action in Washington may impact things back home.
As Koelemay asked his fellow panelists, “How are we as states going to manage the continuing deterioration of the federal role (in transportation) given that we have ambitious plans? Are we going to build our own toolkits that mimic some of the federal tools that we have or are we just going to be at the mercy of that federal, political gridlock for some time?”
Bass argued that’s already taking place.
“I think over the last decade for Texas and I think other states as well have already started to make that transition knowing the uncertainty that’s occurring and has been occurring at the federal level that we can no longer rely on that partner as we have for decades,” he said. “So whether it’s state infrastructure banks that may operate similar to TIFIA working with our local governments, if it’s pass-through tolls, P3s, toll equity loan agreement which is more of a public-public partnership, I think you’re going to see more and more states move away from (reliance on the federal government) and I think perhaps a leader to date on that is California because I think most of their funding is coming from the state and local level and a very small percent is coming from the federal government.”
Bass also said the Lone Star State, unlike a number of others around the country, is well equipped to handle the impact of any Highway Trust Fund shortfall.
“We’ve been conservative in all of our planning documents,” he said. “We assume the federal program is going to diminish. We’ve projected what we think the federal gas tax just by itself would support at the national level and that’s what we’ve planned for. So hopefully we’re wrong and there will be more money and we can add projects to our planning. The more near-term issue with the federal Highway Trust Fund and perhaps it running out of cash and not being able to fully reimburse states on time, one of the tools our legislature has provided to us is short-term borrowing. We have contracts in place right now to where we can borrow up to $750 million. If we’ve already made a commitment but the federal government’s not able to fully reimburse us, we’re still going to be able to move forward and meet our obligations and commitments through that.”
For the state of Florida, the preferred means of accomplishing less reliance on the federal government largely comes down to one word: tolling, said Brian Peters, Assistant Secretary for Finance and Administration at the Florida Department of Transportation.
“We’ve been looking for years to reduce our reliance on the federal government,” he said. “Our percentage is probably less than 30 percent today. Tolling is a big part of it. (State Transportation) Secretary (Ananth) Prasad has been very clear in terms of if we’re widening something or expanding something, we’re going to toll it, which is why we’re putting express lanes on I-4 and (on) any other project we do, we’ll put in express lanes.”
But Peters acknowledges his state has already made a couple of difficult leaps that other states may find difficult to make.
“We’re lucky that in Florida we have the most toll roads in the country—over 700 miles—and Texas is right behind us,” he said. “Tolling is more accepted and I think one of the challenges a lot of states have is how do you get tolling accepted if you don’t have it. You just have to take that step and our secretary has been very bold in saying ‘hey listen, if you want that new expressway … we’re going to toll that.’ … and very vocal that roads aren’t free. There has to be a way of paying for it. We’re also fortunate that we’ve indexed our own state gas tax so we get the benefit each year of that increase and so again, less reliance on the federal government.”
Building a Better P3: Growing Sophistication of Structures and Payment Agreements
While the availability payments P3 model has emerged as an alternative to traditional toll concession deals on a growing number of projects, a variety of hybrid models and variations are also getting a look in some states.
Karl Reichelt, Executive Vice President of the project development and construction firm Skanska, said he has seen shifting priorities on both sides of the public-private divide over the years.
“I’ve been involved in the market since the early days with Texas on (the central Texas State Highway 121), where you had the private sector offering significant up-front payments,” he said. "Now in the market you have clients putting those up-front payments into deals, which is quite a shift. In the early days, there were a lot more full market risk projects out there and there are fewer now. That’s another change. The O&M (operations and maintenance) component (in P3 deals) has become much more significant as a result. Another issue that has evolved in the market I think is that the projects are now seen for what they are. They deliver value, they are economic development opportunities, job creation, life cycle, O&M-specific. You see some of the softer or socioeconomic factors related to projects now more prevalent.”
Reichelt cited the Interstate 4 Ultimate Construction Project, a $2.3 billion availability payment project in Florida that will add four toll lanes in the middle of the interstate and maintain the existing free lanes for use. The Florida DOT will retain the toll revenue and control toll rates.
“In the I-4 project, we want to create a signature corridor because this is an economic engine for the state and all these other factors come into play,” he said. “Safety, green, sustainability … Those things I think are now more prioritized with clients. And I think also you’re seeing the evolution of bank debt come back into deals, so there is competition for (private activity bonds). And we talk about TIFIA a lot. TIFIA has become more active in projects. That can be good. It provides low cost financing. It does slow down the process and frankly states that have high credit ratings and strong balance sheets don’t necessarily need TIFIA.”
Texas has recently pioneered new financing structures on SH 183, a managed lanes project in the Dallas-Fort Worth metroplex being pursued as a Design-Build-Finance project with long-term operations and maintenance obligations and the Loop 375-Border Highway Extension Project in El Paso, which combines a Design-Build with long-term operations and maintenance.
Russell Zapalac, Chief Planning and Project Officer at the Texas Department of Transportation, explained the reasoning behind the approach to the SH 183 project.
“We had really wanted to do a pure concession project on that particular corridor focusing basically on revenue risk,” he said. “We actually went out twice to the industry and the feedback we got from the industry was the project just wasn’t right for that type of a pure revenue risk concession. As I think everybody is aware, Texas does not have the ability to do an availability payment so we worked with our advisers and worked with the industry to come up with a model that essentially gave us as much of the advantages of a concession project as we could get without actually turning it into an availability project. We ended up basically with a (Design-Build-Operate-Maintain) with gap financing. I think the industry ultimately embraced it very well. We saw great competition. The feedback that we’ve gotten from the industry has been extremely positive. I don’t think that it is an ultimate solution—a silver bullet, if you will. But I think it gave us a hybrid that until the industry can help convince our legislature that availability payments are something the state should be allowed to use, I think it gives us an alternative to pure revenue concession deals.”
But most don’t necessarily expect the hybrid model in Texas to take off elsewhere.
“I think the option of the Design-Build O-M with the gap financing made sense for that specific project, for that specific state,” said Tony Elkins, Commercial Director for infrastructure development firm Cintra U.S. “I think given the fact that Texas doesn’t have the ability to do availability, that was the right solution for the right project. I think availability—had Texas had the ability to use it—would have been a better alternative and would have provided better value for money. The Design-Build O-M gap financing is a bit of an expensive solution because the equity is not there to support the O&M so that buffer is not there and that has to get priced into the O&M. There’s no free lunch there. Whether it can be repeated in other markets, I don’t see it as a model that will be widespread over the next few years. I think in isolated situations where states don’t have the ability to do (availability payments) and it not being financially feasible, it could be a good solution but you also lose the benefits of equity, which we all know. And I think one of the major ones, particularly in a state like Texas, is the motivation of an operator—a concessionaire—to reduce congestion. When you have equity on the line, you’re highly motivated to reduce congestion.”
Skanska’s Reichelt has concerns that trying to twist square P3 models into round holes can water down some of the benefits that P3s ideally should provide.
“It sounds like some projects that are being classified as P3 really could have been done as straight up Design-Build or traditional (models) and a concern would be that projects are kind of morphing away from the true risk transfer that comes with the P3s,” he said. “In our case, at Skanska we like to build the projects and finance the projects and have equity at risk and take the long-term (operations and maintenance) because we think that delivers huge value to the client and the taxpayers but also to ourselves. As that gets diluted, it becomes a little bit less attractive perhaps. There’s not as much equity in place and you lose the efficiency and the innovation and some of the other benefits. The taxpayers still end up being on the hook for a majority of the project throughout its lifecycle. So one concern we have as a trend is that there are more projects coming out there that are being called P3 but frankly they don’t pass the test in our book.”
Other models being employed include the developer ratio adjustment mechanism (DRAM) being used on the I-77 project in North Carolina, under which the North Carolina DOT agrees to pay up to $12 million per year if toll revenues don’t meet annual projections, with total DRAM public contributions capped at $75 million. Additional models are also emerging around the world, speakers said, using such features as minimum revenue guarantees and shorter-term concessions.
As additional models develop and evolve, it will be important for the P3 industry to quantify the benefits of risk transfer and the lifecycle advantages of incorporating long-term operations and maintenance, said TXDOT’s Zapalac.
“It’s really nice to go talk to the community or a politician and tell him the reason this is such a good deal is because of the risk transfer,” he said. “But that doesn’t mean a lot to them. If you can go through and say that the reason we’re doing this is because the efficiencies of the operations and management and that we’ll save the state X number of dollars over that 35-year period, that means something because that translates to more projects for that region at that point. So we’ve got to get to where we have that analytical data that we can support the justification for these projects because right now it’s not there. All we do is go in and say ‘Gee, trust us. The risk transfer is a really good thing for you.’ That doesn’t sell it. That hasn’t sold it in Texas. That’s probably the biggest reason we don’t have availability payments.”
As for what the future may hold, many expect the availability payment model to continue to proliferate.
“Availability payment projects tend to be more politically acceptable and publically acceptable because the government has a heavy thumb over the whole project for a long period of time,” said Reichelt. “There’s a performance-based contract associated with it and the government can more directly dictate how the project shall be financed, built and operated. … Still I think we will see more projects in this area because I think it’s a simpler solution in many cases. A lot of times politicians don’t want to risk their livelihood on what would be called risky projects. … I think if you’re worried about being re-elected, if you’re worried about consequences of a project going wrong on your watch, you would probably tend to lean more toward the safer bet on availability.”
Cintra’s Elkins: “I think we’re still going to be having a fair amount of availability and demand risk structures. I think going forward you’re going to have a lot of these projects that are going to be a little bit more tailored to the needs of the state and a little bit more to the needs of the project. … I’ve even been speaking with various DOTs about hybrid-type structures, where you would have a demand risk structure supporting the full tolls of the deal and then instead of having a massive public subsidy for a deal that perhaps couldn’t pencil out, you’d have an availability payment for that piece of it. So that could be a structure that I know some DOTs are thinking about that could work well for certain projects. I think structures will evolve and hopefully there will be some better risk sharing in some of these structures going forward.”
Skanska’s Reichelt said the P3 industry right now is a buyer’s market and clients are benefitting tremendously from P3s.
“There are many more competitors in the market who are hungry for wins,” he said. “The contractors, particularly those based in the U.S., have caught on in becoming more competitive. The idea of having the (operations and maintenance) legacy costs taken by others, the cost of labor, the cost of materials, the availability of financing, the low interest rates—it’s all I think adding up to a real strong market from a client perspective, which hopefully then generates another round of big projects out there. I also see as a trend that it’s very encouraging that there are more sectors opening up. It’s traditionally been nothing but a toll road sector here in the U.S. and that’s okay but now you’re seeing light rail, you’re seeing airports, you’re seeing the social (infrastructure) market, you have the water sector coming just among a few. And I think thirdly, I really have a lot of faith in the governors driving the agenda. I think governors are the ones who do the projects, they’re the ones who champion the growth of infrastructure and the economy in their states. I think they’re also smart in picking up on this trend and using P3 to their advantage and the hope is that the government at the federal level becomes a partner in that, not an obstacle.”
Mass Mobility Promises and Challenges: Transit, Light Rail and High-Speed Rail
Mass transit, one of the newest sectors to explore the P3 market in the United States, was the subject of the InfraAmericas forum’s final panel.
The panel’s moderator, Edward Fanter of BMO Capital Markets, framed the discussion this way: “When you get down to why you are going to do a P3 in any sector, you want your risk transfer, you want your private sector expertise, at-risk capital, expedited procurement. These all really apply to rail projects as well. Owners want international operators, they want to depoliticize the (capital expenditure) program, they want that lifecycle efficiency. The rolling stock and the integration risk really come into play with the transit programs.”
The state of Maryland is pursuing its Purple Line light rail project as an availability payment-style public-private partnership. The line will extend 16 miles across Montgomery and Prince George’s counties.
“Just about a year ago we were here making the announcement that we were going to move forward with a public-private partnership for the Purple Line,” said Jodie Misiak, Assistant Director for Innovative Finance at the Maryland Department of Transportation. “For the past year, I think many of you have seen the progress that we’ve made. Last fall, we received approval from our Board of Public Works to move forward with the process and shortly afterward we issued a request for qualifications to find great teams to help us along the way. We have since then short-listed four teams and have been working with those teams since the winter on development of (a request for proposal), which will be finalized shortly with the intent of having commercial close and financial close completed by around this time next year. So hopefully we will be coming here with a success story for transit to build on.”
Misiak said the state is also exploring the possibility of a P3 for the Red Line, a light-rail transit project in the Baltimore area, although a decision has yet to be made. She explained what goes into her state’s decision making process in pursuing projects as P3s.
“We had been exploring the P3 as a tool for projects … that were smaller than the Purple Line up until last year and as we had been considering the Purple Line as a project that was moving forward … and also this idea that we could through a P3 control for the costs and the schedule and the long-run (operations and maintenance) in a much more certain manner through a P3 approach, it became increasingly clear that this would be a good way to deliver the Purple Line,” she said. “We went through all of the same types of due diligence that you see elsewhere with value for money, market soundings with the industry, and thoroughly considered all of the key risk transfer and delivery aspects of the project before … making the decision that the Purple Line made a good case as a P3. Because in Maryland we do not only have to convince ourselves at the department of transportation that it makes sense to move forward with a P3, before we start a P3 we do need to convince those at higher levels of government—our Board of Public Works and our legislature—that we should move forward with a P3 process. So all of that had to be very clearly articulated before we brought in the private sector so we could be assured that once we started the P3 for transit, which took a great deal of education to move forward, that we would be able to continue on the schedule and in the manner that we intended. So I think we’re benefitting from that right now. We’ve moved through the process quite cleanly and with a good core set of rationale and values for the project so that when we do get to the end, we know that we have a good value for the state.”
Misiak said managing and sharing risk in any P3 deal is a key consideration as well.
“I think we’re very thoughtful about the types of risk that we know we can take ourselves, that we are better able to manage ourselves,” she said. “There is definitely that gray area in between what’s clearly the private sector at risk and what’s clearly the public sector risk. Sometimes that can be shared. Sometimes there’s a discussion about how we would like to transfer and how much we would be willing to pay for that transfer of risk. At the end of the day I think we’re trying very hard in all of our projects—not just the transit projects—to be realistic about what we’re expecting from the private sector. I think some projects that may have failed in the past might not be so realistic about how much more the private sector can bring to the table than we would be willing to do otherwise if it was just a standard, Design-Build project for ourselves. I think it’s always a balancing act. There’s always an ongoing discussion both during draft RFP process and I’m sure well into negotiations about how those risks get transferred and really what it means for the long term value to the deal. It really depends obviously on the asset and transit just makes it a little bit more complex with the (operations and maintenance) over a long period of time.”
But others on the panel also cautioned that finding the right balance of risk transfer on a transit project can be difficult.
“I guess just the nature of transit (is) they’re linear projects,” said David Pratt, a Vice President at Infrastructure Ontario. “In Ontario, we’ve done a lot of social (infrastructure) projects (hospitals, courthouses, etc.) and I was talking to a contractor the other day. He’s started to look at transit as well and his comment was on the social (infrastructure) projects—the buildings—once they get out of the ground, most of the risk is gone. …They’re building one floor after another. It’s just more of the same. But with transit projects, you’re actually never out of the ground so it’s just 19 or 20 kilometers of risk. That really is a big challenge—the linear nature.”
All photos courtesy Enrique Cubillo, 85 Photo Productions Inc., New York, NY. Thanks also to Charlotte Henderson and everyone at Inframation Group and InfraAmericas.
- “A New Breed of Transportation Public-Private Partnerships,” Capitol Ideas E-Newsletter, May 8, 2014.
- “Extended Interview: Jodie Misiak, Maryland Department of Transportation,” Blog Post, May 5, 2014.
- “Extended Interview: Bryan Kendro, Pennsylvania Office of Policy & Public-Private Partnerships,” Blog Post, May 5, 2014.