New York Conference Highlights Evolution of Public-Private Partnerships for Infrastructure

More states than ever before are moving forward with public-private partnerships (P3s) as they cast about for the mechanisms that can best help them invest in infrastructure and offset what’s expected to be a dwindling federal transportation program in the years ahead. That was the consensus among state officials, transportation experts and P3 industry professionals who spoke last month (June 18-19) at the ninth annual InfraAmericas U.S. P3 Infrastructure Forum in New York City.

For the third year in a row, the Council of State Governments was a supporting organization for the InfraAmericas conference, which this year attracted nearly 550 attendees including public sector transportation leaders along with the project developers, equity and debt investors, construction firms and advisors that make up the P3 industry.

Among the things the attendees heard:

  • Virginia plans to move forward with a pipeline of innovative P3 projects even in the face of a court decision that could impact many such deals in the state.
  • But they won’t be alone among the Mid-Atlantic States. Maryland, where lawmakers recently approved expanded P3 legislation, plans to be a player in the industry as well, starting with a couple of major transit projects.
  • Both states were also among those that moved to increase revenues for transportation this year. A diminishing federal program is leading states to take a growing responsibility for their own transportation revenue sources, which in addition to funding projects directly can also help states pay back private capital involved in P3 deals.
  • Pennsylvania, which has the highest concentration of structurally deficient bridges in the nation, is looking to tackle a bundle of replacement bridges in a P3.
  • The industry should expect more P3 deals based on availability payments in the years ahead rather than deals that rely on toll revenues and shift revenue risk to the private sector.
  • There is a growing understanding and sophistication about P3 deals among state officials thanks to successes already achieved in projects around the country.
  • States are sharing best practices as they try to assess the value of entering into public-private partnerships versus completing transportation projects by more traditional means.

Greater Consistency for U.S. P3 Market

While the U.S. market for public-private partnerships has been marked by ups and downs over the last decade, greater consistency appears to be developing, analysts at the InfraAmericas conference said.

“The U.S. P3 market will never be a commoditized or standardized market like Canada, where predictability of deal flow is nevertheless important,” said Peter Allison, Managing Director for Content at InfraAmericas. “What the numbers do indicate however is a more consistent market in terms of dollar value. In 2009, 2010 and 2012, over $4.5 billion in deals reached financial close.”

A growing pipeline of potential P3 deals across the country is expected to bring that number up considerably over the next several years.

“Our analysts estimate that there are $12 billion of P3 deals currently in the procurement stage,” Allison said. “Those are deals that could be reasonably expected to close in the next two to three years. They include deals in Florida, Texas, New York and New Jersey. That number equates to around a dozen deals. … And then there are deals that have yet to be formally launched. Those are deals that could be reasonably expected to close in the next five years or more. They include deals in Indiana, Ohio, and Los Angeles. Again our analysts estimate that a further $18 billion of P3 deals fall into that category and even if just two thirds of those were to close, it’s a big number. The U.S. P3 market is growing steadily state by state, city by city and region by region. … A most likely outcome in the medium term is that the U.S. P3 market will settle somewhere around the $10 billion to $12 billion mark with between 10 and a dozen transactions. That’s a significant change and enormous progress since InfraAmericas first organized this conference in 2005.”

But that doesn’t mean the P3 deals of the next few years will look anything like the earliest ones undertaken in the United States. Rather than deals that rely on toll revenues and shift significant risk to the private sector, many newer deals will instead follow the availability payments P3 model, under which the public project sponsor retains the underlying revenue risk associated with the project and makes payments to the private partner to compensate them for designing, building, operating and/or maintaining the project.

“Interstate 4 in Florida was originally planned as a toll revenue deal and following market feedback (became) an availability deal,” said Allison. “Pennsylvania has said it prefers to do deals such as a bundled bridges program on an availability basis and Virginia has also hinted that its next batch of deals will be availability payment P3s. So our estimate is that availability deals could move from accounting for a third of the market as they have so far in the case of closed deals to … two-thirds in future deals.”

Success of P3 Market Requires Public Sector Investment Too

Speakers at the InfraAmericas conference said interest in public-private partnerships is spreading around the country.

“I think what has been interesting to watch is those states that perhaps five years ago or 10 years ago we’d never think of as P3 possibilities, they’re coming into the P3 market and looking very seriously, particularly some of the states in the Northeast where … there has been some resistance to P3s,” said Jane Garvey, the former FAA Administrator who now serves as North America Chairman for Meridiam Infrastructure. “So I think that’s one element of surprise. The second is the interest of cities. … Some of you may have seen … on one of the morning talk shows, former President Clinton with (Chicago Mayor) Rahm Emmanuel talking about the need for public-private partnerships in the infrastructure of cities. I think we’re seeing more big city mayors talk in those terms. And I think the third issue … is the degree to which Congress is talking about infrastructure and the degree to which they’re talking about alternate (project) delivery methods.”

Allan Marks of the industry law firm Milbank agreed.

“Many times in the past we have been focusing on a state being successful,” he said. “Texas was successful for a bit. Then Virginia was successful for a bit. Florida was successful for a bit. … And what’s nice and new this year in looking at the pipeline of projects that are serious, credible contenders over the next couple of years, we’re seeing multiple states and multiple agencies that are coming around to P3s and are looking at P3s as a viable option in ways that might be attractive to the private sector—both debt and equity alike. And that’s something new. That I think is an encouraging trend as the United States struggles to become more than just an emerging market for these sorts of transactions.”

Joshua Schank, President and CEO of the Eno Center for Transportation, a Washington, D.C. think tank, said there are some very good reasons for the level of interest in P3s among state governments.

“States are looking for whatever mechanism they can find to try to invest more in infrastructure,” he said. “Right now they’re having success actually in a few states in increasing revenues by going after sales taxes on motor fuels. That’s happened in Wyoming, it’s happened in Maryland, it’s happened in Virginia. And you can expect that as the federal government continues to decline in its share of investment that states are going to look more and more to their own revenue sources.”

Schank believes if the federal government is interested in creating a better market for P3 investment in the United States, they should seek to encourage the efforts of states to generate additional revenues for transportation.

“The real way to create a better market for P3 investment is by creating incentives for states and localities to raise revenue,” he said. “It’s not the ban on tolling interstates that is the real roadblock, although that’s not helpful. It’s the fact that there’s no incentive provided by federal funding to get states to say ‘okay, well I’m going to try to put tolls on this free road’ or ‘I’m going to raise my gas tax’ because if I do, I’m going to get extra flexibility from the feds or I’m going to get extra money from the feds. That’s the only way that the federal government can really stir up the P3 market substantially and infrastructure investment overall. … It’s not enough to just try to open up the markets by creating better loan programs. You have to move to the next step and say ‘here are some incentives for raising revenue.’”

Schank said it helps for both the public and private sectors to understand access to capital and what it can and can’t do.

“You will often hear private sector folks talk about their ability to provide capital as the equivalent of being able to provide funding for transportation and of course those things are not equivalent,” he said. “The crisis in transportation infrastructure—to the extent that there is a crisis and the extent to which we’re underinvesting nationally—is not a crisis of capital. It’s not a problem about access to capital. Yes there are occasions—many occasions—where access to capital can be a barrier to infrastructure investment but it is a barrier and not the main problem. The main problem is there’s not enough money and you can’t pay back investors without having more revenue coming into the system.”

Virginia Changes Revenue Equation, Sets New P3 Projects

One state that did come up with new revenue for transportation in 2013 was Virginia, where lawmakers passed legislation that reduced the gas tax but replaced it with a sales tax that grows with the economy, among other things. But Tony Kinn, who heads up the Virginia Office of Transportation Public-Private Partnerships, said there will still be plenty for his independent agency to do.

“Gov. (Bob) McDonnell … passed a very innovative transportation bill that will put more money into transportation by raising funds differently in the commonwealth,” Kinn said. “It will allow maintenance levels to be upgraded. ... But I’m comfortable that that will give us our piece of the pie. … It’s not going to be enough money to solve all the state’s problems but it will keep us very actively involved in all the projects as we go forward. … It’s still going to come down to a strong partnership with the private sector to deliver the innovation that we need. We are not going to back off. We’re going to be extremely aggressive.”

To that end, in the days following the conference, Virginia Transportation Secretary Sean Connaughton and Kinn’s office issued a list of potential public-private partnership projects in the commonwealth. They include an innovative project involving the potential development of air rights above Interstate 66 at two Northern Virginia Metro stations to generate additional revenues for transportation. A Request for Information has been issued to gather feedback and ideas from the private sector on the project. 

Virginia has of course long been a leader in the P3 arena, tackling projects like the new Express Lanes on the Capital Beltway with private sector support.

But some are concerned that a recent court decision striking down planned tolls on a public-private tunnel project in the Hampton Roads area could have broader implications for other toll and P3 projects in the state.

Connaughton recently told legislators Virginia could be out at least $700 million if a contract to upgrade and operate the area’s Midtown and Downtown tunnels has to be terminated.

The court decision was a topic of discussion during a couple of sessions at the conference.

“I think it’s something that the market is watching very, very carefully,” said Garvey. “I think other states are watching it carefully. … I think (Connaughton) is still very confident that they have a strong case and that they will prevail but I think we really have to wait and see.”

Garvey said challenges and setbacks are not anything new in P3 deals, citing as examples a lawsuit that held up the Presidio Parkway project in California and economic challenges faced by the Port of Miami Tunnel project in Florida.

“It is not unusual however for any P3 project to run into interesting and difficult challenges,” she said. “Challenges are not new to this market. I think the real issue is what can we learn from these and do we reshape things going forward.”

Dale Bonner, who served as California’s Transportation Secretary and who now chairs the infrastructure firm Plenary Group USA, agreed.

“I think a lot about the issue of resiliency,” he said. “There are going to be setbacks and the key question that will arise in the next couple of years is how well those projects that have reached commercial and financial close how well are they performing and being executed. And in some cases there are going to be setbacks … and it’s going to be a question of how resilient not only the policy is but also how the market responds to those setbacks.”

For his part, Kinn said he doesn’t expect the court decision to slow the state down too much.

“All the laws have been followed,” he said. “I think there are always lessons to be learned and if we did make a mistake—I’m not saying that we did—but if we did, I think outreach is very, very critical to these projects and the benefits of these projects certainly outweigh the costs of them. And I believe that we should have been more forceful with our private sector partner to do more of that before we got to that point. … We have a very strong case and we’re going to pursue it.”

Maryland Pursues P3 Transit Projects

Virginia won’t be alone among the Mid-Atlantic states in pursuing transportation investment. Maryland also approved new transportation revenues in 2013, in addition to expanded P3 legislation that will allow the state to tackle some major priorities.

“This spring Gov. O’Malley and I worked with our legislature and passed the Transportation Infrastructure Investment Act of 2013,” said Maryland Lt. Gov. Anthony Brown, the highest ranking state official to speak at the InfraAmericas conference. “What we really did is we raised the gas tax. ... This increase in the gas tax will generate $4.4 billion over the next six years to invest in infrastructure. It will help us address many of our deferred priorities and support as many as 57,000 jobs in the state. We fought for this law because we know that investment in transportation infrastructure is an investment in Maryland’s future and we knew that we needed to get back into the business of investing in Maryland. … But these traditional revenue sources and funding mechanisms are not enough. They go a long way but alone they’re insufficient to address our needs. And that’s why I believe that public-private partnerships are an important part of the work that we’ll be doing together.”

So Brown also championed P3 legislation during the 2013 legislative session.

“This legislation sets up a predictable—and it needed to be predictable for the private sector to be attracted to Maryland, accountable—it needed to be accountable for voters to accept what we were doing, transparent—and that’s important certainly for our colleagues in the legislature who like to get involved in public-private partnership deals sometimes at the wrong time, and streamlined process for future P3s,” he said.

Brown expects the legislation to allow the state to do one to three P3 projects every year, create 4,000 jobs in the process and deliver 6 to 10 percent of Maryland’s capital projects.

“We’ll fix not only roads but also strengthen our ports, bridges, our rail, energy grid, water systems, schools, court houses and other social infrastructure,” he said. “This bill took two years and lots of effort to get it done and frankly it was assisted by the urgency and the debate surrounding the gas tax.”

In particular and for starters, the P3 legislation will allow Maryland to pursue a pair of high-profile transit projects, Brown said.

“As we look to the future with our new P3 legislation and the Transportation Infrastructure Investment Act in hand, there are two fantastic, potential P3 projects on the horizon in Maryland—the Purple Line and the Red Line--$2.2 billion and $2.6 billion mass transit projects respectively,” he said. “These are two of the largest transportation projects in our state’s history, light rail lines that will connect two of Washington, D.C.’s largest suburbs in the case of the Purple Line and connect the East and West sides of Baltimore City and Baltimore County in the case of the Red Line. These are significant investments in Maryland.”

Brown announced that after consultations with the private sector at two industry forums in May, the state will pursue the 16-mile Purple Line project first with plans to seek a commercial close on the project by the end of 2014.

“We know that these partnerships present both the public sector and the private sector with tremendous opportunities—opportunities that are about more than just capital—but also opportunities to utilize innovative techniques developed in the private sector to build, to deliver and to maintain our infrastructure,” he said. “While we seek to move forward with the Purple Line as a P3, the Governor and I remain committed to both the Purple Line and the Red Line because we know that strategic investments in infrastructure are critical to creating jobs, growing our economies and connecting our communities both in the National Capital Region and the Baltimore region. … Public-private partnerships aren’t a complete solution to our infrastructure challenges but they are a sizable tool in our problem-solving toolbox.”

Pennsylvania Looks to Bundle P3 Projects

Pennsylvania, a relative newcomer to the P3 world having just approved legislation last year, is hoping to make a quick splash in the market, offering up a couple of innovative package deals they hope will appeal to private capital investors.

“Unfortunately the commonwealth has the dubious distinction of the most structurally deficient bridges (in the nation),” said Bryan Kendro, Director of the Office of Policy and P3s at the Pennsylvania Department of Transportation. “What that basically means is our bridges are old and they’re getting weak. … We dedicate a lot of our funding and resources already to bridges to the detriment of our pavement.”

As part of a $2 billion transportation funding package considered in the legislature last month, Pennsylvania officials planned to set aside a portion of the additional revenues for availability payments on a proposed P3 bundle of 1,000 of those bridges, with the intent of reaching financial close by November 2014, when Gov. Tom Corbett is up for re-election. Pennsylvania officials are also hoping to package several projects to rehab and develop train stations in the state, Kendro said.

“We’ve indicated that P3 is going to be an important tool in delivering projects once we do have that additional revenue,” he said.

But lawmakers were unable to complete work on the transportation funding package, which included an increase in a wholesale fuel tax, before they left Harrisburg for their annual summer break at the end of June.

That may leave these projects and many others in the state in limbo for now. Still, Pennsylvania officials may need the extra time to convince potential private sector partners that a portfolio of small assets—rather than the one large single asset the market is used to—is worthy of investment. Such an arrangement presents a very different risk profile for those private sector partners.

More Availability Payment Deals on the Horizon

Many believe that one type of public-private partnership the industry is likely to see much more of in the years ahead is the availability payments model, with states retaining more control of public infrastructure assets and the risks that come with them.

Speakers at the InfraAmericas conference said public officials are discovering that if they’re going to get blamed when something goes wrong on a project, they might as well retain the ability to do something about it.

“At the end of the day, the public sector still does take a lot of blame for (the project),” said Eno’s Schank. “The (Express Lanes on the Capital Beltway) in Virginia because they’re not carrying enough traffic, the public sector officials are taking some share of that blame even though it actually has very little impact on taxpayers at all. They’re still taking that blame because it’s a highway and highways are associated with public sector officials.”

Meridiam Infrastructure’s Garvey also expects states to increasingly turn to availability deals as they continue to become more politically acceptable.

“Even if they decide to go with tolls, I think they will be controlled by the public sector,” she said. “I think there will be more examples of that with the public sector controlling it and setting it up as an availability payment. … You can shift all the risk to the private sector but in the end the public official is the guy who gets criticized if it’s not going well. Just ask (former) Mayor (Richard) Daley about the parking (privatization) deal in Chicago. For most public officials I think they would really rather control it and make those determinations.”

Case in point is Indiana, which less than a decade ago led the P3 charge in the United States by leasing its Toll Road to a private conglomerate. The state has a different plan for tackling an important section of the multi-state I-69 project.

“It’s 24 miles of converting existing roadway into an interstate,” said Michael Cline, who following the New York meeting stepped down after three years as Commissioner of the Indiana Department of Transportation. “We identified that going with a P3 procurement makes the most sense for us. However we are conditioned with the situation that the corridor will not be tolled. We worked with our General Assembly to educate about the possibility of doing a public-private partnership without a toll.”

Some tweaking of the state’s P3 law was needed during the 2013 session to allow the project to move forward as a non-toll public-private partnership.

“It’s novel in one sense for us and yet we’ve been able to have a good dialogue,” said Cline. “We have everything positioned. We issued an RFQ back in May. Gov. (Mike) Pence reconfirmed his commitment to getting the entire corridor done, but specifically this 24-mile segment, which was, if we’d done it the old fashioned way, roughly a $400 million project.”

Cline said the state is looking to have a procurement sometime in 2014 and reaching commercial and financial close on the project shortly after that.

An availability payment style concession is also being employed on the East End Crossing, an Ohio River-spanning bridge and approach under construction in the Louisville area that first showed up in the region’s long-range transportation plan in 1969. That project will include tolls, according to Indiana Public Finance Director Kendra York.

“We are coming to understand I think as an industry that for new toll revenue projects, government sponsors may oftentimes get better value for money by retaining revenue risk,” she said.

The procurement process used on the project allowed the state to achieve $224 million in cost savings from initial estimates and shave 240 days off the construction calendar, York said. The crossing, which incorporates a tunnel excavation and other complicated elements, is expected to be complete by Halloween of 2016.

Neighboring Ohio is also moving forward with a couple of projects that could rely on availability payments. The state has issued an RFQ for the Portsmouth Bypass, a project that’s been in the planning for 50 years but hadn’t been set in motion due to its $500 million price tag. At the recommendation of private sector consultants, state transportation officials now plan to pursue a slimmed down 15-mile project using the availability payments model. Industry responses to the RFQ are due by August 9th.

Availability payments could also come into play on a long-planned replacement for the Ohio River-spanning Brent Spence Bridge, a project complicated by the differing policy landscape on either side of the river.

“We’re partnering with Kentucky on this one and we’ve been working feverishly with our consultant team on (doing an options analysis study) but Kentucky’s political timeline has slowed us down a bit,” said James Riley, Deputy Director for Innovative Delivery at the Ohio Department of Transportation. “They need some legislation to enter into any kind of tolling or any kind of public-private partnership and that won’t happen until next spring. But what we’ve decided to do together as a state is we’re going to wrap up this study … and then we’re going to move forward over the next several months procuring both a design-build alternative and a design-build-finance-operate-maintain (alternative) either with tolls or with an availability payment. We’ve eliminated the transfer all toll risk (option) so with the public sector taking the toll risk, it will be an availability payment. We’re going to advance those two models through a financial plan and by the beginning of September, the (Kentucky) Secretary (of Transportation) and the Director (of the Ohio Department of Transportation) are going to get together and finalize which approach we want to take.”

Without tolls, Riley said, the bridge is a $2.5 billion project. He predicts an RFQ on the project in the spring of 2014.

States Sharing Best Practices, P3 Success Stories

Many at the InfraAmericas conference also noted that success is now breeding success in the U.S. P3 market as states share ideas and participate in increasingly valuable information exchanges.

One state that has benefitted from the wealth of P3 experience around the country is Nevada, where state officials recently signed off on moving forward with Project Neon, a $500 million redesign of a stretch of I-15 in Las Vegas. The project will be a Design-Build-Finance-Operate-Maintain project with availability payments. Nevada Department of Transportation Deputy Director William Hoffman said the state faced a significant learning curve in getting their head around the project.

“It has been a tremendous learning experience for myself and the department,” he said. “That project was initially introduced as an unsolicited proposal (from the private sector)—and currently that’s our only method still (of entering into P3s). We did put legislation forward unsuccessfully to try to solicit P3 types of projects but unfortunately that didn’t go through. But over the last two and a half years, it’s been a tremendous learning experience—almost vertical at times. In the engineering industry, to have this complex and complicated financing piece roll in that’s totally different from what we’re used to, it’s tough to get us black-and-white, yes-and-no types of folks to think in terms of flexibility, innovation, things like that. Not that all engineers aren’t innovative, but it takes a while. It takes quite a bit of time to get us to feel comfortable with new things.”

In May, Hoffman said, Nevada officials took advantage of a Federal Highway Administration peer-to-peer exchange program that allowed them to learn from some of the states that have had the most success in the P3 arena.

“We hosted Florida DOT, Virginia DOT and CalTrans,” he said. “They came to Nevada DOT and spoke about their various projects and how their programs are run. And I think the biggest benefit to NDOT was we opened it up to all NDOT staff. They’ve been hearing the executives talk about (Project Neon) and P3 and really didn’t understand or have the ability to ask those detailed questions about what a P3 is. So they came in and listened. And nine times out of 10 when you have somebody from outside the department come in and say ‘this is okay. You can trust this,’—when it comes from somebody else’s mouth—it seems to make them feel a little bit more comfortable with it that this has been done before.”

The private sector is taking notice of the information sharing too.

“States are beginning to reach out to each other more and exchange between them,” said Grant Holland, Vice President at CDM Smith, a consulting, engineering, construction and operations firm. “I think as we’re moving through the process, the more stuff that’s in the pipeline, states are taking a more collaborative approach to P3s whereas 10 years ago, five years ago even, they were looking at them more as just a way to bring private capital into the marketplace.”

But even for states that have experienced success with P3s, there is often a need to continue to learn and to continue to educate stakeholders as each new project comes along.

“Although we’ve had a strong track record and a lot of success with two transactions—the Port of Miami Tunnel and I-595—after those transactions, new legislation was put in place where basically the legislature wanted a 14-day consultation period because they were concerned those transactions moved very quickly so they wanted more time for them to weigh in,” said Brian Peters, Assistant Secretary of Finance and Administration at the Florida Department of Transportation. “With MAP-21 getting passed last July, that allowed us to put in Express Lanes and toll I-4. We thought it would take about 60 days to get approval. It took six months. We thought it would take a couple of meetings. It took over 12 meetings with the governor and his staff, with the legislature and their staff. So I think we built on the successes. We can point to those two that are moving through. But we also found that with the legislature changing so quickly, you had a whole new group you had to educate on the benefits of this. And I think we ultimately got there, but instead of taking 60 days, it took six months. So what I would say is reach out to those that are important to your decision and educate them.”

Peters believes specific performance successes on past projects and the promise of future performance improvements can go a long way in helping to sell new P3 projects to skeptical public officials.

“As we were selling the I-4 project, we really were selling four things: one was transfer risk, two, it was the outside capital because it gave us more capacity, but more importantly, it was the reduced cycle time so we could build the project in five years, not 26 years and that all translated into a cost savings,” he said. “One of the big selling points was we could say that our traditional projects have this amount of overrun. On both the Port of Miami Tunnel and on I-585, they’re coming in on budget and on time. And those are huge. I think one of the things that people struggle with as citizens of a state is why does it take so long to build a project and to be able to say that we can build I-4 in five years and not 26 years under the traditional method was a huge incentive for going forward with the project and being able to cite our other two P3s, which are coming in with no cost overruns and on time was also a huge selling point with the Governor’s office and the legislature.”

Still, some warned that at the end of the day every project is different and every state will face its own unique challenges when it comes to evaluating whether a public-private partnership makes the most sense for a project.

“The value for money is to me not a static concept,” said Michael Cheroutes, Director of the Colorado High Performance Transportation Enterprise. “Those judgments are unique within the states themselves and even from project to project. You need some consistency, but moving from project to project is a unique determination depending on local politics and very often circumstances that exist in the budget cycle. … You’ve got to do it yourself. You’ve got to go through those steps and make your own way and make your own judgments—judgments that are aided by consultants but that basically get down to what are your goals, what’s it going to cost you and what are you giving away.”