Political Turnover, Other Factors Blamed for Lull in Transportation Public-Private Partnerships
The past year has seen the states of Florida, Indiana, Ohio and Pennsylvania close deals with the private sector to undertake some long-awaited transportation projects (the I-4 Ultimate, I-69, Portsmouth Bypass and Rapid Bridge Replacement Project respectively). But much of the talk at a recent conference on public-private partnerships (P3s for short) revolved around why the market for such projects remains sluggish in the United States.
“The deal flow is erratic and very difficult to aggregate in any meaningful way,” said John Porcari at the InfraAmericas U.S. P3 Infrastructure Forum held June 9-10 in New York City. Porcari’s resume includes stints at both the U.S. and Maryland departments of transportation and he now serves as a senior vice president at the engineering and design firm Parsons Brinckerhoff.
While 33 states and Puerto Rico have legislation that allows them to enter into public-private partnerships, a much smaller number have actually embarked on successful projects. While a number of P3 first-timers appear poised to join such states as Virginia that have championed the procurement method in recent years, speakers at the conference said the U.S. P3 market hasn’t come close to reaching its full potential and the U.S. is currently seeing a significant lull in the volume of projects for a variety of reasons.
Joseph Aiello, chief of business development at the global infrastructure firm Meridiam, said uncertainty about what long-term role Washington will play in transportation funding is one factor keeping the P3 market from growing.
“States are still hoping that the federal government is going to step back in … with a significant increase in revenues," he said. "That hasn’t happened. Some states have reacted … with respect to raising their own funds (but) until we see more of a national consensus about how to provide funding and who should pay for transportation, I think we’ll still see a little bit of sluggishness.”
What the private sector isn’t seeing is a consistent message from Washington that investing more money in infrastructure is a priority, speakers said.
“There have been 33 short-term extensions of (federal) transportation funding … since basically 2009 and it’s hard not to believe that that doesn’t have a negative impact in terms of the P3 pipeline,” said Blair Anderson, Acting Chief Financial Officer at the U.S. Department of Transportation. “There needs to be long-term, stable funding for the transportation sector such that you have increased federal formula funding but you also have this ability to look at all these alternative procurements moving forward.”
While a lack of new money coming out of Washington might be a factor that would encourage states to pursue more P3 deals, many of the projects involve either tolling motorists—something that’s becoming increasingly unpopular in some regions of the country—or the state coming up with availability payments to compensate the private company charged with ongoing operations and maintenance on the project.
“Many availability (payment) deals get part of their funding from gas taxes,” noted Trevor D’Olier-Lees, Senior Director at Standard & Poor’s Ratings Services. “So the fact that the (Highway Trust) Fund is not funded means that there’s pressure on the availability P3 deals as well. … I think the reality is that the impact of the fund uncertainty is hurting both the traditional money market and the P3 market.”
Changes in State Leadership, Priorities
Another significant factor holding back P3s, some say, is the impact of recent political turnover that has brought with it changing priorities in a number of states.
“Both in Maryland and Virginia, my home state, where parties switched (over the last two years), new governors came in and got the list of projects they were doing and said ‘Well, those aren’t really my priorities,’” said D.J. Gribbin, managing director at the infrastructure firm Macquarie. “You see that all over America and I think as long as we have governors coming in with different priorities…that increases the political risk.”
Porcari suggested it may be instructive for people on the private sector side to put themselves in the shoes of public officials for a moment.
“Think about what it takes to deliver one of these projects,” he said. “You have to be willing to be the project champion. That means burning political capital on an ongoing basis. And the overlay over all of that is the electoral cycle. So if you’re a (two-term) governor or a mayor, that’s eight years and more likely than not, you’re inheriting projects that others started and starting projects that others will inherit. So, go in with that understanding of it. And to me the biggest part of what’s lacking here in this discussion is the capacity building at the state and local levels. We’re asking our elected officials to undertake projects that they don’t have basic knowledge and training in.”
Indeed, political risk has become the number one concern for many private sector firms, speakers said.
“What drives people crazy in this room is if there is some political issue and they have a change in government and all of a sudden for no real economic reason related to the project, the project is put on hold, it’s cancelled or something happens that really has nothing to do with everyone that has been working on it for a year,” said Douglas Fried, a partner at the law firm Chadbourne & Parke.
Some states have sought to get around those challenges by accelerating deals so that they’re signed before a change in administration.
Pennsylvania tried the hurry-up offense when it came to planning the timetable for its Rapid Bridge Replacement Project, under which a private sector consortium is working to repair or replace a bundle of more than 550 bridges around the state.
“We essentially came to the conclusion that for a variety of reasons we felt that the contract needed to be signed under the (then-current) administration (of Gov. Tom Corbett),” said Bryan Kendro, who until last month served as the Director of the Office of Policy and P3s at the Pennsylvania Department of Transportation. “There was going to be a gubernatorial election and a change of administration and being sensitive to the history of what happened with the (2007 failed privatization of the Pennsylvania) Turnpike, we felt it was important to give comfort to the four bidding teams that the contract would be signed under (the Corbett) administration. And we also wanted to make sure that the procurement was done in time to actually allow for a substantial number of bridges to be under construction in the construction season following execution of the contract.”
States have also experimented with using objective economic analyses to demonstrate the value of tackling a project with a P3 versus a traditional procurement method in part as an effort to provide some continuity even through inevitable political changes.
“Is there some way we can deal with (political uncertainty) but maybe have something … that everybody says this project makes sense, we’re doing this up front and even if there’s a change in government, it should still withstand that because it makes more sense?” wondered Fried.
Colorado did a value for money study on its I-70 P3 project while California made a strong business case in moving forward with its Presidio Parkway project, speakers noted.
Virginia hopes to move forward this year with a P3 project to add managed lanes on I-66 but the project was delayed a bit, partially because Gov. Terry McAuliffe had a request.
“He said ‘I want a more fully developed public sector comparator for us to really push against with our P3 engagement,’” said Douglas Koelemay, Director of the Virginia Office of Transportation P3s. “So we spent some time developing a more robust alternative if the state were to try to do this project through its own revenue, bonds or other way on the design (and) building. And now ... having that real alternative more fully developed is making people more confident to move forward with the P3 alternative.”
Speakers at the InfraAmericas forum also cited a number of other possible reasons the U.S. P3 market remains slow, including:
- A continuing learning curve and knowledge gap among state officials when it comes to P3s, especially as they concern the risk transfer involved in such deals and the differences between the types of P3 agreements.
Mark Morehouse, Managing Director at investment bank William Blair, was asked why more design-build projects than P3s are moving along these days. “I think it’s one of these things that is a little bit easier to explain to the public,” he said. “One of the hurdles that you’re going up against is (the perception with a P3 that) you’re selling our asset or you’re getting somebody in the private sector to build our asset. So if you’re able to explain that we’re just getting somebody to build and finance it for a short period of time and turn it over to (the state) that I think is an easier story to tell to some of the skeptics in the public.”
Kendra York is the Director of Planning Services and Economic Development at American Structurepoint and the former Public Finance Director for the state of Indiana: “P3 is becoming more accepted. I think folks are beginning to understand P3 and what that means. I’m still seeing a lot of confusion out there though especially with respect to a toll concession deal versus an availability payment deal. … I spent a lot of time when I was at the (Indiana Finance Authority) explaining to folks how the East End Crossing (part of the Ohio River Bridges Project between Louisville and southern Indiana) deal, which was an availability payment-style procurement, is very different from (the Indiana Toll Road concession deal).” York also said there continues to be confusion about tolling. People assume a P3 means tolling is involved, which is not always the case. And she said the public doesn’t understand the concept of risk transfer in P3s.
Jill Jamieson, Managing Director at commercial real estate firm Jones Lang LaSalle, suggested one way to increase understanding of P3s might be to "dumb things down slightly" by starting with the concept of design-build and simply adding the concepts financing and operations and maintenance. “The ability to simplify, articulate it, manage that public messaging campaign on a consistent basis about the project,” she said. “Ultimately does it really matter if we’re doing (a project) as a PPP or we’re doing it as a design-bid-build? As long as the work is done, it’s affordable and it’s bringing the benefits.”
- P3s are still seen by policymakers as inherently risky.
James Ray, a partner at professional services firm KPMG: “In the American political landscape, politicians will never be held accountable or be encouraged to solve a problem or a perceived problem with a methodology that is seen as risky.”
- Recent challenges experienced by some P3 toll roads. The operators of the Indiana Toll Road filed for bankruptcy last year due to a heavy debt load and lower-than-expected traffic. But an Australian investment firm paid $5.7 billion dollars to take over operation of the facility this spring and the P3 deal is now seen by many in the industry as a success story since at no time did the road have to shut down to traffic or revert back to state ownership.
Mark Morehouse: “I think the whole (Indiana Toll Road) story is actually a good one for the P3 business in that the privatized road went bankrupt but people didn’t stop driving on it. There was no degradation of service and there was no putting it back to the state. So basically it proved the model. That’s actually a good story.”
Kendra York: “From the state’s perspective, the Indiana Toll Road concession was and is a huge success. The bankruptcy process was difficult and it was complicated and it wasn’t fun. I don’t think anybody wanted that to be a result. But guess what? The process worked. The lease was upheld and we’re coming out the other side and the road is still open to traffic. We’re going to come out the other side of this deal and we’re going to go forward. For the industry as a whole I think it can be a good story.”
- Political and philosophical divides over P3s and transportation funding in general.
Michael Lapolla, Managing Director for USA and Canada at infrastructure asset management firm Globalvia: “I think you see now even in states where the governor and legislators are of the same party, there is a fundamental difference of opinion on how to pay for things. You can be in favor of infrastructure projects. You can be in favor of P3s. But if you’re not in favor of generating the revenue source to get the deal done, nothing is going to happen. And that political divide has been getting worse and worse.”
Michael Cheroutes, Director of the Colorado High Performance Transportation Enterprise (the state’s P3 office): “We had a narrow but extreme reaction against the (U.S. 36) project right at the end. That fed into some legislative activity a year ago. … (Gov. John Hickenlooper, a P3 supporter) was able to veto that legislation that came out of the legislature, which was very kneejerk in its action. And since (then) we have sort of learned that lesson and have taken, I think, extraordinary steps to expand not only the amount but also the kind of public outreach that we do in the state. To me it’s a political campaign, it’s an issue campaign and I think we woke up to the fact that you have to approach it that way.” Cheroutes says the state now employs more communications and maintains extra staff to engage in P3 education. They also have built alliances with the business community.
Jill Jamieson, Managing Director, Jones Lang LaSalle: “I don’t know that there is really that philosophical distaste for P3 that we see. We’ve seen some projects gone bad. In the environment we’re talking today, we’ve seen O’Fallon (Illinois water privatization project) voted down by referendum, we’ve seen what happened in Indianapolis (where the city-county council recently voted not to consider a long-in-the-works proposal to build a new criminal justice center under a P3), a lot of projects that are going the distance and then at the last minute are coming down. That’s not the way it should work. We should have the sort of buy-in and decision-making criteria upfront, etc.”
- The length of time it takes for projects to clear environmental hurdles and other obstacles.
- The complexity of the American market, including P3 laws that differ from one state and one jurisdiction to the next.
Jill Jamieson: “There are a lot of unique challenges in the United States. Some of it comes from our decentralized system. Some of it comes from the multiple layers of government. There are more P4s out there now than P3s really because we have federal, we have (the Environmental Protection Agency), we have everybody involved. So it’s a bit of a complicated landscape. But I do think that the new normal is going to be P3.”
- The complexity of the projects and the deals themselves.
Joseph Pavona, Michigan Office for Public Private Partnerships: “I sat in a chair just like this one a few years ago describing at this very conference what I thought was our inaugural project. That was … a mega-binational bridge project. And what we’ve really learned along the way is that large projects can be very, very complex and when things are complex, sometimes they take a while to bake and to reach fulfillment. It’s been at least my opinion that taking that approach set us back about three years in terms of the overall P3 effort and although unintentional, I think the P3 delivery model was given a black eye because everything was related to an individual project and all the politics that go around that mega-project.”
Jumpstarting the P3 Market
Speakers at the forum also had a variety of ideas that could help build confidence in P3s or help the market weather the current lull. Among them:
- A need for a continuing education process for policymakers, stakeholders and the general public on P3s.
Kome Ajise, Chief Deputy Director, California Department of Transportation (CALTRANS): “I think … educating the stakeholders on the project. … Because what tends to happen over time is you think you understand what you’re signing up (for) either as a local party or as the state or some third party and you come to understand it differently down the line and that causes people to get upset. Once you start to lose your stakeholders, that’s what unravels a project.”
David Tyeryar, Chief Financial Officer, North Carolina Department of Transportation: “This could be the best project in the world and if nobody knows about it, nobody knows about it. So you have to control the message.”
James Ray, KPMG: “Let’s be clear. I don’t think that education can solve all of the problems because I think there are people who know the truth and choose to fight it anyway. But it has to start with education. … I think it falls to industry both on the consulting side and also on the investor side and developer side to make sure that people are knowledgeable about these decisions and choices and I think we need to accept that frankly in some circumstances the truth will not prevail.”
John Porcari, Parsons Brinckerhoff: “My vote would be to set up a boot camp process where if I’m a mayor or governor … I’m going to take my team, which would be my DOT secretary and probably my CFO, three or four people together with me through a rigorous, short-term, very specific training process where I understand the risk-reward ratio, where I understand what I’d like to get out of it, who I need help from, how I interact with the federal government. We never in a rigorous way try to do that.”
- Greater public engagement on projects.
Douglas Koelemay, Virginia Office of Transportation P3s: “When I took the job 18 months ago, I said ‘can I say the public is engaged at every stage of this P3 process in Virginia’ and my team said ‘no.’ I said ‘well, okay, I want to be able to say that’ and so we changed our guidelines over the last year so that the public has the ability to participate directly at public meetings, indirectly through the comment and engagement periods at every stage of the process. I think that’s an important thing about business. You listen to your customers. If you listen to them and deliver what they want, you’re likely to be successful. … We’re actually going to do a lot more marketing of both the general ideas of public-private partnerships and also specific information about projects underway all the way through. I can tell you this now: the door is open in Virginia for public comments and public engagement and we expect to benefit from more people having a say instead of fewer people having a say.”
Koelemay: “In the course of (the) 495 Express Lanes (P3 project), for example, doing focus groups not just public hearings helped inform that decision (to move forward with tolled managed lanes). …We found things like the mother who is taking her son to a baseball game. The coach has said ‘if he’s not there on time, he’s not starting.’ She is faced with (the question) ‘do I use the express lanes or the regular lanes?’ She knows she’s already invested $500 in bats, shoes, travel team expenses, uniforms. It’s not even an economic decision for her. Her son is going to be there on time and it really doesn’t matter if the toll is $3 or $5 or $6. It’s not an economic decision, it’s a life decision that she’s making. So once you discover that, you realize … that the benefits present themselves in very different ways to different users.”
Dana Levenson, Assistant Secretary & CFO, Massachusetts Department of Transportation: “There needs to be significant public outreach both in terms of the communities that are affected, legislators whether they have jurisdiction over these projects or not. … The problem is though, as we do this outreach, it is time consuming. It has to be carefully considered by a number of different constituencies. Everybody has to be reached and in the long run they have to be projects that are in search of a procurement methodology and not a procurement methodology in search of projects.”
- Changing state laws to allow and encourage the private sector to submit unsolicited proposals for P3 projects. States like Maryland have done this in recent years. However, speakers from private sector firms said they have have been wary about investing resources in producing unsolicited proposals because they prefer to work on projects that already have significant public support and that have demonstrated a need, which increases the chances they will move forward. There are currently no incentives to encourage them to make unsolicited proposals and the examples of successful projects completed under this approach are few.
- Using successful projects to help sell the concept of P3s to skeptics.
Joseph Aiello, Partner, Chief of Business Development, Meridiam: “The two bridges that Walsh is building on the Ohio River Bridges Project—the one in Louisville and the one just to the east. Again, being built simultaneously, one with a traditional model, one with a P3 model. To see how those projects behave not only during the construction period but through the asset management period. … I think as an industry we should be looking at studying how those two different models that we’re seeing might stack up and whether they’re instructive for future policy.”
Michael Cheroutes, Colorado High Performance Transportation Enterprise: “I think ultimately the best way to convince people that P3s belong in the toolbox is to have successful projects.”
Jill Jamieson, Managing Director, Jones Lang LaSalle: “There is nothing more powerful than the demonstration effect. If we can get a number of projects out there in different sectors actually showing the value proposition, it’s much easier to convince people after that. … What we need to do as an industry is craft sustainable and balanced deals that are going to sell themselves in terms of the value proposition and never give up on the stakeholder outreach.”
But James Ray, the partner at professional services firm KPMG, said states also should recognize what the P3 model is not.
“One thing I think we do need to be careful about is not making P3s appear to be a panacea, a silver bullet, a secret solution that will solve all of your problems,” he said. “The question is: is it an improvement over the alternative? Is it better for citizens and for public policy? And if it is then we should embrace these and move forward.”
CSG was a supporting organization for the InfraAmericas U.S. P3 Infrastructure Forum.
Photos by Enrique Cubillo.
Thanks also to the staff of InfraAmericas for their support.
- "Expanding the Market for Infrastructure Public-Private Partnerships: Alternative Risk and Profit Sharing Approaches to Align Sponsor and Investor Interests," U.S. Department of the Treasury, April 2015.
- "Political Turnover Slows Transportation Public-Private Partnerships in 2015," The Current State, June 22, 2015 (the shorter version of this article for CSG's weekly e-newsletter).