State Officials Tout Pipeline of Transportation Projects for Public-Private Partnerships at New York Meeting

On July 5th, Pennsylvania Gov. Tom Corbett signed legislation (House Bill 3) to allow the state to enter into public-private partnerships (P3s for short) to finance transportation projects. As a result, Pennsylvania became the 33rd state to adopt such legislation. The 32 other states they join all have their own stories to tell about their experiences and justifications for employing the financing tool, as I was again reminded last month at the annual InfraAmericas U.S. P3 Infrastructure Forum in New York City.

For the second year in a row, CSG was a supporting organization for the forum, which took place June 19-20 at New York’s Metropolitan Club and which brought together state and local transportation officials from around the country and representatives of the infrastructure investment community.

The states represented among forum panelists included both longtime P3 adherents such as Virginia as well as relative newcomers to the P3 world like North Carolina and Massachusetts. Nearly all expressed confidence in the ability of private investment to help states stretch scarce public funding, transfer risk, deliver projects in less time and at lower cost, and bring innovations in project design and other areas to the mix in the process.

Despite a year in the rearview mirror that saw the financial closure of only three P3 deals around the country (the Presidio Parkway in California, the Midtown Tunnel project in Virginia’s Hampton Roads area, and a toll road concession in Puerto Rico), state officials at the forum said they’re optimistic that the number of deals consummated will grow exponentially in the years ahead. Many had long lists of infrastructure projects to tout for potential private sector participation.

Virginia Pipeline, Program, Office Make it a P3 Leader

  “One of the biggest challenges facing our industry is whether any one state or jurisdiction can create a predictable pipeline of P3 deals,” said InfraAmericas Managing Director for Content Peter Allison in his opening remarks to the conference.

One state that is trying to do exactly that is Virginia.

 

“We’ve got a lot going on in Virginia,” the Commonwealth’s Secretary of Transportation Sean Connaughton told forum attendees. “We’ve got deals in the pipeline. We just issued our proposed pipeline for P3s that we’re going to be pursuing—both candidate projects and conceptual projects that we’re going to be pursuing both in the short term and long term in Virginia.”

The pipeline follows on the heels of numerous P3 projects the Commonwealth has already undertaken, including the construction of High Occupancy Toll/Express lanes on I-495, the Capital Beltway, outside Washington, D.C.

“We’re very excited about the 495 Express Lanes, which is a $2.5 billion project,” said Connaughton, who is also the Vice Chair of CSG’s Transportation Policy Task Force. “They’re opening up in October or November this year and we think it looks to be a showcase for P3s around the country. In fact, we’re already having people come and visiting. Seeing is believing. Closing (P3 deals) and project delivery are the two keys in selling P3s to the American people.”

Virginia is hoping to keep their P3 winning streak going with the help of the Office of Transportation Public-Private Partnerships, which was created in 2011.

“We are a separate agency that reports directly to the secretary of transportation and the governor,” said the office’s director Tony Kinn. “We are charged with developing P3 projects—the finding, the analysis, the development and the procurement of P3 projects—across all modes of transportation.”

Kinn said his office seeks to create a “business-to-business” environment when interacting with potential private sector investors.

“There is a consistent process in place,” he said. “We know the steps that are involved … When we’re dealing with business, we have done our homework. We’ve done all the environmental work. We’ve done as much outreach as we can. We’ve developed the project. We’ve added transparency within the Virginia law that before a (request for information) or a (request for proposals) goes out, a communication is sent to all the local legislators, mayors and people of that nature for their input. After the input is given, it’s taken and then we start the procurement process. There are no other steps involved there where there can be any interference … Once we go through that, there are no surprises, and I think that is very, very important.”

Representatives of the private investment community spoke favorably of Virginia’s approach.

“(Virginia) is a state that has a well thought through P3 program,” said Ken Schuhmacher, Commercial Director and General Counsel for Skanska Infrastructure Development. “They’ve identified a pipeline of projects. They are professionalizing the way they approach that with their (Office of Transportation Public-Private Partnerships). And critically they’re also truly interested in market input into the projects and what’s going to work and what’s not going to work. We see the coming pipeline in Virginia as terrific. We’re certainly taking a hard look at several of (the projects) and we certainly expect Virginia to have continued success with their plans.”

Tom Osborne, the Head of the Americas Infrastructure Group for the global financial services company UBS, agreed.

“If there is one thing to be learned from the (P3) successes we have seen in Texas and Florida and Puerto Rico and Virginia, it’s this: deals happen when there is a clear and reliable regulatory, legal, and financial framework that’s in place to support those deals,” he said.

Texas Comes Back Around to P3s

Texas in particular has been around the block with P3s, or Comprehensive Development Agreements (CDAs), as they are known in the Lone Star State. Prior to 2007, the state department of transportation and the Texas Transportation Commission both had the authority to select transportation projects for consideration as P3s.

“(Then) we found ourselves in the unique position of being a government agency that was told to slow down,” recalled James Bass, Chief Financial Officer for the Texas Department of Transportation (TxDOT). “Our legislature had given us the authority and we were acting on it. We were acting on it too quickly for some.”

The legislature voted in 2007 to impose what Bass calls the “Swiss Cheese Moratorium.” Most new CDAs were put on hold, although a few already in the pipeline were allowed to move forward. In 2011, the legislature switched gears and gave Bass’ agency renewed CDA authority but with a more narrowly focused portfolio.

“We got a list of seven specific projects for which we as the DOT have the authority to move forward on,” Bass said. “I think that is going to continue as we go forward. Our legislature meets once every two years. So I think every two years, that list will be revisited and we’ll move forward (with the projects selected).”

All of the public-private partnerships undertaken in Texas to date have been to add capacity rather than to lease an existing highway as states such as Indiana have done, Bass noted. So this fall, the state will actually see the opening of its first CDA project, in the Austin area. Like Connaughton in Virginia, Bass believes that opening will play a crucial role in winning support for future deals.

“I think once people start to add the experience of an operating P3, then some of those myths of how a P3 is going to operate, what the toll rate structure is going to be or could be in the future (and they are) faced with the reality of an operating road, I think that’s going to have benefits,” he said.

In addition to the Austin project, two others are on track for completion in the Dallas-Fort Worth area.

“Right now we have about $6 billion worth of P3 projects actually under construction (in Texas),” said Russell Zapalac, Chief Planning and Project Officer for TxDOT.

The state expects to procure contracts on three more projects—one in Houston and two more in Dallas-Fort Worth—over the next nine months. With those projects, Zapalac and Bass’s department will have exhausted its existing CDA authority.

“As we come into this next legislative session, we’re going to be working with them to hopefully get another six or eight projects that we can push forward,” he said.

In addition Texas will look at how to get the private sector involved in caring for existing transportation assets in the state, Zapalac said.

“Texas maintains about 80,000 miles of roadway and 52,000 bridges,” he said. “We’re also looking at the next step in how do we privatize asset management and maintenance on some of those. That’s where we’re going in the future.”

Florida Moves Forward With P3s, Tolling

Florida is another leader among the states in the use of transportation P3s with 10 currently under contract. Eight of the agreements are structured as design-build-finance or build-finance projects (two project delivery methods in which those responsibilities are bundled together and transferred to one private sector contractor) and two are major concession agreements with availability payments. Availability payments are made to a contractor based on performance of the transportation asset and are often used on projects that generate either no revenues from users (i.e. tolls) or inadequate revenues to cover their full cost of construction and ongoing operation.

Leon Corbett, Project Finance Manager of the Florida Department of Transportation told forum attendees that the support for P3s must come from the top.

“On a political level within the state, I think we have two great champions for public-private partnerships,” he said. “Our governor is very much behind privatization and bringing private sector jobs into Florida. Our secretary (of transportation) is on the road frequently advocating tolling right now. He’s been doing editorial board visits around the state explaining the need for tolling within the state, explaining that the traditional funding sources aren’t sustainable. And with that message is a message that DOT regularly partners with the private sector. It’s become normal to do design-build. To advance projects with private sector financing is just another delivery tool we have.”

North Carolina: More P3 Education Required

North Carolina is a state that is somewhat newer to the P3 marketplace but moving quickly on some key projects.

“We’re actively moving in the direction of adding P3s to our toolbox,” said Eugene Conti, North Carolina Secretary of Transportation. “We really see it as part of our toolbox, not as a solution by itself, but certainly as an area in which we want to continue to work.”

The state’s active projects include construction of a toll bridge to the Outer Banks and a High Occupancy Toll lanes project in Charlotte.

But Conti said the work of educating certain state officials about the benefits of P3s is an ongoing process.

“We have a lot of work to do with the legislature,” he said. “The (legislators) we deal with every day, who read up, who follow this stuff—they’re pretty much on board with what we’re trying to do. But then you have others who say ‘well, if you’re doing a P3, why do you need any public money? Aren’t you getting free money from the private sector?’ So it’s still a very heavy education process in North Carolina. The governor is on board with us and has been very helpful … We have also some work to do with our state treasurer. We have a pretty conservative treasurer’s office and they’re very, very comfortable with the (municipal bond) market and how all that works and they’re not so comfortable with P3 issues and concepts. So we’ve had a bit of an education process with them.”

But North Carolina transportation officials believe that education process is ultimately worth it because of the value that private investors can bring to P3 transportation projects.

“One of the things that probably attracted us to the P3 structure is that obviously we were looking for a way to solve transportation problems,” said Mark Foster, Chief Financial Officer for the North Carolina Department of Transportation. “But also we were looking for partners that could complement the skills that are inherent in the state DOT but bring outside perspective and … bring those experts in to really challenge the process and bring value back to the state. Whether that value is through engineering, design, operations, asset management or technology, those are the types of things that I think states that are progressive want to hear.”

Foster believes a P3 can be used to take into account the full life cycle of what is a valuable capital asset for the state.

“You would not invest in an expensive car and then not maintain it,” he said. “Your goal is to not only build it and operate it in the short term but extend the life of that asset, really creating the value. So if you look at where we think P3 really brings the most value to the state, I think it’s on the operations and maintenance side and the asset management side to bring new ideas to the table, to lock in a commitment that that particular asset that you’ve spent a lot of money on will serve the state for the long term and not get into competition for scarce resource dollars with other priorities.”

Ohio Using Turnpike as Calling Card to Enter P3 Conversation

Ohio too is a newcomer to P3s but moving quickly to establish its program. The state has created an office of innovative project delivery and is dangling one of its major transportation assets for a possible long-term lease deal: the Ohio Turnpike.

“In March of 2011, (the legislature) passed P3 legislation,” recalled James Riley, Deputy Director in the Innovative Delivery Division at the Ohio Department of Transportation. “Over the course of 2011, the policy process was put in place. Toward the end of 2011 (the legislature) passed more legislation to allow the state to look at (a P3 for) the (Ohio) Turnpike. All this was in place but we needed an organization and a structure … So we created a new division and it’s important to note that we didn’t create it within the normal division or our normal project delivery (division). We created it off to the side on purpose because it is about thinking differently and approaching differently. Being in the private sector (before joining the department) I’ve worked with a number of agencies. I’ve watched (the Virginia Department of Transportation) in particular as it has progressed its organization … It’s the job of the public agency to give the private sector the confidence that we have the wherewithal to deliver the program.”

Riley said his state will consider a number of different options for the Turnpike.

“We hired a consulting team at the beginning of the year and have commenced a thorough opportunity analysis of the corridor,” he said. “We’re trying to take a very objective, full-blown look at the study looking at everything from doing nothing with the facility to bringing it under (Ohio Department of Transportation) control and re-leveraging the debt to a full concession …We expect some preliminary results to be discussed toward the end of the summer or early fall and we’ll make a final decision by November. If it were to go in the direction of a lease, our legislature has to approve the terms and conditions of our (request for proposals) and the timeline would be to present the terms and conditions before the legislature early in the year in January and follow up with a (request for qualifications). The overall timeline if it went the lease direction would be for financial close by the end of next year.”

Riley said Ohio is also inviting private participation on other projects in a variety of ways. The state has a program for sponsorships and advertising revenue at interstate rest areas, another sponsorship program for bridges and interchanges, and a plan to develop service plazas at non-interstate rest areas. In addition, the state is employing a design-build-finance arrangement for construction of the Innerbelt Bridge in Cleveland and exploring a P3 for construction of the Portsmouth Bypass in southern Ohio.

The state faces a challenge in finding funding for a new $2.5 billion Ohio River-spanning Brent Spence Bridge in Cincinnati. Riley said the state will hire a consultant to consider tolling options, availability payments and other arrangements.

“It’s bigger than both (Ohio and Kentucky’s) transportation budgets combined,” Riley said. “It will never be built for 50 years unless it’s tolled.”

The problem is that while Ohio has P3 authority, Kentucky does not. The two states are operating under a Memorandum of Understanding to consider funding options.

Indiana Partnering With Non-P3 State

Indiana, which also has P3 authority, has faced a similar situation as it works with Kentucky on the Ohio River Bridges Project in the Louisville area. The project includes a downtown Louisville bridge crossing, the untangling of Interstates in an area known as Spaghetti Junction, and a new East End bridge between Utica, Indiana and Prospect, Kentucky.

Kendra York, Public Finance Director for the State of Indiana, explained how her state and Kentucky are moving forward on the project.

“There was a memorandum of understanding executed by (Indiana) Gov. (Mitch) Daniels and (Kentucky) Gov. Steve Beshear on March 5th and pursuant to that memorandum of understanding, the project is now being viewed as one project and two procurements—an availability payment-style concession and a design-build,” she said. “Indiana will lead the procurement on the East End crossing using an availability-style concession and Kentucky will take the lead on the Downtown bridge using a more traditional design-build procurement.”

York tried to put the best spin possible on the arrangement.

“The plan put forward by the two governors has many advantages we feel, most notably speeding construction,” she said. “We feel that the dual procurement structure increases industry competition while utilizing the strengths, existing legislation and experience in each of the states. Cost savings from schedule reduction can be achieved and there is increased accountability to each of the states through the dual procurement. We also feel that there is significant market capacity and appetite for a project of this size.”

Maryland and Massachusetts: Defining a Role for Private Sector

Two other states represented at the conference—Maryland and Massachusetts—are also exploring the potential for private sector investment.

“Maryland is still sorting out how it wants to use P3s and approach P3s,” said Beverly Swaim-Staley, who retired at the end of June as Maryland’s Secretary of Transportation.

Following a recommendation by a Blue Ribbon Commission on Transportation Funding, the state legislature took up a bill this year to expand the state’s authority to enter into public-private partnerships. But the legislation got caught up in an end-of-session budget fight and didn’t get a final vote. Swaim-Staley said the measure likely will be re-introduced next year and she believes it will pass. The state has had some success with a couple of one-off P3 projects, a rehab of the Port of Baltimore and a plan to rebuild travel plazas along I-95.

Richard Davey, Secretary and CEO at the Massachusetts Department of Transportation, said his state is working to define a role for the private sector in its future while it tries to restore public confidence after the infamous “Big Dig” highway-tunnel project became the poster child for mismanaged, over budget, large transportation construction projects in the state. Though the project was completed nearly a decade ago, the state will still be making payments to resolve Big Dig-related debt through the year 2038, it was recently reported. And that debt load is severely limiting the state’s ability to fund other transportation projects, prompting Davey and state officials to seek new transportation finance solutions.

“While we have dipped our toe in Massachusetts in P3s, the (Gov. Deval Patrick) Administration filed legislation about two months ago (to create) a state infrastructure bank, something that we want to use to put Massachusetts on the map when it comes to working with the private sector and think about not only work on the state of repair issues that we have in the Commonwealth but also think about new facilities as well,” Davey said. “But we’ve really been working hard on the reform piece to set the table for not only traditional revenue opportunities but then also (P3) opportunities in the Commonwealth in the upcoming months.”

Davey said Massachusetts will emphasize making the state infrastructure bank a real bank.

“One that is capitalized and serves as a vehicle to foster and invest in infrastructure throughout the Commonwealth,” he said. “We don’t want this entity to simply be a pass-through for Federal aid.”

P3s Not Just for Transportation Anymore

Speakers from the private sector at the InfraAmericas forum also sounded optimistic about the pipeline of projects states are putting forward as potential public-private partnerships.

“I think as we look out at the market, we see about $40 billion worth of projects between now and 2016 in the U.S. and that’s a pretty conservative number,” said Jane Garvey, the former FAA Administrator who now serves as North American Chairman for Meridiam Infrastructure, a long-term equity fund. “It’s those states that have hired financial advisers, who have already done some exercise in value for money and have a pretty comprehensive sense of what their capital program is.”

Garvey said most of those projects will be in transportation, but she expects social infrastructure projects (courthouses, schools, jails, juvenile facilities, hospitals) may also spring up in the wake of a public-private partnership set up to build a new courthouse in Long Beach, California.

“There’s nothing like seeing a project actually built and I think Long Beach Courthouse is a good case in point,” she said. “It’s going well and it gives states an opportunity to visit, to see it, to touch it, to really understand how it works. And I think that could be something that would be the beginning of more social infrastructure (P3s in the United States).”

Meridiam assembled the project team that is designing and building the courthouse project. The fund’s Chief of Business Development Joe Aiello agreed that once state officials from around the country are able to walk through a project like the courthouse, their comfort level with social infrastructure P3s is likely to grow. But there may be other factors to overcome as well.

“Probably the biggest obstacle is really the cost of capital,” Aiello said. “Whereas in transportation, we’re fortunate to have two great federal programs—TIFIA and Private Activity Bonds—those are simply not available in the P3 space for social infrastructure. And that makes it very difficult for chief financial officers to believe that there is a better value for money overall for taxpayers, which is quite a hurdle I think psychologically.”

But James Bass, the CFO at TxDOT, thinks P3 social infrastructure projects may already be having an easier time winning public acceptance than highway projects have in his state. A P3 is currently under consideration to build a new courthouse in Austin’s Travis County.

“I continue to read the newspaper (articles about the courthouse project) and I don’t see all of the debate and discourse and the venom that was directed at (TxDOT) years ago,” he said. “I don’t know if that’s because people hold highways more near and dear to their heart than courthouses or if we’ve been able to kind of break through that and have that policy debate discussion that people are starting to become more comfortable with.”

P3s Not a Panacea

But even the most ardent defenders of public-private partnerships are quick to point out that P3s are not a panacea and that the public sector must still play its vital role and keep up its end of the bargain.

“P3s aren’t free and even though we’ve had some great successes, everyone has to understand that you have to in the public sector come with money to the table,” said Connaughton, the Virginia Transportation Secretary. “We have to be a little bit better at explaining to people that this is the most important option and one with which we can actually get things done. But it’s got to be paid for and I think one of the things that we’ve learned is even in Virginia, where we have very long experience with this, we have to be better at explaining what we’re getting for this, what the benefits are. It’s very difficult to explain to people sometimes the nuances of the deal and the issues on risk.”

For Virginia, those benefits include stretching limited public transportation dollars to achieve the otherwise unattainable.

“We’re going to be going to close shortly on the I-95 Express Lanes (project),” Connaughton said. “It’s a $1 billion project; the state’s putting in $100 million. Given our limited resources, we would never be able to do the projects we’re doing right now if it wasn’t for P3s and the people have to understand that.”

Infrastructure’s Impact on Business Competitiveness

As noted above, Virginia and Texas are two leaders among the states in pursuing P3s to finance infrastructure. But it is Texas that this year tops CNBC’s annual study of which states are the best for business. One reason why: the Lone Star State is now considered to have the nation’s best infrastructure, according to the study. Meanwhile, Virginia, which has alternated in the top spot with Texas since CNBC started ranking the states in 2007, this year falls to third (Utah holds down the second spot). Virginia is seeing perpetually clogged highways and challenging daily commutes as the commonwealth continues to experience growth and that is putting a drag on its ability to attract and serve the business community, the study indicates.

Further Reading

“Pa. Oks public-private projects on roads and bridges,” July 4, 2012, Philadelphia Inquirer

“Pennsylvania Governor Corbett signing P3 bill”, July 6, 2012, Tollroads News

“California Department of Transportation Reaches Financial Close on Presidio Parkway,” June 15, 2012, Infra Insight Blog

“True cost of Big Dig exceeds $24 billion with interest, officials determine,” July 10, 2012, The Boston Globe

“Chicago Infrastructure Trust a Model as More Mega-Projects Turn to Private Investors,” July 7, 2012, Associated Press

“Should Brent Spence get money going to enhancement projects?” July 7, 2012, NKY.com

“Local equity & citizen dividends proposed in variant on P3s—investment fund P3s or IP3s,” July 8, 2012, Tollroads News