States Explore Public-Private Partnerships for New Infrastructure Assets but Face Challenges

While a number of states have deployed public-private partnerships (P3s) to tackle infrastructure projects over the last decade, many believe the P3 industry in this country still has yet to take off in the way it has elsewhere in the world. That’s despite demonstrated success of P3s in traditional areas like managed lane projects and promising developments in a variety of new asset classes including airports, broadband projects and high-tech applications. And while the Trump administration looks to encourage more P3s and institutionalize their practices in federal programs, there are many factors that could limit growth in the industry and prevent any kind of a much-needed infrastructure push from ever getting off the ground in the years ahead. Those were just some of the takeaways from the Inframation Group’s U.S. P3 Infrastructure Forum 2018 held June 13-14 in New York City. The annual event brings together state and federal public officials and regional transportation authorities, along with infrastructure developers, investors and financiers to talk about the issues shaping the P3 industry’s future.

“We saw financial close of $4.77 billion (in P3 projects) in 2017,” noted Inframation Americas Editor Jon Berke at the outset of the conference. “It was way off the $10.66 billion in projects that closed in 2016. In the first half of 2018, things haven’t fared much better.”

But Berke said there have been promising signs of late, including P3s to tackle rural broadband and smart city projects, water infrastructure and renewable energy projects and autonomous vehicle programs. Airport projects have also started to gain momentum, he said. On June 8, the city of Los Angeles reached financial close on a $4.9 billion agreement to build an automated people mover at Los Angeles International Airport. A consolidated rental car facility project at the airport is also getting the P3 treatment. P3 projects at JFK and LaGuardia airports in New York are also moving forward.

Nuria Haltiwanger, North America CEO for ACS Infrastructure, said the people mover at LAX is an example of a great P3 project because it involves a client that could have moved forward on their own but they instead decided a P3 could offer added benefits.

“They decided to do this project as a P3 specifically because they thought they were going to be able to … achieve the right innovations, risk transfer and life cycle optimization that they were looking for,” she said.

Haltiwanger believes if P3s like the Los Angeles and New York airport projects are successful, success will breed success.

“As we see more of those projects, I think other airports are going to realize the applicability of the projects and how they can implement the potential P3 approach,” Haltiwanger said.

Broadband P3s

While not immune to growing pains, one area of growth in the P3 arena of late has been broadband and fiber projects around the country.

“There’s a bit of a perfect storm going on in telecommunications right now,” said Mark Powell, senior managing director at Ernst & Young Infrastructure Advisers.

Powell points to factors driving the market such as continued growth in demand for data usage, the transition to higher-speed 5G networks and the expansion of technology applications in the transportation sector, including intelligent transportation systems, all-electronic tolling, smart city technologies and connected automation, which will require vehicles to be able to talk to each other and the infrastructure.

“Because of all this, the right-of-way on which telecom networks can be built is increasing in value,” Powell said. “And because of this increase in value there’s a need for (transportation agencies) to step back and say ‘okay, what are my needs and what’s the market value of what I have here? And maybe I can create some clever financing mechanism where I can satisfy my needs and actually not have to outlay a whole lot of money because of increasing value.’”

Michael Bonini, who directs the P3 office at the Pennsylvania Department of Transportation, explained that the decision by his department and the Pennsylvania Turnpike Commission to enter into a P3 to install a fiber optic network within the turnpike’s right-of-way had a lot to do with the fact that operation of such a network fell well outside the core functions of the state’s transportation agencies.  

“In our case it’s to plow the snow, it’s to maintain roads and bridges and ancillary to that is the efficient movement of people and goods,” Bonini said. “(The P3 allows us) to have someone come in and assist with the ability to lock in the operations and maintenance of a fiber network, which ultimately gives the turnpike commission the ability to shift to their all-electronic and cashless tolling … (and) to provide broadband to underserved sections of Pennsylvania.”

Other P3 Technology Applications

Broadband isn’t the only technology where state transportation agencies have found themselves outside their comfort zone and willing to seek new partners to deliver infrastructure innovation. Colorado is in the midst of studying whether the futuristic Hyperloop travel system could be feasible there and has partnered with the company Arrivo to build a half-mile test track near the Denver airport.

“As public servants, we’re supposed to go out and fix potholes and replace guardrails and plow the snow,” said David Spector, director of the Colorado High Performance Transportation Enterprise, the state’s P3 agency. “That’s people’s expectation and we have to continue to do that and do that well. But mobility is changing. How people get around is changing every day. … People are hungry I think for different mobility options and choice. … Our authorizing legislation says ‘aggressively pursue mobility solutions’ and innovative solutions to our mobility problems. So, for us, it’s part of the job.”

Elsewhere, the state of Michigan is participating in two partnerships that are helping to advance research into autonomous and connected vehicles. The first of those is Mcity, the 30-acre facility near Ann Arbor where vehicles are being subjected to 35 different factors they could encounter on the open road.

“The university and the state of Michigan paid for the construction (of Mcity) and then private companies have come in and they pay for the continued operations,” explained Michigan Department of Transportation director Kirk Steudle. “Currently there are 11 private companies in what they call the leadership circle. They each put in $1 million apiece over three years. There’s 45 affiliate companies that each put in $150,000 over three years. And they provide for the operations of that facility and fund the research.”

The model was so successful, Steudle noted, Michigan decided to replicate it and scale it up to create the American Center for Mobility, a 330-acre site where vehicles can move from proof of concept to validation testing. The $140 million facility is another public-private partnership built by challenge grants with six companies contributing $5 million apiece to get it started.

Managed Lane P3 Projects

But states are also turning to P3s to deliver more traditional projects that have long been virtually synonymous with P3s: toll roads and managed lanes that require drivers to meet certain requirements and/or pay to access the less congested lanes.

“As congestion continues in certain cities—and we’re seeing it more and more … businesses are realizing that this is impacting the ability of people to efficiently get to work when you’re spending hours of your day in gridlock,” said Haltiwanger.

James Ray, senior advisor at the U.S. Department of Transportation, believes the best days of managed lanes may lie ahead and one need look no further than the Washington, D.C. area.

“I think if people travel to Northern Virginia and they see how big of a congestion-buster they can be … I think they’ll realize that that is a problem we can address,” Ray said. “And I think then we start to hold our local leaders accountable for not bringing those solutions to our communities and I think you’ll actually start to see it move into the second-tier cities. … Once people have a taste for it, I think they’ll want more.”

After successfully adding managed lanes to I-495 and I-95, Virginia is now seeking to transform one of its most notoriously congested corridors, I-66, which was once called “the worst damn freeway in America,” said Virginia Secretary of Transportation Shannon Valentine.

“Given the limited footprint that we had, the enormous cost of right-of-way and limited resources for that matter, it became very clear to us that we could not construct enough highway to build our way out of the congestion problem that we had,” said Valentine. “I will say that no one wants to pay a toll but no one wanted to continue living with what we had there. People want to live, they want to work and they want choices that make sense to them.”

A unique feature of the I-66 managed lanes P3 deal was a $500 million payment made to the commonwealth of Virginia by the project developer, according to Martin Klepper, former executive director of the USDOT’s Build America Bureau.

“That’s money the state of Virginia is required to use within the corridor to further improve infrastructure,” he said. “In addition, if the private sector developer is successful in achieving their traffic and revenue projections, they will make payments in excess of $1 billion over the term of the concession to the state of Virginia, which Virginia can use for enhanced transit. I think those benefits to the state in addition to the managed lanes and the extra capacity to really look at congestion are likely to be opportunities that many other states will look at in terms of being able to use managed lanes to solve their problems.”

One state already looking at managed lanes is Virginia’s neighbor Maryland, where Gov. Larry Hogan has proposed a $7.6 billion plan to relieve congestion on I-270 and the Maryland portion of I-495, the Capital Beltway.

“The public is very accepting of tolling new lanes today,” said Maryland Secretary of Transportation Pete Rahn. “They don’t have to use them if they don’t want to use them. They can drive exactly the way they are driving today and yet they benefit from those people who do use them. … I think it’s a policy that hits that sweet spot between what the public will accept and what will also impact our ability to keep traffic moving within congested corridors.”

Rahn and others note however that they have concerns about how factors like the growth of ride-hailing companies like Uber and Lyft and eventually autonomous vehicles will impact the ability to project traffic and revenue levels for managed lanes, particularly if those vehicles are allowed to access the lanes for free or at a reduced cost.

“I’m just of the opinion that if you use the system, you should pay for it and I believe that’s the fairest way for all of the motorists,” Rahn said.

Trump Administration’s Push for P3s

When the Trump administration presented its infrastructure plan in February, it emphasized using federal dollars to leverage a mix of private and public funding sources to generate more infrastructure funding. To the surprise of some perhaps, the plan didn’t suggest that P3s could be the silver bullet solution for all states or all projects.

“They thought that this was going to be an extraordinarily pro-P3, forward-leaning, aggressive administration on P3,” said USDOT’s Ray. “But we know that the bulk of the infrastructure in this country is not owned by the federal government and I think the role of the federal government should be to promote effective, efficient infrastructure delivery and those decisions as to … [procurement type] are more appropriate for the asset owner, whether that be a mayor or a governor.”

Which isn’t to say the administration wouldn’t like to see more P3s around the country. In fact, administration officials have taken notable policy steps they believe could advance P3s in the years ahead, including efforts to streamline and speed up environmental permitting processes.

The administration has also sought to bring some of the philosophies inherent in many modern P3s to bear in competitive infrastructure grant programs like INFRA and TIGER (now known as BUILD). Those include requiring applicants to present asset management plans based on life-cycle cost analysis, which can present a more realistic view of a project’s long-term costs and ongoing maintenance needs.

“We learned a lot from P3 over the years and we’re trying to bring that into the program,” said Ray.

Such opportunities to inject policy into federal transportation programs may be tempering disappointment among some administration officials that it appears unlikely Congress will take up the Trump infrastructure plan this year.

“Washington plays an important role but it’s not the most significant role,” said D.J. Gribbin, who resigned in April as special assistant to the President for infrastructure policy. “That role is played by state and local governments. Working together we can improve infrastructure, we can increase efficiency, we can boost productivity, we can create a higher quality of life for all Americans.”

What Could Hold P3s Back?

But public-private partnerships face a variety of headwinds that some believe could limit their growth in the coming years.

One of those is that more education and capacity building is still needed to help public officials and stakeholders make their way through complex P3 deals.

“P3s are far more efficient and provide greater value to the public than traditional procurements,” said Gribbin. “The challenge is that they’re not particularly user friendly. P3 procurements take too long. They’re too expensive, they’re too politically risky. … We need to figure out how to come up with a P3 EZ form.”

Indeed, many believe political risk remains one of biggest challenges facing P3 projects in the United States.

“The challenge right now is if you’re elected mayor or governor and you want to do a P3, there is a chance that even if you start almost immediately that that will not get done during your first term,” Gribbin said. “I think it’s important on the industry side to come up with a better and more efficient way to actually get through these procurements in a timely manner so that we can close these inside a political lifecycle.”

Impending elections can not only contribute to the political risk, they can sometimes prompt bad decision making when it comes to P3s, said Greg Ciambrone, vice president of construction company The Walsh Group.

“Public agencies and public owners are bringing projects to market either too soon or for the wrong reasons,” he said. “If there’s a fundamental need for a project, everyone needs to embrace it and do everything they can to push that project forward. Just because there’s an election coming up in November is not the reason why someone should force a project agreement to hit the streets before technical provisions are adequately defined.”

But Ciambrone, whose company has been involved in prominent P3 projects like the Ohio River Bridges and Pennsylvania’s Rapid Bridge Replacement, also isn’t convinced that P3s can be counted on to drive a much-needed construction boom and infrastructure upgrade in the years ahead.

“I think the infrastructure needs in America are so great and I think everyone was hoping that P3 would be a vehicle in which those infrastructure needs could be met but I think what we will see is that’s not going to happen,” he said. “It’s not going to be enough. … State DOTs are going to have to look at different forms of procurement. They’re going to have to become creative to try to find a way to address the infrastructure needs. I wish there would be a (construction) boom but a boom that happens gradually so that the market can adapt and companies can adapt for that.”

Ciambrone and others also point to a variety of labor and economic factors that would make a construction boom that might result from a federal infrastructure push difficult. Among them: rising interest rates, growing inflation, a tightening labor market, credit market volatility, unknown impacts of the 2017 tax cuts, President Trump’s tariffs and rising material costs. These factors and others appear likely to drive up the costs of construction projects in the years ahead.

“The ill-advised tariffs—and my personal opinion is they’re ill-advised—will undoubtedly increase the costs of steel, concrete, rebar, lumber—all critical components of infrastructure construction,” said Ciambrone.

Stan Halliday, chief underwriting officer at Travelers Insurance, said the industry is seeing a shortage of labor across the spectrum, starting at the engineering and design firms which have seen considerable consolidation in recent years

“The most common complaint we’re hearing today is that the design work is not of the quality that it used to be,” Halliday said. “There are repeated errors and things like that the contractors are having to deal with and they don’t always get the A team. As we do more and more big projects, not every employee is capable of working on a $1 billion-plus, design-build, six-year project and that’s true at almost every firm at every level.”

Halliday said the labor shortages also extend to state and municipal governments that are struggling to compete for talent and to the contractors themselves that may not have the depth of talent to tackle multiple megaprojects around the country.

“(States and municipalities) certainly don’t have the pocketbooks of the private sector to attract the top talent and they’re not getting the same level of construction professional that they used to get to manage the work from their end,” Halliday said. “I think as you put all that together: more large projects, all areas of the people who work to actually put the project in place challenged for staff, that’s definitely inflationary and I think … it’s going to cause some contractors maybe to choose not to pursue some work that they did in the past, which again I think will be a lift on pricing.”

CSG served as a supporting organization for the 2018 U.S. P3 Infrastructure Forum.

All photos courtesy Inframation.