Perspectives



As federal, state, and local budgets continue to shrink and the nation’s infrastructure continues to deteriorate, the prospect of leveraging public funding with private financing for the nation’s infrastructure investments is gaining steam. As such, it is expected that public-private partnerships (P3) will become increasingly important financing mechanisms for future infrastructure investments throughout the United States. P3 Focus offers a snapshot of the dynamic and rapidly evolving P3 market.1 In this issue we will first analyze the PR-22 and PR-5 Brownfield P3, the only deal to reach financial close in the last six months. Next, we will outline the growing U.S. P3 pipeline as evidenced by the increasing number of P3 studies being commissioned for projects. Finally, an overview of recently passed and potential upcoming U.S. P3 legislation will be provided.

PR-22 and PR-5 Brownfield P3: First U.S. Monetization since 2007

Only one U.S. P3 has reached financial close in the last six months: the PR-22 and PR-5 Brownfield P3 (see Box 1 on the following page). Although deal flow is still slow, as will be discussed in the P3 Pipeline and P3 Legislation sections of this article, P3 activity in the U.S. is rapidly gaining momentum. This will ultimately culminate in more P3 deals reaching financial close.

 

On September 22, 2011, the PR-22 and PR-5 Brownfield P3 reached financial close. It is the first P3 to reach financial close in Puerto Rico and is the first highway monetization in the U.S. since the lease of the Northwest Parkway in Colorado in 2007. Opened in 1971, PR-22 is a 52-mile toll road that runs along the northern coast of Puerto Rico, connecting the capital of San Juan to Arecibo. It contains seven tolling stations and generated $85 million in revenue in 2009.2 PR-5 is a 2.5- mile highway located in the San Juan metropolitan area that connects the cities of Cataño to Bayamón. It opened in 2006 and generated $4.2 million in revenue in 2009.2

As part of the deal, the concessionaire, a consortium led by Goldman Sachs Infrastructure Partners II and Albertis Infraestructuras, will pay Puerto Rico an up-front concession fee of $1.136 billion to lease both facilities for 40 years. In addition, the concessionaire agreed to invest $56 million in capital improvements in the first three years of the deal for an accelerated safety improvement program on the facilities while also investing an additional $300 million in preventative maintenance improvements over the life of the lease. Among the improvements to be made to the facilities are full roadway rehabilitation, improved levels of service, and full implementation of an electronic tolling system. The concessionaire will fund the up-front concession fee and subsequent facility improvements with a combination of equity ($455 million), debt ($825 million, 7 year maturity, LIBOR + 2.5 percent), and toll revenues that it will receive from the facilities.

The deal benefitted from both political buy-in from the Puerto Rican government and the avoidance of public backlash to the deal. The government helped to avoid public discontent by mounting an effective communication campaign that included television commercials detailing the benefits of the P3 to the public.

The benefits from this deal were plenty. Aside from experiencing an improved level of service on two of its key roadways, Puerto Rico used much of the proceeds from the concession fee to pay down the existing $850 million in public debt on the two facilities. The completion of this deal actually helped Puerto Rico experience its first credit ratings upgrade in 23 years. Also helping the public case was the concessionaire’s pledge not to raise toll rates until 2014 and to cap annual toll rate increases to 1.5 percent per year.

The deal itself took only a year. This is primarily attributable to the aforementioned government buyin and the deal’s reliance on the already established frameworks and contract documents used for theChicago Skyway and Indiana Toll Road deals.

With its rapid procurement time and demonstrable benefits to the general public, the PR-22 and PR-5 Brownfield P3 is expected to once again open the door to more brownfield toll facilities throughout the U.S. This is a model that would have worked on the Pennsylvania Turnpike, had its monetization been legislatively approved, and it is a model being investigated for the Ohio Turnpike and possibly for Virginia’s and North Carolina’s sections of I-95 (see P3 Pipeline and P3 Legislation). At a minimum, this project will certainly lead to more deals coming out of Puerto Rico. Next on the agenda for Puerto Rico are the Luis Munoz Marin International Airport P3 and the Puerto Rico PR-66 and PR-53 Brownfield P3.

P3 Pipeline: Progressing

Boxes 2 (previous page), 3, and 4 (following page) represent the current P3 pipeline. The P3 pipeline has been broken into three categories: recently closed (for informational purposes), in active procurement, and under P3 consideration (which may or may not ultimately be delivered as P3s). These tables will be continually updated in each EFR issue allowing one to track the progress of P3 projects. It should be noted that these lists are not comprehensive; they list publicly known and reported potential P3 projects and are subject to change.

Since the last issue of EFR, the U.S. P3 Pipeline has shown significant progression, as eight projects previously being considered for P3 procurement have moved into active procurement. Further, the pipeline of projects under P3 consideration has exploded, as over 30 projects have been added to the queue (in only six months). As previously discussed, only the PR-22 and PR-5 Brownfield P3 has moved from active procurement to closed in the last six months. Next year, the Presidio Parkway P3 in California (which reached commercial close in January), Segments 3A and 3B of the North Tarrant Expressway in Texas, and the Ohio State University Parking Lease are speculated to reach financial close.

The eight projects that have moved into active procurement are as follows: Hamptons Road Bridge Tunnel P3 and I-95/395 HOT Lanes P3 in Virginia, the Grand Parkway P3 and I-35E Managed Lanes P3 in Texas, the Travel Plaza Redevelopment P3 in Maryland, the Knik Arm Bridge P3 in Alaska, the I-70 Mountain Corridor P3 in Colorado, and the Ohio State University Parking Meter Lease in Ohio. It is no small coincidence that five of the eight projects are from states that have been quite active from a P3 legislation perspective (Virginia, Texas, and Maryland; see P3 Legislation).

As previously noted, over 30 projects are new to the P3 pipeline. In Florida, four highway and one rail project were added to the queue: the I-75 Managed Lanes P3, the Palmetto Expressway Expansion P3, the Heartland Beltway P3, the Wekiva Parkway P3, and the Tri-State Rail System P3. Maryland added two: the Baltimore Federal Courthouse P3 and the Inter County Connector. Other notable additions to the P3 pipeline include the Atlantic City Commuter Rail P3 in New Jersey, the New York City Parking P3 in New York, the Chicago BRT P3 in Illinois, and the I-95 Tolling P3 in North Carolina.

P3 Legislation: Foundation for Future Deals

Since the last issue of EFR, several states have made considerable progress at laying a strong legislative foundation into place for future P3 procurements as the following notable legislative actions have taken place (please note that this list is not comprehensive and is subject to change):

Texas

Senate Bill 1420 was passed, effectively lifting the 2009 moratorium on P3s in the state. This bill paves the way for the private sector to collect tolls on 11 Texas highways and freeways, including the Grand Parkway P3 and the I-35E Managed Lanes P3.

Pennsylvania

Legislation enabling P3 for delivering projects is currently being debated in the General Assembly.

Washington

Washington formed the Connecting Washington Task Force to explore innovative ways to construct and finance the state’s infrastructure needs over the next decade. One such tool they will be exploring is the use of P3s.

Illinois

House Bill 1090 was passed, which allows for the Illinois Department of Transportation to enter into greenfield surface transportation P3s throughout the state.

Virginia

Virginia created the Office of Transportation Public-Private Partnerships (OTPS), which will be tasked with developing and implementing a statewide program for transportation project delivery via the Virginia Public-Private Transportation Act of 1995. In addition, the Federal Highway Administration (FHWA) granted Virginia conditional provisional permission to toll its 179-mile stretch of I-95 as part of FHWA’s Interstate System Reconstruction and Rehabilitation Program, a pilot program that allows up to three states to toll their interstate highways. Virginia would be the second such state to receive entry into the program. Missouri is the first, having received permission to toll its portion of I-70 in 2005.

North Carolina

North Carolina sought permission from FHWA to toll its 183-mile section of I-95 as part of the aforementioned interstate tolling pilot program. Arizona has also sought permission from FHWA for the third and final slot in the program.

Maryland

Maryland’s Blue Ribbon Task Force has been busy working on comprehensive P3 legislation for the state. They have issued P3 guidelines that the legislation is expected to follow and are currently contemplating the formation of a state P3 office.

Connecticut

Connecticut passed P3 legislation, which stipulates that the governor must approve all P3 deals and that the governor is limited to five P3 approvals prior to January 1, 2015. Further, state funds cannot contribute to more than 25 percent of the P3’s cost.

The Times, They are A-Changin’

P3 deal flow has been slow, but the PR-22 and PR-5 Brownfield P3 is an important step for the market. It is the first highway monetization in the post Great Recession economy and may lead to many more. There are plenty of brownfield facilities that would be good candidates for P3 – many sections of the interstate system among them. As it did with Puerto Rico, this type of deal can both help cash strapped states pay down existing debt while also taking the operation and maintenance of facilities off of their books.

The times are changing.Stepping away from this deal, we see several states passing P3 enabling legislation and over 30 projects being added to the P3 pipeline. In these times of shrinking federal and state funding for infrastructure, states and local communities are finding alternative funding sources.

P3 project delivery, once viewed with much apprehension and suspicion, is quickly becoming a legitimate project delivery consideration in the eyes of the public. This is seen in the PR-22 and PR-5 Brownfield P3: a deal that was completed with enthusiastic government buy-in and little public opposition.

 

Image Header Source: Will Weaver (Creative Commons)