Perspectives



As federal, state, and local budgets continue to shrink and the nation’s infrastructure needs escalate, the prospect of integrating private financing into 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 US.

P3 Focus offers a snapshot of the dynamic and rapidly evolving P3 market in the US.1 This issue’s P3 Focus will first look at the Goethals Bridge Replacement P3 in New York and the North Tarrant Expressway Segments 3A and 3B in Texas. It will then outline the upcoming P3 project pipeline. Finally, it will provide an overview of recently passed and potential upcoming US P3 legislation.

Deal Flow

In the second half of 2013, two P3 deals reached financial close, representing a total value of approximately $2.9 billion. The Goethals Bridge Replacement project reached financial close in November 2013. The project consists of the construction of a new 12-lane cable-stayed bridge over the Arthur Kill to replace the existing bridge. Construction is expected to last about 50 months. The deal totals $1.5 billion and will be delivered through a 40-year design-build-finance-maintain (DBFM) contract. Upon completion of construction, the bridge will be operated by the Port Authority of New York and New Jersey (PANYNJ), and the concessionaire will be compensated through availability payments.

The concessionaire, a consortium led by Macquarie and Kiewit, will provide $113 million in equity. The remaining project financing will come from a $474 million TIFIA loan, $461 million in Private Activity Bonds (PABs), and a subsidy of $363 million from PANYNJ. Fitch assigned both the TIFIA loan and the PABs a rating of BBB-minus—the lowest possible investment grade rating. The rating is thought to be indicative of recent investor unease with the municipal bond market and specifically the debt issues plaguing many US cities, including Detroit and Chicago.

The second deal to reach financial close in the second half of 2013 was Segments 3A and 3B of the North Tarrant Expressway (NTE), which is the second phase of the overall NTE project. The first phase of the project (Segments 1 and 2) reached financial close at the end of 2009 for approximately $2 billion, with the P3 bringing two-thirds private funds and one-third public funds. Similar to the first phase of the project, this P3 is unique as the concessionaire is taking demand risk on the roadway, thereby bucking the recent availability payment trend.

Segments 3A and 3B are 6.5 and 3.6 miles, respectively, of contiguous existing highway that will be expanded to include two express toll lanes in both directions, doubling capacity of the road. Construction is expected to be completed in 2018.

The deal for Segments 3A and 3B was reached with NTE Mobility Partners Segments 3 LLC (NTEMP3), the same developer as Segments 1 and 2 of the project. NTEMP3 will design, build, finance, operate, and maintain Segment 3A, while the Texas Department of Transportation (TxDOT) will build Segment 3B, for operation by NTEMP3. The project is being financed through a mix of sources: $430 million in equity, a $531 million TIFIA loan, $247 million in PABs, and $127 million from the TxDOT and the North Central Texas Council of Governments. The PABs have maturities of 25 and 30 years, with an average interest rate of 6.87 percent per year. The interest rate for the TIFIA loan is 3.84 percent per year.

P3 Pipeline

Although the last six months only saw the closing of two P3 deals, the pipeline of potential P3 projects continues to grow. While many projects are screened as potential P3s in the early stages of project development, very few actually come to market. Moving forward, P3 Focus will report on P3 projects that have begun their P3 procurement, which will be defined at the issuance of a request for qualifications (RFQ). In total, five RFQs for P3 projects have been released since June.

Most of the recently released RFQs are in the highway sector. In Los Angeles, the Los Angeles County Metropolitan Transportation Authority issued an RFQ for a $700 million package of six highway projects, titled Accelerated Regional Transportation Improvements (ARTI). All six projects will be procured under a single, 35-year DBFOM contract.

Elsewhere, RFQs were released for single highway projects in Ohio (Portsmouth Bypass P3), Nevada (Project Neon: I-15 highway expansion), and Illinois/Indiana (Illiana Expressway P3), with each project being procured under DBFOM contracts. In keeping with recent trends for P3s in the infrastructure industry, all four projects will compensate the private entity through availability payments.

In addition to the highway pipeline, one RFQ was released in the transit sector: the Purple Line P3 in Maryland. The project—a 16-mile light rail link in suburban Maryland outside Washington, DC, connecting to Metrorail, commuter rail, Amtrak, and local buses—is expected to cost about $2 billion and will be procured under a DBFOM contract. Like the highway projects, the Purple Line will compensate the developer through availability payments.

P3 Legislation

P3 legislation and other infrastructure financing legislation continue to move through both state legislatures and the federal government. With a continued emphasis on the federal budget on the national stage, P3s and other innovative funding and financing methods will continue to be important for infrastructure funding.

New York

P3-enabling legislation for social and transportation infrastructure projects is currently being prepared by Senator Greg Ball. This potential bill follows another P3 bill introduced earlier in 2013 that would allow transportation agencies to utilize P3s. The two proposed bills could be joined at some point in the future.

Florida

New legislation establishing new P3 procurement procedures and creating a P3 task force was signed into law. The law forms a new Public-Private Partnership Guidelines Task Force, tasked with establishing uniform processes for P3s. The law also establishes guidelines and procedures for unsolicited proposals.

Texas

The Texas House of Representatives is working on legislation to allow availability and milestone payments for transportation projects. Although the bill was passed by the House Transportation Committee, the bill was unable to pass through the Texas Legislature during the 2013 spring session. The Legislature’s next session begins in January 2014, at which point the bill could proceed further.

Oregon

Representative Jim Thompson is expected to reintroduce legislation that would establish an application process for private companies looking to engage in highway projects. The bill was previously defeated due to controversy over a provision proposing a design-build-finance delivery of the Coastal Parkway project.

North Carolina

The North Carolina state Legislature recently passed legislation enabling P3s for public building construction. The bill provides standard processes for both P3 and DB procurements of government buildings and calls for the creation of an independent committee to examine prequalification standards on projects not related to transportation. The bill is expected to be signed into law by Governor Pat McCrory.

Federal

Since the last edition of EFR several pieces of federal legislation relating to P3s have progressed. First, two bills designed to increase private investment in water projects are progressing through Congress. On the House side, the Committee on Transportation and Infrastructure is looking to introduce the Water Resources Development Act (WRDA), which may contain a provision to establish a program similar to the TIFIA loan program for water projects—the Water Infrastructure and Financing Authority (WIFIA). The program would provide loan guarantees and low interest loans aimed at facilitating large water projects. In the Senate, the WRDA was approved by an 83-14 vote and includes a provision for WIFIA. Should the House pass its version of the WRDA, a final, reconciled bill could be developed for consideration by the full Congress.

In addition to the water initiatives moving through Congress, several pieces of legislation related to infrastructure financing are also progressing through the federal government. In the House, Rep. Bill Pascrell (D-NJ) is working on a bill that would remove limits on the number of tax-exempt Private Activity Bonds that can be issued for water and wastewater projects in an attempt to incentivize private investment on these projects. Although the bill has found a co-sponsor, the Chairman of the House Ways and Means Committee has indicated a resistance to introducing any legislation that requires changes to the tax code until comprehensive tax reform legislation has been introduced. However, changes to PAB requirements could be included as part of a comprehensive tax reform effort.

Several pieces of legislation regarding infrastructure financing authorities are also in development. First, Senator Mark Warner (D-VA) is developing legislation to create an independent infrastructure financing authority, with the ability to provide low interest loans and loan guarantees for transportation, water, and energy projects. The legislation is expected to include a $100 million total project cost threshold.

Next, a bill that would create a $50 billion infrastructure bank is being developed in the House by Rep. John Delaney (D-MD) along with 13 Republican and 13 Democratic co-sponsors. The infrastructure bank, the American Infrastructure Fund (AIF), would provide loans and loan guarantees to state and local governments to finance infrastructure projects. The loans would be paid back at a market rate determined by a newly created regulatory body, the Office for Infrastructure Partnerships. The AIF would be funded via the sale of infrastructure bonds. US-based corporations would be incentivized to buy these bonds by permitting them to repatriate an amount of their overseas cash tax free.

Finally, Rep. Rosa DeLauro (D-CT) has reintroduced another national infrastructure bank bill in the House. She first introduced the legislation in 2011.

Conclusion

Despite a relative lack of closed deals in the P3 market over the last six months, P3s should continue to play an important role in the infrastructure world moving forward. The pipeline for P3 projects remains strong, and newly introduced legislation on both the national and state level indicates the level of importance policy makers are placing on P3s. With federal funding likely to remain tight, P3s and other means of innovative financing will continue to be important. Look for more deals to reach financial close in the future.

 

Note:

  1. Information in this article is taken from publicly available sources.

 

Image Header Source: Maryland Transit Administration