Roundtable



Assessing The US P3 Market

Roundtable features senior practitioners engaging in open discussion on the most pertinent issues facing the infrastructure industry both today and tomorrow. This edition features David Alvarez, Mark Briggs, and Sallye Perrin speaking about public-private partnerships (P3s).

Rolando Amaya (RA): In the past five years, the US P3 market has seen a wave of interest from both the public and private sectors. What factors have precipitated this interest?

Mark Briggs (MB): There has been concern that, very often, public agencies are not delivering their projects on budget or on time. Time and time again a project starts, its costs overrun, and then it is delayed. With the delay, its costs continue to go up. This is a risk that the public sector just doesn’t want.

With a P3 procurement, the performance requirements related to cost, schedule, and operations are clearly set out with penalties established if those requirements are not met. The performance requirements can be very precise, even coming down to the number of lights out in a railcar. This is an easily understood justification for utilizing a P3 process.

In general, the public agency will retain responsibility for tasks such as the environmental process, right-of-way acquisition, or farebox collection. The performance-based nature of P3 contracts has piqued the interest of public agencies looking for ways to transfer performance risk where it’s appropriate. The fact that, in a P3, a public agency can shift performance risks and have a contract that guarantees how the project is going to be built, when it will reach substantial completion, and what the cost will be for the full concession period is very attractive to a lot of agencies.

Sallye Perrin (SP): I should begin by stating that P3 delivery methods are not ideal for all projects. That being said, for large and complex projects, P3 offers are a new way to deliver that can accelerate the project schedule, provide a long-term operations and maintenance (O&M) solution, and take whole-life pricing into consideration.

The economy has made it difficult for states and municipalities to find the funding for projects in their entirety. The result has been projects being strung out over 10, 12, or 15 years using traditional design-bid-build procurement packages that are released only as funding becomes available. The financing opportunities that a P3 offers can allow the project delivery to be accelerated. Further, P3s offer owners both price and schedule certainty. That certainty, coupled with the financing options, can be attractive to owners.

Additionally, the private sector performs the project integration and the O&M. This can reduce the staffing needs of the owner and ensure that the project will be maintained throughout its concession period.

Finally, the lifecycle considerations in a P3 are attractive to owners, as P3s have been shown to achieve greater efficiencies over the life of the asset. The asset will remain in a good state of repair and will be handed back to the owner in a state of repair that is defined in the contract. For a P3 using the whole-life approach, the overall cost of the project can actually be less expensive to the owner than traditional design-bid-build procurement.

David Alvarez (DA): It can be a combination of factors. Cost and schedule certainty have certainly precipitated the interest in P3s. In addition to the aforementioned factors by Mark and Sallye, there are three other factors that I would like to specifically highlight that have really led to the increased interest in P3s.

First, the last five years have seen the successful closings of several key projects, such as I-595 in Florida, the Denver Eagle P3, Presidio Parkway, Long Beach Courthouse, and more recently, Ohio River Bridges and the Luis Muñoz Marín International Airport. These, among other projects, have provided not only impetus to the market but have delivered key lessons learned for market participants. Success has nurtured more success. There’s nothing better than a clear example that people can actually see as being successful. That has generated more interest in the market.

Second, the financial markets are back. It’s not the same financial world that we were experiencing prior to the global financial crisis of 2008, but financial markets have improved significantly and the financial instability is in large part behind us. Banks that typically participate in the infrastructure market are lending again and infrastructure funds are chasing projects. So any well-structured project should be able to generate interest from the financial markets.

Third, the P3 industry has made an important effort to educate stakeholders about P3s. Those efforts have yielded some level of positive results. Ten years ago things were very different; we had more questions than answers. We still have a long way to go but there is no doubt that there is more widespread knowledge than there was 10 years ago. Now more than 30 states have some level of P3 legislation. Overall, this is a movement in the right direction.

RA: What aspect of P3 is appealing to public agencies? What attracts private parties to P3? What makes a project a good P3?

DA: First, public agencies are interested in cost effectiveness and savings from P3s. If you’re a public agency, you’re doing a P3 because it’s going to be cheaper than traditional delivery. As a public owner, you’re searching for value for money, so you’re going to explore P3s. It is important to keep in mind that savings in project delivery represent direct savings for the taxpayer, and this is a very important consideration for public owners.

Second, public agencies are interested in the risk-sharing component of P3s. Risk sharing is a very powerful thing for public agencies. The risks throughout the life of a project are so numerous and complex that they are very difficult to foresee before the project begins. For public owners to not be directly responsible or liable for that is a big plus.

Third is the focus on performance that gets public agencies enthusiastic about P3s.

MB: I especially agree with you on risk transfer. Risk transfer is one of the main components of P3 procurement that is attractive to public agencies. On recent P3 deals, the public sector has retained control over fare pricing/tolling, while shifting construction and operating risk to the private sector. This is appealing. As we educate public entities, we help them to determine how much control they want to maintain. Their risk appetite dictates how much of that risk they want to transfer to the private sector. Taking the public agencies through the options helps them address the policy questions about how far they move along the design-build, design-build-finance, design-build-operate-maintain, or design-build-finance-operate-maintain continuum.

SP: P3s are attractive to public agencies because of the price and schedule certainty and the potential for accelerated delivery. The P3 agreement requires the concessionaire to deliver the asset on schedule and at an agreed upon price. If they don’t, it’s the concessionaire who is on the hook financially for schedule or cost overruns.

MB: We have this very interesting convergence that is happening. On one hand, there are public owners who are looking for P3 options. On the other, there is a huge amount of private sector money sitting on the sidelines looking for good, long-term infrastructure investments. So public owners are in the enviable position of realizing that there is a lot of money looking for good projects and that P3 is a good way to invest some of those stocks.

The private side is interested in making a profit. Under a well structured P3, there is sufficient detail that is provided to them when they bid on their project. Through their very extensive due diligence process, they have a good idea of the level of profits they will achieve if they perform exactly to the requirements. From their point of view, a well structured P3 gives them some assurance that they know what the rules are going to be and how they have to perform to achieve their profit goals. To them, a good P3 project is one where there is an availability payment that is both reliable and sustainable.

SP: I agree. Private parties are attracted to P3s as a form of project delivery because they provide positive business opportunities. Through the risk transfer, there’s room to provide innovation and creativity through a whole-life approach to achieve the best solutions for owners. While risks may be transferred to the private sector, the private sector also has more control over a positive outcome by being able to deliver the project better, faster, cheaper, and of a higher quality. That can be both very satisfying and also achieve a profit for the private sector.

DA: P3s represent an investment opportunity for private investors. Infrastructure is a very interesting asset from the investment point of view as it offers a long-term, steady return.

Infrastructure P3s offer a different risk profile for investors. These are not investors that try to look for a speculative profit and a quick turnaround.

SP: Right. There are many funds out there that really look at infrastructure as a solid, long-term investment with a high quality return. Currently, there’s a lot more money than P3 projects in the pipeline. So, it’s very attractive to the private sector that more good P3s are making their way into the marketplace. I think three aspects define a good P3.

First, a good P3 minimizes external interfaces that can complicate a P3 contract. Parsons Brinckerhoff is currently working on the Purple Line light rail project that will be built in the Washington, DC suburbs in Maryland. It is an excellent P3 because it is a self-contained project with few external interfaces.

Second, it is important that the public sector allows for innovation and creativity throughout the concession by not over-specifying the project’s design. Providing just the right amount of specification and really focusing on performance instead of details, drawings, and specifications can foster innovation.

Third, it is important for a P3 to have a sufficient operations period component that has meaningful performance factors. These factors allow the proposing P3 teams to differentiate themselves during the bidding process to achieve the best value for money for the owners.

DA: I’d like to add two more. The project has to be used by its stakeholders. We’re not trying to build something that isn’t going to provide an actual service to someone. You must have the expectation that, over time, people will increase their demand for the facility. So, whether it’s transit or a highway, you want solid and robust projections for demand and for usage. This is critical.

Next, you want to make sure the project’s P3 approach is well structured. You don’t want to reinvent the wheel. It is important to make sure what you are doing does not ignore past precedent. You also want to ensure that it has a solid legal framework. These two things are part of the fundamentals for a good project.

RA: Early US P3 projects focused almost solely on revenue-risk concessions. Recently, however, with the exception of managed lane projects, which rely on a combination of revenue-risk and subsidy, US P3s have veered heavily toward availability payment deals. What caused this shift? Moving forward, is the availability payment deal the new standard P3 structure in the US?

SP: Availability payment deals are attractive to a wide range of P3 players. Most of the early P3 concessions, particularly those in Virginia and Texas, were purely revenue based. Revenue-based P3s are predicated on revenue projections. Some have performed to expectations. Others have not, as real world revenue has fallen short of projections. A limited number of P3 players are willing to rely solely on revenue risk to support P3s. Many of the new revenue-based P3s are managed lanes. It is difficult to accurately project the attractiveness of the managed lanes once the entire roadway section has been improved so it will be interesting to see how these projects perform against their projections.

Because of this uncertainty, many states are moving towards availability payment P3s. I think we get greater competition with availability payments because you are not passing revenue risk to a private partner who may not be entirely willing to take it. This provides more predictability in what can be achieved over the life of the project for the private sector while still providing value for money to the public sector.

DA: We’re still emerging as a P3 market in the US, but I would agree that we seem to be converging into a new availability payment standard in the US. Early US P3s were brownfield and toll revenue concessions. To some extent, weak economic conditions in the US have made forecasting traffic demand and revenue on existing and new transportation facilities challenging. The risk associated with forecasting demand and revenue has shifted the interest towards availability payments in the US.

Now we’re seeing a general acceptance of greenfield availability payment P3s. Moving forward, I expect to see more projects based on the availability payment structure. A large part of this is due to greater understanding among public officials about the benefits of performance-based availability payments. The day we see a brownfield project with strong demand being procured as an availability payment P3, then a new undisputed standard would have emerged in availability payments. We’re not there yet.

MB: Many of the projects I’m working on in terms of a P3 structure are transit projects, so I’m coming at this question from the transit perspective. The reason availability payments are important for transit projects is because US transit projects do not generally generate sufficient fare revenues to support the repayment of both capital and operating costs. Therefore it is necessary for the public entities to identify other revenue sources to support transit projects. That has varied from transit-specific sales tax revenues to general fund commitments. Availability payments will not necessarily become the standard P3 structure as public entities prefer that the private sector rely on user-generated revenues as opposed to other public funds. They’ll continue to seek P3 models that do that. Unfortunately, for transit projects, revenue-risk P3s do not currently seem feasible.

Now I’m not saying these availability payment P3s cannot generate revenue. We have counties all around the country that have passed half- or full-cent sales taxes and that additional sales tax revenue is devoted entirely to transit. That tax revenue fills that gap between the cost of the availability payment and the transit system’s fare revenues.

RA: As previously mentioned, despite several transit, port, and aviation P3s, to date, US transportation P3s have almost exclusively been focused on the highway sector. With the advent of the availability payment deal, we’re seeing more sectors getting in on the action. What sectors do you foresee being most active in the P3 space moving forward and why?

MB: As I previously mentioned, transit has become and will continue to be an area of interest for P3. It has been successful in Denver with the Eagle P3. Now Maryland Transit Administration has decided to move forward with a P3 solicitation for the Purple Line project and we’re seeing P3 interest from other transit agencies across the country.

This is happening for two primary reasons. First, we have the aforementioned counties around the nation that passed sales taxes for transit. That is a reliable and sustainable revenue source that can be looked to in a P3 transaction.

Second, the public wants to see certainty when they buy onto a project. Unfortunately, over the years, public agencies have had tremendous cost overruns and have not been able to deliver on time. They’re recognizing that P3s offer an innovative way to transfer risk and get us the long-term performance that we expect.

SP: I think we’ll continue to see highway projects of all sizes move along as availability payment P3s. From billion-dollar-plus megaprojects to medium-sized projects in the $300 to $600 million range, the availability payment model works for highway projects.

I also agree with Mark. Between transit, ports, and aviation, transit P3s offer the greatest potential for growth opportunities for P3 delivery, particularly on the heels of the so-far-successful Eagle P3 and a number of successful transit projects in Canada. That being said, the US is faced with the dual challenges of limited funding for availability payments and bureaucratic processes limiting the owners’ capacity to pay availability payments.

With respect to aviation, the Luis Muñoz Marín International Airport deal appears to be a success and a good precedent for future P3s. However, the LaGuardia Airport procurement is currently the only active aviation P3, as two attempts at a P3 for the Midway Airport in Chicago have failed.

DA: I agree with you both. In the US market, we’re going to continue to see surface transportation, including transit and highways, as the dominant P3 sectors. Especially with the flexibility of the availability payment structure, I think we’ll see deals in all forms of transit, from rail to streetcars and busing.

There are additional sectors that have very large potential in the US. One, as Sallye mentioned, is airports. I think we’ll need a few more successful deals before momentum builds in that sector. Parking is another sector with some very interesting opportunities. People are starting to realize that parking can be effectively delivered through a P3. I also believe that water is a sector with interesting potential as there is a general need to extend the lifecycle of US water infrastructure assets.

SP: We haven’t seen much in social infrastructure but I think we will eventually. The Long Beach Courthouse P3 has been successful. We are also seeing some uptick in student accommodations. Balfour Beatty has been active in that area.

DA: Hopefully, the lessons learned with availability payment transportation deals can be transferred to the social infrastructure space. They’re not all that different and the model is applicable to social infrastructure and other sectors as well.

RA: Paying for availability payments can introduce many challenges for public agencies. Toll/fare revenue aside, are there any innovative means of helping to offset the cost of availability payments? How about various value-capture techniques? Are there other innovative means of generating revenue out there?

MB: Value capture is one of the cornerstones of the business and finance plan for the Charlotte Red Line that runs from downtown Charlotte to Lowe’s World Headquarters in Mooresville, which is 26 miles north of Charlotte.

The northern towns knew that they wanted to see the Red Line done and realized that they needed to take responsibility themselves to come up with the financing plan. Parsons Brinckerhoff worked with them to identify the Red Line corridor and create a benefit district that was comprised of tax increment financing and assessment districts along its entire 26 miles. Through that process we identified sufficient revenues to support not only the $226 million that they needed to cover their 50-percent share of the cost for the construction of the project, but also their fair share of the operating costs for the 30-year period of time of the concession.

The other aspect that was unique about Red Line is that we had the governance issue of allocating funding from seven different taxing entities. Because no private entity would be interested in coordinating cash flow issues with seven different taxing entities, we created a joint powers authority, into which all of the revenues from the seven tax entities were funneled. The funding with the joints powers authority could then be used to support tax-exempt revenue bonds or serve as the availability payments for the concessionaire.

SP: As Mark suggested, we see a lot of the creativity in the transit market. The Eagle P3 in Denver is funded in part from the proceeds of a voter-approved sales tax for the RTD service area. Other transit agencies have similar taxes that can be applied to availability payments. In addition, value capture through tax increment financing can be applied to offset the cost of transit service, which is the backbone of the Cotton Belt financing plan in Texas.

On the negative side, we are seeing states like Texas and Virginia where the interpretation of the law limits their ability to undertake availability payment type projects. Specifically in Texas, they are moving to a hybrid design-build-finance approach with an O&M tail. With this approach, the owners are trying to achieve the efficiencies of a P3 without specifically utilizing an availability payment. Virginia is currently only looking at revenue-risk projects but does provide some up-front funding to limit the revenue demands of their P3 projects.

DA: Other ways to offset cost of availability payments include making modifications to the commercial terms of the concession agreements. Trying to offset the amount of availability payments is directly related to how creative you can be with the P3. There are many different ways to mitigate availability payments, but obviously it depends on where the project is located, the uniqueness of the project, what assets you have around you, and the legislative hurdles you have to clear. In short, it depends a great deal on the project’s environment and how much room you have to maneuver.

One approach can be to combine other assets. You can bundle other assets and their additional revenue streams while achieving economies of scale. This commercial critical mass can help to mitigate the costs of availability payments.

You can also work with the commercial terms of the deal. For example, extending the deal’s term is a value driver. You can also modify other aspects of the concession agreement. Clearly there are tradeoffs but if you are looking at a very challenging availability payment, you have to go back and look at your concession agreement and identify the value drivers, and then see what levers you can pull.

Internationally, I have seen deals that set a ceiling on the availability payments. That’s another option. There are definitely many ways to be creative about this. It’s important that every owner looks at this in detail to try and come up with creative ideas to reduce their availability payments.

RA: As we’ve established so far in this discussion, the P3 market has evolved from revenue-risk to availability payment deals. This has resulted in the development of innovative and creative means of paying availability payments. Where do we go from here? What’s the next step for P3?

SP: It is important to the private sector that there is a pipeline of projects that can be bid. This contributes to a healthy P3 market. We are seeing states like Virginia, who recently published a P3 pipeline of projects to give the private sector a sense that there will be future P3 work.

Texas and Los Angles have also has been very clear on their pipeline. Full pipelines encourage the private sector to stay in the market and continue to bid. Also, as David mentioned, we are seeing projects bundled to make larger, more attractive procurements. A great example is the Accelerated Regional Transportation Improvements (ARTI) project in Los Angeles or the bundled bridges in Virginia or Pennsylvania.

Another growing trend in the P3 marketplace is the unsolicited proposal. It has been an integral part of the Virginia program and 19 other states allow the submission of unsolicited P3s. In a sense, the unsolicited proposal allows the private sector to make the market by identifying projects that are financeable and beneficial to the public. It will be interesting to see where this trend goes.

DA: There’s no way to be specific about this question. As an emerging market in the P3 space, we’re still evolving and looking for ways to deliver projects. We will continue to explore more within the framework of availability-payment greenfield P3s. As previously stated, we’re going to see more agencies being more creative with their projects and trying to bundle projects together. We’re going to keep converging toward a standard P3 structure. It will be our challenge to remain as flexible as possible within that structure. That will be the natural evolution of the market.

RA: As a worldwide consultancy, Parsons Brinckerhoff is in the unique position of having expertise in a great number of international markets that have more advanced P3 programs than those in the US. How can we best leverage that expertise to help public agencies develop robust P3 programs? How can that expertise assist private sector practitioners?

MB: One of the things that our P3 practice does well is help the two sides—the public sector owner and the private partner—understand each other’s perspective. Our experience working on behalf of both enables us to help both sides find common ground. We have taken, and will continue to take, many public agencies through the P3 process. Many of them have not been through it before and appreciate our expertise. In fact, the very first thing that our perspective public sector P3 clients are interested in is Parsons Brinckerhoff’s tremendous amount of national and international experience in the P3 space. We are on the cutting edge in terms of what we did with the Denver Eagle P3 project and are currently doing with Maryland’s Purple Line project. When issues get raised and challenges are identified, we have the experience and enough activity going on that we can respond to those issues.

With respect to private sector clients, one of the major things that we bring them is an understanding of the public policy constraints and limitations. Very often, the private sector doesn’t realize that they’re operating within the policy constraints of the local jurisdiction with whom they’re working. An example of this is subsidy on behalf of the public partner. Every single constitution has a prohibition against the gift of public funds. So the question becomes: what is the appropriate level of public subsidy? What is the methodology of financing? This needs to be structured in such a way that you don’t violate that constitutional purpose. That is one of the things that we do for the private sector to help to educate them so that they really know the appropriate way to approach the public sector.

The main thing that all of our clients appreciate is that we really do serve both our private sector and our public sector clients better because we understand the other side’s perspective. I don’t think you can discount that. It’s a very subtle thing, but it makes us a real asset to both sides.

SP: There is a lot to learn from Canada and the UK, who both have robust P3 programs. We, as Parsons Brinckerhoff, can leverage our worldwide reach to really look at those programs for lessons learned while also seeing how they are actually performing. We can look at their performance data and determine if there really is value for money being generated on these projects. Being able to bring those various lessons learned is a great help to the clients that we’re advising.

DA: Parsons Brinckerhoff has a great global reach. We have a tremendous business footprint out there and there are a ton of lessons learned to be leveraged from different people within Parsons Brinckerhoff. We are also uniquely positioned as a technical advisor that can serve many functions. Our reach is across geographies. It is also across disciplines, meaning that we’re not only engineers, but we also understand the legal, financial, and commercial components of P3s. Our cross-disciplinary and geographic reach offers great value, particularly in the US where there is still much to learn about P3s.

Another unique characteristic about Parsons Brinckerhoff is that we speak technically, legally, and financially, so we can consult an infrastructure or pension fund as easily as we consult public sector agencies. We bring the different parties and disciplines in a P3 transaction under one roof and help them to communicate so that a deal may be facilitated.

Our cross-disciplinary capabilities coupled with our different experiences throughout the world can help not only our clients but the P3 market as a whole as it continues to grow in the US. That’s a very positive thing and it’s something of which we are proud.

 

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