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 first looks at the Midtown Tunnel/MLK Extension P3 and the Presidio Parkway P3, the two deals that reached financial close in the last year, and then provides an overview of recently passed and potential upcoming US P3 legislation.

Deal Flow

In 2012, two P3 deals have reached financial close representing a total value of about $2.5 billion. Both deals are structured as design-build-finance-operate-maintain (DBFOM) dictating that the concessionaire will design, build, finance, operate, and maintain the project for the length of the deal.

The Midtown Tunnel/MLK Extension P3 in Norfolk, Virginia, reached financial close in April 2012 (Box 1). The Midtown Tunnel project will construct a new, two-lane tunnel next to the current Midtown Tunnel, improve the existing Midtown and Downtown Tunnels, improve the existing interchange at Brambleton Avenue and Hampton Boulevard, and extend the Martin Luther King Freeway. The deal totals $2.1 billion and has a 58-year term.

The concessionaire, a consortium led by Macquarie and Skanska, provided $272 million in equity and will be compensated through toll revenues from the tunnel.

The concessionaire is receiving government support in the form of a 34-year, $465 million Transportation Infrastructure Finance and Innovation Act (TIFIA) loan and a Private Activity Bond (PAB) allocation. The TIFIA loan includes $43 million in capitalized interest. No payments are required on the TIFIA loan until 10 years after financial close.

Additionally, the concessionaire obtained $675 million in financing through the issuance of tax-exempt PABs. The bonds were issued over several tranches, ranging from 10 to 30 years with yields ranging from 4.45 percent to five percent. All bonds received ratings of BBB- from both Standard & Poors (S&P) and Fitch. The Virginia Department of Transportation (VDOT) is also providing a $408 million subsidy to the concessionaire.

All remaining construction expenditures will be funded by an estimated $268 million in expected toll revenues from the existing tunnels during the project’s six-year construction period.

The Presidio Parkway P3 project in San Francisco, California reached financial close in June 2012. The project will replace the former southern access road to the Golden Gate Bridge, Doyle Drive, on Route 101 with a new, partially tunneled parkway. The $365 million Presidio Parkway P3 (Box 2 on the following page) has a 30-year term. Golden Link Partners, a consortium led by Hochtief PPP Solutions and Meridiam Infrastructure North America, will receive availability payments and provided $46 million in equity.

The project received a TIFIA loan split into two tranches totaling $153 million. The TIFIA loans consist of a 3.5-year tranche that totals $90 million and a 30-year tranche for $63 million (including $3 million in capitalized interest). In addition, the consortium raised a 3.5-year, $167 million bank loan with an interest rate of LIBOR plus 1.75 percent. At the conclusion of construction, the California Department of Transportation (Caltrans) and the San Francisco County Transportation Authority (CTA) will pay down the bank loan and short-term TIFIA tranche with a $277 million milestone payment.

P3 Legislation

Since the last P3 Focus, there have been two major legislative events at the federal level, both of which have impacts on future P3 procurements. Most important was the passage of Moving Ahead for Progress in the 21st Century Act (MAP-21), the surface transportation reauthorization bill. While the law includes the full spectrum of surface transportation programs, there are three key provisions that affect P3s:

1.) TIFIA: MAP-21 expands the scope of the TIFIA program, which provides federal credit assistance to nationally or regionally significant surface transportation projects, including highway, transit, and rail. The bill increases TIFIA funding to $750 million in 2013, more than seven times previous funding levels, and $1 billion in 2014. Additionally, the maximum share of TIFIA funds for a given project was raised from 33 percent to 49 percent of total project costs. Expansion of the TIFIA program is important for P3s, as the low cost of finance makes them more likely to be viable or good value for money.

2.) Transit: The bill also establishes P3 authority for the Federal Transit Administration (FTA), similar to the authority previously granted to the Federal Highway Administration (FHWA). MAP-21 directs the Secretary of Transportation to develop policies to address any impediments to P3s for transit projects, as well as work to provide assistance to public transportation P3s.

3.) Best Practices: MAP-21 requires the United States Department of Transportation to both develop a standard P3 transaction model for use by states and local governments, and develop best practices for working with the private sector to deliver transportation projects.

The final bill did not include two proposed amendments that would have discouraged private investment. The so-called “Bingaman Amendments,” named after their proposer Sen. Jeff Bingaman (D-NM), would have excluded private highways when calculating state apportionments of federal highway funds, and would have required private companies leasing highways to use harsher depreciation practices on their leases.

In addition to MAP-21, Congress also passed the Federal Aviation Administration (FAA) reauthorization bill, which was signed into law in February 2012. Of particular note, the reauthorization bill doubles FAA’s Airport Privatization Pilot Program from 5 to 10 airports. 

Currently, Midway Airport (Illinois), Luis Muñoz Marín International Airport (Puerto Rico), and Hendry County Airglades Airport(Florida) occupy slots in FAA’s pilot program. At the state level, Pennsylvania passed P3-enabling legislation this year. Passed in late June and signed into law in July, House Bill 3 enables P3 procurement structures for infrastructure projects. The addition of HOT lanes to Route 422 and the rehabilitation of I-95 are candidates for P3s.

Another state to watch is Maryland, which could pass P3 legislation in early 2013. Both the Maryland House of Delegates and State Senate passed a version of P3 legislation in April; however, both bodies could not reconcile the differences in their bills before the session adjourned. The sides differed on an amendment allowing parties filing a lawsuit against a state agency involved in a P3 to go straight to the Court of Appeals for a decision. It is expected that the legislation will be voted on during the next legislative session.  

 

Notes: 

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

 

Image Header Source: Abe Bingham (Creative Commons)