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 United States.

P3 Focus offers a snapshot of the dynamic and rapidly evolving P3 market in the U.S.1 This issue’s P3 Focus will first look at the Indiana I-69 Section V project, the I-4 Ultimate P3 project in Florida, and the SH 183 Managed Lanes project in Texas. It will then outline the upcoming P3 project pipeline. Finally, P3 Focus will introduce a new interview series - P3 Perspectives - featuring a conversation with Richard Fierce, a Senior Vice President from Fluor.

Closed Deals

Since the last edition of EFR, three P3 deals have reached financial close, representing a value of approximately $2.6 billion.

Indiana I-69 Section V

The Indiana I-69 Section V project reached financial close in July 2014. Section V of the project includes reconstructing 21 miles of existing road to interstate standards from Bloomington to Martinsville. Section V is the fifth of six total sections for the overall I-69 project which will link Evansville with Indianapolis. The deal totals $284 million, and will be delivered through a 35-year Design-Build-Finance-Operate-Maintain (DBFOM) contract.

Spanish P3 developer Isolux Infrastructure leads the consortium that will contribute $40.5 million in equity. The remaining project costs will be financed through a $243.8 million issue of tax-exempt SAFETEA-LU Private Activity Bonds (PABs). The concessionaire will be compensated through $80 million of milestone payments, as well as availability payments starting at $21.8 million per year post-substantial completion.

Twenty percent of the availability payments are indexed to CPI, while the remaining 80 percent will increase at a fixed 2.5 percent per year. The PABs were structured via two issuances: approximately $3.5 million serial bonds due in 2017 and approximately $240.3 million term bonds, due at various maturities no later than 2046. Both PABs received a rating of BBB from Fitch. Yields on the bonds range from 3.98 percent to 5 percent.

I-4 Ultimate P3

The I-4 Ultimate P3 project in Florida reached financial close in September 2014. The project will reconstruct 21 miles of existing general purpose lanes of I-4 near Orlando and add four tolled express lanes to the highway. The project will be delivered via a 40-year DBFOM contract and total approximately $1.5 billion. The concessionaire will be compensated through annual availability payments, which are set to start at $75 million.

The project will be financed through an equity investment of $104 million by the concessionaire, a consortium led by Skanska and John Laing plc, a $486 million senior construction bank loan from six banks, and a $949 million TIFIA loan. The TIFIA loan is split into two tranches: Tranche A, comprised of $131 million of short-term debt and Tranche B, comprised of $818 million of long-term debt. It is the largest TIFIA loan to be awarded to a P3 project to date. Both the construction bank loan and the short-term TIFIA tranche will be repaid by a final acceptance payment from Florida Department of Transportation (FDOT) upon substantial completion.

Moody’s assigned both the commercial and TIFIA loans a provisional Baa1 rating, while Standard & Poor’s (S&P) assigned a preliminary BBB rating to each. The short- and long-term tranches of the TIFIA loans are due in 2023 and 2058 with interest rates of 2.35 percent and 3.79 percent, respectively. The construction loan has an interest rate of 3.85 percent.

SH 183 Managed Lanes

The SH 183 Managed Lanes DBfOM project near Dallas was conditionally awarded in May 2014. The project will reconstruct 15 miles of existing lanes along with the construction of the new managed lanes. The Texas Department of Transportation (TxDOT) will pay for $600 million of design and construction costs. Southgate Mobility Partners, a consortium led by Kiewit, is providing the remaining $247.6 million in gap financing for the $847.6 million project and will be responsible for operations maintenance of the project for 25 years in return for a total $171.8 million operations and maintenance (O&M) payment, escalated annually. After substantial completion, the consortium will be compensated with annual milestone payments of $50 million per year for the first four years and a final $47.6 million in the fifth year. Bidders were given $850 million as a public funds limit—$600 million available prior to substantial completion and $250 million available over five years thereafter—and each bid a variable scope within that budget. Southgate Mobility Partners was the only bid to deliver the base minimum scope plus four additional scope items under the public funds limit. The SH 183 deal is unique in several ways including that it appears Kiewit is financing the $247.6 million gap internally.

P3 Pipeline

While the US P3 pipeline remains robust with projects in their planning phases, the launch of P3 transactions (defined by the issuance of an RFQ) has been slow, with only one transportation P3 RFQ released in the US over the last seven months. The West Virginia Department of Transportation released an RFQ in August for the Coalfields Expressway Project, a 3.3-mile section of the road. The project will be the first P3 for the West Virginia DOT’s Division of Highways. TxDOT issued an RFQ for US 181 Harbor Bridge Replacement DBM in Corpus Christi, which may include gap financing following the SH 183 model. Despite the recent slowdown in RFQ issuances, several active P3 procurements have reached significant milestones. In Maryland, the RFP for the Purple Line DBFOM was released in July (discussed previously here). In Texas, TxDOT listed three teams on the shortlist for the SH 288 toll road project near Houston. Finally, proposals were received by the PennDOT Public Private Partnerships Office for the Rapid Bridge Replacement project (discussed previously here).

P3 Perspectives

Closing a P3 transaction takes tremendous effort from numerous players on both sides of the aisle. Public officials, engineers, contractors, legal/financial advisors, and countless others must work together to bring a project to completion. P3 Perspectives focuses on each of these players individually, with a conversation about P3s and the market from their perspective. This edition of P3 Perspectives features an interview with Richard Fierce. Richard is the head of sales for Fluor’s Infrastructure business line. In that role, he has global responsibility for sales, marketing, and business development for transportation, commercial and institutional, telecommunications, alternative power, and water projects. He has significant P3 experience and is currently a board member of the P3 advocacy group AIAI, the Association for the Improvement of American Infrastructure.

Matthew Deery (MD): What is your view of the infrastructure P3 market nationally? Where do you see the market both in the next 6 to 12 months and longer term?

Richard Fierce (RF): My view of P3 in the US is pretty bullish. I don’t have metrics to recite, but the best thing I could say is that five to seven years ago if we looked at our near-term pipeline for the next 18 months, P3s might have represented 20 percent of the pipeline. Now it’s more like 80 percent. It’s to the point where in larger procurements, P3 is no longer the exception. It’s almost become the rule. I don’t necessarily see a big difference between the near term and the longer term, except that I see the market gradually accelerating, as has been the case pretty consistently for a long time. I expect P3 to be more the rule in 10 years than it is now. That’s been true looking back over about that same period of time with a little bit of disruption around the time of the global financial crisis when it was hard to finance anything. If you normalize things for that the market’s not just been steadily growing, but steadily accelerating. I see that continuing.

MD: Do you notice any regional trends in the market?

RF: That’s an interesting one, and I think the answer is not really. I don’t really see the market in the US being much different in the Southeast than the Northeast, the Midwest, etc. It’s more driven by which states have been out in front, not just in terms of getting the enabling legislation but also then doing something with their enabling legislation. That does seem to vary quite a bit from state to state, but I couldn’t really draw any regional conclusions from that.

MD: What do you make of the transit P3 market? Do you see any increase in activity in the market or will it remain slow?

RF: I certainly think you’re going to see more transit P3s. You definitely get into an added layer of complexity when you put P3 into transit though. In more conventional road and bridge type projects, the O&M and lifecycle costing is a little bit easier to get your arms around. When talking about long-term O&M and refurbishment for transit, you’ve got vehicles and systems technologies that are getting a lot of wear and tear. Those aspects of the P3 become much more complicated and difficult to estimate. Also, when thinking about the ‘O’ piece of ‘O&M’, toll road operations is pretty straightforward stuff, where you’re doing toll collecting, grass cutting, removal of dead animals, etc. But when you start talking about a transit system with guaranteed headways, the ‘O’ piece takes it up to a whole new quantum level in terms of complexity. I see P3s in transit continuing, but they are almost in a class by themselves in terms of complexity both to bid but also to then execute and operate.

MD: What are your thoughts on the private sector taking demand risk on projects? Will there be any more appetite to take it on in the future?

RF: Well P3s in the US have been an interesting history to watch over the last 20 years. Back before some of the more recent legislative improvements, such as PABs, you really couldn’t combine tax-exempt debt and private equity or a long-term private O&M contract. In both cases, the degree of private inurement was viewed as being unacceptable for giving the debt federal tax-exempt status. So early on a number of projects were along the vein of what are referred to as 63-20 projects, which is a reference to a bit of the US tax code.

Generally speaking, they were privately developed, financed, designed, and built but they were publicly owned and operated. There was a tax-exempt organization, a 63-20 organization, which could then act as the issuer of the debt and would own the project after it went into revenue service. That was mostly done so that less expensive tax-exempt debt was available to help finance the project without running afoul of private inurement rules. So at one point in time, the notion of projects being privately developed and financed but publicly owned and operated was fairly common.

It was later that you saw the influx of the real toll demand risk concessions starting out with a couple of notable brownfields in Chicago and Indiana. So when you talk about availability as being kind of the rule, that’s really only been true for maybe the last several years. The pendulum has certainly swung very dramatically in that direction and I see that continuing with a couple of asterisks. One is that some states aren’t sure that they have the legislative or constitutional authority to go with availability structures. I think Texas and Virginia, both leading states for P3s, fall into that category so they’ve been doing demand risk more than availability.

As a contractor, we are much happier with availability structures because we are putting our money behind things that we actually have more influence and control over. We can influence whether the asset is available for service. You can’t always have influence, control, or even predictability over demographics and competing facilities. Also, really revolutionary changes in technology are things that could really bite you with long-term demand risk concessions.

There’s still room for the right revenue risk project to come along and to succeed every now and then. Virginia is looking at I-66 for example, which is rumored to likely be revenue risk. We’re happy to chase those under the right circumstances. But I do think that the overwhelming weight of deal flow in the next few years is likely to be availability or maybe Design-Build-Finance (DBF).

MD: As a contractor, how do you view the risk flow-down from concessionaires in P3s?

RF: We’re generally in an okay mindset on this issue. Sometimes when folks first venture into P3, they’re somewhat uncomfortable with the notion that the concession entity or special purpose vehicle (SPV) is, by definition, a thinly capitalized single purpose entity that can’t bear a lot of residual risk. Some first time contractors in the P3 space might be a little bit put off by the degree to which all of the risk is downstream from the SPV to the construction joint venture (CJV). But when you get your arms around how this is supposed to work, it’s not as off-putting, with one cautionary comment: even though most risk needs to be passed along, that doesn’t necessarily imply that your concession is a completely risk-free entity. It’s not as though every risk gets passed along, and there are going to be certain residual risks that are retained by the SPV. It’s been our experience generally that when you’re dealing with folks who have done a few P3s, everybody understands the market. There may be a few arguments, but it’s not been terribly off-putting to us. Much of the risk is passed along from the SPV to other entities, and that’s just part of the landscape.

MD: What do you view as the appropriate minimum threshold for the size of a P3 in order for it to be attractive for you to pursue?

RF: As previously indicated, P3s can be pretty complicated to estimate and bid. They’re also more expensive to estimate and bid. There’s just a lot more participants involved. If you look at an organizational chart of the bidding entity, there’s typically an SPV organization, a design-build organization, and frequently an O&M organization instead of just a design-builder and a few key subs. All of those entities need to be created and there needs to be the organizational documents and negotiations associated with that. Mundane things need to be completed, such as licenses to do business and tax filings. There is a lot of administrative expense with a more complicated organizational chart.

There is also a lot more work to estimate because you have to develop the operations and maintenance scope. As I mentioned, the operations piece in a transit environment is extremely complicated. There’s also frequently refurbishment or renewals towards the middle or end of your concession duration, so there is a lot more to estimate.

There are also a lot more advisors. You’re always going to have a financial advisor. You need more outside legal help than normal. As you make the push between being selected as preferred bidder to financial close, you frequently find yourself with the need to pay for other parties’ legal advisors as well. So there are lenders’ technical advisors, financial advisors, and lawyers for all these different players. All of that makes it expensive and complicated. Plus, we’re talking about investing some of Fluor’s money so that gets extra internal scrutiny in terms of the equity investment.

Because of all of that, P3s are way more expensive, time-consuming, and complicated to bid. Hence, we really think they need to have a bit of heft behind them before the juice is worth the squeeze. We don’t put a hard and fast number on that, but you’ll not see us really bidding much in the P3 space of less than $500 million, and I’m just talking CapEx.

In fact, you will not really see Fluor bid that many P3s less than $1 billion, but there’s certainly not a hard rule. But generally speaking, it’s going to be worth it to us and we’re going to be competitive when the project is right around $1 billion and larger.

MD: Fluor has traditionally been active in the international P3 markets in addition to the US. How has the experience in both environments differed?

RF: One thing is that while availability is sort of a new concept to the US, availability structures are old hat over in Europe. The other interesting thing, generally speaking, if a transport project doesn’t go P3 in the US and it goes more conventionally, the debt piece of your plan of finance would typically be municipal bonds. A unique quirk of US law is that ‘munis’ are tax-exempt. That’s a concept that has no bearing over in Europe. So when looking at value for money and the determination of should it go P3 or non-P3, that’s one of the difficulties.

Some people just want to attribute it to the fact that we have 50 state DOTs and so it’s like 50 little nations. There’s some truth to that, but part of it is the baseline that you’re measuring a project against always or frequently has tax-exempt debt because it comes in the form of municipal bonds. Consequently, that certainly put some strain on plans of finance to make P3s look good in comparison with a conventionally financed and built project, particularly before the days of PABs. Without having tax-exempt ‘munis’, there was never really that headwind to fight against in Europe. So not only are there fewer procuring agencies—a handful of nations versus 50 states—there’s no weird quirk of what the baseline looks like in terms of the cost of debt. European markets have been kind of quiet in the last few years since the global financial crisis. We’re just in the process of closing a P3 in the Netherlands right now.

It is true that the variability in the documents and the degree to which you feel like you’re making it up from scratch every time you bid a P3 is much less over there. There are standard forms of contract and you know what you’re getting into and it looks very similar to the last one that you bid. We certainly aren’t anywhere near that in the US so, there are a lot of players over there that are really familiar with the process and fewer folks learning it as they go.

MD: Being from Washington, DC, the Capital Beltway Express Lanes is a P3 of particular interest. Can you share any experiences or lessons learned from that project?

RF: We’ve closed three P3s in Virginia now. The first one was Pocahontas Parkway. We did that one as an unsolicited proposal under Virginia’s Public-Private Transportation Act (PPTA), and it was a 63-20 tax-exempt debt deal. Then we did the 495 Capital Beltway HOT Lanes, and we’re in the process of finishing construction on the 95 HOT lanes which closed a couple of years later. Virginia is a great state for P3, a leader. I have a couple of thoughts or observations about those projects, particularly the latter two. One, we really had developed 495 and really had pretty much come to commercial close on 495 before the financial crisis, and we tried to bring it to financial close during the worst of the financial crisis. That was like walking a tightrope and not something I’d like to try and do again. It took a lot of creativity and some real leaders in the financial community, as well as with VDOT.

A comment about the 95 HOT lanes that I think is a little bit telling: I don’t know whether to laugh or cry when I tell this story, but that project was basically a 30-month design-build effort. It took us over eight years to develop it from when we first submitted our proposal. So there was about eight years in developing and getting the project to financial close despite needing just two-and-a-half years to build it. You wouldn’t think that the development effort would overshadow the design and construction element by such a large margin.

There were many things happening, including the Great Recession and the global financial crisis happening midstream in that development. But there were a variety of other things, including an injunctive lawsuit brought by some local communities, which really stalled things. That kind of gives a flavor of the complexity of P3s and I think it does make you stop and think a little bit about the notion of unsolicited proposals and the opportunity to be creative, entrepreneurial, and really get out there. All of that’s true, but if projects are not part of a planned, supported, and well thought out procurement process sometimes projects can be much slower to get to the starting point when they’re unsolicited versus a competitive P3 procurement process. That’s a bit of experience from our Virginia history that might not be readily obvious to others, but I don’t think too many people think about working the development side of one of these deals for over eight years.

The final comment on Virginia is that there are always a lot of folks from the private sector side of the table who fancy themselves leaders. But the fact of the matter is none of these projects will really happen successfully without somebody on the public sector side willing to stand up, take the arrows, act as a leader, and be out in front of the process to push it and make it happen. There are plenty of folks who want to lead the parade from the private sector side, but just of necessity the real, brave, and courageous leadership needs to come from the public sector side. If you looked at any P3 that has closed, you probably find somebody who was a forward-thinking, brave, and courageous person willing to take on some of the naysayers.

Based on our experience in Virginia, which is right up there among the best two or three states in the nation, P3s certainly take forward thinking leadership from the DOT side and that message has been driven home every time we approach a P3.

MD: Any closing thoughts?

RF: I’d certainly encourage everyone who thinks that P3 is a good project delivery mechanism to be sure that whenever they have any interaction with their elected representatives to encourage them to promote TIFIA enhancements and PAB replenishment in the next highway bill. TIFIA and PABs are both the lifeblood of these transactions, so when folks get serious about a highway bill next year we certainly encourage everyone to talk to your elected representatives and promote TIFIA and PABs.

One last thought is a little bit more philosophical. I think a lot of folks view P3 as a mechanism to close a gap in a plan of finance. There certainly is an element of that, but the benefits of it go well beyond that. It’s because of the kind of innovation and collaboration when the public sector and private sector get together earlier in the process and continue that partnership through the lifecycle of the process that you come up with better solutions. For a given dollar of toll revenue you’re going to get more project, so you really do get more for your money with the collaboration and innovation that P3 allows.

In some respects, I think that’s even truer than in straight design-build. In the design-build world, if you’re really collaborating with the client and engaging in alternative technical concepts, the public sector must worry about pushing the envelope because once the warranty is expired, they have to live with the consequences.

In a P3 world where there’s a private sector partner who’s operating and maintaining the asset for many and whose equity returns depend on the asset being open and available for revenue service, there’s an added element of private sector skin in the game. The public sector can be a little bit more comfortable taking on, analyzing, and giving a fair shake to these innovative solutions and alternative technical concepts because they know that the private sector can’t afford to sell them an innovation that isn’t going to work over the long haul. So think of P3 not in terms of closing a gap in finance, but as a best-in-class asset delivery mechanism.



  1. Information in this article is taken from various P3 news sites and is current as of October 2014.

Image Header Source: I-4 Mobility Partners