Infrastructure Investors Are Willing To Pound the Pavement
Florida Dept. of Transportation officials and their advisers aren’t likely to forget the year 2008. FDOT was trying to close on two different billion-dollar-plus public-private partnerships, but the financial markets were collapsing. In September, while still restructuring the year-delayed Port of Miami Tunnel (POMT) deal, FDOT accepted bids for a $2-billion Interstate 595 expansion. Just days later, emblematic of market conditions, the financial giant Lehman Brothers filed for bankruptcy.
“Credit was just not obtainable,” recalls Jeff Parker, founder of Jeffrey A. Parker & Associates Inc., Chilmark, Mass., a financial adviser to FDOT. “The bid assumed $900 million in private activity bonds. But there was no market for that type of debt.”
But the FDOT team rallied. Bank debt replaced bonds, which meant the concessionaire had to pony up another $50 million in addition to the original $150 million of equity. “We learned to accept certain risks, like risk for movements in credit spreads,” says Parker. “We recognized from the tunnel project that we needed flexibility.”
As for the tunnel, the team scrambled to make the project eligible for a $341-million Transportation Infrastructure Finance and Innovation Act loan. It had to meet federally required environmental processes, “Buy America” provisions and Disadvantaged Business Enterprise requirements. “We basically married the POMT with the federal process,” says Gerry O’Reilly, FDOT transportation development director. The Federal Highway Administration had to be brought up to speed on maximum availability payments (ENR 5/14/07 p. 11), used for the first time on a U.S. public-private partnership project.
Ironically, the market collapse proved to be a saving grace. The original bids for POMT had come in unaffordably high. “The euro started going down. Commodities prices went down,” says Parker.
Both projects are now under way. In Miami, Bouygues Civil Works Florida Inc. is leading the $607-million construction of two 3,900-ft-long, 41-ft-dia tunnels. In Broward County, I-595 Express— a consortium led by ACS Infrastructure Development with Dragados USA and, heading the design-build team, AECOM—is building three toll lanes in the median of I-595.
Two massive new P3 deals in Texas also have been inked. In Denver, a team has just won a $2-billion deal for a new commuter rail line. The past two years of ramped-up activity—despite or because of the recession—marks the ongoing evolution of P3s in the U.S.
“What we’re seeing is a new wave of projects,” says Fred Kessler, partner with Nossaman LLP, a law firm specializing in infrastructure deals. The first wave was in the mid-1990s, mainly in Virginia, California and Washington. Virginia, Texas and Florida are riding the current wave, and a third is coming down the pike.
Drawing on past experiences, new deals increasingly feature availability payments, no non-compete clauses and emphasis on long-term federal loans like those in the Transportation Infrastructure Finance and Innovation Act.
As with so many other aspects of transportation legislation and financing, the future of P3s in the U.S. hinges on the delayed reauthorization of the six-year federal financing bill. “If they delay reauthorization, then the way that P3s are supported remains unclear to everybody. It inhibits the ability of things to happen,” says Michael Della Rocca, president of Halcrow’s North American operations. “On the flip side, the longer the bill is delayed, the less certainty states have with regard to public money. This suggests they might turn to P3s more [often].”
If they do, a look at P3s to date offers important lessons in revenue assumptions, payment methods and balancing risks and responsibilities among all parties.
If Greg Hulsizer, chief operating officer of San Diego’s South Bay Expressway (SBX), had to do the project all over again, he would modify the roles of the participants. “We should have the government do what it does best: environmental permitting and land acquisition,” he says. “That would take significant risk out of the project.” Hulsizer also suggests non-compete clauses, property-tax exemption and the ability to add years to the franchise if revenue forecasts aren’t met to allow the investor time to recover costs.
The 35-year contract to build and operate SBX, also known as state Route 125, a 9-mile, four-lane toll road (ENR 8/21/06 p. 24), was first awarded to New York City-based Parsons Brinckerhoff in 1991. It faced 12 years of lawsuits during environmental permitting. Australia-based Macquarie purchased the project from PB in 2003.
In 2007, the road was completed, which coincided with the beginning of a recession that thinned traffic and expected toll revenues. Lawsuits ensued between SBX and the contractor team of Fluor Corp. and URS. SBX filed for Chapter 11 reorganization in March, citing $40 million in legal fees and the economy. A fall trial could determine lien priority among the parties. Hulsizer predicts his agency’s emergence from reorganization in about a year.
Still, the job demonstrated that P3s do work, says Hulsizer. “It did what was anticipated: It built a road decades before it would have broken ground if left in public hands.” Kome Ajise, director of the California Dept. of Transportation’s P3 program, adds, “The next generation of P3 takes into account lessons learned in South Bay and around the world.”
California’s interest in P3s received a boost from SBXX4, which replaced a law that only allowed four P3 projects; the new law allows P3 projects until 2017, and several are in the works. In the Bay Area, a $1.045-billion Presidio Parkway P3 was approved by the California Transportation Commission in May. Requests for proposals could go out this fall. To reduce private risk, Caltrans walked the project through the environmental review process before awarding the contract.
Instead of granting a franchise, Caltrans will pay the concessionaire a $35-million availability payment over 30 years based on maintenance standards. “That adds certainty while ensuring that they have skin in the game,” Ajise said.The project also includes a milestone payment for timely completion that can be used to pay back some of the financing.
The new measures are drawing interest from investors, says Mike Lucki, global infrastructure leader in the Irvine, Calif., office of Ernst & Young. “About $150 billion in pension and infrastructure funds are sitting on the sidelines waiting to invest,” Lucki says. By taking the risk out, it drives the cost of the financing down, which drives the project cost down.”
Georgia’s initial foray into P3s, the Public Private Initiative (PPI) program enacted in 2003, relied on firms or consortiums to make unsolicited proposals for transportation projects. But transportation officials became concerned. “We concluded that the private sector was cherry-picking routes that would generate the most financial return, rather than maximizing mobility options,” says David Spear, spokesman for the Georgia Dept. of Transportation. “The result would be projects built and developed in a disoriented manner with no connectivity or interoperability.”