Have PPPs reached boiling point?
Link to article here.
Remember that this article is written by those who profit off these sweetheart deals known as public private partnerships or PPPs. It underscores the mentality inside the industry and government - that government is broke and the private sector can fix it. While both may be true in some respects, the question we ask is at what cost to taxpayers/commuters? In Texas, we're already under water with debt and borrowing for toll roads that aren't paying for themselves. Toll roads nor PPPs have solved either the funding or congestion problems that face our state. When a PPP toll road, like the two in North Texas, I-635 and the North Tarrant Express, costs commuters 75 cents PER MILE to get to work, how is that not a tax increase? It's not a user fee as PPP advocates claim, since $1 billion in gas taxes are propping up those two projects, with $8 billion in future gas taxes also at risk for the Hwy 161 toll project that couldn't get financing without taxpayers being on the hook for the losses. Regardless of whether the public sector or private sector slaps tolls on our public freeways, the end user, you and I, are footing the bill. PPPs remain the MOST expensive way to fund roads with the most long-term ill effects to taxpayers, like non-compete clauses that prohibit or penalize the expansion of free roads surrounding toll projects.
Has US PPP reached boiling point?
Project Finance Magazine, 24 September 2010
Strains on local government, combined with an established US PPP track record, are prompting greater government interest in public-private structures. By Robert Gibbons, partner, Ivan Mattei, partner, and Michael McGuigan, associate, Debevoise & Plimpton LLP.
Read more: [us] [ppp] [tifia] [legislation] [states]
Severe cost cutting at various levels of government across the US has resulted in painful and widely publicised cutbacks in a wide range of governmental services that had once almost been taken for granted. If, as seems increasingly likely, these budgetary constraints are structural and not merely transitory, they will force government to explore calling on private capital and expertise to develop, construct, operate and maintain transportation infrastructure in the United States. These developments are coming to a head at a time when the volume of completed PPPs has grown to a level sufficient to create broad and growing awareness among public officials of their potential benefits.
The track record of private involvement in US transportation infrastructure projects includes the well-publicised monetisations of the Chicago Skyway Toll Bridge and the Indiana Toll Road, as well as the use of PPPs to procure numerous other significant transportation facilities, such as the Dulles Greenway, SR-91 in California, the new international air terminal (Terminal 4) at JFK International Airport, the Port of Miami Tunnel, the North Tarrant Expressway and I-635/LBJ Freeway in Texas, and Denver’s FasTracks commuter and light-rail project.
These projects demonstrate, most notably, the fact that PPP procurement compels all parties to plan and budget for the full life cycle costs of maintaining and operating (and not just building) the transportation facility in question. This is a sea change from the traditional model of transportation infrastructure procurement in which the life cycle costs to be incurred years and decades into the future are neither considered nor budgeted for at the time of procurement. Aside from leaving state and local governments with a potentially significant overhang of unfunded operation and maintenance obligations, the traditional procurement model has not always focused the parties’ attention on the fact that design decisions at inception can have important effects on life cycle costs.
While the current environment creates an opportunity for PPPs to flourish in the US transportation infrastructure industry, obstacles certainly remain. Proponents of PPPs have encountered difficulty in achieving effective PPP-enabling legislation at many levels of government, as legislators attempt to balance transportation infrastructure needs with the concerns of their constituents. But governments must also avoid imposing terms and conditions on PPPs (whether substantive or procedural) that result in unnecessary delay or expense in the procurement process or that undermine the viability of projects by shifting risks to the private sector that it is not well equipped to bear. These dangers are particularly acute at a time when financial markets remain unsettled and lenders are reluctant to stretch to finance projects presenting unusual risks.
This article discusses the status of PPP-enabling legislation in the US at the state and federal levels and identifies some of the key transportation infrastructure PPP projects that have recently been procured or proposed in the US and their related financing structures.
PPP-enabling legislation
As a general matter, governmental entities in the United States must be authorised by statute to use PPPs to procure transportation infrastructure projects. Recently, there have been both advances and setbacks on this front.
States
A number of states have enacted some form of PPP-enabling legislation. However, the scope and substance of state PPP-enabling statutes tends to differ significantly from state to state and, indeed, the lack of a uniform national framework has dragged on the PPP market in the US. Some states have broad, sweeping PPP-enabling statutes that permit an array of projects, thereby facilitating the use of PPPs in those jurisdictions. Yet, other states’ PPP-enabling legislation is narrowly drafted, sometimes specifically identifying permitted projects and/or requiring prospective projects to be approved by a specified officer or body of the state, thereby subjecting PPPs to greater political scrutiny and generally inhibiting their application in those jurisdictions.
Legislators in Illinois and Indiana have paved the way for procuring the estimated $1 billion Illiana Expressway project, a 37km eight-lane expressway connecting interstate highways in Illinois and Indiana, through a PPP. In June 2010, Illinois governor Pat Quinn signed a bill authorising the state to seek a private partner to develop, finance, construct, maintain and operate the new road. Indiana governor Mitch Daniels had signed a similar bill in March.
In 2009, California enacted comprehensive PPP-enabling legislation that vastly expanded the state’s PPP program for, among other things, transportation infrastructure projects, and Arizona governor Jan Brewer signed a bill authorising the state to enter into PPPs to construct, finance, operate and maintain transportation projects and to issue toll revenue bonds to finance them.
However, there have been setbacks. Most significantly, in 2007, Texas instituted a partial, two-year moratorium onprivately financed toll roads throughout the state (with exemptions for some existing projects). Although the partial moratorium expired on 1 September 2009, the Texas legislature failed to extend the PPP-enabling legislation that authorised comprehensive development agreements for transportation infrastructure projects, and the authority expired on 31 August 2009.
In May 2010, the Michigan house narrowly voted in favor of a bill to permit the Michigan Department of Transportation to enter into PPP agreements to design, construct, operate, or maintain public transportation facilities. However, the state senate has gone into recess without acting on the legislation. If the state senate had passed the bill, the $2 billion Detroit River International Crossing project could have been procured as a PPP. A similar setback occurred in Hawaii, where a proposed bill that would have authorised PPPs for transportation-related projects failed.
Federal – highways
US law generally restricts the tolling of roads that are constructed using federal funding, a class which includes most interstate highways in the country. As such, statutory exemptions to federal law are necessary in order to allow PPPs to charge tolls on such roads. The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) was signed into law on 10 August 2005 and contains a number of such exemptions to federal law.
Among other features, SAFETEA-LU provides for an Express Lanes Demonstration Program, which authorises 15 express toll lane projects on congested interstates, high occupancy toll (HOT) lanes projects where existing high occupancy vehicle (HOV) lanes may charge tolls to vehicles that do not meet the passenger requirements, an Interstate Construction Toll Pilot Program, under which up to three states may impose tolls on new interstates to support the financing for their construction, and up to $15 billion of tax-exempt private activity bonds (PABs) for PPPs in which a private partner has a long-term interest.
SAFETEA-LU was set to expire on 30 September 2009. James Oberstar, Chairman of the House Committee on Transportation and Infrastructure and an opponent of PPPs, has proposed the Surface Transportation Authorization Act of 2009, which would overhaul federal transportation programs and compromise the ability to use PPPs for highway projects in the US. The vote on the Surface Transportation Authorization Act of 2009 has been deferred until the end of 2010. In the interim, in March 2010, President Obama signed into law the $17.6 billion HIRE Act, which contains language extending SAFETEA-LU through the end of 2010.
In addition to the various programs available under SAFETEA-LU, the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) authorised the US Department of Transportation to assist in financing up to 33% of the cost of transportation infrastructure projects, including PPPs, with a value of at least $50 million. The Transportation Infrastructure Finance and Innovation Act of 2009, introduced in the US House of Representatives in June 2009, could increase the maximum loan amount for certain transportation infrastructure projects from 33% to 49% of the cost of the related project.
Federal – aviation
In the airport sector, the PPP debate arises in the context of the necessary reauthorisation of the Federal Aviation Administration (FAA), including its airport privatisation pilot program. The US House of Representatives passed its version of the FAA Reauthorization Act in 2009 (FAARA), and that bill is now in the US Senate. The House bill, which was also proposed by Representative Oberstar, contains two significant changes to the airport privatisation pilot program that would adversely affect prospects for privatisation of US airports. First, the bill would increase from 65% to 75% the percentage of airlines using an airport that must approve its privatisation. Second, the privatised airport would not be entitled to some of the discretionary funds available to other airports. As the House and Senate continue to prepare an agreed-upon version of FAARA, the latest FAA authorisation has been extended until 30 September 2010.
American Recovery and Reinvestment Act of 2009
The $787 billion American Recovery and Reinvestment Act of 2009 (ARRA), passed in February 2009, includes over $48 billion for shovel-ready US transportation projects. While these projects are generally not suited to procurement as PPPs, the availability of such funds to state and local governments may have contributed to the recent lull in PPP activity in US transportation infrastructure.
Recent US transportation infrastructure PPP projects
California
In May 2010, the California Transportation Commission (CTC) approved the use of a PPP to procure the Presidio Parkway, a $1.045 billion project that will refashion the south access to the Golden Gate Bridge in San Francisco. The California Department of Transportation (Caltrans) subsequently issued a draft RFP, which indicated that Caltrans will apply for up to $500 million in PABs and request $309 million in TIFIA financing. This would be the first PPP project under California’s new PPP-enabling legislation. In February 2010, the Los Angeles County Metropolitan Transportation Authority agreed to launch strategic studies of six PPP projects that would re-develop the area’s highways and public transportation. Although California’s PPP efforts encountered a slight setback in August 2010, when the California Public Infrastructure Advisory Commission determined to procure the $1.1 billion Gerald Desmond Bridge project as a design-build project rather than a PPP as originally anticipated, the PPP movement remains strong in California.
Colorado
In June 2010, the Denver Regional Transportation District (RTD) selected a consortium to design, build, finance, operate and maintain the $2.1 billion PPP portion of the $6.5 billion FasTracks commuter rail development project that includes a train to Denver International Airport. On 12 August 2010, the initial $1.6 billion phase of the project achieved financial close with a financing package that included roughly $400 million in PABs and $52.3 million of sponsor equity, in addition to roughly $1.15 billion in progress payments to be provided by the RTD.
Florida
In February 2010, ground was broken on the I-595 express lanes PPP project in Broward Country, Florida. The US Department of Transportation provided $603 million in TIFIA financing in March 2009 toward the total project cost of $1.8 billion. The Florida Department of Transportation will use federal funds and toll revenues to make payments to the private operator under a 35-year design-build-finance-operate-maintain concession. In October, 2009, the Port of Miami Tunnel PPP project reached financial close. The financing for the project consisted of a $340 million TIFIA loan, $340 million of senior debt from a syndicate of ten banks, and $80 million of sponsor equity. The city of Miami also provided a $50 million letter of credit to backstop its obligations.
Georgia
Georgia passed PPP-enabling legislation in 2009 that allowed the Georgia Department of Transportation (GDOT) to establish a PPP program using solicited bids. In June 2010, GDOT short-listed three consortiums to bid on the West by Northwest project, which includes a 50-year concession to design, build, finance, operate and maintain a managed lane system on segments of I-75 and I-575, as well as the addition of managed lanes to portions of I-285 and I-20. GDOT, which has estimated the aggregate cost of the project at over $2.3 billion, originally expected to issue the RFP in late 2010 but has extended the timeline of the RFP process to allow the short-listed bidders more time to study the draft RFP, and the RFP is now expected in January 2011. GDOT is currently considering eighteen separate projects that could be valued at over $16 billion.
New Jersey/New York
The Port Authority of New York and New Jersey (the Port Authority) issued a request for information in May 2010 for a 30- to 40-year concession to design, build, finance and maintain a replacement to the Goethals Bridge. Operations, including toll collection, will remain under the Port Authority’s control. It has been reported that the Port Authority expects to issue an RFQ in August 2010 and to select the winning bid by late 2011. It has also been reported that the Port Authority is looking to lease the Outerbridge Crossing and the Bayonne Bridge, which also connect New Jersey to Staten Island.
Puerto Rico
The Puerto Rico Public-Private Partnerships Authority (PRPPPA), which was established in 2009 to launch infrastructure PPPs, has started its first PPP process. In June 2010, the PRPPPA issued a RFQ for a 50-year concession to finance, operate and maintain the PR-22 and PR-5 toll roads, and by late July 2010, eight consortiums had responded to the RFQ. The 84km PR-22 is the most traveled highway on the island and generated $85 million in revenues in 2009. PR-5 is located in the San Juan metropolitan area and generated $4.2 million of revenues in 2009.
Puerto Rico also plans to seek a private partner for the financing, operating and maintenance of the existing PR-52, PR-20, PR-66 and PR-53 toll roads. While the PRPPPA has the authority to form committees that can issue RFQs and negotiate contracts for infrastructure projects, final decisions rest with the governor of the island.
Texas
The 52-year concession to design, build, finance, operate and maintain a managed lane system along I-635/LBJ Freeway reached financial close in June 2010. The $2.7 billion financing included $615 million in PABs, a $496 million loan from the Texas Department of Transportation (TxDOT), $665 million of sponsors’ equity and a $850 million TIFIA loan – the second-largest loan in the history of the TIFIA programme. The $2 billion North Tarrant Expressway project, which reached financial close in December 2009, was financed with a combination of PABs, a TxDOT contribution, sponsors’ equity and a TIFIA loan.
Virginia
On 5 May 2010, the Virginia Department of Transportation (VDOT) solicited proposals for the 89km greenfield US Route 460 toll road project, which VDOT is procuring as a PPP under the Public-Private Transportation Act of 1995. The project is estimated to cost roughly $1.5-2 billion and, initially, no state or federal funding was expected to be available to finance the project. However, VDOT has acknowledged a potentially significant gap in toll revenues and debt service and supplemented the solicitation for proposals with an addendum that provided for a public subsidy. Conceptual proposals are now due in early September 2010 and the detailed RFP is expected in January 2011.
Airports
After collapsing in 2009, the privatisation of Midway Airport may move forward. The FAA has granted the city of Chicago’s latest request to extend its inclusion within the pilot privatisation programme, which permits the privatisation of five airports, and the city of Chicago now has until November to submit its plans and timetable for privatising the Airport. As a large hub airport, Midway occupies the sole slot available for such airports under the pilot programme.
The FAA has also accepted preliminary applications to privatise three non-hub airports, thereby allowing the airports to seek a private partner before submitting a final application to the FAA. In September 2009, the FAA accepted New Orleans’s Louis Armstrong Airport’s application. In December 2009, Puerto Rico’s Luis Muñoz Marín Airport was selected as the third airport. Finally, in May 2010, the FAA accepted the application from Georgia’s Gwinnett County Airport, leaving one last non-hub slot available. The RFQ for the Gwinnett County Airport project was issued in July 2010 and three consortiums responded; the RFP is expected in October 2010.
Conclusion
In order for PPPs to flourish, PPP-enabling legislation must be effective, workable and compatible with private sector concerns and objectives. Reliance on the private sector for transportation facilities long-provided by governmental authorities may seem a risky proposition at first. However, dire economic conditions and the escalating need for reliable transportation facilities may well allow PPPs to establish a prominent role in the development of transportation infrastructure facilities in the US.