July | August 2014

 

 

 


States Take Their Time with Public-Private Partnerships

By Sean Slone, CSG Senior Transportation Policy Analyst
Despite the nation’s crumbling infrastructure, dwindling transportation revenues and a ready and willing private infrastructure investment industry, state governments are proceeding at their own pace when it comes to entering into public-private partnerships—also known as P3s—to finance transportation projects.
That was the broad picture presented at the seventh annual InfraAmericas U.S. P3 Infrastructure Forum held in New York City June 14-15. The Council of State Governments was a supporting organization for the conference, which brought together state and federal transportation officials and representatives of global investment firms to discuss the status of and outlook for P3s.

Virginia, Puerto Rico Move Ahead

Virginia is taking steps to greatly expand its P3 program.
“In the last few years for a host of reasons, the program has not been as aggressive and as welcoming as it had been in the past,” Virginia Transportation Secretary Sean Connaughton said. The state has made, and continues to make, changes to the program. “We are trying to welcome as much P3 activity as possible. It’s good business for us.”
Those changes include the establishment of an independent office of transportation P3s focusing solely on P3s; that office opened in June and will focus on the development of projects across all modes of transportation. The state has committed $1.5 billion to the P3 program over the next three years. Connaughton said the state also has standardized processes and procedures so it doesn’t have to reinvent the wheel for each new P3 deal.
The renewed focus was made necessary not just by Virginia’s growing infrastructure needs, but also by governmental structural realities.
The state is required to have a balanced budget each year.
“And also, it’s a long tradition in Virginia that we have very low debt-to-expenditure ratios, which makes the state have to look for innovation,” said Connaughton, the incoming vice chair of CSG’s Transportation Policy Task Force. “It makes the state have to look out—particularly to the private sector—to find ways that we can deliver essential services and capital infrastructure at the lowest possible cost to the state and to the taxpayers and to the businesses of Virginia.”
Connaughton believes Virginia’s renewed focus on P3s will pay huge dividends for the state.
“Some of the major P3 projects that we’ve identified … will be bringing almost $4 billion worth of additional economic activity in the state per year,” he said. “And we’ve been able to show our legislators and our citizens this is why P3s make sense and why we need to continue to find ways to attract P3 partners into the commonwealth.”
International toll road developer and investor Transurban North America is already involved in three infrastructure projects in Virginia, including the construction of high occupancy toll lanes on the Capital Beltway (I-495) around Washington, D.C. Michael Kulper, the company’s president, told conference attendees the bipartisan political support for the P3 program and a dedication to delivering transportation services to the travelling public attracted Transurban to Virginia. He believes the creation of the new independent P3 office will only make Virginia more attractive to private investors.
“That’s about institutionalizing an approach to P3s that allows them to happen better, quicker, faster and delivers the outcomes to the community in a timely manner and I think it’s quite inspirational, it’s quite admirable,” he said.
Puerto Rico has taken that level of institutionalization to the next level, entering into an agreement in 2009 to have investment firm Macquarie Capital consult on development of the territory’s entire P3 program.
“What Puerto Rico did is said ‘Listen, public-private partnerships are going to be part and parcel of our government-reform package,’” said Macquarie Managing Director D.J. Gribbin. “(Puerto Rico has said) ‘What we want to do is we want to develop infrastructure and provide it to the public in a manner that’s cheaper, that’s more cost effective and that’s a higher quality, so we’re going to incorporate P3s just as what we do as part of our business.’ And in fact (Macquarie has) been spending a fair amount of time trying to talk other states into doing a similar model.”
Gribbin said it’s no longer enough for states simply to have legislation on the books that allows them to enter into P3s as 31 states now do. They also need the governmental infrastructure and expertise that allows them to execute P3 transactions.

Some States Move Cautiously

But not every state is likely to follow the lead of Virginia and Puerto Rico in moving quickly to attract private dollars to infrastructure projects. New York, for example, plans to take a more cautious approach. Procurement laws prohibit the state from entering into P3s, but state officials hope the legislature will soon consider changing the law and establishing a framework for a P3 program.
“We are like nearly every other state—heavily in debt,” said the state’s First Deputy Comptroller Pete Grannis. “We have identified infrastructure needs that may exceed $250 billion over the next 20 years. … We have a huge backlog and it’s a big problem … and we don’t have the resources to pay for it. So the opportunities presented by P3s, I think, are extraordinarily positive if they’re done the right way.”
But there’s the rub, Grannis said. Doing deals the right way means states must ensure the value of public transportation assets is not underestimated, the public will not be burdened with excessive toll and fee increases that may result from P3 deals, P3 agreements don’t promise unrealistic goals and that the agreements aren’t used simply for short-term fiscal relief, pushing actual costs to the future and increasing public debt.
“We just caution that they be done properly because a few of these that go awry in the beginning, I think will doom this effort for the future,” he said.
Texas also is taking a more measured approach. Following a period of aggressive pursuit of P3s, Texas enacted a partial moratorium on new P3 toll road projects in 2007. Lawmakers recently approved legislation to reinstate the state department of transportation’s ability to enter into long-term toll concessions, which are known in Texas as Comprehensive Development Agreements. But the authority is only for about a dozen identified projects and that authority will sunset in August 2015.
“Turned out that doing nothing was more scary than doing something,” said Mike Krusee, a former member of the Texas House of Representatives, who authored the state’s original 2003 P3 authorizing legislation. “The Texas legislature has come back despite all the political fears and passed a new bill. The new bill sets up a new framework … that’s not the wild west of before.”
The new framework includes issuing requests for information from the private sector before the state transportation department meets with local stakeholders to decide how to move forward with financing a particular project. The department issued requests for information on the first two road projects in June.

P3s Gaining Support?

Despite all the activity in states to define the parameters of P3 programs, many investors at the New York conference expressed some disbelief that private infrastructure investment is not further along in the U.S.
“To a certain extent, the U.S. market, I’d say, is a bit of a head-scratcher, particularly for our partners in Europe and Asia,” said John Veech, a managing director at Morgan Stanley Infrastructure Partners. “Because if you look at the fundamental dynamics, … there are enormous (infrastructure) needs. The budgetary constraints on state and local governments are unprecedented. And at the same time, there is a ton of capital that wants to invest in this sector. There are funds like us all around the world. There’s a ton of capital that would come in literally at a moment’s notice.”
Still, Veech remains optimistic that the stage may be set for increased volume in P3s in this country in the near future.
One thing that may help gain P3s support is the success of existing projects such as the 2006 deal to have a private firm operate and maintain the Indiana Toll Road for 75 years. The deal netted the state $3.8 billion to put toward 400 transportation projects, which in turn created more than 60,000 jobs.
Many believe it will take demonstrating those kinds of tangible benefits to convince average Americans and their elected officials that privatization of public assets is the way to go.
“You’ve got to bring the people with you,” said Macquarie’s Gribbin. “At the end of the day … I think one of the major feelings in this industry is that we really have not done a particularly good job of explaining to the public why these transactions are in their interest. Puerto Rico is running newspaper ads and radio ads talking about the value of public-private partnerships. I’ve never seen that before. … It’s a brand new concept and they’re actively selling the public on it.”
Grannis said he has witnessed firsthand the limited understanding among legislators and the general public about the risks involved in P3s and the complicated nature of these agreements.
“There’s a real need for education even to get to the point where you talk about whether there’s a trade-off between a public-private partnership and a continuation of using state debt to pay for these very much needed projects,” he said.
Fortunately, Gribbin points out, many states have already established a track record with P3s that can contribute to the education of both the public and public officials.
“Ten years ago, our big cry was we just need a project that really works so we can show everybody the value of this procurement method and then it will all be good,” he said. “Well, (now) we’ve got all that, so I think we’re in a significantly better position than we were in the past. But for some reason, … this industry has never quite gelled. I think the resources are there, the case studies and the good stories are there, the audience is receptive. It’s just a matter of connecting all of that.”

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