P3s on the rise despite complexities
4 min read
© Gittings Photography
As funding from the Bipartisan Infrastructure Law dwindles away and Congress is locked up over budget disputes, many states are looking at public private partnerships playing a bigger role in funding infrastructure projects.
“You’re starting to see over the last decade, states really focusing in on this,” said Joe Saverino, a partner at Chapman and Cutler. “As that grows, then you start getting the hybrid models and infrastructure as a service, energy as a service, etc.”
“They start spinning off the general P3 once people have that baseline knowledge.”
P3 spinoffs include a spectrum of models ranging from “operate and maintain contracts” to total privatization of assets. But the path to success is not always easy.
Maryland’s troubled Purple Line light rail project is a partnership between the state’s Department of Transportation, the Maryland Transit Agency and the Purple Line Transit Partners.
PLTP is responsible for designing, constructing, operating, maintaining and partially financing the project while the MTA retains ownership.
The 16-mile, 21-station light rail project has been under construction for over ten years and is now 80% complete. It’s scheduled to come online in 2027 with costs estimated to be $4 billion over the original budget.
Maryland has also approved a progressive design-build P3 model for rebuilding the Francis Scott Key Bridge, a deal that has attracted negative
Georgia set up a P3 to expedite the construction of 16-miles of tolled express lanes on State Route 400, that connects Fulton and Forsyth County.
The state originally planned on adding the lanes via an “availability payment,” model in which the public sector pays a private partner for the availability and performance of a facility, rather than the private partner collecting tolls.
Instead, the state landed a record-breaking $3.38 billion Transportation Infrastructure Finance and Innovation Act loan combined with a $3.2 billion private activity bond sale to fund the $11 billion “design-build-finance-operate-maintain” deal.
“We first tried to procure it as an availability payment model,” said Helen Pinkston-Pope, the P3 Commercial Advisory Administrator for the Georgia Department of Transportation “I can look back now and say the risk allocation were misallocated. We went through a very lengthy procurement, and the procurement was not successful.”
The DOT went back to the drawing board and recalculated using a DBFOM formula which increases its risk while reducing the costs.
“We went from a project we couldn’t afford to turning it around,” said Pinkston-Pope. “The project is bigger than it would have been before, and we think it’s going to serve the public better.”
It’s estimated the 56-year concession will send $4.05 billion in upfront fees into the State Road and Tollway Authority.
The Virginia Department of Transportation is currently studying P3 models to add express toll lanes to eleven miles of Route 495 which connects to Maryland via the Woodrow Wilson Bridge.
Georgia chose DBFOM partially because it was looking for technological innovation to make the system preform as promised.
The legal matters or making a P3 work can be smoothed out by setting up the proper milestones.
“Having appropriate Key Performance Indicators that are achievable is an important aspect of these transactions,” said Saverino. “If either side comes to the table with unrealistic expectation, that’s typically where the negotiation will bog down.”
Having insurance coverage for all the partners and deciding who is responsible for cost overruns caused by tariffs are potential trouble spots.
The lack for credit ratings on securities sold to private investors can also be an issue. “When you’re talking about 4A2 private placements and taxable debt, a lot of times, those deals aren’t rated,” said Saverino.
“You may get better cost-of-capital execution in a publicly offered situation, but you need to build in a realistic timeline to get there.”
Despite the complexity and the possibility of deals heading south, P3s appear to be on the upswing.
“I think large parts of the transportation infrastructure industry have been somewhat spoiled given the availability of federal money and of PABs allocations,” said Nicholas Vallorano, partner at Mayer Brown.
“Next year, the Surface Transportation reauthorization is going to happen. What does that mean for PABs allocation, and does federal money continue to be as available as it’s been in the last few years? There’s a high potential that the capital stack will need to get increasingly creative and complex to fund these projects.”
