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California P3 Still Has Skeptics

MAY 27, 2010 7:06pm ET
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LOS ANGELES — The first public-private partnership project under a program championed by California Gov. Arnold Schwarzenegger recently cleared a major procedural hurdle, though questions remain over whether the Presidio Parkway project is the right way to use P3s.

Last Thursday, the California Transportation Commission approved a P3 project designed to reconstruct one of the major approaches to the Golden Gate Bridge.

But the CTC, an autonomous board that programs and ­allocates state transportation funds, approved the project on a narrow 6-to-5 vote that overturned its staff’s recommendation to reject it.

The key sticking point was the project’s use of availability payments over 30 years as its key financing tool for the Presidio Parkway project, which will not be tolled.

With availability payments, the private concessionaire receives periodic payments over time as long as the facility is open to traffic and maintained to a standard specified in the contract. There is no toll or traffic risk for the concessionaire.

By committing future state highway funds, the Presidio Parkway project financing plan simply reduces the resources available for other projects, the CTC staff report said.

“Approval of this project by the commission would effectively establish and endorse a means of committing state transportation funds to capital projects that bypasses state programming procedures designed to ensure statewide funding accountability and equity,” the report said.

The discussion continued here Tuesday, when the state’s Public Infrastructure Advisory Commission held a morning meeting followed by an industry forum designed to encourage development of the other projects in the state’s P3 pipeline.

The Presidio Parkway project would be the first project financed under legislation approved by state lawmakers in 2009, with the governor’s strong support, to facilitate greater use of P3 financing.

The CTC staff report noted that three different legal opinions had been prepared to ask if the Presidio Parkway’s availability payment plan is legal — the state’s Legislative Counsel and the CTC’s attorneys said no, while the Transportation Department’s attorneys said yes.

“I’m a little bit concerned about the potential for litigation,” said PIAC member John Hummer. “It seems to me that there’s an interpretation that this should be a toll road and that therefore the availability payments on this are not sufficient or not legal.”

Jose Luis Moscovich, executive director of the San Francisco County Transportation Agency, replied that the state’s P3 legislation was never meant to mean toll roads only.

The point of using the P3 procurement on Presidio Parkway is to off-load the risk of cost overruns and ensure there is proper maintenance of the new facility over time, Moscovich said.

The new 1.5-mile parkway will replace Doyle Drive, a mostly elevated roadway that dates to the 1937 opening of the Golden Gate Bridge.

The state is planning to award the “design-build-finance-operate-maintain” contract by the end of the summer, according to Kome Ajise, Caltran’s P3 program manager. “We are teed up now with commission approval to begin procurement,” he said.

Guidelines for the procurement call for the developer to be paid a $173.4 million milestone payment at the end of construction, with availability payments estimated by Caltrans to be between $1.13 billion and $1.38 billion in year-of-expenditure dollars over 30 years.

Legal merits aside, policy questions about the use of availability payments ­remain.

“One thing this commission can contribute is the broader question of how availability payments transactions fit into our broader program,” said Dale Bonner, secretary of the state’s Business, Transportation and Housing Agency.

Bonner is the Schwarzenegger administration’s point man for P3s, a role in evidence Tuesday afternoon at PIAC’s Public Infrastructure Financing Forum, which drew a mix of potential public and private partners.

“We brought together in the room what he hope will be many of your future customers,” Bonner said.

He tried to steer discussions to a framework of what can be done to encourage private investment.

Some of the private-sector participants said that people’s mindsets need to change — that the private sector needs to be engaged early in project development, rather than coming in toward the end of the process and then looking for money.

“Allow us to come into the room at an early stage and I don’t think you’ll be disappointed,” said Peter Luchetti, managing partner at Table Rock Capital.

“There is a market there to finance these projects,” said Carlos Ugarte, head of U.S. business development for Cintra.

The public, and the public sector, often misunderstand the goals of potential private partners, Ugarte said, adding that Cintra is not in it for a quick buck.

“We are here on 50-, 75-, and 99-year contracts in which we are not going to see returns for 25 years,” he said. “This is a marriage without a divorce court.”

The well-publicized bankruptcy this year of California’s only existing P3 highway, the Macquarie Group’s State Route 125 toll road in San Diego County, is actually a positive example of risk transfer, according to panelist Richard Little, a PIAC member and director of the Keston Institute for Public Finance and Infrastructure Policy at the University of Southern California.

“The people who are taking it in the shorts are the private sector. The public sector still has a road,” Little said.

“That’s a classic example,” Bonner said. “It’s a great facility that would still be on the drawing board today if it wasn’t financed the way it was.”

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