CHICAGO — The U.S. market for public-private partnerships remains small and fragmented, marred by hurdles like clashing legislation and political controversy, in contrast to Canada and Europe, panelists said at The Bond Buyer’s Transportation/P3 Conference here.
After a slow 2011, market participants said the national P3 sector faces a crucial juncture, as more states assemble advisory teams to identify alternative capital sources to offset shrinking public funds as observers watch the outcome of projects that are in the pipeline.
“After many, many years of working in this group, I’m amazed still that the U.S. is so slow and so intermediate and episodic in its approach to P3s,” said Chee Mee Hu, managing director at Moody’s Investors Service.
“All of the ingredients in the U.S. are fully developed and ready,” she said, citing a supportive legal system for contracts, strong government credits, and a growing demand for services, among others. “Yet there is still this reluctance to develop an ongoing and dependable market.”
Canada and Europe, in contrast, have established strong and efficient markets for P3 projects. Part of the problem here is politics, particularly where public employees are involved, as well as debate over the best deal structure, a lack of enabling state and federal legislations, and bad press surrounding many of the brownfield projects that have dominated the sector for the last 10 years.
“In the U.S., it’s more grassroots,” said Edward Fanter, a director at BMO Capital Markets who works on Canadian P3s. “There are multiple layers of government involved all the time, and some resistance in general to bend the public funding model.”
The current European bank eurozone crisis also hampers the sector, since European banks traditionally have financed many of the projects while U.S. banks tend to shy away from long-term loans, participants said.
“It’s an unprecedented time right now, and a lot of the players that have dominated the business are going through some very serious difficulties,” said Ray DiPrinzio, senior vice president and team leader of infrastructure project finance at Sumitomo Mitsui Banking Corp., a top Japanese bank heavily involved in the P3 sector.
Despite their problems, banks that are invested in the sector are unlikely to just abandon it, DiPrinzio added. “This is a core platform that many European banks have built their U.S. corporate finance operations on, so they will be very reluctant to just walk away.”
Meanwhile, a pair of contrasting bills pending in the U.S. Senate, both introduced by lawmakers from Illinois, could push the nascent sector in different directions, panelists said.
Democratic Sen. Dick Durbin last June introduced legislation he said would help protect taxpayer money in privatization deals by requiring public input before municipal assets such as roads or parking lots could be sold.
Two days later, Republican Sen. Mark Kirk unveiled his Lincoln Legacy bill, which would work to promote P3s for transportation projects by lifting federal restrictions on tapping private financing for airports, highways and railroads. The bills show the differing philosophical approaches to public-private partnerships in the United States, panelists said.
“The private sector is really looking to understand what the rules of the game are,” said Jason Radford, a partner at Ashurst LLP. “The difficulty is where the rules aren’t well-defined and there isn’t that transparency.”
It has been a slow year for the P3 sector, but the future looks brighter, some experts said. Many states, like Ohio, have already assembled advisory teams or are in the midst of assembling them, which is an important step, according to John Dionisio, corporate and finance manager and investment director at Meridiam Infrastructure, an investor in greenfield projects.
“If the state or municipality has hired a competent set of advisors, that’s very, very important and key to our involvement and lenders’ involvement,” he said.
A secondary trading market is also starting to develop again after many years, according to DiPrinzio. JPMorgan, for example, has started to assemble a team to trade P3 finance loans, and other banks have put out lists of projects in their portfolio to get some “recycling of their credit and free up balance-sheet capacity,” he said.
Both investors and governments will be watching the P3 projects that are on the table in the United States, panelists said.
“The next couple years are going to be very telling to see how these projects are going to come out,” said Mary Francoeur, managing director of public finance and utilities for the Americas at Assured Guaranty Corp. “Performance will be an important driver of how far lenders and sponsors are willing to go.”
