First the schools, then the roads, and now the airport. In the past two years, Puerto Rico has tackled more public-private partnership projects than most governments in the United States.
Puerto Rico’s flurry of public-private partnerships, or P3s, comes at a time when U.S. infrastructure needs are enormous and economic growth is lagging.
Supporters say P3s — agreements between a public agency and a private entity to complete infrastructure projects — can serve as a cost-saving way for governments to address infrastructure needs, and there is certainly interest among private investors. Still, the trend has been slow to catch on in the U.S.
Raj Agrawal, member and head of infrastructure at Kohlberg Kravis Roberts, a global investment firm, said P3s are an attractive investment that he would like to see more of.
“From an infrastructure fund perspective, it’s a low-risk way to get capital to work,” he said last week at Bloomberg’s State & Municipal Finance Conference.
“And from the municipality [perspective] it’s really a win-win because it’s a way to get capital upfront for reinvestment into the municipality or to the state and to enforce these operating standards, and to bring the efficiency, speed, and reliability to the public,” Agrawal said, pointing to Puerto Rico’s P3s as successful examples.
In December 2010, the Puerto Rico Public-Private Partnerships Authority began its first project, called Schools for the 21st Century, which aims to provide greatly needed renovations to 100 schools. Less than two years later, the agency has procured all 100 schools, and has operations underway in more than 60.
“One of the beauties of the P3 is that it allows you to accelerate investment, it allows you to accelerate all the actual works that happen — the construction, maintenance and design — and the Schools for the 21st Century has been a clear example for that,” said David Álvarez, head of Puerto Rico’s P3 authority. He added that they plan to do a second round of another 100 schools.
Last year, Puerto Rico received an upfront payment of $1.436 billion in private investments to upgrade two of the island’s major toll roads.
Autopistas Metropolitanas de Puerto Rico LLC — a consortium between Goldman Sachs Infrastructure Partners II LP and Abertis Infraestructuras — will finance, repair, operate and maintain the roads over the next 40 years.
In its most recent project, Puerto Rico is on track to complete the first U.S. airport P3 by the end of the year. Under the agreement, Aerostar Airport Holdings LLC will make significant investments to improve San Juan’s Luis Munoz Marin International Airport — the Caribbean’s busiest — over a 40-year period.
In both the road and airport P3s, the government agencies in charge, the Puerto Rico Highways and Transportation Authority and the Puerto Rico Ports Authority, will continue to receive a portion of revenues.
Looking ahead, the authority is working on a P3 to develop a juvenile social-treatment campus complex.
Juan Carlos Batlle, president of the Government Development Bank of Puerto Rico, which works closely with the P3 authority, said that based on feedback from industry participants, Puerto Rico’s P3s have so far been successful.
Two of the reasons for success are “having a legal framework from which to work and having a dedicated authority that’s 100% of the time focused on getting the transaction done,” Batlle said in an interview.
Puerto Rico’s legal framework is established in its P3 Act, signed by Gov. Luis Fortuño in 2009 when the commonwealth was facing fiscal strains and little to nonexistent capacity to make infrastructure investments. The act set up specific public policy rules and established the P3 authority.
In addition to the basic legal framework, successful P3s should also establish framework that is specific to each transaction, participants said.
“We have a lot of concern from people saying — talking about the toll roads, for example — well what’s going to happen with toll fees? So you have to make sure that you establish a very specific rate regime going through the life of the project,” Batlle said.
With the toll roads, they set specific rates and allowances for hikes. Tolls cannot increase until 2014, when any increase must be justified by the increase in the cost of the project’s life.
Other terms set from the beginning include an agreed amount invested into certain areas of the toll roads and specific maintenance time frames.
“The biggest hurdles that we found is that people just don’t understand,” Batlle said, noting that people are often opposed to the government selling its assets.
“We’re not selling the asset forever and we’ll get the asset back, which will most likely be in better shape,” Batlle said.
Communicating to everyone involved is important in establishing a successful P3, as well as maintaining transparency and disclosure, Batlle said. The P3 authority posts any documents related to the projects on its website.
Outside Puerto Rico, public-private partnerhips remain uncommon in the U.S..
According to the Federal Highway Administration, there are about 40 current or anticipated P3 transportation projects in the U.S.
That number includes design-build projects, which can be considered P3s in the most loose sense of the term.
When involving the private sector in developing infrastructure, there are varying amounts of private-sector involvement and control, from traditional public procurement on one end to complete privatization on the other.
P3 projects fall between traditional procurement and complete privatization. A design-build structure has the lowest degree of private sector involvement, designing and building projects for a fixed price but typically using traditional public financing.
Other structures might include any combination of the private sector financing, operating, maintaining, designing, and building the project.
Puerto Rico’s toll roads and airport P3s have a higher degree of private sector involvement as they are long-term leases. The only other long-term leases in the U.S., according to the FHWA, are the Chicago Skyway and the Indiana Toll Road.
One of the reasons for a lack of P3s in the U.S. is poor communication about how these deals work, according to Agrawal.
“I think we, as investors, as well as governments haven’t done a great job in communicating that P3s are not a zero-sum game. There’s a lot of value that’s created if executed and done well,” Agrawal said.
He said that, according to a study done by the Council of State Legislators, there could be as much as 40% in cost savings over the lifetime of a P3.
The challenge, Agrawal said, is that the market for P3s is relatively new in the U.S., while in other countries, they are very well established. In Europe, for example, there have been 1,400 P3s in the last 20 years.
“In the U.S. it’s been very sporadic. We’ve seen it been done very successfully — what [Batlle] has done — and we’ve seen it been done very unsuccessfully,” he said. “When you do 1,400 over 20 years, you get to a pattern and recognition and the public gets comfortable with it.”
In Canada, over 100 P3 projects have been completed or are under construction since the 1990s, according to the Canadian Council for Public-Private Partnerships. The United Kingdom, according to data compiled by its Treasury, has 717 projects under its private finance initiative, a program started in 1992.
Puerto Rico has looked to successful P3 projects in other countries — like Canada’s Sea-to-Sky Highway in British Columbia — as models for its own projects.
“We do not want to deliver a toll road with a structure that has not been applied around the world. You need to apply what has worked,” Álvarez said.
Some reasons for why most U.S. governments have not pursued P3s are because they add complexities and they also mean giving up revenues, according to Rob Williams, director of income planning for the Schwab Center for Financial Research.
“Governments in the U.S. are more used to providing those services on their own, especially in mature communities, so — other than operating an existing facility — there may not be as much incentive to turn over that responsibility,” Williams said.
Fewer than half of the states in the U.S. have enacted legislation that enables the use of various P3 approaches. Pennsylvania’s Gov. Tom Corbett most recently signed a bill establishing framework for P3s in July.
Maine, Vermont, New Hampshire, New York and New Jersey are some of the states that have not enacted legislation.
“If we see a continuation of a very problematic or difficult economy, you may see more governments going to some sort of P3 to try to reduce costs and as a one-time means of supporting revenue,” Williams said.
For any governments looking into P3 programs, Batlle’s advice is: don’t start with a complex project or something too big to handle.
“Start small, but think big,” he said. “When you start getting investor confidence and market confidence, then you can build your program out.”