P3 Marketplace Maturing as Transportation Funding Option

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DALLAS — Inaction at the federal level on long-term transportation infrastructure spending in 2015 will provide fertile soil for a growing public-private partnership sector as states and local governments look for new ways to fund, build, and operate complex projects.

Slideshow: 2015 Outlook: P3 Sector

"Congress is doing its part to help promote transportation P3s by doing nothing, by not dealing with infrastructure funding," said Jonathon Gifford, director of the Center for Transportation Public-Private Partnership Policy at George Mason University in Arlington, Va.

"There's a lot of uncertainty that the states have about federal highway and transit funding," Gifford said. "The attractiveness of P3s is that they are a way states can access private investors to make projects happen."

Gifford said Congress could accelerate the growth in P3s in 2015 by increasing funding for federal loans and credit support programs used in partnership financing. The P3 market would also benefit from an increase in transportation-dedicated private-activity bonds to $19 billion from the current $15 billion cap as proposed by President Obama in 2014, he said.

"The credit enhancements from the Transportation Infrastructure Finance and Investment Act and the low interest rates from tax-exempt bonds pay an important role in almost every P3 project," Gifford said.

Most transportation P3 projects in the U.S. are concentrated in just a few states even through 35 states have some sort of P3 legislation in effect, he said.

"P3s are looking attractive to a lot of states but there are barriers to entry into that market," Gifford said. "The projects have to be attractive to private investors looking for a return on their investment, and the political climate needs to be friendly."

Private partners want a steady supply of projects in the P3 pipeline because they want to spread their investments to reduce the risk, he said. With a limited supply of proposed projects in the U.S., Gifford said, international investors may not be as interested.

"I don't think we'll see a dramatic change in the U.S. P3 market in 2015," he said. "We might see more P3s expanding into other applications, such as government buildings. Money is not just tight for transportation, it's tight for other government functions.

Gifford said most transportation projects will be funded through taxes, bond proceeds and other revenues even if P3 funding for transportation projects reaches the levels seen in Europe.

The Congressional Budget Office said in 2014 that highway P3s accounted for only $61 billion, or about 1.5% of $4 trillion of total spending, for road projects between 1989 and 2013. But more than half of that $61 billion was committed in just the last five years, CBO said.

House Panel

A special panel of the House Transportation and Infrastructure Committee that studied P3s as an alternative funding method issued a report in 2014 projecting that private investments could eventually provide up to 15% of infrastructure spending in the U.S., or about the same as Europe's more developed P3 market.

"Even if we reach the levels in the P3 panel report we'd still have to fund the remaining 85% through traditional methods," Gifford said.

"P3s are not a panacea for our funding ills," he said. "They can provide real benefits, but P3s will never be able to do it all."

Availability payments, with a concessionaire receiving regular payments for operating and keeping systems in good condition rather than collecting toll revenues, could expand the P3 market to more transit projects, Gifford said.

"Fare box revenues haven't kept up with operating expenses for the last hundred years and certainly not since World War II," he said. "The availability payment model is going to be more widely adopted, but there's still a ceiling on those if politicians are reluctant to raise taxes."

P3s will become increasingly important as more states gain experience with them, said Tim Heilmeier, a vice president with HTNB Corp.

"I'm generally positive about the expansion of the P3 market in 2015," he said. "States and local governments are getting more comfortable with the process, and more states now have P3s laws."

State transportation departments are hampered by the lack of a guarantee for long-term federal funding and congressional regular brinksmanship that leaves the Highway Trust Fund teetering on the edge of insolvency every few months, Heilmeier said.

"Large, expensive projects need some sense of financial security as they move from planning to construction and operation," he said. "If that isn't going to come from Washington, it'll have to come from the private sector."

The P3 market in the U.S. is still evolving, Heilmeier said.

"There have been some mistakes, and we're learning what works and what doesn't work," he said. "Some of the lessons have been learned the hard way.

"A P3 is not the perfect fit for every project but it can deliver a project more economically and efficiently when it is," Heilmeier said.

Congressional expansion of tolling to currently free lanes on existing interstate highways probably won't happen in 2015, but it will happen eventually, Heilmeier said. Current federal law prohibits states from levying tolls on existing interstates unless new lanes are added to reduce congestions.

"Removing the current restrictions would open up a revenue opportunity to fix our interstate highways that are basically worn out after 50 years of service," he said.

"Interstate tolling would be a game changer," Heilmeier said. "The time might not be right in 2015, but it will be sooner or later."

P3 Model

The P3-delivered managed lanes on I-95 that opened in mid-December and those on I-495 that have been in service since 2012 offer other states a model for highway funding, said Doug Koelemay, director of the Virginia Office of Transportation Public-Private Partnerships.

"Those roads were significantly congested, and the new tolled lanes really brought some relief," Koelemay said. "When the consumers see a benefit, they are more willing to pay for it."

Virginia is in the middle of a 17-month study period for a possible $3 billion P3 to reduce congestion on I-66 south of Washington, Koelemay said.

The work could include 25 miles of tolled express lanes, he said.

The state expects to complete environmental studies and identify funding for the I-66 project by the end of 2016.

The Virginia General Assembly, which passed the state's transportation partnership law in 1995, may be asked in 2015 to consider legislation that would make P3s an option for state office buildings and other facilities, Koelemay said.

"I'm very positive about the future for P3s in Virginia," he said. "The state has gained a lot of experience in these projects that will be valuable in the future."

Constant wrangling in Congress over long-term transportation funding is good for the toll road sector, said Pat Jones, executive director of the International Bridge, Tunnel and Turnpike Association.

"Toll roads will continue to grow as long as there is gridlock in Washington over how to fix the Highway Trust Fund," Jones said. "We're really going to see states like Virginia and Maryland assert themselves and not wait for Congress to act."

Toll roads have been around for centuries, Jones said, but modern electronics has simplified revenue collection and allowed operators to levy tolls that vary depending on road congestion and time of day.

"There's no staffing problems or bottlenecks at collection points because there are no toll booths, and dynamic pricing provides better traffic control," he said. "There is a renaissance under way in toll roads.

The toll road sector's stable outlook should continue in 2015 due to continued traffic growth, rising revenues, and lower gasoline prices, Moody's Investors Service said in a November report.

Toll road traffic is expected to grow by 1% to 2% in 2015 on the 42 toll roads rated by Moody's, with revenues up 3% to 5%.

More traffic means more toll revenue, said Maria Matesanz, a senior vice president at Moody's.

"Lower gasoline prices will also contribute to the recovery, increasing leisure travel," Matesanz, said. "The drop in gas prices could also lead drivers to use less-congested toll roads that provide faster and more predictable trip times, especially in urban areas."

A decision is expected in early 2015 on whether Maryland will proceed as planned with its $2.45 billion Purple Line light-rail project after a deadline was extended to give newly elected Gov. Larry Hogan time to evaluate the proposed public-private partnership.

Hogan criticized the16-mile Purple Line during the campaign but later softened his opposition.

The Maryland Transit Administration said in early December it would move the bids to March 12 from the original Jan. 9 deadline.

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