CHICAGO — The increasingly popular design-build-finance model works best for transportation projects that are more than $100 million and owned by a sophisticated public issuer with strong credit, panelists said Friday at The Bond Buyer's annual transportation and P3 conference here.
The DBF landscape is uneven but more issuers are considering the model, panelists said. Florida has been doing them since 2004, while Ohio is about to embark on its first one, a $330 million bridges project in downtown Cleveland.
The ability to fast-track important transportation projects by three to five years while retaining ownership make them attractive to states, panelists said. Under the model, a contractor agrees to design, build and finance the project for a future repayment from the state.
"The main reason they're being considered these days is jobs, jobs, jobs," said Lowell Clary, president of advisory firm Clary Consulting LLC and former Florida transportation director. "The areas looking at these types of projects are the more sophisticated areas, which are already looking at P3s and have good advisors," he said.
"Pricing and construction costs have been very competitive now and interest rates are low, and that's a pretty good market for DBF," Clary added. "That's pretty good for the industry too, because they get the work and the public gets the improvements earlier."
Florida DOT officials have become more sophisticated about the process over the years, Clary said, allowing them to graduate from deals financed with bank loans to tax-exempt bonds for recent projects.
"There's a big education process, and the government should surround themselves with consultants and knowledgeable people so they can be prepared for the issues of contractors and lenders, and they don't get bogged down in challenging negotiations," said Joanna Horsnail, partner, Mayer Brown LLP.
The credit quality of the agency that owns the asset is key to the deal, participants said.
"The underlying credit quality of the public owner is where you need to look," Clary said. "I'm not looking at areas where the public owner has poor credit quality, because any way you do it, [the deal] is going to be lower than their credit. It doesn't make sense."
The agency's credit, the security of future payments and the structure of the P3 program itself are key considerations for analysts reviewing a deal, said Michael McDermott, an analyst with Fitch Ratings.
"It's the credit quality of the [department of transportation] as opposed to the contract, and you want to see a very well defined contractual arrangement and process that's followed." For analysts as well as private partners considering a proposal, the security of future payments is a chief consideration.
"The DOT has other obligations, and where does [the contractor's future payment] fall in the waterfall?" said McDermott. "What methods will the DOT use to make adjustments if revenues are less than expected? It will be different in every state," he said. "In some places this approach would work, and in others it may not."
