Uncertainties related to Detroit’s bankruptcy filing are resonating among public-private partnership players, according to a lawyer who advises on many P3 deals.
“What’s interesting about Detroit, and I hear this from clients on the equity side, is whether these cities that are able to get into bankruptcy can reject a concession agreement,” Allen & Overy LLP partner Kent Rowey said Wednesday at his firm’s “Bridging the Gap” P3 conference in New York.
Rowey has advised on such large concession transactions as the privatization of waste and water systems in Bayonne, N.J., Chicago’s parking-meter system, the toll-road and airport privatization deals in Puerto Rico, a commuter rail project in Denver and the Poseidon desalination project in Carlsbad, Calif.
“I think if you structure the deal to address Chapter 9 concerns and write a contract that’s not an executory contract, you could continue to operate an asset. People still need a place to park their cars,” said Rowey, who admitted that legal uncertainties surrounding Chapter 9 present huge variables.
“It’s certainly a new phenomenon,” he said.
So is the use of private equity investments in infrastructure projects in the United States. The concept gained traction in the capital markets with the leasing of the Chicago Skyway and Indiana toll roads in 2005 and 2006, respectively.
Virginia transportation Secretary Sean Connaughton, whose state is one of the most active in P3 transactions, said his department closed $5 billion of such deals last year.
“Virginia has been a real success story,” he said.
According to Connaughton, the commonwealth is leveraging more than $3 billion in infrastructure through a state investment of less than $600 million, and has created a stand-alone Office of Transportation Public Private Partnerships.
This, he said, should help the transition when Democrat Terry McAuliffe succeeds Republican Bob McDonnell as governor next month.
Virginia is also home to the Center for Transportation Public-Private Partnership Policy at George Mason University’s Arlington campus, just outside Washington.
“We’re on the cusp of a revolution in P3s in the United States,” said Connaughton, who said Virginia is advising its localities and even other states on P3 management.
“Pennsylvania, the District of Columbia, and Maryland are emulating what we’re doing in Virginia. People are taking our documents, canceling the Virginia slug and putting theirs up. For us, that’s fine,” he said.
Pennsylvania Gov. Tom Corbett last year signed a law authorizing P3s in Pennsylvania, and the state’s partnership board is proceeding with a project to repair hundreds of structurally deficient bridges.
Connaughton added that P3 projects enhance public-agency transparency.
“We in the public sector have been good at hiding the true costs of infrastructure. Now, with P3s, we are better at articulating just how much it costs to provide good, solid transportation,” he said.
Cherian George, a managing director and head of the Americas in Fitch Ratings’ global infrastructure and project finance group, said the U.S. Northeast has lagged in concession deals. “In the Southeast and the Southwest, smaller public agencies, smaller purpose government entities,” he said. “Politically they’re not as significant as the Port Authority, the MTA or the Mass Pike,” he said.
When George was an assistant comptroller and head of finance for the Port Authority of New York and New Jersey’s bridges, tunnels and terminals business unit in the late 1990s, the agency discussed a new Goethals Bridge conceptually. Last month, Allen & Overy closed a 35-year design-build-finance-maintain contract for a new Goethals, which connects New York City’s Staten Island borough with Elizabeth, N.J.
George said Fitch considers such factors as project rationale, sponsor and legal structure, completion, technology, operating and maintenance risks, and risks to project gross volume, price or availability.
He urged both public and private entities to think long-term.
“What will tolls be in 20 years?” he asked, citing toll-road and express-lane projects. “Flexibility is important. Otherwise, they will truly be express lanes because no driver is going to be able to afford it.”
Connaughton noted that “83% of my money” now goes out to the private sector through subcontracting.