WASHINGTON — The coming year could be fertile ground for public-private partnerships, especially in the transportation sector, but states and localities probably will have to go without federal help and enter deals cautiously so as not to kill public support for them, market sources say.
Public-private partnerships are hundreds of years old — the first recorded P3 was in 1680. During the past year, states have been trending toward more P3-financed infrastructure. The country will enter 2010 with 26 states or territories holding significant legal authority to do P3s, according to the U.S. Department of Transportation. As illustrated by the recent transaction entered into by MAT Concessionaire LLC for the Port of Miami Tunnel, states are finding private capital again as the credit market thaws.
However, deals have been mostly piecemeal instead of part of an overarching plan, analysts and industry sources said in recent interviews. A full-blown P3 movement may require more programmatic approaches and possibly a centralized agency or a state P3 network.
Legislation that is currently pending in Congress, and proposals by the White House, could enable more private investment, but other federal proposals could have the opposite effect.
Growing state-level interest in P3s during the past year stems from a trio of factors that are likely to persist into 2010, according to sources.
It has become conventional wisdom that infrastructure — not only highways, bridges, and transit, but water and sewer facilities as well — is falling apart. State transportation officials say they could immediately move forward with $69 billion of projects if they were given the funds.
Municipal wallets are thin and growing thinner. States have pared down their budgets to cope with across-the-board tax revenue declines. Nineteen states cut their transportation spending for this fiscal year, according to the American Association of State Highway and Transportation Officials. Economists and state groups predict the budget gaps and tax revenue shortfalls will not be reversed for a few years.
Meanwhile, the traditional federal-aid-to-states method of paying for transportation has been in peril. The highway trust fund that covers much of the cost of state-administered construction projects is running dangerously low, and a statutory rescission of nearly $9 billion has further eroded spending.
Industry groups say states cannot plan for new construction until they know how Congress will repair the funding situation — but legislation that would do that is delayed, likely until after the 2010 elections. As a result, many governments are turning to the private sector to meet their needs. At least 16 states and territories are home to privately operated toll facilities, according to AASHTO.
“It’s happening on a more rapid basis than was the case a year or two ago,” said Richard Norment, executive director of the National Council for Public-Private Partnerships. “I think [the move to P3s] will happen on a federal level, but Congress is preoccupied with other things.”
More than a half-dozen states in 2009 enacted laws or began considering legal provisions to enter into partnerships.
Georgia launched an 18-part program, becoming one of the examples used by market participants to illustrate “programmatic” P3s.
Proponents of P3s rejoiced when California enacted legislation in February allowing state and regional transportation agencies to partner with private companies. The legislation created a Public Infrastructure Advisory Commission tasked with ferreting out potential P3 opportunities in the state and guiding agencies through the deals.
“Increasingly we’re seeing, by and large, it’s coming out of governors’ offices or majority leaders in legislatures,” Norment said.
States including Louisiana, Michigan, Nevada, and possibly New York are poised to enact their own P3 legislation, he added.
But Chee Mee Hu, who heads the U.S. project finance team at Moody’s Investors Service, contends that, with the exception of Georgia, the P3 market will continue to be “more episodic than programmatic.”
“Next year, we’ll still see interest in [transportation partnerships] but I’m not sure it will be a steady stream,” she said.
One thing that will not change next year is the public’s long-held skepticism about private ownership or operation of public assets, according to Hu.
“You would expect, logically, that people would realize there’s less funding ... that they would have to partner with the private sector to get things done, but that’s never really stopped resistance of public support before,” Hu said.
The private sector may have piles of money at the ready for P3s, but states and regions must grapple with complex questions about how to structure deals before entering into them. The wrong answers can sour the public on the process.
Hu said one big question is whether to enter into a deal wherein the private entity provides an up-front payment in exchange for a long-term lease of the asset — the model used in the much-criticized Chicago Skyway deal — or a transaction wherein the public sector essentially repays the private investor over a period of time, which was the model used in the recent Port of Miami Tunnel P3.
The states then must consider how much risk the private sector will bear and how much value to place on a public asset.
“This is not corporate philanthropy,” Norment said. “The private sector expects and deserves a return on its investment.”
Steve Steckler, chairman and founder of Infrastructure Management Group, added that the collapse of some deals, including those involving the Pennsylvania Turnpike and Chicago’s Midway Airport, may have spooked some investors.
Nevertheless, AASHTO predicted this month that 50% or more of new highway artery or bridge-capacity improvements during the next decade will have to be paid for through toll roads, which can be privately run, because governments will have to use tax revenue to maintain existing roads and bridges.
“There’s obviously political resistance to raising taxes” to pay for infrastructure improvements, “so this is one way government officials can use to avoid those difficult choices,” said Mike McDermott, lead transportation analyst for Fitch Ratings.
The federal government currently can only forbid P3s or tolling on Interstate highways, in keeping with the “freeway” philosophy on which the Interstate system was built. Most partnershipss take place at the state, regional, or local level and do not require a federal green light.
“The feds could only encourage or create an additional support level for these things,” Hu said. “Anything at the federal level could only encourage interest.”
Currently, the federal government supports several different mechanisms for states that want to enter into P3s or toll their roads. Among them are the Transportation Infrastructure Finance and Innovation Act — a low-interest loan and credit support program — and the $15 billion of private-activity bond capacity that is available for transportation projects.
The National Council for Public-Private Partnerships and others are pushing for the federal government to remove the volume cap on PABs used to finance transportation projects The transportation PAB program has technically been well-subscribed — the U.S. DOT has approved more than half of the amount — but issuance has been slow.
Removal of a state-by-state cap on PABs for non-transportation projects is also something the NCPPP wants. Simply removing the cap on water infrastructure would help, the council contends — a bill introduced in January by Rep. Bill Pascrell Jr., D-N.J., and cosponsored by House Ways and Means chairman Charles B. Rangel, D-N.Y., would do just that. A desalination project in Tampa Bay took “three years of Florida’s entire allocation of PABs,” Norment said.
Meanwhile, TIFIA this month suspended its rolling application process for fiscal 2010 due to low funding and high interest. Before that, over the past 10 years it had provided nearly $7 billion of credit to support projects costing more than $25 billion.
Advocates of P3s said during interviews that they want to see Congress increase funding for the program or authorize the creation of a national infrastructure bank that could support partnershipss in a similar way.
“I salivate at some of the things [the Federal Highway Administration or Federal Transit Administration] could do if they had four or five times the TIFIA capacity they have now,” Steckler said.
Every bill that would create a national infrastructure bank, including one that would model it after TIFIA, has failed to progress beyond committees, despite support from the White House. Congressional appropriators this month decided not to provide funding for such a bank this fiscal year, preferring instead for the bank to be created through the regular authorization process.
A bill sponsored by House Transportation and Infrastructure Committee chairman James L. Oberstar, D-Minn., that is pending in the committee would set up a federal Office of Public Benefit to provide technical assistance on P3s. However, the office would have approval powers over tolls and toll rates, a provision that has drawn opposition from some state officials.
“That would be an enormous damper,” Norment said, adding that infrastructure investors may see an extra level of bureaucracy and decide to take their money to Germany, India, or Spain instead. “It could be the ultimate wet blanket to P3s that get federal funds,” he said.
Some market participants would like to see a more cohesive approach to P3s on the national level — what Hu describes as an “orderly” and transparent system where objectives are laid out step-by-step along with “the inventory of projects, the way it is going to be implemented.”
“The perfect example is the Canadians,” she said, explaining that the Canadian system for P3s is more coordinated between provincial agencies. “It’s all kind of vetted up-front,” she said. “In the United States, things get done, but they get done piece by piece.”
WHERE’S THE MONEY?
Some market participants believe the amount of private capital available for public-private partnershipss rivals the proposed funding in the House-passed jobs bill, which includes almost $30 billion for highways alone.
“There are literally tens of billions of dollars out there looking for a place to go in American infrastructure,” Steckler said.
Pension funds have been attracted to infrastructure because they see it as low risk with relatively good returns over the long term, sources said.
“I think one of the biggest impacts” on P3s in 2010 “is going to be seen with the emergence of pension funds as investors,” Norment said. He noted that the California Public Employees’ Retirement System has become “very active” in infrastructure investment, and that its interest may have helped in the passage of the state’s P3 law. CalPERS is working toward an asset allocation target of 5% — or $4.6 billion — in a category that includes infrastructure, according to its documents.
However, pension funds tend to be drawn to so-called brownfield deals — partnerships on already-constructed infrastructure, such as tolling an existing roadway. Greenfield projects, by contrast, involve new construction, such as a new highway.
“The opportunity for greenfield investments has never been better despite the recession,” Steckler said. But pension funds see the greenfields as higher risk, he added, and “this is an environment where risk has a bad name.”
However, a brownfield project that simply monetizes a public asset does not necessarily add a public benefit or new infrastructure, so those projects may not be as viable in the future.
“My sense is in 2010, the large-cap funds are going to continue to struggle to look for brownfield” projects, Steckler said. But smaller greenfield projects and new projects within existing infrastructure — such as a wastewater treatment facility within an airport — will become more common, he said.