Issuers Look to Thread the Needle on P3s

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PHILADELPHIA - Shortly after Pennsylvania Gov. Tom Wolf took office in January, he asked state Auditor General Eugene DePasquale how he could "take the Allentown P3 model all over Pennsylvania."

Allentown in 2013, under a public-private partnership, leased its water and sewer system to the quasi-public Lehigh County Authority to cover a pension liability about to consume one-third of its budget.

Under the 50-year agreement, the city got an upfront payment of $211 million and stands to receive annual payments of $500,000 beginning in 2016.

DePasquale found that the Allentown model applied only to seven of 1,300 municipal pension plans statewide.

"You have to weigh the costs and benefits and find the right balance because rising costs fall back to the public," DePasquale said in an interview during The Bond Buyer's Mid-Atlantic Municipal Market Conference in Philadelphia Sept. 21. "What sounded good at 40,000 feet would only work in seven instances. It's not a cure-all for everything."

DePasquale, in his second year as auditor general and known primarily for his efforts to shore up Pennsylvania's wobbly state and municipal pension systems, is no stranger to P3s.

"We weigh in on a lot of things and P3 falls into that," he said.

As a Pittsburgh-area state representative in 2012, DePasquale voted for the bill that authorized P3s in and laid the groundwork for a rapid bridge replacement project, designed to replace 4,500 structurally deficient bridges.

"Now I'm in the position of auditing PennDOT [Pennsylvania Department of Transportation] and other agencies. We have to call it down the middle," DePasquale said.

"Forgetting the politics and focusing on the financial aspect of the leasing agreement, Allentown put capital into its pension fund and it was seen nationwide as a unique way of a distressed municipality leveraging its assets."

His disclaimer was a not-so-veiled reference to the FBI's ongoing investigation into Allentown's contracting process. Federal agents in July raided City Hall, seized computers and other electronic devices in search of hundreds of documents.

Four days after the raid, Allentown Mayor Ed Pawlowski suspended his run for the U.S. Senate.

Ramzi Haddad, a developer with properties in Allentown's Neighborhood Improvement Zone and elsewhere in the city, pleaded guilty Sept. 10 to a federal charge of conspiring to bribe a yet-to-be-named public official.

While Allentown's particulars stand out, selling or leasing a water and sewer system is hardly an outlier. Non-transportation P3s overall are on the rise.

Moody's Investors Service on Wednesday cited housing and higher education as well as water and sewer as procurement growth areas as state and local governments spend less on infrastructure.

Even fiber-optics are ripe. Moody's referenced the recent closing of the KentuckyWired Infrastructure Co.'s statewide fiber-optic network availability P3 project. Conduit issuer Kentucky Economic Development Finance Authority priced $230 million of 30-year tax exempt bonds last month.

"The U.S. has underinvested in infrastructure for many years," said Moody's. "At the same time, economic growth has led to a greater use of existing infrastructure."

Days earlier, Standard & Poor's acknowledged limited P3 use in the United States.

"In our view, the large size and complexity of the projects and the concession agreements, as well as the lack of uniformity in the terms of these agreements--no two P3s are alike --have all created high start-up costs and acted as a barrier to greater adoption of this model," said S&P credit analyst John Sugden.

Water and sewer P3s pose higher degrees of difficulty, given complexities of systems as well as the need to educate local officials and ease public fears.

"It's highly surgical," said Greg Cannito, a managing director at private developer Corvias in East Greenwich, R.I. "It has to be a viable economic project."

Municipal divides don't help. In York County, Pa., for instance, a regional wastewater treatment system involves 14 communities, only one of which had an unfunded liability.

"The others are asking: 'Why should we bail out the city of York?" said DePasquale.

Corvias' stormwater management portfolio includes the Chesapeake Bay watershed in Prince George's County, Md., a 30-year agreement where it initiated a green infrastructure program to manage runoff.

Partners in the pilot program include the federal Environmental Protection Agency and the Maryland Department of the Environment.

The county will invest $100 million in an initial three-year retrofit of the county's water systems, while Corvias will manage design, construction, and long-term maintenance of stormwater management systems for up to 4,000 acres. A local economic development push involves widespread use of local small and minority-owned businesses.

Corvias began as Picerne Military Housing under namesake founder John Picerne before branching into student housing and stormwater. In May, the firm's Corvias Campus Living unit privately placed $548.3 million of taxable bonds for a 65-year P3 student housing pact with the University System of Georgia.

National Development Council, the oldest national nonprofit community development organization in the U.S., finances its U.S. projects with 63-20 debt or 501(c)(3) bonds, both named after their enabling Internal Revenue Service codes.

Internationally, NDC finances with equity and taxable debt.

NDC, recently named the front-runner for a lease concession to run the parking assets in Scranton. Pa., applies the American model when a public agency views the activity as an essential governmental responsibility, when specialized developmental skills are necessary and when delivery time and operating costs are critical, according to eastern region director Daniel Marsh.

"Time is a killer in municipal projects," he said.

Marsh said NDC used nearly $190 million in 63-20 bonds to finance the Ninth and Jefferson medical office building in downtown Seattle and erase a $30 million overrun from the previous general contractor-construction manager process.

A King County, Wash., audit found that NDC restructured the project for substantially less than the initial project estimate.

NDC's portfolio also includes "workforce" housing in Cincinnati and St. Petersburg, Fla.; parking structures in Seattle and Syracuse, N.Y.; and a University of Washington laboratory, also in Seattle.

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Infrastructure Pennsylvania