Landscape remains tricky for large P3 projects in U.S.

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DENVER — It hasn't gotten any easier to get a large public-private partnership project through the many hurdles the U.S. market throws at them, and it's taking a toll on the sector.

That was the consensus opinion among four panelists asked to gauge the state of the project pipeline Wednesday at The Bond Buyer’s Transportation Finance/P3 conference in Denver, though it was with some caveats.


Skanska, an international developer, announced in October 2018 that it would no longer bid on U.S. P3s saying it no longer found the risk-reward ratio attractive. Others followed.

While the largest, most well-known transportation developers may shy away from complex projects with price tags north of $500 million, speakers said the industry is experiencing growing interest in smaller and more complicated projects.

“The pipeline is never as active as we would like it to be,” said Shai Markowicz, a Citi director, who said he knows of at least 40 projects in the pipeline.

Two-thirds of those projects are funded by availability payments versus revenue risk transfer, he said. Among those he counted is a surface transportation project at New York City’s JFK Airport, Honolulu’s struggling elevated rail project, surface-area redevelopments in New York, Philadelphia and Charlotte and a few airport deals.

“The pipeline is much thinner than we have ever seen it,” said Michael Gibbons, managing director, for the Walsh Infrastructure Group. “Though we do see pockets of optimism in Georgia and Virginia, Los Angeles International Airport has a couple of projects, the Arizona Department of Transportation, parts of Virginia and Texas.”

To say there are 40 deals in the pipeline seemed optimistic to Kevin O’Brien, a Bank of America Securities managing director, who added that he only counts deals further along in the process that have done their due diligence and have political support lined up.

“I think we are starting to see a trend of smaller projects as developers start to evaluate their risk profiles,” O’Brien said.

He used the example of how the Los Angeles Metropolitan Transportation Agency has broken larger projects down into “smaller bites" as it has built out its rail network.

Speakers expect that developers will take on more partners on projects to lessen the risk.

“A lot of major construction projects had to take write-downs, because of the concessions in the projects they got involved in,” O’Brien said. “They are taking a longer look at larger projects. It’s why you see more projects downsized to a lower level of risk, or more partners on the deal, maybe smaller companies that would not normally be able to participate on their own.”

He also expects more risk will be pushed on to public partners.

There has been an increase in social infrastructure projects for higher education and government buildings, O’Brien said.

The demand for construction services at the larger end of the scale is also exceeding the industry’s ability to deliver, Gibbons said. This is partly the effect of coupling the contractors, who say they have been losing money, with a tightening labor market for skilled labor, he said.

The developers may be shying away, but O’Brien said there is still interest from equity investors, as some funds love infrastructure, because of its longer duration.

"The money is there," he said.

Though the trend is toward smaller projects, he added that he thinks the private sector is just taking a breath, before resuming its interest in mega deals.

The transportation sector always brings the largest projects with the greatest opportunities for equity, but smaller social infrastructure projects will keep the industry busy until factors slowing larger projects abate, Markowicz said.

"I am optimistic about P3s generally even though some of the projects have struggled or failed," O'Brien said. "The biggest projects are accelerating delivery, which is huge. We are seeing a lot of that in the airport space."

Los Angeles International Airport used the method for its people-mover project and has used a P3 model for much of its terminal renovations, he said.

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