WASHINGTON — Public-private partnership, a financing model that has started to spread across the U.S., may face some challenges as Congress debates limits on the federal role in infrastructure, according to Simon Santiago, leader of Nossaman LLP's east coast infrastructure practice.

Private activity bonds, the Transportation Infrastructure and Innovation Act (TIFIA) and the Transportation Infrastructure Generating Economic Recovery (TIGER) are among the ``hottest topics" in Washington, Santiago, who helped negotiate the $2.1 billion Elizabeth River Crossings tunnel project in Portsmouth, Va., said in an interview.

One challenge is is structuring and coordinating procurements and financial closings with the various processes and requirements of federal-aid programs. Another, he said, is to do a better job explaining the pros and cons of the financing methods.

"We need to have an honest dialog," Santiago said. "What are the reasons for going public-private partnership? How does that benefit the public at large? Especially when it comes to tolling. If they're not accustomed to user fees, that is something that you need to address head-on."

Federal policy on infrastructure finance is poised to take shape during negotiations on water infrastructure and transportation appropriations bills, as well as the early discussions on a new highway bill. While the House of Representatives and its Republican majority aim to strike funding for TIGER grants, the Democrat-led Senate wants to authorize another $550 million for the program.

The Senate's Water Resources Development Act bill would enact a federal loan program for water infrastructure called the Water Infrastructure Finance and Innovation Act, but would prevent WIFIA borrowers from using tax-exempt bonds. That has led to some discussion that Transportation Infrastructure Finance and Innovation Act, or TIFIA loans, should share the same restriction. Since TIFIA loans are offered at extremely low rates to begin with, allowing the same project to also use tax-exempt financing to get low rates has struck some as too tax-evasive.

A number of major P3s have either obtained or applied for TIFIA financing to supplement bond money, including the Elizabeth River Crossings project, which Santiago negotiated on behalf of the Virginia Department of Transportation. Though TIFIA financing has only been utilized by densely-populated areas to date, Santiago said restricting the ability of projects to use both tax-exempt debt and low-interest federal loans would present a hurdle to some P3 projects.

"That's a concern, and definitely something that the P3 industry is monitoring," he said. "That would somewhat dilute the utility of using TIFIA."

Santiago added that although federal loans like TIFIA might still have some use even under such a restriction, it would be more beneficial if state and local governments did not have to make such a tough call in deciding the best path forward to finance a project.

"We hope that you can use all of the tools in the toolbox, and you don't have to use one or the other, or be disadvantaged in any way if the project financing structure wants to use both TIFIA and tax-exempt bonds." he said.

Santiago joined Nossaman in 2006 after practicing construction law, doing both litigation and transactional work. He said he now uses his litigator instincts to assist his public clients with identifying the risks in a project's contractual structure. He said a major hiccup for public-sector clients has been the need to reach out to stakeholders and the public to clearly establish the pros and cons of P3 development.

Toll roads have been controversial, with some even suffering lawsuits from citizens arguing that the tolls represent an illegal tax. Other roads, like the Pocahontas Parkway in Virginia, have failed to live up to revenue expectations. Santiago said a trend that bears watching is an increased usage of availability payment structure, in which the public sector maintains the revenue risk and user-fee setting authority and makes payments to the private investor based on how the project performs. This structure has been used notably in Florida and has been touted as a good solution for roads and other transportation projects where moving the revenue risk to the private sector might not offer the best value for the money.

"Whether that trend is going to continue remains to be seen," he said, "but it appears that those types of deals are very attractive to the private sector."

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