SAN FRANCISCO — The wheels are grinding slowly toward implementation of a landmark California bill authorizing public-private partnerships for transportation projects, with concerns arising from both would-be public and private participants as to how the P3 process will be implemented.

Gov. Arnold Schwarzenegger signed SB 4 in February; it provided authority through 2016 for state and local transportation agencies to use development lease agreements for transportation projects. But state officials are still hashing out the details of how P3s would be approved.

The legislation, which authorized an unlimited number of P3 transportation projects through 2016, has drawn plenty of interest, according to Dale Bonner, secretary of California’s Business, Transportation and Housing Agency.

“We have had a lot of interest expressed by investment banks, private-equity funds, pension funds, and investors from all over the world,” he said.

The California Transportation Commission, the body charged with programming transportation construction funds in the state, will have a role in approving any proposed P3 projects. And before the ball can get rolling, the CTC must adopt a policy specifying what its role will be.

Commission members debated that policy language at meetings in August and September without reaching a conclusion, deferring action until at least October.

Some of the financial heavy-hitters that Bonner and the Schwarzenegger administration are counting on to make the P3 program work expressed concern about the initial direction of the CTC’s draft policies.

Officials from Macquarie Infrastructure Partners Inc., Kiewit Corp., ACS Infrastructure Development Inc., and Heritage Oak Capital Partners LLC all  submitted written comments to the commission, warning that its original draft policy would put too many roadblocks in front of P3 projects.

“The overriding issue for private sector participants in any PPP procurement is certainty, particularly certainty of process and certainty of timetable,” Macquarie Infrastructure chief executive Christopher Leslie wrote. “The proposed process does not provide adequate certainty for projects to reach financial close.”

Leslie and other industry commenters expressed concern that there were too many steps in the proposed approval process, that the final approval would be too late in the process, and that the entire approval process would be too long.

“Because P3 projects are more expensive to bid compared to other types of projects, the private sector will be skeptical of any process that leaves open the risk that an approval will be declined after such a substantial investment of money and time,” wrote Juan Santamaria, chief ­operating officer of ACS Infrastructure ­Development.

“If approval is not tendered until down the line, then contractors will price that risk into the project and it will make the whole enterprise cost prohibitive,” wrote Karl Reichelt, executive vice president of Skanska Infrastructure Development.

In a staff report, CTC executive director Bimla G. Rhinehart wrote that the commission’s concerns stem from one of the two primary models of P3 financing.

“This would not be an issue if P3 projects were to rely entirely on toll revenues or public funds from other non-state sources,” Rhinehart wrote, adding that many P3 proposals are expected to be based instead on the “availability payments” structure.

“Availability payments are pre-determined, periodic payments made to a private sector partner in exchange for delivering and maintaining the 'availability’ of an asset,” she wrote.

“Availability payments that are in effect the reimbursement of a contracting entity for its project capital expenditures would also have the effect of distorting the distribution of state capital program funding,” Rhinehart wrote, adding that because state funding levels for transportation are neither stable or adequate, other projects could lose out.

Bonner said that he anticipates that the questions and doubts about the CTC’s P3 policy language will be ironed out by the commission’s mid-October meeting.

“I think most of the issues that we have identified and expressed, I believe have been addressed pretty effectively in the most recent draft of the guidelines,” he said. “My understanding that they have one issue that they will be taking a vote on at their October meeting, relating to the question of what happens if you have a green light [for a project] and there is a significant material change after that.”

In addition to the CTC, Bonner’s Business, Transportation and Housing Agency, under the aegis of SB 4, has also set up a Public Infrastructure Advisory Commission charged with identifying P3 transportation project opportunities throughout the state and reviewing proposals.

In the advisory board’s first two meetings, it has looked at two potential projects. One, the reconstruction of the Doyle Drive approach to the Golden Gate Bridge in San Francisco, is being reviewed as a possible candidate for an availability payment structure. That project is already well underway, with initial construction work expected this year.

The other potential project is more wide open: construction of a replacement for the Gerald Desmond Bridge connecting the city of Long Beach and the Port of Long Beach. It carries a great deal of container traffic from the ports of Los Angeles and Long Beach onto the national highway system via Interstate 710. The 41-year old bridge is deemed structurally worn, too narrow for current levels of trade-driven traffic, and too low for the most modern container ships to pass beneath.

Bonner said a P3 approach has the potential to speed up the delivery of a replacement bridge, currently planned for 2019 — assuming enough funding for the $1.125 billion project.

“There’s no full funding plan for it,” he said. “If we don’t select the P3 option, there’s some question of whether, or when, we’ll be able to move forward on it.”

He said no decisions have been made about a financing structure — particularly the touchy issue of tolling. The Desmond bridge has never carried tolls. Its counterpart to the west, the Vincent Thomas Bridge, which links the same container facilities to San Pedro, had its tolls removed in 2000 by then-Gov. Gray Davis.

“That’s one of the issues that’s been discussed, but we’ve been very careful not to predetermine what the financing would be,” Bonner said. “There’s some question, if you look at a tolling option, can you toll the bridge without driving traffic to other facilities? That’s one of the issues were testing right now.”

The Republican administration’s high-profile support for P3s is not shared throughout California political circles, particularly by the Democrats who dominate the Legislature. The only reason SB 4 passed at all was because of the horse-trading needed to secure some Republican votes to get the needed two-thirds vote to pass the state budget.

But Bonner believes the administration is putting together a lasting program that will take its place in the state’s infrastructure financing toolbox along with its long-standing bond financing program — which, as Bonner puts it, is simply another way of securing private financing for the state’s priorities.

“There’s lots of reasons to be encouraged for the long term,” he said of the P3 alternative. “Over time it will be viewed as robust and effective as our long-term bond programs.”

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.