From small projects to mega airport revamps, public-private partnerships are growing. As one more tool in the issuer toolbox, are there new opportunities to tap private capital given the priority shifts – and the continued support of private-activity bonds – in Washington?
Transcription:
Matthew Neuringer (00:08):
Thank you Chris. Alright, we're here to talk about P3s. I think somebody told me the topic of this panel is like, what are we going to talk about? I'm like, well, it's the same thing that other panels have already talked about. I said, no, we're going to do something different. We're going to do something fun. So my name is Matthew Neuringer and I'm a partner at Orrick. You may be familiar with Orrick. There's a handful of us. Is there some people in the room from Orrick? Everybody's still sleeping. Okay. Alright. We got a good group, but there's about 10 of us here, which is just a tiny piece of the over 200 lawyers that I get the distinct honor and privilege to work with just on our energy and infrastructure side. So I'm an energy and infrastructure lawyer and I'm also an honorary member, which I always love to say at the Bond Buyer Conference, of our public finance practice, which is well over a hundred lawyers and professionals across the United States.
(01:01):
And my practice is pretty cool because it gets to focus on that intersection—the magic, as I like to call it—between public finance and innovative project delivery. And some of that brings us to advising governments. Some of that brings us to advising developers, investors, and lenders. And so we get a distinct vantage point of being able to advise from all sides of the transaction. We want to talk about how all of those different stakeholders think about P3s in the market right now. One of the innovations that—and you may recall from prior Bond Buyer things, my fourth Bond Buyer Infrastructure conference—what came out of this was actually energy as a service with tax-exempt financing. And since last year's conference, we highlighted a few projects and we'll talk a little bit about that today. I think there's been over $3 billion worth of projects either in the market right now moving towards a close or have closed with that innovation of tax-exempt financing for energy as a service.
(02:01):
And that's the type of stuff that's really exciting because we as the Bond Buyer community have an opportunity to move the market to create new markets that don't exist. And P3s, while it is a bit of a mystique as to what they are, it really shouldn't be that complicated, right? All we are trying to do is get projects built, get them built fast, get them built with the appropriate delivery model. It's just another tool. And one of the things that's really warmed my heart about the municipal finance community in the last five or six years is that folks have seen this as an opportunity, not a threat to the bond market. And as a result, the proliferation around P3s in the US has expanded meaningfully because of this community. And so we're going to challenge the panel to focus on how do we structure these deals more simply?
(02:59):
How do we maximize the risk transfer with private capital while also still ensuring that the absolute lowest cost of capital is used to deploy these projects? And then as a result, figure out and identify where the most appropriate risk transfer makes sense for asset classes across the market. And so with that, I'm going to start with Chris Hicks from Provident. And I've had the pleasure working with Chris and his team on a handful of transactions in the last few years. So Chris, give us some thoughts on your ability to focus on getting these projects done in a more efficient way. And what are some of the deal features that you've seen on projects that have either made them successful or have caused them to go sideways?
Chris Hicks (03:50):
Well, that's a very broad question, but I'll do my best. Again, I'm Chris Hicks, I'm president of Provident Resources Group. For those of you who aren't aware of Provident, we are a 501(c)(3) nonprofit partner that really uses our nonprofit missions—we have five of those—to effectuate projects and get projects built for communities around the country. One of our mission areas is lessening the burdens of government and fostering economic development, which outside of what we're most known for, which is really in the education space, allows us to do some very creative financing, some very interesting projects, and actually allows us to sort of bridge the gap between what is normally seen as a nonprofit deal in higher ed or healthcare, but actually move into more heavy infrastructure and what you all are here to talk about to allow us to really get projects done. In terms of the types of structures that we see and the things that really make a difference in our space are really around availability payment structures, which we've seen in the energy space quite a bit.
(05:05):
Those types of approaches really allow not only the project to get built efficiently and quickly, but also a commitment from an otherwise creditworthy entity—that beneficiary in the local community—that gives investors comfort that bonds are going to be successfully repaid over time. What's also important to that is to be in partnership with a robust, financially viable development and GC partner that is going to give the market as well as the client, the local community, comfort that the assets are going to perform. It's called an availability payment for a reason in terms of making that project available. And if for any reason anything goes wrong, you have a backstop there other than the local government or authority that's going to come in and actually cover that debt service in the event of underperformance. So I think those types of commitments are integral to success.
(06:08):
And as we've seen in the energy space as well, there are mechanisms in place that allow a nonprofit delivery mechanism to take place in conjunction with what you've seen in the private sector where developer partners want to have skin in the game, want to have equity in the deal, which benefits not only their bottom line but also the risk transfer to the local community and the partner. We've seen that as well, where Orrick was actually integral. Matt and his team were integral to opening the door to that approach whereby an equity contribution—not normally as large as you would see in traditional P3s, but an equity contribution nonetheless—can be put in place. A return can be sizable enough for those equity players to participate, downsizing the borrowing, but allowing them to be repaid their equity investment in a performance-based contract, allowing them to have skin in the game, metrics they have to hit, performance they have to hit, and ultimately allows them to also achieve their economic objectives.
Matthew Neuringer (07:19):
Thanks Chris. And how many people know what an availability payment is? Can you raise your hand? Okay, so we have half the folks in the room. So I was asked this yesterday when I did a workshop, and Chris, could you just talk about maybe the distinction: what is an availability payment versus revenue risk at its core?
Chris Hicks (07:37):
Well, revenue risk at its core is something along the lines of a non-recourse loan or financing whereby truly the operation of the project and revenues that are generated determine payment. Think of student housing, for example. I know that's not exactly what is the topic today, but that's normally done with rents and charges. That's the sole repayment source for the project. On an availability payment, think of a leaseback structure, a direct leaseback to the client, but it is subject to the actual asset performing under certain KPIs being literally available for use. In other words, if for any reason you're not meeting metrics or performance specifications within the documents and what was planned, there's an ability for you to basically hold back that payment and that performance to be guaranteed by your operating partner.
Matthew Neuringer (08:36):
Yeah, I think that's great. I think it's just important to understand with an availability payment, it also opens and expands the aperture for where you could potentially utilize this delivery model with true equity. I think that's a good segue to the next question around when you're thinking about AP availability payment versus revenue risk, what are some of the challenges in order to be able to still do that and have the risk transfer where developers are expecting upside? Are they truly capped at upside? And how does an availability payment potentially address that?
Chris Hicks (09:14):
Well, the availability payment allows, again, what I was referring to in terms of the private party who's contributing equity to be repaid through O&M. Obviously that gives them metrics that they have to perform to. And so in many ways they are somewhat capped. There's always going to be a cost of borrowing constraint on any deal that's done for the benefit of the public. And so we are most interested in accessing tax-exempt capital, lowering the cost of borrowing, maximizing affordability for the end user, and allowing expensive projects to actually pencil. And so when you bring in the element of an equity contribution, normally what is expected in that role is you're going to put in, let's pick a number, 50% of the cost of the deal, and you're going to require a certain return on that size of an investment. In a C3 nonprofit structure, the ability to put equity into the deal, ask for that type of return, and do so in a way that doesn't dilute the economic upside of a tax-exempt structure is important. You're not going to see a $200 million project where a hundred million of it is equity; it will be a smaller amount because from a performance standpoint, the project would get underwater that way. And it's the same reason that in our world, especially now more than ever, you've got construction inflation, you've got cost of projects going up, you have interest rates higher than they were several years ago, even though they are trending downward lately. And you've seen kind of a dearth in lending, right? You're really not seeing as much easy access to cost-effective private capital. And so the ability to balance those costs is essential in any project today more than ever. And so you're not going to see that outsized equity contribution necessarily just given that fact.
Matthew Neuringer (11:22):
Yeah, and I think that's a great point because there's always a cost of capital conversation around P3s. And I think when folks are considering these projects internally—if you are an owner, represent an owner, or you advise owners—there are ways to optimize the structure, both from a credit enhancement perspective, it's pure project finance risk, or through a synthetic structure. And Cintia, if you could jump in and maybe just talk about what you've seen on credit ratings and how to optimize them so that we can reduce the differential from a cost of capital perspective, that'd be helpful.
Cintia Nazima (12:00):
Sure. So from a credit perspective, I think it makes sense for us to talk about Henry Ford given this panel. That's what we saw for that availability payment where the credit quality of the project itself wasn't that different from the offtaker. And the reason is mainly because of the project's features. A lot of the points that Chris just mentioned were present in Henry Ford. We have a high essentiality project to the offtaker. On top of that, the high predictability coming from the availability payments and that project also had a cap on the deductions. Those were features that resulted in the project quality being very similar to the offtaker. Again, the project is not notched from the offtaker; it is one of the considerations, but the project itself had very strong financial features that resulted in that similar credit quality that you just said, Matt.
Matthew Neuringer (13:02):
And so the thought here is—and Marshall and Mike can talk about how this applies more broadly in the market—as potentially availability of PABs comes into question on a go-forward basis, this could be a tool to continue to drive the market into other sectors. For example, with surface transportation, which historically has looked to PABs and the volume cap from the Build America Bureau, to the extent that there isn't availability, we as a market can continue to drive and get projects built, and some of these features can help make that happen. So Marshall, I just want to jump to you now. Can you talk to us a little bit about who you are, what you do, and maybe get into a little bit about what's going on in Maryland?
Marshall Macomber (13:53):
Thank you, Matt. It's great to be here at Bond Buyer again, and I want to thank everybody here in the room for your collaboration and partnership through the years. We appreciate that. Since we're talking about innovation, it's through this spirit of partnership and collaboration that helps states like Maryland do big things and to be innovative. Talk a little about that right now. I have to go back to one of Matt's earlier comments. He says we're going to have fun today. And I can tell you, being in the public sector, that's not what I want to do, especially because I don't want to say anything fun by any stretch of the imagination. I used to work for—do we have any C-SPAN junkies here in the room? Anybody who watches C-SPAN? Years ago we had a little saying: "We dare to be boring." So I don't want to be boring, but I also don't want to say too much fun here today, Matt. Marshall Macomber at the Office of Innovative Finance and Delivery at Maryland Department of Transportation. I have to think Maryland is one of the most innovative state DOTs in the country. And I'll go a step further to say that Maryland itself as a state is one of the most innovative states in the country when it comes to projects at the city and county level as well. I think we're going to talk a little today about how do you institutionalize this kind of innovation mindset? It's one where there's no one answer, but it matters going forward. Maryland DOT has six modal administrations. If you can think of a project for a transportation agency to do, we've done it or we'll consider it.
(15:25):
So everything from when you fly into BWI, to taking a subway in Baltimore, to taking one of our toll roads or bridges through our toll authority. Roads, bridges, rail—I feel like there's one in there I'm forgetting somewhere. There are six different modal administrations. We have a lot of different things. Just to talk about some of the tools we've taken advantage of, Matt, that help drive this innovative mindset: Maryland alone has been the customer of three TIFIA loans—a bridge, their Intercounty Connector in the Washington DC suburbs, and of course our Purple Line project. We'll get to that in a moment. Three P3s and one still to come in our portfolio. If you're coming down north, stop at our beautiful travel plazas; that's our toll authority. We have two concessions there, 20 plus years. We'd like to think you get a great customer experience and spend lots of money at those toll plazas. That'd be great. Port of Baltimore Seager marine terminal creates hundreds if not thousands of jobs and is a key facility for our nation's economic growth for the cargo that passes through the Port of Baltimore. And of course, last but not least, the Purple Line: $9 billion integrated DBFOM—design, build, finance, operate, maintain—20-mile new transit line just outside of the District of Columbia, connecting two legs of the WMATA heavy rail subway line. Extraordinary undertaking. And also a $1.7 billion TIFIA loan undergirding that. There are significant PABs for that project as well. We're going to open that thing early 2027; winter, I believe, testing is now going on, 82% complete. We're very excited about it. So I say ambition, ambition, ambition. One more note here about Maryland: just take a look at the types of projects we talked about. Energy projects—those of you who have been in the University of Maryland seeing the amazing NextGen project also at risk. It's an energy savings performance contract in many ways writ large. That's University of Maryland, not DOT, but a really fascinating project. You need to read about what the university has done to help meet some of the state's and the university's decarbonization goals. From schools in Prince George's County—we've got two bundles of schools that are being delivered under a P3 model. Howard County, we've got a beautiful courthouse. In Annapolis, we have a new parking garage, the excess revenues of which are funding some of the resiliency work on the city docks. One we overlook sometimes: we have a water resiliency project in Prince George's County where the developer is at risk working to limit the amount of runoff that is flooding into the Chesapeake Bay. Really astonishing program and project to see that happening at work. Montgomery County, Maryland: we've got a privately owned design, build, finance, operate, integrated bus delivery—energy as a service charging facility for the county's bus fleet. So I say all that—it's a lot of words. There's a lot going on in Maryland. This doesn't even talk about what we have coming up down the road. It is in many ways a state of innovation, and keeping that innovation going is absolutely critical. How do you do that, Matt? Well, you got to have a good lawyer, right? That's the first thing. Always.
Matthew Neuringer (18:49):
Smart man. You probably joined this panel for a reason.
Marshall Macomber (18:51):
Obviously you have to have good advisors. But before you get to your advisors, first of all, any owner agency out there, what do you need? You need an innovation mindset. Innovation doesn't mean every project's going to go P3; quite the opposite. It's going to help agencies realize that what they do best in many ways is traditional delivery, traditional finance, and Matt, to work to see how we can limit those schedules to get to market. To add onto that certainty, I think you also have to approach it with a risk and a life cycle cost analysis view. You want to have those value for money analyses. Secondarily—just two more points here—process, process, process. The owner agency has to know how things have been done in the past, why they were done that way, and if you're going to do it in a different way, you need to know why. You need to know your own procurement law because there's three elements that we always need to be thinking about: one, how you deliver the project; two, how you're going to solicit the market interest in that project; and then ultimately what sort of contract structure is going to govern that project over the term. That is how you get these things going. And of course at agencies, we all have to talk to each other. You have to open up the doors, look out the window, and say there's others out there. In our case, the state DOT works very closely with our counties to try to share best practices and to learn from each other about how to advance these projects however they might be advanced. I'll pause there.
Matthew Neuringer (20:27):
Marshall, the filibuster would've been one of your core functions.
Marshall Macomber (20:34):
I'm a member of Congress, I'm not going to talk anymore, so that's it.
Matthew Neuringer (20:38):
No, but Marshall, I think what people particularly want to hear about, in the context of the incredible accomplishments of Maryland, is for the advisors in the room and the folks who are really thinking about their portfolio of projects. Obviously Maryland's been able to think outside the box. It has a P3 statute, so it has fertile ground from a legislative perspective to do these projects. But where the market is right now, if you could say one or two things for folks who are advising government agencies, DOTs, or transportation organizations that they should be thinking about to bring projects to market that will be attractive to the private sector—what is the tool? Is it value for money or otherwise that can help get them there?
Marshall Macomber (21:26):
I think it starts with transparency. I think it starts with defining what the agency wants to do upfront and having an ongoing and constructive dialogue with all the people in the room that are interested in that. That's community, that's everyone here in this room, and certainly with your very qualified bench of advisors—legal, financial, and technical. I think when an agency goes out to market and talks about that and the objectives that you're trying to achieve, and then points to the statute, and ultimately you talk about who is your leader—your elected leader who is standing there as a champion for that, not just that project. We get caught up on political champions for a project. It's really about elected leadership for innovation, for getting things done in a timeline that your taxpayers expect and delivering on those promises. That's a lot of words, but I think that's where we are. And as projects get larger and more complex, the tools seem to multiply. Things like value for money analyses are absolutely critical. And to begin to think about projects from a risk perspective, again, over the entire life cycle of the project, not just the contract. Somebody in the previous panel said a hundred-year commitment to our communities. I love that—that's lifecycle planning, and I think that's the type of approach we need to think about as owners, whether we want to build something, rebuild something, or add on to it.
Matthew Neuringer (22:57):
Thanks, Marshall. And so, how many people are familiar with the value for money analysis? Raise of hands. Okay, even less than AP versus revenue risk. So VFM: just talk about where the market is heading. There are discussions happening in Washington about how do we incentivize through carrots, not sticks, because there currently are sort of unfunded mandates out there. But how do we incentivize the market so that when DOTs and transit agencies are looking to engage with the federal government, they will have gone through a holistic analysis of what would it cost us to deliver a project through traditional means—through tax-exempt debt, design-bid-build, design-build—versus an alternative delivery model like design-build-finance-operate-maintain or otherwise. And that differential, when you put them next to each other with a bar chart and you think about the risk transfer that's achievable, some of the equity that we talked about, and then compare it with the cost of capital—does it pencil out to do a P3? That is the feasibility study analysis that underlies whether or not a government agency should go out to the market with a P3 project. And that's effectively what we'd like to see from a market perspective: folks around the Bond Buyer community talking to their clients about this, because it's going to serve as the fundamental foundation for whether or not a P3 makes sense. Because just as important as it is to get it right if you are delivering a P3 is to ensure that you're not bringing projects to the market that shouldn't be a P3. Marshall mentioned that from being agnostic as to a delivery model perspective. So I appreciate that, Marshall. Mike, I want to turn to you now. Could you talk to us a little bit about your experience? You've got a lot of great experience in large innovative projects. What are some of the challenges that you're seeing right now in the market, particularly around aviation and airports?
Michael Melzer (25:00):
Yeah, so I'm Michael Melzer. I'm a partner in Nixon's project and public finance group. Probably going back to my first deal, I was a secretary with a legal degree, but I was on the meter deal in Chicago, which is everybody's favorite, I think. But most recently there's been a lot of these major airport deals. There are a lot of costs that are non-financial as well for your constituents when you're on the muni side of it. These are critical pieces of infrastructure. Not just airports, but often with roadways and everything else, you're delaying your people, you're causing frustration. And one of the things that I think everybody's getting better and better at all the time, but there's still room for improvement, is as much planning and de-risking as you can on the front end. As much contingency thinking—one of the things we're seeing is site access and site control causing delays and stop-work orders, which in the ordinary course can have a lot of value and incentive.
(26:09):
But when they're hitting your own revenues and when they're delaying your constituents' access to these things, it can be counterintuitive or not so helpful for the owners. But beyond that, it's just finding the right balance of most efficient cost of capital, balancing a lot of different sources of revenue that all have their pros and cons and sources of funding, and trying to deliver these truly massive projects that take multiple years in the midst of political change. It's been a very weird five years where we had COVID and then right after that supply chain disruptions and limited workflows. It seems like a very challenging era, and it's potentially going to get a little worse before it gets better with a lot of the AI revolution things coming on.
Matthew Neuringer (27:12):
No, I appreciate that. Obviously there does seem to be a bit of an uptick in aviation generally, and the market is certainly shifting away from what historically was viewed as sort of privatization but more towards true partnership. But then that brings with it complexity around how do you actually bring these parties together, especially with airlines, and negotiate these complex arrangements in such a way that allows for cost certainty and project delivery certainty in a very dynamic market? And so that's certainly an emerging trend. And the same thing with some of these mega transportation projects as well—I think for the P3 market to have three large-scale toll road projects happening at the same time is certainly stressing the market from a bid capacity perspective, but the market is also stepping up. Do you want to just talk a little bit about some of those risks around project delivery on some of these mega toll road projects that you're seeing?
Michael Melzer (28:17):
Yeah, I mean, it's kind of the same concept. You do need to effectively, to the maximum you can—toll roads are maybe a little bit easier in terms of the broader planning on the tax side and compliance side. When you're coming up with a structure, it's less likely to be as in flux. But the delivery itself—having a source of funds if there is a delay, making sure your credit rating is where it needs to be. I'll just reiterate the same thing again and again, but it's all risk management. The more you can figure out in advance, the more you can lay it out, the easier it is for every party at the front end and the better you're going to do. The more efficient your capital finance is going to be and the faster the project will go actually once you have to shut things down. So that is its own value. The more you can put to the front end, the better off you're going to be.
Matthew Neuringer (29:18):
Makes sense. Obviously with these big projects, it just means there's a lot of different types of capital coming together—be it PABs, TIFIA, private bank. I mean, how are you seeing those structures work? Is there a way to do it more efficiently going forward based on what you're seeing?
Michael Melzer (29:33):
Yeah, we've definitely seen it trending towards bank financing on the front end, which I think has historically been the model. You use that instead of longer-term financing because it's flexible to take out; you use that as a way to de-risk before you take out your permanent financing, if you will. And that has a lot of benefits. It doesn't have negative arbitrage, so you don't have cash sitting there unspent, or not nearly as much. It is very flexible in terms of when you're figuring out those early stages. You have lenders that can come to the table easily as opposed to the public markets where it's very challenging to get lenders to the table. So that structure has worked for a long time and I think it's come roaring back in the recent past on a much larger scale where you have consortiums working together to make huge credit facilities available.
(30:28):
And that's got its cons as well, which is that they tend to be quite a bit tighter on the covenant packages and it's not the most efficient cost of capital. So you want to pivot from that when you can. TIFIA obviously is a wonderful program, but it introduces federal compliance requirements, it introduces quite a bit of lead time, and it's capped in terms of what it can be applied to. So there's kind of shortfalls across the board and benefits. Private activity bonds are the same—they're very nice, but you have the industry standard 10-year call protection period which leaves you unable to roll back out on a lower cost basis. And then obviously you have rigid regulations around what you can and can't do on a tax-exempt basis. And then taxable debt these days seems like it's always a make-whole call; you have limited flexibility to take it out. It has a higher cost of capital, but it's a necessary evil, particularly outside of PABs. There are still governmental bonds that go into these things as well, and taxable debt can cure a lot of warts with those. So it's very helpful in that framework.
Matthew Neuringer (31:37):
Yeah, for sure. We've seen that as a helpful feature to just get deals done, make them happen. So I want to jump to Cintia. Maybe you can just talk to us from your perspective in the last year or so, what are some of the key factors moving P3 ratings most? Is it construction complexity, demand volatility, inflation?
Cintia Nazima (31:58):
Yes. So again, Cintia Nazima from Moody's Ratings. As Marshall noted, we do rate a lot of the transactions that we've been talking about this morning and yesterday, not only in Maryland but globally. I'm a VP, Senior Analyst, also the Toll Road Sector Lead at Moody's. I initially started my career in the Sao Paulo office more than 12 years ago, always covering P3s and infrastructure, so happy to be here. To your question, Matt, I would say that recently construction complexity has been one of the major drivers for our actions. But on the positive side, so it is a transition from the construction phase to steady-state operations. This is what has been driving most of the positive actions that we had, mostly in our availability P3s—here we're talking about hospitals and even roads. That is a key point that I would say maybe impacted our portfolio a lot over the past year. And of course we also have the managed lanes. This is a topic that we covered yesterday and we're going to be covering today again, and we all know that they've been performing pretty well because of their traffic and revenue performance, mainly given the traffic congestion in places where we are still seeing economic growth. So that, on top of dynamic pricing, results in their pricing power. So that is also one of the key drivers that we're seeing for our rated universe in the P3 market recently.
Matthew Neuringer (33:31):
On the construction complexity, what type of security features are you seeing to help you guys get comfortable with ratings at this point?
Cintia Nazima (33:40):
When we talk about complex credits, I think it makes sense to mention Purple Line. We rate this current deal, and I think that one of the key aspects we've mentioned about it is partnership. With this Purple Line transaction, there is proof that the offtaker is very much committed to the project, not only financially but also throughout the implementation of this complex credit. A lot of the risk has been taken by the offtaker. So again, the risk allocation really being put into place and really being exercised in a good manner. So on top of having a good project agreement, this partnership is something that we think is very key for especially complex projects. Sometimes there are unforeseen events, so you've got to sit at the table and really discuss those. So that would be a key point that I would highlight for those complex projects.
Matthew Neuringer (34:38):
It's a great point to highlight, and I think it cuts across everything we've been talking about. Marshall's thinking about rolling out a platform of potential projects or a program of potential projects. There's organizations out there like the Association for the Improvement of American Infrastructure (AIAI) who have put out standardization of risk as a platform for the market to adopt on these transactions. And a lot of people think about what are the advantages from a credit perspective, which is ultimately going to drive the cost of capital. That is one of the underlying principles—never mind the fact that it should help accelerate the delivery on the front end, which deals with some of the political risk. So that is a trend that had not existed before in the US: this ability to potentially have some standardization around risk. And you can go on their website right now and download it—it's about an 80-page document that goes risk by risk in the P3 market and why those particular risk allocations may or may not exist from a first principles perspective. And that document was put together by about two dozen participants—from the public sector to infrastructure investors to financial advisors—to be able to address these issues. I'm glad you brought that up. I know Marshall, did you want to—?
Marshall Macomber (36:01):
Well, I just pointed out that while it was put together by generally an association that represents P3 developers, those risks are inherent to the project usually no matter what. So it really doesn't matter the delivery methodology, whether you're including a performance-based regime in the ultimate decision by the agency to deliver it that way. The risks are the risks, and it's just like the cost of the project is the cost in many ways. To rate that appropriately and to identify those risks appropriately upfront is where this industry is going. And I think it's ultimately going to make better projects no matter how they are delivered or financed.
Matthew Neuringer (36:39):
So Cintia, can you get into a little bit about just credit strength on both airports and some distinguishing features right now, but then also maybe touch on some of the different structural themes that we're seeing in the energy-as-a-service market from a project risk perspective versus just a guarantee, no set-off, no deduction type structure?
Cintia Nazima (37:04):
So on the airport side, Mike already covered a lot of the topics, but talking about the JFK transactions, for example, one of their strengths that we know, again, is partnership with those complex, large construction projects. Those are key features, but we also have their standalone qualities because of their location—they have a very strong competitive position as an international gateway. One of the points that we also highlight as a strength for those transactions is strong liquidity, not only during the construction that we mentioned but also during operations. One of the points that could be highlighted this week, especially if we compare it with the other airports in the US, is that those projects are exposed to demand risk. So here we're talking about demand risk mainly focused on international travel that we've seen has had a different profile since COVID—especially T1, for example, where we still have Chinese visitors being down. So that is a key consideration when it comes to the level of additional demand risk that you face for those projects. And then on the energy side, what we can comment is that the new transactions continue to come, and one of the aspects that we noted is essentiality. This is very important. So because of their essentiality, one thing that we're also seeing is that besides the monetization that we used to see more, we're also seeing new builds, and that makes a lot of sense because we are talking about that investment in a very essential asset to the offtaker. So that's what I would highlight for that.
Matthew Neuringer (38:54):
Appreciate it. And I think the essentiality goes to the core around what lenders are looking at for these types of transactions from a credit risk perspective, but also a security perspective. And I know Mike, do you want to just talk about some of the preconceived perceptions that folks might bring to the table around credit analysis and security that maybe isn't as relevant in a P3 structure from an essentiality point of view?
Michael Melzer (39:24):
Sure. So I would say right out of the gate there are a lot—it's across the board. It's not just financial, but there's a lot of risk modeling, high-performance, low-performance situations, and there's a lot of protections built in inherent in the fact that you're trying to get investment-grade credit ratings. But the overall process does have its failsafes for a delay in revenues, a delay in operations, or a delay in the construction schedule. There's a lot of management around that. Obviously liquidated damages have become—and if you have availability of payments, maybe you don't need the same protections there—but that becomes part of the overall credit. It does put pressure on the GC pool who's willing to deal with that headache. But there's a team pitch and a team model, and there's strength to fill in what you might ordinarily expect on a pure revenue credit to be catastrophic failure.
(40:22):
There's a lot of ways to backfill that, and it's all inherent in the initial structuring. It's all inherent in usually the procurement process and the award. These things are not rushed, I would say, to date. So I do think that there are a lot of protections built in the marketplace. I do think that there's still a lot of room for improvement on that, though, particularly on our side of the world. I do think that the stress testing on the finance side is great, but I do think there's room for improvement on the legal and documentation side to just think through what will happen if it goes a little faster, what will happen if it goes a little slower. Try to do a better job of optionality and be more accommodating with the provisions of the primary document—whatever's controlling all these different pieces of debt. Those documents have to be a little bit more flexible. We've seen a lot of hiccups in that particular space, and hopefully over time we'll get better and better at it. But I think it's already done well in a lot of places and I think that's one area we can definitely focus on improving.
Matthew Neuringer (41:29):
Thanks, Mike. Yeah, I think it's important just looking at the underlying security for these deals. You're not going to foreclose and take a toll road away from the government or their airport away. And so the underlying security and the way to think about it is just fundamentally different. And that's one of the things that we are regularly talking to investors about and getting them comfortable with: how to structure these deals with direct agreements, for example, to be able to get them direct access in an efficient way to the underlying collateral, which is the revenue streams and the contractual entitlements that flow therefrom. So just a couple questions. Whoever wants to jump in: policy right now, state and federal policy levers. Obviously things are changing; it's a dynamic situation. What type of things right now do you think could help catalyze the market, get projects built faster—whether it be headroom on PABs, standardizing contracts in some way, permitting, or streamlining permitting? Any thoughts? We'll start with Chris.
Chris Hicks (42:37):
Well, I'm not going to focus on things like permitting. What I think some of the best ways to accelerate projects in the P3 space are to have examples put forth by folks like Marshall and Maryland. In our world, there is a general reluctance in certain situations to be the first through the wall. And there are enough pioneering states out there who are taking that step on everyone's behalf. And I think having that precedent has been able to open a lot of doors. I mean, even if you look at energy as a service—you've noted this before—Henry Ford got done and that was a unique transaction in itself, but now they're taking place in Kentucky, they're looking at it in Tennessee. There's a number of other states that are looking at that and saying, "Okay, this makes sense for us."
(43:38):
And that may not be a state project, but it is for the benefit of the community overall. And I think you're going to see that more often in the transportation space as well. One of the things we've talked about before today was you see these large airport transactions—where is that headed? I think you're going to see a lot more of that in the mid-market space and the regionals because of the pioneering efforts of some of the mega projects you've talked about. And I think you may ask, why am I up here today? A C3 deal doesn't seem to resonate, but at the same time, when PABs and TIFIA projects have all been proven out and they're very efficient and they're cost-effective, that doesn't always necessarily mean it's the right fit. And I think what can be added to that is the fact that there are options now. It's not a one lane you've got to stay in. The menu has broadened. And I think educating people on what those options are can really accelerate projects to get them in the ground faster if you've assumed that you don't check a box on a certain proven mechanism. And I think that there's a lot more flexibility out there.
Matthew Neuringer (44:58):
That's good perspective, Chris. Thanks. So Marshall, sitting from where you are, what do you want to see happen to get projects out the door quicker?
Marshall Macomber (45:06):
Well first of all, I think everybody here is proof of concept of trying to get things done more quickly and more efficiently. You're here, you're learning, we're all talking and exchanging good ideas. I think that's great step one. I think that step two also needs to happen—or concurrently with a public sector owner. It's boring to say this, as I started off in my comments, but process matters. In a particular state, tell this to your clients and tell this to your partners that you're working with across the country: if there are projects in a particular state, there are other agencies that have done things already and have been successful at it. Even those that may have had some hiccups or challenges along the way, talk to each other so you can learn your individual process in that state.
(45:49):
Because at the end of the day, it's those elected officials and the owner that's going to bear the ultimate risk of reporting back to the taxpayer. They need to do the projects well, and that comes from a dialogue both with the private sector and the public sector, but also the public sector among itself. That's certainly what we try to do in Maryland to learn from each other. And I think across the country, it's what we all also can be doing at conferences like this. So I'll continue to think of others. They should also raise the PABs cap.
Matthew Neuringer (46:20):
Anybody else want to jump in?
Michael Melzer (46:21):
I would add in: I think Maryland was a leader on the P3 side for statutory authority. It's easy to do some of these with freedom of contract, but that's not how munis work. The governmental side is quite restricted, and when you have that authorization and states are leaning in, it makes everything a lot smoother. And it also—there's a lot of areas to focus on. It's not just the project itself, but your ability to enter into what the term is, the procurement process. A lot of these things are a little too wild west in certain states and a lot too restricted in others. So it's nice to see. I think that if we wanted to really accelerate it, that's step one for a lot of states: to lean into legislative authorization that is broad enough and sufficient enough while still protecting their constituents.
Matthew Neuringer (47:13):
Yeah, for sure. A lot of people don't realize that in most states—like in New York with Article 9 of the Energy Law—you can already do a P3 effectively under these traditional energy ESCO (energy service company) statutes that were passed in the early nineties. Those deals could be used for P3s. Now we need equivalents across the board. That market has exploded as a result of that authorization. So great point, Mike. Cintia, any thoughts?
Cintia Nazima (47:42):
Yes, I would say that given all the success that we've seen in these past years with PABs, and then demand for more PABs capacity as well, and more use of TIFIA, as was mentioned yesterday. But I would also say that, to support what Chris and Marshall said when it comes to examples—we rated most of them as well. So when it comes to having those out there and really just seeing how those structures that might not even have had PABs and TIFIA work, that is also something that's part of the evolution of the process. So I would highlight that as well: learning from those best-rated transactions that we have.
Matthew Neuringer (48:28):
Appreciate it. Alright, so to wrap up, we're just going to do a quick lightning round. If DC offers one lever going into this year's legislative authorizations—2026—is it PABs capacity? Or what's been buzzing around now is potentially de-federalizing federal credit instruments like TIFIA or RRIF. So if you take it, you don't have any other federal source of funding and you don't have to comply with things like NEPA, for example, and as a result, get projects out the door quicker. And then the third piece of that is: will we have a shutdown or not? Right now there's some bets. I think if you look online, the bets are high. So I'll start with Chris.
Chris Hicks (49:11):
I'll go backwards. There will be a shutdown. I think that's a done deal. On the levers, I like the de-federalization idea myself. I think nobody knows better where dollars should be allocated than the local communities in which they exist.
Matthew Neuringer (49:27):
I think I expected you might say that. Marshall?
Marshall Macomber (49:29):
I'm going to throw in with PABs. Let's raise that cap. Let's double it at least. It's a tool that's clearly been proven to have a lot of efficacy in the market. Let's continue to lean into that. That's on the transportation side. And I'm not going to make predictions on that. I'm not trying to get you to say something, Marshall.
Michael Melzer (49:50):
I'd go PABs as well. I think, as Marshall said, they're tried and true, they get it done. It's a huge part of the necessary mechanics for a lot of these big projects. It would be nice to speed things up as well. But yeah, the money is as important as time, if not more.
Cintia Nazima (50:11):
And I would focus on this question only as well. I think yes, I think that we've been talking about very successful projects and the demand is clearly there.
Matthew Neuringer (50:21):
Appreciate it, appreciate it. And maybe PABs for spaceports as well, right? We'll see if we get some of those deals done. Let's bring them to market. Alright everybody, thanks so much for your time.
P3 Market Growth – Opportunities, Challenges, and Incentives
September 30, 2025 9:20 AM
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