(1). The pipeline of US P3 deals is genuine. More states have credible P3 projects than previously.
US transportation officials are beginning to learn the lessons from sporadic P3 procurements, fishing expeditions to gauge market sentiment and failures to award P3 projects. Such basic errors can prove fatal to P3 programs, permanently damage the reputation of states or municipalities and change the way the private sector evaluates P3 opportunities. With that in mind, states like Ohio, Puerto Rico and Virginia are attempting to create more uniform and predictable P3 pipelines. An important step in that direction has been the creation of standalone P3 project delivery agencies – the Innovative Delivery Division in Ohio, the Puerto Rico Public-Private Partnerships Authority (PPPA) and the Office of Transportation Public-Private Partnerships (OTP3) in Virginia. There will still be setbacks in those states – and others – but steps like this help create confidence in the project pipeline and they also mean that the US is moving towards becoming an established P3 market like Australia, Canada and the UK. One estimate puts the value of the near-term US P3 project pipeline at USD40bn.

(2). There is a growing realization that P3s can deliver projects more quickly than conventional procurements.
US public officials are slowly understanding the benefits of P3s, and one of those benefits is that P3s can expedite project delivery. Projects procured as P3s can have shorter construction timelines than projects procured through the conventional process. It also means projects that would have had to wait many years to be procured conventionally can be brought forward. In Florida, using the DBF procurement method has meant projects have entered construction by an average four years sooner than under conventional methods. For its two major concessions – the Port of Miami Tunnel and I-595 Corridor – Florida transportation officials have not even tried to estimate the time savings. This is important in the current economic climate because, by speeding up project delivery, P3s can create construction jobs that would otherwise not exist. By creating new jobs, P3s have a greater political appeal.

(3). The industry needs to work harder in attaching a value to the risk transfer proposition of P3s.
Continuing a theme of promoting the benefits of P3s, the industry could do more to deflect attention from the cost-of-capital debate that is still attached to P3s at the state and local level. The higher cost of capital remains a challenge for the industry and indicates that it still has work to do in explaining why there is a premium attached to P3s. The trick is in demystifying the concept of risk transfer in the face of organized opposition that continues to encourage state and local governments to borrow through the municipal tax-exempt debt market. Such a process will assist state and city CFOs and other public officials in attributing a true value to P3s and determining whether their extra cost is justified by the risk transfer. One way is to provide simple examples that illustrate the cheaper government borrowing under a conventional procurement is more than offset by cost overruns that can add up to hundreds of millions of dollars, money that governments then have to borrow to cover the overruns. There are plenty of examples from the Canadian P3 market that could be used to support this case.

(4). US engineering and construction firms are more prepared to invest equity in P3s than they were previously.
US engineering and construction firms are becoming more involved in the P3 market. That has involved them investing equity in projects, or bidding for projects as equity partners. For some, it is a natural progression to invest equity in projects. A degree of transactional risk is usually passed on to the construction industry. Equity participation does not add to that risk and can create construction opportunities that might not have otherwise existed. As the size of P3 deals increases, and more projects are procured as P3s, those construction opportunities are assuming a greater significance. The real value of equity participation, however, is that it gives engineering and construction firms greater say in a project. Among other things, being in the same camp as financial investors gives them access to information and a long-term project perspective. That can be important in encouraging design innovation by involving them in much closer dialogue with state departments of transportation. However, it should not be an obstacle to successful project delivery.

(5). As more P3s move from construction into operation, the political argument is becoming easier to win.
P3s remain political, and an anti-P3 sentiment still lingers among voters. However, the industry has worked hard to counter this and to involve local political stakeholders in a broad dialogue. In Texas, for example, the 1420 Committees (named after SB 1420, which authorized the development of 11 highway projects as P3s) have enabled the Texas Department of Transportation (TxDOT) to enter into a dialogue with local communities, planning agencies, regional toll authorities and others to inform a public discussion about P3s. In Chicago, a five-member board was recently named for the Chicago Infrastructure Trust in an attempt to depoliticize infrastructure investment decisions. Nevertheless, closing and project delivery remain the biggest selling points for P3s. Construction completion and the successful opening of projects has enormous benefits in minimizing the debate and discourse over P3s. In Texas, the scheduled opening of one of the state’s first P3s – SH 130 Segments 5 & 6 – later in the year should go a long way in allaying voter concerns about P3s.

(6). US labor union and public pension plans are exploring ways to invest in greenfield infrastructure, but there are mixed views about how they can be involved.
There is a lot of work going into how US pension funds, including labor union funds, can be more involved in direct infrastructure investing. In greenfield infrastructure, including P3 investments, there are a lot of barriers to their entry. Pensions frequently lack in-house expertise, and the risk/return profile of greenfield infrastructure projects may be outside their investment parameters. Nevertheless, if structured correctly, P3 investments and pension funds are well aligned and several of the large US institutional managers are open-minded to investing in greenfield projects. Opinions differ, however, on the investment route for those funds. While the Dallas Police and Fire Pension System’s investment in the LBJ Freeway and North Tarrant Expressway toll road concessions in Texas showed that participation at the equity level is possible, direct equity investing by public pension plans in P3s is difficult. Frequently complex project risk profiles will mean that many are unlikely to invest in early phase P3s. In the case of certain labor union funds, there may also be conflicts between union member interests and supporting a P3 procurement versus a conventional one. However, there are other investment routes including debt investments – especially inflation-linked debt – and investments in de-risked P3 projects. TIAA-CREF’s acquisition of half of ACS’ stake in Florida’s I-595 Corridor P3 scheme is a good illustration of the latter. Another advantage of P3s moving from the construction to operational phase is that more recycling of development equity capital will occur. At the moment, this is probably the best route into P3s for US pension plans.

(7). A lot of capital is seeking opportunities in the US infrastructure market, which is making for a competitive market.
There is strong demand among US dollar investors, and foreign investors including Canadian and Australian superannuation funds, for high quality US infrastructure assets providing stable, long-term, inflation-linked returns. In combination with a thin but growing pipeline of US P3 projects, that is creating a competitive environment for infrastructure investing in the US. A recent illustration is the USD483m winning offer for the OSU parking concession, which is 29% higher than the minimum price of USD375m. Another case is Puerto Rico’s P3 juvenile correctional facility, which received 11 responses to an RFQ in May. A competitive marketplace might not be good news for investors, although a lack of availability of leverage is a limiting factor, but it is helpful for states and municipalities as they seek to achieve the best price for their assets and get the best value-for-money for taxpayers.

(8). It can be better to run a competitive bidding process rather than a negotiated one in order to achieve the best value-for-money for taxpayers.
There has been no real pattern or structure to the US P3 market to date. It has witnessed unsolicited proposals, bilateral arrangements and alternative models like the recent proposal from a consortium of labor union pension plans to invest equity in the USD6bn Tappan Zee Bridge replacement project. That contrasts with Canada where more structured P3 initiatives, like Ontario’s Alternative Financing and Procurement (AFP) program, have had great success. While US public officials need to be flexible in considering new ideas proposed by the private sector and, at the same time, recognize the value of its entrepreneurial approach, this needs to be balanced with probity and good process. One of the messages from markets like Canada is that competitively procured projects deliver better value-for-money for taxpayers than bilateral or negotiated ones. In the case of Ontario’s AFP program, such an approach has resulted in over 50 P3s valued at CAD23bn (USD22.5bn) and enabled billions of dollars of savings in the process.

(9). TIFIA continues to have an instrumental role in funding P3s.
The federal government’s TIFIA credit assistance program has been instrumental in creating a foundation for P3 projects to be successfully financed. TIFIA credit facilities have been used in nearly every major transportation P3 project over the past several years and the program continues to be oversubscribed. The latest project to benefit from TIFIA credit assistance was the Presidio Parkway P3 in California, which was brought to financial close in conjunction with five banks. In that case, TIFIA took a short-term and long-term piece of the debt. Presidio Parkway was an important deal for the P3 market and for the way the Federal Highway Administration (FHWA) approaches P3 structures. For the first time, FHWA allowed the equity and financing components of an availability payment to be reimbursed by direct federal aid. There are around 16 projects in the pipeline for which TIFIA is ready to commit funds in the next two years. That continuing support – and priority to projects that attract private capital – is extremely important.

(10). There is a range of debt financing sources for P3s, each with pros and cons, but all with the capacity to fund deals.
Recently closed deals, and expected transactions like OSU parking, LMM International Airport and I-95 HOT lanes in Virginia are showing that there is depth and capacity in debt markets to fund P3s. In addition to TIFIA, the bank and private activity bond (PAB) markets are both available. The bank market is arguably more volatile because of the crisis in Europe, but the void left by European banks is slowly being filled by others, including US banks. There is also some pressure on bank tenors. However, the bank market still offers certain structural advantages that are not available in the tax-exempt market, such as committed debt financing, for example, which means it will continue to have a role in funding P3s. Public offerings of tax-exempt PABs are not the only alternative to bank market solutions, however. The Central Texas Regional Mobility Authority (CTRMA) issued bonds in a private-placement transaction to AE Capital in 2010 to finance a portion of SH 183A in Williamson County. Private markets, including the 4(2) private-placement market, are able to offer long-term, fixed-rate debt and could become a new source of liquidity for P3s.

At the mid-point of 2012, therefore, the US P3 industry is tantalizingly poised.

If your glass is half empty, then the hiccups, missteps, and challenges involved with P3s, their higher cost-of-capital compared to the municipal tax-exempt bond market, spotty track record, and past mistakes will be significant reasons to doubt their future in the US.

However, if your glass is half full, then their record in expediting project delivery, allocating risk to the private sector, long-term, steady cash flows, and growing acceptance among state departments of transportation – and the general public – will more than offset those drawbacks.