In 2008, a consortium of private firms offered Pennsylvania $12.8 billion for a 75-year lease of the Pennsylvania Turnpike.

Then-Gov. Edward Rendell favored the deal, saying it would mean $1 billion annually for the state’s aging roads and bridges over the next decade. But many lawmakers, voters and the Pennsylvania Turnpike Commission opposed the deal. A stalemate ensued, and the consortium eventually dropped its bid.

The failed Penn Turnpike deal illustrates two lessons that experts say hold true today for the U.S. public-private partnership sector.

The first is that politics matters. And, as seen in the $12.8 billion offer, which marked the highest bid ever tendered for a U.S. toll road, private capital has robust interest in American infrastructure.

The U.S. lags much of the globe when it comes to partnering with the private sector to lease existing infrastructure assets or construct new ones under design, build, finance, operate and maintain models. In the U.S., P3s make up only about 1-2% of infrastructure spending compared to 5-20% of spending in other developed countries, according to the Bipartisan Policy Center.

Besides political opposition, obstacles include: the availability of low-cost debt in the form of municipal bonds, the scarcity of revenue-backed assets like toll roads, and the reluctance of state and local governments to lose control of assets or enter into what are often deeply complex contracts.

The lack of a national infrastructure policy has also dampened development.

The U.S. P3 sector is a patchwork industry driven by state legislation – which lays the ground rules – and federal programs that support the financing side. The earliest U.S. procurement dates back to 1993, and though each project is unique, a handful of high-profile deals are considered benchmarks with broader implications for public perception and investor interest.

Looking ahead, 2021 may mark an “inflection point” for U.S infrastructure and P3s due to the passage of the $1.2 trillion Infrastructure Investment and Jobs Act, according to the law firm Husch Blackwell, which publishes an annual P3 trends report. The law will pump billions of dollars into state and local governments that are used to constrained budgets and promote new federal policies and programs that could spur P3s. That’s especially true for deals outside the traditional roads-and-bridges sector, in the areas of energy, broadband, and electric vehicle infrastructure.

Political support

In the early 2000s, under former Gov. Rick Perry, the Lone Star State enacted broad P3-enabling legislation that launched a building spree of toll roads, like the $2 billion North Tarrant Express, to manage congestion amid a growing population.

From 2008 to 2014, the fast-growing state constructed four major P3 toll deals, and Texas became a champion for large toll-based P3s.

But all those new tolls sparked a backlash from drivers and state lawmakers that culminated in 2017, when the Legislature rejected a bill that would have authorized 18 new P3 projects and Gov. Greg Abbott called for a moratorium on any new toll roads.

In the shifting political environment, Texas went from having one of the most promising P3 markets to a zero-action state, said Robert Poole, director of transportation policy at Reason Foundation.

“The Texas legislation [enabling P3s] was a real landmark and led to $10 billion of private investment, most of which was successful,” Poole said, noting that one of the projects, State Highway 130, failed to meet traffic projects and filed for bankruptcy. But post-Perry, the state’s leaders like Abbott “became very anti-toll,” Poole said. “It’s really stymied things. TexDOT would love to do tolling but it’s not possible as long as the Legislature prevents tolling and P3s.”

As of February 2019, 38 states, Puerto Rico and Washington D.C. statutorily authorize P3s for the transportation sector, according to the National Conference of State Legislatures. Fifteen of the states allow P3s beyond just transportation, and three limit P3s to sectors outside transportation. A handful of states limit P3s to specific projects.

In contrast to Texas, Virginia has enjoyed strong bipartisan support for P3s that has survived several administrations. The state now has 13 P3s either completed or underway, the most in the country.

The 496 Express Lanes project on the Capital Beltway has generated nearly $3.5 billion for the economy, according to the state. The state came to market in February with $1.145 billion of tax-exempt senior lien revenue and refunding bonds and taxable subordinate lien bonds to finance the project, which also taps a $1 billion TIFIA loan.

The new lanes aim to ease congestion at the American Legion Bridge. P3 projects aimed at managing congestion are gaining traction, said Fitch transportation analyst Scott Monroe.

“We’ve been seeing this across the U.S., the increasing use of P3s to address congestion issues,” said Monroe. The use of P3s for high occupancy toll lanes marks a “huge growth sector” in the toll road space, he said.

Governors often push high-profile P3 projects as legacy projects. But if they’re unable to button up the deals during their tenure, the projects face the prospect of being dropped by less-supportive subsequent administrations.

In Maryland, for example, Gov. Larry Hogan is pushing hard to get shovels in the ground for a $9 billion P3 to build new toll lanes along I-270 and the Capital Beltway before he is term-limited out of office in January. If the project advances, it would be the largest P3 in the world to date. But a court protest from the losing bidder – a first in the P3 sector – threatens to delay the process past Hogan’s exit date.

Stable political support is important to negotiating high-profile deals, said Shawn Wilson, Secretary of the Louisiana Department of Transportation and Development and current president of the American Association of State Highway and Transportation Officials.

Setting up a procurement under an administration that is replaced by another that may not as supportive “could really burn the industry,” said Wilson, who is pushing to complete the state’s largest transportation P3 before Gov. John Bel Edwards leaves office in January 2024.

The private sector “needs certainty, and when you change out a principal, you’re fundamentally changing that relationship,” Wilson said. “I think it really speaks to following the best practices and understanding the industry’s concerns.”

A teachable moment

In 2005, former Indiana Gov. Mitch Daniels cemented his legacy with the $3.8 billion, 75-year lease of the Indiana Toll Road.

“As I think about the really big watershed moments, the first would be the offering of the concession to operate the Indiana Toll Road,” said Tom Osborne, executive director of IFM Investors, which purchased the 157-mile road in 2015.

“That got everybody’s attention and showed that these kinds of public-private partnerships could be done over existing assets in the U.S,” Osborne said.

When the state floated the lease, it got four bids. The Indiana Toll Road Concession Company LLC, a partnership of Cintra of Spain and Macquarie of Australia, was the top bidder, offering $1 billion over the next-largest offer.

Daniels used most of the proceeds to finance the state’s transportation budget for the next decade in a program called Major Moves. Putting the money back into infrastructure is one reason why the deal is considered a success, Poole said.

“It was very controversial and people thought he wouldn’t be reelected, but when the money flowed in and they used the proceeds for a fully funded 10-year program, it was a political success,” said Poole, who acted as an advisor to Daniels on the deal.

Even when things went wrong, the ITR still offers a success story for the P3 market, said Osborne and Poole.

In 2014, amid lower-than-expected traffic and a high debt load, ITRCC, which had more around $6 billion of debt, backed by tolls, filed for bankruptcy protection.

“The original concessionaire ended up in bankruptcy as a result of putting too much debt on a great asset,” Osborne said. “The key thing is that the concession terms had been written in a way that contemplated this could happen and the bankruptcy was administered in an orderly way, in line with the terms.”

In 2015, IFM won a bidding process for the remaining 66-year lease with its $5.725 billion offer, at the time the largest price tag for an existing U.S. asset and the first time that major U.S. pension funds invested in American infrastructure.

In the end, Poole said Chapter 11 proved to be only a small bump in the road for the larger P3 sector.

The increased price IFM paid for the asset kept taxpayers protected and creditors almost whole. “So, it was a huge success after all,” Poole said.

Revenue risk vs. availability payments

Experts are fond of pointing out that P3s are financing, not funding, tools. Private capital may cover and possibly reduce upfront costs for governments, but ultimately, the issuer has to pay back the money — plus interest.

Revenue-risk structures, more common internationally, involve a user fee like a toll backing the debt. Availability-backed P3s deals are ones in which the government commits to regular payments over the life of the concession, usually subject to the consortium meeting certain performance requirements.

The use of availability payments allows a government to avoid the controversial issue of a private entity controlling tolling toll rates or even the unpopularity of tolls altogether, which has sunk many projects, including a $2 billion proposed bridge P3 in Alabama.

Many states, like Louisiana, have shied away from availability-backed payments as the structure could “cannibalize” already anemic transportation funding, according to Wilson.

Availability-payment deals often require less equity investment because they are viewed as less risky, by investors, bondholders and ratings agencies.

“Availability payment deals don’t have the upside opportunity that may exist in a volume-risk deal or a tolling-risk deal, but they don’t have the downside either,” Osborne said. “So, they may be appropriate for investors who are looking for a very stable investment that requires less hands-on management and who doesn’t want to incur a lot of associated risk.”

Availability payment structures are becoming increasingly common in the U.S., said Charles Renner, a partner at Husch Blackwell who is the author of the firm’s annual P3 trends report.

“Over the last 10 years there has started to emerge a few prevailing terms to a P3 project for the U.S. market,” Renner said, with availability payment structures being one.

“The availability payment structure is certainly carrying the day,” especially with deals in the energy space, where “every one is fixed payments,” Renner said. “The more that those structuring components get used and adopted, the more frequency you start to see them.”

In 2009, Florida was the first issuer to use the availability payment model for its $1.8 billion I-595 Express Lanes project. The 13-mile venture includes 10 miles of three reversible tolled express lanes that feature a congestion pricing system. The model allowed the state to keep control over toll rates, which are based on congestion pricing, and it can use the revenue to offset availability payments.

Looking forward

While roads and bridges have traditionally seen the most action, the U.S. P3 market over the last several years has welcomed new issuers and has stretched into new fields.

The pandemic accelerated that trend, Renner said.

Surface transportation saw one of the lowest project counts ever in 2021, Husch Blackwell found in its newest report, published in March.

“Our 2021 research cohort did not contain any projects aimed at roads and highways, the traditional sweet spot of U.S. P3s, as grantors focused surface transportation projects on mass transit, electric vehicle infrastructure and other ancillary areas like rest areas and visitor centers,” the 2022 report said.

Overall, there were 84 active P3 projects in the U.S. during 2020, marking a 320% increase from 2018, the firm said. The number of U.S. P3 projects reaching financial close in 2021 increased year-over-year 13.6%, to 25 from 22, the report said.

The energy sector in particular is poised for growth, Renner said.

“It’s clear for all kinds of reasons that energy-based P3s or integrated P3s with an energy component is seeing a lot of volume and activity,” he said. “Anything that has got some climate-friendly energy-based component to it, singular or integrated, is where we’re going to see most of the movement.”

The Ohio State University set the model for energy-related P3s in 2017 when it entered into a $1.2 billion, 50-year lease of its energy system. The University of Iowa followed in OSU’s footsteps in 2019.

In 2021, three higher-ed facilities closed on energy P3s, including Fresno State, Georgetown University and Illinois Institute of Technology.

The uptick in utility-based P3s is happening overseas as well, said John Godfrey, Senior Government Relations Director for the American Public Power Association.

“At least internationally, some of the biggest targets for privatization are public utilities. We are extremely stable and we have a monopoly,” said Godfrey, who is a P3 skeptic. “We’ve been very leery of that and pushing back against that narrative of saying the private sector does it better.”

Last year marked a first on the federal side when the Army Corps of Engineers closed on a long-planned $2.75 billion flood prevention project between North Dakota and Minnesota. It’s considered a template for the Army Corps’ P3 pilot program, which could include up to 10 projects.

U.S. airports are another area that investors hope to see more action, said Osborne. Crucial to this sector is federal legislation, the Airport Investment Partnership Program, which allows airports to explore privatization as a way to generate private capital.

“Airport assets are highly sought after by infrastructure investors globally, and many major city airports around the world are operated through public-private partnerships today, and in some cases even owned by private sector operators,” Osborne said. “We would very much like to see an increase in the number of airport transactions that could come up over time.”

The IIJA also expands the TIFIA program to include airports, which could spark activity.

Chief among the IIJA’s P3-friendly provisions is a doubling of the private activity bond volume cap, a key financing tool for many P3s. As of February 2022, approximately $16.49 billion of PABs have either been issued or allocated, which has exhausted the total PABs volume cap. The IIJA boosted the cap to $30 billion.

The new law provides technical assistance for governments evaluating P3s, and requires a value-for-money analysis, which examines life-cycle costs for various delivery models, for any project that costs more than $750 million and uses federal funds.

The IIJA also reflects a Biden Administration emphasis that’s less on new highway capacity than on climate-friendly, equity-based programs in a variety of areas. That too could is expected to promote deals outside the traditional roads and bridges space.

At least half the states, and many cities, have appointed infrastructure coordinators who will be focused on building the pipeline of projects. More than 90% of the law’s resources will be delivered by nonfederal partners, including states, cities, universities, and private entities.

“The IIJA provides considerable funding, but at the end of the day, it’s state and local governments who make decisions as to what to build, how to build, and how to fund U.S. infrastructure,” said DJ Gribbin, founder of infrastructure consulting firm Madrus and President Trump’s former infrastructure advisor who oversaw the administration’s $1 trillion infrastructure plan.

“The volume and diversity of infrastructure in the United States is just enormous, and there is considerable opportunity for investors across a wide range of asset classes, including energy, education, electric vehicles, and broadband,” Gribbin said.

Back in Pennsylvania, the turnpike remains in state hands while PennDOT has launched what it calls one of the most ambitious and comprehensive P3 programs in the country.

Its most recent initiative is the Major Bridge P3 program. It will rely on tolling to fund the projects. The plan has sparked local opposition, and several municipalities and counties have sued to block the tolling.

The outcome of the political dispute remains to be seen.

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