U.S. Infrastructure PPPs: Ready for Takeoff?

The United States, once a global leader in infrastructure competitiveness, now ranks 16^th in the world.1 This decline shows no signs of abating as federal, state and local funds for infrastructure remain constrained, and government resources remain centered on health care, social security, and defense.2

Underinvesting in existing and new infrastructure reduces the productive capacity of the U.S. economy. The United States could eliminate this major drag on economic growth and protect against a $3.1 trillion loss in gross domestic product (GDP) through sizable infrastructure investments through 2020, according to a 2013 study by the American Society of Civil Engineers.3

In an era of limited federal funding for infrastructure, PPPs are an increasingly used tool for U.S. state and local governments to bridge resource gaps. This article explores key PPP trends and takeaways from the past decade in the United States and analyzes some of the factors that will determine industry growth going forward. The article also offers specific, tangible evidence of the benefits of PPPs in the United States that demonstrate that significant public value can be created through the responsible fusion of private and public sector resources.

Brownfield to greenfield: A short history

Since the catalyzing $1.8 billion Chicago Skyway lease was completed 10 years ago, the U.S. PPP market has developed dramatically. From 2005 to 2014, 48 infrastructure PPP transactions with an aggregate value of $61 billion reached the formal announcement phase. Of the forty-eight deals, 40 transactions — or more than 80 percent — successfully closed. 2012 was the busiest year on record for PPPs that reached financial close, with nine such transactions achieving completion during the year. A summary of historical transaction activity is included in Table 1.

Despite a sizable and growing track record, PPP skeptics in the U.S. often narrowly focus on the handful of announced transactions that did not close — most notably, Texas’s $3.5 billion SH-121 (2007), the $12.8 billion Pennsylvania Turnpike lease (2008), the $452 million Pittsburgh Parking concession (2010), and the $2.5 billion Chicago Midway Airport lease (2009, 2013).7

The most common thread in these unsuccessful PPP initiatives is a lack of political consensus to support the underlying project through to completion. If a jurisdiction is divided on partisan or other lines as to whether a PPP is the correct approach, it reduces both the chances of success and the appetite of bidders to present attractive proposals. Without a real consensus at the outset, history suggests that the risk of a PPP being thwarted or mischaracterized by opponents is high. This is true even at the local level in cities that enjoy “municipal home rule,” which generally provides broad legal authority and protection from interference at the state level.8

Political risk, however, was not the only defining characteristic in the early years of the US PPP industry. Financial market conditions also played a fundamental role.

In 2008 and 2009, the global financial crisis profoundly reshaped the US PPP market. Prior to the crisis, only 10 infrastructure PPP transactions had been announced, reflecting the industry’s nascent stage. The vast majority of PPPs from 2005 to 2007 were privatization-style transactions involving “brownfield,” or existing assets. In such transactions, the private sector assumed significant risks and underwrote aggressive assumptions regarding future levels of demand.

The largest completed PPP of the pre-financial crisis was the $3.8 billion lease of the 157-mile Indiana Toll Road, which is now undergoing a financial restructuring via Chapter 11 bankruptcy.9 At this point, such privatization transactions — which were highly politicized despite the private sector overpaying — appear to be a relic of the credit bubble and financial history.

Since the crisis, the U.S. infrastructure PPP market has almost entirely shifted away from “brownfield” transactions in favor of “greenfield,” i.e., new-build projects. In a greenfield context, the primary value of the PPP model comes not from monetizing an asset, but rather from delivering a needed project more effectively. Such projects are often tendered by governments as “availability-payment” transactions, which entitle a developer/private consortium to receive periodic payments as long as the asset is “available” to the public at the standards set forth in the contract.

Overall, the U.S. PPP market has successfully transformed from its early days. Transaction structures have steadily changed as governments balance proceeds potential, risk allocation, project delivery costs, and other policy considerations. In this context, the current market for PPPs remains robust, as underscored by diverse transaction activity across the United States (see Figure 1).

Looking Ahead

In a September 2014 report, Moody’s Investors Service stated, “the United States has the potential to become the largest PPP market in the world, given the sheer size of its infrastructure.”12 The extent to which this statement will hold true depends on at least three factors:

• Political cycles, particularly the implications of gubernatorial elections;
• The federal government’s continued ability to offer loans and other forms of financial assistance in PPP transactions; and
• The extent to which other funding sources (e.g., gas taxes) grow and lessen the catalysts for PPPs.

Federal Support

For transportation projects, the Transportation Infrastructure Finance and Innovation Act (TIFIA) program, originally enacted in 1998, plays an essential role in the U.S. PPP market by providing “credit assistance for qualified projects of regional and national significance.”17 Particularly since the financial crisis (and in light of a 2012 expansion of its lending capacity), TIFIA has been instrumental in facilitating PPP activity.18

In addition to federal loan programs, the Obama administration recently announced that it would propose “the creation of an innovative new kind of municipal bond, Qualified Public Infrastructure Bonds (QPIBs).”21 If approved as conceptualized, QPIBs would offer a low-cost financing tool to increase private participation in building U.S. infrastructure. Unlike Private Activity Bonds (PAB), QPIBs would have no issuance caps. The overall impact of QPIBs would be to allow PPPs, including transactions involving long-term leases and management contracts, to take advantage of the benefits of municipal bonds.22 If QPIBs are indeed approved by Congress and the President, “brownfield” PPPs in particular could reemerge as a source of new infrastructure funding.23

Conclusion

At a conceptual level, the primary drivers of infrastructure PPPs — new sources of capital, cost savings, risk transfer, and accountability — remain strong. Government officials at all levels (federal, state, and local) continue to operate in an environment of constrained financial resources and citizen expectations for efficient and timely operations.

In Florida, the I-595 PPP provided capacity improvements 15 years sooner than a conventional plan would have offered.25 In Maryland, an innovative expansion of the Seagirt Marine Terminal in the Port of Baltimore was completed two years ahead of schedule due to the PPP model.26 As a result, the Port of Baltimore is only the second port on the U.S. East Coast to have unrestricted access to both a fully functioning 50-foot channel and 50-foot berth.27

In California, the Administrative Office of the Courts used a PPP to deliver a new 531,000-square-foot courthouse in Long Beach ahead of schedule and under budget.28 While many other successful case studies exist, these three examples — I-595, Port of Baltimore and Long Beach Courthouse — provide tangible evidence of the value creation potential of PPPs in the United States.

In sum, the United States cannot expect to have an “A” economy with “D+” infrastructure.29 PPPs, while not a comprehensive policy solution, can help the United States “make the grade” going forward by enabling and accelerating the completion of important projects. A supportive federal government role — whether through existing programs like TIFIA or new initiatives such as QPIBs — will be critical to continuing the growth trajectory of the U.S. market.

From 2005-14, Andrew Deye advised on public-private partnerships (PPPs) and infrastructure M&A transactions throughout the U.S., most recently as a Vice President at Greenhill & Co. He received his Master in Public Administration at Harvard University and currently serves as Director of Strategy at JobsOhio, a private economic development organization in Columbus, Ohio. 

This article first appeared in the 2015 print edition of the Harvard Kennedy School Review and is excerpted with permission.  http://harvardkennedyschoolreview.com/us-infrastructure-public-private-partnerships-ready-for-takeoff. You can order your copy here. 

Endnotes

1 Steve Kroft, “Falling Apart: America’s Neglected Infrastructure,” 60 Minutes, 23 November 2014.

2 Paul Haven, “Issue Brief: Federal Funding for U.S. Transit and Roadway Infra- structure,” Environmental and Energy Study Institute, 8 August 2013.

3 Economic Development Research Group, Inc., “Failure to Act: The Impact of Current Infrastructure Investment on America’s Economic Future,” American Society of Civil Engineers, 15 January 2013.

4 “Friday Marks 7 Years Since I-35W Bridge Collapse,” CBS Minnesota, 1 August 2014.

5  “About PPPs: Frequently Asked Questions,” PPP Canada, accessed 3 January 2015.

6  “PPP Defined: Design Build Finance Operate Maintain Concession,” Federal Highway Administration.

7 “IV. The Growing Use of PPPs in the United States,” in “Innovation Wave: An Update on the Burgeoning Private Sector Role in U.S. Highway and Transit Infrastructure,” Federal Highway Administration, 18 July 2008; “Driven by Dollars: What States Should Know When Considering Public-Private Partnerships to Fund Transportation,” Pew Center on the States, 24 March 2009; Michael Benouaich, “Making Sense of Recent U.S. Parking-Lease Transactions,” Parking Today, May 2011; “Airport Privatization: Limited Interest Despite FAA’s Pilot Program,” United States Government Accountability Office, November 2014.

8 Stephen Goldsmith and Andrew Deye, “A 5-Part Test for Public-Private Partner- ships,” Governing, 17 December 2014; “PPPs and Municipal Home Rule,” Allen & Overy, Spring 2009.

9 Jacqueline Palank, “Judge Approves Indiana Toll Road Bankruptcy-Exit Plan,” The Wall Street Journal, 28 October 2014.

10 “Introduction to Public-Private Partnerships with Availability Payments,” Jeffrey A. Parker & Associates, Inc., 2009.

11 “Governor Rick Scott Breaks Ground on I-4 Ultimate Project,” Florida Governor’s Press Office, 17 February 2015.

12 “Public-Private Partnerships – Global PPP Landscape: A Region-by-Region Round-Up,” Moody’s Investors Service, 8 September 2014.

13 “Senate Session,” C-SPAN, 3 November 2011.

14 HNTB Corporation, “Brent Spence Bridge Project Options Analysis,” Ohio Department of Transportation and Kentucky Transportation Cabinet, September 2013.

15  John London, “Governors: Tolls to Help Pay for Brent Spence Work,” WLWT5 Cincinnati, 28 January 2015.

16  “Rauner’s Order Puts Planned Illiana Expressway on Hold,” Associated Press, 13 January 2015.

17  “TIFIA Overview,” United States Department of Transportation, last updated 4 February 2015.

18  “Fitch: TIFIA Increasingly Relied Upon for PPPs and Non-PPPs,” Business Wire, 29 October 2014.

19  “U.S. Transportation Secretary Foxx Announces $474 Million TIFIA Loan for Goethals Bridge Replacement Project,” United States Department of Transportation, 6 November 2013; “U.S. Transportation Secretary Foxx Announces $452 Million Loan for Louisville-Southern Indiana Ohio River Bridges Project,” United States Department of Transportation, 13 December 2013; “I-95 HOV/Hot Lanes,” United States Department of Transportation; “Project Profiles: Presidio Parkway,” Federal Highway Administration.

20  “Infrastructure Financing,” American Water Works Association.

21  “FACT SHEET: Increasing Investment in U.S. Roads, Ports and Drinking Water Systems Through Innovative Financing,” The White House, 16 January 2015.

22 Ibid.

23 John Schmidt, “A Sane Way to Upgrade Bridges, Ports, and Transit,” The Wall Street Journal, 2 February 2015.

24 Scott Horsley, “Obama Talks Gas Tax And Visas With Business Leaders,” NPR, 3 December 2014.

25 Joe Borello and Paul Lampley, “I-595 Public Private Partnership (PPP) Presentation for Talking Operations Webinar,” Florida Department of Transportation, 7 July 2010.

26 “Governor O’Malley Leads Celebration of New 50-Foot-Deep Berth and Supersized Cranes at Port of Baltimore,” Maryland Department of Transportation, 8 May 2013.

27  Leif Dormsjo, “Funding the Nation’s Freight System,” House Panel on 21st Century Freight Transportation, 10 October 2013.

28  “FACT SHEET: Governor George Deukmejian Courthouse,” California Administrative Office of the Courts, August 2013.

29  “2013 Report Card for America’s Infrastructure,” American Society of Civil Engineers.