September 24, 2014
Infra Americas

24 Sep 2014 | USA | Roads

Eugene Gilligan

Washington sharpens its focus on P3s

The federal government’s involvement in US P3s is not new, as the TIFIA loan program and Private Activity Bonds have both played a major part in getting numerous projects across the finish line. But recent initiatives launched by President Obama and Congress send a clear signal that the procurement method is increasingly seen by the government as a tool for addressing America’s infrastructure funding gap. Infra Americas reporter Eugene Gilligan discusses the initiatives with P3 market makers.

Federal lawmakers have not historically been P3 advocates. In the past, the concept was not well-understood by many politicians in the US, and opposition from the public and from organized labor made arguing for privately owned or leased assets a political minefield.

But the federal government is increasingly looking at P3s in a new light, seeing them as a way to build critical infrastructure as traditional funding sources like the federal gas tax wither. Both the executive and legislative branches, and politicians spanning the spectrum from Republican to Democrat, have stood behind significant recent movements aimed at lowering the barriers to P3s.

For many in the industry, these initiatives are eye-opening, and a sea change from where the US P3 market stood a few years ago.

Doug Fried, partner at Chadbourne & Parke, says that it was not very long ago that he had to worry how to explain what a P3 was to government officials. The moves at the federal level, particularly the establishment of a knowledge center at the USDOT, are welcome, Fried says.

“An educated government can be the best proponent for P3s,” Fried says.

A year of hearings
Over the course of the last year, the House of Representative’s Transportation and Infrastructure Committee’s P3 panel held a series of hearings and roundtables on how P3s can be used in transportation, water/wastewater and government buildings. Public and private sector participants testified about the success of federal programs like TIFIA and discussed barriers to private investment in infrastructure.

The panel’s work concluded in September with a 56-page report on how to lower barriers to US P3s, and some of those suggestions will likely be contained in the new transportation reauthorization bill, and other legislation.

While the panel was preparing its report, in July, President Barack Obama rolled out a number of initiatives designed to break down barriers to the development of P3s in the US. He announced the creation, by executive order, of the Build America Transportation Investment Center, to be housed in the Department of Transportation, that will “serve as a one-stop shop for cities and states seeking to use innovative financing and partnerships with the private sector to support transportation infrastructure,” according to a White House statement.

The administration also launched the Build America Interagency Working Group, co-chaired by Cabinet secretaries Anthony Foxx and Jacob Lew. The group will work with state and local governments, project developers, investors and others to address barriers to private investment and partnerships in municipal water, ports, broadband and the electrical grid. The group will be focus on projects of regional and national significance, and will seek to accelerate financing and completion of these projects, particularly those that cross state borders.

The administration hosted an Infrastructure Investment Summit on 9 September, which included developers, institutional investors, and state, local and federal officials. Participants examined and discussed innovative methods to fund infrastructure development.

There has been a pronounced shift in attitudes toward P3s and tolling in the US, says Marcus Lemon, shareholder in Polsinelli and former chief counsel to the Federal Highway Administration in the George W. Bush administration. During his time in Washington, many key Democrats were completely anti-tolling.

That has changed, for the most part, he says. In addition to Obama’s P3 efforts, his GROW America transportation bill introduced earlier this year in Congress would grant states the option to toll their interstate highways.

Promise and critique
The federal initiatives are promising, says Richard Fierce, senior vice president at Fluor, who also serves as a member of the Board of Directors of the Association for the Improvement of American Infrastructure. It is notable that the Obama Administration and the House P3 Panel are essentially calling for the same solution, a knowledge center or center of excellence at the US DOT, he says.

As the project pipeline matures and diversifies, some standardization of key P3 documents and contracts will be necessary to manage that diversity, Fierce says. It is true that the private sector has sometimes blamed the languid growth of P3s on the 50 different state DOTs that procure projects. Standardization, and a repository of procurement best practices that states could access, would be helpful. It will also prove valuable as the number of procurement agencies “will grow exponentially” for water and wastewater projects, he says.

The center, however, should not turn into a “new layer of bureaucracy” that would dictate to states how to run their P3 programs. The “steering wheel should not be taken out of the hands of the states,” Fierce says.

Rod Didiron, executive director of the Mineta Transportation Institute, a think tank, cautions of the danger in looking to P3s as a “silver bullet” that will solve all of the US’s transportation funding problems.

While President Obama should be applauded for focusing on the need for transportation spending, Didiron argues that P3s are best suited to projects that generate a profit after operations and maintenance costs, such as toll roads and high speed rail projects.

The P3 project delivery method is still somewhat misunderstood, says John Dionisio, Investment Director for Meridiam Infrastructure North America. Cost of capital is often the immediate focus for public officials - “while the real value of P3 is the ability to transfer risk, the value of building in life cycle costs, the additional innovations that the private sector can bring.” Part of the evolution of the US P3 market will involve conveying that notion of value “to the taxpayer,” he says.

Further steps
The federal government could find further P3 opportunities in Amtrak and the US Postal Service, Lemon says. The significant inventory of government buildings that have vacancies could also be helped by P3s. These assets are “a huge drag on their expense sheet,” Lemon says.

On the transportation front, the federal government could move P3s forward by further streamlining the environmental review process, Lemon says.

Tolling is another step that could be undertaken with federal support. Granting states the power to toll their interstates would generate much-needed money to fund key transportation projects, Fried says.

The federal government could also advance P3s by awarding additional money to projects that use a P3 structure, says Jacob Falk, counsel at Chadbourne & Parke, with a grant program modeled on the TIGER program.

Timing is everything.

The Great Recession and improved tolling technology are two of the factors that have brought P3s into greater focus for President Barack Obama and federal legislators, says Marcus Lemon, shareholder at Polsinelli.

“Ten or 15 years ago, there was less of a case for P3s,” Lemon says. But factors such as the Great Recession, which forced states to take a closer look at alternative procurement methods, and the declining purchasing power of the federal gasoline tax have made a more convincing case, he says.

Improved tolling technology, such as EZ-Pass, is another plus for P3s, and the day could be coming when consumers look at their monthly toll bill as a utility in the same category as the water or electric bill.

But P3s can carry the entire funding load for transportation projects. The deadline to pass a new federal transportation funding bill has been extended to May 2015, and many advocates are pushing for a long-term funding stream for projects.

While the federal push to lower barriers to P3s is “promising,” that “cannot be in lieu of a transportation reauthorization bill,” says Richard Fierce, senior vice president of Fluor and a member of the Board of Directors of the Association for the Improvement of American Infrastructure.

“That’s job number one, we are very keen on that,” Fierce says, calling the lack of reauthorization legislation “a limiting factor on deal flow.”