Over the past year, Florida's PPP and infrastructure programme has showed more promise than any other state, with three projects in various stages of procurement, and a pipeline of new projects in the works. However, despite optimism from some parts of government and from the private sector, no deal has yet reached financial close, and each has encountered a series of obstacles.

Some challenges are not exclusive to Florida transportation development: the ubiquitous difficulties in the debt markets and the associated fallouts from the credit crunch are at the forefront of concern for projects across the nation and beyond. But the slowness of the state- and municipal-level decision-making, and the time-consuming processes involved in using federal funding support programmes, have both had an impact on Florida's developments.

The state has three major transportation projects, at various stages in the procurement process; the forthcoming lease of Alligator Alley, the Port of Miami Tunnel project and the I-595 concession.

The Port of Miami Tunnel

As Project Finance went to press, the fate of the Port of Miami Tunnel project was in the balance, because its primary sponsor, Babcock & Brown is teetering on the brink of bankruptcy. All parties, including Florida's Transportation Secretary Stephanie Kopelousos, had expressed a positive outlook for the project, despite its various challenges, most recently when the secretary appeared on 2 December 2008 at Project Finance Magazine's Florida Infrastructure Finance Forum in Miami. However, the Florida Department of Transportation said on 12 December that it will withdraw its support for the project.

The Port of Miami Tunnel project had faced a number of hurdles since its inception almost two years ago. Since the request for qualifications for the 35-year concession was issued in February 2006, the $1 billion project has been delayed by political-, sponsor- and credit-related problems. Miami Access Tunnel, the consortium led by Babcock & Brown with Bouygues, won the concession with bid of $33.6 million in annual availability payments, inflation-adjusted over a 35-year concession, with a 47-month construction phase. It was accepted by Florida Department of transportation (FDOT) in May 2007.

The state's contribution to the project, through FDOT, is $457 million. Miami Dade County and the City of Miami were to contribute $402.5 million and $55 million, respectively.

The first delay came in securing the $55 million payment from the City, upon which the bid was dependent, and which took a number of months to be approved. The project was also hampered by objection from some of Miami's Cuban community, some of whom objected to Bouygues' participation in the construction, since it had been involved in some recent Cuban projects. Both of these problems were resolved.

When the deal had not closed by September 2007, the sponsor and FDOT extended the deadline a number of times. Lehman Brothers, which has since disappeared, had originally been mandated to underwrite a bond financing for the project, but its commitment, and the pre-negotiated spreads on the debt, expired at the end of the 150-day window. The project still has active allocations from the US Department of Transportation of private activity bonds (PABs) and TIFIA debt.

The majority shareholder in the consortium, Babcock & Brown, is in the process of liquidating its assets to deleverage, and essentially wind down operations to avoid bankruptcy. Paul Boucher, who has headed the project for Babcock & Brown, is now joining Meridiam Infrastructure to run its North American operations, and a number of sources confirmed that there was a plan in motion for Babcock & Brown to transfer its interest in the concession to Meridiam, and Bouygues would have held its existing stake. Though no acquisition fee or premium was expected, Meridiam may have had to reimburse Babcock & Brown for some of the costs of developing the project to date.

The sponsors had lined up a number of banks, mainly French and European, and with relationships with Bouygues, to underwrite $500 million in bank debt to complement the roughly $400 million in approved TIFIA funding, and 10% in equity. BNP Paribas, Societe Generale, BBVA and Santander were said to be among a number of interested lenders. The sponsors were said to have decided against using the PAB allocation, as the cost of underwriting bond debt in the current market is too great.

An epilogue?

With such a plan in place for a financial close, and given the extent of the costs of developing the project, the state's move to cancel the project might seem premature, and one source close to the project does not expect it to be so easily defeated; "Wait for the epilogue," he says, "Our view is that because the state has a $2 billion shortfall in transportation funding, cuts were inevitable. Weaknesses at Babcock & Brown may have created a way to deflect blame. The cuts to the project are, in my opinion, entirely political. Let us not forget that the project depended on pure availability payments from the state, it did not have its own revenue stream from tolls, so it was an easy target."

The availability payments would have been adjusted according to inflation; and the nominal $33.26 million figure was in addition to the upfront milestone payments. FDOT would have been responsible for all of the availability payments for operations and maintenance after construction, and would have assumed some of the interest rate risk on the debt.

Miami locals are said to be shocked, and somewhat angered, by the FDOT withdrawal; City and county government had pledged half the state's input. One government source suggests that FDOT is hoping for its share of the project to be included in a federal infrastructure stimulus package for the state, under the new federal administration. Whether the project would even be eligible is unknown, at least for a few more weeks. The state has identified in excess of $6 billion-worth of ready-to-go projects, which it estimates could be procured and in construction in 30 to 90 days, as part of a potential stimulus package to the economy, infrastructure and employment. "This is no longer a project finance story," says the source, "but a political one".

Another source is more candid; "Yes, FDOT has been going out trying to cancel the project under the premise that the financing has fallen apart. This is a fabrication and the decision to kill the project is purely political. There is a small opportunity to reverse this effort." The sponsor is said to be doing all it can to make this opportunity a reality, and has reportedly asked that FDOT stay any decision until it hears all the facts. In particular, it is challenging FDOT's assertion that the sponsor change was a surprise.

FDOT's transportation funding shortfall is no small problem. One banker, familiar to varying extents with all three current deals, expressed cynicism about the state's capabilities to deal with both its transportation needs and its project procurement, even before the fate of the Tunnel was again in question. "Florida has the gumption to push these deals into the market," he says, "and they're good deals from a lender's point of view, but the combination of the market with Florida's messy politics... I doubt any of them will close."

The political concerns are not the only ones facing Florida's PPPs, though they are the most volatile. Developers active in the state have noted the increased cost of borrowing. Conor Kelly, managing director at Scotia Capital in New York believes that "lending won't begin to look normal again in the US until at least the first quarter of 2009, at best, and probably second or third quarter." However, while bank debt providers are now licking their wounds from credit crunch, the market is beginning to come to life. The Port Mann bridge and highway project in British Columbia, Canada, is in syndication, the first for some time, and its debt structure marks a new way of lending; one which might reemerge in the Florida deals. Sponsors, who view the cost of raising bond debt as prohibitive, do still not favour the bond market, however.

I-595 to the rescue?

FDOT awarded the 35-year concession to design, build, finance and operate the I-595 to a consortium led by ACS on 24 October 2008. The consortium will receive $64 million in availability payments per year. All toll revenues will go to FDOT, which will in turn toll the road and set its toll rates. The five-year construction is due to be complete in 2014, and construction costs are estimated to be around $1.26 billion. The consortium comprises ACS Infrastructure Development, Grandi Lavori Florida, and Earth Tech.

Like the Port of Miami project, I-595 had been approved for both TIFIA funding and private activity bond use under a federal SEP-15 authorisation from the US Department of Transportation, before a concessionaire had been selected. This pre-approval is based on project rather than sponsor, and would also allow the Port of Miami Tunnel to navigate a change in ownership of its project company. For the ACS deal, the pre-approval simply meant a greater number of financing options.

During the procurement process the sponsor is said to have courted both bank and bond debt providers, and though it had a club of banks assembled, there was some contention over flex clauses. The consortium had settled on a bond solution as its least expensive option; but this predated the crunch's darkest period. Another concern with using PABs is that the project must find an entity to issue them, as it is not permitted to do so itself and FDOT cannot issue PABs either. One of the state's toll authorities, such as Miami Dade Expressway Authority, could issue the bond or an economic development authority, if it has the jurisdiction. The limitation is not insurmountable, but is certainly an extra complication to an already complex financing plan.

Irrespective of the PAB complexities in the state, market sources now suggest that the bond market is too troubled to provide cost-effective financing, and ACS has gone back to the table with some of its original banks. Santander is believed to be lined up as lead arranger, and may be considering a construction guarantee as credit enhancement, as it views the I-595 as more of a corporate deal, since ACS/Dragados is also the contractor.

I-595 was considered by many in the market to be the most promising of the deals, with financial close eagerly anticipated. From an FDOT perspective, the deal might be viewed as more appealing than its contemporaries, as it has a revenue stream from tolls, from which FDOT may benefit, and feed some of its shortfall. If ACS can close the deal in a timely fashion, it may well save the state's burgeoning programme. The project, while situated in a built-up area, is technically less demanding than the Port of Miami Tunnel, where a paucity of bidders, and limitations in the ability of FDOT to build the project, circumscribe the state's options.

Alligator Alley looks menacing

Its third major project is the 50- to 75-year Alligator Alley concession, involving the operation and maintenance of 125km of the I-75 in South Florid, which crosses the south of the state from east to west. The deal would involve an upfront concession payment to FDOT for the asset, and the concessionaire would also be required to share a portion of revenues with the state. The project is valued between $350 million and $650 million, dependent on the length of the concession and the terms of the agreement.

FDOT shortlisted six consortiums for the project, after a number of delays, including a reissuance of the request for qualifications in June 2008, and has also pushed back the deadline for bids a number of times. Proposals are now due on 9 January 2009. FDOT has been seeking public input, and has held a number of public information meetings across the state.

Of the six prequalified proponents, only two are now expecting to submit bids. The other four are said to have either withdrawn, or are planning to withdraw from the procurement, mainly for credit-market and equity related reasons, though the underlying political concerns make both debt and equity all the more jittery in an uncertain market.

Atlantia, and Brisa with CCR are now the only expected bidders. The four other shortlisted consortiums are: Alligator Alley Development Partners (OHL and Carlyle); Vinci; Everglades Parkway Partners (Cintra and Goldman Sachs Global Infrastructure Partners); and GVI Alligator Alley Access Partners (Caja Madrid, FCC GlobalVia).
FDOT has a number of other projects in its pipeline, including plans for US-1, further developments I-75, and the First Coast Outer Beltway, but it must close its active projects before it can begin to develop more.

Miami had come to accept and embrace the Port of Miami Tunnel project, after a degree of resistance. The mayors of Miami-Dade County and the City of Miami are now lobbying the state to reverse its Tunnel decision. Latest reports say that the state's governors might stay the decision. Whether the public or the private component of the partnership was the weaker is still being thrashed out; but a failure of the state's first major PPP does not bode well for the future of the programme as a whole. PPP is supposed to provide value-for-money to the public, and while it often does so successfully, in Florida, a lot of money has been spent, from many different sources, on protracted and incomplete procurement processes which have not come to fruition.

The state's history in procuring transportation projects was build-finance, a model that has worked well, with some recent tweaks to accommodate unsolicited proposals. The PPP programme has been active for more than two years, and if ACS reaches close on its I-595 in the coming months, it will not be before time, neither for the project nor for the state's transportation needs.

Whether the Obama administration will rescue some of Florida's transportation is, in many ways, immaterial. The PPP plan and most of the projects' structures are considered financially sound and practicable. Despite the troubled markets, sponsors are prepared to break ground in Florida with equity and lender commitments. But Florida's reaction to the stresses of the crunch is far from inspiring.

FDOT projects