Despite formidable obstacles, public-private partnership (PPP) transactions have proven their staying power in the United States (US) over the past 15 years, and the level of enthusiasm remains high among the most prominent players in the industry.

The current phase of PPPs in the US began with the Dulles Greenway Toll Road, the SR-91 Tolled Express Lanes and the JFK International Airport Terminal 4 privatization transactions in the early to mid 1990's. This early activity was followed by limited progress until, in 2005, an entity created by Cintra Concesiones de Infraestructuras de Transporte, S.A. (Cintra) and Macquarie Infrastructure Group (Macquarie) completed the purchase and long term financing of the 99-year concession to operate the Chicago Skyway Toll Bridge (Skyway) in exchange for an upfront payment of $1.83 billion to the City of Chicago.

In 2006, another Cintra/Macquarie consortium was awarded the 75-year concession for the 157-mile Indiana Toll Road (ITR) in exchange for the payment of $3.85 billion to the State of Indiana. Unlike the earlier transactions involving the financing of new facilities, Skyway and ITR involved the concession of existing facilities in exchange for large up-front payments that captured the attention of politicians and governmental officials in cash-strapped states and municipalities throughout the country.

Legislative and political backdrop

The multiplicity of federal, state, regional and local governmental entities responsible for transportation infrastructure projects sets the US apart from the other countries in which the PPP concept has caught hold more readily.

Accordingly, the viability of PPPs in each of the 50 states is subject to the willingness of state and local politicians to support the enactment of legislation to authorize transportation infrastructure projects that utilize PPPs. With the enactment of PPP enabling legislation by many states in response to the monetary success of the Skyway and ITR transactions, a majority of states now have in place some form of PPP authorizing legislation.
However, there have been notable setbacks on the state legislative front.

Last year, Texas, which had been at the forefront of transportation PPPs in the United States, enacted legislation instituting a partial, two-year moratorium on privately financed toll roads throughout the state (the law contains exemptions for certain existing projects) and giving regional public toll authorities the right to develop and operate toll roads in priority to PPPs. Since then the battle has only intensified between the Texas Department of Transportation, a strong proponent of the Governor's initiatives for expanded use of PPPs, and regional toll road agencies seeking to maintain control over future toll road development and operation.

In New Jersey, PPP proponents eagerly awaited the results and recommendations of that state's study of alternative means for financing its vast transportation infrastructure needs, anticipating that the study would result in support for legislation to permit the privatization of the New Jersey Turnpike and other major toll roads, which would have been by far the largest PPP transaction in the US to date. Instead, the completed study has served as the basis for New Jersey Governor Corzine's rejection of the PPP model in favor of his vigorously promoted proposal for the monetization of the state's major toll roads under arrangements that retain control within the public sector.

For several years, the City of New Orleans had considered privatization of its secondary airport but reached no political accord on proceeding in that effort. However, recently the Speaker of the House of Representatives of the State of Louisiana introduced legislation to transfer ownership of the major international airport in New Orleans from the city to the state, rejecting the alternative of transfer to the private sector. At the time of this writing, neither the Mayor of the City nor the Governor of the State has taken a position on any transfer, whether a public-to-public transfer under the proposed legislation or a privatization alternative.

In California, which together with Virginia got the PPP ball rolling in the early 1990's, the PPP bill championed by Governor Schwarzenegner to encourage "performance-based infrastructure" projects recently failed to achieve the necessary votes to get out of legislative committee. That proposal ran into stiff opposition from advocates of the view that PPPs increase costs to citizens because of the profit margin built into the fee structure and their perception that capital costs for PPPs are higher than available to the public sector, despite strong support for the operational efficiency and more diverse and flexible debt and equity sources of capital available to the private sector, particularly in difficult credit conditions.

Also in California, residents will be voting this year on Proposition 98, a ballot measure proposed to ban the use of eminent domain to acquire property for transfer to private owners for purposes deemed to be in the public interest. PPP proponents are concerned that passage of Proposition 98 would greatly hinder the development of PPPs in California.

At the federal level, US law limits the ability of public and private operators to toll roads that were constructed using federal funding, a class which includes most interstate highways in the country. As such, the viability of PPPs to rehabilitate existing toll-free roads that were constructed with federal funding requires the support of politicians in Washington for statutory exemptions to federal law in order to permit tolling. In this regard, the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), which was enacted in late-2005, contains a number of exemptions to existing federal law that are favorable to tolling and PPPs.

Among other features, SAFETEA-LU provides for an Express Lanes Demonstration Program which authorizes 15 express toll lane projects on congested interstates, HOT lanes projects where existing high occupancy vehicle lanes may charge tolls to vehicles that do not meet the passenger requirements, an Interstate Construction Toll Pilot Program under which up to three states may impose tolls on new interstates to support the financing for their construction, and up to $15 billion of tax-exempt private activity bonds (PABs) for PPPs in which a private partner has a long-term interest.

In addition, the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) authorizes the US Department of Transportation to provide direct loans, loan guarantees, and lines of credit to cover up to 33% of the cost of transportation infrastructure projects, including PPPs, with a value of at least $50 million.

Notwithstanding the federal legislation noted above, opposition to tolling and to PPPs in general has been encountered in both the US Senate and the US House of Representatives. For example, in September 2007, Senator Hutchison (Republican from Texas who sits on two key Senate committees affecting transportation) introduced legislation to tighten the restrictions on tolling existing federally funded interstate freeways. While the proposed legislation has not been passed, the enactment of this or similar legislation would chill the prospects for many future PPPs dependent on implementation of tolling on existing interstate freeways. In the House, Congressman Oberstar has been a highly vocal opponent of PPPs in his key position as Chairman of the House Transportation and Infrastructure Committee.

Airport legislation

In the airport sector, the PPP debate arises in the context of competing bills introduced in Congress for legislation required to reauthorize the Federal Aviation Administration (FAA), including its airport privatization pilot program.
The FAA's airport privatization pilot program is limited to 5 airports, only one of which may be a large-hub airport (i.e., an airport that had 1% or more of total passenger boardings in the US in the preceding calendar year). In addition, absent the consent of a supermajority (65%) of airlines at a privatized airport, a governmental entity that leases its airport to a private operator would not be able to use any portion of the lease proceeds for any purpose that is not airport related and the private lessee would not be able to increase airport fees at a rate greater than the rate of inflation.

The current FAA authorization was set to expire at the end of September 2007, but has been extended on a temporary basis pending enactment of definitive federal legislation for multi-year renewal of its authorization and funding. Several competing bills have been introduced in Congress containing alternative proposals for the FAA reauthorization.

Proponents of a liberalized airport privatization pilot program, including the FAA, favor increasing the number of permitted airports from 5 to 15, eliminating the 1 large-hub restriction and substantially curtailing the supermajority airline consent requirements, while opponents of the airport privatization pilot program have suggested increasing the supermajority airline consent requirements and other measures that would make the program more restrictive.

The lack of agreement among politicians at the state and federal levels as to the overall benefit of using PPPs in US transportation infrastructure is understandable at this relatively early stage in the development of the PPP concept in the US. The political debate reflects the many competing concerns and prospects that have been pondered by academics and industry participants alike, and which are garnering attention on Main Street as well as Wall Street.

Key factors of debate in US PPP development

Economic factors: The ready access of state and local governmental entities to a large and liquid market for tax exempt bonds with relatively low interest rates has served as an impediment to the use of PPPs in the US. However, a shortage of governmental resources, increased pressure on tax revenues, and difficult financial markets are causing public entities to reconsider the financing sources to meet their transportation infrastructure needs. The situation is exacerbated by the recent troubles of monoline insurance companies that provide municipal bond insurance, which has been a significant feature of the municipal bond market for many years. The spread between interest rates on US Treasury bonds and municipal bonds has recently reached historic highs, making borrowing by the public sector relatively more expensive than in the past.

Although PPPs are also adversely affected by the current debt crisis, and monolines have been instrumental in their access to long-term debt in the capital markets, nevertheless the private sector has the advantage of greater diversity and innovation in its financing sources. For example, the abundant supply of equity capital available for infrastructure PPP investment, including very sizable infrastructure funds recently launched by a number of investment banks and private equity firms, creates opportunity for PPPs in the current challenging economic environment.

Practical considerations: PPP proponents emphasize that (i) much of the transportation infrastructure in the US is in need of improvement and expansion, and is ripe for private sector ingenuity and efficiency, (ii) PPPs shift various risks, such as construction overruns and underperformance of the infrastructure asset, from the government to a private entity, (iii) PPPs allow the public sector to focus its resources on core governmental functions, and (iv). privatized infrastructure facilities are typically paid for by the direct users of those facilities and not by the tax paying citizenry at large.

Public policy concerns: Many US politicians and citizens are adverse to foreign entities being heavily involved in the development, operation and maintenance of US transportation infrastructure, particularly if those entities may be entirely or partially owned by foreign governments. Residents in most of the states have enjoyed toll-free travel since the inception of the federal highway system, and proposals to shift to a toll-based system, whether under a PPP or a publicly operated facility, are often viewed with skepticism. There is highly vocal opposition to the profit motive of the private sector, particularly when coupled with the specter of imposition of tolling or permission to increase tolls. There is also potential concern about the impact of the private sector's profit motive on the job security of union workers and governmental employees who may not be accustomed to the efficiency demands of the private sector, as well as concerns that the private sector will not exhibit an adequate degree of concern for the needs of the public beyond what is required to meet financial targets.

Even where there is consensus on a PPP alternative, there may well be debate about whether the proceeds of sale of a transportation concession may be used, in whole or in part, for any purpose other than vital transportation improvements. For example, proceeds of the Chicago Skyway sale were applied to a variety of worthy governmental purposes unrelated to transportation; whereas the use of the ITR proceeds exclusively for vital transportation needs was a key factor in achieving requisite legislative support for the transaction.

As to concerns that the needs of the public will not be sufficiently addressed by private operators, PPP proponents are quick to note that PPP concession agreements typically contain extensive provisions designed to protect the public interest, including limitations on toll and fee increases, specific labor requirements intended to protect the local workforce, and comprehensive and exacting standards by which the facilities must be operated and maintained in order for the private operator to retain its concession rights.

Recent PPP projects

Since the closing of the Skyway and ITR transactions, a number US transportation infrastructure projects have been undertaken with the use of PPPs, some of which are discussed below.

Colorado: The Northwest Parkway, located northwest of Denver, was constructed with $416.4 million in bonds issued by three local governments. The parkway opened in November 2003 and had been consistently generating less income than had been estimated. In November 2007, Northwest Parkway LLC, a joint venture between Brisa Auto-Estradas S.A. and Companhia de Concessões Rodoviárias, purchased the concession and lease agreement from the Northwest Parkway Public Highway Authority ("NWPPHA") for $603 million, $543 million of which was used to retire the bonds issued by NWPPHA to fund the construction and maintenance of the parkway.

Florida: Florida has been a hotbed of PPP activity recently. In February 2008, a consortium led by Babcock & Brown was awarded the 35-year concession for the new $914 million Port of Miami Access Tunnel. In December 2007, the Florida Department of Transportation (FDOT) issued an RFQ for the $1.8 billion, 46.5-mile Jacksonville Outer Beltway project and four consortia have submitted their qualifications. While FDOT has expressed its commitment to the Jacksonville project, in May 2008 FDOT postponed the balance of the RFQ process pending resolution of a number of issues, including issues relating to the concessionaire's exemption from property taxes.

In May 2008, FDOT also issued an RFQ for the long-term concession of Alligator Alley (Everglades Parkway), an existing 78-mile toll road that runs coast-to-coast across the southern portion of Florida.

Missouri: In December 2007, the proposal by the consortium led by Zachry American Infrastructure was selected as the "best value" of the two submitted proposals for the Missouri 800 Bridges project, though negotiations are continuing. The project involves the rehabilitation of 802 bridges throughout the state and the concessionaire is expected to be granted a 25-year operating concession in return for funding and completing required capital improvements. Earlier in 2007, the Missouri legislature enacted amendments to the state's performance bonding statutes necessary for the project to proceed as a PPP.

Pennsylvania: On May 19, 2008, Pennsylvania Governor Rendell announced that a $12.8 billion bid submitted by the consortium comprising Abertis Infraestructuras SA, Citigroup Inc.'s Citi Infrastructure Investors and Criteria CaixaCorp SA was the winning bid for the 50-year lease and concession to operate the Pennsylvania Turnpike, subject to enactment of state enabling legislation. If approved by the Pennsylvania Legislature, this would be by far the largest US PPP to date.

Texas: A limited number of PPP projects are moving forward as planned pursuant to exemptions contained in the Texas PPP moratorium legislation. The North Tarrant Expressway northwest of Dallas is expected to require up to $2 billion in concessionaire investment for the construction of nearly 36 miles of highway and the addition of express toll-managed lanes. Four teams pre-qualified for the project and the request for proposals was issued in March 2008. However, one consortium was reported to have withdrawn from the bidding process on account of changes to the project, namely the right of the North Texas Tollway Authority to collect tolls and receive a commission for the entire concession term rather than for just the first five years. Proposals for the North Tarrant Expressway are currently due in July 2008.

In March 2008, a Cintra-led consortium reached financial close on the $1.1 billion project to construct and operate Segments 5 and 6 of SH-130, which will constitute a new 40-mile electronically tolled roadway between San Antonio and north Austin. Under the concession agreement, the state received a $25 million up front payment and the right to a share of toll revenues over the next 50 years, and the consortium will bear the financial burden of acquiring rights of way for the project while the state will hold title to any acquired property. The consortium financed the project, in part, with a $430 million direct TIFIA loan and a $680 million 30-year term loan.

Virginia: In 2006, Australia's Transurban acquired a 99-year concession for the existing Pocahontas Parkway under which it is building a 1.6-mile road connecting the parkway to the Richmond International Airport and upgrading the electronic tolling system. The project was funded, in part, with a $150 million direct TIFIA loan. In April 2005, Fluor and Transurban entered a comprehensive agreement with the Virginia Department of Transportation (VDOT) to finance, design, build and operate the high occupancy toll (HOT) lanes project on a segment of I-495 in Virginia, and Federal Highway Administration approval was received in May 2007. In December 2007, the Fluor-Transurban consortium reached financial close on the nearly $2 billion facility to finance the project, which includes a $586 million direct TIFIA loan and $586 million of PABs.

Airport projects

The airport sector in the US holds the potential for dramatic expansion of the PPP concept, since every single commercial airport in the country is currently in the hands of governmental authorities (albeit with many essential airport services historically being provided by private companies). However, proponents of airport privatization face great challenges resulting from a variety of factors, including restrictive Federal regulations and longstanding relationships between airport authorities and airline companies that have rendered privatization problematic.

In more than a dozen years since its promulgation, there has been little activity under the FAA's airport privatization pilot program. Only Stewart International Airport in Newburgh, New York, has been privatized, in 1999. And, in late 2007, following a change in focus of its business from air to surface transportation, the private concessionaire, the UK's National Express Group, sold its rights to Stewart Airport to the Port Authority of New York and New Jersey, the governmental entity that operates the three major New York City area airports.

Previous applications for participation in the FAA's pilot program had been submitted for airports in San Diego, California; Niagara Falls, New York; and Aguidilla, Puerto Rico, but each of these applications was withdrawn prior to 2002. An application was also submitted for New Orleans Lakefront Airport in 2000 but has remained inactive for several years for lack of adequate local support. In fact, the most significant airport facility PPP in the US, the US$1.5 billion Terminal 4 at John F. Kennedy International Airport in New York (undertaken by affiliates of Amsterdam Airport Schiphol, US developer LCOR, and a major investment bank in 1997) occurred outside of the FAA's pilot program because it did not involve an entire airport.

In September 2006, however, the City of Chicago filed a preliminary application with the FAA for participation in the pilot program to privatize Midway Airport. The FAA promptly approved the preliminary application and authorized the city to commence the tender process. After more than a year of discussions with airlines operating out of Midway as to the potential terms of airport use agreements that might be sufficient to achieve their requisite supermajority consent, the City recently released its request for qualifications and, by the end of March 2008, received statements of qualifications from several interested bidding groups, including leading international airport operators and major financial institutions. The City's hopes to complete the bidding process, obtain supermajority airline consent and FAA final approval, and close the transaction by year end.

Conclusion

Despite the partial, two-year moratorium on privately financed toll roads enacted in Texas and the ongoing debate over the efficacy of PPPs, several significant toll roads, bridges and tunnels have been undertaken as PPPs recently, and more PPPs are in the planning stage. In the airport sector, proponents of airport privatization are hopeful that Chicago's efforts at Midway Airport will produce a successful privatization model that will invigorate the airport privatization debate and enhance the opportunity for federal legislative action to expand the FAA's airport privatization pilot program.

Authors:
Robert J. Gibbons, Partner
Michael P. McGuigan, Associate
Debevoise & Plimpton LLP, 919 Third Avenue,
New York, NY 10022, US.  Tel: +1 212-909-6000
Email:  rjgibbons@debevoise.com
mpmcguigan@debevoise.com
Web site: www.debevoise.com