The prospects for public-private partnerships (PPPs) in the US transportation infrastructure industry are on the rise. After a burst of activity in the early and mid-1990s, followed by years of limited progress in this area, the PPP concept has come to the fore with the Chicago Skyway Toll Bridge concession last year for an up-front payment of $1.87 billion. The $3.85 billion payment for the Indiana Toll Road in June 2006 maintained the momentum. The success of these marquee projects evidences a new era for the development, expansion and operation of transportation infrastructure projects in the United States through the use of PPPs.
This article discusses the continuing trend towards the use of PPPs in the US toll road industry.

Representative US PPP closings

Chicago Skyway Toll Bridge

An entity created by Cintra and Macquarie Infrastructure Group purchased the concession to operate the Skyway and collect tolls during a 99-year lease term for a price more than $1 billion in excess of its nearest competitor's bid. This provided an unprecedented infusion of cash into the City of Chicago's coffers and enabled the city to contribute much-needed funds to its education and welfare programs, repay a number of its debt obligations, narrow its budget deficit and replenish various reserve funds, thereby improving its credit rating significantly. In August 2005 the concession company obtained $1.4 billion of long-term financing under an innovative structure involving built-in refinancing arrangements, including accreting interest rate swaps and forward commitments for financial guarantee insurance.

Indiana Toll Road

Once again a Cintra/Macquarie consortium outbid its competition by more than $1 billion when it was awarded the 75-year concession for the 157-mile Indiana Toll Road. A portion of the proceeds will be used to extinguish all outstanding debt on the Indiana Toll Road and to fund the state's 10-year highway program. Cintra and Macquarie each made an equity contribution of roughly $385 million, for an aggregate equity contribution of nearly 20% of the project cost. A number of banks participated in the debt financing, which is comprised of three tranches that each mature in nine years, subject to expected refinancing. Primary syndication of the bank debt has been completed and secondary syndication is expected to commence by the end of September 2006. The interest on the bank loans is fully hedged and the financing arrangement includes, among other features, accreting swaps to reduce interest payments. In addition, nearly $700 million has been reserved for capital expenditures and improvements required by the concession and lease agreement and another $100 million of debt has been set aside as a liquidity facility. 

Pocahontas Parkway (Virginia I-895)

In June 2006, Australia's Transurban acquired the interest of the Pocahontas Parkway Association (PPA) in the Pocahontas Parkway under the existing comprehensive agreement between PPA and the Virginia Department of Transportation (VDOT). PPA is a non-profit corporation created by VDOT and authorized to issue tax-exempt bonds to finance the construction of the parkway. The comprehensive agreement governing the lease of the road will be amended to provide for a 99-year lease period during which Transurban will manage, operate, maintain and collect tolls on the parkway.

Transurban is also required to build a 1.6-mile road connecting the parkway to Richmond International Airport. Transurban's obligation to construct the connector is contingent upon its ability to obtain assistance under the US Department of Transportation (US DOT) Transportation Infrastructure Finance and Innovation Act (TIFIA) program. It is reported that Transurban is seeking a $150 million TIFIA loan for the project. In lieu of an upfront payment, Transurban agreed to fully defease the existing bond obligations of PPA and to reimburse VDOT for costs and expenses VDOT incurred operating and maintaining the parkway, and has agreed to a revenue-sharing arrangement with the state. Transurban's equity contribution accounted for nearly 30% of the over $600 million project cost, with the balance by means of a 30-year syndicated commercial bank loan.

Select PPP projects in progress       

Texas

Perhaps more than any other state, Texas has been proactive in the proposed use of PPPs to develop, operate and maintain new and existing transportation infrastructure facilities. In 2003, the Texas legislature adopted a law authorizing the Trans-Texas Corridor; a 4,000-mile network of toll road, rail line and utility corridors crossing the state.

The first segment of the corridor that will be developed is Trans-Texas Corridor 35 (TTC-35), which will run from Oklahoma in the north, to the border with Mexico in the south. In December 2004 a consortium led by Cintra and Zachry, Cintra Zachry, LP, was selected by the Texas Transportation Commission to develop TTC-35, and in March 2005 a comprehensive development agreement was signed between the Texas Department of Transportation (TxDOT) and the consortium.

The agreement presently authorizes expenditures estimated at $3.5 million for planning purposes but does not provide for additional commitments or guarantees. Private investment of nearly $6 billion is expected for the initial Dallas-San Antonio segment of TTC-35 and it is reported that the consortium is prepared to pay the state $1.2 billion for the exclusive right to operate and collect tolls for up to 50 years. The estimated cost of the TTC-35 project is reported to be $29-$36.7 billion.

In April 2005 another Cintra/Zachry partnership submitted an unsolicited proposal to fully fund the addition of highway and frontage roads to US-281 and tolled direct connections to Loop 1604 in the San Antonio area. A Macquarie consortium has submitted a competing proposal, the details of which have not been announced. The highway is expected to cost about $1.4 billion and is proposed to operate as a fully electronic toll road, except that the frontage roads would be toll-free. In July 2005 TxDOT issued a request for competing proposals that would include concession payments to, or other revenue-sharing arrangements with, the state.

The Texas SH-121 turnpike project, estimated to cost $300 million, was originated with an unsolicited proposal in January 2005 from Skanska. In June 2005 TxDOT issued a request for competing proposals and qualifications and by November 2005 the shortlist consisted of four consortiums (including Skanska). Detailed proposals are due in November 2006.

An interesting aspect of the PPP movement in Texas has been the potential direct competition between public and private sector proposals for TxDOT projects. The most notable public competitor to emerge in this process is the North Texas Tollway Authority, which had announced in June 2006 its intention to submit a proposal for SH 121. However, in August NTTA indicated its plans to withdraw from the competition in order to support TxDOT's private sector initiatives for SH 121 and several other new road developments in its region. In turn, TxDOT is expected to require private sector developers to use NTTA as the toll collection service provider for back office, clearinghouse and customer services on new toll roads in the North Texas region for at least the first five years of operation of each private road.

Virginia

Virginia has also taken a lead role in promoting the use of PPPs in transportation infrastructure projects. Virginia's Public-Private Transportation Act of 1995 allows private companies to finance, develop and operate public transportation facilities. In 2002 a Fluor/Transurban consortium submitted a proposal to finance, design, build and operate high occupancy toll (HOT) lanes on a segment of I-495 in Virginia. No competing proposals were submitted and in April 2005 a comprehensive agreement was entered among VDOT, Fluor and Transurban. The project is valued at nearly $900 million and the comprehensive agreement entitles the consortium to receive toll revenues and to pledge them to secure its debt financing.

A Fluor/Transurban consortium has also been selected to finance, design, build and operate HOT lanes on I-95 from I-495 to Route 17 in Virginia, though this project is still in the early planning stages. DEPFA Bank has been selected as the financial adviser to Fluor and Transurban in connection with the two projects. Transurban is reported to be considering an unlisted equity fund to hold its US assets, which would include the Pocahontas Parkway and the I-495 and I-95 projects (if these latter two achieve financial closure), which combined would have a total equity investment of $1 billion.

In 2002, both Skanska and Fluor submitted unsolicited proposals to finance, design and build the third crossing over Hampton Roads and the Elizabeth River. Neither proposal received the recommendation of the Initial Review Committee (IRC). In 2004 a consortium led by Skanska submitted a new unsolicited proposal that was soon followed by an unsolicited proposal from Fluor. Both proposals were recommended by the IRC and approved by the Commonwealth Transportation Board. The estimated project cost in both proposals is $3.2 billion, nearly $1.3 billion less than initial estimates. In August 2005 VDOT issued a request for detailed proposals by 15 December 2006. Illinois

A recently-completed valuation by Credit Suisse estimated the value of a long-term lease of the 274-mile Illinois Tollway at $8.3-15.4 billion, depending on various factors. Still to be determined are the term of the lease and whether an up-front payment and/or profit-sharing mechanism would be implemented. Toll rates on the highway have been relatively flat, increasing only 14% in the last 42 years, so realistic toll rate increases will need to be carefully considered. Additionally, the Tollway is in the midst of a 10-year major improvement plan that involves, among other things, restoring 90% of the roadway and replacing all twenty main toll plazas with open road electronic tolling systems. The assumption that the concessionaire will complete the planned improvements at its own expense is a factor to be considered in the valuation of the concession. In 2005 the Tollway collected $592 million in tolls and spent $211 million on operations and maintenance and $99 million on debt service.

Oregon

In January 2006 the Oregon Department of Transportation entered an agreement with a Macquarie-led consortium to develop the state's three pilot PPP projects: (i) construction of a new, limited access four-lane tolled facility on the Sunrise Corridor and transportation infrastructure for the newly incorporated city of Damascus, (ii) construction of the 11-mile Newberg-Dundee bypass as an alternative route to a congested state highway, and (iii) the widening and tolling of I-205 in southeast Portland. The consortium is to receive $20 million for their services and will be permitted to negotiate for participation in the implementation of any project that proceeds. The concessions are expected to be for at least 30 years.     

Georgia

In May 2006 the Georgia Department of Transportation (GDOT) entered its first-ever public-private initiative contract when it signed a developer services agreement with Georgia Transportation Partners, a 19-member consortium led by Bechtel Infrastructure Corporation. The developer services agreement outlines the conceptual framework for a project that includes a combination of HOT lanes, high-occupancy vehicle lanes, truck-only toll (TOT) lanes and a bus rapid transit system for I-75 and I-575. The project is estimated to cost up to $1.8 billion and is likely to be financed through a combination of state and federal funds and toll-backed bonds.
GDOT has solicited proposals by the end of October 2006 for TOT lanes along the north-west quadrant of I-285, following an unsolicited proposal from a Goldman Sachs-led consortium. GDOT has already received letters of intent from five consortia involving firms such as Cintra, Transurban and Skanska.        

Colorado

In August 2006 Colorado's Northwest Parkway Public Highway Authority announced plans to seek a private partner to operate and manage its struggling Denver area toll road under an arrangement whereby all of the Authority's several hundred million dollars in outstanding bonds would be repaid. The relatively new roadway, which connects with two other road segments to form a loop around the City of Denver and depends in part on traffic from the Denver International Airport, has experienced lower than expected traffic and revenues during its ramp-up period. The announcement follows an unsolicited proposal (whose proponent and terms have not been publicly identified) that the Authority received earlier this year. No estimates of the price of the concession or its revenue potential have been made. The authority has stated its intent to select the private participant by the end of 2006.

Key considerations regarding US PPPs

Federal legislation

Generally, federal law limits the ability of public and private operators to toll roads that were constructed using federal funding, a class that includes most interstate highways in the country. However, the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), which was enacted in late-2005, contains a number of provisions that are favorable to tolling and PPPs. Among other features, SAFETEA-LU provides for (i) an Express Lanes Demonstration Program which authorizes 15 express toll lane projects on congested interstates, (ii) HOT lanes projects where existing high occupancy vehicle lanes may charge tolls to vehicles that do not meet the passenger requirements, (iii) an Interstate Construction Toll Pilot Program under which up to three states may use toll finance to build new interstates, and (iv) up to $15 billion of tax-exempt private activity bonds for PPPs in which a private partner has a long-term ownership interest in the project.

In addition, the TIFIA program, administered by the US DOT, provides for direct loans, loan guarantees and lines of credit to help cover up to 33% of the cost of transportation projects, including PPPs, that are valued at $50 million or higher.

In August 2006 TxDOT applied for an allocation from the US DOT to issue $1.62 billion in tax-exempt private-activity bonds. It is the first state agency to officially apply for authority to issue the bonds under the SAFETEA-LU program. TxDOT is also applying for a $561 million loan under the TIFIA program. TxDOT plans to make both sources of funds available for the private developer ultimately selected for the SH-121 project discussed above, if the developer chooses to include them in its financing plan. If the winning bidder wants to change the bond issuance or the loan amounts, it would be responsible for seeking the change from the US DOT. The expectation is that both the private activity bonds and the TIFIA loan would be repaid from tolls collected on the road.  

State legislation

Some form of enabling legislation is typically required before a state, city or other public agency may lease an infrastructure asset to a private entity or otherwise permit the private operation of public transportation facilities, or convert a free road to a toll road. A number of states have recently taken the legislative steps necessary to authorize the use of PPPs and the tolling of designated roadways, and many others have under consideration legislation to authorize PPPs of varying types.

Public opinion; demonstrated need

There are many factors to be considered by government officials pondering the use of PPPs. First and foremost is the perspective of their constituents. Citizens who are accustomed to toll-free travel may feel abused by their elected officials if they are now compelled to pay tolls. They may also be resistant to large-scale construction projects running through their local areas, or they may be sceptical about the idea of conceding control of their area roadways to private entities, particularly foreign companies. The intensity of the opposition can be attenuated by the extent of the demonstrated need for the facility in question. Many US roads are congested and in need of refurbishment and expansion beyond the capacity of state and local governmental entities. In fact, most of the projects discussed above were selected for PPP development because the relevant governmental entities were not prepared to independently undertake the necessary development within the limitations of their own resources.

Governmental oversight

Governmental entities bear a responsibility to the public to ensure that roadways developed under PPP arrangements are constructed, operated, and maintained in accordance with appropriate standards, including the charging of tolls that are reasonable, and returned to the public sector in proper condition upon termination of the private concession. Therefore, concession agreements typically contain detailed provisions regarding required capital improvements and maintenance standards, as well as limitations on toll rates or the formula for determining toll increases.

Conclusion

The past two years have seen tremendous growth in the use of PPPs in the US transportation infrastructure industry, particularly in the toll road sector. The growth has been largely due to the following factors: (i) the proven success of a couple of particularly visible transactions; (ii) governmental support for PPPs at the federal, state and local levels; (iii) the availability of abundant sources of investment capital for long-lived infrastructure projects; (iv) the participation of domestic and foreign developers with records of success in undertaking projects of this nature in other parts of the globe; and (v) the demonstrated need for private involvement in the development of new and existing transportation infrastructure in the US. The prospects for the growth of PPPs in the US transportation infrastructure industry are better than ever.

By Robert J. Gibbons, Partner,
Michael P. McGuigan, Associate
Debevoise & Plimpton LLP, 919 Third Avenue,
New York, NY 10022
Tel: + 1 212 909 6303 Fax: + 1 212 521 7303
Email: rjgibbons@debevoise.com
Web: www.debevoise.com