The US public-private partnership market is languishing. Abertis and Goldman Sachs’ $1.136 billion PR-22 and PR-5 real toll brownfield highway concession in Puerto Rico is the only transportation deal to close so far this year. But state-level grantors are now evaluating the feasibility of PPP deals rather than debating the concept of PPP, a clear sign of progress for the sector.

But US PPP may rally before the end of the year. Hochtief and Meridiam Infrastructure’s roughly $360 million Presidio Park­way phase two concession, which was award­ed a year ago this month, has been delayed by a lawsuit from the Professional Engineers in California Government (PECG). But the financing could move forward once the California Supreme Court decides by November whether or not to hear the case. Macquarie Investments and Skanska’s $1.9 billion Midtown Tunnel project is targeting an early December close, pending receipt of a $586 million TIFIA loan from the US Department of Transportation. In 2012, the Louisville and Southern Indiana Bridges Authority’s $4.1 billion Ohio River Bridges, the Port Authority of New York and New Jersey’s roughly $1.6 billion Goethals Bridge replacement and the Virginia Department of Transportation’s (VDOT) up to $2.7 billion US-460 real toll greenfield concession are all expected to reach financial close.

Project Finance, in partnership with Lloyds Corporate Banking and Skanska In­fra­structure Development, held an editorial roundtable with six industry players to discuss the state and future of US PPPs on 22 September. Karl Reichelt, executive vice-president at Skanska Infrastructure De­velopment in the Americas, Anthony Porter, head of North American project finance at Lloyds, Tyler Duvall, an associate partner at McKinsey & Company, Tony Kinn, director of Virginia’s Office of Transportation PPPs, Warren Lilien, partner in the project finance group at Latham & Watkins, and Hank Webster, managing director of the PPP division at the American Road & Transpor­tation Builders Association (ARTBA), participated in the discussion.

Edward Russell, Project Finance (ER): What is the current state of US infrastructure financing?

Karl Reichelt, Skanska (KR): The traditional methods of delivering infrastructure have to be adjusted and adapted because the re­sources are no longer there and the demand is extremely high. The government has built fantastic infrastructure in this county – world-leading in many regards. Unfortunately, now we barely have enough money to maintain what was built decades ago and revenue options are limited. There is now room, and probably demand, to look at alternative means to deliver that infra­structure, and private companies can be a part of the solution.

Tyler Duvall, McKinsey & Company (TD): There is a general misconception that the gas tax is the primary financing mechanism. In the US, it is actually a minority revenue source today. If we look at all of the rev­enues that are going into surface transportation, gas taxes are less than 50% of total revenues. At the federal level it remains the dominant source, but overall states are doing anything they can do to find a rev­enue source, from increasing their sales taxes to general fund transfers and borrowing. Tolling is also rapidly growing. I think states are coming to the conclusion that, for any major rehabilitation or new capacity project, tolling is the most viable revenue source.

Hank Webster, ARTBA (HW): As everyone knows there are funding challenges at the federal level. The [federal] gas tax has not been increased since 1993 and there have been inflation costs that have not been kept up with. We think there are great opportunities to bring in alternative financing and ways to generate additional revenue.

Tony Kinn, Virginia (TK): The gas tax in Virginia has not increased since 1986. That’s 17.5 cents for the last 25 years. That’s less money for maintenance and less money for new projects. As the state grows more like a private corporation, creativity, innovation and new systems have to come into play here.

ER: Who needs to drive PPPs in the US?

KR: The real innovation, from financing to providing lifecycle thinking to a project, is best addressed at the state level with private partners. Governors have a better chance at delivering PPP projects. In my world, less interference and more encouragement and action from the federal level can help states generate a greater volume of good projects through PPP.

Tony Porter, Lloyds (TP): Within the US, you’ve got 50 states and there are multiple political jurisdictions within the states. You’re probably looking at hundreds of dif­ferent market applications for PPPs around the US. The successful programmes have strong state support. The federal government can be a catalyst, particularly through programs such as TIFIA, but the states need to be the drivers.

Warren Lilien, Latham & Watkins (WL): With­out a somewhat uniform process, it’s very difficult to develop an efficient process that keeps projects moving. What we are seeing, in the context of state-to-state inno­vation, is that with innovation comes ex­pense and, to some degree, reinvention of the wheel with each programme. Even project-to-project within states, we are seeing differentiation in the utilisation of funding sources and in overall strategies. That, in contrast with some of the pro­grammes that have been successfully implemented in other countries, is some­thing that needs to be addressed. Whether it is with a federal framework or some sort of federal infrastructure bank, something along those lines must be implemented to help shape this market and give it some framework.

TK: I think consistency is what you’re talk­ing about here. Today, we hear so much talk from all the various state legislatures and what they think of PPP projects. We have a very rigid screening process to deter­mine what a PPP project is. We’re getting very close to a uniform process. When our private sector partners come in we want them to be, one, excited to come and, two, know what they’re going to get.

ER: How much transportation infrastructure can realistically be done with PPPs?

KR: Very few projects actually qualify for PPPs, we need to be clear about that. Our numbers show some $2.2 trillion of need in the US and our estimate is that some $35 billion are potentials for PPP. That’s a very small component of an overall challenge. PPP is just one option states can pursue to help solve the problem.

We would like to see more projects coming to market, being awarded and closed, and being built. Unfortunately in the US, there have been only two to three true PPP pro­jects closing each year. You have a lot of theoretical discussion, people at the governmental level trying to set the pace, and states like Virginia, Florida, Texas and California pushing the agenda as best they can. Nevertheless, dealflow still lags.

HW: Our forecast is that there could be may­be four to five projects maximum across the US per year. That’s if more states enact­ed enabling legislation, got into the [PPP] game and institutionalised their practices. But even those states that have these face challenges to their programmes. That’s the reality the industry faces.

ER: Why do PPPs face so many challenges?

KR: We as an industry have not always help­ed in advancing the cause. There has been a lot of overselling and some irresponsibility, and when you’re early in a market like the US it actually has had the effect of setting things back. We’ve suffered some of the growing pains of building a PPP market in the US and there is a high level of scepticism in some political sectors is a challenge to overcome. Even so, I am very optimistic for growing acceptance and usage of PPP in the US.

TD: Another thing that the PPP community has done a poor job at is explaining the benefits of the concept. Obviously, the risk transfer is a big part of the benefit quantification, but the other advantages people rarely talk about are the flexibility and speed of PPP projects. When states enter into a contract, they basically unleash the ability to flexibly procure other elements of the project. Government procurement processes can be rigid and are often driven by legal compliance objectives more than performance objectives. The flexibility and free­dom that comes to the firm that is selected in an integrated procurement is extremely valuable, but often not valued.

The other huge impediment is the US permitting process. The US ranks quite low among industrialised countries in the world for the length of permitting. The uncertainties and delays impose large costs. Ob­viously, there are benefits to the process, but other major western democracies have been are able to respect the environment and impacted resources just as much as we do and still complete the permitting process in a quarter to half as much time.

HW: Particularly in this economy, it’s more important than ever to quantify the benefits not only to the government but to the users. At the end of the day, they’re still footing the bill for it in one way or another – whether it’s through availability payments, taxes or direct tolling. You can say that for every dollar worth of tolls it will create this many jobs, save you that many minutes on your commute or the environment will be this much cleaner.

ER: How could the benefits of PPPs be better presented to stakeholders?

TP: Value for money analysis is something that other political jurisdictions outside the US do very well. Partnerships BC in Canada, for example, does a superb job. When they undertake a project it is analysed in a transparent way so the public and the political members who have an interest in it have a chance to understand the benefits and this generally results in the projects receiving strong public support. Colorado followed a similar process with the Denver FasTracks and received strong public support when it went to public vote.

HW: In the past, local ballot initiatives pass something like 75% of the time for local transportation funding. When people see the benefits they’re going to receive, they are very supportive of investing in infrastructure.

TK: If you’re building a project, you’re deal­ing with various municipalities and constitu­encies. You’ve got to be in every meeting and make sure the local politicians are talking the benefits. We did all this for the Midtown Tunnel but I think we could have done more outreach. We could have ex­plain­ed why it is necessary to build this tunnel from Norfolk to Portsmouth and told residents that ‘yes, you’re going to pay for it but you’re going to save 40 minutes a day.’

KR: Using the Midtown Tunnel project as an example, the benefit that resonates with me as a taxpayer is that for $395 million, Virginia is getting a $2 billion project. If you tell the travelling public that we’re going to improve quality of life, fix traffic problems and boost the economy and that government is footing less than half of the bill that is a very powerful value proposition.

ER: What needs to be done to get more PPPs moving?

TK: You need to have a state that has a sound legal basis for PPPs. Once you have that, the attitude comes forward that you are open for and pro business. Virginia has a bunch of projects that are under construction or under agreement but there’s a whole lot more that we need to start. Without the sound legal framework and the pro-active gubernatorial and secretarial leadership that we are extremely fortunate to have in the commonwealth of Virginia most of these projects would struggle to get done.

KR: You have to look at PPP projects as true partnerships. Yes, you have to play an adversarial role as you’re hammering out a deal, but at the end of the day there must be a mutual benefit for all parties. In order for PPPs to be successful, states have to say this is a partnership and that we’re looking at things from a different perspective – perhaps from a holistic or societal perspective.

TP: To receive comprehensive and well thought out private sector proposals you need to have a strong PPP programme. A number of states like Virginia, Florida and Texas have developed successful PPP programmes and generally receive strong private sector interest for projects they are developing. In Canada, once projects clear the value for money hurdle, 12 months later construction is usually starting. To incen­tivise the private sector to commit significant resources to pursue PPP states need to develop greater certainty around transaction closure and do a better job learning from one another and building on successes.

ER: What are the financing options for PPPs?

KR: The best gauge is that we are currently on-market with the Midtown tunnel project. The interest from the finance community is rather high. A number of banks are com­peting to finance the Midtown project, for example. We are also looking at the bond financing route. I’m pretty confident a well-structured, risk balanced, viable project can get financed, even in a tough market like today.

TP: There are a number of financing options available including: bank debt, bonds such as private activity bonds (PABs), and federal money such as TIFA. Bank loans have certain benefits, you can draw when you want during construction and as such they are more cost competitive during construction. Bonds such as PABs are tax exempt and can extend for a longer period and therefore longer repay. This, however, can be offset by significant negative carry, particularly during projects with longer construction. TIFIA provides competitive pricing and flexible repayment terms.

The optimal option can be driven by the length and requirements of the concession, the current financial markets, sponsor pref­erence, as well as the risk transfer mecha­nism. This process is competitive and the public sector benefits from the competition.

TD: Various political leaders in Washington have proposed eliminating or curtailing the federal tax exemption on municipal debt. Whether or not that is a good idea, it would likely have an impact on PPP development in the US in the long term. Right now, one of the primary arguments that PPP oppo­nents utilise is the cost of capital advantage that a state or local borrower enjoys, in part because of the federal tax exemption applicable to municipal bond interest. Eliminating that advantage would level the playing field a bit more between different financing options. Of course, the other way to level the playing field more would be to remove the cap on PABs or allow more infrastructure projects to be financed outside state volume caps.

ER: What is the outlook for PPPs in the US?

TK: The outlook is an environment that’s getting brighter. For it to succeed, you have to hope that the economy doesn’t bottom out and that the states continue to develop a consistent infrastructure to work with the private sector. If you do those things and the economy stays stable, I believe that PPPs will continue growing.

KR: The market is maturing. There is huge potential across a number of sectors but we still need to see more realistic deals come to market. But, if you take the Goethals Bridge as an example, nine consortiums applied for the shortlist and three were selected. So, you have an enormous number of interest and players out there. All that is needed is more states procuring more projects to really take the US PPP market to the next level.

TD: I’m generally optimistic. There are some material headwinds that are still there that are not going to go away very quickly, and we need to acknowledge that PPP progress will be regional. The southeast continues to have a good overall combination of political momentum, supporting laws and demo­graphics to boost projects, although several of the key states have suffered major hits from the real estate market collapse, which is not positive for overall demand. The north­east and upper Midwest have a tremendous­ly valuable existing asset base that presents a great opportunity, but navigating the poli­tical climate continues to be a challenge. It’s going to be generally spotty, but the overall trend is going to be positive.

HW: I’m optimistic as well in the prospects of a bigger market. I don’t think deal flow will increase all that much but more states will get into the game. This is a tool in the toolbox to do projects.

WL: Our clients – including lenders, under­writers, multinational investment funds and construction companies – are all devoting substantial efforts to pursuing PPP opportunities in the US. For all the reasons we’ve discussed, it really is just the dearth of deals that’s preventing this from being a 12 to 15 deals per year market.

TP: The infrastructure needs in the US are great and there is a significant amount of financial capacity available to meet those infrastructure needs. PPP is just one of the project delivery options available. We’re going to see more successes and the number each year is going to continue to grow and those successes will stimulate more interest in PPP as a project delivery method. ■