Part 2. What Public–Private Partnerships Are and What They Are Not

What Public–Private Partnerships Are and What They Are Not

After years of underfinancing much-needed repairs and maintenance to America’s infrastructure—by as much as $2.2 trillion, according to some estimates—digging out of the current deficit will be costly. And with state and local governments facing tight budgets, it may be decades before the work will be affordable. The lack of resources for infrastructure improvement and maintenance extends beyond highways and affects a range of public capital investments, from levees to wastewater treatment and from transportation to schools. The dismal state of the nation’s current infrastructure could hamper future growth.

The ways that governments allocate new funding for infrastructure projects and the ways they build, operate, and maintain those projects has contributed to the problem. New spending often flows to less valuable new construction at the expense of funding maintenance on existing infrastructure.  Further hindering efficiency, the traditional process for building infrastructure decouples the initial investment—the actual building of a highway, for example—from the ongoing costs of maintaining that highway. As a result, the contractor building the highway often has little incentive to take steps to lower future operations and maintenance costs. Such inefficiencies likely contribute to falling rates of return on public capital investments. PPPs can be used for solid waste, transport (airports, bridges, ports, rail, roads, tunnels, and urban railways), tourism, and water.

The United States is a relative newcomer to PPPs. Public–private partnerships have existed worldwide at least since the time of the Roman Empire (e.g., the use of private tax and toll road collectors) and in the United States since its founding. During the Revolutionary War, the Continental Congress authorized the use of privateers to harass the British navy. Later, much of the West was developed through a variety of PPPs, including the cross-continental railway. The production of transportation infrastructure often has been undertaken with PPPs, from the development of private toll roads and canals during the nation’s early history up to the recent Dulles Greenway—a privately financed, built, and operated toll road in northern Virginia.

Even though there is an old nineteenth-century tradition of privately provided public infrastructure and even of private tolled roads and bridges,  the United States still depends almost exclusively on the government for its public transport infrastructure (with the important exception of railroads).The two-decade trend toward PPPs that has revitalized the ways that many countries provide infrastructure has gained only little traction  in the United States. Whereas the United Kingdom financed $50 billion in transportation infrastructure via PPPs between 1990 and 2006, the United States, an economy more than six times as large as that of the United Kingdom, financed only approximately $10 billion during the same period.

Even with their ubiquity, there remains some ambiguity as to what exactly constitutes a PPP. . . For future articles . . . we shall focus on a . . . form of PPP that involves a greater role by the private sector in decision making and assumption of risk in the joint venture.

Increased Private Ownership of Public Water Systems On Horizon?

According to Bluefield Research, a dearth of public funding coupled with municipalities’ growing needs to repair or replace aging water and wastewater systems militates in favor of substantial private investment.

Although an investment of more than $532 billion will be needed over the next decade to meet the nation’s water infrastructure needs, federal funding for municipal water projects has dwindled steadily over the past four decades forcing municipalities to foot the bill to an increasing extent.(See: Bluefield Research) . For example, the Congressional Budget Office estimates federal spending on water utilities has dropped by 75 percent since 1977, reported Politico.

Only 15 percent of the 49,000 water systems in the United States are privately owned. Most P3s in the sector have involved operation and management agreements. However, recent merger and acquisitions (M&A) activity presages a growing role for private ownership. More than 19 pending or finalized deals worth $384 million were recorded during the first half of 2016, and, the number of water system M&As in Illinois, North Carolina and Virginia are increasing as well.

Pending projects in California, Florida, Indiana and Texas involving desalination, water treatment and wastewater plants also reveal growing public interest in these types of agreements. Meanwhile, the highest level of growth in this area is likely to occur in New Jersey, California and Pennsylvania, predicted Bluefield.

Despite these promising developments, obstacles to increased private investment in the sector, “including public pushback, asset bankability and debt financing remain, however, the broader, national focus on infrastructure upgrades is opening the door to more private participation,” said Keith Hays, Bluefield Research’s vice president. “There is no silver bullet to solving the infrastructure challenge. Stakeholders must deploy a range of solutions including alternative financing, operations management and innovative technologies,” he added.

Why the FAST Act Will Benefit Public-Private Partnership

Congress has passed, and the president has signed, a long-term surface transportation reauthorization bill, (America’s Surface Transportation Act (FAST Act), H.R. 22) providing approximately $305 billion of funding for highway and transit projects over the next five years and revising federal transportation policy on a number of important topics-including public-private partnership market.

The Highway Trust Fund

The Highway Trust Fund, supported largely through user fees by way of federal gas tax revenues, serves as the primary mechanism for states to fund road and transit construction and maintenance projects. The Highway Trust Fund has a growing gap between revenue and expenditures because the federal gas tax rate has not been raised since 1993 and is not indexed to inflation, while the cost of maintaining and improving U.S. surface transportation infrastructure continues to rise and increasingly fuel-efficient cars use fewer gallons of gas per mile traveled.

The FAST Act generally maintains the existing federal transportation funding model — distributing more than 90 percent of federal funding to state departments of transportation through formulas — while boosting highway spending by about 15 percent over existing levels, and increasing transit spending by about 18 percent. After dozens of recent short-term patches of the Highway Trust Fund through transfers from the general revenue fund, the FAST Act closes a five-year, roughly $70 billion gap through creative one-time budget mechanisms such as transfers from Federal Reserve accounts and the sale of oil from the Strategic Petroleum Reserve.

While state departments of transportation have praised the predictability of the FAST Act, the modest increase in overall spending levels will not fully address the looming U.S. infrastructure backlog. For example, the American Society of Civil Engineers estimates that the U.S. needs to invest approximately $1.8 trillion in surface transportation projects by 2020 to maintain a state of good repair. Additionally, the FAST Act does not provide a long-term sustainable solution (such as a gas tax rise or a vehicle miles traveled fee) for fully funding the Highway Trust Fund beyond the act’s five-year term.

Public-Private Partnerships and Innovative Financing

Previously, states relied almost exclusively on Highway Trust Fund transfers, state gas tax revenue and municipal bonds to fund new projects, delivering such projects through a design-bid-build model whereby the state department of transportation developed design specifications then solicited the lowest bid for the construction of a project. In an effort to improve mobility and build new highway and transit capacity in a funding-constrained environment, U.S. states have increasingly turned to public-private partnership (P3) delivery models that include project risk transfer from states to private entities, efficient and integrated delivery of design, construction and maintenance project components, and an infusion of upfront private equity. U.S. states are also using more project-based revenue sources, such as user fees and tolls, and innovative federal finance tools such as the Transportation Infrastructure Finance and Innovation Act (TIFIA) federal credit program and private activity bonds.

On balance, by providing a relatively stable but still under-funded federal revenue stream, the FAST Act is largely positive for the continued use of the P3 delivery model by U.S. states. The FAST Act will end much of the short-term funding uncertainty that caused states to postpone or cancel projects during prior weeks- or months-long Highway Trust Fund patches, but the lack of fully realized surface transportation funding will encourage states to continue to seek project delivery efficiencies and private funding sources through P3s.

Toll Policy

The FAST Act takes a mixed approach toward federal tolling policy. User fees, usually in the form of tolls for highway projects, are often essential elements of the funding and financing package for P3 projects. While federal law only allows tolling on interstate highways where additional lanes are constructed, the Interstate System Reconstruction & Rehabilitation Pilot Program allows three states to experiment with tolling existing interstate highways. Created in 1998, the pilot program has long been fully subscribed, but the three participating states (Virginia, Missouri and North Carolina) have not yet implemented any tolling of existing facilities under the program. While P3 and tolling proponents had urged Congress to expand the number of slots in the pilot program, the FAST Act instead encourages the existing participants to expedite their projects, requiring the three existing states to move forward with a tolling project within one year (with a potential one-year extension). If the participants fail to comply, their slot will expire and other states will be eligible. The FAST Act also requires new states to have legislative authority to implement the tolling of an existing facility, and any new participants must complete their projects within three years.

TIFIA Funding Levels and Policy Tweaks

The FAST Act reduces funding levels for the TIFIA program (utilized by many P3 projects) from $1 billion over the last two years to $275 million in FY 2016, rising to $300 million for FY 2019 and FY 2020. However, TIFIA had not made full use of its authorized funds in the last two years, causing $639 million in TIFIA funds to be transferred back to the Highway Trust Fund in 2015. The FAST Act eliminates the requirement that the TIFIA program transfer such uncommitted balances.

While the TIFIA funding cut is not ideal, it should not have an acutely adverse effect on P3 projects due to the lack of market support over the last two years for the $1 billion annual level and the steady increases in funding over the five-year life of the FAST Act. The FAST Act also allows states to use an increasing array of funding sources to pay the subsidy and administrative costs associated with TIFIA credit assistance, expands eligibility to include smaller projects and transit-oriented development projects, creates a streamlined process for TIFIA loans under $100 million, and increases funding levels for the U.S. Department of Transportation’s administration of the program. Additionally, the FAST Act codifies existing DOT practice by allowing costs related to P3 projects using an availability payment concession model to be eligible for federal reimbursement.

WIFIA Fix

The FAST Act fixes a widely criticized element of the Water Infrastructure Finance and Innovation Act (WIFIA) program introduced in 2014 by eliminating a prohibition on financing water infrastructure improvements with financing packages that include both WIFIA loans and tax-exempt debt such as municipal bonds.

Innovative Finance Bureau and Investment Center

The FAST Act also establishes a National Surface Transportation and Innovative Finance Bureau within the DOT, which is intended to serve as a “one-stop-shop” for states and local governments to receive federal financing or funding assistance, as well as technical assistance. The nascent Build America Transportation Investment Center introduced this year by the Obama administration appears to have an overlapping mandate, and it remains to be seen how these two entities will interact. While the bureau and center may not provide enormous benefits for state departments of transportation with extensive P3 experience, their existence reflects a general positive attitude of Congress and the administration toward P3s and innovative finance.

Nationally Significant Freight and Highway Projects Program

The FAST Act creates a new grant program, the Nationally Significant Freight and Highway Projects Program, funded at $4.5 billion over five years, for “nationally significant” projects costing more than $100 million that improve the movement of both freight and people, increase competitiveness, reduce bottlenecks, and improve intermodal tansportation. The DOT will award projects competitively based on statutory criteria, similar to the popular existing “TIGER” competitive grant program administered by the DOT. The FAST Act limits the federal share of project costs to 60 percent, and only $500 million of the $4.5 billion can be awarded to freight rail and freight intermodal projects.

Long-Distance Intercity Passenger Rail Routes

In addition to the highway and transit provisions, the FAST Act contains a passenger rail title that reauthorizes and funds Amtrak intercity passenger rail operations for a five-year period. Included among the passenger rail policy prescriptions is a new pilot program that would allow a public entity (such as a state or a joint powers authority) or a private rail carrier to bid to operate up to three long-distance (more than 750 miles) passenger rail routes that are currently run by Amtrak. While Amtrak turns a profit on its heavily used Northeast Corridor service, many of Amtrak’s long-distance routes are unprofitable.

States should look to P3’s – Standard & Poor’s.

Those who follow us on Social Media know we have been staunch advocates for P3s. Firm members have served on many public-private partnership panels. We are persuaded on P3’s as evidence mounts of public-private partnership success.

According to a new report from the Standard & Poor’s (S&P) credit ratings agency, states will have difficulty maintaining high credit ratings if they rely too heavily on issuing tax-exempt bonds to pay for expensive, but badly needed, infrastructure projects. Given that  locally owned roads are mostly ineligible for federal funding and the uncertain prospects for receiving long-term federal funding for eligible projects, states should look to alternate financing strategies, such as public-private financing says Standard & Poor’s.

The agency estimated that states would be forced to issue $1.19 trillion in debt though 2020 to cover their share of the $3 trillion in infrastructure investment the American Society of Civil Engineers predicts will be necessary to meet current and future transportation needs, reported the Bond Buyer.

“We anticipate that both, because of what it would do to their direct debt levels and because of the O&M implications of funding the nation’s infrastructure needs with tax-supported debt alone, states will increasingly consider alternative financing strategies. P3s are one such avenue,” the S&P report says.

State and local governments have reduced the issuance of tax-exempt, new-money bonds from an average of $234 billion per year from 1996 through 2010 to an average of $151 billion per year since then. This reflects their recognition that infrastructure projects require outlays, not only for construction, but for decades of operations and maintenance (O&M) as well.

However, tax-exempt debt cannot be used to pay for O&M and federal grant funding only covers the costs of major maintenance projects, an Oct. 27 Infra Insight blog post points out.

The growing popularity of fuel efficient cars and a consistent drop in long-distance road travel are reducing the amount of gas tax revenue states would typically spend on such projects, another S&P report says. The federal government’s refusal since 1993 to raise the gas tax has been widely questioned and many states are reluctant to take this step as well.

Some experts, including Robert Poole of the Reason Foundation, have called instead for the imposition of user taxes as a more reliable means of funding.

Martin J. Milita, Jr. Esq., is senior director at Duane Morris Government Strategies, LLC.

Duane Morris Government Strategies (DMGS) supports the growth of organizations, companies, communities and economies through a suite of government and business consulting services. The firm offers a range of government relations and public affairs services, including lobbying, grant writing; development finance consulting, media relations management, grassroots campaigning and community outreach. Milita works at the firm’s Trenton and Newark New Jersey offices.

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The Public-Private Partnership Infrastructure Investment Act

U.S. Rep. Sean Patrick Maloney is a prime sponsor of a Bill that calls for the U.S. Department of Transportation (USDOT) to assist  state and local agencies that receive DOT grants develop and implement “best practices “ in procuring projects through public-private partnerships, under legislation introduced by him on Sept. 9.

The Public-Private Partnership Infrastructure Investment Act calls for USDOT’s senior procurement executive to develop guidance that will encourage standardization of “state P3 authorities and practices,” including those used to consider unsolicited bids, non-compete clauses and other details in P3 and other types of agreements.

The legislation also calls for the executives to work with agencies to implement best practices governing model contracts and other procurement approaches.

In an article published by the Hudson Valley News Network, Maloney’s office says that the bill instructs USDOT to establish a transportation procurement office to help agencies implement these best practices.

Maloney has been a staunch advocate for P3s. He served on the public-private partnership panel charged with advising the House Transportation and Infrastructure Committee on potential P3 legislation and said he helped create a public-private partnership commission while working in the New York Governor’s office.

Martin J. Milita, Jr. Esq., is senior director at Duane Morris Government Strategies, LLC

Visit his blog at: https://martinmilita1.wordpress.com

Follow him on twitter: @MartinMilita1

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http://www.dmgs.com/

Duane Morris Government Strategies (DMGS) supports the growth of organizations, companies, communities and economies through a suite of government and business consulting services. The firm offers a range of government relations and public affairs services, including lobbying, grant writing; development finance consulting, media relations management, grassroots campaigning and community outreach. Milita works at the firm’s Trenton and Newark New Jersey offices.

NJ Gov. Chris Christie has conditionally vetoed P3 Infrastructure Bill

Martin J. Milita Jr. Esq., senior director at Duane Morris Government Strategies, offers: ”NJ Gov.  Chris Christie has conditionally veto P3 Infrastructure Bill”.

Duane Morris Government Strategies (DMGS) supports the growth of organizations, companies, communities and economies through a suite of government and business consulting services. The firm offers a range of government relations and public affairs services, including lobbying, grant writing; development finance consulting, media relations management, grassroots campaigning and community outreach. Milita works at the firm’s Trenton and Newark New Jersey offices.

New Jersey Gov. Chris Christie has conditionally vetoed a Senate bill that would expand public-private partnership opportunities for government entities, calling for the removal of provisions mandating prevailing wage requirements and project labor agreements.

These modifications to S2489 would further competitive bidding for projects and reduce costs, Christie said Monday in a veto message that also recommended that the departments of Transportation, Education and Community Affairs take leading roles in building and transportation projects.

The legislation sponsored by Senate President Stephen R. Sweeney , that  cleared the Senate in July, permits Local and state government units and school districts as well to enter into the partnerships, in which the private entity assumes administrative and partial or full financial responsibility for a project, according to the bill.

“While I agree with the sponsors that we must take advantage of the opportunity to improve our infrastructure through private investment, we must take care to ensure that the state has a unified plan of development that considers the impact of projects on our residents, the economic benefits of such projects, and the long term goals of the state,” Christie said in the message, which specified municipal projects and transportation work on bridges, roads and tunnels.

The departments Christie highlighted Monday in his veto message would work alongside the Economic Development Authority, which under the bill would review and approve applications and to cancel procurement after a short list of private entities is developed for projects in the public interest.

Presently only state and county colleges can enter the partnerships, according to state law. Christie cited the successes of such partnerships in Montclair State University and said others were planned or underway at Rutgers University, Ramapo College and the College of New Jersey.

The Assembly State and Local Government Committee had amended the original version of  the bill to allow the use of availability payments as a financing method, to specify that a contractor is precluded from taking on projects under $50 million if the contractor contributed more than 10 percent of the project’s financing, and to eliminate the $10 million project threshold and instead require that roadway or highway projects must include an expenditure of at least $10 million in public funds or any expenditure in private funds.

Other amendments make certain lease provisions permissive rather than mandatory, exempt private entities from procurement and contracting requirements applicable to the public entities, and exempt nonprofit projects from property taxation and assessments.

The committee prohibited the bundling of multiple projects and eschewed the requirement that a government entity assign a management employee to enforce the prevailing wage requirement. They added requirements of EDA approval prior to commencing procurement of the project; that the private entity establish a construction account to fully capitalize and fund the project; and that the general contractor, construction manager or design-build team would post performance and payment bonds, rather than the chief financial officer of the public entity.

Tax breaks would apply to nonprofits, and private entities are exempt from certain procurement and contract requirements that apply to public entities, according to the legislation.

The bill was introduced in the Senate in October and then reviewed by the State Government, Wagering, Tourism & Historic Preservation Committee.

Martin J. Milita, Jr., Esq. Senior Director

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Public-Private Partnerships ( P3s) can be a major component of strategies to solve national infrastructure problems.

In recent testimony before a U.S. Senate panel,  Mitch Daniels, one time governor of Indiana, director of the Office of Management and Budget and now president of Purdue University, shared his thoughts on how public-private partnerships( P3s) can be a major component of strategies to solve national infrastructure problems.

While testifying before the U.S. Senate Finance Committee on his state’s effective use of P3s to build infrastructure projects, Daniels offered several pieces of advice on how ensure their efficacy. He urged Congress to encourage states’ use of P3s to finance upgrades to existing assets, not just to fund new construction, and as a way of generating revenue. He also urged Congress to allow states to continue to carry debt on tax exempt bonds that were issued to fund new construction when entering into a P3 to expand or improve that project. Currently, states must pay off the debt or finance it as taxable bonds at a potentially higher interest rate, he pointed out.

Daniels called on states to invest revenues from P3 infrastructure projects in similar projects rather than spending it on current government operations. He also encouraged the federal government to change and expand programs that permit states to charge tolls on new, expanded or reconstructed interstate facilities in order to pay for infrastructure projects and attract partners that would be willing to bear most or all of the financial risk.

As governor, Daniels used the $3.8 billion sale of a 75-year lease for the Indiana Toll Road to fund a 10-year initiative, now in its ninth year, to build more than 100 new infrastructure projects and more than 1,000 bridges. “We became the only state in the union to have a fully-funded, 10-year infrastructure plan that required no new taxes and no new debt,” said Daniels. (Credit AP).

The state also put $500 million into a permanent trust fund to finance future projects. Under the toll road sale — which, in the state’s hands, was valued at no more than $1.92 billion because of the cost to the state to collect the tolls — the private partner agreed to upgrade, maintain and operate the road and be paid through the tolls it collected. The partner also agreed to expand lanes, add electric tolling and make other improvements valued at an additional $450 million. To prevent taxpayers from bearing a burden, the tolls were to remain at 1985 rates for passenger cars for 10 years and rate increases were limited to inflation, GDP growth or 2 percent.

The poor economy reduced the road’s anticipated use and the private operator of the toll road, which had to absorb the loss, declared bankruptcy last year; another firm stepped in to purchase the lease.

Daniels described two other successful P3 infrastructure projects that the state negotiated during his tenure as governor. The Ohio River Bridges project started out as a joint Indiana-Kentucky venture to be paid for with state and federal funds. When both legislatures decided to permit P3s as a financing option, Indiana negotiated an availability payment P3 for one of the bridges through which a private partner would finance, build and maintain the bridge for 35 years. The states would set and collect the tolls, using the revenue to compensate the private partners. The cost of building the bridge, which is scheduled for completion next year, will be $225 million less — a 23 percent savings — than the original estimate, reported Daniels. “Most importantly, over the next 50 years, the project is expected to generate an average of 15,000 jobs a year and a total of $30 billion in personal income and $87 billion in economic output for the region.” (Credit AP).

Another project was the Cline Avenue Bridge, which had been condemned due to structural weaknesses in 2009. The state negotiated a P3 that called for the private partner to fully finance the construction of a replacement bridge, with no risk to the government, invest $3 million in improvements to a state road leading to it and return a share of all toll revenue to the local community. Carefully devised P3 agreements like this can protect taxpayers from incurring the risks inherent in big infrastructure projects funded and conducted by the state, Daniels said.

By: Martin J. Milita, Jr. Esq., Sr. Director.

Please feel free to contact the author or your other Duane Morris Government Strategies LLC contact to learn more about this article and what it may mean to you.

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