The pace at which state and local governments in the US are turning to public private partnerships (PPPs) as a tool for the procurement of essential transportation infrastructure continues to accelerate. Though the recent Moving Ahead for Progress in the 21st Century (MAP-21) legislation, signed into law by President Obama on 6 July 2012, provides an important boost to the market and has rightfully garnered much publicity, the real news is that the US PPP pipeline is filling up.

The development is driven in no small part by necessity. Governmental entities at all levels in the US continue to struggle to meet their transportation infrastructure needs in the face of prolonged fiscal stress. As a result, lawmakers and governmental officials are increasingly receptive to enlisting the private sector, and PPPs are increasingly at the core of their analysis.

Recent developments at the federal level are important, but are often limited in scope and effect. For example, MAP-21 provides over $100 billion of funding for various surface transportation programmes and projects, but the legislation expires in 2014. While MAP-21 also evidences a federal commitment to exploring the use of PPPs, various federal rules and regulations continue to impede the viability of using PPPs for transportation infrastructure projects.

However, the planning, development and operation of transportation infrastructure in the US remains largely the province of state and local governments. As a result, the US transportation PPP market is somewhat fragmented, which has tended to impede the formulation of uniform PPP methodologies across the country.

The evolution of PPPs in US transportation infrastructure

PPPs have been used to procure many significant transportation facilities since the 1990s. Prime examples are the Dulles Greenway, SR-91 in California, the new international air terminal (Terminal 4) and its recent expansion at JFK International Airport, the Port of Miami Tunnel, the North Tarrant Expressway and I-635/LBJ Freeway in Texas, Denver’s FasTracks commuter and light-rail project, and the Presidio Parkway in California. The well-publicised monetisations of the Chicago Skyway toll bridge, the Indiana Toll Road and, most recently, the PR-22 and PR-5 toll roads in Puerto Rico have similarly highlighted the prominent role that the private sector can play in improving and operating transportation infrastructure.

Each of these projects has served to illustrate that PPP procurement compels all parties to plan and budget for the full life cycle costs of maintaining and operating – and not just building – the project in question. This is a significant change from the traditional procurement model, under which the life cycle costs to be incurred years and decades into the future are neither considered nor budgeted for at the time of procurement. Aside from leaving state and local governments with a potentially significant overhang of unfunded operations and maintenance obligations, the traditional procurement model has not always focused parties’ attention on the fact that design decisions at inception can have important effects on life cycle costs.

There is also growing appreciation by state governments that PPPs can be used to effect an efficient transfer of various risks (e.g. construction overruns and revenue shortfalls) and obligations (e.g. operating an airport in accordance with rigorous standards) to the private sector, thereby allowing the government to focus its resources and efforts on core governmental services. The private sector is also willing and able to contribute significant equity to PPPs, which can be used to lever debt financing for transportation infrastructure projects, relieving the government of substantial financial commitments.

Although several states have experimented with PPPs since the 1990s, the more recent resurgence of this market can be traced to the Chicago Skyway and Indiana Toll Road transactions, each of which was essentially a monetisation of a government asset. With the exception of the recent privatisation of the PR-22 and PR-5 toll roads, such deals have become increasingly unpopular because they can be perceived by the public (or portrayed by opponents) as little more than sales of valuable assets at bargain prices, resulting in increased user fees without the construction of meaningful new transportation capacity.

There has been more success with PPPs in projects where a private party constructs incremental capacity for users willing to pay for enhanced service, and agrees to operate and maintain to a high standard a less congested toll-free option for other users. HOT and managed lanes projects are examples of this type of transaction. Their political success is founded on the ability to deliver benefits to all relevant constituencies.

Such projects are not without their challenges, however. Aside from the usual risks inherent in new construction, it is not easy to project traffic and revenues for urban facilities whose use depends on users paying for what may be a relatively modest reduction in travel time. For instance, in 2006, Transurban acquired a 99-year concession for the Pocahontas Parkway for $611 million. Since then, development along the route has not met expectations and traffic volumes have not increased in line with original projections. As a result, in June 2012, Transurban announced that, based on revised traffic forecasts, future cash flows will be significantly impaired relative to original forecasts.

Governments can instead structure projects on the basis of availability payments rather than toll revenues. Entirely greenfield projects such as the Port of Miami Tunnel and Presidio Parkway in California comprise a further class of PPPs that are gaining traction in the US market.

Legislation affecting PPPs

Federal: Highways. US law generally restricts the tolling of roads that are constructed using federal funding, a class that includes most interstate highways in the country. As such, statutory exemptions to federal law are necessary in order to allow PPPs to charge tolls on such roads. MAP-21 effectively replaced the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU). Like SAFETEA-LU, it contains a number of key exemptions permitting such PPPs. Though some critics argue that these programmes should have been expanded instead of merely continued at the SAFETEA-LU levels, they are nonetheless central to the continued development of PPPs in the US. They include: the Express Lane Demonstration Programme, which provides for 15 express toll lane projects on congested interstates; high occupancy toll (HOT) lanes projects where existing high occupancy vehicle (HOV) lanes may charge tolls to vehicles that do not meet the passenger requirements; an Interstate Construction Toll Pilot Programme, under which up to three states may impose tolls on new interstates to fund the financing for their construction; and authorisation of up to $15 billion of tax-exempt private activity bonds (PABs) for long-term PPPs.

MAP-21 also permits tolling on new capacity on existing interstates, provided that the number of current free lanes does not decrease, and contains a number of PPP-specific provisions. For example, the US Secretary of Transportation is required to organise, encourage and provide technical support to public transportation PPPs, to develop guidelines promoting greater transparency in PPP agreements, and to create standard PPP transaction model contracts within 18 months. The US Department of Transportation (USDOT) is also required by the statute to compose best practice guides for collaborating with the private sector in developing transportation facilities, and it will be important to see how the US Secretary and Department of Transportation implement this mandate. Most significantly, MAP-21 drastically increases the funding available under the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) programme, from $122 million annually to $750 million in 2013 and $1 billion in 2014. This is expected to spur $34 billion in private sector and other investments. MAP-21 also allows TIFIA to cover a greater share of project costs, by increasing the maximum loan amount for certain transportation infrastructure projects from 33% to 49% of the project costs. Additionally, TIFIA loans will no longer be limited to a single project, but can be applied to a programme of related projects, and applications will be processed on a rolling, rather than a competitive, basis, allowing for more flexibility. However, despite the significant increase in available funding, it is believed that TIFIA will continue to be oversubscribed, and the industry still has some concerns, such as how USDOT will handle the increased flow of applications and what will happen after the current two-year funding period.

Of equal importance is what was excluded from the final MAP-21 legislation: the anti-PPP provisions known as the Bingaman amendments. These provisions would have penalised states entering into PPPs by reducing the level of federal funding allocated to any state in proportion to the miles of privatised highways in the state. The amendments would also have amended the Internal Revenue Code to lengthen the amortisation and deprecation period to 45 years (from the current 15 years) for long-term highway PPPs, significantly reducing the effective value of cost recovery and depreciation deductions.

Federal: Aviation In the airport sector, the key constraint on state experimentation with PPPs is a general federal prohibition against the use of airport revenues for non-airport purposes. Thus, as with the federal prohibition against tolling existing interstate highways, PPPs in this sector depend on the availability of an exemption under Federal law. For airports the relevant exemption is found in the Federal Aviation Administration’s (FAA) airport privatisation pilot programme, which permits a private participant to derive a reasonable profit from airport revenues. In February 2012, the FAA Modernization and Reform Act of 2012 reauthorised the FAA, including its airport privatisation pilot programme. While the legislation increases the number of airports allowed to participate in the programme from 5 to 10, the required consent of at least 65% of scheduled air carriers serving the airport, and at least 65% of the total landed weight of all aircraft landing at the airport, has not changed. Not surprisingly, airlines handed this significant bargaining leverage have used it to their advantage. The airline approval requirement has made it exceedingly difficult to structure viable transactions, and is one of the principal reasons why there is presently not a single privatised airport under the FAA’s airport privatisation pilot programme. However, the disappointment about Congress’s failure to address the most significant impediment to the viability of the FAA’s airport privatisation pilot programme may be mitigated if there is a successful closing of the pending Luis Muñoz Marín International Airport privatisation.

States Over 30 states and Puerto Rico have enacted some form of PPP-enabling legislation. However, the scope and substance of state PPP-enabling statutes varies substantially from state to state. Some statutes are broad and permit an array of projects, while other statutes are narrowly drafted, sometimes specifically identifying permitted projects and/or requiring prospective projects to be approved by a specified officer or agency or, in some cases, the legislature itself. However, the key attributes of successful enabling legislation are procedural transparency and predictability.

In the past year, there have been a number of positive developments at the state legislative level. Pennsylvania has finally passed a measure authorising transportation-specific PPPs after having failed to consummate the Pennsylvania Turnpike monetisation for lack of a PPP-enabling statute. Connecticut has authorised the use of PPPs for up to five revenue-generating transportation facilities, and Illinois has passed a bill allowing PPPs in transportation projects. However, each of these statutes provides for some form of approval by the state legislature or other governmental body. Recognising that such requirements can compromise the transparency and predictability of the PPP process, and that PPPs have the greatest potential where the risk of political impediments is low, Indiana legislators recently eliminated the requirement for legislative approval on most PPP transportation infrastructure projects. PPP-enabling bills are also pending in a number of state legislatures, such as New York and Michigan.

However, there have also been recent setbacks. In Florida, bills that would have expanded authority for PPPs in public infrastructure and government facilities have failed to pass. In Maryland, most funding bills have been defeated, and lawmakers rejected a bill that called for the creation of a task force to study PPPs that might support mass transit. The Montana and Nevada legislatures similarly failed to pass PPP-enabling legislation for transportation projects. Despite these setbacks, the positive news is that these states are seriously considering the use of PPPs for transportation infrastructure projects, reflecting the reality that PPPs have penetrated the political consciousness.

In July 2011, Virginia established its Office of Transportation Public Private Partnerships to administer the state’s PPP programme. Puerto Rico was the first jurisdiction to establish such an office in 2009. Other states have since followed the lead set by Puerto Rico and Virginia. Texas has created a committee under its 2011 legislation that resurrected the use of PPPs for transportation projects in Texas, and to evaluate PPPs within the framework of state and federal legislation. Washington has recently formed a joint transportation committee to evaluate the potential for procuring state transportation projects using PPPs.

Infrastructure banks Several states, including Virginia, Massachusetts, New Hampshire and New York, either have passed, or are considering, legislation authorising a state infrastructure bank (SIB), in some cases to be capitalised primarily with private sector funds. For the past few years there has also been talk of a federal infrastructure bank. While SIBs could provide much needed funding for transportation infrastructure projects, the full potential of these vehicles will be realised only if states use SIB financing to leverage and supplement private sector involvement at the project level, and do not merely replace funding that would otherwise be provided by the private sector.

Recent US transportation infrastructure PPP projects

Despite obstacles and a general slowdown in the market recently, PPPs continue to play a role in significant US transportation infrastructure projects.

California In June 2012, California Department of Transportation (Caltrans) and a Meridiam/Hochtief-led consortium reached financial close on the 30-year availability payment concession for the Presidio Parkway project. Commercial close had occurred in January 2011, and was the first PPP project under California’s broad PPP-enabling legislation that was enacted in 2009. The unusually long period of time required to reach financial closing is indicative of the continued difficult market for financing PPP projects. The project is being financed with a combination of bank debt, approximately $46 million of equity, and a $150 million TIFIA loan comprised of a $90 million short-term tranche and $60 million long-term tranche. At the local level, the Los Angeles County Metropolitan Transportation Authority is evaluating a programme to accelerate delivery of certain highway improvements using PPPs. Six specific improvement projects, expected to cost $630 million to $770 million, may be combined under a single availability payment concession with a term of 30 to 35 years.

Colorado In July 2012, the Colorado High Performance Transportation Enterprise (CHPTE) issued the draft request for proposals (RFP) for a managed lanes toll concession project on the US 36 corridor between Boulder and Denver. CHPTE shortlisted three teams in June 2012, and will work with those teams to develop the final RFP for the project. The winning consortium is expected to be chosen in late November 2012 and will design, build, finance, operate and maintain nearly 40km of managed lanes under a toll concession that is expected to last 50 years.

Georgia In June 2012, the Gwinnett County Board of Commissioners in Georgia rejected a proposal to privatise Briscoe Field because it lacked sufficient technical and financial details. The board also voted to withdraw its application under the FAA’s airport privatisation pilot programme. Propeller Airports, a New York-based private equity firm, had presented the lone bid for the potential lease, operation and upgrade of the airport in February 2012, following an RFP from the county in December 2011.

In June 2010, Georgia Department of Transportation (GDOT) had short-listed three private consortiums to bid for a 50-year concession for the construction and operation of a new, $1.3 billion managed lane system on segments of I-75 and I-575. However, in December 2011, as the final bids were being prepared, the state’s governor called off the project, amid fears that too much control would be ceded to the private sector. The scope and cost of the project has since been reduced to about $800 million, and it is being retendered under a more traditional arrangement where the state will retain control of the roadway. In late August, 2012, GDOT shortlisted four teams to design and build the project and to finance approximately 10-20% of project costs.

New York In late 2011, New York law was changed to permit design-build contracting for transportation infrastructure projects. As noted above, PPP-enabling legislation remains pending in the New York state legislature. New York governor Andrew Cuomo is seeking to construct the $5.2 billion Tappan Zee replacement bridge on a design-build basis with the assistance of TIFIA funds, but has also suggested that the bridge could be the subject of a PPP monetisation after construction. If that were to occur, the project may unfortunately prove to be a classic missed opportunity to reap the benefits of full life cycle budgeting when the party that designs and builds the infrastructure is also charged with responsibility for its operation and maintenance under a PPP procurement.

Ohio River Bridges (Indiana and Kentucky) In August 2012, the FHWA approved the financing, management and tolling plans for the $2.6 billion Ohio River Bridges project. In June 2012, FHWA had issued a revised record of decision allowing the project to proceed. In January 2012, Indiana and Kentucky agreed to split the project roughly in half, with Indiana procuring the East End Crossing and related infrastructure with a PPP, and Kentucky constructing the Downtown Bridge portion of the project through a traditional design-build arrangement. The Indiana Department of Transportation issued the RFP to four bidding consortiums in early August 2012. Proposals are due by the end of October 2012, and the preferred bidder is expected to be announced in late November 2012.

Puerto Rico In July 2012, the Puerto Rico Public Private Partnerships Authority (PRPPPA) selected the consortium comprised of Mexican airport operator Aeroportuario del Sureste and Highstar Capital for the 40-year concession of the Luis Muñoz Marín International Airport. The concessionaire will make an upfront payment of $615 million, which may be financed with up to $350 million of privately placed long-term bonds, followed by annual payments of $2.5 million to PRPPPA during the first five years of the concession, 5% of annual gross revenues for the next 25 years, and 10% of gross revenues for the last 10 years of the term. The revenue-sharing arrangement is expected to generate an additional $1.2 billion for the government. The concession will also require the concessionaire to finance and make roughly $1.4 billion of improvements throughout the concession term.

In September 2011, the PRPPPA achieved financial close on its first PPP project – the 40-year concession for the existing PR-22 and PR-5 toll roads with a consortium comprised of Goldman Sachs Infrastructure Partners II and Abertis. The consortium made an upfront payment of $1.36 billion and is required to make roughly $356 million of improvements over 25 years.

Texas In August 2012, the Texas Department of Transportation (TxDOT) issued an RFQ for the roughly $1.8 billion SH 183 PPP. The state’s PPP-enabling legislation allows the government to permit bidders to make PPP or traditional design-build proposals for projects. While that flexibility is beneficial to TxDOT, it creates a large degree of uncertainty for prospective bidders – requiring that proposals follow a single model levels the playing field. It is expected that the SH 249 and SH 288 projects will also be tendered as PPPs.

Virginia Virginia’s Office of Transportation Public Private Partnerships has recently announced 22 transportation infrastructure projects that could be procured as PPPs. The projects range from improvements to existing roadways and HOV-to-HOT lane conversions, to privatisation of parking facilities and a long-term lease of the Port of Virginia. Three projects have already entered the procurement phase, five more projects are expected to be launched throughout 2012 and 2013, and the remaining 14 projects are presently at the conceptual stage.

In August 2012 a Transurban-Fluor consortium reached financial close on the I-95 HOT Lanes project. The project will create about 32km of HOV/HOT lanes and is expected to cost $950 million. Transurban and Fluor will contribute approximately $300 million in equity and hold a 76-year concession. The project’s $245 million of long-term PABs priced in July 2012, and the project has also been shortlisted for about $300 million of TIFIA financing.

Washington, D.C. In early September, 2012, the District Department of Transportation (DDOT) in Washington, D.C., announced that had has received 20 responses to an RFI for a potential 30-year, US$1.2 billion PPP to build a 22-mile streetcar system and set up a non-regional bus system. DDOT is expected to evaluate the responses and may issue the RFQ by the end of 2012.

Airports The preliminary application for the privatisation of Puerto Rico’s Luis Munoz Marin International Airport, discussed earlier in this article, received FAA approval in late December 2009. In October 2010, the FAA approved the preliminary application for the privatisation of AirGlades Airport in Hendry County, Florida. AirGlades is a general aviation reliever airport with a new general aviation terminal and a number of corporate hangars. The FAA preliminarily approved the privatisation of Chicago’s Midway Airport in October 2006, and the city selected a consortium to operate Midway under a 99-year lease in exchange for an upfront payment to the city of $2.521 billion. However, the transaction never reached financial close and the winning bidder forfeited its security deposit of nearly $126 million. Despite this setback, Midway’s application remains in effect. The only completed transaction under the current pilot programme was the privatisation of New York’s Stewart International Airport under to a 99-year lease with National Express in 2000. However, in late 2006, the Port Authority purchased the lease and control of the airport was returned to the public sector.

Airport terminals Although privatisations of entire airports have proved challenging, there has been noteworthy success in the application of PPP techniques to individual terminals within a larger airport. The prime example is the Terminal 4 project at John F Kennedy International Airport in New York. The underlying arrangement reflects a true, custom-tailored PPP between a private entity (as lessee) and the Port Authority of New York and New Jersey (PANYNJ). The private lessee of Terminal 4 was responsible for constructing the original, $1.2 billion terminal, and is now responsible for constructing an $800 million expansion project that achieved financial close in December 2010. In addition to its construction obligations, the private lessee is responsible for the daily operation and maintenance of the terminal pursuant to a long-term lease. In late July 2012, the PANYNJ announced that 16 consortiums were interested in the $1.5-2 billion renovation of the central terminal at LaGuardia Airport. This project could be procured through an arrangement similar to JFK Terminal 4.

Conclusion

In order for PPPs to flourish, federal, state and local governments and officials must formulate PPP programmes and enabling legislation that are effective, workable and compatible with private-sector concerns and objectives, and have transparent and certain procedures.