by Agnes a Paris
Tue Mar 28th, 2006 at 05:48:21 AM EST
The use of special-purpose public-private partnerships (PPPs) by U.S. government agencies and departments to meet their financing requirements started only recently, with a ten to fifteen year delay vs Europe.
The alleged flexibility provided by PPPs gives federal departments that have the authority to enter into these instruments an avenue to meet their expanding capital requirements.
NB : A PPP is a business entity--such as a corporation, partnership, limited liability company, or grantor trust--that is established by the private sector for a single specified purpose.
This diary specifically focuses on infrastructure transportation.
The recent sudden interest in PPP structures has resulted primarily from actions by specific state and municipal leaders, including Chicago Mayor Richard Daley (Chicago Skyway), Gov. Mitch Daniels of Indiana (Indiana Toll Road), Gov. Rick Perry of Texas (Trans-Texas Corridor), and Gov. Tim Kaine and former Gov. Mark Warner of Virginia (various projects).
While more are expected, presently just a handful of U.S. toll roads have been funded through PPP structures, including the following:
- Dulles Greenway, a 14-mile toll road northwest of Washington, D.C. was originally constructed as a privately owned PPP toll road, was purchased in 2005 by the Macquarie Infrastructure Group.
- Virginia Route 895, a nine-mile toll road south of Richmond constructed as a PPP toll road. The project's sponsor (the Pocahontas Parkway Association) announced in 2005 that it is considering selling the roadway concession to another private entity.
- State Route 91 Express Lanes : 10 miles of HOT lanes south of Los Angeles originally constructed as a PPP toll road. The toll lane concession was repurchased by the state in 2003 to eliminate a noncompete clause that restricted capacity improvements along the corridor.
- State Route 125, a 9.5-mile toll road southeast of San Diego expected to open in early 2007. It is being constructed as a PPP by San Diego Expressway L.P., which is 100% owned by the Macquarie Infrastructure Group.
- Chicago Skyway, an eight-mile toll road east of Chicago originally constructed with public funds. The $1.83 billion, 99-year concession was purchased in a 2005 privatization by a consortium of Cintra SA and the Macquarie Infrastructure Group.
- Indiana Toll Road, a 157-mile toll road in northern Indiana originally constructed with public funds. The $3.85 billion, 75-year concession was purchased in a 2006 privatization by a consortium of Cintra SA and the Macquarie Infrastructure Group.
The last two transactions represent an enormous change in U.S. toll road financing and have created a big splash that continues to ripple throughout the U.S. surface transportation sector.
Not surprisingly, this has resulted in many state, local, and regional providers of roadway infrastructure stepping back to evaluate their capital programs in the context of the evolving public-private partnership (PPP) model.
Faced with the prospect of diminishing resources for roadway investment, global interest by investors and operators, and encouraged by visible support from elected officials along with the growing acceptance of tolling technology, federal and state authorities are increasingly laying the legal and political groundwork to allow for PPP arrangements. Toll road and bridge PPP projects are currently being discussed publicly in at least 18 states.
In the transportation sector, practical issues, such as how quickly and cost effectively the toll projects can be delivered, along with public policy issues regarding control and sharing of financial risks as well as benefits, will be central to the debate over PPPs in the toll road sector.
These issues beg the following questions, among others: How will new greenfield projects with unknown revenue potential attract private capital, which, to provide competitive rates of return to investors, might require the high degree of leverage observed in the Chicago Skyway and Indiana Toll Road concessions?
Given the poor history of toll revenue projections, what other forms of financial support could project sponsors look to? If alternative payment mechanisms are incorporated, will they work to diffuse the risks to bondholders or other lenders?
The answers to these and other questions remain to be seen as sponsors and the developer community evaluate the growing pipeline of potential PPP projects and look to global examples for application in the U.S. market.
With respect to a toll road or bridge, a PPP has traditionally referred to the public and private sectors' medium- to long-term sharing of traffic and operating risk, capital cost risk, maintenance cost risk, and toll revenue reward. Recently, the term PPP has also been applied to a wide spectrum of toll road financing and ownership structures: from cost- and profit-sharing partnerships to complete privatization through sale or long-term leases.
To illustrate, even though the Chicago Skyway and Indiana Toll Road are now completely privatized, a minimal amount of state oversight is still being maintained, requiring the private concessionaires to meet annual road maintenance standards and to add lanes when necessary to meet traffic congestion standards. Nonetheless, privatization--particularly the addition of equity ownership and the distribution of dividends--represents an enormous change in U.S. toll road financing.
Toll road PPP and privatization projects typically fall into two categories: "greenfield" and "brownfield" projects.
Greenfield projects refer to the construction of new toll roads and bridges. Brownfield projects frequently relate to the privatization of an existing toll road or bridge by means of a very long-term lease.
Optimally, privatizations permit local governments to avoid future capital expenditures on the privatized road and also provide funding for new greenfield projects. High-occupancy toll lanes, or HOT lanes, represent a hybrid of these two categories. HOT lanes are new toll lane capacity constructed alongside existing highways.
Although the brownfield and greenfield categories do not determine the financing and ownership structure of the road, they do have distinct credit characteristics--particularly regarding traffic risk.
Will increased fuel prices and tolls decrease the propensity to drive alone? Will the cycle of more drivers each year, more congestion, and endless highway expansion finally break?
Many think not, and additional sources of funding for highway construction are being sought. PPPs are a possible source of additional highway and bridge funding, as they provide debt and equity from the private market to fund toll road capital needs.
The European experience reminds though, that there is no one best way.
I have worked on most of the transactions mentioned above, so feel free to ask questions, I will be happy to answer if the info does not fall into confidentiality provisions.
