Public-Private Partnership Market Sags Under Trump

by William G. Reinhardt, Editor

At recent meetings in Washington, D.C. construction industry CEO’s and the heads of three major P3 developers spoke alarmingly about the slow pace of deal flow and the dim prospects for repopulating the new business pipeline during the next few years. Ironically, the slow market is partly due to the rise and fall of expectations of a Trump bounce for P3s.

William M. Marino, managing partner of Star America Infrastructure Partners, bemoaned the slow progress in the U.S. P3 market despite four years of promotion by the Association for the Improvement of American Infrastructure (AIAI), which he helped found. “It’s really everywhere but here,” he said.

In July, Steve DeWitt, ‎Senior Vice President of Business Development at ACS Infrastructure Development, Inc., reminded the attendees at ARTBA’s P3 conference that only one P3 deal had closed in the first seven months of 2017—ACS’s Angel’s Flight project in Los Angeles, a small, but important project to rehabilitate and operate an iconic funicular there.

Only one other P3 design-build-finance and O&M (DBFOM) is expected to reach financial close this year, Cintra’s I-66 managed lanes project in northern Virginia. Repeated 30-day extensions to the closing schedule are expected to end this month with TIFIA/PAB/equity financing arranged for the 100% revenue-risk project by mid-August.

Colorado DOT got financial proposals recently and expects to name its preferred bidder for the I-70 Central DBFOM project on Aug. 28.

Virginia Gov. Terry McAuliffe cut the ribbon for Transurban’s I-395 DBFOM concession on Aug. 9. The $460-million managed lanes project extends Transurban’s I-95 concession by 8 miles. The terms of the concession were negotiated by VDOT a few years ago as part of Transurban’s existing I-95 contract. Despite that and the project’s high credit rating, Transurban was not able to obtain a TIFIA loan in time for its July 25 financial close.

VDOT’s Hampton Roads Bridge-Tunnel (HRBT) project got a Record of Decision from FHWA in June and expects to issue an RFQ in a few months for what could be a P3. About 75% of the funding for the $3.3-billion project is in hand from regional sales taxes, and toll revenues will easily cover the rest, making it a good P3 candidate. Election-year politics could stir up anti-toll sentiment, but the project looks solid at this point. HRBT looks to be the last major P3 project candidate on VDOT’s list.

Alabama DOT will hold an industry forum on Aug. 28 to reveal its plans for a revenue-risk concession for $1.5-billion toll bridge carrying I-10 over the Mobile River. An RFQ is set for this fall and an RFP for next spring. The project is considered to be speculative due to limited public funds to support the toll financing.

Ferrovial is hoping to reach commercial close soon for its $1.8-billion Great Hall terminal P3 at Denver International Airport, but last-minute airline opposition has become a political issue. The City Council has repeatedly postponed its vote on the contract, which is now set for Aug. 14.

Fluor Corp. has stepped in to replace Ferrovial/Walsh as the preferred design-build partner to investors in the Texas Central Rail Holdings, who are promoting a 240-mile Japanese bullet train between Houston and Dallas. Fluor will support the preliminary engineering, including a cost estimate, in exchange for being the preferred builder.

In Maryland, Fluor’s Purple Line P3 got a go-ahead decision in court recently, but still is in jeopardy of being cancelled unless federal funding is secured for $900 million of the $5.6-billion project cost.

Airports are a bright spot, starting with LAX, where two DBFOM procurements worth $2.7 billion are underway for a people mover and rental car facility. Westchester County, NY, and St. Louis are considering long-term leases. Atlanta, Phoenix and San Diego are considering P3 projects. Kansas City is considering a design-build-finance contract for a new terminal.

On the other side of the coin:

To deny their Democratic governor a win, the Republican legislature in Louisiana refused to increase the gas tax last month, which killed plans for P3 development of the I-10 corridor though Baton Rouge.

For the lack of an industry voice, California’s P3 enabling legislation died a few months ago, leaving the largest potential alternative delivery market in the U.S. with no way forward at the state level. LA Metro, which lobbied hard for the bill, still plans to move ahead, probably announcing procurement plans for 1-2 P3 projects in the near future. Plans to resurrect the statewide legislative effort are being hatched, so all hope is not lost.

Trump budget cuts and GOP political preferences have put two major blue state megaprojects in jeopardy. A near doubling of the capital cost estimate (to $13 billion) for the Gateway rail tunnel under the Hudson River between Manhattan and New Jersey has jolted that bistate project’s financing plan, which depends on 50% federal funding.

A P3 is being considered for the tunnel portion of the Gateway project, and Francis Sacr of Societe Generale has been hired as interim CFO to investigate private interest. Responses to an RFI are due Sept. 15, but little progress has been made in identifying public funding sources, and the bi-state project sponsor still lacks a permanent executive director.

In California Gov. Jerry Brown’s high-speed rail project is under new attack in Congress where GOP lawmakers once again have vowed to cut off all federal funding. The third stage of the initial operating segment is planned as a P3.

Developer Concerns

Ten years ago, when it signed its first U.S. toll road concession, there were limited amounts of capital and only a few companies competing for a few projects, says Belén Marcos, President of Cintra U.S. Cintra’s capital and experience allowed it to thrive in the early days of the P3 market. All 10 of its North American toll concessions were financed with revenue risk debt. Now the U.S. market is characterized by too many P3 bidders competing for too few projects. Marcos believes asset recycling is the best hope for repopulating the deal pipeline.

“Not having a credible pipeline is difficult for us,” she says. “It complicates resource planning and makes it harder to compete for corporate resources and the attention of investors.” A slow market also hurts recruitment of new talent, especially people with the multidisciplinary skills needed for P3 projects.

Jennifer Aument, Group General Manager of Transurban North America, says, “There’s a growing imbalance between the funds available and the transactions closed. To right that imbalance, “asset recycling would be transformational,” she says, though “there has been no meaningful U.S. brownfield transaction in 10 years.”

The Trump effect on infrastructure, so far, is greater anxiety, higher risk and, therefore, higher prices for capital. “I see things becoming less stable now,” says Pat Stricklin, a long-time construction executive who recently retired from AECOM. “People are dropping back and reevaluating the P3 market,” he says.

“All of us are waiting to see what will happen at the federal level—there’s a lot of uncertainty,” says Nuria Haltiwanger, CEO of ACS Infrastructure Development. Even if Congress approves Trump’s $1-trillion spending plan, she asks, how would that translate into projects?

Similarly, Brian Grote of Mercator Advisors, warns: “What is the capability within the Trump administration to advance a major pivot in infrastructure delivery and then to administer it?”

Or, for that matter, what is the ability of the construction industry to take on a major investment surge. The Associated Builders and Contractors trade group claims the industry can’t find the 500,000 additional workers it needs to build existing projects.

Similarly, three of the largest P3 developers in the U.S. say finding qualified project management staff is their main problem, even in the current down market

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About Bill Reinhardt

Editor of Public Works Financing newsletter

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