The page may be turning for US public-private partnerships in 2023 after a tough year of rising interest rates, stubbornly high inflation and snarls in supply chains.
Last year saw the US P3 market hit a record with close to USD 22bn in projects reaching financial close. But the big jump in activity, as measured by deal value, came in large part due to two major airport terminal P3s at New York’s John F. Kennedy International Airport. Volume declined to 17 closings compared to 25 in 2021 and 21 in 2020, according to Infralogic data.
While economic challenges will carry into the New Year, including the possibility of a recession, governments are seeking innovative solutions to address traffic congestion, climate change and a pressing need to expand broadband access.
Industry executives, advisors and government officials tell Infralogic this should provide more of an opening for increased activity in 2023.
“I am excited for 2023,” says Geoffrey Stricker, senior managing director at Edgemoor Infrastructure and Real Estate. “More states are embracing P3s.”
Federal funds from the Infrastructure Investment and Jobs Act could “open up doors” to P3s in sectors where there has been limited activity, such as transit, water and aviation, Stricker notes.
And higher interest rates could mean procurement agencies are more open to alternative procurement methods, such as P3s.
“The need for infrastructure is only increasing,” Stricker says. “With higher interest rates, there is an increased demand for creativity.”
Michael Bonini, a director of the Pennsylvania Department of Transportation, says the P3 office he runs wants to find ways to leverage federal funding this year and take a close look at projects to see if they are best suited for traditional delivery or P3s.
Electrical vehicles are one area of focus along with reaching financial close on the three remaining bridges in the state’s Major Bridges P3 project, Bonini says. The state reached financial close on the first six bridges in the program late last year under a P3 with Bridging Pennsylvania Developer 1, a partnership of Macquarie, with a 60% stake, and Shikun & Binui with a 40% stake.
PennDOT is targeting the middle to the end of this year to launch the procurement for its Partnership 81 P3, a 7.5-mile highway DBF, Bonini says. The project will address safety, capacity, and mobility improvements along the highway near Wilkes-Barre.
Pennsylvania passed legislation last year that blocks the use of tolling to fund the Major Bridges P3, but the state was able to switch the project to availability payments.
Other states, though, are embracing managed lane programs as a funding source and means to cut traffic congestion.
Tennessee Governor Bill Lee proposed a major plan in December to change state law to allow P3 projects to use choice lanes, often called managed lanes that feature variable tolls.
Sia Kusha, senior vice president and group head for business development and partnering at Plenary Americas, says he welcomes the entrance of Tennessee to the P3 market, noting the state’s embrace of P3s comes as Georgia, North Carolina and Virginia are moving ahead with their own managed lane programs.
In another major road procurement, the Puerto Rico Public-Private Partnerships Authority (P3A) is moving ahead with the sale of a concession to upgrade and operate four toll roads on the Caribbean island.
Georgia employed an innovative DBF financial structure for its Interstate 285/I-20 East Interchange Project near Atlanta that involved a financial institution routing a loan through the Wisconsin-based Public Finance Authority and a trustee who used proceeds to purchase project certificates from the SPV on the project, a consortium led by Walsh Construction Group.
"I think that's another model that … could be adapted and expanded elsewhere," says Joe Seliga, co-lead of Mayer Brown's government and infrastructure investment team, who expects to see a “blossoming of creativity" in the P3 space.
Creativity may come in particular in how P3s are structured through new types of pre-development agreements, increased use of the progressive design-build model and different forms of availability payment and revenue concession structures, he says.
Many government procurement agencies at the local level are still working on the basics.
Cities have issues with finding and procuring the right advisors and may not be sure if they have the legal authority to undertake a P3, says David Gilford, Sidewalk Infrastructure Partners’ head of policy and strategic partnerships.
The 2021 bipartisan infrastructure act provides USD 100m over five years to local governments to hire advisors to analyze potential projects.
Procurement authorities can take some practical steps to streamline the P3 process, such as compiling a full inventory of assets they own. If the city or county wants to launch a broadband P3, knowing what entity owns rooftops and telephone poles can make a major difference, Gilford notes.
Earlier this month, Sidewalk teamed up with Accelerator For America, which describes itself as an “R&D arm of cities and mayors,” to form a long-term partnership called the Innovative Infrastructure Initiative to help municipalities develop infrastructure.
The partnership, which will select its first cohort of cities this spring, “will convene local leaders to learn how P3s have been successfully implemented, and share their own insights,” Gilford says.
Market innovation comes as inflation and rising interest rates have had a significant impact on the market, according to industry participants.
The city of Fort Lauderdale spent most of 2022 negotiating a final agreement with IDE Technologies, Ridgewood Infrastructure and Kiewit to develop a new water treatment plant using a progressive P3. Projected costs have jumped from USD 385m to USD 485m.
Across the country in Oregon, inflation delayed the final agreement for a progressive DBFOM project for a new wastewater treatment plant for the cities of Lake Oswego and Portland. The project has been delayed as the contractor tries to mitigate price increases, resulting in the extension of the pre-development agreement for another year.
In December, Murray State University in Kentucky voted to pause its student housing P3, citing rising costs for the project. The delay bucks the trend of colleges employing P3s to fund the construction of new housing and upgrades to energy systems.
Inflation is not holding back governments from exploring P3s to solve tough infrastructure problems.
Patrick Harder, a partner at Nossaman, says areas for focus in 2023 include projects that address the effects of climate change, problems created by major highway projects that divided urban neighbourhoods and the continued expansion of broadband to rural areas.
The city of Annapolis, Maryland reached financial close in September on a project that will in part address the impact of climate change. The Hillman Garage City Dock Redevelopment includes the installation of hydraulic flap gates, to protect the city from flooding and storm surges.
Governments are also using P3s to fund the construction of new bus terminals and depots, often connected to plans to convert bus fleets to electric vehicles. New Hampshire, Rhode Island and New Jersey and New York’s transit agencies are all exploring projects.
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