More projects, more refinement: Recent PPP developments in the US transportation sector

Transcription

1 More projects, more refinement: Recent PPP developments in the US transportation sector by Barney A. Allison and Brandon Davis 1, Nossaman Guthner Knox Elliott, LLP The US is now home to an unprecedented volume of public-private partnership (PPP) deal flow, with several billion dollars worth of projects reaching financial close in 2007/2008.There has been a flurry of new PPP legislation as state and local agencies expand PPP use to address the growing gap between transportation infrastructure needs and traditional funding sources.the US Department of Transportation and two Congressionallyauthorised commissions have endorsed this strategy. As interest in PPPs grows, criticism has inevitably surfaced, but it is less likely to slow state PPP use than it is to spur a refined balancing of competing considerations some unique to US sensitivities to achieve a blend of international and domestic best practices. Making good deals out of bad news For state and regional transportation authorities, PPPs are a bright spot in an otherwise gloomy funding landscape. From both a policy and project perspective, 2007/2008 was a year for PPP successes. Major PPP highway projects including the State Highway 130 Turnpike Extension in Texas and the Capital Beltway High Occupancy/Toll Lanes project near Washington D.C. reached financial close; precedent setting PPPs such as the availability payment deal for the Port of Miami Tunnel were negotiated; several large transactions in Texas, Puerto Rico, Missouri and California, among other jurisdictions, are in mid-procurement; and even more innovative infrastructure projects both brownfield and greenfield are in active discussion. New or pending PPP legislation in 15 additional states portends even more future PPP activity. The Bush administration and the US Department of Transportation have continued aggressively to endorse PPPs as part of the solution to the dangerously declining traditional federal sources of funding.two bi-partisan Congressional commissions released reports showing interest in PPPs and a final report from one commission expected after the 2008 presidential election likely will advocate that PPP support continue with the next administration. The bad news US Transportation Secretary Mary Peters has summed up the funding crisis simply, We are spending more than we take in. 2 The US Department of Transportation (USDOT) currently projects that the balance in the Highway Trust Fund dedicated transport funding largely through federal fuel taxes will go negative by over US$200m in 2009 and will grow worse thereafter, with the American Association of State Highway and Transportation Officials projecting federal funding reductions to the states by 20%-30% across the board by The good deals In response to the funding crisis, the USDOT, state legislatures, governors and transportation agency officials are exploring PPP concepts in increasing numbers and varieties. Greenfield developments Texas The Lone Star State continues to be a major incubator for PPP development.with one successful financial close, several projects in mid-procurement and legislative intervention causing one or more procurements to abort, many other states are watching closely. SH 130 segments 5 & 6 reached financial close. This was the state s first concession agreement, the first US turnpike concession agreement signed in over a decade and the first to close financing since the SR 125 in San Diego in The project reached commercial close in March 2007 and financial close a year later. A Cintra-Zachry team will design, build, finance and operate the 45-mile turnpike project. The concession agreement includes US$1.3bn in private investment, a US$25m up front concession payment and a state share of the toll revenue over the next 50 years, with an estimated value of approximately US$1.6bn. IH 635 managed lanes proposals expected. This 17-mile project to add priced capacity in the median of an existing interstate highway, is estimated to cost US$1.5bn to construct. TxDOT issued an 46

2 RFP on September 18, 2007 to two shortlisted teams, one led by Dragados/Zachry and another by Cintra/Macquarie on September 18, 2007 and expects to receive proposals July 2008 and award a contract in the fall.txdot has up to US$700m in public funds available to contribute to the project. The Federal Highway Administration granted the project one of 15 slots in its Express Lanes Demonstration Program. North Tarrant express proposals expected. For this 36-mile, managed and general purpose lanes programme,txdot issued a request for detailed proposals March 2008 to four teams shortlisted in August 2007, requesting hard bids for a concession to develop the first 6-mile segment, estimated to cost US$700m-US$800m, and conceptual development plans for the project s balance. Proposals are due in July with preferred bidder selection and contract award planned shortly thereafter. Trans-Texas Corridor 35 master development plan. Since March 2005, Cintra-Zachry has been working with TxDOT under an agreement for the long term planning and development of the Trans- Texas Corridor 35 (TTC-35), a corridor extending from north of Dallas/Fort Worth south to Mexico. Under the agreement, the parties have produced a master development plan for the potential construction of automobile and truck toll facilities, passenger and freight rail facilities and utilities. TxDOT expects to complete by June 2008 its Tier 1 environmental studies, which may culminate in new infrastructure development, including the Loop 9 turnpike in the Dallas area. Trans-Texas Corridor 69 proposals received. TxDOT is planning tolled truck and vehicle lanes, rail, utility infrastructure and intermodal facilities for another large corridor extending from Northeast Texas to the Mexican border at Laredo and/or the Rio Grande Valley with a possible connection to the Texas Gulf Coast. In February 2008,TxDOT issued a request for detailed proposals on corridor development, with special focus on US 77. Proposals from the two teams shortlisted September 2006 Zachry/Dragados and Cintra were received in April. A preferred proposer selection and conditional contract award is expected by August SH 121 reached public agency financial close. In February 2007, TxDOT completed a successful procurement for this new, 26-mile turnpike project, selecting in a Cintra-led consortium as the preferred bidder on the basis of a bid worth in excess of US$3bn. In May, prior to contract execution the legislature stepped in to the process. In a display of complicated state politics, the legislature compelled TxDOT to delay signing a contract with Cintra which the Texas Transportation Commission had approved in order to allow the North Texas Tollway Authority (NTTA), a public agency which operates existing tollroads in the region, to submit an alternate plan. The North Central Texas Regional Transportation Council (RTC) recommended that the Commission accept NTTA s project plan.txdot and NTTA then negotiated a project agreement granting NTTA the right to the project. NTTA achieved financial close in November 2007, using a system financing to produce more than US$2bn in new money for other regional projects. SH 161 public agency negotiations for delivery. For this proposed 10-mile turnpike project,txdot shortlisted four teams in Similar to the SH 121, however, the legislature in May 2007 required TxDOT to consider an NTTA proposal to deliver the project with its own systems financing resources, after agreeing on business terms and market valuation. In April 2008, after months of negotiations,txdot accepted the NTTA s valuation of about US$458m, which NTTA is now endeavoring to finance.the NTTA also agreed to pay US$610m in construction costs. If the NTTA is unable to assume the project,txdot may continue the original procurement. Virginia Capital Beltway HOT lanes reached financial close. In one of the most important deals in recent years, the Virginia Department of Transportation and a consortium of Fluor and Transurban reached financial close December 2007 for this 14-mile High Occupancy/Toll Lanes (HOT) project on part of the interstate loop around Washington DC. Pursuant to the 80-year toll concession agreement,transurban will invest US$315m over five years, the largest private equity investment yet in a US greenfield toll road PPP project.the US$1.5bn project will utilise a US$587m PABs allocation and a US$587m TIFIA loan. I-95 HOT lanes under negotiation. Following an October 2006 interim agreement VDOT and Fluor/Transurban are in negotiations for a toll concession similar to the Capital Beltway deal for the development of 28 miles of HOT Lanes projected to cost US$900m, on the key north-south interstate highway south of the DC metropolitan area. Construction on the first section could begin as early as late Florida Port of Miami tunnel awarded. In February 2008, the Florida Department of Transportation (FDOT) 47

3 awarded the Port of Miami Tunnel project to the Bouygues Travaux Publics/Babock & Brown team. This US$1.3bn tunnel, bridge and roadway project will be developed through the first availability payment concession in the country. FDOT will pay US$100m during construction, US$350m upon project completion and the balance as annual availability payments (contingent upon lane availability and service quality) over a 30-year operating period. FDOT anticipates reaching commercial close in the summer of 2008 and financial close in early fall. I-595 Express lanes RFP issued. In April 2008, FDOT issued an RFP to four teams shortlisted December 2007 for a 10.5-mile express lane system to be developed through an availability payment based concession. Proposals are due July Commercial close is expected in the fall and financial close soon thereafter. Alaska Knik arm crossing shortlisted. In April 2007 the Knik Arm Bridge and Toll Authority shortlisted two teams one led by Macquarie and one by Bouygues and is currently working through the RFP process for a two-mile toll bridge and 18 miles of approaching roadway. Approximately US$129m in public funds have been allocated and total construction cost is estimated at US$600m. Colorado Fastracks rail programme planning underway.the Denver Regional Transportation District intends to pursue several rail and light rail PPP projects that taken together could cost upwards of US$6bn. A portion of the programme, the East Corridor and Gold Line, is under consideration for development through one or more availability payment contracts. Georgia I-75/I-575 Northwest Corridor under review. The Georgia Department of Transportation (GDOT) is in the process of re-examining a 26-mile managed lanes project estimated to cost between US$1.2bn and US$1.8bn. In January 2006 GDOT signed a letter of intent to negotiate with a Bechtel Infrastructure-led joint venture to develop the project. California Oakland airport connector RFP issued. In May 2008, the San Francisco Bay Area Rapid Transit issued its RFP for a 3.2-mile long automated guideway transit system to connect the Oakland International Airport to the regional transit system. A team composed of Merrill Lynch, Granite Construction, Parsons Transportation, Bombardier and Babcock & Brown is the sole remaining bidder from an original three proposer short list. Missouri Safe and sound bridge improvement programme preferred bidder selected. In December 2007, the Missouri Department of Transportation selected a consortium of Zachry American Infrastructure, Infrastructure Corporation of America, Parsons Transportation Group, HNTB and Clarkson Construction for a 25-year availability payment contract to repair/replace and maintain over 800 bridges statewide. Construction, estimated to cost US$400m-US$600m, could begin as early as spring Oregon South I-205 corridor project feasibility studies underway. The Oregon Department of Transportation has concluded that one of three projects Macquarie was evaluating as part of a 2005 PPP agreement the I-205 managed lanes project may be feasible as a toll concession. Studies are proceeding. Brownfield developments Colorado Northwest parkway lease reached financial close. In August 2007, a consortium comprised of Brisa Auto-Estradas and Companhia de Concessões Rodoviarias entered into a 99-year lease to operate this existing 11-mile toll road.the Parkway s construction was originally financed with US$416.4m in bonds to be paid back with toll revenue over 35 years.when revenues fell short of projections, the Authority opted for the lease deal. The concessionaire reached financial close in November 2007 and shortly thereafter closed a US$459m debt facility. Puerto Rico Luis Munoz Marin international airport parking facilities and PR22 tollroad RFQs issued. The Puerto Rican port and highway authorities, along with their financial advisor the Government Development Bank have begun the process of seeking competitive proposals for long-term, operate and maintain agreements for the parking facilities and a 50-mile tollroad as part of a broad PPP programme announced in November An RFQ for the parking facilities was issued in February 2008 and statements of qualification were received in March.An RFQ for the tollroad project was issued in late April, Pennsylvania Pennsylvania turnpike bids sought.the Governor has solicited proposals for a long-term concession of the Pennsylvania Turnpike. Proposals are expected in May, and legislative approval will be 48

4 required. Last year the General Assembly approved alternative legislation that would permit the Turnpike Commission to toll I-80 under the Interstate Reconstruction and Rehabilitation Pilot Programme if federal approval is obtained and to pay the state the value of a long-term lease for the facility. Florida Everglades parkway under consideration. FDOT may use new legislative authority (see discussion below) to lease existing toll facilities, including the Everglades Parkway (also known as Alligator Alley). The federal perspective supporting good deals Recognition of the need for serious changes in how transportation infrastructure is developed and financed is gaining wider traction within the federal government, transcending party lines. Recently, Senator Barbara Boxer and Congresswoman Nancy Pelosi, both liberal Democrats from California, have expressed their support for PPPs publicly.while some politicians and bureaucrats have concerns about PPPs, the topic is now an established part of the debate and supportive programs are now established policy. Policy recommendations from congressional advisory commissions 3 The national surface transportation policy and revenue study commission Published its voluminous final report in January Included in the commission s range of recommendations were; a 40c increase federal gas tax; eliminating the current federal restrictions on tolling the Interstate Highway system in order to fund new capacity and implement congestion pricing; and permitting PPPs with restrictions. US Transportation Secretary Peters and two other commissioners dissented on several issues, including the gas tax increase and restrictions on PPP use. The national surface transportation infrastructure financing commission 4 Issued an interim report in February 2008 and is expected to issue its final report in November 2008.The interim report noted that current transportation-related revenues are insufficient and current funding mechanisms not sustainable and are no longer closely tied to the use of the transportation system.the report laid out several different funding and financing options including PPPs that would be evaluated in the final report. Supportive federal programmes Private Activity Bonds (PABs) Interest in the PABs programme has continued to be steady in 2007 and the first quarter of It is possible that the USDOT will allocate all of the authorised US$15bn during 2009, making a good case for Congress to expand the PABs programme with the next reauthorisation. In 2007/2008, projects approved to issue PABs include: the Port of Miami Tunnel, the Knik Arm Bridge Crossing, the Capital Beltway,Texas I-635 and North Tarrant Express, the Pennsylvania Turnpike and the Missouri Bridge Improvement project. To increase the obvious value of the PABs programme, advocates will be looking to Congress for improvements. Under current law, only about 25% of private activity bond proceeds can be used to acquire land, which may impact certain greenfield transactions; tax rules that require 95% of the proceeds of PABs to be used for qualified or capital costs preclude deferring interest payments on the bonds during project ramp up; and a straight-line depreciation required by PABs is less advantageous than accelerated depreciation. TIFIA The Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) applicants in the past year have sought ways to incorporate TIFIA into hard bid PPP procurements, by using SEP-15, a federal mechanism the USDOT created two years ago to encourage innovation in the project development and financing process. 5 The first such SEP-15 approval for TIFIA authorised TxDOT to act as the initial applicant for TIFIA credit assistance in order to jump-start the application process and make the commitment available to proposers to incorporate in their finance plans in three tollroad concessions. Upon award, the selected developer may complete the TIFIA credit assistance process and execute a credit agreement with USDOT. KABATA received USDOT approval for a SEP-15/TIFIA programme similar to the TxDOT experiment, but with variations allowing proposers to negotiate individually with the USDOT prior to proposal submission. Other recent TIFIA applications include the Maryland Transportation Authority and Maryland State Highway Administration for the Intercounty Connector;Transurban for the Richmond Airport Connector 6 which would be the first use of TIFIA to refinance existing debt; and Capital Beltway Express LLC for the I-495 HOT Lanes project. 49

5 PPPs for transit After announcing its Public, Private Partnership Pilot Programme (Penta-P) in 2007, the Federal Transit Administration selected three projects for participation; the Bay Area Rapid Transit District s Oakland Airport Connector Project, the Denver Rapid Transit District s FasTraks programme (East Corridor and Gold Line) and the Metropolitan Transit Authority for Harris County s METRO Solutions Phase 2. The state perspective authorising good deals with new and pending legislation The increase in state PPP legislative activity indicates that transportation authorities continue to explore innovative solutions to their infrastructure funding crises. As of this writing, many state legislatures were still in session. Alabama.Two bills related to the construction of new toll roads using PPP have passed the House and are pending in the Senate. Arizona. A bill authorising regional toll authorities passed the Senate.Two broad PPP bills failed on a Senate vote. California. As part of a performance-based Infrastructure initiative, Governor Schwarzenegger proposed legislation broadly authorising PPPs. The bills failed a vote on May 1, but the Governor has asked the legislature to reconsider. Other bills would establish programs to educate local agencies about PPPs. Colorado. A bill to authorise the sale or lease of non-state owned toll highways has passed the House. Florida. In June 2007, the Governor signed a bill authorising the state to lease existing toll facilities (except the Florida Turnpike System) to private concessionaires for up to 75 years. Kentucky. Legislation has been introduced into the Senate that would help create the framework needed for a potential Ohio River Bridges mega-project. Mississippi.The Governor signed a bill into law in April 2007 that allows governmental entities to build new toll roads and bridges through PPPs.A bill is under consideration in the 2008 session to amend the existing PPP law in several important respects. New Jersey. In February 2008, the Governor released a draft bill that would permit the state to monetise the New Jersey Turnpike and other existing facilities via concession agreements between the government and public benefit corporations not private sector companies. North Carolina. Revisions to an August 2007 law broadened the North Carolina Turnpike Authority s PPP contracting abilities to cover all transportation infrastructure. Pennsylvania. In February 2008, a state senator introduced a bill that would enable the Transportation Commission to carry out long-term leases of the Pennsylvania Turnpike. Tennessee. In June 2007, the Governor signed a bill authorising the Department of Transportation to enter into long-term agreements to develop two tollroad pilot projects. Texas. In June 2007, Governor Rick Perry signed into law a hard fought two-year moratorium on certain kinds of PPPs, with a long list of exemptions, including; the TTC 69, the IH-635 Managed Lanes project and the North Tarrant Express, among others.the bill also limited long-term concession agreements to 50 years and gave regional local transportation authorities certain rights of first refusal to build new toll projects. Utah.The Department of Transportation is currently implementing 2006 legislation enabling the Department to enter into PPPs for tollway facilities upon approval of the Transportation Commission. In November, it published draft guidelines on the administration of unsolicited PPP proposals. West Virginia.The legislature passed a bill in March 2008 enabling the Division of Highways to enter into Comprehensive Agreements with private parties, to acquire, construct or improve transportation facilities and to toll the facilities to recoup their costs.the authority is scheduled to sunset in Growing pains As with all innovation, PPP initiatives are attracting critics, including a few federal and state lawmakers 7, raising questions and concerns.will PPPs create more value than publicly financed toll roads using tax-exempt debt and systems financing? Do PPPs offer the government the full value of public transportation assets or do they essentially create unregulated monopolies which outsource the responsibility for raising tolls to the private sector? Do PPPs represent a loss of state control because of their long duration and limit the government s rights to build future facilities because of non-compete clauses and buyout provisions? 8 As answers to these questions are hammered out, players in the PPP market will continue to tailor international best practices into hybrid deals that work within US political and economic realities. 50

6 Conclusion The PPP market in the US continues to mature and expand. Financial close is expected in the coming year on a number of projects, including the IH 635 and the North Tarrant Expressway in Texas, the Port of Miami Tunnel and I-595 Managed Lanes in Florida, the Missouri Bridge Project and potentially the Oakland Airport Connector.With an increasing number of projects in the pipeline, Georgia, North Carolina, Virginia,Texas and possibly Utah, California and Oregon are poised to be strong PPP markets. Despite pointed criticism from a few state and federal lawmakers, PPPs continue to enjoy strong support from the Bush administration and congressional commissions support that will likely continue through to the next US administration. Just as importantly, PPPs are supported by state policy makers, faced with urgent infrastructure needs and grappling with ever fewer traditional funding choices. Notes: 1 The authors wish to express their thanks to Geoffrey S.Yarema and Anne Marie Ruff who assisted in the preparation of this article.the views expressed in this article do not necessarily reflect the views of clients of the firm. US Secretary of Transportation Mary Peters, Remarks to Congress, Department of Transportation Budget for Fiscal Year 2008 (Webcast), February 5, The National Surface Transportation policy and Revenue Commission and the National Surface Transportation Infrastructure Finance Commission were established pursuant to the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, Pub. L. No , 11142, 119 Stat. 1144, 1961 (2005). Geoffrey S.Yarema, a contributor to this article, was appointed by US Secretary of Transportation Mary Peters to serve as a member of the Financing Commission. See Design-Build Dateline, April 2006, Innovation in Highway Delivery: Survey of SEP-14/SEP-15 Projects, by Brian Papernik and Brandon Davis. See Matthew Hobby & Kurt Forsgren, US Transportation s PPP Market Continues Down a NOSSAMAN Leading Legal Advisors on Innovative Infrastructure BREADTH - DEPTH - VISION Providing Insight and Experience on Ground-Breaking Projects from Alaska to Puerto Rico Largest transportation project in U.S. history: The Trans Texas Corridor I-35 High Priority Corridor First availability payment concession in the U.S.: The Port of Miami Tunnel First privately financed concession and transfer of an existing asset in Virginia history: The Pocahontas Parkway First toll concession agreement in Texas history: State Highway 130 Segments 5&6 51

7 8 Long and Winding Road, article published at (April 3, 2007). For an example of the arguments articulated by PPP opponents, see the testimony of Dennis Enright (a principal and founder of NW Financial Group) at a recent House of Representatives subcommittee hearing titled Public-Private Partnerships: Innovative Financing and Protecting the Public Interest. Testimony.aspx?TID=235 (February 13, 2007). For a response to these arguments, see Robert W. Poole, Jr.,Tolling and Public-Private Partnerships in Texas: Separating Myth from Fact, Reason Foundation Working Paper, May tollroads_ pdf. Authors: Barney A. Allison, Partner Brandon Davis, Associate Nossaman Guthner Knox Elliott, LLP 445 South Figueroa Street, 31st Floor Los Angeles, CA US Tel: Fax: Website: 52