US Public-Private Partnerships: A Few Steps Forward and One Possible Step Back

US Public-Private Partnerships: A Few Steps Forward and One Possible Step Back

June 01, 2013 | By Douglas Fried in New York

There are currently more public-private partnership projects in the procurement phase in the United States than ever before.

Six major public-private partnership or “PPP” projects in the US have reached financial close in the last 14 months, and several more are currently at advanced procurement phases.

Three factors are expected to contribute to continued growth of the PPP market. One is increased federal government support for PPP transportation projects, notwithstanding the federal budget cutbacks in other areas. Another is adoption of a fast-track approval process for major infrastructure projects. The third factor is the possibility that Congress may authorize a national infrastructure bank or similar type of entity.

However, a recent court decision in Virginia has called into question when and how private parties can recover their investments in PPP projects through tolls collected from users of the assets.

Although the US PPP market has not yet experienced growth at the scale and speed as in some other countries like Canada, the United States is steadily building a good track record with such projects.

MAP-21 and TIFIA

Both federal and state governments are spending less on transportation projects due to general budget cutting. A primary source of funding for highways in the United States has been a highway trust fund that is funded by excise taxes on motor fuels. Motor fuel tax collections are down as Americans drive less and tax rates remain at early 1990s levels.

A major exception to this trend is funding at the federal level for financing of projects through the Transportation Infrastructure Finance and Innovation Act, a 1998 statute called TIFIA for short. TIFIA is administered by the US Department of Transportation and provides federal direct loans, loan guarantees and credit support for a wide variety of transportation projects, including highway and transit projects. TIFIA funding levels have increased.

Federal legislation in July 2012 called Moving Ahead for Progress in the 21st Century — or MAP-21 — increased TIFIA’s loan-making capacity from approximately $1 billion a year to approximately $7.5 billion in 2013 and $10 billion in 2014. Before MAP-21, the TIFIA program was being used (or considered for use) to support several projects, but would clearly not have sufficient funding to assist more than a few of them.

The combination of the additional support for innovative project delivery methods (such as PPPs) and the decreasing support for traditional means of project delivery makes PPPs a much more palatable option for states to finance some of their infrastructure needs.

Most TIFIA support for projects is through fixed-rate loans for a percentage of project costs with interest rates equivalent to Treasury rates. Loan guarantees and line-of-credit facilities are also possible, but are used less frequently.

MAP-21 also increased the percentage of total project costs that TIFIA may fund from 33% to 49%, but the Department of Transportation has indicated that TIFIA funds will generally remain limited to 33% of project costs absent special circumstances.

TIFIA loans were used in several PPP projects in 2011 and 2012. Twenty-nine applications were submitted from August 2012 through February 2013 for TIFIA funding on projects with total costs of $41 billion. Several of these applications have been identified as potential PPP transactions.

Detailed guidance from the Department of Transportation for TIFIA’s revised program under MAP-21 is forthcoming, but the department has updated its application procedure in the meantime and now accepts applications for projects on a rolling basis. Applications are submitted by the procuring government agency, but loans are ultimately distributed to and repaid by the private concessionaire in PPP projects. Some projects in previous years have stalled after not receiving TIFIA funding. These projects may reapply, and several already have done so.

Expedited Approval Process

The classic newspaper headline “Red Tape Holds Up New Bridge” is no laughing matter for those involved with projects that are stalled by problems with governmental approvals.

The Obama administration is attempting to address this problem through a series of executive orders, presidential memoranda and interagency reports, one outgrowth of which is a pilot program for streamlining the government approval process for major infrastructure projects. The goal of the pilot program is to come up with a list of lessons learned and best practices that can be applied to all projects.

The first of these presidential memoranda in August 2011 called for a listing of projects for an expedited review process. The initial list included 14 initial high-priority projects and eventually grew to 50 after adding “nationally or regionally significant projects.” The projects include bridges, transit projects, railways, waterways, roads and renewable energy generating facilities.

Executive Order 13604 in March 2012 created and directed a steering committee on federal infrastructure permitting and review process improvement to present recommendations for how to expedite federal permitting reviews.

Identified techniques include expanding the use of advanced data analysis, more and earlier governmental coordination at all levels, assigning a coordinating agency responsibility for the overall permitting and review process for each project and undertaking concurrent (rather than consecutive) project review by various agencies.

The list of identified projects that are supposed to benefit from the expedited review process includes the high-profile replacement of the Tappan Zee Bridge in New York, which is under procurement as a design-build project and is in the process of procuring a TIFIA loan. While New York does not have PPP legislation currently that would allow the Tappan Zee Bridge to be procured as a PPP project, the state legislature is considering proposed PPP legislation that would allow the bridge reconstruction or an expansion of it to accommodate mass transit to be funded through a PPP. The Department of Transportation and White House say the expedited approval process “trimmed up to three years off the timeline” for the project.

Another presidential memorandum in May 2013 directs federal agencies to adopt these improved procedures on a wider basis.

The new procedures should help the PPP market because they will allow states to take proposed projects to market in a faster and more predictable manner.

National Infrastructure Bank

The Obama administration has not given up on the idea of creating a national infrastructure bank or fund. The President called for additional support for leveraging private financing for infrastructure in a speech in March in Miami to call attention to the Port of Miami tunnel project. Subsequent White House releases outlined some details of a proposed national infrastructure bank. The bank would be capitalized with an initial injection of $10 billion in capital and be structured as an independently-operated entity to prevent political interference. It would finance transportation, water and energy projects through direct lending or loan guarantees. Projects would have to be at least $100 million in size to qualify for funding. Federal loans would have tenors of up to 35 years, but would finance no more than 50% of total costs and would have to be backed by dedicated revenue streams. Several of these features mirror what is required currently under the TIFIA program. However, for TIFIA projects, cost limits are lower: $50 million in general or $25 million for rural infrastructure projects.

Congressman John Delaney (D.-Maryland) and 26 co-sponsors introduced a bill in May (H.R. 2084) to establish a government-owned corporation called the American Infrastructure Fund to guarantee repayment of project debt and make loans and equity investments to state and local governments and non-profit infrastructure companies. The bill has significant bipartisan support: the co-sponsors are split evenly between Democrats and Republicans.

The Delaney proposal would require at least 25% of the projects financed through the American Infrastructure Fund to be PPP projects for which at least 20% of a project’s financing comes from the private sector. The fund would invest in transportation, energy, water, communications and education infrastructure and be funded by the sale of $50 billion worth of infrastructure bonds with terms of 50 years that would pay a fixed interest rate of 1%. US corporations would be incentivized to purchase the bonds by allowing them to repatriate a certain amount of their overseas earnings tax free for every $1 they invest in the bonds.

It is unclear exactly how funding for transportation projects through the proposed national infrastructure bank or the American Infrastructure Fund would overlap with the existing mandate of the Department of Transportation under the TIFIA program. However, a similar situation developed in the energy sector when the Department of Energy, under its loan guarantee and other programs, shared space with the Treasury cash grant, production tax credits and investment tax credit programs for renewable energy projects.

Outside of the transportation sector, a national infrastructure bank or fund could become a useful tool for filling investment gaps for water, environmental and social infrastructure projects, just as TIFIA has done for transportation projects.

While the current push for fiscal austerity in Washington is not ideal for enacting any such new initiatives, the fact that Congress found a way to increase TIFIA funding, news reports about unsafe bridges and the bi-partisan support for the American Infrastructure Fund suggest a bank or fund is not out of the running.

Litigation in Virginia

In a potential step backward in the PPP market, a recent court decision, Danny Meeks v. Virginia Department of Transportation, may call into question the tolling regimes for certain projects in Virginia and possibly in other states as well.

The case, brought by citizens, businesses and a group called Citizens Against Unfair Tolls, focused on tolls that must be paid for use of the midtown tunnel project in Norfolk. The $2.1 billion project was arranged as a toll-revenue design-build-finance-operate-maintain project with a TIFIA loan and private activity bonds.

The project involved construction of a new tunnel parallel to the existing midtown tunnel under the Elizabeth River connecting Norfolk with Portsmouth, Virginia, as well as an extension of the nearby Martin Luther King Freeway and improvements to the existing nearby downtown tunnel.

The new and existing tubes for the midtown tunnel, the existing tubes for the downtown tunnel, and the highway extension were each planned to be tolled to pay for the project. The two existing tunnels had previously been tolled, but those tolls were lifted when their original construction financings were paid off.

Opponents argued that the proposed tolls would technically be taxes and that the procedures for imposing taxes in the Virginia constitution were not followed.

A state circuit court agreed. The court said the Virginia legislature violated the Virginia constitution by “ceding the setting of tolls rates and taxes in the circumstances of this case for the use of facilities that have been bundled solely for revenue-producing purposes” and by giving “unfettered power to the Virginia Department of Transportation to set toll rates without any real or meaningful parameters.”

The defendants argued that the tolled facilities collectively form an integrated transportation network and that “motorists drive on the tolled segments for convenience, so the toll is a voluntary payment for a governmental service, not ‘an enforced contribution’” as in the case of taxes. They also argued that the state’s PPP legislation does not unlawfully delegate legislative powers.

Toll collection was scheduled to begin in February 2014. The court rejected a request for a stay of the ruling, which would have allowed toll collection to begin during the appeals process.

If not reversed on appeal, the potential impact of the case is not limited to the midtown tunnel project. It could affect other existing and proposed PPP projects in Virginia, particularly those with tolling structures rather than availability payments, and those with multiple components that are aggregated into a single project.

Outside of Virginia, while each state’s law and project-specific facts and circumstances would control, the case may serve as a springboard for challenges to other projects. While rulings from courts in other states usually do not control, they can be persuasive, especially when facts and circumstances are similar.

Parties to existing concession agreements should confirm who bears the risk of this type of litigation. Documentation should be clear as to which parties assume this risk.