Infrastructure opportunities after the US elections
The November 8 federal elections in the United States could have a significant effect on the US infrastructure and P3 markets. A large group of industry participants gathered in New York two days after the elections for a breakfast roundtable discussion about US P3s hosted by InfraAmericas and Chadbourne. The following is an edited transcript of the panel discussion.
The panelists are Patrick Foye, executive director at The Port Authority of New York and New Jersey, former New York Governor George Pataki, a counsel at Chadbourne, John Porcari, president, US advisory services, at WSP|Parsons Brinckerhoff and interim executive director at Gateway Development Corporation, DJ Gribbin, national director strategic consulting at HDR, and former general counsel at the US Department of Transportation, Mike Parker, US infrastructure advisory leader at Ernst & Young, and Mike Lapolla, managing director at Globalvia. The moderator is Doug Fried, a partner in the Chadbourne New York office.
MR. FRIED: Donald Trump said in his acceptance speech that he wants to make US infrastructure “second to none.” Pat Foye, infrastructure investment and P3s were not a hot topic of debate during the Presidential campaign. Do you believe that Trump will make a push for more private investment in US infrastructure?
MR. FOYE: Definitely.
There are two things I don’t know anything about: one is Washington and the second is Donald Trump. [Laughter.] But I will note the following:
Donald Trump is a builder. He has written about visiting construction sites with his father, Fred, who was one of the great real estate entrepreneurs in New York. Fred built more than 27,000 apartments in Brooklyn and Queens, the value of many of which was determined by their proximity to subways. Donald Trump’s first major transaction was a place called the Commodore Hotel, which is basically in the Grand Central Terminal.
This was a largely issue-free campaign, but one of the few issues on which there was bi-partisan agreement was that American infrastructure is in an unacceptable state. It is a current drag on the nation’s economy. It poses threats in the short term and the long term to the nation’s economic competitiveness and to job creation. If you look at why Donald Trump got elected, it is because of concerns about job insecurity and the fact that on a real basis American wages for middle class people have declined over the last 10 to 20 years. That is really the first time that has happened outside the Great Depression.
I think there is a bi-partisan consensus on three things.
One is that America’s infrastructure issues have to be addressed.
Two is that private capital is going to play a significant role. That is not an unusual conclusion for someone like Donald Trump who has spent his career in the private sector doing deals, some of which, like the Commodore Hotel, were done with government assistance.
Three is the need to revise the National Environmental Policy Act, building on the work that was done by President Obama, Transportation Secretaries LaHood and Foxx and John Porcari, the executive director of the Gateway Program Development Corporation who is sitting here. There is a consensus that the NEPA environmental permitting process for transportation infrastructure is broken. This is especially true for projects that replace existing facilities. The Gateway program is a good example.
The Gateway program is replacing existing Amtrak tunnels that opened in 1910 and were severely damaged by Superstorm Sandy. The tunnels are safe — Amtrak inspects them regularly — but at some point their useful lives will end. If that happens before new tunnels are built, it will be a transportation disaster, an economic disaster and an environmental disaster. It will be an environmental disaster because tens of thousands, perhaps even hundreds of thousands, of people who currently take Amtrak from Washington and other points north on the way to New York City will be forced to take other modes of transportation, including private cars, buses and planes. It will be an environmental disaster for a region whose air quality does not currently meet the Environmental Protection Agency standards.
This is a transaction that ought to be hurried along, which we are doing under John Porcari’s leadership and with the cooperation of the US Department of Transportation, Amtrak, New Jersey Transit, and The Port Authority, which has been helping lead the drive to create urgency here.
President-elect Trump talked about the need to rebuild our aging infrastructure starting a minute or two into his victory speech. He has tweeted about it regularly over the years and compared the state of our infrastructure to China’s. There was talk from the Trump campaign about tax credits for investors of private capital. I think there will be significant amounts of private capital put to work.
MR. FRIED: Pat Foye, how much of an impact do you think Trump will have on what The Port Authority will be doing?
MR. FOYE: We have had a very robust $27 billion capital plan in place since 2014. We are in the process of reviewing it. Our board just made a contribution to the Portal Bridge North portion of the Gateway program, and is working closely with John Porcari on figuring out how the tunnel can be financed. The financing will probably come from a combination of sources, including user fees and private capital. The fact that the President-elect is focused on this area will help.
He can also push through NEPA reform. Most of our projects — for instance, the Goethals bridge — are replacement projects. We are also raising the roadway on the Bayonne bridge, which in many ways is a new bridge. The LaGuardia Airport project is a replacement project. The President-elect can also help by creating an infrastructure czar in the White House who has responsibility for working with the US Departments of Transportation and Commerce and EPA to streamline approval processes.
MR. FRIED: John Porcari, what do you think are the most significant challenges with respect to our nation’s infrastructure that Donald Trump will face?
MR. PORCARI: First, you must have the will to build infrastructure. By any objective measure, we have fallen behind on this as a nation. We are not spending 7% or 3% or even 2% of our GDP on infrastructure. That is not investing for the next generation.
On the positive side, the candidates talked about infrastructure during the campaign. Secretary Clinton had very detailed plans for a $275 billion, five-year-plus plan to increase infrastructure spending. President-elect Trump said several times he would double that, and, in fact, at one point he said he would triple it, but without providing details.
The point is that if there is anything even remotely near bi-partisan in Washington, it is infrastructure. Infrastructure is at the top of the list of what could be done during the first 100 days of the new administration. There are a couple plans already that could serve as vehicles. For example, on the House side, Congressman Delaney has a bill with 60 co-sponsors that would allow US companies to repatriate overseas earnings and pay a reduced tax rate. The additional taxes collected would be used for infrastructure.
What does it mean in terms of actually getting more roads and bridges built? As DJ Gribbin and others here who have been on the inside know, tangible results require a lot of hard work. The new secretary of transportation should spend the first week in office talking to every governor and every state transportation secretary and make sure Washington understands each state’s top five priorities. Obviously Nebraska and California have different needs. The new administration should follow those priorities in an agonistic way. This would have a remarkable effect in focusing the mind. The approach is consistent with our governing philosophy in America, which is federalism. There is a misunderstanding that the transportation network is some kind of national plan. Even the interstate highways were not a national plan. They were a bunch of local priorities, or city-pairs, that were aggregated into a national system.
The point for the President-elect is you can start with the state priorities and build a national program from that very quickly.
MR. FRIED: DJ Gribbin, as John Porcari mentioned, you were an insider at US Department of Transportation when it started focusing on P3s. Do you think private investment in infrastructure will be a priority for the Trump administration?
MR. GRIBBIN: Absolutely. Pat and John have done a good job of explaining why that is. Taking a step back on the question of what Donald Trump is likely to do, I don’t think anybody knows, including Donald Trump. This is a whole new era. We have never been here before. But if you think about his background, what he does, what he prides himself on: it has a lot to do with building things, as Pat mentioned. And Pat and John both touched on the fact that there is a strong bi-partisan consensus around infrastructure. If we were talking about almost any other issue, there are substantial differences between the parties, between Donald Trump and the Democratic Party, and actually between Donald Trump and some of the Republican Party. [Laughter.]
When it comes to infrastructure, there is a general consensus about the right thing to do. The first substantive issue Trump mentioned in his acceptance speech was infrastructure. It came ahead of veterans. It came ahead of the economy. It is what he knows. If you think about private involvement, that is what he has done. That is his background. It is natural for Trump to advocate the value of private investment in infrastructure.
MR. FRIED: Mike Parker, you work with state and local officials who are responsible for delivering infrastructure projects. What are they hoping for from President-elect Trump?
MR. PARKER: I think everybody is recalibrating and trying to think about how they react to the news, and then, what are they asking for. It would have been the same had Clinton been elected.
Let me highlight three areas.
One is long-term funding and predictability. Funding is needed for large projects. Predictability is important because these projects take many years to plan and deliver.
Another is process reform, including, as Pat Foye mentioned, NEPA reform, particularly as more projects become multi-modal or bi-state. We need to reduce the cycle time for completing NEPA.
Lastly, can there be a different track for projects that are self-funding perhaps 50% or more of their costs? We are getting to a point where states and localities have become significant players. Can there be a different alignment of roles when substantial local money is contributed? For example, could the local money confirm the priority of the projects? One person’s bridge to nowhere may be another person’s critical bridge, but if there is half local match, that is a pretty good way to confirm the project has merit.
MR. GRIBBIN: What Mike Parker just said is absolute genius. Historically, we talked about a federal program. What federal money do we get? Over time, the federal share, especially on highways, has decreased. The Trump campaign promised to double whatever funding Secretary Clinton promised. I encouraged the transition team to think about incentives for investment of non-federal dollars. Think about growing the whole pie as opposed to just the amount of federal dollars that we are putting in. Over time, we will see counties, cities and states playing a much bigger role in transportation infrastructure dollars than the federal government.
MR. FRIED: Mike Lapolla, what are the infrastructure companies hoping to see from Donald Trump?
MR. LAPOLLA: I am the token crazy liberal Democrat here. I am very depressed about the results. [Laughter.] I wore the red tie as a sign of transition. A friend of mine texted me yesterday that she is so depressed that if a clown invited her into the woods, she would go. [Laughter.] That is how I feel today. I think Doug Fried was surprised to see me walk into the room.
The Trump plan calls for $1 trillion over 10 years with $187 million in tax credits. The support will only be for projects where there is a revenue stream. It specifically said toll roads. I am cautiously optimistic.
My company is based in Madrid. We want stability and predictability. We do not want chaos or the rancor that we saw during the campaign to continue after January 20. I hope things calm down and there is actually a policy.
MR. FRIED: DJ Gribbin, what do you think will have a bigger impact on infrastructure: the new President or the new Congress?
MR. GRIBBIN: Both. It will be interesting to see the extent to which the new administration works with Congress as a co-equal branch of government. It helps that both will be in Republican hands. It is the first time since 1928 that Republicans have held the House, Senate and the White House at the same time.
That said, Congress has a bigger role potentially in infrastructure because it appropriates funds. Congress passes a reauthorization bill for the highway program, for the airport program and for the water program, and Congress sets the ground rules for how those programs can incorporate private funding.
We touched on NEPA earlier and the need for process reform. Congress determines what NEPA does and does not require. Thus, for infrastructure writ large, the answer is Congress.
For just P3s, the President plays a bigger role. The current administration has set a great example in terms of how to help lead in this area. It helps when the White House, US Department of Transportation, EPA, and the Army Corps of Engineers are out front saying that P3s are something that they think are important.
MR. PORCARI: Making infrastructure a priority really has to come from the White House.
MR. FOYE: I agree.
The Republican Congress has been talking about privatizing the air traffic control system. The idea has not gone anywhere. It might go someplace in an environment like this. That would be incredibly important in New York and New Jersey because a third of flights in the entire country are affected by delays in New York, New Jersey and Philadelphia airports. Being able to make progress on that would be unbelievably important to the regional economy.
Congress can also think about revenue sources, like the passenger facility charges authorized by the federal government that are an important source of funding for airport investment all over the country, including our P3 for the central terminal building at LaGuardia airport. PFCs have not increased in a long time. Having a revenue source is incredibly important. The President-elect mentioned toll roads the other night. I am not sure that the optimal use of tax credits is on toll roads because toll roads already have a source of revenue.
The Trump campaign talked about some type of national tax increment financing. That is an intriguing concept. There was an article in one of the papers today about the average rent on 2nd Avenue in New York for a residential unit being expected to go up something like $500 dollars a month when the 2nd Avenue subway is completed. It is unfortunate that the Metropolitan Transportation Authority cannot capture some of that. The MTA should focus on capturing it going forward. The MTA is talking about doing four new Metro North stations in the Bronx. The Bronx is not 2nd Avenue, but there are real opportunities for value capture.
MR. GRIBBIN: Whenever you build infrastructure, the property around that infrastructure becomes more valuable, and yet governments have consistently underperformed in capturing that value.
MR. PARKER: Governments are not completely underperforming. New York City will capture all the property tax value. The question is whether it will use the additional revenue to pay for infrastructure.
MR. FOYE: From a Port Authority point of view, having real estate developers and owners contribute over a long period of time can be part of the financing package for infrastructure projects. How to do it on a national level is a fascinating issue.
MR. PARKER: Doug also asked about Congress and, while DJ Gribbin said the president could have the greater role to play with respect to P3s, if a new infrastructure agenda is authorized, Congress will be where it happens, and choices in legislation could have a big impact on P3s.
People always ask us why the US P3 market is so slow to develop. They want to know why value-for-money processes do not justify more P3s in the United States. The reality is that value is in the eye of the beholder. Other countries are prioritizing P3s. Some of the project-by-project discussions about the value of a P3 would be settled in the United States if there were a prioritization of P3s at the federal level. Otherwise making the case for P3s, particularly in some sectors, can be harder in the United States than in other countries because here you have federally subsidized tax-exempt debt as an alternative to private finance.
Those of us who work in the industry see benefits in P3s around certainty of performance and certainty of delivery. If you look at how money actually comes in through programs like the Federal Transit Administration’s New Starts capital grant program for major transit projects, sometimes the money comes in a considerable amount of time after the projects are delivered.
Perhaps this points to a way to incentivize using contracting methods that provide greater certainty of outcomes. A federal program need not push for a P3 or other delivery approach, but instead might just tell grantees that it does not matter how you build and deliver the project. The money is coming in only after you have completed the project, or in amounts over the first five or 10 years as operational performance metrics are met. Some states and localities might choose to manage those projects themselves, and others might choose to transfer that risk to a private partner. That’s a risk that the private sector is well equipped to manage.
If Congress was bold or looking for budget savings, it could look at tax-exempt debt, either make it more available to private infrastructure or, in the extreme, get rid of it for future public infrastructure. These are examples of very significant legislative options that, if considered, would certainly affect the P3 market.
MR. PORCARI: You do not need legislation for some of the opportunities related to P3s. Objectively, if you look around the country at deals that have cratered, they crater, usually at the 11th hour due political risk. Federalism, which is a real strength of our country, works against us in this case. The deal could be changed at the local level at the eleventh hour.
MR. GRIBBIN: Going back to what Mike Parker said, you have to give local elected officials all the way up to the governor some political cover. If what they are saying is, “Listen, we get additional funding from Washington if we consider this method,” that is huge.
MR. PORCARI: Absolutely, but I am also suggesting you build in some consistency and predictability. It is okay to say, “No, you can’t do it” at the 11th hour. If there were federal funds involved, you could have a process where those kind of threshold political viability questions at the local level had to be asked and answered earlier in the process. You would bring that consistency and predictability. You do not need legislation to do that.
MR. FOYE: I agree. It is another reason to shorten the NEPA process. By shortening the NEPA process, you reduce the escalation of construction costs and capitalized interest costs. You reduce the risk of electoral cycles, the risk of a new mayor or new governor coming in, from a different party, or with a different philosophy.
MR. GRIBBIN: These projects are incredibly controversial. Every day that a project is under consideration, it is like a piñata. People are just whacking at it. If you can shorten the NEPA cycle, shorten the procurement process, and end the last-minute changes, that would be huge.
MR. FRIED: Mike Lapolla, I want to get your take on what you think is the most important thing the new Congress can do to facilitate P3s?
MR. LAPOLLA: The big question is whether Paul Ryan can get congressmen who think tolls are a tax to go along with anything. You cannot do nuanced tax credit proposals. The voter does not understand what a tax credit translates into for jobs. Voters understand if the federal government gives $50 million to their county to build something. I think P3s are going to be a small part of a much bigger policy discussion among all sides.
MR. FRIED: DJ Gribbin, a handful of former state and local officials may be moving to Washington to help the new administration with infrastructure. What experience would you like to see these officials bring to the table and how important is it that they have private sector experience?
MR. GRIBBIN: I worked on the Bush-Cheney transition in 2000 and I think the media got about 20% of it right in terms of who is likely to come in.
If you think about the characteristics that you want in the transportation secretary, private sector experience is beneficial. The public and private sectors have different cultures. They have different rhythms.
Public sector experience is also very important. One of the concerns that I have about the President-elect is whether he understands that he is just a third of the government and not a CEO. He can have really good ideas, but he needs to bring a lot of people with him to execute on those ideas.
It would be good to have a new transportation secretary who has worked with legislatures.
Sales experience is also helpful because he or she will have to sell new ideas.
When you look across the country, I think someone like Pete Rahn would be phenomenal. He is the former director of the New Mexico Department of Transportation, former director of the Missouri Department of Transportation and the current head of the Maryland Department of Transportation. He may be the only person in America has led the transportation departments in three states. And he started off his life as an insurance salesman.
You may think that technical, engineering, legal and financial skills are important for someone at that level, but it is most important to have somebody who can convey ideas clearly and simply and get other people to buy into them.
MR. PORCARI: It would be a real bonus also to have real projects experience in the public or private sector. I had many frustrations as a state transportation secretary trying to deal with the US Department of Transportation. It included not only things like the NEPA issues we have been talking about, but also people returning your phone calls. How the people who are actually building projects are treated is important.
State Ballot Initiatives
MR. FRIED: Mike Parker, I know you were following the regional and local ballot measures to increase funding for major transit agencies in cities like Los Angeles, Seattle and Atlanta. Were these measures successful and will any of them let transit agencies pursue major projects that otherwise would not have been pursued?
MR. PARKER: This is a really big part of the story of the election.
You now have funding in Los Angeles not only to do major projects, but also to plan some very large projects that will be transformative there. The fact that Los Angeles is already focused on delivering major projects is no surprise, but the level of funding that was approved in the local ballot measure is a significant differentiator.
The Seattle area is at a different place than Los Angeles in terms of decisionmaking on project delivery. It may continue to evolve. Washington State has had a mixed history with consideration of P3 projects. There have been successful measures in Atlanta.
These types of local initiatives should be considered in the design of a new federal program. You saw a possible issue with the Obama stimulus, where when the federal government stepped up, some states considered pulling back. Federal funding should complement local revenue.
MR. FOYE: Governor Christie pushed for a constitutional amendment that passed in New Jersey and that will allow New Jersey Transit to borrow against the increased gasoline tax revenues.
MR. GRIBBIN: Will the focus then shift from states to localities? For those in the room who are pursuing P3s, should they spend a little less time on states and a little more time on localities?
MR. PARKER: The answer may be different state by state and place by place. Many of the states are dependent on the federal program. Agencies like Caltrans have seen their programs depleted as the level of funds goes down and their operating costs, which are CPI linked, or worse, go up.
There are many different types of states. The coalition that supported Donald Trump includes people from states that do not have the kind of funding Los Angeles has. Part of this election was perhaps about making sure that the economic improvements on the coasts are not leaving behind other states.
MR. FRIED: Pat Foye, The Port Authority has been through a number of P3s at this point. How would you advise a new governor or new mayor who wants to understand the merits of a P3 and the P3 model?
MR. FOYE: The elected official is trying to figure out what is the best risk-adjusted way to deliver a project.
We want to do more P3s at The Port Authority. I would not be surprised if in two or three years we are well on our way toward a P3 deal bigger than LaGuardia. I think that P3s could have significant roles in a Port Authority bus terminal project, the Gateway program and other things on which we are working.
The advice is as follows:
A P3 does not fit all cases. We are doing two airport deals. The LaGuardia Central Terminal Building is being done as a P3. Terminal A at Newark is most likely going to be done as a design-build with additional Port Authority financing.
We are also building two bridges at the same time. On the Goethals bridge, the first lanes will open in February. We did that as a P3 thanks to a $500 million TIFIA loan, which is an important part of the capital stack. On the Bayonne bridge, we decided to do the project using traditional Port Authority tax-exempt financing. We will look at every project above a certain size, say $500 million, through the prism of P3s. P3s are complicated deals. You need a certain size to justify the complexity.
You have to pick your spots.
The advantages to The Port Authority on both Goethals and LaGuardia were as follows. While the private equity will earn a higher return than the traditional Port Authority tax-exempt capital, The Port Authority got innovation from the private sector on both LaGuardia and Goethals. We also transferred risk, which is incredibly important.
We have a $27 billion capital plan, and $9 to $9.5 billion of it will be delivered through the LaGuardia and Goethals P3s and a deal we made with Delta at LaGuardia. We have fixed price commitments from creditworthy parties. If the transactions are late or they go over budget, then it is someone else’s problem.
That gives the board a great deal of comfort in capital-constrained times. P3s ought to be something that every executive is looking at for projects above a certain size even if they are not a good fit in every case.
MR. FRIED: Would you say that risk transfer was the tipping point of your decision to do a P3?
MR. FOYE: There are three things. One is risk transfer. Two is innovation. Three is that while government is good at lots of things, given the operating costs and cost of construction of some projects, government is going to be better off having a creditworthy private party do the project with a big balance sheet backing up the obligation.
MR. FRIED: Pat Foye, what would you say were the biggest challenges of getting Goethals and LaGuardia over the finish line?
MR. FOYE: John Ma and I are going to write a book. It will not be a bestseller. [Laughter.]
These transactions are all tough, complicated transactions. LaGuardia is a project with an international profile. There were certain things that were really important to get it done. One was full-throated support from Governor Cuomo, Governor Christie and the board. Another is we had the full-throated support of labor on both of those transactions, and no P3 is going to get done, at least in this part of the country, unless labor is behind it. The construction and building trades in both New York and New Jersey recognize that in capital-constrained times, P3s will result in projects getting done that would not otherwise get done. Men and women are going to go to work who would not otherwise have been employed.
LaGuardia was a roller coaster. Had the transaction failed, it would have been devastating to P3s in the region and in the country. Fortunately, we got an unbelievable execution and are proud of the deal.
MR. FRIED: Governor Pataki, what should Donald Trump do to make sure that investing in infrastructure is not a partisan issue, but instead draws support from both parties?
GOVERNOR PATAKI: He has to try to bring people together across the partisan divide. I am enough of an optimist to hope that the effort is made. From a policy standpoint, I think the place where that would be the easiest is infrastructure.
Hillary Clinton had about a quarter trillion dollar infrastructure plan that she advanced. Donald Trump had about a half trillion dollar infrastructure plan. There are bills now in Congress, with Democrats and Republicans sponsoring them together, to do things on infrastructure.
The other thing that President-elect Trump has talked about is lowering the corporate tax rate to bring money back from overseas. There is a real opportunity early in the next session of Congress to do something along these lines. A temporary reduction might bring as much as $2 trillion back, with a low tax rate such as 10% on the amount that is brought back, to use to fund a massive infrastructure program in America. This is something that I think could achieve broad bi-partisan support. The economy has been slowing, and it is likely to slow more. With the interest rates as low as they are, this is exactly the time when we should be doing a trillion dollar investment in roads, bridges, mass transit and other infrastructure projects, like health and water projects.
MR. FRIED: Do you think that the Republicans in Congress will support private investment in infrastructure?
GOVERNOR PATAKI: Yes. They have always been more in favor of P3s and private investment. With the low interest rates, pension funds and insurance companies with enormous financial assets are getting very low returns. Investing in infrastructure projects is something where you could put in place financial protections to guarantee a sufficient return to attract enormous capital.
MR. FRIED: How do we make sure that there is no gridlock in Congress with respect to private investment in infrastructure?
GOVERNOR PATAKI: There has not been gridlock in the last 90 years. [Laughter.]
I think the attitude of the American people now is that we can’t continue with the partisan bickering the way it is. The Republicans will control both houses of Congress and the presidency, but still in the Senate you are going to need 60 votes for any significant legislation, which means you are going to have to achieve a bi-partisan consensus. I think that can be done. Senator Chuck Schumer will be the Democratic leader in the Senate, and he has always been willing to make a deal. And then you have Donald Trump who claims that he always wants to make a deal.
MR. FRIED: Governor Pataki, are there any new governors, mayors or other officials on whom we should keep an eye from a private investment and infrastructure perspective?
GOVERNOR PATAKI: In New York State this year, revenues are something like $900 million less than they were projected to be at the beginning of the budget year. You will see that repeated across the country. Having been a governor, it is a terrible thing when your revenues go down. This creates the opportunity for P3s. One of the reasons it has gone a lot slower than I had hoped for, because I’m a great believer in P3s and accessing private capital, is because budgets have been largely okay. The deterioration in state budgets creates the opportunity all over the country where governors will be looking to have infrastructure projects that require private capital.
One other point: when Mike Pence was governor of Indiana, he was very active in P3s and infrastructure investment. I would hope that he has some significant input going forward.
Now is the time. Pat Foye hit it on the head. Interest rates are low. Long-term treasury yields are at 1.8% or 1.85%. If ever there was a time to make intelligent, long-term investments in infra-structure, now is the time.
MR. FRIED: John Porcari, as interim executive director for the Gateway Development Corporation, what can you tell us about the Gateway project that is supposed to add rail capacity on the northeast corridor between Newark and New York? Will there be P3 components to Gateway?
MR. PORCARI: First and foremost, it is a real project. It has been talked about for a while, but it is actually underway.
There are three essential project partners: The Port Authority, New Jersey Transit and Amtrak. The most useful way to think about Gateway may be that it is a program of projects starting with replacing the Portal Bridge North over the Passaic River in New Jersey, then going to the new tunnels under the Hudson and then there are subsequent phases that include Penn Station, Secaucus Loop and a lot of other pieces.
Gateway is the most urgent infrastructure project in America. It is the single biggest choke point in the entire northeast corridor. The northeast corridor has roughly 20% of America’s GDP. You have 106-year-old tunnels and a 106-year-old bridge. The tunnels flooded during Sandy, and they are far beyond their design life. Just to give you a sense of what an engineering achievement it was when they were built, the year those tunnels opened, Henry Ford moved from a wood body to a metal body Model T. The Wright Brothers went from a Model A to a Model B flyer, and a shipyard just laid the keel for the Titanic. It is well past the time to replace those facilities. If you picked a center of the US economy with a single point of failure like this and tried to find one more acute, you could not.
The good news is that The Port Authority and the other partners have identified the local funding that will allow the project to apply for a federal core capacity grant. That grant application is in. The US Department of Transportation is treating this as a priority. It has been put on the President’s dashboard of priority projects. The Portal Bridge North is ready to go to construction. We could do that late next year. The tunnels are under design, and the NEPA process is greatly accelerated. The Tappan Zee-type NEPA process of concurrently reviewing a number of the elements of an environmental impact statement is underway on Gateway.
While you cannot pre-judge the procurement methodology, to me, the tunnel part of the project providing capacity under the Hudson, what we call Phase 1B, may fit the profile for a P3. The primary beneficiaries are New Jersey Transit and the 200,000 commuters a day that need to get into New York, but there are also commuters on Amtrak and the northeast corridor. Beyond that there might be other rail users, and the tunnels might provide for high priority, air freight-type, off-peak use. The line might be used as a utility corridor. That portion of the Gateway program, as a discreet element or even as part of the larger program of projects to follow the Portal Bridge North, could well be a P3. Agencies like The Port Authority have experience doing projects that way.
The bottom line is that it is the most urgent infrastructure project in America, period. We should treat it like that. It should be at the top of an agenda for an incoming administration, and I would be saying this no matter who won the election.
MR. FOYE: Let me add two things. One is to praise the responsiveness and sophistication of the US Department of Transportation team led by Secretary Foxx, Andrew Right and the Build America Bureau, the Federal Railroad Administration and the Federal Transit Administration. They have been extraordinary. We will make a filing, either in draft or in final, and we will get comments literally days or a week or two later, which is extraordinary.
The other thing is this is a project with bi-partisan support. This project is led by Governor Cuomo and Governor Christie, and the four Senators from New York and New Jersey provide bi-partisan support. One could see a deal in this Congress made involving the President, the Republican House, and the Republican Senate that would relate to infrastructure spending, including Gateway because of its importance.
US P3 Market
MR. FRIED: There has been an expansion of the P3 model to other types of projects. The Massachusetts Bay Transportation Authority is procuring a P3 for an automated account fare col-lection system. The Chicago Infrastructure Trust has shortlisted teams for a Chicago smart lighting P3. Mike Parker, do you think that the P3 market will continue to diversify for projects with new technology solutions?
MR. PARKER: Yes. We are seeing this model applied in a number of places. The model is not workable in every setting. Lenders and investors have to get comfortable taking on a project finance risk and must be sure they can replace the technology provider with creditworthy counterparties. There are issues that we have to think about or, in some instances, we have to invent different types of models if we cannot apply the models used earlier.
Some of the areas you mentioned could see more P3s, like communications-related infrastructure. We are also starting to see a cluster of what we would refer to as resiliency-related infrastructure. One such project that many are aware of is a flood relief and flood prevention project in the central part of the country. We are also in Toronto working on a resiliency project on the waterfront, and we are going to be looking at another US project that would transfer water when there is a drought. We are also seeing initiatives like the Pacific Forest Trust that could lead to new ways of thinking about resiliency for aquifers and about using natural infrastructure. There is also a discussion about far-reaching resiliency projects in New York City, among other places.
MR. FRIED: In terms of the expansion of the P3 market into other areas, the University of California Merced recently reached financial close on a major campus expansion. Ohio State University is procuring a major P3 for energy utility systems. Mike Parker, do you think other universities will catch on to this? It seems like a natural fit if it works for these schools.
MR. PARKER: Yes. Merced is a unique place in that it is a new campus. Not every university system is looking at an entirely new half of a campus. There are different types of P3 programs. The student housing market has been robust as has been the military housing market. So there has been private sector involvement for a long time. There is also significant recognition of real estate development potential at the edges of campuses as universities think about themselves more as part of an overall area. This is certainly an area of interest.
Sometimes on the energy side, if universities are looking at projects that are complex and they have not built a cogeneration facility or managed one in a long time, the benefits of a P3 approach could be very significant. It should be easy to define performance requirements for these types of projects.
Lastly, these institutions will remain under budgetary pressure, so they also should be looking at how to focus on their core missions. It is a robust area where industry can play a significant role, but it is one where we may not see $1.5 billion deals every time.
MR. FRIED: Mike Lapolla, recently the Indiana toll road sold for $5.7 billion and the Chicago Skyway sold for $2.8 billion. Are there more brownfield sales on the horizon?
MR. LAPOLLA: There are great opportunities in brownfields. My company was recently named the successful bidder for the Pocahontas Parkway. There will be more opportunities, but they will vary across jurisdictions. Virginia is a model for P3s and understands the nuances of brownfields, greenfields and other projects. In some places people talk like they understand P3s, but they really don’t.
I talked earlier about leadership at the federal level. When Secretary Foxx was going to create the P3 office within the US Department of Transportation, he was in Madrid visiting our company, and he and his staff spent six hours with us trying to understand how such transactions work.
Whether there will be a lot of opportunities also turns on the political will of individual governors, state transportation commissioners and others. We talk too often in broad strokes about political risk, but the risk is specific to the people with whom you are involved, what positions they are in politically, how strong they are, and how committed they are to the project.
MR. FRIED: Governor Pataki, when will New York get P3 legislation?
GOVERNOR PATAKI: The Cubs just won the World Series. [Laughter.] That only took 108 years. I don’t know whether New York will ever have comprehensive P3 legislation. I hope that it will. Governor Cuomo will be looking to do a lot of P3s, with his Tappan Zee experience and his desire with LaGuardia and other places to do significant infrastructure projects. It is more likely to be done on a case-by-case basis as opposed to a generic authorization.
MR. FRIED: The District of Columbia released a P3 project pipeline recently. Mike Parker, do you think that Washington, DC could prove an attractive place for P3s?
MR. PARKER: One of the privileges of doing the type of work we do is to have a good understanding of a lot of clients. On the other hand, an essential part of that is also having some discretion about what we can say about them. We are working with the Washington, DC Department of Transportation already on the South Capitol Street bridge, which is a design-build project. I grew up in Washington, DC. There is a lot to do there, and when you do it the visibility is tremendous. There is also a federal partner at times.
Washington, DC has some significant requirements with respect to its own finances and how those function. You have leadership that is interested in doing P3s. To the degree projects work within the framework that they have, including the revenue and funding models that they have, I think you will see significant activity. You have a mayor who is really committed to doing things, but it is a city and it lacks the girth of a state. There will be a number of things that are important to think through and understand, but the city is off to a great start.
MR. FRIED: Maryland recently closed the Purple Line light rail P3. John Porcari, what do you see for the future of P3s in Maryland?
MR. PORCARI: The future is bright. As the Maryland transportation secretary at the time, the Port of Baltimore Container Terminal deal that we did was actually one of the few large deals to close in 2009. It was a great educational process for the public at large, the elected officials and the internal DOT people. We followed that with replacing the welcome centers on I-95 through a P3, and then the Purple Line. I think the future is very bright, notwithstanding the fact that I have personally been involved with the Purple Line since 1994, and it is now in what is hopefully its last legal challenge. The compelling P3 aspects of the Purple Line really speak for them-selves. The healthy competition for that project and ultimately the stability of the partnership between the private team and the governmental entity is something that will serve the project very well in the future.
MR. FRIED: Texas, Georgia and Florida have all procured highway projects using a design-build-finance or DBF structure. Arkansas is considering a DBF structure for the I-30 project. Mike Lapolla, do you expect to see more of these projects?
MR. LAPOLLA: I don’t know. The decision to go that route is political. The appetite for P3s in Texas has waned. In Florida, it had more to do with the people who are now in charge of making decisions. In terms of getting a project done, having lived through some battles when projects are P3s, it is easier to get to the private money through a DBF and have operations and maintenance with a government logo on it. This makes it a government project. You do not have to deal with contractors and unions who complain about a P3.
MR. PARKER: When you are a public official, you want to get projects done and you have to use the tools that are available to you. These are not cases of not doing a P3 and settling for a DBF.
There may not be flexibility to issue state debt, or there may be a need for short-term financing.
In Florida, for a long time — now the law has changed – the state had two different buckets. It had a bucket for GARVEES and a separate bucket for P3 projects that could be used to leverage the State Transportation Trust Fund. The only way to get at the second bucket was either through availability payments or DBF. In other states, it may not be convenient to access commercial paper or other types of short-term debt to advance a project. For them, the DBF, especially in this financing market, becomes appealing. States doing that get experience, and places like Georgia were able to build up confidence around having private investment in procuring projects. That can end up a stepping stone to more complicated arrangements like P3s.
MR. FRIED: DJ Gribbin, most of the P3 activity is at the state and local level. Do you think we will see P3s for federal infrastructure?
MR. GRIBBIN: Yes. The US Army Corps of Engineers is doing a project in Fargo, but for the most part, while the federal government has been a strong advocate of P3s at the state level, it has not been as quick to use them itself.
Part of the challenge is OMB Circular A11, Appendix B, which is used for government accounting. It basically says that if the federal government were to lease a building for 20 years, it can account for those payments one year at a time. If it were to lease the building with the option to buy it — which is how a P3 concession would be treated – it would have to consider all those payments as made in year one. The Office of Management and Budget did this because there was some abuse of accounting in the 1970s.
Those accounting rules may have made sense at the time when the government was leasing battleships. We have tried to make the government understand that the current accounting system creates some perverse incentives. P3s are hard. You are giving up a bit of your fiefdom. There are not a lot of government employees who say, “I currently oversee X number of people, but I would like to oversee half of that number five years from now.”
MR. PORCARI: An incoming president can sweep away Circular A11 and change that with executive action.
MR. GRIBBIN: Absolutely. Treasury Secretary Jacob Lew wrote Circular A11 when he was a staffer at OMB. We approached him about changing it. The challenge was that it had other incremental budgeting ramifications that they were not willing to accept.
MR. FRIED: Let’s get the final thoughts of each of the panelists on where they see the P3 market going in the US.
GOVERNOR PATAKI: We will see a complete change in Washington when it comes to infrastructure for the better, including on things like P3s. Love Trump or hate Trump — and there are not a lot of people on the fence [laughter] — he comes from the private sector. He understands the importance of infra-structure. He is a builder. He will not want the government building these things. I could tell you a couple of the battles that I had with him when he wanted government infrastructure to help his private projects, and we didn’t do it. I expect very significant changes and federal government support for P3s that has been lacking in the past.
As Governor I got to see a lot of great things. I would be down in sewer and water tunnels and the caissons of bridges. I would always think, “Those people 100 years ago were really smart and really thinking ahead.” Government today has not been very good at that.
It is our turn. It is our obligation so our grandchildren or great-grandchildren 100 years from now are looking at something like the Gateway project or the brand new Penn Station or a high-speed Maglev train from Washington to New York City that I know Governor Hogan has been so supportive of, and is a prime project for P3, and they will say that those people were smart, too.
MR. FOYE: One thing the federal government should look at is monetizing large government loan portfolios. Surprisingly, the US Department of Agriculture may have the largest.
I am incredibly bullish about the prospects for infrastructure projects. We will see more P3s because of the condition of the economy, the fact that infrastructure has been ignored for such a long period of time, the bi-partisan recognition that it is a current drag on our nation’s economy and competitiveness, the fact that there is not enough money to go around to do it all and that private capital can supplement that money.
Progress will be lumpy. You asked Governor Pataki a good question. What could derail us? In my mind, one thing that could derail P3s is a serious scandal or a deal that really goes bad. There are some natural opponents to P3s in the political system, and that will remain the case.
MR. PORCARI: I want to very quickly identify a potential P3 opportunity. The LaGuardia deal is a signal for opportunities around the country. There are medium-hub airports throughout the country that are boxed in on their landside development by a passenger facility charge cap. They may have flat passenger numbers, but they desperately need landside development. The framework for the LaGuardia deal, scaled down, can be replicated for a number of medium-hub airports that are desperate for something like that right now.
MR. FOYE: Based on the calls we have had from advisors and airport operators around the country, I would expect that to be the case.
MR. LAPOLLA: I do not want to play the cynic on the panel, but I laid out my political concerns earlier. I am more optimistic that P3s can be used, and that the federal government may, in this administration, keep an open mind and give us opportunities.
I worked in government for 25 years before joining my company. I listened to the discussion about the Gateway project. Prior to Gateway, this project was called the “Access to the Region’s Core” project. I attended the organizing meeting for ARC in 1988. Hope springs eternal that big projects can get done. You have to approach this state by state and agency by agency because the financial situations of the states, counties or authorities are going to be so different that some may be turning to P3s because they lack alternatives, and others because they are willing to try new things. It is impossible to make blanket statements. Even if we get these opportunities under the new administration, it will end up a local decision.
MR. PARKER: Our focus as a firm is on delivering the project. This is the public’s focus, too. We need to remain focused on three things. First, have you actually moved some money into projects? It is not so easy to move money. Have we had a net increase in spending, and not just changed the type or source of spending? Second, have we delivered meaningful tangible projects? Have we picked good projects? Third, are we delivering the projects efficiently? Are they performing the way we expected?
Lastly, it is important to recognize that 10 years from now when some of these infrastructure projects are ready for use, there will be new technologies that have changed how we live and travel and use infrastructure. Our infrastructure will increasingly be a networked system.
We need to plan new programs with a more nuanced under-standing of regions and of what is going to deliver a truly modern system.
MR. GRIBBIN: Two quick things: one is good news and the other is a challenge. It has been about 20 years since I started doing P3s. We spent a lot of time talking to people about what a P3 is. People are now coming to us asking whether a project can be done as a P3. People are better educated about the alternatives.
The challenge is there is still a big misunderstanding about “why the F” — why the finance? What does private equity bring to the deal? There is still a big knowledge gap in terms of folks understanding why someone would use more expensive equity to build something when they have access to lower-cost capital. The answer goes to risk allocation, alignment of incentives, spur-ring innovation and all of that. As far as we have come in the last 20 years in terms of excitement for P3s, we are still in relatively early days of making political leaders understand why it makes sense to tap private equity for a transaction.