Community matters

Bystanders may have been confused by the sight of a group of Florida schoolchildren cheering the arrival of a piece of tunnel boring equipment and seemingly referring to it by the name of “Harriet”. But to Joseph Aiello, partner and North America chief executive officer at Paris-based fund manager Meridiam Infrastructure, this was a perfectly normal manifestation of the community role that he thinks infrastructure financiers need to take seriously.

The equipment’s arrival heralded the beginning of the construction phase for the Port of Miami Tunnel, a $900 million tunnel construction and bridge widening project led by Meridiam and French developer Bouygues which achieved financial close in October 2009.

It so happened that the tunneling site was adjacent to a children’s museum. In a community relations initiative, Meridiam established a “tunnel club” at the museum to help children understand engineering and transport matters. It also held a contest to name the port project’s tunnel boring machine – a contest that resulted in the “Harriet” moniker, a tribute to Harriet Tubman, the African-American abolitionist and creator of the so-called Underground Railroad, a network of secret routes and free houses used to escape slavery. And this was why “Harriet” was treated to an enthusiastic welcome. 

Always clean up

This was no mere public relations frippery. Getting “buy-in” to a project is, for Aiello, absolutely crucial. He explains it thus: “These projects are new and there are a lot of eyes on them. The average citizen is thinking gee, this is new, is it a legitimate [infrastructure] delivery system? So there has to be continuous community engagement. If we mess up a local playing field, then we’d better clean it up. It’s that level of detail you have to go to. It speaks to your value system, and we watch that like a hawk.”

What this also speaks to is that Aiello, as a former public official with the Massachusetts Bay Transit Authority and head of the public-private partnership arm of support services giant AECOM, has witnessed US infrastructure from a number of different perspectives. And out of this has come an appreciation of the need to understand the motivations of all stakeholders in an infrastructure project. 

“There is an under-appreciation of the bottom line for the public sector,” he muses when asked what misconceptions there are around the public/private relationship. “There is a lot of talk about risk transfer. But on the public side you are worried about a broader set of criteria. You are beholden to taxpayers and the users of assets and you want procurement to be the best fit in terms of the impact on those taxpayers and users. We [the private sector] need to fit our criteria with theirs [the government] and I think the private side is maturing in this respect.”

It was an appreciation of the nuances of these different stakeholder priorities that informed the initial discussions between Aiello and Thierry Deau, the charismatic Frenchman who founded Meridiam in 2005 and remains the firm’s chief executive officer. “I came into contact with Thierry who was examining the evolving concessions business in the US,” recalls Aiello. “He was convinced that the private equity model was a bit of a mismatch with what the public agencies wanted and also with the life of the assets.”

Concerns

At the same time, Aiello had concerns about how the concessions market was evolving. “Governments are used to stable, long-term private providers. When the concession business came along and saw a lot of asset flipping, government became naturally concerned. Thierry wanted to create a model where private greenfield investors could remain as long-term partners.”

The end result was what is described on the firm’s website as the “Meridiam model”. More about it can be read there, but two aspects are emphasised: one is a “long term approach” delivering yield for investors in greenfield projects over 25 years; the other is a “partnership-based approach” through an investment philosophy “aligned with that of the public authorities”.

Since Meridiam launched its model, Aiello has taken encouragement from the way the US P3 market has evolved. “Things have turned out a bit better than I thought they would in 2006/07,” he reflects. “It was dominated by brownfield deals at that point and we struggled to make the case that greenfield should be thought through in equal measure. Now brownfield has subsided and greenfield is the dominant market today.”

He also sees the increased engagement of domestic players in the US infrastructure market as a “big difference” as they have an understanding of local nuances. Up until the Crisis, the US market had been largely dominated by foreign firms.

Aiello expands on the point: “When you’re a politician wanting to convince users they should pay taxes or fees for an improved service, who do you go to in the community? Engineering and construction firms can help make the case. But if these firms are not the ones getting a shot at the projects, there’s a disconnect. Now, US constructors and developers have a bigger role, which is good. They are competing for projects and winning.”

Another source of encouragement is that “one good deal begets another”. He thinks there are now transport commissioners “who can take lessons learned from the 15 or so successful US projects and understand how to deal with the politics and come out the other end alive”. 

Acceleration 

This has contributed, in Aiello’s view, to an acceleration of deal flow to north of $40 billion currently – around double the figure 12 months ago. “Compared with the US’ total infrastructure investment requirement, this is quite small. But it’s still a nice increase,” he says, smiling.   

He is also enthused by the continuing recognition of the P3 model in increasing numbers of states around the US. In the forefront are the likes of California, Texas, Florida and Virginia, which have been through multiple processes and offer the prized trait of predictability in their dealings with the private sector. Behind that group, you have ‘second tier’ states like Colorado, often in the middle of their second deals. And just behind that second tier you have the likes of Arizona and New York beginning to develop nascent deal pipelines.

This gradual country-wide P3 dispersal is important not just for the obvious impact it will have on deal flow – though that is, of course, important – but also for the diversification benefits it offers investors such as Meridiam.

“We want to build a portfolio and disperse our risk, and that means we don’t want to be over-burdened on one state,” Aiello explains. “If you have eight availability-based projects in one state running over a period of 35 to 45 years, you go through maybe 10 electoral cycles and you have the volatility of economics and politics to manage.” He adds: “We think about business partners in the same way: there are some partners we love working with, but we need to diversify our relationships.”

‘Great programs’

Aiello hails what he describes as “two great national programs” in TIFIA [the lending program stemming from the Transportation Infrastructure Finance and Innovation Act] and Private Activity Bonds (PABs), saying they have helped to galvanise transport P3s. “USDOT [the US Department of Transportation] has been extraordinarily effective these past three years,” he adds.  

He thinks the lack of equivalent assistance for social infrastructure projects is the main reason why the emergence of the P3 in that area has been slow. Conversely, he thinks that large water projects in big cities, which do have access to PABs, will be a major growth growth area over the next three or four years.    

But despite welcome financing initiatives – and the other reasons for optimism outlined above – Aiello believes it would be unhealthy to view P3s as a panacea for the ills of US infrastructure. “In Washington, in the House and Senate, there is a tendency to see P3s as a magic act,” he says. “But the federal government is a big source of finance for the states and, if they pull back thinking P3s are the solution, the states will be under huge pressure. P3s can give better outcomes and offer improved private sector accountability, but it needs to be understood that the private sector is not creating new money.”

From experience, Aiello knows that getting P3s done will never be easy; that they will never simply roll off a production line. And nor should they. The business is about winning people over by persuading them that – in a particular situation, and certainly not in all possible situations – a P3 offers the best solution.

Asked to reflect on one or two deals that he would select as highlights, Aiello references Long Beach Courthouse – the $495 million project which reached financial close in December 2010 as the first availability payment-based social infrastructure P3 in California. “It was a case of trying to get a good financial deal for taxpayers but also understanding the symbolic importance of the courthouse to the community,” he reflects. “We heard about the master plan early, with [governor] Schwarzenegger asking for it to be done as a P3. He was very strategic on this.”

Aiello points out that a courthouse has many ‘temporary’ constituents, such as jurors, the accused, witnesses, lawyers etc. But the ‘permanent’ constituency is the judges “who often feel they don’t have good facilities”. Therefore, a key aspect of the deal in Aiello’s view was teaming up with Clark Construction, a firm which had worked with judges numerous times before on design/build projects. The consortium also had good relationships with southern California’s notoriously strong unions. “We were not a well-known commodity compared with other bidders, but we made the case that we knew how to operate in southern California,” says Aiello.

Union tussle 

But a second highlighted deal  – which involved an actual tussle with unions – took place in the northern half of the state. The Presidio Parkway was a $1.1 billion project led by Meridiam and Hochtief PPP Solutions which reached financial close in June this year. The project involved a 30-year contract to design, build, finance, operate and maintain a replacement access point to San Francisco’s Golden Gate Bridge.

One potential hindrance to the deal from the outset had been union opposition. But the deal ended up illustrating the importance of thorough pre-deal due diigence. “When you decide to chase a project you have to not just win it but look ahead through 35 years looking at all the risks. We understood there was some resistance [to Presidio] that would try to stop it. We had to understand opponents’ legal position and make sure the Californian Department of Transportation [the procuring authority] was in a superior legal position. That was a really important part of the early due diligence.”

Further to this, the Meridiam consortium also had to assure itself that any court reviews could be accommodated within the timeframe demanded by procurement. It had to bear in mind, for example, that contractors could not hold prices steady indefinitely while legal challenges rumbled on. But having explored the legal case, the consortium was sure the deal was on solid ground. This meant Aiello and colleagues were able to stay calm through media speculation that the sky was falling in on the project through a legal challenge that was ultimately brought to an end in November 2011.

It is this sort of attention to detail which probably helped draw new investors – which accounted for two-thirds of capital committed – to Meridiam’s European fund, which achieved final close on €935 million in April this year. The fund was the second raised by the firm, with its debut effort having been a combined Europe/North America offering which closed on €600 million in 2008.  

With the firm having decided to raise separate vehicles for Europe and North America, all eyes are now on a hotly anticipated final closing for the North America vehicle. Market sources predict that the fund, which has a target of $750 million to $1 billion, is expected to be wrapped up by early November. The firm itself has not commented.

Despite having to be careful what he says about fundraising for regulatory reasons, Aiello does say that once the fundraising cycle is concluded the priority for the next three or four years will be about fund investing and asset management. Expect more innovative approaches along the way – even if none that quite beat the naming of Harriet for novelty value.