A time for innovation

Government employees for the City of Long Beach do not mind the sounds of construction coming from the lot adjacent to the old Civic Centre, Marilyn Surakus says. Neither are they bothered by a longer walk from a new parking lot to the 1970s office building where they work.

That is because government workers in the Southern California city know development is underway for a new Civic Centre, and thanks to a feat of financial innovation, Long Beach's public budget will not take a hit.

Surakus, project manager for the new Long Beach Civic Centre, says the city government realised it lacked capital to build a new centre in early 2015, and that it is not a very popular time to ask the public for more money. “So we started investigating the PPP model,” she explains.

As more government budgets are constrained, from the federal level on down, officials are increasingly seeking financial innovation from the private sector in the form of public-private partnerships to fund projects that need to be built.

The current Civic Centre is in “pretty bad shape,” Surakus says, “it's showing its age.”

Maintenance has been deferred for years, she adds. There are plumbing, heating and air issues. It gets hot near windows and too cold in the interior. There is even a safety hazard. The city learned from a study in 2007 that its office building does not meet updated seismic codes that say it would withstand an earthquake.

“The city was looking for a development partner who was collaborative, innovative and willing to take quantifiable risks,” recalls Stuart Marks, a senior vice president at Plenary Group, the lead company in the Plenary Edgemoor Civic Partners consortium developing the $520 million Long Beach Civic Centre, which reached financial close in April. The project includes the construction of two 11-story towers that will house offices for the City of Long Beach and Port of Long Beach, the main public library, a park and a 40-year operations and maintenance agreement.

“An important goal for the city was to achieve an annual cost for the new facilities that was no greater than the annual cost of its old, outdated, existing facilities,” Marks says. The city achieved this goal with the annual cost of new facilities being $14.48 million in 2013 dollars compared to an annual cost of $19 million for the outdated, existing facilities after taking into consideration the cost of deferred maintenance, according to a facilities condition assessment reporty by Parsons.

Plenary is no stranger to the PPP market or finding new ways to finance projects, having developed around $27 billion of public works infrastructure projects in Asia-Pacific and North America. Most recently, Plenary closed a deal to expand the student campus capacity at the University of California, Merced from 6,000 to 10,000 students.

He explains an important factor for whether Plenary takes on a project is how critical a piece of infrastructure is. “What there is a need for is collaboration with the private sector. In particular, the transfer of quantifiable and manageable risk to the private sector, and the generation of private sector innovation. One way to achieve this is through the use of private sector capital.”

Renewed interest

In the US, there has been a “renewed” interest and “rededication” to infrastructure investment, according to Jane Garvey, North American chairman for Meridiam, a firm based in Paris and one of the US' largest PPP investors. She adds that the PPP model can help develop more than just social infrastructure projects like the Long Beach Civic Centre.

For example, Meridiam is part of a consortium that won in November the right to develop the $2.1 billion I-66 Outside the Beltway road project, in Virginia.

“In the last few years we have seen a growing recognition that we have to consider a number of different alternatives for project delivery,” Garvey argues. “Particularly when you look at large infrastructure projects. They really call for innovation. They call for, perhaps, a different way of approaching it, and PPPs can certainly play a role in that.”

The Long Beach Civic Centre is an example of the role PPPs can have on financial innovation. Surakus says it was important to city government in Long Beach to not only get new facilities, but that operational expenses stayed the same.

Plenary accomplished this in three ways. Firstly, it designed the Civic Centre to optimise energy efficiency. Secondly, it used a taxable private placement to raise financing. And thirdly, the city sold the Plenary consortium a plot of land associated with the Civic Centre that acted as a subsidy to the deal.

After the project is completed in 2020, the City of Long Beach will pay “rent, if you will,” Surakus says, at its current rate for the next 40 years. The structure of this type of PPP is known as an availability payment, one of the two most commonly used in the US and “more favored” by developers, Marks adds.

Under this structure, the private sector invests equity and debt to build a project, accepting the development risks. The municipality or state starts making regular payments after the project is complete.

Meridiam's Garvey said many states and localities have turned to availability payment structures. The structure allows officials to transfer risk to the project developer and to know how much to deduct from their budgets for years down the road.

The alternative PPP structure is revenue-risk, where the investor is repaid through an end-user fee, such as with toll roads. However, revenue-risk comes with more liabilities, because the return on investment is subject to factors that can change, like traffic patterns.

“As we see the market grow and develop, we'll see more revenue-risk projects,” Garvey adds.

'No one solution'

PPPs' growing maturation has also led some to voice complaints about how they are done in the US.

Roger Johnson, deputy executive director of airports development at Los Angeles World Airport, the agency responsible for procuring bidders for the Los Angeles International Airport modernisation PPP, explains that inconsistencies between federal, state and municipal development regulations is one of the main criticisms he has heard about the financing method.

In Europe or Canada, “the procurement process using a PPP delivery is fairly consistent across the board. In the US, the only thing that's consistent about the PPP process is everyone is different. I think that causes some frustration and confusion,” Johnson claims.

Marks, however, sees the varying laws and regulations as another opportunity for PPPs to be used to serve the specific needs of investors and governments.

“I don't necessarily see that as a problem that needs to be fixed. I see that as an opportunity to innovate and an opportunity to better tailor delivery structures and models to the specific needs of clients and public sector agencies,” he argues.

According to Surakus, the City of Long Beach is already considering PPPs for more public works projects, and this might be the case across the country.

President-elect Donald Trump has made infrastructure a focus of his economic reform platform. He has looked to the private sector as an important part of making his campaign promise of $1 trillion invested in infrastructure possible.

“The President-elect has talked a great deal about infrastructure and the importance of it, and I think he's made the appropriate link between investment and jobs and the economy,” Garvey says.

“There's no one solution that will solve all of our problems or deal with all of the issues. It will be a multi-pronged approach when you start thinking about financing and funding. It's going to be a number of approaches that will need to be brought to bear, and certainly PPPs are part of that.”

The Long Beach Civic Centre is one example of what PPPs can do, but it is illustrative of a wider theme: states and municipalities across the country have long pipelines of projects that need funding, but do not have the budgets or the appetite to ask their constituents to pay for them upfront.

If government officials, the public and the private sector see that collaboration can yield beneficial results for all sides, it seems likely PPPs will be recognised more and more as a preferred financing structure.