Rethinking P3s in San Francisco

Industry participants gathered in the financial hub on the West Coast to discuss the future of P3s in the US.

Industry participants in the P3 market gathered in San Francisco on a beautiful day, engaging in conversations on the future of P3s in the US – how to pick a partner, how to structure a deal, and how to finance a deal.

Some of the speakers admitted that it would be a much simpler meeting if the summit was held a few years ago – capital is abundantly available for such a form of partnership between the public sector and the private sector, and P3s were considered a cost-effective way to upgrade the crumbling transportation infrastructure in the US.

Things are certainly different now – the P3 market has become more crowded and valuations have been somewhat inflated.

More importantly, both the private and the public sectors have come to realize that a P3 is not necessarily for every project due to a combination of increased complexity, longer procurement period, increased procurement expenses, and the difficulty navigating choppy waters with other stakeholders and the public.

For transportation P3s in particular, toll roads in the US can no longer deliver the traffic volumes they used to so as to ensure the revenues for the private partner.

There is no “one-size fits all solution… There must be strong and persuasive reasons to use a P3 instead of a more traditional structure,” said Roddy Devlin, attorney at law at Squire Patton Boggs, told the audience at the P3 Summit.Devlin advised Georgia Department of Transportation in connection with its groundbreaking $833.7 million Northwest Corridor P3 project in Atlanta, Georgia, among other P3 projects in the US.

The question for the public entity is not “should I use a P3 structure,” but rather “what are the key public objectives for the project?” he added.

Indeed, the market is now increasingly looking at the fourth P in P3s – preparation, which include project selection and scope, political and public support, access to state and federal resources, legal and regulatory framework, among others, participants said.

The public sector also needs to take into account of the financing aspect of P3s, which allows access to private sector financing. State governments and agencies will have to compare the benefits of private financing with that of tax-free municipal bonds, and initial cost of capital issue, among other things.

For private investors, they need to consider factors affecting the cost of private financing, which include weighted average cost of capital, spread, market situation, transaction and project characteristics, availability of private activity bonds and tax exemption and federal credit support, and credit rating of public and private borrowers, Jen Mayers, senior vice president Ernst & Young Infrastructure Advisors, told the audience of the summit.

Ultimately, a P3 should be viewed as “a project and services procurement structure,” one participant said.

P3 Sponsor Edgemoor’s managing director Greoff Stricker said his criteria for picking good partners are “dream big” (a clear vision), sufficient resources, and financing ability.

Understanding of the role of architecture within the consortium is also an important element in choosing a good partner in a P3, Stricker said.

Different kinds of risks throughout a P3 project were also discussed by participants, and many admitted that political and regulatory risks in the US makes it a choppy market to peddle through.

This is a contrast compared with the P3 market in countries such as Chile where a P3 project will be guaranteed to be closed thanks to strong political and regulatory support from the government.

It is partly because many states and cities in the US don’t have legal authorities to enter into P3s.

Political resistance and public perception is another hindrance for the country to see more P3s in the making – the average American doesn’t understand the benefits of the P3 market, which has a political dimension, and the education of the stakeholders of toll roads, highways and rails seems necessary, participants agreed.

That said, the future of US P3 looks still promising – participants said they see an increasing pipeline of projects in new sectors, such as water and social infrastructure, while programs such as the Transportation Infrastructure Finance and Innovation Act (TIFIA) and the new Water Infrastructure Finance and Innovation (WIFIA) also increase the private sector’s comfort level.