Survey of the 2012 US P3 transport market: no longer an outlier
April 2013 | PROFESSIONAL INSIGHT | SECTOR ANALYSIS
Financier Worldwide Magazine
Malcolm Gladwell’s book ‘Outliers: The Story of Success’ introduced the idea that 10,000 hours of practice are required to master any skill, as evidenced by Canadian elite hockey players and software billionaires like Bill Gates. The 10,000 hour rule could apply to the P3 transportation industry as well. The P3 transportation market in the US lagged far behind Canada’s and Europe’s when P3 was first implemented over 20 years ago. Pioneering P3 projects such as Florida’s I-595 or Port of Miami Tunnel have paved the way for development of mega-projects using a P3 delivery model.
Showing that there’s still robust interest on the part of bond investors and equity in taking on demand risk, on 16 April 2012, the Virginia Department of Transportation (VDOT) and a joint venture of Macquarie and Skanska reached financial close for the $2.1bn, 58-year toll concession to complete a new Midtown Tunnel, rehabilitate the existing Midtown and Downtown tunnels, extend Martin Luther King Boulevard, and operate the facilities for 58 years. It was the first US P3 project to reach financial close in 2012 and the largest project to get under way in the region in almost 30 years. Construction began in fall 2012 and completion is expected in 2018. The project’s plan of finance includes a $422m TIFIA loan, $663.75m in private activity bonds, $272m in private equity, and $310m from VDOT. Final numbers on the capital structure will produce savings on average toll rates of approximately 40 percent, lower than the $2.89 toll rate estimated under the interim agreement signed in January 2010 before Governor Bob McDonnell took office.
Building on the success of the Florida Department of Transportation’s availability payment concessions for the Port of Miami Tunnel and the I-595 highway project, on 14 June 2012, the California Department of Transportation (Caltrans), in cooperation with the San Francisco County Transportation Authority (SFCTA), reached financial close with a consortium led by Hochtief and Meridiam on an availability payment contract to design, build, finance, operate, and maintain the Presidio Parkway for 30 years. This $1.1bn deal replaces the seismically challenged Doyle Drive, a 1.6-mile segment of Route 101 in San Francisco, connecting the southern terminus of the Golden Gate Bridge with the city. The TIFIA credit assistance used a first-of-its-kind two tranche loan to maximise efficient use of the state’s milestone payments. As a result, the final availability payment dropped from the initial bid to $22.1m annually, 37 percent below the $35m limit the California Transportation Commission authorised in April 2010. This project is significant because it is the first transportation P3 in California signed in almost 20 years and the first under the recently enacted P3 statute. Only the third availability payment highway deal in US history to reach financial close, the Presidio Parkway Project was the first bid taken on such a deal since Florida’s I-595 in 2009, showing clear market acceptance.
The international developer industry showed keen interest in another availability payment project when the East End Crossing achieved commercial close at the very end of the year. The project, located in southern Indiana, is part of the larger Louisville-Southern Indiana Ohio River Bridges Project. This $800m new toll interstate availability P3 bridge project spans the Ohio River between Indiana and Kentucky. The selected developer is a joint venture of affiliates of Walsh Investors, LLC, Vinci Concessions S.A.S. and Bilfinger Berger PI International Holding GmbH. This project is significant because the contract was procured in 7.5 months from the issuance of RFQ, the fastest procurement undertaken for a project of this nature in the US; and because the project is the first bi-state project with an innovative procurement process, setting an excellent example of bi-state cooperation. Financial close is scheduled for the end of March 2013.
Transportation projects over the last year have not been limited to P3 concession contracts. On 23 July 2012, the Port of Long Beach (Port) awarded a $649.5m design-build Contract, the single largest contract ever awarded by the Port, to a joint venture of Shimmick Construction Co., Inc., FCC Construction S.A. and Impregilo S.p.A. for the replacement of the Gerald Desmond Bridge, the state’s first long-span cable stay bridge more than 200 feet over the water. This project is the largest of the 15 projects selected for California’s Design-Build Demonstration Program enacted in 2009. The developer selected is a joint venture team headed by Shimmick Construction Co. Inc., FCC Construction S.A. and Impregilo S.p.A. The Port and Caltrans jointly procured the project, with the Los Angeles County Metropolitan Transportation Authority and US Department of Transportation contributing additional funds. Completion of the project will ensure that the Port will be able to accommodate the newest generation of ‘post-Panamax’ cargo ships that will become prevalent once the current widening of the Panama Canal is completed. Construction started on 8 January 2013 and is expected to be completed in early 2017.
Texas led two major projects in 2012. On 27 September, the Texas Transportation Commission selected a joint venture comprised of Zachry Construction Corporation and Odebrecht Construction Inc., as the apparent best value proposer for a design-build contract to complete the Grand Parkway in Harris and Montgomery counties, a 37-mile project that is part of a planned 184-mile beltway around the Houston Metropolitan area. Zachry-Odebrecht’s proposed design and construction price was a little over $1bn, resulting in significant cost savings from the proposed $1.16bn in the RFP. In addition, Zachry-Odebrecht proposed the fastest schedule with completion approximately seven months earlier than the outside deadline set by TxDOT. Commercial close is anticipated to occur shortly. On 13 December, the Texas Transportation Commission awarded Design-Build and Capital Maintenance contracts to a joint venture comprised of Archer Western Contractors, LLC, Granite Construction Company and The LANE Construction Company for the IH 35E Managed Lanes Project, a $4.4bn, 28-mile corridor reconstruction from IH 635 in Dallas County to US 380 in Denton County and installation of dynamically priced managed lanes. Commercial close is anticipated to occur in the first quarter of 2013.
Other high-profile projects include the replacement of the Tappan Zee Bridge across the Hudson River in New York, and the development of the California High-Speed Rail Project. The Tappan Zee Bridge project is on a fast track with the passage of the landmark design-build legislation in New York in 2011 and Governor Cuomo’s ardent support. In December 2012, the Board of the New York State Thruway Authority approved award of a $3.1bn design-build contract, with the winning bid $900m below the next lowest bid, but still making it the largest transportation design-build project to date in the US. Adding to the transportation fervour, the California High-Speed Rail Project is on track, following the judgment from the Sacramento Superior Court Judge denying plea to halt the project. This $69bn, 520-mile project is by far the first and largest high-speed rail project in the US. In March 2012, the California High-Speed Rail Authority issued the Request for Proposal for Construction Package 1, a $1.5bn to $2bn design-build project.
One driver of the success of the market was the congressional bi-partisan support of the Moving Ahead for Progress in the 21st Century Act (MAP-21). And this was in the middle of a hotly contested presidential election. Funding surface transportation programs at over $105bn for fiscal years 2013 and 2014, MAP-21 is the first highway authorisation enacted since 2005. One of the major changes in MAP-21 was the enhancement of the TIFIA federal credit assistance program. Nearly every one of the P3 project in the US has benefitted from a long-term, fixed rate, low interest, deferred payment loan under this program. MAP-21 dramatically increased funding availability for TIFIA, authorising $750m in 2013 and $1bn in 2014, and the share of project costs increased from 33 to 49 percent. Congress is recognising that, as their role evolves away from significant capital participation, it should evolve toward providing incentives for states and localities to make up the increasing shortfalls, with TIFIA loans being a good example.
Political support for P3s could also be found at the state level. More than 30 states have adopted P3 legislation now. In addition to states with previous experience in P3s such as Florida, Texas, Virginia, Colorado and California, new states started to move forward with P3 projects, such as North Carolina, Indiana, Ohio, Nevada, Alaska, New York, and New Jersey. State and regional agencies that are implementing the P3 delivery method are becoming more and more sophisticated with doing value for money analyses.
P3 project delivery in the US is no longer considered an ‘outlier’. P3 is being widely implemented in highway and transit projects, such as toll roads, managed lanes, bridges, tunnels and terminals. An attractive capital markets environment with new equity players, coupled with a recovering US economy and political support both at the federal and state level, will continue to attract funding for major US projects that could be delivered through P3s, via availability payments and toll concessions.
Barney Allison is a partner and Tae Yeon Kim is an associate at Nossaman LLP. Mr Allison can be contacted on +1 (213) 612 7847 or by email: email@example.com. Ms Kim can be contacted on +1 (213) 612 7889 or by email: firstname.lastname@example.org.
© Financier Worldwide
Barney Allison and Tae Yeon Kim