The future of P3s in the US: financing the funding gap for infrastructure

July 2013  |  SPECIAL REPORT: Infrastructure & project finance

Financier Worldwide Magazine

July 2013 Issue

July 2013 Issue

The United States is facing an infrastructure funding crisis. In 2013 the American Society of Civil Engineers (ASCE) gave the US infrastructure a grade of D, which is the same grade received in 2009. The country’s bridges are falling down and the roads are in disrepair and overly congested. The US Congressional Budget Office estimated in 2012 that the future financial requirement for surface infrastructure investment in the US is over $280bn annually. The Federal Highway Administration estimates that $170bn in capital investment will be needed on an annual basis to significantly improve road conditions in the US, while the ASCE estimates the need of more than $2.75 trillion by 2020 to build infrastructure and maintain infrastructure given the US population growth and increased economic activity. The ASCE also calculates a $1.1 trillion gap in funding in US infrastructure needs by 2020, if infrastructure funding levels stay constant. Is private investment in public infrastructure the solution to financing the funding gap?

Historically, the US has relied on low-cost municipal bond financing and the funds raised from the gas tax to fund transportation infrastructure projects. As a result, state and local governments have not had to turn to the private sector for creative financing solutions. The recent economic and financial downturn has decreased the availability of federal funding and the ability of states to raise more debt, and as a result states and municipalities are facing funding shortages. Due to the lack of both local and federal funding, the question being asked in the marketplace is who is going to step up and fund the financing gap for the transportation infrastructure redevelopment the country so desperately needs? The private sector is one solution. 

Public-private partnerships (P3s) have become an increasingly important tool for states in leveraging private funds to meet their surface transportation investment needs. Using private capital, and the private sector, for upgrading infrastructure in the US is becoming more acknowledged and accepted as states across the country enact P3 legislation and governments warm to the necessity of using private capital to fund these capital intensive transportation infrastructure projects.This type of investment has the potential to tap into vast pools of money in which the investors are looking for reliable long-term returns, including investment funds and institutional investors. Infrastructure funds alone could provide massive amounts of money to the sector. 

Both inside and outside of the United States, P3s have been proven to be very successful at delivering critical infrastructure projects that were delayed due to public sector funding gaps. P3s have also demonstrated the ability to deliver projects on time and on budget. A recent study by Chasey, Maddex and Bansal (Transportation Research Record: Journal of the Transportation Research Board, 2012) supports the contention that P3s are better than traditional public delivery methods at doing so. In their analysis, the authors compare 12 completed, large scale P3 highway projects in North America with previous research studies on large scale design-bid-build and design-build highways and found favourable results in support of P3s. Their data indicate that P3 cost and schedule overruns average 0.81 percent and -0.30 percent, respectively. Meanwhile, design build projects that did not use a P3 framework produced average cost and schedule overruns of 1.49 percent and 11.04 percent, respectively. The numbers for design-bid-build projects were similarly higher at 12.71 percent and 4.34 percent, respectively. This study provides compelling evidence for the use of P3s in getting highway projects built on budget and on time. Many jurisdictions with P3 enabling legislation have made clear the other motivating factor behind utilising this type of project delivery method is to accelerate the actual delivery of these projects. Florida publically acknowledged that the I-595 project would not have been realised as quickly were it not for the private sector stepping up and moving the project forward on an accelerated timeline; the state government did not have the funding available to pay for this much needed transportation infrastructure improvement and so they turned to a partnership with the private sector. 

P3 successes and failures

According to the US Department of Transportation’s Federal Highway Administration there are currently 2995 miles of toll road across 28 states within the interstate system and another 1983 miles outside of it. Not surprisingly, the highest concentration of toll roads are in areas where the state has passed public-private partnership legislation; notably Florida, New York, Pennsylvania, New Jersey, Virginia, Colorado and Texas. Some form of a public-private partnership has been used to develop many projects in these states. Generally, a P3 is a government service or private business venture that is funded and operated through a partnership of government and one or more private sector companies. In Virginia alone, over $9bn in transportation projects have been delivered using a P3 model since the Commonwealth’s P3 law passed in 1995. In Texas, over $10bn has been delivered and in Florida over $5bn. Many would count these developments as a move away from a model of the public sector funding transportation infrastructure, to a model of the public and private sector working together to successfully finance this infrastructure. However, for those projects that have a toll-revenue backed financing plan, examples of over-optimistic traffic projections have resulted in project defaults and restructurings. 

The last few months have seen a slew of articles published on problematic toll road concessions throughout the world. Spain, for example, has a long history of toll road concessions and has been plagued by underperforming infrastructure assets. As presented by Baeza and Vasallo (Baeza, Maria and Vasallo, Jose. Traffic uncertainty in toll motorway concessions in Spain.

Proceedings of the Institution of Civil Engineers, Transport, 165, May 2012, Issue TR2, Pages 97–105. 2012), Spain has demonstrated a consistent bias toward overestimation (by both the government and the concessionaires) when forecasting traffic on toll roads. This has meant shortfalls in traffic and thus financial problems for many projects. The solution employed by Spain to deal with this issue has been to renegotiate the concession contracts, leading to extended concession terms or modified tolls. On average, the Baeza and Vasallo study found that contracts awarded between 1967 and 1975 have been renegotiated eight times. In half of the cases, tolls have been modified and a quarter of the time contract extensions were granted. But the problem of forecasts in Spain appears to be driven by strategic errors rather than modelling ones. Concessionaires to these Spanish projects were awarded contracts based on the best offer as defined by preset criteria, and contracts were then signed before financial close was reached. This process led to what can be called the ‘winner’s curse’ whereby being overoptimistic on the traffic projections in order to win a contract has automatically resulted in lower than projected traffic and revenue.

Australia, another country with a long history of tolling greenfield transportation facilities, started using P3s in the early 2000s. A study in Australia reviewed 14 toll roads (nine motorways, three tunnels and two bridges) operating in Sydney, Melbourne and Brisbane (Li, Zheng and Hensher, David. Toll Roads in Australia: An Overview of Characteristics and Accuracy of Demand Forecasts. Transport Reviews, Vol. 30, No. 5, 541–569, September 2010). For five of the roads where data on forecast and actual traffic was available for the first year of operations, the traffic volumes realised were on average 45 percent lower than those projected. Many of these projects have also been or are being restructured. 

Promoting P3s – getting investors interested 

While not all tolled facilities have the problem of overestimating traffic and revenue, it is these projects that do make the news. As tolled transportation assets become more commonplace and well-recognised, keeping these infrastructure assets in a positive light, and with positive cash flows, is vital to the public’s willingness to continue to use P3s as a tool for delivering transportation infrastructure projects. For the private sector, if the perception is that the returns are not ultimately reliable, then their willingness to invest in this type of asset decreases. There is money out there looking for yield and institutional investors are exploring this space. Investment funds dedicated to investing in infrastructure increased worldwide from $60bn in 2006 to $250bn in 2011. Vehicles managed by investment banks and private equity managers in over 60 such funds had a leveraged purchasing power of about $625bn by 2012. Australian and Canadian pension funds started investing in infrastructure in the mid-1990s, attracted by very favourable risk and returns when compared to other asset classes. The Australian Superannuation Fund (ASF) pension fund invested for the first time in an infrastructure project, the M4 Motorway toll road, in 1994. In 1999, Canadian pension fund partners entered into an agreement to manage, finance and operate Highway 407, the 65-mile, barrier-free toll road located east of Toronto, in a 99-year lease contract. 

A decade later, US pension funds are starting to invest. The Dallas Police and Fire Pension System was the first US pension fund to invest directly in the construction and maintenance of a major infrastructure project. In 2009, the pension fund invested about $43m in the $2bn North Tarrant Express project in the Fort Worth area. Also in 2009, one of the largest US pension funds, the Teachers Insurance and Annuity Association – College Retirement Equities Fund, or TIAA-CREF, invested in the project company I-595 Toll Road, LLC, one of the equity partners and concessionaire to the I-595 roadway in Broward County, Florida. This pension fund invested more than $100m into the $1.8bn concession contract for 35 years. More recently, Canadian and Australian pension funds have been looking to invest in infrastructure opportunities in emerging markets to combine their expertise in the field with the greater risk reward found in developing economies. In 2012, the Canada Pension Plan Investment Board, the country’s second-biggest retirement fund, invested over $1.1bn in five major Chilean toll roads. Similarly, the Association of Superannuation Funds of Australia is looking at infrastructure assets with steady returns in China, Poland, and the UK, among other countries, to replace the low and choppy returns earned recently in Australian brownfield projects. 

Infrastructure investing is unlike other asset classes regarding the nature, costs and risk profiles of the projects. In addition, high-quality data on infrastructure investments is difficult to obtain and thus the risk assessment of these investments is challenging for institutional investors. Few institutional investors have specialised infrastructure teams capable of performing this kind of analysis and they need to understand detailed risk and return information about each project before actively investing in it. Key issues related to fund governance and structure, as well as legal, regulatory and fiduciary considerations, will have to be addressed by both the public and private sectors to continue increasing investment in the sector by institutional investors. Finally, national and local governments will need to continue supporting good projects, providing information about them, and developing bidding processes that facilitate investment by the private sector.

Future of investment – the road ahead 

The continuing fiscal crisis of the US federal government provides an opportunity to continue to change how the US funds, and finances, transportation infrastructure. The reality is that going forward the federal government will no longer be able to fund the much needed upgrades and modernisations of the country’s transportation infrastructure. Thankfully a handful of jurisdictions in the US have had some successes implementing P3s for the delivery of these projects. Many of these facilities have been revenue based, tolled facilities, as state and local governments can no longer afford to rely on the traditional design-build models of the past. What role infrastructure funds, and other sources of alternative financing, play in the infrastructure space in the US is unknown and the challenge of creating an enabling an environment conducive to investment remains.


Jennifer Hara is a vice president, Jase Cabrera is an associate and Beatriz Ariza is an analyst at Taylor-DeJongh. Ms Hara can be contacted on +1 (202) 777 2116 or by email:

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Jennifer Hara, Jase Cabrera and Beatriz Ariza


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