Slowdown on the Public-Private Express
By Melissa Maynard, Staff Writer
Way back in the early 1990s, Minnesota was one of the first states to pursue the idea of public-private partnerships in transportation. All these years later, it has yet to see its first privately operated toll road open.
Legislation that passed in 1993 sought to focus the state Transportation Department's limited resources on maintaining its existing network of roads and bridges. It would allow private operators to finance, build, operate and maintain toll roads to fill out the system. But the project's first endeavor, a high-profile new toll road that was to jut out from the southwestern edge of the Twin Cities, failed to win the public approval it needed and the whole costly experience soured the state on transportation public-private partnerships ("P3s") for more than a decade.
Minnesota might seem an unlikely candidate to launch a broad P3 portfolio now, both because of the earlier experience and because of local controversy over the Midwest region's high-profile $1.8 billion, 99-year lease of the Chicago Skyway in 2004 and the $3.8 billion, 75-year lease of the Indiana Toll Road in 2006. Still, a comprehensive evaluation of a range of potential P3 projects in the state is due back from a consulting firm by the end of the month, and the Minnesota Department of Transportation is hoping that the time is finally right for P3s to relieve congestion and add capacity in and around the congested Twin Cities more quickly than could be done through more traditional approaches.
The projects that Minnesota and other states are quietly launching in this new generation of P3s are more modest than the big-ticket P3 push of the mid-2000s, which focused largely on finding opportunities to lease existing toll roads to private operators for decades in exchange for large upfront payments. " They were all driven by the political desire to quickly turn future revenue streams into a big pile of cash," says Joung Lee, of the American Association of State Highway and Transportation Officials.
Blockbuster "brownfield" projects such as the Indiana Toll Road that convert existing highways into P3s and use future toll income to compensate the private operators have largely stalled, and are being replaced with more modest projects aimed at building new roads or adding additional capacity to existing ones. "We're not even considering things like the Chicago Skyway or Indiana Toll Road at this point and that's because it seems to be a very polarizing approach," says Brad Larsen, of the Minnesota Department of Transportation. "We've found it easier to say we're not going to look at those types of projects at all."
Wall Street's welcome
The more modest approach that many states are taking aligns well with the current needs of potential partners in the private sector. "There is more interest in smaller transactions and not necessarily going for the home runs," says Jim Taylor, vice president of the infrastructure firm Mercator Advisors. Smaller deals are less trouble to put together and are seen as an easier sell in cases where formal legislative approval is required, which is sometimes late in the process. " While the credit markets have opened meaningfully since 2008, the deals need to really show legislative certainty before banks will spend time on them," says Robert Collins, a managing director at Greenhill & Co., an investment bank.
As the former head of Morgan Stanley's domestic infrastructure banking efforts, Collins worked closely with Pennsylvania Governor Ed Rendell as Rendell attempted to sell the Legislature on his 2008 proposal to lease the Pennsylvania Turnpike to an international consortium of investors for $12.8 billion. The deal would have been the largest domestic P3 deal to date, but the necessary legislation stalled in the Legislature due to concerns about everything from the size of the offer to foreign involvement and the impact of toll increases on neighboring communities. "The biggest obstacle to transportation P3s is effectively the glide path for the approval process," Collins says. "If we spend the money to launch the plane, are they going to be able to land it?"
In the "greenfield" P3 projects that states such as Florida and Virginia have launched on empty land, the private sector gets involved in varying aspects of the financing, design, building, operation and maintenance of a new road or additional lane, and is compensated for its investment in varying ways by the state. This can mean an accelerated schedule for cash-strapped states such as Arizona, especially where there's limited debt capacity and a long wish list of projects.
"P3s provide an opportunity to stretch our limited conventional funding," says Doug Nintzel, a spokesman for the Arizona Department of Transportation, which is using authority granted under 2009 legislation to explore a range of P3 projects. "If a project can be done with private investment, that could allow state funding to be used elsewhere. We're finding that P3s could be used to get big projects done sooner than anyone might think."
A toll-free model
Florida, for example, is working with a group of investors including Meridiam Infrastructure to build a new tunnel connecting the Port of Miami to key downtown highways and create an alternative to the often congested area on and around the Port Bridge. Construction began in May on the $903 million tunnel project — which a private operator has agreed to design, build, finance, operate and maintain for 35 years — and it is expected to be completed in 2014, an accelerated timeline by industry standards for a project of its magnitude.
In exchange, the state will provide milestone payments throughout the project's construction and annual "availability payments" of up to approximately $32.5 million that will be determined by the condition of the road. Other states are watching Florida's project closely because it offers a toll-free approach to P3s that might be more palatable to the public and state legislators than other options — such as increases in the gas tax.
California significantly altered its P3 legislation in 2009 to allow for a more comprehensive approach that doesn't require legislative approval for each project. A major P3 project called the Presidio Parkway that uses a payment structure similar to that of the Port of Miami Bridge is in the works in San Francisco. But it has proved to be more difficult to identify other projects and move them forward than many in the state had hoped, says Richard Little, a member of California's Public Infrastructure Advisory Commission. "At the heart of the matter with doing P3s is 'where's the revenue coming from to do this,'" Little says. "If you're not going to take it out of the tax structure, you're going to have to charge a fee."
The available permutations of P3s are increasing, says Jaime Rall, a research analyst at the National Conference of State Legislatures who focuses on transportation issues. " That raises a lot of opportunities, but it also makes the necessary dialogue more complex," says Rall, noting that questions about how to govern and oversee P3 contracts over long periods of time tend to be especially prickly.
According to NCSL, 29 states now have some form of "enabling legislation" authorizing P3s, up from 23 in 2008. These statutes set up a variety of governance structures and range from authorization for pilot projects to the go-ahead to launch a range of projects without consulting or briefing the legislature. The more cautious states require a vote of the legislature before any particular projects can move forward or, in Missouri's case, even a vote of the people under some circumstances.
In 2008, public concern over the neighboring Chicago Skyway and Indiana Toll Road deals prompted Minnesota to significantly disable its 1993 enabling legislation. An amendment called the "prohibition on privatization provision" now limits the extent to which a private operator can operate and maintain a road. Although Minnesota is still counted in most tallies of states with "P3 enabling legislation," new legislation would be necessary to move forward virtually any significant P3 project.