In U.S., Two Steps Forward, One Step Back

Howard Roth, Ernst & Young Although public/private partnerships formed to construct and own major infrastructure projects have gained traction in Europe, Canada and Australia, acceptance by U.S. state and local governments has been more problematic and spotty.

Although public/private partnerships formed to construct and own major infrastructure projects have gained traction in Europe, Canada, and Australia, acceptance by U.S. state and local governments has been more problematic and spotty. As we revealed earlier this year in our 2010 Infrastructure Report—Investment Imperative, co-produced with the Urban Land Institute, it’s largely been a case of two steps forward, one step back for PPPs in this country.

The recent recession didn’t help as investors retreated and governments retrenched. Few major transportation projects moved ahead—government fiscal problems and stimulus funding created confusion, officials didn’t see an easy way forward, and investors questioned where and whether to invest. To add to the problem, foreign capital has been discouraged by the falling dollar, increasing government debt loads, and prospects for higher interest rates.

Nevertheless, several high-profile, first-of-their-kind PPPs closed during the last year and construction for another project is well underway. These transactions may offer guideposts for future U.S. public/private partnership deals:

 In Florida, the Department of Transportation entered into two separate agreements: for constructing a $2 billion tolled expressway expansion in south Florida (I-595) and a $1 billion tunnel for the Port of Miami.

 The Texas Department of Transportation and a private operator collaborated on building high-occupancy toll lanes, part of a $4 billion expansion and upgrade for I-635, a key highway at the center of the Dallas/Fort Worth Metroplex.

 Construction continued on a 14-mile section of HOT lanes for the Capital Beltway (I-495) outside Washington, D.C., in Virginia. Slated to finish in 2013, the PPP budget is $1.4 billion.

 Georgia officials invited firms to work in concert with the state to develop a framework for future availability payment deals.

While common in Europe and Canada, PPPs using an availability payment mechanism are just now drawing attention in the United States. Under varying terms, private sector concessionaires are paid for developing and operating a facility and keeping it available and ready for public use, while the public sector receives the revenues from any user fees. Greater government involvement in funding projects also gives operators a boost in attracting private financing and equity capital. After early stumbles, these deals represent real progres – anticipate more to come.