Armando Rivera Jacobo | White & Case
An extract from The Public-Private Partnership Law Review, 6th Edition
Overview
It has been said that the development of the modern form of PPP can be traced back to the power purchase agreements developed in the United States (US) during the 1980s, which provided for a two-component compensation system: a capacity availability payment and an actual usage payment.
There is no uniform statutory definition of PPP in the US. The scope of transactions that each state may use to procure from, or partner with, the private sector for the delivery or operation of infrastructure varies from state to state. In some cases, some infrastructure-related procurement laws have not permitted the typical forms of contracts used in PPPs, requiring, for example, the separation of the procurement of the design of a project from the procurement of the constructions of the same. Most notably, this has been the case in the State of New York but policies towards design-build procurement have changed in recent years, and at the end of 2019, the state legislature passed authorising legislation enabling various state agencies (including the Department of Transportation, the Department of Environmental Protection, the School Construction Authority and the New York City Housing Authority) for a period of three years to enter into design-build contracts.
Some states have enacted PPP-specific enabling legislation; others rely on legislation relating to their general procurement authority and common law. In some cases, the PPP enabling legislation is limited to specific categories of projects, such as transportation. In others, it allows the performance of all types of infrastructure projects.
Currently, a majority of states and Puerto Rico have enacted PPP-specific legislation that permits PPP transportation or social projects. In some cases, the PPP-enabling legislation authorises specific projects on an ad hoc basis. Some states, such as New York, have enacted pilot programmes authorising the procurement of a limited number of projects using the PPP model.
The categories of public infrastructure that can be procured through the PPP model also vary from state to state. The transportation sector has historically accounted for greatest use of PPPs in the US, most commonly for the development of roads and related infrastructure, but also for light rail and airport projects. PPPs have also been successfully used for water, wastewater and desalination projects in the US. In recent years, it is becoming increasingly common to find social infrastructure projects being developed in the form of PPPs, particularly courthouses, prisons, university housing and schools.
The market for PPP transportation projects began to develop in the 1990s with the SR-91, Dulles Greenway and Camino Colombia projects. When these projects ran into financial difficulty, the market for this kind of PPP project froze for several years. It was only in the mid- to late 2000s that the transportation PPP market in the US began gaining new momentum. However, many PPP projects at the municipal level had existed for long before that, mainly in the water and waste water sectors. Correctional services companies have also built prisons and offered their services to all levels of government for several years.
The year in review
A key recent development in the US market is the substantial increase in the number of social infrastructure assets being developed through PPPs. Multiple courthouses and prison projects have achieved commercial or financial close in recent years and there are many other social infrastructure projects currently in procurement, including civic centres, schools, student housing and sports and leisure facilities. A number of states, including New Jersey and Arkansas have recently introduced PPP legislation facilitating the application of PPPs beyond transportation and authorising a range of government agencies to procure such projects.
Transportation continues to account for the biggest portion of the PPP market in the US by value. A number of significant projects have closed or come to market in the airport sector, including terminal redevelopment projects at LaGuardia and John F. Kennedy airports in New York, some of which are using a modified approach to the traditional PPP model. Two pathfinder projects to develop consolidated rent-a-car (ConRAC) facilities at LAX and Newark International Airport successfully reached financial close in the past year. The success of these transactions may encourage other airport authorities to look at opportunities for this new asset class.
Other major PPP transactions that achieved financial close since December 2018 include the I-95 Express Lanes Fredericksburg Extension, the Travis County Courthouse and the Austin Soccer Stadium.
However, the past year has seen a couple of set-backs in the PPP market. First, in August 2019, Denver International Airport announced the termination of its contract with Great Hall Partners for the Denver Airport Great Hall (Jeppesen Terminal) PPP project. Since then, Denver Airport has selected contractors for the completion of the project under a different delivery method. In December, St. Louis’ Mayor withdrew her support for the long awaited St. Louis Lambert Airport project, bringing the procurement process to a halt. The St. Louis Lambert Airport project was expected to use an FAA’s Airport Investment Partnership Program (formerly known as the Airport Privatisation Pilot Program). This programme has only been successfully used three times in the past, despite having been in the books for over 20 years, for the privatisation of the Muñoz Marín International Airport in San Juan, Puerto Rico, the Stewart International Airport in Westchester, New York (which ceased being privately operated in 2007 and is now operated by the Port Authority of New York and New Jersey) and, most recently approved (September 2019), the sale of the Hendry County Airglades Airport in Florida to a private operator.
Outlook
While the number of PPP projects to reach financial close in the US has remained relatively limited over the last couple of years, there continues to be a strong pipeline and the use of PPPs can be expected to increase as states and municipalities continue to look for ways to leverage private finance to meet their infrastructure needs.
Unfortunately, political risk continues to be an important factor in the US PPP market. The political environment has resulted in the postponement and cancellation of several PPP transactions (such as the Houston Justice Complex, the Indianapolis Courthouse, the US Route 460 Corridor Improvements and Philadelphia’s Southport Marine Terminal Complex, and more recently, the St Louis Lambert Airport) that had reached advanced stages of procurement, and although the new federal administration has touted a US$1 trillion infrastructure investment plan and more recently outlined some regulatory and financing programme changes to incentivise investment, many details on how new projects would be brought to the market or how closing risk would be reduced remain to be seen. The US PPP market has not yet evolved to a point where the procurement process is sufficiently institutionalised to render it largely immune to the political cycle.
At the time of writing, there are close to 40 projects in the US for which the preferred proponent has been selected and that are in the process of achieving commercial close or the proponent shortlist has been issued and that have already received bids and await the award, or are scheduled to receive bids in the relatively near future. This includes the Honolulu Rail Transit P3 project, the Miami-Dade County Civil and Probate Courthouse, the Los Angeles Civic Center, Gilcrease Expressway West, Lincoln South Beltway and the Phoenix Central Station Redevelopment. Barring issues with governmental approvals of the final PPP agreements and delays in the procurement schedules, this by itself should create a pipeline of transactions for the next year or two that maintains the current level of activity on a par with previous years.
In addition, there are currently many proposed PPP projects, in pre-procurement or RFQ stages, that by their nature should be of significant interest to private parties. This would indicate that a pipeline for an even longer term is being created. Projects of this type that come to mind include the Sepulveda Pass, the Miami-Miami Beach Rapid Transit and the Hudson River Tunnel Replacement (Gateway) projects. As previously discussed, more states continue to enact or further develop their PPP legislation, broadening the scope of potential transactions. Moreover, states that have already been successful with their transportation PPP projects continue to expand their PPP programmes to other sectors. We are seeing a growing interest in social infrastructure, water, broadband projects and electric vehicle charging stations, not only from granting authorities, but also from developers, equity investors and financing parties. We believe that this trend will continue to the extent that granting authorities hit the sweet spot on the size of project value. States have started to pack their pipelines with these kinds of projects, many of which remain in the viability study stage, but some of which have made it to procurement, or even to commercial and financial close.