Armando Rivera Jacobo and Dolly Mirchandani | White & Case
All questions
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 during the 1980s, which provided for a two-component compensation system: a capacity availability payment and an actual usage payment.2
There is no uniform statutory definition of PPP at the federal level 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, infrastructure-related procurement laws have not permitted the typical forms of contracts used in PPPs in the international context, requiring, for example, the separation of the procurement of the design of a project from the procurement of the construction of the same. Most notably, this has been the case in the state of New York. However, policies towards design-build procurement have changed in recent years and, at the end of 2019, the legislature in the state of New York 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.3
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 procurement by way of a request for proposal of all types of infrastructure projects.
Currently, a majority of states and Puerto Rico have enacted PPP-specific legislation that permits PPP transportation and social projects. In some cases, the PPP-enabling legislation authorises specific projects on an ad hoc basis. Other states, such as New York, have enacted pilot programmes authorising the procurement of a limited number of projects using the PPP model.
The types of public infrastructure that can be procured through the PPP model also vary from state to state. The transportation sector has historically accounted for the 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, PPPs have increasingly been utilised for social infrastructure projects, 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 been implemented for long before that, mainly in the water and wastewater sectors. Correctional services companies have also built prisons and offered their services to all levels of government for several years.
Two pathfinder projects to develop consolidated rent-a-car (ConRAC) facilities at the LAX and Newark International Airports successfully reached financial close in recent years. The success of these transactions has encouraged other airport authorities to look at opportunities for this new asset class.
In the past decade, the use of predevelopment agreements has also become a trend across multiple types of authorities and projects. Prominent examples of PPP projects that have used predevelopment agreements include the Texas SH 130 (segments 5 and 6), the Denver International Airport Great Hall (which has since been terminated after a dispute between the owner and developer) and the National Western Campus (stages 1 and 2). Projects currently in procurement that are expected to use a predevelopment agreement model include Los Angeles County Metro’s Sepulveda Corridor, the Lake Oswego Waste Water Treatment Plant and portions of Maryland’s I-495/I-270 Capital Beltway. Unlike the traditional PPP model, predevelopment agreements are used at an early stage of development, when the full scope of the project is not completely defined, environmental studies may still be ongoing and the financial viability of the project may not be clear. A predevelopment agreement mitigates the financial and execution risk for the private party and the authority, limiting the scope of the initial work and investment prior to determining that the project is viable. At the same time the parties benefit from their open collaboration defining the project scope and selecting the features that will make the project provide the best value for money to the authority and an attractive return on investment to the private party. The authority has the right to terminate the predevelopment agreement and related work on the project, with limited termination payments liability, and the private party has the option to enter into a definitive PPP agreement before it is offered to other potential developers. This arrangement typically results in a reduction in the length of the procurement period and costs.
The year in review
A key recent development in the US market is the substantial increase in the number of broadband and social infrastructure assets being developed through PPPs. Multiple courthouses, prison projects and student housing have achieved commercial or financial close in recent years, and there are many other social infrastructure projects currently in procurement, including civic centres, schools 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.
Although, overall, transportation continues to account for the biggest portion of the PPP market in the US by value, only a handful of PPP transportation transactions achieved financial close during 2020, with a number of procurements stalled or on hold due to the ongoing effects of the covid-19 pandemic on the transportation sector. These include major terminal redevelopment projects at the John F Kennedy Airport in New York.
The US also saw a number of university energy PPP projects reach financial close in 2020, including projects procured by the University of Iowa, the University of Syracuse and the University of Idaho. There is a growing trend in the US for universities to enter into comprehensive long-term arrangements with a private partner who will take on responsibility for the operation and maintenance of the university’s utility system as well as the management and funding of future renewal and capital improvement needs. In some cases, these projects have involved a large upfront payment for the procuring university, also making them attractive revenue-generating opportunities for public universities. The private partner typically makes its return through a utility fee structure, similar to the rate-setting methodologies employed by regulated utilities in the US.
Other major PPP transactions that achieved financial close during 2020 include the Texas A&M Medical Building & Student Housing, the Prince Georges County Public Schools and the Miami-Dade County Civil and Probate Courthouse projects.
The past year also saw a couple of setbacks in the US PPP market, including the cancellation of highly anticipated projects such as HART’s Honolulu Rapid Transit Project and the Los Angeles Civic Center. Increasing development costs, beyond the affordability expectation, and uncertainty of availability of sufficient appropriations, user fees or other sources of funding, have presented a significant challenge for projects to achieve successful commercial and financial close. Although in the long term the negative economic effects of the covid-19 pandemic will be overcome, the immediate reduction in tax and user revenue created or exacerbated immediate challenges to the granting authority’s assumptions of its expected financial commitments. In addition to these challenges, the covid-19 pandemic increased parties’ focus on the definition of force majeure and relief events, not only to ensure the inclusion of pandemics, but also the actions that authorities may adopt in response to them. The numerous decentralised jurisdictions in the US, and entities within each such jurisdiction that constitute the universe of grantors, and the different powers that they hold, make it impossible to provide an overall view of how the covid-19 pandemic, or the possibility of similar future pandemics, have changed the terms of PPP agreements. The range of responses in the market goes from simply adjusting or tightening the definition of force majeure events, adding more detailed descriptions of events related to widely spread disease and responses thereto, to implementing covid-19 and covid-19 response-specific relief events, forms of relief and conditions to granting such relief.