Budget Gaps, Backlogs Spur States To Tap More P3 Opps
By Linda Chimes
Law 360 (May 15, 2018, 2:04 PM EDT) -- The Trump administration’s push to have local governments shoulder a bigger share of their infrastructure project costs will likely inspire more states and municipalities to tap private investors to get their most crucial projects financed, built and delivered.
Budget shortfalls and a growing backlog of aging infrastructure have heightened local officials’ awareness of how public-private partnerships can be used to fund construction, spurring more states and localities to enact legislation allowing them to partner with private developers to get airport, highway, transit, bridge and other infrastructure projects off the ground faster.
“[It’s] the result of a lot of education, exposure and publicity,” Katten Muchin Rosenman LLP partner Bill Dudine told Law360. “Infrastructure’s in the news a lot and I think there’s been a pretty big emphasis on describing how these projects work, particularly to government officials who are becoming more comfortable with it.”
At least 35 states, the District of Columbia and Puerto Rico have so-called P3-enabling legislation in place for transportation infrastructure, according to the U.S. Department of Transportation, allowing them to bring in private partners to help design, build, maintain or operate public works projects. With P3s, private developers share the financial risks for projects that would otherwise have to go through traditional procurement processes, in which the public agencies behind the projects front the entire cost of designing and building them.
The Trump administration unveiled an infrastructure investment proposal in February that puts more responsibility on state and local governments to find creative ways to pay for their own projects rather than rely mostly on federal funds. Senior officials have frequently said states must have more “skin in the game.”
But with their coffers depleted as it is, state and local governments are left with few alternative funding options, which often can be narrowed down to raising taxes to cover transportation and infrastructure upgrades or seeking out private partners, according to some industry observers.
“We can’t wait for federal legislation [and] it’s really the economic reality that most state and local governments are facing that there isn’t enough money,” Cecelia Bonifay, chair of Akerman LLP’s land use and development practice, told Law360. “To spur redevelopment, or development, we’re going to have to find better models in partnership. So the development company has some skin in the game, they’re stakeholders.”
Frank Rapoport, chair of Peckar & Abramson PC’s infrastructure and P3 practices, agreed that there will likely be more movement by states to enact P3 legislation if they haven’t already.
“Once Congress takes up legislation — assuming they agree with Trump — they can’t fund all the money, so any governor who is not asleep, that doesn’t have P3 authority will want to move a [P3-enabling] bill,” Rapoport said.
Attorneys say the P3 model can be a game changer in getting critical infrastructure projects off the ground but, because of existing barriers, is still not used enough. For one, the transportation agencies responsible for taking the lead on infrastructure projects are still hamstrung by a mishmash of contracting and procurement laws. The 35 states with P3-enabling legislation on the books have varying degrees of flexibility to tap private investors for public works projects.
Some of those states have been expanding what’s called “design-build authority,” a more simple and straightforward P3 method that packages the design and construction components of a project under one contract with the project owner instead of having those phases completed separately.
“The finance mechanisms for P3s have actually become more developed and flexible,” Dudine explained. “Municipalities are looking at this like what do we need to move forward to be able to get these additional tools in our tools box to provide for a more varied delivery system.”
States like Virginia, Florida, California and Colorado have been blazing a trail with P3s.
Some of the splashier P3-backed projects under construction include Florida’s I-4 Ultimate Improvement Project, a $2.3 billion, 21-mile-long reconstruction of Orlando’s interstate highway; the All Aboard Florida project, a $2.5 billion, privately funded, high-speed passenger rail project; and Colorado’s Central 70 project, a $1.2 billion reconstruction of a 10-mile stretch of I-70 East that’s one of the most heavily traveled and congested highway corridors in the Denver region and Colorado.
Industry observers say New York is one to watch. The state has not enacted legislation authorizing the use of complex P3s for infrastructure projects, although there's been a number of bills that have proposed expanding design-build authority to several state agencies.
However, the Port Authority of New York and New Jersey has been free to pursue P3 deals for several high-profile projects, including the $4 billion redevelopment of LaGuardia Airport’s central terminal and the $1.5 billion Goethals Bridge replacement.
States have to also keep in mind that private partners aren’t attracted to run-of-the-mill infrastructure projects, attorneys say. A project needs revenue-generating potential — think toll roads, transit systems or airports that can charge users of the infrastructure — to eventually pay back what the private partner invested on the front end to get the project built in the first place.
“There has to be enough critical mass and there has to be enough sources that have to be in the form of subsidy in order to make it work,” said Mitchell Bierman, a partner with Weiss Serota Helfman Cole & Bierman PL. “Nobody in the private sector is going to come out and fund a transit system when the fare box revenue and advertising and other revenue can only cover 30 percent of the capital costs and a small portion of the annual operating costs. Where does this other money come from?”