Wednesday, April 04, 2007

"Many have questioned the U.S. Department of Transportation’s role in advocating P3s [public-private partnerships]."

Possible P3 Roadblocks

S&P: As Plans Proliferate, Opposition Looms


by Humberto Sanchez
The Bond Buyer
Copyright 2007

This year could be pivotal for transportation public-private partnerships, with several large projects poised to move forward, but challenges persist that could hinder their growth, including possible opposition from state and federal lawmakers, according to a report published yesterday by Standard & Poor’s.

The report comes as a number of states are exploring P3s. Pennsylvania is looking into a potential lease of the 172-mile Pennsylvania Turnpike. New Jersey Gov. Jon Corzine is considering various options related to leasing the New Jersey Turnpike System, the South Jersey Transportation Authority, and other state infrastructure.

In Florida, Gov. Charlie Crist and the Legislature are considering legislation to expand highway development by allowing the Florida Department of Transportation to lease its facilities, excluding the Florida Turnpike, for up to 75 years.

States and localities have been looking to P3s to finance transportation infrastructure as other sources of funding fail to keep pace with growing transportation needs.

“The main impetus is that there is an amazing amount of need and an enormous willingness on the part of the market to invest in infrastructure right now,” said Standard & Poor’s analyst and report author Matthew Hobby.

One possible challenge to P3s is opposition from the public and lawmakers.

“Political and public perception is certainly an important new focus for the industry,” Hobby said.

Hobby pointed to recent attempts by Texas lawmakers to limit P3s in the state, such as by proposing a two-year moratorium on private equity toll roads and requiring more legislative oversight of the Texas Department of Transportation.

“What ultimately becomes law remains to be seen, but any modifications to the process that increase time or alter the risk-reward calculus — or, most importantly, inhibit the ability of the operator to increase tolls consistent with the provisions of the concession agreement — could have the effect of slowing or stopping the state’s long list of projects exploring P3s,” the report said.

At the federal level, some Democratic lawmakers have spoken out against attempts by the U.S. Department of Transportation to raise the profile of P3s.

“The chairmanship of transportation-related oversight committees has returned to long-time Democrats with a more traditional view of federal government-financed projects,” the report said. “Indeed, many have questioned the U.S. Department of Transportation’s role in advocating P3s”

One market participant believes that the way to allay concern from the public and lawmakers is for the concession agreements to carefully balance public and private interests.

“Public perception is incredibly important in terms of balancing public policy with” private interests, said Robert Collins, head of infrastructure mergers and acquisitions at Morgan Stanley. “We believe that the [previous] transactions have created a body of concession agreements that do protect the public from private interests that are not aligned with serving the citizens that utilize the asset.”

“We think that the first step in the process should be a thorough review of financial operation and public policy issues,” he said. “We do spend a lot of time up front trying to understand the balance of corporate governance from the standpoint of how the entity is going to be regulated going forward, with giving the private operator maximum degrees of freedom to earn a reasonable return on its capital.”

The ultimate public protection is that these concessions include a provision that the private entity can reclaim operation of the facility if the private operator does not live up to its concession agreements.

“The municipalities really aren’t selling their house and all the furniture, they are just leasing a room in the house,” Collins said.

Other challenges to greater acceptance of P3s include the difficulty of valuing the asset, which has led to a wide disparity in bids for concessions, the report said.

Collins said that this is likely the result of two few projects being sought by a large number of private consortiums.

“At the same time, the capital markets are becoming more efficient in understanding how to achieve the lowest cost of capital and maximum proceeds, and so I think we are going to see tighter ranges for concession agreements … in the future,” he said.

© 2007 The Associated Press:

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