MCC: What is driving the demand for transportation infrastructure projects in the U.S.?
Lent: A number of factors contribute to a recognized need to invest in infrastructure. One is the importance of a reliable transportation network to the U.S. economy in terms of moving goods to and from U.S. ports of entry. There’s also the issue of road congestion and the need for public transportation, including rail systems and streetcars, as an alternative to cars. Much of our existing infrastructure was built a long time ago, back when the interstate highway system was first created; many of these roads and bridges are crumbling and need attention. On the aviation side, facilitating travel is another recognized priority; therefore, airports are investing in infrastructure so that they can attract more air service, particularly international service.
MCC: Can you talk about some projects you’ve recently been involved in?
Lent: I represent a toll road agency seeking to build an alternative route to Interstate 5 that connects Orange County to San Diego. The project is complex and involves numerous stakeholders, but I am working with the client to advance this project through to completion.
I’ve also worked on the Gerald Desmond Bridge Replacement Project, assisting with various aspects of a major design-build project that involves rebuilding a major access point for my client, the Port of Long Beach.
Another interesting project involves seeking federal funding and approval to build a streetcar, essentially a light rail, in downtown Fort Lauderdale, which should be a great economic development driver. Buffalo is also looking at the possibility of extending its light rail system, so I’ve been working on that project as well.
MCC: What types of projects are eligible for federal funding? What does that process look like?
Lent: A broad range of projects could be eligible for federal funds, assuming they are public works. At minimum, the project has to be a public-access road, transit system or airport – which, it turns out, covers a broad range of projects such as roads, bike paths, transit projects, airport improvements and some projects within port complexes. Once you accept federal funds, you must meet various federal requirements. For example, highway and transit projects have to be part of a region’s transportation plan, in which funds must be identified for projects. Beyond that, you have to complete an environmental review and follow certain procurement rules and labor laws for all transportation projects. It pays, for example, to know that if you start a project without competitively procuring products and services, you may entirely preclude the possibility of federal funding.
MCC: From a strategy perspective, what comes first? Do you work out procurement and environmental hurdles first and then seek federal funding?
Lent: It’s an interesting issue. You really do need to make a decision at the onset whether you want to pursue federal funds for a project. Given the added compliance costs associated with federal funds, project sponsors will want to plan up front whether they will seek federal funds for a project. This has caused some challenges for public entities pursuing transportation grants under a program first created under the Recovery Act called TIGER, which provides decent-sized grants, let’s say in the $15-20 million range. The catch is that the project has to advance far enough along in the federal environmental review process in order to compete for the money, which often is more costly than just going through a state process. So, agencies have to be selective about seeking federal funding for individual projects, and then they need to follow all the federal rules if they go forward using such funds.
Procurement is often not as problematic because most state and local laws are similar to the federal laws, so transportation agencies typically follow a mini-federal acquisition regulation process that involves full and open competition. While procurement is not such a big concern as a matter of course, there are other issues – for example, relating to the Buy America Act and prevailing wage rates, among others, that will arise specifically when you are seeking federal money.
MCC: Talk more about agencies and how the system works for them.
Lent: The project sponsor (an agency) will be the recipient of federal funds, and the agency itself may be a state department of transportation, a regional transportation agency or a city. An example on the transit side is the Washington Metropolitan Area Transit Authority, which receives annual federal funding based on a formula and then decides how to spend that defined amount. Previous transportation laws allowed for more discretionary money, where a state department of transportation, a city, a port or a transit agency could apply to the Department of Transportation for grants. A lot of that has gone away. Now, funds are provided to the states and transit agencies; if you’re a city or a port, you have to access the money through the state, which subdivides the money across different regions.
MCC: Turning to public-private partnerships, or P3s, what are the most common sources of private funding for transportation infrastructure projects?
Lent: Private funding often comes from private equity, pension funds and equity investment by transportation companies. While we’ve seen some pure privatizations, that’s not the preferred method because of the risk involved with basically selling off public roads to the private sector. These deals more typically involve some type of a long-term concession, with varying structures depending on whether it’s a greenfield or a brownfield project.
With a brownfield project like the Chicago Skyway and Indiana toll road, the private entity is paying for the right to operate the project, collect revenues and realize profits. Greenfield projects usually involve a long-term agreement where a private sector entity will design, build, finance and then operate the road or the transportation entity over a period of time. The payment structure varies, but typically includes a debt and an equity side of the investment, meaning the private sector is both borrowing money and investing its own resources. The difficulty of predicting future revenues for a greenfield project can be problematic in certain circumstances, and, in other circumstances, revenues will not be sufficient to allow for a profit. As a result, many projects will utilize an availability payment structure, where the public entity makes annual payments once the transportation facility is operational. The payment also can be reduced from year to year if the private entity doesn’t maintain the facility in accordance with performance requirements laid out in the contract.
MCC: P3s have been touted for accelerating project delivery. What’s your take on their merits?
Lent: The biggest perceived benefit of P3s is shifting risk to the private sector and allowing the private sector to achieve cost savings through design and operational innovation, but, again, the private sector expects a reward. Within a P3 design-build structure, the public sector cedes some control – typically through use of performance specifications instead of detailed design specifications – for the sake of getting the project done. In other words, P3s are probably not the way to go for a public-sector entity that wants to control all of the project details versus simply describing the project functionality. If such requirements are added to an existing P3 contract, the public-sector entity requesting them will be expected to pay for them. So, the idea for P3s is that the public sector defines how the infrastructure should perform, and the private sector uses its innovation to build the project quicker and, presumably, at a lower cost. And when a project combines the design-build with the operate-and-maintain, there is a window of opportunity for the private entity to achieve cost savings and make a reasonable profit, either through energy efficiency or other innovative lower-cost approaches to maintaining a project.
MCC: What kinds of deals are you seeing that involve P3s?
Lent: I’m working on an interesting social infrastructure project in Fort Lauderdale. The federal courthouse is 35 years old and is in desperate need of replacement because of security risks associated with building design and set-back, persistent roof leaks and flooding, and space constraints, and there’s no money to build a new courthouse. So, there’s been a lot of interest from the General Services Administration (GSA) in doing P3s for public buildings, including courthouses, and I’ve been working with public and private sector stakeholders on making the case.
Given federal government budget requirements, GSA would have to come up with all the money upfront in order to do a design-bid-build of a courthouse, but if the private sector finances the project, the government wouldn’t have to pay until the project is completed and operational. Then there would be an annual payment thereafter, which is budgeted back as an availability payment for a project that serves an important governmental purpose. That same concept applies to transportation projects – such as the Denver rail system, which was done as a P3. Congress is interested in P3s and whether to facilitate more of them.
MCC: Talk about the political risks facing private investors in this space.
Lent: Obviously, ongoing payments for these projects are subject to availability of future appropriations. Some P3 statutes provide more protection than others, but investors need to look carefully at these issues when assessing opportunities and risks. The analysis should include the risk of spending time and money lobbying for projects against the real possibility that success will be thwarted by the subsequent election of a new political leader. For example, in Maryland, the Purple Line light rail project is on hold while the governor further considers its viability, and in Illinois, the new governor has frozen spending on any future action related to the proposed Illiana Toll Road.
MCC: What’s on the horizon in Washington?
Lent: Things are a bit unsettled right now because the current transportation law is set to expire at the end of May. Everyone believes that Congress will not allow funding to run out, but Congress must find offsets to continue current programs at flat funding levels. While Republicans and Democrats see the value of a strong federal transportation program, there isn’t a clear path toward providing significant funding for transportation. As a result, states are stepping up and figuring out how to increase revenues for transportation. I don’t have any major predictions as to future direction and opportunities, but I can say that there’s great interest around the country in transportation investment relating to highway, transit, aviation and freight infrastructure. Right now, I’m watching closely.
Published May 1, 2015.