Governing 2016 P3 ebook

TRENDS: A STATE & LOCAL MARKET BRIEFING Market Opportunities, Case Studies and How Private-Sector Partners Can Help Governments

#sledbriefing

P3s: An Overview P3s have been underutilized in the U.S. thus far relative to Europe and Canada, where they have been widely used since the 1990s. But the outlook for P3s in the U.S. appears poised for change. An early 2016 report issued by Moody’s indicates that “while P3 growth in the U.S. has been slow and fragmented, positive legislative developments at the state level means that the market is likely to flourish.”

50 % of state and local public officials believe that a lack of infrastructure investment is their most significant financial problem.

2015 Governing Institute Survey

The Governing Institute has been closely monitoring and investigating the rise in P3 interest by state and local governments in the U.S. over the last year. Our team has launched surveys and conducted research on this subject in order to better understand the trends and where we are headed. In February we conducted a webinar to present our findings to over 300 companies interested in knowing more about the future of P3s and how to get involved.

Given the enormous need for infrastructure repair and improvement in the U.S., as well the desire for new and innovative financing alternatives, P3s are likely to see significant growth in coming years.

In response, the Governing Institute will continue to explore this issue.

In May, we’ll conduct a P3 Summit in California. In June, we’ll publish our first Guide to Public-Private Partnerships.

Within the pages of this eBook you will get a snapshot of data and analysis gathered thus far from our experts, as well as case studies and data from third party research. To find out more about our continuing P3 research or how to get involved in helping governments as they prepare to build P3 partnerships, email us at marketing@governing.com

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Source: GOVERNING Institute

What is a Public-Private Partnership (P3)?

••A contractual agreement formed between a public agency and a private-sector entity that allows for greater private-sector participation in the delivery and financing of projects ••“Any medium- to long-term relationship between the public and private sectors, involving the sharing of risks and rewards… expertise and finance to deliver desired policy outcomes” —Standard & Poor’s ••A risk-sharing, long-term partnership ••P3s are a financing—not a funding—mechanism

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SHUTTERSTOCK

P3 Market Drivers at the State & Local Level ••Critical infrastructure needs pose a threat to economic growth, road and bridge safety, water safety, environmental and public health.

••Tight budgets and decreased federal funding limit what governments can do on their own. Governments’ reluctance Source: GOVERNING Institute to take on debt via municipal bonds makes the P3 option more attractive.

••Signed into law in December 2015, the FAST Act creates P3 incentives and gives governments greater short-term certainty about funding.

••An increase in P3-enabling legislation at the state level is helping eliminate barriers to public-private partnerships.

••A growing number of state-wide or regional P3 offices and a new federal Build America Transportation Investment Center offer governments more P3 support, expertise and capacity in the form of dedicated staff and resources.

••Multiple P3 success stories, a growing comfort level at the state and local level and a growing knowledge base of best practices is spurring more governments to experiment.

••Recent innovations are making it possible to use P3s for smaller and a much more diverse range of projects.

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P3s in Other Countries ••P3s are an increasingly important but underutilized tool in the U.S. ••The U.S. lags behind every other country in the Organization for Economic Co-operation and Development (OECD) in attracting private capital to public infrastructure projects.

••OECD countries have about a 30% rate of private equity investment in infrastructure projects, compared to about 10% in the U.S.

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P3 Contract Models P3s come in a wide range of types and sizes and vary in complexity.

In the last few years, governments and their private-sector partners have gone beyond the traditional design-build model to experiment with longer-term and more outcome-driven models that expand private-sector involvement and that work well not just for transportation projects but for water/waste infrastructure, new government buildings and facilities, “smart city� infrastructure and broadband internet service, to name just a few examples.

Risk Transfer & Private-Sector Involvement Concession Design-Build-Finance-Maintain-Operate

PPP MODELS

DEGREE OF PRIVATE SECTOR RISK

Privatization

Design-Build-Finance-Maintain Build-Finance Operation & Maintenance Design-Build DEGREE OF PRIVATE-SECTOR INVOLVEMENT

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Source: GOVERNING Institute

SHUTTERSTOCK

Source: GOVERNING Institute

P3 Innovations Availability payments are one example of recent innovative P3 trends.

Availability payments are a way of paying the private-sector partner based on project milestones or facility performance standards—completing build projects on time, for example, or hitting specific maintenance performance metrics.

They are often used to pay for projects not expected to generate enough revenue to pay for their own construction and operation, allowing the public sector to carry some of the risk (and call more of the shots) while allowing the privatesector partner to count on predictable payments over the life of the agreement. Used extensively in Canada, Europe and Australia, availability payments are just beginning to gain interest in the U.S.

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DAVID KIDD

Estimated U.S. infrastructure deficit = $3.6 trillion by 2020

Source: GOVERNING Institute

••U.S. public investment in infrastructure is 2.4% of the GDP— half of what it was 50 years ago.

••77% of infrastructure spending in 2014 was absorbed by state and local governments—and the municipal market will play a key role in future infrastructure investment and development.

••Federal investment in water infrastructure has decreased by more than 80% since 1980.

•• The nation’s water infrastructure needs $600+ billion in repairs over the next 20 years.* According to the American Water Works Association, restoring underground pipes across the country will cost $1 trillion over the next 25 years.

••The nation’s infrastructure grade: D+ Source: *American Society of Civil Engineers

*U.S. E.P.A.

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Anticipated State & Local Future Spend State and local leaders we surveyed reported that spending in their jurisdictions will increase for most areas, especially for maintenance and repairs of existing infrastructure and for information technology.

Existing infrastructure maintenance/repairs

51 % 45%

Information technology Adding new transportation infrastructure

40%Source: GOVERNING Institute

Intelligent transportation systems

39%

Expanding transit services

31%

Staffing and personnel

30% 26%

Security/enforcement Source: 2015 Center for Digital Government Transportation Survey

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State & Local Transportation Priorities According to our 2015 survey, state and local transportation and infrastructure leaders identified the following priorities over the next 12-18 months.

70% Maintenance/

repair of highways & roads

42% Pedestrian

infrastructure improvements

39 % Bicycle

infrastructure improvement/ expansion Source: GOVERNING Institute

39% Public transit

improvement/ expansion

10 % Aviation

and airport improvement/ expansion

19 % Railway

12%

infrastructure improvement/ expansion

Waterway improvement/ expansion

9%

6 % Other

None of these

Source: 2015 Center for Digital Government Transportation Survey

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Muni Bond Market Over the last several years, public officials have generally become less enamored with long-term debt, which is bringing new attention to P3s as a financing alternative. P3s can also be a source of “venture capital� for projects that might not work within the structure of the traditional muni bond market.

New Money Municipal Bond Financing Since 2000

2007

46 ,22 0 $1 46 ,00 9 $1 61 ,50 $1 2 44 ,01 0 $1 50 ,49 8

$1

$2

$2

61 ,33 2 $2 79 ,77 1

2001 2002 2003 2004 2005 2006

08 ,22 5

2000

2008 2009 2010

2011 2012

2013 2014

11

2015

,28

74

3

$2

,36 58

$2

7

,20

0 $2

21

,02

,04

29

63

$2

$2

,97 37

$2

,57 97

$1

$1

65

,19

1

0

6

9

5

($ millions)

Source: GOVERNING Institute

SHUTTERSTOCK

P3s: What Stands in the Way? ••Lack of clarity on risk assessment (revenue forecast and ROI) and risk sharing ••Lack of public-sector experience: Governments can’t afford to develop the relevant risk management expertise, and few states have dedicated P3 offices / teams to provide the necessary institutional knowledge and support.

••Lack of political support and/or legislative authorization ••Availability of tax-exempt municipal bonds, which creates the perception that publicly funded projects will always be cheaper —but P3s can often deliver faster and at a lower cost.

••Different ideas about how to define P3 success ••U.S. P3 market viewed as high risk because of project cancellations

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FAST Act: Fixing America’s Surface Transportation Source: GOVERNING Institute

In December 2015, President Obama signed into law the Fixing America’s Surface Transportation Act (FAST Act).

The first long-term transportation bill in ten years, FAST represents a $305 billion investment in surface transportation over 5 years (fiscal years 2016-2020).

Under FAST:

••States get five years of federal funding certainty for highway, safety and transit programs.

••The $305 billion represents an 11% increase in funding for surface transportation projects such as upgrading transit lines or implementing automated infrastructure.

••Every state will receive a 5% increase in federal highway funding in the first year.

••Local transit systems will receive an 8% increase.

Source: https://www.whitehouse.gov/the-press-office/2015/09/14/fact-sheet-administration-announces-newsmart-cities-initiative-help

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DAVID KIDD

Source: GOVERNING Institute

FAST Act Authorized Funding: FY16: $11,789 (numbers in billions) $263 Seniors & Disabled

$4,538 Urbanized Area Formula

$536 Growing States & High Density $620 Rural Formula $696 Bus and Bus Facilities

$115 Administrative Expenses

$2,507 State of Good Repair Formula

$2,301 Capital Investment Grants

Source: http://www.fta.dot.gov/FAST.html

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DAVID KIDD

FAST Act: The Good News •• Establishes federal office to promote best practices for P3s.

•• Adds pilot program for P3s in building transit.

Source: GOVERNING Institute

•• Allows states to use surface transportation block grants to run P3 offices.

•• Pressures states to “use it or lose it” on pilot program to toll existing interstates.

•• Provides stability necessary for governments to initiate long-term projects.

FAST Act: The Bad News ••Funding levels are still lower than advocates, state and local governments had hoped for.

••No permanent new funding source.

••Significant reductions in total funding for TIFIA credit assistance • Before FAST Act: $1 billion annually • FAST Act: $275-$300 million annually

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P3-Enabling Legislation Making P3s work requires effort from both the public sector and the private sector. On the public-sector side, providing legislative authority to enable P3s is the first step. As of January 1, 2016, 33 states had some form of enabling legislation.

Source: GOVERNING Institute

Broad enabling legislation Limited or project-specific legislation No legislation Source: NCSL, 2016 P3 Statute Categorization & Analysis

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Building P3 Expertise Source: GOVERNING Institute

Public-private partnerships require fairly complex negotiations and typically require a good deal of technical and staff support, so planning for and building those needs are another key to P3 success.

Several states have created or partnered in the creation of statewide or regional P3 offices, and many others have plans to do so.

State & Regional P3 Offices:

•• P3 VIRGINIA: Provides dedicated resources for six transportation agencies that identify, select, evaluate and procure P3 projects •• TXIC: Texas Infrastructure Council •• WCX: West Coast Infrastructure Exchange for California, Oregon, Washington & British Columbia States Building P3 Expertise:

•• Arizona is developing a P3 office •• Illinois DOT has issued an RFP for a P3 advisor 17

DAVID KIDD

Source: GOVERNING Institute

P3 Landscape & Industry Trends •• P3s are not a silver bullet, but an important financing tool for much-needed infrastructure investment.

•• P3s align well with the growing emphasis on outcome-based decision making and performance improvement •• The best new and developing P3 opportunities are often with jurisdictions that have already completed a successful P3 project.

•• Bundling. Some jurisdictions have realized impressive cost savings and economies of scale by bundling multiple projects (government buildings, bridges, schools, etc.) into a single P3.

•• P3 project size diversification. We are seeing more and more local (regional, urban) market opportunities in addition to the more traditional “mega” statewide projects.

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SHUTTERSTOCK

Source: GOVERNING Institute

Diversification by Sector: Expanding Beyond Transportation P3 innovations include the application of the P3 model to sectors other than transportation. Public-private partnerships are being utilized in many different contexts, including:

•• Government Buildings

•• Hospitals

•• Green Infrastructure

•• Airports

•• Storm Water Management

•• Telecommunications / Broadband

•• Former Military Site Redevelopment

•• Government / Social Infrastructure including “Pay for Success” initiatives

•• Affordable Housing

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Source: GOVERNING Institute

Case Study: Long Beach Court House The Long Beach, California, Courthouse is an example of an innovative “availability payment” P3. A $429 million project, it included a 35-year lease-leaseback contract and incorporated “green building” standards.

Performance-based measures were included in the contract, ensuring that private-sector partners were invested in creating a space that was as energy-efficient and sustainable as possible. It has become a national model for social infrastructure projects.

•• $492 million; 35-year lease-leaseback contract •• Performance-based infrastructure •• Innovation and “green” building •• Model social infrastructure project

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WIKIPEDIA

Source: GOVERNING Institute

Case Study: •• Will bring broadband to all 120 Kentucky counties

SLED TREND: governments building their own broadband systems: approx. $4.2 billion of debt for broadband and other telecommunication services outstanding

•• 3,000 miles of fiber-optic lines by 2018 •• Est. $324 million cost •• Unprecedented in scope & impact •• First fiber P3 •• Won Bond Buyer’s Deal-of-the-Year

Other jurisdictions considering broadband P3s: Los Angeles, New York, Oregon

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WWW.NACO.ORG

Stormwater Case Study: Prince George’s County •• Green infrastructure •• 30-year project •• 2,000 acres by 2017 •• Private sector partner Corvias will: • “Race” a county team, compare results • Design, build & maintain; est. 40% savings • Finance 30-40% of costs • Hit performance benchmarks in order to get paid •• Social benefits: local hires, women- and minority-owned businesses For details on this new P3 model, see www.governing.com/topics/PGProject

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Source: GOVERNING Institute

SHUTTERSTOCK

Source: GOVERNING Institute

What’s Needed to Make P3s Work Better?

PUBLIC SECTOR:

PRIVATE SECTOR:

•• Legislative authority

•• Demonstrate added value of P3s vs. traditional financing

•• Political champions

•• “Skin in the game”

•• Transparent pipeline of projects

Key on Both Sides: Communication …with advisors, stakeholders and citizens.

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APIMAGES.COM

What Governments Need from Private-Sector Partners •• Partners who help governments clearly identify their needs Source: GOVERNING Institute and goals will ensure that political leaders are clear on objectives and that the project aligns properly with goals before planning begins.

•• The private sector needs to be able to demonstrate the value of P3s. What are the benefits they bring to a project compared to a non P3-procurement?

•• The private sector also needs to demonstrate that they have “skin in the game” and are prepared to see the project through in the long-term and to provide the government agency the broad support they need.

•• Government agencies also need the private sector’s help developing clear cost projections and a clear understanding of risk sharing and life cycle costs.

•• Above all, communicate. Communication is absolutely critical to the success of a P3 project. Not only must public- and privatesector parties communicate with each other on all aspects of a project, they must also communicate with the public.

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Source: GOVERNING Institute

Governing’s P3 Reading List •• Finding the Express Lane to a Successful P3 FEBRUARY 2016 •• Cleared for Takeoff: Airports & the P3 Opportunity FEBRUARY 2016 •• Cashing in on the Public Right of Way DECEMBER 2015 •• The Untapped Potential of P3s SEPTEMBER 2015 •• A New P3 Model for Building Green Infrastructure MAY 2015 •• An Intriguing New Approach to Funding Social Programs APRIL 2015 •• The Growing Evidence that P3s Are Delivering Value MARCH 2015 •• A 5-Part Test for Public-Private Partnerships DECEMBER 2014 •• States Turn to Public-Private Partnerships for Infrastructure Services NOVEMBER 2013

•• Why Isn’t the U.S. Better at Public-Private Partnerships? FEBRUARY 2013 For more on P3s visit governing.com.

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SUMMIT ON INFRASTRUCTURE & PUBLIC-PRIVATE PARTNERSHIPS MAY 12, 2016 / SANTA MONICA, CA

In June of 2016, Governing will publish its first Guide to Public-Private Partnerships.

REGISTER/SPONSOR: governing.com/events

Source: GOVERNING Institute

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