CHICAGO - Indianapolis' latest high-profile public-private partnership effort is a new criminal justice complex that's expected to carry a price tag of at least $500 million, marking the largest such P3 deal in the U.S.
The city will receive final bids on the project in late November. It hopes to tap a private team by the end of the year, and present a final proposal to the City-County Council in early 2015.
It will be Indianapolis' third high-profile P3 under Mayor Greg Ballard, who took office nearly seven years ago. Under Ballard's tenure, the city has already privatized its parking system and sold its water and sewer department. The latest project features a new downtown criminal justice complex to replace four existing facilities that officials say are unsafe and inefficient, in part because the courthouse is located in the City-County Building.
"You will have prisoners and detainees mixing in the halls with judges, victims, and prosecutors; the mix is bad from a safety and a legal perspective," said Adam Collins, the city's Deputy Director of Economic Development.
"The city has tried for 20 years to remedy the issue," Collins said. "Those had always stumbled in terms of financings."
The project will be structured as an availability-payment P3, an increasingly popular option in the P3 sector, according to analysts. The growing trend of availability-payment models in the U.S. is partly due to a private sector resistant to taking on risks associated with the more traditional demand-risk model. In Indiana, the recent bankruptcy of the Indiana Toll Road operator highlighted the risks to private operators of P3s that depend on usage based payments, such as traffic or tolls.
The Indianapolis deal calls for the private team to finance the upfront costs associated with building, operating and maintaining the new complex for at least 35 years, while the city owns the complex. The city will in return provide the private team with annual availability payments.
It would be only the second so-called social-infrastructure P3 structured with availability payments done in the U.S. so far.
The Gov. George Deukmejian Courthouse in Long Beach, Calif. which opened in 2013, was the first, with an estimated price tag of $495 million.
"All the big P3s are being done in transport, because you've got [departments of transportation] with huge budgets and huge funding sources," said Barney Allison, partner at Nossaman LLP, which is acting as the city's national counsel on the project. "Here we've got a city and a county that's looking to operate an essential government function for the next 35 years and they're very concerned about what it's going to cost them," said Allison. "The city is looking at this particular project from a policy standpoint, a way of getting new infrastructure and new jails and a new courthouse, and hopefully through the efficiencies of the P3, they'll come up with a way to achieve at least neutrality of running that jail and courthouse."
In addition to Nossaman, which is also P3 counsel to the Indiana Finance Authority, the finance team for the court project includes as financial advisor KPMG, which also worked on Indiana's high-profile Ohio River Bridge project. Local counsel is Bingham Greenebaum Doll LLP.
The new complex will be built on a former General Motors stamping plant site across the White River from southwest downtown. In addition to new courts and a processing facility, the complex will include a 3,000-bed jail - up from the current 2,100 beds.
"We think obviously we're on the leading edge of this particular type of delivery model, but being there provides us with opportunities that we wouldn't have had otherwise," Collins said. "We have a market hungry for participation and three bidding teams that we believe are interested in seeing this done, and sharpening their pencils to give the city the best deal."
The city has refused to release financing details of the project, citing the ongoing bidding process. The secrecy has sparked criticism in local media, as well as from the state's Public Access Counselor under Gov. Mike Pence.
Traditional financing options for similar P3s include taxable bonds or bank loans.
The Long Beach courthouse project initially used bank loans, later refinancing with taxable bonds, Allison said.
The use of tax-exempt debt is unlikely due to current Internal Revenue Service rules, he said.
"There's more and more interest on the part of public agencies on using the European or full-on concession approach to these projects," the attorney said. "But it's a real challenge to do tax-exempt [financing]."
Allison added that P3 supporters are currently lobbying Congress to revise various IRS rules to allow for an exemption to the private activity bond rules for P3 governmental building projects.
"It would be wonderful to have that," said Allison.
Indianapolis plans to make its availability payments out of its existing criminal justice budget, which totals roughly $122 million a year, according to Collins.
The size of the payments is yet to be determined, but will come largely from savings the city expects to achieve by terminating existing contracts, and saving on rent and management of the facilities, he said. The payments will include operations and maintenance and debt service, among other things.
The city says it won't have to raise taxes or dip into its general fund for the payments.
"This is a project we expect to be revenue neutral and won't require any additional funding source or tax for the city at all," Collins said. "That was the promise and the allure for the city."
Indianapolis may not be taking on traditional bond debt, but availability payments still represent debt, and all the risk that come with it, said John Gilmour, professor of government and public policy at the College of William and Mary, who studies P3s.
"What's good about it is a new asset is being built," Gilmour said about the new complex. "But the question is, how does it compare to a conventional financing deal?"
Unless the private developer can qualify for tax-exempt debt, the interest costs and profit margin demanded by the private developer could be higher than if the city embarked on a traditional, 30-year tax exempt deal, he said.
"If the credit agencies were smart, they'd recognize that this is equivalent to bond debt and they should count it as debt," he added. "But the credit agencies are sometimes stupid in this way."
The project will likely be closely watched by public officials and market participants interested in the pitfalls and savings associated with availability payment P3s.
In a recent report on the growing P3 market in the U.S., Moody's Investors Service noted that similar projects are already on the horizon as governments look for savings.
"Availability payment-based P3s are gaining a bit of traction because the private sector has been unwilling to take revenue risk for some projects and governments are recognizing the value of the availability model," Moody's said.
"Under pressure to keep fiscal spending in check, governments want more for every dollar invested," Moody's analysts said. "They also want to insulate long-term maintenance and capital investment from the political cycle, since capital spending is typically cut during times of austerity, reducing the asset's useful life. As more state and local governments pass, clarify and expand their P3 authorizing legislation, we expect that more projects will begin procurement and that the project pipeline will grow."
