Earlier this month, capping years of debate, Pennsylvania Gov. Tom Corbett signed a bill establishing a framework for financing improvements to the state’s transportation infrastructure through public-private partnerships — so-called PPP, or P3, projects.
The road was long and bumpy.
“Actually when it passed, I wasn’t thinking about anything other than, my God, it’s done,” said the bill’s primary sponsor, Rep. Rick Geist, R-Altoona.
Five years ago, Corbett’s predecessor, Ed Rendell, sought to privatize the Pennsylvania Turnpike system, but that proposal died in the legislature.
Proponents of the new P3 initiatve envision a private capital pipeline flowing into cash-strapped Pennsylvania. In 2010, an advisory committee estimated the state’s unfunded transportation needs at about $3.5 billion.
One year later, a separate panel advised Corbett: “Much like the rest of our nation, Pennsylvania’s transportation infrastructure is aging significantly due to decades of underinvestment. … The gap is growing and will reach an estimated $7.2 billion in 10 years if we do not take action to address the transportation need.”
Opponents of the new bill, meanwhile, fear financial risks and the loss of local control of projects. While the Senate passed the bill 49 to 0, the 117-to-79 House vote reflected a lingering divide over the viability or desirability of such projects.
Neither Moody’s Investors Service, Fitch Ratings nor Standard & Poor’s have commented yet on the possible credit implications of the bill.
Moody’s rates Pennsylvania’s general obligation bonds Aa1, while Fitch and Standard & Poor’s assign AA-plus and AA ratings, respectively.
While common elsewhere in the world, the idea of using private equity investments in infrastructure projects gained speed in the United States with the 2005 leasing of the eight-mile Chicago Skyway toll road, which connects to Indiana.
That transaction provided the city $1.83 billion through a 99-year lease, and drew worldwide attention from the capital markets.
Australia’s Macquarie, whose airport fund holdings include international hubs in Sydney, Brussels and Copenhagen, has been an especially active player, notably in Puerto Rico, as have the Canada Pension Plan, the Ontario Teachers’ Pension Plan and the Ontario Municipal Employees Retirement System. The latter opened a New York office last fall.
“Pennsylvania, New York and New Jersey are very fertile fields for this kind of stuff to happen,” said Geist, who served in the legislature since 1978 but lost his re-election bid this year.
Pennsylvania’s move could prompt action by the governors of the latter two states, Andrew Cuomo and Chris Christie, respectively, to avoid a flow of private capital to their Mid-Atlantic neighbor.
The next big American P3 after the Chicago Skyway was the 2006 lease of the Indiana Toll Road, which generated $3.8 billion for the state government.
That was the example Rendell, then Pennsylvania’s governor, sought to follow in 2007, by privatizing the Pennsylvania Turnpike. A consortium led by Spain’s Abertis Infraestructuras and Citi Infrastructure Investors offered $12.8 billion for a 75-year lease. The proposal fizzled without a vote in September 2008.
“The way it was handled with the state legislature put people off,” said Frank Rapoport, a senior partner and chair of the global infrastructure and public-private partnerships practice at law firm McKenna Long & Aldridge LLP. Rapoport has testified in favor of P3 projects before the Pennsylvania legislature.
The new bill makes all transportation modes eligible for P3s. It calls for a seven-member public-private transportation partnership board to approve or deny requests for P3 projects, with the General Assembly able to override them if a project involves a state-owned facility.
Also, the legislature must specifically grant authority for any agreement regarding “substantial control or oversight” of the turnpike.
Any net proceeds from P3 projects would go into a dedicated fund and the state’s Department of Transportation would oversee the projects and could retain consultants.
“Until the past couple of years, many people did not understand P3. They thought it was about firing tolltakers on the New Jersey Turnpike. They thought it was like a Wall Street thing, just funneling money to a Goldman Sachs,” said Rapoport, who emphasized the importance of educating unions on the nuances of P3s.
It’s widely accepted, meanwhile, that Pennsylvania’s bridges and roadways are crumbling.
State auditor general Jack Wagner said two months ago in Johnstown that Cambria County motorists are nine times as likely to pass a structurally deficient bridge than a McDonald’s restaurant.
At a press conference near the Mulberry Street Viaduct near the state capitol building in Harrisburg, Wagner cited a deteriorated deck and cracks in the facades of the concrete support arches. Transportation officials have had a nylon net underneath the bridge for the past four years to prevent loose concrete from falling on traffic on the street underneath.
Peter Derrick, a transit historian and former executive at New York’s Metropolitan Transportation Authority, warned against a one-size-fits-all approach.
“People have to understand, at a certain place PPPs make a lot of sense, but you have to look at it on a case-by-case basis,” he said. “In other places it would be much more efficient if the government could do it itself and pay for it itself. You have to look at the specifics of each proposal. You could be paying a higher cost of capital through the private sector.”
Derrick added that some public transit systems, such as the Southeastern Pennsylvania Transportation Authority in greater Philadelphia, might consider a public-private partnership because of its struggles obtaining adequate funding from the state.
He noted that the New York MTA, by contrast, fares better with its Albany paymasters.
Despite the promise of additional investment, the P3 structure has its own built-in pitfalls, Moody’s said in a special report released Thursday.
Counterparty risk has become more prevalent in P3s, analysts said.
“The sensitivity ... is heightened as a result of the exposure of P3s to a wide range of local and institutional construction companies, financial institutions, equity sponsors, providers of operating services and insurance companies,” the rating agency said.
According to Moody’s, with European banks weakened and some downgraded, some P3 projects have become increasingly exposed to deteriorating counterparties for undrawn loans, letters of credit and swaps.
“Hence, some P3 projects may see their ratings deteriorate by 'contagion’ of events that are not under their control, and not even occurring in the jurisdiction where the asset is located,” Moody’s analysts said.
