Asset recycling in US: Obstacles and opportunities

We will focus on a holistic portfolio analysis to determine which assets are best suited for major improvements and monetization.

Transcription:

Christine Reynolds (00:07):

Right. Well again, thanks everybody for being here this morning. We're ready to kick it off with our first live in real life panel asset recycling in the US obstacles and opportunities. I'll turn it over to Caitlin to introduce the panel and get underway. Thank you all.

Caitlin Devitt (00:23):

Thank you. I'm Caitlin Devitt, infrastructure reporter at The Bond Buyer and we're here to talk about asset recycling. It's sort of a niche market in the public private partnership market. It's a little unevenly developed but closely watched in the muni market and by infrastructure reporters also a market that has potential to generate a lot of money right now for infrastructures. We're kind of in this national rebuilding moment, so we've got some great panelists. I'm gonna let them introduce themselves starting with Mary. Okay,

Mary Francoeur (00:55):

Great. Good morning and thanks Caitlin and thanks to the bond buyer for having this discussion. I'm Mary Francoeur, I'm a managing director at PFM Financial Advisors. I'm part of our transportation practice work out of our New York office and also lead our efforts in public private partnerships and alternative delivery.

Edward Fanter (01:16):

Hi, and thanks everyone and thanks for providing the light so we can see everything very clearly here. I'm Edward Fanter from National Bank of Canada or National Bank Financial. We're one of the top six investment banks in Canada. I had investment banking for infrastructure for the firm and I co-head the US for investment banking for power utilities and infrastructure. And we do a lot of stuff in the M & A space as well as the p3, but also on the acquisition financing for those types of transactions in all sectors.

Anthony Buckley (01:48):

Good morning, I'm Anthony Buckley. I'm the director of innovative partnerships for the Washington State Department of Transportation. I've been in public finance on the government side for close to 20 years now, having worked most of that time in the Pacific Northwest doing anything from bond issues to public private partnerships.

Roderick Devin (02:06):

Good morning. Hey, my name is Rodercik Devin. I'm a partner in Nixon Peabody in New York. I've been doing p threes for, my first one was in 1999, the JFK terminal four. So suff basically say I've been doing a lot of things other than p3's because one has to do other things other than p3s but you're very happy to be in the panel and looking forward to our conversation.

Caitlin Devitt (02:28):

Okay, thank you. Well, we'll start at the beginning. What is asset recycling? When I was telling I don't know if Ben Watkins is out here, but he asked me what I was doing and he said, oh, modernization . No, we can't say modernization. It has to be recycling. So asset recycling. So who want Edward, maybe you wanna get started, tell us what it is?

Edward Fanter (02:47):

Sure, but I'm gonna use the word modernization as a part of it. So in the pre-call we had to sort of negotiate what asset recycling is and the term itself comes from more in the international field where Australia and Europe, they called it the asset recycling program where they would sort of monetize or privatize what they said non-core assets. And it was more a federal program top down where they don't have states, they have provinces or some other entities and all these other countries, but there was a federal program where they incentivize by if you get a hundred million out you might get a 15 million bonus or something like that. But there's a balance on the terms. So the term itself is more of a general statement on either privatizing, monetizing in the case of stuff, but either through a lease or a sale or something like that. But for the purpose of this, we're not talking about p3's where it's a greenfield, we're talking more brownfield assets and well, although some of the p3's as once they're built, you could consider that asset recycling or when they're rebid after they're developed, either when they're return to the government or even with the private sector selling interest. Would you see a lot in the secondary market at the moment? And it could be across all assets including the ones we normally see. And as we'll get into later some assets that probably if you're a government entity you might have some value someplace value creation that you don't even know is underground.

Caitlin Devitt (04:16):

And what about use of proceeds? Is that sort of a key part of the definition? Does anybody wanna add anything? And you?

Roderick Devin (04:22):

Yeah, Kelly, I agree wholehearted with everything that it was saying. But the recycling part is a key part in that when you talk about asset recycling, it's taking the proceeds, the public proceeds from that monetization and turning it back into infrastructure investment. And generally the US has not been good at that in the Toro did some of that. But generally as a, it makes a point, these assets are monetized and then that money goes to other good laudable public goals, often tax cuts or whatever, paying off debt.

Edward Fanter (04:56):

Pension plans.

Roderick Devin (04:58):

Good Legitimate purposes all but the asset recycling kind of brings that added discipline of sailing that money aside and requiring it to be reinvested back in infrastructure. And there's been a few examples of that in the US but not that many to date.

Mary Francoeur (05:11):

I mean I think one of the most important things about pursuing an asset recycling looking at the asset and being clear up front about what you're going to do with those proceeds. I think one of the biggest challenges toward for asset recycling is the political challenges and having a clear plan of what you're going to do with the proceeds is key to having a recycling effort make sense and move forward.

Edward Fanter (05:41):

And you might not realize it, but if you actually get more money than you thought, it's actually a bigger problem cuz there's more of a food fight over what to do with the extra.

Anthony Buckley (05:49):

Well I think Mary actually preempted me from, and I promise not to be a contrary in this whole time while on the panel, but the use of the proceeds is a big issue and my specialty is in transportation in the state of Washington and other states where I've worked, the statutes are pretty clear that where the proceeds have to go. But then you have the battle with the legislature when you're talking about asset recycling and the size that those opportunities represent. It becomes a much bigger fight on where those monies will, where the proceeds will go. So if it's transportation, it's not going to the pension fund, they're gonna fight about their different pet projects that they want funded and they being the legislature.

Roderick Devin (06:30):

But at least those fight sort of a projects and not pension fund funding what it hopes.

Anthony Buckley (06:35):

Would hope.

Caitlin Devitt (06:38):

Well Anthony maybe you wanna talk to us a little bit about why it, what's the benefit on the government side?

Anthony Buckley (06:44):

Well, quite honestly and quite bluntly it will help reduce the size of some of the portfolios that we're dealing with as far as assets. And again, transportation dots are probably some of the most asset rich. And that's a kind way of saying it. We've got a lot of asset real estate assets in particular and Washington has toll ways, but we have a lot of assets that demand a lot of attention. And if we could start paring some of that down and really focusing on those key assets that are in a state of disrepair that need more time and attention then that's where asset recycling comes into play. And I do a lot on the p3 side. There's an opportunity here to have a conversation with government. And again, let's go back to the beginning. We're talking about 50 different governments, 50 different countries within the United States. We all have play, have different sets of rules. But how you change the mindset and get governments to understand how to better leverage their assets, how to better value and utilize those assets, that understanding's not there today. It's not widespread in the transportation sector we acquire right away, we acquire it to do a project. Once that project's done, we don't invest, we don't sell, we surplus that right away and there's some prime right away out there for investment.

Caitlin Devitt (08:13):

Have you guys done it

Anthony Buckley (08:15):

We right now are piloting a project in the city of Kirkland, it's called the Kingsgate Park and Ride. We are one of the first dots in the country to take on the challenge of doing a transit orian development on the right of way. We've had a lot of coordination with the FHWA we're converting an eight acre site into a TOD. It will right now the goal is to facilitate 600 housing units. It's in outside the Seattle metro area. So you're talking housing issues. 51% of those housing units will be for affordable housing. We will increase parking capacity from 500 to 900 vehicles and probably have create some retail opportunities there. So I come from a private sector background before I went to the government and this comes from my product development days. So that's the conversations I've been having with our legislature and our governor's office that this is an opportunity to create a new product that generates, has the ability to generate revenues and reduce the burden on a taxpayer.

Edward Fanter (09:12):

Just to add that usually what people say is like what you Robert Bank cuz I wanted the money but aside from the money, what he was saying is there's a term they call non-core assets, a thing that they don't deem it's something they need to own. They don't need to control it or they don't need, they can have somebody else do it and still have governance over it. But it's something that they don't really need to control and there's a benefit to risk transfer and have somebody with international expertise not only just to operate it better, but they may be able to have some other value creation. If you're gonna take over a water treatment plant or a system, maybe you operate it for 30, 40 years but somebody that's done it for two centuries on a global basis may be able to bring some new ideas in.

Mary Francoeur (09:53):

Well yeah and I think that to continue that thought, I mean one of the benefits of asset recycling is that risk transfer the issues of deferred maintenance. I mean to the extent that you've got an operating asset that you haven't had the opportunity to invest in, it's an opportunity to have somebody else come in and take the responsibility for that. It's also an opportunity, I mean one of the challenges that we see with governmental agencies is an ability and willingness, less the ability but more the willingness to adjust rates and charges. And sometimes by doing an asset recycling, you transfer that obligation and the political risk associated with that to a private sector party. And so they're, by transferring that authority not fully within reason, within bounds you are basically creating the opportunity to generate the cash flow to invest in the asset. And so it's one way of creating value where the government is unwilling or unable for variety of reasons to create that

Anthony Buckley (10:58):

Value. And if I can marry, so from the government side, the problem that creates is the same issue that we've been dealing with in the p3 world. And that's that ability of the control and trust with the public that you're privatizing this now and the private sector's gonna come in and charge enormous fees and we don't want that. So, therefore keep it in government control. Not always true but, it's something to be aware of

Caitlin Devitt (11:22):

And Rod that's, you can control that through the terms. Right. I mean we're jumping ahead a little bit cause I wanna talk about benefits for the private sector too, but just on that point.

Roderick Devin (11:32):

Yeah, absolutely right. And Youit is, you hit one of the other key differentiators as to your asset recycling isn't, which is, it's not a privatization, it remains a public asset remains under overall public control through the contract and the contract will almost always have KPI, key performance indicators, your standards that have to be made. And if they're not met then there's almost always a financial penalty and there's deductions from the payments or payments have to be made damages. And worst case scenario, things are going to hail in the hand basket, the public order can actually terminate and take that step back. Termination is not easy and often there's a large termination payment usually involving the date, sometimes equity depending on the nature of the termination. But it remains a public asset. It remains under public ownership and there's still public control through that contract. With regards to the rate setting, I think everyone has to recognize that have been asset asset monetization project, not necessarily recycling, I'm just gonna name the Chicago parking, which for better or worse, there was a public perception.

Caitlin Devitt (12:35):

As a Chicago and I'll say for worse.

Roderick Devin (12:39):

There was a perception that once that as it was turned over to the private operator that the fees just were unlimited and went sky high. In fact they were regulated by the contract. They just weren't regulated in a way which the public found satisfactory. And because there was no asset recycling, there was nothing that the city could point to say, okay, we know you're paying more for the parking but look at this great asset over here. That money went quite quickly on laudable short term political purposes, I think it's fair to say.

Caitlin Devitt (13:12):

Filling the deficit.

Edward Fanter (13:13):

Just on, when you look at the governance on it, there's those good on the legal perspective. But there's an economic governance too. I mean the rate setting, no one usually if you look at the charts on tolls or water rates, no one raises rates during an election year or very rarely. Or you see it mildly right, you'll see go like that. But I think it's not just the rates but what's the purpose of the rates on a toll road you really want, is it money maximization or is it to keep free flow free flow traffic. So we're learning, we learn from our successes, we learn from our mistakes and then some of the other things on governance, but it's also on upside scenarios where there could be sharing because you don't want this thing where you sold it off and now the private side's making more than they anticipated and you don't get any of that. But you also realize that they don't always work out great. Some of the toll roads were a lot of the toll roads that came out, they actually lost money and the equity got wiped out. So there's that risk out there too.

Roderick Devin (14:11):

Yeah, we haven't really talked about the upfront payment much, which is that generally in these asset recycling, there's two sources of revenues for the public owner. One is a large upfront payment and depending on the asset it can be really large. Certainly the hundreds of millions if not more depending on the asset. And then quite regularly there's also your profit shedding over the term of the project too, which gives the one or hopefully the opportunity to share and share the upside. But those are the two revenue streams that generally go to the public owner on these projects.

Caitlin Devitt (14:43):

Well let's talk a little bit about the benefit on the private side then what's in it for them?

Edward Fanter (14:51):

I can start that off. Well if it's infrastructure related if you've seen other industry reports, they keep raising money for infrastructure funds and there's not a lot of assets. So they need more assets to invest in. And it's not just to funds, but it's also the treat strategics. They operate toll roads, water treatment, they do that for a living. So, it's an extra business where they get to actually prove themselves where they can do value creation and what they do for a living, not just a one off operating contract. And the bigger deals, the better They seem to be successes and each time we do another one, we get better at structuring the contract. So it creates more of a market, not just for the primary selling or leasing stuff, but also the secondary market. Cuz we're finding a lot of the funds, they say they're long term but they're selling five to seven years for various reasons. And it creates a market. And the more that we create a market for these things, the more initial value goes up as well. Cuz they can show that there's a history of selling them and there's a terminal value. It doesn't have to be your 30, it can be your five or seven.

Mary Francoeur (15:58):

So one of the things to recognize is that a lot of these infrastructure funds are pension funds that these assets, because they're long live they're stable and they're a good, are asset liability match for them.

Roderick Devin (16:15):

And they have an existing track record too as the point as me before. These are brownfield assets, these are existing assets, whether they're operating history and generally almost always they have to be revenue generating assets. So, we're talking tow roads, airports, water waste, water treatment systems that have a history of revenue generation that can be used as the basis of the financial model for the private sector party. But that that's very attractive to a private developer cuz they can see historically what the revenues have been and they can bring hopefully their private sector to know how their efficiencies in new technology to maybe even increase those revenues over time.

Edward Fanter (16:50):

But fun fact number one, almost every infrastructure fund is underinvested in every category and fund fact number two to get around this, they're making up new categories that they're calling infrastructure that I would say 80% of people in the room would be shocked if they called that infrastructure.

Caitlin Devitt (17:06):

What's an example of that?

Edward Fanter (17:08):

Aways things that are more real estate. They've all jumped into the digital stuff. They've operating water operators energy some energy contractors electric fences janitorial services. I have a top 10 someplace but i'll the luggage carts at airports. Right, so that's a famous one, but there's a lot of these that most people would not think were infrastructure.

Caitlin Devitt (17:42):

So what hinders Anthony, maybe you could take this to start us off. What hinders the development of it in of asset recycling in the US from your perspective? And then maybe other people could weigh also what might advance it.

Anthony Buckley (17:57):

Well I think this goes to the basics. It starts first with the politics in state government. It truly is about the politics and the relationship that you have with the citizenry. What's the level of trust there? I just said earlier in another conversation, again 50 states plus couple territories only about two thirds of us, less than two thirds of us have p3 statutes. So again, p3 resources asset ization, we would see it the same way out of those two thirds, what 10 or 20% of us are actually actively engaging in p3. So it's taken this country almost 30 years to get where we're at to a certain level of comfortness where we're still somewhat uncomfortable with p3 now we're talking about asset recycling. So it it's an education process. The other thing I would say is we do a really good job in the p3 world of touting and promoting P three we're appropriate and the successes of P three. But we don't do in the supplies to asset recycling in the same way. We don't talk about the failures and how they're cured. So when we talk about Chicago Skyway or some of the Indiana tollway we don't go back and talk to the public about how those things were cured and how they didn't suffer in Texas. So that's a huge missing point. It's the education component. Yeah.

Roderick Devin (19:25):

Yeah. The Indiana to is a very interesting example because depending on where you're sitting on which day it's a massively successful project or a complete failure of your equity, that's a disaster. If you're the D O T, it was great. I mean they got a massive upfront payment. They got an asset that continued to be operated at keeping high levels and the road never closed down or slowed down for a day. But you're right when that bankruptcy happened, there was no, the state didn't raise, didn't say there's a great deal for the state because this has been stress tested and it's working as it should and it's passing from one competent operator to another competent operator and no public charge. And we may have been overpaid, but all well and good, we've got that money and we're using it for other assets

Anthony Buckley (20:09):

Even if, again, even just with social infrastructure and the opportunities that are, we don't talk about the successes in student housing where this has been widely practiced. Long Beach Courthouse is another great success. Again, depends on which side of table you're sitting on, but there's an asset that's producing and it's under unavailability payments model. But we don't do a good job telling the stories. Yep.

Roderick Devin (20:34):

Very trip.

Mary Francoeur (20:35):

I'm sorry, I'm smiling because Dan hug the executive director of the Indiana Finance Authority and the owner of the toll world.

Edward Fanter (20:48):

I agree on that story cuz both Indiana Toll Road and the Chicago Skyway had financial issues and everybody kept talking about how the public sector's losing out and everyone should know that they didn't lose a dime. As a matter of fact, if anything that got overpaid on it. But no one complains when you get too much money or get overpaid. But I think some Australians in Spanish were very upset about the outcome, but they'll do fine in the long run.

Caitlin Devitt (21:19):

Well in the other party that was unaffected by, it was the drivers. I mean it never closed down. It was, and I take it frequently, and so as a driver you didn't really quite notice that happened.

Roderick Devin (21:32):

And s point too with regards to kind of weaving the flag, the nice thing. But as of recycling, if it's done properly, unlike check out parking is you can point to look at all the port of money. We've got an infrastructure fund now and look at all the projects that have been developed through that infrastructure from. So you can draw a direct line from this project being monetized, although I don't like that word. To all the additional infrastructure builder to develop and improve because of that. And that's a great story.

Caitlin Devitt (22:00):

So what would advance the market? I mean we talked a little, Anthony, you were saying tell the story, figure out how to tell stories better. But is it more state based p3 enabling legislation or is it a big answer or small? Are there certain things we could do?

Anthony Buckley (22:19):

Well, I'm gonna kind of point to the IAJA. My office is responsible in state of Washington for managing the NEI funds and building out the EV infrastructure in our state. The first step has been taken with Department of Transportation, creating the joint office between transportation and energy breaking down the silos. Another that underlies a big challenge in my world when we talk about p3 or assets in general and that's the siloing and the regulations that apply to each one of those silos. So education is my number one point that you have to educate the public every two years depending on the state that you're in. You have to go back and educate a new set of legislators. So, there's this constant education that's taken place, but there's the regulations when you're dealing with the federal government and you have assets that have federal proceeds tied to it in transportation, the use of the right of way is a huge issue. So while a toll way could be is a great opportunity for asset recycling right away is also a great opportunity to develop something that benefits the public that may have a loose tie to transportation. So how we break down those silos. And again, transportation specific, I apologize. Another thing I tend try and tell my audience is our national highway system was built in the 1950s. We still occupy a lot of right away we're operating a late 19th, 20th century highway system for the 21st century and they just don't align.

Mary Francoeur (23:57):

In addition to those 50, I mean there's 80,000 units of government in the United States probably half of them have some asset that is a revenue generating asset. A water and sewer system, a parking system mean the asset itself needs to have present cash flow in order for it to be an opportunity recycling. But it's looking at those assets that the government says to itself, okay, this is core to my operation. I have to do this, I have to provide this service. These are my operations that are not core to my operations. Maybe it's a parking garage maybe. Well it's core to their operation and provision of health, safety and welfare that water and sewer system needs some investment. There's an opportunity there to adjust the rates and charges. Somebody I need to make some investments here, maybe I bring in a third party to do that for 30 years and they'll take care of it and they'll give me some upfront cash to do that. But it's a matter of looking at where the opportunities are. And for government to say, it's more, it's really not a finance decision, it's really more of a policy decision of thinking about what to do with that asset. And maybe it's best served by having a private sector operator owner come in and take care of it for the next 30 years or take it outright and sell it. And so it's being, thinking about it in the context of a very sort, thoughtful, strategic planning about what assets you have and what assets you don't need to be responsible for on a long-term basis.

Roderick Devin (25:46):

I mean your ED alluded to the Australian your situation, which is you interesting and clearly it can't be imported to the US cuz almost nothing can be imported to wholesale to the us. But the Australian system did what media was alluded to, which is and challenged your governmental authorities and you to look at the assets and consider what could be brought into asset monetization asset recycling program. So it did that first step, which is kind of the educational piece of take stock of what you have and asked those questions and see what could be put in the program. And then they took an additional step, which was essentially a 15% grant program for every dollar that was put, 85 cents that the program, that was a $15 grant from the government to encourage that recycling. And that was a key part was to bring, again, to bring the discipline to the project of not using that money for the pension funds or using it for the local, whatever the issues were, the short term political needs, but bringing the discipline to put the money aside for asset asset recycling and the infrastructure act. Last year there was talk early on of doing something around asset recycling including some conversation around a grant program. And what ended up being in there was a requirement for a report from the sector transportation 2024. They have to report to Congress on your asset recycling opportunities. So hopefully that report will, you'll touch on some of the things that Mary was talking about, which is your incentivizing universalities cities counties to look at that assets and ask the question. And as all we all know the feds don't have much of a stick, but they do have carrots and that carrot is often a checkbook. So if there's grants to help them do those studies in that investigation, I think that could help jumpstart the asset class in the us.

Anthony Buckley (27:39):

And just to underline, connect with your comment about the I A J A and the asset inventory that is another component of the education. This is probably not the right group, but there are other groups out there that need to play a role in helping the 80,000 agencies understand what their inventory looks like. Us, we agencies who have huge portfolios of assets, don't tell anybody who said this, don't write this down. Sometimes we don't know what we don't know. We don't in a rural community how a farmer has approached onto our right of way So we don't have a solid understanding of our inventory and where the opportunities are. There are glaring examples, there's a toll way, there's a fair system. Those are one offs. There's a book of assets out there that need, we need to better understand.

Edward Fanter (28:33):

Just asking what do we do to help it? And I think expanding what they both said we're not a top down country where the federal says this is what we're gonna do when everyone just follows where where're Americans, we're gonna reinvent the wheel, we're gonna go ground up. And that's what makes the country great. All the states have different election processes. Some are done the day of and some are done, aren't done a week later. And they're all gonna do it their own way no matter what anyone says. But all we can do at the top down is education and incentives. Whether it's something like a federal program that provides a bonus or it it's education, how do you, something like a center of excellence that comes in and helps people evaluate their assets or a funding program that helps them hire advisors to come in and help them evaluate their assets, look for change in the couch or big ticket items or something like that. It worked in the waste industry in the eighties and that's the only one that really worked. It worked with some of the federal programs for transportation on toll roads to get them started. But it's everything else. It's a free for all.

Caitlin Devitt (29:39):

Well how do you evaluate, Mary, maybe you wanna take this how do you help a government or how do you start to evaluate the value of an asset?

Mary Francoeur (29:49):

Yeah, I mean if you're selling your house, right, you're gonna have an appraisal done before you put your house on the market and asset is no different. It's really kind of understanding what the current value is from a cash flow generation standpoint and what the potential value is in terms of the pricing of it. Edward made a good point. Historically infrastructure assets in the United States have basically been priced to cost recovery haven't been priced to what a market market sort of intersection of supply and demand. We're seeing more of that in the toll sector with managed lanes that are basically being priced to maintain free flow of traffic. But most of our assets are really funded on a cost recovery basis, which for governmental assets is appropriate. But there's an opportunity there potentially. But that's also again a policy decision. And so it's looking at what it's generating, what it has the potential to generate understanding the policy implications of pricing and asset to that level and then going out to the market and see whether or not there's a viable market there. It's one thing to value your house at $5 million but if the house next door is being priced at a million dollars, you're not gonna sell it. So it's making sure that if you're going to think about it, that there's a market there for it. And having a competitive environment, bidding environment and auction environment is one way to do that. But it's also managing your stakeholders both internally making sure that all the parties are aligned, that this is something that's appropriate to move forward with. One of the challenges for a lot of these undertakings is that they're an idea of a single person at a governmental agency potentially. And without broader support across executive legislative branches without support internally on the administrative side there's going to be a lot of headwinds and of understanding the perspectives of those individuals or organizations and moving the project forward is also an important part. So it's understanding the objectives and being clear about the objectives of why you're doing it. Being clear about the needs for investment and the maintenance of the asset. So to getting for that risk transfer but also what your willingness is on the pricing side of things. So there's a lot of decision points that need to be made before you go out into the market. One of the other challenges I see, and I apologize for monopolizing the conversation, but one last important point is that a lot of the asset recyclings have occurred because someone on the private sector side has come to a government agency and said, Hey, I'll give you money for your asset. It's a good opportunity to of spark the conversation, but that's not the way to make a decision in those instances. It's a good opportunity to start the conversation and start the analysis but it shouldn't be the basis for the decision making.

Edward Fanter (33:12):

I hate when people do that.

Caitlin Devitt (33:18):

Just a quick question. Does an asset have to be revenue generating to be considered? Is there even globally, are there any examples?

Edward Fanter (33:29):

Well if there's things that'll be easier. It's easier to value something where it's easy to value something if it does have cash flow. But there could be things that don't have cash flow that could be value to somebody else. It could be worth zero to you if it's right away that's just sitting there. You're not gonna do anything with it, but somebody else could develop it and bring cash flow or everyone's talking about all the rail lines. I think starting, I don't know what year, but there's actually fiber, there's dark fiber under all the rail lines right now that nobody knows is even there. It's probably outdated at this point, but, There could be value for some of these things that people don't even know it's there.

Roderick Devin (34:14):

And there have been a couple of programs but really not many where there's been some asset generating revenue generating assets which have been you monetize and that money's been put into a trust and that trust has been used to make availability payments on other assets. But a key part of asset recycling is having something to recycle. So you need that revenue flow in order to turn it back into that investment stream. I think it'll be a while I'm in the US before we get to something as complicated as revenue generating monetize assets being with the revenues being put into trust and that trust being used for vulnerability payments. I think we're a long way from that happening in the US Hamas

Anthony Buckley (34:56):

And I think is we struggle with this in the p3 side, the size of those projects. The bundling concept of bundling is kind of been embarked upon recently with p3 that you can find a number of projects, put 'em together. Now when I worked in Oregon, we were looking could we bundled pro energy projects across state lines. So bundling may help accelerate that discussion.

Caitlin Devitt (35:19):

Yeah, the director of Field America bureau talked, I mean the White House is encouraging that I think a little bit. He also talked about when we're talking about taking inventory of your assets, that they're doing that, that they're doing that national database. So that might make a difference in the market a couple years if you have a place you can go and see a list of all assests.

Edward Fanter (35:38):

Some states have done that over the years and Mary touched on it, what you should go down. But I guess it's not just a monetary decision, it's also a strategic and it's a logical decision. You have all these assets here, it goes, oh yeah, we'll keep the good ones and we'll put these piece of craps out to bid. And that's why a lot of process have failed. You use different words but it's what happens and you wonder why it fails or they're too small for anyone to have any interest or they don't make any sense or they don't have the right terms. And you have to be in touch with people that might to be some market sounding to prove the concept that before you go out. There's been a lot of p threes and other processes that even the private side does. They have some of these with ESG issues. They have marine assets, liquids. Liquids means it's not water or milk, it's petroleum products, which is all bad now. So they trying to unload them all five years ago. Prices and no one's biting, but the process is out there and you just have to be realistic on the reception to that.

Caitlin Devitt (36:44):

Well speaking of terms, I mean are we seeing the structures of deals? I know there's not a ton out there, but are we seeing terms change? Are we seeing structures change over time? Are we seeing development in that way?

Edward Fanter (36:58):

Well I think we learn from our successes and we learn from our failures. I'm not gonna mention certain any projects in Pacifics, but I think there's certain things that are in there so that the government can still get some upsides. So there's not some runaway upside from someone that makes them look bad if it's beyond the base case. And there's been some there's always ways that governments can get out of the deal if they have to and ways to calculate that payment. And there could be you go into a partnership with someone for up to 50 years and after year five they wanna sell and you're seeing more. Well you need more than notification, need some approval. And in some cases there may be a payment that has to happen in order to transfer that asset. We're seeing more of those things being considered going forward.

Mary Francoeur (37:48):

I'll also make another reference to Dan which is that while there's an expectation that you're sort of entering into these agreements and it's a long-term agreement but that you sort of sign it and walk away, that's not what happens. Things come back, they return. And so they are partnerships, they need to be partnerships and you need to go into these relationships with your private sector partner with an understanding that things will need to be worked out in the future. And so who you bring to the table is as important as what they bring to the table.

Roderick Devin (38:31):

Yeah and that kind of ties back to the contract. You'll be a p3 year concession, a lease, whatever the base document is. You can't just draft it for the next five years. You have to drive transfer for the next 30 years and you have to acknowledge that there's things that will happen no one can foresee right now and if the public owner just can't, to transfer all of that unknown risk over to the private party because that's a contract and the won't master test of time you need to, your flexibility and realism built within the four corners of that contract to give it that flexibility to survive the unseen circumstances in terminal four, again that I alluded to before, that was a P three that opened in August before 911. And that project survived through your catastrophic, your dropoff in revenues. But the two partners got together with Port Authority and skipping this partners got together and worked it through and that project's been a good channel of success story.

Caitlin Devitt (39:29):

Are there any terms or structures that could chill development in any way for either the government or the private side or really advance it?

Roderick Devin (39:41):

Well on the regulatory side when we've talked about airports a little bit there's only the trouble with doing asset recycling airports is that the understandably takes the position that they have funded and financed airports for generations and they take the position that money and funds generated by an airport need to stay on the airport and that lessens the desire for a full airport asset recycling because if you get a large upfront payment, you can't do anything with that apart from put it back in an airport that's now being operated maintained by someone else. So there was an airport pilot privatization program. Those two words are highly inappropriate. It wasn't a pilot and it wasn't privatization but it's been rejiggered to try. And the purpose of that federal program is if you go through the program, the Port Authority, the city to county that owns that airport can take the revenues from the airport and use it for other properties, hopefully other infrastructure purposes. And there's only ever been two airports that have gone through that. There were Stewart Airport in New York, which is not a sharing example. That kind of came in and came out quite quickly. And then there's Puerto Rico, which I think has in many ways been a good example and that's had many kind of catastrophic events and hurricanes and it's continued to be, you're operating in a very, very high standard. And that program, that airport did go through the program, but the program is difficult. It requires your two-thirds approval and consent by the airlines in terms of passengers and freight. And that has been a difficult, your hurdle door to go over in many ways. And that still remains in the current legislation. So on a regulatory side, there are things that could be done to encourage a encourage asset recycling depending on the asset class. But politically it's difficult to do some of this stuff.

Caitlin Devitt (41:32):

So if airports aren't, and you often hear talk about airports, but it sounds like there's some difficulty there. What are some of the most attractive, what are other asset classes that are the most attractive or the most sort of poised for us to see some asset recycling?

Edward Fanter (41:48):

I think you could start with the ones that have been, there's a history around, you see some of the energy assets like district energy and things like that. Most of the marine port assets have their own type of privatization going on with these lease and with these lease holds and other types of concessions, toll roads, parking is an easy one. It's kind of not core it's it. Those would be good ones to get off cuz who knows what the future of parking's gonna be if we ever have these flying vehicles or all these other things that keep coming up in the consultant reports. But if nobody has cars where they all gonna go and managing all that. I think some of the airports they have bonds out there with 10 to 30% revenues from parking and they don't know what that's 30 year bonds out there.

(42:38)

And it could be a risk reduction as well. I think some of the newer things you're gonna see is things on around things in the digital space that no one even knew was there. And it's a new asset class that's big in infrastructure in the private side at the moment. They're an asset class that gets around a lot of ESG issues. It's the new hot thing and a lot of the initiatives have failed because no one understands it. But as data centers now, people understand that people are starting to understand how to structure a fiber deal the right way after a couple of, and I think we're gonna see more of that expanding and the development deals that you were talking about on right away,

Anthony Buckley (43:19):

Which are more fall into the p3 category because they, they're more the greenfield.

Roderick Devin (43:25):

And I should just say that there's certainly been a lot of very interesting things happening. Airports, your GFK, LaGuardia, I think New York has just opening the new terminal today. I heard from the radio this morning they're having a ribbon cog ceremony. So it's certainly been a lot of interesting alternative to procurement p3, maybe even as recycling to an extent at airports. But it's been done on a terminal by terminal basis and not in an airport wide basis for avoiding some of the restorations that they've brings to bear.

Mary Francoeur (43:52):

And there's real estate. A lot of governments have historically been owners of a lot of real estate office buildings and if with changes in operations reductions in staff through technology and things like that, there might be a lot of excess property out there and that becomes an opportunity. We've worked with a couple of clients who have looked at their real estate holdings and have determined that their excess property and putting that out to the market. One other area is again, utility systems. Your water and waste water systems. I mean a lot of that is a risk transfer in order to bring in a private party to make the capital investments that are necessary and to meet the environmental regulations, but still potential to get some upfront payments as well. And that ranges in terms of size of the system and there's a market out there because even for a small system that's looking to be a city that's looking to recycle a small system, they're generally recycling those to one of the large in American water or somebody like that who's going to come in and take over the operation and potentially actually even purchase the asset.

Caitlin Devitt (45:14):

So I mean you guys have sort of answered this a little bit, but I just wanted to talk a little bit about if we see a pipeline again, the director of the Build America Bureau yesterday was talking about, I can't remember the numbers, but some huge pipeline which includes a lot of p3 stuff. Do we see a pipeline in this market going forward or right now that we're gonna see in the next few years?

Edward Fanter (45:36):

One thing on the immediate pipeline is anything that's already been out there that's existing, whether it was a p3 that's operating, it seems like every five years, these things sort of recycle themselves even in the market. So it might have been a privatization or a P three, but you see them changing hands for a lot of different reasons. And it's the owners why would anybody sell? There's different classes. There's funds that are capital gains funds. Once it's built, they need to sell or they only have a seven year, 10 year life. So it's time for them to sell. They find all it's opportunistic to sell because there's a value in that asset class that's better if it was a contractor or an operator, they're no longer in that field. People exit business lines and they have to sell. So there tends to be a market just on those. And you'll see, I wouldn't be surprised, even Skyway and Indiana and Chicago part, all these ones, you'll see them starting to retrade themselves.

Caitlin Devitt (46:34):

I know that's true with the Skyway. I think a couple of the owners are looking to sell right now or might be. Is that deal closed any?

Edward Fanter (46:42):

It's not closed yet, but it's been awarded.

Caitlin Devitt (46:45):

Yeah. And so what does that tell us about the secondary market? That Skyway deal?

Edward Fanter (46:49):

It's active. So anytime something came up and that was a big ticket, people were interested.

Anthony Buckley (46:58):

Populate the pipeline also goes back to helping agencies understand what it is that they have and understand what the opportunity is. I can tell you in Pacific Northwest, yes there are opportunities. Are we ready to have the conversations around those? Probably not because we're focused on some large scale projects that it's either gonna be public financed or a p3. So we're not at the discussion on existing projects that we may wanna put under asset recycling. So helping agencies understand what they have and that could be put into the pipeline. So there's a lot of legwork there.

Mary Francoeur (47:35):

Yeah, I mean it's a real issue I think of institutional capacity. Anthony is sort of the rarity of someone who's sort of a dedicated individual looking at these opportunities for on behalf of a governmental agency. So it's a challenge of especially these days, I mean most of our clients are trying to get their ARPA dollars in and out the door and their IHA looking at those opportunities. And so the ability to step back and say, okay, so what are the assets that I have and what can I recycle is not top of the priorities. And generally when you are fishing for dollars at a time when things, you're not fishing for dollars right now because a lot of our governmental agencies are flush. A couple years ago they weren't fishing for dollars or two years ago we weren't fishing for dollars because all we were doing was worrying about how we were going to survive a pandemic. So there's gotta be a the alignment of the sun, the moon, and the stars, in order for folks to have the capacity to step back, do that strategic analysis and sort take it forward.

Edward Fanter (48:45):

The other sector is in the marine transportation, you're gonna see a lot of container terminals come up for sale as not just people looking to exit that, but also some of the leases will be up and including the port authority, they decide what they're gonna do. Are they gonna extend it, which has been the history or are they gonna run another process and just sort of recycle it back into the market And it's a bunch of terminals throughout the country.

Caitlin Devitt (49:10):

Yeah. Do we have any questions from the audience? It's hard to see.

Audience Member 1 (49:20):

You mentioned that from time to time some of these assets are resold or change partners. One of my concerns with p3 has always been for critical infrastructure assets like say the Skyway. How do you guarantee that there's adequate maintenance on that facility during the P three pro, this initial sale and that the government doesn't get back an asset that is worn out per se.

Roderick Devin (49:55):

I could take that one. Caitlin, I mean there's a lot that goes into that with regards to the sale of the lease or the P three concession. Then the lease of the concession will have lots of your requirements in there as to who's a qualified buyer. And you either the owner will be given your kind of consent right over that new buyer coming in or the contract will kind of lay out your strict parameters that have to, you operated so many similar assets and so many locations you over a seven period of time. So they seek to kind of regulate who can come in and replace them. And the QPR key performance indicators, the requirement that you clear snow, you you're within 15 minutes if there's a breakdown that is removed within X period of time, those KPIs, are you in place throughout the contract. And I think it's fair to say that pretty zealously enforced with regards to your imposing penalties. And actually you're hitting the pocket book of the operator. They don't comply with that. And with regards to give the hand back period when you enter the end of the concession or the lease, almost always they have a capital improvement program. Towards the end they're addressing that very issue. So the asset isn't running to the ground. Not only that, but there's often a requirement for increased capital investment towards end. So the asset is handed back in better condition than it was five years before. And usually it's an obligation to get together with the owner and talk about what that capital plan is. And that capital plan will be funded by the private operator to improve and get the asset up to a good standard by the time it's handy back

Edward Fanter (51:30):

And just expand on the hand back. That whole process would be monitored by a third party that would verify that there was enough funding to bring that back into starting from up to up to five years or more back. That there's enough funding to bring that back into the required hand back condition so that someone doesn't start taking get to the last year and then say, okay, the concession's over, I'll default and hand it back.

Anthony Buckley (51:58):

And I think that's one of those issues that early on in the p3 world, we were not good at the transfer, the turn back provisions, we've gotten a lot better on what those look like now.

Edward Fanter (52:12):

And then you mentioned also on the sale to expand. So there'll be a term that if you're selling your equity in a p3 or something else, there's usually some provisions and it varies, but usually they have to give consent. You have to get consent from the owner or give notification or get kids sent that can't unreasonably be held, but also show that that person is qualified not just as an investor, but to manage that asset the way that it was originally selected.

Audience Member 2 (52:48):

Critical importance to this country and national security are those eligible for p3.

Roderick Devin (52:59):

There has been a couple of instances where particularly sensitive road assets near your military sites or airports, there've been some concerns with regards to foreign ownership of those. You primarily, I think it's fair to say most of the owner operators, well I shouldn't say operators, but most of the private concessionaires are lease holders have been European, your friendly European nations. And that's generally not been an issue. Generally it's not too much an issue the have the Spaniards or the Italians operating the assets, but there have been situations where they've been your foreign wealth funds or foreign operators in other countries who have had their projects stamped on because of those security concerns. So that is part of the mix to make sure that these assets are not being handed over to nations that aren't as maybe fairly disposed of the US as Spain might be.

Anthony Buckley (53:58):

I know it's one of the underlying concerns, but I think when Australia got into asset recycling, it was one of those issues that popped up and they built a process around evaluating foreign ownership. I think there's a third party governmental bureau that has to approve evaluate and approve.

Roderick Devin (54:13):

Approve it.

Mary Francoeur (54:14):

And in the US some assets have to go through the CFIUS process. Don't ask me what the acronym stands for. We warned you about acronyms against today.

Edward Fanter (54:23):

No acronyms.

Mary Francoeur (54:24):

Her foreign investment. Anyway, sorry, corrupt,

Edward Fanter (54:27):

You'll, see it a lot more in the aviation and the marine space than on roads though.

Caitlin Devitt (54:33):

Yep, And I know too, Congress keeps an eye on it cuz you'll hear that issue come up at Senate. At Senate and house hearings. The political concern about foreign ownership, Well, we're out of time. That's a wrap. So thank you all. Thank you.