- Build from ground projects: availability payments vs. revenue payment P3s
- What are the latest trends with how governments are paying back private partners
- Purple Line and other trends with P3s: where are the opportunities?
- Toll roads: What states are really active: TX, VA, LA GA,
- Political headwinds with P3 toll financing
- Hybrid P3s – how do they work?
- Why is the US P3 pipeline so challenged, and how can it be improved?
- Pre-Development Agreements – how are they being used to advance the P3 model?
Peter Keating (00:07):
Thanks. I'm Peter Keating. Welcome back. This is our panel on P3s, which brings up two questions. One, is there anything left to say about P3s after all the other panels have discussed them and also wow, there's just know, I'm here all the week. Then also I warned the panelists why they put you at four 40 right before the cocktail reception. They either think you're going to bring the energy or people are just trying to make it through and stay conscious. So I hope it is the former. I was going to say the first bond buyer panel I ever moderated. I began by saying our panel was so great that I myself might apply for CPE credit at the end of the panel and see one person laughed, which was enough for everyone to realize it was supposed to be a joke but only one person laughed. So that everyone knew it was a terrible joke. But that is equally true of today's eminent panel. I want to thank everybody for coming and putting their effort into this. I'm going to ask each person to introduce yourself by name and title so we can just hear your voice and hear your name.
Jonathan Dingle (01:16):
Good everyone. Jonathan Dingle with Meridiam one of the infrastructure equity funds in the market. I think been the US market for about 15 years now and I've been with Meridiam for about 10 years, mostly in transportation and social sectors as well as the energy sector.
Matthew Neuringer (01:35):
Hi good afternoon. Matthew Neuringer, I'm a partner at Orrick, may have heard of us, got a banner outside and I'm in our energy and infrastructure group in particular p3. I spend most of my day talking about p3 so hopefully there's enough for us to cover during this panel as well. Got a couple clients here as well. So only good things to say on this panel in particular, but looking forward to the discussion.
Michael Discenza (01:57):
So I'm Michael Discenza, the Chief Financial Officer for North America for Transurban, I mean P3s, our business model. So we're depending on the day, the 10th or 11th largest listed company in Australia with a range of about 25 p3 deals in Australia, the US and Canada. It's great to be here. We've worked with everybody up here, right?
Saavan Gatfield (02:23):
So last bit, not least, it's Saavan Gatfield from Fitch Ratings. I'm a senior director responsible for our business development in infrastructure and project finance across North America. So yeah, I also spend quite a bit of time talking around P3, so I think we should be good for 45 minutes.
Peter Keating (02:41):
Great, thank you. I want to begin with an interesting statistic. Private investment and partnerships and infrastructure deals is booming. If you look internationally, the top hundred global infrastructure investment funds, which together add up to about 90% of the sector have raised 791 billion over the past five years. In 2021 it was a record 136 billion. But if the 15 biggest projects around the world launched in 2021, only one was in the United States, that's the 30th street station in Philadelphia. There are 77 live P3 projects around the country right now. 25 closed last year. That's a fair number, but it's not in the thousands. So I would like each of you to just take a quick crack at this simple question. Why does the US lag other countries in this space? Is it just the presence of a tax exempt municipal bond market or what other factors are at play?
Jonathan Dingle (03:50):
Yeah, I think, I'm not sure that necessarily is a negative given. Look at the transportation sector and how the tax exempt markets actually supplied a lot of the ability to do some of the deals, especially deals that may be a little bit more on the edge of feasibility and can appreciate the advantage and the funding. I don't have the answer to that one obviously, but I would say I think it's coming back and I think arguably it's made both the investors I think look more broadly at the definition of p3 and to maybe help bring some other sectors into the space that we've traditionally seen as maybe more transportation and social infrastructure only. I think more and more we talk about p3s and we see the energy, the district energy the universities are doing. So I think not sure why it lags, but I'd also say maybe if you argue that the traditional space lagged like transportation, maybe that's actually created a nice opportunity for some of these other sectors to grow. I mean I think it's fair to say that again, district energy at the university sector is really expanding rapidly over the last few years after a few successful deals. So I think again, what's dynamic here is the ability I think for both the investors as well as our public clients to find opportunities and new sectors. I think digital space is another space that I think arguably is moving in that direction that we've seen.
Matthew Neuringer (05:16):
Agree wholeheartedly. I think the p3 market and the muni finance market or completely linked in a way that they both work collaboratively together to enable one another to have as prolific of a market as we've seen to date. I think that will continue to be the case going forward. The US is plagued, I think, unlike other countries like other Canada, the UK, Australia by the fact of having extreme decentralization at the state local level and the federal level across the country and also the fact that most agencies at the state and local level they take federal money, but there's also a healthy level of skepticism around the federal government telling them exactly what to do. So because of that we have a lack of ability to transact efficiently and so transactions take a lot longer and time, as we all know, kills deals and especially in a very complicated political atmosphere that we have where we see the principle risk to these transactions not just on the p3 side, but design build mega, any mega project is around the political risk.
(06:29)
So if you've heard more earlier today and is discussion around some of the things that build America Bureaus trying to do around centralization and creating a more streamlined process and having incentives for agencies to be able to hire advisors to create some type of centralization around procurement delivery, that is I think really the path forward on the core infra type assets, being able to deliver it on a more efficient basis, more robust basis. Coz you're right, the US if you look at Texas, New York, California alone should have a much larger market than most countries around the world. I think we can get there, but the general's point on the non-core infra, what it's created is a huge opportunity and we've seen I think on the 97 deals that I've counted that are in the market this year right now, the core infer deals are certainly in the minority and the other transactions that are of infra plus are really where there's a lot of exciting opportunities. I think funds are starting to put money there where there's an opportunity to make higher returns with a little bit more risk. Also we as an industry starting to look a little bit more dynamically as to what is a p3, not being as sort sort close minded as to it's gotta be this specific box in order to serve as a public private partnership.
Michael Discenza (07:45):
I think one of the observations is maybe obvious, but when we talk about the US as a market, when Transurban looks at the US it's really 50 markets and they're all very unique in their political makeup, the regulatory environment, your ability to transact over decades. We're making 50 to a hundred year bets and just for point of reference, when Transurban had been in business for, I don't know, 12 or 13 years in Australia and made the decision to come to the US, selected Virginia for many reasons, but it's taken us 15 years and 4 billion of capital invested in one market and to some of the points that were made, I'll echo them, they're the time required to do these deals is it really not for the fainthearted. You have to be willing to spend money over long periods of time and you can only do that credibly in a limited number of markets at one time.
(08:45)
So I think it's not a lack of capital. We have capital, we can raise capital and there's people in the room that have capital, it's the people and can you have a repeatable process? I missed Marta's session earlier, but I've spent a lot of time with him over the last years working on deals that we've closed in the Virginia market and some of the feedback we've given constructively about Tifia is just standardization tells what the box is and we'll will fit in it. I think we're not quite there, but I applaud that he's really trying to get there and say this is what you need to do to deals and it kind of unlocks that capital.
Saavan Gatfield (09:24):
Yeah, it's good to have people who know what they're talking about in positions of that kind. I think definitely. I've got a couple of observations which sort I think build upon what couple of people have said here already. One is look in other parts of the world where there have been three programs. I think if I'm not mistaken, all of them have had political challenges and most of them have experienced, well, most of 'em are kind of pretty slow right now I think as far as I'm aware. So politics is is always going to come into play and there are always going to be times when p3 is fashionable and p3 is not fashionable and you've gotta kind of write those waves to some degree wherever you are. I think one thing that the other markets where you had a sustainable pipeline build up did which picking up on what Matt was saying and a couple of others, you know, had central expertise at the really national level which developed effectively a program, developed standardized documents, developed standardized processes around, and really more around smaller projects.
(10:33)
I think really that's where you could get the volume to actually generate this sort of pipeline. So schools, hospitals, courthouse, things like that that's just much more difficult for a lot of the reasons one is mean, there is a center of expertise at the federal level, but to Matt's point, sometimes the states don't want to listen to it and it's just too difficult to build those centers of expertise across in each individual state because the deal flows probably isn't there to justify it for everything until you get a bigger pipeline. So it's going to be a challenge. I actually think there is a reasonable amount of visibility on the pipeline in the us not all the deals will come forward. There will be deals that fall away the monorail in Miami last week I think but there's a reasonable amount of visibility on it.
(11:26)
I was going to say something else and I've forgotten what it is, but there was one other point actually I just wanted to pick up on Peter, that you mentioned the amount of money that there is in infrastructure funds and others may disagree with me, I don't think they will, though the vast majority of that money's not really looking at greenfield projects, especially in public infrastructure. Meridium urban, I saw Sierra out there in plenary. There are some dedicated funds that do this, but the vast majority in the funds, people like Stone Peak, Blackstone, they're looking to buy businesses and it's just not part of this market
Peter Keating (12:01):
Difference between investing in the infrastructure and investing as an asset class or buying the whole business. Is that right? Yeah. Let me ask you a question, and it's kind of political and just from an outsider's perspective, is there, you talk about the lack of centralization in the US for planning, for developing expertise, for running projects, how much of that is from the ground up? How much of is does this country seems to have a cultural allergy, for lack of a better example, just of paying tolls? I mean most people here experience private, public, private partnerships as a news announcement saying the state or county is going to lease a highway or a bridge for 50 or 75 or 99 years. People just seem to have an instinctive reaction that number one, we already paid too much in taxes. This country's very, very sensitive to gas prices.
(12:58)
So they seem to rebel strongly against the idea of road tolls and also the idea of selling what they regard as a public asset without worrying about, without even being able to come close to calculating whether they're discounted value added up over X number of years is worth the asset price. People just like, I don't want it's, I don't want to sell this, it's selling their backyard or sell worth selling their schoolyard or a lake or something. They don't want to sell the road. Is there something cultural about just kind of populist about American politics or culture that is a special problem? Or am I just reading way too much into some of the opposition that's up in places like Pennsylvania or other places around this country? Please speak freely. Those of you who are, I'll go. Those of you who are grinning, I want to hear what you really think. I'll tell you,
Michael Discenza (13:47):
It's a complicated question, but yes, there is that strand of American populism that I think you have to take into account when you're making these investment decisions and we certainly had that conversation in Virginia when we built these express lines, but I think over time as you survey our customers, you start to see that people understand the value of what you're providing, which was, as I said, 4 billion of brand new roads. Those were not roads, that was a greenfield project. So we're creating something that is new, newer, safer, it's got embedded technology, it's just a better experience. You start to ask people what it's like to use these express lanes, they value and they vote with their pocketbooks. They don't use it every day. But I think there's a big education part. The flip side is the legacy in the US is we all pay your fuel tax.
(14:45)
It's invisible, right? Oh, gas is four 50 now you don't really do the math and say, oh I've just paid for rehab on the 14th Street Bridge. Well you didn't really cause you didn't feel it. But when you take a trip to Tysons, for those of you who live in the area and it's cost you 10 bucks, you know what you got in the bargain. I think that this link of the purchase is really a problem that we have to do a better job explaining to constituents. That's a big part of what we do even in this
Peter Keating (15:14):
Is part of it on those northern Virginia roads, outside the city where you're driving along and you can see that if you visibly you can see, oh, traffic is jammed up over there, I'll pay a little bit more. But here's the clear road. Is that part of what differentiates you?
Michael Discenza (15:29):
That is, and I think that is a very particular feature of our business in Virginia. You can see the free alternative and you have multiple moments where you can make a choice. That's not always the case. Even in other parts of trans urban's business, you know, just have a toll road and you might be able to take some city roads. But what
Peter Keating (15:49):
Else goes into the buy-in or what else goes into making these politically successful? Cause I've noticed it's not just partisan politics. When Rick Perry was governor of Texas, he encouraged p3's, he claims to have brought 10 billion of investment into infrastructure projects. His lieutenant governor took over him, the guy who was Greg Abbott took over and it dried up immediately because he just didn't want to pursue them. Both Republicans, some places, I mean there's three big projects around Atlanta going on right now that are p3 s that are happening. There's others that are under consideration. I've noticed that sometimes states work together, sometimes it's easier for them to both accept the idea of a p3, like the I five bridge going between Oregon and Washington might be a p3. But there's other places where, I mean I mentioned Pennsylvania before where the courts struck down the very idea that the private public partnership transportation board could take the authority that the courts said was taxing authority unto itself and the whole things and the whole Bridges program is in trouble. So if it's not just political, what goes into these projects being more likely to succeed in some states or some localities than others?
Matthew Neuringer (17:04):
I mean, I could just jump in on the Bridges side cause I think that's a great example of a total PR challenge. I think focusing on the terminology of public private partnership is a bit of a distraction. Ultimately. For example, in Pennsylvania, the bridges there were not being told by the private developer. So that was a classic availability payment and it is a classic availability payment three project where the state of Pennsylvania, the commonwealth retained at all times all of the rights and responsibilities for setting and collecting the tolls. However, because it was linked to the p3 project, there was likely some public perception issue around there's some private developers going to be coming in and tolling. So those two things I think get complicated because of the fact that we're using the terminology p3 as opposed to just focusing on innovative project delivery, alternative project delivery.
(18:00)
This is the terminology I think comes with a lot of different preconceived notions around what it means based on where you are in the country. I think looking at this as a alternative tool or innovative tool to delivering projects first and foremost, as opposed to using the terminology public private partnership can probably solve a lot of challenges. But in the Pennsylvania context, it had nothing to do with the p3 as far as the tolling goes. It was the fact that the state was choosing to use toll revenues to pay for these public improvements as opposed to not and ultimately in that project after the courts had made the determination, the state came out and said, okay, we're just going to pay for it in the ordinary course through grant funding and otherwise. The underlying structure for that deal remained exactly the same. So that's I think an area that a lot of people don't realize in the US is that just because you're doing a p3 project or an alternative delivery, innovative delivery doesn't mean that there has to be some type of revenue raising element to it that the private sector has some type of control over.
(19:07)
Most of the projects that have closed to date are actually availability payment three projects where the government retains that risk and that control. Even if you are doing a revenue risk project, I think that's the other element of the pie here, is that there's still a lot of control and restraint and protection, significant amounts of protection that the public sector retains in these contracts. So it's getting that message out there that by entering into these arrangements, it's not like it's a real estate deal where you're just leasing this asset and then the developer runs away with it for the next 50 years. It's complete opposite of that. So a lot of this is really truly a PR disaster I think in many different jurisdictions around the country and that really is the underlying challenge.
Peter Keating (19:51):
What's interesting about that is we're, in Pennsylvania case, we're talking about major bridges. The state was going to enter into this agreement to repair nine huge bridges, billion dollar level projects. But just a few years earlier it had gone through a process of rapidly repairing small bridges and kind of struck a p3 deal to get the revenues to go in, repair a bridge, kind of have a uniform branding of the bridges, repaired something like 550 bridges. hat was a great success. So I think they didn't feel they needed to call it anything different, but I guess when it came to the bigger bridges, people didn't want to think that they were seeding control to someone else.
Matthew Neuringer (20:29):
I think the difference there was on the Rapid Bridges project, which was 563 bridges major logistical undertaking, there was no tolling, no tolling for at all, right? Whereas here, there was this conflation of the tolling but still had nothing to do really with the underlying p3.
Peter Keating (20:45):
So it sounds like issuers not only have to find partners who are going to be involved in as much as they want them to be involved and be around for the length of the life of the asset. Sounds like the partners have to do research into how sensitive the issues are around what the issue is dealing with.
Saavan Gatfield (21:02):
I mean this, it's public infrastructure, so it's directly involved with the community. So you've gotta, project's not going to be successful if you don't have community buy-in ultimately, right? I don't think it's at the core of what we do,
Peter Keating (21:16):
But that's not just the issuer. If the state, the issuer can be a state and you still have to have local buy-in from local entities, governments, mayors, towns, counties, the
Saavan Gatfield (21:24):
People who are directly affected, the users. Yeah, I mean the other thing is, and I think this is a feature of your deals some of them at least in when it comes to revenue risk deals, toll deals, perhaps one of the concerns that comes up from time to time, there's a toll road in Canada, the 4 0 7 where there's definitely been the case is concerned that ultimately the private sector's going to make way too much money. In the case of that project in Canada, it's a hundred year lease. It's just apologize, sorry it's, excuse me, it's
Peter Keating (22:02):
Thought that was Canada calling right there. That
Saavan Gatfield (22:04):
That would've!
Peter Keating (22:05):
Been, well would've been timed.
Saavan Gatfield (22:07):
Probably the kid's bedtime or something. I dunno. No, I was just saying, so there's the perception that it's the public private sector's making too much money. I think I've seen it in some of your deals and certainly some others, you know can align interests much better and then it's on the public sector to figure out how they utilize the money through revenue share of excess revenues. Then that way the public sector is also bought into the success of the project. It can utilize that money, it can for community projects, for enhancing public transit for whatever it might be. As long as that's advertised and talked about with the community, then that's a way that you can manage that risk as well.
Peter Keating (22:48):
I think also, no matter how well you vet contractors, they might not be around for your projected lifetime of the deal. I mean, contractors might not be here in 50 or 75 years. No one likes to say that up front, but there is a lot of three deals that went through major bumps including bankruptcies, including litigation, but still emerged as solid deals. Want to, I hate that to be the purple line, but I see you're using a purple line pen. The purple line has is what, 21 stations in Maryland, right? Reached financial close just recently, right? Total cost now about $9 billion but well you can correct any of that, but it went through a lot. The previous contractors went through a lot, right?
Jonathan Dingle (23:34):
Yeah, and I mean to be clear, the original contracting party is the concessionaire part of that group. I think that, I'm hopeful that actually ultimately comes a success story. I mean we think it's a success right now. I think ultimately we need to deliver it for the public. I think one of the difficulties I think for the public in accepting these things, and I'll come back to tolls. I mean I'm from Brisbane, no one likes paying tolls in Brisbane either . So it's not just a cultural thing in the US but I think they've, what is generally comfortable is the confidence that through these types of delivery, and again maybe if the public is even less aware of the type of delivery that you can actually deliver big infrastructure projects. I think that's what talking to the purple line we want to ultimately achieve is to give that confidence to the public that we can deliver these big, big projects.
(24:25)
I don't think there's necessarily been enough success of, again, privately delivered maybe, but ultimately public projects being delivered successfully at the scale they can be. I think we see the same success. I think that Trans Sea is now in the Dallas market where we get, again, no one's ever voluntarily saying I'm happy to pay tolls, but they've seen us deliver on time, on budget again, we hope ultimately that purple eye will be successfully delivered. It's obviously been through some challenges, but I think the nuance that may be hard for the public to see, but hopefully they can understand, is that these things can be delivered even when they experience difficulty and there isn't value in having the private party that is committed long term. As Mark was saying, I think if you have a true long term partner, they'll be bumps in the road but you won't be leaving that the public sector to deal with some issue.
(25:22)
There's a willingness to say our interests are aligned, they're a long term partner and so we'll work together. You can have very patient money. I don't think there is a lot of investors that can go through five years of construction only to then start another five years of continuing to put money to work before there's any chance of any sort of dividend or distribution. I think that's been recognized I think by, in Maryland, by the state continuing to partner with us. I think they see the value that we've delivered there and every project to look like that obviously. But I think that was an important, I think test of the model in terms of the underlying partnership and I think the players involved in being able to deliver successfully so that we do reach completion and it's not just a hole in the ground inevitably, which has happened around the country here and there.
(26:13)
So I think back to your original question, it's going to be a lot of patience because I think, and I think that's why in certain markets it's working in Virginia cuz the public has seen they can deliver. Again, I'm not sure they always understand the nuance of it being delivered by public private partnership, but oh, you can deliver a multi-billion dollar project and I think hopefully even through restarting the purple line and getting that moving and hopefully the next Maryland project will be successful because they can see that the private sector can deliver these infrastructure projects and in Texas they get it. We can deliver and we've been delivering the big projects so it'll take time. I think as you said, the MPOs are a big powerhouse in the transportation industry. So I think we need to be cognizant of working with customers, but also those smaller regional organizations in making sure we hear their needs. I think Purple Line is an example before we even got involved, all the work they did with the counties to make sure we got all the stations in the right place so that we've had that continuing support throughout the difficulties as long as we've been present as a partner to the state and the counties in delivering the project. Ultimately.
Peter Keating (27:20):
Let me just shift to asking a question about current economic conditions and how the environment's affecting p3 s. In August, a Fitch report said that some contractors were leaving p3 s behind while more were also moving toward collaborating in deals before prices are finalized because typically contractors are legally responsible for cost overruns. Until now or until recently, most of we're healthy enough to absorb them. But between inflation, supply problems, labor shortages, it's just been getting more difficult. So you think it's getting harder to find contractors or is the right way of asking the question, are those pre-development agreements where you bring in contractors early into the process, are they still proving useful as a tool to attract and keep the partners that issuers want? Where do things stand with that?
Michael Discenza (28:15):
So I'll take that and I think you have two questions there. Is it getting harder to find design builders? Yes. I mean we're not a construction company so we need to find good long term partners that can deliver on our designs. It's definitely been harder, just a smaller shrinking pool of well capitalized, experienced builders that are willing to take on that risk of fixed price, fixed schedule. It's just not that. I mean we get it. It's a lot for them to take on. So we do think the PDA model is something that we're doing in Maryland. We were selected by Maryland to extend the express lanes from Virginia into Maryland using that very model. We think it has some place in the market to do this kind of progressive design so that we can start to cost in the face of uncertain market conditions like nobody really assumed that the supply chain was going to go.
Peter Keating (29:14):
Can you sketch out how that typically works? If you're an issuer, how early do you bring in contractors or other partners? Do you bring them in to help design the project? You have them in mind even earlier than that. Do you wait until you know, have it sketched out what you think you want but then bring them in but it's still before pricing? How does that usually pan out? I
Michael Discenza (29:35):
Mean we do all of the above. It depends. You can spend a lot of time up front scoping out a design and costing and having a lot of certainty, but it takes a long time to do that and a lot of money. I think you may design the wrong thing and it goes back to the stakeholder engagement piece with government to make sure, and not just government with your stakeholders in the region, whether it's the county, whether it's the neighborhood or your building, you have to get all of those aligned. So the alternative on the other end of the spectrum is you have a much less percent complete design, but you bring somebody in to help you and say you thought you wanted this and it cost X, but in fact now that there's inflation, that there's supply chain delays, maybe we need to break it into phases and take it in smaller bites. So it's that kind of, but you need a partner on the government side ultimately that is willing to work with you and say there's some uncertainty here and it's uncomfortable for everybody, but if you structure the partnership properly, you're all bearing some of that uncertainty and risk.
Peter Keating (30:38):
Are there ways to learn how to find the right contractor? I mean it seems like finding the the partners that fit well is the all important issue. So far everything you've said how do you learn? Is it you don't have much time to make mistakes about that, right?
Saavan Gatfield (31:00):
As somebody who's never picked a contractor, it's that 50 to build my porch but it's not different. It's actually not that different. No. Yeah, I guess mean somebody else can talk about this more than me, but I mean you've probably not just one right answer, but you've gotta go through the rigor of assessing everybody's capabilities, everybody's incentives. Well first of all, you've gotta structure the deal to make sure that you're going to encourage collaborative behavior ultimately. I mean John, I was going to ask you about this, but at the end of the day, why with the purple line, the reason that project got resurrected and successfully moved forward is I don't think because of the legal documents it's because the parties were willing to come back to the table and talk again. That's what you need is parties. So I guess you've gotta set up a framework where you're going to encourage that behavior and then you've gotta pick parties who you can work with and trust and then obviously you have to go through the actual numbers that they're presenting.
Peter Keating (32:03):
Does that typically include performance targets after the project is completed? We heard earlier about the DC Street lighting program that if the lights aren't working, the district's not going to keep paying. Does it of these deals include? That probably an oversimplification, but
Michael Discenza (32:22):
No, you're right. There is a design specs that you have to have the thing as built as we agreed to design, right? That's absolutely true. There's a warranty and there's all sort sorts of assumptions that need to be made about life of the concession, but it's pressing on a point that is really hard and it's challenging. I mean we do spend a lot of time looking at the track record of design builders who we might want to work with, how they've approached delays and claims in prior instances and are they delivering things on time? I mean it does fundamentally, you're trying to get those three vectors and it's an inexact science.
Peter Keating (33:08):
Let me ask from the other point of view how do you get to new investors? Is the market also is if the market of opinion and understanding and governance of all of this is all fragmented is all also fragmented when it comes to investors? I notice for example that US pension funds are investing in some infrastructure, but often it's overseas. Calpers put a billion dollars into the Australian, I believe it's called the Golden Reef Trust fund. I don't think they made any similar kinds of investments in p3's here, although I don't know that for sure, but it seems to me that that's like a target rich environment. But how would you ever get to a new group like that where there might be billions of dollars available just for this exact kind of partnership but isn't being utilized yet?
Jonathan Dingle (33:57):
I mean I would say that the more and more we're seeing pension funds, I think that's what specialist infrastructure development funds give them access to to avoid them needing to do it directly. I think, and I can't speak to, so I mentioned earlier investment in sort of the brown food funds, which are a different scale or a different size scale I think often than the greenfield focused investment funds. But I think we definitely have US investors and I think more and more so we're seeing that interest and I think they recognize that they even have a potential advantage through their cost of capital and any tax exempt status they have as well. So I think we'll see them continue to be more present in the space. I think they're still getting their head around greenfield risk. I think that's not where they've typically seen their private equity infrastructure divisions looking. So I think as we can continue to show success, we'll see them maybe not directly but rather behind the funds which they don't always advertise so explicitly.
Matthew Neuringer (35:00):
I'll just jump in on the contractor point. So in addition to having picked a couple contractors in my house here or there, we spend probably half our time advising government agencies like the city of New York and the MTA and the Port Authority on pure design build. The same issues that we see in the p3 market around complex delivery projects. So billion and up are the same issues that they're seeing on the design belt side and that's why many of the issuers and owners in the room sure have started to look or have already utilized methodologies like progressive design build or GMP contracting and all of that dynamic delivery that's necessary to accommodate a very complicated market right now between inflation, supply chain challenges. All of that has translated into the p3 market. Just the same on the design build side. Where we've started to see, and this is sort of an innovation in a couple of recent deals, a focus on selection particularly in the PDA slash progressive design build delivery area is a focus on the key personnel in particular because those are the individuals, the firms obviously are important, especially for deep pockets in dealing with challenging situations.
(36:03)
But the key personnel are the ones with the real experience and the individuals that are going to be the boots on the ground delivering the project. We've seen certain projects have certain controls around whether or not key personnel if they're not on site and they're not available on the specs that they're supposed to be available, that there's the same type of non-conforming deductions that we've talked about around performance is the same thing that applies to key personnel. So there's been a heightened level of seriousness around contracting with the people that you sign the deal with are the same people that are delivering the project. I think that's something where when you're doing that evaluation and structuring that procurement front, you've gotta make sure you've got the right firm but you've also got the right people backing up that firm as well.
Peter Keating (36:47):
That's
Michael Discenza (36:47):
Interesting. I'll just pick up on your question cuz there's, at least for urban, it shows up in a two different ways. We, in the last year and a half or almost two years ago now, we brought in a consortium of three joint venture equity partners. So two Australian and one Canadian pension fund for 50% of our US business. So it really was the Virginia business and it's really interesting the just long term strategic capital looking for 100, they're looking at a hundred years of but to mass, I mean they want the developer, they want the operator, they're so it's a little different. They're not just buying into an operating business. They want the pipeline of opportunities that we think we can source and deliver. So it's not just the first check, it's the next 10 years of investment. So that's on the equity side and on the debt side we just did Project Next, the northern extension of 495 and that reached financial close earlier this year. I think my numbers are right, we about 40% of our private activity bond investors were new investors like new to Transer in that deal. It's because we come to events like this, we go do road shows, we do non-deal road shows, we talk about it all the time and we've got a pretty good track record. So we're trying to spread the lot a little bit.
Peter Keating (38:02):
I've been asking you mostly about roads and bridges, I think that's where most people associate p3s with. But Surface Transportation actually had a really low volume of deals and last year and there are other areas where p3 s are increasingly popular. Jonathan, you mentioned a couple right off the bat when we started talking including higher education and energy, I noticed that there's a few colleges around the country which could combine those and struck p3 deals to have partnerships, long-term partnerships to take over their energy or heating and cooling systems are kind of a combination of greening aging facilities that are both educational and also related to energy or utilities. Are there other areas? One that I was really interested in is the Army has its first p3 deal last year. Drudging I'm sorry doing flood diversion in the Red River in Minnesota and I think North Dakota. I noticed they had also been involved in a dredging project in the Mississippi River starting two years ago. I'm wondering, is the military a possible partner in some of this stuff or just whatever other areas you think are interesting places the p3 s will grow? We'll just throw that out there.
Matthew Neuringer (39:19):
I mean as a person who sort of worked on that project initially was a Fargo, I mean the Fargo project is not a military centric p3 in the sense of the military housing is, they were a stakeholder but it was a joint venture essentially between both the states of North Dakota, Minnesota, and the military essentially through the Army Corps of Engineers was at the same time delivering a design build project. So it wasn't a military driven piece,
Peter Keating (39:51):
No. But the core of engineers may be more involved going forward in climate mitigation or environmental projects in general. Right?
Matthew Neuringer (39:58):
Yeah, certainly. I mean there's been an effort to try and get the core of engineers to deliver on a separate p3 mandate. However, there are impediments at the federal level as it pertains to scoring OMB scoring and ring fencing revenues. So I think until those challenges are resolved, the only way for military outside of energy savings performance contracts, which has its own express carve out under o b circular 11 as well as for the military housing, you need either special legislation or otherwise. So I think that there's certainly opportunity there. It's just that the legislative environment to be able to deliver those projects at the federal level still isn't there yet.
Michael Discenza (40:41):
I can't let a reference to A11 and OMB go. I started in Washington, my career at omb, so that's like, that is super inside baseball. But I love it. We made it into the panel.
Saavan Gatfield (40:57):
A couple couple of other areas just to that I think are interesting. John, I touched on apart from higher ed, also digital, so that there is going to be more around fiber. I mean there are questions about how long will fiber be relevant, but we'll leave that for another day. One area that I personally am think three, four years, five years time is going to be a real boon for the industry. It's going to be around water cuz there's huge needs across this country but half the country's in permanent droughts. So there's a lot of water related work to be done over there. Obviously that supports agriculture and everything else in this country. But then there's also pipes in many cities, obviously we've seen Flint, we've seen Jackson, Mississippi. There's the amount of work that has to be done in the water sector to bring the infrastructure up to par is unbelievable.
Michael Discenza (41:53):
I think there's a message in that comment, the long term deferred maintenance, no matter what infrastructure we're talking about is endemic in this country. We've all seen whatever the latest scorecard was, probably a D or D minus. A lot of it's about that we'll all go do ribbon cuttings and we could probably get a governor, some mayors to do ribbon cuttings on new things, but nobody does a ribbon cutting when they fix the pipes in Flint. I mean it's just not a thing. But it's the model of these p3 s puts an obligation on the developers and operators to provide for that 50 to a hundred year investment so that you, for your investors, are delivering on the commitment that it's not a shabby asset when you give it back at the end.
Peter Keating (42:36):
How about airports in boom boom booming cities? They're overcrowded in older cities. They have a reputation for being poorly managed. I don't think airports are as popular as roads if people have to end up paying some kind of service charges. They're, you see any asset sales or leases or deals on the horizon with private entities to manage airports,
Saavan Gatfield (43:00):
Whole airport deals in this country. I mean they're a challenge. I dunno, Matt, you've probably got more insight through your work with the Port Authority on that kind of thing. One area where there is activities around freight, freight works at airports so that there is stuff happening.
Matthew Neuringer (43:18):
Yeah, I mean the Port Authority has done obviously airport public private partnerships but not, so there's two different classifications, and this is where we go back to terminology like airport privatizations. Yes, not very prevalent in the us, much more difficult. But airport true p3s collaborations between the public sector, private sector, the airlines themselves happen very regularly, at least in with the Port authority in New York and Jersey and otherwise in the US and those, particularly in markets that have prolific revenue generating capability can be done on a revenue risk basis. I mean John, if you want to touch on that at all. But I mean I think that that's an area certainly for certain issuers that have the right assets that an airport p3 is feasible.
Jonathan Dingle (44:06):
Yeah, I mean I feel like Terminal B is a phenomenal asset, but also very unique and not necessarily replicable. Not every project has the Port authority and that's a little bit fundamental in the sense that we always talk about these projects needing a really strong partner on the public side. I think the Port Authority brings a lot is difficult in other markets where rightly so, those markets are maybe more directly served by a single airline or something that has bought a lot of economic benefit through being the primary airline in that sector. So I think that it creates a different dynamic. Whereas New York City obviously being a very diverse base for both the airlines and a high demand area, I think is pretty unique. I think as said, I think in other areas like freight, I think that could be something that we see more. Then maybe some of the bigger cities that have the flexibility that New York has, perhaps we'll see some old, but it's yeah, it's very unique to the US too. I think the way the organizations are all the sort of quasi government organizations are set up the airport authorities.
Matthew Neuringer (45:21):
Yeah. Also to, and this was picking up another point that Mar mentioned earlier today about what the Build America Bureau is seeing is this the 30 billion pipeline, A large portion of that is TOD some of that has to do with the bundling of assets we're working on a bundling project for the MTA of very non-traditional assets, which are ADA compliance elevators and other related assets. But taking the mta, which is a agency that has not been compliance with the ada rapidly into compliance by bundling a number of geographically dispersed, very complicated elevator projects into one where if it was just one or two it wouldn't work. But the aggregation of a number of assets and you look at Pennsylvania is another example of that makes these projects or DC lighting makes theses projects more feasible and viable as p3 project. So I think you could have a simple project of a handful of different assets, depend, you name it, but bundling them together could create an opportunity for innovation around logistics and delivery that wouldn't otherwise exist for any other type of delivery model and that's where sort of a p3 could add a lot of value. Ada, I think is one where we've talked to other owners outside of the MTA and it seems to be of interest because it is a challenge and it is a challenge to be able to rapidly deliver those types of assets in a way that is transferred to one entity. So you have a consistent delivery model across the entire spectrum of assets.
Peter Keating (46:52):
I think that's a great place to end because the willingness of the federal government and implementing the two big infrastructure bills to not just consider that, but encourage it is very, I mean, wherever you stand, whatever you support, whatever projects you're working on is very encouraging because it means you can scale up, be innovative, and get things done all at the same time with the support rather than the obstruction of the federal government. So at least that's one happy note to end on. Thank you very much. Thank you to everybody for your time. I appreciate it.