Look at the Region's Transportation Infrastructure: Use of P3s and the Growing Potential of EVs (CPE)

Transcription:

Kenneth Neighbors (00:08):

Good Afternoon. Good Afternoon. We know you're anxiously awaiting beverages or flights or maybe the beach, so we're going to try to, we're start a little early and try to be expedient, but of course we're going to leave room for questions. I am Ken Neighbors. I'm a Partner at McGuire Woods, LLP I am based out of Atlanta, Georgia. I started my career actually in practicing public finance in Florida and before that doing investment banking. My very first investment banking deal was a water sewer deal in Hollywood, Florida. I think that was 1991, but I have the pleasure of being the special Assistant Attorney General assigned to the Georgia Department of Transportation. I've had that role for the better part of the last 15 years and cut my teeth for the state doing their social P threes for their board of Regents PPV program and also have the pleasure of doing highway light rail and transit P threes across the nation. You can always do more, but with that I am going to moderate a really esteemed panel for the region's transportation infrastructure outlook. We're going to focus on the use of P threes as well as the impact of the growing utilization of EVs. I am going to allow each of my panelists to say hello. I'm going to start with Robert Poole on my left and I'd ask them to say a few words about how they got here and then we'll start ripping and running. Robert, you.



Robert Poole (01:48):

Okay, thanks very much, Ken. I'm Robert Poole. I'm the Director of Transportation Policy at a think tank called Reason Foundation, which I was the founding CEO of quite a number of years ago. I've been doing transportation policy full-time for the last 20 years and was doing it part-time before that. Three areas that I have specialized in are long-term P threes, DBFOM P threes primarily, but also brownfield, long-term leases, express toll lanes. I've had a major role in, I actually came up with the concept for variably priced expressed toll lanes back in 1988 and persuaded Caltrans the state DOT, that they should try it and we got legislation through one year after my policy study came out. I've never had anything action like that again, but it gave me a false impression of how to affect public policy. But anyway, we actually served on a steering committee.



(02:45):

We did the first world's first expressed toll lane in Orange County, California, privately financed based on the toll revenues and it opened to traffic in December of 1995. It was 10 or 12 years before there was another one. See, even though it was working well, but it seemed like such a strange idea to many people. But today there are over about between 65 and 70 expressed toll lane projects in operation around the country, so it's very gratifying to see that hatch on the third area. Well, another area I've worked in is mileage based user fees. I was on a TRB committee in 2009 looking at the long-term viability of fuel taxes as the main highway funding source. We concluded probably not for the whole 20th century of 21st century and Congressional Commission then looked at a whole different ways to replace it, came up with per mile charging as the best and fairest way and I've done a lot of work on that issue in the subsequent years. Finally, I took an interest in the interstate highway system and did five years before a big TRB committee did a report that Congress asked for on the future of the interstates. I did a 50 state quantitative study of the potential of toll financed reconstruction and modernization of the interstate system and my estimate of about a trillion dollars was just about what the TRB came committee came up with five years later. So we haven't done it yet, but I'm hopeful that we will one of these days. So I'll stop there.



Kenneth Neighbors (04:18):

Next we have Brad Guilmino from one of my other favorite cities, NOLA.



Brad Guilmino (04:23):

Appreciate it. Yeah. Brad Guilmino, I'm a member of our transportation group and cover transportation nationally for PFM. My background's a little unique in that I've worn a lot of different hats inside of the transportation spectrum. I started off doing investment banking at Citigroup and then moved to a large engineering firm building out a financial planning practice and then missed doing the real innovative debt pieces. So have gotten back into what I call real finance, not just talking about it here at PFM, looking at doing a bunch of different style transactions. Also looking to increase the type and the sophistication of a lot of planning studies that clients dots, cities, municipalities, transportation agencies kind of undertake to hopefully bridge a little bit some of the financial market perspectives that we're going to have as we get later on down closer to a transaction. Bringing some of those policies, understanding how policies and what gets publicized might or might not have impacts on how much financing capacity you can get out of these programs and really understanding the quantification of some of those decisions so public entities can make informed decisions.



(05:33):

I am a big fan of pricing, Bob, so we're going to have a very good discussion that could probably go a whole bunch of different ways. Interstate tolling, congestion, pricing. I've led a whole bunch of those type of studies, so fascinating where I think we're at currently in the United States, funding is starting to take on a whole new design and I think it's going to take some time for us to figure out what that's going to look like. We're looking at some monumental changes potentially with transitioning from the motor fuel tax. Is road user charge M buff, is that ready yet? Is there a natural transition which potentially could be tolling? What is the role user fees versus tax base? So as we start to get into some of these conversations, we're seeing different states look at these things a little differently and I think in some stances over time when we have to make a really big time change, I think the groundwork's being laid with some of these policy analysis that are being done.



Kenneth Neighbors (06:32):

Alright, excellent. Excellent. And last but certainly not least, Robert Downing Greenberg Traurig.



Robert Downing (06:41):

It says shareholder, but I consider myself a Partner at the law firm. So Robert Downing, my background is I used to work for Duke Energy, I'm going to come at this in a little bit different perspective, more as an energy infrastructure lawyer, which I am. I spent my time between Miami and Houston. I represent clients. My clients are foreign nationals or foreign companies and they are very interested based on the Inflation reduction Act and some other legislation that has been recently been passed about actually manufacturing here in the United States, charging station companies that I represent of Europe, south America, et cetera. So I think we're in for an interesting, I've done toll roads in Columbia, several, you probably aware of some of those deals. P three experiences more quite frankly outside the country. So I'm looking hearing from you gentleman, I'm very familiar with this structure, so they are used here in the US as well when we're talking about monumental changes, we'll get into this in the discussion.



(07:43):

S are thinking about combustion engines, this thing so to speak, and it's going to impact a lot of our transportation going forward. I don't think we realize that the average person in the US realizes how much of an impact that will have. I used to be a non-believer it was going to happen, but it's already happening. By way of example, I was in Mexico City last week. Every Uber I got in was an EV, China U-I-D-J-A-C. They're coming here to the us. There's huge demand and the demand will be on the infrastructure because right now there's not sufficient EV charging stations have a thing called range anxiety in the EP space. It's really going to affect and there's a huge role that public private partnerships can play in actually developing this infrastructure. We'll get into that as we discussed.



Kenneth Neighbors (08:38):

Alright, great start. So we're going to start the round Robin. First question is to the panelists, how does the United States stack up against other countries in making use of privately financed public private partnerships for transportation projects?



Robert Poole (08:57):

Well, I'll start if you want. I think we're way behind. I wrote a book called Rethinking America's Highways and did a lot of research on transportation worldwide. It turns out that long-term p threes have been in use in Europe since the sixties or seventies, particularly the toll road systems of France, Spain and Italy and to some extent Portugal. And so we have a long way to go to catch up. Latin America in some countries such as Chile are way ahead of us in more widespread use. We're big, of course, Australia has also been a pioneer and companies like Macquarie and Transurban operating in the United States now cut their teeth on doing these things in Australia. So I think we've made a good start, but it's really just handfuls of projects in transportation at least rather than with the need being so much greater. So I am hoping we're working hard at reason to try to build more awareness of the potential that is not really fully realized in the United States.



Brad Guilmino (10:10):

And I think there's a reason for that, right? And it's the tax exempt debt market that we enjoy here. Being able to have the ability to sell low cost debt, be able to have the autonomy to do it at the local level at the transportation authority level is really important. Obviously the equity component that comes in is really attractive. Can you get somebody to really get aggressive with their bidding and how you're looking at your traffic, how they're managing those risks. On the public side, we're doing a lot of innovative pieces as well, and a lot of that is with additional credit support. So for startup toll roads, you see sometimes gross revenue pledges where we're able to sell debt against gross revenues, not net, but you need a DOT or some might to guarantee that. So we're able to kind of go up the rating slide a little bit in order to do that, be able to get a little more leverage as long as there's the public sector comfortable with looking at that.



(11:06):

The other thing we've seen is some entities have been guaranteeing or providing a backstop up to a certain amount for an appropriation. So now all of a sudden the riskiest piece of those revenue curves, those subordinate pieces, we can actually get higher ratings. We can monetize that full toll revenue stream. When we look at the traffic and revenue forecast domestically, a lot of folks think they are kind of conservative, so it's not necessarily too risky for folks to do it. At the same time, dots, transportation authorities are typically comfortable with taking on a decent amount of this risk. So I think for the right type of project, I think it does make a lot of sense, but it's something here that we don't necessarily have to embrace and then having the flexibility if you're maintaining your public control to be able to change your policies, to be able to change some of your operations, to be able to impact the roadways in a different way is still beneficial and I think attractive to many of our public entities.



Robert Downing (12:10):

Yeah, again, I've drawn that experience. I think before the current administration came in, Columbia transportation infrastructure and their system was such representation of one of the financial. We went through all those very, very tough issues on revenue estimate things and then what was stopping it. You have your scenarios, what if it's this, it's that and how much can we actually require the equity investors basically essentially an additional capital contribution. But to your point, that's the first go-to in many of these countries, the thought is let's go public, private, private partnership because there's quite frankly not necessarily funding available by the private sector, certainly not by the public sector to do it alone. So they do look at that and they want the guarantees to make sure I can say one of the transactions I worked on, they actually did have to go back and get additional equity. In general, that's the evaluation the same as you would have in the us. I just think it's a first thought in several of the jurisdictions I work in, see how we can do this with and a private, it's not like, well, it should all be private or additional.



Kenneth Neighbors (13:27):

We talked specifically about the southeast. I want a quick follow up question. In one of the earlier panels yesterday, there was a pretty good discussion about whether or not the developer concessionaire should be able to refinance out into the project and create refinancing gain and otherwise take some money back in distributions for the equity spirit of conversation. I don't know who won the argument, but I wanted, since we have policy people and people who run numbers, I figured I'd have to ask what your thoughts are on that.



Robert Poole (14:00):

My thought as a policy matter is that the savings from of refinancing should be shared between the public and private partners revenue share the spirit of a partnership.



Brad Guilmino (14:11):

And that's common language, which is fortunate. A lot of times the public owner has the right to allow that or not allow that, and when you're inside of one of these P three transactions, each side has a whole host of things they would like to see changed inside of these. So that's a negotiation. A lot of times those are compensation events that are tied to those. Having these type of opportunities to recalibrate to take some of that money off the table and utilize it a little bit of a different way, be able to smooth out some of those commercial term pieces that might not have aged as well as you would've liked or in practice kind of lookout. So I think that it is definitely a good thing inside of that to be able to do that.



Kenneth Neighbors (14:55):

Alright. Alright. Now we'll turn back to the reason for the season. We've talked about the US a little bit about the international scene. What are we seeing in terms of the southeast region's embrace of what I'll really say revenue risk p threes, I guess they could be, we're seeing availability payments as well, but revenue risk P threes?



Robert Poole (15:15):

Well, I think it's a nice coincidence that we're doing this as a southeast conference because I think the real action in long-term p threes and transportation is in the southeast. You've got Florida, Georgia, Louisiana, North Carolina, and now Tennessee. No projects yet in Tennessee, but the P three legislation pretty good passed overwhelmingly in the house and Senate last year. They're moving along I think rapidly getting to define, they've selected where the first four projects are going to be. They're going to be expressed toll lanes, which has been the most successful highway kind of P three we've seen so far. So I think it's exciting. It's timely that you have this conference and focus on the southeast because that is really where I think the biggest new action is in this space today.



Brad Guilmino (16:05):

And whether it's P three or public, I think the name of the game is user fees. When we look at the size of the needs on the interstate system, if we look at a lot of these major multi-billion dollar bridges that need to be replaced, it's going to be really hard for state DOT to come up with that kind of funding. What they would really need would be the legislature to come through with big capital outlay or geo debt to kind of do that, but there's just not a lot of appetite. There's a lot of competing interest for statewide dollars. So reverting to the, Hey, let's go ahead and toll it. The users will actually have to pay that. We've been getting pretty innovative inside of local discounts if you have that local transponder, if you want to have frequency discounts, if you want to have equity, low income discounts if you're entertaining HOV or not.



(16:55):

So there's a lot of different policy options to get at that revenue. Then the next kind of decision point is do you want to control that facility? Do you have other tolling facilities in your state? Do you have capability to do that? Do you have the desire to do that? Like I said, on the public finance side too, and I see Bill here from Alabama, right, looking at a multi lien structure with different levels of credit support, pretty innovative. We're able to really be able to finance down to that one times coverage level to get that revenue. And it's still tough sledding, right? Because these projects are really big. I think that once some of the states start to embrace interstate tolling in a long way, I think the domino is going to happen. We've been talking about this probably for 10 years.



Robert Poole (17:41):

I'm waiting for the first state, still 15. I thought it was going to be Michigan, maybe it still will be.



Brad Guilmino (17:47):

And we say, oh, we need a governor in their second term to follow through with some of these big interstate tolling plans.



Robert Poole (17:53):

I thought that would happen in Indiana though.



Brad Guilmino (17:54):

That's right. That's what they promised. It didn't happen. Right? And we see other places really start to look at it. Bridges is something because I think the public can see that they're getting something new, this big structure, they understand it's got high dollars. It's a little harder to say, Hey, we need to repay 70 miles of I 95 and then we're going to start paying you for it. And now when we're looking at what's going on with EVs and road user charge, we can do the stop gap, which is vehicle registration fees on EVs and hybrids. But that also starts to change the dynamic of how we're starting to fund. What about some of the older population that doesn't really drive much, right? So they're going to pay this big one-time fee based on 12,500 miles average you're going to drive and how does that look?



(18:41):

Do we need to start saying, Hey, some of these drivers are really utilizing it, it's not fair for them not to have to pay for 30,000 or 40,000. But then you say everybody benefits from it. You need the mobility, the transportation network for your goods and your services. So should sales tax or should some statewide fact tax be part of that? Should it be a combination of user fee, vehicle registration fees, as well as these other broader taxes? And I think that folks are looking around and the legislatures are, a lot of times it's taking the easy spot because we don't know where it's going to go. We need public perception to change on getting tracked inside of road user charge and what that looks like. So I don't think that you're going to see major action until we're forced to see major action. But it's coming and I think some of the conversations, some of the policy centric analysis that we're looking at, hopefully will, when people are ready, the options will be known.



Robert Downing (19:42):

Go back over to the EV side of things, which offers all these opportunities. Again, winter is coming because I'm actually positive about not coming it here. Number perspective, I think there's fewer than 5 million EVs used in the US right now. The estimate is in six years there'll be 25 million. There's a need for 2 million EV charging stations. I teach at FIU College of Law on a basic energy course. I tell them it's GENCO, Transco and disco. And I guess I for that period of time when there was in New York City and I go to Studio 54, however, but basically it's generation, trans transportation and then distribution. EV charging is actually EVs themselves. That's distribution charging stations. But the TRANSCO is always the, it's always transmission and electricity. It's always transportation and pipe. Here we have a huge generation increase. We have a lot of EVs coming online very quickly. We don't have TRANSCO and disco worked out. This, especially this Joan you're talking about related to long range transmission transportation system. That's where I've seen a huge key.



(21:14):

Now a lot of the private companies are aware of the incentives from the Iowa, from the Bipartisan Structure Act, from even the VW settlement that have in few. They're aware of these things that can be combined as incentives, revenue sharing can happen. Take a multifamily project here in Florida for example. The resistance may be initially that, Hey, I don't want put these EV charging stations. It's going to take up now people are using, so they're going to demand not just an amenity, it's the city of Coral Gables. You have the, I think it's over 10 parking spaces. You must have at least 20% now 20% must have capabilities.



(22:02):

We're seeing this change. But then once you get outside of your, how do you get revenue there? The utility wants to sell electricity, they want to sell that. They're not opposed to this FPL Duke where I used to work, go down the list. Maybe they have an incentive to help out. The private sector is aware of the incentives. They're aware of all the credits that are given. There's grants available. I think Texas took $407 million from the federal government. They did not 20% contribution. But Texas by the way, it's not a political thing here in the sense of red state, blue state, I want to make that clear. Number one, as you know probably is California use of EVs. Number two is Texas. It's happening whether it's a policy, but there are policies that can be used to incentivize this as we toll worlds. This is interesting because under the IRA, they're supposed to have every 50 miles or so in other EV charging station. That's build ups been slower than they expected, but the adoption of EVs themselves, the vehicles has been much quicker. And there's also a lot of discussion about what will happen if possible for the Chinese who are manufacturing in Mexico right now, able to somehow enter this market. It won't cost you 65,000 for your Tesla, it'll cost you between 15 and 30,000 bucks. So we have a lot of things that will affect the entire transportation section, that transco part that will need to be developed. And it's going to be a combination of revenue sharing of how do you allocate the costs? Will the private company put up, can you put bonds up there to raise? Can you do a fleet at the port that can be done? There's a lot of opportunities here, but the challenge really is on, I think it's on the transportation side.



Kenneth Neighbors (24:05):

Yeah, it's funny, I live in Atlanta, so we do traffic and when we were building toll rolls, I was a little bit worried. I said, what about the long-term impact of us actually getting a mass transit system that moves people? And so we have Marta actually leaning in on GDO Ts SR 400 projects to put transportation infrastructure in. We've got the Atlanta belt line is actually going to be light rail systems going to be implemented by Marta. So I thought those things would impact toll roads, right? Then covid happened and people weren't using mass transit, but this is a really fluid field and it's actually fun to be in there. So with that said, what are some of the factors you all think are impacting our adoption of p threes? And particularly if we think there's a shift back to revenue as p threes, what's driving that?



Robert Poole (24:56):

Well, I think we went through a phase about 10 or 12 years ago where availability payments were seen as easier and better than revenue risk. And we got some good projects done, 5 95 here in Florida and also Georgia I four in Orlando and so forth. But the problem that states started to realize is that you make a 30 or 40 year obligation to pay these availability payments that goes on your balance sheet. And in fact, the state, I forget the name of the organization that monitors state finances, but it now had made an official policy what.



Kenneth Neighbors (25:37):

GFOA?



Robert Poole (25:38):

Yes, yes, that these have to be counted on the balance sheet as liabilities. And in fact, Virginia and Texas, which have pioneered a lot of P three revenue risk p threes have never allowed aps. And North Carolina, I believe made a policy decision not to do that. Florida has used only aps, although most of them have some toll revenue in them, and I think that is probably going to have to change because there's only so much that they can put on the Florida liability side. I think the advantage of a big advantage, I've done keep track of these, the highway and transit projects over since 1993 when the first financial closes in the United States happened, and the average equity investment in revenue risk P three transportation project is 28%. Some of them go up to 45 and 50%, but the average is 28%. The average in an availability payment concession is 6% equity. So that's a huge difference in terms of what's coming from private investment and taking the risks of sheltering the taxpayers from those risks if the thing is structured properly. So I think we are seeing a turnaround, a return back to more revenue finance p threes, and I'm glad to see that. I think they make better sense over the long term.



Brad Guilmino (27:04):

Yeah, I think one of the risks on P three is it is toll rates, right? Are you willing to seed long-term toll rate control? If you're looking at say a bridge or an existing interstate, you set the initial toll, you can bid that toll and it's going to go up with inflation. So basically you monetized the toll rate and you're going to take it up, which makes a lot of sense, but when you look at express lanes, it gets a little trickier in my opinion.



(27:33):

Because we don't really understand, and I don't really think that people are pricing the value of what that price is going to look like when your general purpose lanes are extremely congested. So if you're looking at a 50 year toll concession, and let's just pick on Atlanta since Ken's here. So you're going to potentially have multiple developers running the express lanes around the Atlanta area. Now Serta still has some of those, but when those GP lanes get really high, and you can have pricing caps in it, but at some extent you're going to have unlimited pricing power in those express lanes. You have to. Yes. And those toll rates are going to be astronomical. And before you get to that point, is the public going to think they're paying way too much? Are they going to look at the lanes and say they're actually not that crowded? You could lower the toll and move more people through. I mean, we've seen this in some of the other cases and what happens if the reason for the express lanes was through control congestion to encourage economic development when all of a sudden your toll facility is starting to hemorrhage people out of there because they simply can't afford to go downtown. We haven't seen that happen yet, but in 20 years.



Robert Poole (28:45):

Get something to be concerned about.



Brad Guilmino (28:46):

In 30 years, in 40 years, what on earth is that going to look like? What kind of leverage or power is the public going to have? You'll never buy 'em out of it, right? Because at that point there'd be billions and billion, be tens of billions to kind of pull out of that and you don't really have an option. So I don't know what you would do in that scenario. Can you toll the existing lines? Would that even be allowed inside of that? I think when some of these areas are looking at these privately operated systems, let's see how it ages, I guess.



Robert Poole (29:15):

Well, I say if you're looking at let's say 15, 20 years on into the project, the general purpose lanes are probably going to have a per mile charge on them. So they're going to be told in a way, so you could think of it as a two tier tolling system, a variable price for when you have really high value trips that you otherwise can't make and the general ones that are basically to pay for the lanes. So that may save our bacon over 20 years from now when the problem starts to occur, it would be two tiered tolling.



Kenneth Neighbors (29:48):

I've got a thought as a structuring tool, are you seeing the revenue share calibrated such that after the developer reaches a certain revenue return threshold that kicks in and maybe that's a disincentive for price gouging I'd say.



Robert Poole (30:04):

My recollection is that both, it may not be all of the projects that express to lanes in Virginia and Texas, but most of them at least have revenue sharing built in and the share that goes to the state gets higher the more the revenue goes above the agreed on baseline. So I think that is one way to deal with some of that problem.



Brad Guilmino (30:24):

Yeah, you're right. And they're all structured a little different. What percentage share do you have outside of bands? Do you want to put some absolute upper limit, which is kind of you're talking about is hey, once you make 10 billion, it reverts back. We saw in Texas the 2 88 project was a P three and TexDOT bought it back. It was wildly successful in the contract. They had a price that basically they could get purchased back and they did. I don't think the concessionaire was too happy about that.



Robert Poole (30:50):

No, definitely not.



Brad Guilmino (30:51):

But in other places, they're not going to have that ability. It'll be interesting to see where it all goes, but I think for new capacity projects, especially in urban areas, express lanes make all the sense in the world, right? Toilets be able to have that reliable travel component to it, have the flexibility to rebalance your system if you like, right? Depending on where growth goes, where your urban downtown is, what's going to happen at work from home. There's definitely risk that the private sector is taking. There's no doubt about it. The question is how do you keep that public?



Robert Poole (31:26):

The other thing that often doesn't get mentioned with express toll lanes is Regionwide express bus transit. This is a platform of guideway that the bus system doesn't have to pay a dime for and they get to use it at no charge. So what a deal. I mean, hardly most metro areas haven't really taken full advantage of this in revamping their transportation, their transit system to take advantage of the free that could dramatically improve the performance. And here in Miami, when I take up too much time, I 95 express lanes opened in the first four years, the express bus ridership, quintuple, they had to build new park and ride lots up in Fort Lauderdale for the people coming from there to Miami because the old HOV lanes were stop and go. They were mostly violators because very expensive to try to enforce that. So once they became priced express lanes, whole different bug, those buses speed along and they became a popular alternative to either sitting in the congestion or to paying the sometimes pretty high prices.



Kenneth Neighbors (32:34):

You can work while you're sitting in the congestion on your own train, right?



Brad Guilmino (32:39):

And transit is transit truly integrated into our statewide transportation funding. The answer in most places is no, right? It's an afterthought. It's a local deal. They're not really utilized. They have their own sales tax minor fair box. But as we're looking, we can't add capacity into our urban cores. What's going to happen? How are we going to have mobility choices? How are we going to make it fair for folks to move around if they can't afford the car? I think that we're going to have to say transit has to start to come into this as well. Not that hey, they're going to run their small thing, but the reason nobody's using transit is because often they're not efficient because they don't have the dollars to run the headways to reach the audiences that they need. So then all of a sudden there's more strain in here. So at some point urban construction is going to be so expensive or not possible, you're going to have to do something else. And if they work together, if we could have the vision to do it earlier instead of chasing it, we could maybe impact it. But that's even harder probably than getting rough off the ground.



Kenneth Neighbors (33:39):

Just it's a little jab. So in the eighties we used to talk about flex time and I think Covid precipitated this work from home thing that may be saving us and for the people that are traffic and impaired metro areas.



Robert Poole (33:52):

The breathing room at least.



Kenneth Neighbors (33:53):

Yeah, seriously. Yeah. But alright, so we talked about, it was a great point about what were the split, about 28% equity in revenue risk versus 6% in aps. But who's chasing what equity is chasing P threes in the US and how do you see that bearing out in the future?



Robert Poole (34:13):

Well, it's infrastructure investment funds to a significant extent, but also we're starting to see insurance companies do this. I think very, very interesting is public sector pension funds, employee retirement systems are now investing. CalPERS the biggest one in the country started this about 10 years ago. They bought a piece of privatized Gatwick airport in London and then they later bought a piece of the Indiana Toll Road concession and that started to set an example and now there's hundreds of local county employee pension systems, statewide pension systems that are making allocations sometimes several times a year to infrastructure investment funds because they don't have the expertise to judge which projects are really likely going to be the most successful. It's like instead of investing in individual stocks, they're investing in a mutual fund, basically an infrastructure investment fund that produces a balanced portfolio that have good average returns. They hope and it's lower risk than doing it themselves. So that I think is a very important factor. And if state legislatures realized the connection there, I think they'd be more favorable to effective P three legislation because what the pension systems need is a place to invest equity and you can't invest equity in public sector airports and public sector to roads. There's no equity. So you can only invest in those equity finance projects and that connection isn't really out there yet to legislators. They don't get it.



Brad Guilmino (35:44):

And if you look at it, public equity inside of the pension funds can work just like equity inside of a P three deal. So that riskier part of the revenue line, after you sell as much debt as you can given coverage and ratings, you could have a DOT guarantee, the debt service, or you could have your pension fund participate in the upside. So then they would potentially have an equity shake. You have your targeted IRR eight and a half usually is a common one. So they have a fiduciary responsibility to be able to take care of their holders. At the same time the states fund the unfunded liabilities. So if there's a dual purpose, if it also can spur some economic development, there is the opportunity to be able to do more with it. Maybe they could come in and be much easier partner than TIA on a subordinate lien. And truly a pension fund should be patient, right? By definition, long-term assets that they're trying to manage get right. So insurance, the only other thing on the revenue risk side is that market is thin, right? On the developers that are doing it well



Robert Poole (36:51):

It stayed in the United States, but that's why most of these US pension system investments going to infrastructure investment funds are being invested in projects all over the world, not necessarily us. There's not that many projects to invest in the United States.



Brad Guilmino (37:04):

The pipeline here is a handful of states.



Kenneth Neighbors (37:08):

Quite bit of interest.



Robert Downing (37:09):

Canada itself, pension funds. Yeah, makes sense. It's interesting because in certain of the systems in those countries themselves, the pension funds are required to invest in local infrastructure. There's basically seven major PE firms and pension for Columbia and they're required. There's a certain amount of home investment that is mandatory.



Kenneth Neighbors (37:39):

So Robert, let's pivot. I love your utility and the EV background from overseas and we had nevi pass that is really trying to provide for our EV charging infrastructure. I just got an EV at the end of last year. I totally understand the fear of driving from Atlanta to Tallahassee and running out of electricity or whatever anxiety.



Robert Downing (38:05):

We have road rage.



Kenneth Neighbors (38:06):

Yeah, yeah. So let's pivot there in terms of what are you thinking about the prospect for us ramping up quickly on the charging side and then are there any obstacles you see that are presented?



Robert Downing (38:22):

Yeah, I mean I think this is, Europeans have called the IRA. It's kind of weird if Biden would've something called the IRA, but it is. And everything else but the inflation reduction Act, it is probably one of the most nationalistic policies we've ever had. It is Europeans are very upset. Canada's coming out with, they're rolling out their own version of this coming this coming year, discuss the Europeans. They did a partial motion as well that continue to, if you can put together, and this is one thing to say is we're talking mostly about the federal, but there's also federal, state, other incentives that occur throughout this area. You basically plan this all out, all planners and we have to plan this out. We put together all the credits. The grants heavy 5 billion. I mean there's a huge amount of money that has gone in here and it's amazing how many more nationals are more up to speed on this than some of our own companies here. I represent some large destruction companies.



(39:34):

It's like they are very much well versed in this. It is attracting a lot of foreign investment on that side when you total all the credits, the grants and everything, you put together your program, then you run your numbers, do you get your proper IRR, et cetera, that type of a thing. One of the biggest challenges I think we're going to have, and this is across the board, not just with EVs but also in the solar space and others, is a lot of the critical minerals are sourced out of other countries that and others where there may be restrictions. And I'll give an example if I can wander over to the solar space. The Biden administration was very much promoting renewable energy ira, everything else promoting this at the same time we were attacking on or release certain tariffs on solar panels and various estimates, but 70 to 90% of the solar panels have critical minerals from China and from other countries that may be on the list that we don't do business with or we're discouraging or we put a heavy, heavy. So I think the challenges here are the idea is to try to make this a homegrown industry, but a lot of critical parts of this components will be coming from overseas. But I can tell you that there's not an issue with coming here and trying to build here in America, adding inquiries from South Korea, from Turkey, you just go down the list, people say you want to come to the us, how do we set up, what do we do and what are the government incentives for doing this, not just at the federal level.



Kenneth Neighbors (41:12):

Alright, very nice. So we have already pivoted the EVs, but I guess when you put it all together, it seems like the kind of introduction and adoption of EVs is going to challenge us really as policy planners and as financial stewards to pivot away from fuel-based taxes. Y'all want to talk about that a little bit more for that.



Robert Poole (41:36):

Yeah, I think we have no choice but to plan for doing that. And I really respect the work of that infrastructure financing commission that Congress appointed that looked at about 15 different ways of paying for paying for roads and concluded that the least bad or the best alternative would be charge per mile rather than per gallon because then that's a propulsion source neutral. It doesn't matter if somebody invents something new 20 years from now, you still based on how many miles and of course if your big vehicles wait as well as the miles, certainly for trucks, which typically as Brad, you know that on toll interstates, heavy trucks pay about four times as much per mile as passenger cars, which somewhat approximates the higher pavement damage to trucks. I'm not going to argue with the trucking industry to go beyond that because they grudgingly accept that, but that's better than getting nothing.



(42:33):

So I think we have to start planning this and fortunately, I mean Congress has done something right for about 10 years. They've been funding in transportation bills, state pilot projects to try out ways of doing this and we're learning a lot from those pilot projects. I mean people who think that this is big brother in their car, it can be a death to privacy. They learn, well it isn't that bad and you already have GPS in your phone and the phone knows where you're going and so forth and you can build in privacy. The Oregon transition that is actually not a pilot, it's ongoing. They have privacy guarantees. Worked out with the Oregon ACLU chapter embedded in I think in state legislation now. So that's about as good as you're going to get in terms of trying to come up with sensible ideas to protect the privacy. But I think we've got a lot of learning still to do though, and a places haven't. A lot of states, the majority of states haven't had even one pile of projects. So there are legislators, leaders are, they may know in theory that we need to do something, but they're not really focused on coming up with any specific transition plan.



Brad Guilmino (43:50):

And since this is a finance conference too, I think that one of the things that the pilots are all missing is the financial market perspective. So right now we have motor fuel tax bonds that are outstanding 30 years. Louisiana goes 35. So what starts to happen with that as we're starting to see that plateau, that inflection point. Now, does some of these have a basket of goods? So it's hey, everything goes into the credit, it's que registration feeds. It might be sales tax on auto parts or cars. It's obviously motor fuel tax. So when you're creating these new fees, are you dedicating those to it, right? Could that work as a standalone credit? Are you making it a fee or a tax? There's implications to how that looks. Does the market need an investment grade traffic and revenue study like a toll or are they going to say, no, this is more like tax, so we don't need that or we need any kind of professional certifications from a revenue recognition standpoint, from the technology standpoint of hey, the account manager, can they handle this? Right? So I think that the state pilots have proved it works. The public might not necessarily be there and I think that it'd be great to instill into some of these pilots a bigger in depth look at the financing piece of it. Good point.



Robert Downing (45:08):

I do want to revisit two things. Should have you got it totally remiss. Challenges battery storage of the biggest manufacturers. Well again, critical minerals. We've got Olivia, you have China and other places and that is key to this. It might not be as dire as we think. I can remember going give another example. I remember being at the River Oaks Country Club in Houston, Texas, the top traders and they had predicted in 2009 hole would be 55% our generation feed stock and that would increase, that turned out to not be correct because they missed the shale oil and gas revolution, which meant led to natural gas being substitute coal, et cetera. I think that there's a lot of emphasis now on the technological improvements they can make on batteries, battery storage and things of that nature. And that has moved things forward quite a bit.



(46:15):

If there's a challenge, that's one of them. The other one though is we already, again go back to Genco, Transco, disco transportation transmission in the electricity space grid is a big issue. Talk about congestion. We have major congestion and if all of a sudden we're going to be using a lot more electricity to power all these vehicles, China has 20 million, over 20 million EVs, we have 5 million less than they have to expand the grid. Meaning that's an investment in the grid. And who pays for it? Who pays for it? This is a big issue because if all of a sudden when you go an interconnection, it's not simply as, okay, you just, it's a capacity issue. It's a capacity issue. How much do you have to expand your transmission capabilities that people can indeed charge their vehicles going to be a charge goes to the rate base for FPL L Do the users have to be, if I hear this, this is a massive challenge for this entire,



Robert Poole (47:18):

It really is. And when you put trucks into the mix, all of a sudden it's a whole new ball game. You talk about lack of capacity in the grid. I mean a truck electrification, heavy truck, electrification station is going to be like a small town or a huge industrial plant in terms of the electricity needed for that. And there've been several big studies done in the last year on this. I've been reporting on them and they're talking about massive, massive investments to upgrade the grid to take not just cars but heavy trucks.



Robert Downing (47:57):

Sorry, this is, sorry, near and dear to me. Port of Corpus Christi, which had looked at putting solar panels above the France, it's required about warehouses on parking structures. It's not required in the us. We're much more make it mandatory except California with EVs port of Corpus. Christi looked at this and said, you know what, we're building our own solar farm. They're built, they're building their own solar farms to help power the port ports and fleets are two of the biggest expansion areas. How do you get private public? Those are all public working with private. Does private put up the money? Do they share revenue Some degree? That's how we structure it, how you can structure it. But yeah, it's almost like behind the fence. Certain point you have such a large demand for a whole trucking fleet, then you build your own.



Robert Poole (48:54):

They have to. Yeah.



Kenneth Neighbors (48:55):

So we've got a minute 18 left. So a quick sum up. It seems like EVs are going to force the conversation of our weaning away from fuel-based taxes. Also another observation. We moved away from regular gasoline to unleaded only in cars and there were equitable issues presented there. Who can afford to make those shifts. And so that's something to look out for, but one to open up for. Any questions from the audience over to the mic if you don't mind. Alright. And while he's working over there, note that a guy raised in New Jersey, but I've been down here a long time. I said, y'all right, it's perfectly acceptable everywhere now.



Audience Member (49:39):

So this question is mainly I guess for Robert, but can chime in. So the Texas 2 88 concession that was bought back by the state. Do other countries like say specifically Latin America where these were p threes specifically revenue risk concession, P threes are so popular and have been for a while. Do those countries structure their P threes with that option where the government can buy it back? I'm just thinking in my head if it's so popular down there and part of the reason that they're not super popular here is because governments don't like it. When the GP makes all this money, are they better at negotiating the terms? Do they have better terms or do they just simply don't have any other way to finance things.



Robert Downing (50:37):

Better at it? There is a lot of negotiation. Those general talking about. So ability at the end, I can in the United States also foreign concessions. You're familiar with the law gather oil and gas. So I went have the two pipelines that usually only have million projects at the end of the concession, which is 25 years, it's turned back over the CFE. The allows to have the right to all the majority interest minority public information. So I represented one of the company's local structure companies from here that did have video local scales and that's how was structure. So there wasn't ability because it was actually, I've seen it in a couple of projects, yes, you could do this. At the end of the day, we have this ability tie early Robert.



Robert Poole (52:00):

Yeah, I know a lot about that transaction, but I don't know the general practice of termination provisions overseas and overseas P threes. So I can't help you there.



Kenneth Neighbors (52:19):

I would hazard to guess there are a few firms that the law firms that struck these deals are often from, the lawyers are from Australia, they're from London, they're from Canada. Sometimes the bankers as well. And they tended to bring a model. I think they brought that over here. There's somebody I could ask and I can get back to you if you just send me an email, but I'm pretty sure that termination for convenience is probably something that they kept in their documents as well.



Robert Poole (52:51):

I think the Build America Bureau at SDOT has done some research on termination provisions for long-term concessions. I have not looked at it, but I'm pretty sure they do.



Kenneth Neighbors (53:01):

Yeah, they do. And I think they compare the UK model as an example to, yeah, that's a good resource. I'll try to find that. If you reach out to me. We've gone over by about a minute and a half, but we started about three minutes early. But I know you all have to fly out, hit the beach, have some beverages of whatever you're choosing. So thank you very much. It's been a great audience. Appreciate you.