The Good and the Bad of P3s 2017 Preserving the American Dream Conference August 7, 2017 Rossyln, Virginia Jonathan L. Gifford

Agenda A brief introduction The Good The Bad Discussion Surface transportation P3s in the US The Good Evidence of benefits The Bad Management challenges, Political risk, Project risk Discussion

A Brief Introduction

What are P3s? Public sector tool to provide services and infrastructure Long-term contracts bundling together different project stages Why is it used by the public sector? Allows access to private sector resources for building & maintenance Improves risk management, e.g.: design-construction mismatches Improves incentives, e.g.: finish construction faster to receive payment

P3 Legislation in the US

Recent Surface Transportation P3 Projects State Financial Close Project Project Type Status June 2017 California 2012 Presidio Parkway Phase II Road Operating Colorado 2010 Eagle P3 Commuter Rail Under Construction 2014 US-36 and I-25 Managed Lanes Phase II Florida 2009 I-595 Managed Lanes P3 Port of Miami Tunnel Tunnel I-4 Ultimate Improvements Under construction Indiana 2013 Ohio River Bridges Project, East End Crossing Bridge I-69 Section 5 Maryland 2016 Maryland Purple Line Procurement New York - New Jersey Goethals Bridge North Carolina 2015 I-77 HOT Lanes Ohio Portsmouth Bypass, Southern Ohio Veterans Memorial Highway Pennsylvania Pennsylvania Rapid Bridge Replacement Project Texas 2008 State Highway 130, Segments 5 & 6 North Tarrant Express Segments 1 & 2A I-635 LBJ TEXpress Managed Lanes North Tarrant Express Segment 3A, I-35 State Highway 183 Managed Lanes, Midtown Express Virginia 2007 I-495 Capital Beltway HOT Lanes Elizabeth River Tunnels, Midtown Tunnel I-95 HOV/HOT Lanes, Express Lanes

The Good Side of P3s

P3 Evidence: Phase 1 Project selection using three criteria: Type of infrastructure: surface transportation Market maturity: financial close after 2003 Type of contract: long-term engagement (DBFOM, DBFM, DBOM) 6 projects selected out of 22 project universe Virginia’s I-495 Express Lanes Colorado’s U.S. 36 Express Lanes Virginia’s I-95 Express Lanes Methodology: Interviews of main actors & review of project documents Florida’s Port of Miami Tunnel California’s Presidio Parkway Texas’ LBJ TEXpress Lanes

P3 Evidence: Findings Multiple objectives Goal achievement Goals beyond efficiency and funding Other goals: cost & schedule certainty, project acceleration, access to private sector expertise Key tools: incentives, contract bundling, competition, and unsolicited proposals Goal achievement Overall goals are achieved Even if not achieved, better than DBB (Presidio: $91M cost overrun compared to expected $418M in DBB) Presidio Parkway Phase II was built on-budget versus >$300m DBB project average cost overruns of 76%. However, public-sector cost conflicts led to a lawsuit and settlement. Even considering this, the project cost-overruns are only 25% compared to the expected DBB project risk. Moreover, the 76% of the DBB should be considered on the estimated $550M cost, not the P3 agreement cost of $360M. So 76% of $550 are: $418M vs $91M

Main Objectives Identified Congestion management Congestion free HOV/HOT lanes Increased speeds on General Purpose lanes Private-sector resources US 36 overcomes TABOR public-sector debt constraints Accelerate project delivery US 36 & LBJ delivered 10-15 years earlier vs traditional procurement Virginia’s I-495 & I-95 delivered at least 6 years earlier Certainty: cost and schedule Certainty is challenging for large complex scale projects Most projects within budget On-time or within 2-8 weeks of delay Large complex projects: think Big Dig in Boston

Main Objectives Identified Access private-sector expertise Design & electronic tolling (I-495) Tunnel boring (Port of Miami Tunnel) Trench and cantilever (LBJ) Risk management Geotechnical risk in Port of Miami Tunnel Debt repayment in US 36 Phase II, includes debt from Phase I Increase transit funding Project funding allows for greater range of objectives, particularly transit and multi- modal approaches

The Bad Side of P3s

P3 Evidence - Findings Transparency practices gaps Goal achievement Not all goals are measured (Miami Tunnel downtown improvements, e.g., safety) Not all goals are disclosed (I-495 improved toll collection) Main challenges to achieving goals Intergovernmental coordination Force majeure Transparency practices gaps Disclosure is not citizen friendly Some states/projects are leaders in project transparency But… is traditional procurement any better? Presidio Parkway Phase II was built on-budget versus >$300m DBB project average cost overruns of 76%. However, public-sector cost conflicts led to a lawsuit and settlement. Even considering this, the project cost-overruns are only 25% compared to the expected DBB project risk. Moreover, the 76% of the DBB should be considered on the estimated $550M cost, not the P3 agreement cost of $360M. So 76% of $550 are: $418M vs $91M

Examples of Management Challenges Project Dates Relevant dates Indiana Toll Road 2006 Financial close Opening year “Toll freeze” until electronic tolling is in place. State reimbursement Reduction on investment obligations 2007 Construction starts Delays in certain investments until 2010 2008 State reimbursement due to lost revenue 2010 Delays in certain investments until 2011 2014 Operator files for bankruptcy 2015 Exits bankruptcy Pocahontas Parkway 1998 2002 Transurban USA purchases the contract for: Lease Develop-Operate Extension of concession period (to 99 years) Additional investments: 1.6-mile (2.6km), four-lane (Airport Connector), and electronic tolling 2012 Transurban USA writes off its equity on the parkway to zero. Transurban USA transfers the operation to DBi Services

Political Risk Three dimensions of political risk: Each triangle contains the identified political risk elements that exist from each dimension. Ideological opposition differs from NIMBY as being a threat from outside of the community, such a national environmental groups, anti-tolling groups, that attack any project they feel is undesirable, rather than a community organized group whose best interests are directly related to their community. Public and ideological opposition feeds can feed into political opposition – these factors are not exclusive to each other, but do have a variable scale of interaction.

Political Risk in P3 Projects (Only DBFOM) Row: previous stage Column: next stage Projects ever in this stage Initial procurement Commercial close Financial close Under construction Operating - private concessionaire End of contract Early termination Deferred Cancelled 42 7% 57%   29% 24 88% 12% 21 100% 33% 67% 14 79% 14%

Project Risk (Bankruptcy) State Contract Opening Cost (US$, million) Cause of bankruptcy Camino Colombia Bypass TX DBFOM 2000 90 Demand lower than projected Competing facility  Southern Connector SC 2001 191 Demand drops during Great Recession No-skin-in-the-game (63-20 nonprofit corporation) Las Vegas Monorail NV DB/Equip+O&M 650 Cost overruns (from $350 to $650 million) SR125 South Bay Expressway CA 2007 635 Environmental permits & Community opposition Cost overruns (from $400 to $650 million) Foley Beach Expressway AL 1999 44 Parent company went bankrupt for other project Indiana Toll Road IN DBFOM + OM 2006 3,800 Drop in interest rates (interest-rate swaps) SH 130 (Segments 5-6) 2012 1,327

Discussion

Conclusions P3s are not yet widely used in the U.S., except in a few states Evidence of benefits Private sector expertise used to introduce cost-effective designs or sound construction methods Increases cost & schedule certainty Accelerates delivery of projects 6 to 15 years Improves risk management of projects Projects are affected by: Macroeconomic conditions Revenue projections Political risk, mostly NIMBY concerns Inter-governmental conflict

Ways to improve P3s Expand objectives, such as multi-modal transportation and real estate development Engage communities early on in the process to gain approval and identify best-practices Share best-practices among states to improve inter- governmental cooperation in infrastructure projects

Thank you! The Good and Bad of P3s Jonathan L. Gifford George Mason University Center for Transportation Public-Private Partnership Policy P3policy.gmu.edu

Political Risk in P3 Projects (Only DBFOM) Surface Transportation P3 Projects Cancelled Deferred Early-termination No political risk 3 1 Authority overlap Inadequate contract terms 2 Legislative change Political transition Political Opposition Public Opposition (NIMBY) 7 Ideological Opposition: Environmental Activism, Private and Foreign Firm Opposition Total 13 Note: 1 project with insufficient information to assess whether it faced political risk.