The Graduate Baruchian

Carol Patterson, Thomas Madison, Kyle Kimball, Stephen Jones, Porie Saikia-Eapen & Benjamin Cheatham

P3s (private-public partnerships) have made news lately as a possible model for funding infrastructure improvements.  The concept has piqued interest of politicians and investors alike as being a silver-bullet solution for one of our nation’s intractable woes.  How do we provide the efficient energy and transport infrastructure that our economy requires and our citizenry demands while not increasing taxes?  Is this a new innovative model? or a mirage that dangerously misallocates assets and funds? Are we privatizing gains and subsidizing losses?

Zetlin & De Chara LLP generously hosted a panel discussion on June 7 with support from the American Society of Civil Engineers (ASCE) and the Urban Land Institute (ULI).  Carol J. Patterson, Esq.  senior partner at Zetlin & De Chiara LLP, moderated the discussion.

Panelists:

Thomas J. Madison, VP & Director of Transportation Policy at STV Corporation

Kyle Kimball, CFO and EVP at the NYC EDC

Stephen Rigal Jones, Managing Director of Construction/Infrastructure at Natixis

Porie Saikia-Eapen, VP, & NYC Area Manager at CH2M Hill

Benjamin Cheatham, Partner at McKinsey & Company

This post has paraphrases comments that I found most relevant.  Ms. Patterson began the discussion with an introduction to the issue and gave backgrounds of the panelists.   The first question she posed to each of the panelists was:

What are examples of P3s with relevance in NYC — successes and failures?

TM There is an intersection of P3s with the NYS Dept of Transportation (NYSDOT).  P3s exert a strong pull because of the huge unmet funding needs just for the maintenance of the infrastructure in the NYC area (and across the US).  The funding situation is bleak even without mentioning the needed improvements.  One can easily point to 300 billion in deferred upkeep and repairs for the roads, railroads, as well as, water and treatment facilities.

KK The NYC subway system is perhaps the largest and least known  P3 in the NYC area.  Historians and “straphanger” afficionados will recall that the IRT and BMT were once private enterprises that were originally competitors.  Now they are artifacts in the greater NYC Transit  Authority and the MTA.   This example illustrates both the promise and pitfall of P3s.  Investors are drawn by the predictability of revenue streams and the inelastic demand for transport.  However, political uncertainty and meddling can lead to unintended consequences.  A politically-mandated 5 cent fare that couldn’t change for 50 years caused the IRT to defer maintenance and seek a workout.  The City eventually purchased the IRT and merged it with the BMT.

SJ The popular High Line is a terrific example.  Pier 40 is another successful example.  P3s are not a panacea.  Projects will require public funds, but the private sector can help.

PSE  It’s the inability of the public sector to manage their end of a P3 that made many failures.  Projects airports here in NYC have been a success stories.

BC The parking facility in Pittsburgh is a cautionary tale.  It’s a type of project that is ideal for P3 funding.  The conditions and mandate were clear and the revenue streams were long-term and steady.  However, the deal came apart at the last minute due to a political situation with the City Council.  The unpredictability of political changes make private investors uncomfortable with P3s.

Is the City becoming more friendly towards P3s?

KK  The EDC sees P3s less as a way to raise needed money, but more as a improvement on the delivery of a service (e.g. parking ); especially as a way that doesn’t involve City capital.  That is, the City is looking to P3s as a way for new and better ways to deliver product and services.  Moreover, the City’s power of occupancy as a AA tenant might help seed and spur development.

Winning public and legislative support is essential.  In these terms do P3s in NYC face special challenges?

TM  Legislation is essential, but there’s little movement.  Right now there is little legal framework in New York for P3s.  There is a gulf (more a fundamental misunderstanding) between the profit motive and service motive that needs to be resolved.  Perhaps in the transportation area a state-wide board with a master plan may take some of the political invective out of the process. Such a board may provide standard parameters on how to evaluate projects.

P3s can offer attractive returns over a long-term horizon.  What are key factors or barriers?

SJ P3 investors are concerned about pursuit costs and long bid periods.  The political uncertainties keep many investors on the sidelines.  However, investors are keen on the asset class because of the characteristic attributes (i.e. capital needs, contractual basis and long asset lives)

BC  There are three types of investors in P3s:  1) Corporate investors (e.g. suppliers, contractors & consultants) who want to generate revenue for their core business; 2) Private equity types who want to reduce risk, lengthen time horizons, take out costs and run the class more efficiently; and  3) Limited Partnerships (e.g. pensions plans and sovereign funds) who have huge investment pools and are looking for balance through a small sliver in infrastructure.

The sources of failure are: political uncertainty and lack of clarity; untenable early-stage risks; weak returns (e.g. restrictions on pricing); and small or sub-scale projects.

There are ways to mitigate these sources of failures:  develop a mechanism for review, transparency and certainty;  shoulder the responsibility for de-risking the project; create investment instruments to tip the balance; package small projects together   . . . but no institution exists.   There is no framework.

On the assumption of risk, what are solutions that the UK, Canada and Australia have used?

SJ  Few in the US have accepted offshore models.  This is partly due to the efficient and mature tax-exempt market here.  Every project is different and solutions are bespoke and wide ranging.  There are models in some sector-specific areas (e.g. telecoms).

Many thanks to the panelists, Ms. Patterson, Zetlin and DeChiaa, the ASCE and ULI.  Readers will find images and more info at GreenPearl.