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Follow TURFHistory of private investment in roads not the same thing as today's hybrid
To compare a truly private road done in the 1790s with today's public private partnership hybrids that exploit the governmental power of eminent domain, that heist massive sums of public money to subsidize private profits, that put the toll tax rate in the hands of private corporations, that include non-compete provisions that prohibit or penalize the expansion of free routes surrounding the privatized toll roads, and that guarantee profits at taxpayers' expense, just isn't a valid argument in favor of road privatization. The two are NOT the same, the later has already required taxpayer bailouts (South Bay Expressway in San Diego).
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Friday, 02 March 2012 00:01
Proposed Red Line funding model not a new concept
Written by Andrew Warfield
Lake Norman Citizen.com
First public infrastructure financed by private investors in the United States began in 1792. The Philadelphia-Lancaster Turnpike lasted more than 100 years.
In a country suffering economic hardship and without the funds to invest in infrastructure, the government turns to the private sector to help pay for road and railroad projects.
Sound familiar? Sure, but the first recorded public-private partnership (or P3, as local commuter rail proponents refer to it) began in 1792, when the nation's first turnpike, the Philadelphia and Lancaster Turnpike, was chartered in Pennsylvania. A new nation had no money to build infrastructure, so the first long-distance broken-stone-and-gravel surface was built, opening the territory northwest of the Ohio River.
The private owner of the road was repaid from tolls. The road literally was blocked by wooden gates, or "pikes," that would be "turned" to open the road after the tolls were paid. Thus the term, "turnpike."
The tollgates were located about every seven miles of the 62-mile road. The turnpike remained in use until the early 1900s.
"Early in the United States, the country didn't have money and relied on the private sector to build infrastructure, including roads and railroads," said Patrick DeCorla-Souza of the Federal Highway Administration's Office of Program Delivery, during an online presentation about P3 projects Feb. 16. The presentation was viewed in the Rotunda at Huntersville Town Center, as well as in other locations, by town planners, elected officials and others studying the Red Line Regional Rail Project proposal.
As discussions about the proposal have continued through the first 90 days of 2012, P3 has emerged as the likely scenario through which the project, if approved by all stakeholders along the Charlotte-to-Mooresville corridor, could be built. A combination of state funding and local transit tax money, along with private investment — repaid by special assessment district fees and tax-increment financing — would fund the estimated $452 million to upfit the track, purchase trains, build passenger stations and complete related road improvements along the 25-mile commuter and freight rail project.
It's a term that will be used more frequently here as well. Studies are currently under way to employ the P3 model for the widening of I-77, and a form of P3 is being used for the completion of I-485. In that project, the contractors are actually financing the project for the state, with the promise of repayment plus interest when the funds were originally scheduled to be available. This allowed the project to move up years on the calendar rather than waiting for the state's funding schedule.
'Infinitely financeable'
Among other meetings — and set against the backdrop of a recent letter from Norfolk Southern Railroad outlining its concerns with the project, which would utilize its rail bed — those discussions continued on Thursday, Feb. 23, with a P3 workshop at Huntersville Town Hall. At that meeting, Mark Briggs of Parsons Brinckerhoff, a consultant to the North Carolina Department of Transportation, produced a list of potential private entities from which he expected proposals to be generated if the project were to move forward. He also introduced executives from international investment firm Guggenheim Securities to explain why the industrial revenue bonds to finance the half of the capital expenses of the project not potentially covered by the state and Charlotte Area Transit System will be an easy sell.
"These companies specialize in public-private partnerships and they are worth many times more than what they would invest in this project," Briggs said by telephone from his California office on the Monday before that workshop. A complete list of these firms follows at the end of this story.
Dan Gangwish of Guggenheim told the group last Thursday that he has overseen some $5 billion worth of P3 investments during his career, and he has "seen a lot."
"It's very clear this financing works well with the state backstop," said Gangwish, adding that private investors — which typically invest in rail infrastructure in chunks of at least $10 million to $20 million — can expect a return of more than four percent. "This is infinitely financeable."
The investment and project delivery firms represent the modern-day cream of a centuries-old P3 crop, a model that has gained favor in the past two decades as some regions of the country began to shift away from only publicly financed infrastructure development.
With not enough money from local transit tax dollars to fund the Blue Line Extension light rail project from downtown Charlotte to University City and the Red Line Commuter Rail — and with the Red Line not qualifying for any federal dollars — NCDOT officials, interested in expanding the state's freight movement capacity, re-tooled and repackaged the Red Line, complete with the new, and yet centuries-old, methodology for paying for it.
Private equity, public rail
Since formally unveiling the proposal in December and scheduling a 180-day time frame for meeting, vetting, refining and completing what must be a unanimously approved business and financing plan among a number of governmental jurisdictions and agencies, there have been a number of issues raised.
Among the most controversial of those issues is whether smaller commercial property owners within the special assessment districts will see a return worthy of the increased taxes they would pay, and whether that district should be expanded to include more revenue-generating properties farther from the tracks. The private investment would be repaid by a combination of special assessments upwards of 75 cents per $100 valuation for commercial properties within the unified benefits district along the corridor, and on tax increment financing on 75 percent of the improved value of developed or redeveloped property.
Meanwhile, the NCDOT continues its vetting process and necessary talks must continue with the owner of the tracks on which the Red Line would run, Norfolk Southern.
Central to all that talk is just what form the construction, operations and maintenance might take. In recent weeks, talk of design/build/finance/operate/maintain (DFBOM) has been prevalent, whereby a single entity or a team would take on the whole project and be responsible for coming in on time and within budget.
"Exactly what form of delivery the project takes is still under development, but I would imagine it would be some sort of hybrid," said Briggs by telephone. "Typically you get a team that represents all four (disciplines) of those who come in with a unified plan. So far, in places we have taken these types of projects, we have had at least three teams of bidders who have come in and looked at these projects."
Those "teams" are typically made up of concessionnaires/contractors, equity fund investment firms, operators and vehicle (train car) manufacturers. They form consortiums to assemble their bid and, if awarded, run the project from start through delivery of the product.
"We want to be in a position if we can structure (the P3 contract) in such a way that they have to build it, buy the rolling stock and get (the rail corridor) tested and certified before they get paid a penny," said Briggs. "How this agreement gets structured is partially what makes best sense in terms of financing, because if the state provides the backstop, we will get very good interest rates."
The P3 approach, DeCorla-Souza said during his prior presentation, is usually faster and more efficient than the traditional public sector process because, while government-run projects must accept the lowest qualifying bid for a project, a P3 approach can secure the "best suited" vendor for its various aspects. An additional benefit, he said, is that all financial risk is borne by the private sector in a P3 project.
But that doesn't mean, he said, that the public sector can wash its hands of the Red Line. "The public sector must make sure the project is performing to standards, but the P3 model reduces the amount of oversight the public sector has to do and has to be involved with," said DeCorla-Souza.
The oft-repeated question regarding cost overruns and who bears that responsibility was asked again last Thursday, this time by Davidson Commissioner Laurie Venzon. "This is a legitimate concern," replied Briggs, adding that liability for extra costs are borne by the P3 team. "It is (their) risk to build it, buy the rolling stock, etc., and only when that happens do you get an availability payment. The main reason for a P3 approach is you have to put that risk on the private sector side instead of the public side because there are too many examples of cost overruns (in government-run infrastructure projects)."
So why would private investors become involved in building government-owned infrastructure? They wouldn't, Briggs and others have stated, unless they knew they could deliver the project on budget and earn a profit.
"Private concessionnaires are looking for a return on investment that is long-term, stable and predictable, and has a moderate risk," said DeCorla-Souza.
But, he added, P3s are not easy. "A lot of groundwork is required before you can secure a P3 partnership," DeCorla-Souza said.
Red Line proponents can certainly attest to that.
P3 players
Global companies that typically become involved in P3 public infrastructure projects.
Concessionnaires/Contractors
• ACS/Hochtief/Flatiron
• Acciona
• Balfour Beatty
• Bechtel
• Bouygues
• Fluor
• GlovalVia
• Kiewit
• SNC Lavalin
• Skanska
• Vinci
Equity Funds
• InfraRed
• Laing
• Macquarie
• Meridiam
• Uberior (Lloyds Bank)
Operators
• ACI
• Herzog
• National Express
• Serco
• Stagecoach
• Veolia
Vehicle Manufacturers
• Alstom
• Ansaldo/Breda
• Bombardier
• CAF
• Kawasaki
• Siemens
• Rotem/Hyundai
— Source: Parsons Brinckerhoff