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"Florida's Highway Partnership Plan Can Serve as a Roadmap"

Daily Journal
By: Patrick D. Harder
04/10/09

Fort Lauderdale, Fla. is going to get some traffic relief. That's good news for California. To understand why, you need to know two things. First, the $1.8 billion highway improvement project, which will relieve congestion on the I-595 - Fort Lauderdale's main east-west traffic corridor - is being financed largely by the private sector, specifically a consortium of European and Australian banks. Second, California just passed a law, SB 4 that will allow similar, privately financed transportation projects - known as public-private partnerships- in the coming years.

California, once a leader in public-private partnership transactions with the toll road network of Orange County's Transportation Corridor Agencies, the SR 91 Express Lanes and similar facilities in San Diego County, has lost ground to some of its sister states in the race to line-up private investment in its transportation infrastructure. Under Gov. Schwarzenegger, this situation appears poised for change and private investors are looking on with keen interest.

Public-private partnerships allow public agencies to own transportation infrastructure (roads, bridges, rail lines etc.) that are financed, built and sometimes operated and maintained by the private sector. Typically, the private sector makes their money back, with a reasonable profit, by charging tolls to use the infrastructure. In California, the Foothill and Eastern Toll roads, the Southbay Expressway and the SR 91 were built as public-private partnerships under limited legislative authority.

The recent Florida deal, which will build reversible toll lanes in the median of an existing freeway, includes an innovative twist on the type of partnerships we are familiar with in California - instead of the private sector, the Department of Transportation will collect the tolls and set the toll rates. The department will then pay the private investors "availability payments," think of these as rent - but only if the road performs to certain standards. If the private investors fail to meet their obligations, including the obligation to keep traffic flowing, the amount of availability payments they receive will go down.

The Florida deal serves as a good model for California transportation agencies as they contemplate structuring deals for anything from high-speed rail, to new subway lines to managed toll lanes on existing freeways.

The Florida I-595 deal offers a few take-away lessons that will be relevant to the California experience.

A properly structured deal can be financed, even in the toughest of markets. In these uncertain financial times, a successful public-private partnerships transaction requires a great deal of flexibility in the procurement process and the contract documents. Such flexibility will allow the parties to adjust to the inevitable, yet unpredictable, changes that will occur over the course of an extended partnership procurement.

On the I-595 procurement, for example, both of the proposer teams sought to make changes to their team composition very late in the procurement process. The Florida Department of Transportation anticipated the potential for such changes and put an explicit and streamlined process in place that allowed for fair and thorough consideration of the requested changes.

On the finance side, the winning proposer team, ACS Infrastructure Development, decided to shift from its planned bond financing structure to a bank financing structure just weeks before the planned financial close. Without sufficient flexibility, the transaction may well have hit a brick wall when it became apparent that the market would not bear such a large debt offering. Similarly, the Department of Transportation showed exceptional foresight to provide some protection from interest rate movements, and a risk-sharing mechanism for credit spread movements, which were key to keeping the transaction on the rails when volatility in the markets was at its highest levels.

On the technical side, the department established a process to allow proposer teams to suggest alternative technical solutions in a confidential setting prior to submitting proposals. This gave it the flexibility to adjust technical requirements to accommodate meritorious ideas in the final contract released prior to bid.

These are all lessons in flexibility that California can learn from and emulate as it gears up to do more and more public-private partnerships projects in all infrastructure sectors. In California's case, this flexibility is built-in to the provisions of SB 4 which, if properly implemented, provides California agencies with the necessary latitude to structure a successful public-private partnerships procurement.

Governmental support is critical to the success of any public-private partnerships transaction. While flexibility will oil the gears of a complex transaction, it is only with true governmental and public support on multiple levels that the myriad elements will come together to a successful conclusion. Support in Florida started at the highest levels, with Gov. Crist singling out the project in his "Accelerate Florida" stimulus plan months before the Wall Street meltdown. Crist challenged the Department of Transportation to bring the transaction to a successful close as quickly as humanly possible. Resolve to meet this challenge permeated through all levels of department, from the secretary down through the district leadership to the project procurement team. The procurement team was able to short-list, develop documents, conduct extensive industry review, receive and evaluate proposals and close financing in the midst of the tightest credit market in modern times.

In all, this process took about 15 months - an unprecedented time for a procurement of this type. Similarly, Schwarzenegger has strongly challenged California's agencies and legislators to look at public-private partnerships, which he refers to as "performance-based infrastructure," as a way to deliver projects sooner and better.

In Florida, federal level support mirrored the state support. Substantial federal credit support ($608 million), through a program known by its acronym, TIFIA, proved absolutely critical to keeping pricing within the Department of Transportation's affordability limits. Without this low-cost credit, the deal would have collapsed when credit spreads in the private lending community were hitting unprecedented levels. With recent moves in Washington to support the TIFIA program even more, California should experience similar benefits from this key federal program.

Equally important to the project's success was the support of local stakeholders, including cities along the project route, Broward County, and local residents. The Department of Transportation conducted innumerable public hearings on the project and listened when some residents objected to the original design concept of elevating portions of the project. It demonstrated its flexibility by redefining the project profile, which won the public support necessary to make the project a reality.

To be successful, the California program will need the support of not only of the governor, but of the various agencies that are authorized to pursue public-private partnerships, the construction industry, the trade union lobby, and the traveling public. It will be a challenge to bring these diverse interests together, but it is a challenge that other states have successfully overcome.

Availability payment transactions are here to stay. With the I-595 transaction successfully closed, states throughout the country, including California, are taking a hard look at availability payment structures and the features that make them attractive. For example, the Administrative Office of the Courts here in California is considering a similar contracting structure for the design, construction, financing and long-term maintenance of a replacement courthouse facility in Long Beach.

For toll road projects, the availability payment structure eliminates the question of who sets toll pricing, making it far more politically palatable than allowing the private sector concessionaire, often a foreign-based company, to make these decisions.

Construction performance quality is assured because the concessionaire receives no payments until the construction is complete. The availability payment structure - with its payment deductions for performance shortcomings - provides the concessionaire with ample financial incentive to ensure high-quality construction, good traffic management during construction and effective maintenance after the facility is open to the traveling public. Typically, contracts will also include hand-back standards to ensure that the agency gets a fully functional facility at the end of the concession term.

From the private sector's perspective, availability payment transactions are attractive because they provide a more predictable payment stream, with nearly all traffic and toll-revenue risk and upside potential held by the public sector. The concessionaire and its lenders rely on the agency's credit rather than an often unpredictable toll revenue.

While the success of the Florida I-595 deal was as much art as science, several of the key elements, including flexibility, government support and contracting structures can be replicated here in California. That is some good news amidst the general economic gloom.

Patrick Harder, of Nossaman's infrastructure practice group, led the legal team that advised the Florida Department of Transportation on the I-595 Corridor Roadway Improvements Project.

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