While growth of infrastructure public-private partnerships (P3s) in the US has been slow and fragmented to date, the market remains positioned to become one of the world’s largest, according to a new report from Moody’s Investors Service. New state and federal P3 resources and political and legislative support, combined with a strong underlying legal framework for contractual enforceability and a deep capital market ready to finance projects, are positive developments as the sector continues growing.
“Each US P3 project is unique and draws on limited local market experience,” says John Medina, Moody’s VP – Senior Analyst “But state-level P3 activity has risen over the last three years, and nearly all P3 projects have been completed early or on time.”
At the federal level, the Fixing America’s Surface Transportation (FAST) Act includes a mix of provisions that may be positive for the P3 market in the longer term. One key measure is the creation of the Build America Transportation Investment Center (BATIC), which is intended to serve as a single point of contact and coordination for federal transportation expertise for states, municipalities and project sponsors. The FAST Act cuts to Transportation Infrastructure Finance and Innovation Act (TIFIA) funding appear to be severe, at about 70% from 2015 levels, but may not dampen the project pipeline, given that another FAST Act change allows TIFIA to retain uncommitted funds.
“The need for more inter- and intra-government P3 best practice sharing remains key for the US P3 market’s long-term development compared to other markets where infrastructure development and funding may be more centrally aligned,” Medina says.
Moody’s says 2015 saw a record amount of availability-payment P3 projects reach financial close, with four states closing on their first availability-payment P3 project, including the KentuckyWired broadband project (Baa2, stable), the Ohio Portsmouth bypass project (Baa2, stable), the Pennsylvania Rapid Bridge Replacement Project (unrated) and the Michigan Freeway Lighting project (unrated). Each P3 project that reaches financial close is often the first in its jurisdiction.
Funding for the P3 market will continue to be supported by the private placement market as heightened demand and limited supply motivate competition. P3 projects have relatively more complicated financing structures given the multiple sources of project funding. Unique P3 financing structures have emerged over time, and recently-financed P3s have benefited from innovation to lower capital costs.