Which Type of P3 is Best?

In its “Global P3 Landscape” report, Moody’s Investors Service says given the sheer size of its infrastructure and growing urban population, the U.S. has the potential of becoming the largest market for public-private partnerships (P3s) in the world.

For quick reference, a P3 is a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. And according to Moody’s, an increasing number of states are authorizing the use of P3s for transportation projects while the use of P3 models has been steadily increasing over the last five years.

Looking across North America, Moody’s finds Canada to have the most mature market, where P3s have been predominantly availability-payment projects, which is when payment to the private developer is made as long as the asset is available and meets specific performance criteria. The payments cover operating and maintenance costs, as well as debt service on borrowings to pay for construction costs.

Mexico, in contrast, has primarily demand-risk P3s, where the private developer is paid back through user fees it has been granted to collect. This fee-for-service model places transfers performance risk to the private developer.

The U.S. has a history of demand-risk P3s, but the market for availability-payment P3s in the U.S. is expanding, says Moody’s. Which is a good thing, because demand-risk P3s tend to not be too successful.

According to an article on nwi.com, privately operated toll roads have struggled financially across the country in recent years. Operators of tolls roads have missed debt payments, gone bankrupt or been written down as worthless assets in Texas, California, South Carolina and Virginia.

California’s State Route 125 is one example. SR 125 was the first road to be built in California as a P3. The toll road was funded by the private company and several public agencies. Citing traffic counts at less than 40% of initial estimates, the private company declared bankruptcy in 2010 and sold the road to the San Diego Association of Governments, which reduced tolls up to 40% and increased traffic by 19%.

Just last month, Indiana Toll Road operators were looking to file bankruptcy to get out from under $6 billion in debt and sell the right to operate the road for the remainder of its 75-year lease. Traffic volumes on the road have been lower than expected since the Great Recession.

In the U.S., more P3 availability-payment projects are in procurement or in the process of closing than ever before. The availability-payment P3s that have reached financial close in the U.S. in the last year are I-69 in Indiana (for $370 million), the Goethals Bridge P3 for the Port Authority of New York and New Jersey (for $1.5 billion), and the $2.3 billion P3 to fund the I-4 in Florida.

Availability-payment P3s are the better option and should be explored as one of the alternative ways we can fund this nation’s roads.