Given the sheer size of its infrastructure and growing urban population, the US has the potential of becoming the largest market for public-private partnerships (P3s) in the world, says Moody’s Investors Service in its “Global P3 Landscape” report. An increasing number of US states are authorizing the use of P3s for transportation projects, typically the first type of P3 project in a new market, and the use of P3 models has been steadily increasing over the last five years.
“More US states and governments around the world are using P3s to develop and maintain public infrastructure,” says Managing Director Chee Mee Hu. “Two inter-related trends are at work that could cause P3 activity to expand: the need to upgrade, replace or build out essential infrastructure assets and the inability of governments to finance these current and future infrastructure investments entirely on their balance sheets.”
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 US has a history of demand-risk P3s, but the market for availability-payment P3s in the US is expanding, says Moody’s.
“Aided by supportive legislation and public-policy initiatives, more P3 availability-payment projects are reaching financial close or are in procurement than ever before,” says Moody’s Assistant Vice President John Medina.
The availability-payment P3s that have reached financial close in the US 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 availability-payment P3 to fund the I-4 in Florida, which closed on September 5.
Globally, Moody’s says the use of public-private partnerships and private-finance initiatives has grown over the past 20 years following the adoption of the model in the UK, Canada and Australia in the 1990s. This early adoption provides other countries with templates to use as they develop their own P3 markets.
“Global P3 Landscape” is part of a new Moody’s research series that addresses the growing global need to expand and revive infrastructure and related credit and capital market implications for various sectors, industries and governments.