    [Senate Hearing 114-50]
    [From the U.S. Government Publishing Office]

                                                             S. Hrg. 114-50

    EXPLORING OPPORTUNITIES FOR PRIVATE INVESTMENT IN PUBLIC INFRASTRUCTURE

    =======================================================================

                                    HEARING

                                   before the

                                SUBCOMMITTEE ON
               HOUSING, TRANSPORTATION, AND COMMUNITY DEVELOPMENT

                                     of the

                                  COMMITTEE ON
                       BANKING,HOUSING,AND URBAN AFFAIRS
                              UNITED STATES SENATE

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

       EXPLORING THE POTENTIAL FOR GREATER PRIVATE INVESTMENT IN PUBLIC
    TRANSPORTATION AND EXAMINING THE ROLE SUCH PARTNERSHIPS CURRENTLY PLAY
     IN THE DEVELOPMENT AND DELIVERY OF TRANSPORTATION AND INFRASTRUCTURE
                                    PROJECTS

                                   __________

                                 APRIL 29, 2015

                                   __________

      Printed for the use of the Committee on Banking, Housing, and Urban
                                    Affairs

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                     Available at: http: //www.fdsys.gov/
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                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      RICHARD C. SHELBY, Alabama, Chairman

    MIKE CRAPO, Idaho                    SHERROD BROWN, Ohio
    BOB CORKER, Tennessee                JACK REED, Rhode Island
    DAVID VITTER, Louisiana              CHARLES E. SCHUMER, New York
    PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
    MARK KIRK, Illinois                  JON TESTER, Montana
    DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
    TIM SCOTT, South Carolina            JEFF MERKLEY, Oregon
    BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
    TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
    MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
    JERRY MORAN, Kansas

               William D. Duhnke III, Staff Director and Counsel
                     Mark Powden, Democratic Staff Director
                           Dawn Ratliff, Chief Clerk
                          Troy Cornell, Hearing Clerk
                          Shelvin Simmons, IT Director
                              Jim Crowell, Editor

                                     ______

       Subcommittee on Housing, Transportation, and Community Development

                      TIM SCOTT, South Carolina, Chairman

             ROBERT MENENDEZ, New Jersey, Ranking Democratic Member

    MIKE CRAPO, Idaho                    JACK REED, Rhode Island
    DEAN HELLER, Nevada                  CHARLES E. SCHUMER, New York
    JERRY MORAN, Kansas                  JON TESTER, Montana
    BOB CORKER, Tennessee                JEFF MERKLEY, Oregon
    TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
    MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
    DAVID VITTER, Louisiana

                   Travis Norton, Subcommittee Staff Director
             Brian Chernoff, Democratic Subcommittee Staff Director
                Jackie Schmitz, Democratic Legislative Assistant

                                      (ii)

                                C O N T E N T S

                                  ----------

                           WEDNESDAY, APRIL 29, 2015

                                                                       Page

    Opening statement of Chairman Scott..............................     1

    Opening statements, comments, or prepared statements of:
        Senator Menendez.............................................     2

                                   WITNESSES

    Jane F. Garvey, Chairman, Meridiam Infrastructure Fund, North
      America........................................................     4
        Prepared statement...........................................    19
    Colleen Campbell, Board Member, Infrastructure Ontario...........     5
        Prepared statement...........................................    22
        Response to written question of:
            Senator Vitter...........................................    99
    Calvin E. Hollis, Managing Executive Officer, Countywide Planning
      and Development, Los Angeles County Metropolitan Transportation
      Authority......................................................     7
        Prepared statement...........................................    76

                                     (iii)

    EXPLORING OPPORTUNITIES FOR PRIVATE INVESTMENT IN PUBLIC INFRASTRUCTURE

                                  ----------

                           WEDNESDAY, APRIL 29, 2015

                 U.S. Senate, Subcommittee on Housing,
             Transportation, and Community Development,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Subcommittee met at 9:30 a.m., in room SD-538, Dirksen
    Senate Office Building, Hon. Tim Scott, Chairman of the
    Subcommittee, presiding.

                OPENING STATEMENT OF CHAIRMAN TIM SCOTT

        Chairman Scott. I call this Subcommittee meeting to order,
    and good morning to everyone. Thank you for taking the time to
    be here.
        This is the first meeting of this Subcommittee, so before
    we begin, I would like to welcome all Members and, in
    particular, Ranking Member Menendez. I know that he has a deep
    concern for the issues in our jurisdiction, and I look forward
    to working with you on housing, transit, and community
    development issues.
        Today's hearing is entitled, ``Exploring Opportunities for
    Private Investment in Public Infrastructure.'' I would note
    that Congress will meet in a joint session at 10:40 this
    morning. I have had the opportunity to share that with the
    witnesses already. So I will limit my remarks and ask the
    Ranking Member and our witnesses to do the same.
        Last week, the full Committee heard testimony from the
    Acting Administrator of the FTA and transit industry experts
    about our Nation's transit needs. We learned that there is an
    $86 billion backlog of repair and maintenance costs for
    existing transit assets. According to FTA Administrator
    McMillan, this backlog grows by $2.5 billion a year.
        Even though we cannot take care of our existing
    infrastructure, the Federal Government continues to invest in
    new infrastructure. Some of these new investments are in the
    same transportation systems that contribute to the massive
    repair backlog.
        I think last week's hearings made clear that we need to
    reset our priorities in transit policy. We need to be smarter
    about the way we use our Federal transit dollars. MAP-21 made
    some progress in this area by requiring the FTA to do more to
    facilitate private investment in public infrastructure.
        In a traditional model, a public entity contracts
    separately for the design, engineering, construction,
    maintenance, and operation of a transit system. In a P3, or a
    public-private partnership, some or all of those
    responsibilities, and sometimes even the financing, are
    undertaken by a private sector entity with experience and
    expertise in the transportation industry. Properly encouraged,
    the private sector entity uses the synergies derived from
    managing all phases of the project to deliver the project on or
    ahead of schedule and oftentimes under budget. P3s have shown a
    lot of promise in other countries for improving project
    delivery and operation, and at the same time reducing the role
    of Government in infrastructure funding. The question is: Why
    aren't we seeing more of them in the United States? I do not
    believe the FTA has made the best use of its P3 mandates from
    MAP-21.
        As this Committee looks forward to a reauthorization bill,
    I am interested to learn what more we can do to encourage
    private investment in public infrastructure and, where
    possible, joint development. At a time when our national debt
    is a little over $18 trillion, and with the current repair
    backlog of $86 billion, we need to start getting very serious
    about innovative methods of providing Government services.
        I look forward to hearing the testimony of our witnesses,
    and I look forward to hearing Ranking Member Menendez.

                  STATEMENT OF SENATOR ROBERT MENENDEZ

        Senator Menendez. Well, thank you, Mr. Chairman, and
    congratulations on your role as Chairman of the Housing,
    Transportation, and Community Development Subcommittee. I look
    forward to working with you on all of these issues. The
    Subcommittee has an impact on people's mobility, its access to
    jobs, its quality of life, and these are critically important
    issues.
        Today we are little bit more than a month out from the
    expiration of the Federal transit programs. During the
    development of MAP-21, we worked to enact a number of
    bipartisan policy reforms, programs, streamlining performance
    measures to enhance--to ensure, I should say, that Federal
    dollars were targeted to where they were needed the most, and
    that they were being used effectively and efficiently.
        But MAP-21 failed to address, from my view, the central
    problem: a lack of adequate funding. The Banking Committee has
    heard from disparate groups--the Chamber of Commerce, labor,
    transit agencies large and small. Every one of them has
    testified that current funding levels are grossly inadequate.
    It does not matter whether you are talking about a major
    metropolitan heavy-rail system or a light-rail line serving a
    growing community or a bus route running through a small town.
    We need to invest more.
        At some point all the efficiencies, all the cost savings,
    and all the reforms are simply not enough to make up for a lack
    of investment. Everything we have heard tells us we have
    reached that point.
        The topic of today's hearing is exploring opportunities for
    private sector involvement in public transportation projects,
    and I am particularly interested to hear from our witnesses
    today what they have done in leveraging, for example, real
    estate assets to support transit projects that improve foot
    traffic for local businesses, attract new residents to a
    neighborhood, something in which the private and public sector
    have a shared stake.
        One of the programs I worked to include in MAP-21 was a
    transit-oriented development pilot program. The Federal Transit
    Administration is still working to select recipients, but I
    believe it is an area that holds a lot of promise for the
    future.
        But even the transit projects with some of the largest
    roles for the private sector still include significant amounts
    of public capital. If we want the types of private sector
    partnerships we will be hearing about today to work, we need to
    step up as well. The private sector on its own cannot build and
    maintain a nationwide transit network. And given that many of
    the existing transportation P3s are large, complex, mostly
    metropolitan mega projects, I think we should all be concerned
    about the potential that too great a focus on private
    investment runs the risk of leaving behind smaller or rural
    communities, low-income populations, the elderly, and persons
    with disabilities.
        So it is my hope that we can look for ways to work with the
    private sector when appropriate and make certain the
    environment, workers, and social equity are protected and
    enhanced.
        Mr. Chairman, thank you. I look forward to hearing from our
    witnesses.
        Chairman Scott. Thank you, Ranking Member.
        We will go to introducing our witnesses. I would like to
    say welcome to Senator Warren, who is not a part of the
    Subcommittee, but always part of the Banking Committee--thank
    you for being here; and Senator Crapo, who is a Member of the
    Subcommittee.
        Our witnesses today, we have a fantastic group this
    morning. The first witness is Ms. Jane Garvey. She is the North
    America Chairman of Meridiam Infrastructure. In 2008, Ms.
    Garvey served on the transition team for President Obama with a
    focus on transportation policies. From 1997 to 2002, she was
    the Administrator for the FAA after earlier positions as Deputy
    Administrator of the Federal Highway Administration, Director
    of Boston's Logan International Airport, and Commissioner of
    the Massachusetts Department of Public Works. Ms. Garvey is
    currently Chairman of the Board for the Bipartisan Policy
    Project in Washington, DC.
        Ms. Colleen Campbell serves on the Board of Directors for
    Infrastructure Ontario and as Vice Chairman of the Bank of
    Montreal Capital Markets. Ms. Campbell has over 30 years of
    experience in investment banking and debt capital markets, most
    recently as global head of debt capital markets for BMO Capital
    Markets. She is recognized as a leader in the development of
    model for infrastructure bond financing in the Canadian market
    and was named as a top bond investment banker in Canada in the
    Brendan Wood Journal ``Outperformance in the Capital Markets
    2006.''
        Finally, Mr. Cal Hollis is the Managing Executive Officer
    for Countywide Planning and Development at the Los Angeles
    County Metropolitan Transportation Authority. Mr. Hollis joined
    Metro in May of 2011, following a 26-year career as an adviser
    in public-private real estate transactions and managing
    principal of Keyser Marston's Los Angeles office and a 2-year
    stint as acting CEO and COO of the Community Redevelopment
    Agency of the city of Los Angeles. Mr. Hollis is the former
    Vice Chairman of the Urban Land Institute's Public-Private
    Partnership Council, a board member of the Pasadena Heritage,
    and a member of Lambda Alpha. He and his wife are long-time
    residents of Pasadena, California.
        Finally, without objection, your written statements will
    each be made part of the record, as will any extraneous
    materials that Members have for inclusion in the record. I
    would ask each of you to briefly summarize your testimony in 5
    minutes or less.
        Ms. Garvey, you are recognized.

    STATEMENT OF JANE F. GARVEY, CHAIRMAN, MERIDIAM INFRASTRUCTURE
                          FUND, NORTH AMERICA

        Ms. Garvey. Thank you very much, Mr. Chairman, Senator
    Menendez, Senator Warren, Senator Crapo. It is a real pleasure
    to be among you today.
        I am the Chairman of Meridiam Infrastructure, and we are a
    long-term investor in public-private partnerships. Our
    investors are all public pension funds, and they are very
    committed to the notion of building public infrastructure. And
    while there is a broad range of definitions of P3s, P3s are
    fundamentally a legally binding contract between the public
    sector and a private company, which I will make the distinction
    this is not privatization. This is really public-private
    partnerships that we are talking about.
        I will start by saying P3s are not for every project. As
    you mentioned, Mr. Chairman, P3s are best applied to large,
    complex, and very difficult projects. I would like to focus,
    for a minute or two, on the characteristics of what I have seen
    in my almost 30 years' experience in transportation as what
    constitutes successful P3 projects.
        The first characteristic is that there has to be
    authorizing legislation in place, and this is true both for
    highways and for transit. There has got to be a clear sense and
    a clear message to the private sector of what is expected. Half
    of the States in the United States have the authorizing
    legislation, and many others are adding legislation as we move
    forward.
        The second characteristic is choosing politically smart
    projects. What I mean by that is projects that are critically
    important to the community. The projects should be part of an
    overall or comprehensive and cohesive transportation plan. We
    are not interested in doing a sort of one-off project. We want
    a project that really is supported by the community. These are
    long-term partnerships that have to transcend several
    administrations, and having those sorts of partnerships and
    support in place is really critical.
        That also implies that there has been a very robust
    discussion of public policy goals. It is important for the
    private sector to understand upfront what does the community
    want, what is the community's interests, what are the concerns
    about labor, what are the concerns about the environment,
    mobility, and if it is about economic development.
    Understanding those public policy questions up front is very
    critical and important.
        Another aspect is a true understanding of risk sharing. I
    would say that is one of the most complicated issues when you
    look at P3s, understanding who is assuming what risk. Risk can
    be shared in many, many different ways. The public sector often
    takes the environmental planning and permitting risk while the
    private sector will assume the risks associated with design,
    construction, financing, operating, and maintaining the project
    through the life of the project.
        The devil, though, is in the details. Sometimes the same
    sort of prescriptive approach that is used in traditional
    methods is applied to P3s, and I think that does cause delays
    and inefficiencies.
        Certainly determining the revenue stream is critically
    important. We know what challenges transit faces. We know the
    wonderful programs that Congress has put in place, but often
    that is still not enough, and I would echo Senator Menendez's
    comment that a strong, robust Federal program is always needed
    for transit.
        A number of localities have looked at this in a very
    different way and developed revenue streams at the local level.
    Los Angeles has done a great job with developing a sales tax
    that is dedicated directly to P3s in LA. We will hear more from
    Cal about that as well. So localities are taking on a number of
    these responsibilities themselves. Development rights, impact
    fees, the transit-oriented development--all I think offer great
    possibilities as well.
        A final point I would say is the institutional capability
    of a community. Often we find that P3s are very complicated,
    difficult projects, and the first time a State or an entity has
    taken this on. So making sure they have the capability to do
    that, the kind of technical expertise is really critical and
    important. And I think that is something that Congress could
    help with as well.
        I will end by saying, as I started, P3s are not for every
    project, and, frankly, if the only reason that a State is
    looking at a P3 is because of financial reasons, it is not the
    right reason. But P3s are one more tool. They provide fixed
    price for the public sector and allows the public sector to
    really think and plan as they move into the future. And it is
    really, I think--one of the most important aspects is the
    ability to build in life-cycle costs through the life of a
    project--really dealing with one of the greatest challenges
    that I think we face in infrastructure, and that is long-term
    maintenance costs.
        With that, I will conclude and welcome any questions after
    the other panelists.
        Chairman Scott. Thank you, Ms. Garvey.
        Ms. Campbell.

      STATEMENT OF COLLEEN CAMPBELL, BOARD MEMBER, INFRASTRUCTURE
                                ONTARIO

        Ms. Campbell. Thanks as well for having me here today. As
    mentioned, I am a board member of IO, and I also chair their
    Investment Committee.
        IO, just by way of background, is the Government of
    Ontario's Crown agency responsible for delivering major
    infrastructure projects using our made-in-Ontario P3 model. We
    call it ``Alternative Financing and Procurement.'' I will refer
    to it as AFP. We are very proud of the work that IO does and
    believe it brings together the best in public sector investment
    and private sector expertise.
        As Ms. Garvey mentioned, legislation is important. The
    agency was created in legislation and is accountable through
    our independent board of directors to the Ministry of Economic
    Development, Employment, and Infrastructure. The majority of
    the board members of IO are from the private sector with a
    variety of experience in finance, law, construction, and
    general management. You referred to my own experience in
    financial markets. Specifically, I started BMO's infrastructure
    practice in 1997.
        So IO itself was created 10 years ago when the province
    faced similar challenges to what you described for you today.
    The government has a very ambitious plan to rebuild its aging
    capital stock, and yet we had great concerns about procuring
    and managing these projects using a traditional method because,
    quite frankly, we had failed on many of those projects.
        The government realized that complex infrastructure
    projects have big risks and that transferring those risks to
    the private sector was in the public interest. So rather than
    taking a status quo approach, we developed our own model to
    modernize how these could be done.
        Over the last 10 years, IO's major projects division has
    completed 46 projects. The construction value of these projects
    is well over $10 billion.
        A review of our track record conducted March of 2014
    confirmed that 97 percent of the completed projects were
    delivered on or below budget, and 73 percent of those projects
    were also delivered within a month of their scheduled
    completion date, so a much better record than the more
    traditional method.
        This model is obviously being deployed elsewhere. Both
    Australia and the United Kingdom have done so for quite some
    time. And we are also taking note of the progress being made in
    the United States. We are pleased to be partnered with the
    National Governors Association to assist in building P3
    capability in the United States.
        So there is a growing body of evidence that P3s are a
    responsible way for government to invest in infrastructure, and
    we just wanted to give a bit of a foundation for our discussion
    today to describe some of the core elements that make this
    approach successful.
        First, we do not break large projects up into smaller
    projects and tender them separately. Breaking them up leaves
    enormous integration risks with the public sector.
        Second, we do not pay until projects are complete, or at
    least we try to limit the amount we pay until completion. In
    some cases, we have to make interim payments.
        And, third, we require builders to design the projects to
    meet our specifications and build to meet our objectives, and
    change orders to deal with deficiencies in the design are the
    private sector's responsibility.
        And, finally, where appropriate, we hold builders
    accountable for the long-term quality of the asset by paying
    them a portion of the construction cost over time on what we
    call ``Design Build Finance Maintain,'' or DBFM, contracts.
        Private finance is a tool in the toolbox for government to
    ensure that the private sector has skin in the game and
    delivers results for government. In a sense, it is a cost of
    the risk transfer as arguably private sector financing costs
    are typically higher than the public sector. The point is the
    benefits outweigh the costs. That is value for money.
        It is important to be clear: all of our AFP projects result
    in publicly owned assets; AFP is not privatization; and AFP is
    not a fundraising tool for government.
        While IO's first 10 years delivering AFPs have been focused
    on social infrastructure, the next 10 years are anticipated to
    be dominated by civil infrastructure. We are now working on
    major roads, subway, and light-rail transit systems.
        Ontario is a leader in AFP, and Canada is a leader in P3s
    globally. There is a strong industry within Canada that
    includes financial institutions, general contractors,
    architects, and engineers, all of whom are part of the success.
    There is a deep, efficient bank and bond market available to
    finance these structures, and this financing is available on a
    long-term basis to match the long life of the assets, thus
    eliminating refinancing risk.
        It is important to note that last week the Governments of
    Canada and Ontario both delivered their respective annual
    budgets. Ontario committed $130 billion for investment in
    infrastructure over 10 years, with a focus on transport and
    transit. And the Federal Government created a $1 billion annual
    public transit fund that will be leveraged to deliver projects
    using AFP.
        Equally important to the success of this model is the
    culture of transparency and fairness and the centralization of
    expertise that an organization like IO brings to the equation.
    A large part of our mandate is risk management. And like any
    risk management function, the oversight and independence that
    our organization brings to our ministry clients strongly
    supports the objective of on-time, on-budget delivery of high-
    quality infrastructure assets.
        Our organization is the intermediary between the public and
    the private sectors. Our ministry clients trust us to execute
    on their behalf, and our private sector partners trust us to
    run a transparent and fair process.
        I would be happy to discuss any aspects of our model so
    that we can help you advance the use of modern project delivery
    models in the United States. Thank you.
        Chairman Scott. Thank you, ma'am.
        Mr. Hollis.

      STATEMENT OF CALVIN E. HOLLIS, MANAGING EXECUTIVE OFFICER,
        COUNTYWIDE PLANNING AND DEVELOPMENT, LOS ANGELES COUNTY
                 METROPOLITAN TRANSPORTATION AUTHORITY

        Mr. Hollis. Mr. Chairman, Ranking Member Menendez, and
    Members of the Committee, thank you for the opportunity to be
    here today. I am responsible for Metro's real estate and joint
    development program in Los Angeles. The department houses the
    real estate acquisition group, our real estate asset management
    team, and the joint development program. The joint development
    program results in ground leases with private sector developers
    for the residential and commercial development of Metro
    property. The projects are often on or immediately adjacent to
    Metro's below- or at-grade rail stations, on park-and-ride
    lots, and similar underutilized properties. The Metro joint
    development program dates back to the early 1990s with Metro's
    first light-rail project.
        To date we have completed 17 joint development
    transactions, which has resulted in over 2,000 residential
    units, approximately 30 percent of which are subsidized
    affordable housing units, the 300-room W Hotel in Hollywood,
    800,000 square feet of retail space, and 600,000 square feet of
    office space. We have 3 additional residential projects that
    are under construction, 9 under negotiations, and another 14 to
    20 sites that are under consideration for future development.
    Private sector demand is very strong for our well-located
    sites. With the implementation of five additional transit
    projects this year, additional joint development sites will be
    identified.
        With regard to our board's policies and priorities, the
    board has established the following goals for its joint
    development program: first, to increase ridership; to encourage
    comprehensive planning and development around stationsites and
    along transit corridors; to reduce auto use and congestion
    through the encouragement of transit-linked development; to
    generate value to Metro through maximizing ground rent on
    Metro-owned properties; and to enhance land use, urban design,
    and economic development goals of the communities that we
    serve.
        Typically, our joint development agreements are structured
    as long-term, nonsubordinated ground leases such that we
    maintain long-term control and ownership of the property. Lease
    payments have been structured as either prepaid lump sum leases
    or with annual payments with escalations. In certain cases, the
    projects have also made capital contributions for station
    modifications and additional transit enhancements. In the
    current fiscal year, our asset management group will generate
    over $12 million in revenue from property and the joint
    development group an additional $10 to $14 million in lease
    income. We believe a joint development program can provide
    significant benefits to transit agencies and the general public
    by: recouping a portion of the public investment in transit
    infrastructure, capitalizing on the land value enhancement
    created by that public investment; providing a dependable
    revenue stream to support operations; creating a platform for
    additional private investment, particularly in communities
    which to date have been struggling to attract such investment;
    and demonstrating how TOD principles as espoused by the Urban
    Land Institute, and others, can add both real estate value to
    public lands and reduce the dependency on the private
    automobile.
        There are impediments to developing joint development
    programs. The first of those is the availability of land and
    capital for joint development. Typically, our experience at
    Metro is that major transit corridor projects seek to minimize
    land acquisition to preserve limited capital dollars for
    transit improvements. Metro has not applied for Federal FTA
    grants for joint development purposes in favor of reserving
    such grant opportunities for transportation improvements.
    Should a source of funding be available that was reserved or
    targeted specifically for joint development activities, Metro
    would be interested in these programs to expand our joint
    development program. With regard to financing tools that can be
    applicable to joint development, S. 797 and S. 880 are steps in
    the right direction.
        Second, alignment of transit capital projects with real
    estate cycles is very difficult. It is most cost-effective to
    move forward with integrated joint development and
    transportation projects at the same time. This has been
    difficult for a variety of reasons, but not impossible to
    achieve. Where it is not possible, we attempt to mitigate the
    costs inherent in serial development by looking at station
    design from a future joint development perspective in addition
    to a transportation perspective such that future development is
    anticipated and not precluded or made more costly than
    necessary.
        In conclusion, we believe Metro has developed a model for
    maximizing the return on transit infrastructure investment
    through joint development and proper stewardship of our other
    property assets in partnership with an active private sector.
        Thank you for the opportunity. We would be happy to respond
    to questions of the Committee.
        Chairman Scott. Thank you, Mr. Hollis.
        I will start with the first of Ms. Campbell. I believe that
    we should do more to leverage public resources to address some
    of our infrastructure needs. Federal highway projects have been
    very successful in the P3 space. The same is not necessarily
    true for public transportation. I remember back in my days on
    county council where we were able to use a design-build public-
    private partnership to create a number of road projects that
    were very successful. It gave local government and the Federal
    Government predictability and certainty as we moved forward in
    some of the projects.
        The one example that I am aware of, the P3 on the transit,
    is the Denver Eagle P3 project. However, this project did not
    receive expedited consideration, nor has the Federal Government
    waived any of the construction or financial management
    oversight requirements for the project. And as a result, what
    was supposed to be a project delivered through a streamlined
    and expedited process is still mired in Federal bureaucracy.
        Ms. Campbell, the process for entering into an
    Infrastructure Ontario P3 seems quite different than what I
    just described, as does the timeline for review. Could you
    discuss the process that IO has in place for advancing
    projects? What kind of consideration do you give to the due
    diligence of private investment groups? And how much oversight
    of the actual construction process and the financials does IO
    exercise once a P3 is signed?
        Ms. Campbell. I will do my best. So just to be clear, the
    IO's role, we would deal with the ministry responsible for the
    given project. In this case it would be--you know, they would
    own the decision on whether to go ahead with the project. And
    so once that decision was made, IO is brought into procure and
    run the P3 process, and we have a very defined process for
    doing that in terms of what our role is and how we face the
    private sector.
        And so once the project is designed, signed off, we work to
    come up with a budget for that through the traditional, and
    then we put it out to tender through what we call a Request for
    Qualifications as the first step where we--consortiums are
    formed, and in this case they probably would be financing as
    well, so they have financial partners as well as the
    construction partners. We shortlist that to a group of three
    groups once we are through the RFQ, and then those three go
    away and over a 6-month period typically will come up with a
    competitive bid to both finance and build that.
        It is a very defined process that they all respond to. It
    has got to meet all the requirements for--all the technical
    requirements and all the financing requirements. And at this
    stage, after 10 years, the process is quite well understood by
    the groups that bid on it, and so I would say it is quite
    formulaic now when you get into transportation projects versus
    hospitals. There are obviously very different risks. So it is a
    little more complex, but it is very well defined.
        So without getting into the details on whether we look at
    the structures, we are very precise in terms of what the
    requirements are on the design. They are allowed to innovate
    within that if they can find a better way of building. But they
    have to provide to a standard kind of construction and design
    complement. And in that way, three prices are arrived at, and
    then we take a few months to decide which of those three we
    will pick to proceed with. But these are fully financed as well
    by them.
        Chairman Scott. Thank you, ma'am.
        Ms. Garvey, how does the private marketplace work the
    broader Federal process into their overall deliberations when
    deciding whether to invest in a P3 project? And is there a
    point at which the Federal process is considered to take too
    long and, as such, a firm like Meridiam would decide against
    investing? For example, would a P3 through IO be more
    attractive than one going through the Capital Investment Grant
    Program?
        Ms. Garvey. I think from our perspective, the first thing
    that we look at is where does it fit in in a transparency plan.
    And if it looks to be a critical part of the plan, that is
    incredibly important to us.
        We have found, in terms of the Federal Government,
    sometimes we run into difficulties in trying to apply the TIFIA
    program. We have worked very closely with that. I think the key
    is in the whole discussion of how you are defining risk, and
    that is done very early on in the project.
        If you are sitting down with the private sector and really
    understanding who is taking--or the public sector--who is
    taking which risk, I think that is critical. That is really
    important to understand.
        The public sector understands the environmental process
    very well, so we tend to look at those projects that have
    already been through the environmental process, that have the
    environmental document if not fully in place, a draft in place,
    because that is a real document. Understanding that is sort of
    a threshold question for us. If the public is through the
    environmental process or have a draft in place, then there is a
    good indication that that project will continue. So that is
    generally how we judge the projects that we are going to engage
    in, that and whether it is a really critical piece of an
    overall transportation plan.
        Chairman Scott. Thank you.
        Ranking Member.
        Senator Menendez. Thank you Mr. Chairman. Thank you all for
    your testimony.
        There has been some discussion in this Committee about
    whether the private sector can fill in the gaps where
    Government has fallen short, in particular the question of
    whether we can pass another flat-funded transportation bill and
    ask the private sector to fill in the gaps.
        So my first question, Ms. Garvey, your testimony notes that
    if the only reason a public sector agency is considering a P3
    is for financial reasons, it is probably not the right model.
    Can you give us a little context to that? Discuss why that is
    the case.
        Ms. Garvey. I think the real advantage of a P3 is
    threefold:
        One, you can move a project much quicker, and the private
    sector can finance it upfront. You still have to have a robust
    revenue stream, and I will get to that. But you can finance it
    upfront, often moving a project ahead many years before it
    might have happened or occurred ordinarily.
        The second is the real sharing of risk that we talked
    about. The public sector takes on the risk that they are most
    comfortable with--that is, the environmental, the permitting,
    and those aspects--leaving the construction risks and the
    design risks to the private sector.
        The third reason that I think it is really important is
    this whole notion of life-cycle costs. When I look at the
    infrastructure in this country, in my own State of
    Massachusetts, one of our great challenges is maintenance and
    long-term life-cycle costs. We have not always done as well on
    that.
        When you look at a public-private partnership, although the
    public sector owns it, the private sector is only paid when
    they perform according to the performance standards, but the
    life-cycle costs are taken on by the private sector, and I
    think that is a real advantage. Those to me are the reasons why
    you would move to a P3.
        Having said that, I fully agree with your assessment that a
    robust Federal program, a robust State program is absolutely
    needed. It is a partnership, and to think of this as taking the
    place of the public investment I think is probably not
    appropriate or not the best way to look at it. This is one more
    tool--as was said by one of the previous speakers, it is one
    more tool in the toolbox, but it should not be viewed as a
    panacea or the silver bullet.
        Senator Menendez. Thank you for those insights.
        Mr. Hollis, let me ask you, your testimony focuses on an
    important point, not just better leveraging of existing
    resources but ways to actually create new revenue streams for
    transit agencies by leasing real estate to the private sector
    for residential or commercial development. So I think it is a
    creative approach.
        Joint development produces a revenue stream for your
    agency, albeit a modest one compared to, I guess, your overall
    operation. How is your agency using that revenue? That is one
    question.
        And, last, your testimony notes that although you have the
    option of using Federal transit dollars for joint development,
    LA Metro has declined to pursue that option, focusing instead
    on using those funds solely for transportation purposes. Should
    Congress consider dedicated funding for public-private sector
    joint developments? If you could put your microphone on.
        Mr. Hollis. With regard to how we use revenues, all of our
    joint development revenues go into our general fund which
    supports operations, which helps keep our fares some of the
    lowest in the country. So it is a small piece, but it is
    critical because it is very flexible revenue, and we use it for
    operating costs of the system.
        With regard to the availability of Federal funds for joint
    development, it is a permitted use under the regulations. We
    currently have a $5 billion construction program with five
    transit projects underway. Our board would like to see that be
    much larger. Every dollar is critical, and so where I would
    love to have extra dollars that I could round out a development
    site so we could do a better development, a more impactful
    development, our transit planners will be trying to minimize
    the footprint of that real estate that we acquire. So rather
    than having to go to funding a program that competes with
    capital dollars for our transit system, if there was a separate
    program that was dedicated to joint development, it would allow
    us to compete for those dollars, creates better projects, more
    valuable projects, therefore generating more operating revenues
    for our system.
        Senator Menendez. All right. I have other questions, but in
    deference to our colleagues, Mr. Chairman, depending how long
    we go, I might ask you to come back.
        Chairman Scott. Absolutely.
        Senator Warren.
        Senator Warren. Thank you very much, Mr. Chairman. Thank
    you for inviting me here today. And I want to thank our
    witnesses, all three of you, for your very thoughtful analysis.
        You know, elsewhere we hear a lot of talk about public-
    private partnerships around infrastructure and claims that they
    will solve our infrastructure crisis. And so I just wanted to
    ask a question around focusing on the financing aspect.
        These partnerships can provide capital to start a project,
    as you have talked about. But there is no magic here. The money
    must always be repaid, and the price must always include a
    healthy profit for the private company. Whether it is increased
    taxes to pay back a private loan, higher tolls on a bridge, or
    higher parking fees at the airport, the bill comes due;
    taxpayers must pay.
        As the Federal Highway Administration noted in its report
    in 2010 regarding public-private partnerships, these programs
    ``do not generate revenue, they require it.''
        Public-private partnerships have another problem. The
    profits are privatized, but when something goes wrong,
    sometimes taxpayers end up having to deal with the
    consequences. Bankruptcies, design changes, falling demand,
    huge cost overruns can eat up the supposed benefits of these
    deals.
        So the question I would like to ask is: Since these
    projects are ultimate funded by the taxpayers for the benefit
    of private companies, do you agree that there should be strong
    Federal oversight to evaluate the costs, the risks, and the
    benefits of these programs? Ms. Garvey, how about if I start
    with you?
        Ms. Garvey. Yes, I think there certainly is an appropriate
    role for the Federal Government for oversight. Absolutely. But
    I will tell you there are two key pieces.
        One is that in determining the sharing of the risks, the
    construction risks, for example, the design risks, those are
    all assumed by the private sector. So the kind of due diligence
    that the private sector has to do in order to make that happen
    is important.
        Senator Warren. Let me just stop you right there, though,
    and just ask the question: That is, if that is what the public
    requires. There is nothing inherent in that that requires it,
    because we have seen the projects that have been the public-
    private partnerships that have exploded, that have gone very,
    very badly. And the risks all got shoved over to the taxpayers.
        Ms. Garvey. Well, actually, the one that I am the most
    familiar with would be the one in California, and in that case,
    the Federal Government did--I do not want to say ``very well,''
    but they were able to--the TIFIA program was able to recapture
    that. I think you are making a good point, that you have to be
    very clear in the contracts that you draw up. It absolutely has
    to be ironclad. And I would say that that is in the private
    sector's interest as well. You have got to have a clear
    contract.
        I think we have learned a lot from the early days of P3s
    and certainly learned a lot from the Canadian experience as
    well. A clear, ironclad contract is absolutely essential. But
    you are right; you need a robust revenue stream. They have to
    be paid back.
        Senator Warren. Good. Thanks, Ms. Garvey.
        Ms. Campbell?
        Ms. Campbell. I will try not to be competitive, but I
    disagree. And I think it is fine to talk about these things in
    the model and isn't it great, but if it is not done right, you
    will get extra costs and the downside of the risks. So it
    really is critically important.
        And, you know, to go back to, I think, why it has worked--
    and we have had 10 years of learning, and starting from small
    things, working on hospitals for 10 years. If you do not
    structure the contracts right and you do not do your--and I do
    think you need a central authority. You cannot have everyone
    creating their own way, however that works, whether it is the
    State level or the Federal level. You have to have a Center of
    Excellence, and I think the Center of Excellence has to be
    independent from the owner of the asset. It is like I say, when
    you build a house--and in my case, my husband is the problem,
    not me. But you decide what you are going to build, and then
    all of a sudden he wants the fancy sound system or the bigger
    garage or whatever it is, and you have to say, ``No, I am
    independent. I was told that you wanted to build this. We have
    procured this. We have priced this. We have a timeline for
    this. If you want to change it, we have to go back to the top
    of government. No meddling in the back room.''
        And what is equally important is that the oversight during
    the process and the selection of the partners and the
    structuring--and that is why the transfer of the financial risk
    to the private sector is critically important. And I know in
    our Governor General's report, we got the note on, you know,
    you paid these additional financing costs that you referred to,
    and there is no question the financing costs are higher for
    that entity than it would be if the government was raising the
    money directly. But without the transfer of the financial risk,
    you do not get the accountability for delivering. And so when
    they go offside, they own the risks of going offside.
        Senator Warren. Thank you.
        And, Mr. Hollis, if I could ask you just to respond
    briefly, because I am over time, if that is all right, Mr.
    Chairman.
        Mr. Hollis. Well, I cannot speak directly to the P3
    program. I will say I agree with the speakers, and it is
    evident in the real estate program. You need to have the right
    people with the right expertise to deal with complicated
    projects. P3 is a financing tool primarily, and if you do not
    have people that understand financing, the first X-number of
    deals are going to go bad. And you have to have the right
    people in the right place. That is why it is difficult for
    small agencies, I think, because they do not have the in-house
    expertise, and there needs to be some kind of regional entity
    that can gather that expertise together.
        Senator Warren. I want to thank you all, and I just
    appreciate your emphasizing here the importance of the Federal
    role and the importance of having excellent oversight. There is
    no free lunch here. Giving into the temptation of a short-term
    fix with private money and then paying for it with long-term
    taxpayer money not only does not create any new resources for
    infrastructure; in fact, it makes the problem worse over time.
        We need more up-front taxpayer investments in
    infrastructure, period. Public-private partnerships will not
    solve that problem, and if governments are going to turn to
    public-private partnerships, the need to exercise the kind of
    careful oversight our witnesses have talked about is critical
    to ensure that taxpayers are not left holding the bag.
        Chairman Scott. Thank you very much.
        Senator Warren. Thank you, Mr. Chairman.
        Chairman Scott. Yes, ma'am.
        Mr. Hollis, during the hearings last week, the Committee
    focused on the growing state of good repair backlog. It strikes
    me that one way to address some of the backlog is to look more
    seriously at the potential to generate nontraditional sources
    of revenue from transit investments, also known as ``value
    capture.''
        Today transit systems often only look at traditional
    revenue streams--Federal, formula funds, State and local taxes,
    and fare box recovery--when there are a myriad of other
    opportunities to generate revenues. Around the world, more and
    more work is being done to capture the commercial value of the
    transit investment rather than simply value-engineer the
    investment to obtain the lowest-cost alternative.
        LA Metro has done some work in this area, but I understand
    that LA still struggles with some of the value engineering
    issues associated with the overall cost of projects.
        First, what types of value capture projects has LA Metro
    undertaken in an effort to generate revenues? How much annual
    revenue has been generated to date from these investments? And
    do you expect greater revenue potential in the future from
    additional investments?
        Senator Menendez. Mr. Chairman, if I may, just for a
    moment, I have an amendment that is pending in the Finance
    Committee which I have to go attend to. So if you are finished
    before I can come back, then I will just submit my questions
    for the record.
        Chairman Scott. Sounds good. Thank you, sir.
        Senator Menendez. Thank you.
        Mr. Hollis. Mr. Chairman, we currently generate from our
    real estate operation--our real estate operation deals with all
    of our real estate assets other than the joint development
    piece. That group generates about $12 million a year, and that
    is from short-term leases, from advertising opportunities on
    that property, from temporary uses by a whole range of people.
    Our joint development program this year will generate about $14
    million.
        There are other real-estate related sources. As an example,
    we are negotiating with the State of California to acquire a
    number of park-and-ride lots that are located along the Green
    Line of one of our transit lines. The State of California's
    statutes do not allow it to generate revenue from those parking
    lots. We are working diligently with the State of California
    and with the Federal Highway Administration who helped pay for
    those lots to try to convey those lots to Metro so that we can
    put them into more productive use. And I think more cooperation
    between the State, the Federal, and the local agencies to get
    some of those stagnant assets back into productive use would be
    very, very helpful.
        Our board has been very clear that we are to look for every
    revenue stream that we can find in addition to fare revenues.
    And that includes advertising revenues; it includes cell tower
    revenues; it includes leasing revenues; and it includes
    expanded joint development opportunities. They are an important
    revenue because, as I mentioned, they do not have many of the
    single-purpose strings attached to them that other sources of
    funds have within a transit agency.
        Chairman Scott. Thank you.
        Ms. Campbell, since 2004, Infrastructure Ontario has been
    assigned 83 projects representing a total construction cost of
    around $5.5 billion. This is a significant investment, but much
    like the United States, there is also the long-term costs to
    maintain these significant infrastructure investments.
        Can you speak to the life-cycle cost requirements that are
    built into the P3 arrangements? And how long are
    concessionaires expected to maintain these assets, if at all?
    What are the advantages to a P3 that included operating and
    maintaining the assets? It certainly seems to have caused a
    number of questions about the long-term investment and the
    long-term risk exposure to taxpayers. I would love to hear your
    comments.
        Ms. Campbell. We look at each one of these assets--and I
    talked about the DBFM, the Design-Build-Finance-Maintain model,
    and it does not apply to every project we do. But when there
    is, as Ms. Garvey referred to, when it is an asset where the
    life-cycle costs are significant, you want an alignment between
    the fact that they are going to build this thing upfront, you
    are not going to be clear on how well it is built or what the
    maintenance looks like until, you know, 30 years in. If you
    need to line those up, they then have a 30-year operating
    arrangement on that. At the end of 30 years, they will hand it
    back to the government.
        And so if you do the whole package, they will finance it
    upfront; we will pay them some payments--well, actually, on a
    full DBFM, they will not get paid anything upfront. They will
    get paid over the 30 years. And if there are maintenance costs
    over that 30-year time that exceed what our payment stream is
    to them, they bear that risk. And their financing lines up over
    that 30-year period in an amortizing instrument as well.
        And so they are at risk. If indeed they go over cost on the
    build or if they go over cost on the maintenance, that is fully
    their responsibility.
        Not all assets make sense. If it is viewed that there is
    little life-cycle risk in the asset, it might not make sense to
    do it that way. But where there is life-cycle risk, we bundle
    it all together with the financing component and transfer that
    risk to the private sector.
        Chairman Scott. Thank you.
        Ms. Garvey, are there any guiding principles Meridiam
    believes must be a part of a P3 investment that it considers,
    contracting guidelines or long-term revenue requirements,
    operating and maintenance goals?
        Ms. Garvey. Well, I think we have discussed a number of
    those today.
        Chairman Scott. Yes.
        Ms. Garvey. But I think, again, when we look at the
    guidelines, what we are looking for is clear legislation. We
    are looking for a clearer understanding of what the public
    policy goals and expectations are for the public sector. We are
    looking at what the revenue stream is and how robust is that
    revenue stream. We are looking at the institutional capability,
    that was talked about before. Those are fundamental principles
    for us as we look at a project.
        The whole notion of operating and maintenance that you just
    referred to, Mr. Chairman, I think is really critical and
    important, and one of the more interesting aspects that we are
    finding in P3s is that there is often an incentive built into
    the contract for the private sector to move to more energy-
    efficient projects or energy-efficient techniques, because that
    is really a way to capture some of the efficiencies. So some of
    those incentives are important as well as we look at the
    contracts.
        Chairman Scott. Thank you.
        Ms. Campbell, IO's literature talks about leveraging the
    expertise in project management discipline of the private
    sector through the use of P3s to deliver infrastructure
    projects. However, Ontario's Auditor General released an audit
    on IO's P3 model and asserted that Ontario taxpayers spent $8
    billion more than it would have if the projects were completed
    successfully using traditional government procurement. Eight
    billion dollars is not an insignificant amount. Could you
    address this finding and explain to the Committee why, in spite
    of this 2014 finding, IO continues to advance the P3 model? Are
    there other benefits or efficiencies that were not considered
    in the audit?
        Ms. Campbell. The short answer is yes, and there has been a
    lot of press over that. There are two numbers missing from the
    $8 billion. There is a $14 billion number, which is the
    savings--we do something called value-for-money analysis on
    every project we look at. And we look at the risk transfer and
    the dollars in that risk transfer, which in the total of the
    projects that she referred to was $14 billion. So we
    calculated--and this is third-party verified, well-known
    technology in the calculations--that there were $14 billion in
    savings in transferring those risks, and those would have been
    life cycle, capital, and the rest of it--$14 billion in savings
    against the $8 billion of additional financing costs, which is
    both the upfront fees plus the financing costs over the life of
    the asset, that it costs incrementally to finance through the
    private sector, leaving us a net gain of $6 billion. So that is
    the full assessment.
        Chairman Scott. That is the whole story.
        Ms. Campbell. That is the whole story.
        Chairman Scott. Excellent. Thank you.
        Last question, and thank you all for your participation in
    this panel discussion, an important discussion about how we can
    hopefully move more projects forward and do it in less time and
    more cost-effective.
        Mr. Hollis, one way to employ the value capture concept is
    through contracts with concessionaires who in turn generate
    revenues that can be reinvested in the system. I understand
    that one of LA Metro's efforts centers on bringing
    concessionaires into Union Station as part of a broader
    revitalization effort. Mr. Hollis, could you speak to the
    broader efforts to revitalize Union Station and the decision to
    bring in private concessionaires? How much revenue has been
    generated as a result of these contracts? And is the revenue
    sufficient to cover the annual operating budget of Union
    Station?
        Mr. Hollis. Mr. Chairman, in 2011, our Metro Board of
    Directors acted to purchase Union Station from a private party.
    Since that time, we have done a complete master plan for the
    property, and we have begun attracting concessionaires into the
    property. These include restaurants and other retail uses. We
    currently generate approximately $1 million, $1.2 million in
    revenue, which does cover the operating costs of the station as
    a property. In addition to that, we have tenants, including
    Amtrak and commuter rail, that pay additional costs for the
    burdens they put on the station.
        We believe Union Station is the kind of property that can
    certainly generate substantial revenues that will more than
    cover its costs. We also as part of the master planning for
    Union Station planned for 3.2 million square feet of commercial
    development at the station, and those ground lease revenues
    will generate tens of millions of dollars for the transit
    agency.
        So that was an asset that we had to acquire, and we are
    achieving the benefits of that acquisition decision today and
    will continue into the future.
        Chairman Scott. I was pretending that was my last question.
    Actually I have one more that came to mind.
        Drawbacks from being a landlord, having the transit system
    as a landlord, you know, just quickly?
        Mr. Hollis. The principle drawback is that the agency needs
    to think of itself as an owner of real estate, and
    increasingly--and there has been a change in the way we address
    this issue to the positive. We have to recognize we have to
    work with our local communities. We are imposing development
    within their communities. We need to work with those
    communities to be sure that development is consistent with the
    needs of those communities, and we are doing a much better job
    of that.
        Second, we need to act like a private landlord if we are
    going to get the benefits of being a property owner. We need to
    insist upon fair value for our property, which our board has
    been very good at insisting upon. We need to be sure that the
    development is built properly for the long term, because these
    are our assets forever, as far as we are concerned.
        So as long as you are diligent, as long as you are willing
    to act like a private landlord in terms of protecting the value
    of those assets, and you properly transfer appropriate risks to
    those lessees, we do not believe that there are significant
    downsides for a transit agency to be the owner of a commercial
    property.
        Chairman Scott. Thank you very much. Thank you to all the
    witnesses for being here this morning. I know that Senator
    Menendez as well as other Members may have questions. We will
    submit those questions for the record.
        Chairman Scott. Thank you so much, and this Subcommittee is
    adjourned.
        [Whereupon, at 10:27 a.m., the hearing was adjourned.]
        [Prepared statements and responses to written questions
    supplied for the record follow:]
                      PREPARED STATEMENT OF JANE F. GARVEY
             Chairman, Meridiam Infrastructure Fund, North America
                                 April 29, 2015
        Good Morning, Chairman Scott, Ranking Member Menendez and Members
    of the Subcommittee.
        My name is Jane Garvey, and I am Chairman of the Meridiam
    Infrastructure Fund, North America. It is my pleasure to be here today
    to discuss the opportunities and the challenges for private investment
    in the United States transit system.
        Meridiam is a long-term investor in public-private partnerships, or
    P3s. Our investors are primarily public pension funds or institutional
    investors who embrace the long-term nature of the fund and are
    committed to the notion of building public infrastructure. While there
    is a broad range of definitions for P3s, fundamentally, it is a legally
    binding contract between the public sector and a private company where
    the partners agree to share the risks and rewards that are inherent in
    an infrastructure project. In the case of some P3s, the private sector
    assumes all of the revenue risk and collects tolls or fees generated
    from the project
        Meridiam's business model contemplates an agreement where we, the
    private sector, designs, builds, finances, operates and maintains the
    facility for a pre-determined period of time. In exchange, the public
    sector provides a reoccurring payment based on the condition of an
    asset--In other words, we are paid only if we meet certain performance
    standards set by the public sector.
        Currently, we have 33 billion under management and 39 projects in
    operation worldwide. Our investments have been across a number of asset
    classes including transportation, power and social infrastructure but
    what links them is their social importance to the communities they
    serve.
        Let me be clear--Public-private partnerships are not for every
    project. However, large, complex projects that lend themselves to
    innovation are often good candidates. There are certain characteristics
    that we in the private sector look for--and criteria that are equally
    important to public sector as well.

      1.  Strong, authorizing legislation that gives clarity and direction
            to the public/private relationship. Currently about 33 States
            have the ability to enter into P3 agreements. Legislation that
            provides clear guidance and direction is an essential threshold
            for the private sector.

      2.  Politically smart projects: Projects should be of critical
            importance to the community. In the case of transportation, the
            project should be part of a larger plan that is integral to an
            overarching view of the future of the community. This implies
            an open public policy debate and discussion early in the
            process. What public policy goals are important to the
            community, how are they reflected in a P3 relationship? These
            projects are long term in nature and extend far beyond the term
            of one administration. Projects that reflect clear policy goals
            that are laid out early in critical to success and give the
            public sector an understanding of what is important to the
            community as well.

      3.  Active engagement of the stakeholders: These are complex
            projects, often it is a ``first time'' approach. Active
            engagement of the stakeholders throughout the process, not just
            the early stages, is critical for success.

      4.  Determining the revenue stream: As has been said many times, P3s
            are not ``free money''. Lack of a robust revenue stream has
            been an impediment to many transit projects and P3s are no
            exception. Fares do not generate enough to cover the long-term
            costs. Some communities, such as Los Angeles and Denver, have
            opted to pass a sales tax dedicated to creating a long-term
            revenue stream. Others are considering impact fees, development
            rights along the transit corridor or a combination of multiple
            streams.

      5.  Risk sharing: Risk sharing may be among the more complicated
            aspects of P3s and can take many forms. The public sector often
            takes on the environmental and permitting risk while the
            private sector assumes the risk for design, all the
            construction risk, financing risk and the operating and
            maintenance of the facility. But as is often the case, the
            devil is in the details. For example, during the design phase
            of a project, is the private sector free to design to a
            performance measure or are the same design reviews that are
            used in traditional delivery models still employed here,
            creating a duplicative layer of review? Similarly, during
            construction, is the contractor free to employ techniques that
            meet the performance standards or are they expected to follow
            more prescribed techniques? And is the revenue risk transferred
            entirely to the private sector or is it an availability
            structure where the private sector is paid if it meets
            performance standards or metrics? These are important questions
            and for a project to succeed, those issues should be understood
            upfront.

      6.  Institutional capability: It is critical to have an empowered
            dedicated P3 public sector team. Centrally located and a team
            with the technique expertise to oversee what is a complicated
            process. Often the responsibilities for moving through the
            process are shared across many agencies or departments in
            government. This can create delays as well as confusion for
            proposers who may have questions or concerns. A focal point, or
            a ``one stop shopping'' could help eliminated the
            inefficiencies that can arise during the process.

      7.  Political Leadership. The Federal Government has a key role in
            fostering P3 projects. However, there is no substitute for a
            strong, local leadership to advocate for the project and in
            this case for an alternative delivery model. It is generally
            true for any large, complex infrastructure project and I would
            say particularly true for P3s. These projects only succeed with
            strong local leadership.

        When I look at the lessons learned from established P3s,
    particularly here in the United States, the extent to which they are
    successful depends, in part, on recognizing and embracing these
    elements I have outlined:

        Clear legislation,

        Understanding of revenue risk,

        Level of expertise,

        Transparency,

        An identified revenue stream, and

        Political leadership.

        There are certain to be some growing pains with our experiences
    particularly in the United States. For example, how does the contract
    deal with what could be unanticipated events far into the future
    perhaps in year 20 or 25? Is there some sort of ``elasticity
    provision'' that could give both parties an opportunity to revisit a
    narrow provision in the contract without opening up the entire
    contract? Are the roles of each entity public and private clearly
    understood particularly in the area of ``risk sharing''?
        In the case of the private sector, it is essential for us to fully
    understand the political considerations and challenges that the public
    sector faces. I believe we can better explain some of the advantages of
    the P3 model, but also fully recognize it is not for every project and
    the public policy considerations may lead the public sector to another
    conclusion. And while we urge transparency on the public side, it is
    equally important for us to be transparent in our goals, approach and
    revenue returns as well.
        As I stated, P3s are not for every project. If a public sector
    entity is considering this approach solely for financial reasons, it is
    probably not the right model. But it is one more ``tool'', one more
    approach for the public sector to consider as they are looking at
    solutions for their infrastructure investments. A P3 approach allows
    for appropriate sharing of risk, encourages the private sector to be
    innovative and efficient and gives the public sector a fixed price for
    all the elements (design, construction, operation and maintenance).
    This allows a real opportunity for the public sector to anticipate and
    plan well into the future. For me the real benefit of a P3 is the
    ability to deal with a challenge that has long plagued the aging
    infrastructure in this country and that is the ability to build in life
    cycle costs. It is a recognition that construction of a project is step
    one and that maintaining that infrastructure throughout its useful life
    is equally necessary to the long-term success of a project.
        I applaud this Committee's interest in this issue. Working
    together, I am confident we can create constructive partnerships
    between the public and private sectors, partnerships that benefit our
    communities and help to improve our national infrastructure.
        Again, thank you for the opportunity to appear before your
    Committee. I am happy to answer questions.
                                     ______

    Meridiam Infrastructure Fund, North America
    Examples of U.S. Projects
        Port of Miami: This project comprises the construction and
    management of a 1.6 km tunnel linking the Port of Miami to the
    MacArthur Causeway. The concession company receives FDOT payments over
    the term of the concession based on the availability of the tunnel.

        Overall investment: $903 M

        Concessionaire: MAT Concessionaire, LLC

        Partners: Meridiam (93.4%), Bouygues Construction (6.6%)

        Public partner: Florida Department of Transportation
            (FDOT), Miami-Dade County, city of Miami

        Date of entry into service: August 2014

        Concession period: 35 years

        Presidio Parkway: This project is a design, build, finance,
    operate, and maintain concession in San Francisco, California. The
    Project will replace the current 1.6 miles (2.6 km) Southern approach
    to the Golden Gate Bridge with a parkway facility, two pairs of cut-
    and-cover tunnels, a high viaduct, a low-causeway and landscaped
    medians.

        Overall investment: $365 M

        Concessionaire: Golden Link Concessionaire (GLC)

        Partners: Meridiam Infrastructure (50%), Hochtief (50%)

        Public partner: California Department of Transportation
            (Caltrans), San Francisco Transportation Authority (SFCTA)

        Current status: Construction with date of entry into
            service as Fall 2015 (provisional)

        Concession period: 33.3 years

        IH-635 (LBJ) Managed Lanes: This project consists of reconstructing
    the motorway alignment to provide general purpose lanes and 13 miles of
    new Managed Lanes as well as the construction of new frontage roads on
    the IH-635 road that currently serves as the main circumferential
    roadway in the Dallas region in the Dallas-Fort Worth metropolitan area
    (the ``Metroplex''), the fourth largest metropolitan area in the United
    States.

        Overall investment: $2.6 B

        Concessionaire: LBJ Infrastructure Group (LBJIG)

        Partners: Meridiam Infrastructure and co-investors (42.4%),
            Cintra (51%), Texas Police and Fire Pension System (6.6%)

        Current status: Construction with date of entry into
            service: Fall 2015 (provisional)

        Concession period: 52 years

        North Tarrant Express project: The NTE project includes the
    financing, design and total rebuilding and expansion of 21.4 km length
    sections of the existing roadway, including frontage roads and the
    addition of tolled managed lanes. The roadway borders a number of
    communities to the north and east of Ft Worth, Texas. The project is
    financed by a mix of private and public sources.

        Overall investment: $2.1 B

        Concessionaire: NTE Mobility Partners

        Partners: Cintra (57%), Meridiam and co-investors (33%),
            Dallas Police and Fire Pension System (10%)

        Public partner: Texas Department of Transportation (TxDOT)

        Date of entry into service: October 2014 (nine months ahead
            of schedule)

        Concession period: 52 years

        Long Beach Courthouse: This social infrastructure project includes
    the design, construction, financing, operation and maintenance of the
    new court building which replaces the current Long Beach Courthouse
    completed in 1959. The new Courthouse comprises 31 courtrooms, with
    accompanying holding cells and administrative office space. The project
    also includes renovation and operation of a car parking facility and
    the provision and management of commercial office space and retail
    space within the Courthouse.

        Overall investment: $495 M

        Concessionaire: Long Beach Judicial Partners

        Partners: Meridiam and co-investor (100%)

        Date of entry into service: Fall 2013

        Concession period: 38 years

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      RESPONSE TO WRITTEN QUESTION OF SENATOR VITTER FROM COLLEEN
                                CAMPBELL

    Q.1. As you know, building or upgrading highway infrastructure
    is among the most common uses for Public-Private Partnerships.
    In Louisiana, for example, a Public-Private Partnership has
    been considered as a way to complete the long-delayed
    Interstate 49 corridor from Lafayette to New Orleans.
        From your experience, can you describe the criteria or
    formula that should be used to determine what ratio of
    investment should be public versus private, and how to fairly
    determine a price for tolls for projects such as a highway?

    A.1. The decision to utilize private funding as a means of
    financing civil infrastructure should be used judiciously as it
    comes with a cost. The ratio with respect to private versus
    public investment in a project should be limited to the optimal
    amount required to align the interests of the public and
    private sectors; with the ultimate goal of giving the public
    sector appropriate negotiating leverage and protection in the
    event of a default by the builder or operator of the asset. In
    Canada, the majority of new roads have not involved the
    transfer of toll risk. Therefore, the totality of the risks
    being passed on to the private sector specifically relate to
    those associated with construction, lifecycle, and maintenance
    of the asset. Traditionally, this means that the majority of
    capital used during construction is private and the majority of
    the capital during the operating phase is public via annual/
    monthly service payments to the operator. In some cases, as
    much as 85 percent of the capital during the operating phase is
    publicly funded. This type of funding structure is typically
    utilized on our largest capital transactions where the sheer
    size of the contract warrants a larger substantial completion
    payment (SCP) in order to make it financeable and affordable.
        IO's current policy for Highways is to pay up to 85 percent
    of Capital Costs at Substantial Completion to achieve the
    optimal balance between risk transfer and maximizing value for
    the Province.
        That said when devising IO's internal strategy with respect
    to determining the optimal SCP size, IO conducted sensitivity
    analysis on two risk coverage/exposure metrics in addition to
    reviewing the nature (complexity/labour intensity & spatial
    coverage) of the specific asset class to assist in informing
    our policy:

       LPublic Sector Coverage Ratio (PSCR): This ratio
            essentially captures the value of the private sector
            money at risk (debt and equity) over the 30 year
            concession period as compared to performance
            obligations that Project Co. must meet per the Project
            Agreement (i.e., facilities maintenance and lifecycle/
            rehabilitation) over the same period. Overall, it is an
            indication of the Sponsor's leverage over Project Co.
            during the concession period.

       LExpiry Transition Period Over-run Cushion (ETPOC)--
            This ratio focuses on the sponsor's (public sector)
            coverage during the high risk years (i.e., 5 years
            prior to expiry of the Project Agreement). The ratio
            captures how much facilities maintenance and lifecycle/
            rehabilitation costs can increase before it eats into
            the remaining private sector debt and equity. It is a
            measure of how high actual costs can deviate upwards
            from projections before a potential default by Project
            Co.

    It is important, however, to keep in mind that other factors
    can influence this policy. Therefore it is critical to balance
    the following constraints with the above ratios to achieve the
    optimum SCP on a Project-by-Project basis.

       LAffordability--as the amount of public sector
            investment decreases (or SCP), financing costs will
            increase. Higher SCP makes the project affordable for
            the Province.

       LMarket Lending Capacity--for civil transit projects
            in particular, the dollar scale of the project may be
            too large for the market to accommodate from a bond
            capacity perspective. This may warrant an increase to
            the overall amount of public investment.

       LMinimum Lender Capacity--to ensure competitive
            pricing a transaction should ideally attract large
            dealers and institutional investors. For this at a
            minimum, bond solutions must meet the DEX Bond Index
            size requirements (>$100m & 10 buyers).

       LProject Rating--a decrease in the amount of the SCP
            will improve the coverage and break-even ratios but
            depending on the size, scale and risk profile of the
            project, it may not achieve the desired project rating
            no matter any change (i.e., a movement from a BBB+ to a
            low A rating may not be worth the increase in overall
            financing costs).

        As an example of SCP sizing in recent IO highway projects:

       LWindsor Essex Parkway (2009)--85 percent
            substantial completion payment

       LHighway 407 Phase 1 (2012)--85 percent substantial
            completion payment

       LHighway 407 Phase 2 (2015)--85 percent substantial
            completion payment

       LHighway 427 (2016 estimated)--75 percent
            substantial completion payment