[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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______
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95-736 PDF WASHINGTON : 2016
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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
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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