[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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            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