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Infrastructure Investment Through P3s

Albert E. Dotson, Jr.

Last month, a roundtable policy discussion on ways the financial community can invest in infrastructure using public-private partnerships (also known as P3s or PPPs) took place in New York City. The panel, chaired by U.S. Rep. John J. Duncan, highlighted the current need across the U.S. to re-invest in infrastructure, including highways, water infrastructure, airports and public buildings. On July 17, 2014, President Obama addressed this need and announced a new initiative to boost private investment in public infrastructure, which would encourage collaboration between state and local governments and private-sector investors, expand the market for public-private partnerships and make greater use of federal credit programs.

U.S. infrastructure projects may be more attractive to investors worldwide because of federal support for P3s and because investment in the U.S. market may prove to be more favorable from a tax perspective as compared to other countries. Also, as the panelists noted, P3s offer a stable, long-term return on investment with returns reaching up to 32%, depending on the project and the level of risk assumed by the investor. The cost of capital may be greater when investment equity is an element of a P3, but that rise in the cost of equity capital may be offset by greater efficiencies and overall lower costs throughout the life of the project.

In determining whether an investment is worth the time, effort and money that a P3 procurement process requires, investors seek certainty that there will be a project at the end of the process and economic feasibility by judging factors such as the parameters outlined for the procurement process, the political and community support for the project and the risk allocation. Tom Osborne of IFM Investors discussed using the assessment tool known as value for money (VFM), which is an assessment to determine whether a P3 as compared to a traditional public procurement is going to generate greater value than it takes away. VFM looks at the entire life of the P3 to ascertain if the cost of delivering, operating and maintaining the P3 will be lower by using a P3 versus a traditional public procurement. Such an assessment is available to give investors the level of comfort needed to invest in P3 projects.

As highlighted by Karl Kuchel of Macquarie Infrastructure Partners, the private sector is presently looking for investment opportunities in these infrastructure assets, specifically P3 infrastructure projects.  To maximize appeal to equity investors, infrastructure projects should provide clarity and transparency on the procurement process. This means providing an expected project time table, projected redevelopment costs, clarity of risk allocation, and a good track record by the procurement agency. When the municipal personnel have the level of expertise in understanding PPP agreements, planning and forward thinking that will ensure the agreement’s and P3′s success, there is opportunity for greater alignment between the public and private sectors, which is essential to have throughout the life of the PPP. In terms of allocating risk, P3 agreements can include clauses that allow such agreements to be renegotiated every set number of years because of the difficulty in predicting, for instance, volume. This also encourages the public and private sector to remain aligned throughout the life of the project.

As P3 attorneys actively involved in P3 developments in South Florida, we anticipate that the public sector will continue to develop the expertise needed to analyze risk transfer and appropriately price and manage the risks of P3s, increasing their viability and attractiveness to investors. Miami-Dade County officials continue to seriously explore the use of P3s for infrastructure development, making Miami more of a prime target for foreign and national investors. Miami does not need to be viewed as only the gateway or stepping stone to Latin America. As a city that is undergoing a boom in development, investors and businesses need not look further than Miami for investment opportunities and business success.

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