Miami Sets Example for P3 Considerations in Port Projects

Law360

Publication
October 20, 2015

A new public-private partnership is coming to PortMiamiRoyal Caribbean Cruises LTD seeks to design, build, finance, operate and maintain a new cruise terminal in the northeast section of the port. RCCL's plans have been preliminarily memorialized in a nonbinding memorandum of understanding that was approved by the Miami-Dade County Board of County Commissioners. Subsequent commission approvals will be needed for the binding deal documents and agreements.

Typical of a P3, RCCL will do more than simply enter into a ground lease for space in a terminal. It will share the risk of designing, constructing, operating and most importantly to the port, financing the new terminal. The maintenance responsibilities will be split between maintenance of the leasehold improvements by RCCL and maintenance of the common areas outside the leased premises by the county, satisfying the remaining "M" element in the DBFOM (design, build, finance, operate, maintain) acronym that is used to characterize a PPP.

The P3 with RCCL comes after the successful completion of the Port Tunnel P3 that has garnered a visit and praise from President Obama who extolled it as an example of the kind of P3 that should be used around the country to modernize aging transportation infrastructure. The $1 billion PPP was built because it was expected to divert vehicles from and reduce congestion in Downtown Miami and reduce travel time to and from the port. In less than a year, the Port Tunnel met and even exceeded many expectations.

The Port Tunnel P3 was structured as an availability payment-based concession agreement. With this financing structure, the private-sector partner constructs, operates and maintains the facility with its own funds and the public agency (in the case of the Port Tunnel, Florida Department of Transportation) makes payments to its partner based on the project's availability for use by the public. The public agency bears risks pertaining to the demand for the facility because the amount it pays to the private sector party does not change even if the project is not used to the extent anticipated, though the availability fee may be offset with user fees received from public use of the project or facility. The risk for the private party includes the fact that this fee structure relies on the public budget, which may be subject to budgetary conditions and constraints and political pressure. There are also risks pertaining to delays, repairs and increased costs that could lead to the private-sector partner missing key deadlines or taking the project out of service, which would lead to penalties for unavailability.

This new P3 at the port is timely, not just for Miami-Dade County, but also considering the port developments that are taking place around the world. It is estimated that 70-80 percent of the world's trade in volume and value travels by ship. To keep up with economic demands for commodities and trade demands for new specialized equipment and modernized ports, there has been a groundswell in the number of port infrastructure projects.

With the deepening and widening of the Panama Canal to double its capacity, ports on the East Coast of the United States are deepening their harbors, in an effort to compete for the bigger cargo container ships that are expected to arrive as early as next year. In conjunction with deepening their harbors, ports are developing new high-tech terminals. PortMiami has completed its deep dredge project and the P3 with RCCL is just one of several terminal development projects slated for the port, which is maximizing its efforts to compete for the bigger ships, by being one of only four U.S. Atlantic ports to be at 50 feet when the Panama Canal opens after its expansion. New terminals with the latest technology will work in conjunction with the Port Tunnel to reduce turnaround time for the transporting of imports and exports and speed up cargo delivery.

Entering into P3s will help ports not only obtain the investment that is needed for these multimillion, nearly billion, dollar upgrade and expansion projects, but also the skills and management needed to do so effectively and efficiently. With a P3, the private sector entity can reduce its investment burden, but still maintain a level of control and involvement in the management of the port.

It has not yet been finalized, but the structure of PortMiami's P3 with RCCL will likely differ from that of the Port Tunnel P3, because port terminal development usually follows a landlord model in which the public sector entity that governs the port is responsible for common infrastructure and facilities and the private sector entity is responsible for terminal-specific developments and operation. The P3 investment from the private sector entity typically helps the public sector entity fund the main infrastructure developments for which it is responsible. The memorandum of understanding signed by RCCL and PortMiami provides a basic outline of this type of structure. Alternatively, a port P3 could also be structured as an availability payment agreement. The public sector entity could use an availability payment P3 to have a private sector entity develop, finance and maintain the common facilities. This would assuage public sector budget constraints, increase the odds of on-time delivery of the upgraded facilities, enable the sharing of risk and reduce long-term maintenance costs because maintenance will be the responsibility to the private entity, thus it will be incentivized to use higher quality materials that require less maintenance over time and consequently extend the life cycle of the project.

A landlord model P3 is a long-term investment for investors and can be just as unpredictable as an availability payment-based P3. A port's income is vulnerable to global supply and demand issues and the volatility of the price of commodities. Thus, where as global economic and commercial trends may not have an effect on a road or tunnel infrastructure project, they may have an effect on ports. But this is buoyed by the overall reliance on sea transport for global trade and economic development.

Ports are major economic drivers for the cities in which they are located. Adding to the revenues that are generated by the millions of tons of cargo that are imported and exported by ports, cities are modernizing their ports by adding commercial developments that make the ports as much of an attraction as a trade and shipping hub. Les Terrasses du Port opened at the Port of Marseilles last year, revitalizing an area of the port that had not been accessible by the public for many years. It is a retail and leisure shopping center with 190 stores and a restaurant terrace with unrivaled seaview dining. A portion of the ground floor level of the center also acts as the passenger terminal for the passenger ferries.

PortMiami is just one breeding ground for P3s in Miami-Dade County, future P3s will include: the Baylink rail connection between downtown Miami and Miami Beach; the expansion of Miami International Airport; and the new civil and criminal courthouses and jail facilities. As Miami-Dade County continues to make strides in financing projects and providing infrastructure solutions with P3s, it can look to the success at the port as assurance that P3s can do well in Miami-Dade County.

This article is reprinted with permission from Law360.

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Albert E. Dotson, Jr.

Albert E. Dotson, Jr.

Managing Partner
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