Florida's I-595 road deal shows how big schemes can survive the credit crunch, says Sacira Coric, infrastructure and project finance director at Scott Wilson.

The US$1.2bn Interstate-595 project in Florida was signed during a period of turmoil in the credit market, surprising everyone with a new financing model. So why is the project a good benchmark for the ‘still emerging’ P3 market in America?

The I-595 project covers the refurbishment and improvement of a major 10.5-mile highway corridor route in Miami, Florida. It involves a number of technical challenges, such as re-alignment and widening within a highly constrained location, the implementation of an innovative system of reversible express lanes, the improvement of complex junctions and the management of traffic during the construction works.

The Florida Department of Transport chose to develop the project as a PPP, under which the successful bidder was required to have the entire financial package committed at the time of the submission of the final proposal. Over the 35-year concession, the department will set and collect tolls, while compensating the concessionaire with a combination of availability payments over the operating life of the project and final acceptance payments during construction.

This approach was supported by Florida Governor Charlie Crist, who commended the transport department for making the project a reality, ensuring the deal would bring strong economic benefits to the region.

This did not mean the deal was without setbacks. The lead-up to obtaining financial close was hit by the rapid deterioration of the credit environment and a limited supply of equity and debt in the market. But while many projects faltered at this final hurdle, the innovative use of various funding sources to create an optimal financing structure ensured financial close was achieved in March 2009.

Much of the success of the financial close can be attributed to the financing component provided by the US Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA). TIFIA is a federal credit programme that provides flexible and competitive loans and loan guarantees to transportation projects of national or regional significance. In the turbulent market conditions, TIFIA provided the crucial alternative to commercial bank funding.

Providing such a unique financing solution for the I-595 project was only one piece of the puzzle. As with all infrastructure deals, understanding and recognising risks is critical – in particular, the intricate relationship between technical and commercial risks. The timing of the project and the market conditions at the time intensified the scrutiny from a club of lenders wanting to ensure the project was bankable.

Lenders and credit-rating agencies did not have an appetite for risk, and there was a notable increase in their desire to dig deeper into the details of the technical solution. As deal flow in the market fell, and the pipeline of opportunity diminished, the I-595 project was no longer just another road PPP.

Successful deals depend on strong relationships. On the I-595 project, the relationships formed between the ACS Infrastructure Development Consortium and their advisors enabled the team as a whole to rapidly identify the key risks to the project and introduce mitigation measures, ensuring the risk profile satisfied the lenders’ requirements.

Having proactive advisors keen to work as part of the team, whilst maintaining independence and objectivity when identifying risks, proactively searching for mitigants and in particular forming opinions, makes the transition to financial close so much easier.

In the past few years, the industry has had the luxury of an incredible deal flow in infrastructure. However, the challenging market conditions at the end of 2008 exposed some fundamental flaws in previous deals. The I-595 project demonstrates that with all parties working together and tackling risk pro-actively, large and complex infrastructure deals can be bankable, despite adverse economic times.

As an emerging market, the US considers PPP experience from the UK and other mature markets as essential for the success of new deals and is keen to benefit from any lessons learned on past projects.

The US market is ready for the muchneeded PPP model as one of the most suitable options for tackling the funding gap and the need for new infrastructure and for the expansion of the existing facilities. An impressive amount of work has been done in some states in terms of legislation, public involvement and adapting the procurement processes to this promising way of partnering, and other states will certainly follow the same path.

American contractors and investors are more and more willing to participate in this kind of partnership and clearly see the opportunities involved. The I-595 is an example of how to manage such an important effort and lead it to conclusion. It has also demonstrated that a good PR strategy and strong institutional support are essential for success.

The recent stimulus packages proposed by the Obama Administration, along with a willingness to attract foreign investment to fill the funding gap requirements associated with US infrastructure, are beginning to create signs of improvements in the market.

The lessons learned from the I-595 project, its challenges and how they were overcome, can be used as a benchmark for new deals in this now emerging market.

Its success, despite market conditions, can be followed in future US PPP deals. But much greater efforts at federal and state levels are still required to ensure the pipeline of new projects significantly increases.