Coming to America

With a realistic pipeline beginning to bear fruit in many states, the US is starting to attract interest from a variety of companies across the globe. But how can companies looking at the Land of the Free turn it into their Promised Land, asks P3 Bulletin

Figures from public policy organisation Brookings Institution’s Metropolitan Policy Program show that US spending on PPP infrastructure projects accounted for only 9% of the global total between 1985 and 2011.

So why has the US been so slow on the uptake, despite crumbling infrastructure that some of its own public officials have compared to that of developing countries? Mainly, it’s come down to a readily available source of finance – the municipal bond market in the US has represented the chief source of financing for the country’s public infrastructure.

Together with a previous willingness to let infrastructure remain untouched for decades at a time (a major road infrastructure programme was only instituted after a number of bridges across the country started to literally crumble into the rivers below them), this has meant the US has long been the sleeping giant of the PPP world. A lack of anything resembling a pipeline or any real enthusiasm at government level has also inhibited the US market over recent years.

But with public funds dwindling in the face of the global financial crisis and growing calls for speedier development of new improved infrastructure, the US is beginning to acknowledge the potential merits of PPP. In short, something has to change.

Virginia, Texas, Florida, Indiana, and Colorado have all used PPP to fund infrastructure projects over recent years, with four deals closing in 2014 and a further five in the first half of this year alone. And with this, the international investor community is starting to take note.

“Turmoil in Asia, uncertainty surrounding the euro in Europe, political risk in Africa and Latin America, and largely saturated markets in Australia, Canada and the UK will increasingly drive investors to our shores,” says Michael Likosky, principal and infrastructure head at US firm 32 Advisors.

“Our market is a safe haven where decent rates of inflation-adjusted returns can be had. The US has 50 states, each with distinct markets, [plus] hundreds of additional agencies, which are responsible for financing infrastructure projects, that procure these projects independently of states. This represents a tremendous opportunity.”

Of those 50 states, 36 have so far passed PPP-enabling legislation and are attempting to grow their pipelines. More are expected to join the table in the coming years and naturally, some have had more success than others in putting these laws into practice, with Florida, Virginia and Texas currently viewed as the leading lights.

Knowing how to approach such a vast and complex market will be vital for any new entrant, agree the experts. “There is no market like it in the world,” Likosky continues, “but you need to access these markets, which requires deep relationships and understanding.”

“You need to have a clear understanding of the market and challenges and know how to face them,” warns Jason Radford, partner at law firm Ashurst, who has experienced the process first-hand, having been drafted into the firm’s New York office following years working on UK PFI deals. “From a legal perspective, this is the world’s largest and most competitive market. Anyone thinking to establish a US PPP practice needs to understand how to compete against that backdrop.

“Any new entrant needs to identify what it is that they will offer that will differentiate them from people who are already working in the market,” he continues. “For Ashurst, we had an established international business with established clients who were already active in the market. We also had established domestic municipal finance capabilities that many firms no longer have or never had (whether US or international).”

Ashurst’s US PPP practice was established in 2011, combining its international PPP knowledge to develop its presence in the US. The firm has seen solid progress over the past few years as the market has begun to take shape, working on some of the biggest projects across the US, including the closed $2.5bn I-4 highway in Florida and the ongoing multi-billion dollar Purple Line light rail transit deal in Maryland.

The problem for both new and established players in the market remains that, despite the best of intentions from some quarters, there are currently relatively few projects coming to market. This means that international firms looking to get a toe-hold in the US have to know where the deals are.

“Early due diligence is key. In choosing which deals to bid on, international teams would be wise to sit down with the key public sponsors to assess their level of commitment and knowledge regarding the P3 approach,” adds Squire Patton Boggs PPP attorney Roddy Devlin.

“Such conversations should take place early, as generally, such due diligence is legally prohibited once the procurement process off icially commences with the issuance of the request for qualifications.”

Growing pains
Such a young and inexperienced market is facing teething problems as it seeks to establish itself, and for all the hype that many people looking in from outside might see, 2015 has been a tough year for the US market, with a notable slowdown from what threatened to be a boom at the end of 2013. 

Political risk remains the most significant hindrance. It has appeared at times that the entire political system in the US is structurally opposed to developing new infrastructure. The midterm elections toward the end of last year, which saw a number of key governmental changes, led to projects being delayed and cancelled.

Again, for those looking to get involved in the US, the political system means talking to just one or two people is unlikely to be enough.

“One major difference between the US and other jurisdictions is the number of public sector shareholders who can be involved in a project,” adds Radford. “In many other markets globally, there are typically only one or two public entities that have an active role in a deal.

“In the US, the public shareholders on a large project can include, among others, the city and county governments, the state governor and legislator, the state department of transportation and the state attorney general’s office.”

And then there is still the federal government, where the US Department of Transportation and the Environmental Protection Agency may also be involved. This can often lead to confusion or disagreement between the various organisations – something that only exacerbates the already rocky ground facing a deal.

“Project sponsors rush forward into projects with government partners without bringing communities and environmentalists on board,” explains Likosky. “These stakeholders have the power to stop projects if they don’t think that they advance the needs of communities. They simply stop them in their tracks. It is why the US gets a bad name.”

It is a frustration for many that these issues continue to crop up. “This problem is infinitely solvable,” laments Likosky. “Again, it is a relationship and expertise driven market, that is what gets things done.”

Educating public figures is central to growing the market and increasing these opportunities, as public sector scepticism toward PPP projects remains rife. And that will bring its own difficulties for some organisations that have made their name in other parts of the world, particularly in the UK, where there has been a prominent political backlash against the concept.

On the other hand, such uncertainty among the political class can off er new entrants an opportunity, by giving them the chance to discuss the pros and cons of PPP procurements.

Tunnel vision
Those currently monitoring the US market may also feel that at present, there is little place for them to make an impact, due largely to the narrow focus of the industry on transportation projects – and particularly roads – beyond all else.

“As it stands, the road sector is seeing vigorous competition, in which there are more well-qualified teams seeking to be pre-qualified for each project than can be taken through to the request for proposals stage,” says Mike Matheou,  partner and foreign legal consultant at law firm Hogan Lovells – and another who has made the transition across the Pond.

“That is going to make it tough for a new entrant into that sector to get pre-qualified. So, judged from that perspective, there are not enough projects in that sector of the market to make it worthwhile for a new entrant to try to break in.”

However, it will be in the dissemination of the PPP skills to other parts of the US infrastructure market that gaps and opportunities open up. “As the PPP approach spreads to new market sectors, then credentials gained outside the US will once again need to be taken into account,” adds Matheou.

The social and water sectors in the US have not got off  to the most auspicious of starts however, bogged down in financing and legislative issues that have prevented deals from progressing as many in the market would have hoped.

“The good news is that the market is diversifying, unfortunately projects that come to market can and do fail to reach fruition,” adds Radford.

However, that has not in itself stopped interest from outsiders, and after all there are still a few projects flying the flag, with schemes in California, Georgia and potentially New York all on the cards.

“Many global firms are still betting big on the US,” says Devlin. “Given the massive needs of the US infrastructure sector, both in terms of capital improvements and expansion, the smart money is on the US PPP market substantially expanding in the short to medium-term.”