P3 in 2023: Social infra to take the strain as transportation feels the pain?

Following the success of 2022, we take a look at what to expect in the US P3 market over the next 12 months

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There is plenty of optimism around the US P3 market right now, and for good reason: recent figures from P3 Bulletin’s Global Project Tracker (GloPro) found there were more projects in procurement in the US in 2022 than in Europe and the UK put together.

Furthermore, there is a real belief that the money that has already started to flow from the Infrastructure Investment & Jobs Act (IIJA) will continue to create new opportunities for the infrastructure market as a whole.

“For the P3 market to thrive, the overall infrastructure funding market must continue to improve,” says Mike Schneider, managing partner at advisory, InfraStrategies. “Over the past few years, we have seen a relatively strong willingness to invest from federal sources and through local and regional governmental initiatives.”

With that investment from the federal government only just beginning, experts are hopeful that 2023 can build on the momentum of the past year.

“I believe there will be a modest improvement as we enter 2023,” Schneider continues. “I see the market being relatively strong in the next couple of years, especially since we have yet to realize the significant infusion of money coming down the line from the IIJA.”

Sia Kusha, senior vice president and group head of business development & partnering at Plenary Americas, agrees. “We are cautiously optimistic that even though we may be facing a global financial downturn, the construction industry - and therefore the smaller subset of P3s - in North America will continue to grow and provide opportunities for the public sector to benefit from leveraging private investment.”

The momentum of signing deals - as opposed to simply developing them - is also expected to continue, which is good news for debt providers who are at last beginning to see a more stable flow or projects reaching financial close.

“Last year Key put its balance sheet to use with a number of infrastructure loans as the capital markets were challenged,” says Thomas Mulvihill, managing director and head of infrastructure at KeyBanc Capital Markets.

A key ingredient in that more stable dealflow has been the shift in the US P3 sector into social infrastructure, rather than relying on massive transportation deals to prop up the market. Mulvihill says higher education was a key market for the bank last year, with plenty of student accommodation deals coming to fruition.

“Over the past year, the social infrastructure market has grown stronger,” agrees Schneider. “We are seeing more and more localities and states seeking P3 solutions for higher education, campus housing, civic center and related facilities, courthouses, etc. There has also been significant interest in the energy sector, and we are watching the electric vehicle charging infrastructure market begin to mature and achieve a scale at which P3s become a viable delivery method.”

One of the reasons that the P3 market has been able to develop in the social infrastructure space has been its willingness and ability to adapt. Kusha points out that there is now “host of real estate based, lease-leaseback and hybrid deals alongside traditional DBFM/DBFOM” that mean a range of opportunities are now coming forward in areas such as student accommodation.

However, alongside those traditional sectors, Mulvihill is hopeful that 2023 will see a push into some new markets - specifically healthcare. “We are starting to see interest in PPPs in this market,” he says, “particularly around campus energy and parking facilities.”

KeyBanc owns Cain Brothers, a boutique healthcare investment bank, and Mulvihill is optimistic that the firm can leverage this niche expertise to develop P3 opportunities in this space.

James Littlefair, chief operating officer at boutique advisory firm, Project Finance Advisory Ltd (PFAL), is confident that social infrastructure will continue to grow - particularly on the west coast. He points to California’s Surplus Land Act, which requires any municipality in the state to consider affordable housing as a first option for any surplus land.

“Municipalities want to combine P3 with affordable housing solutions,” he explains. While this can be difficult due to the different approaches to financing that are often seen by an affordable housing development compared to a P3 and/or real estate approach, if those issues can be tackled then there will be a real opportunity for affordable housing P3s to flourish.

While there is much optimism around the social infrastructure market, there is an expectation that things will be somewhat quieter in the transportation sector over the next 12 months.

“There are projects underway and on the horizon, but others have been canceled or the choice has been made at the outset not to utilize public-private partnerships, often owing to local concerns with transparency and the role of private partners,” says Schneider.

Nonetheless, there are reasons to be hopeful: there is now a significant push to drive federal dollars out into the states and municipalities, leading to the likelihood that projects will start to get underway in the years to come. Add to that the changes to the Tifia legislation to increase the maximum level of eligible project costs to 49%, plus the move to bring airports and transit-oriented development (TOD) within Tifia’s purview, and there is reason to believe that the market will generate deals in the medium to long-term.

This goes to the heart of the issue of transportation P3s: in general these tend to be mega deals that take years to come to fruition, making for lumpy dealflow that fluctuates from year to year.

“Even if the percentage of projects using a P3 model remains the same, the dealflow and number of dollars being spent on P3s should increase,” explains Kusha.

So while there will be deals to work on in 2023, the number of transportation P3s crossing the line will perhaps be more sparse than in social infrastructure. Indeed, there are promising signs: many in the market welcomed the financial close of the Pennsylvania Department of Transportation’s Major Bridge P3 program at the end of 2022, while the plans for new legislation to enable transportation P3s in Tennessee are also being viewed with interest.

Increasingly, however, the US P3 market is seeing some crossover in the transportation and social spaces: transit-oriented developments (TODs), often using land owned by transit agencies to deliver new housing and other facilities, are becoming increasingly popular. “It’s an unexpected evolution,” says Victoria Taylor, president and chief executive of PFAL. “Transit agencies have the property and they see encouraging TOD as part of their remit.”

Energetic future

The big prospect for 2023, however, looks set to be the energy transition. Recent months have seen years of talk begin to translate into activity on the ground, bolstered by the IIJA’s focus on green energy.

Alongside accommodation, one of the biggest P3 opportunities in the market at present is for campus energy facilities at university sites. “We are actively advising on three campus energy procurements at the moment and we see a dozen or so more in the near-term pipeline,” says Mulvihill.

University campus projects have been at the forefront of this to date, but Kusha says in 2023 the campus energy market will expand beyond student sites. “Most entities who own utility plants are investigating the move to renewable sources of fuel,” he says. “We continue to see mandates at higher education and healthcare campuses, as well as at municipal district utility plants, looking to replace existing, aging systems.

“To support the transition, there will be a need for significant upgrades and expansions to the transmission and distribution grid. Additionally, we could see an increase in the development of microgrid centers for resiliency and added generation capacity, which could also provide opportunities for P3s to take place.”

Opportunities in the electric vehicle (EV) charging market have long been discussed by the P3 industry, with most agreeing that the best place for the market to get involved will be in providing charging infrastructure for fleet vehicles.

Taylor points to Californian state rules, where there is now a requirement for all traditional public sector fleets to transition to emission-free technologies. “A lot of transit agencies have never had to deal with that,” she says. “It is expensive to build out and there are questions around how to ensure continuity of electricity supply, for example.”

However, Schneider suggests that we could see the start of things changing around wider EV charging facilities, as more authorities begin to recognize the benefits of having a long-term partner on board. “We are watching the electric vehicle charging infrastructure market begin to mature and achieve a scale at which P3s become a viable delivery method,” he explains.

He and others point out that the operation & maintenance of EV charging facilities is absolutely critical: if chargers are not maintained, the capital expenditure is useless because the asset is not being used. Some see this providing an opportunity to bundle the O&M with the financing of the facilities.

As ever with P3, politics will once again be at the forefront in 2023. With the economy still far from safe, many Democrats remain suspicious over a perceived lack of transparency in P3 deals, and remain concerned over private profits. Meanwhile, Republicans are in general keen not to be seen spending public money.

There is palpable frustration from some in the market over how this often plays out. “The hypocrisy is breathtaking from those elected representatives who strongly opposed and voted against the IIJA, but are quick to attend a ceremony or groundbreaking for a project in their districts, pretending they are responsible for bringing new and improved infrastructure to their constituents,” says Schneider.

Kusha, however, is more sanguine. Pointing to the experience in Canada, where some provincial governments have in the past brought a halt to P3 programs of their predecessors, he is happy to follow where projects are coming through.

“Elections tend to keep us nimble; some administrations are more open to P3s than others,” he says. “The current US administration under the IIJA and IRA, seem to have a greater openness to P3s. Whether this openness translates to greater dealflow is yet to be determined.”

In general, though, many in the industry believe that the evolution of the P3 model over recent years, combined with the increase in federal dollars, means there is increasing appetite for using partnership models to build infrastructure.

“We are continuing to move towards a collaborative environment where there is greater emphasis on appropriate identification, management and sharing of risk,” Kusha concludes.

Schneider agrees: “Politics aside, and regardless of the typical credit-claiming games, the important bottom line is that increased federal investment, often used to leverage increased local investment, is resulting in a significant uptick in infrastructure and the related opportunities for P3 delivery to be used effectively.”