“We were involved in a project that wasn’t feasible, IRA came along - it’s now feasible,” said one UK-based P3 figure during a recent discussion on the UK’s future investment climate. “We have got to remain internationally competitive.”
It’s clear that the Act is a game changer, and has put fear into decision-makers the world over as they struggle to compete with an increasingly comprehensive incentivization regime in the US, when things like the IIJA and CHIPS Act are included.
As countries look to undertake their own energy transitions, the US government’s efforts to stimulate this in its own market are enough for many to be worried it will warp the market across the world. The IRA will put new tax credits and subsidies worth $369bn into the American clean energy industry - bolstering domestic energy firms and attracting plenty of foreign firms to the States.
“The IRA gives huge tailwinds to investments,” says Milbank partner Allan Marks, pointing to solar and wind particularly as winners. “It’s really positive. It is having its intended effect in stimulating investment to refurbish neglected infrastructure.”
While money has already started flowing, the 10-year subsidy system provides certainty over the long term and “gives a clear runway” for developers, says Marks.
Unlike IIJA, it doesn’t mention P3s at all. Not surprising given its focus, but with huge crossovers in sectors, figuring out how it intersects and will influence the P3 industry is a little bit more complex.
So what does this mean for the domestic P3 industry?
The introduction of IRA puts a major remaining piece of the green jigsaw in place: supply. As a result, the optimistic forecast for infrastructure in the USA, fueled by IIJA, can now become a reinforcing circle.
In short: IRA will help create the supply for a green future, and IIJA will (amongst other goals) deliver the infrastructure needed to support that future. One without the other could have been a big imbalance.
Take for instance, transmission lines. The enormous future demand on grid networks to transport and transfer the increasingly concentrated energy nodes will require huge investment.
Foreseeing this need, the Department of Energy released a request for information last year looking for market feedback on how best to deliver the new expanded network networks - and specifically mentioned P3s as part of that. We’re already starting to see some early stage projects such as these come forward: take for example the North Path transmission project, which is seeing New Mexico’s Renewable Energy Transmission Authority (RETA) and a private partner join forces to deliver a new 400km line to connect a renewables node to the wider network.
The biggest example, however, is of course electric vehicles, as most importantly noted in the applications for the IIJA’s National Electric Vehicle Infrastructure (NEVI) funding.
Make no bones about it: the infrastructure industry has just had another massive push to its future.
“We’re trying to balance out where the IRA comes in here,” says Tom Mulvihill, managing director and group head of infrastructure finance and P3 at KeyBanc, pointing to the extra complexity that the funding could bring. “We are working through that on projects and trying to understand where that source of capital might fit in the capital stack for a project.”
The relevance of IRA to pure P3s might not be that direct, however, as Mulvihill points out: “From my experience,it’s tough to incorporate tax-equity or investment tax credits into a competitively procured P3 which requires committed financing.”
The funding is still very competitive in terms of cost of capital against private equity, although perhaps less so on availability payment deals with high gearing.
“We’re still doing analysis to figure out how it fits, but it’s certainly something to think through,” he adds.
That being said, the additional momentum that the IRA has given to green projects is hugely significant, considering the fact it is on top of the major programs already out there.
“We need to focus on the game changers with regard to funding as we are only in the first inning of IIJA, plus add CHIPS and IRA,” Mulvihill says.
IRA is nonetheless having a big influence on the minds of authorities.
“The winds are shifting,” says one advisor. “The legislation won't solve all the problems but it allows the conversations to be had.”
Those conversations then allow public entities to bounce ideas off the P3 market, thus increasing the opportunities for projects to be developed
However, one advisor says that the macroeconomic environment is having an impact at present. “People are a little more hesitant to commit capital over that long of a term. They're not stepping back from P3s, but they are re-evaluating what they need,” he says. “For us it's weaving the story about your objectives, and analyzing all the best procurement strategies to realize those objectives; sometimes it's a P3, sometimes it's not.”
The mission then for the P3 industry becomes focussing on the niches where it is the right option - and there are many of them.
One investor points to the university sector, where many have set ambitious Net Zero targets that are critical to their future core missions of attracting and educating students.
“They're more open than other spaces I’ve seen to partnering with the private sector to achieve their climate goals,” he says. “They’re under a lot more constraints with funding which is pushing them to be more creative.”
The University of Iowa has led the way in this sector, signing a 50-year P3 to overhaul its energy system. Early disagreements on that have already led the scheme to end up in court - although most are confident that the partnership can withstand that procedure, as it’s based around specific interpretation on a specific issue. Nonetheless, there will certainly be a lot of people watching the outcome - and how the parties interact after the case is over.
Alongside innovation, P3s offer another major bonus to the green transition: risk transfer.
Whether it’s huge new energy systems or a return-to-base fleet charging facility, public authorities are going to have to handle risks that can often fall outside their current expertise.
“There is a technology risk that really there is no reason for the public sector to manage,” says Joshua Schank, managing principal at InfraStrategies. “There’s quite a lot of evidence that the private sector could do a good job of managing that, as the private sector has managed technology roles of many kinds in the past.”
One of the major risks here is the elephant in the room on all green projects: nobody knows what the technology of the future will be yet. Just as one example, the debate still rages around hydrogen versus EV for medium-sized vehicles.
While as an industry, many would take a punt on which technologies will come out as a winner, the private sector doesn’t have to bet taxpayers’ money on it. If an authority backs a certain technology that becomes outmoded in five years’ time, there could be a lot of trouble.
“There’s no doubt that technology in this area will continue to improve; there’s going to be change,” says Schank. “The private sector is much better at making those adjustments because they have a greater incentive to do it when they have invested their private capital in it.”
As an example of coping with change, he points to the transition of fare payment on public transport and the speed at which the private sector was able to switch to a new system such as contactless when there was the incentive to do so.
For the P3 industry to seize the opportunity of the green transition, it will need to find its niche and play to its strengths. Long-term thinking, risk sharing and innovation are natural fits to the technological change that is needed - but so is the flexibility to cope with an evolving target.