P3s incentivize on-time and on-budget projects and harness the innovation of the private sector, Nossaman LLP partner says.
Public-private partnerships (P3s) are an alternative method to fund port infrastructure projects that can help maximize value, said Brian Papernik, a partner at Nossaman LLP.
A P3 is a delivery and financing method for the development of public infrastructure that includes private finance. The private entity has long-term maintenance and renewal, and possibly operating, responsibility and its investment is at risk to performance.
Design-build-finance-operate-maintain (DBFOM) P3s, in which the private developer agrees to perform the operations and maintenance in addition to providing the necessary up-front capital, offer public partners a variety of benefits, Papernik said. DBFOM P3s close funding gaps by accessing the private equity market and efficiently transfer the risks, which are better managed by the private sector, he said.
The P3s, Papernik explained, also harness private-sector expertise and incentivize the developer to optimize the investment in the initial design and construction of the asset, which helps the project throughout its life cycle.
“By combining the construction and design with the operation and maintenance, you are allowing the entity, the developer, to focus on the entire life cycle when trying to figure out how to build this project, not just the cheapest construction way of doing it,” said Papernik recently at the American Association of Port Authorities’ 12th annual Planning for Shifting Trade Conference in Tampa, Fla.
“Really all we need to do is tell the developer what it is that we want … and you figure out the best way to do it and you figure out the best way to build it. That’s really the kind of essence the advantages of P3 and how that can optimize for ports building infrastructure.”
Availability payments, in which the public owner makes payments to the developer once the project is available for its intended use, motivate on-time and on-budget completion for the project so the private partner can recoup its investment and achieve its expected rate of return, he said.
The public agency, which retains any project revenues and related risk, makes a unitary payment that encompasses a developer’s capital expenditures, operating and maintenance expenditures, and financing costs.
Although the private developer is at risk financially until the project achieves availability, public partners can lessen the financial burden, Papernik said.
“Often in these availability payment deals there’s a mix of the owner paying some milestone payments during construction … to reduce the amount of interest but still motivate the developers,” he said.
The payment method is appropriate, he said, when the project does not generate direct revenue, if the revenue or demand is difficult to predict or manage or if service quality is a more applicable goal than private-sector revenue maximization. Public agencies also could opt with availability payments if they wish to retain direct rate-setting authority.
Concession/revenue payments, in which user charges or fees generated by the project are the primary revenue source, give developers the right to collect revenues during a concession period.
Revenue-sharing provisions often are included in concession agreements in case revenues exceed specified thresholds, Papernik said.
Still, despite the benefits of DBFOM P3s, there are considerations that need to be made, he said, such as legislation, the strength of the proposed revenue stream, the cost of private finance and the complexity of the deal.
“You still need the strength of a revenue stream whether it’s rooted in revenue generated by the port or public funds,” he said.
Port Tampa Big Bend Channel Expansion
Stephen Fry, vice president of finance at Port Tampa Bay, said the port used a P5 partnership during its expansion of the Big Bend Channel, which is expected to be completed in March.
“The reason I say this is because there’s five stakeholders involved,” he said during the conference, referencing Port Tampa Bay, the Florida Department of Transportation, Mosaic, Tampa Electric (TECO) and the Army Corps of Engineers. “They all put funds in for this project. Once this project is done, it becomes a federal channel.”
The port has $72 million budgeted in 2019 for improvements, development, growth and maintenance, but the $63 million Big Bend Channel expansion is not included in that number, Fry said.
The expansion, which has been funded by state and federal grants, bond proceeds and partnerships with TECO and Mosaic, deepens the channel’s entrance by nine feet to 43 feet and widens the entrance by 50 feet to 250 feet, among other developments.
Railroads Offer Ports P3 Opportunities
Partnerships with railroads, including shortlines, can be used to help drive business development, said John Elliott, senior vice president at Strategic Rail Finance.
The ownership, operations and pricing for railroads — including building industrial tracks, operation of rolling stock, leasing options, land leases and storage rates — are all relevant for ports looking to create a partnership, he said.
“All of these things and more are relevant to your business development efforts, and they all relate to the ownership, operation and pricing of railroads,” Elliott said. “Each of these … represent opportunities to structure partnerships to advance your rail freight mobility out of the dock.”
Precision railroading has led to railroads dismissing business development, Elliott said, as Class I railroads often opt to reinvest instead of building new assets.
“They need you now more than ever to drive business opportunities as an industrial landowner and as a port,” he said. “They need you more than ever to identify opportunities.”
Ports offer both financial returns on investment and programmatic returns, which include job creation, increasing exports and infrastructure development. The two different returns on investment, in addition to ports’ access to capital, provides ports with a financial hurdle rate below 10 percent, Elliott said, compared to a hurdle rate of at least 25 percent for railroads.
“Use your access to capital, use your low cost of capital, and use the fact that you care about programmatic return on investment in addition to financial return,” he said.
Elliott said revenue sharing via “carload credits” is a simple partnership ports and railroads can establish. The owner invests in new infrastructure that benefits the railroad, which, in turn, credits the tenant money on new rail traffic for an agreed-upon time.
The railroad gains more box cars on every switch without an increase in operating expense and no capital expense, while ports gain export containers and generate new wharfage revenue, Elliott explained.