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P3 Defined

Long Term Lease Concession [ Existing Facilities ]

P3 Graphic Defined

Detailed description of the graphic

Public Owner leases to Private Concessionaire (funding from private equity, commercial debt or possible innovative finance credits) and Concessionaire's private Operator and (optional) private Constructor (engineer and contractor).

This P3 model involves the long term lease of existing, publicly-financed toll facilities to a private sector concessionaire for a prescribed concession period during which they have the right to collect tolls on the facility. In exchange, the private partner must operate and maintain the facility and in some cases make improvements to it. The private partner must also pay an upfront concession fee.

Long term leases are procured on a competitive basis, with awards going to the qualified bidder making the most attractive offer to the sponsoring agency. The most important criterion for the award of a long term lease concession generally is the amount of the concession fee. Other criteria may include the length of the concession period and the credit worthiness and professional qualifications of the bidders.


Long-term highway lease transactions can be grouped into the following three categories:

  • Debt transfer lease transactions where a fee paid by the private concessionaire is used to defease the toll facility's underlying publicly-held debt, with no additional funds available to the public sponsor. Such transactions require the private concessionaire to maintain the road to specified standards throughout the concession period and may also require the private investors to make additional capital repairs to address safety and condition issues.
  • Hybrid debt transfer and new construction lease transactions where the private investor pays a fee that is used to defease the underlying publicly-held debt on the facility and agrees to complete new center-line construction extending the existing toll facility. With this model additional payments in excess of the debt underlying the existing road are not made. In some cases, new construction may only be required at a future point in time if certain predetermined performance levels are achieved.
  • Value extraction lease transactions where a fee paid by the private investor is used to defease any underlying public debt associated with the toll road and provide the public sponsor leasing the facility with a sizeable infusion of additional funds which it can use for other needs. These transactions require the private investor to maintain the road to specified standards throughout the concession period and may also require the private investors to make additional capital repairs to address safety and condition issues.

Recent Experience

Through 2013, five major long term lease transactions have closed in the United States.

Facility Date Length Lease Term Upfront Lease
Lease Option Commitments
Chicago Skyway (Chicago, IL) January 2005 7.8 miles 99 years $1.83 billion Value extraction O&M
Pocahontas Parkway (Richmond, VA) June 2006 8.8 miles 99 years $611 million Hybrid O&M
Upgrade to electronic tolling
Construction of the 1.58-mile Richmond Airport Connector
Indiana Toll Road (Northern IN) June 2006 157 miles 75 years $3.85 billion Value extraction O&M
Northwest Parkway (Denver, CO) November 2007 8 miles 99 years $303 million
$40 million (placed in escrow; release contingent on parkway extension within specified timeframe)
Debt transfer O&M
$200 million administrative fee (total over lease term, inflation adjusted)
$60 million contribution toward parkway extension within specified timeframe
Puerto Rico PR-22 and PR-5 (Northern PR) September 2011 54.5 miles 40 years $1.08 billion Value extraction O&M
$356 million in upgrades and safety improvements

Factors Affecting the Use of Long Term Leases

There are a number of factors that influence the use of long term leasing arrangements. For the public sector the most basic factors are the political and financial situation of individual states and local jurisdictions. When these two factors coincide, local leaders may make the decision to consider leasing arrangements. In cases where there is not a pressing financial need, local decision makers may explore the possibility of leasing toll road assets to ascertain whether the terms of a potential transaction would be attractive enough to move forward with an actual transaction. For private investors, the primary motivation for pursing leasing opportunities is the potential to gain an adequate rate of return on their investment.

Moody's Investors Service has identified several characteristics that may make certain toll facilities good candidates for long term lease arrangements. These include:

  1. Established toll roads that have political limits on toll raising ability
  2. Roads owned by governments that are short of capital to fund government programs
  3. Roads with a significant number of non-resident users, such as truckers or tourists, who may be less able to effectively protest against privatization
  4. Roads that are financially distressed but which may present a strategic business opportunity for concessionaires seeking to enter the U.S. market

Potential Benefits of Long Term Leases

The potential benefits of long term lease transactions include:

  • Depoliticization of toll setting process by transferring toll setting responsibility to the private sector
  • Ability to reduce ongoing public sector operating, maintenance and capital improvement costs
  • Acceleration of new construction or needed maintenance and capital improvements to the leased facility
  • Debt restructuring in the case of underperforming toll roads at risk of default
  • Ability to generate large upfront lease payments that can be used to fund other transportation improvements
  • Risk transfer, chiefly traffic and revenue risk transfer to the private sector
  • Better asset management through application of private sector operational and maintenance efficiencies

Public Policy Issues Associated with Long
Term Leases

Several policy issues associated with long term leases need to be assessed carefully to ensure a beneficial outcome. One of the most important is the potential undervaluation of an asset to be leased. As was witnessed with the Chicago Skyway procurement where the value of the winning proposal was 2.6 times greater than that of the next highest bid, competition can help prevent undervaluation. Toll road owners considering leasing options should also seek the advice of financial advisors who can identify fair market values of lease transactions based on the anticipated revenue streams.

Other policy issues can be addressed in the legal terms and conditions underpinning lease transactions to ensure a fair outcome and protect the public. Such issues may include:

  • Loss of public control over toll rates
  • Loss of public sector revenue streams
  • Potentially burdensome toll increases
  • Inequitable return on private sector equity
  • Channeling toll proceeds away from transportation purposes

The significance and implications of each of these issues would vary depending on the facility considered and various means exist for addressing or mitigating their effects. For example, a lease's terms and conditions can preserve some public control over toll rates. Similarly, caps can be place on the private sector's rate of return. As with the Indiana Toll Road transaction, other regulations can be enacted to ensure that the lease proceeds are used to support transportation improvements in prescribed areas. Governments also provide oversight of the private sector partner's performance as well as include capital reinvestment, availability, safety, and customer services requirements in their lease agreements. Public agencies executing long term lease agreements can protect the public interest when they use these tools effectively.


Federal Highway Administration | 1200 New Jersey Avenue, SE | Washington, DC 20590 | 202-366-4000
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