- Briefing Room
Since the early 1990s, state departments of transportation (DOTs) and other transportation agencies (collectively Agencies) have fostered the development of highway projects with private concessionaires and developers (Developers) through public-private partnerships (P3s). These P3s have taken advantage of new approaches to deliver infrastructure, recognizing that, through P3s, risks may be more optimally allocated, projects may be realized more quickly and with lower life-cycle costs, and Agencies' budgets are less burdened.
In the last decade a number of P3s have experienced significant liquidity issues and financial stress requiring additional equity investments, restructuring, and/or bankruptcy processes resulting in losses to banks and bondholders (Lenders) and Developers as shown in Table 2. There are a number of explanations for these challenges, but two frequent ones include the global financial crisis impact and traffic and revenue forecasts that proved to be inaccurate.
|P3 and Private Toll Roads
|Dulles Greenway, VA
|Privately-owned toll road underwent a technical bankruptcy in the 1990s, resulting in the original Developer selling its ownership to Macquarie.
|South Bay Expressway (SBX), CA
|Restructured and sold by the original Developers. The second Developer, Macquarie, experienced financial difficulties once the road opened and Lenders took over the project and then sold it to a public authority, San Diego Association of Governments in 2011.
|I-495 Capital Beltway (Capital Beltway), VA
|Restructured in 2014, with the Developer, Transurban, swapping senior debt for additional equity.
|Pocahontas Parkway, Richmond, VA
|The most recent Developer, Transurban, transferred its interest to Lenders resulting in a total loss of its investments in 2014.
|The Indiana Toll Road, IN
|Sold in 2015 in an auction for $5.725B, wiping out the equity of the original Developer, Cintra/Macquarie. The bid was high enough to cover most of the $6B of outstanding debt.
|Developed by Cintra, reported to be in a restructuring process.
|Northwest Parkway, CO
|A private toll road concession in the Denver area of Colorado, reported to be undergoing financial stress due to low traffic.
|Public Non-Recourse Toll Roads
|San Joaquin Hills Transportation Corridor Agency 73 toll road, CA
|The $1B project, financed in the early 1990s on a non-recourse basis by a public authority, has had much lower than expected revenues for most of its project life. The authority was able to refinance the project in 2014, taking advantage of lower interest rates.
|LA 1 Expressway, LA
|A public authority toll road connecting to the Port of Fourchon, this road had much lower traffic than forecasted and was taken over by the State of Louisiana in 2013.
Due to the uncertainty surrounding traffic and revenue forecasts, one of the key decisions in structuring a P3 is which party should bear the traffic and revenue risk - the Agency or the Developer.
In part because of the history of underperforming highway P3s, some Developers operating in the U.S. are shying away from revenue risk P3s. In interviews with observers and participants (Respondents) in the U.S. P3 market conducted for this Discussion Paper (see a list of these in 0), several Developer Respondents discussed how they had suffered financially from managed lanes projects that were once considered less risky than greenfield toll roads, and would not consider managed lanes without a revenue risk sharing mechanism. Furthermore, some Developers have indicated that they believe their competitors may have acted irrationally and have been accepting excessively risky forecasts. Therefore, some Developers prefer P3 structures in which the Agencies assume all revenue risks primarily through availability payments (AP) as is common in Europe and Canada. Under an AP P3, the Developer receives an annual AP that should cover its operations and maintenance (O&M), debt service, and equity dividends, subject to making the road available and maintaining it to established standards. If a Developer fails to carry out its duties, the Agency can impose penalties, in the form of AP deductions that can place pressure on their equity dividends and possibly the Developer's ability to make debt service payments.
Nonetheless, other Developers still actively consider revenue risk projects. In 2015, Industry Funds Management, an Australian-based infrastructure fund, purchased the Indiana Toll Road for $5.725B, paying off most of the outstanding debt, demonstrating the continued availability of equity for revenue risk deals for existing or "brownfield" facilities. In addition, the Virginia Department of Transportation (VDOT) has issued an RFQ in 2015 for the I-66 managed lanes that could be structured as a revenue risk sharing P3. VDOT received statements of qualifications from three consortia interested in bidding on the revenue risk sharing transaction and other consortia interested in non revenue risk sharing structures. Furthermore, established public toll roads tend to be financially stable and highly rated, according to credit rating agency Respondents, making bonds issued by these entities highly desirable. Finally, Developers report that at least in 2015, and likely in 2016, Financial Investors have become very aggressive in offering financing for P3s, including increased willingness to take on start-up period development and T&R risks.
While APs may create public policy benefits or "value for money" (VfM) due to a more efficient risk allocation (see Section 2.1), in many instances they require that the Agency recognize a part or the entire AP payment as a long-term liability, thereby reducing the "off balance sheet" advantages of AP P3s (Hecht, 2015). Even when the AP is funded by toll revenues collected by the state on that facility, known as "self support," the rating agencies will only recognize that revenue after three years of stable support. In interviews, some Respondents raised concerns that Agencies will "run out of money" if they only commission AP P3 transactions.
The question is therefore whether there is a more optimal "middle ground" between APs where Agencies absorb all revenue risk and current U.S. revenue risk toll P3s where Developers are responsible for revenue risk. In light of the foregoing, this Discussion paper (the Discussion Paper) to explores this question, seeking to foster further thinking about revenue risk sharing in highway P3s and maintain robust private participation in these concessions.
The Discussion Paper primarily focuses on those mechanisms that redistribute revenue risk in cases where actual revenue is significantly below forecasted revenue. The U.S. P3 market has already developed a set of approaches to address the sharing of revenues in upside cases, as documented in the major concession contracts such as in Texas and Virginia. The purpose of this Discussion Paper is to: