Tim Wilschetz, Principal, KPMG LLP (US):
“The US is learning from successful public-private airport collaborations globally, including how to balance the cost of capital with private risk sharing.”
You have over 30 years of infrastructure project experience, particularly focused on project finance and advisory work. From your point of view, how have the involvement of the public and private sectors in global infrastructure changed?
The US is a unique environment for delivery of public infrastructure since it is the only major world economy that offers public agencies direct access to a lower cost of capital finance than private entities, in the form of tax-exempt bonds. Prior to the recent passage of legislation granting allocations of project-specific tax-exempt “Private Activity Bonds” to qualified public agencies, only a limited number of public service providers, for example airports and public housing sponsors, had access to that low cost capital. However, with the emergence of public-private partnerships (“P3s”) in the US, first in the highway/toll road sector, and more recently in the social infrastructure sector, there has been a tremendous education of public sponsors regarding opportunities for effective risk-sharing with new private partners. This increased understanding has come at an opportune time for the many public agencies that have been confronted by the dual challenges of an aging asset base and a lack of further investment capital. For those agencies, such concepts as life-cycle costing and risk transfer, coupled with new sources of private capital and risk appetite, have created a broad spectrum of new options.
For global players in the project development, construction and investment markets, these same changes have opened one of the world’s largest economies to new competition and new opportunities. While the P3 form of delivery will not be embraced by all public agencies, the sheer size of the US market has provided a reason for many “non-traditional” US players to scale their operations here.
The Public Private Partnership model, also known as PPP or P3, is a successful strategy that is growing in the airport sector. Is the P3 model the best formula for airport infrastructure development and modernisation?
That’s an interesting question because our government treats airports differently from most other forms of public infrastructure. The US has long recognised the dependency of airport owners on the performance of airlines that provide passenger and private cargo services, and as a result the US airport sector has been granted access to the tax-exempt Private Activity Bond market. As a matter of fact, large and medium hub US airports are among the most prolific issuers of such debt for funding expensive landside and airside infrastructure. The important point is that US airports have historically been built through their own brand of “public-private partnerships”, particularly those complex arrangements with airlines that pay fees for landing aircraft and renting terminal space, rental car agencies and parking operators that provide a service in return for a concession or other fees, and a myriad of local and national concessionaires that offer food and beverage, personal shopping and other amenities.
The new brand of P3 applications is a bit different however. US airports are increasingly interested in the appetite of strategic or financial investors to put their own capital at risk through direct equity investments alongside airport debt funding to incentivise longer-term performance. So where historically airport-style P3s had emphasised short-term agreements for property development or operations, the new brand of P3s focuses on creatively delivering and financing projects in a way that aligns private partners with the airport sponsor for a much longer period, in some cases for the full useful life of the asset. It’s a great evolution of the airport market in my view, because it incentivises creativity and commitment by the private sector to help solve the very complicated US airport challenges.
PPP has become more common in the United States over the last decade for transportation projects. Is there an established regulatory framework for private investment? Are there fewer political barriers for P3 deals?
The US P3 market has come a long way in the past 20 years, however to answer that question is to consider the changing value drivers behind assets being developed and managed. A small wave of P3 projects emerged in the early 2000s in Virginia, Texas and Florida, driven in part by the sheer scale of needs in those states. Early projects were considered for P3 delivery because a backlog of congestion-relieving highway “mega-projects” of $1 billion or more each would otherwise drain public resources, leaving little traditional funding to service growing maintenance needs. Those projects were developed as revenue risk toll concessions to plug the gap in state transportation budgets. With time, public sponsors gained familiarity with non-revenue P3 structures such as Availability Payment concessions, and hybrid structures whereby public agency retained revenue risk and paid developers for operating performance. Those alternative structures have more recently gained acceptance in the social infrastructure space for such assets as student housing and airport facilities, and I believe an increasing number of public agencies will embrace these new models.
That said, the US market is governed in a large part by the specific regulatory environment within each of the 50 states, and therefore it’s difficult to generalise regarding regulatory or political barriers. In my view the market is benefiting from the growing number of peer agencies that have embraced innovative approaches, providing early case histories and proving the private sector’s appetite for cost-effective risk sharing.
Do you think P3 model are currently part of the mindset of US airport authorities? In the coming future will we see more airports in the USA based on P3 projects?
For the reasons described earlier, US airports have always been an interesting version of P3 based on contract agreements with the numerous private entities required to deliver the passenger experience. During favourable market development, the growing interest among airport sponsors now hinges increasingly on the desire for life cycle costing and more efficient whole-life risk allocation rather than purely short-term operations. Such models are now proving their value for discrete components of airports, such as people movers, rental car facilities, power plants and in cases such as Denver Airport and New York’s LaGuardia, JFK and Newark airports, full terminal modernisations. As these top-tier large US hubs embrace long-term P3 approaches, I believe the model will also gain popularity with other large and medium hub airports looking to tap private sector innovation for similar airport elements where the private sector does provide unique value.
What are the main advantages or benefits of choosing P3s in airport infrastructure?
The US-style airport operating model depends on the efficient interface between the government sponsor and the numerous private interests providing the service. I believe that what’s been missing in the US model is a cost-effective way to tap private innovation and risk-taking for the full lifecycle of the asset, rather than for short-term operations. Creative financing approaches such as co-investment of public funds alongside a manageable portion of taxable debt and equity can increase opportunities for strong partnerships without further challenging affordability constraints. The US is learning from successful public-private airport collaborations globally, including how to balance the cost of capital with private risk sharing. It’s a delicate balance and one that needs to be well informed to address the needs and concerns of the numerous public stakeholders and airport customers. As we’ve seen with successful P3 developments with the three major New York City airports, and are currently witnessing with regard to the Great Hall P3 in Denver and the APM and CONRAG P3s at LAX, this new model of collaboration will align private innovation and risk sharing, with good public stewardship of high profile, “community gateway” infrastructure, all to the benefit of the travelling public.
The information contained herein is of a general nature and is not intended to address the specific circumstances of any particular individual or entity.
