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February 10, 2016

New York Financiers Weigh In on Public-Private Partnerships


NEW YORK — When members of the House Transportation Committee trekked this morning to Manhattan for a roundtable discussion on private financing for public projects — also known as public-private partnerships, or P3s — with financiers from J.P Morgan and other firms, they got a message of both opportunity and caution.

“The focus on U.S. infrastructure from participants around the globe has never been at this high a point,” said Jamison Feheley, managing director and head of the public finance team at J.P. Morgan, which recently served as lead banker to the state of Washington on a $1.1 billion toll revenue bond financing program for building a new bridge across Lake Washington to replace an aging span.

He cited reasons for the interest: “The attractiveness of U.S. assets, the stable political environment, and the long-term nature of the assets, the stable and predictable returns.” He told the panel “the amount of calls we field on a weekly basis from participants around the globe asking ‘how do we invest in U.S. infrastructure?’ – I’ve never seen anything like it.”

A convergence of forces is driving interest in P3s, including low interest rates, pension funds’ searching for predictable returns, and an unwillingness by Congress to increase gasoline taxes to finance infrastructure building. Or as Rep. Michael E. Capuano, D- Mass., put it, “because we in Congress don’t have the courage at the moment to actually do what we have to do on the Highway Trust Fund,” which is facing inadequate revenues from the gas tax.

“At one of the hearings we had, Texas and Colorado, two of the biggest users of P3s, and I asked them both: if we fully funded the Highway Trust Fund the way it should be funded, would you be using them? And the answer was no,” Capuano said. “They publicly said it. They said, ‘we’re doing it because it is the only way we can get our roads done.’”

P3 plans are widely used in Australia and Europe. But Feheley said one thing that differentiates the United States from many other countries is “our tax-exempt marketplace. And we also field calls from other sovereigns around the world saying, ‘how do we replicate what you do in the U.S. with your tax-exempt market? Because we don’t have that.’ I think that’s why you see the P3s other countries and the specialties they bring in financing infrastructure elsewhere in the world … whereas we have something very unique and cost effective here in the U.S.” with tax-exempt municipal and state bonds.

Feheley said, “From our perspective at J.P. Morgan we take pretty much an agnostic view. There’s a time and place for traditional delivery” — meaning states building highways and bridges by floating bonds — “and there’s a time and place for innovation and P3 procurement” calling P3s “one tool in the toolbox.”

Tom Osborne, executive director of infrastructure at IFM Investors, which manages about $17 billion of infrastructure equity investments, told the panel that “We are very keen to see more public-private partnerships develop. We think it’s a constructive solution to the legacy of underinvestment in infrastructure and to frankly undercharging relative to the true cost of services in many instances.”

Osborne said P3s can bring “a level of accountability that often does not exist in the public sector.” He said “the private sector’s feet are being held to the fire by their equity investors and by the debt investors.” He said “there’s a lot of scrutiny that comes in that frankly is not there in the same degree” for some public agencies.

But Osborne also agreed with Feheley on the dominant role that the tax-exempt bond financing still has for infrastructure. “Nowhere else in the world is there a $3 trillion plus municipal securities market that’s done a great job historically of doing infrastructure investment,” Osborne said. “To do something that is new and different when you have something like the municipal securities market already in place takes some risk and requires some innovation.”

He also said that in P3 projects that rely on toll revenue to pay the private equity investors, the burden is on elected officials to convince the driving public to pay tolls (in some cases where they have never paid them before). “There’s been frankly a challenge in terms of creating the political will to charge tolls. Without having revenue streams, it’s going to be very, very difficult to attract private sector capital to make these types of investments. There are states I think that have gone out on a limb a little bit in terms of recognizing the need for tolling” – he cited Texas, Virginia and Florida.

Another witness, Columbia University urban planning Professor Elliott Sclar, cited the case of private toll highways in Portugal that saw traffic slump during the 2011 economic austerity and raised tolls — the very opposite of what they should have done to spur economic growth.

“I raise these questions, but right now the things I have to say are not what anyone listens to,” Sclar said before the event. The movement for more PPPs, he said, “has got a life of its own. It’s not a Republican or Democratic issue because the Obama administration supports this stuff too.”

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