The Public-Private Partnership Law Review: USA
It has been said that the development of the modern form of PPP can be traced back to the power purchase agreements developed in the United States (US) during the 1980s, which provided for a two-component compensation system: a capacity availability payment and an actual usage payment.2
There is no uniform statutory definition of PPP in the US. The scope of transactions that each state may use to procure from, or partner with, the private sector for the delivery or operation of infrastructure varies from state to state. In some cases, some infrastructure-related procurement laws have not permitted the typical forms of contracts used in PPPs, requiring, for example, the separation of the procurement of the design of a project from the procurement of the constructions of the same. Most notably, this has been the case in the State of New York but policies towards design-build procurement have changed in recent years, and at the end of 2019, the state legislature passed authorising legislation enabling various state agencies (including the Department of Transportation, the Department of Environmental Protection, the School Construction Authority and the New York City Housing Authority) for a period of three years to enter into design-build contracts.3
Some states have enacted PPP-specific enabling legislation; others rely on legislation relating to their general procurement authority and common law. In some cases, the PPP enabling legislation is limited to specific categories of projects, such as transportation. In others, it allows the performance of all types of infrastructure projects.
Currently, a majority of states and Puerto Rico have enacted PPP-specific legislation that permits PPP transportation or social projects. In some cases, the PPP-enabling legislation authorises specific projects on an ad hoc basis. Some states, such as New York, have enacted pilot programmes authorising the procurement of a limited number of projects using the PPP model.
The categories of public infrastructure that can be procured through the PPP model also vary from state to state. The transportation sector has historically accounted for greatest use of PPPs in the US, most commonly for the development of roads and related infrastructure, but also for light rail and airport projects. PPPs have also been successfully used for water, wastewater and desalination projects in the US. In recent years, it is becoming increasingly common to find social infrastructure projects being developed in the form of PPPs, particularly courthouses, prisons, university housing and schools.
The market for PPP transportation projects began to develop in the 1990s with the SR-91, Dulles Greenway and Camino Colombia projects. When these projects ran into financial difficulty, the market for this kind of PPP project froze for several years. It was only in the mid- to late 2000s that the transportation PPP market in the US began gaining new momentum. However, many PPP projects at the municipal level had existed for long before that, mainly in the water and waste water sectors. Correctional services companies have also built prisons and offered their services to all levels of government for several years.
The year in review
A key recent development in the US market is the substantial increase in the number of social infrastructure assets being developed through PPPs. Multiple courthouses and prison projects have achieved commercial or financial close in recent years and there are many other social infrastructure projects currently in procurement, including civic centres, schools, student housing and sports and leisure facilities. A number of states, including New Jersey and Arkansas have recently introduced PPP legislation facilitating the application of PPPs beyond transportation and authorising a range of government agencies to procure such projects.
Transportation continues to account for the biggest portion of the PPP market in the US by value. A number of significant projects have closed or come to market in the airport sector, including terminal redevelopment projects at LaGuardia and John F. Kennedy airports in New York, some of which are using a modified approach to the traditional PPP model. Two pathfinder projects to develop consolidated rent-a-car (ConRAC) facilities at LAX and Newark International Airport successfully reached financial close in the past year. The success of these transactions may encourage other airport authorities to look at opportunities for this new asset class.
Other major PPP transactions that achieved financial close since December 2018 include the I-95 Express Lanes Fredericksburg Extension, the Travis County Courthouse and the Austin Soccer Stadium.
However, the past year has seen a couple of set-backs in the PPP market. First, in August 2019, Denver International Airport announced the termination of its contract with Great Hall Partners for the Denver Airport Great Hall (Jeppesen Terminal) PPP project. Since then, Denver Airport has selected contractors for the completion of the project under a different delivery method. In December, St. Louis' Mayor withdrew her support for the long awaited St. Louis Lambert Airport project, bringing the procurement process to a halt. The St. Louis Lambert Airport project was expected to use an FAA's Airport Investment Partnership Program (formerly known as the Airport Privatisation Pilot Program). This programme has only been successfully used three times in the past, despite having been in the books for over 20 years, for the privatisation of the Muñoz Marín International Airport in San Juan, Puerto Rico, the Stewart International Airport in Westchester, New York (which ceased being privately operated in 2007 and is now operated by the Port Authority of New York and New Jersey) and, most recently approved (September 2019), the sale of the Hendry County Airglades Airport in Florida to a private operator.
i Types of public-private partnership
As mentioned in the Overview, there is no uniform statutory definition of PPP in the US and the scope of transactions for the delivery or operation of infrastructure varies from state to state. However, the great majority of the major PPP transaction in the US follows a design, build, finance, operate and maintain model, under the form of concession or long term leases, including the LAX and Newark ConRAC projects and the I-95 Express Lanes Fredericksburg Extension project.
ii The authorities
Owing to the distribution of powers in the US, most PPP projects are procured at the state or local level. Some localities and other municipalities, such as city governments or transportation authorities, have traditionally entered into PPPs based on the powers assigned to them under home rule laws or the general powers granted to authorities. However, the federal government has also entered into PPP projects, mostly relating to social infrastructure (e.g., through the Department of Veterans Affairs, the National Park Service and the Postal Service). Most importantly, the federal government has significantly encouraged the use of the PPP model, particularly in the transportation sector, through financing and grant programmes such as the Transportation Infrastructure Finance and Innovation Act (TIFIA) and Railroad Rehabilitation and Improvement Financing (RRIF). The federal government created the Build America Bureau to serve as a single point of contact and coordination for states, municipalities and project sponsors looking to explore ways to access such federal financing programmes. Federal funding is also available for water and wastewater infrastructure projects through the Water Infrastructure Finance and Innovation Act (WIFIA) programme administered by the Environmental Protection Agency.
In states where, for example, PPP-enabling legislation is limited to specific types of projects, such as transportation, it is commonly the state's department of transportation that is charged with the execution and performance of the applicable PPP project. In other states, a centralised PPP authority (which may be an authority created expressly to fulfil such a role, an office within a department of the state government or an existing instrumentality of the state) is in charge of coordinating the PPP policy for the state. In some cases, such an authority is also directly in charge of executing and performing the PPP directly with the private sector, and in others it is a sector agency (e.g., the department of transportation) that executes the PPP under the supervision of the centralised PPP authority. States that have created centralised PPP authorities include California, Colorado, Georgia, Michigan, Oregon, Virginia and Washington. All of these authorities exist within the department of transportation or treasury. Among these states, the PPP authorities of California and Michigan have a broad sector mandate, while other state authorities are focused primarily, if not solely, on transportation. In other states, the PPP programme has been entrusted to more than one authority.
iii General requirements for PPP contracts
Some PPP statutes mandate the use of specific forms of contracts. In some cases, the statutes create a specific form of PPP agreement or comprehensive agreement, and include the terms that have to be included therein. In such cases, even if the statute does not expressly say so, they create the obligation that the PPP agreement be governed by the law of the relevant state. Typically, a state is not amenable to accept a governing law other than the laws of such state.
Generally, laws governing design defects in construction vary from state to state to a degree that would be well beyond the scope of this publication. However, although it is common that, in non-PPP projects, design professionals disclaim warranties of the adequacy of their services, some courts have held that, in the case of design-build contracts, unless expressly disclaimed, the design portion of the agreement is warranted in a similar fashion as the construction portion, based on the overall contract being a 'construction contract' and not treating each portion differently.
Although PPP statutes may imply or list as one of the terms of the PPP agreement the inclusion of warranties, generally the legislation defers on the terms of the warranties to the terms negotiated by the granting authority and the private parties. It will be particularly important for a party participating in a PPP project to confirm whether the local legislation overrides any warranty requirements generally applicable to public contracts and, if permitted, to consider including any disclaimer thereof.
Among the implied warranties that are generally found in state legislation, good workmanship may be the most common. State laws generally regulate the duration of warranties, particularly in connection with hidden defects. However, it is common that the terms of these warranties can be altered by the agreement of the parties.
Although, generally, the uniform commercial code is not applicable to construction contracts, it is important to consider whether the PPP agreement has a component that could be characterised by courts as a goods' supply agreement. Some state courts have recharacterised certain construction agreements as dealing more precisely with the supply of goods. In such cases, implied warranties of merchantability, fitness for a particular purpose and good title could be made applicable to portions of the agreement. Therefore, the parties to a PPP agreement should consider whether they should be expressly disclaimed.
Payment terms are governed by different rules in each state. Some states deem some payment terms in construction contracts to be matters of public policy and, therefore, the terms provided for in the applicable statutes cannot be modified. In particular, some states have enacted 'prompt payment' statutes that would prohibit pay if paid or paid when paid terms in construction contracts, requiring contractors to review and approve invoices or pay them within a maximum period of time, regardless of whether payment from the owner has been received. Equivalent project relief clauses are generally enforceable. However, to the extent that they run afoul of prompt payment statutes (e.g., permitting a contractor to withhold payment to a subcontractor simply because the payment has been withheld by the owner and not on the basis of a specific breach by the subcontractor), equivalent project relief may be unenforceable.
There is no mandatory uniform treatment across states for the O&M terms. In recently closed projects and projects that are currently in the procurement stage, a mixed approach of detailed obligations and performance criteria is being used.
There is no particular legal requirement regarding the degree to which facilities must be refurbished before they are handed back to the government party. Recently closed projects and projects currently in procurement include handback requirements to varying degrees. In some cases, such handback requirements include the establishment of a reserve account, funded from payments received by the project company or a letter of credit (issued for the account of the sponsors or the project company), starting a number of years before the end of term, which must be handed (in whole or in part) to the government in case the scheduled refurbishment of the project is not performed to the required level.
Bidding and award procedure
i Expressions of interest
Generally speaking, statutes (or regulations issued thereunder) include planning and approval processes for PPP projects to determine in the first instance whether the project is worth pursuing. Statutes differ on how this process is performed, mostly based on whether a dedicated PPP authority exists or not. In some states, this process is also involved with respect to unsolicited proposals.
Once the relevant authority has decided to procure a project under the PPP model, generally, a public bidding process is required under the applicable legislation. The most commonly used process involves a solicitation for expressions of interest together with a submission of qualification, following which the procuring authority selects a shortlist of bidders that is typically comprised of three to four bidders.
ii Requests for proposals and unsolicited proposals
After selecting shortlisted bidders, the procuring authorities issue a draft request for proposals to that shortlist. It is customary for the procuring authority to request comments and invite commentary by the shortlisted bidders (written and in the form of one-on-one in person meetings) before formally issuing the final request for proposals. Responses to commentary, unless part of proprietary discussions related to proposed alternative technical concepts (i.e., deviations from requirements in the request for proposals), are shared with all bidders.
Some PPP statutes, particularly in the most active states in the PPP market, permit receipt of unsolicited proposals. The proposal is, in most cases, subject to an analysis similar to that of projects that the states propose by themselves. If the authority decides to proceed with the project as proposed, it then has to proceed through the same procurement process as if it had proposed the project itself. In some cases, the proponent is entitled to either credit in the evaluation of the proposals or to a special stipend for its work.
In the case of some states, the procuring authority is permitted to offer a stipend. Where this is permitted, the stipend is customarily paid to the extent that the unsuccessful proponents agree to assign or license their work product related to their bid to the procuring authority, which can then incorporate it into the project at hand or other projects.
It is customary in the US for the procuring authority to require both evidence of availability of financing as part of the proponents' bids (most commonly the requirement is to deliver financing commitments) and bid security to guarantee that, if selected as preferred proponent, it will enter into the PPP agreement and do what is necessary to achieve commercial close.
iii Evaluation and grant
Evaluation criteria vary from state to state. In some cases, a specific set of factors must be evaluated. In others, the generic best value for money test (in addition to satisfying the technical requirements of the project) is used.
Bids are typically required to include two separate proposals, a technical proposal and an economic proposal. After confirming that a responsive technical proposal has been submitted, the procuring authority reviews and evaluates the economic proposals. In some cases, the evaluation criteria provides that a number of points will be allocated to different aspects of the proposal, based on objective or subjective criteria (e.g., depending on how a bidder proposes to address certain technical requirements), and the aggregate amount of allocated points will serve to compare all bids. Furthermore, in some cases, a proposal must satisfy a minimum of points to be deemed responsive.
Many jurisdictions within the US allow proposers to offer alternative technical concepts on a confidential basis and it is a common feature in many of the current PPP procurements. The procuring authority may accept these deviations and determine whether it will indeed receive better value for money by accepting the deviations, while at the same time satisfying the expected outcome from the original technical requirements. After receiving the confidential proposal, in advance of the proposer's bid, the authority would then analyse if it is willing to accept it or not, based on value for money offered and satisfaction of its expected goals. Typically, before performing such an analysis, the authority will receive the confidential proposal and decide whether it indeed constitutes a deviation or not.
Depending on the terms of the applicable legislation, after selection of a preferred bidder, the procuring authority sometimes entertains limited negotiations on the final terms of the PPP agreement, and execution and commercial close is performed shortly thereafter.
The permitted forms of remuneration for the private party vary depending on the state. However, commonly used forms of remuneration include construction milestone payments, availability payments and shadow tolls and user payments (e.g., tolls), or a combination of the foregoing. It is more typical for the private party to be compensated with the right to collect and keep toll revenue where there is established usage, for example in the rehabilitation of existing assets. Most greenfield projects are pursued as availability payments, although there are recent examples of greenfield projects being pursued as revenue risk transactions.
Some jurisdictions, such as Texas, have incorporated the sharing of usage risk through the use of shadow tolls in public-private projects. In most revenue-risk deals, the public entity will retain a share of revenues and thus share the risk to some extent.
Typically, PPP agreements in the US allow the government party to collect liquidated damages or apply deductions on the payments due to the private party.
ii State guarantees
The payment obligations of the procuring authority are subject to the applicable state's ability to appropriate funds beyond any particular fiscal year. State constitutions vary on the period for which a legislature may appropriate payment obligations. Appropriation risk is generally present in PPP agreements in the US and addressed by remedies entitling the private party, among other alternatives, to suspend work or claim relief events.
iii Distribution of risk
The distribution of risks between private and public parties varies from project to project. In addition to typical force majeure and undisclosed or undiscovered circumstances, some of the typical risks expressly dealt with in PPP agreements include delay or failure to achieve financial close or obtain and maintain necessary permits
The project company typically is not excused from achieving financial close unless the state authority has failed to satisfy its obligations, including obtaining authorisations allocated to it. To the extent that a delay in financial close is not caused by the actions, or inactions, of the project company (including, for example, trying to renegotiate the terms included in the financing term sheet used for the procurement of the PPP agreement, failing to obtain required approvals assumed by the project company, etc), some states have agreed to take on the risk of timely financial close by agreeing to cover differences in margin or interest rates assumed in the applicable financial model.
If responsibility for the acquisition of a permit was allocated to the government party (which is typically limited to major environmental authorisations), a delay in obtaining such a permit typically entitles the private party to relief in the form of an extension of the time in which it is required to perform its obligations. In some cases, the private party assumes the obligation to continue the approval process for some approvals initiated by the government party, and, in such cases, the private party then assumes the risk of timely issuance of such approvals.
In different jurisdictions within the US, and at different times, PPP agreements have included a force majeure concept that is treated both as a general concept relating to acts outside the parties' control and a list of specific enumerated events that have satisfied the typical concept of force majeure. Occurrence of a force majeure event typically entitles the private party to relief in the form of an extension of the time to perform its obligations, but not additional economic compensation. Weather conditions are usually covered by the concept of force majeure in those cases in which the private party is entitled to relief. In the case of extended force majeure events, the effected party will usually be entitled to terminate the PPP agreement.
Discovery of geotechnical circumstances that were not shown in the reference information provided by the government party, or that could not be expected or learned after a reasonable investigation (the standard of which may vary from state to state), typically entitles the private party to relief in the form of an extension of time to perform its obligations and payment of additional compensation to cover for additional costs. A similar approach is usually followed for pre-existing environmental conditions and third-party release of hazardous substances, but the calculation of the compensation for additional costs arising from these circumstances in some cases is different.
Depending on the type of project, the government party typically assumes responsibility for some matters, such as access rights to real estate property or the performance of work by other contractors. However, PPP agreements sometimes make the private party responsible for obtaining some access rights or cooperation from third parties (including in connection with additional property (not originally contemplated for the project)). To the extent that the government party has assumed such a responsibility, any failure to provide access, lack of cooperation or failure to perform by third parties typically entitles the private party to relief, including in the form of economic compensation or extensions to the schedule.
Risk of political actions (including discriminatory changes in laws and regulation) that occur because of the government of the state to which the government party to the PPP agreement belongs is assumed by the government party. The occurrence of such events typically entitles the private party to extension of time and economic compensation for additional costs. However, in the case of non-discriminatory actions by the state, the economic downside is shared between the state and the private party to varying levels.
Customarily, PPP agreements include a programme of insurance that each party must carry. Typically, unavailability on commercially reasonable terms entitles the party obliged to maintain the affected insurance to some form of relief, which may take different forms on a case-by-case basis.
iv Adjustment and revision
The general concept of price and other economic adjustments is more commonly addressed through a negotiated set of relief events forming the basis for compensation to the private party or sharing of financing improvements with the procuring authority. For example, it is now relatively standard for PPP agreements in the US to include a mechanism whereby, if the project company refinances the project debt, and as a result thereof there is an improvement in the rate of return of the sponsors, some or all of the gain is passed through to the public entity. Rebalancing clauses are not generally found in the US and we are not aware of a specific rebalancing requirement included in a PPP statute. Customarily, if the normal operation of the project produces an improved rate of return, there is no rebalancing requirement.
On the other hand, some PPP agreements include terms that limit the obligation of the public entity to compensate the project company for adverse actions or certain termination events by reference to a maximum rate of return, as reflected in the financial model used in connection with the closing of the PPP agreement, regardless of the actual financial performance of the project.
Subject to the right of the private party to request compensation and, if applicable, time relief for such a change, the government party typically may request changes to the scope of work under the PPP agreement. The terms of such a right to request changes are usually negotiated on a case-by-case basis.
The calculation of compensation for such changes is determined on a case-by-case basis by the PPP agreement, and to a large extent is dependent on the model of PPP used. In revenue risk projects, it is customary to see an allowance for increase in tolls or extensions of the term of the PPP agreement. In availability payment transactions, it is customary to find increases in the availability payment. In both cases, it is common to find an obligation to pay a lump sum by the government party, which, in some cases, is intended to restore the private party to the situation it would have been in but for the occurrence of the relief event, and in other cases, it is intended to restore the private party to the situation it projected in the financial model used for commercial close (in some cases as updated from time to time).
v Ownership of underlying assets
As a consequence of the main form that PPP agreements take in the US (i.e., DBFOM), ownership of the asset remains with the procuring authority with the private party assuming the obligation to operate and maintain (and hand back) such asset in accordance with the standards set forth in the PPP agreement. This is seen as particularly useful for the procuring authority as it permits it to more quickly step in and take over the operation of the asset if necessary to continue providing a public service. However, there are some cases, particularly in water treatment or supply related projects, where the asset is owned by the private party, and the procuring authority retaining an option to acquire such assets upon expiration and certain termination events.
vi Early termination
The parties termination rights vary on a case-by-case basis, but some of the most common termination events that are included in PPP agreements include material or repeated breach (including violations of laws and governmental approvals), abandonment of the project, failure to achieve substantial completion by a certain longstop date, extended relief events, unavailability of material insurance, insolvency of the project company or, while its equity commitments remain outstanding, of an equity member, and changes of control.
To the extent of repeated or material breaches, the government party typically may terminate the PPP agreement. Additionally, the government party has the right to order the suspension of work, to enter into the site and correct any wrongful use or to step-in and perform actions that the project company fails to perform.
On the basis of serving the public interest, PPP agreements in the US typically provide for termination for convenience by the procuring authority, subject to payment of compensation.
Customarily, compensation is available in the event of termination of the PPP agreement, including in the case of termination owing to default by the government party or the private party, convenience and extended relief events.
Depending on the cause of termination, the termination payment typically includes a combination of amounts due to lenders (or a portion thereof) and, as long as termination is not owing to default by the private party, a component to compensate the private party for its equity in the project, subject to deductions that vary from project to project, such as project company's available cash, insurance proceeds and unapplied performance deductions.
In the case of a termination for convenience or breach by the government party, the calculation of the portion of the termination payment that corresponds to the private party typically involves a determination of the present value of the amounts that the private party was projected to receive during the remaining time of the agreement or a fair market value calculation, depending on the PPP model used for the particular project. In the case of termination for extended force majeure events, the equity component of the termination payment is usually limited to the amount of contributed equity less distributions made prior to termination.
Historically, PPP projects in the US have been financed through a combination of public/tax exempt debt issued by or on behalf of the granting authority, such as private activity bonds (the proceeds of which are onlent to the concession company), government loans, guarantees or grants (such as TIFIA, RRIF, WIFIA and INFRA federal programmes) and private bank or bond financings.
There is a continued significant reliance on private activity bonds for large scale capital projects in the US but market participants are also looking at other tax-exempt structures for the implementation of PPPs such as the use of not for profit entities pursuant to 26 USC Section 501(c)(3). There has also been a growing use of the US private placement market to fund PPP projects, although predominantly for brownfield or post-construction phase projects
While the number of PPP projects to reach financial close in the US has remained relatively limited over the last couple of years, there continues to be a strong pipeline and the use of PPPs can be expected to increase as states and municipalities continue to look for ways to leverage private finance to meet their infrastructure needs.
Unfortunately, political risk continues to be an important factor in the US PPP market. The political environment has resulted in the postponement and cancellation of several PPP transactions (such as the Houston Justice Complex, the Indianapolis Courthouse, the US Route 460 Corridor Improvements and Philadelphia's Southport Marine Terminal Complex, and more recently, the St Louis Lambert Airport) that had reached advanced stages of procurement, and although the new federal administration has touted a US$1 trillion infrastructure investment plan and more recently outlined some regulatory and financing programme changes to incentivise investment, many details on how new projects would be brought to the market or how closing risk would be reduced remain to be seen. The US PPP market has not yet evolved to a point where the procurement process is sufficiently institutionalised to render it largely immune to the political cycle.
At the time of writing, there are close to 40 projects in the US for which the preferred proponent has been selected and that are in the process of achieving commercial close or the proponent shortlist has been issued and that have already received bids and await the award, or are scheduled to receive bids in the relatively near future. This includes the Honolulu Rail Transit P3 project, the Miami-Dade County Civil and Probate Courthouse, the Los Angeles Civic Center, Gilcrease Expressway West, Lincoln South Beltway and the Phoenix Central Station Redevelopment. Barring issues with governmental approvals of the final PPP agreements and delays in the procurement schedules, this by itself should create a pipeline of transactions for the next year or two that maintains the current level of activity on a par with previous years.
In addition, there are currently many proposed PPP projects, in pre-procurement or RFQ stages, that by their nature should be of significant interest to private parties. This would indicate that a pipeline for an even longer term is being created. Projects of this type that come to mind include the Sepulveda Pass, the Miami-Miami Beach Rapid Transit and the Hudson River Tunnel Replacement (Gateway) projects. As previously discussed, more states continue to enact or further develop their PPP legislation, broadening the scope of potential transactions. Moreover, states that have already been successful with their transportation PPP projects continue to expand their PPP programmes to other sectors. We are seeing a growing interest in social infrastructure, water, broadband projects and electric vehicle charging stations, not only from granting authorities, but also from developers, equity investors and financing parties. We believe that this trend will continue to the extent that granting authorities hit the sweet spot on the size of project value. States have started to pack their pipelines with these kinds of projects, many of which remain in the viability study stage, but some of which have made it to procurement, or even to commercial and financial close.
1 Dolly Mirchandani and Armando Rivera Jacobo are both partners at White & Case LLP.
2 E R Yescombe, Public-Private Partnerships, Principles of Policy and Finance, Butterworth-Heinemann, United Kingdom.
3 However, the Port Authority of New York and New Jersey, as a bi-state agency formed by treaty between the States of New York and New Jersey, approved by the United States Congress, is subject to different procurement rules, which have allowed it to carry out major projects under a PPP model, including surface transportation and airport projects.