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 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 at the federal level 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, infrastructure-related procurement laws have not permitted the typical forms of contracts used in PPPs in the international context, requiring, for example, the separation of the procurement of the design of a project from the procurement of the construction of the same. Most notably, this has been the case in the state of New York. However, policies towards design-build procurement have changed in recent years and, at the end of 2019, the legislature in the state of New York 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 procurement by way of a request for proposal of all types of infrastructure projects.
Currently, a majority of states and Puerto Rico have enacted PPP-specific legislation that permits PPP transportation and social projects. In some cases, the PPP-enabling legislation authorises specific projects on an ad hoc basis. Other states, such as New York, have enacted pilot programmes authorising the procurement of a limited number of projects using the PPP model.
The types of public infrastructure that can be procured through the PPP model also vary from state to state. The transportation sector has historically accounted for the 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, PPPs have increasingly been utilised for social infrastructure projects, 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 been implemented for long before that, mainly in the water and wastewater sectors. Correctional services companies have also built prisons and offered their services to all levels of government for several years.
Two pathfinder projects to develop consolidated rent-a-car (ConRAC) facilities at the LAX and Newark International Airports successfully reached financial close in recent years. The success of these transactions has encouraged other airport authorities to look at opportunities for this new asset class.
In the past decade, the use of predevelopment agreements has also become a trend across multiple types of authorities and projects. Prominent examples of PPP projects that have used predevelopment agreements include the Texas SH 130 (segments 5 and 6), the Denver International Airport Great Hall (which has since been terminated after a dispute between the owner and developer) and the National Western Campus (stages 1 and 2). Projects currently in procurement that are expected to use a predevelopment agreement model include Los Angeles County Metro's Sepulveda Corridor, the Lake Oswego Waste Water Treatment Plant and portions of Maryland's I-495/I-270 Capital Beltway. Unlike the traditional PPP model, predevelopment agreements are used at an early stage of development, when the full scope of the project is not completely defined, environmental studies may still be ongoing and the financial viability of the project may not be clear. A predevelopment agreement mitigates the financial and execution risk for the private party and the authority, limiting the scope of the initial work and investment prior to determining that the project is viable. At the same time the parties benefit from their open collaboration defining the project scope and selecting the features that will make the project provide the best value for money to the authority and an attractive return on investment to the private party. The authority has the right to terminate the predevelopment agreement and related work on the project, with limited termination payments liability, and the private party has the option to enter into a definitive PPP agreement before it is offered to other potential developers. This arrangement typically results in a reduction in the length of the procurement period and costs.
The year in review
A key recent development in the US market is the substantial increase in the number of broadband and social infrastructure assets being developed through PPPs. Multiple courthouses, prison projects and student housing have achieved commercial or financial close in recent years, and there are many other social infrastructure projects currently in procurement, including civic centres, schools 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.
Although, overall, transportation continues to account for the biggest portion of the PPP market in the US by value, only a handful of PPP transportation transactions achieved financial close during 2020, with a number of procurements stalled or on hold due to the ongoing effects of the covid-19 pandemic on the transportation sector. These include major terminal redevelopment projects at the John F Kennedy Airport in New York.
The US also saw a number of university energy PPP projects reach financial close in 2020, including projects procured by the University of Iowa, the University of Syracuse and the University of Idaho. There is a growing trend in the US for universities to enter into comprehensive long-term arrangements with a private partner who will take on responsibility for the operation and maintenance of the university's utility system as well as the management and funding of future renewal and capital improvement needs. In some cases, these projects have involved a large upfront payment for the procuring university, also making them attractive revenue-generating opportunities for public universities. The private partner typically makes its return through a utility fee structure, similar to the rate-setting methodologies employed by regulated utilities in the US.
Other major PPP transactions that achieved financial close during 2020 include the Texas A&M Medical Building & Student Housing, the Prince Georges County Public Schools and the Miami-Dade County Civil and Probate Courthouse projects.
The past year also saw a couple of setbacks in the US PPP market, including the cancellation of highly anticipated projects such as HART's Honolulu Rapid Transit Project and the Los Angeles Civic Center. Increasing development costs, beyond the affordability expectation, and uncertainty of availability of sufficient appropriations, user fees or other sources of funding, have presented a significant challenge for projects to achieve successful commercial and financial close. Although in the long term the negative economic effects of the covid-19 pandemic will be overcome, the immediate reduction in tax and user revenue created or exacerbated immediate challenges to the granting authority's assumptions of its expected financial commitments. In addition to these challenges, the covid-19 pandemic increased parties' focus on the definition of force majeure and relief events, not only to ensure the inclusion of pandemics, but also the actions that authorities may adopt in response to them. The numerous decentralised jurisdictions in the US, and entities within each such jurisdiction that constitute the universe of grantors, and the different powers that they hold, make it impossible to provide an overall view of how the covid-19 pandemic, or the possibility of similar future pandemics, have changed the terms of PPP agreements. The range of responses in the market goes from simply adjusting or tightening the definition of force majeure events, adding more detailed descriptions of events related to widely spread disease and responses thereto, to implementing covid-19 and covid-19 response-specific relief events, forms of relief and conditions to granting such relief.
i Types of public-private partnership
As mentioned in Section I, there is no uniform federal level statutory definition of PPP in the US, and the scope and nature of transactions for the delivery or operation of infrastructure varies from state to state. However, the great majority of the larger PPP transaction in the US follows a design, build, finance, operate and maintain model, or a variation thereof, under the form of concessions or long-term leases, including, recently, the LAX and Newark ConRAC projects, the Texas A&M Medical Building & Student Housing and the Prince Georges County Public Schools.
ii The authorities
Owing to the distribution of powers in the US, most PPP projects are procured at the state or local level. Some municipalities and other local governmental entities, such as city governments and 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 programmes such as the Transportation Infrastructure Finance and Innovation Act (TIFIA) and the Railroad Rehabilitation and Improvement Financing (RRIF) established by the Transportation Equity Act for the 21st Century (TEA-21), as amended. The federal government created the Build America Bureau within the US Department of Transportation to serve as a single point of contact and coordination for states, municipalities and project sponsors looking 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 usually 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 and territories that have created centralised PPP authorities include California, Colorado, Georgia, Michigan, Oregon, Puerto Rico, Virginia and Washington. All of these authorities exist within the department of transportation or treasury or, in the case of Puerto Rico, the Fiscal Agency and Financial Advisory Authority. Among these states and territories, the PPP authorities of California, Michigan, Virginia and Puerto Rico have a broad sector mandate, while other state authorities are focused primarily, if not solely, on transportation. In other states, their 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. For example, the Virginia and Puerto Rico PPP statutes create a specific form of PPP agreement or comprehensive agreement, and include the terms that have to be included therein, such as the obligation to deliver performance and payment bonds and obtain certain insurance and the authority's audit and inspection rights. 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. Even if no specific form of contract is mandated, typically states are not amenable to accepting a governing law other than the laws of such state.
Although PPP statutes may imply or list the inclusion of warranties as one of the terms of the PPP agreement, generally the legislation defers on the terms of the warranties to the negotiation 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.
Laws governing design defects in construction vary from state to state to a degree that would be well beyond the scope of this publication. In non-PPP projects, design professionals typically disclaim warranties of the adequacy of their services. However, some courts have held that, in the case of design-build contracts, the design portion of the agreement is warranted in a similar fashion as the construction portion, unless the warranty is expressly disclaimed. This treatment is afforded based on the overall contract being a construction contract and not treating each portion differently. Among the implied warranties that are generally found in state legislation, good workmanship may be the most common.
Generally, the uniform commercial code is not applicable to construction contracts. However, it is important to consider whether the PPP agreement has any components that could be characterised by courts as a goods supply agreement. Some state courts have recharacterised some 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.
State laws generally regulate the duration of warranties, particularly in connection with latent defects. It is usual that the term of warranties can be altered by the agreement of the parties.
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 in the applicable subcontracts.
There is no uniform mandatory treatment across states for O&M terms. In recently closed projects and projects that are currently in the procurement stage, determination of compliance with O&M requirements has used a mixed approach of level of service performance obligations that are subject to penalties or deductions from availability payments before triggering a default, and obligations that breach triggers a default immediately.
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 the term. The funds on deposit in such account must be handed (in whole or in part) to the government in cases where the scheduled refurbishment of the project is not performed to the required level.
Bidding and award procedure
i Expressions of interest and request for qualifications
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 depending on whether a dedicated PPP authority exists or not. In some states, this process is also applicable 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 followed by a request for submission of qualifications. During the expression of interest stage, the authorities usually request the private sector's opinion on and hold industry forums to discuss the possible scope and ways to develop a project. After the authority has sufficiently defined the scope of a project and pre-development activities are advanced to the point where there is some level of confidence regarding the viability of a project, the authority typically requests interested parties to submit evidence of their technical and financial qualifications to develop the proposed project (a request for qualifications, or RFQ). The authority then selects a shortlist of proposers that typically comprises three to four proposers whose qualifications provide the authority with confidence that they are technically and financially capable of developing the project. The selection of a shortlist of proposers renders the procurement process more manageable, allowing the authority to take comments from and negotiate with a limited number of proposers, guaranteeing a level playing field, including by open and substantial communication on a one-on-one basis with all the proposers. The selection of a shortlist also creates competitive tension among proposers, who are able to take a view on the odds of being selected and the costs and risks they are willing to assume in their bid to be awarded the project.
ii Requests for proposals and unsolicited proposals
After selecting shortlisted proposers, the procuring authorities issue a draft request for proposals to those shortlisted proposers. It is customary for the procuring authority to invite commentary by the shortlisted proposers (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 typically shared with all proposers.
Some PPP statutes, particularly in the most active states in the PPP market, permit submission by the private sector of unsolicited proposals to an authority to enter into a PPP agreement for the development of projects within such authority's mandate. In fact, some authorities, such as Los Angeles' Metro, through its Office of Extraordinary Innovation, and Puerto Rico's Public-Private Partnership Authority, encourage the submission of unsolicited proposals. Unsolicited proposals provide a valuable means for projects to be jump-started by the market and for innovative solutions to be delivered by the private sector. Unsolicited proposals are, 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 payment 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 the 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, a 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 provide 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 proposer plans to address certain technical requirements), and the aggregate amount of allocated points will serve to compare all bids. Further, in some cases, a proposal must satisfy a minimum number of points to be deemed responsive.
Many jurisdictions within the US allow proposers to offer alternative technical concepts (ATC) on a confidential basis, and it is a common feature in many current PPP procurements. After receiving the confidential ATC, in advance of the proposer's bid, the procuring authority may decide whether to accept these deviations based on 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. Typically, before performing such analysis, the authority will decide whether the ATC indeed constitute a deviation.
Depending on the terms of the applicable legislation, after selection of a preferred proposer, the procuring authority sometimes entertains limited negotiations on the final terms of the PPP agreement, and execution and commercial close are consummated shortly thereafter.
The permitted forms of remuneration for the private party vary depending on the state. PPPs in the US are a mix of revenue risk projects, where payment depends on the actual use of the asset, and capacity deals not dependent on actual usage of a project, where one of the key financial risks to assess is the counterparty's credit. Commonly used forms of remuneration include construction milestone payments, availability payments, shadow tolls, user payments (e.g., tolls, rider fees), 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 currently 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 payment obligations
State and local government agencies in the United States typically commit funds pursuant to approved annual budgets, and have limited authority to incur multi-year payment obligations. While state constitutions vary with respect to the period for which a legislature may appropriate payment obligations, the payment obligations of a procuring authority under a PPP agreement will generally be subject to appropriation by the state legislature, and there is usually a desire for it not to be characterised as indebtedness of such procuring authority, which can be subject to constitutional limitations. As mitigation, the procuring authority may covenant to include amounts payable under the PPP contract in its annual budget proposals and use best efforts to secure the timely approval of such payments, but the private partner will generally have no right to compel contractual payments for which funds have not been appropriated. Other mitigations built into a contract may include relief events or suspension of services by the private partner. While an appropriations risk might be expected to have a chilling effect on PPP transactions, the PPP market in the United States has generally evolved to accept it, as procuring authorities have traditionally treated payment obligations as if they were fully enforceable (considering them to be 'moral' obligations) for fear of losing market access should they fail to make such payments, and as a result rating agencies typically rate projects only one notch below the rating it would have otherwise received to account for appropriations risk.
iii Allocation of risk
The distribution of risk between private and public parties varies from project to project. In addition to typical force majeure and undisclosed or undiscovered conditions, some of the typical risks expressly dealt with in PPP agreements include delay or failure to achieve financial close, or to 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), some states have agreed to share the risk of movements in interest rates assumed in the applicable financial model at the time of the bid.
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.
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, with the private party expected to procure insurance to the extent available. 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 outstanding in excess of 180 days, the affected party will usually be entitled to terminate the PPP agreement.
Discovery of geotechnical conditions 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 varies 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 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 timely 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 and 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 usually shared between the state and the private party to varying levels, depending on the extent to which increased costs are permitted to be passed on to users.
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 the 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 there is an improvement in the rate of return of the sponsors, typically 50 per cent of the gain is passed through to the public entity. Rebalancing clauses are not generally used 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.
The government party typically may request changes to the scope of work under the PPP agreement, subject to the right of the private party to request compensation and, if applicable, time relief for such a change.
The terms of such a right to request changes and the compensation therefor are usually negotiated on a case-by-case basis, and to a large extent depend on the model of PPP used. If the private party is able to raise financing to pay for the cost of the change, it is customary to see an allowance for increase in tolls or extensions of the term of the PPP agreement in revenue risk projects, or 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, DBFM), ownership of the asset remains with the procuring authority with the private party assuming the obligation to operate or maintain (and hand back) such asset, or both, in accordance with the standards set forth in the PPP agreement. 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 retains 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.
In the event 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 not fettering the public sector's options and discretion, 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 the 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 return on equity component of the termination payment 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.
Public or tax-exempt debt issued by, or on behalf of, the granting authority, such as private activity bonds, has played a significant role in the financing of PPP projects in the US. Private activity bond (PAB) proceeds raised by a public issuer are on-lent to the concession company for application towards qualifying facilities, allowing the private entity to benefit from tax-exempt interest rates and a lower cost of capital. A portion of project costs may also be met through federal financing programmes in the form of government loans, such as the TIFIA, RRIF and WIFIA federal programmes.4 Such programmes provide projects with a low-cost source of usually subordinate debt,5 although financing terms may be more covenant-heavy than those typically seen in private financings for similar projects.
While there is a continued reliance on private activity bonds for large-scale capital projects in the US, the legislative cap on PAB volumes and restrictive eligibility criteria have acted as a barrier to their availability, and market participants have also looked 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). Commercial bank debt also continues to play a prominent role in the financing of PPP concessions although, in recent years, there has been a growing use of the US private placement market to fund projects. While, to date, private placements have been predominantly used for brownfield or post-construction phase projects, institutional investors are increasingly willing to accept some construction risk and facilitate delayed draw models to support greenfield projects.
While the number of large PPP projects to reach financial close in the US has remained relatively limited over the past 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.
Political risk continues to affect the US PPP market, with the political environment resulting in the cancellation most recently of the HART Honolulu Rapid Transit project, which had reached an advanced stage of procurement. The new federal administration has highlighted infrastructure investment as one of its key priorities. However, details on how new projects are to be brought to market or how closing risk will be reduced remain to be seen.
At the time of writing, there are close to 40 projects in the US, across different sectors, that are in an advanced stage of procurement. These include the I-495/I-95 Capital Beltway and I-270 Congestion Relief Improvements, Georgia's SR 400, the Miami-Dade Beach Corridor Trunk Line and the Potrero Bus Yard Expansion. Barring issues with governmental approvals of the final PPP agreements and delays in the procurement schedules, these transactions alone should maintain the current level of activity on 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 indicates that a pipeline for an even longer term is in the process of being created, and this does not take into account new initiatives to be deployed by the new federal administration. Projects of this type include the Corpus Christi Desalination Plant, I-285/I-20 East Interchange, the George Mason University Digital Innovation Center and the Hudson River Tunnel Replacement (Gateway) projects. As discussed previously, 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 growing interest in social infrastructure, water, broadband and electric vehicle charging station projects, not only from granting authorities and universities but also from developers, equity investors and financing parties. Water treatment and supply projects are a particularly interesting sector to watch. At the time of writing, Santa Clara Valley Water is expected to launch a procurement process for an expedited purified water PPP project imminently. In the shorter term, the town of Alice in Texas is expected to achieve commercial closing of a water desalination project after selecting Seven Seas Water as its preferred partner last year. With an anticipated 15-year term and relatively low capex, this project is significantly smaller than some of the large PPP projects in the US water and wastewater sector of the early 2010s, but it may provide an attractive template for municipal utilities looking to address water shortages. We also expect to see more university energy projects coming to the market over the next couple of years as universities continue to hire advisers to evaluate potential PPPs as a means of addressing their long-term utility needs and leveraging private sector expertise to help meet sustainability goals.
1 Dolly Mirchandani and Armando Rivera Jacobo are partners at White & Case LLP. The authors wish to thank Claire Watson, counsel at White & Case LLP, for her contributions to this chapter.
2 E R Yescombe, Public-Private Partnerships, Principles of Policy and Finance, Butterworth-Heinemann, United Kingdom.
3 Note that the Port Authority of New York and New Jersey, as a bi-state agency formed by interstate compact 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.
4 The TIFIA programme provides credit assistance for surface transportation projects in the form of secured loans, loan guarantees and standby letters of credit. Under the RRIF programme, the Department of Transportation provides direct loans and loan guarantees for the development of railroad infrastructure. The WIFIA programme provides supplemental loans for the development of water and wastewater infrastructure. Each programme has bespoke criteria for eligibility and the portion of project costs that can be funded through such credit assistance is different for each programme.
5 TIFIA and RRIF debt may be subordinated in payment to other project debt prior to a bankruptcy, insolvency or liquidation of the borrower. Upon a bankruptcy, insolvency or liquidation of the borrower, the lien securing the TIFIA or RRIF debt becomes pari pasu with the liens of other project debt.