Infra Insight Blog : written by Nossaman LLP Infrastructure attorneys, covers infrastructure project delivery, including Public-Private Partnerships, Operations & Management Agreements, policy, and news.

I-595 The $1.8 billion I-595 Corridor Roadway Improvements Project was the nation’s first transportation concession to use an availability payment structure. The successful deal closing is remarkable because the private equity markets for U.S. projects had been essentially frozen for most of 2008. As the first PPP infrastructure deal to reach financial close in almost a year, the transaction signaled to the credit markets that infrastructure is still considered a strong asset class. This P3 was the first to use availability payments in a concession in the United States and allows Florida to complete a major transportation infrastructure project that would have been otherwise impossible given the dearth of public funds available. On the finance side, the flexibility of the parties to respond to change with a "can-do" attitude allowed the sponsor, ACS Infrastructure Development, to shift from its planned bond financing structure to a bank financing structure just weeks before the planned financial close. Without this flexibility, the transaction may well have terminated when it became apparent that the market would not bear such a large offering of alternative minimum tax debt. Similarly, the Florida Department of Transportation showed exceptional foresight to provide some protection from interest rate movements, and a risk-sharing mechanism for credit spread movements, which were key to keeping the transaction on track when volatility in the markets was at its highest levels. The American Road and Transportation Builders' Association named the project their 2009 Project of the Year.

Port of Miami Tunnel The $900 million Port of Miami Tunnel and Access Improvements Project (POMT), which had been widely expected to be the first availability payment deal, ended up as the second, after the deal survived numerous political obstacles and a near death experience. The POMT contract incorporates several novel risk allocations to accommodate the development of the nation’s largest soft earth bored tunnel. The project is a first in the U.S., a technically challenging transport project, implemented through a P3, without charging tolls to motorists. The original bid price for the project was almost 50% less than the Florida DOT’s own internal estimate, evidence of the considerable value it will bring to the public sector. Although the Port of Miami Tunnel Project actually closed financing after Florida DOT’s I-595 Managed Lanes Project, many of the innovations incorporated into the I-595 financing protocols and its TIFIA loan structure were actually developed for the Port deal. While both financial market and political fluctuations delayed the project (the project was even terminated at one point) the Florida DOT remained flexible. They were able to accommodate Meridiam Infrastructure as the lead contractor’s choice for an equity partner after the original equity players pulled out late in the procurement. As the monoline insurance market disappeared, and PABs financing became untenable, the Florida DOT turned to the TIFIA federal credit assistance program, negotiating a deal-saving loan that sets precedent for what TIFIA can accomplish. In the end the Port of Miami Tunnel Project was delivered at a lower cost than the original bid. Project Finance International named the Port of Miami Tunnel its 2009 Americas P3 Deal of the Year.

North TarrantExpress The $2.02 billion toll concession agreement was financed using a senior bond transaction that was the first tax exempt private activity bond transaction to be sold “unwrapped,” without credit enhancement from an insurer or a bank – a truly remarkable feat in this financial market environment. One of the equity holders is the Dallas Police and Fire Pension Fund – marking the first time such a fund has been a direct equity holder in a transportation infrastructure deal

Nossaman was pleased to have the opportunity to work on all three deals, which represented all of the U.S. deals that reached financial close in 2009.

On the design-build front, both the $1.4 billion Metro Solutions Phase 2 in Houston, Texas and the $1.02 billion Dallas-Fort Worth Connector received notices to proceed.

Looking ahead, 2010 continues to hold promise for the P3 industry. The $2.68 billion IH-635/LBJ project in Texas, which reached commercial close this year will be moving toward financial close. North Carolina’s $640 million Mid-Currituck Bridge and Texas’ $2.68 billion second phase of the North Tarrant Express are both proceeding under pre-development agreements executed this year.

The stimulus funding coupled with new state PPP programs under development in Georgia, California, Nevada and Arizona, as well as a regional program in Los Angeles mean the next few years are likely to see ongoing P3 dealflow.

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Port of Miami Tunnel: Digging Through Novel Risks
By Brandon Davis and Patrick Harder

On October 15^th, the landmark Port of Miami Tunnel and Access Improvement Project reached financial close, eliciting a collective sigh of relief from those who participated in the 45-month procurement. Work could finally begin on the technically challenging $900 million project that will result in a tunnel under Biscayne Bay connecting the Port of Miami with I-395, thereby allowing truck and bus traffic to bypass Downtown Miami Streets. 

Florida is home to many things, but not to complex tunneling projects. Compounding the issues created by this project’s novelty was the fact that it was the Florida Department of Transportation’s (FDOT) first procurement for a true public-private partnership. Instead of lowering its head like a University of Florida fullback intent on powering the ball to the goal line by brute force, FDOT kept its head up and reconsidered its standard risk allocations. In doing so, FDOT nimbly protected both the public’s interest and ensured the private sector remained interested.

To this end, FDOT kept an open mind, engaging the private sector early and often. From the industry forum in 2005, to sitting down with the selected proposer (the Miami Access Tunnel consortium) and discussing problems with its lead equity member and the slowing economy, FDOT considered many novel risk allocations. The following four stood out.

1.         Changed Geotechnical Conditions

Because the geology under Biscayne Bay is porous and undisputedly unpredictable, the Port of Miami Tunnel project would be a challenging project for even for the most experienced tunneling contractors. Discovery of large voids or other unforeseen ground conditions during tunneling will undoubtedly lead to delays and increased costs. FDOT knew that it could not bear this risk all by itself.  At the same time, if it shifted all of the risk of changed geotechnical conditions to the private sector, either no one would bid or the bids would skyrocket.

To address these countervailing concerns, FDOT came up with the following risk sharing solution:

a) The first $10 million of extra costs due to changed geotechnical conditions is the concessionaire’s responsibility;

b) The next $150 million is FDOT’s responsibility (paid out of a contingency reserve containing FDOT and Miami-Dade County funds); and

c) The next $20 million is covered by the concessionaire.

Over this threshold ($180 million), either party may choose to terminate the agreement. This allocation ensures that the private sector will have “skin in the game” without the threat of losing its shirt.

2.         Named Windstorms (Hurricanes)

Florida’s hurricanes are as famous as its college football teams. So the shortlisted proposers were understandably concerned about the possibility of hurricanes wreaking havoc on the project. After considerable negotiations, FDOT decided to address the risk by agreeing to cover property damage costs resulting from a named windstorm (any storm severe enough for the government to name it), provided that the concessionaire:

a) Complies with the procedures in the Hurricane Readiness Plan prepared by the concessionaire and approved by FDOT;

b) Complies with storm-related directives issued by the Port of Miami or other governmental entities; and

c) Covers the first $1 million of damage caused by each storm (with a maximum liability of $3 million each year).

FDOT also agreed that if a named windstorm causes a project delay, it will extend the concessionaire’s construction completion deadlines.

Why did FDOT decide to shoulder this risk? If shifted to the private sector, FDOT would pay the cost for this risk through higher bids regardless of whether any hurricanes occur during project construction or not. In addition, the private sector may not have been able to obtain insurance to mitigate the risk of damage caused by a hurricane and the unavailability of insurance would have further increased bids. In contrast, by taking on this risk, FDOT got the benefit of lower pricing from the private sector and the ability to mitigate the risk itself through a combination of federal emergency funds and other similar sources if a hurricane were to cause extensive damage. Simply put, FDOT determined that it was more cost effective to keep this risk and hope that the only hurricanes near the project end up being students from the University of Miami.

3.         Marine Transit of the Tunnel Boring Machine

Very few companies in the world manufacture tunnel boring machines (TBM) big enough to bore the twin 42-foot tunnels for the project. Since all of these manufacturers are outside the United States the concessionaire will need to transport the TBM over open water. The concessionaire was willing to assume the risk of losing or damaging the TBM in transit. The banks, however, were not. A few weeks prior to financial close the banks demanded time relief in the event the TBM joins the Titanic at the bottom of the Atlantic.

FDOT could have dug in its heels and rejected this request. Instead, FDOT kept an open mind. Ultimately, FDOT agreed to extend construction deadlines if the loss or damage results in at least 60 days of project delay, provided that the ship transporting the TBM was seaworthy. This compromise enables the concessionaire to avoid default if forced to replace its TBM (which takes a year or longer), though it does not extend the term of the concession or otherwise provide for monetary relief.

4.         Bonding Requirements

Florida law required contractors on public works projects to provide surety bonds covering 100 percent of the contract price. Although such requirements are common, they can by themselves undermine PPP programs because the surety market does not provide bonds big enough to cover the contract price of many PPP projects.  Nevertheless, legislatures are slow to pull back these requirements due to concerns that the state and local subcontractors will be unprotected if there is a default by the prime contractor.

To resolve this problem, FDOT spearheaded an effort to enact legislation in 2007 that permits FDOT to reduce bonding requirements for larger projects, as long as the private sector provides alternate security for the balance of the uncovered contract amount. With this revision in hand, FDOT was able to require payment and performance security that are obtainable in the market. This security, coupled with other project-appropriate tools, provides FDOT and local subcontractors with the protection they need in case of concessionaire default.

Conclusion

Although the Port of Miami Tunnel Project is novel in many ways, the construction industry generally, and the PPP market in particular, can learn from the deal. Specifically, as documented above, the industry can learn the value of early and active engagements between the sponsoring agencies and proposers regarding their concerns and re-assessing standard risk allocations when appropriate. At the end of the day, this approach played a key role in enabling FDOT to reach financial close on a project unlike any other in the state’s history, despite the worst recession in decades. 

Nossaman LLP attorneys Patrick Harder and Brandon Davis served as lead outside legal counsel to the Florida DOT on both the Port of Miami Tunnel Project and the recently closed I-595 Corridor Roadway Improvements Project.