P3 Policy and Delivery Summit in Washington D.C. May 14-15

One of the key events for the P3/infrastructure industry this year will be the P3 Policy and Delivery Summit, which is being held in Washington D.C. on May 14th and 15th. The Summit is taking place during, and in partnership with, Infrastructure Week, and is poised  to attract industry leaders from the private sector and senior officials from federal, state, and local government. The event will be held at the Cosmos Club, a D.C. landmark listed on the National Register of Historic Places.

The Summit’s focus is to analyze the respective roles of federal, state and local government in helping deliver world-class infrastructure across all sectors in the U.S. via P3s. The conference is particularly timely, given the imminent Infrastructure Bill, which it is hoped will move forward with bipartisan support. The program for the Summit has been developed in collaboration with DJ Gribbin, former Infrastructure Advisor to President Trump, and current Nonresident Senior Fellow, the Brookings Institution; Senior Operating Partner, Stonepeak Infrastructure Partners; and founder, Madrus, LLC.

In addition to Mr. Gribbin, keynote speakers include: Andrew Wheeler, Acting Administrator, Environmental Protection Agency, Derek Kan, Under Secretary, U.S. Department of Transportation, Ryan Fisher, Principal Deputy Assistant Secretary of the Army for Civil Works and Tim Petty, Assistant Secretary for Water and Science, U.S. Department of Interior.  The organizers are also anticipating having a member of the House Committee on Transportation & Infrastructure as a keynote speaker.

Geoff Yarema, partner and  co-founder of Nossaman’s Infrastructure Practice Group, will be part of the event’s closing panel “P3’s–Past, Present, and Future” along with Robert Poole, Director of Transportation Policy for the Reason Foundation and Mike Parker, Americas Infrastructure Leader, EY Transaction Advisory Services.

Additional topics that will be covered at the Conference include:

  • How should the financing burden be shared between federal, state and local governments?
  • Reform of the Gas Tax – is it viable, and, if so, how?
  • Harnessing P3 for airports

For more information on the event, you can visit the Summit website here.

Bipartisan Support for Bill Authorizing Tax Exempt Financing of Public Buildings

A pair of Senators from both sides of the aisle, Senator Todd Young (R-Ind.) and Senator Catherine Cortez Masto (D-Nev.), introduced the Public Buildings Renewal Act of 2019 last week, which would authorize the use of tax exempt financing along with private equity to rebuild schools and public buildings through public-private partnerships.  “We owe it to our students and teachers, our firefighters and nurses, and all taxpayers to find a way to upgrade our schools and public buildings.  This is a public health and safety issue that impacts not just Hoosiers, but all Americans.  Our bill will enable local governments to access private financing to support public building projects for the first time, so that much needed building upgrades can occur.  I look forward to working with my colleagues to advance this critical legislation,” said Senator Young.

At the end of 2016/beginning of 2017, the IRS issued a revenue procedure which liberalized the ability on the part of public agencies to enter into long-term management contracts with private companies and still benefit from tax exempt financing.  However, the P3 industry has yet to come up with a way of using the new IRS rule to couple tax exempt financing with the infusion of private equity in the capital structure.  This latest bill (which was originally introduced in the last session of Congress) would expressly authorize up to $5 billion of tax exempt private activity bonds for government buildings in part financed with private equity.

“Whether it be police stations, court houses, hospitals, or schools, our nation’s infrastructure is one of the most important assets we have.  Having the private sector involved in our infrastructure projects allows us to tap into innovation and technology that the public sector may not otherwise have access to,” said Senator Tim Scott (R-SC), another co-author of the P3 bill.  “When we allow public buildings to be eligible for Private Activity Bonds, we reduce the cost of capital for public-private partnerships hoping to invest in our neighborhoods and communities.”

By adding public buildings as a new class of projects eligible for financing with Private Activity Bonds, state and local governments can more easily attract private investment to pay for public building projects, such as schools, universities, courthouses, and hospitals, and preserve the risk transfer so critical to the success of a P3 project.  Private investment in public building provides state and local governments with access to private capital, accelerated project development, transfer of risk, and the ability to spread out payments over the length of the contractual term.  The ownership of the building, however, would always remain with the government entity.

Feds To Launch New Source for Information About Major Transportation Projects

Have you ever wished there was a comprehensive, easily accessible project cost database for major US transportation projects?  It would be populated following an in depth review of information available from State DOT’s and would capture not just the capital cost of the project, but it’s operation and maintenance cost and delivery and financing approach.  The information could be valuable in many ways, including assessing the project performance outcomes for P3’s and non P3’s.

As I found out a couple of weeks ago at the Transportation Research Board annual meeting, there will soon be an internet based, open-source database for this information courtesy of the FHWA’s Office of Innovative Program Delivery housed in the USDOT Build America Bureau.  With assistance from researchers at the University of Maryland, FHWA is conducting a rigorous data collection effort for over 130 US transportation projects covering development, procurement, design, construction and operation and maintenance costs.  Projects will be categorized by type, such as tunnel, bridge, managed lanes and location by region and delivery and financing approach (DB, DBF, DBFOM, CM/GC).

As you can imagine, this is a labor intensive effort on the part of the researchers, not just to gather and catalogue the information, but to develop a searchable, user friendly database.  I’m told that it is in the final stages of development so we will post a link when it’s live so you can add it to your “favorites” list.

P3 Industry Gets an Early Holiday Present in IRS Guidance on Interest Deduction

Contractors and investors in P3s can continue taking a full tax deduction for interest on debt under recent IRS guidance (Revenue Procedure 2018-59, issued November 26). Many P3s are highly leveraged, and the interest deduction is a valuable tax benefit for developers. Were this deduction restricted, P3 developers’ (and by extension governments’) costs would rise; potential investors would demand higher rates of return; and infrastructure projects would be more costly.  Without this guidance, the 2017  tax law would otherwise severely restrict the interest deduction for businesses.[1] The IRS’ position is welcome (and a relief) and caps an intense letter-writing campaign by industry groups – including the Design-Build Institute of America, Associated General Contractors of America, Performance Based Building Coalition, and Association for the Improvement of American Infrastructure – to the IRS and Treasury.[1]

The deduction restriction (new section 163(j)) emerged from last year’s Tax Cuts and Jobs Act (“TCJA”) and generally caps a business’ interest deductions at 30% of “adjusted taxable income” (which is similar to, but not the same as, EBITDA or EBIT).[2] “Real property trades or businesses” can elect out of these new deduction limits, but at the price of less-generous depreciation for their buildings and other improvements. The actual section 163(j) language is a good deal more complicated, and the Treasury proposed regulations accompanying the IRS guidance consist of 400-plus pages trying to explain everything.[3]

Revenue Procedure 2018-59 provides a safe harbor – which most P3s should meet – under which a P3 will be a “real property trade or business.”[4] As a result, companies and investors in a P3 can elect out of the restricted interest deduction rules – and, because the tax-exempt government agency in a P3 usually owns the improvements which otherwise give rise to depreciation deductions, giving up the more generous depreciation treatment usually is not an issue. Because Revenue Procedure 2018-59 is an administrative promulgation and not a regulation, it is effective immediately and not subject to the comment period and other delays with the accompanying Treasury proposed section 163(j) regulations.

Revenue Procedure 2018-59 follows a trend of mostly favorable treatment for infrastructure by the IRS and Congress, including continuing to allow an exemption for interest on private activity bonds used to funds P3s[5] and proposed regulations issued in June  clarifying that investment of bond proceeds in infrastructure projects will not trigger rebates to the government under the Code’s exempt bond arbitrage provisions.[6]

[1]  The letter can be viewed at http://www.naylornetwork.com/ngc-fcreport/pdf/P3_Coalition_Letter_to_Treasury_163j_May_10_2018.pdf

[2] The text of Code section 163(j) is available at https://www.law.cornell.edu/uscode/text/26/163. The text of the TCJA and accompanying Congressional reports, can be viewed at http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-466.pdf.

[3] The proposed regulations (REG-106089-18) are available at https://www.irs.gov/pub/irs-drop/REG-106089-18-NPRM.pdf.

[4] Revenue Procedure 2018-59 is available at https://www.irs.gov/pub/irs-drop/rp-18-59.pdf.

[5] Earlier drafts of the TCJA would have ended this tax exemption (see our prior post (November 10, 2017) at https://www.infrainsightblog.com/2017/11/articles/legislation/proposed-house-ways-and-means-committee-tax-bill-would-eliminate-all-pabs/) but the final bill kept it.

[6] The proposed regulations (REG-106977-18) are available at https://www.irs.gov/irb/2018-27_IRB.

Financial Close Achieved for Consolidated Rent-A-Car Facility at LAX

Courtesy of LAWA

Los Angeles World Airports (LAWA) and LA Gateway Partners, LLC  (LAGP), together with equity providers and lenders, achieved Financial Close on the approximately $2 billion consolidated rent-a-car facility (ConRAC) at Los Angeles International Airport (LAX) on December 6, 2018.

LAGP is owned indirectly by funds managed by Fengate Asset Management (“Fengate LAGP US I, LLC”, 83.3%) and PCL Investments USA, LLC (“PCL LAGP Partnership LP”, 16.7%). After achieving Commercial Close on November 6, 2018, Fengate and PCL proceeded to secure private financing for the project  comprised of (a) approximately $458 million in notes due in 2046 issued by LAGP, and (b) a construction loan of approximately $73 million with National Bank of Canada as lender. Fengate and PCL are making equity contributions to the project.

Moody’s assigned an A3 rating to the notes based in part on the strength of the availability-based revenue stream from LAWA under the terms of the design-build-finance-operate-maintain (DBFOM) agreement and the fact that PCL Construction Services Inc. (design-builder ), Johnson Controls, Inc. (operator) and MVI Field Services, LLC (Quick Turn Around area (QTA) sub) are experienced contractors. The notes were issued by way of private placement to three life insurance companies (MetLife Investment Management’s managed accounts, Legal and General Assurance Society Limited and The Canada Life Assurance Company and its affiliates).

LAWA will contribute approximately $690 million to the capital costs of the project through construction period payments and a final completion payment. Once the ConRAC is operational, LAWA will make availability payments to LAGP, which payments are subject to deductions for unavailability and other failures to meet the performance standards set forth in the DBFOM Agreement.

The ConRAC facility will relocate over 20 existing rental car locations scattered around the airport area into one convenient location adjacent to the 405 freeway. The ConRAC  facility will include  6,600 ready/return spaces, 10,000 idle vehicle storage spaces, 1,100 rental car employee spaces and a QTA area that allows for car washing, fueling and light maintenance. The facility will be approximately 5.3 million square feet in size and will be connected to the LAX Automated People Mover (APM), which reached financial close in June.

The ConRAC and the APM projects, slated for completion in 2023, will transform the airport and dramatically improve the experience for travelers at LAX.  These projects, with a collective contract value in excess of $7 billion, represent the first two public-private partnerships to be entered into by the City of Los Angeles.

Commercial Close Achieved for Groundbreaking ConRAC Project at LAX

Los Angeles World Airports (LAWA) and LA Gateway Partners (LAGP) have reached commercial close on the design-build-finance-operate-maintain (DBFOM) agreement for the consolidated rent-a-car facility (ConRAC) at Los Angeles International Airport (LAX).  In reaching this milestone, LAWA’s ConRAC project becomes the first public-private partnership for a ConRAC facility in the United States.  LAGP will now proceed to close the financing for the project, which is expected to occur in December.  The financing structure will be a private placement.

Leading up to commercial close, LAWA’s Board of Airport Commissioners and the Los Angeles City Council both unanimously approved the roughly $2 billion DBFOM availability payment agreement for the project.  The Board’s approval came on October 18, 2018, and the City Council took its action on October 31, 2018.

Courtesy of LAWA

The 5.3 million square foot ConRAC facility will include 6,600 ready/return parking stalls, 10,000 idle storage and 1,100 rental car employee parking spaces, easily making it the largest ConRAC facility in the nation.  The new facility will be the anchor of LAX’s Landside Airport Modernization Program, which includes a new Automated People Mover (APM), various stations, and a connection to LA Metro’s Crenshaw Light Rail Line.  The APM is under construction pursuant to a separate DBFOM agreement.  For more information on the APM project, please see the following blog post, Financial Close for Automated People Mover (APM) Project at LAX.

The ConRAC DBFOM agreement requires LAGP to design, build and partially finance the ConRAC facility, and then operate and maintain the facility until the end of the agreement’s 28-year term.  LAWA will make milestone and other periodic payments to LAGP during construction.  Once the ConRAC facility is available for use by rental car customers, LAWA will make availability payments to LAGP, which may be adjusted downward if the facility does not meet specified availability and performance requirements.

For more details, click here to read the full press release from LAWA.

Port of Wilmington Uses P3 Concession to Develop Port Facilities

The State of Delaware and a subsidiary of Gulftainer Company Limited (“Gulftainer”) have finalized a concession agreement for the operation and further development of the 100-year-old Port of Wilmington (“Port”).

While the concession agreement signed on September 18, 2018 is not publicly available, it is expected, based on deal terms described in Port documents submitted in support of approval of the P3 transaction,[1] that the agreement grants Gulftainer exclusive rights to manage the Port for a 50-year term. In return, Gulftainer agrees to invest up to $584M in the Port in the first 10 years to improve the Port’s cargo terminal facilities, $411M of which will be used to develop a new 1.2 million TEU (twenty-foot equivalent units) container terminal. Gulftainer will pay concession fees to the State based on cargo volume along with periodic adjustments for inflation. These fees could reach $13M by the tenth year of the concession.[2] At the end of the concession, Gulftainer must hand the Port facilities back with the capacity to handle specified minimum service and tonnage volume requirements.

In May 2017, Diamond State Port Corporation (“DSPC”), the state entity that owns and operates the Port, issued an RFQ seeking private partners to develop, finance and/or operate port-related infrastructure.[3] After evaluating submissions, DSPC signed a non-binding letter of intent with Gulftainer in December 2017.

As Gulftainer is a port management and logistics firm based in the United Arab Emirates (“UAE”), the concession agreement was reviewed by the Committee on Foreign Investment in the United States (“CFIUS”). CFIUS evaluates the national security implications of foreign investments in United States companies and operations and may prohibit foreign investment that poses a threat to United States national security. In June 2018, CFIUS determined that the agreement was not a “covered transaction” under Section 721 of the Defense Production Act of 1950,[4] and as such the parties were cleared to execute the agreement.

The Wilmington/Gulftainer deal is comparable to the $1.3B lease and concession agreement entered into in 2010 by Maryland Port Administration (“MPA”) and Ports America Chesapeake, LLC (“Ports America”) for the development and operation of the Seagirt Marine Terminal (“Seagirt”).[5] As with the Wilmington/Gulftainer concession, the Seagirt concession has a 50-year term and Ports America agreed to make significant capital investments, including developing a new terminal.[6] Ports America’s financing included a combination of tax-exempt bonds and equity. The Seagirt P3 deal reportedly enabled the State of Maryland to avoid the need to incur additional debt, provided a capital reinvestment payment to the Maryland Transportation Authority and allowed the port to handle larger vessels two years earlier than scheduled.

Ports are exploring alternative ways to deliver and finance large infrastructure projects, and the Wilmington and Seagirt P3 deals are examples of how private sector financing is being integrated into these transactions. Both deals demonstrate how, for the right projects, alternative approaches may allow ports to better capture the value of their existing infrastructure and accelerate delivery of port infrastructure improvements.

 

[1] DSPC Board of Directors Resolution 18-15 Regarding Recommendation of a Proposed P3 with GT USA Wilmington, LLC, available at http://www.portofwilmington.com/uploads/1/1/0/4/110497727/p3.pdf and http://www.portofwilmington.com/uploads/1/1/0/4/110497727/p3_presentation_-_4-6-18_dspc_board_meeting.pdf.

[2] “Governor Carney, Diamond State Port Corporation, Gulftainer Sign Agreement to Expand Port of Wilmington,” State of Delaware Press Release (September 18, 2018) available at https://news.delaware.gov/2018/09/18/governor-carney-diamond-state-port-corporation-gulftainer-sign-agreement-expand-port-wilmington/.

[3] “Request for Qualifications: Formation of a Public/Private Partnership (P3) with the Diamond State Port Corporation”, DSPC Public Notice, available at http://diamondstateportcorp.com/HTML/our_facilities/Bids&Proposals.htm.

[4] Letter from Department of the Treasury Deputy Assistant Secretary of Investment Security Regarding CFIUS Case 18-105 GT International Limited FZC (United Arab Emirates)/Certain Assets of Diamond State Port Corporation (June 25, 2018) available at https://governor.delaware.gov/wp-content/uploads/sites/24/2018/06/06252018-Letter.pdf; “Government Panel Signs Off on Port of Wilmington-Gulftainer Agreement”, Delaware Business Now (June 30, 2018) available at https://delawarebusinessnow.com/2018/06/government-panel-signs-off-on-port-of-wilmington-gulftainer-agreement/.

[5] Ports America Chesapeake, News Alert, available at https://www.pachesapeake.com/Seagirt/Default.aspx.

[6] Maryland Transportation Authority, “Public-Private Partnerships in Maryland,” available at http://mdta.maryland.gov/partnerships/tp3overview.html.

LA Metro Announces P3 Job Opportunity

Los Angeles County Metropolitan Transportation Authority has posted notice of an opening for a position as “Manager, Innovation” in its Office of Extraordinary Innovation.

The job responsibilities will include:

  • Managing and facilitating evaluation of unsolicited proposals submitted to the OEI
  • Managing OEI’s P3 advisors
  • Managing pre-procurement activities for P3 projects such as project screenings, qualitative and quantitative assessment and value for money analyses
  • Managing procurement schedules and project budgets
  • Coordinating among key LA Metro departments, staff and outside stakeholders
  • Participating in outreach for the P3 program and projects.

Applications are due by 5:00 pm September 21.

When Phil Washington became LA Metro’s Executive Director, one of his first initiatives was to create the OEI and reach out to industry to encourage innovative unsolicited proposals to advance LA Metro’s mission.  Metro’s goal is nothing less than to be the most innovative transportation agency in the U.S.  With the largest transit capital program in the nation, LA Metro seeks better solutions for delivering its major projects and improving mobility.  The OEI is focused on technological and financial innovations that deliver quality infrastructure and services at lower cost than traditional ways of doing business.  It is particularly interested in proposals for public-private partnerships to speed and improve capital project delivery.

To date the OEI has received 113 unsolicited proposals and vetted most of them through the first of its two-phase evaluation process, with 18 proposals currently in the second phase.  Thirteen proposals have been implemented or are in implementation or proof of concept.  One of the best examples is Metro’s Microtransit P3 pilot project, currently in the first implementation stage.  Through OEI’s program, Metro is in pre-procurement development for the West Santa Ana Branch light rail line and the Sepulveda Transit Corridor project, two of the biggest future projects in LA Metro’s capital program.

There will be no shortage of work, opportunity and stimulating professional experience for LA Metro’s new Innovation Manager.

Port of Vancouver USA Completes $251M Rail Access Improvement Project

The Port of Vancouver USA and its rail partners BNSF Railway and Union Pacific Railroad have substantially completed a $251M railroad access improvement project which significantly increases rail access in the port. The project creates a new rail entrance to the port, increases the port’s internal track miles from 16 to more than 50 (including a new loop track at the port’s Terminal 5 facilitating unit train transport) and increases rail capacity on BNSF and UPRR lines outside the port.  According to port CEO Juliana Marler, the project “reduces rail congestion on the mainline and expands [port] capacity to 400,000 rail cars per year.”

The project was funded from no less than 10 sources, including a High Speed Intercity Passenger Rail Program Grant ($15M); Freight Mobility Strategic Investment Board Grants ($13.4); a Transportation Infrastructure Generating Economic Benefit (TIGER II) Grant ($10M); BNSF funds and in-kind contributions ($8.1M); port tenant lease payments and user fees ($6.2M); a Federal Railroad Administration grant ($3.9M); and an American Recovery and Reinvestment Act Grant ($2.5M).

“It is a thrill to celebrate the West Vancouver Freight Access Project and the jobs it will bring. This project shows that the Port of Vancouver USA and the region is open for business as WVFA improves freight mobility dramatically and opens Southwest Washington to more trade opportunities,” Gov. Jay Inslee said. “Today is a great day of celebration for Vancouver and the entire state!”

The project is also spurring private investment in and near the port. Port tenants and neighbors, including United Grain Corp., Great Western Malting and Farwest Steel, have already invested more than $200 million in private funds to upgrade facilities and equipment and take advantage of increased rail capacity.

 

Updated: FRA Releases Latest Railroad Progress Report as PTC Deadline Looms

The Federal Railroad Administration (“FRA”) has released its latest Positive Train Control (“PTC”) implementation progress report for the 2nd quarter of 2018. The FRA’s latest report indicates that railroads are making steady progress toward PTC compliance.

FRA says that 15 railroads have installed 100% and 12 railroads have installed between 95 and 99% of the mandated PTC system hardware. In addition, all but one railroad has acquired sufficient spectrum required for PTC Implementation.

FRA states that railroad implementation of PTC has improved since December 2016, “where freight railroads had PTC active on just 16 percent of required tracks, while passenger railroads were at 24 percent[1].” FRA did note, however, that nine railroads are “at-risk.” FRA labels these railroads as at-risk because they have installed less than 90% of their PTC system hardware as of the reporting date. FRA further cautions that installation of all PTC hardware is only an initial phase of PTC implementation and would not merit consideration for an extension to the pending deadline.

Click here to read the original May 16, 2018 post.


[1]Press Release, FRA Publishes Railroads’ Quarter 2 PTC Data (Aug 23, 2018) available at https://railroads.dot.gov/newsroom/fra-publishes-railroads-quarter-2-ptc-data.

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