Pa. Ripe For P3s In Wake Of $1.1B Bridge Deal
Law360, Philadelphia (April 10, 2015, 6:12 PM ET) -- With financing now complete for a $1.1 billion project to replace nearly 600 structurally deficient bridges in Pennsylvania, experts say that the successful start to the commonwealth's first public-private partnership will enable future infrastructure revitalization projects in the Keystone State and could serve as a model for other states to follow.
Figures on the inside of the Rapid Bridge Replacement Project and observers both agreed that the smoothness of the procurement phase — which led to a winning bid by consortium Plenary Walsh Keystone Partners LLC — and the subsequent financing showcased the virtues of the state's enabling legislation for P3s.
The state's P3 law, Act 88, which was signed by former Gov. Tom Corbett in 2012, works to balance the involvement of the state Legislature in individual projects, by allowing it to review whether a P3 makes sense, before the actual procurement process begins.
"The marketplace loves it and would see it for a blueprint for other states to follow," said Andrew Fraiser, an Allen & Overy LLP partner who advised the Pennsylvania Department of Transportation on the project. "It doesn't afford an opportunity for the Legislature or policymakers to meddle in the procurement process. They basically give the green light for the procurement before the project goes to market, and then the project proceeds."
According to a number of experts, the commonwealth had the benefit of drafting a P3 statute after a number of other states had done so, which allowed Pennsylvania to learn lessons from its predecessors.
It also had its own example of what could go wrong. A 2007 plan to privatize the Pennsylvania Turnpike fell through after the Legislature refused to vote on the $12.7 billion deal.
Another, more recent failed deal in the state was Philadelphia Mayor Michael Nutter's effort to sell for $1.86 billion city-owned Philadelphia Gas Works to UIL Holdings Corp. The Philadelphia City Council's refusal to vote on that proposal led to its demise.
"It's not unreasonable for the Legislature to want to have some sort of oversight," saidBallard Spahr LLP partner Brian Walsh, who served as bond counsel on the bridge replacement project. He favorably compared the commonwealth's law to those in Texas and Virginia, which lack any provisions for legislative involvement.
But the safeguards in Pennsylvania's statute that check the influence of politics helped convince a number of aspirants to invest the considerable resources in responding to the commonwealth's request for qualifications. Ultimately, four bidders made the final cut.
"They got the biggest construction companies in the U.S. to bid," said Frank M. Rapoport, a Pennsylvania-based partner at Peckar & Abramson PC and chief strategy adviser for the Association for the Improvement of American Infrastructure.
The complex deal aimed at replacing 568 of the state's nearly 4,500 structurally deficient bridges also managed to overcome the added challenge of spanning a leadership transition in Harrisburg between Corbett, a Republican, and new Gov. Tom Wolf, a Democrat.
"We negotiated the contract under Corbett and the financial close under Wolf," said Bryan Kendro, PennDOT's P3 director.
Kendro attributed the smooth sailing through the change in governors to the existence of broad bipartisan support for P3s in the state, adding that the idea of legislation to enable the arrangements was first endorsed by Democratic Gov. Ed Rendell.
The bridge project itself shifts the majority of design, construction, financing and maintenance risks over the deal's 28-year term to Plenary Walsh, which is expected to spend an average of $1.6 million on each bridge. PennDOT has said that these costs would reach $2 million under a standard contracting process.
"It's also much quicker than if you bid these out one by one," Walsh said.
The commonwealth raised $800 million in private activity bonds to finance the work. It will also put in $225 million during construction as Plenary Walsh meets specified milestones. Plenary Walsh is contributing $60 million of its own money as equity.
"One of the big benefits from PennDOT's perspective is that it's not going to cripple their budget for the next 20 to 30 years. It will still have plenty of money to do other projects," said Jason Tomasulo, senior counsel at Philadelphia-based construction firm Cohen Seglias Pallas Greenhall & Furman PC. "On the private side, it's also a great opportunity."
Observers and participants noted that the Pennsylvania project was an unusual P3, in that most projects advanced under the mechanism have been large efforts at building a single bridge, tunnel or highway. While Plenary Walsh can realize economies of scale in designing and building a number of the bridges to the same specifications, they do bear a certain amount of risk.
"This isn't a huge P3; it's really a logistically challenging kind of situation where the companies really have to understand what they're doing or they can lose their shirt," Rapoport said.
But Fraiser, who started his career working on P3s in Europe and the Middle East before relocating to the U.S., noted that there were certain benefits to Pennsylvania's program, which will deliver tangible improvements to bridges in every corner of the state.
"What they did was very clever. There's always a level of skepticism about involvement of private investment in public infrastructure projects. But this one touches many communities in the commonwealth," he said. "In a relatively short period of time, [they are] going to feel the benefit of this procurement method and this delivery method."
Combined with positive feedback from bidders, investors and officials, this anticipated public support will likely ease the way for future projects. One possibility is another bridge deal because Pennsylvania will still have nearly 4,000 structurally deficient bridges after the work is completed.
"More broadly, we want to be strategic about where we're using P3," Kendro said. "Maybe on more traditional highways and interstate projects in southeastern Pennsylvania, central Pennsylvania, western Pennsylvania — all highly congested areas."
One P3 project that is already in the works is an effort to set up 20 compressed natural gas fueling stations across the state for local transit agencies. Four bidders have been shortlisted, and the commonwealth is in the process of inviting them to submit proposals.
Other possibilities could come from left field. PennDOT announced Thursday that it would be accepting unsolicited P3 proposals from the private sector until April 30. Not all states with P3 legislation provide space for these unsolicited proposals.
"As much as people in the commonwealth are looking at their needs, sometimes there's an opportunity to do something and they don't necessarily see it," Tomasulo said. "The law allows the private sector to step in and say, 'We've noted this need, and we think we have a solution for it.'"
One example is a wireless telecommunications infrastructure project that is currently in the procurement stage. But Kendro said the statutory requirement for open bidding on all projects limits what emerges through unsolicited proposals.
"Other than a head start, it doesn't give them a huge competitive advantage," he said.
While only transportation projects are eligible for P3 arrangements in Pennsylvania at the present, that could change in the future. While Wolf is currently focused on getting an ambitious budget proposal passed, he has left the P3 office installed by Corbett in place.
"I wouldn't be surprised after that to see him take a commanding role in revitalizing infrastructure in Pennsylvania," Rapoport said. "I expect to see that this governor is going to move out even more forcefully than Corbett on roads and bridges."
Construction industry players are hopeful that Wolf also uses his muscle to work with the Legislature to pass a social infrastructure bill that would authorize P3s to build projects like schools, courthouses and hospitals.
Until then, observers will be closely tracking Plenary Walsh's work on the building the bridges, which are scheduled to be completed by the end of 2017.
"It was a very well-procured project, and it closed on time," Rapoport said. "Now the proof will be in how the construction team executes the replacement and how they maintain them over the next decade."