Not Just Toll Roads Anymore: Governments Find New Uses for P3s

State and local officials are striking long-term deals with private companies to upgrade airports, college campuses and prisons.
by | April 23, 2019 AT 4:00 AM
Entrance to purdue university.
Purdue University is turning to a P3 to build new campus housing. (Shutterstock)

The biggest news in the world of public-private partnerships (P3s) last year had nothing to do with toll roads -- the most visible way governments team up companies. Instead, the most expensive infrastructure deals were projects to build a car-rental facility and a small tram at Los Angeles International Airport.

Other significant P3s struck last year centered around student housing at Purdue University, a courthouse in Maryland and a replacement for a 155-year-old prison in Kansas, according to Inframation, a news and analysis service.

The only highway P3 in the mix last year, in fact, did not involve toll roads. The Michigan transportation department turned to a private consortium to design, build, finance and maintain a 5.5-mile stretch of Interstate 75 just outside of Detroit. As a result of the P3 and other innovations, the improved highway will be ready a decade earlier than previously planned.

The wide variety of projects shows that once-controversial P3s are gaining acceptance in more quarters. The arrangements are contractual agreements that let private companies play a big role over a long time in building or running publicly owned properties, such as airports, buildings and, yes, toll roads.

“From the governmental side, you have to ask: What is your core strength?” says Larry Belinsky, the managing director for Frasca & Associates LLC, a firm that advises municipal governments on infrastructure projects. “Right now, one of government’s core strengths is that it has the land, it has the assets and it has access to inexpensive money. I don’t know that people would necessarily think that government’s core strength is building. ... The private sector tends to be more innovative.”

As governments expand their use of P3s, they're also expanding their expertise on them. State and local governments are increasingly hiring pools of preapproved advisors who can consult with public officials when a proposal for a P3 comes their way. In New Jersey, a new law gives state agencies, school districts, local governments and universities access to the pool of experts, which is selected and run by the state treasury department.

The idea, says Belinsky, is that governments pick a diverse pool of advisors with different specialties: say, housing, government buildings and transportation. That way, when outside companies come to the governments with unsolicited proposals, the public agencies don’t have to go through long processes to determine which advisors should evaluate the proposal. (Frasca & Associates, where Belinsky works, is one of the companies in New Jersey's advisory pool.)

It’s similar to the process that many governments use to pick advisors when they issue bonds, says Belinsky.

The P3 field is changing in other ways, too, as a proliferation of deals has led both investors and government agencies to reconsider their approaches. Here's a rundown of how they're being used by airports and universities and on toll roads:

 

Airports

The most vibrant area for P3s these days may be in airports. Airports in general are launching major renovations of their terminals and other facilities now that the airline industry is in a position to help finance the upgrades. But it's hard for other airports to not notice the P3 projects at LAX and New York’s LaGuardia. They're promising to fix some of the biggest problems for neglected airports in America’s two largest cities.

“The LaGuardia and LAX were important deals for the market to show that deals of that size and complexity could get done and actually get moving on construction,” Belinsky says.

Denver is using a P3 to renovate its Great Hall. The new operator will move and modernize the ticketing counters and security checkpoints at the airport as well as manage the concessions that are offered there. Austin, Texas, used a P3 to revive the south terminal of its airport.

More recently, airports are looking at P3s to add hotels. Jackson, Miss.; Nashville, Tenn., and Phoenix are among those exploring the idea, and New York’s JFK Airport will soon open a hotel in an iconic former TWA terminal.

Not all airport P3s have gone off without a hitch.

Kansas City, Mo., considered using the arrangement to rebuild its terminal but has since scaled back those plans. Advocates in St. Louis hope to turn over day-to-day control of the airport to a private entity, but significant political opposition to the idea remains.

The growth in the number of airport-related P3s also means that investors are getting more selective about which projects they bid on.

“At the time of the LaGuardia deal [in 2016], it was the only deal out there. There was a lot of money chasing that deal, and bidders spent a lot of money to try to win that deal,” Belinsky says. “Now the deals are starting to compete with each other. Investors aren’t running after every deal.”

 

Universities

Perhaps it shouldn’t be a surprise that Purdue University is turning to a P3 to build new campus housing. The university’s president, after all, is former Indiana Gov. Mitch Daniels, who oversaw the lease of the Indiana Toll Road, which is still the biggest P3 on the books.

The University System of Georgia also recently awarded a 65-year, $517-million contract to a company to build new student housing and maintain current facilities. And even more universities are likely to explore P3s for student housing, says Jon Berke, the Americas editor for Inframation.

“Universities are seeing trends of declining housing, but they’re not seeing trends of declining numbers of students, so they’re looking to modernize their housing,” he says.

It’s one area of construction that’s tough for universities, Berke explains. Alumni contributions and ticket revenues can help cover the cost of renovating athletic facilities, and municipal bonds and state funding can help cover classroom upgrades. But those sources are harder to rely on when it comes to building or upgrading housing, he says.

Case in point: Ratings agencies downgraded the municipal bonds used to build luxury dorms at Texas A&M and Oklahoma universities last year, after cost-conscious students shunned the pricey living quarters. Using P3s, however, can avoid that risk because the private partners often provide financing.

“We’re not sure whether revenues or [alumni] contributions are enough to build housing, but you do have investors who are willing to partner with schools to build housing projects,” says Berke.

Some universities -- many of which rely on aging power plants -- are turning to P3s to become more energy-efficient. Fresno State in California, for example, is looking for private partners to replace its central utility plant and related infrastructure, to improve the system’s reliability and help the campus meet the state’s environmental goals.

 

Toll roads

Toll roads may create political controversies, but P3s that use managed lanes and other tolling mechanisms aren't likely to fade away anytime soon. Those types of deals can lead to quick roadway expansions and improvements for traffic-choked highways, and often reduce up-front costs to states.

Perhaps the most ambitious push for more toll roads right now comes from Maryland Gov. Larry Hogan. The Republican governor wants to expand several interstates in the Washington, D.C., suburbs using public-private partnerships. Hogan says the project would reduce congestion in the region, which has some of the most gridlocked roads in the country.

Opponents say Hogan’s approach focuses too much on highways and not enough on transit and other forms of transportation. They tried to block or slow the project at the Maryland statehouse this year, but their efforts were ultimately unsuccessful. The state is currently conducting environmental impact studies of the project.

Berke, the Inframation editor, says Illinois could also soon join the states using managed toll lanes. The cash-strapped state is considering a capital bill, a decade since lawmakers passed the state’s last major building program. A P3 component could be included in the mix, especially because the state has few ready revenues and a bond-rating that’s teetering on junk status. What’s more, Berke says, the state has already conducted environmental reviews for managed toll lanes on Interstate 55 in the Chicago region.

The expansion went nowhere under former Gov. Bruce Rauner, a Republican who constantly feuded with the Democrats who control the legislature. But now that Rauner has been replaced with a Democrat -- Gov. JB Pritzker -- the odds of moving the project forward increased substantially, Berke says.

 

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