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Can Kentucky join the P3 club?

By Mark Green

Mounting state and local infrastructure needs in Kentucky, as in most states, exceed public resources and revenues to pay for them – by a lot. Thus, members of the construction contracting community and others such as the Kentucky Chamber of Commerce advocate for a state public-private partnership law they believe will have multifaceted benefits:

  • More projects for contractors, subs, architects, engineers, designers and construction lawyers
  • Job creation
  • Better infrastructure important to conducting business
  • Improved competitiveness
  • More economic development.

UKcampusP3 is short for public-private partnerships, which have been employed to accomplish billions worth of projects in place across the United States. In the commonwealth, the most prominent P3 deals have involved student housing construction at public universities. EdR of Memphis is now in the midst of a $500 million student housing renewal project and will also manage the dorms upon completion. EdR will recoup and make a return on its investment from students over the next generation.

Another P3 example is Private Corrections Corporation of America, which operated several prisons in the commonwealth from 1981 to 2013.

While some types of public-private partnership projects have found authorization pathways, there is no legal basis in Kentucky to enter into P3 deals for transportation projects, which are often expensive and involve complicated financing, especially if federal dollars come into play.

Enacting P3 statutes also would clear routes through Kentucky’s legal landscape, allowing deals for capital projects such as schools, hospitals, parking facilities, convention centers and arenas or to provide services historically reserved for government operations.

At least 35 states, including all seven that adjoin Kentucky, have P3 laws allowing and providing direction as to how private companies may not only do the work to build public projects or provide public services but pay for it themselves. The public (government) partner in such deals commits to pay for the job over time in the future or allow the private party to collect some form of user fee such as traffic tolls.

Transportation infrastructure projects are where the P3 action is.

Twenty-four states and the District of Columbia used the P3 process for 96 transportation projects totaling $54.3 billion from 1989 to 2011, according to a Kentucky Chamber report. As of mid-June 2014, $16.5 billion more were in active procurement around the country with potentially another $57 billion in “pre-launch” phases, according to a Council on State Governments report on a InfraAmericas U.S. P3 Infrastructure Forum this past June in New York.

Brent Spence Bridge toll issue killed bill

Kentucky’s General Assembly passed a P3 bill in its 2014 legislative session by a significant margin, but Gov. Steve Beshear vetoed it, citing as unacceptable a provision added to the bill by state Rep. Arnold Simpson, a 10-term Democrat from Covington, that banned the use of tolls on any replacement for the 51-year-old Brent Spence Bridge crossing the Ohio River between Covington and Cincinnati.

The proponents of the 2014 session’s P3 legislation say they will renew their push when the 2015 General Assembly session opens Jan. 6.

However, the political roadblock that kept P3 off KRS books is unmoved: Rep. Simpson remains adamant in his position that tolls on a new Brent Spence Bridge would harm his constituents and said he will do all he can to ensure they are proscribed.

Tolls have long been part of the financing package for much major U.S. highway and bridge construction, including the $2.34 billion Ohio River Bridges Project now underway in Louisville. One of the largest current transportation projects in the world, ORB includes two new bridges – one downtown and another 7 miles upriver – and upgrades the I-65, I-64 and I-71 “Spaghetti Junction” interchange to improve traffic flow and safety.

Kentucky and Indiana split ORB oversight. Kentucky let contracts for and oversees work for the downtown span and interchange upgrade. Indiana is using a public-private partnership for the upriver East End Crossing that incorporates a challenging one-third-mile tunneled approach under historic Kentucky riverbank property.

Scheduled for completion in 2016, the $1.2 billion East End Crossing has garnered national and international P3 recognition:

  • InfraAmerica U.S. P3’s project of the year.
  • London-based Partnership Bulletin’s top road project and best overall P3 project.
  • The Bond Buyer’s 2013 Deal of the Year.
  • American Road and Transportation Builders Assocation 2013 P3 Project of the Year.
  • Project Finance magazine’s North American Project Bond Deal of the Year.

Several thousand workers with dozens of subcontractors are employed as ORB construction progresses. When it is finished, the increased and improved transportation capacity it will bring is expected to cut costs for some businesses and spur new economic development, especially in the I-275 corridor on the Indiana side where waiting sites include the 6,000-acre River Ridge industrial park.

Business community avidly wants P3

Financial impacts such as these are a significant reason the Kentucky Chamber of Commerce has been a prominent promoter of adoption of state P3 legislation. So has the Association of General Contractors of Kentucky, the voice of more than 700 contractors and industry associates.

The chamber urged P3 passage in July 2013 in a 24-page special publication detailing the benefits to Kentucky of public-private partnerships. AGC-K’s Legislative Committee chairman, veteran construction attorney Buckner Hinkle of Stites & Harbison’s Lexington office, drafted the template legislation that became House Bill 407, modeling it after Virginia’s well-regarded P3 statutes.

“We all know state and local governments don’t have much money,” said Bryan T. Sunderland, the chamber’s senior vice president of public affairs. “Projections indicate that’s not going to change anytime soon.”

Elected officials are resistant to increasing taxes to pay for mounting infrastructure and public service needs since surveys for several decades have reported that voters tend to think taxes are too high and many government operations are too inefficient.

Given these conditions, Sunderland said, it’s a good time to consider what innovative approaches could allow state and local government to provide the infrastructure and services people still expect in a cost-effective manner.

Private-sector companies, he said, can provide services for less direct expense to taxpayers, and private employees do not add to public pension costs. For example, consider energy efficiency updates that government offices built in the 1950s and ’60s require today, he said.

A public-sector building manager’s budget process might allow for paying the power bills, maintenance and repairs to systems, and replacing the light bulbs that burn out, Sunderland suggests. However, a private-sector firm could propose to upgrade the heating and cooling system to new technology and retrofit the building with LED lighting; with a condition that utility costs will decrease 30 percent, the project deal might call for payment over five years.

The private partner will make a profit, create jobs and pay taxes, Sunderland said, and taxpayers will be left with a better building.

Good P3 laws ensure that public-private deals protect taxpayers, produce a result that is for the good of the community, create clear accountability and provide transparency – the latter to prevent “doing a deal with your brother-in-law.”

‘P3 deals are financial transactions’

Good P3 laws and deals also must produce profits and return on investment for the private participants.

“P3 deals are financial transactions,” said Hinkle, who has been attending conferences and seminars to learn more, especially since the Kentucky Chamber report came out in mid-2013 and it made P3 legislation a top priority.

“That’s the basis for doing P3s,” said Bill Ernstrom, vice president for major strategic projects for The Walsh Group of Chicago, which won the bid for both pieces of ORB: Walsh Construction Co. for Kentucky’s downtown crossing and WVB East End Partners – a consortium of Walsh Investors, Bilfinger Project Investments and VINCI Concessions – for Indiana’s East End Crossing.

P3 projects represent “a significant trend in the construction industry,” Ernstrom said, and Walsh Group sees the P3 pipeline “significantly growing.”

Investment bankers bring private capital into P3 deals from pension funds, hedge funds, endowments, wealthy individuals, private companies or other parties with assets they want to invest with relative security and with better returns than Treasury instruments that have been at historic lows for five years.

“The P3 market in the U.S. is not as developed as the markets in places like the UK, Australia and Canada. They’ve been at it longer,” he said. “You have private resources of money that have been active in those places looking at the U.S. as a tremendous marketplace for infrastructure investment.”

U.S. Treasury Secretary Jacob Lew said in early September that private investment will be increasingly important in closing a $1 trillion shortfall in funding for infrastructure needs nationally.

With ORB’s main elements progressing toward expected conclusions in around two years, attention is turning to the next big project in the region: The heavily-used Brent Spence Bridge is a 1,700-foot double-decker structure that carries I-75 and I-71 traffic across the Ohio River. Its original three-lane configuration, providing a designed capacity of 80,000 vehicles day, was restriped for four lanes in each direction years ago, and bridge traffic topped 172,000 vehicles daily as far back as 2005, according to a Northern Kentucky Chamber of Commerce report.

It was a $10 million project when it opened in 1963, but cost estimates to replace it today hover around $2.5 billion, much of that arising from work required to tie a larger structure into downtown Cincinnati. All of the Ohio River and thus the bridge are Kentucky property, but the commonwealth expects to split costs with the state of Ohio.

There is general assumption that a new bridge will be built only as a P3 project since the federal Highway Trust Fund, historically funding option A for big transportation projects, has shrunk for years and came close to bankruptcy this past summer.

“In addition to the Brent Spence, no fewer than 36 transportation ‘mega projects’ – defined as costing $1 billion or more – currently are in the works around the United States,” Kentucky Transportation Secretary Michael Hancock wrote in a Cincinnati Enquirer op-ed early in 2014. “Several are larger than the Brent Spence.”

Additionally, Kentucky’s Road Fund dollars are committed years in advance through state government’s complicated transportation project authorization and appropriation process. It does not include $1 billion-plus for a new I-75/I-71 Ohio River crossing.

Tolls: The only way, or an unfair mistake?

Simpson knows Kentucky P3 legislation advocates think “I’m the guy with the black hat” after his amendment banning tolls on the Covington-Cincinnati I-75/I-71 corridor was cited as the reason Gov. Beshear vetoed the bill the General Assembly passed. He plans to make sure any new P3 legislation has the same tolling ban, but said he is “not trying to be an obstructionist.”

A governor’s office spokesperson said Beshear backs P3 legislation but continues to believe tolling should be an option.

Tolls on a new bridge would hurt his inner-city Covington constituents and the economy of his district, Simpson said. Traffic, including large vehicles, that wants to avoid paying tolls will divert through and disrupt his district to use the multiple smaller bridges without tolls. Tolls would have a disproportionately negative impact on the low-income Northern Kentucky residents who work in Cincinnati.

And it would simply be unfair to impose tolls on his constituents for a transportation infrastructure project, even though they would be primary beneficiaries of it, Simpson said, when this is not done for other projects that create similar local benefits – for example, the Mountain Parkway extension that will cost hundreds of millions of dollars.

Brent Spence Bridge replacement forces argue that a larger capacity crossing would pay for itself in time saved, efficiency gained, economic development, new jobs and increased tax revenue.

But Simpson argues further that the better course is to wait until after Louisville’s new Ohio River bridges open in 2016 to see the impact of its tolling policy. Tolls are not a reliable revenue source, he said.

Statistics do indicate shifting American driving habits. Decades of steady increases in total miles driven appeared to peak as the baby boom generation began to enter retirement and have fallen in many areas since the aftermath of the 2008-09 Great Recession decreased Americans’ mobility.

In fact, on Sept. 21 the private operator of the 157-mile Indiana Toll Road filed for Chapter 11 bankruptcy. Toll road operators in Alabama, Michigan and San Diego have gone through bankruptcy, and the operator of Denver’s Northwest Parkway has hired a reorganization adviser, The Wall Street Journal reported.

The Walsh Group will not enter into a P3 project deal in which its payment relies on toll revenue, Ernstrom said.

“Not a lot of people are good at predicting the future,” he said. “We won’t do a deal unless it’s (based on) availability payments” – meaning long-term Walsh Group revenue is based on roadway or bridge being operational and available for the public’s use rather than on how much the public uses it.

Mark Green is editorial director of The Lane Report. He can be reached at [email protected].