RENEGOTIATION OF TRANSPORTATION PUBLICPRIVATE PARTNERSHIPS:THE U.S. EXPERIENCE
Jonathan L. Gifford, Ph.D.
[with Lisardo Bolaños and Nobuhiko Daito]
George Mason University
jgifford@gmu.edu / 703-993-2275

International Transport Forum
Roundtable
Public Private Partnerships for Transport Infrastructure:
Renegotiations, how to approach them and economic outcomesGeorge Mason University
Arlington, Virginia
27-28 October 2014

Presentation Outline• Defining P3 renegotiations• Theoretical perspectives• U.S. P3 Market Overview• Highway P3s and renegotiations in the U.S.

• Six case studies on highway P3 renegotiations in the U.S.
• Discussion• Conclusions• Q&A and general discussion
Gifford et al., Renegotiation of PPPs (2014)2

Defining P3 Renegotiations
Concept

Modifications to P3 contractual agreements involving associatedlegal processes, including but not limited to:• Changes in tariff arrangements, service requirements• Buy-outs of the private consortium• Bankruptcy filings
Analysis• Public concern about rent seeking and opportunism• No clear test to evaluate motives (opportunism, externalshocks, contract complexity, and winner´s curse)

Gifford et al., Renegotiation of PPPs (2014)

3

Theoretical Perspectives (1)Opportunism and Exogenous Changes
Renegotiation occurs as one ofthe parties aims to extract
rents opportunistically, taking
advantage of theincompleteness of thecontract

Renegotiation occurs as one
or both parties aim to adapt
the original contract tocurrent unexpected
exogenous events

Variables

Variables

Public:• Change of leadership (“roving bandit,”
political contestability)
Private:• Experienced with renegotiations

Macroeconomic variables• Inflation (consumer, producer)• Economic growth (stagnation)• Unemployment• Interest rates

Gifford et al., Renegotiation of PPPs (2014)

4

Theoretical Perspectives (2)Contract Complexity and Winner´s CurseP3s are common for complex
projects, which may
exacerbate uncertainty, andtrigger renegotiations

Renegotiation occurs when, inthe presence of uncertainty,
the winner is the bidder withthe most optimistic
expectations

Variables

Variables

•
•
•
•
•

• Process to award the P3• Number of bidders• BidsDesign (length, bridges/tunnels)
Contract design (type, duration)
Experience (novelty of the P3s)
Political env. (ethnic fractionalization)
Institutional env. (state management
capacity and regulatory body)

Gifford et al., Renegotiation of PPPs (2014)5

U.S. P3 Market Overview
33 States, 1 Territory with Enabling Legislation

Source: U.S. Federal Highway Administration Office of Innovative Program Delivery (retrieved: June 2014)

Gifford et al., Renegotiation of PPPs (2014)

6

U.S. P3 Market Overview – Historical Number of Projects
Number of P3 Financial Closes in the U.S. 1988-2013, Transport and All Sectors
40353025

Transportation

2015Total

10520132012201120102009200820072006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

0

Source: Public Works Financing

Gifford et al., Renegotiation of PPPs (2014)

7

U.S. P3 Market Overview – Sector Distribution
Sectors of U.S. P3 projects that reached financial close, 1986-2013
Water/Wastewater(50)
Airport(23)Airport (23)
Building (60)Miscellaneous (5)Building (60)Miscellaneous(5)Water (43)Motorway (63)Parking (5)Rail (30)

Seaport (8)Motorway (63)Toll bridge (16)Wastewater (101)Toll motorway (46)Toll tunnel (4)Rail (30)

Wastewater (101)Parking (5)Water (43)Toll tunnel (4)Toll motorway(46)Water/Wastewater (50)

Seaport (8)Toll bridge (16)Source: Public Works Financing

Gifford et al., Renegotiation of PPPs (2014)8

Geographic Distribution of Highway P3s in the U.S.

Puerto Rico not shown. Source: Public Works Financing and InfraDeals

Gifford et al., Renegotiation of PPPs (2014)9

Location of Highway P3 Renegotiations in the U.S.

Source: Public Works Financing and InfraDeals

Gifford et al., Renegotiation of PPPs (2014)10

History of Highway P3 Renegotiations in the U.S.

P3 financial close

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

50
4540
3530
25
20
15
10
50

Cumulative Highway P3 Projects (total and renegotiation) by financial close,
1993-2014

P3 financial close with renegotiation
Source: Public Works Financing and InfraDeals

Gifford et al., Renegotiation of PPPs (2014)

11

The 6 Case Studies Under Analysis•

California– SR 91 Express Lanes (SR19)– South Bay Expressway (SBX)•Indiana– Indiana Toll Road (ITR)•Virginia– Dulles Greenway (DG)
– Pocahontas Parkway (PP)
– Downtown Tunnel /Midtown Tunnel / MLK
Extension or Elizabeth River
Crossings (ERC)

P3
P3 Highways with Cases Under
StateHighways renegotiations
Analysis
Alaska10California
422
Colorado
21
Florida131
Georgia
11Indiana
211
Massachusetts
10Michigan
11New Mexico
11
North Carolina
10South Carolina
11
Texas
104
Virginia
653
TOTAL
45
186

Source: Public Works Financing and InfraDeals

Gifford et al., Renegotiation of PPPs (2014)

12Case Study 1 – SR 91 Express Lanes (SR91)

Financial close

Level 3 Communications,
Vinci Autoroute, & Granite
Construction
1993

Facility Open1995

Revenue source
Contract type
Original cost (US$)
Constructed
LengthBridge / Tunnels

Toll
DBFOM
88.3 million (1990)

Concessionaire

10 miles (16.1km)
No / No

Los Angeles, California

Renegotiations• 2003: OCTA purchases the project for $341.5M to eliminate non-compete clause,
after attempts to breach the contract by the public sector

Gifford et al., Renegotiation of PPPs (2014)13Case Study 2 – South Bay Expressway (SBX)
Financial close

PB, Egis Projects, Fluor Daniel,
Prudential Bache; then Macquarie
2003

Facility Open2007

Revenue source
Contract type
Original cost (US$)
Constructed
LengthBridge / Tunnels

Toll
DBFOM
400 million (1990)

Concessionaire

12.7 miles (20.4 km)
Yes / NoSan Diego, California

Renegotiations• 2010: SPV files for bankruptcy (Chapter 11)• 2011: Exits bankruptcy. MIG equity to zero. Owners are lenders, incl. USDOT• 2011: SANDAG purchases part of the equity share.
Changes in USDOT’s stake in the project:
Pre2011: $140M TIFIA debt & $32M in capitalized interest
Post2011: $6M equity & $93M debt obligation from toll revenues, 32% ownership
Gifford et al., Renegotiation of PPPs (2014)

14Case Study 3 – Indiana Toll Road (ITR)
Concessionaire

Cintra & Macquarie

Financial close

2006

Operation began: 2006
Revenue source
Toll
Contract type
DBFOM + OM
Original cost (US$) 3,778 million (2006)
Constructed
10 miles (16 km) to build &Length
150 miles (240 km) to maintain
Bridge / Tunnels No / No

Indiana

Renegotiations• 2006: “Toll freeze” until electronic tolling in place in exchange for $60 million.
Reduction in investment obligations• 2007: Reduction in investment obligations to build a toll plaza.
• 2008: Reimbursement of $60 million due to electronic tolling• 2010: Delays on investment obligations (1.5 miles – 3 years; 3.4 miles – 1 year)• 2014: ITR filed for bankruptcy (Chapter 11)
Gifford et al., Renegotiation of PPPs (2014)15

Case Study 4 – Dulles Greenway (DG)
Financial close

Shenandoah Group, Kellogg
Brown & Root
1993

Facility Open

1995

Concessionaire

Revenue source
Toll
Contract type
DBFOM
Original cost (US$) 350 million (1993)
Constructed14 miles (22.5km)
LengthBridge / Tunnels Yes / NoLoudoun, Virginia

Renegotiations•••••••

1995: Owners defaulted on debt.
1997: Tolls increased and speed limit increased
1999: Debt restructured. Project modified (from 2*2 lanes to 3*3 lanes)
2001: Extension of concession period (+20 years)
2004: Change in tolls (variable peak and discounted off-peak point-to-point rates)
2005: Macquarie Infrastructure Group (MIG) buys it
2013: Mechanism to define tolls(highest:CPI+1%, real GDP, or 2.8%.)
Giffordis
et changedal., Renegotiationof PPPs (2014)16

Case Study 5 – VA SR895 Pocahontas Pkwy (PP)Concessionaire

Fluor Daniel & Morrison Knudsen

Financial close

1998

Facility Open2002

Revenue source
Contract type
Original cost (US$)
Constructed
LengthBridge / Tunnels

Toll
DBFOM
381 million (1998)
8.8 miles (14km)

Richmond, Virginia

Yes / No

Renegotiations• 2006: Transurban USA buys it, concession period is extended to 99 years andinvestment increases: 1.6 mile, four-lane road and electronic tolling• 2012: Transurban USA writes off equity but operation continues• 2014: Transurban USA transfers operations to DBi Services

Gifford et al., Renegotiation of PPPs (2014)17

Case Study 6 – Downtown Tunnel/Midtown Tunnel/MLK Extension orElizabeth River Crossings (ERC)
Concessionaire

Skanska & Macquiare

Financial close

2012

Facility Open

Expected 2017

Revenue source
Contract type
Original cost (US$)
Constructed
LengthBridge / Tunnels

Toll
DBFOM
2,089 million (2012)

2.2 miles (3.5km)

Norfolk, Virginia

Yes / Yes

Renegotiations• 2012: toll delayed in exchange for $100 million (2012)• 2014: toll decrease in exchange for $82.5 million (2014)

Gifford et al., Renegotiation of PPPs (2014)18

Discussion
Opportunism

Exogenous Changes

Evidence

Evidence

Public:• CA: SR91 – govt attempted to breach noncompete clause• CA: Professional Engineers in California
Governments’ alleged influence on SBX?
• VA: high contestability; possible source
Private:• Concessionaires experienced withrenegotiations
Problem:• Evidence of opportunism limited• Additional analysis is needed to evaluate
the relationship between the variablesand opportunism• Economic growth andunemployment may have affected:
DG, SBX, PP, partly ITR• SBX may have been affected bysudden price increases inconstruction machinery
manufacturing and iron and steelmills• Interest rate changes affected DG
and ITR

Gifford et al., Renegotiation of PPPs (2014)19

Discussion
Contract Complexity

Winner´s Curse

Evidence

Evidence• Technical complexity: high in SBX,
considerable in other projects• Novelty of the P3 model: SR91, ITR, DG,
SBX, and PP• Political viability (e.g., fiscal/tolling,environmental, civil rights concerns)• VA strongest institutional environment• Technical complexity, duration, andcomplicated political environment apotential problem for ERC

ITR appears to have been subject tosome degree of winner´s curse:• Bidding process• Four bidders• Cintra & Macquarie: $3.8 billion• Indiana Road Co LLC: $2.8 billion• Itinere I S.A.: $2.5 billion• Indiana TRP LLC: $1.8 billion

Gifford et al., Renegotiation of PPPs (2014)20

Conclusions• Factors associated with renegotiations in the U.S. P3 market:– External shocks: e.g., economic growth, inflationary pressures, and interest
rate hikes (Dulles Greenway, South Bay Expressway, Pocahontas Pkwy, andIndiana Toll Road)– Contract complexity, due to the novelty of these type of projects– Political environment: e.g., resistance to private provision of public goods– Complex projects, with high uncertainty, difficult to account for in contracts• No definitive evidence of opportunism.
• Winner´s curse effect may have been present in Indiana, given thegap between the winner´s bid and what others submitted.
• Government losses to date: South Bay Expressway may bring losses
to TIFIA; Dulles Greenway 20-year term extension• Further research needed
Gifford et al., Renegotiation of PPPs (2014)

21

Center for Transportation Public-Private Partnership Policy
George Mason University
Expanding the evidence base, enhancing agency
capacity, educating the workforce andcommunity about P3s
For more information:
Visit us at: p3policy.gmu.edu
Jonathan L. Gifford, Ph.D.
George Mason University
School of Policy, Government, and International Affairs
3351 Fairfax Drive, Arlington, VA 22201 USA
jgifford@gmu.edu / +1(703)993-2275
Gifford et al., Renegotiation of PPPs (2014)22