dbrTV: What Exactly Are Public-Private Partnerships

Daily Business Review

dbrTV reporter Paola Iuspa-Abbott talks about why PPR's have become popular to fund massive infrastructure projects and how some PPR's don't always turn out as promised.

Interstate 595 in Broward County was brand new when Hurricane Andrew destroyed entire communities in western Miami-Dade in 1992. Suddenly, west Broward was flooded with displaced families moving into new neighborhoods. With the population explosion, I-595 became congested almost overnight.

The Florida Department of Transportation knew right away it needed to expand the newly built road, but the state possessed only half the projected $1.4 billion needed to do the job. It would have taken the FDOT nearly two decades to raise the money to complete the expansion. That was not an option, said Paul Lampley, the state's I-595 construction project manager. What were the alternatives?

"One method that came up was a public-private partnership, which had never been done in the state of Florida," he said. "By using a private partner we could do the work 15 to 20 years earlier."

The private partner would pay up front, and FDOT would pay with interest over 35 years like a home mortgage, Lampley said.

That's how one of South Florida's largest private-public partnerships — commonly referred to as PPP or P3 — was born. The laborious overhaul of I-595 started in 2010 and is scheduled for completion early next year.

The new approach to paying for large projects underscores a trend gaining popularity among state agencies and local governments.

Over the last four years, counties and cities across South Florida have increasingly opted to form P3s to upgrade infrastructure and redevelop public land into revenue-generating projects. Private-public partnerships are not new to the region, but they are becoming a preferred way of doing business as cash-strapped public agencies push for infrastructure upgrades or look for new revenue sources.

Another high stakes example is the $903 million Miami port tunnel being built by a P3 contractor, which also is paying up front for a project set to open next May.

Jobs, Jobs, Jobs

In addition to helping finance a job, P3s often transfer the construction and financial risks to the private partner.

"That's usually a significant reason why P3s are very attractive," said George Burgess, former Miami-Dade County manager. He was involved in negotiating the port tunnel agreement. "Risk has cost and, if the cost is being borne by the private sector, it is a dramatic improvement for the public sector."

P3s are job creators because without the private partner, government would not be able to do many of these projects, said Burgess, now chief operating officer of the Becker & Poliakoff law firm in Fort Lauderdale.

The I-595 widening project has had as many as 165 contractors with 2,500 employees, Lampley said.

But P3s don't come free, at least not for I-595 drivers. When express lanes open in March, motorists who use them must pay a toll to help repay the private contractor. The P3 contractor — a partnership between Spain-based ACS Infrastructure Development Inc.'s Dragados USA and TIAA-CREF — plugged in about $200 million in equity and secured about $600 million in bank debt to do the job, Lampley said. Federal funding pays the remaining $600 million.

Forming a P3 is how the Miami-Dade Aviation Department plans to build Airport City at Miami International Airport, where office space, stores and hotel rooms will capitalize on airport traffic. That's also how Miami Beach plans to modernize and expand its convention center, a key economic engine. That's how West Palm Beach plans to redevelop the vacant City Hall into a mixed-used development on the Intracoastal Waterway. That's how Hollywood plans to transform a beachfront parking lot into the Margaritaville Hollywood Beach Resort. And that's how Pompano Beach plans to redevelop a beach parking lot into restaurants and shops along A1A.

"In this country, we always had Uncle Sam with a lot of money to pay for all that, and municipalities could always float a bond ... but that is all changing," said attorney Frank Rapoport, a senior partner and a leader in Peckar & Abramson's public-private partnerships practice group in New York.

His law firm, which often pairs P3 contractors with equity partners, represents Dragados USA.

In part, the growing appetite for P3s is fueled by pension funds eager to invest in infrastructure works, he said.

"The only impediment to P3 really taking off is educated politicians who don't feel threatened by this," he said.

Some politicians see private-public partnerships as a form of privatization and fear P3s would lead to the firing of public employees. Rapoport said that fear is unfunded, otherwise pension funds wouldn't be involved.

"Under most P3 laws, you must offer them a job if you are going to" let them go, he said.

Profit Sharing

P3s have the potential to spread like wildfire. The Florida Legislature passed legislation last month to set ground rules for P3s and formally define the process, said Burgess, who played a key role in drafting the language.

The bill would bring more certainty to both sides by defining their roles, responsibilities and steps to follow.

"The legislation is intended to protect everybody involved so there is consistency and sends a message to the major P3 players," he said. "Florida is a state that really wants to encourage private-public partnerships."

P3s can take different shapes, he said. In some cases, the private sector will design, build, finance, maintain and operate a public asset for about 35 years, like I-595 and the port tunnel. The development team behind the port tunnel is a partnership between Meridian Infrastructure, with offices in Paris, New York and Ontario, and France-based Bouygues Travaux Publics S.A.

Another form of P3 involves the private sector building and financing construction of a project on public land through long-term ground leases. Under that scenario, the local government charges rent to the private partner and often participates in a profit-sharing program.

In some instances, a P3 may charge the general public like with tolled express lanes. But anytime a government agency has to invest in infrastructure, it passes the cost to consumers, Burgess noted.

"No matter if it is a P3 or a public work, you are going to have to finance the project," he said. "In this case, rather than the government going out and issuing conventional municipal debt, which can be done at a very low interest rate, you may have private equity investors like large funds and insurance companies."

He said P3s can generate savings in the long term rather than in the short term by having experts maintain and operate pubic assets

"The return may be a little higher or not, but we are also looking at the life cycle cost of the project," Burgess said. "When you look at the life cycle, oftentimes that public-private partnership is going to be less expensive than the traditionally financed and operated by the public sector."

Patience Required

PortMiami Director Bill Johnson said a P3 was the only way the port could be modernized because there wasn't enough public money to pay for the tunnel.

"You have to align yourself with private partners to make things happen," he said.

The funding is coming from three sources, said Kevin Lynskey, assistant port director.

The private partner — Meridian in partnership with Bouygues Travaux — is contributing $80 million in equity and $342 million in bank debt. The Federal Highway Administration is providing a $381 million loan, and the county and city will pitch in $100 million before the tunnel is completed. It won't have a toll to pay back the concessionaire, Lynskey said. Instead, FDOT has budgeted $457 million to pay the private partner for 35 years after the tunnel opens. The city of Miami, where the port is located, and Miami-Dade County, which owns the port, will pay more than $300 million, in addition to the $100 million, over the next decades to pay off the bill.

Putting the finances together for the tunnel deal wasn't easy, said Greenberg Traurig Miami attorney Kerri Barsh, who represented the development team formed by Meridian and Bouygues Travaux, in the negotiations.

"The lesson learned there is that you have to be patient," she said. Barsh noted one of her client's financial partners, Merrill Lynch & Co., dropped out during the financial crisis, and her client had to look for more capital elsewhere.

Port Director Johnson also is using a P3 to create a rail line to move cargo in and out of the port. The private partner is Jacksonville-based Florida East Coast Railway.

"The restoration of rail on the port of Miami is huge," he said, adding rail cargo could reach more than 70 percent of the U.S. population.

Funding for the rail line would come from many sources, including $10.9 million each from FEC and FDOT. The Federal Highway Administration is contributing $22.76 million, and the port will add $4.8 million.

The port, which will be deepened with federal aid to accommodate post-Panamax cargo ships, also is considering a P3 to redevelop more than 20 acres into a mixed-use complex, Lynskey said.

"We are considering developing it in partnership with the World Trade Center Miami," which holds the World Trade Center license in Miami, he said.

Port officials are doing preliminary research to see what kind of commercial uses could be developed on property so close to downtown Miami. One thing seems clear.

"It is highly likely the project will be done by a private developer who brings his own financing under a long-term concession agreement," Lynskey said.

'Redevelopment Deals'

Kim Briesemeister helps community redevelopment agencies negotiate P3s. Redevelopment of the old West Palm Beach City Hall and surrounding land is keeping her busy these days. The city's Community Redevelopment Agency has two finalists vying to redevelop the nearly 3 acres on Flagler Drive.

Briesemeister, who runs the agency, plans to recommend a winner to the agency board June 10, she said. Finalists are Navarro Lowery Properties Inc. of West Palm Beach, which is proposing a five-story, 260-room Hyatt hotel, and a development team led by Crocker Group LLC of Boca Raton, which suggests a 12-story building with 200 hotel rooms, apartments and ground-floor retail space.

The city has experience negotiating P3s. In the last real estate cycle, it joined forces with a private partner led by the Related Cos. in New York to turn 70 acres in the heart of downtown into the mixed-use CityPlace. The lifestyle retail center, with stores, residential units and Class A office space revived a chunk of the city.

It also became a new source of revenue for the city, which gets $4.7 million every year under a 30-year partnership. That money pays down the public debt on $15 million worth of garages, roads and plazas serving CityPlace, said Briesemeister, a principal with Redevelopment Management Associates LLC in Pompano Beach. She recently helped the Pompano Beach CRA negotiate a P3 to redevelop a beachfront parking lot into a commercial project. The agency would collect rent and share revenue on the publicly owned site that's been vacant for nearly three decades. Private partner New Urban Communities LLC in Delray Beach is ready to build 40,000 square feet of retail and restaurant space.

"These deals are very complex and difficult for some cities to negotiate," said Briesemeister, whose company also runs the Pompano Beach agency. "Unless they have the right expertise at the table, the deals tend to fall apart."

Deals tend to fail when a city has unrealistic expectations or the private sector doesn't understand the nuances of the deal, she added.

Hollywood is working on a P3 to turn parking lots into the Margaritaville-themed resort. A partnership among Hollywood developer Lon Tabatchnick, singing legend Jimmy Buffett and Starwood Capital Group plans to build the $147 million Margaritaville Hollywood Beach Resort. City commissioners could transfer the site to the development team in early July. The city would charge rent and share revenues with its private partners. In this P3, the public partner would contribute at least $23 million. The bulk of the money would come from the developer, which would pay rent and share revenues with the city.

Public Risk

P3s can be a good if implemented properly, said Frank Schnidman, director of Florida Atlantic University's Center for Urban Redevelopment Education in Fort Lauderdale. But taxpayers often end up on the losing end due to poorly negotiated agreements. In South Florida, some P3s have not lived up to the financial expectations of their public partners, including deals for the arenas that the Miami Heat and Florida Panthers call home, he said.

"Contracts are drafted in such a way that the private partner, quote-unquote, never makes enough money to have to pay any rent," Schnidman said.

The key to a mutually beneficial partnership is simple.

"There has to be equal bargaining power at the table" to avoid the public partner being outmaneuvered by the private partner, he said.

The danger of P3s is that political interest in getting the deal done can put the public at a disadvantage.

"The lack of adequate due diligence on the public-sector side has repeatedly put taxpayers at risk because these public-private partnerships in implementation turned out to be very one-sided — to the benefit of the private partner," Schnidman said.

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