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The P3 Model Should be a Win-Win, But States Have Been Slow Adopters

07/03/2017 03:36:00 pm | Viewed: 441

Texas Construction News from Virtual Builders Exchange

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Source:  Associated Builders and Contractors Inc.

 

Posted: 7-3-2017, 5:05 p.m.

By Edmond Ortiz

Texas municipalities have been advocates of public-private partnerships for nearly a decade, but state officials have only recently tested the P3 model.

Alliances between public entities and private entrepreneurs were common in the 19th and early 20th century. The Great Depression put a stop to that, and beginning with Roosevelt's 1930s New Deal era, Americans put their faith in taxpayer-funded projects to support transportation infrastructure, drainage, schools and hospitals.

However, public investment went into a steady decline in the last quarter of the 20th century. Political opposition to maintaining tax revenues at rates that would provide sustainable maintenance and growth put increasing pressure on public officials to come up with alternatives.

That search for alternatives caused public officials to revisit the P3 model, but only within the last decade. In 2013 AIG released a white paper titled The United States: The World’s Largest Emerging P3 Market.

“Today, private financing of public projects in the world’s largest emerging P3 market is nearly nonexistent. Some experts estimate that U.S. private investments could reach 10 percent of the nation’s total spend in construction,” wrote Dan McNichol, author of the white paper and of The Roads that Built America.

Mary Scott Nabors - Strategic Partnerships CEO

Mary Nabors, as president and chief executive officer of Austin-based Strategic Partnerships Inc., consults with local governments on formulating partnerships with private developers. This generation’s P3 trend began with road, bridge and drainage projects, but Nabors said it’s important to realize that infrastructure is more than civil engineering work.

“It’s the power grid, water systems, broadband--anything that has to do with the foundation of how we work and live,” Nabors said.

Her company website elaborates on how a P3 can be something as concrete as a city parking garage or as abstract as managing a state pension fund: “Public-private partnerships are revolutionizing how services can be delivered more efficiently and effectively, and how innovation and collaboration can reinvent government and reinvigorate our economy.”

Particularly since the end of the 2008-2009 recession, city and county governments across Texas have been experimenting with P3 deals to revitalize urban centers, turn around brownfields and exploit other underutilized real estate.

These deals are intended to be a win-win. The public sector offers something, such as a low-cost and long-term land lease and/or economic incentive grant, to get something it wants. The private developer is assured a revenue stream on a project that involves less risk.

The P3 model is not a panacea, however. Projects can fail, and others never materialize despite the public entity’s efforts to attract sound development. Experts on P3s say private sector investors want high-quality, long-term proposals with substance.

The key, Nabors points out, is for the public sector authority to make its proposal more enticing.

“If you don’t have a big enough project, like $100 million or above, the public sector could consolidate a few or several projects to attract the private sector,” Nabors said. “I get calls all the time from small communities and public agencies. They have to create something that has an attractive revenue model.”

The city of Waco fell into this category. It has tried for two years to attract a private developer to do something with Heritage Square. a 2.3-acre downtown block in front of City Hall, which for the most part is surface parking. The first round of solicitations attracted no one. In late May, however, two proposals came through in for mixed-use projects. It remains to be seen whether one will lead to actual construction.

If scale is what is required, few projects compare to the $3 billion Vista Ridge Pipeline, a San Antonio Water System P3 venture that Nabors called “pretty incredible” in both scale and concept.


Vista Ridge Pipeline
The effort to build a 145-mile pipeline and deliver water from Burleson County to Bexar County has not been without controversy.
 
The initial private sector partner/developer, Abengoa, dropped out and filed for bankruptcy. Garney Construction is now building the pipeline. Water delivery is still scheduled for 2020.

SAWS and city leaders have taken political hits from Vista Ridge critics, and some other aspects of the contract have changed since the City Council first approved the project in 2014.

“But even when the first private sector partner filed for bankruptcy, the city was never really damaged in the deal,” Nabors said. “The risks shifted to the private sector partner.”

Vista Ridge has one mission--to ensure San Antonio’s water needs into the future. Other P3 deals attempt to meet a wide array of needs.

The city of San Antonio established the nonprofit Hemisfair Park Area Redevelopment Corp. (HPARC) to oversee a multi-phase redevelopment of city-owned land at Hemisfair into a series of urban parks surrounded by new residential and retail options.


Hemisfair Civic Park

Civic Park (illustrated above) is one of three major park spaces planned within the redevelopment of Hemisfair.


One P3 was instrumental in developing the first phase — Yanaguana Garden, a playscape for all ages and abilities.

Last February, the City Council approved an agreement between HPARC and Zachry Hospitality to develop five acres on the northwest area of Hemisfair for hotel, retail, residential, office and public parking space.

HPARC officials expect $80 million public-sector investment in this second phase of the Hemisfair redevelopment to leverage $540 million in private capital investment over several years. The city expects another P3 agreement to support the final phase of redevelopment.

“The private sector can do some things the public sector can’t do, but still be held to the same standards as a public sector project,” said Omar Gonzalez, HPARC’s real estate director.


Andres Andujar and Omar Gonzalez of HPARC

Andres Andujar (left) and Omar Gonzalez have led HPARC's efforts to redevelop San Antonio's Hemisfair Park.

According to HPARC, 52 percent of the acreage for Zachry’s development will be designated for park land. Gonzalez said the partners here understand the importance of dedicating land for public park usage.

“A developer doesn’t want to develop a park,” Gonzalez explained. “The city isn’t going to build high density residential, hotel or retail. That’s where the P3s come in handy. The developer provides capital and incentives for future development.”

Lease payments will help fund future public improvements, park maintenance and HPARC’s operations.

“I call it a virtuous cycle. The better the parks, the more likely that developers will want to build residential and retail,” Gonzalez said. “That means more park users and residents, meaning more demand for things.”

Previous public investments in the Hemisfair redevelopment have come in the form of a total $30 million allocation in city bond money in 2012, and $26 million allocated in this year’s bond issue.

“The private sector sees Hemisfair again as a real project with real money and potential,” Gonzalez said.

City and county P3 deals, while beneficial to their communities and a boon to the construction industry, rarely get attention beyond their local base. Arlington was a notable exception when the Metroplex suburb made national news. City leaders in 2016 boldly announced deals for a mixed-use entertainment and hotel complex, combined with a new climate-controlled ballpark for the Major League Baseball Texas Rangers franchise.


Texas Live! and the Rangers Ballpark

The new Rangers ballpark and the Texas Live! entertainment complex, at a combined $1.25 billion, is one of the more prominent and costly P3 projects to be attempted in Texas.

Community support was overwhelming. In a November referendum, residents voted in a landslide to support financing half the cost of a $1 billion retractable roof stadium. This came after city officials had agreed to as much as $100 million in cash and tax rebates toward the $250 million Texas Live! project, an entertainment complex/hotel that will be partially owned by the Rangers.

Texas Legislature Cautious on P3

There are scores of other examples of P3 deals recently completed or in the works in cities large and small across the state. But at the state level, legislators have been slow to adopt the model.

In 2015, the Texas Legislature rejected a bill that would have permitted P3s to take part in 18 state highway projects that totaled $30 billion. Legislators have generally equated a P3 deal with toll-financed road projects. They have been cautious of public opposition to toll roads.

It did not help that the Texas Highway 130 toll road between Seguin and Georgetown, although completed, did not draw the anticipated traffic or revenue. SH 130 Concession Company, the original operator, filed for bankruptcy in 2016 and turned ownership over to its lenders.

Lawmakers in the state house did take notice, however, that local governments have had consistent successes with P3 developments. The 2015 legislative session, a bill managed to get to the governor’s desk and signed into law that would test the P3 waters; it established the Center for Alternative Finance and Procurement, an office within the Texas Facilities Commission (TFC) intended to foster the formation of P3s.

It was not until earlier this year, however, that the TFC issued its first P3-related Request for Information, which is nothing more than a request for advice from developers on how the state might proceed with a mixed-use development that would include a new office building for state employees in San Antonio. In exchange for the building and the lease revenue that would come with it, the eventual developer would get favorable terms to develop the G.J. Sutton complex, a 6-acre campus next to the Alamodome with other commercial and/or residential properties.

No developer has yet been selected, but the TFC's success or failure with G.J> Sutton will help determine whether the state will expand use of P3s.

State governments, in general, have been timid about trying P3 deals. According to the Associated Builders and Contractors Inc., 37 states have laws permitting some type of P3 contracting, but the vast majority of these restrict P3s to transportation projects.

William Eliopoulos, a partner at construction practice law firm Rutan & Tucker, told ConstructionDive, “The main hesitation is that they don’t have experience implementing the P3 method of procurement.” Eliopoulos then predicted that, “As public sector agencies … developm more experience and expertise with this new method, they will develop standardized legal procurement processes and forms and use it more.”

Despite public wariness, Nabors concluded that P3s will continue to be an effective way to deliver major public projects. With any luck, the federal government will get on board and participate.

“We’ll need that private sector capital and federal capital if the Trump (Administration) infrastructure program becomes a reality,” she said.

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EOrtiz@journalist.com


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Adolfo Pesquera
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Adolfo Pesquera is a veteran news journalist. He has worked for Hearst Corp., American Lawyer Media, News Corp and Freedom Communications. His work has been published in newspapers and magazines across the USA. He is a journalism graduate of UT-RGV. He writes, edits and creates digital pages for VBX.