[Editor: This is the text of a news release from Fitch Ratings.]
Fitch: US PPP Benefits Tempered by Post-Award Interventions
Fitch Ratings — New York-29 July 2016: Delays in three recent major infrastructure projects underscore the importance of greater transparency, disclosure and public buy-in before public-private partnership (PPP) projects are awarded, Fitch Ratings says. This also applies to publicly funded projects. Some public sector risk is inherent in all projects. However, projects that have significant advance planning and meaningful public involvement to identify key long-term public policy objectives and acceptable tradeoffs create a better risk-reward balance for taxpayers, users and investors.
Last month, after a lengthy debate, North Carolina’s House voted to cancel the Interstate 77 managed-lanes project. However, the state Senate did not agree. The governor recommended changes to the project to appease a local stakeholder group that had concerns about the impact of additional tolls on users, the costs of the financing and a bankruptcy in another project by the same concession company. No delays to the project have yet emerged, though these actions came after the project was awarded.
Going forward, the state could cancel it, though at some expense. Changes to the project could raise costs, as post-award changes would not be bid out to multiple contractors. The project could also go forward as planned and face a stronger political challenge. Under a PPP format, the project converts two high-occupancy vehicle lanes into express lanes and adds a new express lane.
In a similar instance in June, a federal district court judge recommended a six-month delay in construction of Maryland’s Purple Line, a light-rail project, due to an environmental-impact lawsuit brought by residents of the state. The suit also questions the project’s usage forecasts. The Purple Line is structured as a PPP for the design, construction, financing, and operation and maintenance of the 16-mile line. The delay will raise the cost of project implementation and require private project sponsors to be compensated to ensure that the eventual decision mitigates the additional carrying cost of debt, construction cost escalations and reduced equity return.
Two years ago, Gov. Andrew Cuomo changed the scope of the much-needed redevelopment plan for LaGuardia Airport in New York City. His changes were motivated, in part, by community complaints about the project’s design. This intervention occurred during the bid process and the recommendations were made after the bids were received. His recommendations will improve the final outcome. However, this also required a renegotiation with the consortium winner that likely increased the project’s cost more than it would have been had the changes been brought to the planning process prior to the initial bid. At $5.3 billion, it is one of the one of the largest US airport PPP projects in the past 20 years. The conduit issuer sold $2.4 billion in special-facilities bonds on May 17.
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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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