This live video will feature a discussion among host Caitlin Devitt, The Bond Buyer’s senior infrastructure reporter, and two top leaders in the U.S. P3 space. We will talk about the current state of the U.S. P3 sector, the impact of the new infrastructure law, chief challenges and how the sector may change the U.S. public asset landscape over the next decade.
Transcription:
00:00:14:19 - 00:00:46:07
Caitlin Devitt
Good afternoon and welcome to our Leaders Webinar and Public Private Partnerships. I'm Caitlin Devitt, infrastructure reporter at the Bond Buyer. Very happy to be joined by two fantastic panelists, Dr. Shawn Wilson, who you see is in transit right here is the secretary of the Louisiana developed Louisiana Department of Transportation and Development. He's also the current president of the American Association of State Highway and Transportation Officials, which most of you know is an influential advocate for state transportation departments nationally.
00:00:46:18 - 00:01:13:08
Caitlin Devitt
Dr. Wilson holds a Ph.D. in public policy. D.J. Gribbin is the founder of Infrastructure our consulting firm Madras. He's also a senior operating partner with Stone Peak Infrastructure Partners and a Brookings Institute nonresident senior fellow. DJ was also President Trump's infrastructure advisor, where he led the administration's $1 trillion infrastructure plan. He also served as general counsel for the U.S. Dotti under George W Bush.
00:01:13:24 - 00:01:36:22
Caitlin Devitt
So we're here to chat about the role that public private partnerships play in the U.S. infrastructure sector. We'll talk about the critical role that local officials play in advancing the sector. How the political atmosphere influences deals. How P3 can work for mid-sized or small projects as Louisiana. We recently saw Louisiana did the Belle Chase Bridge and Tunnel replacement.
00:01:37:09 - 00:01:59:23
Caitlin Devitt
We'll talk about the best situations in which to do a P3 when it doesn't make sense. Revenue risk and availability payments and how outside factors like inflation might impact the market. And of course, we're going to talk about the IAG a, the Infrastructure Investment Jobs Act and how it might in fact impact the sector. It looks like we lost Dr. Wilson, but I'm sure he'll come back.
00:01:59:23 - 00:02:14:23
Caitlin Devitt
I know he was in transit, right? And he's going to get to his office. He's going to come up. So we'll see him reappear, I'm sure. Our fingers crossed, I hope, in a few minutes. But d.j. Let's start with you, obviously. So tell us a little.
00:02:14:23 - 00:02:15:10
DJ Gribbin
Good idea, Caitlin.
00:02:17:11 - 00:02:18:10
Caitlin Devitt
Either that or me.
00:02:21:07 - 00:02:25:07
Caitlin Devitt
So tell me a little bit about what it was like to work in the Trump White House.
00:02:26:04 - 00:02:47:15
DJ Gribbin
Oh, it was. It was. It was very interesting. My gosh. We could sit down like I have hours and hours worth of stories. But the the most interesting part is. Yeah, the most part is I was part of the National Economic Council which is headed up by Gary Cohn, former president of Goldman Sachs. And basically we had a policy expert in different areas.
00:02:47:21 - 00:03:07:13
DJ Gribbin
I was actually the first infrastructure expert for the White House. Normally, if the secretaries be sort of part of domestic policy and this is the first time or one person focused on nothing but infrastructure, so that was quite interesting. And that coupled with the fact that when you're in that job, you know, President Trump, as you know, wasn't a former elected official.
00:03:07:21 - 00:03:40:19
DJ Gribbin
And prior presidents normally come in with a team of policy experts they've been working with over the years, already have locked in positions on a number of issues. And in this case, there really wasn't any set infrastructure policy. So I got to start with the blank sheet of paper and really work with the nation's governors and mayors, members of Congress, trade associations like ASCO and build from the bottom up a approach to infrastructure that was focused really on two things, making the permitting process quicker.
00:03:40:24 - 00:03:59:12
DJ Gribbin
And we'll continue this a little more detail later. But right now, U.S. infrastructure is considerably held back by the complexity and the linked four primary process. And then also, just how do we get more funds into infrastructure projects as we go? So it was a fascinating point of history to be working on infrastructure.
00:04:00:08 - 00:04:10:08
Caitlin Devitt
Yeah, I mean, it sounds like it. And when you say more funds, you mean more private funds in particular. Right. That was sort of a centerpiece of your plan. Or do you mean public also?
00:04:10:11 - 00:04:26:10
DJ Gribbin
I'm so glad you mentioned that, because the number one urban myth about the Trump plan was that it incentivized private funds to come into infrastructure. And we get on this later. But there's no such thing as private funding. There's private financing for infrastructure.
00:04:26:19 - 00:04:32:12
Caitlin Devitt
Okay. Yes, yes, yes. It's funding versus financing. I know that’s the pet peeve of many people. Right.
00:04:32:13 - 00:04:56:06
DJ Gribbin
Yes. But I mean, The Washington Post, The Wall Street Journal, The New York Times like they all got this wrong in reporting on the bill and continue to kind of get confused between funding and financing. I mean, there is no capital constraint when it comes to infrastructure. It's the only non-capital constrained industry I know of. There's hundreds of billions of dollars of private equity happy to flow in infrastructure.
00:04:56:13 - 00:05:18:11
DJ Gribbin
But those funds are all I mean, it's equity. It has to be repaid with interest. So, yes, P3 helps attract more financing to a project. So if you don't have the funds immediately available, you can build things now as opposed to waiting. And it looks like Secretary is back in his office and looking good. Yeah.
00:05:19:06 - 00:05:21:17
Shawn Wilson
You don't know the half of it. The computer died on the way.
00:05:24:07 - 00:05:29:19
Caitlin Devitt
Well, we're happy to see you updated. You just want to finish that point self-funding versus fight?
00:05:30:14 - 00:05:50:22
DJ Gribbin
The funding, and Secretary's familiar with this, is that there is a misconception that P3 is will bring more funds to a project where they really bring financing. I mean, it's akin to taking out a home equity loan on your house. You'll have more cash available now and you can do things you otherwise wouldn't be able to do. At the end of the day, you have to pay it out all back.
00:05:50:22 - 00:06:09:02
DJ Gribbin
I remember I was talking to a governor, not a former governor of Louisiana, but from a different state. And I explained this concept to governor and he was on the impression, obviously, that he'd be able to get this private, private funding to do things on top of his existing program. And they explained that no, no, where you have to pay it back and pay it back with interest.
00:06:09:10 - 00:06:14:19
DJ Gribbin
And his response is, you know, what the hell good is that? I just want more funds.
00:06:15:07 - 00:06:34:23
Shawn Wilson
So you make a very good point. They also don't think you have to pay any of it back in the public yet. That's the real challenge. And I'll make it a point to tell people why this is efficient and they're good. They're going to cost a little bit more. But that's the nature of doing business and that's the nature of getting that project sooner rather than later.
00:06:35:10 - 00:07:04:12
DJ Gribbin
No, that sounds right. So at the end of the day, there's only two sources of funding for infrastructure, taxpayers and user fees. Right. That's sort of at the end of the day, everything goes back to those two sources. So whether you're paying for it as you go, whether you're doing a P3, a payback equity, whether you're taking out loans or you're doing this year with your issuing bonds, all of those financing activities, ultimately you have to be repaid by taxpayers or by users of that infrastructure.
00:07:05:03 - 00:07:30:24
Caitlin Devitt
It will be repaid. Right. And I do want to talk about that a little bit later about revenue risk versus availability payments and maybe sort of, you know, the pros and cons of both. But, Dr. Wilson, maybe you could tell us a little bit about the role that you think. I mean, I would say since you've come in, we've seen Louisiana start to gain a bit of a reputation for P3 transportation projects.
00:07:31:17 - 00:07:39:01
Caitlin Devitt
And I was wondering if you could tell us a little bit about the role that you think local officials play in advancing in advancing the sector.
00:07:39:17 - 00:08:11:22
Shawn Wilson
You know, it's quite interesting, Caitlin. The local entities demand projects. And typically they're going to be demanding projects that are state projects, but are really megaprojects, things that are really outside of the scope of those two revenue sources, or at least the one revenue source that we control that you mentioned user fees and citizen taxes. The tax level that we get is really not designed or nor is it sufficient enough to deliver the types of projects they want and so the locals can play one of two roles.
00:08:11:22 - 00:08:32:21
Shawn Wilson
They need to be champions of delivering a project and being innovative to demand that they get better infrastructure and admit that they're willing to pay an additional fee for it. And in many cases, they will be the opposition speaking against the funding mechanism or the delivery model and the financing of it, as opposed to saying they don't want the project.
00:08:32:21 - 00:08:52:18
Shawn Wilson
And so it's reconciling. You can't have it both ways. You can't necessarily say you're going to get something right now for free. If I can't afford it. And that refers you back to the ivory procurement. And we've had some success with it and it's also very challenging. But if you're committed to delivering the project, that's exactly what we have to do is overcome that opposition.
00:08:54:20 - 00:09:02:18
Caitlin Devitt
So some of that political those local officials being sort of on the front end of some of that political opposition and their messaging really being important.
00:09:03:05 - 00:09:23:06
Shawn Wilson
Absolutely. And look,I can tell you there's a there's a project that we're in procurement right now with the capital to bridge. The locals were demanding a P3 in advance of the project, being ready to enter into that P3 process. Along comes the bipartisan infrastructure law. And all of a sudden weight P3 is may not be the way to do it.
00:09:23:18 - 00:09:41:14
Shawn Wilson
I think there's a fundamental disconnect and may want to comment on this as well. There's a disconnect to how we deliver projects. I think folks are in a mindset of 60 years ago or 50 years ago, what, 30 years ago where there was just a big lump sum of money and you dropped it and you started to do work.
00:09:42:03 - 00:10:05:15
Shawn Wilson
These projects have all suffered from a lack of investment to prepare them for the P3 process or for the delivery process. Even using design bid build. We're not sitting on mega-project plans that aren't being funded. They're just not even at that stage yet. So there's a disconnect with how you deliver a project and that gets complicated when you add a new delivery model.
00:10:06:08 - 00:10:37:00
Shawn Wilson
What is relatively new for the public? A Public-Private Partnership, they're used to low bid procurement. They're used to design, build, build. And when you marry those two, it can be pretty challenging to try and explain process, explain things like risk, explain things like deliverables and business models, and to create what I would call a perpetual piece of infrastructure in that it's designed and built to be taken care of and not just hit estates, unmet need or backlog with.
00:10:39:13 - 00:11:05:12
Caitlin Devitt
And tolls also of course, being politically a hot button issue and controversial. And I mean, that's really, you know, that's what people and we've always seen that and we'll continue to see that. It seems like I know you've had a couple projects in Louisiana, a couple projects that you proposed as P3 is that you ended up not going forward with those.
00:11:05:18 - 00:11:34:15
Shawn Wilson
Yeah, we had one that was a greenfield project. It was a four-lane corridor about 30 miles. And this was a very difficult one because I think it gave us an opportunity to modernize or optimize, monetize, I should say, the value of broadband in a very rural community. And so we saw an opportunity to integrate public right away to a privatized opportunity while delivering this four-lane corridor.
00:11:35:05 - 00:11:55:06
Shawn Wilson
Unfortunately, we only got one bid at the very beginning of our process and we didn't have the competitive tension and we ended up pulling that back. It was not a total project and it did not come with the same maintenance component that you might see in a toll project. And so that wasn't the most attractive to the market for obvious reasons.
00:11:55:06 - 00:12:19:15
Shawn Wilson
And there were some structural issues with not having that competitive tension yet, given the public's sensitivity to making sure that there is a fair and balanced competition. And then we had a second project that we attempted and it was the nature of land that was going to be subsidized that was really a transportation services contract where we were looking for a private partner to design, construct and operate or a feed to the state.
00:12:20:11 - 00:12:42:22
Shawn Wilson
And we did not get any takers on that as well. And so now we're resorting back to a more methodical and traditional delivery of design bid build that's going to take a little bit longer. And one of the things that people don't always realize is the P3 procurement process actually simplifies government, because I've got three different procurement types that I have to manage in one project.
00:12:43:04 - 00:13:01:11
Shawn Wilson
That are dependent upon each other. So whether it's the construction, whether it's the technological components of the design and then the operations, those are three different contracts governed by three different statutes. Here in the P3 model, I could have managed it all under one statute in terms of its procurement and delivery, and that would have been much more efficient.
00:13:02:02 - 00:13:20:04
Shawn Wilson
But we are still continuing to try and use this model because I believe people want infrastructure, and if I can't afford to give it to them in a traditional way, we're going to do everything we can to give it to them in what I consider a new model has really good potential for states of various sizes with limited resources.
00:13:22:20 - 00:13:33:05
Caitlin Devitt
So DG, What do you think is places where a P3 might work best and, and maybe times when it might not work.
00:13:35:09 - 00:13:55:11
DJ Gribbin
That's an excellent question and it is a big picture question. Where P3s work best is if you have a project that is overly complicated, for example, Port of Miami Tunnel, where Florida had never done a tunnel before, Florida hadn't. And so they went out and did a P3 and got one of the world's leading tunnel contractors to come in and do that.
00:13:55:19 - 00:14:30:23
DJ Gribbin
So as the Secretary mentioned earlier, a huge component of P3s is shifting risk. So when you look at risk, whether it's design risk, construction risk, timing risk or funding risk, if your project has any or all of those elements and you have the ability under a three to transition at risk, the private sector, that makes a lot of sense for threes and then ones that make less sense would be a project to a smaller project, not particularly complicated type of projects that a dot would do in day in, day out.
00:14:31:23 - 00:15:09:20
DJ Gribbin
Not a lot of the risks that Secretary mentioned in terms of design, construction, technology kind of fits into your regular basket that would probably be best procured under your traditional system. There was a there was this inclination early in the history of U.S. So I've been working on P3s. It's about 30 years, both of the private sector and in the private sector I spent some time working for Koch Industries early days and this are one 25 in California and then ended up on the private side running the forest sell side advisory practice where we advise states on how to structure and use P3.
00:15:10:11 - 00:15:37:04
DJ Gribbin
But, but in all of that, it was interesting to see historically during the course of the evolution of P3 in the U.S., how states were often had like a revenue producing project that was an urban area a lot of technicalities, but they wanted to do that big project because it's a big project and they did have like, you know, Worst-Case example, like a rural transit operation it's very little revenue, small dollars.
00:15:37:13 - 00:16:03:18
DJ Gribbin
And there's like, well, we'll do the big one and we'll try to do a P3 on the small one. And that never works, which you ought to do is take your bigger, complicated projects, think about P3, some of those projects and then self perform the smaller ones that are going to require some form of subsidy like transit. So but you know, secretaries, you know, is it a good job of feeling its way through this and other states have done the same thing.
00:16:04:09 - 00:16:35:18
DJ Gribbin
And Caitlin, you mentioned earlier local control and you know, P3 is it's a global market and it's quite frequent that global investors have come to the U.S. not completely understanding that the federal government the U.S. really does not have much control over our infrastructure almost all of it is government and state and local level. And so helping states understand that dynamic between what are good prospects for P3 And then the secretary mentioned earlier, how do I do that risk analysis?
00:16:35:18 - 00:16:54:19
DJ Gribbin
Because I'm going to pay a little bit more because I've got private equity involved. But am I offsetting risks that outweigh that additional amount that I'm paying, the additional increment I'm paying in terms of financing? And then you become when you reach that answer, that then becomes a great P3 for a state or county or city to execute.
00:16:56:14 - 00:17:03:18
Shawn Wilson
How little bit from that perspective, I would like to see and wait that yeah.
00:17:04:08 - 00:17:08:06
Caitlin Devitt
We're having just a little bit there. Maybe it's a little bit better just having a hard time hearing you for.
00:17:08:15 - 00:17:09:04
Shawn Wilson
And hear me now.
00:17:09:21 - 00:17:10:04
Caitlin Devitt
Yeah.
00:17:10:20 - 00:17:30:02
Shawn Wilson
All right. So I would say, you know, one of the things that I'm interested in doing and I think the rest of the country could benefit in well as the industry is to not necessarily look for those small projects, but look for a mid-sized project and not just the mega project in Louisiana. We had maybe four projects that were suitable for P3.
00:17:30:11 - 00:17:55:20
Shawn Wilson
We have others that aren't necessarily that billion dollar project. It might be 200 million, 300 million that may offer some opportunities. And then the other thing I would say, and I don't think you would disagree with this part, would be using a P3 helps me in an operational standpoint as well as maintaining a level of technology that the state might not have the capacity or the desire to keep up with.
00:17:55:20 - 00:18:13:17
Shawn Wilson
So you could just look at pulling equipment and tolling technology if the state's required to do it. We're not going to be in a position on an annual basis or every four years to modernize that equipment as efficiently as you can in the private sector. And that's one thing that the public may not think about when owners perspective.
00:18:13:21 - 00:18:16:20
Shawn Wilson
We look at those issues in our infrastructure.
00:18:17:10 - 00:18:41:19
DJ Gribbin
And that that's an absolute excellent point. Anything that requires frequent refreshing, a P3 has a huge advantage. I mean, anybody who's had to suffer through a government procurement code would not question the state of you. Do not, as a government, want to be re procuring things on a regular basis. And so if you've got a technology project, hand that off to the private sector to fully frame.
00:18:41:19 - 00:18:55:13
DJ Gribbin
It's a perfect example. If you get outside of transportation, you know, anything like the private motor vehicle services, it has a technology component where the market's changing frequently it's just very, very hard as a practical matter for governments to keep up.
00:18:56:21 - 00:19:02:00
Caitlin Devitt
So can those things can those issues be built into the concession then? Are they built into the contract?
00:19:03:09 - 00:19:04:03
DJ Gribbin
Oh, yeah, yeah.
00:19:04:07 - 00:19:32:16
Shawn Wilson
We absolutely do. So whether it's the requirement to modernize equipment or to deal with it from a handbag provision standpoint, because you're talking about a concession anywhere from 30 to 50 years potentially, think about the changes that are going to occur to just the physical infrastructure with the technology. The speed of technology is so vast you may have something totally different from a collection system or from a lighting system or from the driver notification system.
00:19:32:21 - 00:19:50:20
Shawn Wilson
And they've got to keep up with that because it's a business model. It's not necessarily the government model. The government model says we build it and then we take care of it as best we can in the condition it was when we bought it and we go depreciate it and in 30 years we'll come back to it. That's not the same thing in a P3 Yeah.
00:19:51:03 - 00:20:05:21
DJ Gribbin
That's. Yeah, just, just, just add just a quick little thing on top of that. And if you're just talking about revenue collections, you actually don't even need to include it in the concession agreement because the private operators are already incentivized to make that more motivated. Yeah, exactly.
00:20:06:21 - 00:20:07:01
Caitlin Devitt
Hmm.
00:20:09:09 - 00:20:34:22
Caitlin Devitt
So what about long term leases of exist? So far we've talked about, you know, design, build, finance, operate, maintain new projects. What about long term leases of existing projects? I'm not even sure what question to ask. I mean, maybe the state of that, the state of the play of that industry or maybe Dr. Wilson, starting with you, if you guys thought about doing that, I mean, we have Indiana Toll Road.
00:20:35:00 - 00:20:57:20
Caitlin Devitt
So I'm in Chicago. We have the Indiana Toll Road we have the Skyway. We also have the parking meter deal, the gift that keeps on giving. But I'm frequently riding those roads. So I do think about it. I know the Indiana toll road is sort of a benchmark, very high profile event in that. So is that something you know, what are kind of the pros and cons of, you know, Dr. have you guys thought about that?
00:20:57:20 - 00:20:59:09
Caitlin Devitt
What are the pros and cons of that?
00:20:59:22 - 00:21:29:22
Shawn Wilson
Yeah, we thought about it. And so we thought about it from a perspective of the condition of our system. And do we have something that could be monetized to produce additional revenue to do it, to address other other priorities. The reality is if we were to get a lump sum payment or a lease or an asset, we would more than likely because it had been 33 years until last year that we addressed our revenue, we would probably have to put that revenue back into that same project.
00:21:30:12 - 00:22:03:02
Shawn Wilson
And the challenge then becomes how do we generate the resources to be able to maintain that relationship over time, given the way government budgets are operated and the fact that we didn't have the most efficient way of allocating or collecting, I should say, in applying resources to different assets. And so we've not really found the right project, nor do we own things like airports or do we own things like a train station or rail station here that offers an opportunity to have a business model.
00:22:03:03 - 00:22:32:19
Shawn Wilson
What we do on our roads that are probably in some cases not in the best shape, some that are in great shape, but that they're free and they aren't revenue producing. And so that's a hard place for us as a state government to be in. But we think there's some models where local governments who own those assets, whether they're utility systems, whether they're aviation systems or transit systems, there may be some opportunities there to be able to convert those and a long term lease option to reinvest in public infrastructure.
00:22:34:09 - 00:22:55:08
DJ Gribbin
Yeah, and Caitlin, that's what you're talking about, is it called brownfield transactions? Not not in the environmental brownfield sense, but in the real 43 term of brownfields. There's also coal asset recycling. And the theory is, is that the governments can take it, develop a project. And the sector is right. Usually it's a revenue generating project, not just any project.
00:22:55:15 - 00:23:17:18
DJ Gribbin
But develop a revenue generated project, get it up to a certain point. You're gone through design risk, you've gone through construction risks, you're now operating it, you have a history and the market will value that very highly. And there's an opportunity to capture a premium for that asset that can then be reinvested. And so if used correctly, it can be incredibly valuable.
00:23:17:18 - 00:23:41:22
DJ Gribbin
And as you mentioned, the need a toll road actually work on that transaction was at Macquarie and Governor Daniels had a phenomenal job of taking the $3.8 billion that came off of that and reinvesting it. At the time, he had the only the only fully funded state capital plan how we get on in the country. Right. Everyone else had a plan that things we wanted to build that wasn't completely funded, his was completely funded.
00:23:43:02 - 00:24:07:10
DJ Gribbin
However, there's a couple of downsides to use an existing asset. One is you could reinvest that money back into things that do not produce the type of return that Governor Daniels did not. Every infrastructure spend is an investment. We like to turn it in social investment, but not every project produces a great return on investment. So project selection is important.
00:24:07:24 - 00:24:34:10
DJ Gribbin
And then there is a little bit of a misalignment of incentives for the current governor to have a bucket of money that's going to be paid back over the course of the next 50 years. Under the under the terms of future governors, you could end up in a situation where election officials like want to grab as much cash as they can now spend it that unduly raises tolls or whatever user fees are being used to refinance that asset recycling.
00:24:35:11 - 00:24:38:11
DJ Gribbin
And so you need it from a policy perspective to keep an eye on that as well.
00:24:39:09 - 00:25:04:07
Caitlin Devitt
Hmm. Yeah. You bring up that issue of governors and subsequent administrations, and it raises the question, Dr. Wilson and I talked last week for a separate story I was doing about the state's P3s. And you mentioned at the time that you that Governor Edwards is term-limited out. He's leaving in January 20, 24. Right. And you really want to get that Calcasieu I'm not sure if I'm pronouncing that.
00:25:05:08 - 00:25:31:02
Caitlin Devitt
I think that that project finished and or finalized. I mean at least that you know inked and the dotting the I's and T's before he leaves because of the importance of having a politically won administration in there. And once you have all the principals swapped out, you know, we're seeing that a little bit with Governor Hogan and some of his P3 projects, it becomes more difficult.
00:25:31:03 - 00:25:37:07
Caitlin Devitt
Could you talk a little bit about like that, maybe the certainty of the people in place for why you think that's important?
00:25:38:21 - 00:26:03:10
Shawn Wilson
And you know, when we started the P3 business, we created an office in procurement, and that office really is accountable to the secretary and by way of the secretary, the governor. So these are the very high profile projects that are important for many, many reasons, not just for the infrastructure asset itself, but their political reasons. They have their agendas and legacies that are going to be built.
00:26:04:00 - 00:26:32:15
Shawn Wilson
And the secretary or the leadership in that space actually provides day to day direction in many cases on big long term policy decisions for a state, whether it's toll rates, whether it's policies around exemptions, whether it's esthetic elements, and so we are best positioned to make those decisions if we have to transition that over to another administration. Let's face it, in the world of threes, not every state's doing them.
00:26:32:23 - 00:27:04:10
Shawn Wilson
And so you may have a secretary or an executive that might not be experienced, might not have a desire to do it. You may have governors who will switch over every four or eight years. One may be supportive of tolls, one may mean may not be one may find additional resources. And so to do that for the industry and provide that uncertainty, it needs to be at a point in the negotiation that it's either buttoned up or that you have a legitimate stopping point that a project has so much energy and support that there's no turning back from it.
00:27:04:20 - 00:27:36:04
Shawn Wilson
And if you have a project that is a toll project, no administration, I think, is going to be able to do that unless it's one of these projects that are universally accepted. So you can go to Florida and Texas and places where tolling is a major piece. You got to remember in Louisiana, probably five years before this administration took over, we eliminated the tolls on a bridge and gave back about $30 million a year to citizens who were paying a very low toll rate and absorbed all of that maintenance and capital into our system.
00:27:36:16 - 00:28:07:20
Shawn Wilson
Wasn't a great policy, but it was the one the legislature supported and we took it on. This governor came in and says, we have big projects we've been talking about for decades, and the only way we can fund them is an all of the above strategy. And with P threes, we're going to be foolish and committed to trying to finish what we start or at least leave something, as GE said, for the next administration to deal with that you don't want to label them with something if you a pretty decent public servant, I'd like to say who Okay.
00:28:07:20 - 00:28:25:22
Caitlin Devitt
Thank you. We have a question. I think it's about inflation. One benefit of P3s is the initial cash flow to help get the project started and avoid likely higher prices that would come if the project would be delayed by few years. With that in mind, as high inflation helped create an environment where P3s make more financial sense.
00:28:28:12 - 00:28:49:11
Shawn Wilson
I will say yes, and it will make more sense because with some of the inflation issues, remember states and municipalities for that matter, are going to be limited in their capacity to accept a bid that is exorbitant. And when we've had situations where we had a much larger bid, you take it back and you rebuild it and guess what?
00:28:49:11 - 00:29:09:02
Shawn Wilson
It comes in even larger. And if you don't have the resources to accept it the first time, you certainly won't have it the second time in the P3 space, because you're dealing with, in many cases, private equity, you have an opportunity to grow the cost of a project. And that's one of the fears that people have is it could be more expensive, and that's absolutely correct.
00:29:09:13 - 00:29:25:15
Shawn Wilson
But the alternative is not having the infrastructure. And so in this environment where we're seeing escalating prices, there's that's the only way, I think, to guarantee certainty because for the state of Louisiana, I can only a water project if I have full funding is a little different.
00:29:26:24 - 00:29:51:03
DJ Gribbin
So, I mean, I'm agree that that could that could certainly be helpful if you're worried about your option to lock in prices today, A, to cap B, it's not one Oftentimes concession agreements will have escalators in them for inflation. So your private partner may be willing to give you a price but want that price escalator for inflation because they're unclear where inflation is going and you'd like the government to take that risk.
00:29:51:12 - 00:30:24:03
DJ Gribbin
And I think we're seeing right now in the contracting community where our contractors are, the term over which they're willing to hold their prices is getting shorter and shorter and shorter as as inflation becomes more and more of a potential concern. Second, on if you flip that around on the financing side, one of the benefits the P3 market had as interest rates came down is the spread between the cost of municipal debt or tax exempt debt and the cost of taxable debt was relatively small.
00:30:24:08 - 00:30:49:24
DJ Gribbin
Historically, if inflation results in higher interest rates, you could see that spread grow. And when that spread grows, it makes it harder and harder to pass the value for money analysis, because now you're paying that much more money for your private capital to invest in the project, which means you need to find that much more in terms of risk allocation or in terms of efficiencies and private delivery to offset that higher cost of finding.
00:30:50:21 - 00:31:16:08
Caitlin Devitt
Hmm. Interesting. It seems like it would affect the risk appetite for the contractor on the contractor side. I mean, it's such a difficult environment right now to price projects, any P3s, any capital projects. So okay, here, I want to get to the idea. But here's another question we only see we only really see three projects being completed by large municipalities is there an opportunity for smaller cities, villages to participate in this market?
00:31:17:20 - 00:31:27:18
Caitlin Devitt
And we think we talked a little bit about that earlier when we talked about small and mid-size P-3s versus megaprojects. I don't know if either of you wanted to add anything to that.
00:31:28:15 - 00:31:54:00
Shawn Wilson
I would balance a challenge. I would see for small municipalities or smaller governments really is the procurement process and developing the Expertize and unfortunately, it's so different than when we talk about iJet and having a pretty robust discretionary pot. It might cost a community 30 to $40,000 to do a decent application. That's going to be a hard left for them.
00:31:54:00 - 00:32:20:15
Shawn Wilson
That would have been the match potentially, or one of those grants that they may be successful at getting when you look at the dollars it takes and the time it takes to procure one of these. I don't know that that capacity is there, nor do I think that states can assume that capacity for a local project to help them maneuver and go through that delivery model no different than design build or see more.
00:32:20:15 - 00:32:42:06
Shawn Wilson
I think those are just the nature of it's just the nature of what we do. I'd love to find a way to help local governments, but as GE said, earlier, they may not have the resources or have a project that is going to be revenue producing that's going to offer value and interest for the private sector to extract some level of innovation to make a profitable project out of it.
00:32:42:23 - 00:33:03:14
DJ Gribbin
Yeah, no, I think that's exactly right. I mean, it's the problem with the P3 is, is it costs about as much to $100 billion project. There's a cost to $1,000,000,000 project. And, and so it's just not very cost effective to do it for small projects. I mean, I'll commit a little bit of heresy here. I never understood world tipping right there.
00:33:03:16 - 00:33:25:07
DJ Gribbin
There's this huge push like we want to have it to be available to small communities. Like it's a small community. Give them a grant, just give them the money, lend the money to the larger, wealthier communities that can afford to pay that loan back. And so I'd say similar with P threes. I mean, this is a complicated, nuanced transactions that can be quite expensive and quite too time consuming.
00:33:25:11 - 00:33:45:20
DJ Gribbin
Student I just don't think it makes much sense to try to do a free on a smaller project. Depends also which term about P three. If we get into like housing water systems thing where you're combining multiple water systems of the one and getting the benefit of a roll up, then maybe that makes sense in some rural areas.
00:33:46:04 - 00:33:59:04
DJ Gribbin
But I would say, you know, if you're looking at a state, get your P3 efficiencies in your larger projects and then use that savings to pay for grants for projects in poor areas.
00:34:00:03 - 00:34:34:03
Shawn Wilson
Hey, this is this is one of my pet peeves. If someone who's really been engaged with the degree industry and I'll like your analogy that it costs the same thing to procure $100 million project that it does $1,000,000,000 project, I don't know that that's sustainable for government given the pinch on limited resources. And you and I probably would not be asking you your question, but I would like to see how we can make it more affordable even for states, because each one of them, those procurements are actually taking away resources from doing some of those very small but meaningful projects.
00:34:34:03 - 00:34:35:21
Shawn Wilson
So thoughts on that.
00:34:36:12 - 00:34:58:19
DJ Gribbin
Oh my gosh, I could not agree with you more. I have been preaching for years that the P3 industry is making a huge mistake in allowing these procurements to go on so long and be so, so expensive. I mean, I mean, you've witnessed some of the politics around this, these procurements like pinatas that are just sitting out there for the public and opponents to beat on and the longer they're there, the more risk there is to your project.
00:34:58:19 - 00:35:23:19
DJ Gribbin
So I think this is something that the private sector needs to take away is these projects just it feels like they're getting longer and longer and more and more expensive. The contracts are getting bigger and bigger. And I'm not sure that's equating to value to the public sector. Is we need to think figure out a way to do quick protect the taxpayers interest, but do in a way that's much more efficient than what we're doing today.
00:35:24:02 - 00:35:25:07
DJ Gribbin
I could not agree more.
00:35:25:16 - 00:35:28:07
Shawn Wilson
But maybe they're going to listen to this and change their habits.
00:35:29:03 - 00:35:29:22
DJ Gribbin
We can only hope.
00:35:31:03 - 00:35:33:19
Caitlin Devitt
Can you name any examples? Can you provide any examples?
00:35:35:17 - 00:35:38:03
DJ Gribbin
I, I can, but I can't.
00:35:38:12 - 00:36:06:02
Shawn Wilson
So I would just tell you, Caitlin, from my perspective, we've been working on this issue, procurement over a year now, and I'm probably still six or eight months away, maybe a little longer from a commercial or financial close. And, you know, it requires extensive work. Now, this is a very complex project. I can tell you on the blockchain project, we went for a little over a year and a half on that procurement.
00:36:06:14 - 00:36:29:13
Shawn Wilson
It got done and it's well on its way. It's under construction. But you're right, the time it takes, we've done something different on design build, and we're trying it to hopefully attract more bidders. And that is have a pre-qualified list that will shorten the process from the time we announce it. And you require them to have basically the core elements of a team and not their pool out.
00:36:29:22 - 00:36:52:02
Shawn Wilson
Do I really need to spend time reviewing the qualifications of someone who's going to do less than 10% or less than 5% on project? Probably not. I need to be concerned about who's doing the 50 or 60% not. And is that critical for the delivery of it? I think the same thing can happen to a certain degree with threes, but you know, the old adage says you've seen one party three, you've only seen one party three.
00:36:52:04 - 00:37:01:08
Shawn Wilson
Yeah. And so we tend to reinvent the wheel. And I don't know that that's really in the public's best interest or the industry's best interest to continue to do it that way.
00:37:02:10 - 00:37:27:24
DJ Gribbin
Yeah. I mean, and then the challenge is, is there there is a little misalignment incentives. Your current advisory team is incentivized to like Bill as much as they can to developing that project, which is really not good for the industry where the incentives ought to be, you know, making this as efficient as possible. I mean, the question is, does every three need to be a Bentley or can we get something like Model T's between.
00:37:28:01 - 00:37:52:05
DJ Gribbin
Right where we're we're not like crafting these things by hand. We have some standardization. And there is and I'll confess, there's there's there's incentives in the private sector to make this more complex and more nuanced. But there's also this desire in the public sector that my state is unique. My communities are different than the community. And this needs to be crafted specially to meet those needs.
00:37:52:22 - 00:38:12:13
DJ Gribbin
I was I was working on a four lane highway project from an urban area to a rare area in the high desert. The project went really well I went to another state, and literally the project could not be more similar and was told that this project is nothing like this project. In the neighboring state, we are totally different.
00:38:12:13 - 00:38:33:10
DJ Gribbin
We do things totally different our state and you can't import that. So I think it's incumbent both on the public sector and the private sector to sit down and spend a little time thinking about, okay, is the process that we're using to reach the decision, execute on P3 and actually procure P3? Is is that process gotten a little bit out of control?
00:38:33:14 - 00:38:36:02
DJ Gribbin
And how do we rein that in to make that more efficient?
00:38:38:18 - 00:39:04:03
Caitlin Devitt
So to talk about the IIJA a little bit, we were just talking about the difficulty of small communities and having kind of the expertise. I know that there is a provision in there for technical assistance, right, to governments who are thinking about it. We also have a doubling of the private activity ban cap, the value for money analysis required on certain big projects that have federal funds.
00:39:04:07 - 00:39:27:07
Caitlin Devitt
Anyway, there are several provisions in there that are considered kind of P3 friendly. I think people didn't get everything they wanted in the industry for asset recycling stuff in there. But what do you guys think? You think it's going to move the needle do you think the idea really will move the needle for the P3 industry, or is it or is it kind of tough too complicated?
00:39:27:07 - 00:39:31:11
Caitlin Devitt
There's too much going on and it's not going to win?
00:39:31:12 - 00:40:00:05
Shawn Wilson
I think it's going to help. I don't know that it'll be transformative. And some would hope the marrying of these different options that are available to us through identity is really where the magic is. So when you look at the mega project grant novo that just came out and you think about it and you think about Gabi and you think about Pams, all of a sudden you start to have the tools to really make these megaprojects a reality.
00:40:00:12 - 00:40:27:24
Shawn Wilson
And the fact that the Mega Projects Fund was not funded at the request of the amount that the administration introduced, it's still significant and meaningful and so if we are ever going to be serious about doing these megaprojects, you're going to need a collective of those tools. And I think, you know, the value for money pieces are really good policy element to put in for these projects so that we don't have the boondoggle other project that became a runaway project.
00:40:28:16 - 00:40:53:06
Shawn Wilson
Ideally, and so I think the synergy of all of those things that are in this bill and the things that have been doubled or capitalized even more are going to be helpful. Even in the discretionary part, even though I'm I'm a big fan of formula, because if you really want to, in fact, policy for everybody, do it in the formula because more than half the country will not take it or be able to take advantage of the discretionary parts.
00:40:53:06 - 00:41:14:14
Shawn Wilson
And so you may have heard the odds say, listen, cap it at 8% or 10% of our federal program. But cap it because it costs to pay. And if you really want to do with equity, you know, rural America is not going to be able to compete and provide additional match or to provide the programmatic support needed to be very competitive.
00:41:15:04 - 00:41:39:13
Shawn Wilson
There's a few hotspots that that can happen and there's some collaboration happening with state governments all over the country. But that's a rarity for that to happen. And so I'm a bigger fan of formula, but I appreciate the discretionary part to so don't get me wrong, we're going to apply for every dollar we can get. But if you want to change policy, I think you do it through formula and not necessarily rest is kind of public policy interesting.
00:41:39:23 - 00:41:58:20
DJ Gribbin
Yeah. Yeah. And so much of that is is similar, but a little different. I completely agree with the secretary. The value for money study is critical and any policy, we should be doing a tax benefit analysis, but it's terribly cost benefit analysis, which in essence is what a value for money study is just a fancy word for cost benefit analysis.
00:42:00:15 - 00:42:29:01
DJ Gribbin
I think, though, that that, you know, the one provision you mentioned in terms of fees for advisors on P3 is I'm going to beat this drum one more time. Those fees are not eligible for any project where the project through taxes or user fees, it imposes a burden on any family earning less than $400,000. Again, there are only two sources of funding for these projects taxes and user fees.
00:42:29:09 - 00:42:53:14
DJ Gribbin
And every project imposes a burden. So essentially Congress defined a null set of projects that then would be eligible for these advisory fees. So I think demonstrates and maybe trying to work creatively around that language. But it kind of goes to the fundamentals of some of our policymakers just really don't understand how these projects are financed. I think there's also a practical limitation.
00:42:54:11 - 00:43:16:05
DJ Gribbin
The search I mentioned going after is as much federal funding grant funding as a can, which every secretary ought to be doing. And I think that's going to impose two challenges. The one is there's now free money available and there's any investor on this call appreciate. Nothing does wonders for your weighted average cost of capital like money. You don't have to pay back.
00:43:17:03 - 00:43:38:04
DJ Gribbin
So that's going to be a huge priority. And then so there's a crowding out aspect in terms of financing. I think we also run the risk of being too crowded at crowding out aspect in terms of people's time. Right. There's only so many government employees that are working on infrastructure. And if my job is, I can work on this P3 or I can work trying to bring grant money.
00:43:39:11 - 00:44:00:08
DJ Gribbin
That's that's a tough balance to resist going for the grant funding. But I do think the fact that there's more money available, there's a lot of creativity on the three side of ways that that maybe those funds could be used, you know, potentially a big benefit of P3 is that we don't talk much about is prepaid maintenance, right.
00:44:00:09 - 00:44:21:23
DJ Gribbin
So every three long term concession agreement comes in with something that governments do not do well, which is setting aside money already to maintain those projects. And so if there's a way to capture some of that funding to pay for tomorrow's maintenance that could be hugely impactful as well. So I think the idea we'll see where it comes out.
00:44:21:23 - 00:44:46:13
DJ Gribbin
I think if you think about transportation obviously there's some specified funding for ports, for airports, highways gets a big chunk that the public transportation is a little hard from IAG funding and P3s, if you move into energy, there's a lot of opportunity there. Broadband, a huge amount of opportunity, electric vehicles, which kind of bridges energy and transportation. Enormous amount of funding.
00:44:46:13 - 00:44:52:18
DJ Gribbin
There are hydrogen. So there's there's opportunities to encourage wider investment. Right.
00:44:53:07 - 00:45:08:08
Shawn Wilson
You mentioned the clean water piece about rules and ways to consolidate and work with rural and locals. That is a perfect example of where you could achieve that for these small rural water systems that all need to be recapitalized.
00:45:09:00 - 00:45:30:04
DJ Gribbin
Yeah. Now there's exactly right. So I think it's going to be selective, but but I do worry a little bit about the crowding out phenomenon, both in terms of money and time. And so I think that just means the private sector has to work just a little bit harder to make things more accessible, easier to do for government Okay.
00:45:30:04 - 00:45:32:16
Caitlin Devitt
Well, I guess time will tell. We'll see what happens with that.
00:45:34:19 - 00:45:49:10
Caitlin Devitt
You know, it's our time. I don't know. You know, that. I mean, I think we talked about a lot. I don't know if there's any last thoughts that either of you had that you wanted to kind of make sure we got two or excuse me points that you wanted to make sure you made before we wrap it up.
00:45:52:15 - 00:46:23:14
Shawn Wilson
If I were to ask you in a very pointed out so that it's so much more that public and officials need to understand about this because there's a lot of oil projects many, many more projects that are eligible. I think for this model, if we have the right champions and there not as many people because these are high risk maneuvers and my friend Jim Ray would always talk about how, you know, CEOs who are pursuing threes are walking a tightrope.
00:46:23:21 - 00:46:51:02
Shawn Wilson
And he stressed the importance of building a coalition around them to support when these things get challenging and tough or if they don't go as well as you would like. And that's the nature of the beast. But risk takers do that. And that's what we do in this infrastructure space with deep phases, which we lead. And it's an exciting time given the resources available and the challenge we have before us, because certainly we've got some challenges with our infrastructure.
00:46:52:12 - 00:47:24:14
DJ Gribbin
Yeah, and I agree with with all of that you know, key threes are hard and that can be challenging. That can also produce considerable benefits to taxpayers into communities and allow for the development infrastructure that basically just wouldn't have been developed otherwise. And we've got a couple of decades experience in this country. The one thing I would encourage people who are part of this webinar to keep in mind is the United States is just an enormous country with trillions and trillions of dollars worth of infrastructure.
00:47:24:23 - 00:48:12:15
DJ Gribbin
And what we're seeing in the free market is people moving from more traditional roads into courthouses and schools and college generation capacity. So there are innumerable opportunities for the private sector to play a really impactful and meaningful role in helping us improve its infrastructure. And I think that those opportunities are somewhat improved and also maybe limited by J but again, the IJA is producing about a 20% increase in federal funding with the federal government funding only about 25% of infrastructure overall So while a lot of attention is paid to the federal government, most infrastructure, virtually all infrastructure is funded at the local level.
00:48:12:24 - 00:48:30:03
DJ Gribbin
Locals and states are making decision of which projects to procure how to procure those projects. And so the opportunity is immense and it's quite diverse but I think it's, it's really important for the private sector to play a critical role in helping America improve its infrastructure.
00:48:32:00 - 00:48:43:12
Caitlin Devitt
Okay, exciting times. Thank you both very much for your time and your expertise. And thank you to all of our listeners and viewers for joining in. Thank you.
00:48:44:04 - 00:48:44:21
Shawn Wilson
Thank you, Caitlin.
00:48:45:17 - 00:48:46:04
DJ Gribbin
Secretary.
00:48:46:20 - 00:48:47:15
Shawn Wilson
Good seeing you, D.J..
00:48:48:08 - 00:48:48:22
DJ Gribbin
See as well.
