Although the first availability payment P3 projects did not reach financial close until 2009, half of the P3 projects that to have closed since then have been availability payment projects. Concession periods for availability payment projects range between 25 and 40 years, with an average of roughly 35 years. This is nearly 20 years less than typical concession periods for real toll P3 projects and provides an indication of the timeframe public sponsors are willing to extend payment obligations. Over half of U.S. availability payment activity has been concentrated in two states: Florida with three availability payment projects, and Indiana with two. The pace at which availability projects have been developed gained momentum in 2014 and 2015, with five projects reaching financial close in those two years alone. However, deal flow slowed in 2016, and it appears that there may be fewer availability projects in coming years.6
Transportation agencies have used availability payment procurements to develop a wide array of highway projects. Five of the nine availability payment projects that have reached financial close involve non-tolled projects. They include a tunnel providing truck and vehicular access to the Port of Miami, the approach road to the Golden Gate Bridge, an Interstate highway segment in Indiana, a highway bypass in Ohio and 558 one- and two-span bridges in largely rural regions around the state of Pennsylvania. The remaining four projects involve two priced managed lane projects in Florida and two toll bridges, one connecting New York and New Jersey and the other Kentucky and Indiana.
The expanding use of availability payment P3 procurements has been driven by a number of factors. They have proven an effective strategy to accelerate the completion of large and expensive projects that would otherwise be built in smaller pieces extended over multiple budget cycles. As with real toll projects, they also transfer lifecycle risk to the private partner and incentivize long-term maintenance efficiencies and cost savings. They also engender rigorous competition among the companies bidding for availability payment concessions, given that award decisions are based primarily on cost. They can also be an effective vehicle for providing sponsoring agencies access to international firms with expertise not necessarily available domestically-such as experience with subaqueous, wide-diameter, bored tunnel construction in the case of the Port of Miami Tunnel. One of the strongest motivations for project sponsors to use the availability payment approach is to extend all the benefits described above to high-priority projects that do not generate revenue, and would otherwise be procured using other means.
Although these arguments are all valid, many of the same outcomes can be achieved through design-build contracts. Public sector owners should also be aware of the potential downside to availability payment concessions. While some sponsors may initially have equated availability payments with lease, or off-balance- sheet transactions, all three major rating agencies consider them equivalent to debt obligations.7 As such, the use of availability payment concessions puts downward pressure on state credit ratings. This pressure can be mitigated to a certain extent if availability payment concessions are used on projects that generate toll revenues covering all or a portion of the state's obligations. However, this is not the case with availability payment procurements for non-revenue generating projects. Therefore, there is a limit on the volume of availability payment activity in order for states to avoid a threat to their credit rating. Because of this dynamic, the use of availability payment procurements is also generally limited to those states with stronger credit ratings.
The growth in the use of availability payment concessions in the U.S. has also clearly coincided with the wake of the 2008 financial crisis. With the tightening commercial credit market and the loss of the bond insurance market, availability payment concessions provided public agencies with a new way to structure P3 transactions that mitigate risks that some private investors may have no longer found acceptable, such as the revenue risks associated with real toll projects. The availability payment approach allowed project sponsors and private partners alike to focus on managing risks associated with construction, operations, and asset management. With the lower risk profile, the public sector may receive more competitive bids providing lower financing and capital costs.
Availability payment concessions are not without financial risk to the private sector. The private partner typically must assume appropriation risk associated with the availability payments themselves. However, state policies often mitigate this to an extent by prioritizing availability payments in their capital or work programs ahead of other agency obligations. Even with such policies, the annual state legislative appropriation process may still present risk to the private partner. In the case of the Presidio Parkway in California, the state legislature chose to commit to a "continuous appropriation" that provides protection against budget delays, because, as a lump-sum appropriation, the funds may be paid regardless of passage of the annual budget.
While availability payment procurements may afford many benefits to project sponsors, the fact that availability payments are prioritized above other needs reduces the sponsor's flexibility to allocate future revenues where they may be most needed. Public agencies should have a clear understanding of the impact availability payment obligations will have on their budgets and the state's credit rating, and they should only use this approach on high priority projects where it will deliver value. Florida has set caps on the overall amount of availability payment activity that can occur in the state. Its current portfolio of availability payment projects is well below the cap, enabling it to maintain the robust confidence of the credit agencies and derive the benefits from the procurement strategy on a small number of complex, high-priority projects.
Availability payment procurements are attractive to private sector developers because they mitigate the troublesome revenue risks associated with real toll projects. However, their upside profit potential is capped by the availability payments, which are fixed for the duration of the concession. Real toll concessions provide the potential for greater profit, but with much higher risks.
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6 "Where Did P3 Deal Flow Go?" Public Works Financing, September 2015, pp 11-15.
7 Jodi Hecht, "Are Availability Payment Obligations Debt?" Public Works Financing, September 2015, pp. 16-18.