USA: An Introduction to Projects: PPP

US PPPs: Overview 

The year 2024 commenced with ongoing instability in the global geopolitical environment, disruption to supply chains and high interest rates without clarity as to how and when they would move down. However, the need for infrastructure investment remained acute fueled by energy transition, legislative and regulatory developments, and aging assets in need of replacement, among other factors, with public funding programmes providing additional momentum for asset development and renewal.

The year 2023 saw a 40% increase in the number of active public-private partnership projects in the USA. While some states are more advanced with adoption of P3s than others, P3s have become a proven model for the development and long-term operation of infrastructure assets that has evolved over the years to adapt to different sectors and public priorities. This flexibility has enabled the development of innovative procurement methodologies as well as tailored risk allocation and funding mechanisms to deliver infrastructure across the US. Below are highlights of near-term trends in key sectors.

1. Water 

The US water sector saw P3 projects double in 2023. We expect this number to rise in 2024, driven by increased public funding and a growing recognition of the benefits of P3s to tackle the US water crisis.

Water infrastructure assets across the U.S. have aged past their useful lives and face serial deferral of capital maintenance expenses. Extreme weather events, strict proposed per- and polyfluoroalkyl substances (PFAS) regulation by the US EPA and growing populations in areas of water scarcity further highlight the need for increased investment in water supply, treatment and resilience.

The Infrastructure Investment and Jobs Act of 2021 (IIJA) provides for USD55 billion in funding for the restoration and improvement of water and wastewater systems in the US, including USD15 billion for the identification, replacement and monitoring of lead service lines and USD4 billion for the reduction of PFAS in drinking water. However, the IIJA funding alone cannot solve the water sector’s funding gap, leaving a large role for private sector investment.

In 2023 we saw the emergence of a new model for private investment in US water assets with the City of Fort Lauderdale’s Prospect Lake Clean Water Center project, developed by Ridgewood Infrastructure and IDE Technologies. The project will deliver state-of-the-art water treatment technology owned by the City, City control over water rates and lifecycle cost optimisation combined with high levels of long-term asset performance requirements. The City elected to assume financing risk given its lower cost of capital, resulting in a reduction in both the availability payments payable by the City and the water rates chargeable to the City’s residents.

2. Decarbonisation 

Decarbonisation of transportation has been front and center of public policy with the electric vehicle industry being a key focus. At the State level, in December 2023 Delaware became the 13th state to adopt California’s Advanced Clean Cars II regulation, which establishes minimum sale targets for zero emissions vehicles ranging from 35% in 2026 to 100% in 2035. At the Federal level, in April 2023 the US EPA proposed ambitious pollution standards for light-, medium- and heavy-duty vehicles for model years 2027 through 2055. Meanwhile, since 2022 several automakers have voluntarily adopted electrification targets.

The IIJA targets the development of 500,000 EV charging sites by 2030, with USD7.5 billion in funding for EV charging infrastructure from 2022 through 2026, primarily under the National Electric Vehicle Infrastructure (NEVI) programme. The year 2023 was a ramp-up period for charger manufacturers, who had to navigate R&D challenges to meet strict performance eligibility requirements, and States with minimal or no prior EV charging experience, who were called upon to implement the programme. The expectation is that NEVI will be deployed at an accelerated rate in 2024, although market participants await development of a concession structure that will enable greater scale, attract private investment and deliver stable performance, which is key to alleviating drivers’ range anxiety.

The year 2024 should also see more “fleet electrification-as-a-service” (FEaaS) projects. We have seen different models being used in the USA (such as the Montgomery County project with AlphaStruxure, which integrated solar PV panels, battery energy storage and electric bus chargers) and elsewhere in the Americas (eg, the electric bus and charging infrastructure leases for Chilean bus service concessions), and new models will likely evolve.

3. Fiber and Broadband Deployment to Bridge the Digital Divide

Recognising the importance of broadband access as the “fourth utility”, the IIJA earmarked USD42.25 billion to the new Broadband Equity, Access, and Deployment (BEAD) funding programme, which supports broadband expansion in underserved communities (especially last mile and rural areas) as well as community anchor institutions.

As with the NEVI programme, the BEAD programme must be implemented by the states, who are the recipients of the federal grants and must adhere to certain obligations to gain access to BEAD funds, including the implementation of a competitive system for subgrantee selection.

As with EV charging infrastructure, there are significant challenges to scaling broadband infrastructure implementation and unlocking private financing in the sector. However, the P3 model and its concession approach could provide a powerful method to minimise utilisation of public subsidy dollars while delivering long term, stable service delivery.

4. Transit and TODs 

While road transportation P3s faced headwinds in 2023, the number of transit projects in the USA increased by more than 50%, with 10 projects more in 2023 than 2022. This is partially attributable to the TIFIA 49 initiative implemented by the USDOT in October 2022.

The Transportation Infrastructure Finance and Innovation Act (TIFIA) program is a low-interest, long-term credit program designed to leverage private co-investment and subordinate public investment in transportation related projects of national or regional significance. The TIFIA 49 initiative increased the borrowing limit under the TIFIA program from 33% to 49% of eligible project costs for both transit and transit-oriented development (TOD) projects.

TODs are projects that integrate land use and transportation planning to further the development of communities near public transit. They involve developing mixed use properties within walking distance of transport infrastructure to both increase ridership and capture value from land adjacent to transport infrastructure. TIFIA loan-eligible TODs must improve or build public infrastructure that is either:

• located within walking distance of, and accessible to, a fixed guideway transit facility, passenger rail station, intercity bus station or intermodal facility; or

• for economic development, including commercial and residential development, and related infrastructure. We expect a significant increase in TOD projects, including as a way to manage the existing housing shortage.

5. Lower Volume of Transportation P3s 

We expect the volume of transportation P3s to remain low in 2024 with US transportation authorities digesting the high level of funding provided under the IIJA and continuing to refine procurement plans. Contractors have been reluctant to price construction risks against a backdrop of aggressive risk allocation and while high interest rates have also adversely affected project cost estimates.

These factors have led to use of progressive P3 procurements, which provide a framework for the public and private sectors to establish the project’s design, schedule, cost and risk allocation in a collaborative and transparent manner in an effort to de-risk the project prior to execution of the longer-term, fixed price, date certain concession agreement.