JP Villamizar is the Head of Advisory at GISI Consulting Group
The American express lanes boom is fueling renewed interest the opportunities for public sponsors to take a more commercial approach to infrastructure development and asset management. Up until recently, the number ricocheting back and forth across the infrastructure investment industry was $3.8 billion. That amount was concession fee that the Georgia Department of Transportation garnered when it procured the SR-400 express lanes project north of Atlanta.
Now the industry has a new, even more eye-popping number to bat about: $24.8 billion. That is the amount of concession value that the Tennessee Department of Transportation (TDOT) from the winning proposal team for the I-24 Choice Lanes procurement in August.
The two concession fees aren’t fully comparable; only $1.5 billion of the fee for the I-24 project will be paid at financial close and the rest will come over the life of the concession. Either way, however, it is a staggering amount of public value to unlock via a single procurement.
The recent commercial success of express lane procurements has turned heads in more ways than one. It wouldn’t be surprising if more public sponsors began examining the express lanes model for congestion relief, in particular, but the fact that these procurements have been able to garner significant concession fees for public sponsors opens up an older, broader question about the value that public sponsors could unlock by simply taking a more commercial approach to project delivery and asset management.
To discuss all of these topics, and the commercial opportunities for public sponsors in express lanes and beyond, this month PWF spoke with JP Villamizar. JP is Head of Advisory at GISI Consulting Group and the President of Hill Advisory. He has spent his career advising public agencies, utilities and other large asset owners in both the United States and globally on their long-term capital programs and project delivery.
GISI Consulting Group is an employee-owned consulting and development parent company operating a number of subsidiaries, including Hill International. The company’s advisory work spans a wide range of topics for both public sponsors and investors, including procurement strategy and long-term capital program planning.
(This interview was conducted before the I-24 Choice Lanes proposals were made public)
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JP Villamizar
PWF: Express lane procurements are the sector of the day, but this broader topic of public agencies taking a more commercial approach to the assets they manage or the projects they procure has been around for a while. It still hasn’t really taken off in the United States. For much of your career, you’ve advised public sponsors and regulated utilities with advise on long-term capital investment program planning and management. If more public sponsors start taking a more commercial approach to asset management, how big is the opportunity?
JPV: It is important to answer that from the perspective of the public client, and I think the message from these few datapoints that we get like SR-400 is: the opportunity is bigger than you think. Remember that for SR-400 they thought they were going to have to pay a public subsidy, not get a concession fee, when they were planning it. But they structured the procurement well, they did the commercial structuring work right from the very beginning, and they thought about the project in terms of maximizing public value instead of just minimizing costs. They tested the market, and the market responded! Now that is the new template business case for the industry.
PWF: The numbers are certainly big, but big commercial opportunities for public sponsors have been around for a long time. The SR-400 corridor in Atlanta is certainly an exceptionally congested express lane opportunity, but there are many other public sponsors with similar opportunities that have been around for a while, whether in express lanes or another sector. If the opportunity is so big, why aren’t more governments pursuing it?
JPV: I still think they will, and it is already starting to happen in both highways and other sectors too. Clients in the aviation sector are thinking about their assets and needs not just as projects but as a business case. They are thinking more in terms of broad public benefits – there really is a mindset change happening.
And more importantly, they are thinking about a business case for their projects early and brining in advisors to help early. That is key – path dependency in our industry exists not just because we like the “usual way of doing business” but also because in order to adjust to this more commercial approach to project planning, agencies need to start very, very early in the process. Otherwise it becomes too late to adjust. Procurements like the SR-400 project make it more likely that sponsors will take an early approach to commercial planning in the future.
You’re right that this approach challenges the norm. The way to do that successfully is to do what [the Georgia Department of Transportation] did: start early and have those commercial structuring discussions up front.
PWF: You’ve advised a lot of public sponsors globally that are looking at the same types of procurements or commercial structuring questions that sponsors are starting to examine here in the United States. Are there any lessons or practices that you see globally that you think would benefit the U.S. public works sector?
JPV: Globally the trend of the day is lifecycle asset management and maximizing the public value of projects well past the construction phase. More and more agencies are adopting the lifecycle approach, at least in their rhetoric and objectives, if not always in their practices.
I think some of the best lessons to take from some international procurements is around maintaining the public trust during the development process, especially when taking this more commercial approach. That means not just defining the best model to maximize public value. It also means communicating the benefits clearly and consistency, and then delivering the asset at the cost you promised.
PWF: Sure, there is a big economic opportunity in this transition to a more commercial approach by public sponsors, but people have been saying that for a long time. I don’t even think there is a lot of pushback against that argument anymore. Isn’t the bigger concern around public value capture? Agencies, politicians, and the public want to make sure these procurements capture value for the public instead of turning that growth into profits for investors. Isn’t that the biggest impediment? What can sponsors do to reassure people that a procurement will capture value for the public?
JPV: The key is up front engagement and a programmatic approach: stepping back and thinking about a capital plan as a business case and not just doing straight to the delivery model and financing sources. What is the objective? What are the core risks? What is the public appetite for the program? What is the market interest in the delivery options that we have available? If sponsors take that approach and integrate feedback from the market, they’ll structure projects to not just maximize public value but capture that value too. The problem is that the only opportunity to take that approach is to do so early. You’re deciding on the business case for your project whether you do so deliberately or not.
PWF: The recent express lane procurements are also unique, because more public sponsors have concluded that there needs to be some mechanism by which prices can adjust to meet demand and preserve the free flow of traffic in the express lanes. Even if there are some price caps in the short term, sponsors have included some mechanisms by which they can adjust if the lanes underperform. That changes the game on these concession fees, because they really become a depended variable as opposed to an independent variable that impacts future prices. Does that make the recent express lanes trend unique, or do you think this more commercial approach will expand to other sectors as well?
JPV: I see that shift to pricing demand in high congestion corridors as just one factor that makes express lane projects in particular really unique. I also think there is pent up demand for congestion relief in a lot of cities in the United States that these projects can meet. So I think there are a lot of things coming together that make these projects unique. However, this shift to a more commercial approach to development planning is something that I’m seeing across asset owners, and I think that trend will continue.