In The News

By Tanvi Acharya, 2/10/2023

Almost 7 years after Pennsylvania signed its first P3 agreement, the Commonwealth reached financial close on another significant bridges project – Pennsylvania Department of Transportation’s (PennDOT) first package of the Major Bridges P3 Redevelopment Package 1 programme.

Like the Rapid Bridge Replacement project, the Major Bridges P3 programme also involves bundling multiple assets in a single transaction. The first package, which is expected to cost $2.3 billion, comprises 6 out of the 9 bridges included in the programme.

John Pickhaver, head of infrastructure and energy capital for the Americas at Macquarie Capital, says: “This project was one of the largest P3s to reach financial close in recent years.”

“It was the largest issuance of private activity bonds (PABs) for a surface transportation project, showing that a pre-development agreement can work and lead to an outstanding result, and do so in record time – without delays to the original project schedule despite a pens-down period.”

Sam Headon, head of infrastructure investment at S&B USA Concession, adds: “It’s a precedent in terms of the speed at which a P3 project can get done. Everyone seems to have assumed that it takes years, but the reality is that if everyone is partnering and organised then you can get it done in same or less time as a traditional DB. We set a new benchmark on how quickly a project can get done when you have true partners on all sides.”

Background
Pennsylvania is home to the third-largest number of bridges in the nation, with more than 25,400 state-owned highway bridges greater than or equal to 8 feet in length. However, with an average age of over 50 years, many of these bridges are in dire need of reconstruction and rehabilitation.

The main funding for PennDOT's highway and bridges – around 75% – comes from federal and state gas taxes. However, with the increasing adoption of fuel-efficient, hybrid, and all-electric vehicles, fuel consumption has been progressively decreasing.

As a result, the state created its PennDOT Pathways initiative to identify, evaluate and implement alternative funding solutions.

The Major Bridges P3 programme was born out of this initiative and approved by Pennsylvania’s Public Private Transportation Partnership (P3) Board in 2020. The programme would accelerate the reconstruction and rehabilitation of 9 major bridges throughout the state.

The 9 bridges selected for in the programme were:

• I-78 Lenhartsville Bridge Replacement Project in Berks County
• I-79 Widening, Bridges and Bridgeville Interchange Reconfiguration in Allegheny County
• I-80 Canoe Creek Bridges in Clarion County
• I-80 Nescopeck Creek Bridges in Luzerne County
• I-80 North Fork Bridges Project in Jefferson County
• I-80 Over Lehigh River Bridge Project in Luzerne and Carbon counties
• I-81 Susquehanna Project in Susquehanna County
• I-83 South Bridge Project in Dauphin County
• I-95 Girard Point Bridge Improvement Project in Philadelphia County

Procurement
In February 2021, PennDOT issued an RFI to gauge interest in the reconstruction and/or replacement of all 9 major bridges across the Commonwealth via a P3. An RFQ was launched the following June seeking a developer to DBFM the project, with a shortlist of 3 bidders was issued that September.

As per the RFQ, the user fees collected on the bridges were slated to be PennDOT’s primary source of funding for availability payments. In the event that user fees would be insufficient to fully fund the availability payments in any given period, PennDOT will use federal and Commonwealth funds to fulfil payment obligations.

Additionally, all construction work was mandated to be performed by contractors prequalified for work in Pennsylvania. At least 65% of the construction work will be subcontracted to firms that can work in the state.

PennDOT selected Bridging Pennsylvania Partners (BPP) as the preferred bidder in March (2022) to DBFM the bridges over a 35 year concession. The team includes:

• Macquarie Infrastructure Developments
• Shikun & Binui Concessions USA
• STV
• FCC Construccion
• SAI Consulting Engineers
• Wagman Heavy Civil
• Joseph B Fay Company
• H&K Group

The procuring authority singed a pre-development agreement (PDA) in May with BPP which stated that the project will be delivered in 2 or more groupings of bridges and related infrastructure.

However, later that month, Commonwealth Court judge Ellen Ceisler ordered a temporary halt on PennDOT’s bridge tolling plans, impacting all 9 bridges that were candidates under the Major Bridges P3 initiative.

The judge supported Cumberland County and a few other municipalities that were challenging the tolling plans as illegal and unconstitutional.

As part of the halt, PennDOT was asked to stop all studies, right-of-way acquisitions, construction, and cancel any planned hearings, meetings or spending.

Later that summer, the Commonwealth Court put a permanent end to tolling plans for certain bridges – including the ones in the Major Bridges P3 programme – claiming that the state administration had violated procedures in getting its plan approved.

A panel of judges ruled in favour of the 3 Pittsburgh-area municipalities – Bridgeville, Collier and South Fayette – which had argued that PennDOT was required to provide an exact list of bridges that would be tolled to the state’s P3 Board when seeking approval for the plan.

It had failed to do so and as a result, the towns could not meaningfully participate in the process before the plan was approved.

Consequently, the state’s P3 law was amended to eliminate tolling of existing free lanes and then PennDOT moved ahead with the bridge projects in the Major Bridges programme without tolling.

“You can imagine if it was a hard bid P3 that had run into these challenges, it would have been a major problem for the project and that’s has happened on other P3s and the outcome has been problematic in some cases,” says Headon.

Pickhaver adds: “The delay required the team and the Commonwealth to work even harder and more collaboratively to hold the initial timelines that PennDOT established. The project was always envisioned as an availability payment, so the removal of tolling didn’t impact the financing – assuming the Commonwealth was able to dedicate other funds to the availability payment, which they did.”

Financing
The Macquarie Capital and S&B USA Concession-led consortium reached financial close on PennDOT’s first package of the Major Bridges P3 Project in December 2022.

The $1.76 billion in PABs were underwritten by Wells Fargo Securities and JP Morgan, and have maturities ranging from 2029 to 2062. These Series 2022 bonds have an interest between 5% to 6% with yield ranging from 3.81% to 5.33%.

Pennsylvania Economic Development Financing Authority is the issuer and the borrower is the Bridging Pennsylvania Developer I (BPD1), which will provide equity of $202 million split:

• Macquarie – $122 million
• S&B USA – $80 million

US Bank Trust Company is acting as the collateral agent and trustee.

Proceeds of the PABs, along with the equity commitment, mobilisation payment, and the milestone payments, will be used to fund the first package of the $2.3 billion Major Bridges project.

Through this project, PennDOT decided to adopt a progressive P3 approach in 2 separate developments under a PDA to improve its bridge infrastructure. The 6 out of 9 bridges involved in the first package are:

• I-81 Susquehanna
• I-80 Nescopeck
• I-78 Lenhartsville
• I-80 Lehigh River
• I-80 Canoe Creek
• I-80 North Fork

The remaining 3 bridges excluded from the package will remain within the scope of the PDA and will be part of another proposal and project agreement.

Headon says: “Ultimately the selection of a PDA as the procurement model for this deal was helpful in managing many of the challenges along the way, in particular the removal of the tolling piece and the significant changes in the capital markets during 2022.

“These issues brought some rethinking from PennDOT into what the right path forward will be, but ultimately the flexible contracting model gave us a lot of space to accommodate and deal with the changes and get to close. Throughout the process there was a lot of time spent with PennDOT and our team to shape what was possible while still preserving PennDOT’s goals for the project.”

Advisers involved in the transaction are:

• Orrick – borrower counsel
• Mayer Brown – underwriters counsel
• Greenberg Traurig – co-bond counsel
• Turner Law – co-bond counsel
• Altus – technical adviser to lenders
• INTECH Risk Management – insurance adviser

PennDOT was advised by:

• KPMG – financial
• PFM – financial
• Ballard Spahr – legal
• Bluebird Advisors – technical