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Two recent road projects have been heads in the construction industry and have something interesting in common.
Both the $9.2 billion Interstate 24 Southeast Choice Lanes project in Tennessee and the $4.6 billion state Route 400 Express Lanes in Georgia, use concessions, which allow a consortium in a public-private partnership to benefit from future use fees, such as toll revenues.
In return, the consortium contributes a significant amount of cash to design, build, operate and maintain the roads. For contractors, being part of a consortium can provide them with steady employment and income for decades.
For example, in the case of the Georgia state Route 400 project, the consortium is Peach Partners, made up of Acciona Concessions, ACS Infrastructure and Meridiam, which will deliver and maintain the project in a 56-year public-private partnership. The consortium offers a $3.8 billion grant commission to state DOT to help fund other highway projects as part of the P3 to design, build, operate and maintain the express lanes, according to the US DOT.
JP Villamizar, head of consulting at Newport Beach, Calif.-based GISI Consulting Group, said the two projects stand out as models of how infrastructure projects can go from being a sink of fixed costs for governments to businesses that generate revenue for project stakeholders.
Here, Villamizar talks to Construction Dive about how concession projects benefit builders, whether small and medium-sized businesses are priced out of the option, and what risks contractors should consider when choosing this option.
Editor’s Note: This interview has been edited for brevity and clarity.
CONSTRUCTION DIVER: These two P3s revolving around project participants collecting concession fees are in the news. How do these types of projects work from a builder’s perspective?
JP VILLAMITZAR: It does not change the build strategy or sequencing.
What changes is that they are part of a consortium that includes legal, finance, construction, design, all in a single entity that is investing in this long-term asset and performing all of these functions within that consortium. So the build sequencing, the phasing, none of that changes.
Both are multi-million dollar projects. Are smaller contractors restricted from entering into these types of concession contracts?
It’s going to be very difficult for a single entity to invest in a program and have the scalability from an execution perspective, but also from a capital perspective to go invest in a program like this.
I think that, for these large types of infrastructure, you need to have a consortium of entities that bring different values to this team.
Now, can it be done for small or medium builders?
I think what’s happening with the Tennessee I-24 Choice Lanes and Georgia SR 400 projects is that the whole industry is looking at both right now to see how the model will work and whether it will be successful.
I think industry and states are going to look at different types of projects that don’t have to be mega billion dollar projects, they could be mid-sized or smaller, and they’re going to use that alternative business model to fund their particular project. This would allow small or medium-sized companies to invest in it.
What other kind of projects do you foresee?
We are seeing a lot of interest in the aviation sector in terms of terminal expansions or mega-expansion. We are actually helping a particular client with this aspect right now.
Roads, aviation, highway extensions, railways. I think there are quite a few programs that can take advantage of this kind of business model.
For contractors, in what scenarios would it make sense to be part of a consortium requesting a concession project?
On the contractor side, you’re looking at an opportunity you’ll be involved in for decades. You will be involved in design, construction, maintenance and operation tasks for 30 to 50 years.
JP Villamizar
Authorization granted by GISI Consulting Group
If you look at Tennessee and why this corridor investment makes sense, the population is growing. A lot of economic development is happening around infrastructure. There is a great need for mobility improvements.
When you look at all of that and start doing the financial models and the potential return, it could be a win-win for both the public interest and the consortium.
What challenges or risks should builders consider in this type of concession project?
We are talking about a significant amount of capital.
We just finished a project for a private investor that was part of a consortium for an aviation program. They focused on the capital investment for their owners and what the return will be, but what they really need to focus on is that they are not the technical experts delivering the project.
Thus, investors will do their due diligence and hire or engage or work with a technical advisor to ensure that this investment will be viable, both from a constructability perspective and a budget perspective. These are the elements that contractors really need to focus on.
Anything else contractors should consider?
Risk monetization.
It is important that both the agency and the consortium have a clear and transparent discussion about the cost of these potential risks and where they might be. And if you have that discussion up front on both sides, that’s when a project will be successful.
There are definitely many areas that a consortium should focus on from the public interest and support, such as permits, utilities, right-of-way and long-lead items. Most important in a grant like this is the right long-term revenue model for the program. This is where the real payback will be for them.
There are many caveats on the part of the contractor if they want to make an investment like this.
