09 Jan 2014
Plenary is a major presence in the Canadian market. It is now seeking to emulate that success in the US. It recently set-up shop in Los Angeles, appointed Dale Bonner as chairman of Plenary Group USA, won its first P3 deal and is bidding several others, so its aims are becoming a reality.
InfraAmericas’ features editor, Michael Dunning, talked to Bonner about Plenary’s US strategy and his views of the US market.
Earlier this year Plenary Group accelerated its drive into the US infrastructure market. Among its key moves in this context was the appointment of Dale Bonner as Chairman of Plenary Group USA. Bonner, among other roles in the public and private sectors, was formerly California’s Secretary of Business, Transportation and Housing.
The expansion into the US by Plenary is part of its wider North American strategy. The firm already has well-established operations in Canada, and the US is regarded as the logical next step.
“Broadly speaking, the timing is right,” says Bonner. “The leadership of Plenary has been in and around the US for some years, watching the market evolve and determined that there are signs of a real market and pipeline, and that now is the time to make a commitment and set up shop here.
“And Plenary has an active management and development model, meaning we are more than just a financial investor. That’s one reason we didn’t set up shop in New York with other financial firms. Our commitment and success in the US will be as much driven by the quality of our project delivery.”
Not being tied to the New York financial centre has allowed Plenary to choose a location for its US headquarters that is more appropriate to what it can offer the market and that is strategically placed in terms of deal pipeline. As such, Los Angeles was an obvious choice.
“There aren’t many large states that will be planning to move as many projects over time as California,” explains Bonner. “The fact of the matter is that on the west coast and south-west in particular, there are still tremendous infrastructure needs. There’s LA Metro – showing strong potential to be one of the biggest P3 programs in the country.
“We think it makes a lot of sense to not only be close to the potential clients here but that it’s a nice beach-head to be active in places like Colorado and other places we’ll be doing business. That’s a key factor in our thinking behind the location.”
Bonner’s appointment at Plenary is a shrewd one. As Secretary of Business, Transportation and Housing (BT&H) for California, he was instrumental in the development of the state’s P3 sector, and furthered that expertise on leaving the BT&H when he founded Cal-Infra Advisors. That experience means he is well qualified to read the fluctuations and nuances of the US’s growing P3 markets.
“We’re not only seeing a continued development of the P3 pipeline, especially in transportation,” says Bonner. “But more importantly, we’re seeing a normalization of the process. There’s been a significant downturn in political risk, where states’ programs are maturing and a more business-like approach is being taken.”
“There’s a realization that earlier workhorse funding programs are still defunct. So states and local governments are looking far and wide for new alternatives. There is also a consistent push on the part of the private sector to invest in the US and make long-term commitments. These are the ingredients for a market to start to take hold.”
The early P3 adopter states have remained at the forefront of the overall development of infrastructure markets in the US. Those states include California, Florida, Texas and Virginia, and each of them is slowly maturing its P3 market by introducing additional reforms. However, outside of these key states, says Bonner, progress is also clearly apparent. In particular, he points out four states embarking on significant P3 programs: Maryland, Colorado, Illinois and Pennsylvania.
“Maryland has passed some good P3 legislation and is already bringing the Purple Line project to market,” he says. “We are closing our first project in Colorado – the US-36 – and they are expecting to bring additional projects to market over the next two years.
“In Illinois and Indiana, there’s the Illiana project. Pennsylvania has just had a big forum with their bridge program they are trying to develop. So, that’s another tier of states that have built their programs over the past year and are now yielding some projects.”
Closer to home, LA Metro’s program in LA County has been making significant waves among US P3 markets. Bonner points out that they are aiming to get their first project off the ground soon but he thinks that some of their larger projects will take more time to get going.
“On their highways projects there are some questions over whether they can bring them to market in a format and with a risk-profile that is palatable and manageable to the private sector. On transit, there are questions about integrating a private operator with the numerous public transit agencies.
“More broadly, if they are looking at this over a very long-term period, it may be the case that some of the projects they are looking at may not be the same projects that eventually come out of the program. The Sepulveda Pass project was not part of their plans but is now a high priority project, for example.”
The vast majority of deals in the US have been in the transportation sector, and the LA Metro program is a case in point. However, recently, there have been signs that a social infrastructure pipeline could develop; the most well-known deal in that area being the Long Beach Court House. However, there are other deals beginning to come to market.
“There are some signs at the local level,” says Bonner. “At the federal level, there’s a broad and growing coalition of industry players who are working with Congress to try to get a new category of private activity bonds for social infrastructure. If that is successful, next year, then we expect it to be a catalyst to move some projects along.
“It’s going to continue to take a bit of time to bring the social market along but there are signs of forward movement. In many cases, public agencies may need to call on general fund or capital budgets to make availability payments. That’s a complex equation as to how to prioritize projects and then move forward.”
The support and interest shown at federal level for developing social infrastructure markets in the US is welcome among P3 advocates. However, its record more generally, at times, is a little more problematic. Uncertainty surrounding the government’s long-term financial and fiscal plans is the biggest elephant in the room. However, an infrastructure finance authority bill was recently introduced, which would involve the creation of an infrastructure bank. There are other areas of promise too:
“There’s federal legislation for both an infrastructure financing authority and WIFIA – a water infrastructure financing bill,” says Bonner. “There’s a lot of inter-agency and inter-governmental learning going on behind the scenes. But how and when that materializes is hard to say.
“People are also wondering whether the federal government will continue to ease some of the rules and regulations in projects that are primarily funded by states, at the local level and private sector.”
There are also some potential issues related to TIFIA. The federal reauthorization bill, MAP 21, is due to expire and there is uncertainty over when the depleted Highway Trust Fund will be refinanced. However, recently, there has been excitement over revised terms for TIFIA extending the program.
“It has been difficult to realize all the benefits of this because there is the challenge of recruiting and integrating a larger workforce needed to administer a larger program,” says Bonner. “And with other organizational changes, the expanded program hasn’t progressed as quickly as the private sector would have liked.
“But fundamentally, the program appears to be solid and so the questions about whether it can staff-up and move as quickly as states are moving with projects, and as quickly as the private sector. It’s encouraging but it will take some time to yield results.
Despite a degree of uncertainty over schemes like TIFIA and, more generally, federal budgets, Plenary’s move into US markets appears to be well-timed. In fact, as Bonner points out, they have done much of the ground work of appointing a team full of P3 experience. As mentioned, they are already focused on closing their first deal – the US-36 in Colorado. They are also bidding the SH-183 in Texas, the I-69 in Indiana, and the Portsmouth By-pass in Ohio among others.
“We are taking a North American perspective, and integrating our teams across both Canada and the US to make sure we deploy all the talent across the organisation,” says Bonner. “In Canada, the priorities are shifting to civil projects – mainly light rail and other transportation projects.
“We’re very well positioned to make major investments in our civil portfolio in the US, allowing us to leverage that experience as the civil market picks-up in Canada. Likewise, as the social market unfolds in the US we’ll be leveraging the track record we’ve built in Canada.”
Plenary, unlike many of its rivals, has more of an integrated approach to the P3 market, which includes acting as a long-term developer, manager and operator of assets. This long-term approach, says Bonner, ensures that the group has a focus on P3s from their inception until the end of the project life-cycle“Not only having the origination team but also working closely from inception with the delivery and asset management teams, who understand the project from day one, facilitates a seamless interface as projects evolve through their various phases,” says Bonner.
“We also have all the major partners at the table from day one. We believe in having the right people on a project from its inception. It’s a recipe we think is proving successful.”
In 2012 Plenary partnered with Caisse de Dépôt et Placement du Québec (CDPQ), a Canadian institutional fund manager. CDPQ pledged to invest a total AUD139.2m (USD137.3m) in five Australian projects, and the two groups entered into an alliance, as part of which CDPQ would consider co-investing in future social infrastructure projects originated by Plenary Group.
“We expect to continue partnering with institutional investors as we expand here in the US,” says Bonner.
On the immediate horizon, for Plenary, and other US infrastructure firms, are the 2014 elections at the federal, state and local levels. Bonner points out that many of the projects that have closed recently or are in procurement are the product of office holders who were elected in 2010 and 2012.
“It’s going to be interesting to see if those approaches and decisions are confirmed by the electorate in a number of key states,” he says. There is potential political risk associated with an election year, so we’ll be watching very closely as projects go forward in 2014.
Looking further into the future, Bonner points out that Plenary is making a very long-term commitment to the US, and, as such, is taking a long-term perspective.
“We are all-in in the US, and expect to grow prudently with the market,” he says. “We are very optimistic about the evolution of the market. But it is too early to assume it will be like Canada and Australia. Fundamentally, we expect progress in transportation and other sectors.
“We are expecting to be very much involved in the West Coast Infrastructure Exchange and other initiatives. We’re committed to doing some of the missionary work as well that’s required to help the market mature. It all reflects our long-term optimism in the US.”
– published 6 January 2014
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