Thursday, 17 January 2019

SID pushes for P3 evolution

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  • Karl Reichelt, EVP, Skanska Infrastructure Development

Skanska Infrastructure Development won two of the largest P3 deals in the history of the US market with the 1-4 Ultimate Project and the Midtown Tunnel, both closed within the past two years. As the group moves forward with a significant but disciplined pipeline of investments, its leader is pushing for financing mechanisms that can move the entire market forward. By Alison Healey.

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Founded 1887 in Sweden, Skanska is a project development and construction group, operating for more than 125 years and now in not only selected home markets in the Nordic region, but also other European countries and in the Americas. Headquartered in New York, Skanska has expertise in construction, civil infrastructure, public-private partnerships and commercial development initiatives.

The company is organised around three development units: residential, commercial and infrastructure. Skanska has been incorporated in New York since 1971 with 39 offices across the country, averaging 80 years in operation and more than 9,600 US employees. The company is listed on the Stockholm Stock Exchange.

Skanska Infrastructure Development (SID) is the PPP business within the company that identifies, bids, and delivers projects through a P3 model. Skanska has been doing infrastructure development for more than 20 years but has only focused on the US for eight, starting with five people and now up to 32. In North America P3s the firm was considered an early player and has been steadily growing.

Skanska invests its own equity and secures financing for public-private partnerships with the goal of providing a sustainable, one-of-a-kind project that is fully delivered and exceeds the client’s and society’s expectations.

The firm is distinguished from many others in the market by its equity investing component.

“Skanska offers what I call the ‘full house’ of the PPP value chain,” said Karl Reichelt, EVP. “We can take on the project development, the design-build construction, the equity investment and project financial arrangement, as well as the entire O&M profile. So we back our promise via construction and equity investment in PPP projects. There are very few such players who can make that kind of offer to clients.

“Further, we are a major force in the US market and in the case of Skanska Infrastructure Development, we have been at it for more than 10 years, so we are a known, trusted, established player. The success we now have is hard fought, well earned, and gives us hunger for more.”

The I-4 Ultimate Project was the firm’s big win in 2014. The deal was bid for, won and financially closed within the course of the year, with six-year construction to begin in January.

“I-4 is a huge, positive market effect for PPP,” said Reichelt. He pointed out that the deal was the firm’s largest US PPP so far, was eagerly awaited and won through extremely tough competition. He said the transaction was “very positive for Skanska but also certainly and most importantly, Florida. Florida is a true national leader in PPP with Port of Miami Tunnel, I-595, and now, I-4 Ultimate.”

The deal followed the close of the Midtown Tunnel/Elizabeth River deal in 2011/12. Virginia achieved commercial close on the US$2.1bn Downtown Tunnel/Midtown Tunnel/MLK project in 2011. The financing on the project closed in 2012, with a combination private activity bond (PAB)/TIFIA loan transaction. Under the contract, the project company, in which Skanska has a 50% stake, will assume full traffic, revenue and toll collection risk.

The project is now under full Elizabeth River Crossings operation. Tunnel elements have been manufactured and two are in place. The project was rolling along nicely on time and on budget, said Reichelt, and some early issues with tolling were now rectified.

Reichelt leads the American arm of the US$21bn international construction and engineering firm in procuring and advocating for more public-private partnerships (PPPs) in the US. He is responsible for Skanska’s PPP business in North America, where he leads the development, investment, financing, construction and operation of transportation, renewable energy, and social infrastructure projects.

Reichelt joined Skanska AB in January 2006 as executive vice-president for infrastructure development – North America. He serves on the six-member Skanska Infrastructure Development Executive Group, which oversees 130 employees in eight countries, a US$50m annual operating budget, and Skanska’s US$750m portfolio.

In North America, he heads an international team of 31 employees located in seven cities with a US$15m annual operating budget. From 2009 to 2011 Reichelt accepted an additional assignment as head of Skanska Infrastructure Development’s Latin America division and in 2010 his team won the Antofagasta Highway PPP in northern Chile valued at US$400m.

Under his leadership, Skanska has secured US$6bn in PPP projects. His North American team is pursuing an additional US$20bn in PPP projects including the LaGuardia Airport Central Terminal Building in New York, the Purple Line Light Rail project in Maryland, the New Bridge for the St Lawrence River in Montreal, the UC Merced 2020 Campus Expansion in California, the Houston Justice Complex in Texas, the I-70 East in Colorado and the I-66 Corridor Improvement Project in Virginia.

Reichelt’s background provides some unique perspective because he spent a good deal of time on the public side of project procurement. He was a director of federal marketing and government affairs based in Washington, DC, for the law firm of Greenberg Traurig. In that position he advocated the business objectives, policy interests and political priorities of the firm’s clients to the Administration and Congress.

He moved to Greenberg Traurig following a public service career that included three senior presidential appointments and three senior gubernatorial appointments. From January to December 2004, Reichelt served as the Chief of Staff of the United States General Services Administration (GSA), a federal government agency of 13,000 associates that in partnership with the private sector, delivers IT, telecoms, acquisition, real estate, workspace, policy and operational solutions to military and civilian government agencies worldwide.

Appointed by President George W Bush, Reichelt had daily management responsibility over GSA’s three main business divisions, including public building services, federal supply service, and federal technology service, and 13 support offices based in Washington, DC, as well as senior appointed executives heading regional offices in Boston, New York, Philadelphia, Atlanta, Chicago, Kansas City, Fort Worth, Denver, San Francisco, Seattle, and Washington, DC.

Skanska Infrastructure Development is typically operating in six to eight states that are in what the company considers an advanced state of development with P3s and have already awarded projects. The company has its eye on a few others it may target soon, including Massachusetts, which has been assessing market interest in P3 plans for the Cape Cod Bridge and Route Three South Express south of Boston. The state will also explore the possibility of building a connector highway between Route 3 and Route 25. The Port Authority of New York & New Jersey is also on watch. If the LaGuardia deal goes ahead as planned, there are expected to be several more projects considered for a P3 model.

In order for Skanska to bid on a project, it must be able to participate in construction, development, and equity. The project must require a large equity investment, typically with a total project cost of above US$500m.

Reichelt said the social infrastructure market in the US was very attractive for Skanska but noted that to date had been a series of one-off opportunities rather than a steady pipeline of opportunities.

Political risk and the associated setbacks are always a part of the business, Reichelt acknowledged. An example is the Purple Line project in Maryland. The Maryland Transit Administration recently delayed the bid deadline on the proposed light railway between Montgomery and Prince George’s to March 12 from the original deadline of January 9. The move was made to allow Governor-elect Larry Hogan more time to evaluate the US$2.45bn P3 after he indicated uncertainty about allowing it to proceed under his administration. Four teams, including Skanska, are competing for the deal.

Reichelt has found Transportation Infrastructure Finance and Innovation Act (TIFIA) loans and private activity bonds (PABs) to be tremendously effective financing mechanisms to back P3 projects in the US and has recently been supportive of the work of the Performance Based Building Coalition (PBBC), which has been lobbying for tax-exempt facility bonds that could be used for social infrastructure projects.

He would like to see government entities at the federal level focusing on empowering individual state governors to run P3 procurement programmes effectively rather than proposing P3 programmes and federal initiatives such as the National Infrastructure Bank, which he does not feel would do as much to move the market.

In terms of trends, the company is seeing more states active in PPP and sector diversity, with the market no longer limited to toll roads. The availability payment model with large client subsidies was a prevalent approach used now by states, said Reichelt, but by not procuring projects with more market risk and need for higher equity investment, clients were missing out on the full power and value of PPP to solve infrastructure challenges.

“With a new House and Senate in Washington and many new Governors taking office, the prospect of more PPPs seems promising,” said Reichelt. “Perhaps the ‘talk’ of PPP becomes more the ‘walk’ of PPP because the newly elected officials will want to get things done, to make progress. PPPs are a perfect option for project acceleration, job creation, economic growth, private investment, cost savings, life quality improvements and plain old progress toward solving America’s infrastructure crisis.”



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