What do renovations at San Juan’s Luis Muñoz Marín International Airport and LaGuardia Airport, and replacement of the Tappan Zee Bridge all have in common? Each was procured using a successful, high-profile, public-private partnership (P3) financing model used in project development and finance.
Such multi-billion-dollar infrastructure projects coordinate governmental or agency objectives with private sector expertise, skills and services. They require negotiating and aligning risk allocation of countless finance, design, construction, and operational details, which is exactly what Ana Cruz-Backman, assistant general counsel at Kiewit, loves about her job.
Her first exposure to project development and finance came as an associate at BakerBotts, LLP when she worked on a bid for the development of a Venezuelan liquefied natural gas (LNG) terminal. Aside from the intellectual challenges of project finance ventures, she was immediately drawn to working on tangible projects that provide practical benefits, such as access to affordable energy and transportation that can change lives in meaningful ways.
“You can see and touch most P3 projects,” Cruz-Backman says. “When my kids ask me what I do, I can point to a bridge or the road we’re driving on and tell them I helped build it.”
She also enjoys the people she collaborates with in the P3 environment. She characterizes them as having very strong quantitative and networking skills, but also as having an eye toward innovation and finding new, cost-effective strategies that haven’t been tried before.
For Kiewit’s Southwest Calgary Ring Road project, a $1.4 billion, 31-kilometer stretch of six- and eight-lane divided freeway, this spirit was demonstrated by the team’s idea to implement medium-term financing. The alternative to traditional long-term financing saved $700 million and was a major reason the project won a Gold Award in the Financing category of Canada’s 2016 National Awards for Innovation and Excellence in Public-Private Partnerships.
Cruz-Backman attributes her Spanish language skills with providing access to P3 learning opportunities early in her career. Clerking for Judge José A. Cabaranes of the 2nd Circuit Court of Appeals and Judge Juan R. Torruella, Chief Judge of the 1st Circuit Court of Appeals, provided valuable training early in her career.
“As a clerk, I learned to pay attention to detail, and I was exposed to a wide range of issues that would be considered outside the scope of my current expertise, which are strengths when negotiating contracts,” Cruz-Backman says. “I also developed an understanding of what happens when litigation is needed, so I know how to draft contracts to avoid problems and make sure there are adequate provisions if, with the best of intentions, things go wrong.”
“You can see and touch most P3 projects. When my kids ask me what I do, I can point to a bridge or the road we’re driving on and tell them I helped build it.”
To get an idea of the complexity of a typical deal, consider Kiewit’s Goethals Bridge project, which replaced an 85-year-old bridge with a new six-lane, cable-stayed bridge connecting Staten Island, NY to New Jersey. The project was under the auspices of the Port Authority of New York & New Jersey, cost $1.436 billion, and involved four funding sources and six consortium team members.
As a former Math Olympian, Cruz-Backman not only enjoys such complexity, she welcomes opportunities to continue learning from each experience. For example, she remembers when she first heard of total return swaps in the early 2000s when Enron was selling off its assets. More recently, she worked on Kiewit’s bid for Maryland’s 16-mile Purple Line Light Rail Project. The company did not win the project, but Cruz-Backman gained her first experience negotiating a subcontract for an entire fleet of rail cars.
“Every project has a new and unfamiliar component, so you always have a fresh challenge and a chance to learn about something you didn’t know before,” she says.
Although they are becoming more common, P3 projects are relatively new in the US. As a result, Cruz indicates that parties often come into projects with several misconceptions. Among them are that P3s will cost less than traditional design/build projects and will transfer risk economically from the government to the private sector.
These are, in fact, achievable goals, but certain fundamentals need to be in place. First, all parties must be open to innovation and competition. If a government or agency is committed to all of the fine details of pre-defined design and financing structures, there is limited ability for private bidders to offer innovative perspectives that could result in better pricing.
Second, risk can be transferred to private parties, but Cruz-Backman stresses that it comes at a price—and that every effort should be made to transfer risk efficiently, that is, to the party best qualified to address the risk or who can bear the risk at the lowest cost. For instance, a contractor may be the best party for assuming construction risks and insurable risks, but a government contracting authority may still be most qualified for addressing some complex permitting issues, unknown and uninsurable risks. It is much more cost effective for the relevant government contracting authority to retain unknown or uninsurable risks than to try to transfer them to a contractor, who will have to charge contingencies for events that may never take place.
“I do a lot of educating as part of negotiating contracts so that projects will be more successful and owners can achieve the objectives they have in mind,” Cruz-Backman explains. As part of that effort, she frequently has to advise why merely appending a financing requirement to existing traditional design/build contracts is usually a bad idea. The traditional contract forms do not account for items like interest-rate hedge agreement breakage fees, interest-rate benchmarking, and delayed interest costs.
With a trend toward more US P3 projects, Cruz-Backman expects owners will quickly learn to structure deals that maximize their real benefits. She also anticipates more opportunities to shepherd innovative projects that bring real-world benefits to communities across the country.