Financing Gateway & the P3 pipeline


Caitlin Devitt (00:03):
Hi, welcome to the Bond Buyer Podcast. I’m Caitlin Devitt, Infrastructure Reporter at the Bond Buyer. My guest today are Pat McCoy, Deputy CFO of the Gateway Development Commission, and Corey Boock, a P3 attorney with Nossaman who’s going to talk to us about the current P3 landscape. I’m going to have two separate conversations with them, and we’re going to start with Pat. Pat joined the Gateway Commission as Deputy CFO in February of 2023. Before that, he was the longtime director of finance at the MTA, which is well known to our listeners as one of the biggest bond issuers in the market where he managed a $44 billion debt portfolio. Pat’s joining us today to outline the financing for the Gateway Program, one of the largest, and also billed as one of the most urgent public infrastructure projects in the country, which is going to create rail infrastructure between New York, New Jersey and Penn Station and New York City along the busy northeast corridor. 

The Gateway Development Commission was created by New York and New Jersey as a special purpose entity that’s overseeing planning and financing gateway’s first phase. There’s a bunch of different phases and I think Pat will talk to us about it. But the first phase, kind of the heart of it is the construction of a new two track tunnel under the Hudson River, as well as the rehab of the existing two track North River Tunnel. The Hudson Tunnel project alone carries a price angle around 16 billion. So let’s get a closer look at the financing details for this massive and complex project from Pat. Hi Pat. 

Pat McCoy (01:28):
Hi, Caitlin. Thanks for having me today. I really appreciate it. It’s great to be here speaking to the Bond Buyer audience. 

Caitlin Devitt (01:34):
Well, thanks for joining us. So break down the funding structure with contributions from federal, state and local governments. 

Pat McCoy (01:40):
Sure. So as you noted, Caitlin, this the Hudson Tunnel project is forecasted to cost 16.1 billion, and this will be a long construction period due to the complexity of the project. The funding package is going to be funded from a mix of first and foremost federal funding through the US Department of Transportation, and then the local share will be provided by the state of New York, the state of New Jersey Court Authority, and of course Amtrak’s a key player as well. And the Amtrak funding kind of falls into the federal category and because of its strong connection to the federal government, so both states and Antra will share equal responsibility for cost overruns should they occur. 

Caitlin Devitt (02:29):
What do you expect the federal piece of it to end up being if you get everything you want? 

Pat McCoy (02:33):
Sure. So we’re seeking the maximum federal participation, and we we’re doing that by actively pursuing a number of different grant opportunities. Some of those that we have already put applications in for of course include the RAISE program and the mega program. You may recall that President Biden and other senior officials from DOT were here in late January announcing an award of 292 million of a MEGA grant, and that will be used for a portion of the project called the Hudson Yards Concrete casing, which is an integral part of the Hudson Tunnel project. It’s Manhattan portion that kind of crosses part of the Hudson Rail Yards facility and leading into Penn station. So that grant was awarded in January. We’ve also applied for the CRISI grant and we’ll be working on an application to respond to the Federal State Partnership grant, but those are a series of discretionary grants that we’ve been pursuing. But our overarching relationship that we’re pursuing with USDOT is under the Capital Improvements Grant program. We’re seeking a full funding grant agreement. So again, pulling all those different grant funds together, together with the local share is how the overall project will be funded. But because we don’t have answers on a lot of the grants yet, I can’t say that the feds are going to pick up exactly this much and so forth and so on. That will come as we progress our negotiations on the grants. 

Caitlin Devitt (04:14):
Do you expect any munis to be issued? 

Pat McCoy (04:16):
Good question. At this time, we’re not anticipating any bonds. Again, the issuance of obligations by the local partners is intended to be accomplished through the Build America Bureau RRIF Program or Railroad Rehabilitation and Improvement Financing program. And that’s a really a nice program of the DOT that allows for low cost grants that are effectively key to the US treasury rate plus one basis point. And so the local funding will be provided through those grants because they don’t count as federal support. It’s an important distinction with the loan programs. Those are not grants, they’re loans. So that kind of rounds out how the funding broad strokes, how the funding’s going to be put together. If there’s any takeaway from this, it’s again, the GDC with its local funding partners, we’re pursuing every possible grant and to maximize those federal grants and as those grant announcements, those awards are made that just helps us lock down certain elements of the project funding packages so that when we’re, our goal is to be in a position about a year from now to have a full funding grant agreement, to have the RRIF loans all accomplished through a financial close, financial close so that we can really begin the project in earnest. 

Caitlin Devitt (05:41):
And when we’re talking about this different money, we’re talking about the Hudson Tunnel piece of the project, or are you talking about the full thing? 

Pat McCoy (05:47):
We call it the Hudson Tunnel Project or H T P and the Hudson Tunnel Project is really the project that if you look at the easternmost Terminus Penn Station through the Manhattan bulkhead under the river over into New Jersey, and where ultimately that rail line connects up with Secaucus Junction and then Newark Penn Station. So I think you kind of described that in your opening. That’s really the project that we’re talking about here. 

Caitlin Devitt (06:19):
So Pat is there, so far we’ve been talking about the Hudson piece of the project. Is there a price tag on a full gateway program? 

Pat McCoy (06:28):
No, we don’t have an estimate on the full project that extends beyond what I just described as the Hudson Tile Project portion of this. 

Caitlin Devitt (06:37):
Okay, got it. I know President Biden’s fiscal 24 budget was released a few weeks ago, and you could correct me if any of this is wrong. I think it allocates about 700 million in FY 24 appropriations for the projects and then further recommends capital improvement grants, which you had mentioned, I think about 5.85 billion of capital improvement grants in advanced appropriations over the next decade. Is that right? And do you have any comment on that? 

Pat McCoy (07:04):
Sure. Yeah. So we were obviously very pleased to see the president’s budget contain specific items for the Hudson Tunnel project, and as you noted, the president’s budget did include 700 million for federal fiscal year 24 for the project. We were very encouraged by that. It’s obviously a very demonstrates, in our view, a very strong commitment to the project. Obviously the budget still has to go through its normal process and Congress and with respect to approvals and so forth, but we’re encouraged by what we saw coming out of the president’s budget 

Caitlin Devitt (07:41):
It’s him sort of sending a signal to Congress about what he’d like to see. 

Pat McCoy (07:46):
That’s right. 

Caitlin Devitt (07:46):
So why the need for the special purpose entity? 

Pat McCoy (07:49):
Sure. So that is what Gateway Development Commission is. We’re a special purpose entity that fills a, in my view, a very critical role in delivering the Hudson Tunnel project, keeping in mind that the Hudson Tunnel crosses two states, crosses New York and in New Jersey. So clearly there’s a motivation for both states to want this because of the economic activity generated in this region, having both the intercity transportation as well as commuter transportation services delivered by New Jersey Transit through the Hunts Hudson River Tunnel is just essential for this local and regional economy. And so the key stakeholders at both states, New York and New Jersey really came together and I think in a really important way to put this special purpose entity together. It coordinates all stakeholders around a common, well-defined plan. It serves to represent equally and fairly the needs of both states, the interests of both states. And then clearly Amtrak is a critical partner here as well as New Jersey Transit because they are the stakeholders that will be running various rail services through that tunnel when it is complete. And so having a special purpose entity that can coordinate with all the critical stakeholders and represent a singular face to the federal government who’s a critical funding partner here, I think was really well designed with the attention of optimizing the funding package and delivering the project efficiently and on time and on budget. 

Caitlin Devitt (09:34):
As you know, we’re in the midst of some pretty strong economic headwinds or at least economics or uncertainty. We’ve got inflation and labor shortage. How are those challenges affecting the project? 

Pat McCoy (09:47):
Sure, great question, and obviously it’s first and foremost on our mind. What are the economic conditions that we’re going to be battling with as we deliver this project? The reality is that large infrastructure projects like Hudson River Tunnel Project have long construction periods that extend over multiple economic cycles. So our approach to planning and budgeting is to be conservative and to use historical precedent as a guide for conditions that could recur. And then obviously, but most importantly, we rely on inflation indices that are used in the industry. These are what we call the building cost index or the construction cost index. And I would focus your attention to the building cost index or BCI. It includes both a labor component and a materials component. And the one thing we’ve noticed about the BCI is that going back to October when we put together our first draft financial plan for the full funding grant agreement, we had various assumptions in there about BCI. What we’ve seen is those assumptions have come down as we predicted. So I think we’re ticking the right approach in my view, by building in the most commonly used and well relied upon indices for the project. What else can I tell you about that, Caitlin? 

Caitlin Devitt (11:22):
I think that was good. That was sufficient. I mean, we know that it’s an issue that’s affecting a lot of governments. A lot of state and locals are scaling back from even postponing projects as they’re trying to get a handle on it. So I think you talked about key federal grant applications. Those dates are coming up over the year. Is that right? And you’ll be applying, and actually today’s a deadline for one of ’em. 

Pat McCoy (11:48):
Yeah, that’s right. Today it’s a deadline for submission of grant applications for what’s known as the Federal State Partnership for in Interstate Rail projects. And we will be submitting an application for that particular grant today. And as you noted, the various discretionary grant programs that the U S D O T is put out do come with different time periods for when grants are due and different time periods for when grant awards will be announced. And so we’re kind of grappling with some of that sort of timing and uncertainty as we’ve put the full package together. That’s why I can’t give you those precise costs now because until we get the grant picture more locked down, the other pieces aren’t able to be locked down either. 

Caitlin Devitt (12:39):
What’s the size of the grant that’s due today? How much did you ask for? 

Pat McCoy (12:43):
The total pool of funds available under the Fed State Partnership is 8.9 billion. So we’re obviously putting in an application for a sizeable amount of that, but we’re not going to reveal this specific amount now until that we’re not going to talk about that until the application again, 

Caitlin Devitt (13:02):
That’s the program that’s broken down between, there’s the Northeast and then there’s like everybody else. 

Pat McCoy (13:08):
That’s right, yeah. There’s a northeast corridor portion and then there’s a non-northeast Corridor portion as well. And the 8.9 billion relates to the northeast corridor portion of that discretionary grant 

Caitlin Devitt (13:20):
For 2024. 

Pat McCoy (13:21):
Well, the Federal State Partnership grant program doesn’t locked into a particular federal fiscal year, the grant and extend over a number of years. There’s no deadline, if you will, in terms of dollars have to be spent or when projects have to be completed. Those are part the overall package for the project. But with respect to the specific grant, this particular grant doesn’t have a sunset in terms of when you have to spend the money. 

Caitlin Devitt (13:50):
Okay, got it. So any other key dates coming up for the project that we can look for that you want to mention? 

Pat McCoy (13:59):
Yeah, so really our next key date, if you will, or is getting the project into what we call into engineering. And that is an important technical step that we would take together with USDOT. It represents a movement of the project into a more formal phase of negotiation with our federal partners on the full funding grant agreement. And we hope to be into engineering and the coming months 

Caitlin Devitt (14:34):
In the coming months. So at some point this calendar year? 

Pat McCoy (14:37):

Caitlin Devitt (14:38):
Okay. Just to wrap up, I don’t know if there’s anything else you want to add, but maybe you want to tell me why you know guys talk about this as the most urgent infrastructure project, kind of outline the reasons behind that and then anything else you’d like to add. 

Pat McCoy (14:52):
Sure, sure. So the Northeast Corridor in the United States represents about 17% of national GDP. And if you look just at the New York Metropolitan region, it approaches nearly 10% of national GDP. So you’re talking about an area of the country that is vitally important to the economic health of the country. And obviously you’re talking about a part of the country where we have a high density population centers and moving people between these population centers, these big cities, and within the cities is just the reason the Northeast corridor exists. And this particular section of the Northeast corridor brings nearly 24 trains per hour in and out of Penn Station with several hundred thousand revenue passengers per day. And that rep represents real economic activities this region. And so keep in mind that the existing tunnel structures that are relied on for this movement of people in the Northeast corridor was constructed and opened, I believe in 1908. 

So you’re talking about a piece of infrastructure that’s over a century old and suffered severe damage. When Hurricane Sandy hit the region in 2012, it effectively flooded both tubes of the North River Tunnel F Florida ceiling. That inundation of seawater caused additional damage, additional wear and tear on the tunnel, and continues to cause issues that represent slowdowns or stoppages in service that are necessary to get work completed. And quite frankly, the existing North River tunnels represent a potential point of failure that would really present severe risk to the economic wellbeing of the region. And so that’s why Gateway Development Commission in the Hudson Tunnel project is considered such an urgent, urgent infrastructure matter, not just for the region but for the country as well. 

Caitlin Devitt (17:16):
Well, great, Pat, thank you. Very important project that we will definitely be tracking closely and thanks for joining us today. 

Pat McCoy (17:22):
It’s my pleasure. Thank you, Caitlin. 

Caitlin Devitt (17:24):
We just talked with Pat McCoy about the complex and large infrastructure project that is the Hudson Tunnels Project and Gateway, and now we’re going to pivot a little bit to talk about P3s, which is one way, another way to finance large complicated public infrastructure projects. Corey Boock is an LA based partner at Nossaman. Boock has worked with both public and private entities for more than 25 years now. He’s had a emphasis on transportation deals, but he also works in many other sectors including social infrastructure, water and wastewater. Corey, thanks for being here. 

Corey Boock (18:08):
Good morning, it’s privilege to be with you today, Caitlin. 

Caitlin Devitt (18:11):

Well, we’re at an interesting moment for infrastructure, sort of as we heard Pat talk about some of those federal funds. There’s a flood of money unleashed right now by the federal bipartisan infrastructure, and and state and locals are also relatively and a little bit surprisingly, post pandemic with cash with all this money. Who needs P3’s? 

Corey Boock (18:32):
I got to tell you, I love this question as a starter. I think it goes to oftentimes a core misunderstanding about public-private partnerships. Some view P3s as about kind of funding and financing. It’s that bringing that private money to the table where public funds aren’t available. Now that certainly can be part of a P3 and is no question a collateral benefit. It’s not really what a P3 is or should be about in total. In fact, if an agency is simply doing a P3 to quote, get the money, that may not be the right answer for that agency or that project. Instead, what we really think the essence of P3s are about is optimizing risk transfer, shifting what has been very historically inefficient bifurcation between design and construction and operations and maintenance to focus on what we call whole lifecycle costs of a infrastructure asset and about bringing the rigor and efficiencies of the private sector to public infrastructure. 

Now for some agencies, having that more money that you’ve mentioned through infrastructure bill, through the inflation act, and just generally through the congressional acts and the Biden budget, that may in fact lead them to undertake their projects the same way they always have and it may give them an out to continue business as usual, they may think their money’s in their pocket, it’s cheap money and they don’t need to learn any new tricks or change any mindsets or continue doing anything other than that well-trodden path. Other agencies, however, will continue to explore P3s for a number of reasons. I think some of them include, they want to leverage all this wonderful public money to create an even bigger pipeline of projects so they can meet their agency’s missions and infrastructure needs. They see that benefit of that risk transfer and the focus on lifecycle costs, and they see value in what we call greater cost certainty afforded P3 delivery. Now note, I’m not saying necessarily less expensive, that may or may not be the case, but greater cost certainty and predictability for long-term budget than traditional delivery. 

Caitlin Devitt (20:58):
Well, we talked a little bit with Pat about risks tied to inflation and labor shortages and that these are problems that are big enough that they’ve prompted some states and locals to scale back projects or even drop them. Can a P3 help manage some of those risks? 

Corey Boock (21:16):
It certainly is a very challenging environment, and I agree with Pat’s earlier comment from the agency perspective, a P3 does help manage risks and related to inflation and labor, you’re getting ultimately a fixed price for a long-term relationship, including the upfront design and construction and operations and maintenance. And that project company, the private partner, is tasked with managing the risk of inflation and labor costs and labor shortages and like it’s a competitive process with the pricing. So they can’t overcook their assumptions if they intend to win because of the relevance of pricing into the overall equation. Now that said, in the current market environment, it has been very challenging and I think there are owners agencies that are concerned about what assumptions are being built in if high escalators are being put into these bids and how to manage that. So we are seeing some attempts at sharing of risk with use of indexes or things like that for really hyper inflation or significant issues. On the labor shortage side, I would probably put forth that P3s don’t really do much more than a conventional delivery. And these issues have faced have been faced by P3s in the market in recent times.

Caitlin Devitt (23:02):
We’ve been hearing a lot more, at least I’ve been hearing a lot more about P3s and we’ve written a little bit about this, about P3s structured is what what’s called pre-development agreement or progressive P3s bringing, and it seems to me like bringing in the private partner in a much earlier stage. Maybe you want to briefly describe what they are. Let us know, are you seeing more of these, what the benefits are and what does this mean for the traditional design build, finance, operate, maintain structure? 

Corey Boock (23:33):
Great. Well, it’s a great question. We are no doubt seeing more of them at this time. It has become a bit of the flavor of the months or the year. One line of clarification I might make on just for the listeners is that pre-development or progressive P3s don’t by themselves deliver projects. As you said, they bring in the private sector in earlier for collaboration, but they ultimately meet you later negotiation and deal to deliver the project. Still often through that DB F O M structure, it is simply about bringing in that collaboration earlier and leaving that pricing and kind of that final deal for a later time period. So in terms of kind of benefits or challenges of the model, we think it’s really valuable for projects that are less defined, where earlier private sector involvement can help that agency define the project. 

So for instance, we are advising on a project out west where in essence the agency is trying to determine what is the best mode for that project. Is it a monorail, is it a tunnel, is it light rail or what have you? Where among several different locations and alignments should it go. So this is ripe and perfect for that progressive delivery because the private sector can get in there and start helping the agency kind of shape and optimize what the project is is about. Progressive and pre-development agreements are provide for a faster and more streamlined procurement, which can be both less expensive for the private sector as well as the agencies in those AR bid committed finance, D B F O M procurements, which many have become familiar with that process, focuses on advanced technical and financial proposals. They require a decent amount of design estimating and financing activity, all just to put in the bid, takes a fair amount of time, can cost proposers a bunch of money. 

The progressive or PDA procurements are faster, focus more on qualifications and don’t require the level of design estimating or financial commitment just to compete. And then finally, progressive and PDAs, I think one of their core benefits is it can allow an agency and the private partner to help de-risk the project through that early collaboration and investigation. This I think is one of the core reasons that the contracting community really likes the model. It gives them an opportunity to get in, maybe kick the tires, understand the projects and the issues before they have to price and finance it. So maybe I’ll pause there because there are some challenges too, but if we want to talk more about the benefits of which there are many, let me maybe pause. 

Caitlin Devitt (26:50):
Is there a difference between pre-development or progressive? I’m just curious about that. Is that, are those terms used interchangeably? 

Corey Boock (26:59):
I think in the current market they are used fairly interchangeably. The pre-development or PDA vehicle was what we kind of used to call it, and now it’s I think part of the umbrella term. 

Caitlin Devitt (27:14):
Got it. Okay. Well yeah, talk about the challenges. 

Corey Boock (27:18):
Sure. So been talking about how great it is. It’s not all roses and lavender. There are challenges and issues going on most prominently that at the point that that project and collaboration is matured enough to be priced and financed, that agency is really in what we call a sole source and negotiation with that private partner. And there’s not that level of competitive tension in play that generally benefits the agency and pricing. They’re negotiating the deal with that entity. There’s not that competition around them. So there’s that question or challenge of making sure that from the agency perspective that you’re getting a good and fair deal. Now there are some things you can do to try and mitigate this issue, and typically an agency does have off-ramps in which to back away from the deal and go to a later competition. But that becomes a bit challenging after you may have spent a year or two plus years working with a private partner to kind of have to somewhat reach restart process. 

Ultimately it’s a trade off for an agency to and as they consider what is the best of delivery method for the project. And they’re going to have to really consider whether the characteristics of the project’s warrants progressive pre-development versus that committed finance. So going back to where you started, we do not believe D B F O M’S structure is far from dead. Not only do those progressive deals end up in that structure, but if you’ve got a project that’s well defined and understood where there’s been reasonable due diligence available to allow for optimized risk transfer and pricing by the private sector, the hard bid committed D B F O M structure remains quite valid and useful. And again, we’re about to launch just such a project for a client next month in California and the biogas sector. So these deals are happening as well. 

Caitlin Devitt (29:31):
The D B F O M? Correct. All right, great. Well, you brought up that deal, the biogas. Let’s talk a little bit about the pipeline 12, 18 months, what the pipeline look like. What sectors do you think will be the most active? What should we be keeping our eye out for? 

Corey Boock (29:48):
No, I think there is a lot going on. We’re kind of in that sweet spot past the congressional midterms and in the pre-election year, and that’s often when things can really start to hum because people are in that very short window where they’re not looking at the next election. From our experiences in practice and what we see, we’re seeing a variety of sectors. Transportation, which as you mentioned in my bio, is kind of our meat and potatoes for our practice that remains an active area, but with some different twists than what we previously been seeing. We’re not seeing as many pure kind of horizontal highway road type P3s as in the past, but we’re seeing P3s in some different interest areas in transportation such as in transit, which aligns obviously with some of the Biden administration goals. 

Interestingly, we’re seeing agencies with real interest in kind of joint development or transit-oriented development projects, perhaps marrying a rail station or a bus maintenance facility with housing or commercial retail. These types of projects are really quite complex and can lend themselves very well to P3s because of not only that complexity, but because they also have that revenue generating aspect associated with the joint use. So I think that’s an area we’re seeing activity and will continue in the coming year. Water wastewater with particular interest in projects, willing to biogas bios, solids and kind of renewable type byproducts of the water wastewater treatment process where again, there is that some revenue potential or onsite energy uses that are valuable and also kind of fit within kind of the graining of these types of assets. Social infrastructure, courthouses, government centers, stadiums continue. The university space has been quite active with P3s the past couple years and we expect those to continue. 

Some of that housing oriented projects will continue to follow more traditional real estate path lease leasebacks, which arguably are not true P3s, but others will focus again on kind joint use and with research labs, with the commercial retail aspects or research labs which have private sector involvement as well as the university energy related projects continue to be of interest at the university because they’re an important function at the schools, but not the one that’s not really core to their university mission or even their expertise. Now. We do see some potential changes in how those deals are being done there. We see a potential potential trend away from projects like the University of Iowa project that were essentially what we call monetization deals, trying to get a big upfront concession payment to the university. Some of those have been in the news for the wrong reasons lately, and instead, instead, maybe some of those projects are going to focus more about development and expansion of university utility systems rather than that upfront payment, which can put real pressure on both sides to make sure that the revenues are sufficient. 

And then finally, I need of course to mention things like broadband and EV charging as interesting areas, lots of seed money have come out of the infrastructure bill and the inflation bill, so there’s real potential in those sectors. That said, I think right now the P3 market is still trying to get their arms around how these deals might work and be structured. The money that’s being put forth I think will be hugely helpful for the capital side of these projects, getting them in the ground. But then the question remains, will you deals ruling pencil on the revenue and long-term o and M side, many of the federal goals focus in both of these sectors on bringing broadband or charging to underserved or more rural areas. And we just at this point don’t know how these dealers are going to work financially or government subsidization will be required even during the o and m phase. 

And if you take EVs as an example, there are additional issues associated with what additional infrastructure might be necessary to support them, additional generation or transmission to get to the charging stations. Again, particularly in less populated areas, what are those costs? Who’s going to be involved with them and the like. I do think there is a way for these deals to move forward, and I do expect that in the private sector and P3s may ultimately lead the way. Whether those will start to pop in the next 12 to 18 months or take a bit longer, I think that still remains to be seen. 

Caitlin Devitt (35:18):
Okay, great. Yeah, a lot. It’s going to be fascinating to see when we start to see some of those deals hammered out, especially like you said with the EVs and broadband, which are real priorities for the administration and how they end up doing that, but that’s a lot of food for thought. So thank you, Corey. Thanks for joining us. I appreciate it. 

Corey Boock (35:37):
My pleasure. Appreciate the opportunity. 

Caitlin Devitt (35:40):
And thanks to the listeners of this latest Bond Buyer podcast. Don’t forget to rate us, review us and subscribe at For The Bond Buyer, I’m Caitlin Devitt and thanks again for listening.

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