2024 Market Snapshot: Public-private partnership trends and sectors to watch

Federal funding, interest rates, and more current trends

Inflationary pressures on construction costs, combined with the U.S. Federal Reserve’s interest rate hikes, put a damper on activity in the P3 sector throughout 2023 as the increased cost of capital led to a reduction in deal volume. Through the first quarter of 2024, as interest rates remained elevated, the slow pace of activity persisted.  

P3s and project finance transactions were hit particularly hard with the combination of inflation and interest rate increases. “With no deep pocket to rely on, borrowing costs for P3s are higher, because there’s more risk,” Mulvihill said.. “2023 was a frustrating year, and the first half of 2024 feels like a ‘hangover’ from 2023.”

At the same time, thanks to a strong jobs market and robust consumer spending, the broader economy has continued to perform well, and state and local government budgets are generally strong and stable. Assuming inflation continues to moderate and the Fed initiates interest rate cuts in the near term, experts expect that P3 deal volume will rebound in the second half of 2024.

The market for infrastructure P3s is also influenced heavily by federal funding. Provisions of recent legislation such as the Infrastructure Investment and Jobs Act (IIJA, also known as the bipartisan infrastructure bill), the CHIPS Act, the Inflation Reduction Act (IRA), and the American Rescue Plan have earmarked federal funds for infrastructure projects all over the country.

“I think the IIJA will ultimately result in more P3s,” Mulvihill predicted. “Right now, it seems like a lot of public entities are pursuing government funding, but once the ‘easy money’ is claimed, they’ll need to look for other sources.” Explore insights on opportunities created by the IIJA.

While P3 projects come in many forms, Hill expects that decarbonization/energy transition will be a major area of focus in 2024: “A lot of folks are focused on helping universities, hospitals, municipalities achieve net zero emissions,” said Hill.

P3s that support local digital infrastructure projects, such as building data centers and delivering broadband connectivity to homes, schools, and government entities, will also be prevalent in 2024.
 

Growing opportunities in transportation, energy and higher education sectors

Historically, the transportation industry — roads, rail, bridges, tunnels, airports, and marine ports — has been a robust source of P3 activity. In 2024, the Southeast region of the U.S. is driving a significant portion of KeyBanc Capital Markets’ P3 deals in the transportation sector, with active P3 programs in Georgia, Tennessee, and North Carolina.  In fact, both Georgia and Tennessee are expected to begin procuring new managed lanes P3s later this year for the I-285 East Express Lanes and the I-24 Southeast Choice Lanes P3 projects, respectively. Between its steady population growth and a less restrictive approach to labor contracts than in other parts of the U.S., the Southeast is a highly attractive market for transportation P3s.

The energy sector is also a focus for P3 deals this year. For example, the IRA includes substantial funds for electric vehicle charging, but these projects are aimed primarily at creating infrastructure for passenger vehicles. Industry watchers expect opportunities for P3 projects that support EV charging for larger fleets, such as school buses and public transit.

In addition, Mulvihill and Hill expect to see continued momentum for P3s in higher education. For many colleges and universities, student housing is an important competitive differentiator. P3s can support new construction or residence hall upgrades to make existing accommodations more attractive to prospective students. Academic institutions are also exploring P3s to manage their energy infrastructure, and many are investigating ways to monetize their existing non-core assets. 
 

Unlocking value from underutilized assets

Underutilized public assets such as parking, land, office buildings, transit hubs, parks, and housing can be an untapped source of value for owners. A private-industry partner can identify ways to repurpose these assets and extract value, as well as provide support for maintaining or upgrading crucial infrastructure assets when government budgets are tight.

“Asset monetization P3s can be attractive solutions for public entities that are up against financing issues — their resources are depleted, they can’t issue any more debt, and they need to unlock value,” Mulvihill said.

Contrary to common misconception, this does not entail the sale or privatization of these assets: The public entity retains ownership and transfers control and operation to a private sector partner for an agreed-upon period. At the end of the partnership, the public entity can negotiate a new P3 deal or take back operating control of the asset.

For example, KeyBanc Capital Markets recently completed P3 financing for the University of Akron’s parking system. The university entered into a 35-year concession agreement in exchange for an upfront payment of $55 million and upfront capital investment into the parking system of $11 million. Additionally, the University will receive $75 million of cash flow during the concession and $62 million of long-term maintenance investments into the parking system. The private-industry concessionaire will take responsibility for operating and maintaining the parking system, which has more than 9,000 parking spaces, and retains the rights to revenue generated during the partnership.

“There are lots of cities and universities, as well as some hospitals, that are land-rich but cash poor,” Mulvihill said. “They own a significant quantity of vacant land or underutilized office space, and they have a desire to repurpose those assets to extract value.”

Mulvihill and Hill see a P3 market that’s poised to rebound in 2024 as interest rates come down and inflation cools. These deals come in all shapes and sizes. With multiple pieces of federal legislation creating a tailwind for infrastructure investments, as well as the promise of revenue generation for public institutions, opportunities in the P3 space continue to emerge and evolve. 

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