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Public Finance Advisory Ltd. And Their Private Finance Toolkit

Santa Clara has no money for its ambitious new $250 million museum-aquatics-recreation-community center. But the City Council is betting that something called a Public Private Partnership—PPPs or P3s—can conjure up the missing millions for a Central Park complex housing the International Swim Center, the Community Recreation Center and the Swimming Hall of Fame museum.

Last April the Santa Clara City Council approved a $650,000 contract with Project Financial Advisory, Limited (PFAL), which specializes in putting together private deals for public infrastructure construction.

PFAL will design and negotiate public private partnership agreements and term sheets for the center’s design, financing, construction, maintenance and operation, according to the contract approved at the Apr. 4 Council meeting. PFAL will also provide financial advice and project management to evaluate “potential financial strategies and funding,” conduct public opinion research, and “community information outreach” that includes ballot initiative language.


These were the terms of the request for proposals sent out last January to 29 companies, according to the Apr. 4 meeting agenda report. The RFP also specified that the funding methods to be analyzed included (in order listed): special purpose sales tax, general obligation bonds (paid for by property tax), parcel tax, special district assessments, Public Private Partnership financing mechanisms, general funds, CIP reserves, land sale reserve fund, developer fees, stakeholder and future facility tenant contributions, grants and “other.”

Three companies responded to the RFP, and PFAL was chosen unanimously by a “review panel compromised of representatives from the Parks & Recreation Commission, the Silicon Valley Aquatics Initiative, the City Manager’s Office, the Finance Department and the Parks & Recreation Department,” according to the Apr. 4 agenda report. The Weekly has requested information about the committee, as it doesn’t appear in a search of the City website.

Founded in 2012, PFAL has offices in London and San Francisco. According to UK financial filings, PFAL is categorized as a small company with under $8 million in revenue and fewer than 50 employees.

PFAL is part of the DAR Group, a $26 billion multinational engineering project company with Principal Design Centers in Beirut, Lebanon; Aman, Jordan; London, England; Cairo, Egypt; and Pune, India. Privately-held DAR’s principal business operations are in the Middle East, Africa and Asia.

PFAL describes itself as “an independent financial advisory firm that specializes in developing and implementing financial solutions for infrastructure and real estate projects.” What makes it different from an investment bank that the service it provides to clients consists of financial advice that also “incorporates design, engineering, and construction considerations.”

However, a look at the company’s past and current projects shows that all of its public agency projects involve setting up PPP financial deals. The project manager for Santa Clara’s swim complex project, PFAL CEO Victoria Taylor, formerly represented lenders and financiers in 12 of 14 projects listed at PFAL’s website under “Team Experience.”

Half of those projects involved guaranteed payments by the public agency over the multi-decade term of the agreement, eight involved government guaranteed loans, and several made use of financial devices like credit and interest swaps, hedging, letters of credit and other financial “innovations.”

One of the projects was Virginia’s 2012 Capital Beltway carpool toll lanes project on I-495. The construction project met its milestones and the new toll lanes achieved Virginia’s goal of reducing traffic jams and increasing carpooling.

The project is, according to PFAL’s website “the first project in the US to utilize transportation PABs and the first to use bank letters of credit to credit enhance and provide liquidity support for a project financing.”

In return for the financing, Virginia guaranteed the operator, Australian firm Fluor and Transurban, a minimum level of toll revenue—the availability fee. Since the incentive to carpool is not paying tolls, increases in carpooling increased state costs and will do so for the life of on a continuing basis, according to a recent New York Times story.

Public Benefit or Public Risk?

PPPs are getting a lot of attention these days as public treasuries fail to grow at the same rate U.S. infrastructure deteriorates—the American Society of Civil Engineers gives U.S. infrastructure a grade of D+, with an estimated $4.6 trillion needed to improve. But at the same time Americans bemoan their decaying infrastructure, they resist taxes to raise the money to fix it.

PPPs are presented as alternatives that avoid political storms and fill the financial breach with private money. The reasoning is that PPPs can provide money for needed work, quickly—instead of waiting for federal or state grants or ballot measures—freeing constrained resources for other high priority projects.

While “public-private partnership,” can describe any arrangement between a public agency and a private entity to build public infrastructure or deliver public services, it’s used specifically to refer to long-term projects where a private entity finances some or all of the development, and undertakes responsibility for a significant part of the execution, operation and maintenance. This role can include complete privatization.

In return the private partner collects direct revenue from the project—for example tolls, which sometimes are also set by the private partner—or receives tax proceeds to repay bonds and loans. There is usually a guaranteed return—”availability payment”—for investment. If projects fail to deliver the anticipated returns, the public agency is still on the hook for the availability payments, which are ultimately paid by taxpayers and users.

PPPs also offer opportunities for public agencies to issue special kinds of bonds on behalf of the private partners that offer tax-free benefits for buyers without appearing on the public agency’s balance sheet—avoiding impact on credit ratings and official levels of indebtedness.

“It’s misleading to say that [PPP] projects are built by private capital,” said David Besanko, IBM Professor of Regulation & Competitive Practices at the Kellogg School of Management at Northwestern University.

“It’s not free money. The public will pay for the project one way or another.” The long term revenue streams that pay for up-front financing come from public revenues—taxes and user fees—just as it does for public agencies’ bonds and loans.

Another potential PPP pitfall is project “transaction costs”—the costs of negotiating and monitoring contracts throughout the life of the project. These can be very high, Besanko said, because these contracts are much more complex than ordinary public procurement agreements.

Because PPP projects are led by private companies, these deals aren’t necessarily subject to public disclosure and competitive bidding requirements.

“We do have some evidence that [PPP projects] result in lower costs and operations,” Besanko said. “If you integrate design and construction you have fewer change orders.” But, he adds, “the evidence isn’t overwhelming.”

It’s possible those effects might be the results of other things such as more careful oversight. “The jury is out on whether they reduce cost at all,” he said.

The Weekly invited PFAL to discuss PPPs, but as of press time the company hasn’t responded.


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