Project Finance Q&A with Stanford’s Michael Bennon

Written By: Jen Neville
January 19, 2018

Stanford interviewed Michael Bennon, the Managing Director of Stanford’s Global Project Center, during their Enabling Infrastructure in the United States webinar.

To view the webinar on-demand, click here.

Michael Bennon is a Managing Director at the Stanford Global Projects Center, developing new initiatives for the GPC and managing their student programs and industry affiliations. Michael’s research areas of interest for the center and work experience are in Public Sector finance, infrastructure and real estate investment, and project organization design.

Michael served as a Captain in the US Army and US Army Corps of Engineers for five years, leading Engineer units, managing projects, and planning for infrastructure development in the United States, Iraq, Afghanistan, and Thailand. Michael received a bachelor’s degree in Civil Engineering from the United States Military Academy at West Point and received an MSCE and MBA from Stanford University.


Stanford: Are certain types of infrastructure projects more successful when using public-private partnerships (P3)? Such as toll roads, airports, etc.?

Bennon: Yeah, in general, I would say that the projects that entail more risk are better suited to this procurement model. A project such as a toll road that has funding risks, if there’s not enough drivers for the road that entails additional risk. And therefore, this procurement model is a strong fit for that sector.

Airports are interesting, I mentioned the US is an outlier for this procurement model, and airports is the one sector where the US is probably the largest outlier.

Most airports that are in other international developed economies have been financed using project finance. And in those cases, the remuneration for the investors and the airport are essential, of course, the airline fees that use the airport. But then also, things like parking or rents from the vendors in the airport, so there isn’t necessarily any single sector in which this procurement model is a particularly unique fit. But in the US, at least, it’s mostly been used for toll roads.

Stanford: Could you speak about P3 for aging energy assets, such as central plants? 

Bennon: My discussion was really focused on public infrastructure, so transportation and social infrastructure. But for energy project finance, it is actually been used in the United States and globally at a much higher rate.

So for a P3 with an aging energy asset, I think that is the problem. Or what would need to be addressed in procurement is really the source of funding for the project. If it’s an aging infrastructure asset that requires rehabilitation, the government or sponsoring body for that procurement would really have to identify a funding source. So that might be if it’s an electric utility it might be part of its rate base or some other source of funding for the asset. It certainly has potential, but really it comes down to identifying that revenue stream for the project.

Stanford: Do all public-private partnerships include allowing the private entity to have infrastructure that they can monetize? If there are other options, can you elaborate? 

Bennon: So in general, using project finance, all of the cost to develop an asset and maintain it for the long term are accounted for. So I guess to answer your question, using this procurement model the project has to be fully funded. And the private company that wins the contract. And also importantly, the financer, the source of debt financing for the project is going to really scrutinize this project to make sure it’s fully funded. So by that metric, there has to be a source of actual funding for a project that uses this model.

Maybe I could clarify just that using the P3 procurement model in almost every case, the private partner doesn’t get ownership of the infrastructure asset to monetize it. Usually, it’ll just be a long-term contract. In some cases, there’s privatization so the asset will be transferred in ownership to the contractor, but most cases it’s not.

I guess to answer your question, yes, there does have to be a source of funding if project finance was going to be used.

Stanford: Do you have any examples of grid modernization projects that use P3?

Bennon: Yeah, so this is a relatively new sector. I would say, I don’t have a very good example in the United States of a kind of grid modernization project.

There are some related projects. The state of Michigan recently procured a contract to essentially upgrade its lighting systems on some freeways around Detroit. That would be the source of funding for that project is essentially the energy savings that the state’s going to have over the long term.

And I think that the city of Washington, DC, is also in the process of procuring a street lighting project. Chicago has recently procured a street lighting P3, so I think that’s kind of a related grid upgrade or pole upgrade project with a clear source of funding through cost savings. That would be maybe a proxy.

Stanford: How about elaborating on infrastructure financing for energy, especially distributed energy resources or EV charging?

Bennon: Yeah, I guess the trouble with more distributed projects or EB charging projects for cities, there have been some smaller contracts to do that in the US.

In general, I think those projects to really use project finance or to be procured as a public-private partnership, they usually have to be bundled because they’re generally kind of for smaller scale projects. But the procurement model could certainly be used for those.

I think for new technologies, like sometimes this procurement model, it can be slower to be adopted. In this case, if there’s an EV contractor, I believe it was a distributed energy kind of project, then most likely the source of revenue there, of course, will be energy fees from users of those EV charging stations or from the community. And because it’s a relatively new sector, it’s kind of hard for companies to really forecast that revenue.

So in some cases, I would imagine for an EV project, if a city wants to pursue one of those using a public-private partnership, they might be able to transfer some of that demand risk to a private partner, but also potentially guarantee some payment over the long term for the project. It’s possible, but it’s difficult for some new technologies to really assess demand.


For more insights from Michael Bennon, view Stanford’s Project Finance webinar below:

Dividend Finance energyassets p3