Post on 29-Dec-2015
DC-#1210253 v1
World Bank Workshop: Current Developments in U.S. P3s
Roger D. StarkPartner, K&L Gates1601 K Street N.W.
Washington DC 20006-1600Roger.Stark@klgates.com
202/778-9435
June 18, 2008
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OVERVIEW
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Summary of Presentation
Focus first on strategic objective, then on process Background on public finance and key paradigms Legal constraints on P3s Elements of successful P3s Conclusions
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Background on P3s, Public Financeand Key Paradigms
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Combination of public and private finance components
A formula for success – due to the unique contributions available from each participant Governmental power
Eminent domain Taxing power Access to tax-exempt financing
Private strengths Construction expertise Equity investor Private procurement Private management
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Key Elements of a P3
Contracts awarded based on “value for money,” not lowest bid
Capital or capital-equivalents provided by public and private parties
Reliable, long-term commitments Flexibility in structuring contractual arrangements to
best suit the economic, operational and policy goals of the parties
Assets with relatively high residual value
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“Traditional” Finance Paradigms
In the corporate world, capital is raised through equity as well as debt offerings
In the public sector, capital is raised primarily through the issuance of long term debt – bonds – in order to accomplish specific projects. Most public sector debt has an amortization term of 20-30 years; most debt is amortizing – often on a level payment basis
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Recent Developments
Increased Budget Constraints at the Federal, State and local level
Mistrust of merchant projects/market projections
Degradation of municipal credit quality Heightened attention to regulatory and
political risks
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Structural Paradigms
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Municipal Finance
General Obligation Municipal Bonds (tax exempt, indenture trustee)
“Private Activity” Revenue Bonds Lease Purchase Certificates of Participation (“non-
appropriation risk,” “essential services”)
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Tax-Exempt Financing
Debt issued at lower interest rates, because the recipient does not include the interest in federal gross income
The structure of the debt is limited primarily by state law. Debt may be fixed rate, variable rate, auction rate, credit enhanced, un-credit enhanced, senior or subordinate lien
Bond insurance used to be a major factor in project financing and public private partnerships
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Tax-exempt lease purchases
Public partner enters into a long term agreement: Providing for payments over time Public participant has management of and control
over the asset during the term of the lease At the end of the lease term, public partner may
acquire title to the property
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Conduit Financing
The public partner may participate as an issuer of debt solely to provide access to tax exempt financing
Public partner does not provide any direct financial support (i.e. taxes, revenues other than project revenues) to the project
Bond Repayments
Project Trustee
InvestorsGovernment Issuer
Trust agreementBond proceeds
Proceeds to pay cost
Revenues from project
Bonds
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Partnership Financing The public partner may participate not only as an issuer, but also with a source
of governmental revenues – governmentally imposed Special excise taxes Customer facility charges Incremental tax revenues Utility revenues (special revenues)
Project Trustee
InvestorsGovernment Issuer
Trust agreement
Bond proceeds
Proceeds to pay cost
Revenues from project (may be secondary or absent)
Bond Repayments
Bonds
Govt. revenues
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63-20 Financing Option
What it is: A mechanism created under federal tax law (Rev.Rul. 63-20; Rev. Proc. 82-26) that permits nonprofit corporations to issue tax-exempt debt
How it works: Nonprofit corporation established under state law issues tax exempt bonds; proceeds used for a desired project; the nonprofit corporation is obligated to repay the debt from identified and pledged sources
Applications: Unlimited, but particularly helpful in the P3 context
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Legal Counsel
Design Engineer
Investment Banker
Revenue Modeler
Accountants
Rating Agency(ies)
Parent Guarantor
O&M Provider
Sponsors Senior LendersTerm Notes -Banks -Public -Institutional InvestorsBank Revolver/LC Facility
Subordinated Lenders
Subcontractors
Equipment and Material Suppliers
EPC Contractor
Parent Guarantor
WarrantiesPerformance Guarantees
Equity InvestmentShareholders Agreement
Project Input ContractFixed PriceEPC Contract
Offtake Agreements/Concessions/Project Agreements
O&M Agreement
Guarantees or
SupportPayingAgent
CollateralAgent
Funding Company
Passive EquityInvestors
Insurers
Supplier
Legal Counsel
Independent Engineer
Market Consultants
Insurance Consultant
Project Company
Offtake Purchaser(s)
ParentGuarantor
Subsidiary Infrastructure(e.g., rights-of-way)
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Typical PFI Structure
Procuring Authority
Project Company’sShareholders
Project CompanyProject Company’s
Lenders
D&BContractor
OperatingContractor
Lender’s DirectAgreement
Loan andSecurityDocuments
Key: = contract = flow of money
Project Agreement
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Risk Mitigation Paradigms
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Risk Mitigation (Lender Goals)
Mitigation of Construction Risk Reliable cash flow/credit quality—off-take
and Concession Agreements (non-appropriation risk?)
Mitigation of market risks Mitigation of political risk (“essential
service”?) Bilateral contracts that integrate market
requirements and mitigate market risks
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P3 Risks
Political, regulatory and change of law risk Additional costs of project oversight, documentation
and execution may exceed savings from efficiencies Market projections fail to pan out
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Design Bid Build
Private Contract
Fee Services
Design Build
BuildOperateTransfer(BOT)
LongTermLease Agreement
DesignBuildFinanceOperate(DBFO)
Build OwnOperate(BOO)
Other InnovativePPPs
PUBLIC Responsibility PRIVATE Responsibility
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Legal Constraints on P3s
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Legal Constraints on Public Private Partnerships
Legal constraints generally arise as a result of the participation of a “public partner”
Why? -- Unlike private enterprise, public agencies are entirely creatures of state law. They have only those powers that are granted by a state constitution and by the state legislature. The power of a state legislature is plenary The state constitution limits the powers of a state legislature As a result, any party dealing with a public agency is required to
be aware of the constraints of state and local law. Any exercise of power by a local government beyond its express grant of authority (or that necessarily implied) is void. Let the private party beware.
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Lending of Credit
Most often (but not always) found in a State Constitution. In order to protect the taxpayers from their elected representatives Prohibits gifts of public funds to private parties Prohibits lending of public credit to benefit private parties Prohibits the acquisition of stock
Effect of limitation Generally limits the ability of a public agency to be a “partner” with
private enterprise Prohibits public agency from guaranteeing the performance of what is
essentially a private function The public agency is limited in its ability to participate in the “upside”
and the “downside” of a business venture
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The Role of Government
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Checklist for Government Support Arrangements
Determinable Tax Liabilities (“PILOT” Agreements)
Credit Support for Governmental Obligations
Assistance in Obtaining Governmental Permits/Approvals
Mitigation of Change of Law Risks
Mitigation of Uninsurable Force Majeure Risks
Priority or Parity on State-Controlled Facilities (e.g. port facilities)
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The Way Forward: Role of Government
Traditional Government Financing Governmental grants/Revolving Funds/“63-
20” corporations to attract private capital P3 Structures Transaction-specific innovation
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Why do P3s succeed and why do they fail?
Politics/philosophical misunderstandings and differences Key public/private distinctions
Constituencies: Shareholders vs. the general public Control: Shareholders vs. state legislature Motivation: General (and often unrelated) political issues (affecting the public
partner) vs. internal political issues (affecting the private partner) Sunshine Effect
Negotiations with a public partner invite public scrutiny Public records issues Public notice and public hearing requirements
Motivations of the parties negotiating may not be different; however, the reward systems are different
When parties who are not similarly situated are negotiating, the probability of miscommunication is enhanced and the opportunities for mistrust and communication breakdown escalate
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Conclusions
Risk sharing is the essence of P3s Without suitable risk sharing, structural,
legal, and regulatory risks may reduce flow of private capital to infrastructure projects
Existing paradigms must be adapted to accommodate changes in the market
Governmental support central to attracting private investment
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Roger Stark (Washington, D.C.) For more than 19 years, Mr. Stark has concentrated his practice on a wide variety of domestic and international energy and infrastructure transactions. His experience includes complex project and structured financings, mergers and acquisitions, privatizations and all manner of commercial agreements relating to energy and infrastructure. Building on over 10 years of domestic practice involving projects in 12 U.S. states, he has worked in over 16 Latin American countries and numerous other locations worldwide and is fluent in Spanish and proficient in Portuguese. He has structured, documented and/or closed over US$1 billion in complex infrastructure financings, including the first limited recourse electric sector financings in Kenya and Panama (representing the borrower and lender, respectively). He has also worked on a variety of domestic electric generation project financings utilizing conventional and non-conventional fuels (e.g., the two largest waste-tire-to-energy projects in the world and the first gas-fired co-generation plant located on a New York State superfund site).
Mr. Stark’s practice also involves telecommunications and transportation infrastructure transactions and extends to regulatory matters, including advising a major multinational oil corporation on considerations, strategies and tactics for its entry into the electric power business and advising numerous clients on the rules and requirements of various U.S. and international energy regulatory structures. In addition, he has participated in a variety of contested regulatory and litigation/international arbitration matters concerning energy projects. Notably, he participated in a World Bank mission to advise the government of Argentina in connection with the proposed restructuring of its public service concessions after the peso crash of 2001.
J.D., Vanderbilt Law School (1984), B.A., Queens College of the City University of New York (1981)
+1.202.778.9435roger.stark@klgates.com
Speaker Bios
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Questions?
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