PUBLIC-PRIVATE PARTNERSHIPS (P3) ISSUES, SOLUTIONS AND WHAT’S NEXT? Chet Mitrani, Executive Vice...

PUBLIC-PRIVATE PUBLIC-PRIVATE PARTNERSHIPS (P3) PARTNERSHIPS (P3) ISSUES, SOLUTIONS AND ISSUES, SOLUTIONS AND WHAT’S NEXT?WHAT’S NEXT?

Chet Mitrani, Executive Vice PresidentWillis North America

September 20, 2012

LBJ EXPRESS

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PUBLIC - PRIVATE PARTNERSHIPS

WHAT IS A PPP?

A Public-Private Partnership is a contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each section (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.

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P3 PROJECTS

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Bluebonnet Contractors, LLC

Ferrovial Agroman / W.W. Webber

Concessionaire NTE Mobility Partners, LLC

Cintra / Meridiam Infrastructure $1.45 Billion

Trinity Infrastructure, LLC

Ferrovial Agroman / W.W. Webber

Concessionaire LBJ Infrastructure Group, LLC

Cintra / Meridiam Infrastructure$2 Billion

MAT Concessionaire, LLC

Bouygues Civil Works / Meridiam Infrastructure

$700 Million

Central Texas Highway Constructors, LLC

Ferrovial Agroman / Zachry Construction

Concessionaire – SH 130 Concession Co, LLC

Cintra / Zachry Infrastructure

Co-Broker with MarshSegments 5 & 6

$1 Billion


CURRENT P3

Fraser Transportation Group

ACS Infrastructure / Dragados Group / Zachry

South Fraser Perimeter RD Project

Vancouver, CA

$700 Million

NTE Mobility Partners – Segments 3A / 3B

Cintra / Meridiam

Fort Worth

$1.3 Billion

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COMPREHENSIVE DEVELOPMENTAGREEMENT (CDA)

1. Current Types Of CDAs Design / Build Pre-Development Agreements Concession Agreements

2. CDA procurement Unsolicited Independent Proposals submitted at TxDOT’s request

3. Project Transfer To TxDOT At the end of the CDA term (Concession) Transfer occurs after construction (Design/Build)

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CURRENTLY EXECUTED CDAs IN TEXAS

PROJECT DESCRIPTION COST OF CONSTRUCTION ($)

1 DFW Connector (Oct-09) Design/Build w/Maint Opt 1.5 billion

2 I-635 / LBJ Freeway (Sept-09) Concession 4 billion

3 North Tarrant Express Seg 1 & 2W (Jun-09)

Concession 1.1 billion

4 North Tarrant Express Seg 2-4 (Jun-09) Master Development Plan 750 million up to 4 billion

5 SH 130 Segments 5 & 6 (Mar-2007) Concession 1.35 billion

6 SH 130 Segments 1 - 4 (2002) Design/Build w/Maint Opt 1 billion

7 I-35 TTC (2005) Master Development Plan 4.4 billion

8 Toll Integrator (2004) Design/Build Raytheon 68 million

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CONVENTIONAL PROJECT DELIVER: DESIGN-BID-BUILD

In the United States, most transportation projects are delivered using the Design-Bid-Build “(DBB”) model

Public Owner Designs project to 100% PS&E Breaks project up into biddable scopes The bidder submitting the lowest responsive bid is awarded the contract Pays invoices out of available tax revenues and/or bond proceeds Operates and maintains project itself or through separate contractor Keeps integration, traditional construction, long term performance and

revenue risks

Private Parties Design the project and perform construction under standard construction

contracts and specifications Have conventional rights to claims and change orders

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CONVENTIONAL PROJECT DELIVER: WHY CHANGE? DBB works well for many projects, but there are situations in which P3s

can offer outcomes not available otherwise Capture private sector innovation early in project development Accelerate project delivery Fix costs / completion date early in design phase Encourage lifecycle cost efficiencies and quality facility performance Shift risks and reduce claims that under DBB are public’s responsibility

P3s can offer more upfront capital formation than muni revenue bonds Tax-exempt bond market has more conservative debt coverage ratios Investor classes are different, offering different risk appetites Private investors are willing to take more risk on toll revenues

performance Tax exempt borrowing rates available through $15B federal PABs

program Accelerated depreciation creates significant value for private equity

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P3 SCREENING AND STRUCTURING

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INPUTSINPUTS SCREENINGSCREENING OUTPUTSOUTPUTS

Project CharacteristicsProject Characteristics

Sponsor PrioritiesSponsor Priorities

• P3 or Conventional

• If P3, Which Type?

• P3 or Conventional

• If P3, Which Type?

P3 Contract Terms

P3 Contract Terms

Competition Structure

Competition Structure

TechnicalTechnical

LegalLegal

RFP Submittal RequirementsRFP Submittal Requirements

Evaluation Criteria

Evaluation Criteria


TYPES OF P3 CONTRACTS

Design – Build – Finance

Availability Payment Concession

Toll Concession

Pre-Development Agreement

Asset Lease

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Supplier Contract

PUBLIC PRIVATE PARTNERSHIPSINFRASTRUCTURECONTRACTUAL STRUCTURE – RISK ALLOCATION

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Equity Sponsor

A

Equity Sponsor

A

Equity Sponsor

B

Equity Sponsor

B

Equity Sponsor

C

Equity Sponsor

C

PROJECT COMPANYSpecial Purpose Vehicle

PROJECT COMPANYSpecial Purpose Vehicle

LENDERS / BONDSSenior & SubordinatedLENDERS / BONDSSenior & Subordinated PUBLIC ENTITYPUBLIC ENTITY

CONSTRUCTION CONTRACTOR

CONSTRUCTION CONTRACTOR SUPPLIERSUPPLIER O&M

CONTRACTORO&M

CONTRACTOR

Sub-ContractorSub-Contractor Sub-ContractorSub-Contractor Sub-ContractorSub-Contractor

Loan Agreement

Financial Covenants, Remedies, Reserve and Insurance Requirements and Flow of Funds

Concession Agreement

Performance requirements, Risk Allocation, Schedule, Force Majeure, Relief Events

Sub-contracts Sub-contracts Sub-contracts

EPC ContractInsurance

Requirements

O&M ContractInsurance

Requirements

Sources and forms of Insurance and Guarantees

Sources and forms of Insurance and Guarantees


TYPES OF P3 COMPETITION STRUCTURES

Competitive Hard Bid RFP requires:

Committed pricing and financing Detailed technical proposal in response to pre-defined project

Award based on value or auction

Best Development and Finance Plan RFP Requires:

Recommended approach to developing and financing project within specified general concept

Qualifications to work as successful private partner Degree of sweat equity and capital committed to pre-feasibility phase

Award based on best plan, qualifications and pre-feasibility cost-sharing

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DESIGN – BUILD – FINANCE

Suitable When Project Is: Close to environmental clearance Sufficiently designed for developer to guarantee price I completion date Not 100°/o designed, to permit developer innovation A gap exists between total project capital costs and identified public funding

sources The timing of available funding is spread over time and does not allow for levels

of upfront capital needed to do the project Savings from accelerated project delivery outweigh cost of private sector

financing

Public Owner Performs conceptual I preliminary design Achieves environmental clearance May provide some, but not all, capital funding

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Public Owner (cont.) Oversees design and construction Operates and maintains the project Keeps long term revenue risk

Developer Designs and builds the project

Assumes integration of design and construction and other development risks conventionally retained by public agencies

Finances the owner's shortfalls in cash flow Provides debt financing via one or more mechanisms (i.e., deferred

payment schedule, contractor loan, subordinated debt, financing of change orders)

Assumes interest rate risk on its financing Guarantees price / completion

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Results In: Greater price certainty with a lump sum price I guaranteed delivery date Cost and time efficiencies Provides owner cash flow financing, as needed

Examples Florida DOT

1-75 Road Expansion Project ($430M) 95 Express ($122M) SR-5 (US-1) Project ($112M)

Michigan DOT 1-69 Reconstruction in St. Clair County ($38M) 1-75/M-21 (Corunna Road) Bridge ($7.3M)

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AVAILABILITY PAYMENT CONCESSIONSuitable When Public owner has identified a dedicated source of revenue for the

project (toll revenue or other source) Public owner desires life-cycle cost efficiencies Public owner wishes to retain direct toll rate setting authority and

collection Revenue or traffic volume is difficult to predict

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AVAILABILITY PAYMENT CONCESSIONPublic Owner - Same as Design-Build-Finance, except: Pays private party based upon project availability and performance

over extended period Liable for fewer claims and change orders than DBF

Developer- Same as Design-Build-Finance, plus: Operates and maintains the project for contract term (35 - 50 years) Assumes life cycle performance risks Primary compensation is through availability payments

May also receive milestone payments from the public owner upon reaching certain construction milestones

May receive federal tax benefits due to deemed "tax ownership"

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AVAILABILITY PAYMENT CONCESSIONAvailability Payments Unitary payments for capital expenditures, O&M expenditures and financing costs

Amount bid by the developer as part of its proposal Made periodically after substantial completion (e.g., monthly) Fixed amount that may:

Be adjusted downward based on developer's performance with respect to quality, safety, lane availability, environmental provisions, etc.

Be adjusted by changes in an index (e.g., CPI) Structure encourages early completion of the construction phase and quality facility

performance

Examples Florida DOT - 1-595 Florida DOT - Port of Miami Tunnel British Columbia MOT - Sea to Sky Highway

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TOLL CONCESSION

Suitable When Project will directly generate revenues Traffic and revenue risk can be efficiently transferred to private

sector Political support exists for private sector toll collection and

enforcement

Public Owner - Same as AP Concession, except: Contributes no or limited public funds to project costs Decides on toll rate setting mechanism over contract life Relieved of all or most toll revenue risk May receive share of toll revenue as/when benchmarks met Possibly receives upfront payment from the developer

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TOLL CONCESSION

Developer - Same as AP Concession, plus: Collects tolls in accordance with rate-setting mechanism Assumes all or most project traffic and revenue risk May share excess toll revenues with public owner

Examples TxDOT - SH 1307 Segments 5 and 6 TxDOT- North Tarrant Express TxDOT - I-635 Virginia DOT - I-95/395 HOT Lanes

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PRE-DEVELOPMENT AGREEMENTS

Suitable When Project not yet completely defined Financial feasibility not yet determined, but preliminarily has good

potential Public owner seeks private sector innovation in defining and

accelerating an optimally feasible project Environmental analysis is in the early stages

Procurement and Award Public owner procures Developer on basis of "best development

and financial plans" Awards contract with two phases:

Initial phase to determine feasibility Implementation phase

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PRE-DEVELOPMENT AGREEMENTS

Initial Phase Public and private partners "co-invest" in pre-development activities Public owner retains complete control over environmental clearance process,

with Developer performance of technical studies Developer participates in project planning and design Developer prepares master financial plan and master development plan Developer may absorb some or all of its initial phase work - "sweat equity" If project proves feasible, Developer has right of first negotiation for the

agreement(s) covering the implementation phase If unable to reach agreement, public owner retains right to separately procure

Implementation phase agreements can take form of: Design-Build-Finance Availability Payment Concession Toll Concession

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ASSET LEASE

Public Owner Leases existing asset to private partner Gets up front payment from private partner (monetizes the asset) Gets facility back at the end of the lease

Private Partner Gets right to any revenues (e.g., fees, tolls) from the facility Implements fees I tolls in accordance with lease requirements Maintains the facility in accordance with lease requirements

Examples Indiana Toll Road ($3.8B up front payment; 75 year lease) Chicago Skyway ($1.8B up front payment; 99 year lease) Pocahontas Parkway (Pay off $500 M of existing debt, upgrade facility and cover other

VDOT expenses; 99 year lease)

Asset leases have been particularly controversial

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CDAs & RISK ALLOCATION

CDAs DELEGATE RISK TO THE PARTIES BEST ABLE TO MANAGE IT.

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Assign to Owner

Assign to Developer

Shared Risk

Concession Program Differs from Design / Build


RISK ALLOCATION & CONTRACTINGALLOCATING OTHER RISKS

Who can best control the risk?

Who can best manage the risk?

Are contractors willing to assume the risk?

How much will it cost?

Right of Way

Utility Relocations

Differing Site Conditions

Force Majeure

Hazardous Materials

Paleo / archaeo / bio

Permits

Railroads

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DIFFERENT PROJECT DELIVERY TYPES & RISK SHARING1

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RISK TYPEDESIGN BID BUILD

DESIGN BUILD

AVAILABILITY PAYMENT

DESIGN BUILD FINANCE O/M (PASS-THROUGH)

CONCESSION FINANCE O/M 50 YEARS

Environmental Approval Owner Owner Owner Owner Owner

Environmental Compliance

Owner Shared Developer Developer Developer

Financing Owner Owner Developer Developer Developer

Design Owner Developer Developer Developer Developer

ROW Acquisition Owner Shared Developer2 Developer2 Developer2

Utility Delays Owner Shared Developer Developer Developer

Construction Shared Shared Developer Developer Developer

Schedule Delays Shared Developer Developer Developer Developer

O & M Owner Owner Shared Developer Developer

Traffic & Revenue Owner Owner Owner Shared Developer

1 Actual Risk Allocation may vary by specific project2 Eminent Domain risks and delays retained by the owner

PUBLIC - PRIVATE PARTNERSHIPS 28

… SHARED RISK ALLOCATION

DESIGN / BUILD D/B/FINANCE D/B/F OPERATIONAL / MAINTENANCE

BUILD-OPERATE-TRANSFER /

CONCESSION

Regulatory Regulatory Regulatory Regulatory

Approvals Approvals Approvals Approvals

Environmental Environmental Environmental Environmental

Customer Acceptance Customer Acceptance Customer Acceptance Customer Acceptance

Design Design Design Design

Traffic / Rev. Traffic / Rev. Traffic / Rev. Traffic / Rev.

Finance Finance Finance Finance

Technology Technology Technology Technology

R-O-W R-O-W R-O-W R-O-W

Construction Construction Construction Construction

O&M O&M O&M O&M

PUBLIC PRIVATERISK TRANSFER BY MODEL


INSURANCE ISSUES FOR DESIGN AND CONSTRUCTION PROFESSIONALS INVOLVED IN A PPP PROJECTInsurability PPP agreements must always be carefully checked against the

professional liability policy In the event that terms and conditions appear uninsurable, make

sure that the Concessionaire understands that their interests – even if for a lesser amount -- are better served by an insured claim that by a potentially larger claim that has no insurance support


KEY PPP PROJECT INSURANCES - INSURANCE REQUIREMENTS

Construction Period Construction “All Risks” Construction “All Risks” Terrorism Soft Costs/Delay in Opening Third Party Public Liability Statutory Insurances (Workers Compensation/EL) Professional Liability (Design and Build) Pollution Legal Liability Auto Liability Railroad Protective Liability


KEY PPP PROJECT INSURANCES - INSURANCE REQUIREMENTS

Operational Period Property Damage “All Risks” Property Damage “All Risks” Terrorism Business Interruption Third Party Public and Products Liability Statutory Insurances (Workers Compensation/EL) Pollution Legal Liability Auto Liability Professional Liability


WHY ARE THESE INSURANCES REQUIRED?

They protect the Public Agency, SPV, Lenders and other parties with an insurable interest in respect of physical loss or damage to Project property/assets earnings and additional costs of the SPV in respect of the

above incurred Third Party Legal Liabilities (bodily injury and property

damage) Without insurance the SPV could not accept the financial

consequences of such risk events occurring


WHY IS THE INSURANCE REGIME UNDER PPP DIFFERENT TO STANDARD PROCUREMENT? The Public Agency, Lenders and others with an insurable interest

sit inside the insurance mechanism as a co-insured taking direct benefit for their separate insurable interest

Insurances to be procured on a project specific basis and not derived from parent company program.

Public Agency guidelines and Lender requirements seek to ensure specific conditions are in place defining the duties of the parties to the Project in terms of the operation of the ‘required insurances’


WHAT ARE THE KEY CONDITIONS OF A PPP INSURANCE REGIME?

Waiver of subrogation (Multiple Insured Clause) Separate policy Waiver of disclosure of material information No obligation for premium payment Additional insured Control of claim monies (Loss Payee) Notification of change in cover Notice of cancellation and subsequent step in rights of various

parties to the Project


PPP INSURANCES –CONSIDERATIONS & SOLUTIONS

Relief Events and Force Majeure Premium increases– who bears the risk? Insurance market capacity and market participants Uninsurability Excesses/Deductibles – who pays? Meeting bid/tender requirements - what level of information is

required – insurance proposals must remain “fluid” and negotiable until final design and construction timetable is known

Cost of insurance – provision for cost of insurance in the Financial Model; prevailing market cost + contingency amounts


PPP INSURANCES – CONSIDERATIONS & SOLUTIONS

Phased completion timetable Overlap of ALOP/BI Pre-existing property Latent Defects Environmental/Contamination issues Contractor’s plant and equipment Terrorism risk Marine/Transit


PPP INSURANCES – CONSIDERATIONS & SOLUTIONS

Uninsurability Definition of trigger of Uninsurability – what is the test? What happens to the risk if it becomes uninsurable

(Termination/Public Agency “insurer of last resort”)


WHAT DOES THIS MEAN FOR THE PROJECT INSURANCES?

Contractor/Lender uncertainty over “the risk of insurance” – cost and availability

Fear of the unknown from insurers on contractual requirements of PPP

No established insurance market experience of some risk exposures through PPP contracts

Unpredictable insurance market cycles Sector specific claims impacting on competitive terms and also

cost provision in Financial Model


RECENT TRANSACTIONS:CREATING MOBILITY OPTIONS WITHIN EXISTING HIGHWAY CORRIDORS

If a public owner is interested in adding managed lanes to an existing facility, it might benefit from comparing two recent managed lanes projects: I-595 Corridor Roadway Improvements Project (Florida DOT) North Tarrant Express (Texas DOT)

I-595 Corridor Roadway Improvements Project Background: Project covers 10.5 miles along I-595 in Fort Lauderdale, Florida Improvements to the existing freeway and interchanges and the addition of

reversible, congestion-priced managed lanes $1.28 construction and 35 years of O&M (both free and managed lanes) First availability payment-based P3 in the United States Florida DOT unable to currently finance the project using DBB Winning price - $275M under Florida DOT estimates (present value) Successful financing despite economic crisis (bank financing)

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North Tarrant Express Background Toll concession and pre-development agreement Phase 1 - 52 year toll Concession

Rebuild 13 miles of I-820/SH 183; add 2 new tolled managed lanes‒ Financing Package - $2.05 B‒ $400M of Private Activity Bonds - 30 year maturity‒ $650M TIFIA credit - 40 year term‒ $570M in public sector funding‒ $427M in equity from private partner (includes $43M from Dallas Police and Fire

Pension System) - First time a U.S. pension fund has directly invested equity in a U.S. P3 project

Remaining Phases - Pre-Development Agreement Texas DOT Goals for Phase 1:

To shift construction, lifecycle, performance and availability risks To shift revenue risk, subject to rate setting restrictions and revenue sharing

Texas DOT used a toll concession to close funding gap Reached financial close December 2009

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Comparison of I-595 and NTE Both are complex, urban projects that involve reconfiguring and

reconstructing existing Interstates to add managed lanes and make other improvements

Contrasting Agency Goals Florida DOT - Maximize project availability (both managed lanes

and general purpose lanes) Texas DOT- Minimize state funding for the project

Availability Payments vs. Toll Concession (Reflection of Goals) Florida DOT - Kept toll revenues and used an availability payment

concession to achieve its goals (first such U.S. deal) Texas DOT- Shifted toll revenue risk to achieve its goals

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CURRENTLY IN PROCUREMENT

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PROJECT CITY LIMITS DELIVERY METHOD

TOTAL COST (4)

1 Grand Parkway SH 99 Houston F1, F2 and G Design / Build w/ Maint Opt

1.5 billion

2 Interstate 35 E Dallas LBJ 635 to Denton Concession or D /B 4 billion

3 North Tarrant Express Ft Worth Seg 3 A and 3 B Concession and D/B/B

500 million

4 The Horseshoe Dallas I 35 I 30 interchange

Design / Build or Concession

600 million

5 Border Highway Loop 375 Design Build


WHAT’S NEXT?

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PROJECT DESCRIPTION

Washington D.C.RFI August 12DDOT

22 Mile Priority Streetcar SystemPotential PPPDesign, Construction, Finance, Ongoing Operations and Maintenance

Allentown, PASeptember 2012Capital Value: $100 Million

Water LeaseCity Water & Sewer SystemPPP – Up to 50 Years

San Juan, Puerto RicoPlanningCapital Value: $360 Million

Light RailPPP5.3 Miles

Odessa, TexasJuly 2012Capital Value: $120 Million

Desalination PlantWater SupplyDesign, Build, Finance, Operations

Ontario, CanadaRFQ September 2012Capital Value: $350 Million

Providence Care HospitalPPPDesign, Build, Finance and Maintenance

Gloucester – Salem, NJRFI November 2012Capital Value: $326 Million

Wastewater Treatment PlantPotential PPP

Universities University of California – Student Housing, HotelsUniversity of Kentucky – Residence HallsOhio State – Parking Garage, LotsUniversity of Arizona – Student Housing

Note: American Water Works Association identified the need for $1 Trillion over 25 years in the drinking water sector and waste water.

PUBLIC-PRIVATE PARTNERSHIPS (P3) ISSUES, SOLUTIONS AND WHAT’S NEXT? Chet Mitrani, Executive Vice...

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