Public-Private Partnership Projects · P3s In The News • ENR.com / Engineering News Record –P3s...

Public-Private Partnership Projects

Current Policies

Future Potential

Best Practices

Common Pitfalls

P3 Panel: Bob Chambers

Les Snyder

Geoffrey Stricker

Skip Weiss

Mary Alice McNamara

Edward Fanter

Ernie Brown

Smith Currie (Moderator)

i+icon USA

Edgemoor Infrastructure

Fluor Corporation

Travelers

BMO Capital Markets

Smith Currie

Copyright

This presentation is protected by U.S. and International copyright

laws. Reproduction, distribution, display and use of the

presentation without written permission is prohibited.

©Smith, Currie & Hancock LLP, 2014

©i+icom USA, 2014

©Edgemoor, 2014

©Fluor, 2014

©Travelers, 2014

©BMO, 2014

To Earn CEUs for this Program:

Participants must:

1. Check in with attendance proctor at the door.

2. Attend at least 95% of the session.

3. Complete the post-program evaluation.

4. Complete a brief online assessment with a score of 75% of greater.

Detailed instructions on how to log into AGC Connection to complete the CEU process will be emailed to participants.

AGC of America has been accredited as an Authorized Provider by the International Association for Continuing Education and Training (IACET), 1760 Old Meadow Road, Suite 500, McLean, VA 22102; (703) 506-3275.

Learning Objectives

By attending this session participants will be able to:

Identify common criteria of many P3 Projects

Understand the increased risks on many P3 Projects

Evaluate common hurdles many P3 Projects encounter

MODERATOR: Bob Chambers

Managing Partner

Smith, Currie & Hancock LLP

rcchambers@smithcurrie.com

404-521-3800

P3s In The News

• The Atlanta Journal-Constitution

– Private boost may spur streetcar plan

– $2.3-billion Beltline project, 22-mile transit

“inner circle” – Is P3 a possible solution?

12/16/2013

P3s In The News

• ENR.com / Engineering News Record

– P3s Fuel Construction of Lone Star Lanes

– $5 billion in state funds leverages another

$13.8 billion, for $18.8 billion total in P3

funds

12/23/2013

History of P3s

• P3s are viewed as a cutting-edge approach

• Actually, one of the oldest delivery methods

• The first U.S. Supreme court case was a

dispute over two P3 bridges in Boston

– The year of the case? 1837.

Reasons to Move Toward P3s

PPP Project Structure

P3 Components – Contrasted

with Other Methods

P3 Components – Contrasted

with Other Methods

P3 Components – Contrasted

with Other Methods

Horizontal P3 Projects No

Vertical P3 Projects No

PANELIST: Les Snyder

President and CEO

i+icon USA, LLC

lsnyder@iconusa.com

412-779-3554

AGC P3 Task Force - Intro

• Formed in Mid 2007 to address: – Issues confronting contractors from P3’s

– Legislative activity related to P3’s

• White Paper developed in late 2007

• “Trends and Education” sessions led by AGC in partnership with NCPPP: – “Partnerships for Growth in Infrastructure”

– Charlotte May 2008 & Phoenix January 2009

AGC P3 Task Force

• White Paper, presentations and more

including state by state map of P3

acceptance found at:

• www.agc.org/ppp

AGC P3 Task Force

• January 2009-Held an initial industry forum including Concessionaires, Contractors, Designers and others.

– Identified hurdles and concepts to further the acceptance of P3’s

– AGC’s legislative strengths realized to P3 participants

AGC P3 Task Force

• State of economy in late 2009,

Task Force activity drastically reduced:

– Legislative attention was distracted due to

issues which continue today

– Lagging momentum for use and

acceptance of P3’s

AGC P3 Task Force - Today

• P3 Task Force activities re-initiated:

– Update White Paper; currently in process

– Continuing feedback on P3 acceptance

– Fortify legislative action in the best interest of

expanded infrastructure development

– Reinvigorate efforts to organize an ongoing

industry forum

AGC P3 Task Force - Today

Coordinate activity with other P3 groups:

–

(Association for the Improvement of American

Infrastructure)

–

(Association for the Management and Operations

of Transportation Infrastructure Assets)

–

(National Council for Public Private Partnerships)

AGC P3 Task Force - Today

• Roles for Small to Mid-size contractors in

P3’s

• Education regarding items such as:

– Regional knowledge beneficial to Concessionaires

– Potentially higher costs for proposing

– Contracts differ from that of public entities

– Risk allocation and payment terms

– Opportunities exist in the O&M phases

AGC P3 Task Force - Today

• P3’s NOT the only solution to funding

infrastructure; P3’s offer viable

alternatives for FINANCABLE projects

• In the US, P3’s now mostly used for

horizontal infrastructure; growing use

evolving for social/vertical infrastructure

PANELIST: Geoffrey Stricker

Managing Director

Edgemoor Infrastructure & Real Estate

geoffrey.stricker@edgemoordevelopment.com

301-272-2990

If You Have Done 1 P3 . . .

. . . You Have Done 1 P3

Risk Transference Via P3 Approaches

Key Issues

• Enabling Legislation

• Critical Need vs. “Fishing Expedition”

• Ability to Pay – P3 = Free Money

• External Advisors (or track record)

• Defined Schedule

Contractors View of P3 Projects

The GOOD

• New (in the US) method for delivering

and operating (large) projects

• Higher risk for contractor

• Rewards equal the risk

• For the entrepreneur and

sophisticated contractor

• Contractor is a core competency –

show me what else you bring

• Pool of competition can be smaller

• Banks look at the financial strength

and stability of the contractor with

loan

The BAD

• The pool of players and teammates may

be new

• Foreign contractors that have done this

outside US

• New Developers / New Investment funds

required because of equity component

• It’s a new concept for the state agencies

• Like turning a freighter

• Unconventional Teams

• Not just your architect – but one that can

life cycle for 35 years and have a FM

provider that will take risk

• New Contracting conventions

• Waterfall arrangements – it all flows

downhill

The UGLY

• High dollar chase investment

• Not uncommon to spend $2-3 million

• Public Trust of the Private Sector

• Not unlike Design-build

• Is a Private Company a good steward

and will it hold the same level of fiduciary

liability that a public entity holds

• Financing

• Very heavy Security Package

• Letter of Credits – 5-10% of contract

value

• LDs

• May equal to one year of lost

payments

Social Infrastructure Gaining Traction

Current Market Opportunities

• Long Beach Civic Center

• Houston Justice

• Multnomah Courthouse

• UC Merced

• Indianapolis Justice Complex

Mary Ellen Henderson MS

South County High School

George Deukmejian Courthouse

UCSF Neurosciences

PANELIST: Spencer C. “Skip” Weiss

Vice President and Managing General Counsel

Fluor Corporation

spencer.weiss@fluor.com

864-281-8088

42

Fluor - U.S. Public-Private Partnership

(P3) Experience

Eagle – Denver Commuter Rail Line

SH 130 – Texas

Toll Road

Conway Bypass

I-895 - Pocahontas

Parkway

I-95/395 HOT

Lanes

I-495 Capital Beltway

Express Lanes

E-470 Colorado Toll Road

SR 125 Expressway

Windsor Essex Parkway

E-470 – Colorado Toll Road

E-470 – Colorado Toll Road

Route 895 – Pocahontas Parkway –

Virginia Toll Road James River Crossing

Route 895 – Pocahontas Parkway –

Virginia Toll Road James River Crossing

Eagle – Denver Commuter Rail

Eagle – Denver Commuter Rail

SH 130 – Texas Toll Road

SH 130 – Texas Toll Road

I-95/395 – HOT Lanes

in Northern Virginia

I-95/395 – HOT Lanes

in Northern Virginia

Conway Bypass – South Carolina Coastal

Access and Evacuation Highway

SR 125 – San Diego County,

California, Expressway

A8 – Autobahn, Southern Germany

Windsor Essex Parkway

Windsor Essex Parkway

A59 Freeway – The Netherlands

A59 Freeway – The Netherlands

London Connect – Subway

Communication System

London Connect – Subway

Communication System

I-495 – Capital Beltway

Express Lanes (HOT Lanes)

I-495 – Capital Beltway

Express Lanes (HOT Lanes)

I-495 – Capital Beltway

Express Lanes (HOT Lanes)

65

Fluor - U.S. Public-Private Partnership

(P3) Experience

Eagle – Denver Commuter Rail Line

SH 130 – Texas

Toll Road

Conway Bypass

I-895 - Pocahontas

Parkway

I-95/395 HOT

Lanes

I-495 Capital Beltway

Express Lanes

E-470 Colorado Toll Road

SR 125 Expressway

Windsor Essex Parkway

Eagle – Denver Commuter Rail

I-495 – Capital Beltway

Express Lanes (HOT Lanes)

PANELIST: Mary Alice McNamara

2VP & Counsel, National Accounts

Travelers Bond & Financial Products

mmcnamar@travelers.com

443-353-2130

Local Project Owner (Municipality, Hospital Board)

Design-Construction Entity

(Corporation, JV, Partnership …)

Subcontractor

Design-Construction

Contract

Surety Company

Performance & Payment Bonds

Subcontract

Performance & Payment

Bonds

When you’re bidding this ……..

Don’t forget …….

Government MinistryPolicy or Program

Mandate

Gov’t AdministrativeAgency (I.O., PBC)

Local Project Owner (Municipality, Hospital Board)

Concession Entity(Project Co)

Corporation, JV, Partnership ...

Lender’s Agent or Trustee

Senior Lender(s)

Junior Lender(s)

Design-Construction Entity

(Corporation, JV, Partnership …)

Facility Maintenance &

Operation Entity(Corporation, JV,

Partnership ...

Design-Construction JV participant

Design-Construction JV participant

SubcontractorSubcontractor

Funding CommitmentAdminstrative Support /

Oversight

Project AgreementDesign, construction, maintenance, long-term

operations, hand-back, refinancing

Financing Agreement(s)

Common Terms

Security Docuements(LOC)

Bond HoldersProspectus,

indenture

Rating Agency(s)(S&P, Moody’s)

Design-Construction

Contract

JV or Partnership Agreement

Mandate and Funding

Commitment

Facility Maintenance &

Operation Contract

Interface Agreement

Surety Company

Performance & Payment Bonds

Subcontract

Subcontract

Performance & Payment

Bonds

Owner’s Direct Agreement (PA Assignment &

Step-In)

DB Contractor’s Direct Agreement

(DB assignment and step in)

Limited Recourse Guarantee

Security Document (LOC)

Lenders’ Direct Agreement (PA Assignment and

Step-In)

DB Contractor’s Direct (collateral)

Agreement

PCG

This

Surety Perspective

• State and federal public bonding

requirements

– State “Little Miller Acts”

• State PPP legislation

– Does it include bonding requirements?

– Or, some other form of security?

• SFAA’s PPP model legislation

Surety Perspective

• What bonds or security could be required on

PPPs?

– Performance and payment bonds

– Proposal bonds

– O & M bonds

– Security in form of ILOCs?

• Demand bonds or bonds with liquid components?

– How are they different?

– How does the risk change?

Surety Perspective

• Different kind of risks on PPPs

– How different?

• Liquidity (Demand) alternatives

74

Government

Owner

Sub Contractors

Conventional Model

Taxes, municipal bonds,

gov’t transfers, user fees

Construction

Term

Financing

$$

GC / DB

Contractor

DB

Contract

O&M

Facilities Maint

Contractor

O&M

Contract

Sub

Contracts

Bonds

Bonds

Bonds

Project

Agreement

DBFMO

Project Co

“SPV”

The P3 Model $$

Long-term

Revenue

Stream

Private Equity

Project Finance Loans

Bonds / Instruments

PANELIST: Edward Fanter, CFA, P.E.

Managing Director – Infrastructure Banking

BMO Capital Markets

edward.fanter@bmo.com

212-605-1614

P3 Overview

There is a wide diversity of views on P3s in the government space but the concept is top of mind in almost every state

Part of the diversity is the confusion (in government and the public) over what a P3 is

Some government’s primary focus is on raising cash and those governments have focused on P3’s that are used to sell assets – airports, roads, parking and water facilities have all been in the news

It has generally only been large Municipalities and States that have the resources to mount a greenfield P3 where the asset is being built instead of sold

There is a growing awareness in government circles that if something is being built, the DBB format does not give them politically acceptable outcomes

76

Reallocate risks to the private sector

Revenue/Rates

Construction

Technology

Operations/Maintenance

Lifecycle/Capital Reinvestment

Private Sector Expertise

Timing & Certainty of Delivery

Risk Transfer

Access to top international firms

New technologies

Innovative designs to reduce cost and enhance performance

Operational best practices

Drive value with lifecycle costing

‘Pre-paid’ O&M and Lifecycle

Additional Resources

Minimize use of scarce public resources

Personnel

Monetary

Access private sector capital to reduce/delay public sector

outlays

Debt and equity

Leasing of existing assets often brings large upfront sums

Cost certainty

Projects return to the Public Sector

Accelerate delivery of high priority projects

Streamlined development process

Fast-tracked financing using private sector experience and

capital resources

Government can present that projects are moving forward and

completed

Four Main Benefits of P3

Why Governments Use P3 Methods

77

Ris

k T

ran

sfer

to P

rivate

Sec

tor

0%

100%

Design – Build

Design – Build w/ Operating

Contract

Design – Build – Finance

Design – Build – Finance –

Operate (“DBFO”)

Asset Sale / Full Privatization

Construction elements incorporated into design by

professionals that actually build reducing change orders

Some elements are more efficiently finalized in f ield during

construction, including compressed schedule

Same entity designs and builds, eliminating finger pointing

experienced in DBB

In addition to DB benefits:

O&M elements incorporated into design by professionals

with experience reducing O&M and R&R

Bid can be based on lowest lifecycle rather than just

construction price

Operator can provide international best practices

In addition to DBO benefits:

Additional diligence by debt investors and at risk-capital

provides certainty

Gap financing enables private funds to advance/expedite

project

In addition to DBO benefits:

Additional diligence by debt investors and at-risk capital

provides certainty

Equity at-risk capital provides additional diligence,

international asset management expertise, and incentives

for a better performing asset

Basically the same as DBFO

78

Alternative Description Key Elements

Concession (or Lease) Model – Standard P3 Procurement

Private Financing Required

Spectrum of P3 | Private Procurement Options for New Assets

Government contracts for the design and construction of

assets directly

Mix of interim and completion payments

Government to manage and operate assets

Adds an operating contract with Private sector for

operating the assets post construction

Often operating contract includes a payment penalty

mechanism to ensure performance

Government contracts with Private Developer to deliver

newly constructed assets

Payment at completion or paid over time as lease

Government to manage and operate assets

Government contracts with Private Developer to deliver newly

constructed assets and operate under a long-term

“concession” agreement

Government can (a) pay fixed “availability payments”

quarterly or (b) grant rights to the Private Developer to collect

fees or tolls

30 to 99 year operating period post-construction

Government sells or leases constructed assets to Private

sector

Government may retain some monitoring and enforcement

rights

P3 Concession Model | Contract Structure

79

Project obligations are passed down to DBJV and OpCo through drop-down contracts on a back-to-back basis

with the Concession Agreement

SUBCONTRACTORS

OPERATING CONTRACT

• Drop-down O&M provisions from

Concession Agreement

• Payment deductions for poor performance

SUBCONTRACT

AGREEMENTS

PROJECT CO (LLC)

• Special purpose vehicle

• Ring-fenced

PPP AGREEMENT

• Allows for tolls/fees to be charged; OR

• Availability Payments for performance

DESIGN-BUILD

CONTRACT

• Drop-down DB provisions from

Concession Agreement

• Fixed-price & date-certain

• Liquidated damages & performance security

Design Build Contractor

(DBJV)

Operating Contractor

(OpCo)

Debt Providers

LOAN

AGREEMENT

EQUITY SPONSOR

Third Party Investors

Public Sector

Granting Authority

Contract Structure

Engineering & Construction

Firms

Operations &

Facility Maintenance Firms

Financial Sponsors &

Construction Firms Financial Sponsors &

Institutional Investors City or State Authority

PERFORMANCE

SECURITY

• Limited

Parent Company

Guarantee

• Partial LOC

P3 Risk Allocation Matrix

80

Project risks are allocated to the parties best able to competitively price and manage the risk

Risk Public Sector Project Co DBJV OpCo

Land / Right-of-Way •

Design •

Permitting • •

Construction •

Geotechnical Conditions • •

Archaeological Findings •

Utility Line Relocations • •

Defects •

Revenue/Performance •

Operations/Collections •

Routine Maintenance •

Major Maintenance/Lifecycle •

Force Majeure/Relief Events • •

Termination • •

Change in Law •

Financial Structuring •

Closing Market Conditions • •

Construction Period Risks

Operating Period Risks

Event Risks

Financial Execution Risks

Privately Owned SPV Entities City or State Authority

Transportation has Dominated U.S. P3s

The majority of P3s in the US market have been transportation focused - this is unusual in an international context

The reasons for this include:

DOTs are one of the few departments that have the sophistication to mount complex P3 procurements

Private Activity Bonds and TIFIA are available in the transportation sector

Roads are top of mind for the voting public and it is less difficult to market to the perception of need

Experience on toll road transportation projects is being applied to availability transactions

Growing focus on Transit P3s is an extension of these factors

Other sectors such as water and social infrastructure have not had the benefit of federal programs

There are movements to add the capability to utilize tax-exempt financing to other infrastructure sectors, including social infrastructure

In the meantime, social infrastructure P3s an be financed with taxable debt or tax-exempt debt if utilizing a non-profit model

81

33 U.S. States and 1 U.S. territory that have enacted statutes that enable the use of various P3 approaches for the private development of infrastructure

Home Rule Note: Cities with “home rule” governance such as

Chicago and Pittsburgh are able to enact local P3s without

statewide authorization or approval

States with Authorizing Legislation

States without Authorizing Legislation

States with P3 Commissions

States with P3 Authorization

82

Government P3 Programs

While many jurisdictions have legislation, the level of activity in the market is focused on a few key States

This is a function of a successful new program requiring a ‘champion’ and how a strong starting program creates a long string of transactions

The strength of the P3 format shows its success in both ‘Red’ and ‘Blue’ states

Greater Washington DC – Virginia continues its long history of road projects and is joined by Maryland and DC who are focusing on transit

Texas roads – TxDOT continues to be a market leader in bringing projects to market

Florida momentum – Following a quiet period after the Port of Miami Tunnel and I-595, the state has launched a major road project as well as legislation to kick off a vertical P3 market

Mid-West leaders – Indiana follows its successful ORB project with new transactions, with Ohio launching a number of road projects and Michigan launching a new program with strong support from the Governor's office

Colorado – Continues slow and steady with additional rail and road projects

83

Government P3 Programs (continued)

Honorable mention goes to those who are focused on building but have pursued their own structures:

California – LA is the center of attention with transportation projects in the region and a new vertical project in Long Beach

NY/NJ – A number of road, airport and bridge projects in the NYC region using modified versions of the P3 process

The newest entrant to the market is Nevada with teams selected on the I-15 project.

84

Key Success Factors of the Canadian Model

A number of items have led to the success of the Canadian P3 model

Not all of them were intentional and came from improving on initial errors or from private sector feedback

Success has been at the state level – municipalities and the federal government are only now considering widespread adoption

Success has been focused at the state level

85

Procurement Agency

• A separate agency to shepherd project – avoids legacy

department politics

• Non-political leadership – senior staff drawn from private sector

and career Government employees

• Build project teams that focus on expertise (accountants not

doing capital markets)

• Use VFM studies and fairness advisor to further emphasize

transparency to public and bidders

• Ministry department is the client

Existing Template

• Use existing (European) template to maximize both bidder and

global lender interest

• Complete new projects using the same standardized docs and

experienced staff – matches private sector experience

• Collaborative approach (Bidder meetings) to identify risk

transfer savings – improve on existing documents and refine to

local market

• Release final documents to the public with only major

commercial terms excised

Project Selection

• Start with relatively simple, well supported projects

• Work out the ‘kinks’ before trying more complex projects

• Initially avoid municipal projects where you can’t full direct

process (eg transit, water)

• Create a transparent pipeline of projects - attracts bidders to

set-up locally

Focus on Construction

• Public support comes from perceived problems with cost

overruns

• Clinical (eg doctors/nurses) left out of structure – project not

introduced as a way to reduce or outsource staff

• Support of construction unions mutes opposition of private

sector unions

P3 Project Types

86

Revenue Risk

Private developer collects

user fee revenues from the

project

Availability Payment

Governmental sponsor

makes performance-based

payments to the private

developer

Midtown Tunnel (VA)

635/LBJ Freeway

SR-125

SR-91

North Tarrant Expressway (TX)

JFK Terminal 4

Chicago Skyway

Indiana Toll Road

Pennsylvania Turnpike

Chicago Parking Garages

Chicago Metered Parking

Presidio Parkway

I-595 Managed Lanes

Denver FasTracks

Port of Miami Tunnel

Long Beach Courthouse

Ohio River Bridges

Possible M&A market activity

after greenfield development

completed.

I-595 Managed Lanes

Several portfolio sales in

Canada and Europe

Greenfield Construction

Brownfield Asset Monetization

DBFO Model – Four Project Types

PANELIST: Ernest C. “Ernie” Brown

Partner

Smith, Currie & Hancock LLP

elbrown@smithcurrie.com

800-832-6946

Contracts & Risks

• Shifting Risks to P3 Concessionaire

– Design and Development

– Construction

– Financing

– Operation Risk

Unique Contract Risks

• P3 Concessionaire responsible for:

– Financing

– Permitting and Environmental Compliance

– Intergovernmental Coordination

– Right of Way

– Utility Coordination

Unique Contract Risks

• P3 Concessionaire Responsibilities:

– Dealing with Stakeholders

– Design Approval from Owner

– Construction and any Unforeseen

Conditions

– Life Cycle Operations (30 years)

Typical Contractor Organization

Financing

• Secure Financing

• Maintain Financing

• Construction Price Escalation

• Demand Risk or Operational Expenses

Permitting

• Responsible for NEPA/CEQA

• Lead Agency Responsible, BUT…

• Contractor has Responsibility

Third Party Agencies

• Conditions Set Externally

• Must Secure Consensus

• Must Secure Environmental Approval

• Hide the Ball Tactics

• Beware!

Right of Way

• Owners Traditionally Negotiate

• Eminent Domain Tasks

• Limited Relief Granted by Courts

• Beware!

Utility Coordination

• Identify Conflicts

• Provide Notice

• Relocation Responsibilities

• Perform Relocation

• Beware!

Other Stakeholders

• Satisfying Owner Promises

• Enforcing Promises

• Beware!

Construction

• Construction Cost Increases

• Labor and Material Escalations

• Cost and Time to Develop Solutions

• Differing Site Conditions

• Beware!

Owner “Approval”

• Obtain “Approval” of Owner

• Valid Reasons for Rejection of Submittals

• Beware!

Long Term Operations

• Satisfy Quality Benchmarks

• Additional Risks:

– Premature Obsolescence/New Competitors

– Adapting Services

– Unexpected Costs

– Inputs

– Labor

Q&A