What Does the Future of Public Private Partnerships Look ... · final decisions on projects and who is awarded the projects Unsolicited Proposals only need to be listed for at least

What Does the Future of Public

Private Partnerships Look Like in

Oregon?

AGC’s Annual Business Meeting

Friday January 10, 2014

10:00–11:45am

Dee Burch

President

Advanced American Construction

Buck’s American Cafe

Buck’s American Cafe

John D. Carter

President and Chief Executive Officer

Schnitzer Steel

Public-Private Partnerships

John D. Carter

Summary

• Why are We Discussing Public-Private Partnerships—and What Are They?

• Why Would the Private Sector Participate?

• Why would the Public Sector want Private Sector Participation?

• Variations of the Model

• Examples

• Risk Factors

• Financial Risk Profile

• Mitigation

• Conclusion

Why Are We Discussing Public-Private

Partnerships—And What Are They?

• What Problems are we trying to solve?

• The nature of Public-Private Partnerships

• When do they work?

• What application do they have here?

• Timing

Why Would the Private Sector

Participate?

• Opportunity to participate in a signature

project

• Opportunity to make a reasonable return on

capital and services

• Potential to create a template that has

application elsewhere

Why Would the Public Sector Want

Private Sector Participation?

• Assistance with risk mitigation: – Cost control

– Completion guarantees

– Schedule guarantees

– Innovative assistance in financing

– Potential for engineering improvements and design optimization

– Private procurement flexibility

– Development opportunities to generate offsetting revenue

• Broaden Public Support

Variations of the Model

• Full Privatization

• Public Ownership/ Private Operation

• Public/Private Joint Ownership

• Concession Award

Examples

• Portland’s Light Rail to the Airport • Channel Tunnel • Channel Tunnel Rail Link/Eurostar • London Underground • Meizouwan Power Plant (China) • Polish Motorway • Tacoma Narrows Bridge • Luton Airport (England) • Manila Water System (Philippines)

Risk Factors

• Political Risk

• Funding Risk

• Regulatory Risk

• Completion Costs Risk

• Schedule Risk

• Construction Risk

– Technology

– Management

Financial Risk Profile

• Seed Money Mezz. Debt Long-term • High risk

low risk

Development Construction Operation

Mitigation

• Build public support through an understanding

of why the private sector should be involved

• Include the private sector in incentive

programs to ensure lowest cost funding

• Develop completion costs incentives

• Develop schedule incentives in conjunction

with related public agencies

• Incentivize construction objectives

Selection

• How do you test private sector appetite for

involvement?

• How do you identify likely candidates for

proposals, and ensure competitive proposals?

• Identification of:

– Competitive selection process

– Governance structure

– Regulatory approach

Conclusion

• Not every project is a candidate

• Each project will have unique characteristics

• Financing will determine structure

• Where it works, major advantages:

– New sources of capital

– Long-term advantages in operations

– Public sector resources multiplied

Johnathan Woolworth

Construction Client Advocate

Willis

Groups Active in P3 Project

Skanska

Kiewit Development

Cintra US

Parsons

Walsh Construction Group (Chicago)

Macquarie Group of Australia

PCL Constructors

ACS Infrastructure Development

Lane Construction

Stacy & Witbeck

Lane Construction

Shimick Construction

Honeywell Building Solutions

Types of P3 Delivery Models

Pre-Development Agreement

Design-Build

Design, Build, Finance

Design, Build, Operate, Maintain (DBOM)

Design, Build, Finance, Operate, Maintain (DBFOM)

Long-Term Concession or Lease

Pre-Development Agreement

Early Private Partner Involvement

Starts during the environmental impact phase Projects in early stages of procurement Technically challenging project

Selection based on qualifications and project benefits from this approach or “business case”

Private Business Group may undertake pre-development work at risk, or with shared public sector risk Private Business Group gets first rights to negotiate

development agreement If agreement not reached; public sponsor has fully developed

project to be available for public bid

Design/Build Model

Designer and Contractor hired under a single contract

Selection usually based on best value

Majority of design and Construction is taken on by the Private Partnership

Possibility of Private Sector Innovation

Greater Cost and Schedule Certainty

Public Sector has a single point of contact for the project

Any disputes are usually handled between the contractor and the

designer

Public Entity/Sponsor retains the obligation to fund

Public Entities retain full maintenance and operational responsibilities

Design, Build, Operate, Maintain Model (DBOM)

Very Similar to Design/Build Model

Private Partnership has the long term operational & maintenance

responsibility

Like an extended warranty

Transfers the lifecycle costs to the Private Partnership

DBOM balances upfront capital costs vs. long term maintenance costs

Public Entity is responsible for the revenue collection and financing

DBOM projects are suited for facilities with specialized operational and/or

maintenance requirements

Design, Build, Finance, Operate, Maintain (DBFOM)

Similar to DBOM

Private Partnership is responsible for financing

Public Entity is responsible for the revenue stream

Applicable to both revenue and non-revenue facilities

Suitability

Where transfer of revenue risk may not be the best value for the money

Long-Term Concession or Lease Greatest Risk Transfer Model

Design, Construction, Revenue, Finance, Operations, Maintenance, Capital Renewal

Has the ability to be expanded in size as capacity deems

Public Entity keeps the least control

Rate Setting

Operational/Performance Standards

Payment to Public Entity(s)

Upfront Payment

Revenue Sharing

Unplanned Refinancing

Excess Revenue

Lessons for Contractors & Public Entities

State of Oregon, County, City & Other Public Entity “Golden Rule”

What would the project cost if the “agency” funded the project

themselves?

Things Contractors need to be aware of:

2% to 8% of the overall project value are: design, legal, financing and

other pursuit cost.

Legal clauses of most contract are very restrictive.

No Special Exemption for unforeseen delay or change orders

Penalties for not having the project ready on the exact day can be

up to $100,000 per day.

CALIFORNIA PROS:

Functioning P3 Commission

Public Hearing on Proposed P3 projects

Constant Pipeline of Possible Projects

Procurement Process: RFI, RFQ, RFP,

Selection, Contract process

All Unsolicited Project Proposals are put

out to public bid for competing private

proposals

Delivered the first Civic Building in the U.S.

with use of a P3 delivery model ($492-

Million)

Single Job Focus

CONS:

Confidential one-on-one meetings with the

State of CA and Proposers of Unsolicited

Projects are encouraged.

All Commissioners are Public officials

FLORIDA PROS:

P3 Task Force appointed with a mix of

public employees, private business owners, and citizens

Single job focus

Public Requests for Proposals All P3 projects are up for Public Bid (Both

Solicited & Unsolicited Proposals) o Must solicit competing proposals for

the same job for 60 days after initial publication

Lending Public Funds to Private Enterprises

for existing publicly-owned facilities or infrastructure

CONS:

Laws have only been on the books for 2

years (5 projects completed, 7 under

contract)

Unsolicited Proposals publicly displayed in

a newspaper publication (1 to 2 weeks)

Task Force can set the timeline for bids for

those Unsolicited Projects (min. 21 days

and a maximum of 120 days)

32

TEXAS

PROS:

Overseer of projects managed by current

TX DOT’s Chief Planning & Projects Officer

Notifies the public within 10 days of

receiving a proposal that meets the P3

standards

Procurement process: RFQ, RFP, Selection,

Contract process

Single job focus

CONS:

Comprehensive Development Agreements

(CDAs) are approved by Legislature ONLY

First Project in 2007 - has only been law in

Texas since 2011.

All P3 Commissioners are appointed by the

Governor, LT Governor and House Speaker

VIRGINIA PROS:

One of the oldest states participating in P3

project (Legislative Framework began in 1995) Accepts both Solicited & Unsolicited project

proposals Single job focus All Unsolicited Project Proposals are put out to

public bid for competing private proposals Constant Pipeline of Possible Projects Procurement Process: RFQ, RFP, Selection,

Contract process Seeks Public and affected jurisdictions for

comments & concerns Sets standards of participation of DBE & SWAM

contractors and suppliers prior to contracts being awarded

Virginia’s P3 Agency provides for more than 45 days for competing proposals if they are deemed “complex”

CONS:

Only elected or state officials make the final decisions on projects and who is awarded the projects

Unsolicited Proposals only need to be listed for at least 45 days

The Virginia P3 agency has to publish AT LEAST ONCE in one or more newspapers or periodicals of general circulation in the affected jurisdiction(s).

No definition on what deems a project to be “complex” or not

Chip Hastie

Vice President

Clark Construction Company

PPP / PBI OVERVIEW

Friday January 10, 2014

PPP / PBI Structure Design – Build – Finance – Operate - Maintain

Client

Architect General

Contractor

Design/Builder

Sponsor

Entitlements Land Legal Finance Leasing Facilities

Management

PBI model is used with great

success in Canada

Performance Based

Infrastructure

Partnerships BC

Performance Based

Infrastructure

Established 2002 to develop provincial approach to alternate procurement methods

Serves public agencies through planning, delivery and oversight of major infrastructure projects

40 projects to date: $17B+ in value with $7B+ private capital at risk – Origins in health care and transportation projects

– Includes social housing, justice, energy, education

Infrastructure Ontario P3

Performance Based

Infrastructure

$1.5 B savings on investment of $35 B.

Job creation and preservation estimated at 300,000 over the past three years

New facilities demonstrate higher employee satisfaction levels and working environment

Wait times in Ontario for healthcare concerns has been reduced by new facilities

DBFOM Observations

Projects Enabled + Execution Expedited

Design and Innovation Focused on Owner Interests

Up-time, Life Cycle and Operations Factors

Emphasized

Cash Flow Certainty (government and contractor)

Guaranteed Building Up-time and Upkeep (private

party risk)

Governor George Deukmejian Courthouse

Project Overview Program

• Courtrooms: 31 (+ 6 future expansion)

• Overall Square Footage: 529,000 SF

o 425,000 SF Court

o 7,000 SF Retail

o 97,000 SF County Lease

• Construction Cost: $340,000,000

• Financial Close: 12/20/2010

• Occupancy Date: 8/30/2013

Mission Replace Outdated and Poorly Maintained Courthouse

Calif. Courts Approach

• 2.5 years design & construction + 35 years

operation

• Parking operation & commercial/retail leasing

included

• 100% private capital

• Strong public counterparties

– Judicial Council of California (AOC)

– LA County

Framework and Participants

Calif. Courts Approach

• 11 Consortiums submitted qualifications

• Five teams shortlisted for interview; three selected

for final competition

• Six month competition with multiple proprietary

meetings

• Long Beach Judicial Partners Selected June 2010

• Financial Close December 2010

Solicitation Process

Long Beach Structure Design – Build – Finance – Operate - Maintain

INVESTOR PROJECT

COMPANY LENDER(S)

Design-Builder Facilities

Maintenance

Agreement

& Payment

Equity Debt

Interest in Land

CALIFORNIA COURTS

Capital

Replacement

Architect Builder

Example of PBI Payment Model

PBI Influence on D/B Up-time Risk: Building Layout / Elevators

PBI Influence on D/B Life Cycle: Flooring Systems

PBI Influence on D/B Operations & Maintenance: Light Fixtures

Local Impacts of P3 Execution of Projects

• Potentially jump-start projects that might not

otherwise have funding or authorized bond sales

• Once contracting underway, fewer de-railers

(budget misalignment, appropriation factors, etc.)

• Aligned interests during project execution (Owner change orders less than 1% at Long Beach)

Local Impacts of P3 Contracting Opportunities

• Local presence is essential (subcontractors,

general contractors, suppliers, etc.)

• 85% of sub-contracts in Long Beach let to firms

Headquartered in Southern CA

• 92% of sub-contracts in Long Beach let to firms

with regional offices and operations to support the

project

Local Impacts of P3 Contracting Factors

• Performance assuredness (schedule + quality) in

context of delivery risk

• Bricks & mortar execution – labor, materials, site

and community logistics, etc.

• Satisfying program in creative / innovative ways

(design-build with different envelope)

Mike Day

President

Day CPM Services LLC

P3 Alternative Project Delivery

Agenda

• Introductions

• Procurement Methods: P3 “PPP”

• Developer Model review

• RFP Procurement Process

• Challenges

• Q & A


Introductions

• Day CPM Services

– Recent/Current Delivery of Healthcare, Public Safety,

Municipal, Institutional and Justice.

– Recent Major Capital Projects in Excess of $2 billion

– Currently Under Contract with 3 major Public Clients

in the Portland Metro Area

– Experienced in Alternative forms of Contracting in

Oregon and Washington: ( ORS, RCW) exemptions

– Innovator in IPD and Lean Project Delivery

– P3 experience: Mike Day, 30+ years experience in

leading major Municipal Capital projects in the NW

region

Mike Day, Development Manager /

Owner’s Representative

Mike is an Executive Leader with more than 30 years of Construction Management/Owner’s Representative experience providing full-service project management expertise in both the public and private sectors. He is a dynamic principal who supports the foundation of teams and leads through example and mentoring. A money-wise Owner’s Representative, he manages construction capital with strict accountability.

His in-the-trenches contracting knowledge translates to protection of Owner interests with persuasive authority in dealing with construction entities. He is very well respected by major construction corporations and A/E firms throughout the Northwest. He has 30+ major CIP projects delivered under alternative forms of contracting in Washington and Oregon in the last 23 years including GC/CM, CM/GC, IPD, Design-Build / Developer led - P3, and CM Agency. Mike’s recent project experience includes; Collaborative Life Sciences - OUS/OHSU; PCC Bond Program; MC-Courthouse; Oregon State Capital Pre-Development – IPD; 3 Greenfield Hospital Programs; 1 International Medical Center Developer - P3 .



Procurement Methods Developer

• Developer Led process: Design, Build, Finance…..

• Public – Private Partnership: P3 (PPP)

• Alternative Financing; Public Bonds and Private

equity

• RFQ/RFP process: Qualifications Based

• Transfer of construction risk

• Efficient Delivery: Saves Time & Money

• Mirrors Private sector delivery model

• May include Operations and Maintenance: DBFM

• Life Cycle cost analysis considerations


Procurement Method - Developer

Pros • Creative alternate funding solutions

– Tax Exempt bond financing (63-20)

• Lease-to-own or rent: "Off balance sheet”

• Qualification based selection

• Efficient project delivery

• Highly collaborative (Use of IPD)

• Minimal initial capital investment for Owner

• May Require less owner staff & management

• May not be bound to requirements for pubic procurement (ORS, RCW)

• Private Development process (Knowledge and Efficiency)

Cons

• Perceived loss of the control of the project and design

• Front end development of Bridging & Concession documents

• Potential debt service premiums for private sector financing

Developer Led P3


Developer P3 Timeline

Pre-Development Phase: • Early Project Screening process for Project Procurement • Business Case Analysis

• Functional Program Concept / Reference Design developed • Cost Modeling; Benchmark estimates Hard/Soft costs & Life cycle • Financial and Funding Models: Value For Money • Analysis of Risk Matrix and adjusters • Detailed Procurement options Analysis: comparison with other

forms of project delivery: DB, CM/GC, DBM, DBFM • Debt Service structure; Proposed sources of funding

Development Phase:

• RFP/RFP Selection Process • Transfer of Risk to Developer ( 1st cost and life cycle) • Design, Planning and Land use • Construction & Closeout • Operations and Maintenance


Developer Selection Process

The Developer selection process: Varies (8-12 months)

– Open to all qualified Developer teams

– Best Value Delivery approach “Value Added”

– Request for Qualifications: RFQ/RFP

• Describes the Project and submission requirements: Experience,

Capacity, past performance Proposed Development plan and

schedule, development agreement, estimated worksheet budget,

Financial Strength

• Owner Develops Bridging Documents and Facilities Master Plan

and functional program. Basis of Design and Blocking/stacking

Diagrams Developed by Owner for bridging document exhibits

• RFQ Process: Developer submits initial SOQ

• Legal Counsel involvement in RFQ/RFP document development

• Establishes the timeline and describes the review process

Developer Selection Process

RFP: Short-list and interview of top Developer teams:

• Conceptual Design & Development Plan provided by Developer with

proposal / interview process

• Developer estimated worksheet budget: Preliminary GMP

guarantees: Fees, GC’s, soft costs, hard costs, contingencies,

financial Guarantees provided with RFP proposal response.

• Notice of award to selected Developer: Pre-Development agreement

executed

• Pre-Development agreement phase: Organizes development

process for planning and design. Establish “Go/No Go” decision

• Developer Agreement: Binds developer to delivery dates, and

overall budget and functional program, as a result of the work

funded by the Pre-development agreement

• Lease offer terms and conditions and Financing finalized



Developer Preconstruction

What happens in preconstruction: – Prepare a detailed plan and schedule:

– Developer leads Pre-Development stage to “Go/ No go”

• Owner Provided funds to : Validate Basis of Design and program

• Prepare estimates “Target value design” in alignment with GMP & RFP

• Track and monitor budget & provide Value Engineering /Design

– Owner & Developer execute Development Agreement:

• Binds developer to develop and construct the project to the established

delivery dates, program requirements and overall budget as a result of the

work funded by the Pre-development agreement

• Binds the Developer to the Soft costs and Fees established in the RFP

estimated worksheet budget. Developer assumes construction risk

• Finalize / validate GMP and lease offer term negotiations pursuant to the

terms of the executed Development Agreement

• Market the project to local subs and suppliers & Expedite procurement


Developer Questions & Answers

Q: When is Developer led alternative delivery model best?

A: For complex projects where alternative financing and speed of delivery are required

Q: Does Developer model cost more?

A: Varies. Initial costs to client can be lower with more reliable results & transfer of construction development risk. Projects may not be subject to Public works ORS and RCW’s & mirror private sector delivery for procurement.

Q: Are there change orders on Developer model projects?

A: Yes. For owner-initiated programmatic scope changes

Q: Are there savings on Developer model projects?

A: Yes. Cost savings and Developer incentives developed as part of an IPD - “Integrated project delivery” approach result in savings $ success sharing.

Q: Is this the way projects are built in the public/private sector?

A: Yes: When alternative financing “off balance sheet” is preferred delivery option: Used in Washington Public sector: Harborview, King County, UW, City of Redmond; Task force and


Challenges

• Educating Stakeholders on developer led

option using P3 project delivery

• Go / No Go decision making model in Precon

• Objective Business Case Analysis process

• Risk Register and Adjuster Assumptions

• Develop Strategy for alternative Financing

“off balance sheet” delivery model & Debt

Service

• Owner Funding options of Debt Service

Questions?

What Does the Future of Public

Private Partnerships Look Like in

Oregon?