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PUBLIC – PRIVATE PARTNERSHIPS IN HIGH-SPEED RAIL DEVELOPMENTMay 18, 2010
Brought to you by
With Presentations By:
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Panelists
• Kathryn Kusske Floyd, Dorsey & Whitney LLP
• Stephen Small, P.Eng.Bilfinger Berger Project Investments Inc.
• Jay Lindgren, Dorsey & Whitney LLP
• Peter O’Neill, Bank of Ireland
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Agenda
• Market Demand & HSR Update –Kathryn Kusske Floyd
• Introduction to P3 Projects – Steve Small
• Legal Authority – Jay Lindgren
• Lender Perspectives – Peter O’Neill
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Market Demand & HSR Update
Kathryn Kusske FloydDorsey & Whitney LLP
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High Speed Rail in Washington, DC
• The Obama Administration has made high speed rail development one of its top priorities
• The American Reinvestment and Recovery Act included significant federal funding for high speed rail
• The Administration has formally designated ten high speed rail corridors as eligible recipients of federal funding
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The Issue
Federal funding is not enough. But in a time when state and local governments face shrinking revenues, P3s have become a timely model for completing projects on time and on budget.– P3: A long-term
performance-basedcontract between publicsector and private sectorto deliver publicinfrastructure
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One Tool: P3s
• Public-Private Partnerships– Accelerates infrastructure projects deemed
impractical under traditional funding– Well-developed international tool– $200 billion capital available?
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Advantages/Disadvantages
Pros
• Risk-sharing
• Innovation and efficiency
• Public liquidity
• Public focus on other core functions
• Decreased reliance on traditional funding
• International investment
Cons
• Long-term/complex contracts
• Loss of public control
• Potential higher user costs
• Risk of quality sacrifice in exchange for profits
• Impact on public jobs
• Loss of accountability
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Introduction to P3 ProjectsIntroduction to P3 Projects
Stephen Small, P. Eng.Senior Vice President – Development
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Intro to P3 Structure Intro to P3 Structure
• A P3 Project has the following key elements:
– A long-term contract with public and private sector
– Private sector provides - design, construction, financing, and operations of a public infrastructure;
– Public sector provides payments over the life of the P3 Contract – (range from 20 to 40+ years);
– Facility reverts to public-sector ownership at the end of the P3 Contract.
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P3 Structure P3 Structure
The traditional organizational chart in a P3 Project has the following characteristics:
– Authority is the ultimate client.
– Concessionaire enters into long term contract. – Design-Build Contract (Fixed term and
fixed price)
– Maintenance Contract
– Finance Arrangements .
O&M Subcontractors
D&C Team
Construction SubsDesign Subs
O&M Team
LEAD DESIGN
PROJECT LEAD
Authority
Financing TeamFinancing Team
Key Advantages for P3 Contracts
Advantages
Effective Risk Transfer for Authority
Schedule and Cost certainty
Long term standards and funding provided for OMR
P3 Timeline
Negotiation Phase
Bidding Phase
PrequalPhase
Client Evaluation
Client Evaluation
1 - 2 m 1 m 4 - 5 m 1 m 2 - 3 m 3 - 4 m
RFP
Short-list BAFOConstruction
Starts
RFQ
EOI
Best and Final Offer
3-way negotiations between project
consortium, public sector client and
lenders
Consortium allocates risk and
submits tender
Preferred Bidder
Financial Close
8 months to 16 months
Risk Sharing
Risk Allocation
Categories
Government Concessionaire DB Contractor Operator
Finance √ √Design / Engineering √Construction √Operating Cost √ √Major Refurbishment – Lifecycle Costs √ √
√: Primary Risk Taker √: Secondary Risk Taker
Compared to a traditional Design-Build project, a P3 Project results in significant risks relating to: The costs of design and construction for the Facility;Market demand for the Facility (if applicable);Service provided by the Facility (Usage risk); and The Facility’s operation and maintenance costs.
…being transferred from the Public Authority to the Project Company.
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Do Public HSR Authorities Have Legal Authority to Build P3 Projects?
Jay LindgrenInfrastructure Practice Group
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Legal Authority Procurement Considerations
• Legal Authority to Move Forward with P3 Projects:
– Federal procurement considerations
– State and local publicauthority procurementconsiderations
• Enabling legislation:
– Broad authority
– Project specific orpilot program authority
Federal Considerations
• SEP-15– Special Experimentation Project Number 15– Process for FHWA to identify new P3 approaches to
project delivery – goal is to identify impediments in current laws, regulations, and practices to the greater use of P3 and private investment in transportation projects.
– Allows U.S. Secretary of Transportation to waive requirements of Title 23 of the United States Codes
– Applicant must be a State DOT
Federal Considerations
• Private Activity Bonds (PABs)– Section 11143 of Title XI of SAFETEA-LU amends
Section 142 of the Internal Revenue Code.– Adds highway and freight transfer facilities to the types
of privately developed and operated projects for which PABs may be issued.
– Allows private activity on these projects while maintaining the tax-exempt status of the bonds.
– Law limits total amount of such bonds to $15 billion. As of January 2010, $6.3 billion had been allocated to seven projects, and $1 billion of that amount had been issued in PABs.
Federal Considerations
• TIFIA– Transportation Infrastructure Finance and Innovation Act– Provides Federal credit assistance in the form of direct
loans, loan guarantees, and standby lines of credit to finance surface transportation projects of national and regional significance.
– Each dollar of Federal funds can provide up to $10 in TIFIA credit assistance.
– Goal is to leverage Federal funds by attracting substantial private and other non-Federal co-investment in surface transportation projects.
State Enabling Legislation – Designated HSR Corridors
• Chicago Hub
NoMichiganNoKentucky
NoOhioNoYesMinnesota
NoWisconsinNoYesMissouriYesYesIndiana(bill pending)No (but bill is pending)IllinoisCovers HSR?P3 Legislation?State
State Enabling Legislation – Designated HSR Corridors
• Northern New England
NoMaine
NoNew HampshireNoVermont
YesYesMassachusettsNoConnecticut
NoNew York
Covers HSR?P3 Legislation?State
State Enabling Legislation – Designated HSR Corridors
• Southeast
YesYesMaryland
YesYesVirginia
NoYesNorth Carolina
NoYesSouth Carolina
YesYesGeorgiaYesYesFlorida
Covers HSR?P3 Legislation?State
State Enabling Legislation – Designated HSR Corridors
• Gulf Coast
YesYesGeorgia
NoYesAlabama
NoYesMississippiYesYesLouisianaYesYesTexasCovers HSR?P3 Legislation?State
State Enabling Legislation – Designated HSR Corridors
• Pacific Northwest
• South Central
YesYesOregon
YesYesWashington
Covers HSR?P3 Legislation?State
NoOklahomaNoArkansas
YesYesTexas
Covers HSR?P3 Legislation?State
State Enabling Legislation – Designated HSR Corridors
YesYesCaliforniaCalifornia
YesYesFloridaFlorida
NoNew YorkEmpire
NoPennsylvaniaKeystone
Corridor State Covers HSR?P3 Legislation?
• Single-State HSR Corridors
Lenders’ Perspective – Peter O’Neill
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High Speed Rail – Too Big to Succeed?
The amounts are staggeringConservative estimate for developing the 11 HSR corridors:– $500 billion.
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Federal $ - a Drop in the Bucket
Federal funds of $13 billion have been pledged by President Obama2.6% of the costs of developing the 11 HSR corridorsWhere’s the rest of the money coming from?– State/Local?– PABs / TIFIA?– Private Capital?
Ultimately it will have to be a combination of all of the above.Some “tracks” of the federal program explicitly favor projects that leverage federal funding with non-federal investments.
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The European Experience
European Union’s Trans European Network (“TEN”) EIB’s commitment of $12 billion to rail networksDutch HSR (2004) had significant EIB Guarantee Facility (35% of total source)French Government is developing an extensive HSR networkEIB funding also present hereSignificant use of Guaranteed Facilities in addition to State subsidiesPrivate Capital
The Lesson – Everyone needs to be involved.
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Significant structural complexities
Enormous size of these projects, multiple sources of funding etc will likely give rise to significant complexities in structuring.Examples include:– Timing of commitment of federal, state/local, private funds– Potential for cost overruns – how can this be mitigated– Revenue sources for the Project – patronage or availability?– Intercreditor issues– Integration issues – who operates the asset, schedules its use?– Permitting/Land Acquisitions – who bears the risk
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PPP structures have addressed many of these risks
PPP structures have for many years successfully mitigated risks associated with cost overruns, even on high value, complex projectsRequirements for fixed-price, date certain construction contracts pass risks to the Design-Builder.PPP structures have also addressed risks associated with multiple funding sources– Milestone payment structures ensure interests are aligned.
Complex intercreditor issues have also been addressed through PPPs– Use of PABS and TIFIA have been structured succesfully
Basis of Revenue structures needs to be carefully considered– Patronage will involve significantly more complexity than Availability
• Who bears risks associated with integrating use of asset by rail operator?• Will Private investors want some protection against competition
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Risk Allocation
Fundamental principle is that a risk should be borne by the party best placed to manage that riskPrivate capital will focus on ensuring that the split of risks between Government and the Private Sector are fair and equitableAn additional area of complexity – what “government” does the Private Sector contractor (“Project Co”) deal with?Federal?State? What if HS network involves more than one state?
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What does Private Capital focus on?
How is it getting its money back?
Robustness of cash flows at Borrower/Project Co level.– If there are delays, how long is Project Co kept whole?– If there are cost overruns, can the Contractor absorb these and still
complete construction?– What is the experience of the Contractor– What other projects is it involved in or has provided guarantees in
respect of?– Is there clear allocation of risk between project parties (“Integration
Risk”)
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Private Capital is ready and waiting!
Very excited about the prospects for HSR development in the US
A robust, tested and proven template is already in existence
US and International contractors have generally had positive experiences
The need is there
Significant opportunity to drive economic growth.
Questions & Answers
Please type your Questions in the Q & A box in the lower right hand corner of your screen
Contact Our Panelists
Kathryn Kusske Floyd, Partner, DORSEY & WHITNEY(202) 442 - 3520 kusske.floyd.kathryn@dorsey.com
Peter O'Neill, Senior Vice President, Global Project Finance,BANK OF IRELAND
(203) 391-5980 peter.oneill@boius.com
Steve Small, Senior Vice President of Development, BILFINGER BERGER PROJECT INVESTMENTS
(604) 678-6532 steve.small@pi.bilfinger.ca
Jay Lindgren, Chair, DORSEY & WHITNEY INFRASTRUCTURE PRACTICE GROUP
(612) 492-6875Lindgren.Jay@dorsey.com
Thank You for Joining Us
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