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transcript
Public Private Partnership – An Opportunity for Louisiana
2007 Louisiana Transportation Engineering Conference
Baton Rouge, La
February 11-14, 200710:00 a.m. - 11:45 a.m. Concurrent Sessions
Session 82: Public-Private Partnerships
Presented by
Bob PrietoSenior Vice PresidentFluor
Overview
Fluor PPP’s
Traditional Funding Sources
PPP Financial Options
– Two examples
PPP Efficiencies
New Skills & Knowledge Required
10 Things We Want in a PPP
A Louisiana Opportunity
Fluor
One of world’s largest, publicly owned engineering, procurement, construction, and maintenance services companies
International workforce of 30,000+ employees
Network of offices in more than 25 countries across six continents
Engineering News-Record (ENR) magazine consistently ranks Fluor Corporation among the top three on its “The Top Design-Build Firms” and “The Top 400 Contractors” lists
Ranked No. 1 in Fortune magazine’s 2004 rating of “World’s Most Admired Companies” in engineering and construction category
Highest credit rating of any major international engineering and construction company
Fluor’s safety performance record consistently makes it one of the world’s safest contractors
Fluor PPP Experience
Pocahontas Parkway (Route 895) Connector
– First project to be developed and completed under VA PPP laws
E-470 Public Highway and Toll Road
– Provided subordinated debt financing
JFK International Arrivals Terminal
– First major privately developed and financed airport terminal in United States
Netherlands High Speed Rail Line
– Large-scale high speed rail financed and executed as a PPP
A 59 Freeway (Public-Private Partnership)
– First highway project to be financed and executed as a PPP
Fluor PPP Experience
Connect London Underground Telecommunications
– Major telecom project financed and executed as a PPP
SR 125 South Gap/Connector and Toll Road
– Innovative combination of private equity and federal TIFIA funding
I-495 Capital Beltway HOTLanes
– Innovative PPP using HOTLanes to reduce congestion
I-95 I-395 Reversible HOTLanes
– Innovative PPP using HOTLanes to reduce congestion
National Roads Telecom Services
– Innovative program to upgrade highway telecommunications as a PPP
Available Transportation Financing Mechanisms
Traditional government ownership
– General state or local revenue (annual appropriation)
– Trust fund (defined/dedicated revenue sources)• Traditional examples – Gas taxes, motor vehicle fees
• Non-traditional opportunity – Share of oil revenues
– Tax increment financing district• Includes PILOT
– Federal funds
– User fees• Tolling, parking fees, vehicle usage fees
Public Private Partnership (PPP)
PPP Financial Options - Simplified
Two Basic Models
– Not for profit
– For profit
Tools provide for variations on the themes
No one size fits all model
– We run all models until just before submission unless client has expressed a preference
Value Drivers
Revenue
Cost
Time to deliver
Risk reduction
Financing flexibility
Sources of Revenue
User fees (tolls)
Other project revenue sources
– ROW related (telecom, pipeline, water etc)
– Related services (gas, food etc)
Availability or other performance payments
– Shadow tolls
Economic development (tax increment or other)
Government subsidy
Sources of Cost
First Cost (CAPEX)
– Constructability
– Packaging/supply chain
– Productivity
– Interface cost (risk)
– Escalation (time)
Life Cycle Cost
– Materials selection
– Maintainability
– Technology leverage
– Ease of expansion
Time to Deliver
Advance project relative to traditional funding availability
Design-build shortens execution cycle
Project phasing financially driven
Risk Reduction
Both models (For profit/Not for profit)
– Capex risks• Fully wrapped
• Interface risk transferred
• Escalation risk transferred
– O&M risks• Fully considered and priced
• Fully transferred if desired
• Map directly to financial plan
– Traffic & Revenue Risks• Fully transferred but valuation varies by model Includes ramp-up risk
• Uncertainty valued
Risk Reduction
Not for profit
– Uncertainty risk partially valued• More financial leverage than traditional bond financing
• Variable period of operation mitigates risk
• Upside fully to state
For profit
– Uncertainty risk “fully” valued• even more financial leverage
– Upside “fully” to for profit entity
Financing Flexibility – Not For Profit
Typical structures:
– “63-20”
– 501 (c) (3)
Term – Variable; 30 year nominal
Sources of financing
– Developer (development phase)
– Bank debt (construction period)
– Tax exempt bonds (senior debt)
– Private Activity Bonds (may be more flexible)
– TIFIA
– State Infrastructure Bank (SIB)
– Sub-debt (by developer or other)
– Standby credit facility (by developer or other)
– Initial or periodic payments by Federal, State or Local governments
More flexible debt structures increase leverage on same traffic and revenue projections
Financing Flexibility – For Profit
Typical structures:– Concession/taxable – historical model– Concession/blend or taxable and tax exempt – emerging
Term – typically 50 to 99 years
Sources of financing:– Developer (development phase)– Bank debt (construction period)– Bonds (senior and junior debt; interest only with bullet; multiple
tranches; multiple refinancings anticipated and programmed)– Private Activity Bonds (blended model)– TIFIA– State Infrastructure Bank (SIB)– Sub-debt (by developer or other)– Standby credit facility (by developer or other)– Initial or periodic payments by Federal, State or Local governments– Accelerated depreciation (except with PAB)– EQUITY (patient)
How Models Differ – A 50 Year Look
Not for Profit
– Shorter period (target 30 – 50 years)
– Worse than expected revenue profile• Not for profit continues to operate until debt repaid
– Better than expected revenue profile• Debt retired earlier
– Facility flips to state on debt retirement
– Early clawback by state more easily achieved• Debt repaid
– Tolls reflect facility financial needs to retire debt in target time frame
– Developer earns development fee plus fees from contracts
How Models Differ – A 50 Year Look
For Profit– Longer period (50+)– Worse than expected revenue profile
• Concession period unaffected; return on equity reduced
– Better than expected revenue profile• Equity returns significantly enhanced
– Facility reverts to state at end of concession period or on default
– Early clawback by state not easily achieved– Tolls reflect strategy to maximize revenue
• No consideration to do other than that• Constrained only by contract but over time period constraints worth
little• Tolls reflect equivalent purchasing power (economic growth) Traffic growth beyond plan to developer Value of congestion growth to developer
– Developer earns development fee plus fees from contracts plus equity returns
Two Examples
Not for profit - Virginia Route 895 Pocahontas Parkway
– Conversion of “mature” asset to for profit facility in progress
For profit (likely) - I-495 Capital Beltway Toll HOTLanes
Virginia Public-Private Transportation Act
Originally adopted – 1995
Revised – 2005
Goal – Encourage investment by private entities by creating more stable investment climate and increasing transparency and public involvement in the procurement process
Virginia Route 895Pocahontas Parkway
Greater Richmond, Virginia
High-level bridge and highway
– New 8.8-mile, 4-lane toll facility• Uses Smart Tag/EZ Pass plus highway speed open road tolling
– Connects I-95 to I-295
– James River Bridge• 4,765 feet long, cast in place• 200-meter clear span• 145-foot vertical clearance for shipping
Cost – $324 million
Traffic (ultimate) – 50,000 VPD
First Virginia PPTA project
Second 63-20 financed project
Project completed 15 years earlier than funding would otherwise have allowed
Design/build reduced project execution period from seven years to four years
Majority of work performed by local designers and contractors
Pocahontas Parkway Map
Pocahontas Parkway Timeline
Virginia PPTA legislation adopted
1995 1998 2002
Facility opened
Comprehensive Development Agreement; start of construction
Pocahontas ParkwayPPP “Term Sheet”
Type of Agreement
– Development, financing, DBOM
Proposal
– Unsolicited
Developer
– Fluor-led LLC
D/B Contractor
– Fluor-led LLC
Project Owner
– Pocahontas Parkway Association (non-profit, 63-20 corporation)
O&M Contractor
– VDOT
Pocahontas ParkwayPPP “Term Sheet” (continued)
Initial Financing– $354 million tax exempt bonds
• Secured by first lien on project revenue
– $18 million SIB loan
– $5 million standby sub-debt by Fluor-led LLC
– $9 million in federal funds for design costs
Development Fee– Yes
Original Underwriter– Bear Stearns & Lehman
Fitch Rating– BBB-
Value CreationPocahontas Parkway Next Steps
2003 – First full year of operation
2005 – Concession offer received from Depfa Bank/Transurban
2006 – Sold as concession
Resale value – $500 million-plus
– Provides refinancing capacity in spite of significant traffic shortfall
– Transfers all O&M and traffic risk to private sector
– Frees VDOT from funding $225 million in O&M
– Brings state-of-the-art technology
– Provides vast pool or resources and experience to draw on for any problems
– Removes debt from state balance sheet
Original cost – $380 million
– Plus deferred reimbursement on O&M costs
Value created by de-risking project
– Development risk removed
– Legislative risk (first PPTA) removed
– D/B risk removed
– Traffic ramp-up known
I-495 Capital BeltwayBackground
1964 – opened
1977 – widened to eight lanes
Primary use shifted to local facility
Currently 180,000 to 240,000 VPD
I-495 Capital BeltwayToll HOTLanes
Add four HOTLanes on existing eight-lane freeway
14 miles long
Access by concurrent adjacent lane access; direct access from 5 or 6 of 11 existing interchanges
Stays in existing ROW with minimal displacement
Property takes significantly reduced from 300-plus in EIS proposals to six or fewer
Estimated cost
– $1 billion
HOTLanes in Operation
12-Lane Configuration8 GP and 4 HOTLanes
General
Purpose
Lanes
General
Purpose
Lanes
HOT
Lanes
HOT
Lanes
I-495 Capital Beltway Timeline
Virginia PPTA legislation adopted1995
2002
2003
2004
2005
2006
2007
2012 HOTLanes open
NEPA public hearing
Fluor submits unsolicited proposal
CDA negotiation begins
CDA completed with Fluor/Transurban
ROD
Financial close; Construction start
I-495 Capital BeltwayPPP “Term Sheet” – Tax Exempt
Type of Agreement– Development, Financing, DBOM
Proposal– Unsolicited
Developer– Fluor/Transurban
Design/Build Contractor– Fluor
Project Owner– Non-profit 63-20 corporation
O&M Contractor– Transurban
Initial Financing– Tax exempt bonds– Sub debt by Fluor/Transurban
Development Fee– Yes
I-495 Capital BeltwayPPP “Term Sheet” – Concession
Type of Agreement– Development, Concession
Proposal– Unsolicited
Developer– Fluor/Transurban
Design/Build Contractor– Fluor
Project Owner– Transurban/Fluor
O&M Contractor– Transurban
Initial Financing– Concession financing– Equity by Fluor/Transurban (15 percent minimum)
Development Fee– Yes
I-95/395 HOTLanes PPTA
$913 million HOT and HOV lanes
Improves 56 miles of I-95
Adds third HOV lane to I-95 in Northern Virginia
Fluor/Transurban proposal selected as competing alternative to previously submitted unsolicited proposal
Comprehensive agreement under negotiation
PPP Performance – Evidence on Construction Projects from the United Kingdom’s National Audit Office
Conventional Procurement
PPP Procurement
Cost overruns for the public sector
73% 22%
Delay in project delivery
70% 24%
What are the “efficiencies”?
Risk transfer – Design, construction, operation, maintenance, and finance
Output-based specifications – You pay for the service you receive (performance payment regime)
– Availability payment
– Congestion priced level of service
Long-term nature of contracts – Whole life costing and asset management
Budget constraints – PPPs “off budget/public debt”
– Terminal 4 JFK
What are the “efficiencies”? (continued)
Infrastructure requirements met earlier
– Pocahontas Parkway
Search for efficiency and creativity – Public sector flexibility facilitated
Partnership – Both the public and the private sector are involved during the whole lifecycle of the project
Private finance involved
– New sources of infrastructure capital
– More flexible financial structures
– More project value captured upfront
How do the users of these projects benefit?
Needed infrastructure is provided earlier
Life cycle financial requirements addressed upfront and provided for
Other benefits are available without PPP if political will and process discipline exist
– Design/build efficiencies (time, cost, risk transfer)
– Performance spec versus design spec
– Value pricing for congestion management and effective capacity improvement• Market rates required
Skills
Project finance and innovative delivery requires new skill sets to deliver:– Design managers (contractor)– Value engineers (contractor)– Constructability (designer)– Environmental/permitting manager (PPP)– O&M (PPP/contractor)– Tolling systems/customer service call centers (PPP)– Life-cycle risk analysis (PPP)– Taxable and tax exempt financing specialists (PPP)– Derivative and hedging specialists (PPP/financial Institutions)– Financial insurance specialists (PPP/insurers)– Economists (PPP)– Concession traffic and revenue forecasting (PPP)– Monte Carlo analysts (D/B/PPP)– Insurance specialists (changed E and C interface) (all)– Tax (D/B/PPP)– Project developers (PPP)
Are we ready?
Skills
Traditional owner skill sets need to change– Shift from buyer of “good” design and low bid
construction to buyer of “performance-based” outcome
– Shift from “ongoing decision framework” to “upfront decision framework”
– Shift from asset owner to procurer of capability
New skills– Asset valuation
– Concession selection, structuring, and sale
– Economic modeling
– O&M standards and contracting
– Performance acceptance versus design review
Are owners ready….not to be owners?
Knowledge
New vocabulary:– Accreting swaps– Subordinated debt– Equity– Concession– “63-20”– Private activity bonds– HOT lanes– TOT lanes– Congestion pricing– Bankruptcy analysis– Accelerated depreciation– Real options– Monoline insurance– Shadow tolls– Availability payments– Toll road regulation– TIFIA
Financial Structure and Cost of Capital
Weighted
Average
Cost of
Capital
Re
Min WACC
Projects goal is to minimize weighted
average cost of capital: Why?
% Debt
10/1/2002 Financial Design and Project Appraisal ©Robert B.H. Hauswald
Top 10Things We WantWhen Entering Into A PPP
10. The PPP exhibits the three key attributes of successful PPPs– the maximum infrastructure for the lowest cost– appropriate risk weighted returns– protects “minority” interests
9. A public sector partner who clearly understands all obligations
8. The project addresses a real need
7. The public sector partner clearly understands risks
6. Stakeholders will support the project and it FLIPS
5. A clear path forward is identifiable
4. Implementing agencies embrace change
3. A transparent procurement process exists
2. Good legislation exists
1. Political will is strongly present
It’s As Easy As ABC
Basic Conditions
Traffic congestion in primary corridors of ABC area worsening
– Baton Rouge traffic bound for I-10 W and I-49 N chooses I-10, not I-49 S
– Further aggravated by traffic using I-10 and I-12 to transverse state in peak periods
• These vehicles contribute little to regional economy, and add further maintenance costs
– Rebuilding of New Orleans ramping up
– Port of New Orleans capturing growing Asia/East Coast container traffic
– I-12 and on I-10 improvements not completed due to lack of funding
Hurricane evacuation capacity and efficient access of first responders to New Orleans are adversely impacted
– Absence of a second, geographically separated, limited access facility
– Ability to sustain capacity and performance further threatened by shortfalls in O&M funding including provision for periodic renewals
• Additional expansion will only exacerbate this shortfall of adequate funding
The Proposal
Fluor’s proposal – Atchafalaya Basin Corridor Project– Institute an integrated basin-wide traffic management
system• Leverage and optimize capacity of basin corridor network• Manage and relieve traffic congestion in the entire area
– Construct a series of border-to-border road improvements• Relieve congestion at key choke points• Provide an alternative hurricane evacuation route• Support Katrina rebuilding effort and continuing economic
development• Support the expansion of the Port of New Orleans
– Develop new sources of revenue to support future capital improvements, operations, and maintenance• Including capture of revenue from out-of-state users
Proposed Project Summary
Total “first cost” – $4 billion
– Includes capital costs, interest during construction, reserve funds, financing, and other costs
50-year O&M and renewal cost – $9 billion
100% toll financed using a not-for-profit PPP structure
Benefits
Optimized life-cycle cost by leveraged use of basin network of corridors
Improved safety and efficiency in the road corridors
Improved road maintenance
Improved freight productivity
Improved accessibility to New Orleans during reconstruction
Improved air quality
Emergency evacuations
Economic development
Financial Benefits
Previously uncaptured revenue from out-of-state users of Louisiana’s highway system is captured from tolls
A new revenue stream is established which can be used to finance the construction of needed facilities
The completion of I-49 South is financed and constructed on an accelerated basis
Traffic congestion in the Atchafalaya Basin is mitigated by providing a means to balance traffic flows among the major roads in the region
– Specific, measurable benefits will accrue in the capital region where congestion is the highest
Financial Benefits (continued)
The entire capital cost of the construction of new facilities, estimated at $4.0 billion including escalation, interest during construction, and other related costs, may be financed without any additional state funds or new taxes
– Alternatively, state or federal contributions to project funding may facilitate either additional projects to be built out, maintenance funds and scope to be adjusted or select tolls to be reduced or eliminated