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How to Structure a P3 Deal
July 21, 2015
Importance of PPPs
State of U.S. Infrastructure By 2020, U.S. infrastructure upgrades will require an investment of $3.6 trillion
dollars with a projected funding shortfall of $1.6 trillion dollars. Current investment path would lead to loss of: $3.1 trillion in GDP, $1.1 trillion in U.S.
trade value, 3.5 million jobs, $2.4 trillion in consumer spending, and 3,100 in annual personal disposable income.
Infrastructure Financing Tools and Funding Mechanisms Federal, State, Municipal Government Funding (Pay as you go, or Debt) Corporate On-Balance Sheet Project Finance (Public-Private Partnerships)
Evaluating Financing Options Importance of evaluating all options Tightening budgets and increased demands require innovation from traditional
financing options Public-Private Partnerships present viable financing option to overcome budgetary
constraints
Evaluating Financial Sustainability of PPPs
Common misperception is that PPPs are always a more expensive form of project delivery for Governments
National Council for Public-Private Partnership’s (NCPPP) white paper, “Testing Tradition: Assessing the Added Value of Public-Private Partnership”, highlights that a thorough and proper evaluation of a PPP involves several analyses:• Costs of deferred maintenance, repair, replacement• Project timing• Complete financial analysis using Value for Money assessment on Net Present
Value (NPV) basis Establish Public Sector Comparator (PSC) as baseline to compare to PPP or
privatized options Conduct full Life-Cycle (FLC) cost and revenue analysis for each option Value and assess transfer of risk more effectively
Financing costs for projects may be higher for PPPs however FLC analysis often shows savings over time due to risk allocation, design, construction, and long-term O&M.
PPP “Value for Money”
• The total cost of a PPP is often less than the Public Sector cost, as illustrated in the below Value for Money diagram
4
Public Sector Cost
PPP Cost [Public sector cost of project delivery] Adapted from “Testing Tradition Assessing the Added Value of Public-Private Partnerships” by National Council For Public-Private Partnerships, 2012]
Example P3 Risk AllocationRisk Category Public Private Shared
Environmental
Land Acquisition
Other Permits
Cost Changes
Completion Schedule
Detailed Design
Force Majeure
Hazardous Materials
O&M Costs
Latent Defects
Revenue Risk
Interest Rates
Equity
Allocating Project Risk
Public and Private Sector Transactions – Risk and Return
6
Exp
ecte
d R
ate
of
Retu
rn
Risk to Investor
Tax-Exempt
Debt
Taxable Debt
Mezz Debt
Preferred or Tax Equity
“Spread”
100% Recourse to Government
Private Sector Transaction
Public Sector TransactionPublic-Private Risk Sharing
Sponsor Equity
PPP Capital Stack
• SPE owners do not finance all project requirements themselves. The capital stack - all the investment in the SPE - can have many different sources of capital or a simple debt / equity structure
• The capital stack demonstrates a positive relationship between risk and return.
Investment grade debt assumes the least amount of risk and requires lowest return
Sponsor equity assumes the greatest risk and requires the highest return
Preferred or Tax Equity
Mezzanine Investment
Junior Debt
Investment Grade Debt
Investment Grade Debt
Sponsor Equity Sponsor Equity
• Tax Exempt—Public Sector Transaction Retail investor driven investment product Requires traditional credit/revenue streams Generally must obtain a published credit rating Fundamentals allow for 100% leverage and/or public entity can contribute cash
equity Public ownership is preferred/necessary Debt Capacity is not an issue “Public Offering” costs of issuance Constrained by IRS Code Section 103(c) - Potential change in law
• Taxable Debt—Private Sector Transaction Multiple institutional investor types/classes to access Accommodates more diverse credit/revenue streams A published credit rating not required Maximum leverage is credit/structure driven Private ownership is typical “Private Placement/Loan” costs of issuance Municipal vs. Corporate Taxable Markets
Tax Exempt and Taxable Debt
• Tax Equity—Private Sector Transaction Cash contributions in exchange for tax benefits/portion of project cash
flows Return is based on “after-tax” basis, which incorporates tax savings it
receives from ITC/PTC/depreciation benefits Limited investor universe (15-20 active participants) Approximately $3.6 billion of tax equity capacity in 2012, with a
demand that exceeded $9 billion—only “best” projects considered Various structures available, such as lease pass-through and
partnership-flips, based upon different return and ownership requirements
• Project Equity—Private Sector Transaction Investor equity return requirements Equity from developer/sponsor, venture, private sources Money can be left in the deal to act as equity (e.g., deferred
development fee) Passive or active investor
Tax Equity and Project Equity
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Debt Service Payments
ESCO
Special Purpose Entity
FinancierAssignment of Payments
Energy and Water ECMs
Public SectorRenewable Energy Project
Public SectorEnergy & Water Savings Projects
Debt
Upgrade or New Generation
Tax Equity
Capital Proceeds
Debt Service
Equity Return
Capital Proceeds
Utility service/Savings payments
EPC and O&M Payments
Funding ProceedsDebt
Service/Equity Returns
Public Sector Agency
Service ContractServices provided
Performance Guaranty
3P Financing Structure-Energy Project
Potential PPP Opportunities
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Transportation
Health•Medical Facilities•Ancillary infrastructure (offices / training facilities)
Housing
Civic and Utilities
Transportation
Corrections and Justice
•Schools, Colleges, Universities•Tertiary Facilities•Student Housing
•Community and Sports Facilities•Local Government Facilities / Commercial Office Buildings•Waste and Wastewater Facilities
•Roads and Highways•Bridges and Infrastructure•Ports and Airports
•Prisons•Courthouses
Education
Energy•Energy Efficiency / Renewable Energy•Combined Heat and Power (Cogeneration) Plants, Power Plants •Smart Grid /Microgrid
•Military Housing•Low Income Housing
Anita Molino President617-226-8102 Direct617.437.0150 [email protected]
This information has been prepared solely for information purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. No representation or warranty can be given with respect to the accuracy or completeness of the information, or that any future offer of securities, if any, will conform to the terms hereof. Bostonia disclaims any and all liability relating to this information, including without limitation, any express or implied representations or warranties for, statements contained in, and omissions from, this information.