101
Public-Private Partnership Projects Current Policies Future Potential Best Practices Common Pitfalls
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
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
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
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
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
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
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
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
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