Identifying P3 Projects and Knowing the Atmosphere

Transcription

1 pwc.com Identifying P3 Projects and Knowing the Atmosphere CDFA Presentation June 20, 2018 Seth Kirshenberg, Partner Kutak Rock LLP Riz Shah, Partner PricewaterhouseCoopers Public Sector LLP

2 Our objective Sharing the market s perspective on the current environment Preparing for the future with new approaches to more effectively engage the private sector

3 Our objective Advice given to me Sharing the market s perspective on the current environment Preparing for the future with new approaches to more effectively engage the private sector 1. Forecast way, way, way out in the future. 2. Do it at the end of your career.

4 Agenda How did we get here? Our challenges as leaders Key considerations for the future Path forward - what can and should we do now

5 How did we get here?

6 A looming national infrastructure investment backlog: How did we get here?

7 How do we compare to the world in the eyes of global investors? How does US infrastructure compare to the rest of the world? The US is a massive spender on infrastructure but according to an analysis by the World Economic Forum, the quality and state of US infrastructure lags many other industrial economies. US infrastructure lags other economies across several categories, ranking 12th overall, 13th in quality of roads and ninth in air transport areas the Trump administration has called out for more investment.

8 Our funding need: $3.3 trillion Where are the funding gaps? The American Society of Civil Engineers (ASCE) estimates $3.3 trillion of investment is needed to maintain, repair and build new infrastructure through 2025, and sees a funding gap of $1.4 trillion to meet those needs. ASCE expects the gap to widen if current public and private investment trends continue unchanged, and further estimate that the economic impact of not filling the gap will sideline a potential $3.9 trillion GDP boost and 2.5 million jobs.

9 And on top of all that.

10 How the US infrastructure industry may evolve under the new administration Choosing the right infrastructure projects The announcement of a new infrastructure investment program can cause a flood of high-priority projects to come in from departments across government. Having a five-step framework that formalizes the project identification and selection process helps ensure that focus is placed on those projects that achieve the most economic, social, and environmental benefits for all stakeholders.

11 What are we seeing so far in the US infrastructure industry?

12 Could our country handle $3 trillion in spend? How do businesses need to evolve? Increased infrastructure investment will likely boost the engineering and construction President Trump signed on January 24, 2017 an executive order to expedite environmental reviews and approvals for high priority infrastructure projects. The order signals an ambitious plan to prioritize and jumpstart infrastructure projects around the country projects that may have a multiplier effect, especially on the engineering and construction (E&C) sector, contractors, and regional economies.

13 Remain aware of how can tax reform create momentum in the market? Tax preferential vehicles: think MLPs or REITs. Expanding the asset classes/characteristics where MLPs or REITs can invest may be one way to open up additional investment opportunities. Consider a different economic paradigm: repatriation incentives could be used for localized projects (e.g., projects in an area where a company has large footprint, staff etc.) to support better transport and public facilities. They can also be applied to projects with little or no return on investment, such as bridge repairs and ongoing maintenance, where investors are simply eliminating tax liability on repatriated profits by investing a portion in these projects. Infrastructure tax credits: use tax credits for emerging technologies across all sectors something akin to ITCs. For example, smart meters, IoT, clean coal, among others could benefit from incentives with the goal of refurbishing existing assets to enhance capacity and utilization. Select credits: if there s a focus on Buy American, provide a tax credit on USmade supplies rather than mandating use that could drive up the cost of the project and reduce its attractiveness to investors. Creative financing support: expansion or creation of new federal government instruments, similar to PABs and TIFIA loans that require remaining funds to be sourced from private investment could be beneficial. This might increase the options for debt financing and provide a greater incentive for state and local governments to leverage private finance for their projects.

14 Our current challenges in delivering infrastructure, and how the private sector can be part of the solution

15 Correcting the course of capital projects Planning ahead to avoid time and cost overruns Any company that has ever undertaken major capital building projects knows they almost always take longer and cost more than expected. Unless strong project controls are put in place in advance, project owners often don t realize the severity of delays and cost overruns until well after a project has foundered. Proper governance and control processes are essential for spotting problems early and getting projects back on track quickly. The more time and effort companies put in at the outset, the greater the chance they will keep projects in check throughout the construction cycle.

16 Correcting the course of capital projects Top 11 reasons why capital projects veer off course

17 Correcting the course of capital projects How to get capital projects back on track

18 What can and should we do now? 1. Get ready to participate 2. Compete for private sector involvement 3. Don t wait 4. Develop capabilities and build trust 5. Be willing to accept tough truths early 6. Evolve!

19 1. How can you get ready to participate in a national infrastructure program?

20 2. How can you compete for greater private sector involvement?

21 3. Don t wait

22 4. Develop your capabilities and build trust

23 5. Be willing to accept tough truths early

24 Evolve! 6.

25 Questions? Riz Shah Partner Linkedin: riz shah pwc

26 pwc.com Identifying P3 Projects and Knowing the Atmosphere CDFA Presentation June 20, 2018 Seth Kirshenberg, Partner Kutak Rock LLP Riz Shah, Partner PricewaterhouseCoopers Public Sector LLP

27 Seems Simple but. Identify the needs Analyze whether P3, traditional financing other options are the right fit Know the process and authorities in your state/community (or agency) Know the other RFPs on the street can developers respond to your project Understand the market and the requirements evolution of deals

28 Q: What types of P3s are Entities pursuing? Question which elements of the design, build, finance, operate, maintain (DBFOM) project components will the entity retain and which to outsource to a developer. Create and customize the project for the need Identify risk willing to undertake and account for on the books of the governmental or university entity

29 Types of Transactions Availability-based payment structures After construction completion, the private developer is entitled to payments from the government as long as contract conditions are fulfilled. Availability payments are sized to cover operating and maintenance costs, debt service costs and equity returns. Concession/Demand-risk projects - Project is largely financed by user payments and we monetize the new or existing asset. This model is often used for roads, student housing and parking. Less Risk to owner. Asset monetization or long-dated concession agreements Hybrids (evolution of the project need)

30 What are other key issues? Understand long term costs when analyzing your project Developers need a return Transaction costs Oversight Understand the Savings over the long-term and benefits Reinvestment requirements Management strength Risk More complex projects often carry more risk, Understand that risk transfer is never complete given a government/university interest in project success.

31 More complex deals Projects include both concession and demand risk. Identify the obligations for the government entity Availability payments, Contingent obligations (financial guarantees) Termination payments Guaranty of demand (for example where demand does not occur at levels required to support debt-service) Specific and well defined contingent liabilities obligations if terminate for convenience or default and need to foreclose

32 When making decisions Understand needs Understand the risks upfront Understand the real cost (both on an annual and long-term basis) Understand whether anyone will bid on your project based on risk allocation (know the market) Understand secondary benefits Understand reputational/political issues for the project Understand Timing Know Your partner once selected Understand that a long term deal may see multiple partners s0 know assignment rights/approvals.

33 33 Seth Kirshenberg Partner 1625 Eye Street, NW, Suite 800 Washington, DC Tel: Fax: Website: