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

Transcription

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

2 Bob Chambers Les Snyder Geoffrey Stricker Skip Weiss Mary Alice McNamara Edward Fanter Ernie Brown P3 Panel: Smith Currie (Moderator) i+icon USA Edgemoor Infrastructure Fluor Corporation Travelers BMO Capital Markets Smith Currie

3 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

4 Participants must: To Earn CEUs for this Program: 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 ed 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)

5 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

6 MODERATOR: Bob Chambers Managing Partner Smith, Currie & Hancock LLP

7 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

8 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

9 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.

10 Reasons to Move Toward P3s

11 PPP Project Structure

12 P3 Components Contrasted with Other Methods

13 P3 Components Contrasted with Other Methods

14 P3 Components Contrasted with Other Methods

15 No Horizontal P3 Projects

16 No Vertical P3 Projects

17 PANELIST: Les Snyder President and CEO i+icon USA, LLC

18 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

19 AGC P3 Task Force White Paper, presentations and more including state by state map of P3 acceptance found at:

20 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

21 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

22 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

23 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)

24 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

25 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

26 PANELIST: Geoffrey Stricker Managing Director Edgemoor Infrastructure & Real Estate

27 If You Have Done 1 P3...

28 ... You Have Done 1 P3

29 Risk Transference Via P3 Approaches

30 Key Issues Enabling Legislation Critical Need vs. Fishing Expedition Ability to Pay P3 = Free Money External Advisors (or track record) Defined Schedule

31 Contractors View of P3 Projects

32 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

33 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

34 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 LDs Letter of Credits 5-10% of contract value May equal to one year of lost payments

35 Social Infrastructure Gaining Traction Current Market Opportunities Long Beach Civic Center Houston Justice Multnomah Courthouse UC Merced Indianapolis Justice Complex

36 Mary Ellen Henderson MS

37 South County High School

38 George Deukmejian Courthouse

39 UCSF Neurosciences

40

41 PANELIST: Spencer C. Skip Weiss Vice President and Managing General Counsel Fluor Corporation

42 Fluor - U.S. Public-Private Partnership (P3) Experience Windsor Essex Parkway SR 125 Expressway Eagle Denver Commuter Rail Line E-470 Colorado Toll Road I-95/395 HOT Lanes I-495 Capital Beltway Express Lanes I Pocahontas Parkway Conway Bypass SH 130 Texas Toll Road 42

43 E-470 Colorado Toll Road

44 E-470 Colorado Toll Road

45 Route 895 Pocahontas Parkway Virginia Toll Road James River Crossing

46 Route 895 Pocahontas Parkway Virginia Toll Road James River Crossing

47 Eagle Denver Commuter Rail

48 Eagle Denver Commuter Rail

49 SH 130 Texas Toll Road

50 SH 130 Texas Toll Road

51 I-95/395 HOT Lanes in Northern Virginia

52 I-95/395 HOT Lanes in Northern Virginia

53 Conway Bypass South Carolina Coastal Access and Evacuation Highway

54 SR 125 San Diego County, California, Expressway

55 A8 Autobahn, Southern Germany

56 Windsor Essex Parkway

57 Windsor Essex Parkway

58 A59 Freeway The Netherlands

59 A59 Freeway The Netherlands

60 London Connect Subway Communication System

61 London Connect Subway Communication System

62 I-495 Capital Beltway Express Lanes (HOT Lanes)

63 I-495 Capital Beltway Express Lanes (HOT Lanes)

64 I-495 Capital Beltway Express Lanes (HOT Lanes)

65 Fluor - U.S. Public-Private Partnership (P3) Experience Windsor Essex Parkway SR 125 Expressway Eagle Denver Commuter Rail Line E-470 Colorado Toll Road I-95/395 HOT Lanes I-495 Capital Beltway Express Lanes I Pocahontas Parkway Conway Bypass SH 130 Texas Toll Road 65

66 Eagle Denver Commuter Rail

67 I-495 Capital Beltway Express Lanes (HOT Lanes)

68 PANELIST: Mary Alice McNamara 2VP & Counsel, National Accounts Travelers Bond & Financial Products

69 Local Project Owner (Municipality, Hospital Board) Surety Company Performance & Payment Bonds Design- Construction Contract When you re bidding this.. Don t forget. Design- Construction Entity (Corporation, JV, Partnership ) Subcontractor Performance & Payment Bonds Subcontract

70 Government Ministry Policy or Program Mandate Mandate and Funding Commitment Gov t Administrative Agency (I.O., PBC) Rating Agency(s) (S&P, Moody s) Funding Commitment Adminstrative Support / Oversight Prospectus, indenture Bond Holders This Local Project Owner (Municipality, Hospital Board) Lenders Direct Agreement (PA Assignment and Step-In) DB Contractor s Direct Agreement (DB assignment and step in) PCG Owner s Direct Agreement (PA Assignment & Step-In) Project Agreement Design, construction, maintenance, long-term operations, hand-back, refinancing Concession Entity (Project Co) Corporation, JV, Partnership... Financing Agreement(s) Security Docuements (LOC) Lender s Agent or Trustee Senior Lender(s) Common Terms Junior Lender(s) Surety Company Design-Construction JV participant Performance & Payment Bonds Design- Construction Contract DB Contractor s Direct (collateral) Agreement Facility Maintenance & Operation Contract JV or Partnership Agreement Design-Construction JV participant Design- Construction Entity (Corporation, JV, Partnership ) Interface Agreement Facility Maintenance & Operation Entity (Corporation, JV, Partnership... Subcontract Performance & Payment Bonds Subcontract Subcontractor Limited Recourse Guarantee Security Document (LOC) Subcontractor

71 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

72 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?

73 Surety Perspective Different kind of risks on PPPs How different? Liquidity (Demand) alternatives

74 Conventional The P3 Model Model $$ Long-term Revenue Stream Government Owner Project Agreement DBFMO DB Contract Construction Term Financing $$ Taxes, municipal bonds, gov t transfers, user fees Project GC / DB Co Contractor SPV Private Equity Project Finance Loans Bonds / Instruments O&M Contract Bonds Bonds O&M Facilities Maint Contractor Bonds Sub Contracts Sub Contractors 74

75 PANELIST: Edward Fanter, CFA, P.E. Managing Director Infrastructure Banking BMO Capital Markets

76 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

77 Why Governments Use P3 Methods Four Main Benefits of P3 Risk Transfer Reallocate risks to the private sector Revenue/Rates Construction Technology Operations/Maintenance Lifecycle/Capital Reinvestment Private Sector Expertise 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 Timing & Certainty of Delivery 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 77

78 Risk Transfer to Private Sector Spectrum of P3 Private Procurement Options for New Assets 0% Alternative Description Key Elements Design Build Government contracts for the design and construction of assets directly Mix of interim and completion payments Government to manage and operate assets 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 Design Build w/ Operating Contract Adds an operating contract with Private sector for operating the assets post construction Often operating contract includes a payment penalty mechanism to ensure performance 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 Private Financing Required Design Build Finance 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 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 Concession (or Lease) Model Standard P3 Procurement Design Build Finance Operate ( DBFO ) 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 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 100% Asset Sale / Full Privatization Government sells or leases constructed assets to Private sector Government may retain some monitoring and enforcement rights Basically the same as DBFO 78

79 P3 Concession Model Contract Structure Contract Structure Financial Sponsors & Construction Firms Financial Sponsors & Institutional Investors City or State Authority EQUITY SPONSOR Third Party Investors Public Sector Granting Authority 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 PROJECT CO (LLC) Special purpose vehicle Ring-fenced LOAN AGREEMENT OPERATING CONTRACT Drop-down O&M provisions from Concession Agreement Payment deductions for poor performance Debt Providers PERFORMANCE SECURITY Limited Parent Company Guarantee Partial LOC Design Build Contractor (DBJV) Engineering & Construction Firms SUBCONTRACTORS SUBCONTRACT AGREEMENTS Operating Contractor (OpCo) Operations & Facility Maintenance Firms Project obligations are passed down to DBJV and OpCo through drop-down contracts on a back-to-back basis with the Concession Agreement 79

80 P3 Risk Allocation Matrix City or State Authority Privately Owned SPV Entities Risk Public Sector Project Co DBJV OpCo Land / Right-of-Way Design Permitting Construction Geotechnical Conditions Construction Period Risks Archaeological Findings Utility Line Relocations Defects Revenue/Performance Operations/Collections Routine Maintenance Major Maintenance/Lifecycle Operating Period Risks Force Majeure/Relief Events Termination Event Risks Change in Law Financial Structuring Closing Market Conditions Financial Execution Risks Project risks are allocated to the parties best able to competitively price and manage the risk 80

81 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

82 States with P3 Authorization 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 82

83 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

84 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

85 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 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 Success has been focused at the state level 85

86 P3 Project Types DBFO Model Four Project Types Greenfield Construction Brownfield Asset Monetization Revenue Risk Private developer collects user fee revenues from the project 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 Availability Payment Governmental sponsor makes performance-based payments to the private developer 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 86

87 PANELIST: Ernest C. Ernie Brown Partner Smith, Currie & Hancock LLP

88 Contracts & Risks Shifting Risks to P3 Concessionaire Design and Development Construction Financing Operation Risk

89 Unique Contract Risks P3 Concessionaire responsible for: Financing Permitting and Environmental Compliance Intergovernmental Coordination Right of Way Utility Coordination

90 Unique Contract Risks P3 Concessionaire Responsibilities: Dealing with Stakeholders Design Approval from Owner Construction and any Unforeseen Conditions Life Cycle Operations (30 years)

91 Typical Contractor Organization

92 Financing Secure Financing Maintain Financing Construction Price Escalation Demand Risk or Operational Expenses

93 Permitting Responsible for NEPA/CEQA Lead Agency Responsible, BUT Contractor has Responsibility

94 Third Party Agencies Conditions Set Externally Must Secure Consensus Must Secure Environmental Approval Hide the Ball Tactics Beware!

95 Right of Way Owners Traditionally Negotiate Eminent Domain Tasks Limited Relief Granted by Courts Beware!

96 Utility Coordination Identify Conflicts Provide Notice Relocation Responsibilities Perform Relocation Beware!

97 Other Stakeholders Satisfying Owner Promises Enforcing Promises Beware!

98 Construction Construction Cost Increases Labor and Material Escalations Cost and Time to Develop Solutions Differing Site Conditions Beware!

99 Owner Approval Obtain Approval of Owner Valid Reasons for Rejection of Submittals Beware!

100 Long Term Operations Satisfy Quality Benchmarks Additional Risks: Premature Obsolescence/New Competitors Adapting Services Unexpected Costs Inputs Labor

101 Q&A