Public Private Partnerships 101

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1 Public Private Partnerships 101 Tony Elkins, Commercial Director October 6, 2016 Cintra s LBJ Managed Lanes P3, Dallas, Texas

2 The Ferrovial Group Development Over The Entire Infrastructure Lifecycle INFRASTRUCTURE DEVELOPMENT CONSTRUCTION Leader in transportation development. 47 years of experience Investor in greenfield and brownfield assets Manage 28 Concessions in 10 countries ($23 billion of managed investment) North American Infrastructure Developer of the Year (2013) Infrastructure Civil engineering Webber TX Construction 80 years of construction experience Specializing in large and complex projects Cadgua water ENR US Transportation Ranking: #7 (2015) SERVICES Construction AIRPORTS Municipal services and waste management Facility management Infrastructure maintenance Focus on intelligent cities, waste reuse and energy efficiency Broadspectum (acquisition) Largest private investor in airports Manages 5 airports, including Heathrow 87 million passengers per year 2

3 Cintra s P3 Projects - North America Toronto, Ontario (Canada): 407 ETR Total Investment: $4.4B Local Partner: SNC-Lavalin Fort Worth, TX: North Tarrant Express Total Investment: $1.9B (Segments 1 & 2W) Tolled Bridge Total Investment: $2.1B Lease Concession Local Partner: Webber Toronto, Ontario: 407 Extension Total Investment: $1.1B Local Partner: SNC Lavalin Fort Worth, TX, North Tarrant Express (Segments 3A & 3B) Total Investment: $1.4B Local Partner: Webber Toronto, Ontario, 407 Phase 2 Ext. Total Investment: $1.0B Local Partner: Dufferin Charlotte, NC: I-77 Managed Lanes Total Investment: $0.7B Local Partner: English Construction Dallas, TX: IH-635 Managed Lanes Total Investment: $2.7B Local Partner: Webber 3

4 Infrastructure Delivery Models 1 Design-Bid-Build (DBB) 2 Design-Build (DB) Ranked by order of risk transfer to private sector Full P3 3 Design-Build-Finance (DBF, gap) 4 5 Design-Build-Operate-Maintain (DBOM) Design-Build-Finance-Operate- Maintain (DBFOM) Availability Payment 6 Design-Build-Finance-Operate- Maintain (DBFOM) Revenue Risk 4

5 5 Design-Bid-Build (DBB) [non-p3] Owner hires designer Owner/designer develop program and complete documents After the project documents are completely designed, they are put out to bid with prequalified GCs Low bidder is usually selected Communication is directed through the designer to the owner Advantages Owner has greatest control over the design and construction Widely accepted, well understood, and has well-established and clearly defined roles for all parties Well suited for uncomplicated projects with straight forward objectives and adequate time Disadvantages Public retains major project risks including: design, schedule, costs, operations, revenue and finance. Little to no risk transfer to private sector Change orders and claims (time and money) are more likely with DBB. [On average 18% late and 18% over budget] No ability to integrate and lower lifecycle costs No innovation/atcs vs. P3 or DB

6 Advantages Design-Build (DB) [non-p3] Owner hires a Design-Build team Design-Build team is responsible for the delivery of the project Fixed-price, date-certain contract is established Public sector finances the project through issuance of state debt and public subsidy Single point of accountability Transfers the majority of design & construction risk to private sector - less change orders than DBB method Reduces project oversight Disadvantages No incentive to reduce traffic congestion, lower cost or provide improved customer service Public sector retains risk for OM&R + demand risk Limited ability to integrate and lower life-cycle costs Lower quality innovation/atcs vs. P3 Construction contract is subject to change orders (time and cost) [On average 11% late and 6% over budget] 6

7 What is a Public Private Partnership? A long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears a significant risk and management responsibility, and remuneration is linked to performance. No two P3s are identical. P3s are tailored to meet the public agency s financial, policy and operational goals. A P3 is not an outright sale of a public asset. The public agency maintains ownership of the asset and sets operational, maintenance and safety standards. At the end of the concession the asset is handed back to the owner with preset hand-back criteria. 7

8 Public Private Partnerships Are Not New Philadelphia & Lancaster Turnpike Road (62 miles) First long-distance paved road in U.S. Cost of the road was beyond the means of the state Pennsylvania legislature voted in 1792 to allow for a private company to build and finance the road with repayment from tolls 8

9 Typical PPP Structure Public Sector Public-Private Partnership Agreement Equity Member(s) Fixed Equity Contribution Concession Company (Developer) Funding Agreements Debt DB Agreement Design-Build Joint Venture O&M Agreement Operations & Maintenance Local Partners Design Firm(s) 9

10 Design-Build-Finance- Operate-Maintain (DBFOM) Availability Payment P3 Demand risk is retained by the public sector Scheduled payments from the public sector to the private sector partner are made based on availability of the asset during the concession period (and performance against predetermined standards) Deductions are made for nonavailability of the asset (and poor performance against predetermined performance standards) Advantages Transfers major project risks to private sector (including design, construction, finance and operations and maintenance) Can be structured without the need of an upfront public subsidy Encourages more innovation than DBB or DB Disadvantages No incentive to reduce traffic congestion or provide improved customer service Public sector absorbs traffic and revenue risk Creates public sector debt and state/province has a limit on how many AP deals before credit rating downgrade No reality check on projects that are not financially viable 10

11 Design-Build-Finance- Operate-Maintain (DBFOM) Traffic/Revenue Risk P3 Private partner assumes revenue/demand risk A DBFOM contract protects the public sector if project underperforms Ability to set revenue rates are governed by the concession agreement Revenue risk incentivizes concessionaire to improve traffic flow along the corridor and provide high-quality of service to its users Advantages Provides maximum incentive to reduce traffic congestion, lower cost and provide improved customer service Provides effective traffic risk transfer from public to private sector New funding source: no impact to public sector credit rating and debt capacity Provides greatest amount of innovation and risk transfer Smart project selection- bad projects won t get funded Disadvantages High financing costs which are directly offset by risks transferred 11

12 P3s Transfer Risk to the Private Sector The Heart of a P3 Risk Design-Bid-Build Design-Build DBFOM - P3 (Availability) DBFOM - P3 (Demand) Scope Changes (owner requested) Public Public Public Public NEPA Approvals Public Public Public Public Permits & Approvals Public Shared Shared Shared Right of Way Public Public Shared Shared Utility Relocation Public Shared Shared Shared Rail Relocation Public Public Public Public Design (errors & omissions) Public Private 80/20 Private Private Ground Conditions Public Shared Shared Shared Environmental Contamination Public Public Shared Shared Construction Delays Shared Private 80/20 Private Private Construction Cost Overruns Shared Private 80%/20% Private Private Labor Disputes Public Private Private Private Quality Assurance/Control Public Shared Private Private O&M + CapEx/Lifecycle Public Public Private Private Financing Public Public Private Private Interest Rate/Credit Spread Public Public Public Public Changes in Law Public Public Shared Shared Force Majeure Public Shared Shared Shared Traffic Public Public Public Private Revenue Public Public Public Private Toll Collection Public Public Public Private 12

13 Key Benefits of P3s Risk Transfer to Private Sector Increased Innovation Infrastructure projects have significant risks including construction, design, revenue, utilities, funding and O&M. A P3 provides the public sector with a valuable insurance policy against these and other risks. P3 delivery will yield significantly more innovation savings through superior ATCs, an emphasis on performance specifications and a whole-life costing approach. Project Acceleration & Funding On Budget & On Time Superior Customer Service & Guaranteed O&M + Lifecycle With accelerated funding from private partners, projects can be put in place years ahead of when they might otherwise be, providing needed transportation improvements sooner and reducing inflationary costs. P3s have a history of significantly lower contractor change orders for cost and time. These benefits are driven largely by the fixed-price, date-certain construction contract, and the oversight role of the private sector financing. P3s motivate the concessionaire to reduce congestion and deliver superior customer service. P3 projects are typically better maintained than conventional projects since the concessionaire is subject to both contractual standards and market pressures. 13

14 Water PPP Case Study Santa Paula Water Recycling Facility Capital Cost $62 million Opening Date May 2010 Design & Construction cost savings $18 million or 15% O&M cost savings Delivery $1.8 million per year 7 months ahead of schedule Facility Footprint Reduced by 70% Energy Consumption 30% savings 14

15 P3 Points of Consider Projects suitable for P3 Size Life cycle cost efficiencies Major technically-complex projects Public sector champion and stakeholder support Institutional readiness Many projects should be procured as DBB or DB if they don t meet the above criteria Funding source P3s are more of a financing tool versus a funding source Advisors 15

16 16 EXAMPLES OF INCREASED INNOVATION

17 EXAMPLE OF INNOVATION LBJ (Dallas) United States Concept A revenue risk P3 will yield significantly more innovation savings than DB procurement Event TxDOT initially proposed managed lanes to be build in a tunnel Ferrovial Agroman s engineers requested TxDOT to allow flexibility to depress managed lanes instead of building a tunnel Benefit Cintra/Ferrovial won project with depressed lane approach Resulted in $1 billion of lower construction costs and in aggregate $1.3 billion of lower public subsidy versus second place proposal 17

18 EXAMPLE OF INNOVATION NTE Segments 1 & 2 (Ft. Worth) United States Concept A revenue risk P3 will yield significantly more innovation savings than DB procurement Event TxDOT did not have the capital capacity to deliver this project without private financing TxDOT has serious public subsidy constraints and sought maximum private sector innovation Benefit Alternative Technical Concepts and Industry Review Improvements resulted in a $480 million or 25% decrease in the final DB price from TxDOT s initial estimate A majority of the innovative ideas came as a result of the transfer of revenue risk which encouraged enterprising new ideas for affordability 18

19 19 EXAMPLES OF PROJECTS DELIVERED ON BUDGET AND ON TIME

20 DELIVERED ON BUDGET AND ON TIME NTE & LBJ (Ft Worth/Dallas) United States Concept Event Studies have shown that DB procurement has a higher level of contractor driven cost change orders. Florida DOT has shown DB has an average 6% cost overrun. 1 Studies have shown that DB procurement has significantly more schedule overruns than P3s. For example P3 early by 0.3% and DB late by 11%. 2 Cintra delivered NTE and LBJ projects in 2014 and 2015 Budget: zero contractor requested change orders on a combined DB price of ($3.6 billion) Schedule: NTE (early by 9 months or 15%), LBJ (early by 3 months or 5%) Benefit TxDOT insulated itself from possible large change orders and late delivery versus selecting a DB procurement Effective risk management 1 FL Dept. of Transportation. 595 Express Value for Money Analysis (June 2009) 2 Chasey/Maddex/Bansal. Comparison of Public-Private Partnerships and Traditional Procurement Methods in North American Highway Construction. (2012) 20

21 DELIVERED ON BUDGET AND ON TIME Mopac Improvement Project (Austin) United States Concept Event Studies have shown that DB procurement has a higher level of contractor driven cost change orders. Florida DOT has shown DB has an average 6% cost overrun. 1 Studies have shown that DB procurement has significantly more schedule overruns than P3s. For example P3 early by 0.3% and DB late by 11%. 2 Mopac project was awarded by the Central Texas Regional Mobility Authority (CTRMA) under a DB contract in 2012 for $136 million Project is currently $110 million over budget (81%) and 29 months (48%) over the planned completion date Problem DB procurement led to a dramatic cost increase for the project, resulting in CTRMA having to request more public subsidy from TxDOT 1 FL Dept. of Transportation. 595 Express Value for Money Analysis (June 2009) 2 Chasey/Maddex/Bansal. Comparison of Public-Private Partnerships and Traditional Procurement Methods in North American Highway Construction. (2012) 21

22 DELIVERED ON BUDGET AND ON TIME SR 99 Alaskian Way Viaduct (Seattle) United States Concept Event Studies have shown that DB procurement has a higher level of contractor driven cost change orders. Florida DOT has shown DB has an average 6% cost overrun. 1 Studies have shown that DB procurement has significantly more schedule overruns than P3s. For example P3 early by 0.3% and DB late by 11%. 2 Washington State DOT awarded a $1.35 billion DB contract in 2010 to Seattle Tunnel Partners consortium Tunneling problems have resulted in an anticipated completion date delay of 28 months (47%) WA-DOT is suing the DB team for $143 million of cost overrun or 11% Problem Had the SR 99 project been procured under a P3 model, it would have most likely been delivered close to on budget and on time 1 FL Dept. of Transportation. 595 Express Value for Money Analysis (June 2009) 2 Chasey/Maddex/Bansal. Comparison of Public-Private Partnerships and Traditional Procurement Methods in North American Highway Construction. (2012) 22

23 Tony Elkins Commercial Director Corporate & Business Development Cintra 9600 Great Hills Trail, Suite 250E Austin, TX O: F: C:

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