P3 101 Overview of Public Private Partnerships

Transcription

1 P3 101 Overview of Public Private Partnerships June 21, 2017 PFM Financial Advisors 300 South Orange Avenue, LLC/ Public Financial Suite 1170 pfm.com Management, Inc. Orlando, FL PFM 1

2 Table of Contents I. What is a P3? A. Background B. Common Misunderstandings/Misconceptions II. How do Florida School Districts Typically Finance Capital Investment? III. Is a P3 Right for You? IV. Legal Considerations V. Exhibits PFM 2

3 Goals for Today Understand o What s a P3? o The history and strategic aspects of Public Private Partnerships o Capital funding options available to Districts (traditional, P3, other) o HB 7069 o The framework for determining whether a P3 is appropriate. If appropriate, the process for moving forward PFM 3

4 I. What is a P3? PFM 4

5 What is a P3? PARTNERSHIP - financial, legal, operational, etc., between a PUBLIC Entity - city, county, school district, airport, toll road, etc., and a PRIVATE Entity typically for profit with expertise in the relevant business (construction, operation, etc.) o P3s are contractual agreements formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery, financing and possible operation of capital projects Typical Characteristics o Long-term in nature (often 30 to 50 years or longer) o Projects are revenue generating Dorms, toll roads, convention center hotels o Partners offer expertise related to the specific project that the local government does not possess o Decision drivers include efficiencies (capital and operating), debt capacity, economic factors, risk transfer, timing PFM 5

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7 Public-Private Partnerships Definition - P3s are contractual agreements formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery, financing and possible operation of projects There are many different P3 structures, and the degree to which the private sector assumes responsibility including financial or operational risk differs from one application to another Additionally, different types of P3s are applicable to the development of new facilities and others P3 concepts to the operation or expansion of existing assets Key is to understand the elements of project delivery alternatives Design, Build, Operate, Maintain and Finance and how Project Finance/P3 techniques can be utilized in various combinations PFM 7

8 History of P3s Are P3s a new concept? o Yes and No o No Airports, seaports, toll roads, bridges, power generation/distribution P3s have existed for decades o Yes Expansion into traditional governmental operations, particularly non-revenue generating assets, is relatively new Why are P3s currently a hot topic? o Budget constraints o Project delivery challenges o Operational Risk o Political priorities o Asset monetization (sale/lease of underutilized assets) Current Local P3s o Examples: Broward Convention Center/Hotel Florida Toll Roads (595 in Broward County, I-4 Ultimate) University dorms Solid Waste Miami Port Tunnel o Many public entities have considered P3s for a wide range of services Few move forward after assessing policy and process PFM 8

9 Common Misunderstandings/Misconceptions There is always a benefit to the public entity o If benefit is narrowly defined, not always o If benefit is broadly defined, yes. Strategic benefit vs financial benefit May include faster/more efficient delivery and/or projects that are important, but too risky for the government P3s are well defined and straight forward. It s just a common lease agreement o In concept, but rarely true in reality o The scope of agreement is unique to the public entity s goals Full P3s that include construction, operation and maintenance require significant documentation (who pays to paint a wall, etc.) Most P3 documents start with a blank piece of paper P3 is not debt, so it solves debt capacity issues o Occasionally this can be true o In most situations, the local government challenge is a Revenue issue, not a debt capacity issue No impact on the District s credit rating o Rating agencies now focus on all long-term obligations, not just traditional debt P3 structures and leases are reviewed during the credit rating process PFM 9

10 II. How Do Florida School Districts Typically Finance Capital Investment PFM 10

11 History of Florida School District Capital Finance Traditionally funding consisted of a combination of General Obligations Bonds, Sales Tax programs and Certificates of Participation (COPs) o Most Florida schools financed in the last 20 years were financed with COPs o COPs debt service funded from Capital Outlay Millage Levy (COML) Example: Palm Beach County School District 2008 to Assessed value declines and decrease in COML from 2 mills to 1.5 mills effectively shut off most financings because of (1) cash flow constraints and (2) rating agency concerns Capital Revenues (in Millions) $350 $300 $250 $200 $150 $100 $50 $0 Capital Outlay Revenue - Historic and Projected FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Capital Millage Levy.25 mils for operations or capital.25 mils for critical needs PFM 11

12 Recent Legislative Action Impact of HB 7069 COML allocated to Charters Drag on COML growth (could lead to material declines) Negative impact on credit characteristics (credit ratings) Impact over time can be material Sample Revenue to Charters $70,000,000 $60,000,000 $50,000,000 $40,000,000 $30,000,000 $20,000,000 $10,000,000 $- FY18 FY20 FY22 FY24 FY26 FY28 FY30 FY32 60% 50% 40% 30% 20% 10% 0% Payment to Charters % Increase from Prior Year PFM 12

13 Rating Agency Considerations Rating Agency feedback The mandate is a credit negative for traditional school districts in Florida, as many have significant charter enrollment and, as a result, will have to transfer a significant amount of revenues ticketed for capital projects to charters within their district. (Source: Moody s Investors Service) School District School District Enrollment Ranking % of Students Enrolled in Charters Estimated % of Available Capital Revenues Transferred to Charters* Miami-Dade % 8.8% Broward % 7.1% Hillsborough 3 8.5% 0.0% Orange 4 6.8% 3.0% Palm Beach % 5.9% Duval % 4.1% Pinellas 7 5.7% 4.2% Polk % 7.9% Lee % 8.5% Brevard % 0.0% *Estimate includes the assumption that only 84% of charter enrollment is eligible for shared capital millage revenues, in line with the statewide average Moody's Rating Issuer: Aa3/ STA Issuer: Aa2/ STA Issuer: Aa1/ STA Issuer: Aa1/ STA Issuer: Aa2/ STA COPs: Aa3/ NEG Not Rated COPs: Aa3/ NOO Issuer: Aa2/ NOO Issuer: Aa2/ NOO PFM 13

14 Rating Agency Considerations School District School District Enrollment Ranking % of Students Enrolled in Charters Estimated % of Available Capital Revenues Transferred to Charters* Miami-Dade % 8.8% Broward % 7.1% Hillsborough 3 8.5% 0.0% Orange 4 6.8% 3.0% Palm Beach % 5.9% Duval % 4.1% Pinellas 7 5.7% 4.2% Polk % 7.9% Lee % 8.5% Brevard % 0.0% Moody's Rating *Estimate includes the assumption that only 84% of charter enrollment is eligible for shared capital millage revenues, in line with the statewide average Issuer: Aa3/ STA Issuer: Aa2/ STA Issuer: Aa1/ STA Issuer: Aa1/ STA Issuer: Aa2/ STA COPs: Aa3/ NEG Not Rated COPs: Aa3/ NOO Issuer: Aa2/ NOO Issuer: Aa2/ NOO PFM 14

15 Rating Agency Considerations Charter growth is expanding beyond largest school districts and has grown to 10% of total enrollment (Source: Moody s Investors Service) PFM 15

16 III. Is a P3 Right for You? PFM 16

17 P3 Decision Process DBOMF - Key project components o Design o Build o Operate o Maintain o Finance o Critical note: Each project component is a discrete in or out decision. The most effective P3 structures typically do not include all components Develop Goals and Objectives o What is the core challenge? o What strategic goals can be accomplished? Are the existing processes efficient, effective and applicable? What aspects of the project are appealing for private sector participation? PFM 17

18 Project Delivery Models Public Private Traditional public operations Privatized Design-Bid-Build Contracts PM/CM at Risk Design-Build Design-Build-Finance Concessions Design-Build-Operate-Maintain Design-Build-Finance-Operate Asset sales PFM 18

19 Key Considerations (Source: GFOA Advisory) 1. Legal Authority State/local/home rule 2. Justification for Project Is the project consistent with vision/goals and address a public priority. 3. Competition Will process be open? If not, why? 4. Expected Project Revenue Assess full life cycle revenue 5. Independent Analysis Public or 3 rd party review of revenues, assumptions, demand 6. Method of Performance Monitoring Is there a proper management structure and clear methodology for evaluating financial and other performance 7. Flexibility Is the agreement flexibly enough to work through changes; early termination/buy out 8. Project Risks Are risk transfer elements clear? What are the performance guarantees from the private entity? 9. Transaction costs Fully defined? For smaller projects, fees and time required to negotiated offset financial benefit 10. Bond Rating Impact What are positive/negative rating impacts? How are cash flows treated for credit perspective? 11. Public Participation and Disclosure Is the process open to public scrutiny? Transparency? 12. Availability of Assistance Are there resources available to assist? Many small governments do not have the resources to evaluate and draft documents. PFM 19

20 Analytical Comparison - P3 vs Traditional Project Delivery Key considerations when comparing traditional financing and a P3: o Construction costs o Lifecycle costs (operation and maintenance); efficiencies and facility upkeep o Financing costs; debt capacity and debt priority o Transferred risks and Retained risks Construction costs are typically lower using a P3 Financing costs are typically higher under the P3 model o For the P3 model to be the most cost-effective, risk transfer needs to occur to the private entity o Risk transfer is hard to define for k-12 school facilities Illustrative Public vs. P3 Cost Comparison Risks Transferred to Private Sector Under P3 Lifecycle Cost Lifecycle Cost Retained Risks Financing Cost Financing Cost Construction Cost Construction Cost PFM Traditional P3 20

21 IV. Legal Considerations PFM 21

22 Legal Considerations P3 vs Lease Operating lease vs capital lease/purchase (ownership, property taxes, procurement requirements, etc.) Unsolicited proposals P3 statutory protections SREF Cost Per Student Station PFM 22

23 Comparison Table Site Selection Construction competitively bid consistent with Board policies Obligation to Pay Property Taxes? Long-Term Operating Lease * F.S (2)(a) Lessor (in the case of the current proposal) No requirement Lease-Purchase F.S (2)(b) Lessee (District) per offers received in competitive process Statute contemplates that building already exists Public-Private Partnership F.S District (through negotiation process) Detailed competitive process required Standard Process Certificates of Participation District Yes No No No Financing Taxable Taxable/Tax-Exempt Taxable Tax-Exempt Direct Purchase of Construction Materials (Sales Tax exemption) No No No Yes Operating or Capital Budget Typically Operating Typically capital Typically capital Capital Maximum Term Required to Comply with Cost/Student Station Compliance with SREF required Negotiable, not specified in statute No No, but compliance with Florida Building Code and life safety required * As proposed by Public School Property Development Lesser of useful life or 30 years No Negotiable, not specified in statute Requires additional research Yes N/A Yes Yes Yes Yes PFM 23

24 Takeaways P3 s can provide benefit to public entities Public entity must assess, identify and value the benefits/risks associated with the P3 Risk transfer is a key factor. What risks can be transferred to the private entity (financial, operating, construction delivery, etc.) Evaluation Process is complicated and time consuming Not a tradition procurement; significant legal and financial analysis required PFM 24

25 Thank You PFM 25

26 Exhibits PFM 26

27 Legal Considerations PFM 27

28 P3 Protections F.S Compliance with the P3 statute provides protections that should be considered in light of the proposed transaction. F.S (3) provides a procedure for an unsolicited proposal designed to promote an open and fair process. o The procedure for an unsolicited proposal permits the School Board to establish a reasonable application fee for the consideration of an unsolicited proposal, including the right to request additional funds if the costs exceed the initial payment. (The funds are to be returned if the School Board does not evaluate the unsolicited proposal.) o Receipt of unsolicited proposals must be advertised in newspapers of general circulation at least once a week for two weeks. o The statute also requires a period of at least 21 days for other proposals to be made. PFM 28

29 P3 Protections The unsolicited proposal must contain: o Description of the project and a schedule for the project s initiation and completion. o Description of the method by which the private entity proposes to secure the necessary property interests that are required for the project. o Description of the proponent s plans for financing the project, including sources of funds. o The proposed user fees, lease payments, or other service payments over the term of the comprehensive agreement, and the methodology for and circumstances that allow changes in user fees, lease payments, or other service payments over time. (F.S (4)) PFM 29

30 P3 Protections The P3 statute requires adequate information to determine the feasibility and valuation of the proposed project: o The School Board may require the proponent to provide a technical study prepared by a nationally recognized expert with experience in preparing analyses for bond rating agencies. In evaluating the technical study, the School Board may rely upon internal staff reports prepared by personnel familiar with the operation of similar facilities or advice. (F.S (3)(f)) o The School Board must perform an independent analysis of the proposed project which demonstrates the cost effectiveness and overall public process before the procurement process is initiated or a contract is awarded. (F.S (5)(d)) o The School Board must ensure that there is provision for the proponent s performance and payment of subcontractors, including, but not limited to, surety bonds, letters of credit, parent company guarantees and lender and equity partner guarantees. (F.S (5)(b)) PFM 30

31 P3 Protections Before approving the project, the School Board must determine that the proposed project: o Is in the public s best interest. o Is for a facility that is owned by the School Board or for a facility for which ownership will be conveyed to the School Board o Has adequate safeguards to ensure additional costs or service disruptions are not imposed on the public if the proponent defaults or the project is terminated by the School Board. o Has adequate safeguards to ensure that the School Board has the opportunity to add capacity to the project. o Will be owned by the School Board upon completion, expiration, or termination of the comprehensive agreement and upon payment of the amounts financed. (F.S (3)(d)) A responsible public entity may approve the development of an educational facility if: o There is a public need or benefit from the project of the type proposed. o The estimated cost of the project is reasonable. o The proponent s plans will result in a timely acquisition, design, construction, equipping, maintenance or operation of the project. (F.S (5)(e)) PFM 31

32 State Building Code (SREF) All educational facilities constructed by the School Board must conform to the SREF. Sec , , F.S. Any educational facility financed by the School Board through its master lease program must conform to SREF. Sec (2)(b) F.S. A School Board may rent or lease space, and fund it through the operational or capital budget. Sec (2)(a), F.S. All newly leased spaces must be inspected and brought into compliance with the Florida Building Code pursuant to chapter 553 and life safety code pursuant to chapter 633. Sec.1013(2)(a)1, F.S. PFM 32

33 Cost Per Student Station Limits Last year Section (6)(b)1 imposed limits on the use of otherwise eligible funding sources to pay for new construction of educational plant space, where the costs per student station exceed certain statewide averages. o o o The list of prohibited funds includes virtually all capital outlay funding sources. Effective July 1, 2017 a school district may not use funds from any source to pay for new construction of educational facilities exceeding the adjusted average costs per student station, and in addition violation of the cost limits on new construction initiated on and after July 1, 2017 will be subject to additional sanctions. These sanctions for violations include loss of the allocations from the motor vehicle licensing tax ( CO&DS) for 3 years and being subject to a construction oversight committee for 3 fiscal years. PFM 33

34 State Survey Approval If the School Board were to finance the new high school through the master lease program, it would presumably pay for it with appropriations from its non-voted capital outlay funding under Sec (2)(COML). o In order to use such millage both the master lease and Sec (2)(a) require that the project be State survey approved under Sec It is not clear whether the proposed high school lease must appear on a state survey. It should, however, appear on the District Educational Facilities Plan. See Sec (2)(a) where public private partnerships are listed as one of many options available to avoid the need for additional permanent student stations. PFM 34

35 P3 Process PFM 35

36 P3 Process: Valuation, Development & Execution Analysis and Valuation Transaction Development Transaction Execution PFM 36

37 P3 Process: Analysis and Valuation Program Development Define project/transaction objectives Define public interest to be served/preserve (e.g. cost, availability of service, reliability/safety) Establish financial framework Probably N/A for school districts Enterprise (toll, fare or other user fee supported) Availability (tax/appropriation supported) Hybrid (user fee & tax supported) Feasibility & Valuation Determine baseline project cost and timetable Evaluate alternative delivery mechanisms Research private sector interest and capabilities Identify major stakeholders, key constituents Preliminary Market Outreach Seek investor/operator feedback Level of interest Potential value add Identify and catalog risks/concerns PFM 37

38 P3 Process: Transaction Development Confirm Preferred Contract Structure Review Alternative Delivery Options Lease, Concession, Design-Build, Operate-Maintain Confirm preferred contract delivery structure Update comparative value analysis Traditional delivery vs. proposed P3 delivery Finalize preferred procurement process RFI/RFQ/RFP Competitive, negotiated, BAFO (Best and Final Offer) Procurement Design Establish RFQ/RFP timeline Initiate due diligence process Assemble transaction team Initiate stakeholder outreach & education Maintain investor/operator outreach & feedback PFM 38

39 P3 Process: Transaction Execution RFQ Process Draft & distribute RFQ Pre-qualify bidding teams based on well defined criteria Execute confidentiality agreements Initiate due diligence information exchange Open and populate virtual data room RFP Process Draft and circulate transaction documents Concession agreements, Operating standards Project design specifications Elicit feedback and hold one-on-one meetings Maintain communications with stakeholders /constituents Amend and re-circulate documents Finalize documents and transaction terms Release RFP Award and close PFM 39