47th Annual Workshop on Transportation Law

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1 47th Annual Workshop on Transportation Law Public Private Partnership Update: Legal Challenges and Obstacles - Protecting the Public Owner Implementation of the Texas Concessions Initiatives July 9, 2008 San Diego, California CHRISTINE D. RYAN Copyright, 2008 Nossaman LLP. All Rights Reserved. 1

2 OVERVIEW New Financial Resources Limiting Financial Exposure Ensuring Reasonable Tolling Structure and Profits Quality Design, Construction, Operation and Maintenance Private Sector Innovation Effective Assurances of Performance Effective Remedies 2

3 NEW FINANCIAL RESOURCES Traditional + PPP project financing = Leverage Accelerated project delivery Otherwise unattainable projects PPP can produce money for public sector: Up-front cash payment Revenue sharing Example: SH 130 Segments 5&6 Upfront Payment, Revenue Sharing 3

4 LIMITING FINANCIAL EXPOSURE 4

5 LIMITING FINANCIAL EXPOSURE Public sector needs reduced capital expenditure, reduced exposure to claims from unanticipated events Revenue-positive projects financial model indicates toll revenues fully pay debt and return on equity SH 130 Segments 5&6 Revenue-negative projects financial model indicates public sector financial contributions needed to fill gap in private investment I-635/LBJ Managed Lanes Project 5

LIMITING FINANCIAL EXPOSURE Revenue Risk Full toll concession financing no public sector revenue risk Developer takes upside and downside Shadow toll financing public sector takes revenue risk

6 LIMITING FINANCIAL EXPOSURE Revenue Risk Full toll concession financing no public sector revenue risk Developer takes upside and downside Shadow toll financing public sector takes revenue risk Maximizes use / minimizes diversion Owner takes upside and downside Other Risk Transfers Cost escalation Differing site conditions Hazardous materials management/remediation Change in law Force majeure 6

7 ENSURING REASONABLE TOLLING STRUCTURE AND PROFITS 7

ENSURING REASONABLE TOLLING STRUCTURE AND PROFITS Public Sector Needs: Maximize its income? Minimize toll rates? Prevent excessive profit? Manage traffic demand and congestion?

8 ENSURING REASONABLE TOLLING STRUCTURE AND PROFITS Public Sector Needs: Maximize its income? Minimize toll rates? Prevent excessive profit? Manage traffic demand and congestion? Depoliticize setting toll rates Texas Tools: Indexed toll rate schedule caps future toll rates, depoliticizes Set initial rates Use stated rates of increase and/or inflation indices for capping future toll rate adjustments CPI, GDP, GSP 8

9 ENSURING REASONABLE TOLLING STRUCTURE AND PROFITS Toll Pricing Congestion Management Dynamic toll rates varying by time of day, level of congestion North Tarrant Express Managed Lanes Project Banded Revenue Sharing generates public partner revenues, prevents excessive profit Public partner takes escalating share of toll revenue as rate of return increases Example: 5% of gross revenues up to $x/yr; 25% of gross revenue between $x/yr and $y/yr; 75% of gross revenue over$y/yr 9

10 REASONABLE TOLLING STRUCTURE AND PROFITS Pass-Through Tolls or Shadow tolls reduce or eliminate tolls, prevent excessive profits, depoliticize El Paso Inner Loop Semi-annual payments based on traffic Amounts may be withheld for default 10

11 QUALITY DESIGN, CONSTRUCTION, OPERATION AND MAINTENANCE 11

12 QUALITY DESIGN, CONSTRUCTION, OPERATION AND MAINTENANCE Traditional Approach Public agency establishes detailed standards, designs and specifications Private contractor constructs, then exits Public agency exercises strong control over construction, including QA/QC, testing, inspection, monitoring, acceptance Public agency maintains and operates 12

maintains Private investors and lenders will not accept

13 QUALITY DESIGN, CONSTRUCTION, OPERATION AND MAINTENANCE PPP Approach Private partner designs, constructs, operates, maintains Private investors and lenders will not accept traditional public sector control How can public partner assure quality? 13

14 QUALITY DESIGN, CONSTRUCTION, OPERATION AND MAINTENANCE Tools Performance-Based Measures and Standards Developer Project Management Plan procedures, processes, quality management systems for all aspects of work. Subject to owner approval Independent Engineer 14

15 QUALITY DESIGN, CONSTRUCTION, OPERATION AND MAINTENANCE Regular performance measurement inspections and reports by Developer to determine and maintain asset condition Public partner audit and monitoring of IE and private partner, and spot testing and inspection Renewal and replacement scheduling and reserves Handback requirements 15

16 PRIVATE SECTOR INNOVATION 16

PRIVATE SECTOR INNOVATION Private Sector Profit Motive Induces Innovation Financing solutions Life-cycle cost containment Design solutions Construction

17 PRIVATE SECTOR INNOVATION Private Sector Profit Motive Induces Innovation Financing solutions Life-cycle cost containment Design solutions Construction means and methods Tolling solutions Maintenance methods How Can Public Sector Capture These Innovations? Contract terms and conditions Effective competition 17

18 EFFECTIVE ASSURANCES OF PERFORMANCE 18

19 EFFECTIVE ASSURANCES OF PERFORMANCE Public Sector Need - effective security for performance of private partner s obligations Traditional Approach 100% payment and performance bonds; parent guarantees PPPs Private partner aversion to: Parent guarantees or other recourse to assets of parent companies Posting bonds Alternative security Lender skin in the game Bonds from design-build contractor Guarantees from parents of design-build contractor, O&M contractor Letters of credit for specific obligations routine O&M; renewal and replacement work; handback work Reserves 19

20 EFFECTIVE REMEDIES 20

21 EFFECTIVE REMEDIES Dispute Resolution Procedures Scale Remedies to the Type and Severity of Breach Liquidated damages for delayed completion, noncompliance with routine covenants Step-in rights, including receivership Work suspension during construction Anticipatory breach and assurances of future performance for persistent default Termination for major uncured default Lender Rights to Notice and Cure 21

22 CONTACT Christine D. Ryan, Esq. Nossaman LLP 901 Congress Avenue Suite 1050 Austin, TX Phone: nossaman.com 22

Fredric W. Kessler, Esq.

Caltrans Legal Division Contract Law Workshop San Diego, California March 21, 2007 PUBLIC-PRIVATE PARTNERSHIPS Fredric W. Kessler, Esq. Nossaman Guthner Knox & Elliott LLP The information contained herein