ABA Public Contract Law Section Public Private Partnerships: Managing Risks, Unlocking Rewards 3 rd Annual State & Local Procurement Symposium May 2, 2008, Austin, TX
ABA Public Contract Law Section State Procurement Hot Topics (Southern) Macro-economic Conditions (recession, budget strains) resident vendor preferences tax collection through contracting (e.g., TIPRA, fees) Socio-Economic Objectives immigration law enforcement energy contracting green purchasing (LEED, EPEAT) disposal of electronics Aging/Changing of Procurement Workforce Integrity/Ethics in Procurement, Lobbying Restrictions Emergency Preparedness Software Licensing Agreements Alternative Project Delivery for Construction finance issues industry form contracts (AGC, AIA, etc.) 2
ABA Public Contract Law Section Public Private Partnerships Introduction and Overview Green Lights Yellow Lights Most attractive rewards, maximizing Risks, managing Future? 3
Patrick D. Harder Nossaman Guthner Knox & Elliott LLP Dana C. Nifosi Venable LLP Frederick J. Springer Bryant Miller Olive PA Amanda C. Wallace Macquarie Capital (USA) Inc. Public Private Partnerships Panel Members 4
Basic Concession Structure Different Stakeholder Perspectives Agency Letter of Credit bank guarantors Equity Concessionaire Lenders Monoline Insurer DB Contractor O&M Contractor $ Tolls Insurance Surety Insurance Surety Users 5
ABA Public Contract Law Section Public Private Partnerships Introduction and Overview Green Lights Yellow Lights Most attractive rewards, maximizing Risks, managing Future? 6
Reasons to Use Concessions Concessions are complex, politically challenging, expensive to procure. Why bother? Four great advantages Accelerated project delivery Powerful tool to receive new capital Private sector innovations, efficiencies, life cycle pricing Risk transfer to private sector We focus today on risk transfer and management to deliver bankable concessions 7
ABA Public Contract Law Section Public Private Partnerships Introduction and Overview Green Lights Yellow Lights Most attractive rewards, maximizing Risks, managing Future? 8
Top Seven Concerns With Concession Agreements 7. Concessionaire will go bankrupt 6. Concessionaire will sell to unfit operator 5. State will lose toll revenue for needed maintenance/expansions 4. Concessionaire will fail to repair facility 3. Concessionaire will raise tolls through the roof 2. Foreign corporations as lessors 9
Top Seven Concerns With Concession Agreements 1. Government use of the concession payment 10
Factors to Consider Each project presents different risk profile Each developer and its equity investors have different risk profiles and portfolios Each agency has different available resources and risk tolerances Objective: best value for money by optimizing risk allocation under unique mix of circumstances 11
Barriers to Achieving Best Value Objective Unquantifiable major risks Inadequate information or due diligence Agency overreaching Proposer not competitive because Equity source too conservative Inefficient risk allocations among proposer team members Inadequate or inflexible concession term Excessive concession term 12
ABA Public Contract Law Section Public Private Partnerships Introduction and Overview Green Lights Yellow Lights Most attractive rewards, maximizing Risks, managing Future? 13
Advantages and Benefits Financing projects without public funding Obtaining up-front payments Optimizing (transferring/sharing) risk allocation Project cost and schedule Use and revenue levels Transparency of project costs Private sector efficiencies in operations and lifecycle management Obtain facility that better reflects true O&M costs 14
Benefits of Concession Model TRADITIONAL PROCUREMENT CONCESSION MODEL VS. + + + + + Revenue Efficiencies CAPEX Efficiencies OPEX Efficiencies Equity Additional Debt ADDITIONAL: Infrastructure Economic Development Jobs Standalone Bonding Capacity Standalone Bonding Capacity Examples State s Estimate of Value Private Sector Valuation Additional Value Indiana Toll Road $2.0bn $3.8bn Approx 90% more Chicago Skyway $1.0bn $1.8bn Approx 80% more 15
Toll Roads: Comparison of Approaches Revenue TRADITIONAL MODEL OF TAX- EXEMPT BOND FINANCING Debt Coverage Tax Exempt Bond Debt Years 40 Toll = $2.00 Raises $100 M Revenue CONCESSION MODEL Bank Debt Stronger Growth Equity 0 40 75 Years CONCESSION MODEL WITH LOWER TOLLS Toll = $2.00 Raises $160 M Revenue Stronger Growth Equity Toll = $1.40 Raises $100 M Bank Debt 0 40 75 Years 16
ABA Public Contract Law Section Public Private Partnerships Introduction and Overview Green Lights Yellow Lights Most attractive rewards, maximizing Risks, managing Future? 17
Efficient PPP Risk Allocation Allocate to party in best position to manage the risk; more often allocated to developer compared to other contracting structures due to strong project control ability to spread risk over time equity cushion If neither better situated to manage risk, share it Perform project risk assessment before procurement 18
Major Risk Categories Political Risks Macro-Economic Risks Legal and Regulatory Risks Traffic and Revenue Risk Tolling/Revenue Risks Design and Construction Risks Operations and Maintenance Risks 19
Key Risks and Responsibilities Public sector s key role is setting the agenda Specify desired outcome Private sector s role Calculate financial impact of policy decisions Educate on concession model and how it addresses concerns Some key dials to consider: Concession length Tolling schedule Non-compete clauses Revenue sharing Existing employees Maintenance requirements 20
Art of Risk Allocation Rate project risks according to likelihood and severity Reduce likelihood and/or magnitude of risk before procurement through pre-development work, data generation/gathering, and due diligence Compare cost of: Risk retention vs. Developer contingency to take risk transfer Assess strength of competition Communicate, listen, and learn Last, allocate risk 21
ABA Public Contract Law Section Public Private Partnerships Introduction and Overview Green Lights Yellow Lights Most attractive rewards, maximizing Risks, managing Future? 22
Factors Influencing Future Direction New Administration s Direction Assessments of Current U.S. Projects and Experience with Various Delivery Methods Increased Demand and Availability of Funding 23
Disclaimers - The Fine Print This document does not constitute an offer to sell or a solicitation of an offer to buy any securities or participate in any transaction. It is an outline of matters for discussion only. You may not rely upon this document in evaluating the merits of investing in any securities referred to herein or participating in any transaction. This document does not constitute and should not be interpreted as either an investment recommendation or advice, including legal, tax or accounting advice. Future results are impossible to predict. Opinions and estimates offered in this presentation constitute our judgement and are subject to change without notice, as are statements about market trends, which are based on current market conditions. This presentation may include forward-looking statements that represent opinions, estimates and forecasts, which may not be realized. We believe the information provided herein is reliable, as of the date hereof, but do not warrant its accuracy or completeness. In preparing these materials, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. Nothing in this document contains a commitment to subscribe for securities, to provide debt, to arrange any facility, to invest in any way in any transaction described herein or is otherwise imposing any obligation on the presenters or their firms. The firms do not guarantee the performance or return of capital from investments. Any participation by the presenters or their firms in any transaction would be subject to their internal approval process. 24