Presenting a live 90-minute webinar with interactive Q&A Financing Public-Private Partnerships for Infrastructure, Transportation, Energy and Redevelopment Projects Structuring Traditional and Alternative Financing and Allocating Risk to Protect Return on Investment THURSDAY, JANUARY 5, 2017 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: David A. Rogers, Member, Frost Brown Todd, Columbus, Ohio Patrick Woodside, Member, Frost Brown Todd, Cincinnati The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
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FINANCING PUBLIC-PRIVATE PARTNERSHIPS FOR INFRASTRUCTURE, TRANSPORTATION, ENERGY AND REDEVELOPMENT PROJECTS P3 FINANCING MODELS AND OTHER WAYS TO THINK ABOUT P3 David Rogers, Esq. FBT Project Finance Advisors LLC & Frost Brown Todd LLC Patrick Woodside, Esq. Frost Brown Todd LLC Rob Mecklenborg, Esq. Frost Brown Todd LLC January 5, 2017 Strafford Webinar
WHY A PUBLIC- PRIVATE PARTNERSHIP? It is non-traditional methods of funding and procurement for infrastructure and other municipal projects: P3s are used throughout the world for a variety of infrastructure asset classes. It is also a contractual agreement between a public agency and a private partner to achieve all, one or a combination of the following: Monetization of an existing infrastructure asset or expansion. Increased value for money possible because of increased efficiency, including with respect to O & M, for life of asset, and you can transfer most risk to the private partner. Value for money is considered over the useful life of the project. Sectors Transportation Examples of Revenue Generating Assets Parking systems Design, construct, finance, and/or operate and maintain an infrastructure project. Transfer risks--such as revenue, operations, permitting, capital maintenance, construction to the partner best able to retain and manage them. Examples of Social Assets Schools Water and Sewer Energy Public Facilities Toll roads and bridges Water and sewer systems Airports Ports Solid waste facilities Student housing Courthouses Roads Transit Other public assets that do not generate sufficient revenues to be self-supporting 6
DBFOM and Variations Thereon DESIGN BUILD FINANCE OPERATE MAINTAIN 7
P3 SPECTRUM More Public Responsibility Responsibility New Build Facilities Existing Facilities Private Contract Fee Services O & M Concession Design Build P3 Options Design Build Operate Maintain Design Build Finance More Private Design Build Finance Operate Maintain Concession Long Term Lease Concession Goal Find more money and financing options through greater private sector participation in the delivery and financing of public projects. 8
How Does a P3 Work? 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 (for state law purposes) and sets operational, maintenance and safety standards. Two Broad Categories Asset Monetization Availability Payment The infrastructure asset s revenues are monetized by the private partner See Ohio State Parking example. The public agency receives an upfront payment, annuities, and/or a revenue sharing arrangement. The private partner operates and maintains the asset and assume most business, financial and capital risks. Often structured as a long-term revenue concession and/or lease. The public agency pays the private partner preestablished rent-like availability payments that are based upon the availability of the assets to the public See Portsmouth Bypass example. Creates budget certainty for the public agency over the life of the contract. The private partner designs, builds (or rehabilitates), finances, operates and maintains the asset, based on strict delivery and performance requirements. The public agency s payments may be reduced for underperformance or there may be bonuses for exceptional performance. 9
Potential Benefits Introduction of new capital sources Creation of new investment opportunities Potential improvements in governance, transparency, and accounting standards (because of new contract language) Incentives to adopt new technologies Improved lifecycle facility management, with cost savings 10
Who are the Parties in a P3? Public Agency A variety of public agencies have used P3s for the development or monetization of infrastructure assets. The public agency is supported by a team of financial, legal and technical advisors. Private Partner Depending on the nature of the P3 project, prospective private partners can be sole companies or a consortium of firms that each represents a specific expertise. Prospective private partners will assemble a team of advisors, consultants, lenders and equity sources. Pursuit costs are significant final bidders may request stipends for more complex projects. Potential Private Partners Include Infrastructure Equity Funds Developers and Operators Construction/Engineering Firms Attracted to the stable cash flows of a public infrastructure asset Can be a stand-alone fund, or part of a larger investing entity Invests capital Experienced with similar asset classes Usually contribute equity Attracted to the possibility of generating incremental value by optimizing construction/ rehabilitation phases Potential equity participation 11
The Need for a Champion Transactions can be complex (money is not easy to find). As a partnership the right partners must be found, vetted and become part of the team. The governmental partner has a continuing role a P3 is not an outright sale of assets so it needs internal expertise, and probably outside advisors. The old way of using traditional public finance is an entrenched industry [It s always worked except when it hasn t. See Flint Water Crises.] As a result, every successful P3 has a public CHAMPION. That takes knowledge, marketing and perservance. 12
Bank Financing v. Bonds Governmental tax-exempt bonds may not be available at lower rates -- There may be a federal tax problem. -- The differential in interest rates (taxable to tax-exempt) may not be much. If the asset is privately owned or leased, and where a private non-501(c)(3) company has equity and/or depreciates the asset, tax-exempt debt can only be used if it s a permitted exempt facility bond under IRC Section 142 For transportation projects the most commonly known exempt facility bond is the so-called Transportation PAB a private activity bond authorized under IRC Sections 142(a)(15) and 142(m) authorizing up to $15 billion nationwide of PABs for qualified highway or surface freight transfer facilities 13
Other Private Activity Bonds Under IRC Section 142(a), some better known bonds of this type are: 1. Airports* 2. Docks and wharves* 3. Mass commuting facilities* 4. Facilities for the furnishing of water 5. Sewage facilities 6. Solid waste disposal facilities 7. Qualified residential projects [low and moderate income rental] *(1), (2) and (3) must be owned by a governmental unit. 14
Advantages of Tax-Exempt Bonds Lower interest cost, because interest is excluded from gross income for federal and (most) state income tax purposes Capital markets/purchasers of these have financed these types of infrastructure assets before Can also finance so-called functionally-related and subordinate facilities, more than the facilities that meet the core definition, like office and storage facilities. Can finance 100% of all capital costs plus costs of reserve funds and costs of issuance; loan to value ratios are not usually officially part of the underwriting process. 15
Tax-Exempt Financing Disadvantages No true equity in the project capital stack; so it s easier for private partners to walk away and administrators and operators can have less flexibility and profit incentive because of federal tax law guidelines. Note: new IRS management contract guidelines allow more flexibility so long as the operator does not look like an equity partner or get its compensation, directly or indirectly, as a share of net profits. Examples: student housing; headquarter hotels; parking systems; wastewater assets. 16
Bank Financing Advantages Documentation can be simpler and less tax rules to observe than tax-exempt debt. Current rate differential is small; which is to the advantage of taxable debt. Allows private parties and concession groups to go to their more traditional asset and real estate lenders. Example The parking facilities of The Ohio State University are now leased to CampusParc, L.P., an affiliate of Queensland Investment Corporation, an Australian pension fund. 17
Equity and Mezzanine Financing If tax ownership and depreciation rights exist in the new private non-501(c)(3) owner then usually there is an equity investment to leverage greater ROI. Here traditional real estate loans, mezzanine financing, subordinated debt and convertible (debt to equity) structures can all be considered. Equity invested by infrastructure funds like QIC (Queensland Investment Corporation) in OSU Parking; or by construction and engineering firms. Mezzanine and other debt can take any form, since lenders are loaning against long-term tolls or governmental revenues, loan-to-value ratios, mortgages and cash flow. 18
How is a Tax-Exempt Bond Financed P3 Structured? The So-Called American Model -- a Public Public Partnership, aka P2. Public Agency Current asset owner or user Needs new assets built or financed Private Partner Another governmental entity or qualified 501(c)(3) corporation Potential Partners Include Another governmental unit See Cincinnati and Toledo Parking examples An economic development agency or unit (like an Ohio Port Authority) A qualified 501(c)(3) infrastructure company An existing 501(c)(3) Potential Benefits Better public perception; your champions are all public or charitable Tax-exempt financing possible issued by a new governmental owner or conduit bond issuer for the owner or 501 (c)(3) Long-term (30 year) management agreements are now possible under new IRS Regulations 19
Key P3 Considerations and Questions Dispelling Myths Does the public agency lose control? What will happen to user fees? How does the public agency oversee operations, maintenance and capital improvements? What if the private partner does not perform? Why is there demand for these assets now? What is the necessary term to create interest for prospective investors? Under the P3 Agreement, the public agency can control tolls or user fees, design and construction standards, operating, maintenance and safety standards and other key parameters. The public agency can control user fee levels. The P3 Agreement may include revenue sharing or other arrangements to avoid financial windfalls to the private partner. The P3 Agreement should impose detailed operating, maintenance and safety standards and capital improvement requirements. A P3 still requires management and oversight by the public agency. After an opportunity to cure the problem, the public agency may reclaim the asset without any payment to the private partner. Pension and sovereign wealth funds and other institutional investors are making significant allocations for infrastructure. There is particularly strong demand for US infrastructure assets due to their stable and predictable cash flows. Typical term has been 30+ years to create sufficient return for investors commensurate with the risk undertaken. More short-term deals are being proposed. 20
POLITICAL LANDSCAPE HOW SOME P3 DEALS ARE GETTING DONE AND WHY SOME ARE NOT 21
Brent Spence Bridge - Today 22 22
Brent Spence Bridge: Today 23
BSB Corridor Area Project length: 7.8 miles $2.7 billion in construction costs Safety concerns Functionally obsolete 172,000 vehicles per day $417 billion in freight Connecting 10 states 24 24
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STATE AND LOCALLY ELECTED OFFICIALS ARE RELUCTANT TO RAISE INFRASTRUCTURE FEES, SUCH AS HIGHWAY TOLLS OR RATES, WHICH CAN LEAD TO A LACK OF NECESSARY FUNDING FOR LONG-TERM CAPITAL INFRASTRUCTURE IMPROVEMENTS
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*CONSTRUCTION COST LOWER THAN THE $860M INITIAL FINANCIAL PLAN = SAVINGS OF MORE THAN $90 MILLION 28
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Case Study The Ohio State University Parking Concession Asset monetization On June 22, 2012, The Ohio State University accepted a $483 million bid submitted by QIC Global Infrastructure to lease the University s Parking System for a term of 50 years. The funding for the lease/concession closed on September 21, 2012. LAZ Parking will operate the Parking System. The University s Parking System consists of over 13,500 spaces in 17 garages, 22,230 spaces in 156 lots and 158 metered spaces. The concession agreement permits parking rates to increase by 5.5% per year during the first ten years, and thereafter by the greater of 4% or the rate of inflation. The concession agreement gives the University considerable flexibility and includes conditions about the construction of new garages, the movement or reclassification of parking spaces and the potential growth of the campus. The net proceeds of the transaction will be added to the University s Long-Term Investment Pool and used to support various program and facilities initiatives. Private Partner Up Front Payment Term of Lease Campus Parc LP, an affiliate of QIC Global Infrastructure LAZ Parking - Operator $483 million 50 years 30
Case Study Portsmouth Bypass Project (ODOT Innovative Delivery Division) Project Scope Missing link in the highway system connecting Ohio to North Carolina 16-mile, 4-lane, limited access highway 31
DELIVERY OPTIONS ANALYSIS Accelerates the project delivery by eight (8) years Delivers the complete project rather than phases Frees budgetary capacity Provides similar or lower whole life cost to design-bid-build Allows ODOT to pay for the project over a longer period and use a TIFIA rural rate loan for cost savings Enables competitive, firm fixed-price with appropriate risk transfer and long-term warranty of construction Generates economies of scale related to construction 32
Example of Risk Allocation Geotechnical Risk Full allocation to the Developer Significant geotechnical analysis previously completed by ODOT provided as Reference Information (not contractual) Opportunity for investigations prior to proposal submittal 33
Payment Structure Milestone Payments Existing federal funds used 70%, 80% and Substantial Completion Availability Payment Structure In return for the opportunity to earn Availability Payments: Developer will design, build, finance, operate and maintain (DBFOM) the facility for ~35 years following Substantial Completion Equity investors and debt providers are at-risk if payments are not earned ODOT Monitors the Roadway Facilities for Ongoing Compliance 34
Potential Finance Sources PABs (Tax-Exempt Private Activity Bonds) issued by State $610MM allocation from US DOT TIFIA (Transportation Infrastructure Finance and Innovation Act) 33% of Project Eligible Costs $209MM financed at TIFIA Rural Rate (~1.7%) Developer Equity Bank Financing 35
Availability Payment Risks Sources of ODOT Funds Federal State Appropriations Risk Ohio Constitutional Issues Debt obligations limited to two-year biennium If ODOT did not appropriate, sole remedy was to seek a termination payment PPA + Lease Approach Coverage To create a legally enforceable claim, ODOT will provide right of way by lease Legally accepted and can extend beyond biennium Creates long-term relationship between ODOT and Developer Provides Developer a constitutionally valid claim if the termination payment is not paid 36
Case Study Proposed Public-Public Partnership Transaction Overview: City of Cincinnati Long-Term Lease and Modernization Agreement with Port of Greater Cincinnati Development Authority A Tax-Exempt Bond Monetization Solution 37
SPOILER ALERT In November 2013, after the election of a new Mayor and members of City Council, the City of Cincinnati and the Port Authority made a mutual decision to postpone indefinitely the proposed P2 transfer and modernization project. BUT Note.. City of Toledo and Toledo-Lucas County Port Authority closed in 2012 a very similar deal for several downtown garages! 38
*ESTIMATED LONG-TERM LEASE AND MODERNIZATION OF THE CITY OF CINCINNATI PARKING SYSTEM Initiated as a competitive process in October 2012, 4 teams were interviewed and the ParkCincy team was selected in December 2012, with the Port Authority designated later as Lessee/asset manager Lease structured with $85 million* upfront payment to the City of Cincinnati with $105* million Note payable from subordinate cashflow for long-term transfer of the use of: ASSETS GARAGES LOTS METERS SPACES 2,242 286 5,000 LEASE TERM 50 YEARS 50 YEARS 30 YEARS Tax-exempt bond eligible because it s a sale of system to the Port Authority, but only for federal tax purposes. At Lease expiration, the parking system reverts to City of Cincinnati 39
Continuing City Participation ONE APPOINTEE ADVISORY COMMITTEE CHANGES OUTSIDE THE NORM (E.G. DYNAMIC PRICING) LEASE AND MODERNIZATION AGREEMENT FOUR APPOINTEES TRUST INDENTURE ON-STREET OPERATOR AGREEMENT (INCLUDING ENFORCEMENT) OFF-STREET OPERATOR AGREEMENT BOND HOLDERS XEROX ON-STREET OPERATOR DENISON GARAGE/ LOT OPERATOR 40
At close the City of Cincinnati was scheduled to receive an $85* million upfront payment from tax-exempt bond proceeds Additional consideration (in the form of a residual Note) estimated to total $105* million payable to the City of Cincinnati from: o o 50% of excess cash flows after debt service payments In addition, once the capital reserve reaches its ending balance requirement of $12.5 million, excess cash flows will flow to the City up to the amount of the Note payment System returned to City of Cincinnati at end of Lease o Also, Lease contains several City Covenants to protect the System and Bondholders * ESTIMATED 41
To operate and manage the on-street parking system for a term of 30 years o o o To charge and collect meter revenues To enforce compliance including writing tickets, booting, and towing regular violators To collect fines and any related delinquencies To operate and manage the off-street parking system assets for a term of 50 years o To charge and collect transient and monthly parking fees Authority has right to raise parking rates o o o Initial schedule in Lease Future annual adjustments permitted, subject to greater of 3% or CPI-Urban Index Rate increases beyond those permitted only subject to Advisory Committee approval 42
Security for the Tax-Exempt Bonds 1. Issuer s Leasehold interest in Mortgaged Premises 2. Accounts receivable 3. Existing leases, contracts, and operating agreements including Lease Agreement and Operating Agreements 4. All Parking Revenues 5. Indenture held funds including Debt Service Reserve Funds and Parking System Expense Account 43
Butler Tech, Ohio P3 Unused land next to its high school campus Looking for revenue and a development partner which could add educational value for students Long-term 30-year lease with Developer desired to construct a building and then employ students Needed to do deal without bidding; so Butler Tech entered into a cooperative agreement with a port authority and is sharing the port s powers under ORC 4582.431. No bidding required; cooperation with port provides access to many P3 powers. Now Port plus Butler Tech plus Developer are engaged in new type of P3 44
The OM Model Private operators contract to operate for set term; opportunity for public sector to evaluate May be followed by full DBFOM P3 Examples: water and wastewater, parking, social infrastructure 45
DBOM Model Public sector will pay for construction and installation with design-build and add availability payments during the term to pay for operation and maintenance Both revenue and non-revenue systems can use; if it s a toll, fee or revenue producing asset then the public entity can keep those revenues Examples: roads, buildings, social infrastructure, smart parking systems 46
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The Enquirer/Liz Dufour 49 49
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FWW Reconfiguration $203M Utility & Infrastructure $15M Ohio-Kentucky Connections $14.8M Floodwall $17M FWW Deck Foundation $10M Third Street Viaduct $31.3M Paul Brown Stadium $455M The Banks Phase II $160M Freedom Center $110M The Banks Phase I $75M Great American Ball Park $350M Freedom Center $6.5M Parking Development $10M Street Grid Modifications $29M Intermodal Transit Center $47.5M Riverfront Park Development $150M
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PROCUREMENT STRUCTURES PUBLIC PROCUREMENT ENTITY ALTERNATIVES SEPARATE PROCUREMENT JOINT PROCUREMENT SINGLE STATE AS LEAD JOINT AUTHORITY STRUCTURE 56 56
MAJOR FACTORS TO CONSIDER WHEN DETERMINING A SPONSOR ABILITY TO EFFICIENTLY AND EFFECTIVELY MANAGE PROCUREMENT, DELIVERY AND OPERATION ACCEPTANCE AND CREDIBILITY IN COMMERCIAL MARKET EXTENT OF POWER/AUTHORITY DELEGATED AVAILABLE COLLATERAL/SECURITY ABILITY TO RECEIVE AND MANAGE REVENUE SOURCES ABILITY TO ISSUE DEBT MITIGATION/ELIMINATION OF SOVEREIGN STATE APPROPRIATION RISK ABILITY TO MANAGE RISK TO LONG TERM PROJECT BENEFITS EXPERTISE IN DEVELOPING COMPLEX PROJECTS 57 57
FUNDING COMMITMENTS LEGISLATIVE AUTHORITY APPROPRIATION RISK 58
RECENT PROJECTS: MANAGING THE RISK ENFORCEABILITY: COOPERATIVE AGREEMENTS OHIO RIVER BRIDGES PROJECT (DOWNTOWN & EAST END CROSSINGS) ILLIANA EXPRESSWAY (ILLINOIS PORTION & INDIANA PORTION) EACH STATE INDIVIDUALLY RESPONSIBLE FOR: PROCUREMENT CONSTRUCTION FINANCING UNCERTAINTY AS TO ENFORCEABILITY AND AVAILABILITY OF REMEDIES INCREASED COMMERCIAL AND POLITICAL RISKS LIMITED COST & SCHEDULE EFFICIENCIES DUE TO MULTIPLE PROCUREMENTS 59 59
MANAGING THE RISK - INTERSTATE COMPACTS ENABLES STATES TO ACT JOINTLY ON MATTERS BEYOND AUTHORITY OF INDIVIDUAL STATE NEGOTIATED BETWEEN 2 OR MORE STATES DEAL-SPECIFIC LEGAL POWERS IN ONE INSTRUMENT EACH STATE LEGISLATURE ENACTS IDENTICAL LAW CONGRESSIONAL CONSENT BI-STATE AUTHORITY MAY BE CREATED TO IMPLEMENT AGREEMENT 60
ADVANTAGES OF INTERSTATE COMPACTS UNIFORM COMPACT RATIFIED BY BOTH STATES ELIMINATES INCONSISTENCIES CONGRESSIONAL APPROVAL PROVIDES GREATER ENFORCEABILITY AND CLARITY COMPACT ENHANCES ACCEPTANCE OF THE PROJECT IN THE COMMERCIAL MARKETS COMPACT ENABLES THE CREATION OF A SOLE AUTHORITY TO MANAGE PROCUREMENT, DEBT, TOLLING AND ADMINISTRATION OF THE PROJECT 61 61
Risk Allocation Public Parties and Private Parties An important consideration in evaluating a P3 financing. Risk allocation involves allocating risk to the party best able to manage it. Allocating risk to a Private Party is one of the primary motivators for Public Parties to enter into a Public-Private Partnership. Risk assumption by a party results in greater expected costs for that party. Private Parties will require a commensurate increase in compensation in connection with the assumption of greater risk. Private Parties will generally assume greater risk if the increase in expected compensation exceeds the expected costs resulting from the risk assumed. 62
Risk Allocation Continued Risks assumed by a Private Party will be mitigated or transferred to third parties to the extent financially possible. Insurance Further transfer to sub-contractors Funding of reserve accounts Risk assumed by Private Parties may be limited by debt and equity providers Assumption of risk may prevent underwriting of debt by lenders Assumption of risk may reduce expected return to an unacceptable level for equity investors 63
Private Entity Risk Allocation TYPICAL P3 STRUCTURE CONTRACTUAL DIAGRAM Public Sector Authority Availability Payment 3 Project Revenue Upfront Payment 3 Private Entity Concession Contract Equity Sponsors Bank/Bond Financing Construction Contract Construction Company(ies) 1 Operating and Maintenance Contract Operating Company(ies) 1 Sub Contractor 3 Sub Contractor 3 Sub Contractor 3 Sub Contractor 3 Notes: 1 May be part of the consortium awarded the concession 2 Organized by the sponsors 3 If/as necessary 64
DBB Design-Bid-Build DBF Design-Build-Finance DB Design-Build DBFOM (toll) Design-Build-Finance-Operate-Maintain Toll Revenue/Monetization DBFOM (ap) Design-Build-Finance-Operate-Maintain Availability Payments 65 65
Project Delivery Options - Risk Allocation Private Sector Assumed Risk for each Project Delivery Method Private Project Delivery Sector Method Assumed Design Risk for Build each Finance Project Operate Delivery Maintain Method Traffic Design-Bid-Build Design-Build X X Design-Build-Finance X X X Design-Build-Finance- Operate (AP) Design-Build-Finance- Operate (Toll) X X X X X X X X X X X X 66
RISK ALLOCATION 67
Successful Projects Defined Summary Public interest test Job Creation Economic Sustainability Affordable Political win champions need to lead process Value for money Risk transfer Optimization of whole of life costs Solution drives efficient program costs 68
Summary 69
CONTACT INFORMATION David A. Rogers President FBT Project Finance Advisors LLC Chair, Public and Project Finance Frost Brown Todd LLC 10 W. Broad Street, Suite 2300 Columbus, OH 43215 Phone: 614-559-7252 Cell: 614-582-0688 drogers@fbtprojectfinance.com drogers@fbtlaw.com Patrick Woodside Frost Brown Todd LLC 3300 Great American Tower 201 E. Fourth Street Cincinnati, OH 45202 Phone: 513-651-6701 pwoodside@fbtlaw.com Rob Mecklenborg Frost Brown Todd LLC 3300 Great American Tower 201 E. Fourth Street Cincinnati, OH 45202 Phone: 513-651-6883 rmecklenborg@fbtlaw.com 70