Public Private Partnerships prepared for Virginia GFOA s 2015 Fall Conference by JoAnne Carter, Managing Director October 21, 2015 4350 North Fairfax Drive, Suite 580 Arlington, Virginia 22203 2015 Public Financial Management, Inc.
What are public-private partnerships (P3s)? (A) The bane of my existence as a Finance Director. (B) How the [insert name of department head here] can spend general fund balance or use limited debt capacity to attract [insert name of private company] to our locality. (C) That thing the City of Chicago did with their parking meters. (D) Means for constructing, operating & financing the Downtown & Midtown Tunnels & the I-95 Express Lanes. 2
(E) All of the Above P3s are contractual agreements between a government agency and a private party for construction, operation and/or financing of projects and significant government functions Also, may capture range of other types of projects Joint development of a shared asset by public & private parties Economic development-type projects In Virginia, often hear references to enabling acts PPEA = Public Private Education and Infrastructure Act of 2002 PPTA = Public Private Transportation Act of 1995 3
What are examples of different types of P3 projects? Design, construction, operation (& sometimes, financing) of a new toll road that is conveyed back to government at the end of the arrangement Development of privately owned student housing/dormitories at a college or university Sale of a municipal asset (i.e., parking garage/meters) to a private operator/owner Agreement to design and build a facility (a municipal complex) to be jointly used by the public & private sector Use might entail giving the private sector the right to lease a portion of the facility to third parties 4 4
What types of projects can be accomplished as a P3? Municipal Government / Social Infrastructure Roads & Transit Water & Wastewater Ports & Rail Energy Higher Education Gaming & Alcohol 5 5
Why consider a public-private partnership? (A) Because GASB can add only so much spice to the life of a Finance Director. (B) So [insert name of department head here] will stop emailing me about [insert name of private company] and the need to spend our fund balance. (C) Duh, politics. (D) Effect a transfer of risk, control & benefits. 6
P3s encompass a spectrum of possibilities Structure Control/Risk Description Gov t Private Public Ownership Public Ownership / Private Management New Development / Availability Payment and Sharing Models Traditional revenue stream design, construction, O&M, governance remains with government Certain elements of above may be contracted Private entity constructs, operates, maintains and finances a project in return for periodic lease payments based on performance Concessions Public owns asset and maintains governance. Private entity responsible for O&M, construction and revenue and cost risk Private Ownership All activities controlled by private entity, including rates 7
Project Delivery Models: Public vs. Private 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 8
Risk Transfer Control vs. Risk Transfer in a P3 Privatization Concession Lease Management Contract Service Contract Fully Public Private Sector Involvement 9
Misconceptions about P3s Misconception Realities P3s can provide free money to close funding gaps for projects Private financing partners require some mechanism for repayment and return on investment P3s give away government oversight and allow private sector free reign to raise rates Detailed project agreements preserve government oversight or define limitations on rate increases P3s are hostile to public sector unions Successful P3s have been structured both with and without continuing union labor contracts The private sector is only in it to make money The private sector often will accept lower returns in a P3 due to low risk factors of infrastructure 10
What are the risks of P3s? (A) Insomnia. (B) Overspending the budget for legal & professional services. (C) Duh, politics. (D) Failure to deliver on financial & other objectives. 11 11
Potential Risks in P3 transactions Financial Public sector receiving insufficient value compared to what an asset is worth Loss of future upside potential Reversion or compensating event risks Use of upfront proceeds must be carefully considered & disciplined in application Service levels Private operator may not provide service at desired levels, at transition or in future Unexpected events may obstruct service and delivery Transition can be a challenge Monitoring and enforcement will require active oversight for life of the partnership Political Citizens, elected officials, stakeholders and the press may assess differently Communication plans take time Labor and union contentions, if applicable Failure to close! 12
Risk transfer sounds good. How? (A) Hire a good lawyer. Or two. (B) Get the assistant finance director to deal with [insert name of department head here] about [insert name of P3 project] as an opportunity to grow professionally. (C) Save every email. (D) Design & implement a transparent, analytical process. 13
P3 project management approach Analysis and Valuation Transaction development and execution Program development Feasibility and valuation Market outreach and communication Procurement design RFQ process RFP and selection Define project / transaction objectives Determine public interest to be served Establish financial framework Enterprise (user fee based) Availability (tax or appropriation supported) Hybrid (user fee and tax supported Build financial model Develop and evaluate alternative solutions Identify legal or legislative hurdles Identify stakeholder and constituent considerations Retain expert technical advisors as required Model best practices Solicit input from investors and operators Gauge level of interest Identify risks Communications and education with stakeholders and constituents Confirm transaction structure Lease Concession Design build Operate-maintain Other Compare to tax exempt options Determine procurement process requirements Retain balance of transaction team Develop procurement schedule Draft and distribute RFQ Develop shortlist of qualified bidders Initiate due diligence Confidentiality agreements Data room Meetings with bidders Determine requirements for final proposals or offers Draft transaction documents Concession / lease Operating standards Design specifications Other One on one meeting with finalists Finalize transaction documents Release RFP or final bid submittal form Select finalist Close and transition 14
Best practices Actively model the valuation and public policy considerations - Consider revenue sharing to align private and public motivations in the run long - Weigh the long-term and short-term value - If rate increases are necessary, implement gradually Ever-increasing transparency and communications Grant stakeholders ample time to review relevant documents Modify terms for special interests based on rational public debate Form diverse advisory committee to engage stakeholders Engage labor unions, if any, and proactively develop solutions Use stakeholder feedback to inform the transaction process Comprehensive procurement process Retain necessary advisors from beginning to perform independent analysis throughout Develop the same framework to evaluate bids Thoroughly vet operators through bidding process Provide adequate time for transition to new operator and new technologies Establish penalties for non-compliance with terms of contract 15
What is the value added of a P3? (A) Running out of storage space in my email inbox. (B) Learning what TIFIA stands for. (C) Developing a deeper relationship with my FA & bond counsel. (D) Shared risk & benefits between both the public & private sectors. 16
P3s create value for both public and private partners Public Sector Shared Private Sector Monetize non-core services to generate upfront payment Opportunity to reset stakeholder objectives Frees up resources and increases capacity for other projects Creates competition and transparency Utilize private sector expertise Potential improvements in asset value and operational efficiencies Alternative to traditional financing methods Partner to share risk Access to private/public funds Leverage partner s market access Reallocation of expertise and responsibilities Contractually defined deadlines and terms mitigate uncertainty in deal Value driven pricing Access to markets with traditionally high barriers to entry Pre-established client base Relatively less competitors in market Leverage existing expertise to improve asset value and return Long-term, relatively predictable revenues Potential benefits from tax and other credits Build firm brand on large scale projects 17
Public partners may share in project revenue and upside For the public sector seeking a monetary return from a partnership, there are multiple ways of revenue sharing and upside Upfront payment Lump sum payment based on projected future cash flows Do not participate in over performance and under performance Performance based Negotiated percentage of revenues or net operating income, heavily dependent on project performance. Participate in over performance and under performance Flat annualized Negotiated amount to be paid annually, independent of project performance Do not participate in over performance and under performance Combination Possible to a lesser extent participate in over performance and under performance 18
How can a P3 be evaluated? (A) By squinting through reading glasses. (B) Simple addition, subtraction, multiplication & division. (C) Duh, politics. (D) Holistically. 19
Evaluating P3 versus traditional project delivery Key considerations when comparing traditional financing and a P3: Construction costs Lifecycle costs (operation and maintenance) Illustrative Public vs. P3 Cost Comparison Efficiencies and facility upkeep Financing costs Debt capacity and debt priority Risks Transferred to Private Sector Under P3 Lifecycle Cost Lifecycle Cost Retained Risks Transferred risks Retained risks Financing Cost Financing Cost Financing costs are typically higher under the P3 model Construction Cost Construction Cost For the P3 model to be the most cost-effective, risk transfer needs to occur to the private entity Traditional P3 Value for Money (VfM) Theoretical answer Have been subject to debate and challenge 20
What does a successful P3 look like? (A) Vacations without email or conference calls. Yay! (B) Finance director gets promoted, assistant finance director gets promoted and [insert name of department head here] is right about [insert name of P3 project here.] Yay! (C) Bragging rights about my locality s awesome project. Yay! (D) Finance director calls [insert name of department head here] to suggest [insert name of project here] would be a good candidate for the next P3. 21
P3 Success Factors Define the public purpose and the potential benefit of P3 approach Review all alternative delivery models objectively Undertake strategic communications/stakeholder outreach Document the process Execute transparent and competitive procurement Develop and implement project agreements that incentivize parties Continued dialogue with rating agencies and auditor to understand balance sheet and credit impact 22
Questions? 23