#SecurityCapabilities

Innovative Financing for Security

Lease Versus Buy Analysis

Robyn Peters - TSA

Alan Estevez - Deloitte

ACC/TSA Security

Capabilities Workshop

July 2018

Introduction

As the threat environment rapidly evolves, TSA APM must

provide innovative, mission-driven capabilities to detect

current and emergent threats through enhanced Transportation

Security Equipment (TSE).

TSA is exploring new acquisition

approaches, including leasing, to quickly

and efficiently deploy TSE while:

• Increasing the pace of security

equipment innovation

• Enhancing operations

• Improving the customer experience

2

Phase 1: Initial Feasibility Study

An initial, high-level, analysis completed

in early 2018 supported leasing TSE as

a method of driving innovation to

improve security, customer experience,

and/or operations.

It also noted that leasing has the

potential to smooth financial outlays,

though it may increase total lifecycle

cost.

3

Security

Customer

Experience

Operations

Focus Areas

Phase 2: Overview

4

• Engage aviation security stakeholders

including airlines, airports, OEMs, and

potential third-party financing providers – to

more fully understand:

• Current market options for leasing

arrangements and their implications to

TSA acquisitions

• Environmental or policy barriers and

high-level mitigation options

• Develop a quantitative cost and

qualitative benefits case for arrangement

options (including incentives and

parameters) suited to a specific TSE type Image courtesy of Deloitte

Phase 2: Considerations

5

Multiple considerations may impact execution of both the deep

dive study and value to stakeholders. The exploration will include:

1based on validated assumptions

Policy and Regulations

Intellectual Property and Proprietary Technology

Technology Maturity / Lifecycles

Stakeholder Interest Alignment

Phase 2: Outputs

6

There will be three key outcomes of this study, including:

1based on validated assumptions

• An executable framework that can guide TSA’s

acquisition approaches for TSE in the future

• Guidance on the form, parameters and

potential participants for leasing

arrangements for four groupings of TSE

• A catalog of barriers to leasing, and a

roadmap for responding to those barriers

Checkpoint Baggage

(CT & AT)

Tabletop Systems

(CAT & ETD)

Checked Baggage

(RSEDS & MSEDS)

Passenger Scanning

(AIT)

Months June July August Sept. Oct. Nov.

Mark

et

Op

tio

ns &

Barr

iers Stakeholder Interviews

Build the Baseline

Outline Future Needs

Create Options

Conceptual Strategy

Roadmap

TS

E S

trate

gy

Checkpoint Baggage

(CT & AT)

Checked Baggage

(RSEDS & MSEDS)

Tabletop

(CAT & ETD)

Passenger Screening

(AIT)

Phase 2: Timeline

7

#SecurityCapabilities

Innovative Financing for Security

ACC/TSA Security Capabilities Workshop

Innovative Financing for Security

Airline Procurement Options: Leasing vs Financing or Something Else…

11

Procuring Checkpoint Security Technology

12

ASLs CTs

Steps to Procurement in a Challenging Budget Environment

13

• Be organized with existing technologies and know

when to replace/obsolete

• Look for opportunities to be a trial/demo/test case for

manufacturers and others (i.e. TSA Test Beds)

• Sharing financial burdens amongst stakeholders

• Participating in outside-own-industry tech

conferences for new ideas

Examples of Public-Private Partnerships (P3) at Airports

14

• Participating in TSA Technology Test Beds

• Participating in Vendor trials for CBP Biometric

Exit/Entry

• Known Crew Member (KCM)

#SecurityCapabilities

Innovative Financing for Security

Innovative Financing for Security

George Merritt

SVP of Government and Community Affairs

JULY 2018

17

DEN OVERVIEW

18

CURRENT CONFIGURATION

19

FEDERAL ASSISTANCE

• Sought Federal funding

• Entered a Memorandum of Understanding with TSA

• Passed legislation creating pilot programs for security innovation within

TSA

• … Became clear that a federal funding was not coming.

• Fixed price and

delivery date

• Security checkpoint

delivery

• Noncompliance

penalties

• Revenue shortfall

standards

Great Hall Partners Mutual DEN

20

PUBLIC-PRIVATE PARTNERSHIP: MITIGATING RISK

• Exclusive license

• Compensation/ delay

events

• DEN performance

standards

• Negotiated scope

• Governing documents

• Dispute process

• Default mechanism

21

GREAT HALL LEVEL 6

22

DENVER INTERNATIONAL AIRPORT

#SecurityCapabilities

Innovative Financing for Security

Classification - 24

A Discussion with Key

Government Finance

ACC / TSA Security Capabilities

Workshop

July 25, 2018

Toni Egan

VP, Federal

Finance

Key Government Finance - Federal

Classification - 25

Vision▪ Largest lender in the

Federal Market; Largest active Bank-owned Lender

▪ Committed to Federal since 2000

▪ Managed portfolio: $400MM

▪ Annual Originations: $475MM

▪ All asset classes, including Maintenance & Support

Value Proposition▪ Depth, Breadth: Most experienced Federal lender. Sole Federal dedication

▪ IT/Energy/Infrastructure Experts: KGF pursues and deploys industry differentiating

market, client, end user and asset expertise

▪ Structuring Experts: Combine OEM/Prime needs with product and structured finance

capabilities

▪ Execution: Contractual/legal/billing/credit expertise sets KGF as industry leading

educators, solutions-providers and transactional execution experts

▪ Capital Markets: Leverages balance sheet confidence with investor reach to bring entire

capital solution to the opportunity

Multi-year Payment Solutions

Using Base Plus Option Year Contracts

Classification - 26

Agencies are capable of spreading out payments over multiple years

▪ Prudent alternative for budget constraints

• Leverages current-year budget as Base Year payment

▪ Delivers entire solution upfront

▪ Ensures Agency’s needs and mission are fully supported

▪ Mitigates risk of future unmet needs

▪ Federal Acquisition Regulation (FAR) compliance

• Deferred payments allowable without violating Anti-deficiency Act

• Allows for Option to Extend contracts and assignment of payments

▪ Flexibility to use Capital or Operating funds

• Agency can determine funding used

Deferred Payment Strategy

Classification - 27

Agency has a need to acquire technology to support mission operations

OEM submits bid with multi-year payment plan

Financing Partner (FP) funds OEM equipment price in full

▪ Agency identifies technology that meets their requirements

▪ With support of Financing Partner (FP), bid includes complete solution

▪ FP takes assignment of the receivable under the contract

▪ FP assumes termination and balance-sheet risks

▪ FP has no rights or obligations beyond payment stream

Allows Agency to acquire entire solution today and pay for it over time.

Multi-Year Payments Workflow

Classification - 28

Finance Structure

OEM Financing

Partner

Fed Agency

(Contract

Vehicle)

Scheduled

Payments

Product

and/or

service

Master Purchase

Agreement [MPA]

Amount Financed $

Assignment of Claims

Prime

Contract

(PO/DO)

Agency and OEM

• Federal Agency awards contract for

acquisition of security equipment

• OEM maintains privity of contract with

Agency and selects Financing Partner

Finance Partner

• Partners with OEM to determine needs

• Enters into assignment of claims with OEM

• Pays OEM in full on behalf of Agency

• Collects periodic payments from Agency

• Assumes all Federal Termination Risk

Classification - 29

Toni Egan

VP, Federal Finance856.419.3083

toni.egan@key.com

APPENDICES

Classification - 30

• Sample Agency client equipment costs for HW, MNT & SW = $2.7 million

Item Part Number Equip Type Product Description Qty. Price Extended Price

1 Xyz-100a HW HW 6 $250,000 $1,500,000

2 Xyz-100a-mnt HW MNT HW Support 6 $15,000 $90,000

3 Abc001 SFT MNT Customer Support, SFT Only 6 $35,000 $210,000

4 Xyz-100c-1 HW BHW 10 $75,000 $750,000

5 Xyz-100c1 HW MNT HW support 10 $2,500 $25,000

6 Abc-002 SFT MNT Professional Services, SW Support 10 $10,000 $100,000

Total $2,675,000

Example Payment PlanAgency budget less than solution cost

• Agency client has $1.0 million in their budget this year; anticipates receiving $1.0+ million each year to meet needs

Budget Shortfall Scenario

Client current budget $1,000,000

Client current needs $2,675,000

Delta ($1,675,000)

Option 1: Modify Equipment Proposal Option 2: Propose Deferred Payment Options (supported by Finance Partner)

Modify proposal to meet budget constraints Maintain original proposal - offer Payment Plan option to pay over time

• Decreases contract economics – no volume

discount; smaller contract awarded

• Enhances contract economics – provides for a larger contract than existing budget allows;

locking in cost today mitigates future price increases

• Decreases footprint of original proposal • Maintains / increases footprint of proposal solution

• Does not meet Clients’ current technology

needs• Meets Clients’ current technology needs & mission; mitigates risk of future unmet needs

• Compromises future potential • Provides Client with potential volume discount not possible with smaller contract

• Options when Agency client budget is less than the proposed equipment cost

2

Finance total to OEM

Hardware: $2,250,000

Hardware MNT: $115,000

Software MNT: $310,000

Solution Total $2,675,000

Item Part Number Equip Type Product Description Qty. PriceExtended

Price

1 Xyz-100a HW HW 6 $250,000 $1,500,000

2 Xyz-100a-mnt HW MNT HW Support 6 $15,000 $90,000

3 Abc001 SFT MNT Customer Support, SFT Only 6 $35,000 $210,000

4 Xyz-100c-1 HW BHW 10 $75,000 $750,000

5 Xyz-100c1 HW MNT HW support 10 $2,500 $25,000

6 Abc-002 SFT MNT Professional Services, SW Support 10 $10,000 $100,000

Total $2,675,000

1

Financing Costs Built-in

Solution $2,675,000

Financing $193,770

Total Gov’t Cost $3,015,000

Client Proposal using Extended Payment Options

3 Annual Level Payments

Base Year $1,005,000

Option Year 1 $1,005,000

Option Year 2 $1,005,000

Gov’t Total Cost $3,015,000

By offering an alternative to pay over time, you help them optimize their investment and retain the total value of the

contract, while minimizing discounting exposure.

*OEM gets paid upfront for solution (including margin), KGF collects Base + OY

payments from gov’t. directly

Example Payment Plan, cont’d.Agency budget < Solution cost

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Innovative Financing for Security