EXECUTIVE & FINANCE COMMITTEE MEETING

CHAIRWOMAN CHARLENE MANCUSO HAS CALLED AN EXECUTIVE & FINANCE COMMITTEE MEETING FOR

MONDAY, APRIL 29th, 2019 FROM 6:30 – 8:30 PM IN THE EUCLID MUNICIPAL CENTER COUNCIL CHAMBER

AGENDA

"Workings of a Potential Public Private Partnership (P3) for Euclid's Waste Water Treatment System”

Barbara Allen

CLERK OF COUNCIL COMMITTEE: Charlene Mancuso, Chair;

Stephana Caviness, Rev. Brian T. Moore, Taneika Hill, Kristian Jarosz, Christine McIntosh, John Wojtila, Daryl Langman & Laura J. Gorshe

STAFF: Mayor Holzheimer-Gail,

Service Director Knecht SPECIAL GUESTS: Table Rock Infrastructure Partners, Arub Group

and Frost Brown Todd Attorneys.

Wastewater Procurement Options – WorkshopCity of Euclid | April 29th 2019

Agenda1. Welcome & Introductions

2. Meeting Objective & Background

3. Arup & Frost Brown Todd’s PPP Experience

4. PPP Background

5. Market Context

6. Table Rock’s Proposal to Euclid

7. Rialto Case Study

8. Break

9. Possible Procurement Options

10. Implications of a PPP for the City

11. Discussion of Legal Considerations

12. Next Steps

13. Q&A

Meeting Objective & Background

The objective of this workshop is to give council a broad understanding of;

a) what it would look like to use a PPP to deliver upgrades to Euclid’s wastewater system, and

b) what Euclid’s governing body would need to do to execute a PPP.

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• On August 7th 2018, Table Rock Infrastructure Partners conducted a workshop with the City of Euclid in respect of options for the Procurement of Wastewater treatment facilities.

• Arup and Frost Brown Todd have reviewed, on an informal basis, the presentation made by Table Rock and submits these slides as an aid to provide context to the City when considering whether to explore this further.

• At this stage, neither Arup nor Frost Brown Todd is engaged by anyone in respect of this project but would be delighted, at the appropriate time, to make a proposal to the City should they wish to seek advice in considering this project further.

Background

Arup & FBT’s PPP Experience

Arup and Frost Brown Todd have advised over300 P3 projects globally, representing $266 billionin CapEx acrossthe transportation, water, cities and energy markets.

Hampden Wharf Restoration, Redevelopment

and Expansion

Norman Manley International Airport

Sangster International Airport

Izmir Port, Turkey

Santa Cruz de Tenerife, Spain Southampton, UKCardiff Bay, UKLong Beach, CA

Long Beach, CA Presidio Parkway, CA

Rialto Water System, CA

Southern Gateway, OH

Ohio State, OH

8 Arup’s Global Presence

We Shape a Better World

9 The Arup Team

Rowan Mills, MScTransaction Advisory Practice Leader, CanadaToronto

Environmental engineer and consultant with 11 years of public and private-sector experience developing innovative solutions to complex transactions.

Jonathan YatesAssociate Principal, Arup AdvisoryNew York

Chartered Quantity Surveyor and consultant with 25 years of experience advising clients in the infrastructure and utilities sectors on complex operational projects.

Ignacio Barandiaran, PE, MBAPrincipal, Arup AdvisorySan Francisco

Registered Municipal Advisor with 25 years of experience planning, structuring and delivering projects using alternative funding and delivery models.

Rebecca Green, MScConsultant to Arup, Transaction AdviceCleveland

Infrastructure finance professional with eight years of experience, specializing in developing and delivering PPP projects globally.

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Arup’s PPP Services

• Integrated financial, technical and commercial consulting

• Advisory and project management services throughout the project lifecycle

• Governance and organizational design advice

• Internal and external stakeholder engagement

Arup advises owners, operators, lenders, sponsors andgovernment bodies on infrastructure projects worldwide

Arup has worked on more than 2,000 wastewater projects globally, providing services spanning from engineering design to due diligence and transaction advice.

Hampden Wharf Restoration, Redevelopment

and Expansion

Norman Manley International Airport

Sangster International Airport

Izmir Port, Turkey

Santa Cruz de Tenerife, Spain Southampton, UKCardiff Bay, UKEsholt Waste Water Treatment Works, UK

Texas, USA

Long Beach, CA

Cardiff Advanced Digestion Facility, Wales

Rialto Water System, CA

East La Mesa Water Treatment Plant, Manila

Arklow Waste Water Treatment Facility, Ireland

Frost Brown Todd’s P3 Services• FBT P3 Team has developed an all-encompassing

approach: P3 Project Counsel

• FBT’s P3 Project Counsel Approach brings innovation and effective, creative problem-solving to the Project Team

• FBT P3 Team has substantial knowledge and experience in the disciplines necessary to develop and implement P3 structures

• FBT P3 Team is comprised of recognized leaders in project finance, development, regulatory, banking, environmental, municipal, construction, public contracting, tax, real estate, state and federal lobbying, and dispute resolution

• Frost Brown Todd serves as P3 Project Counsel on this $2.7 billion mixed-use project

• Comprehensive P3 Implementation

Ohio’s Southern Gateway Redevelopment

KEY P3 TRANSPORTATION AND SOCIALINFRASTRUCTURE PROJECT

DeveloperPrivate Funding

Urban Redevelopment

LoanFTA

Earmark

EDA Grant Park Funding

Grant

CMAQ Grant

ARRA Funding

STP Grant

SIB Loan

• TIF Funding• Capital Allocation• Private Contributions

• TIF Funding• Banks Parking

Revenues• Sales Tax

Capital Grant

Private Park

Funding

Grant

FBT As P3 Counsel to State of Ohio

• Implementation of Ohio’s P3 Legislation

• Prepared Legislative Revisions to P3

Statutory Provisions

• Prepared Legislative Revisions to State’s

Tolling Statutes

• $2.7B Ohio-Kentucky Bridge Corridor

FBT P3 ADVISORY ROLE

FBT as P3 Counsel to the Commonwealth of Kentucky:

• Comprehensive Project Counsel Services on $2.5B Ohio River Bridges Project

• FBT Drafted Model P3 Legislation for Kentucky: 2012-2015

• Kentucky P3 Statute enacted in April 2016

• FBT is P3 Counsel to Commonwealth regarding P3 Contracts 2018

PPP Background

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Traditional Delivery vs Full PPP

CONTRACTOR

PUBLIC SECTORBORROWING

OPERATOR

CONTRACTINGAUTHORITY

DESIGNER

Traditional

CONSORTIUMSPV

PPP

DESIGNER

CONTRACTOR

OPERATOR

FINANCIER

CONTRACTINGAUTHORITY

PPP Background

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Design -Bid - Build Design / Build Completely Private

Entirely Private

(Market-based)

Entirely Public

(Traditional)

Degree of Private Sector Responsibility

and Risk

Typically a combination of Design/Build and Finance and/or Maintain and/or Operate

PPP

DBFDesign, Build,

Finance

DBFMDesign, Build,

Finance, Maintain

DBFOMDesign, Build,

Finance, Operate, Maintain

BFBuild,

Finance

The role of and risk to the private sector increases in the delivery of an infrastructure project

Why PPP: Proper mitigation of risk through transferring responsibility to a party better positioned to handle it.

Roles and Responsibilities in PPP

PPP Background

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VFM is a Business Case assessment tool

• The VFM analysis compares two options: Traditional vs. PPP

• VFM conceptually assesses the delivery method best suited for the

project

• VFM is achieved when the higher costs of the PPP model are more

than offset by the reduction of retained risk

Value for Money (VFM)

Risk Retained

Risk Premium

Ancillary Cost

Financing Cost

Base Cost

Value for Money

PPP Background

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• Objectives and constraints shape how the risk transfer mechanism is shaped in the concession agreement.

• Risk premium will, in turn, have an impact on VFM and what model is selected for the concession agreement.

Objectives & Impact on Commercial Structure

Degree of Private Sector Responsibility

and Risk

Ability to influence risk reduces as the cost of risk mitigation increases A

bilit

y to

Influ

ence

Ris

k

Cos

t of R

isk

Miti

gatio

n

Transaction Design Construction Maintenance & Operation

PPP Background

Market Context

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Small Municipal Wastewater PPPsUS & Canada

Bayonne, New JerseyDelivery Method: DBFOMPhase: OperationsPrivate Interest: KKR, Suez, Argo Infrastructure PartnersSarpy County, NebraskaDelivery Method: DBFOMPhase: RFQ LaunchPrivate Interest: TBDSanta Paula, California*Delivery Method: DBFOMPhase: Financial ClosePrivate Interest: Alinda, PERC Water

* Operating under a Consent Decree

There have been approximately thirteen Municipal Wastewater PPPs smaller than $300 million in the US and Canada. The market has attracted major private-sector players.

Relevant Projects

Rialto, CaliforniaDelivery Method: DBFOMPhase: Financial ClosePrivate Interest: Table Rock, Ullico

Market Context

Some of the key players in North American waste water PPP projects

Table Rock’s Proposal to Euclid

EUCLID, OH UTILITY PARTNERSHIPOPTIONSTUESDAYAUGUST 72018

Securing the best deal for rate-payers

What is a progressive partnership?

A process that allows a city to assess and select the management approach for its wastewater system that delivers the most value.

Assessment includes public-private partnership which can 1) reduce life-cycle costs, 2) lower rates, and 3) generate payments for priority projects in the city.

If city selects partnership, partner assumes responsibility for delivering and financing system upgrades and maintaining the system for the long-term.

Community considerations

No privatization: City retains ownership of all infrastructure, water rights, and rate setting authority

Transparent process: City designs outcomes and retains close oversight of utility operations for life of partnership

Workers protected: All workers guaranteed continued employment with equal or better pay and improved safety and training

Community-driven partnership meets city stakeholders’ and workers’ needs

Why Euclid?

KEY MOTIVATIONS IN EUCLID

Need to meet consent decree and fund wastewater projects.

Potential to reduce cost and risk of operating and maintaining wastewater system and bring world class expertise to Euclid’s utility challenges.

Potential to get more for every dollar invested. Upfront and annual payments can fund priority projects such as waterfront redevelopment.

Affordability threshold for sewer bills is 1.5-2% of median household income. Rates stay below affordability thresholds in all scenarios.

Projected rates in the rate study do not meet debt service coverage and will need to be raised.

Partnership could raise additional funds while still putting Euclid on a long-term lower rate trajectory.

Scenario comparison

Partnership Rate Study Projections

CIP Funded Fully funded - $55 MM Partially funded

Upfront Payment $25 MM $0 MM

Annual Payment $1.0 MM $0 MM

Sewer Bill as % MHI in 2024 1.3% 1.2%

With a partnership Euclid can invest in…

Sewer & Stormwater Projects

Lakefront Development

Other Master Plan Projects

Key Partnership Elements

If the city chooses to move forward with a partnership, it receives

A guaranteed maximum price for all capital projects in the partnership

A fully funded 30-year operations and maintenance plan with guaranteed pricing

Committed financing sufficient to fund all projects

Performance guarantee for all partnership assets; City only pays if partners make good on obligations

Rialto Case Study

Rialto Water/Wastewater PPP

$170 million project to upgrade, operate and maintain Rialto’s aging water supply and treatment infrastructure under a 30 year concession. The first Water PPP in California of its type.

Rialto, CA

City of RialtoPopulation: 100,000

WWIP

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1. Deferred Maintenance: Rialto had been hit hard by the recession, leading to deferred maintenance.

2. “Bare Bones” Operations: This led to more deferred maintenance.

3. Debt: The City was too far in debt and did not have funds to invest.

4. Liabilities: The City had large unfunded pension liabilities.

The Problem

The water supply and treatment assets were in a state of disrepair.

Rialto Wastewater PPP

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• City issued a competitive RFP for right to finance/implement facility upgrades and operate system for 30 years

• Development team led by Table Rock Capital won the concession

• Financial Close November 2012

• $154 mm financing allows for implementation of Capital Improvement Plan (CIP), provide City with up front cash, and put money in place for O&M

• 15% Equity + 85% Debt

PPP as a Solution

$43.10

$41.00

$30.00

$1.20

$24.30

$11.20

Use of Funds ($mm)

Operations & Maintenance Capital Improvement PlanCatch Up Lease Payments Refinance Existing DebtDebt Issuance Costs Transaction Costs

Rialto Wastewater PPP

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• 30-year agreement takes project off the Election CycleInfrastructure needs and funding are better served by decision-making on a long time-horizon

• Maintenance Commitment built inAsset analysis, reserves and funding mechanisms in place to ensure cost-efficient repairs and replacement on an ongoing basis.

• Future CIP needs anticipatedContractual mechanisms ensure periodic reevaluation of system needs and the ability to raise capital for future necessary upgrades and improvements

Benefits of PPP Structure

Rialto Wastewater PPP

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Utility Performance• Major overhaul of system

underway• 25% Reduction in CIP Cost• Projected labor, energy and

chemical cost savings from WWTP rebuild

• 30-year asset management plan

Community Benefits• $2-3 MM annual payment to city• Upfront $35 MM payment

enabled redevelopment and 10,000+ jobs

• City moved from bankruptcy talks to budget surplus

Benefits of PPP Structure

The Rialto Wastewater PPP was developed by Table Rock, who has managed the project since 2012. This was the first wastewater PPP of its kind in the U.S.

Rialto Wastewater PPP

Major rebuild of street network allows city to maintain roads more cost effectively in partnership with concessionaire. Waste Hauling trucks account for ~40% of axel load justifying a surcharge

➢ Surcharge waste hauling bill = upfront capital raised for local street and road repair.

10% =$3 MM25%= $7.5 MM50%=$15 MM100%= $30 MM

Source: Portland Audit Services Division; Credit: Dan Aguayo, The Oregonian

Break

Possible Procurement Options

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1. Do Nothing: Euclid proceeds with business as usual and uses standard procurement mechanisms.

2. Progressive, Qualifications Based Partnership: Euclid initiates a process to select a co-developer based on experience and value.

3. Traditional PPP Procurement: Euclid evaluates all available PPP procurement options and ultimately selects a partner.

Possible Procurement Options for Euclid

Implications of a PPP for the City

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Setting Expectations

Traditional PPP

Specification Type Methods, Materials, etc. Performance Metrics

Manage Contracts With

DesignerGeneral ContractorMaintenance & Repairs StaffOperator

Consortium SPVLendersAdvisors (Financial, Technical, Legal)Independent Certifier

Pay for Asset Performance

Up-Front Transaction Costs Lower Higher

Risk Retained Most Risks Specific Risks

Timeline Shorter transaction phase, greater risk of delay during design & construction

Longer transaction phase, less risk of delay during design & construction

Implications of a PPP for the City

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1. There is no free money

2. Allocating risk does not eliminate risk

3. Careful risk allocation and appropriate incentive structures can pay dividends

4. Up-front decision-making is key

Key Factors

Abi

lity

to In

fluen

ce R

isk

Cos

t of R

isk

Miti

gatio

n

Transaction Design Construction Maintenance & Operation

Implications of a PPP for the City

A variety of procurement options are available to the City of Euclid to meet its long-term wastewater infrastructure needs. These include options ranging from traditional ‘full preparation and then tender’ to ‘selecting a development partner’ which has the benefit of engaging the partner earlier in the process and puts less pressure on City resources. An independent and structured assessment process can help the city select the management approach delivers the most value for the city and determine whether a public-private-partnership is appropriate and beneficial in this case.

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If the city chooses to move forward with a development partnership approach like the one proposed by Table Rock, the objective would be to receive

1. A guaranteed maximum price for all capital projects included in the development partnership

2. A fully funded 30-year operations and maintenance plan with guaranteed pricing

3. Committed financing sufficient to fund all projects in the development partnership

4. Performance guarantee for all partnership assets; City only pays if partners make good on obligations

Key Partnership Features

Implications of a PPP for the City

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• No privatization: City retains ownership of all infrastructure, water rights, and rate setting authority

• Transparent process: City designs outcomes and retains close oversight of utility operations for life of partnership

• Worker protection: All workers continued employment with equal or better pay and improved safety and training

When well-structured and effectively executed, a development partnership can be both community-driven, meet city stakeholder needs and worker objectives including

Community Considerations

Implications of a PPP for the City

Legal Considerations

Legal Context/Concessions in Ohio

Ohio ConstitutionArticle XVIII, Section 3

• Any municipality may…operate within or without its corporate limits, any public utility the products or service of which is or is to be supplied to the municipality or its inhabitants, and may contract with others for any such product or service…

Legal Context/Concessions in Ohio

Ohio State University

Concession Agreement for the OSU Utility System• Concession Agreement to operate, maintain, and improve OSU utility system• $1.015 billion upfront payment• 50-year term• Employment offered to OSU

utility workers

P3 Legal Considerations• Legal and Regulatory Contracting Capacity• Consent Decree Compliance• Consistency with Euclid’s Overall Strategic Plan and Financial Policies• Funding/Financing Options and Considerations• Structuring the Appropriate P3 Legal Framework • Risk Allocation Among Public and Private Parties• Project Risk Considerations

• Project Delivery• Project Schedule• Project Cost Risk

• Monitoring Quality of Performance, Milestones, Reporting and Targets

• Protecting Public Interests• Utility Rates• Long Term System Sustainability

• Dispute Resolution

Setting Expectations• Maximizes Each Sector’s Strengths

- Private Sector Efficiencies and Practices• Potentially Reduces Initial Public Capital Investment• Public Sector Funding• Private Sector Capital Deployed• Improves Efficiencies/Speeds

Completion• Integrate Design, Construction

and Operation• Improves Service to the Community• Allocation of Resources• Allocation of Project Risk

Next Steps

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Need for Consensus on Council and in Community

1. Formalize council workshop to define a scope around the EPA consent decree, wastewater, local streets and roads, and key community quality of life projects.

2. Hire an Adviser (Arup/FBT) to the City to help assess and manage the procurement process.

3. Convene key community organizers for community workshops. Seek consensus and buy-in for formalized procurement process.

4. Work with adviser to formalize and run a qualifications-based procurement process.

Next Steps

Thank You

“What the partnership does is remove the need for political will for the maintenance of the system.”-Tim Boyle, Bayonne Municipal Utilities Authority