How to Structure a P3 Deal

July 21, 2015

Importance of PPPs

State of U.S. Infrastructure By 2020, U.S. infrastructure upgrades will require an investment of $3.6 trillion

dollars with a projected funding shortfall of $1.6 trillion dollars. Current investment path would lead to loss of: $3.1 trillion in GDP, $1.1 trillion in U.S.

trade value, 3.5 million jobs, $2.4 trillion in consumer spending, and 3,100 in annual personal disposable income.

Infrastructure Financing Tools and Funding Mechanisms Federal, State, Municipal Government Funding (Pay as you go, or Debt) Corporate On-Balance Sheet Project Finance (Public-Private Partnerships)

Evaluating Financing Options Importance of evaluating all options Tightening budgets and increased demands require innovation from traditional

financing options Public-Private Partnerships present viable financing option to overcome budgetary

constraints

Evaluating Financial Sustainability of PPPs

Common misperception is that PPPs are always a more expensive form of project delivery for Governments

National Council for Public-Private Partnership’s (NCPPP) white paper, “Testing Tradition: Assessing the Added Value of Public-Private Partnership”, highlights that a thorough and proper evaluation of a PPP involves several analyses:• Costs of deferred maintenance, repair, replacement• Project timing• Complete financial analysis using Value for Money assessment on Net Present

Value (NPV) basis Establish Public Sector Comparator (PSC) as baseline to compare to PPP or

privatized options Conduct full Life-Cycle (FLC) cost and revenue analysis for each option Value and assess transfer of risk more effectively

Financing costs for projects may be higher for PPPs however FLC analysis often shows savings over time due to risk allocation, design, construction, and long-term O&M.

PPP “Value for Money”

• The total cost of a PPP is often less than the Public Sector cost, as illustrated in the below Value for Money diagram

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Public Sector Cost

PPP Cost [Public sector cost of project delivery] Adapted from “Testing Tradition Assessing the Added Value of Public-Private Partnerships” by National Council For Public-Private Partnerships, 2012]

Example P3 Risk AllocationRisk Category Public Private Shared

Environmental

Land Acquisition

Other Permits

Cost Changes

Completion Schedule

Detailed Design

Force Majeure

Hazardous Materials

O&M Costs

Latent Defects

Revenue Risk

Interest Rates

Equity

Allocating Project Risk

Public and Private Sector Transactions – Risk and Return

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Exp

ecte

d R

ate

of

Retu

rn

Risk to Investor

Tax-Exempt

Debt

Taxable Debt

Mezz Debt

Preferred or Tax Equity

“Spread”

100% Recourse to Government

Private Sector Transaction

Public Sector TransactionPublic-Private Risk Sharing

Sponsor Equity

PPP Capital Stack

• SPE owners do not finance all project requirements themselves. The capital stack - all the investment in the SPE - can have many different sources of capital or a simple debt / equity structure

• The capital stack demonstrates a positive relationship between risk and return.

Investment grade debt assumes the least amount of risk and requires lowest return

Sponsor equity assumes the greatest risk and requires the highest return

Preferred or Tax Equity

Mezzanine Investment

Junior Debt

Investment Grade Debt

Investment Grade Debt

Sponsor Equity Sponsor Equity

• Tax Exempt—Public Sector Transaction Retail investor driven investment product Requires traditional credit/revenue streams Generally must obtain a published credit rating Fundamentals allow for 100% leverage and/or public entity can contribute cash

equity Public ownership is preferred/necessary Debt Capacity is not an issue “Public Offering” costs of issuance Constrained by IRS Code Section 103(c) - Potential change in law

• Taxable Debt—Private Sector Transaction Multiple institutional investor types/classes to access Accommodates more diverse credit/revenue streams A published credit rating not required Maximum leverage is credit/structure driven Private ownership is typical “Private Placement/Loan” costs of issuance Municipal vs. Corporate Taxable Markets

Tax Exempt and Taxable Debt

• Tax Equity—Private Sector Transaction Cash contributions in exchange for tax benefits/portion of project cash

flows Return is based on “after-tax” basis, which incorporates tax savings it

receives from ITC/PTC/depreciation benefits Limited investor universe (15-20 active participants) Approximately $3.6 billion of tax equity capacity in 2012, with a

demand that exceeded $9 billion—only “best” projects considered Various structures available, such as lease pass-through and

partnership-flips, based upon different return and ownership requirements

• Project Equity—Private Sector Transaction Investor equity return requirements Equity from developer/sponsor, venture, private sources Money can be left in the deal to act as equity (e.g., deferred

development fee) Passive or active investor

Tax Equity and Project Equity

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Debt Service Payments

ESCO

Special Purpose Entity

FinancierAssignment of Payments

Energy and Water ECMs

Public SectorRenewable Energy Project

Public SectorEnergy & Water Savings Projects

Debt

Upgrade or New Generation

Tax Equity

Capital Proceeds

Debt Service

Equity Return

Capital Proceeds

Utility service/Savings payments

EPC and O&M Payments

Funding ProceedsDebt

Service/Equity Returns

Public Sector Agency

Service ContractServices provided

Performance Guaranty

3P Financing Structure-Energy Project

Potential PPP Opportunities

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Transportation

Health•Medical Facilities•Ancillary infrastructure (offices / training facilities)

Housing

Civic and Utilities

Transportation

Corrections and Justice

•Schools, Colleges, Universities•Tertiary Facilities•Student Housing

•Community and Sports Facilities•Local Government Facilities / Commercial Office Buildings•Waste and Wastewater Facilities

•Roads and Highways•Bridges and Infrastructure•Ports and Airports

•Prisons•Courthouses

Education

Energy•Energy Efficiency / Renewable Energy•Combined Heat and Power (Cogeneration) Plants, Power Plants •Smart Grid /Microgrid

•Military Housing•Low Income Housing

Anita Molino President617-226-8102 Direct617.437.0150 Mainamolino@bostonia.com

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