Ernst & Young Infrastructure Advisors, LLC

P3 overview

March 2014

Page 2

Introduction

► Public Private Partnerships (P3s) are generating a lot of excitement, but…► No financing mechanism alone will make a bad project good► No matter how a project is financed, “At some point, someone has to pay”

► A powerful tool in the toolkit, but not suitable for all projects

► More than just financing► Interaction with technical, institutional, legal framework as to what can be financed,

the appropriate capital structure and on what terms

Page 3

Growing US market for P3 projects

► US examples include:► Goethals Bridge

► Port of Miami Tunnel

► I-595 Express Lanes

► RTD Denver P3 Eagle

► Long Beach Courthouse

► I-4 Managed Lanes

► Numerous other toll projects and facilities

► Considerable interest for transit as well as social infrastructure (courthouses, schools, etc.)

► Being applied to HOT Lanes and toll facilities with toll revenues accruing to the public owner – e.g., I-595, Goethals, I-4

► Hundreds of closed examples internationally (Canada, UK, etc.)

Page 4

P3 – more than just financing

► Sometimes confused with tolling or “new/free” money► Raising capital is not delivering a project and a traffic forecast is not

the same as cash …► Lifecycle of facility extends through and beyond financing duration► There can be significant sources of risk besides just demand

► How experienced is the owner in the delivery and O&M of a major project?► Who bears the risks of construction overruns, delays, operational

underperformance, revenue shortfalls, higher than expected lifecycle costs, and/or unexpected or more frequent major maintenance?

► Public trust is compromised if the performance and cost assumptions used to justify spending and dedicated taxes or other commitments are not achieved.

► Whether or not a P3 is ultimately warranted, considering a full range of delivery options fosters communication among disciplines and can lead to better outcomes and understanding of risks.

Page 5

Delivery option examples B

udge

t Cer

tain

ty

DBBDesign-Bid-Build (Public Finance)

DBDesign-Build (Public Finance)

DBFDesign-Build-Finance

DBFMDesign-Build-Finance-Maintain

Availability Payments

DBFOMDesign-Build-Finance-Operate-Maintain

Availability payments

DBFOMDesign-Build-Finance-Operate-Maintain

Revenue risk transfer

DBOMDesign-Build-Operate-Maintain

Private sector risk

I-595, Port of Miami Tunnel, Goethals Bridge, Ohio Portsmouth Bypass,

Nevada I-15

Texas IH-635, Virginia I-95 HOT lanes

Texas SH-183, BART OAC, Hudson-

Bergen LRT

GA Northwest Corridor , Cleveland Innerbelt Phase 2

Tappan Zee Bridge, I-75/Palmetto Expressway, First Coast Outer Beltway, T-REX

Page 6

Availability Payment P3s

► Alternative to toll revenue P3s► Payments made to the Concessionaire are earned from public agency:

► Solely on the basis of meeting performance standards (regardless of traffic)► Only after successful construction completion (mitigating cost and delay risk)

► In return for the opportunity to earn payments:► Concessionaire designs, builds, finances, operates and maintains facility for ~20-

40 years► Equity investors and debt providers are at-risk if payments are not earned

► Often appropriate for a project if:► It does not generate direct revenue or government wishes to retain control of

rates (e.g. Florida I-4, Goethals Bridge)► Revenue/demand is difficult to predict or influence (Illiana Expressway)► Service quality is more important or applicable goal than revenue maximization► Performance / operational outcomes can be defined and monitored► Opportunities exist for innovative design solutions and lifecycle risk management► Strong public counterparty can credibly commit to make payments

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Project roles – conventional project delivery

Government Tax-exempt Public debt

Operator or government

Contractor(s)Des

ign

-Bid

-Bu

ild

(DB

B)

Designer

User fees

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Project roles – alternative project delivery

Lenders

OperatorDB contractor

Government

Equity investors

Pu

bli

c-p

riva

te

Par

tner

ship

(D

BF

OM

)

Government Tax-exempt Public debt

Operator or governmentDB contractor

Des

ign

-Bu

ild (

DB

)

Concessionaire

User fees

User fees

Page 9

► P3 concessionaire can’t borrow 100% of an expected revenue stream► Need a cushion or “coverage” – risk capital that absorbs financial

impact of poor performance► The coverage revenue is equity’s return – or risk

Understanding equity

Simplified example: 1.2x debt service coverage

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Equity ReturnDebt ServiceNet Revenues

Years

Page 10

P3 - Trends and Best Practices

Page 11

Trends and emerging lessons from US P3s

► High valuations for ultra-long concessions sparked U.S. P3 market, but:► Winners curse for investors in a bubble market (Chicago Skyway, ITR, SR-125, etc.)► Construction pricing and efficiency took a backseat to traffic optimism in bid outcomes► Marginal projects advanced as P3s► Also triggered public backlash (“tolls are public funds too”)► Recognition that reductions in concession lengths potentially benefit both parties

► Now tighter credit and low growth leave most toll projects needing subsidies

► Also a changing universe of projects: ► Emphasis on state of good repair and managed toll facilities and networks, transit and

rail, latterly emerging social infra► Deflation of housing bubble is changing demand patterns

► Benefits exist but need to be more carefully vetted and priced► Equity can increase the amount of upfront funding available, particularly when coupled

with federal programs to equalize cost of capital (e.g. TIFIA loan, PABs)► P3 can provide substantial management of risks (cost and revenue)

Page 12

Best practices – Screening for suitability

CRITERIA DETAIL CONSEQUENCE OF A “NO”

Will the total project cost exceeds [$200M]?

Is the project of sufficient size to justify the increased transaction costs and complexity that public and private participants will incur?

If no, then unlikely candidate for P3 unless there is potential for bundling with another project.

O&M Potential?Is there a reasonable and material potential scope for long-term O&M (10 years or more)?

Priority?

Is the project a priority relative to other potential projects?(i) Is the Public Agency already planning to

pay for the project and is it in the MYP?(ii) Is the project a priority but no current

funding available?

If no to both questions, further resources should not be invested to study the project as P3 at this time

And/or can the project bring significant new revenues and/or self-finance?

Schedule and Environmental Approvals?

Is the project within two (or possibly three) years of receiving an ROD or other applicable environmental clearance?

If no, the project may lack sufficient definition for detailed screening. 

Instead, project planning process should include preliminary analyses of project delivery options and potential financial plan.

Page 13

Best practices – Detailed Delivery Analysis

► Comparing a P3 to next best alternative(s)► Must take into account objectives and constraints of procuring agency and the

characteristics of the project itself► Should result in a better understanding of project regardless of delivery approach

ultimately selected

► Considerations can include all-in cost, affordability, risk management and relevant qualitative factors (NPV analysis is often imperfect)

► The decision to retain or transfer revenue risk is related but distinct from the decision to use a form of P3

► Pre-procurement analysis inherently relies on assumptions► Consider carefully any differentiated cost or revenue risk adjustment factors and

discount rates► Emphasize sensitivity analysis► Recognize that overly detailed analysis may not improve decision making,

especially when estimates are indicative ► Post-procurement outcomes can be studied for P3 & non-P3 projects

Page 14

Best practices – Structuring

► Defining the business model – how will the concessionaire earn revenue and over what period? ► Is there a dedicated revenue stream?

► Drives financing options available to private partner

► Begin with the project’s specific characteristics and public goals► Confirm feasibility

► Seek efficiencies – e.g. tunnel maintenance for Port of Miami

► Optimize risk allocation – including traffic risk e.g. Goethals Bridge

► Retain risks that cannot be efficiently transferred or priced by private partner – e.g. permitting, government approvals, right of way acquisition

► Develop performance specifications, stated in output terms► Be sure that the business model align interests: private partner should

maximize profit by meeting public goals

Page 15

Achieving success

Project Credibility► Viable – defined, buildable and

feasible with environmental approvals in place or pending

► Approval steps concentrated before procurement rather than after award

► Strong champion ► Multi-disciplinary project team

with policy level support for major decisions

Program Credibility

► Effective legislation in place► Project screening process► Publicly defensible rationales for

alternative delivery► Competitive and transparent

procurement processes► Growing institutional knowledge

and capacity► Reasonable, clear and

appropriate specifications

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