Public Private Partnership – An Opportunity for Louisiana Private Partnership... · Public...

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Public Private Partnership An Opportunity for Louisiana 2007 Louisiana Transportation Engineering Conference Baton Rouge, La February 11-14, 2007 10:00 a.m. - 11:45 a.m. Concurrent Sessions Session 82: Public-Private Partnerships Presented by Bob Prieto Senior Vice President Fluor

Transcript of Public Private Partnership – An Opportunity for Louisiana Private Partnership... · Public...

Page 1: Public Private Partnership – An Opportunity for Louisiana Private Partnership... · Public Private Partnership –An Opportunity for Louisiana 2007 Louisiana Transportation Engineering

Public Private Partnership – An Opportunity for Louisiana

2007 Louisiana Transportation Engineering Conference

Baton Rouge, La

February 11-14, 200710:00 a.m. - 11:45 a.m. Concurrent Sessions

Session 82: Public-Private Partnerships

Presented by

Bob PrietoSenior Vice PresidentFluor

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Overview

Fluor PPP’s

Traditional Funding Sources

PPP Financial Options

– Two examples

PPP Efficiencies

New Skills & Knowledge Required

10 Things We Want in a PPP

A Louisiana Opportunity

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Fluor

One of world’s largest, publicly owned engineering, procurement, construction, and maintenance services companies

International workforce of 30,000+ employees

Network of offices in more than 25 countries across six continents

Engineering News-Record (ENR) magazine consistently ranks Fluor Corporation among the top three on its “The Top Design-Build Firms” and “The Top 400 Contractors” lists

Ranked No. 1 in Fortune magazine’s 2004 rating of “World’s Most Admired Companies” in engineering and construction category

Highest credit rating of any major international engineering and construction company

Fluor’s safety performance record consistently makes it one of the world’s safest contractors

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Fluor PPP Experience

Pocahontas Parkway (Route 895) Connector

– First project to be developed and completed under VA PPP laws

E-470 Public Highway and Toll Road

– Provided subordinated debt financing

JFK International Arrivals Terminal

– First major privately developed and financed airport terminal in United States

Netherlands High Speed Rail Line

– Large-scale high speed rail financed and executed as a PPP

A 59 Freeway (Public-Private Partnership)

– First highway project to be financed and executed as a PPP

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Fluor PPP Experience

Connect London Underground Telecommunications

– Major telecom project financed and executed as a PPP

SR 125 South Gap/Connector and Toll Road

– Innovative combination of private equity and federal TIFIA funding

I-495 Capital Beltway HOTLanes

– Innovative PPP using HOTLanes to reduce congestion

I-95 I-395 Reversible HOTLanes

– Innovative PPP using HOTLanes to reduce congestion

National Roads Telecom Services

– Innovative program to upgrade highway telecommunications as a PPP

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Available Transportation Financing Mechanisms

Traditional government ownership

– General state or local revenue (annual appropriation)

– Trust fund (defined/dedicated revenue sources)• Traditional examples – Gas taxes, motor vehicle fees

• Non-traditional opportunity – Share of oil revenues

– Tax increment financing district• Includes PILOT

– Federal funds

– User fees• Tolling, parking fees, vehicle usage fees

Public Private Partnership (PPP)

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PPP Financial Options - Simplified

Two Basic Models

– Not for profit

– For profit

Tools provide for variations on the themes

No one size fits all model

– We run all models until just before submission unless client has expressed a preference

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Value Drivers

Revenue

Cost

Time to deliver

Risk reduction

Financing flexibility

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Sources of Revenue

User fees (tolls)

Other project revenue sources

– ROW related (telecom, pipeline, water etc)

– Related services (gas, food etc)

Availability or other performance payments

– Shadow tolls

Economic development (tax increment or other)

Government subsidy

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Sources of Cost

First Cost (CAPEX)

– Constructability

– Packaging/supply chain

– Productivity

– Interface cost (risk)

– Escalation (time)

Life Cycle Cost

– Materials selection

– Maintainability

– Technology leverage

– Ease of expansion

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Time to Deliver

Advance project relative to traditional funding availability

Design-build shortens execution cycle

Project phasing financially driven

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Risk Reduction

Both models (For profit/Not for profit)

– Capex risks• Fully wrapped

• Interface risk transferred

• Escalation risk transferred

– O&M risks• Fully considered and priced

• Fully transferred if desired

• Map directly to financial plan

– Traffic & Revenue Risks• Fully transferred but valuation varies by model Includes ramp-up risk

• Uncertainty valued

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Risk Reduction

Not for profit

– Uncertainty risk partially valued• More financial leverage than traditional bond financing

• Variable period of operation mitigates risk

• Upside fully to state

For profit

– Uncertainty risk “fully” valued• even more financial leverage

– Upside “fully” to for profit entity

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Financing Flexibility – Not For Profit

Typical structures:

– “63-20”

– 501 (c) (3)

Term – Variable; 30 year nominal

Sources of financing

– Developer (development phase)

– Bank debt (construction period)

– Tax exempt bonds (senior debt)

– Private Activity Bonds (may be more flexible)

– TIFIA

– State Infrastructure Bank (SIB)

– Sub-debt (by developer or other)

– Standby credit facility (by developer or other)

– Initial or periodic payments by Federal, State or Local governments

More flexible debt structures increase leverage on same traffic and revenue projections

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Financing Flexibility – For Profit

Typical structures:– Concession/taxable – historical model– Concession/blend or taxable and tax exempt – emerging

Term – typically 50 to 99 years

Sources of financing:– Developer (development phase)– Bank debt (construction period)– Bonds (senior and junior debt; interest only with bullet; multiple

tranches; multiple refinancings anticipated and programmed)– Private Activity Bonds (blended model)– TIFIA– State Infrastructure Bank (SIB)– Sub-debt (by developer or other)– Standby credit facility (by developer or other)– Initial or periodic payments by Federal, State or Local governments– Accelerated depreciation (except with PAB)– EQUITY (patient)

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How Models Differ – A 50 Year Look

Not for Profit

– Shorter period (target 30 – 50 years)

– Worse than expected revenue profile• Not for profit continues to operate until debt repaid

– Better than expected revenue profile• Debt retired earlier

– Facility flips to state on debt retirement

– Early clawback by state more easily achieved• Debt repaid

– Tolls reflect facility financial needs to retire debt in target time frame

– Developer earns development fee plus fees from contracts

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How Models Differ – A 50 Year Look

For Profit– Longer period (50+)– Worse than expected revenue profile

• Concession period unaffected; return on equity reduced

– Better than expected revenue profile• Equity returns significantly enhanced

– Facility reverts to state at end of concession period or on default

– Early clawback by state not easily achieved– Tolls reflect strategy to maximize revenue

• No consideration to do other than that• Constrained only by contract but over time period constraints worth

little• Tolls reflect equivalent purchasing power (economic growth) Traffic growth beyond plan to developer Value of congestion growth to developer

– Developer earns development fee plus fees from contracts plus equity returns

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Two Examples

Not for profit - Virginia Route 895 Pocahontas Parkway

– Conversion of “mature” asset to for profit facility in progress

For profit (likely) - I-495 Capital Beltway Toll HOTLanes

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Virginia Public-Private Transportation Act

Originally adopted – 1995

Revised – 2005

Goal – Encourage investment by private entities by creating more stable investment climate and increasing transparency and public involvement in the procurement process

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Virginia Route 895Pocahontas Parkway

Greater Richmond, Virginia

High-level bridge and highway

– New 8.8-mile, 4-lane toll facility• Uses Smart Tag/EZ Pass plus highway speed open road tolling

– Connects I-95 to I-295

– James River Bridge• 4,765 feet long, cast in place• 200-meter clear span• 145-foot vertical clearance for shipping

Cost – $324 million

Traffic (ultimate) – 50,000 VPD

First Virginia PPTA project

Second 63-20 financed project

Project completed 15 years earlier than funding would otherwise have allowed

Design/build reduced project execution period from seven years to four years

Majority of work performed by local designers and contractors

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Pocahontas Parkway Map

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Pocahontas Parkway Timeline

Virginia PPTA legislation adopted

1995 1998 2002

Facility opened

Comprehensive Development Agreement; start of construction

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Pocahontas ParkwayPPP “Term Sheet”

Type of Agreement

– Development, financing, DBOM

Proposal

– Unsolicited

Developer

– Fluor-led LLC

D/B Contractor

– Fluor-led LLC

Project Owner

– Pocahontas Parkway Association (non-profit, 63-20 corporation)

O&M Contractor

– VDOT

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Pocahontas ParkwayPPP “Term Sheet” (continued)

Initial Financing– $354 million tax exempt bonds

• Secured by first lien on project revenue

– $18 million SIB loan

– $5 million standby sub-debt by Fluor-led LLC

– $9 million in federal funds for design costs

Development Fee– Yes

Original Underwriter– Bear Stearns & Lehman

Fitch Rating– BBB-

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Value CreationPocahontas Parkway Next Steps

2003 – First full year of operation

2005 – Concession offer received from Depfa Bank/Transurban

2006 – Sold as concession

Resale value – $500 million-plus

– Provides refinancing capacity in spite of significant traffic shortfall

– Transfers all O&M and traffic risk to private sector

– Frees VDOT from funding $225 million in O&M

– Brings state-of-the-art technology

– Provides vast pool or resources and experience to draw on for any problems

– Removes debt from state balance sheet

Original cost – $380 million

– Plus deferred reimbursement on O&M costs

Value created by de-risking project

– Development risk removed

– Legislative risk (first PPTA) removed

– D/B risk removed

– Traffic ramp-up known

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I-495 Capital BeltwayBackground

1964 – opened

1977 – widened to eight lanes

Primary use shifted to local facility

Currently 180,000 to 240,000 VPD

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I-495 Capital BeltwayToll HOTLanes

Add four HOTLanes on existing eight-lane freeway

14 miles long

Access by concurrent adjacent lane access; direct access from 5 or 6 of 11 existing interchanges

Stays in existing ROW with minimal displacement

Property takes significantly reduced from 300-plus in EIS proposals to six or fewer

Estimated cost

– $1 billion

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HOTLanes in Operation

12-Lane Configuration8 GP and 4 HOTLanes

General

Purpose

Lanes

General

Purpose

Lanes

HOT

Lanes

HOT

Lanes

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I-495 Capital Beltway Timeline

Virginia PPTA legislation adopted1995

2002

2003

2004

2005

2006

2007

2012 HOTLanes open

NEPA public hearing

Fluor submits unsolicited proposal

CDA negotiation begins

CDA completed with Fluor/Transurban

ROD

Financial close; Construction start

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I-495 Capital BeltwayPPP “Term Sheet” – Tax Exempt

Type of Agreement– Development, Financing, DBOM

Proposal– Unsolicited

Developer– Fluor/Transurban

Design/Build Contractor– Fluor

Project Owner– Non-profit 63-20 corporation

O&M Contractor– Transurban

Initial Financing– Tax exempt bonds– Sub debt by Fluor/Transurban

Development Fee– Yes

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I-495 Capital BeltwayPPP “Term Sheet” – Concession

Type of Agreement– Development, Concession

Proposal– Unsolicited

Developer– Fluor/Transurban

Design/Build Contractor– Fluor

Project Owner– Transurban/Fluor

O&M Contractor– Transurban

Initial Financing– Concession financing– Equity by Fluor/Transurban (15 percent minimum)

Development Fee– Yes

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I-95/395 HOTLanes PPTA

$913 million HOT and HOV lanes

Improves 56 miles of I-95

Adds third HOV lane to I-95 in Northern Virginia

Fluor/Transurban proposal selected as competing alternative to previously submitted unsolicited proposal

Comprehensive agreement under negotiation

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PPP Performance – Evidence on Construction Projects from the United Kingdom’s National Audit Office

Conventional Procurement

PPP Procurement

Cost overruns for the public sector

73% 22%

Delay in project delivery

70% 24%

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What are the “efficiencies”?

Risk transfer – Design, construction, operation, maintenance, and finance

Output-based specifications – You pay for the service you receive (performance payment regime)

– Availability payment

– Congestion priced level of service

Long-term nature of contracts – Whole life costing and asset management

Budget constraints – PPPs “off budget/public debt”

– Terminal 4 JFK

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What are the “efficiencies”? (continued)

Infrastructure requirements met earlier

– Pocahontas Parkway

Search for efficiency and creativity – Public sector flexibility facilitated

Partnership – Both the public and the private sector are involved during the whole lifecycle of the project

Private finance involved

– New sources of infrastructure capital

– More flexible financial structures

– More project value captured upfront

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How do the users of these projects benefit?

Needed infrastructure is provided earlier

Life cycle financial requirements addressed upfront and provided for

Other benefits are available without PPP if political will and process discipline exist

– Design/build efficiencies (time, cost, risk transfer)

– Performance spec versus design spec

– Value pricing for congestion management and effective capacity improvement• Market rates required

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Skills

Project finance and innovative delivery requires new skill sets to deliver:– Design managers (contractor)– Value engineers (contractor)– Constructability (designer)– Environmental/permitting manager (PPP)– O&M (PPP/contractor)– Tolling systems/customer service call centers (PPP)– Life-cycle risk analysis (PPP)– Taxable and tax exempt financing specialists (PPP)– Derivative and hedging specialists (PPP/financial Institutions)– Financial insurance specialists (PPP/insurers)– Economists (PPP)– Concession traffic and revenue forecasting (PPP)– Monte Carlo analysts (D/B/PPP)– Insurance specialists (changed E and C interface) (all)– Tax (D/B/PPP)– Project developers (PPP)

Are we ready?

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Skills

Traditional owner skill sets need to change– Shift from buyer of “good” design and low bid

construction to buyer of “performance-based” outcome

– Shift from “ongoing decision framework” to “upfront decision framework”

– Shift from asset owner to procurer of capability

New skills– Asset valuation

– Concession selection, structuring, and sale

– Economic modeling

– O&M standards and contracting

– Performance acceptance versus design review

Are owners ready….not to be owners?

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Knowledge

New vocabulary:– Accreting swaps– Subordinated debt– Equity– Concession– “63-20”– Private activity bonds– HOT lanes– TOT lanes– Congestion pricing– Bankruptcy analysis– Accelerated depreciation– Real options– Monoline insurance– Shadow tolls– Availability payments– Toll road regulation– TIFIA

Financial Structure and Cost of Capital

Weighted

Average

Cost of

Capital

Re

Min WACC

Projects goal is to minimize weighted

average cost of capital: Why?

% Debt

10/1/2002 Financial Design and Project Appraisal ©Robert B.H. Hauswald

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Top 10Things We WantWhen Entering Into A PPP

10. The PPP exhibits the three key attributes of successful PPPs– the maximum infrastructure for the lowest cost– appropriate risk weighted returns– protects “minority” interests

9. A public sector partner who clearly understands all obligations

8. The project addresses a real need

7. The public sector partner clearly understands risks

6. Stakeholders will support the project and it FLIPS

5. A clear path forward is identifiable

4. Implementing agencies embrace change

3. A transparent procurement process exists

2. Good legislation exists

1. Political will is strongly present

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It’s As Easy As ABC

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Basic Conditions

Traffic congestion in primary corridors of ABC area worsening

– Baton Rouge traffic bound for I-10 W and I-49 N chooses I-10, not I-49 S

– Further aggravated by traffic using I-10 and I-12 to transverse state in peak periods

• These vehicles contribute little to regional economy, and add further maintenance costs

– Rebuilding of New Orleans ramping up

– Port of New Orleans capturing growing Asia/East Coast container traffic

– I-12 and on I-10 improvements not completed due to lack of funding

Hurricane evacuation capacity and efficient access of first responders to New Orleans are adversely impacted

– Absence of a second, geographically separated, limited access facility

– Ability to sustain capacity and performance further threatened by shortfalls in O&M funding including provision for periodic renewals

• Additional expansion will only exacerbate this shortfall of adequate funding

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The Proposal

Fluor’s proposal – Atchafalaya Basin Corridor Project– Institute an integrated basin-wide traffic management

system• Leverage and optimize capacity of basin corridor network• Manage and relieve traffic congestion in the entire area

– Construct a series of border-to-border road improvements• Relieve congestion at key choke points• Provide an alternative hurricane evacuation route• Support Katrina rebuilding effort and continuing economic

development• Support the expansion of the Port of New Orleans

– Develop new sources of revenue to support future capital improvements, operations, and maintenance• Including capture of revenue from out-of-state users

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Proposed Project Summary

Total “first cost” – $4 billion

– Includes capital costs, interest during construction, reserve funds, financing, and other costs

50-year O&M and renewal cost – $9 billion

100% toll financed using a not-for-profit PPP structure

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Benefits

Optimized life-cycle cost by leveraged use of basin network of corridors

Improved safety and efficiency in the road corridors

Improved road maintenance

Improved freight productivity

Improved accessibility to New Orleans during reconstruction

Improved air quality

Emergency evacuations

Economic development

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Financial Benefits

Previously uncaptured revenue from out-of-state users of Louisiana’s highway system is captured from tolls

A new revenue stream is established which can be used to finance the construction of needed facilities

The completion of I-49 South is financed and constructed on an accelerated basis

Traffic congestion in the Atchafalaya Basin is mitigated by providing a means to balance traffic flows among the major roads in the region

– Specific, measurable benefits will accrue in the capital region where congestion is the highest

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Financial Benefits (continued)

The entire capital cost of the construction of new facilities, estimated at $4.0 billion including escalation, interest during construction, and other related costs, may be financed without any additional state funds or new taxes

– Alternatively, state or federal contributions to project funding may facilitate either additional projects to be built out, maintenance funds and scope to be adjusted or select tolls to be reduced or eliminated