Risks & Advantages on P3 ProjectsPrepared for:

American Bar AssociationDivision 4, Project Delivery Systems

Presented by:

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March 25, 2014

Sid Scott

1. State of P3 – International and US2. P3 Structure and Agreements3. Challenges/Risks/Rewards4. What is the Future of P3 Market?5. Q & A

Agenda

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State of P3

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PPPs Defined

According to the National Council for Public-Private Partnerships, a PPP is defined as:“A contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.”

Why Public-Private Partnerships?

• Public entities continue to face budgetary problems• Infrastructure deteriorating• Major capital projects remain unfunded• Pressure to ease roadway congestion and provide

other necessities to public• No desire to raise taxes in this economic climate

• Solution P3s

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The Current Environment

What’s the Problem?• In FY 2012, 42 states had budget shortfalls totaling

$103 billion, • A shortfall totaling $54 billion across 30 states is

forecast for FY 2013, • 46 states have been forced to cut services and 30

have raised taxes.

Source: Center on Budget & Policy Priorities

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The Current Environment (cont’d)

What’s the Problem?• Decision makers will soon be forced to make difficult

decisions in order to meet the estimated need for $300 billion in urgent infrastructure projects over the next 5-7 years.

• When new construction and renovations are added in, the estimate rises to $2.2 trillion over five years.

ASCE Report: $3.6 Trillion Needed to Improve U.S. Infrastructure (by 2020)

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PPP Projects - Horizontal

Yes

No

Not Definitive

Map Legend

Source: AGC of America – The Associated General Contractors of America 9

Horizontal

PPP Projects - Vertical

Yes

No

Not Definitive

Map Legend

Source: AGC of America – The Associated General Contractors of America 10

Vertical

Status of P3s Internationally

P3 Structure & Agreements

What is a P3?

• Formation of PPPs• Public and private sectors join together to

identify, finance, build & operate infrastructure project

• Infrastructure Project• Need identified by either public agency or private

entity• Project to be used, at least in part, by general

public or public agency

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P3 and Project Delivery

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PROJECT DELIVERY CONTINUUMAnalysis of Alternatives

FUNDING/FINANCING:

Public Funding Private Equity

Tax Exempt Financing Taxable Financing

If concession, BV/QBS w/competitive negotiations

Price Only

PROCUREMENT:

Best-Value (BV) BV/QBS with Competitive Negotiations

PUBLIC SECTOR PUBLIC-PRIVATE-PARTNERSHIPS

DESIGN-BID-BUILD

DESIGN-BUILD(DB)

DESIGN-BUILD-OPERATE-MAINTAIN

(DBOM)

LONG-TERM LEASE/O&M CONCESSION

DESIGN-BUILD-FINANCEOPERATE(DBFO)

Separated Services Early Contractor/Developer Involvement Integrated Services/Project Lifecycle

LEASE- DEVELOP-OPERATECONCESSION

Commercial Debt/Private EquityInnovative Finance Credits/Public Subsidies

CM @ RISK(CM/GC)

PROJECT DELIVERY:

How Are Public-Private Partnerships Structured?

Financial Commitment

Legal Relationship

Security

Legend

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What Does Each Side Bring to the Table?

• Public / Government Contributions• Property• Eminent Domain Powers• Ability to obtain tax-exempt bonds (PABs)• Ability to impose user fees (e.g., tolls)

• Private Contributions• Introduction of Private Capital• Design/Construction Expertise (right people)• Operation and Maintenance Expertise (often long

term)

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State Agencies May Only Act Pursuant to Enabling Legislation

17Soure: National Conference of State Legislatures (NCSL.org) [Current through January 24, 2013]

P3 AgreementsStatutory Requirements

• P3 Enabling legislation confers authority for State Agencies to act

• P3 statutes allow State Agencies to form partnerships with private entities for planning, construction and operation of Infrastructure Projects

• Statutes may or may not set forth terms and conditions of partnering agreements

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P3 AgreementsStatutory Scope of Authority

• Authority to freely negotiate duration of franchise• Broad authority to define terms of concession by

agreement rather than public rate setting authority • Authority to broadly access private sector and local, state

and federal public funding• Procurement through both solicited or unsolicited

proposals• Procurement flexibility promoted by exempting the

negotiation, selection and performance of projects from the State Public Procurement Act

• Public ownership imputed to private entity for planning, zoning, and certain tax purposes

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Rewards, Challenges, and Risks of P3 Projects

The Promise of P3s – Better, Faster, Cheaper

• Better• Innovation• Financial success depends on quality of the

project, and financial model• Faster

• Develop and build sooner than with “pay as you go” public funding

• 76% of P3 Projects completed timely vs. 30% of traditional contracts (CA reports 83% of

P3 Projects on time) – Source: Conference Board of Canada

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Benefit to Investor

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“What better asset in an economic downturn and unclear future than hard real-estate assets providing some measure of inflation protection.”

Leonard ShaykinManaging Partner

LambdaStar Infrastructure Partners

Challenges to the P3 Wave?

• Public Perception• Monetization of “iconic assets”

• Anxiety with putting “public” asset in the hands of private sector for 50 – 75 years

• Foreign control over “vital” infrastructure, user fees, etc.

• Perceived cost of money for municipal projects

• Cost/Time of procurement• Loss of federal subsidies (Transportation)

• Private Activity Bonds, TIFIA• Unrealistic Revenue projections or valuations of assets • Overuse of availability payment (AP) structured deals

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Private Sector Risks

“You have to understand the difference in risk allocation… The additional risk in a P3 project as a contractor (especially if you are an American contractor) is probably nothing you have ever seen before.”

Magnus ErikssonSenior VP,

Skanska Infrastructure Development Americas

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P3 Risks

– Construction• Accuracy & Completeness of Design• Environmental policy/requirements• Labor Agreements• Scope Changes• Cost growth

– Financial• Schedule slippage• Interest rate

– Operational• Revenue• Level of Service/performance

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Typical Risk Transfer Scenario Under PPP Arrangements

Transferred?Public/DBB PPP

Performance Public Private XInterface Public Private X

Scope Public Shared XErrors and Omissions Public Private XInterference/Coordination Public Private XLife Cycle Public Private X

Performance Private PrivateSchedule Public Private XCost Overruns Public Private XChanges in Scope Public PublicForce Majeure Shared Shared

Schedule Slippage Additions Public Private XInterest Rate Risk Public Private X

Supply/Performance Risk Private PrivateFinancing Risks Public Private XDefects Private Private

Maintenance Level Public Private XDeferred Maint/Repair/Repl Public Shared XDefective Components Private PrivateResidual Value Public Shared X

Revenue Public Shared XService Level and Quality Public Shared X

Maintenance and Life Cycle Risks

Operations Risks

Responsibility for Risk

Development Risks

Design Risks

Construction Risks

Financing Risks

Vehicle Supply Risks

Source: National Council for Public Private Partnerships

What is the Future of the P3 Market

• Cautious Optimism!• US predicted to be largest P3 market in

world within 10 years based on current trends and deal flow

(Source: Public Works Financing)

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1. Public Sector Champion2. Statutory Environment3. Public Sector Organized Structure (P3 program)4. Careful assessment/allocation of risks5. Detailed Contract (Business Plan)6. Clearly Defined Revenue Stream7. Realistic performance requirements (AP structure)8. Stakeholder Support9. Pick Partners Carefully

Keys to Successfully Managing PPPs

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Questions / Comments

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Sid Scott