DC-#1210253 v1

World Bank Workshop: Current Developments in U.S. P3s

Roger D. StarkPartner, K&L Gates1601 K Street N.W.

Washington DC 20006-1600Roger.Stark@klgates.com

202/778-9435

June 18, 2008

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OVERVIEW

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Summary of Presentation

Focus first on strategic objective, then on process Background on public finance and key paradigms Legal constraints on P3s Elements of successful P3s Conclusions

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Background on P3s, Public Financeand Key Paradigms

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Combination of public and private finance components

A formula for success – due to the unique contributions available from each participant Governmental power

Eminent domain Taxing power Access to tax-exempt financing

Private strengths Construction expertise Equity investor Private procurement Private management

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Key Elements of a P3

Contracts awarded based on “value for money,” not lowest bid

Capital or capital-equivalents provided by public and private parties

Reliable, long-term commitments Flexibility in structuring contractual arrangements to

best suit the economic, operational and policy goals of the parties

Assets with relatively high residual value

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“Traditional” Finance Paradigms

In the corporate world, capital is raised through equity as well as debt offerings

In the public sector, capital is raised primarily through the issuance of long term debt – bonds – in order to accomplish specific projects. Most public sector debt has an amortization term of 20-30 years; most debt is amortizing – often on a level payment basis

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Recent Developments

Increased Budget Constraints at the Federal, State and local level

Mistrust of merchant projects/market projections

Degradation of municipal credit quality Heightened attention to regulatory and

political risks

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Structural Paradigms

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Municipal Finance

General Obligation Municipal Bonds (tax exempt, indenture trustee)

“Private Activity” Revenue Bonds Lease Purchase Certificates of Participation (“non-

appropriation risk,” “essential services”)

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Tax-Exempt Financing

Debt issued at lower interest rates, because the recipient does not include the interest in federal gross income

The structure of the debt is limited primarily by state law. Debt may be fixed rate, variable rate, auction rate, credit enhanced, un-credit enhanced, senior or subordinate lien

Bond insurance used to be a major factor in project financing and public private partnerships

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Tax-exempt lease purchases

Public partner enters into a long term agreement: Providing for payments over time Public participant has management of and control

over the asset during the term of the lease At the end of the lease term, public partner may

acquire title to the property

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Conduit Financing

The public partner may participate as an issuer of debt solely to provide access to tax exempt financing

Public partner does not provide any direct financial support (i.e. taxes, revenues other than project revenues) to the project

Bond Repayments

Project Trustee

InvestorsGovernment Issuer

Trust agreementBond proceeds

Proceeds to pay cost

Revenues from project

Bonds

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Partnership Financing The public partner may participate not only as an issuer, but also with a source

of governmental revenues – governmentally imposed Special excise taxes Customer facility charges Incremental tax revenues Utility revenues (special revenues)

Project Trustee

InvestorsGovernment Issuer

Trust agreement

Bond proceeds

Proceeds to pay cost

Revenues from project (may be secondary or absent)

Bond Repayments

Bonds

Govt. revenues

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63-20 Financing Option

What it is: A mechanism created under federal tax law (Rev.Rul. 63-20; Rev. Proc. 82-26) that permits nonprofit corporations to issue tax-exempt debt

How it works: Nonprofit corporation established under state law issues tax exempt bonds; proceeds used for a desired project; the nonprofit corporation is obligated to repay the debt from identified and pledged sources

Applications: Unlimited, but particularly helpful in the P3 context

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Legal Counsel

Design Engineer

Investment Banker

Revenue Modeler

Accountants

Rating Agency(ies)

Parent Guarantor

O&M Provider

Sponsors Senior LendersTerm Notes -Banks -Public -Institutional InvestorsBank Revolver/LC Facility

Subordinated Lenders

Subcontractors

Equipment and Material Suppliers

EPC Contractor

Parent Guarantor

WarrantiesPerformance Guarantees

Equity InvestmentShareholders Agreement

Project Input ContractFixed PriceEPC Contract

Offtake Agreements/Concessions/Project Agreements

O&M Agreement

Guarantees or

SupportPayingAgent

CollateralAgent

Funding Company

Passive EquityInvestors

Insurers

Supplier

Legal Counsel

Independent Engineer

Market Consultants

Insurance Consultant

Project Company

Offtake Purchaser(s)

ParentGuarantor

Subsidiary Infrastructure(e.g., rights-of-way)

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Typical PFI Structure

Procuring Authority

Project Company’sShareholders

Project CompanyProject Company’s

Lenders

D&BContractor

OperatingContractor

Lender’s DirectAgreement

Loan andSecurityDocuments

Key: = contract = flow of money

Project Agreement

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Risk Mitigation Paradigms

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Risk Mitigation (Lender Goals)

Mitigation of Construction Risk Reliable cash flow/credit quality—off-take

and Concession Agreements (non-appropriation risk?)

Mitigation of market risks Mitigation of political risk (“essential

service”?) Bilateral contracts that integrate market

requirements and mitigate market risks

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P3 Risks

Political, regulatory and change of law risk Additional costs of project oversight, documentation

and execution may exceed savings from efficiencies Market projections fail to pan out

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Design Bid Build

Private Contract

Fee Services

Design Build

BuildOperateTransfer(BOT)

LongTermLease Agreement

DesignBuildFinanceOperate(DBFO)

Build OwnOperate(BOO)

Other InnovativePPPs

PUBLIC Responsibility PRIVATE Responsibility

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Legal Constraints on P3s

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Legal Constraints on Public Private Partnerships

Legal constraints generally arise as a result of the participation of a “public partner”

Why? -- Unlike private enterprise, public agencies are entirely creatures of state law. They have only those powers that are granted by a state constitution and by the state legislature. The power of a state legislature is plenary The state constitution limits the powers of a state legislature As a result, any party dealing with a public agency is required to

be aware of the constraints of state and local law. Any exercise of power by a local government beyond its express grant of authority (or that necessarily implied) is void. Let the private party beware.

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Lending of Credit

Most often (but not always) found in a State Constitution. In order to protect the taxpayers from their elected representatives Prohibits gifts of public funds to private parties Prohibits lending of public credit to benefit private parties Prohibits the acquisition of stock

Effect of limitation Generally limits the ability of a public agency to be a “partner” with

private enterprise Prohibits public agency from guaranteeing the performance of what is

essentially a private function The public agency is limited in its ability to participate in the “upside”

and the “downside” of a business venture

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The Role of Government

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Checklist for Government Support Arrangements

Determinable Tax Liabilities (“PILOT” Agreements)

Credit Support for Governmental Obligations

Assistance in Obtaining Governmental Permits/Approvals

Mitigation of Change of Law Risks

Mitigation of Uninsurable Force Majeure Risks

Priority or Parity on State-Controlled Facilities (e.g. port facilities)

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The Way Forward: Role of Government

Traditional Government Financing Governmental grants/Revolving Funds/“63-

20” corporations to attract private capital P3 Structures Transaction-specific innovation

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Why do P3s succeed and why do they fail?

Politics/philosophical misunderstandings and differences Key public/private distinctions

Constituencies: Shareholders vs. the general public Control: Shareholders vs. state legislature Motivation: General (and often unrelated) political issues (affecting the public

partner) vs. internal political issues (affecting the private partner) Sunshine Effect

Negotiations with a public partner invite public scrutiny Public records issues Public notice and public hearing requirements

Motivations of the parties negotiating may not be different; however, the reward systems are different

When parties who are not similarly situated are negotiating, the probability of miscommunication is enhanced and the opportunities for mistrust and communication breakdown escalate

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Conclusions

Risk sharing is the essence of P3s Without suitable risk sharing, structural,

legal, and regulatory risks may reduce flow of private capital to infrastructure projects

Existing paradigms must be adapted to accommodate changes in the market

Governmental support central to attracting private investment

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Roger Stark (Washington, D.C.) For more than 19 years, Mr. Stark has concentrated his practice on a wide variety of domestic and international energy and infrastructure transactions. His experience includes complex project and structured financings, mergers and acquisitions, privatizations and all manner of commercial agreements relating to energy and infrastructure. Building on over 10 years of domestic practice involving projects in 12 U.S. states, he has worked in over 16 Latin American countries and numerous other locations worldwide and is fluent in Spanish and proficient in Portuguese. He has structured, documented and/or closed over US$1 billion in complex infrastructure financings, including the first limited recourse electric sector financings in Kenya and Panama (representing the borrower and lender, respectively). He has also worked on a variety of domestic electric generation project financings utilizing conventional and non-conventional fuels (e.g., the two largest waste-tire-to-energy projects in the world and the first gas-fired co-generation plant located on a New York State superfund site).

Mr. Stark’s practice also involves telecommunications and transportation infrastructure transactions and extends to regulatory matters, including advising a major multinational oil corporation on considerations, strategies and tactics for its entry into the electric power business and advising numerous clients on the rules and requirements of various U.S. and international energy regulatory structures. In addition, he has participated in a variety of contested regulatory and litigation/international arbitration matters concerning energy projects. Notably, he participated in a World Bank mission to advise the government of Argentina in connection with the proposed restructuring of its public service concessions after the peso crash of 2001.

J.D., Vanderbilt Law School (1984), B.A., Queens College of the City University of New York (1981)

+1.202.778.9435roger.stark@klgates.com

Speaker Bios

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Questions?

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