lindgren combined 18may10

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PUBLIC – PRIVATE PARTNERSHIPS IN HIGH-SPEED RAIL DEVELOPMENTMay 18, 2010

Brought to you by

With Presentations By:

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Panelists

• Kathryn Kusske Floyd, Dorsey & Whitney LLP

• Stephen Small, P.Eng.Bilfinger Berger Project Investments Inc.

• Jay Lindgren, Dorsey & Whitney LLP

• Peter O’Neill, Bank of Ireland

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Agenda

• Market Demand & HSR Update –Kathryn Kusske Floyd

• Introduction to P3 Projects – Steve Small

• Legal Authority – Jay Lindgren

• Lender Perspectives – Peter O’Neill

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Market Demand & HSR Update

Kathryn Kusske FloydDorsey & Whitney LLP

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High Speed Rail in Washington, DC

• The Obama Administration has made high speed rail development one of its top priorities

• The American Reinvestment and Recovery Act included significant federal funding for high speed rail

• The Administration has formally designated ten high speed rail corridors as eligible recipients of federal funding

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The Issue

Federal funding is not enough. But in a time when state and local governments face shrinking revenues, P3s have become a timely model for completing projects on time and on budget.– P3: A long-term

performance-basedcontract between publicsector and private sectorto deliver publicinfrastructure

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One Tool: P3s

• Public-Private Partnerships– Accelerates infrastructure projects deemed

impractical under traditional funding– Well-developed international tool– $200 billion capital available?

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Advantages/Disadvantages

Pros

• Risk-sharing

• Innovation and efficiency

• Public liquidity

• Public focus on other core functions

• Decreased reliance on traditional funding

• International investment

Cons

• Long-term/complex contracts

• Loss of public control

• Potential higher user costs

• Risk of quality sacrifice in exchange for profits

• Impact on public jobs

• Loss of accountability

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Introduction to P3 ProjectsIntroduction to P3 Projects

Stephen Small, P. Eng.Senior Vice President – Development

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Intro to P3 Structure Intro to P3 Structure

• A P3 Project has the following key elements:

– A long-term contract with public and private sector

– Private sector provides - design, construction, financing, and operations of a public infrastructure;

– Public sector provides payments over the life of the P3 Contract – (range from 20 to 40+ years);

– Facility reverts to public-sector ownership at the end of the P3 Contract.

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P3 Structure P3 Structure

The traditional organizational chart in a P3 Project has the following characteristics:

– Authority is the ultimate client.

– Concessionaire enters into long term contract. – Design-Build Contract (Fixed term and

fixed price)

– Maintenance Contract

– Finance Arrangements .

O&M Subcontractors

D&C Team

Construction SubsDesign Subs

O&M Team

LEAD DESIGN

PROJECT LEAD

Authority

Financing TeamFinancing Team

Key Advantages for P3 Contracts

Advantages

Effective Risk Transfer for Authority

Schedule and Cost certainty

Long term standards and funding provided for OMR

P3 Timeline

Negotiation Phase

Bidding Phase

PrequalPhase

Client Evaluation

Client Evaluation

1 - 2 m 1 m 4 - 5 m 1 m 2 - 3 m 3 - 4 m

RFP

Short-list BAFOConstruction

Starts

RFQ

EOI

Best and Final Offer

3-way negotiations between project

consortium, public sector client and

lenders

Consortium allocates risk and

submits tender

Preferred Bidder

Financial Close

8 months to 16 months

Risk Sharing

Risk Allocation

Categories

Government Concessionaire DB Contractor Operator

Finance √ √Design / Engineering √Construction √Operating Cost √ √Major Refurbishment – Lifecycle Costs √ √

√: Primary Risk Taker √: Secondary Risk Taker

Compared to a traditional Design-Build project, a P3 Project results in significant risks relating to: The costs of design and construction for the Facility;Market demand for the Facility (if applicable);Service provided by the Facility (Usage risk); and The Facility’s operation and maintenance costs.

…being transferred from the Public Authority to the Project Company.

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Do Public HSR Authorities Have Legal Authority to Build P3 Projects?

Jay LindgrenInfrastructure Practice Group

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Legal Authority Procurement Considerations

• Legal Authority to Move Forward with P3 Projects:

– Federal procurement considerations

– State and local publicauthority procurementconsiderations

• Enabling legislation:

– Broad authority

– Project specific orpilot program authority

Federal Considerations

• SEP-15– Special Experimentation Project Number 15– Process for FHWA to identify new P3 approaches to

project delivery – goal is to identify impediments in current laws, regulations, and practices to the greater use of P3 and private investment in transportation projects.

– Allows U.S. Secretary of Transportation to waive requirements of Title 23 of the United States Codes

– Applicant must be a State DOT


• Private Activity Bonds (PABs)– Section 11143 of Title XI of SAFETEA-LU amends

Section 142 of the Internal Revenue Code.– Adds highway and freight transfer facilities to the types

of privately developed and operated projects for which PABs may be issued.

– Allows private activity on these projects while maintaining the tax-exempt status of the bonds.

– Law limits total amount of such bonds to $15 billion. As of January 2010, $6.3 billion had been allocated to seven projects, and $1 billion of that amount had been issued in PABs.


• TIFIA– Transportation Infrastructure Finance and Innovation Act– Provides Federal credit assistance in the form of direct

loans, loan guarantees, and standby lines of credit to finance surface transportation projects of national and regional significance.

– Each dollar of Federal funds can provide up to $10 in TIFIA credit assistance.

– Goal is to leverage Federal funds by attracting substantial private and other non-Federal co-investment in surface transportation projects.

State Enabling Legislation – Designated HSR Corridors

• Chicago Hub

NoMichiganNoKentucky

NoOhioNoYesMinnesota

NoWisconsinNoYesMissouriYesYesIndiana(bill pending)No (but bill is pending)IllinoisCovers HSR?P3 Legislation?State


• Northern New England

NoMaine

NoNew HampshireNoVermont

YesYesMassachusettsNoConnecticut

NoNew York

Covers HSR?P3 Legislation?State


• Southeast

YesYesMaryland

YesYesVirginia

NoYesNorth Carolina

NoYesSouth Carolina

YesYesGeorgiaYesYesFlorida



• Gulf Coast

YesYesGeorgia

NoYesAlabama

NoYesMississippiYesYesLouisianaYesYesTexasCovers HSR?P3 Legislation?State


• Pacific Northwest

• South Central

YesYesOregon

YesYesWashington


NoOklahomaNoArkansas

YesYesTexas



YesYesCaliforniaCalifornia

YesYesFloridaFlorida

NoNew YorkEmpire

NoPennsylvaniaKeystone

Corridor State Covers HSR?P3 Legislation?

• Single-State HSR Corridors

Lenders’ Perspective – Peter O’Neill

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High Speed Rail – Too Big to Succeed?

The amounts are staggeringConservative estimate for developing the 11 HSR corridors:– $500 billion.

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Federal $ - a Drop in the Bucket

Federal funds of $13 billion have been pledged by President Obama2.6% of the costs of developing the 11 HSR corridorsWhere’s the rest of the money coming from?– State/Local?– PABs / TIFIA?– Private Capital?

Ultimately it will have to be a combination of all of the above.Some “tracks” of the federal program explicitly favor projects that leverage federal funding with non-federal investments.

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The European Experience

European Union’s Trans European Network (“TEN”) EIB’s commitment of $12 billion to rail networksDutch HSR (2004) had significant EIB Guarantee Facility (35% of total source)French Government is developing an extensive HSR networkEIB funding also present hereSignificant use of Guaranteed Facilities in addition to State subsidiesPrivate Capital

The Lesson – Everyone needs to be involved.

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Significant structural complexities

Enormous size of these projects, multiple sources of funding etc will likely give rise to significant complexities in structuring.Examples include:– Timing of commitment of federal, state/local, private funds– Potential for cost overruns – how can this be mitigated– Revenue sources for the Project – patronage or availability?– Intercreditor issues– Integration issues – who operates the asset, schedules its use?– Permitting/Land Acquisitions – who bears the risk

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PPP structures have addressed many of these risks

PPP structures have for many years successfully mitigated risks associated with cost overruns, even on high value, complex projectsRequirements for fixed-price, date certain construction contracts pass risks to the Design-Builder.PPP structures have also addressed risks associated with multiple funding sources– Milestone payment structures ensure interests are aligned.

Complex intercreditor issues have also been addressed through PPPs– Use of PABS and TIFIA have been structured succesfully

Basis of Revenue structures needs to be carefully considered– Patronage will involve significantly more complexity than Availability

• Who bears risks associated with integrating use of asset by rail operator?• Will Private investors want some protection against competition

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Risk Allocation

Fundamental principle is that a risk should be borne by the party best placed to manage that riskPrivate capital will focus on ensuring that the split of risks between Government and the Private Sector are fair and equitableAn additional area of complexity – what “government” does the Private Sector contractor (“Project Co”) deal with?Federal?State? What if HS network involves more than one state?

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What does Private Capital focus on?

How is it getting its money back?

Robustness of cash flows at Borrower/Project Co level.– If there are delays, how long is Project Co kept whole?– If there are cost overruns, can the Contractor absorb these and still

complete construction?– What is the experience of the Contractor– What other projects is it involved in or has provided guarantees in

respect of?– Is there clear allocation of risk between project parties (“Integration

Risk”)

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Private Capital is ready and waiting!

Very excited about the prospects for HSR development in the US

A robust, tested and proven template is already in existence

US and International contractors have generally had positive experiences

The need is there

Significant opportunity to drive economic growth.

Questions & Answers

Please type your Questions in the Q & A box in the lower right hand corner of your screen

Contact Our Panelists

Kathryn Kusske Floyd, Partner, DORSEY & WHITNEY(202) 442 - 3520 [email protected]

Peter O'Neill, Senior Vice President, Global Project Finance,BANK OF IRELAND

(203) 391-5980 [email protected]

Steve Small, Senior Vice President of Development, BILFINGER BERGER PROJECT INVESTMENTS

(604) 678-6532 [email protected]

Jay Lindgren, Chair, DORSEY & WHITNEY INFRASTRUCTURE PRACTICE GROUP

(612) [email protected]

Thank You for Joining Us

Please look for future webinars from Infocast athttp://www.infocastinc.com/upcoming_webinars

lindgren combined 18may10

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