nancy c. smith nossaman guthner knox & elliott llp regional finance workshop on public-private...

Nancy C. SmithNossaman Guthner Knox & Elliott LLP

Regional Finance Workshop on Public-Private Partnerships

December 12-13, 2006

Nossaman

• Law and consulting firm with unique specialty in procuring, contracting and financing large infrastructure projects

• Work exclusively for owners, not civil contractors

• Honored to work for more than 30 State DOTs and regional transportation authorities around the country

• Named by Public Works Financing as the #1 owner advisor each year since rankings began

• Projects named #1 of the year by AASHTO, Institutional Investor, Bond Buyer, ASCE, DBIA, ARTBA and many others

• Proud of our clients’ record of success

Outline

• Overview of Public-Private Partnerships

• Private Sector/Legislative Issues

• MDOT Questions

• Defining P3

• From design-build to concession

• Nexus between shifting risk and relaxing control

• DB = least amount of P3 risk shifting to private sector and most retained public sector control

• Concession = Opposite

Overview of P3sTypes of P3s

Overview of P3sTypes of P3s

Risk Element Design/ O&M Financing RevenuesConstruction

ModelA. DBB GA GA GA GA

B. DB PS GA GA GA

C. DBOM PS PS GA GA

D. DBFO PS PS PS GA

E. Full Concession PS PS PS PS

GA - Government Agency PS - Private Sector

Overview of P3sTypes of Concessions

• Long-term lease and operation of existing assets – “Asset Sales/Leases”

• Construction and operation of newfacilities – “Development Concessions”

• Reconstruction, expansion and operation of existing facilities – “Mixed Concessions”


• Asset Sale/Lease

• Existing facility

• Operations, traffic and maintenancehistory

• Stable cash flows and expenses

• Lower risk profile for concessionaire in terms of traffic and revenue

• Requires steady, stable return to investor

• “Buying a going concern”


• Development Concession

• New facility/greenfield

• No traffic or O&M history

• Unproven cash flows and expenses

• Reliance on cost estimates and traffic & revenue projections

• Higher risk profile for concessionaire

• Construction risk (delay and cost-overruns)

• Traffic and revenue/start-up risk

• Higher risk profile requires higher return to investor

• Once past start-up, risks become similar to asset sale/lease


• Revenue Positive Projects

• Project revenues exceed:

• Capital Costs

• Debt Costs (interest, principal, reserves)

• O&M Costs

• Handback/End of Term Costs

• Return to Private Partner

• Can result in up-front payment from private partner to public agency owner or revenue sharing or both


• Revenue Negative Projects

• Project revenues do not exceed:

• Capital Costs

• Debt Costs (interest, principal, reserves)

• O&M Costs

• Handback/End of Term Costs

• Return on Investment


• Revenue Negative Projects, cont.

• Contract identifies how “gap” is filled

• How and when does Owner or other $ come in and under what circumstances

• Progress, milestone, periodic, etc.

• Availability payments – payments to concessionaire depend upon performance

• May provide for recapture of $ back to Owner if project performs above a certain measure

PRIVATE SECTOR ISSUES

TxDOT CDA Term Sheet

1. GENERAL CONCESSION TERMSDeadline for Service CommencementLease TermIndependent EngineerFinancial ModelFederal RequirementsRestrictions on Assignment, Subletting, and Change of ControlIndemnity

2. DEVELOPER COMPENSATIONRights to Toll RevenuesToll Revenues DistributionCompeting Facilities

3. TxDOT COMPENSATIONPayments to TxDOTReimbursement of TxDOT CostsReserved Business Opportunities

4. TOLL RATES/TOLL SYSTEMToll Rate FrameworkAnnual Adjustments to Toll RatesTolling System Interoperability Electronic Toll Collection

5. FINANCINGFinancingRefinancing

6. SITE CONDITIONS / HAZ MAT

7. DESIGN AND CONSTRUCTION

8. O&M

9. INSURANCE AND BONDING

10. EXCUSED PERFORMANCE / CHANGES

11. DEFAULT / DISPUTES

12. TERMINATION

Private Sector Concerns

• Level of risk

• Political

• Cost of investing in proposal

• Enforceability of contract

• Environmental

• Financial

• Revenue projections

• Cost of funds

• Cost/time to complete

• Cost to operate

Private Sector Concerns

• Level of control• Transparency of procurement process

• Control over design and construction

• Do FHWA procurement rules apply to developer contracts?

• Setting tolls, ability to participate in other revenue opportunities

• Control over operations

• Owner termination rights, developer/lender rights upon termination

What to Include in Enabling Legislation

• PPP contracting authority

• Tolling authority, including electronically and after debt repaid

• Authority to issue toll revenue bonds

• Right to condemn property for a project that private sector will lease and operate as a business

• Privacy protections for users


• Ability to mix public and private capital funding

• Private partner ability to sue, collect judgments from public partner

• Good toll enforcement mechanisms (video tolling; DMV data access; late fees; levying driver’s license/registration; civil suits)

• Protection of trade secrets and proprietary information from public disclosure

• Alternative performance security


• Procurement Authority

• Permit solicited and unsolicited proposals

• Design-build authority

• Best value evaluation

• Surety bond flexibility

• Permit negotiations

• Confidentiality of proposals until completion of negotiations

• Long-term operations and maintenance


• Procurement Authority

• Submission of competitive proposals Allow adequate time periods

• Appropriate evaluation factors

• Opportunity for public comment

• Authority for state grant or loan to project and contribution of federal funds

• Clear and fair selection process

• Avoidance of conflicts of interest

• Application review fees


• Financing Authority

• Tolling

• Financing vehicle - authority or 63-20

• Revenue bonding authority

• Contribution of state or federal funds to “private” project

• Stipends - Payment to unsuccessful proposers

MDOT QUESTIONS

Who Owns the Project

• Public entity should always be the owner of underlying asset, regardless of delivery method

• Under concession model, government may transfer “tax ownership” to a private entity in order to create federal depreciation tax benefits

Who Has Tort Liability

• Mich. Comp. Laws Ann. Section 691.1402 et seq. require highways to be maintained so that it is reasonably safe and convenient for public travel. Sec. 691.1403 limits liability for unknown defects. Use of PPP does not change the law.

• Question of state law whether sovereign immunity protection extends to contractors. In most states it doesn’t.

• Agency can require private partner to carry insurance and provide indemnities.

Quality/Safety Assurance

• Traditional Approach

• Public agency establishes detailed standards, designs and specifications

• Private contractor constructs, then exits

• Public agency exercises strong control over construction, including QA/QC, testing, inspection, monitoring, acceptance

• Public agency maintains and operates

Things You Want to Avoid

• PPP Approach

• Private partner designs, constructs, operates, maintains

• Private investors and lenders will not accept traditional public sector control

• How can public partner assure quality and safety?


• Tools

• Performance-based measures and standards – specify outcomes, and inspections to measure outcome achievement

• Private partner project management plan – procedures, processes, quality and safety management systems for all aspects of work. Subject to public partner approval

• Private partner responsibility for implementation, including acceptance testing and inspection


• Use of Independent Engineer

• Field inspections, monitoring and auditing

• Document review and audits for compliance with management plan and performance standards

• Verification testing (at lesser frequency than private partner’s testing)

• Reporting to both parties

• Measures to assure independence


• Built-in incentives and potential tort liability associated with long-term concession help to assure project quality and safe operations

• Regular performance measurement inspections and reports by private partner to determine and maintain asset condition

• Public partner audit and monitoring of IE and private partner, and spot testing and inspection

• Renewal and replacement scheduling and reserves

• Handback requirements


• Remedies for failure to comply

• Avoidance of forfeiture

• Lender rights

• Noncompliance point system for Texas CDA

• Different categories determine whether cure period is allowed and duration of cure period

• Assessment of points in excess of trigger point, or “Persistent Developer Default” or receipt of warning notice results in LDs and higher level of owner oversight at Developer cost


• Owner needs to be able to change standards

• Question is how changes affect the Contract. Different approaches include:

• Private partner must conform at public partner’s election and expense (cost and revenue impacts)

• Private partner must conform at its own expense

• Parties share cost risk

Changes in Standards

Shadow Tolls and Availability Payments

Shadow Tolls

• Payment from public agency based on

• Traffic counts

• Toll rate per vehicle

• Length of road

• Tolls vary

• By vehicle type

• By bands of overall traffic levels

• Over time / when debt repaid

• Congestion levels factored into payment calculation

Availability Payment

• Payment for a service

• Focus on performance

• Payment based on:

• Available lane miles

• Impact of maintenance closures

• Quality measures

• Traffic levels exceeding maintenance specs

• Incentives or compensation

• Safety improvements

• Subcontracting

Availability Payment Issues

• Determining payment mechanism

• Incentives

• Complexity

• Underlying cost of funds

• Measuring value for money

• Affordability

Use of PABs in PPPs

• PABs can be an important part of PPP plan of finance

• To facilitate hard pricing, proposers must know PABs allocation prior to finalizing proposal

• Identity of selected proposer will not be known when allocation is needed

• Selected financial plan will not be known when allocation is needed

• Allocation may not be desired by selected proposer

Questions

Contact

Nancy C. SmithNossaman Guthner Knox & Elliott LLP

445 South Figueroa Street, 31st FlLos Angeles, CA 90071Phone: (213) 612-7837

Fax: (213) 612-7801Email: [email protected]

www.nossaman.com

nancy c. smith nossaman guthner knox & elliott llp regional finance workshop on public-private...

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