While youre waiting, check out some upcoming CDFA events CDFA: - - PowerPoint PPT Presentation

CDFA: Advancing Development Finance Knowledge, Networks & Innovation www.cdfa.net

CDFA – BNY Mellon Development Finance Webcast Series: The Emerging P3 Financing Model The Broadcast will begin at 1:00pm (EDT). While you’re waiting, check out some upcoming CDFA events…

CDFA: Advancing Development Finance Knowledge, Networks & Innovation www.cdfa.net

Erin Tehan

Legislative & Federal Affairs Coordinator Council of Development Finance Agencies Columbus, OH

The Emerging P3 Financing Model

Are you a CDFA Member? Members receive exclusive access to thousands of resources in the CDFA Online Resource Database. Join today at www.cdfa.net to set‐up your unique login.

CDFA: Advancing Development Finance Knowledge, Networks & Innovation www.cdfa.net

The Emerging P3 Financing Model

Using your telephone will give you better audio quality. Submit your questions to the panelists here.

Want to watch again? You will find a recording of this webcast, as well as all previous CDFA webcasts, in the Online Resource Database at www.cdfa.net.

CDFA: Advancing Development Finance Knowledge, Networks & Innovation www.cdfa.net

The Emerging P3 Financing Model

Speakers

Christine Johnson, Moderator BNY Mellon David Rogers Frost Brown Todd LLC Emmett Kelly Frost Brown Todd LLC Tom Lanctot William Blair & Company

CDFA: Advancing Development Finance Knowledge, Networks & Innovation www.cdfa.net

Christine Johnson

Product Manager BNY Mellon San Francisco, CA

The Emerging P3 Financing Model

What are you reading these days? Your development finance toolbox isn’t complete without a set of CDFA reference guides. CDFA Members save 15% or more on every purchase. Order today at www.cdfa.net.

Information Security Identification: Confidential

Public Private Partnership Overview

CDFA-BNY Mellon Webcast Presented by Christine Johnson

Global Corporate Trust April 17, 2012

Information Security Identification: Confidential

Public-Private Partnerships

2

• Public-Private Partnerships (P3’s) describe the constellation of projects that are funded

by the intersection of private and public capital.

• Water/Sewer
• Energy
• Transportation
• Housing
• These types of projects are common in Europe, Australia, and many developing

countries and can take various forms:

• Sale of Existing Assets
• Operating, Maintenance and Management Contracts
• After many years of sporadic large P3 projects are finally gaining momentum in the US

despite weakness in the economy.

• Majority of states have enabling legislation

Information Security Identification: Confidential

US Government Incentives for P3s

3

• Increased efforts have been made in the past decade to provide federal support for P3s.

However there have been recent challenges with this support.

• Transportation Infrastructure Finance and Innovation Act (TIFIA) Credit Support
• Further exemptions from AMT for Private Activity Bonds (PABs) and expanded

definition of Industrial Development Bonds (IDBs) written into the American Recovery and Reinvestment Act (ARRA). (NOT RENEWED – 2010)

• Remains to be seen how financial regulatory reform will affect the financing mechanisms

available for P3s.

• However institutional investors are increasingly interested in investing in

infrastructure.

Information Security Identification: Confidential

CDFA: Advancing Development Finance Knowledge, Networks & Innovation www.cdfa.net

Tom Lanctot

Principal William Blair & Company Chicago, IL

The Emerging P3 Financing Model

Are you a CDFA Member? Members receive discounts to all CDFA events, including training courses and the National Summit. Join today at www.cdfa.net , and start saving.

The Emerging P3 Financing Model The Emerging P3 Financing Model

April 17, 2012

Thomas E. Lanctot Partner and Group Head William Blair & Company 222 West Adams Street Chicago Illinois 60606 Chicago, Illinois 60606 312-364-8120 FAX: 312-236-0174 tlanctot@williamblair.com

What is a Public Private Partnership?

An innovative method of funding and procurement for infrastructure projects: A contractual agreement between a public agency and a private partner to achieve all,

• ne or a combination of the following:
• Often referred to as a “P3” or “PPP.”
• P3s are used extensively throughout the world for a

variety of infrastructure asset classes.

• Monetize an existing infrastructure asset.
• Design, construct, finance, and/or operate and

maintain an infrastructure project.

• Increased value for money due to increased efficiency

and risk transfer to the private partner.

• Transfer risks--such as revenue, operations,

permitting, capital maintenance, construction—to the partner best able to retain and manage them.

Sectors Examples of Revenue Generating Assets Examples of Social Assets

T t ti P ki t S h l

• Transportation
• Water and Sewer
• Energy
• Parking systems
• Toll roads and bridges
• Water and sewer systems
• Schools
• Courthouses
• Roads
• Public Facilities
• Airports
• Ports
• Solid waste
• Transit
• Other public assets that do not

generate sufficient revenues to b lf ti

• Solid waste

be self-supporting

1

How Does a P3 Work?

• Because a P3 can be applied to a variety of projects to achieve diverse goals, no two are identical. P3s

are tailored to meet the public agency’s financial, policy and operational goals.

• A P3 is not an outright sale of a public asset. The public agency maintains ownership of the asset and

sets operational maintenance and safety standards sets operational, maintenance and safety standards.

Two Broad Categories

Asset Monetization Availability Payment



The infrastructure asset’s future revenues are monetized by the private partner.



The public agency pays the private partner pre- established rent-like “availability payments” that y p p



The public agency receives an upfront payment, annuities, and/or a revenue sharing arrangement.



The private partner enhances, operates and y p y are based upon the availability of the assets to the public.



Creates budget certainty for the public agency over the life of the contract. p p , p maintains the asset based on contracted terms, and assume most business, financial and capital risks.



Often structured as a long-term “revenue concession.” the life of the contract.



The private partner designs, builds (or rehabilitates), finances, operates and maintains the asset, based on strict delivery and performance requirements concession. requirements.



The public agency’s payments may be reduced for underperformance or bonuses for exceptional performance.

2

Advantages and Benefits of P3s

Benefits of the P3 Approach:

 Private Sector Financing: equity, longer- term debt and wide array of  Design-Build Savings: reduced construction costs and  Operations and Maintenance Savings: reduced O&M  Long-term Risk Allocation and Transfers that allow the  Access to

• perational

expertise and innovative technology  Long-term contract provides tax benefits to private wide array of financing tools costs and faster project delivery reduced O&M costs allow the public agency to better concentrate

• n its core

f ti technology private partner that can flow through as savings to bli functions public agency

3

Who are the Parties in a P3?

Public Agency Private Partner

• A variety of public agencies have used P3s for the

d l i i f i f

• Depending on the nature of the P3 project,

i i b l i development or monetization of infrastructure assets.

• The public agency is supported by a team of financial,

legal and technical advisors. prospective private partners can be sole companies or a consortium of firms that each represents a specific expertise.

• Prospective private partners will assemble teams of

advisors, consultants, lenders and equity sources.

• Pursuit costs are significant.

Potential Private Partners Include

Infrastructure Equity Funds Developers and Operators Construction/Engineering Firms

• Attracted to the stable cash

flows of a public infrastructure asset

• Can be a stand-alone fund, or
• Experienced with similar asset

class

• Critical in project delivery and
• ngoing operation
• Attracted to the possibility of

generating incremental value by

• ptimizing construction/

rehabilitation phases Can be a stand alone fund, or part of a larger investing entity

• Provides capital
• ngoing operation
• Usually contribute equity
• Potential equity participation

4

A P3 Can Result in More Funds Today

• Municipal bond investors rely on historical revenues to determine bonding capacity
• Equity investors look for future returns based on projected growth
• Debt + Equity = Greater Proceeds

Debt + Equity Greater Proceeds

Municipal Bond Leverage Revenue Concession P3

Net Revenues Net Revenues Debt 1.25-2.00x Coverage Debt Equity Investor Past Today 40yrs 99yrs Past Today 40yrs 99yrs Investor

5

Key P3 Considerations and Questions

Does the public agency lose control? Under the P3 Agreement, the public agency controls user fees, design and construction standards, operating, maintenance and safety standards and

• ther key parameters.

What will happen to user fees? The public agency can control user fee levels. The P3 Agreement may include revenue sharing or other arrangements to avoid financial windfalls to the private partner. How does the public The P3 Agreement imposes detailed operating maintenance and safety How does the public agency oversee

• perations,

maintenance and capital improvements? The P3 Agreement imposes detailed operating, maintenance and safety standards and capital improvement requirements. A P3 requires thorough management and oversight by the public agency. capital improvements? What if the private partner does not perform? After an opportunity to cure the problem, the public agency may reclaim the asset without any payment to the private partner. Why is there demand for these assets now? Pension and sovereign wealth funds and other institutional investors are making significant allocations for infrastructure. There is particularly strong demand for US infrastructure assets due to their stable and predictable cash flows. p What is the necessary term to create interest for prospective investors? Typical term is likely 30 to 50 years to create sufficient return for investors commensurate with the risk undertaken. investors?

6

Lessons Learned

Valuation Execution Use of Proceeds



Internal due diligence



Thorough internal and external due diligence



Long-Term Purposes: D bt d ti



Upfront analysis/modeling



Understand value-drivers



Robust and transparent bidding due diligence



Gradual increases in user fees



Customer service impact



Don’t rush operational and

• Debt reduction
• Capital projects
• Pension funding
• Revenue Replacement

p g process



Manage bidder and stakeholder expectations technology transitions Revenue Replacement



Hybrids possible



Avoid spending upfront proceeds for short term purposes



Value for Money (VFM)



Understand value of risk transfer



Create stakeholder value – perceived benefits from transaction

7

Lessons Learned

Knowledge is Transparency, Terms and Stakeholder Communications Managing the Message and Monetary Value + Favorable Market Conditions + Political Will = g Power Timetable Strategy g Expectations Success



Upfront preparation is crucial



Ensure investor confidence with clear, structured



Early engagement with political and community leaders



Clear communication of policy objectives to



All successful transactions require each of



Selection of assets and projects must be driven by holistic policy , process; ambiguity

• r uncertainty

viewed as risk by prospective bidders y to shape issue and concerns



Political risk is a major bidder p y j relevant

• rganizations and

the general public



Seek to understand q these elements



The best advisory team should have constant holistic policy goals bidders.



Investor data room should have as much information as possible concern



Key stakeholders need to own the issue, process, and solution before being understood



Invite supporters and potential

• pponents to the

constant knowledge of each

• f these three

variables p



Well-vetted P3 agreement; flexible methods of meeting criteria solution



Identify and cultivate P3 champions, spokespeople and

• pponents to the

table



Leave no question unanswered P i l d



Fixed yet realistic timetable for transaction execution spokespeople, and supporters



Public agency must be the steward of the public trust



Proactively educate the media p

8

Case Study – Yonkers Public School District (New York)

• The Yonkers Public School District (“the District”) is

considering utilizing an Availability Payment P3 in order to replace and renovate 40 school buildings, some of which have fallen into disrepair which have fallen into disrepair.

• In 2009, the District identified at least $1.7billion in

construction needs in renovating and replacing facilities, along with $460 million in emergency repairs to bring the buildings up to health and safety standards The the buildings up to health and safety standards. The school district also found that at least 95% of existing classrooms were below state standards.

• The project would be the first ever public schools P3 in

the United States and is modeled after a similar initiative the United States, and is modeled after a similar initiative that has been successful in Canada.

• In March 2012, the District retained a team of advisors to

assist in the transactions. The District will provide an update on the project in May 2012 update on the project in May 2012.

9

Case Study – Chicago Transit Authority Fare Payment Collection System

• The Chicago Transit Authority (“CTA”) operates the nation’s
• The Chicago Transit Authority ( CTA ) operates the nation s

second largest public transportation system, offering mass transit services to 3.8 million residents within a 356 square mile area covering the City of Chicago and 40 surrounding suburbs. The CTA annually provides over a half a billion rides on its more than 4,000 buses and trains.

• In December 2011, the CTA entered into a 12-year agreement

with Cubic Transportation Systems to design, install, finance,

• perate and maintain a first-of-its-kind Open Fare Collection

p p

• System. The award was the culmination of a robust procurement

process involving potential private sector partners from around the globe. Stated Operational Goals for the Project Included:

• Shifting capital outlays to the private sector
• Providing the unbanked and under-banked with
• Achieving operational savings
• Developing an Open Fare model that provides customer

flexibility to payment options

• Divesting the CTA of the issuance and support of

inexpensive access to payment products

• Shifting the risk of increases in payment industry fees
• Providing flexibility for the future with regards to

emerging technology and changing fare structures Divesting the CTA of the issuance and support of proprietary fare media

• Identifying new non fare-box revenues

Private Partner Term of Contract Financial Advisor

 Cubic Consortium  12 years  William Blair & Company  Cubic Consortium  12 years  William Blair & Company

10

Case Study – Long Beach Courthouse (California)

• On December 21, 2010 The State of California

achieved a financial closing with Meridiam Infrastructure on a 35-year agreement to design, build finance operate and maintain a new build, finance, operate and maintain a new courthouse in the City of Long Beach.

• Availability Payment P3.
• The 545,000-square-foot building will have 31 civil

The 545,000 square foot building will have 31 civil and criminal courtrooms, 63,000 square feet of county office space, employ 800 workers and have 9,200 square feet of retail space.

• Construction is underway and the new building is

Construction is underway and the new building is scheduled to be completed and ready for

• ccupancy by Summer 2013.

Funding sources include: $442 million in bank financing arranged by six banks

11

Case Study – Puerto Rico Juvenile Correctional Facility

• The Puerto Rico Public-Private Partnerships Authority in

collaboration with the Puerto Rico Department of Corrections and Rehabilitation, has issued an RFQ for the design build financing and maintenance of a new the design, build, financing and maintenance of a new Juvenile Social Treatment Facility to be housed in Yauco, Puerto Rico.

• The facility, to be known as “Nuevo Comienzo,” or “New

Beginning” will consist of a new social treatment center Beginning will consist of a new social treatment center for 600 youngsters.

• The RFQ was issued in March 2012. A preferred bidder

is expected to be chosen in March 2012.

Stated Goals for the Project Include:

• Developing a new state-of-the-art social treatment campus

complex with a robust long-term maintenance program that will be achieved through performance metrics. T i i t i t t i ti t b i

• Facilitating improvement of other services, such as

those for special education and health.

• Advancing compliance with a civil lawsuit.
• Tapping into private sector innovation to begin a new

phase of juvenile facilities in Puerto Rico.

• Providing best-practices and high standard

accommodations that will strengthen rehabilitation services

• Achieving operational savings.
• Availability Payment structure.

services.

12

Case Study – Presidio Parkway (California)

• The State of California has entered into a 30-year,

$488 million agreement with a team led jointly by Hochtief and Meridiam to design, build,

• perate and maintain the 1.6 mile Presidio

Parkway connecting downtown with the Golden Gate Bridge.

• The project will include building a new six lane
• The project will include building a new six-lane

parkway and the installation of various electrical and mechanical technology. The winning team will operate and maintain the Parkway for the duration of the contract duration of the contract.

• Construction of the project began in October of
• 2011. As of March 2012, all legal challenges have

been dismissed, and financial close of the , transaction is expected in June of 2012.

• Availability Payment structure.

Funding sources include:

 $309 million TIFIA loan  $134 million in bonds  $45 million private equity investment  Unspecified senior bank loan

13

Case Study – Denver FasTracks Eagle Rail Project

• The Denver Regional Transportation District (RTD)

achieved financial closing in August 2010 on the first transit project to use an availability payment structure in the United States.

• The RTD explored a P3 structure for the Eagle section as a

way to close a nearly $2 billion gap in the overall $6.5 billion FasTracks project. Th $1 64 billi E l j t ill t i t l

• The $1.64 billion Eagle project will create approximately

35.2 miles of electrified commuter rail connecting downtown Denver with both the western suburbs and Denver International Airport at a cost savings of 30%. M thl il bilit ill b d t th j t

• Monthly availability will be made to the project company
• ver the course of 30 years. Payments will commence only

upon satisfactory completion of the project.

• Significant safeguards have been built into the contract,

i l di th i ht t t i t th i t t if th including the right to terminate the service contract if the project significantly falls behind schedule or if several non- performance contingencies are met.

 $1.139 billion in construction payments  $396 million in private activity bonds  $54 million private equity investment  $44 million in service payments

14

Case Study – Chicago Parking Meter System

• On February 17, 2009 The City of Chicago achieved a

financial closing with Morgan Stanley Investor-LAZ Parking

• n a 75-year agreement to manage, operate and collect

revenue from Chicago’s 36,000 on-street parking meter spaces The concessionaire paid the city an all equity up-

• spaces. The concessionaire paid the city an all equity, up

front fee of $1.16 billion.

• The proceeds of the transaction were used by the city to

close a $655 million budget hole in the City’s budget, the largest in its history largest in its history.

• The meters will have graduated rate increases over a

period of five years. Parking prices in high-congestion areas downtown will more than double from the current rate of rate of $3 to $6.50 by 2013.

• After the five-year period of rate increase, the system value

will be adjusted by inflation through the addition of meters, expansion of hours or further rate increases expansion of hours, or further rate increases. Private Partner Up Front Payment Term of Lease Lead Financial Advisor

 Morgan Stanley/LAZ  $1.16 billion  75 years  William Blair & Company Morgan Stanley/LAZ Parking $1.16 billion 75 years William Blair & Company

15

Case Study – Chicago Downtown Public Parking System

• On December 18, 2006, The City of Chicago and the Chicago

Park District achieved a financial closing with Morgan Stanley Investors to operate and collect revenue in connection with a 99-year concession and lease of the 9,178- space Chicago Downtown Public Parking System space Chicago Downtown Public Parking System.

• In return Morgan Stanley-LAZ would provide the City and

Park District with a $563 million up-front payment.

• The proceeds of the transaction were used by the city to

defease garage bond debt, and establish reserve funds for the City.

• The concession and lease of the Parking System was the first
• f its kind in the United States.

Private Partner Up Front Payment Term of Lease Lead Financial Advisor

 Morgan Stanley/LAZ Parking  $563 million  99 years  William Blair & Company

16

Case Study – Chicago Skyway Toll Bridge

• On January 24 of 2005, the City of Chicago and

the consortium of Macquarie Capital and Cintra Infrastructure achieved a financial closing on a 99-year agreement to manage, operate and collect revenue from the Chicago Skyway in collect revenue from the Chicago Skyway in exchange for an upfront payment of $1.8 billion.

• Total Equity commitment was $500 million.
• Tolls for passenger vehicles on the Skyway are

g limited under the agreement to no more than $.50 until 2008, $.00 until 2011, $.50 until 2013, $.00 until 2015, $.50 until 2017, and $.00 starting in 2017, with later adjustments equal to the greater of 2% per year or the annual the greater of 2% per year or the annual increase in inflation.

• The privatization of the 45-year old asset

marked the first privatization of a major toll facility in the US facility in the US. Private Partner Up Front Payment Term of Lease

 Macquarie/Cintra  $1.8 billion  99 years

17

CDFA: Advancing Development Finance Knowledge, Networks & Innovation www.cdfa.net

David Rogers

Member Frost Brown Todd, LLC Columbus, OH

The Emerging P3 Financing Model

Need assistance with your development finance programs? Consider CDFA’s Research & Advisory Services – offering customized and tailored technical assistance for all of your development finance needs. Learn more at www.cdfa.net.

Emmett Kelly

Member Frost Brown Todd, LLC Columbus, OH

Public & Structured Finance Group

CDFA Webinar April 17, 2012

Public Private Partnerships

Public Private Partnerships

Public Issuer/Private Party Cooperation is common

• TIF transactions
• Service payments diverted to specific public

infrastructure projects

• Special Assessment financings
• Private party may request SA’s.
• Private Management Agreements
• Tap private sector expertise (without creating

joint venture)

• 501(c)(3)’s use governmental assets or participate as

managers.

Public Private Partnerships

Typical Transportation Issues

Ohio Turnpike Lease/Concession

Probably not a “sale”

The Ohio State University Parking Assets 50 year

Lease/Concession

To fund OSU’s long‐term $3.5 billion excellence mission

Various ODOT Projects

Bridges, Roads, Intermodal Projects

Non‐Traditional P3’s

Case Study: Cuyahoga County, Ohio Convention Center and Medical Mart

City owns outdated convention center below

ground

City owns an adjacent large public hall – previously

home to Cleveland State’s basketball team (among

• ther uses)

County proposes to buy for $20,000,000 and

renovate both; and to add a world class medical mart

Non‐Traditional P3’s

Case Study: Cuyahoga County, Ohio Convention Center and Medical Mart

County determines to finance plans with 20‐year

0.25% sales tax increase

County brings in private expertise – Merchandise

Mart Properties, Inc. (Chicago)

MMPI (a REIT subsidiary) proposes to own and

• perate both the convention center and medical

mart.

Non‐Traditional P3’s

Case Study: Cuyahoga County, Ohio Convention Center and Medical Mart

• A deal is struck:

MMPI deeded underground center; but refuses to accept

public hall [because of renovation expense]

MMPI agrees to reverter at end of sales tax revenue/20 years MMPI agrees to make all private space improvements, but

gets lucky and receives the benefit of tax‐exempt recovery zone facility bonds

MMPI agrees to allow dedicated public use by City and

County throughout the year.

City still gets $20,000,000

Monetizing Buildings/Structures

• “Hedge Fund” proposal
• Goal – a steady 5% coupon
• Fund values lease–purchase arrangement at 100% of land

value, plus 40% of structure value

• Term of 10 to 99 years
• Can amortize, or be a bullet maturity with interest only
• Bring me your office buildings, stadiums, arenas and ball

parks!! Cash today!!

• Any revenue source works with lease‐purchase

arrangement

Public Public Partnerships

City of Toledo Garages and Parking Meters Title to Garages and a Franchise in Meters transferred

to Toledo‐Lucas County Port Authority

TLCPA issued tax‐exempt debt to finance Qualified management contract used with a private

• perator

Primary Benefit – it is not a lease or sale to a private

party

Better public policy?

Questions?

David A. Rogers 614‐559‐7252 drogers@fbtlaw.com Emmett M. Kelly 614.559.7255 ekelly@fbtlaw.com Frost Brown Todd LLC www.frostbrown.com

Offices in Indiana, Kentucky, Ohio, Tennessee and West Virginia

CDFA: Advancing Development Finance Knowledge, Networks & Innovation www.cdfa.net

The Emerging P3 Financing Model

Audience Questions

Register Today Early Bird Rates available until June 15, 2012.

CDFA: Advancing Development Finance Knowledge, Networks & Innovation www.cdfa.net

Continue the Conversation #CDFAwebcasts

CDFA: Advancing Development Finance Knowledge, Networks & Innovation www.cdfa.net

Innovation Finance WebCourse Daily: 12-5pm (EDT) May 8-9, 2012 Intro Energy Finance Course Washington, DC July 31 – August 1, 2012 TIF Week Daily: 12-5pm (EDT) Intro TIF: Sept. 18-19, 2012 Advanced TIF: Sept. 20-21, 2012 Register online at www.cdfa.net

Upcoming Events at CDFA

CDFA: Advancing Development Finance Knowledge, Networks & Innovation www.cdfa.net

Tuesday, May 22, 2012 @ 1:00pm Eastern CDFA – BNY Mellon Development Finance Webcast Series: The Resurgence of Bond Finance in 2012

Bond finance volume is up 60% over last year, and it has everyone wondering: What is fueling the resurgence? The expiration of ARRA bond provisions and the malaise of the national economy made 2011 particularly moribund for the bond industry. Simple logic would suggest that 2012 is bound to be better, but there's something else -- new found confidence on Wall Street or a recovering national economy. During this installment of the CDFA-BNY Mellon Development Finance Webcast Series, we'll explore the resurgence of bond finance in 2012 and hear from the issuers, underwriters, and industry experts leading the market forward. We'll also learn about CDFA's new American Manufacturing Bond Finance Act of 2012 and how this proposed legislation will drive bond financing to even higher levels. Join the conversation and tell us about your experience in the bond market this year.

Next Webcast

CDFA: Advancing Development Finance Knowledge, Networks & Innovation www.cdfa.net

For More Information

Christine Johnson Program Manager 415-263-2026 christine.johnson@bnymellon.com Erin Tehan Legislative & Federal Affairs Coordinator 614-224-1323 etehan@cdfa.net