Nancy C. Smith

1
Regional Finance Workshop on Public-Private
Partnerships December 12-13, 2006

• Nancy C. Smith
• Nossaman Guthner Knox Elliott LLP

2
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

3
Outline

• Overview of Public-Private Partnerships
• Private Sector/Legislative Issues
• MDOT Questions

4
Overview of P3sTypes of P3s

• 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

5
Overview of P3sTypes of P3s
6
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

7
Overview of P3sTypes of 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

8
Overview of P3sTypes of Concessions

• Development Concession
• New facility/greenfield
• No traffic or OM 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

9
Overview of P3sTypes of Concessions

• Revenue Positive Projects
• Project revenues exceed
• Capital Costs
• Debt Costs (interest, principal, reserves)
• OM 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

10
Overview of P3sTypes of Concessions

• Revenue Negative Projects
• Project revenues do not exceed
• Capital Costs
• Debt Costs (interest, principal, reserves)
• OM Costs
• Handback/End of Term Costs
• Return on Investment

11
Overview of P3sTypes of Concessions

• 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

12

• PRIVATE SECTOR ISSUES

13
TxDOT CDA Term Sheet
4. TOLL RATES/TOLL SYSTEM Toll Rate
Framework Annual Adjustments to Toll
Rates Tolling System Interoperability
Electronic Toll Collection 5. FINANCING Financin
g Refinancing 6. SITE CONDITIONS / HAZ MAT
7. DESIGN AND CONSTRUCTION 8. OM 9. INSURANCE
AND BONDING 10. EXCUSED PERFORMANCE /
CHANGES 11. DEFAULT / DISPUTES 12. TERMINATION

• GENERAL CONCESSION TERMS
• Deadline for Service CommencementLease
  TermIndependent EngineerFinancial ModelFederal
  RequirementsRestrictions on Assignment,
  Subletting, and Change of ControlIndemnity
• 2. DEVELOPER COMPENSATION
• Rights to Toll RevenuesToll Revenues
  DistributionCompeting Facilities
• TxDOT COMPENSATION
• Payments to TxDOTReimbursement of TxDOT
  CostsReserved Business Opportunities

14
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

15
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

16
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

17
What to Include in Enabling Legislation

• 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 drivers
  license/registration civil suits)
• Protection of trade secrets and proprietary
  information from public disclosure
• Alternative performance security

18
What to Include in Enabling Legislation

• 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

19
What to Include in Enabling Legislation

• 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

20
What to Include in Enabling Legislation

• 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

21

• MDOT QUESTIONS

22
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

23
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 doesnt.
• Agency can require private partner to carry
  insurance and provide indemnities.

24
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

25
Things You Want to Avoid
26
Quality/Safety Assurance

• 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?

27
Quality/Safety Assurance

• 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

28
Quality/Safety Assurance

• 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 partners testing)
• Reporting to both parties
• Measures to assure independence

29
Quality/Safety Assurance

• 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

30
Quality/Safety Assurance

• 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

31
Changes in Standards

• Owner needs to be able to change standards
• Question is how changes affect the Contract.
  Different approaches include
• Private partner must conform at public partners
  election and expense (cost and revenue impacts)
• Private partner must conform at its own expense
• Parties share cost risk

32
Shadow Tolls and Availability Payments

• 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

• 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

33
Availability Payment Issues

• Determining payment mechanism
• Incentives
• Complexity
• Underlying cost of funds
• Measuring value for money
• Affordability

34
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

35
Questions
36
Contact

• Nancy C. Smith
• Nossaman Guthner Knox Elliott LLP
• 445 South Figueroa Street, 31st Fl
• Los Angeles, CA 90071
• Phone [phone]
• Fax [phone]
• Email nsmith_at_nossaman.com
• www.nossaman.com