[PPT] - Council of Development Finance Agencies -- Negotiating PPP/P3 PowerPoint Presentation

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August 7, 2013

Council of Development Finance Agencies -- Negotiating PPP/P3 Agreements

Greg Daniels

+ 1 614 365 2789 greg.daniels@squiresanders.com

Bruce Gabriel

+ 1 216 479 8746 bruce.gabriel@squiresanders.com

Ed Johnson

+ 44 (0) 207 655 1097 edward.johnson@squiresanders.com

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Squire Sanders Team

Gregory R. Daniels

T + 1 614 365 2789 E greg.daniels@squiresanders.com Education: University of Michigan, J.D., 2001 The Ohio State University, B.A., 1998

Counsel to public and private entities on P3 parking construction and monetization transactions

and a wide range of P3 transactions where government payments are subject to appropriation

D. Bruce Gabriel

T + 1 216 479 8746 E bruce.gabriel@squiresanders.com Education: Northwestern University Law School, J.D. and Kellogg Graduate School of Management, M.M., 1980 Coe College, B.A., 1976

Global Public & Infrastructure Finance Practice Group Leader, with extensive public and structured

finance experience, involving a variety of facilities and counsel roles

Counsel to the Cleveland-Cuyahoga County Port Authority in connection with its participation in the

Cleveland Innerbelt Bridge DB(F) Project

Edward Johnson

T + 44 (0) 207 655 1097 E edward.johnson@squiresanders.com Education: University of Liverpool, LL.B (Hons), 1994 Inns of Court School of Law, 1995

Counsel to project sponsors of UK health, education and transport projects
Counsel to the UK Government on five DBO highway projects with a capital value of approximately

£2 billion

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Presentation Overview

Introduction

Review of Basic Concepts US Hybrid Tax-Exempt Debt Structure

Part I: Negotiating the Terms

Basic Premise Key Concepts and Features Process: Inception to Execution Public Entity Preparation Project/Concession Agreement

Part II: Managing Risks

Typical Project Risks Construction Risk Operation Risk Financing Risk Mitigation of Risks

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What is a Public Private Partnership?

“A set of contractual arrangements between public and private sector participants under which private sector participants play a greater role than has been traditional in the development and financing of public infrastructure. While the public sector usually retains ownership of the infrastructure, the private participants have increased discretion in determining how the project or task will be completed” Traditional US: Public Sector Design, Bid and Finance -- Private Sector Build -- Public Sector Operate and Maintain vs. PPP/P3: Public Sector Scope and Performance Requirements -- Private Sector Design, Build, Finance, Maintain and Operate

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Simple PPP Contract Structure

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Really Simple PPP/P3 Contract Structure

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US Hybrid Tax-Exempt Debt Structure

Opportunity

Tax-exempt, governmental use bonds – capital markets

financing

Public entity’s subject to appropriation credit rating, without

debt incurrence, based on Concession/Project Agreement

Passive role of Financing Authority with respect to

Disbursement of Financing Proceeds to Contractor

Potentially off-balance sheet for contractor

Challenges

Education and Understanding

- State Credit v. State Law Debt
- Federal Tax Requirements

Public sector decision-making processes Documentation (accommodating taxable and tax-exempt

financing)

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US Hybrid Structure (cont’d)

Parties

Public Entity, e.g., Department of Transportation Private Contractors Public Bond Issuing Authority Corporate Bond Trustee Surety

Documents

Funding Agreement Intercreditor Agreement Bond Indenture Direct Payment Agreement

Projects

Florida Ohio

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PART I: Negotiating the Terms

Basic Premise
Key Phases of the PPP/P3 Process
Critical Initial Stages
Public Authority Preparation
PPP/P3 Concession/Project Agreement

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Basic Premise – Cover All 3 P’s in PPP

P3’s must reflect the Public Interest

Retain ultimate control over the asset – state as guardian/custodian of

public assets

Transparency required when dealing with public assets, services and

funds

Obtain value for money Pay for performance

P3’s must reflect the Private Interest

Reasonable profit and performance standards – usually best

determined through open tender

Protects profit against identified risks, especially those controlled by

the public body

Balances transparency with protection of proprietary trade secrets or

intellectual property

Projects that reflect these interests will cover the third P:

Partnership

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Key Phases of the PPP/P3 Process

Termination or expiry Termination or expiry Contract Management Contract Management Financial Close Financial Close PPP/P3 Contract Negotiation PPP/P3 Contract Negotiation Request for Proposals Request for Proposals Bidder Prequalification Bidder Prequalification Project Preparation Project Preparation Project Selection Project Selection Needs Analysis Needs Analysis

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Critical Initial Stages

Needs Analysis/Project Selection/Project Preparation

ISSUE QUESTION Clarity of requirements Is the scope of the P3 project clear? Commercial interest Is there market interest from sponsor and investors? Project information Project launch information. Bidder qualification and evaluation mechanics. Affordability Budgets and approvals in place? Public Sector team Resourced team to manage process. Governance structures. Appointment of advisers. Value for money assessment Legal Processes Approvals. Does exciting law support PPP/P3? Public authority powers. Risk Allocation & Terms and Conditions Draft PPP/P3 Contract

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How should a Public Authority Prepare for a P3/PPP Project?

Avoid the mistakes and learn from experience

Lack of clarity of required outcome. Lack of resources (headcount and experience). Lack of understanding of the private sector perspective. Lack of understanding of what the private sector can achieve. Lack of clarity about the public authority’s statutory powers. Incomplete/inaccurate information provided to bidders. Overly ambitious timetable. Political support and consistency.

Team of specialists

Financial, legal and technical & P3 Unit Public Policy Public Education Regulatory Framework Legal Framework Standardisation of P3/PPP Contract Documents

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PPP/P3 Concession/Project Agreement

Design/Build Issues

Preparation of design – what flexibility to make changes from

preliminary design

Responsibility for zoning, environmental, building permits Construction program and performance standards Supervision of construction Bonding/guaranty requirements Caps on Liability of Subcontractors Insurance requirements Force majeure/Delay Events Reporting/Confidentiality

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Concession Agreement/Project Agreement (Cont.)

Financing Issues

Proposed cost of construction, financing and operation Revenue allocation – profit benchmarking/clawbacks Appropriation/public approvals Rate setting Performance payment criteria Rights of senior debt holders Equity at risk Public buy-back of asset at expiration (residual risk transfer)

Termination Issues (Planned or Unplanned)

Default and termination provisions Step-in rights of senior debt holders Dispute resolution Handback requirements

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Concession Agreement/Project Agreement (Cont.)

Operation/Maintenance Issues

Performance standards during operation/control/modification Supervision of operations Special conditions and cooperation regarding emergencies, safety and

security

Force majeure Insurance requirements Performance Security and Guarantees Caps on Liability of Subcontractors Guarantee of public access Reporting/Confidentiality

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Concession Agreement/Project Agreement (Cont.)

Compensation Events/Material Adverse Events

Duties to expand/build-out facilities in case of increased

demand/deterioration of service levels

Other directives Construction and operation of competing facilities Risk of future changes in law and regulations Taxes Permitting/regulatory delays Closures Litigation Demand/usage Concession term and option to extend/early termination Remedies

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What happens when things go wrong?

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Part II: Managing Risks

Risk Management Principles
Typical Project Risks
Construction Risk
Operation Risk
Financing Risk
Mitigation of Risk

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PPP/P3 Risk Management Principles

Fundamental principle

Risk should not generally sit with Project Company Risk should sit with the party best able to deal with it

Project Company “flow down” risks assumed under Project Agreement Risks assumed by Project Company are risks of funders

Limited recourse financing Principal security is the revenue generated by the Project

More risk = higher price (generally)

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Typical Project Risks

“Cradle to Grave” approach to risk

Construction Operation Political Land acquisition/environmental Legal/regulatory Third party interface

Handback General Principle

Project Company must allocate risks to those best placed to manage

the risk

Typically Building Contractor or FM Provider/Operator

Time for completion

Delay events Long stop date for completion

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Construction Risk

Fixed price lump sum

Compensation events

Site condition and access Quality of works Certification of practical completion Damages for delay

Liquidated and ascertained damages

Parent company guarantee/performance bond Caps on Liability Operation of the asset to the required standard

Continuous improvement/step change Change in law

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Operation Risk

Availability of the asset Payment mechanism

Performance monitoring/Helpdesk Rectifying performance failures Performance deductions/service failure points Warning notices/termination

Handback Parent company guarantee Caps on liability “Flow down” of risk away from Project Company

Subcontractor interface agreement

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Financing Risk

Financing Commitments

Firmness/Capacity Availability of public authority financing to all bidders Interest rate risk Multiple layers of financing Fulfillment of conditions precedent Refinancing risks

Demand Risks

Technological innovation Risk of lesser demand Increased expenses in case of greater demand Flexibility to increase project capacity, or requirement? Increased profits in case of greater demand

Appropriation Risk

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Mitigation of Risk

Performance security

Parent company guarantee Performance Bond Retention Bond Reserve accounts

Corporate security – debenture/charge over shares Insurance Direct Agreements

Authority Direct Agreement Subcontractor Direct Agreement

Due Diligence

Understanding of the sector and market precedent Identifying “legitimate” departures from market precedent Communication – legal/technical/financial

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A Few Examples

Political Risk:

“Georgia shocks investor groups with late stage cancellation of procurement for toll lanes concession on GA/I-75&575” (December 1, 2011, http://www.tollroadsnews.com/node/5661)

Financing Risk:

“Consequences of Midway Airport Privatization Collapse” (May 15, 2009, Reason Foundation)

Operational Risk:

“New York to Repeat Chicago’s Parking Meter Catastrophe” (www.rollingstone.com June 13, 2012) “New York Scraps Privatizing Parking Meters” - WSJ.com Jan 26, 2013 – “Pittsburgh and Los Angeles also have put privatization plans on ice. ... Chicago is in arbitration with Chicago Parking Meters LLC….”

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