Provides overview of the current status (March 2014) of public/private partnerships for development of horizontal and vertical infrastructure in the United States.

1. Risks & Advantages on P3 Projects
Prepared for:
American Bar Association
Division 4, Project Delivery Systems
Presented by:
1
March 25, 2014
Sid Scott

2. 1. State of P3 – International and US
2. P3 Structure and Agreements
3. Challenges/Risks/Rewards
4. What is the Future of P3 Market?
5. Q & A
Agenda
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3. State of P3

4. 4
PPPs Defined
According to the National Council for Public-Private
Partnerships, a PPP is defined as:
“A contractual agreement between a public agency
(federal, state or local) and a private sector entity.
Through this agreement, the skills and assets of each
sector (public and private) are shared in delivering a
service or facility for the use of the general public. In
addition to the sharing of resources, each party shares
in the risks and rewards potential in the delivery of the
service and/or facility.”

5. Why Public-Private Partnerships?
• Public entities continue to face budgetary problems
–Infrastructure deteriorating
–Major capital projects remain unfunded
–Pressure to ease roadway congestion and provide
other necessities to public
–No desire to raise taxes in this economic climate
• Solution P3s
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6. 6
The Current Environment
What’s the Problem?
• In FY 2012, 42 states had budget shortfalls totaling
$103 billion,
• A shortfall totaling $54 billion across 30 states is
forecast for FY 2013,
• 46 states have been forced to cut services and 30
have raised taxes.
Source: Center on Budget & Policy Priorities

7. The Current Environment (cont’d)
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What’s the Problem?
• Decision makers will soon be forced to make difficult
decisions in order to meet the estimated need for
$300 billion in urgent infrastructure projects over the
next 5-7 years.
• When new construction and renovations are added
in, the estimate rises to $2.2 trillion over five years.

8. ASCE Report: $3.6 Trillion Needed to
Improve U.S. Infrastructure (by 2020)
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9. PPP Projects - Horizontal
Yes
No
Not Definitive
Map Legend
Source: AGC of America – The Associated General Contractors of America 9
Horizontal

10. PPP Projects - Vertical
Yes
No
Not Definitive
Map Legend
Source: AGC of America – The Associated General Contractors of America 10
Vertical

11. Status of P3s Internationally

12. P3 Structure &
Agreements

13. What is a P3?
• Formation of PPPs
–Public and private sectors join together to
identify, finance, build & operate
infrastructure project
–Infrastructure Project
• Need identified by either public agency or private entity
• Project to be used, at least in part, by general public or
public agency
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14. P3 and Project Delivery
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PROJECT DELIVERY CONTINUUM
Analysis of Alternatives
FUNDING/
FINANCING:
Public Funding Private Equity
Tax Exempt Financing Taxable Financing
If concession, BV/QBS w/
competitive negotiations
Price Only
PROCUREMENT:
Best-Value (BV) BV/QBS with Competitive Negotiations
PUBLIC SECTOR PUBLIC-PRIVATE-PARTNERSHIPS
DESIGN-
BID-BUILD
DESIGN-
BUILD
(DB)
DESIGN-BUILD-
OPERATE-
MAINTAIN
(DBOM)
LONG-TERM LEASE/
O&M CONCESSION
DESIGN-BUILD-
FINANCE
OPERATE
(DBFO)
Separated Services Early Contractor/Developer Involvement Integrated Services/Project Lifecycle
LEASE- DEVELOP-OPERATE
CONCESSION
Commercial Debt/Private Equity
Innovative Finance Credits/Public Subsidies
CM @ RISK
(CM/GC)
PROJECT
DELIVERY:

15. How Are Public-Private Partnerships
Structured?
Financial Commitment
Legal Relationship
Security
Legend
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16. What Does Each Side Bring to the
Table?
• Public / Government Contributions
– Property
– Eminent Domain Powers
– Ability to obtain tax-exempt bonds (PABs)
– Ability to impose user fees (e.g., tolls)
• Private Contributions
– Introduction of Private Capital
– Design/Construction Expertise (right people)
– Operation and Maintenance Expertise (often long
term)
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17. State Agencies May Only Act
Pursuant to Enabling Legislation
17Soure: National Conference of State Legislatures (NCSL.org) [Current through January 24, 2013]

18. P3 Agreements
Statutory Requirements
• P3 Enabling legislation confers authority for State Agencies to
act
• P3 statutes allow State Agencies to form partnerships with
private entities for planning, construction and operation of
Infrastructure Projects
• Statutes may or may not set forth terms and conditions of
partnering agreements
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19. P3 Agreements
Statutory Scope of Authority
• Authority to freely negotiate duration of franchise
• Broad authority to define terms of concession by
agreement rather than public rate setting authority
• Authority to broadly access private sector and local, state
and federal public funding
• Procurement through both solicited or unsolicited
proposals
• Procurement flexibility promoted by exempting the
negotiation, selection and performance of projects from
the State Public Procurement Act
• Public ownership imputed to private entity for planning,
zoning, and certain tax purposes
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20. Rewards, Challenges, and
Risks of P3 Projects

21. The Promise of P3s – Better,
Faster, Cheaper
• Better
–Innovation
–Financial success depends on quality of the
project, and financial model
• Faster
–Develop and build sooner than with “pay as
you go” public funding
–76% of P3 Projects completed timely vs. 30%
of traditional contracts (CA reports 83% of
P3 Projects on time) – Source: Conference Board of
Canada
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22. Benefit to Investor
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“What better asset in an economic
downturn and unclear future than hard
real-estate assets providing some measure
of inflation protection.”
Leonard Shaykin
Managing Partner
LambdaStar Infrastructure Partners

23. Challenges to the P3 Wave?
• Public Perception
– Monetization of “iconic assets”
• Anxiety with putting “public” asset in the hands of private sector for
50 – 75 years
• Foreign control over “vital” infrastructure, user fees, etc.
• Perceived cost of money for municipal projects
• Cost/Time of procurement
• Loss of federal subsidies (Transportation)
– Private Activity Bonds, TIFIA
• Unrealistic Revenue projections or valuations of assets
• Overuse of availability payment (AP) structured deals
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24. Private Sector Risks
“You have to understand the difference in risk
allocation… The additional risk in a P3 project as
a contractor (especially if you are an American
contractor) is probably nothing you have ever
seen before.”
Magnus Eriksson
Senior VP,
Skanska Infrastructure Development Americas
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25. 25
P3 Risks
– Construction
• Accuracy & Completeness of Design
• Environmental policy/requirements
• Labor Agreements
• Scope Changes
• Cost growth
– Financial
• Schedule slippage
• Interest rate
– Operational
• Revenue
• Level of Service/performance

26. 26
Typical Risk Transfer Scenario Under
PPP Arrangements
Transferred?
Public/DBB PPP
Performance Public Private X
Interface Public Private X
Scope Public Shared X
Errors and Omissions Public Private X
Interference/Coordination Public Private X
Life Cycle Public Private X
Performance Private Private
Schedule Public Private X
Cost Overruns Public Private X
Changes in Scope Public Public
Force Majeure Shared Shared
Schedule Slippage Additions Public Private X
Interest Rate Risk Public Private X
Supply/Performance Risk Private Private
Financing Risks Public Private X
Defects Private Private
Maintenance Level Public Private X
Deferred Maint/Repair/Repl Public Shared X
Defective Components Private Private
Residual Value Public Shared X
Revenue Public Shared X
Service Level and Quality Public Shared X
Maintenance and Life Cycle Risks
Operations Risks
Responsibility for Risk
Development Risks
Design Risks
Construction Risks
Financing Risks
Vehicle Supply Risks
Source: National Council for Public Private Partnerships

27. What is the Future of the
P3 Market

28. • Cautious Optimism!
• US predicted to be largest P3 market in
world within 10 years based on current
trends and deal flow
(Source: Public Works Financing)
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29. 1. Public Sector Champion
2. Statutory Environment
3. Public Sector Organized Structure (P3 program)
4. Careful assessment/allocation of risks
5. Detailed Contract (Business Plan)
6. Clearly Defined Revenue Stream
7. Realistic performance requirements (AP structure)
8. Stakeholder Support
9. Pick Partners Carefully
Keys to Successfully Managing PPPs
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30. Questions / Comments
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Sid Scott