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Goldman Sachs

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									Overview of Public-Private Partnerships

David Utz
Vice President, Goldman Sachs




May 29, 2008
Overview



 Innovative financing transactions, such as public-private partnerships, in
  the transportation sector have been a topic of significant interest in the US

 Recent transactions have included both existing assets (Indiana Toll Road,
  PA Turnpike – in process) and greenfield assets (Miami Tunnel, Denver
  RTD – in process)

 These transactions have had champions and opponents on both sides of
  the political aisle

 Each transaction has its own unique financial, operational and political
  characteristics

 The infrastructure funding gap to maintain existing transportation networks
  (roads, bridges, etc.) and build new facilities is extraordinary, which will
  continue to force governments throughout the US to evaluate all options



                                                                                  1
         The Challenge Ahead: Transportation
         Example



                      Number of Structurally Deficient Bridges in the US


                      WA                                        ND
                                                MT
                                                                           MN

                                                                                                                                                               ME
                                     ID                                                   WI
                      OR                                        SD
                                                                                                          MI                                         VT NH

                                                     WY                                                                                   NY
                                                                                                                                                          MA
                                                                           IA
                                                                 NE                                                                                  CT
                                                                                                                                     PA
                                                                                                                OH                              NJ
                                                                                           IL   IN
                                           UT
                                                           CO                                                             WV          DC
                                NV                                    KS                                                                       DE
                                                                                MO
                                                                                                     KY                         VA
                           CA


                                                                                                 TN
                                                                      OK                                                   NC
                                                                                AR
                                          AZ              NM
                                                                                                                      SC

                                                                                          MS    AL             GA


                                                                TX                   LA




                                AK                                                                                   FL


                                                          HI                          3,500 +
                                                                                                                                                PR
                                                                                      2,500 - 3,500
                                                                                      1,000 - 2,500
                                                                                      500 - 1,000
                                                                                      0 -500
(a) USDOT estimate.


                                                                                                                                                                    2
    The Challenge Ahead: Transportation
    Example (cont.)


         Infrastructure Gap is a Significant Issue                                                          The Needed Investment is Large
 Underfunded roads, bridges and parking structures                                          Nearly $100 billion per year are needed to maintain and
  cause an estimated $117.2 billion in economic losses                                        upgrade American roads
  every year                                                                                 Approximately $185 billion in new funding needed to
 Americans consume an extra 5.7 billion gallons of gas                                       upgrade and expand the road network over the next 5
  due to congestion, producing greenhouse gas emissions                                       years
 The Federal Highway Administration estimated that                                          $94 billion needed to modernize bridges over 20 years
  substandard bridge and road conditions contribute to                                       Spending on infrastructure is at historic lows
  around one-third of the nearly 43,000 highway fatalities
                                                                                              — Only 0.57% of GDP, a 40 year low
  annually
                                                                                              — 2.62% of Federal spending, down from 5.10% in
 Increased investment can create jobs, an estimated
                                                                                                 1977
  47,500 for every $1 billion invested


    Estimated Economic Loss Due to Congestion                                                                 Highway Funding Gap ($ Bns)

                     $15.7 bn                                                                 $200
                                                                                              $180
                                                                                              $160                           Cost to Improve
                                                                                              $140
                                                                                              $120                          Cost to Maintain     Projected Revenues
                                                                                              $100
                                                           $63.2 bn                            $80
                                                                                               $60
                                                                                               $40                     Operations and Maintanence
              $38.3 bn                                                                         $20
                                                                                                $0
                                                                                                 2007      2008      2009     2010     2011      2012      2013   2014
                                                                                                     Operations and Maintainence           Cost to Maintain
     Higher Repairs      Idling Gas Consumption          Loss of Productivity                        Cost to Imporve                       Projected Revenues


Source: “Public Works and Private Wealth: New Directions for America’s Infrastructure” from CIS Public Infrastructure Project.
Source: “Closing America’s Infrastructure Gap” from Deloitte Research


                                                                                                                                                                         3
Public-Private Partnerships provide a new
source of capital for state and local
governments


           Historical Option #1       More taxpayer burden
         Raise taxes or other fees     immediately



           Historical Option #2       Allows conservative
                                       amount of debt to fund
         Issue tax-exempt bonds        projects
                                      Can be structured to
                                       avoid impact on
              New Option               taxpayers
        Public-Private Partnership
                                      More capital for given
                                       project (debt and
                                       equity)

                                      Operating risk shifted
                                       to private party
                                                                4
Policy Makers Must Choose the
Appropriate Revenue Source To Fund
Projects



     Public policy objectives are critical to choosing funding sources


                                  Transportation
    General Taxes                                                 User Fees
                                  Related Taxes

 Sales Tax                    Fuel Tax                      Tolls / Other User
                                                               Fees
 Property Tax                 Vehicle
                                Registration Fees             Vehicle Miles
 General Operating                                            Travelled Toll
  Budget                       Gas Guzzle Fee
                                                              GPS Tolling




                                                                                    5
There are strengths and issues of both
tax-exempt financing and Public-Private
Partnerships


       Tax-Exempt Financing                        Public-Private Partnership

 Strengths                                   Strengths
      Benefit of tax-exempt interest costs         Equity helps to provide full value of
                                                   project
      Established credit parameters
                                                   Equity cushion facilitates debt financing
      Deep, liquid market
                                                   Substantial market demand for
      Retain all operational control of
                                                   infrastructure projects
      asset
                                                   Transfer of revenue and operating risk
 Issues
                                                   Ability to continue governance/oversight
      Full retention of all revenue and
      operating risk                          Issues
      No “equity” to deliver full value            Shift from day-to-day operational control
                                                   to oversight role
                                                   Public policy implications / transfer of
                                                   revenue stream


                                                                                               6
        While several strategies exist to implement and
        finance infrastructure assets, Public-Private
        Partnerships offer a unique alternative



                              Strategy                            Description

                 1) Public Ownership             Traditional toll/revenue system – design,
                                                 construction, O&M, governance, etc. remain
                                                 with municipality
                 2) Public Ownership / Private   Same as above except certain activities may
                    Contracting                  be contracted for – i.e., design / construction,
                                                 etc.
Strategies 2-4
                 3) Concession Agreement         Public owns facilities and maintains
are variations
    of PPP                                       governance, enters into lease agreement
 alternatives                                    with a private entity that is responsible for
                                                 operations, maintenance, construction

                 4) Private Ownership            All activities, including the setting of rates,
                                                 are controlled by a private entity




                                                                                          7
Public Policy Issues in Any Public-Private
Partnership Need to be Analyzed



       Policy Decision                      Description                                    Considerations

 Term of Transaction        Length of time a concession partner will be      What is political sensitivity to length of
                              allowed to operate the asset                      concession?
                                                                               What is value of incremental term length?
 User Rates                 Mandated rate limits                             Public appetite for future rate increases
                                                                               What is the rate elasticity of the asset?

 Labor                      Employments levels and conditions of             What is the proper employment level?
                              employment                                       Should employment be determined by
                                                                                government or the private sector?

 Design and Construction    What capacity levels should be targeted          What is the policy objective?
  Requirements                and maintained?                                  What is commercially feasible?
                             Materials and construction methods

 Operating and              Specific operational rules to which a private    What are operating and maintenance
  Maintenance Standards       operator must adhere                              conditions that are most important?
                                                                               What is the appropriate level of capacity at
                                                                                the asset today or over time?




                                                                                                                               8
        Key Value Drivers for PPP Operators



                                                                           Robust Revenue Projections

                                                            Robust volume growth projections
                                                            Toll and rate increases as allowed by government and market


                                                                 Operating Efficiencies

                                             Advanced use of technology
                                             Advanced management technology to minimize annual costs


                                              Construction/CAPEX Savings

                              Procurement process generates savings
                                                                                                                           Source of
                              Enhanced incentives through “complete life-cycle” ownership                                   Value
                              Potential to eliminate cost layers

                                 Low Cost Debt Financing

               Investors must access low-cost debt financing
               Investors utilize tax losses created in transaction


          Large and Growing Equity Capital Pools

 Investors anxious to invest in infrastructure
 Very competitive market leads to low equity hurdle rates




                                                                                                                               9
       The Increase in Infrastructure Equity
       Capital has Helped Drive the Demand for
       Assets


  Historically European/Australian based investors with links to foreign sourced capital (expertise, asset-
   class distinction, low-cost equity)

  Rise of US-based infrastructure investment funds

  Trend to watch: US pension fund money (e.g., CALPERS)
               Infrastructure Equity Capital Raised                                                Number of New Infrastructure Equity Funds

  (USD Mns)
   $50,000                                                                               30
   $45,000
                                                                                         25
   $40,000
   $35,000
                                                                                         20
   $30,000
   $25,000                                                                               15
   $20,000                                                                                                 25
                                                                                         10
   $15,000
   $10,000                                                                                          11
                                                                                           5
                                                                                                                    8         7        7               8
    $5,000                                                                                                                                     6
        $0                                                                                 0
              North    Europe    Global     North     India    MENA      Other                  North    Europe   Global     North    India   MENA   Other
             America                      America                                              America                     America
                                          & Europe                                                                         & Europe

Source: The Rise of Infra Funds, Global Infrastructure Report, Dr. Ryan Orr; Stanford University


                                                                                                                                                     10
   Recent Examples Have Shown A Path to
   Accelerating Infrastructure Investment



      Asset            Goldman Sachs Role       Transaction Size


 Indiana Toll Road        Indiana Advisor          $3.8 Billion

                                                                         More Capital for
   Texas SH-121         Texas DOT Advisor          $3.5 Billion           Infrastructure
                                                                          Reinvestment


Mexican Toll Roads    Principal, Advisor to        $4.0 Billion
  (1st Tranche)           Consortium

                      Principal, Advisor to        $12.8 Billion
   PA Turnpike       Consortium that finished      (winning bid from
                        in second place            Abertis consortium)




                                                                                 11
Proprietary Polling Has Helped Us
Establish a Framework for Approaching
the Public

                  Frame the Issue                                      Engage the Public

 Solve a Problem: Use funds to solve a major          Anticipate and engage key stakeholders –
  problem. Lead with the solution.                      Lawmakers, Unions, Geographic Players
 Describe it as a “Partnership” or “Lease”, not a     Carefully construct proceeds distribution plan –
  “Sale” or “Privatization”                             spread the benefits
 Emphasize Continuing Government Control              Educate clearly – simplify a complicated issue
 Frame as a Non-Partisan Issue
                                           Use Effective Messaging


                    What Works                                            What Doesn’t

 Government Control                                   Focusing on Efficiencies of Private Sector over
      Cancellation Rights                               Public Sector Control
      Continuing Oversight                             Threatening tax increases or more debt without the
      Ownership Remaining with Government               transaction

 Public Benefit                                       Being branded as a “sale”
       Jobs/ Economic Development                      Foreign involvement without an explanation
                                                        providing an easy target for opponents
 Proof of Success
      Highlight successes at every step

                                                                                                             12

								
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