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

            Nancy C. Smith
    Nossaman Guthner Knox & Elliott LLP
                        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
                    Outline

•   Overview of Public-Private Partnerships
•   Private Sector/Legislative Issues
•   MDOT Questions
                  Overview of P3s
                   Types 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
                         Overview of P3s
                          Types of P3s

Risk Element           Design/          O&M           Financing   Revenues
                     Construction
Model
A. DBB                   GA               GA              GA        GA

B. DB                    PS               GA              GA        GA

C. DBOM                  PS               PS              GA        GA

D. DBFO                  PS               PS              PS        GA

E. Full Concession       PS               PS              PS        PS


GA - Government Agency              PS - Private Sector
            Overview of P3s
          Types of Concessions

•   Long-term lease and operation of existing
    assets – “Asset Sales/Leases”
•   Construction and operation of new
    facilities – “Development Concessions”
•   Reconstruction, expansion and operation of
    existing facilities – “Mixed Concessions”
               Overview of P3s
             Types of Concessions

•   Asset Sale/Lease
    •   Existing facility
    •   Operations, traffic and maintenance
        history
    •   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”
              Overview of P3s
            Types of Concessions

•   Development Concession
    •   New facility/greenfield
    •   No traffic or O&M 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
              Overview of P3s
            Types of Concessions

•   Revenue Positive Projects
    •   Project revenues exceed:
        •   Capital Costs
        •   Debt Costs (interest, principal, reserves)
        •   O&M 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
              Overview of P3s
            Types of Concessions

•   Revenue Negative Projects
    • Project revenues do not exceed:
       • Capital Costs
       • Debt Costs (interest, principal, reserves)
       • O&M Costs
       • Handback/End of Term Costs
       • Return on Investment
              Overview of P3s
            Types 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
PRIVATE SECTOR ISSUES
          TxDOT CDA Term Sheet

1.   GENERAL CONCESSION TERMS                  4.    TOLL RATES/TOLL SYSTEM
     Deadline for Service Commencement               Toll Rate Framework
     Lease Term                                      Annual Adjustments to Toll Rates
     Independent Engineer                            Tolling System Interoperability
     Financial Model                                 Electronic Toll Collection
     Federal Requirements
                                               5.    FINANCING
     Restrictions on Assignment, Subletting,
                                                     Financing
     and Change of Control
                                                     Refinancing
     Indemnity
                                               6.    SITE CONDITIONS / HAZ MAT
2.   DEVELOPER COMPENSATION
                                               7.    DESIGN AND CONSTRUCTION
     Rights to Toll Revenues
     Toll Revenues Distribution                8.    O&M
     Competing Facilities
                                               9.    INSURANCE AND BONDING
3.   TxDOT COMPENSATION                        10.   EXCUSED PERFORMANCE /
     Payments to TxDOT                               CHANGES
     Reimbursement of TxDOT Costs
                                               11.   DEFAULT / DISPUTES
     Reserved Business Opportunities
                                               12.   TERMINATION
        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
        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
      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
      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
  driver’s license/registration; civil suits)
• Protection of trade secrets and proprietary
  information from public disclosure
• Alternative performance security
         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
        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
           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
MDOT QUESTIONS
        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
          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 doesn’t.
•   Agency can require private partner to
    carry insurance and provide indemnities.
     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
Things You Want to Avoid
     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?
     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
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 partner’s testing)
  • Reporting to both parties
  • Measures to assure independence
     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
        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
      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
       partner’s election and expense (cost and
       revenue impacts)
     • Private partner must conform at its own
       expense
     • Parties share cost risk
                  Shadow Tolls and
                 Availability Payments
         Shadow Tolls                      Availability Payment
•   Payment from public agency        •   Payment for a service
    based on                          •   Focus on performance
     • Traffic counts                 •   Payment based on:
     • Toll rate per vehicle               • Available lane miles
     • Length of road                      • Impact of maintenance
•   Tolls vary                               closures
     • By vehicle type                     • Quality measures
     • By bands of overall traffic         • Traffic levels exceeding
       levels                                maintenance specs
     • Over time / when debt repaid        • Incentives or compensation
•   Congestion levels factored into            • Safety improvements
    payment calculation                        • Subcontracting
        Availability Payment Issues

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

        Nancy C. Smith
Nossaman Guthner Knox & Elliott LLP
 445 South Figueroa Street, 31st Fl
     Los Angeles, CA 90071
      Phone: (213) 612-7837
        Fax: (213) 612-7801
   Email: nsmith@nossaman.com
       www.nossaman.com