Joseph L. SullivanHawkins Delafield & Wood LLP

New York, NY

Urban Water CouncilWater System Disaster Recovery

Workshop - June 28-29, 2006 Biloxi, Mississippi

HARNESSING THE PRIVATE SECTOR FOR RECOVERY: PUBLIC-PRIVATE

PARTNERSHIPS AND PRIVATE ACTIVITY BONDS UNDER THE GULF OPPORTUNITY

ZONE ACT

Hawkins

Delafield & Wood LLP

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OVERVIEW

• Public Works Financing and Contracting Generally

• Gulf Opportunity Zone Act• Public-Private Partnership

Considerations• Alternative Project Delivery

Considerations

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HAWKINS PERSPECTIVE

• Public/Private Partnership Transaction Attorneys • Top Tier Public Finance Firm• Top Tier Public Contracts and Procurement Firm• Public Project Finance Experience• Water, Wastewater, Solid Waste, Power Sectors • Privately Owned and Privately Financed Public

Use Projects

PUBLIC WORKS FINANCING AND CONTRACTING

GENERALLY

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TRADITIONAL PUBLIC WORKS FINANCING AND CONTRACTING

• Bid-build contracting• Public operations• Governmental obligation municipal

bonds (revenue or tax secured)• Projects are publicly owned• Design, construction, operation and

financing all separate functions

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ALTERNATIVE PUBLIC WORKS FINANCING AND CONTRACTING

• Design-build • Design-build-operate• Design-build-finance-operate• Design-build-own-finance-operate

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PRIVATE ACTIVITY BONDS

Private financing, ownership or leasing creates private activity bonds (“PAB’s”)

• PAB’s are not tax-exempt• Exception: exempt facility bonds• Exempt facility bonds include water and wastewater

projects (as well as housing)• Exempt facility bonds subject to general state

“volume cap”• Uncertain availability of tax-exempt financing for

water and wastewater PAB project

GULF OPPORTUNITY ZONE ACT

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QUALIFIED GULF OPPORTUNITY ZONE BONDS (1)

• “GO Zone” Bonds may be issued by Alabama, Louisiana or Mississippi (each a “GO Zone State”) or their political subdivisions

• Applicability to water and wastewater projects• qualified project costs include costs of acquisition,

construction, reconstruction or renovation of “public utility property” located in Gulf Opportunity Zone

• Standard PAB exempt facility “volume cap” restrictions do not apply

• But, new limit does apply ($2,500 x state population)• AL: app. $11.4B; LA: app. $11.3B; MS: app. $7.3B

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QUALIFIED GULF OPPORTUNITY ZONE BONDS (2)

GO Zone Bonds can be used for any capital purpose, public or private

Exceptions• No moveable fixtures or equipment can be financed• No bond proceeds may be used for property specified in

Sec. 144(c)(6)(B) (e.g., golf course, liquor store or gambling facility)

Therefore, anticipate significant competition for cap among range of purposes

PUBLIC-PRIVATE PARTNERSHIP

CONSIDERATIONS

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PRIVATE OWNERSHIP AND FINANCING

• Pros:• Eases burden on municipal debt capacity• Transfers risk of performance/project efficacy• Competitive proposal-based procurement

• Cons:• Loss of residual value of the asset• Less public control• Private ownership of an essential public asset is unusual• Double the transactional complexity

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PRIVATE FINANCING AND PUBLIC OWNERSHIP

• Private financing does not necessarily require private ownership and loss of residual value

• Still permits private equity investment and assumption of municipal credit risk

• Still permits public control

ALTERNATIVE PROJECT DELIVERY CONSIDERATIONS

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LEGAL AUTHORITY FOR ALTERNATIVE PROJECT DELIVERY

• Limited legal authority in Louisiana and Mississippi

• No apparent authority for alternative project delivery in Alabama

• Options:• Legislative action• Concede project ownership to allow for

competitive proposal based procurement with public oversight

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BENEFITS OF ALTERNATIVE PROJECT DELIVERY

“Faster, Better, Cheaper”• Speed of project development• Guaranteed performance and

regulatory compliance• Substantial risk transfer• 10-25% savings against “benchmark”• Greater life cycle cost focus

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COST SAVINGS (DBO V. BB “BASELINE”)

Owner Type Savings

Fulton County, GA WW $30M

Stockton, CA WW $100M

Lynn, MA WW $100M

Cranston, RI WW $50M

Seattle, WA W $75M

Phoenix, AZ W $25M

San Diego, CA W $40M

SJ Capistrano, CA W $15M

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UNIFIED PROJECT RESPONSIBILITY

Traditional design-bid-build (BB) trifurcates responsibility

DB, DBO and ODB unify responsibility

Comprehensive asset development and management under a single contract

One contractor deals with all subs and equipment suppliers

Avoids the cost and risk of disputes between the designer, builder and operator

Easier administration

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DBO SAVINGSSource of savings

• Core competency• Competition as to design; operator-driven• Competition as to operation• Cooperative relationship between designer, builder• and operator• Smaller contingency allowances• Bulk consumables buying power• Broader technology access

Preventive v. breakdown maintenance

Optimized balance between capital and operating costs

Excessive redundancy eliminated

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RISKS RETAINED

• Owner’s risk under any delivery method• Changes in law• Force majeure• Unusual raw water or influent

parameters• Pre-existing site and environmental

conditions• Buried infrastructure conditions• General price inflation

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RISK TRANSFER (1)

•Design and Construction Risks• Design liability• Completion risk (delay and efficacy)• Construction cost overruns• Disputes between designer and

builder• Securing patents and licenses

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RISK TRANSFER (2)

• Operation and Maintenance Risks• O&M cost overruns• Regulatory compliance• Capital maintenance• Technological obsolescence• Excess electricity consumption• Market conditions (e.g., mkt. conditions

affecting sludge disposal)• Labor relations

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RISK TRANSFER (3)

• Permitting Risks• Contractor design and technology control• Permit terms and conditions• Permit delays• Permit non-issuance• Atypical regulatory actions

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PROCUREMENT PROCESS

• RFQ• RFP• Vendor due diligence• Vendor proposals• Evaluation• Selection (best value)• Negotiation• Authorization• Execution

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INGREDIENTS FOR SUCCESS

• Initial strategic planning

• Thoughtful, well developed RFQ/RFP

• Creative and responsive proposals

• Clear, comprehensive contract

• Full proposer due diligence opportunity

• Fair and balanced risk allocation

• Outstanding leadership

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CONCLUSIONS

• GO Zone Act provides for greater opportunity to tap into private sector for the financing of water and wastewater projects

• GO Zone Bonds provide a useful mechanism for private, tax-exempt financing without conceding private ownership of an essential public asset

• Further consideration of alternative project delivery legal authority would be valuable

• Private ownership may be appropriate to enable the procurement of a project on a competitive proposal basis with public oversight

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FURTHER INFORMATION:

Joseph L. SullivanHawkins Delafield & Wood LLPOne Chase Manhattan Plaza

New York, NY 10005(212) 820-9513

jsullivan@hawkins.comwww.hawkins.com