Opportunities in Federal P3s, Part 2

Mike Berger, Booz Allen HamiltonHilary Jackler, Kutak RockJill Jamieson, JLL

December 7, 2017

Opportunities for Federal P3s

Where and We Going in Federal P3s, Part 2NCPPP Federal P3Bootcamp

Mike Berger

Collaboration space, Alexandria, VA

Federal investment in physical capital

0.050.0

100.0150.0200.0250.0300.0350.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

DefenseNondefenseGrants

Outlays for Major Public Physical Capital Investment, 2000 to 2016(Constant FY 2009 dollars)

Source: https://www.whitehouse.gov/omb/budget/Historicals, Table 9.2, accessed 12/6/17.

ASCE on Infrastructure Funding Needs

Source: Failure to Act: Closing the Infrastructure Investment Gap for America’s Future. American Society of CivilEngineers, 2016, p. 5-7..

ASCE estimates available funding covers about 57% of infrastructure needs from 2016 to 2025.

57

3046

5973 81

43

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4127 19

TO TA L WA TER S URF A CE TRA NS PO RT

PORTS A IRPO RTS ELETRIC ITY

Funded Unfunded

Bridging the Infrastructure Gap

Source: ASCE Infrastructure Report Card 2017

• $94 trillion in global infrastructure investment needed by 2040 (at least 20% unfunded)

• US infrastructure needs are estimated at over $7.7 Trillionby 2030 ($4.7T by 2025) just to keep pace with GDP (OECD/WEF)

• (ASCE) 2017 report card assigns an overall grade of D+ to the Nation’s major infrastructure.

• Facing debt ceilings and budget constraints, federal, state and local authorities have limited resources to devote to capital and operational expenditures, while users are increasingly facing affordability and capacity-to-pay issues.

• Hawaii, like most other states, is exploring innovative finance and delivery modalities in order to deliver critical infrastructure in a timelier and more cost-effective manner.

© Jones Lang LaSalle 2017

Funding Gap

• Infrastructure Funding

• Four basic sources of funding for infrastructure:

‒ User/usage fees

‒ Budget based payments (taxes)

‒ Asset monetization and value capture

‒ Capitalized savings

– Financing Tools

• Wide variety of federal, state and local credit mechanisms, as well as emerging mechanisms (like impact bonds)

• Need for smarter financing tools that involve incentivizing performance

• Some concessionary finance tools are subsidizing inefficiency

• Federal credit well conceived but poorly implemented

• Need for more credit enhancement tools

Talk about P3 and alternative financing should not be confused with infrastructure funding. P3 does not equate to free money. Infrastructure needs to be paid for one way or the other.

Funding Sources Financing Tools

Compensation & Revenue Sources

• Usage fees [tolls, tariffs, etc.] • Tax proceeds and assessments

– Property Tax Assessments – Special Developer Assessments – Tax Increment Funding – Hypothecated/Dedicated Taxes

• License fees • Value capture revenues • Commercial / ancillary revenues

Public Subsidies & Support

• Upfront capital contributions • Public grants • Tax Credits • In-kind contributions

Standard Credit Facilities

• Bonds (taxable and tax-exempt) • Bank Debt • Special Assessment Bonds • Mezzanine Financing / Quasi-Equity

Concessionary and Alt. Finance

• Federal Credit Programs (WIFIA/TIFIA) • State Infrastructure Banks / State

Revovling funds • Tax-exempt Private Activity Bonds • Other (i.e., EB-5 financing)

Equity

• Sponsor / Operator Equity • Non-Sponsor Private Equity • Public Equity

Standard P3/P4 Funding & Financing Sources

© Jones Lang LaSalle 2017

But challenges go well beyond funding…Infrastructure delivery system is flawed• Public confidence gap in infrastructure delivery• Limited life-cycle asset consideration (fix-as-fails

approach)• Public sector retaining excessive delivery and

performance risk (to the detriment of the public)• General lack of incentivized performance• Excessive regulatory and administrative burdens

unnecessarily increase costs

Taxpayers and ratepayers deserve a better deal• Use of alternative finance and delivery modalities to

optimize risk allocation and performance incentives• Linking funding (and financing) to infrastructure

delivery and performance • Growing focus on optimizing the return on public

investment in infrastructure

Value proposition in alternative finance and delivery structures lies not in the financing of infrastructure (although that can be helpful), but in aligning incentives and optimizing risk transfer to deliver infrastructure in a timelier and more cost-effective manner.

Source: Bent Flyvbjerg, University of Oxford Saïd Business School

Deterioration of infrastructure over time. (FHWA)

© Jones Lang LaSalle 2017

P3 Drivers and Diverse Modalities

© Jones Lang LaSalle 2017

• Public authorities have limited financial resources to devote to capital and operational expenditures

• Addressing growing backlog of deferred maintenance is diverting resources from modernization and expansion

• Intense competition for scarce federal funding, while protracted appropriations delay delivery and exponentially increase costs

• Need to address life-cycle asset management

• Public authorities seek to extract value from existing assets and control costs

Key P3 Drivers• Access to new sources of financing / accelerated

delivery of Infrastructure• Monetization opportunities• Life-cycle cost reduction / Operational efficiencies• Risk allocation and incentivized performance

AUTHORITIES TURNING TO P3 TO MEET INFRASTRUCTURE AND SERVICEDELIVERY NEEDS

Extent of Ownership and Risk Transfer to the Private Sector

Low HighExtent of Private Sector Financing

Public-Private-Partnerships

Infrastructure & Service Delivery Spectrum of OptionsTraditional Delivery

Works & Service Contracts(DBB, CMAR, PDB, DB)

Privatization

Performance Contracts(SPC, O&M, peer partnering, etc,)

Divestiture (Sale, Sale-leaseback, etc.)

Concessions(DBFOM, BOT, etc.)

Lease-like Agreements (LDO, DBOM, Affermage,

Lease-Backs )

© Jones Lang LaSalle 2017

Another Driver: the Federal Infrastructure Plan

Envisioned Infrastructure Plan Parameters• Combination of direct funding and P3

o Public funding increasingly linked to leveraging private capital and expertise

o Recent examples: FTA is proposing Private Investment Project Procedures (PIPP) to streamline P3 for transit projects (offering administrative and funding benefits to applicants leveraging private capital and expertise through P3)

• Increased delegation to State and Local Governments• Cost-share and funding reformulations

• Accelerated delivery of infrastructureo Streamlining approval processeso Reducing regulations

• New and expanded financing toolso Enhancing federal credit programs o Linking federal funding and credit programs to private delivery

and/or VFM• Incentivizing divestiture and asset recycling (monetization)• Innovative Project Delivery is expanding dramatically across U.S.

P3 and the Trump Trillion Dollar Infrastructure Plan…

U.S. Federal P3 Experience

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“While P3 cannot eliminate the need for government spending on infrastructure, we can help meet our nation’s infrastructure needs by expanding the sources of investment and using those dollars, whether public or private, as effectively as possible to advance the public’s interest.” – US Treasury

10

Overview of U.S. Federal P3

Federal • DOT has leveraged P3 for many projects, including over $28 Billion in FHWA projects alone• DOE is utilizing P3 for energy infrastructure, including programs for renewable energy, nuclear

safety and hydrogen infrastructure • DOD has track-record of utilizing P3 to address military housing, which under the traditional

model, would have cost taxpayers $25 billion over 20 years. Let $7B in PPP contracts for renewable energy. Working on P4 for shared services.

• CBP is utilizing P3 to address increased demands for facilities and renovations, including facilities agreements in Houston, Dallas, and Miami

• GSA has used P3 for years for government facilities

New Market Entrants• Smithsonian• USACE• Bureau of Reclamation • S&P predicts US P3 market to become market leader• Veterans AdministrationS&P predicts US P3 market to become market leader

Where Are We Going: Opportunities in Federal Public-Private Partnerships

Federal interest in P3 Projects

Recently Enacted Laws Referencing P3sAgency/Office Public Law Title Latest Action Description

FDA PL 115-52 FDA Reauthorization Act of 2017

Became law 8/18/17 Sec. 602. Reauthorization of the Critical Path Public-Private Partnerships.

Veterans Affairs PL 115-46 VA Choice and Quality Employment Act of 2017

Became law 8/12/17 To authorize appropriations and to appropriate amounts for the Veterans Choice Program of the Department of Veterans Affairs, to improve hiring authorities of the Department, to authorize major medical facility leases…“. The term ‘private-sector entity’ includes an entity operating under a public-private partnership.

Commerce PL 115-25 Weather Research and Forecasting Innovation Act of 2017

Became law 4/18/17 “The strategy shall assess the range of commercial opportunities, including public-private partnerships, for obtaining surface-based, aviation-based, and space-based weather observations.”

NASA PL 115-10 National Aeronautics and Space Administration Transition Authorization Act of 2017

Became law 3/21/17 Sec. 510. Astrobiology public-private partnerships.Sec. 512. Near-Earth objects public-private partnerships.

Various PL 114-318 Federal Property Management Reform Act of 2016

Became law 12/16/16 “(7) Public-private partnership.--The term `public-private partnership' means any partnership or working relationship between a Federal agency and a corporation, individual, or nonprofit organization for the purpose of financing, constructing, operating, managing, or maintaining one or more Federal real property assets.”

Pending Legislation Referencing P3s

• 53 bills containing provisions related to public-private partnerships have been introduced in the 115th Congress– Several of the bills include provisions about energy storage,

utilities, aviation, and military installations• There is legislative movement on some of the introduced

bills, such as:– H.R. 2810, the National Defense Authorization Act, passed the

House and Senate and presented to the President– H.R. 1367, a bill related to hiring VA physicians and employees,

passed the House– S. 1757, which contains a provision about real property

donations through public-private partnerships, has been placed on the Senate Legislative Calendar

Examples of P3 Solicitations in Progress• Request for Proposals for the Smithsonian National

Zoological Park Central Parking Facility P3 Project –https://www.fbo.gov/index?s=opportunity&mode=form&id=7edbe6cffcb0229b2cb79a76f3bf97e5&tab=core&_cview=0

• Request for Information for Optimization of Partnership Opportunities Pursuant to the CHIP In for Veterans Act of 2016 at Several Locations Nationwide –https://www.fbo.gov/index?s=opportunity&mode=form&id=dff2a80ea513b931ba8e0030504d27a5&tab=core&_cview=0

Potential Areas of Focus for New Federal P3s

• Utilities– Electric– Natural Gas– Building resilience

• Enhanced use leases, exchanges, and other real estate-based P3s

• Roads, bridges, dams• Parking facilities• Clinics

Key Considerations for Becoming Involved in a Federal P3 Project

Understanding Authority and Establishing Goals

• Scope of statutory authority / regulations • Federal funding availability and limitations• Procurement processes

– Clarity in expectations and requirements from both Federal and private parties

– Key questions that enable parties to evaluate likelihood of project success

– Use procurement process as an opportunity to advance negotiations and ensure picking a like-minded partner

Negotiating and Documenting Agreement(s)

• Identification of a mutually beneficial transaction structure

• Clear roles and responsibilities for all parties• Definitive performance milestones and explicit

reasons why such milestones could be delayed• Allocation of risks, revenues, and rewards• Establishing metrics for success• Goals and requirements of other key parties that

are not signatories (i.e. investors, community)• Termination rights and processes

Project Implementation• System for monitoring milestones and

responsibilities• Approvals for future work / decisions /

contingencies• Reporting / status meetings / audits• Dispute resolution processes • Amendment or termination when necessary

Questions?Mike Berger, Booz Allen Hamilton• berger_michael@bah.com

Hilary Jackler, Kutak Rock• Hilary.Jackler@KutakRock.com

Jill Jamieson, JLL• Jill.Jamieson@am.jll.com