PPP Basic Concepts Case Study Application: Indiana Toll Road

Ricardo SanchezFebruary 12, 2013

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Index

1. tion: concept, grounds for P3s and main players of highway P3s

01Introduction to PPP’s

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01. Definition of Public-Private Partnerships (PPP)

Contractual arrangements between the public and private sector in which

(i) the private sector assumes most of the risks of financing, constructing (or leasing) and operating and maintaining an infrastructure

(ii) in exchange for the right to future revenues or payments

(iii)for a specified term

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01. The driving forces of PPPs growth (I)

Increasing demand for investment in highway construction, operation and maintenance projects due to:• Traffic congestion• Aging infrastructure• Population growth• Changing development patterns

Decreased purchasing power of the traditional public funding mechanisms for funding highways (the gas tax) due to:• Increasing fuel efficiency of motor vehicles• Political resistance to increasing the gas tax• Depletion of the Highway Trust Fund

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01. The driving forces of PPPs growth (I)

Increasing demand for investment in highway construction, operation and maintenance projects due to:• Traffic congestion• Aging infrastructure• Population growth• Changing development patterns

Decreased purchasing power of the traditional public funding mechanisms for funding highways (the gas tax) due to:• Increasing fuel efficiency of motor vehicles• Political resistance to increasing the gas tax• Depletion of the Highway Trust Fund

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01. The driving forces of PPPs growth (II)

THE CONSEQUENCE:• The private-sector capital becomes an attractive option to

supplement or replace the public funds for highway projects

OTHER BENEFITS THAT BRINGS THE PRIVATE-SECTOR PARTY:• Equity Invested at Risk• Accelerated project completion• Motivated and highly specialized management teams• Cost control and operational efficiency • Innovation and new technology• Improved customer service

WHY SUCH BENEFITS?• Significant risks are allocated to the private sector who is

rewarded for accepting such risks

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01. Main players in PPPs Projects

Public Sector

Participant

• State Legislatures• Governors• Public Sector Sponsors

(State DOTs)• Conduit Issuer of PABs• US DOT (TIFIA)

Private Sector

Participant

• Concessionaire• Equity investors• DB Contractor• Operator• Commercial Lenders (banks)

• Bondholders

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01. Advantages of PPPs

• Maximizes the use of each sector’s strength• Reduces public capital investment• Improves efficiencies – quicker completion• Shares risks• Mutual rewards• Improves aggregate overall costs efficiencies• Improves service to community

02TRADITIONAL VS ALTERNATIVE PROJECT DELIVERY METHODS

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02. Traditional Delivery Method : Design-Bid-Build

Process:• Public sector develops

design • Competitive bids for

construction by private sector based on that design

• Construction work is awarded to the lowest-price bid

• Project financed with public funds

• Public entity inspects compliance of the works with the design

• Public entity operates and maintains the facility

Advantages:• Full control over design by

public sponsor• Low-bid procurement

encourages lowest construction cost

• Ensures competition among private contractors

• Consistent with the institutional framework (state agencies are structured and stuffed to procure highway projects following this traditional method)

Disadvantages:• Impacts on cost and

project schedule: constructor takes advantage of unanticipated design flaws to get additional payments (change orders) or of unanticipated site conditions to get project schedule relief

• Project financed entirely with public funds

• No synergies between design and construction phases

02. Alternative Delivery Methods

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Increasing participation of private sector in the development of the projects:• Assuming

significant project risks

• Making available private sector funds

Design-Build-Finance-Operate-

Maintain

Design-Build-Operate-Maintain

Design-Build

02. Alternative Delivery Methods

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Design-Build-Finance-Operate-

Maintain

Design-Build-Operate-Maintain

Design-Build

Design-buildFaster project deliveryDesign, construction and operational efficienciesQuality improvementsEncourages innovation

Design-Build-Operate-Maintain + Encourages delivery of a higher quality project (to reduce life-cycle maintenance and rehabilitation costs)

Design-Build-Finance-Operate-Maintain (toll)+Risk of traffic is transferred to the private entity. The tolls, are used by private entity to repay the private sector funding

Design-Build-Finance-Operate-Maintain (availability) + Risk of financing the project is transferred to the private

sector: funds from private sources (i) Equity & (ii) debt are available. The tolls, are used by public entity to repay the private sector funding.

03PPP Risk Allocation

03. Design-Bid-Build Risk Allocation

PUBLIC SECTOR

Construction Technology upgrades

Finance

Design

Environmental

Change in law

Approval Process

Right of Way

Integration

Traffic & Revenue

Operation & ManagementPRIVATE

SECTOR

Customer acceptance

Unforeseen conditions

PublicSector

03. Design-Build-Finance-Operation-Maintain Risk Allocation

Construction Technology

Customer Acceptance Delay Events

Financing

Environmental

Operation & Maintenance

Competing Facilities

PrivateSector

PublicShared Private

Design

UnforeseenConditions

Approval Process

Oversight

Termination

ROW

Traffic & Revenue

Change in law

04CONTRACTUAL STRUCTURE OF AHIGWAY P3 PROJECT

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04. Common structure of a highway P3

PROJECTCOMPANY

AUTHORITYUSERS

TOLL COLLECTIO

BACK OFFICE

IT SYSTEMSPROVIDER

OPERATORDB CONTRACTOR

LENDERS

PRIVATESPONSOR

CONCESSION AGREEMENT

REVENUESHARE – UPFRONT PAYMENT

TOLLS

SERVICEEQUITY RETURN

EQUITY CONTRIBUTION&PROVIDES SERVICES

DEBT SERVICE

LOAN FUNDS

PROJECT DESIGN & CONSTRUCTION

LUMP SUM FIXED PRICE

OM&R SERVICES

FIXED PAYMENT

COLLECTION & ENFORCEMENT & BACK OFFICE SERVICES

TRANSACTION PAYMENTS

TOLL SYSTEMS DELOPMENT & INTEGRATION

CONTRACT PRICE

UPFRON PAYMENT

PUBLIC FUNDS

05PPP’s Financing

¿What is Project Finance?

• Financing of a project where creditors have as main and only repayment source the revenues generated by such project.

• Also called non recourse or with limited recourse to the sponsor financing

• As the repayment source is the cash generated by the project, creditors make a careful and deep analysis of the certainty of those revenues in order to minimize the risk of not being repaid.

• Project Finance is generally not applicable to real state or industrial projects where market risks are difficult to mitigate. Applicable to Infrastructure Projects like Toll Roads .

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Ways to finance an Infrastructure Project• Public Financing:

• Financed by a public entity.

• No private investment is involved (equity).

• Public support varies depending on the project: Revenue Bonds (e.g. NTTA projects) vs full support from state.

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• Private Financing:• Financed with the

involvement of a private entity.

• Takes the form of a Public Private Partnership (P3).

• Different degrees of private and/or public support.

• The private investor invest equity at risk and expects a return.

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• The main sources of funding are:• Equity: Provided by the Private Sector• Debt: Funded by the Capital Market (Bonds) or

Bank Loans• Public Support: Usually in the form of direct

subsidy or TIFIA Financing

Civil WorksRight of WayTolling SystemsAdvisors

Public Support

Debt

Equity Debt Interest & Fees

Reserve Accounts

Sources of Funds Uses of Funds

Transaction Cost

¿How is a typical P3 Project Financed?

OPEX & CAPEX

Project

Senior Debt

Equity

Toll collection & other revenues

O&M/Capex Providers

Capital markets/ banks debt service

Federal Government (TIFIA) other Public Entities

Sponsors: dividends payment

Debt like public support

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P3 Typical Flow of Funds

05PPP Case Study: Indiana Toll Road

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05. Indiana Toll Road

ITR Ticket System• 133 miles long, connects the Barrier

system to the Ohio Turnpike

• Closed system w/ 14 plazas

• Few viable alternatives, occasionally competes with SH-20 and I-94

• 1.2 billion VMT (40% trucks), 21 million transactions recorded in 2012

• Cars pay $0.06/mi (cash) or $0.03/mi (ETC tag)

• 5-axle trucks pay $0.24/mi

ITR Barrier System• 24 miles long, connects the Chicago

Skyway to the Ticket System

• Open tolling system w/ 8 plazas

• Strong competition with the I-94

• 431 million VMT (10% trucks), 26 million transactions recorded in 2012

• Cars pay $0.07/mi (cash) or $0.02/mi (ETC tag)

• 5-axle trucks pay $0.22/mi

Barrier System

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05. Existing Traffic & Revenue

385 , 24%

47 , 3%

717 , 45%

436 , 28%

Share of VMT Traveled in 2012VMT in millions

Barrier Cars

Barrier Trucks

Ticket Cars

Ticket Trucks

28, 15%

10, 5%

42, 23%105, 57%

Share of Revenue Collected in 2012Revenue nominal USD, millions

Barrier Cars

Barrier Trucks

Ticket Cars

Ticket Trucks

Light vehicles make up about 70% of the miles traveled on the ITR, making cars the largest market in terms of both number of users and VMT.

Trucks are the most valuable asset to the ITR. 5-axle trucks (the most common variety) pay toll rates 3-4 times higher than cars and demonstrate an inelastic response to toll rate increases.Of the ITR’s $185m annual revenue, two-thirds comes from trucks.

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05. Trend in Traffic & RevenueThe figures to the right show the average daily traffic on each ITR system in blue bars. Traffic is measured in full-length equivalent trips (FLET), which is calculated as VMT divided by the facility’s length.

The annual revenue (nominal) collected from tolls in each year is shown by the red line.

Note that while traffic has not recovered from the recession, revenue continues to increase as toll rates are increased annually.

0

5

10

15

20

25

30

35

40

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2006 2007 2008 2009 2010 2011 2012

Revenue (mn)Traffic (AADT)

Barrier Traffic & Revenue

Traffic (AADT in FLET) Revenue ($ million)

0

25

50

75

100

125

150

0

5,000

10,000

15,000

20,000

25,000

30,000

2006 2007 2008 2009 2010 2011 2012

Revenue (mn)Traffic (AADT)

Ticket Traffic & Revenue

Traffic (AADT in FLET) Revenue ($ million)

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Year 1956 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2081

ITR Commission INDOT ITRCC

157 miles of JRCP Roadway Completed in

1956

HMA Resurfacing Cycles (1975-1992)

New Interchanges along ITR (1980s)

Lane Expansion & 10-year Bridge Capital

Improvement Plan

ETC Tolling System Implemented (2008)

End of Concession

05. Indiana Toll Road Project History• Publicity financed and constructed during the 1950s.• Began operations in 1956 giving motorists easy access

between the Midwest and the Eastern United States.• Operated by the Indiana Toll Road Commission from its

inception.• INDOT assumes operations in 1981 from ITR Commission.• In 2006, ITRCC took over operation of Toll road.• ETC Tolling System implemented in 2008. • As of 2013, over $300 million has been invested in

improvements to the ITR.

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05. ITR Privatization Process  Indiana Toll Road Privatization Process

January 2005

Governor Mitch Daniels begins his first term after winning the election in November 2004. In his first term he introduced the Major Moves Project, which included a 75 year lease of the Toll Road.

Winter 2005Gov. Daniels entrusted Meyer Brown, Goldman Sachs and Wilbur Smith as the advisors for the structuring of Indiana’s lease, using the Chicago Skyway model as a guide.

Spring 2005 The RFQ is released to the market

Summer 2005

The RFP is released to the market

Fall 2005Four bids were submitted for consideration with the winning bid going to Cintra-MIG, a 50/50 consortium, for $3.8 Billion.

Winter 2006 Legislation was passed for the Major Moves Project.

April 12, 2006

Contract for the ITR lease is signed and three months remained to financial close. (IFA represented the State of Indiana)

June 29, 2006

Financial close and transfer of operation to the Indiana Toll Road Concession Company.

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05. ITR Risk Allocation Structure

IFA

Construction ETC Implementation

Delay Events

Environmental

Operation & Maintenance

Competing Facilities

ITRCC

PublicShared Private

Design

UnforeseenConditions

Approval Process

Oversight

Termination

ROW

Traffic & Revenue

Change in law

Financing

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05. ITR PPP Contractual Structure

ITRCC

IFA

Ferrovial Agroman

Lenders

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05. ITR Concession Agreement (I)• Lease Term: 75 years• Tolling Regime

• Tolls increased every July 1st by the greater of CPI, Nom GDP/capita or 2%

• Car tolls ‘freezed’ at 2006 rates for ETC users up to 2016

• Contract allows for certain toll optimization• IFA does not APPROVED new tolls but reviews

compliance with contractual regulation

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05. ITR Concession Agreement (II)• Mandatory Expansion Works in Barrier Section

(Widening to 3+3 lanes of x miles)• Implementation of ETC system no later than

June 2008• Capacity Expansions triggered at LOS D in urban

areas and LOS C in rural areas• Performance Based Maintenance Standards

• Example: PavementsMeasurement Value

Length of the measurement stretch

Threshold

Average Entire ITR < 150 inches/mile

Average 1.0 miles < 170 inches/mile

Average 0.1 mile < 190 inches/mile

Average 1.0 mile < 3/8 inch

Average 0.1 mile < 5/8 inch

FNS Minimum - ≥ 30

Concession Lease Aggreement - Pavement Criteria

IRI

Rut

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05. ITR Financing

Sources of Funds ($ '000) % Uses of Funds ($ '000) %

Bank debt 3,248,341 81.0% Purchase price 3,800,000 94.8%Equity 760,000 19.0% Due Diligence Fees 5,422 0.1%

Development Fees 55,900 1.4%Debt Stablishment Fees 46,728 1.2%Title Fees 291 0.0%Revenue Stabilization Res. 100,000 2.5%

TOTAL 4,008,341 100% TOTAL 4,008,341 100%

06CONCLUSIONS