Public Private Partnership 101 Part 2 Jonathan L. Gifford, Ph.D. National Governors Association State Planning Retreat on Public Private Partnerships –

1

Public Private Partnership 101Part 2

Jonathan L. Gifford, Ph.D.

National Governors Association

State Planning Retreat on Public Private Partnerships – Arkansas

October 7-8, 2015

2

OUTLINE

1. Evidence of P3 impacts

2. What happens when things go wrong?– Renegotiations, Buy-outs and Transfers – Defaults, & Bankruptcies

3

• ~$10B in projects in last 4 years opened on or ahead of schedule

EVIDENCE

Recent Successes

Project Cost* Successes

I-495 Express Lanes (VA) $2.0B opened ahead of schedule (2011)

A-30 (Montreal), $1.7B opened on schedule (2012)

South Fraser Perimeter Road (British Columbia)

$696M opened ahead of schedule (2013)

I-595 Managed Lanes (FL)

$1.8B opened on schedule (2014)

I-95 Express Lanes (VA) $940M opened ahead of schedule (2014)

LBJ Expressway (TX) $2.6B opened ahead of schedule (2015)

* Public Works Financing P3 Projects Database

4

P3 Savings – Ex Ante Estimates

• Value for money (VfM) = how much $$ (if any) is saved through P3 versus conventional approach

EVIDENCE

Retained risk by public sector

Base cost

Competitive neutrality

Retained risk by public sector

Cost of service payments (revenue

stream)

Net p

rese

nt v

alue

of c

ost

Public Sector Comparator P3 Model

Value for Money

Risk transferred to private sector

Source: Grimsey, Lewis 2005, Morallos, Amekudzi 2008, Siemiatycki, Farooqi 2012

5

Review of 7 VfM Studies

Project % Savings with P3 $ Savings with P3

Presidio Parkway Phase II (CA) 23.0% $147M

I-595 Lanes (FL) 4.2% $78M

Port of Miami Tunnel (FL) 27.5% $398M

I-4 Ultimate (FL) 34.0 – 35.0% $1.3B-$1.4B

Brent Spence Bridge (OH) - -

I-64 Lanes (VA) 3.0% $89M

I-85 Lanes (VA) 10.0% $87M

EVIDENCE

Source: Adapted from Kweun, Jeong Yun, Porter, K. Wheeler, and Jonathan L. Gifford. (2015) “A comparative analysis of value for money studies: highway public-private partnerships projects in the U.S.” (mimeo).

6

George Mason P3 Evidence Project

• Scope– What kinds of evidence are useful to decision

makers about P3 impacts?– What kinds of evidence are currently being

collected in the U.S. and elsewhere?– What is the gap between evidence needs and

current practices – and how to close it with research, education & training.

EVIDENCE

7

Understanding renegotiations and buy-outs

RENEGOTIATIONS

Renegotitations• Modifications of the conditions of the P3 contractual

agreements

Buy-outs and transfers• Acquisitions or transfer of the ownership of the Special

Purpose Vehicle to a third-company

Relevance• Citizens concern with rent seeking and opportunism,

mostly from the private sector

8

Renegotiations: 4 case studies under analysis

RENEGOTIATIONS

StateP3

Highways*P3 Highways with renegotiations*

Cases under Analysis

Alaska 1 - -California 4 2 1Colorado 2 1 -Florida 13 1 -Georgia 1 1 -Indiana 2 1 -Massachusetts 1 - -Michigan 1 1 -New Mexico 1 1 -North Carolina 1 - -South Carolina 1 1 -Texas 10 4 -Virginia 6 5 3TOTAL 45 18 6

• California– SR 91 Express Lanes (SR19)

• Virginia– Dulles Greenway (DG)– Pocahontas Parkway (PP)– Downtown Tunnel / Midtown

Tunnel / MLK Extension or Elizabeth River Crossings (ERC)

*As of May 2015Source: Public Works Financing and InfraDeals

SR 91 Express Lanes (SR91)

9

Los Angeles, California

Concessionaire Level 3 Communications, Vinci Autoroute, & Granite Construction

Financial close 1993

Facility open 1995

Revenue source Toll

Contract type DBFOM

Original cost (US$) 88.3 million (1990)

Project attribute 10 miles (16.1km) road

Renegotiations• 2003: OCTA purchases the project for $341.5M to eliminate non-compete clause,

after attempts to breach the contract by the public sector

Dulles Greenway (DG)

10

Loudoun, Virginia

Concessionaire Shenandoah Group, Kellogg Brown & Root


Facility Open 1995

Revenue source Toll Contract type DBFOMOriginal cost (US$) 350 million (1993)

Project attribute 14 miles (22.5km) bridge

Renegotiations• 1995: Owners defaulted on debt. • 1997: Tolls increased and speed limit increased• 1999: Debt restructured. Project modified (from 2*2 lanes to 3*3 lanes)• 2001: Extension of concession period (+20 years)• 2004: Change in tolls (variable peak and discounted off-peak point-to-point rates)• 2005: Macquarie Infrastructure Group (MIG) buys it• 2013: Mechanism to define tolls is changed (highest: CPI+1%, real GDP, or 2.8%.)

VA SR895 Pocahontas Pkwy (PP)

11

Richmond, Virginia

Concessionaire Fluor Daniel & Morrison KnudsenFinancial close 1998Facility Open 2002

Revenue source Toll

Contract type DBFOM

Original cost (US$) 381 million (1998)

Project attribute 8.8 miles (14km) bridge

Renegotiations• 2006: Transurban USA buys it, concession period is extended to 99 years and investment

increases: 1.6 mile, four-lane road and electronic tolling• 2012: Transurban USA writes off equity but operation continues• 2013: PP is not insolvent or in bankruptcy. Plans to transfer it to lenders.• 2014: Transurban USA transfers operations to DBi Services

Downtown Tunnel/Midtown Tunnel/MLK Extension or Elizabeth River Crossings (ERC)

12

Norfolk, Virginia

Concessionaire Skanska & Macquiare


Facility Open Expected 2017

Revenue source Toll

Contract type DBFOM

Original cost (US$) 2,089 million (2012)

Constructed Length 2.2 miles (3.5km) bridge/tunnel

Renegotiations• 2012: toll delayed in exchange for $100 million• 2014: toll decrease in exchange for $82.5 million • 2015: removal of tolls for MLK Extension for $78 million*

13

Understanding Bankruptcy

Default• Situation when the SPV stops paying its debt service• If the firm continues in this situation it may lead to two potential

outcomes: debt restructuring or foreclosure

Debt Restructuring• When, after debt service is not paid, the debtor acts to pay debt,

through the selling of assets or through the restructuring of the debt.

Foreclosure or Liquidation• When, after debt service is not paid, the lender acts to sell the

asset to receive its money back

BANKRUPTCY

14

Operation began: 2000

Revenue source Tolls

Contract type DBFOM

Original cost $85 million

Project attribute 21-mile road

Year bankruptcy filed 2004

Bankruptcy filer John Hancock Life Insurance and New York Life Insurance

Law Texas Property Code Title 5

In brief: causes & aftermath of bankruptcy

• Cause: Demand lower than projected • Actions: Sold in auction for $12 million to John Hancock Financial Services Inc.• New owner holds-up TxDOT and gets $20 million for selling the road• Current Status:

- Toll road is open- Road is currently managed publicly by TxDOT

Texas

Camino Colombia Bypass

15

Southern ConnectorOperation began: 2001


Contract type DBF




Bankruptcy filer Connector 2000 Association

Law U.S. Bankruptcy Code Chapter 9


• Cause:- Demand lower than projected--Demand drops during Great Recession- No-skin-in-the-game (63-20 nonprofit corporation)

• Actions: Reorganization plan approved in Aug. 2012 - Debt is restructured- The $200 million bonds are replaced with a new issue of $150 million bonds

• Current Status:- Tolls are increased - Toll road is open

South Carolina

South Bay Expressway (SBX)

16

San Diego, California



Contract type DBFOM


Project attribute 9.2-mile road


Bankruptcy filer California Transportation Ventures, Inc.



• Cause: - Environmental permit delay & community opposition- Demand lower than projected--Demand drops due to the Great Recession

• Actions: - Purchased by San Diego Association of Governments for $341.5m in Dec. 2011

• Current Status: - Toll road is open - Tolls were decreased

17

Foley Beach ExpresswayOperation began: 1999


Contract type DBFOM


Project attribute 1-mile bridge + 5 mile road


Bankruptcy filer American Roads, LLC



• Cause:- Demand lower than projected--Demand drops due to the Great Recession- Parent company went bankrupt as the City of Detroit filed for chapter 9

bankruptcy, where it operated a tunnel.• Actions:

- American Roads LLC changes hands, from Alinda Capital Partners to Syncora, under allegations of fraudulent traffic and revenue studies

• Current Status: - Toll road is open

Alabama

Indiana Toll Road (ITR)

18

Indiana



Contract type DBFOM + OM

Original cost $3.8 billion



Bankruptcy filer ITR Concession Co. LLC



• Cause:- Great recession decreases interest rates playing against interest-rate swaps- Demand lower than projected--Demand drops during Great Recession

• Actions: - Purchased by IFM Investors for $5.72b in March 2015

• Current Status: - Toll road is open

19

What is evidence telling us “when things go wrong”? (1)

• Concerns are not fully validated.– Exogenous shocks and contract complexity main culprits– Losses concentrate in the private sector– Minimal public sector losses compared to Europe and Latin America

• Bankruptcy legislation affects incentives.– Contracts are clear regarding how risks are shared.– Chapter 9 and 11

• U.S. vs others: private sector needs to keep operating the facilities• U.S. vs others: procedure favors restructuring to continue

operations– Implication: costs of not reaching a deal accrues to equity holder

20

What is evidence telling us “when things go wrong”? (2)

• Private sector is internalizing most of the financial losses.– Only in SBX we see gov. money lost (TIFIA loan)– TIFIA´s “springing lien” protected the public sector

• Active capital market increases options.– High demand for different levels of risk aversion– Implication: monopoly power of the incumbent private

sector diminishes

Visit us at: p3policy.gmu.edu

Jonathan L. Gifford, Ph.D.

[email protected] / +1(703)993-2275

21

Expanding the evidence base Enhancing agency capacity

Educating the workforce and community about P3s

http://p3policy.gmu.edu/

Documents

Public Private Partnership 101 Part 2 Jonathan L. Gifford, Ph.D. National Governors Association State Planning Retreat on Public Private Partnerships –