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Public Private Partnership 101 Part 2 Jonathan L. Gifford, Ph.D. National Governors Association State Planning Retreat on Public Private Partnerships Arkansas October 7-8, 2015 1

Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

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Page 1: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

Public Private Partnership 101

Part 2

Jonathan L. Gifford, Ph.D.

National Governors Association

State Planning Retreat on Public Private Partnerships – Arkansas

October 7-8, 2015

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Page 2: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

OUTLINE

1. Evidence of P3 impacts

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

– Defaults, & Bankruptcies

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Page 3: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

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

3

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

Page 4: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

P3 Savings – Ex Ante Estimates

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

4

EVIDENCE

Retained risk by

public sector

Base cost

Competitive neutrality

Retained risk by

public sector

Cost of service

payments (revenue

stream)

Net

pre

sent

val

ue o

f cos

t

Public Sector Comparator P3 Model

Value for

Money

Risk transferred to

private sector

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

Page 5: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

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

5

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).

Page 6: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

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.

6

EVIDENCE

Page 7: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

Understanding renegotiations and buy-outs

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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

Page 8: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

Renegotiations: 4 case studies under analysis

8

RENEGOTIATIONS

StateP3

Highways*P3 Highways withrenegotiations*

Cases underAnalysis

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

Page 9: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

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

Page 10: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

Dulles Greenway (DG)

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Loudoun, Virginia

ConcessionaireShenandoah Group, Kellogg Brown & Root

Financial close 1993

Facility Open 1995

Revenue source Toll

Contract type DBFOM

Original 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%.)

Page 11: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

VA SR895 Pocahontas Pkwy (PP)

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Richmond, Virginia

Concessionaire Fluor Daniel & Morrison Knudsen

Financial close 1998

Facility 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

Page 12: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

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

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Norfolk, Virginia

Concessionaire Skanska & Macquiare

Financial close 2012

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*

Page 13: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

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

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BANKRUPTCY

Page 14: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

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

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Texas

Camino Colombia Bypass

Page 15: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

Southern Connector

Operation began: 2001

Revenue source Tolls

Contract type DBF

Original cost $191 million

Project attribute 16-mile road

Year bankruptcy filed 2010

Bankruptcy filer Connector 2000 Association

Law U.S. Bankruptcy Code Chapter 9

In brief: causes & aftermath of bankruptcy

• 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 15

South Carolina

Page 16: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

South Bay Expressway (SBX)

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San Diego, California

Operation began: 2007

Revenue source Tolls

Contract type DBFOM

Original cost $635 million

Project attribute 9.2-mile road

Year bankruptcy filed 2010

Bankruptcy filerCalifornia Transportation Ventures, Inc.

Law U.S. Bankruptcy Code Chapter 11

In brief: causes & aftermath of bankruptcy

• 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

Page 17: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

Foley Beach Expressway

Operation began: 1999

Revenue source Tolls

Contract type DBFOM

Original cost $44 million

Project attribute 1-mile bridge + 5 mile road

Year bankruptcy filed 2013

Bankruptcy filer American Roads, LLC

Law U.S. Bankruptcy Code Chapter 11

In brief: causes & aftermath of bankruptcy

• 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 17

Alabama

Page 18: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

Indiana Toll Road (ITR)

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Indiana

Operation began: 2006

Revenue source Tolls

Contract type DBFOM + OM

Original cost $3.8 billion

Project attribute 157-mile road

Year bankruptcy filed 2014

Bankruptcy filer ITR Concession Co. LLC

Law U.S. Bankruptcy Code Chapter 11

In brief: causes & aftermath of bankruptcy

• 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

Page 19: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

What is evidence telling us with recent successes? (1)

• ~$10 billion in projects delivered– Most delivered early

– Most delivered at or near budget

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Page 20: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

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

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Page 21: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

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

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• 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 tolerance

– Implication: monopoly power of the incumbent private sector diminishes

Page 22: Public Private Partnership 101 Part 2 Private Partnership 101 Part 2 ... (2015) * Public Works Financing P3 Projects ... - Purchased by San Diego Association of Governments for $341.5m

Visit us at: p3policy.gmu.edu

Jonathan L. Gifford, Ph.D.

[email protected] / +1(703)993-2275

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Expanding the evidence base

Enhancing agency capacity

Educating the workforce and community about P3s