Workshop on Public-Private Partnerships

(PPPs)

Lowell Clary

Assistant Secretary

Finance and Administration

Jim Ely

Executive Director

Florida’s Turnpike Enterprise

Overview Of PPP’s and Their Current Implementation in

Transportation

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PPPs Defined

• A contractual agreement between public and private sector partners which allows more private sector participation than is traditional:– Private sector may design, construct, finance,

operate, maintain, renovate and / or manage a facility or system

– Public sector usually retains ownership of the facility or system

– Sharing of roles, responsibilities, risks and rewards– Possibility of Private Sector equity

A new movie!!!A new movie!!!

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Purpose of Public Private Partnerships (“PPPs”)

PUBLIC PRIVATE PARTNERSHIPS …have many forms and seek to provide the public sector with a variety of

benefits

PROMOTEEntrepreneuri

al Development

CAPITALIZE Additional

Sources of Private Equity and

Flexible Corporate Debt

Structures

ACCELERATEHigh Priority

Projects

TRANSFERNew Technologies and Engineering

Techniques

BENEFITFrom Private Expertise and Specialized

Management

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Long History of Public Private Partnerships

• Outsourcing Partnerships– 100% of roadway/bridge construction– Over 80% of engineering work– Over 80% of maintenance

• Periodic private sector “equity”– ROW donations– Cash investment such as for Interchanges

• “Advanced” on Innovative contracting

Why the Sudden Interest in PPP’s?

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• PPPs expedite infrastructure development– $887 billion in projects planned or built

– About 2,100 projects

• PPP road projects are the largest category– $325 billion - 36%

– 656 projects

– Mostly toll highways – 66% of PPP road projects

• Most PPP road projects in Europe and Asia– Europe – 43%

– Asia - 26%

• Most PPP road projects by concession or BOT/BTO– Concession – 39%

– BOT/BTO – 26%

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Global Use of PPPs – Since 1985

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• PPPs increasingly used to expedite infrastructure development:

– $104 billion in projects planned or built

– 364 projects

• PPP road projects are the largest category

– $42 billion - 40%

– 73 projects

– Mostly toll highways – 62% of PPP road projects

• Most PPP road projects done by DBOM or DB

– DBOM – 37%

– DB – 24%

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Use of PPPs in the U.S. – Since 1985

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Factors Driving Privatization

• Established PPP Market and Industry Internationally

• $1.6 trillion transportation infrastructure needs nationally in the next 5 years

• Successive federal highway and state innovations authorizing and encouraging PPPs:– Federal: SEP-14, ISTEA, NHS Act, TEA-21, SEP-15,

SAFETEA-LU– State: Turnpike and Expressway Authorities, Innovative

Contracting law, Economic Stimulus, PPP law update

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Factors Driving Privatization

• Non-U.S. Market Becoming Saturated• “Money” ready to invest in U.S.:

– Significant supply of equity capital– Historically low overall interest rate environment

and low returns on comparable equity investments

– Concessions typically provide long-term inflation-protected returns

– Toll roads typically have favorable pricing power compared to other private sectors

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Types of PPP Contracts

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• Design-Build (DB)

• Asset Management Contract

• Design-Build-Operate-Maintain (DBOM)

• Design-Build-Finance-Operate (DBFO)

• Build-Operate-Transfer (BOT)

• Build-Transfer-Operate (BTO)

• Joint Development Agreement (JDA)

• Concession

• Asset Sale

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States with potential concession-type projects

States with existing concession-type projects

States with Existing and Potential Concession Projects

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• Long term erosion of gas tax

• Aging transportation network

• Pent-up transportation demand

• Increasing cost of roadway construction

• Flexible financing tools

• Improved federal laws on tolling

New “Fashion” or Long-Term Trend?

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Environment for Success

• Entrepreneurial Vision

• Political Support

• Executive Leadership and Organizational commitment to innovation

• Risk management philosophy

• Ability to respond to diverse proposals

Primer on Toll PPPs

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Toll Environment

• Demand for capacity improvements, especially new corridors and alternatives

• Willingness to accept/use toll facilities in most major urban areas

• Successful model for toll facility development– Turnpike and Authorities– Financial capacity constraints

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Public vs. Private Toll Road Structures

Public Private

Goals Improve transportation Respond to political environment

Maximize present value cash flow Provide customers a quality product

Tolling/Revenue Restrictions

Toll increase typically limited to operate and maintain facility and repay debt Political pressure Toll rate covenant

Set tolls at lesser of (1) market level and (2) concession agreement limitation Typically no toll rate covenant Political Pressure to Public Entity

Financing

Tax-Exempt Debt TIFIA

Taxable Debt Possible Tax-Exempt Debt (under SAFETEA-LU) TIFIA Equity (15-30% of financing)

Purpose of Debt

Finance initial development and subsequent improvements

Finance initial development and subsequent improvements Maximize leverage to minimize cost of capital/maximize bid price

Traffic/Revenue Modeling

Focus on cost recovery/downside Focus on business approach and upside for equity

Surplus Revenues

Fund capital improvements for facility and other eligible projects

Fund capital improvements for facility Recurring equity dividend payments

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Market Situation

• “Sale” of Existing Toll Facility Assets the talk on national circuit– Chicago Skyway - $1.8B– Indiana Turnpike - $3.8B

• Florida has many toll facility “assets”:– Turnpike System– Expressway/Bridge Authorities– FDOT owned – Sunshine Skyway, Alligator

Alley, Pinellas Bayway

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Florida Model

• Toll Systems leverage overall system to improve existing facilities and build new toll facilities:– Turnpike System– Authorities like OOCEA/MDX

• Start Up Toll Facilities generally subsidized to jump start:– TFRTF loans, O&M covenants/subsidies– DOT operates/maintains– Tampa South Crosstown, Mid-Bay Bridge

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Privatization of Existing Toll Facilities

Qualified Management Agreement

Sale of Long Term Concession Agreement Title Acquisition

Management contract up to 15 years with evergreen provision subject to Tax Code

Management contract subject to termination similar to other vendor contracts

Private Entity manage road

Private Entity receives fixed compensation with limited incentives tied to revenues

Public Entity retains overall operating risk/management responsibility

Sale of long term lease (50 to 99 years)

Public maintains title ownership

Public can reclaim revenue and operations of asset in event of non-performance or default under concession agreement

Private Entity has operating risk/management responsibility

Various types of limits on possible revenue

Sale of ownership asset

Private Entity has ownership, operating flexibility and responsibility pursuant to applicable laws

No limitation on tolling

Maximum Public Control Maximum Private Control

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Toll Issues

Targeted Valuation Elasticity Tolling partially depends on need for net sale proceeds

Develop several toll structures and analyze impact on valuation

Must analyze impact of price elasticity on revenues

Market will always limit tolling, so excessive regime will see diminishing increase on valuation return

Tolling Private Evaluate fixed, inflation indexed and demand based options

Determine length of concession (35-99 years)

Develop feasible toll structures for the public

Properly contextualize future costs relative to benefits

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Toll Issues

Public Goals for Agreement Private Goals for Agreement Transfer operating risk to Private Entity Ongoing protection of public interest from the concession granted to the winning bidder Ensure long-term viability of toll road asset (operating and maintenance standards) Certain employment restrictions (non- discrimination/affirmative action, fair wages, conflict of interest) Ensure that Private Entity expands system in a manner consistent with economic development and demographic needs

Maintain flexibility regarding method of performing repairs and replacements Maximize flexibility regarding employment Maintain public responsibility for law enforcement and some environmental issues Maximize ability to benefit cost efficiencies including modern tolling strategies and technologies Minimize risk of future competing toll roads and freeways Ability to assign Concession Agreement and/or grant leasehold mortgage

The Public Entity (the “Owner”) typically maintains title to the asset and enters into a long-term Concession and Lease Agreement with the Concessionaire (the “Operator”)

The Concession Agreement must fully anticipate any issue that could possibly arise during the term of the lease

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Limiting Tolls / Revenues

Benefits Considerations Protects against excessive returns

Arguably greater importance for negotiated transactions, particularly if public entity’s revenue study does not otherwise capture upside potential

If set too low, makes equity more like “fixed income” requiring higher anticipated return since less upside benefit

Revenue limitations could decrease valuation today and only provide benefit if traffic exceeds expectations

While a concession agreement would typically limit toll rates, it may or may not also place a limitation on toll revenues

Chicago Skyway only limited tolls, however, limits on revenues/returns are often associated with negotiated PPPs

The “limit” could allow for sharing of revenues with the Authority after reaching certain thresholds and/or increasing the amount reinvested in the tollway and related projects

An experienced team can facilitate the negotiation of an appropriate rate of return during the procurement process

● Greenfield toll projects would typically warrant a higher rate of return to compensate bidders for the increased risk

● Appropriate levels will vary over time based on current market (interest rates, available capital supply of projects, etc.)

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Recent overseas toll road privatizations

• 1999 IPOs of Autostrade ($6.7B) and BRISA ($2B)

• 1999 trade sale of Toronto 407 ($2B)

• 2003 sale of ENA ($1.8B), Spain

• 2005 sale of French toll companies

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Toronto ETR 407

• World's first all-electronic, open access toll highway.

• Runs east and west just north of Toronto for a total of 108K.

• First day of tolling was October 14, 1997.• Over 710,000 transponders have been distributed

as of February 2006.• Over 12.9B total vehicle kilometers traveled in

694M total trips since opening 407 ETR in October 1997, as of January 30, 2006.

• The first 36K stretch, opened June 7, 1997 — decades sooner than would have otherwise been possible and at much less cost.

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California SR 125

• SR 125 is one of four PPPs authorized in 1991 by California legislature.

• Toll road connecting the only roadway commercial port of entry in San Diego to the regional freeway network.

• 9.25-mile section of SR 125 is being constructed as a PPP.

• San Diego Expressway LP holds a franchise with California, will finance and build the highway, transfer ownership to the State, then lease back from state for 35 years, reverts to state at end.

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California SR 125

• Agreement lets developer set market rate tolls, with maximum 18.5 percent return on total investment.

• Other connections to the toll road funded with public funds.

• Developers expect the project to be completed October 2006, years ahead of traditional funding.

• Property owners donated $48M for right-of-way, and investors provided over $150 million in private equity.

• Private equity and financing accounted for 78 percent of the project’s costs.

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Chicago Skyway

• First existing toll road privatized in the US

• 99-year concession “sold” for $1.83B to international partnership in early 2005

• 7.8 miles in length, 3 lanes in both directions, 50,000 AADT

• Current tolls $2.50 per car, Feb 2005 first toll increase since 1993

• Moved from cash-only to ETC in June 2005

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Chicago Skyway Lease as a New Approach

• $1.8 billion proceeds caught the attention of public officials

• Brought (some) awareness of global private-sector role in tolling

• Stimulated half a dozen other possible U.S. sale/lease deals

• Focused global companies and capital on US toll marketplace

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Current U.S. Market

Completed deals:– Chicago Skyway—99-year lease, $1.83B– Dulles Greenway—sale for $615M– Indiana Toll Road—bid awarded, $3.8B

Bidding under way:– Dulles Toll Road—5 unsolicited proposals– Various Segments of Trans-Texas Corridor

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Current U.S. Market

Being considered:– Illinois Turnpike– New Jersey Turnpike (withdrawn)– New York Thruway– Delaware Turnpike (withdrawn)– Chesapeake Bay Bridge and Tunnel– Ohio Turnpike

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Sale of Asset or New Facility

• Many international groups focused on acquiring existing toll facilities – ready made market

• Also interested in development of new toll facilities– Trans Texas Corridor– Oregon DOT

• Much interest expressed on both in Florida

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• Can make the pie bigger

• Access to global capital and expertise

• Policy issues must be outlined and discussed– Identify pros and cons– Develop solid process

Toll Road PPPs Can Make Both Fiscal and Transportation Sense

Bottom Line

Primer on Other Types of PPPs

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Non Tolled PPPs

1. Traditional Private Sector Participation– Contribute funds to help finance project– Donate ROW Land

2. New “Advance” Delivery Model– Design-Build-Finance - I-75 in D1

3. Asset Management - Expansion– Current - Routine Maintenance – Routine Maintenance/Preservation– Long Term Full Life Cycle including Capacity

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“Advance” Delivery Model

• Contractor advances project in the 5-year Work Program

• Similar to Local Government Advance Reimbursement Program

• Private Sector Role– Finance advance of project– Normally includes project delivery – DB on I-75

• DOT Role– Evaluate proposal to ensure “good deal” for State– Reimburse private sector when scheduled in 5-Year

Work Program

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Asset Management Model

• Current Asset Management program– Covers Routine Maintenance– Uses both by roadway system (I-75) and

geographical area (D3)– Generally 5 to 7 year contracts, bid via RFP– Uses Performance Standards – Maintenance

Rating Program– Contractor bids lump sum price - paid in

installments over the life of contract• Assumes price risk• Assumes system impact risk within limits

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Other Asset Management Models

• Routine Maintenance and Roadway Surface– Generally 12 to 20 years

• Above plus Roadway Performance (capacity)– Generally 30 to 50 years

• Characteristics of both– Generally significant roadway segments or system– Performance Standards - preservation and capacity– Lump sum contract, paid in installments based on

“availability” of the system (meeting standards)– Contractor assumes price and system impact risk

within limits– May be combined with major rehab/new capacity

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Scale of Asset Management

Routine Maintenance Preservation

Life Cycle Capacity

5-7 Years 12-20 Years 30-50 Years

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Examples

• Europe– UK has contracted out roadway systems in

both models of routine maintenance/ preservation and also with capacity

– Austria considering the entire system for a long-term PPP

– Reported results show a 15 to 20 percent decrease in life cycle cost

– Industry evolved to these methods

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POMT Example

• Port of Miami Tunnel procurement in process – D6:– RFQ issued– DBOM with Concession– Term 35 – 50 years– Risk sharing approach - risk approach for

construction and long term O&M in development

– Working with County on finance plan– Anticipate proposals/award by end of 2006

Key Policy Issues of PPPs

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PPP Model

• PPP is a tool

• PPP has both strengths and weaknesses

• PPP likely to be exception, not rule

• Let’s discuss in more detail

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PPP Strengths

• Innovative ideas and/or projects• Possible private equity• Access to global capital markets• Deliver “market approaches” and expertise

• Transfer of Risk

• Long Term Relationships

• Ability to Terminate

• Can provide “stability” in pricing

• Contract outlines the “deal”

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PPP Weaknesses

• Loss of Control– Day to Day Management– Set by the “Deal” such as setting toll rates, performance

standards, etc.

• Perceived Loss of Control• “Cherry picking” • Lack of State expertise in negotiating PPPs• Greater than expected equity returns • “Real” Transfer of risk• Long Term Relationships• Ability to Terminate

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Other Considerations

• Possible political and public backlash– Concerns over “sweetheart” deals

• Internal DOT acceptance

• Industry acceptance or readiness

• Takes a great deal of energy and effort to develop process and deliver

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PPP ModelsPolicy Implications

• Consideration of Existing Assets– Sale of Toll Facility to generate funds– Long-Term Asset Management

• Greenfield Projects– Developer Approach (early phases, then

DBOM/finance)– Non-Tolled Concessions (DBOM/finance)– Toll Concessions (DBOM/finance)

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“Do we have legal authority?”

• Modernized the Public-Private Transportation Act in Section 334.30, Florida Statutes– Private sector may advance projects in

Adopted Work Program– DOT may partner with private sector and use

state funds where appropriate– Accept unsolicited or request proposals

• Need to amend Surety Bond requirement

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Policy Implications

“Should we use PPPs on Existing Assets?”

Non-Tolls Tolls

• Change in existing relationships• Performance Specs Oriented• Long-Term Agreement• Price stability and possible cost savings• “Profit” to Concessionaire• Changes financial models if used extensively

In addition to Non-Toll:• Rate Control (set tolls)• Generate Funds – one time and/or over time as “equity partner”• Use of Funds• Existing “system pledge” model compares well to PPP toll model

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Existing Assets - Tolls

• Suggest Toll “Systems” be left intact:– Turnpike analyzed PPP approach – resulted

in Turnpike Enterprise model– Should continue periodic analysis, every 5

years to validate what is the “best approach” long-term for Toll Systems

• Examine DOT stand alone toll facilities to validate “best approach”– Consider PPP or public sector approach –

need to consider tolling options

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Existing Assets

• Analyze international examples for long-term Asset Management to validate approach and possible use in Florida

• Consider “pilots” for non-tolled long-term Asset Management– Begin with adding preservation to routine

maintenance– Work on performance specs for preservation

and also capacity

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Policy Implications

“Should we use PPPs on Greenfield projects?”• Generally developers want public sector to:

– Do some or all environmental work– Assistance if needed on ROW acquisition

• Generally interested in toll roads– Traffic must be significant, upside growth a plus

– Toll rates set by developer, limits set in agreement

– Quality service with ETC

– Ensure upkeep of facility, may expand as well

– Concession period of 50 plus or minus years

– State want part of excess revenues - may impact “price”?

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Facilitating PPP’s

• Some Greenfield Toll Options:– Jacksonville River Crossing (outer beltway)– Tampa East-West Road– US 331 Widening (bridge)– New Corridors

• Heartland Expressway• Newly identify corridors

– Interstate/Turnpike Express Lanes

• Suggest Turnpike Take Lead on Toll PPPs– Work closely with local district and CO

Board Q/A, Discussion & Next Steps on PPPs

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Recommended Next Steps

• Keep policymakers informed

• Keep partners informed

• Amend surety statute

• Develop Process for PPPs– Create Cross-Functional Teams

• Turnpike lead on Tolling Projects

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Central Office PPP Management Team

• Lead - Lowell Clary and Ananth Prasad– Office of Financial Development – Office of Work Program– Procurement Office– Contracts Administration Office– Office of Comptroller– EMO– Office of Design– Office of Construction– Office of General Counsel

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Central Office Role

• Develop “guidelines” for all PPPs– Address common issues and set a baseline

for all PPPs– Develop a common understanding of PPPs– Be “flexible” for wide range of PPP options– Identify experts for guidance and “waivers”

where needed in established processes– Provide materials to Executive Board for

approval

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Turnpike Role

• Develop guidelines more specific to Toll PPPs– Include representation from CO and

interested districts in process– Working with Executive Board develop list of

candidate toll PPPs – immediate opportunities and also longer-term options

– Provide guidelines and candidate list to Executive Board for approval

– Manage PPP process for toll PPPs

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Summary Remarks

• PPPs are here to stay

• Develop “understanding” and knowledge on PPPs

• Define common sense rules, benchmark on the best approaches for successful PPPs

• Build a sustainable success story

• Choose the right projects

• Procurement is critical, choosing a long-term partner in most projects

• Remain focused on what is “best” for public

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Environment for Success

• Entrepreneurial Vision

• Political Support

• Executive Leadership and Organizational commitment to innovation

• Risk management philosophy

• Ability to respond to diverse proposals