Leveraging Alternative Finance & Delivery for Water Resource Projects

Jill JamiesonManaging DirectorJones Lang LaSalle

Western Water RoundtableDecember 13, 2016Las Vegas, NV

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Agenda

• Bridging the Infrastructure Gap• Overview of Alternative Finance and

Delivery Structures• Case studies

- Grand Prairie Irrigation Project (Aquifer and Irrigation)

- Fargo-Moorhead (Flood Risk Management)

• Discussion

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Global Infrastructure Market

Global Infrastructure Funding Deficit

• Global infrastructure investment needs by 2030 estimated at $57-$67 Trillion (OECD/WEF)

• US infrastructure needs estimated at over $7 Trillion (by 2030), $3.4T needed by 2020 (to keep pace with GDP).

• Over 50% of these investments cannot be funded by public authorities (fiscal restraints, budget limitations, debt ceilings, repayment capacity, etc.).

• Standard & Poor’s estimates that the majority of public infrastructure spending will go to energy and transportation, putting other sectors at greater risk.

• Within these constraints, governments and public agencies being asked to do more with less.

Infrastructure deficiencies have a direct, material adverse effect on economic growth, competitiveness, life-safety and standards of living.

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America’s Infrastructure Needs

Bridges C+ Dams D Drinking Water D

Energy D+ Hazardous Waste D Inland Waterways D-

Levees D- Ports C Parks C-

Rail C+ Roads D+ Schools D

Transit D+ Wastewater D Other ??

ASCE Report Card GPA: D+

• ASCE report card does not address all infrastructure needs (i.e., public buildings, university infrastructure, prisons, technology, etc.), nor does it anticipate changing regulatory requirements.

• At D-, water resources register the lowest rating of all infrastructure groups• Public authorities simply do not have the debt capacity and funding sources to address the nation’s

growing infrastructure needs• Even with the promise of a Trillion dollar investment in infrastructure by incoming Administration, it is highly

unlikely that this funding will come through traditional channels.

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Public-Private Partnerships

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Public-Private Partnerships (P3)

P3s are typically long-term contractual arrangements between the public sector and a private sector entity for the delivery of public works and/or services, with risks shared between both parties.

PRIMARY BENEFITS OF P3 APPROACH Accelerate delivery to advance public benefits; Provide greater cost and schedule certainty; Leverage private sector innovation; Ensure asset life-cycle management; Minimize cost impact on end-users; Optimize risk allocation; and Maximize public benefits by Incentivizing innovative asset

uses and monetization.

Extent of Ownership and Risk Transfer to the Private Sector

Low HighExtent of Private Sector Financing

Public-Private-Partnerships

Infrastructure Delivery Spectrum of OptionsTraditional Delivery

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

Privatization

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

Divestiture (Sale, Sale-leaseback, etc.)

Concessions(DBFOM, BOT, etc.)

Lease-like Agreements (LDO, DBOM, Lease-Backs )

• Federal, state and local governments have limited financial resources to devote to capital and operational expenditures

• In post-earmark Washington, intense competition for scarce federal funding

• Protracted appropriations delay delivery, defer benefits, and exponentially increase costs

• Public authorities seeking alternative finance and delivery approaches for water resource projects

To address the growing funding shortfall, public authorities are turning to a wide variety of alternative finance and delivery mechanisms for water resource projects, including P3.

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U.S. Federal, State, & Municipal P3

“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

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• USACE is now engaging in P3 for water resource projects (WRRDA 2014)

State / Local• Majority of US states have adopted P3 enabling legislation in multiple sectors• S&P predicts US P3 market to become market leader

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P3 Defined

Public Partner• Specifies requirements/standards

• Owns assets / public service

Private Partner• Build facilities• Provide services

• Infrastructure and services

• Payments to Public Partner

Rights Users / Public

Federal Sponsor

P3/P4Contract

Non-federal Sponsors

Equity Investors

Creditors

Design / Build

O&M

Usage Fees

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Project Screening

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P3/P4 Transaction StructuringTransaction structuring should respond to a systematic process designed at ensuring that the sources of value generation are identified and maximized for each individual project.

Other considerations:

• Bundling• Ring-fencing

• Project Size and Complexity• Benefits from innovation?

• Stakeholder support• Ability to specify output standards

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P3 Compensation Models

P3 is not “free money” and investments and costs need to be repaid:

Challenge: To identify revenue sources that create “bankable” and financially viable projects

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Potential Compensation Structures

CapitalInvestments

Operating Expenditures

Tariffs paid by Users to the Concessionaire

Infrastructure Delivery Date

User Charge based PPP

· Private Sector bears construction AND demand risk· Revenue levels dependent on user payments

Private Sector Investment

Revenue from User Payments

CapitalInvestments

Operating Expenditures

Revenue from Availability Payments

Payments from Public Authority to Concessionaire

Infrastructure Delivery Date

Performance-based PPP

· Private Sector bears construction AND performance risk· Public authorities make regular payments (calculated to cover investor

costs) which are adjusted according to infrastructure availability and service levels.

· Deductions for availability and performance short falls.

Private Sector Investment

Minimum Revenue Guarantee Availability Payment

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Standard P3 Cash Flow Waterfall

• Affordability issues for water resource projects is a critical consideration. Many projects may require Viability Gap Funding (VGF)

• Structuring of payment mechanism is also a key consideration in P3 projects

• Monetization may off-set some costs, but unlikely that ancillary revenues will be sufficient to pay for entire project

• Key to successful P3 is to commit future revenues for project specific purposes

Availability Payment and/or capital

subsidiesUser Charge(s)

Public Sponsor

Ancillary Revenues(if any)

ButtonPrivate Partner

Availability & Performance Deductions

O&M Expenditures

Debt Service

Reserves

Income Taxes

Profit

REV

ENUES

EXPEN

DITURES

Debt Service Coverage Ratio

Escrow Account

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Funding & Financing Alternatives

Funding Sources Financing Tools

Compensation & Revenue Sources

· Usage fees [tolls, tariffs, etc.] · Budget-based performance payments

(i.e., availability payments) · Value capture revenues · Tax proceeds and assessments

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

· License fees · Commercial / ancillary revenues

Public Subsidies & Support

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

Standard Credit Facilities

· Bonds · Bank Debt · Special Assessment Bonds · Mezzanine Financing / Quasi-Equity

Concessionary and Alt. Finance

· Federal Credit Programs (WIFIA, TIFIA, etc.)

· State Infrastructure Banks · Tax-exempt Private Activity Bonds · Other (i.e., EB-5 financing) · State Infrastructure Banks

Equity

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

Standard P3/P4 Funding & Financing Sources

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Case Studies

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GRAND PRAIRIE IRRIGATION PROJECT

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Case Study : Grand Prairie Irrigation Project• Initially authorized in 1950, the Grand Prairie Region

Demonstration Project aims to provide water security for drinking water, industrial and agricultural use, as well as address depletion and resiliency of the alluvial and Sparta aquifers which underlie a seven state region.

• Key project features: major pumping station on the White River; conveyance channels to deliver to water depleted areas; flood management; and other environmental restoration and conservation measures.

• Project benefits: provides sustainable water sources at a more affordable and predictable price; slows depletion of aquifer; water security for farming industry

• Key Public Sponsors: United States Army Corps of Engineers (USACE) is Federal

sponsor. The State of Arkansas, acting through its Arkansas Natural

Resources Commission (ANRC), is the non-Federal sponsor. White River Irrigation District (WRID) is a legal entity

created for the purpose of operating and maintaining the Project upon completion.

Grand Prairie Area Demo ProjectFederal Investment-to-date $137 millionNon-Federal Spend-to-date $75 million

Total investment-to-date $212 million Project Cost Estimates Infra and Distribution System $433.5 million On-Farm Work $106 million Sunk PED $11.5 million Est. Total Project Cost $551 millionEstimated completion date (at current funding levels) 34.5 years

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Grand Prairie Irrigation Project – P3 ScreeningCompeting priorities make a significant increase in federal appropriations for this Project unlikely, so Project sponsors are investigating alternative finance and delivery opportunities with the aim of accelerating Project delivery and protecting existing assets and investments to-date. Project appears to meet P3 screening criteria, including the following: Project Size & Complexity Criticality

Vital to economic activity Urgency of implementation System integration

Significant potential for revenue generation Environmental and Legal Clearances Potential for scheduling efficiencies Project would benefit from innovation and technology Potential for life-cycle cost savings through bundling Network completion

Federal SponsorUSACE

Non-Federal SponsorState of Arkansas (ANRC)

Contracting AuthorityWhite River Irrigation District

P3 Agreement

Private Partner(Quasi-Governmental or Private

Special Purpose Entity)

Creditors / Lenders

Financial Sponsors (Equity)

Design-Build(Construction)

Operations & Maintenance

Insurance and Reserves

Performance Securities

Conduit Tax-Exempt Bond Issuer

PPA

Debt Financing

Equity Financing

EPC Contract

Operating Contract

Grand Prairie Region Demonstration ProjectAlternative Finance & Delivery Structure

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Grand Prairie Tax-Exempt Structure

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Overview of P3 Development Process

• January – June 2016 – Project Review / Initial P3 Transaction Structuring

• High-level viability assessment undertaken • P3 options analysis• Initial transaction structuring and risk matrix

• June 6, 2016 – Request for Information (RFI) Distribution Began

• Launch of RFI - Process heavily marketed in media and industry groups

• Over 50 companies requested RFI and expressed interest in project as P3

• June 28-30 2016 – Industry Forum and Site Tour• Participation of 35 companies attended industry

forum

• Ongoing meeting requests show sustained interest

• July 25, 2016 – RFI Response Submissions • 20 responses received from 22 companies

Project sponsors are currently working with State and Federal authorities to create enabling framework for the project, including state-level legislation, credit-backstops, regulatory framework and Viability Gap Funding

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Key Takeaways from RFI Responses

1. Solid industry interest in GPIP as a P3, if structured appropriately2. Industry unwilling to take demand risk

• Uncertainty related to water usage by farmers, availability of substitute water sources, water pricing risk, etc. generates excessive demand risk

• P3 only viable under an availability/guaranteed off-take arrangement or under a Minimum Revenue Guarantee (MRG)

• Need for viable project credit-backstop requires ANRC involvement

3. Need to better define governance structure:• Role of diverse parties (USACE, WRID, ANRC) over term of agreement• Counterpart risk• Right of way acquisitions completed ahead of P3 project critical path

4. Other:• Most other comments relate to basic transaction structuring issues that

are easily addressed, such as:• Clarifying scope of work• Brownfield transfer issues• Definition of performance standards

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Grand Prairie Irrigation Project – Financial Modeling

Funding Shortfall

Potential Profit

Note: Values are NOT in Net Present Value. These figures are estimates/provides an order of magnitude. Figures meant for discussion purposes only.

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Alternative Compensation Structure

USACE P3 Demonstration Project

FARGO-MOORHEAD DIVERSION PROJECT

US

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Case Study: Fargo Moorhead Flood Risk Management)

• Authorized flood risk management project• Strong local sponsor support:

Local sponsor has leveraged local funding sources (local sales taxes, state funding, and special assessment district)

Local sponsor willing to explore new delivery options to accelerate benefits and minimize appropriations and delivery risk.

Alternative finance and delivery options developed by USACE, leveraging WRRDA 2014 (section 1014)

Project is well-advanced, but awaiting OMB approval of funding for new start.

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Fargo – P3 Benefits• Transaction aims to secure best Value-for-Money in the delivery of infrastructure

and services. Reduced total cost by some $400 million while increasing public benefits by $1.9B

• Accelerates delivery by at least 8 years and reduces Federal funding by $400M

• Split Delivery model allows effective risk transfer to local sponsors, who in turn pass those risks on to private partner.

USACE(Federal)

Equity

Local Sponsors(Diversion Authority)

Private Partner

DBFOMAgreement

Debt

Reserves Design-BuildInsurance

O&M

Requirements

Land

Availability Payments

Performance Standards

Oversight

BondsTaxes

State Appropriations

PPA

Technical Reviews & Permitting

Reimbursement of Advance Funding

Private Sponsors

USACE(Federal)

Local Sponsors(Diversion Authority)

Provide GapFinancingPPAFederal

Appropriations

DBAgreement

Requirements

Issuing Permits

Payments

Performance Standards

Oversight

Private Partner

Design-Build

Provide LandAdminister Reviews

Delivery of Infrastructure

Delivery of Infrastructure

Crossover of O&M Provision

Diversion ChannelWRRDA 1014

Southern EmbankmentWRRDA 5014

Assessments

Creditors

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Fargo – P3 Benefits

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Conclusion

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Conclusion & Discussion

• P3 appears to be the “new normal”. Alternative finance and delivery models are playing an increasing important role for most infrastructure projects, including water resources.

• Significant capital is available for well-structured P3 projects; but capital is not the entire value proposition.

• Water resource projects have some unique characteristics that distinguish them from other sectors (such as transportation), which need to be understood as you seek to structure transactions.

• Federal resources are available to assist in thinking through alternative finance and delivery structures.

COPYRIGHT © JONES LANG LASALLE IP, INC. 2015

Thank you

Jill JamiesonManaging DirectorJones Lang LaSalle Americas202.719.5588 Jill.Jamieson@am.jll.com