All across the country, infrastructure projects are in need of repair, and creative organizational solutions are in-demand. Public-Private Partnerships are long-term contracts between a private party and a government entity allowing for an alternative approach to federal, state and municipal construction projects. The private party bears a large share of risk and management responsibility, and remuneration is linked directly to performance. This webinar discusses the nature of this collaboration across sectors. Presented by: Gregory Fitch Black and Veatch View the on-demand webinar: http://cpe-wpi.hs-sites.com/construction-project-management-webinar-series

1. The Construction Project
Manager’s Modern Toolbelt
How Technology & Creativity
Enable Successful Project Delivery
Webinar Series

2. Private and Public Partnerships
Move Mainstream
Greg Fitch
August 16, 2016

3. Private and Public Partnerships
Move Mainstream
Greg Fitch
August 16, 2016
WPI Department of Civil Engineering ‘98
Columbia University Department of Civil
Engineering – PhD Candidate

4. Greg Fitch
August 16, 2016
Project Controls Lead Analyst
Construction & Procurement in New York City
Private and Public Partnerships
Move Mainstream

5. PUBLIC-PRIVATE-PARTNERSHIPS (PPP OR P3)
1. Characteristics of PPPs
2. Overview of P3 Project Finance Structures
3. Common Aspects P3 Project Agreements
4. Project Risks & Project Procurement Process
5. PPP Financial Markets, Structure & Model

6. Traditional and Alternative
Procurement Methods Defined
Design-Build – Owner uses a competitive proposal process to contract with a
private entity to design and build a project.
Design-Build-Operate – Owner uses a competitive proposal process to
contract with a private entity to design and build a project but also adds
operations to the DB Foundation.
Design-Bid-Build – Traditional method in which the agency or owner
contracts with separate entities for the design and construction of a project.

7. CHARACTERISTICS OF PPPS

8. DBFO or Public-Private-Partnership
Procurement Method Defined
Design-Build-Finance-Operate or Public-Private-Partnerships (PPP or
P3):
Owner uses a competitive proposal process to contract with a private
consortium to finance, design, construct, maintain and operate a
facility and / or build a project.

9. Congressional Budget Office (2012)
Variety of alternative arrangements for Projects that transfer more of the risk associated with
control of the project to the private sector.
Dr. Michael J. Garvin (May – June 2011 edition of TR News)
Long-term contractual arrangements between public and private partners for the creation and
enhancement of assets, bundled together with the provision of services and capital financing
through a private entity.
FHWA – Office of Innovative Project Delivery
Contractual agreements between a public agency and a private entity that allow for greater
private participation in the delivery of transportation projects. Participation involves the
private sector taking on additional project risks, such as design, finance, long-term operation,
and traffic revenue.

10. Why Public-Private Projects Relevant?
• ALTERNATIVE PROJECT DELIVERY METHODS
─ Solution to Resolve Investment Deficits in Infrastructure
• CENTRAL GOAL OF P3 PROJECTS
─ Alleviate Government Budgets with Funding Provided by External
Financiers. (Algarni et al. 2007)
• P3 PROJECTS INCLUDE EQUITY SPONSORS
─ Most Capable of Managing Financial Risk & Owner-like Responsibility
w/out Actually Transferring Ownership. (Culp 2011)

11. PPP VS. TRADITIONAL DELIVERY
• Private Perspective • Public Perspective
• Service-Oriented Delivery
Model
• Large Scope & Long-term
Contracts
• High Priority Projects
• Optimize vs. Maximum Risk
Allocation
• Opportunities for Stable
Investment
• Public Need & Benefits
─ Local, Regional & State
─ Reliable & Safe Infrastructure
Procurement
─ Traffic Congestion Relief
─ Electrical Power Demands
─ Other Public Use Needs
• Financial Feasibility
─ Alleviate Government
Budgets
─ Better Value for Money
─ Market Demand for Projects

12. CHARACTERISTICS OF PPPs
• PROJECT SPECIFIC CONTRACT INCLUDES:
─ Significant New Capital Expenditures [large EPC or DB contracts]
─ Long-term O&M Responsibilities
─ Private Financing Allows Public Funds To Be Used On Other Projects
─ Project Specific Revenue Source
• PUBLIC PERCEPTION OF “PRIVATIZATION”:
─ Convey Ownership of Public Assets Transferred to Private Sector
─ Rely on Private Sector to Provide Services Formerly Provided by
Public Owner or Agency
─ Project May Not Require or Support Private Financing Based on
Generated Revenues

13. • Three Main Models for Project Agreements:
• Offtake Contract (i.e. Process-plant Project):
─ The Project Company produces a product and sells it to an Offtaker.
• Concession Agreement (i.e. Toll Road Project):
─ The Project Company provides a public service, and collects User
Charges.
• Availability-based Contract (i.e. PFI Model):
─ Contracting Authority pays a Project Company for making a project
available for use.

14. OVERVIEW OF P3 PROJECT FINANCE STRUCTURES

15. Project-Finance Structures
• Process-Plant Projects:
─ Projects where there is an input at one end of the project, which goes
through a process within the project, and emerges as an output.
• Concession Projects:
─ Construction or refurbishment of public infrastructure with revenues
derived from tolls, fairs, or similar payments from by users.
• Private Finance Initiative Model:
─ Construction / Refurbishment of Public Buildings or other public
infrastructure with revenue derived from payments by a Contracting
Authority (CA).

16. Example of Project-Finance Structures
Process-plant Project
Investors
16 CE590 – P3 Project Financing
Finance
Lenders
Project-Finance DebtEquity
Government Electricity Distributor
Power Purchase AgreementOperating License
Project Company

17. Example of Project-Finance Structures
Process-plant Project - Subcontracts
17 CE590 – P3 Project Financing
Project Company
EPC Contract Fuel Supply
Contract
Operation &
Maintenance Contract
Construction
Contractor
Fuel
Supplier
O&M
Contractor

18. Process-Plant Project
• SOLAR PLANT PROJECT - Roserock (Project Company) will sell
the energy, capacity and green attributes to the City of Austin
based on the terms of the Power Purchase Agreement signed May
1, 2014.
KEY TERMS VALUES
Effective Date 5/01/2014
Delivery Term 20 years
Expected Capacity (which may not be modified by
RE Roserock to change by +/- five percent)
150 MW
Maximum AC Output 150 MW
Minimum Capacity 140 MW
Contract Price ($/MWh)
$44.95 (no
escalation)

19. Process Plant Project
Holdings
Company “A”
Short Term
Credit
Agreement
Longer Term
Credit Agreement
“Project
Company”
Project
Sponsors
Holdings
Company “B”
Project
Completion
Engineering &
Construction
Operations &
Maintenance
Funding
Funding
Purchase
Shares
Purchase & Sale Agreement Equity Related Contracts
Financial Lender
& Debt Related
Contracts
Initial Investors Other Investors
Other Investors
100%

20. Example of Project-Finance Structures
Toll-Road ConcessionInvestors
20 CE590 – P3 Project Financing
Finance
Lenders
Project-Finance DebtEquity
Contracting
Authority
Road Users
TollsConcession
Agreement
Project Company

21. Example of Project-Finance Structures
Toll-Road Concession - Subcontracts
21 CE590 – P3 Project Financing
Project Agreement
Design &
Build Contract
Toll Operation
Contract
Maintenance
Contract
Design & Build
Contractor
Toll
Operator
Maintenance
Contractor

22. Concession Project
• I-595 CORRIDOR ROADWAY IMPROVEMENTS
─ Located in Broward County Florida.
─ Opened to Traffic in 1989 – With Accelerated Traffic
─ Roadway Improvements includes Reconstruction and Widening of I-595
with various improvements to ramps, interchanges etc.
─ Private concessionaire designed, built, financed and will operate and
maintain project for 35 years.
─ $1.8 Billion (present value in 2009 dollars; a 5% discount Rate)

23. Example of Project-Finance Structures
Private Finance Initiative (PFI) Model
Investors
23 CE590 – P3 Project Financing
Finance
Lenders
Project-Finance DebtEquity
Project Company
Contracting
Authority
Project
Agreement

24. Example of Project-Finance Structures
PFI Model - Subcontracts
24 CE590 – P3 Project Financing
Project Agreement
Design &
Build Contract
Maintenance
Contract
‘Soft’ Services
Contract(s)
Design & Build
Contractor
Service
Provider(s)
Maintenance
Contractor

25. Project Finance Initiative Model Project
Fargo Moorhead Flood Diversion Channel
Red River Basin surrounding Fargo, ND & Moorhead, MN
─ Red River Basin & Diversion Authority (includes counties in ND and MN)
─ Increased Frequency and Severity of Floods
─ 30 mile wide Diversion Channel in ND w/ 150,000 acre-feet of
Upstream Staging
─ Federally Authorized in February 2016
─ USACE as a Demonstration Split Project Delivery Model

26. Fargo Moorehead Flood Diversion Channel
• FINANCIAL OVERVIEW & SPLIT PROJECT DELIVERY MODEL
1. USACE will deliver Southern Embankment and Related projects with
Multiple Design-Bid-Build Projects.
2. Diversion Authority will Deliver Channel & Associated Infrastructure
with Locally-led P3 delivery includes a combination of public and
private financing, leveraging state and local funding sources

27. • FARGO MOORHEAD FLOOD DIVERSION P3 FINANCIAL
OVERVIEW FOR DIVERSION CHANNEL
─ Project Delivery Method
• Design-Build-Finance-Operate-Maintain
─ Construction Funding
• Private financing (debt & equity) secured by P3 Consortium
• Diversion Authority will make Milestone Payments to P3 Consortium
─ Payment Structure for O&M Scope (30 -50 year term)
• Multiple Funding Sources to Meet Debt Service and O&M Payments include
State Appropriations, Sales Tax, Asses.

28. COMMON ASPECTS P3 PROJECT AGREEMENTS

29. Common Aspects of Project Agreements
• Contract Term
─ Useful Life of the Project
─ Term of Debt
─ Equity Return
• Payment Mechanism
─ Payment on Project Completion
─ Level Payments
─ Inflation Indexation
• Contract Monitoring by the Offtaker / Contracting Authority
─ Design, Construction and Operation
─ Subcontracts
─ Financing

30. Common Aspects of Project Agreements
• Performance Bonding and Other Guarantees
─ Offtaker / CA Requires a Performance Bond
─ Duplicates Lenders’ Requirements of Project Company
─ Project Company Incentive is to Generate Revenue
• Compensation Events – “Time & Money”
─ Project Company Receives Reimbursement from Offtaker/CA
─ Breach of Obligation (e.g. provide access to site)
─ Delays in Construction / Contract Variations by Offtaker/CA
• Excusing Causes
─ Protects Project Company against penalties or deductions
─ Temporary Closure of Project by Agreement with Offtaker/CA
─ Implementation of a Contract Variation or Change of Law

31. Common Aspects of Project Agreements
• Relief Events “Time No Money”
─ Force Majeure - No fault & Cannot be Controlled by Any Party
─ Examples include Nat. Disasters, Embargos, Labor Strikes etc.
• Step-in by the Offtaker / Contracting Authority
─ Offtaker / CA may have the right to operate the project itself
─ Contract Payment to Financial Lenders Continue
─ Investors & Lenders Uneasy about Terms when Step-in is Permitted
• Termination
─ Default by Project Company or Offtaker / CA
─ Force Majeure Events – Impossible to Complete or Continue
─ Complicated Terms and Numerous Scenarios

32. Common Aspects of Project Agreements
• Change of Ownership
─ Offtaker /CA May Restrict the Sale of Sponsor’s Share
─ Restriction is generally Limited to Construction Phase
─ Project Technology Dependent on Project Sponsor
• Dispute Resolution
─ Preferable Dispute Resolution by Arbitration
─ Avoid Disputes Related to Poor and Ambiguous Language
─ Standard Construction Contracts not Suitable for P3 Projects

33. PROJECT RISKS &
PROJECT PROCUREMENT PROCESS

34. Risks & Selection of Project Delivery Method
CASE STUDY
─ Pima County Regional Wastewater Reclamation Department
(PCRWRD)
─ Wastewater treatment facilities & conveyance systems in
Eastern Pima County, Arizona
─ Lower Effluent Limits from Roger Road Wastewater Treatment
Facility into the Santa Cruz River Required Construction of a
New Wastewater Treatment Facility
─ Considered DBB for Conceptual Timeframe & Cost Estimates for
Design & Construction
─ Recommended Alternative Procurement methods be considered
including: DB, DBO, DBFO
(Regional Optimization Master Plan – Alternative Delivery Methods Final Report 2008
ASCE Journal of Eng. Construction Management - Fitch et. al. Jan. 2015)

35. Risks & Selection of Project Delivery Method
• OPTIMUM PROJECT DELIVERY METHOD
─ Effective Allocation of Risks Between Project Participants Best Able to
Manage Particular Risks
─ Costs Associated with Each Risk & Total Project Cost are Lessened
• MODEL FOR SELECTING PROCUREMENT METHOD
─ Optimize Risk Allocation
─ Perform and Compare a Risk Adjusted PV Analysis For Each Delivery
Method Under Consideration (DB vs. DBO vs. DBFO)

36. Risks & Selection of Project Delivery Method
• RISK ADJUSTED PV ANALYSIS:
𝑃𝑉 𝑖𝑁 = 𝐶𝐶0 +
𝑡=1
𝑇
𝑁𝐶𝐹𝑡
(1 + 𝑖) 𝑡
─ CC0 = Capital Costs for Design and Engineering in year 0;
─ NCFt = Net Cash Flow in Year t; and
─ i = Discounted Rate for Both Interest and Inflation

37. Risks & Selection of Project Delivery Method
PCRWRD LIFECYCLE COSTS USED FOR PV ANALYSIS
New WRC Project DB DBO DBFO
Capital Costs (Design,
Construction)
$212,000,000 $206,000,000 $206,000,000
Yearly Operation &
Maintenance Costs
$7,000,000 $5,000,000 $5,000,000

38. Risks & Selection of Project Delivery Method
PCRWRD ECONOMIC VARIABLES USED FOR TO SIMULATE THE
RISK ADJUSTED PV ANALYSIS
Interest Rates Rate & Term (yr)
Tax Exempt 5.0%
Muni Bond Term 20
Private Rates 6.0%
Private Bond Term 30
Inflation Rates Rate
Capital Inflation Rates 5.0%
O&M Inflation Rates 2.5%
Energy Inflation Rate 3.0%
Discount Rate 6.0%

39. COMPARISON BETWEEN THE RANGE OF PVs FOR THE NEW
WRC USING DB VS. DBO USING CRYSTALBALL SOFTWARE:

40. COMPARISON BETWEEN THE RANGE OF PVs FOR THE NEW
WRC USING DBO VS. DBFO USING CRYSTALBALL SOFTWARE :

41. Risks & Selection of Project Delivery Method
PCRWRD RISK ADJUSTED PV ANALYSIS RESULTS:
Procurement
Process
Baseline PV
Risk Adjusted
Mean PV 90% Certainty PV
Standard
Deviation
DBO $312,000,000 $350,000,000 $370,000,000 $12,000,000
DB $330,000,000 $369,000,000 $391,000,000 $13,000,000
DBFO $332,000,000 $373,000,000 $394,000,000 $12,000,000
DBFO Risk Adjusted NPV Impacted by 6% Interest Rate and 30 Year Term

42. Risks & Selection of Project Delivery Method
• PIMA COUNTY CONCLUSIONS:
─ Compared Project Delivery Methods (DB v DBO v DBFO)
─ Risk Adjusted NPV for DBFO Higher than DB and DBO
─ For PCRWRD
 Longer Term with Higher Interest Rate (Economic Risk)
 IRS Rev. Proc. 97-13 (Commercial and Regulatory Risk)
• TYPES OF RISKS:
─ Commercial
─ Macro-Economic
─ Regulatory and Political

43. PPP Risks – Commercial
• Commercial Viability:
─ Does the Project Make Overall Commercial Sense for All Parties
• Construction Risk:
─ Can the Project Be Built On Time and On Budget
• Revenue Risk:
─ Will its Operating Revenues be as Projected
• Operating Risk:
─ Is the Project able to Operate at the Anticipated Level and Cost
• Input Supply Risk:
─ Can Materials or Other Inputs be Obtained at the Estimated Cost
• Uninsured Risk:
─ Are there Significant Risks Not Covered by Insurance

44. PPP Risks – Commercial
• Environmental Risks:
─ What effect will the project have on the Environment
• Residual-Value Risk:
─ What happens to the project at the end of the Agreement
• Contract Mismatch:
─ Do the Project Contracts Fit Together Properly
• Sponsor Support:
─ Is there Proper Amount of Recourse to the Sponsors
• Other Reasons for Failure:
─ Does the Project Display Any Common Reasons For Failure

45. PPP Risks – Macro-Economic
• Macro-Economic Risks:
─ External Macro-Economic Risks aka Financial Risks include changes in:
• Interest rates
• Inflation
• Currency Exchange–Rates
─ Are not project specific but relate to the Economic Environment in
which it Operates.

46. PPP Risks – Macro-Economic
• TIME VALUE OF MONEY
─ Analysis of Risks Discounted Cash Flow to Calculate the Net Present
Value (NPV) of the P3 Project
─ Internal Rate of Return (IRR) – The Discount Rate Results in NPV = 0.
─ IRR is Used For Calculating:
• Overall Return on a Project
• Investors’ Return on Investment in the Project
• Compensation Sums under the Project Agreement
• Early Termination Payments Under the Project Agreement
• Benefits of Refinancing
𝑃𝑉 𝑖𝑁 = 𝐶𝐶0 +
𝑡=1
𝑇
𝑁𝐶𝐹𝑡
(1 + 𝑖) 𝑡

47. PPP Risks – Macro-Economic
• Interest Rate Risks
─ Construction-Phase
• During Construction the accrued interest is normally capitalized (i.e. added to
the loan amount) or paid by making a new drawing on the loan.
• Interest Rate is part of the Project’s Capital Budget and a Higher Interest
Rate Than Originally Planned During Construction can Result in a
Construction Cost Overruns.
─ Operating-Phase
• During Operation a Higher Interest Rate means Lower Project Cash Flow and
Reduction in Lenders’ Cover Ratio and Lower Returns for Investors.

48. PPP Risks – Macro-Economic
• Inflation
─ Construction Cost Overruns Related to Higher Inflation Rates
─ Higher Operating Costs Reduces the Return for Investors
─ Mitigating Strategy Includes Indexation of Contract Payments
• Foreign-Exchange Risks
─ Risks Resulting from movements in the Exchange Rate between Once
Currency and Another.
• Refinancing Risks
─ Short-term Construction Loans can be Refinanced by Long-term Loans
after Project Completion
─ Long-term Interest Rates may Be Higher than Originally
Planned.

49. PPP Risks – Political & Regulatory
• Change In Law
─ Legislation Allows for Private Ownership or Control of the Project and
Protects Private Investment
─ Clear Legal and Regulatory Framework for the Project’s Operation
─ Consistency of Legal and Regulatory Policies
─ Ability for Lenders to Take and Enforce Security
• Investment Risks
─ Currency Convertibility and Transfer
─ Expropriation of the Project by the State
─ Political Violence
• Wider Political Risks
─ Contract Repudiation – Deliberate Failure by a Public-sector
─ Creeping Expropriation – Cumulative Effect of Numerous Actions

50. FINANCIAL MARKETS STRUCTURE & MODEL

51. Project-Finance Markets & Lenders
• Private-Sector Project-Finance Debt Provide by:
─ Commercial Banks
─ Bondholders
• Commercial Banks
─ Largest Providers of Project Finance
─ 90% of Private–Sector Finance Debt in 2012
─ Over $18 Billion in Loan Commitments in the U.S. in 2012
• Bonds
─ Bondholders: Life-Insurance Companies and Pension Funds
─ Aimed at the Non-Banking Markets
─ Tradable Debt Instrument

52. Financial Structuring in P3 Projects
• Investors’ Analysis and Equity Structure
─ Minimum Equity IRR used by Sponsors and Other Investors to
Determine whether the Project is a Viable Investment.
─ Hurdle Rates for Equity IRR above which an Investment is Acceptable:
• Investor’s Own Weighted Cost of Capital
• Additional Return Over Cost of Capital Required for Particular Risks
• Market Competition
• Project Viability
𝑃𝑉 𝑖𝑁 = 𝐶𝐶0 +
𝑡=1
𝑇
𝑁𝐶𝐹𝑡
(1 + 𝑖) 𝑡

53. Financial Structuring in P3 Projects
• Main Elements For Project-Finance Structure:
1.Debt Cover Ratios
2.Debt:Equity Ratio
3.Debt Service Profile
4.Interest Rate and Fees

54. Financial Structuring in P3 Projects
• Debt Cover Ratio
─ Level of Debt for a Project is based on Ability to Pay Interest &
Principal with a Margin of Safety.
─ To Assess the Margin of Safety Lenders Calculate Debt Cover Ratios:
• Annual Debt Service Cover Ratio (ADSCR)
• Loan-Life Cover Ratio (LLCR)
• Averages of ADSCR and LLCR
• Project-life Cover Ratio

55. Financial Structuring in P3 Projects
• Debt:Equity Ratio (Ratio of Debt to Equity)
─ Based on Cover-Ratio Calculations and Reflect Project Risks
─ Greater Safety Margin Required by Lenders = Higher Debt Cover Ratio
─ Projects With Greater Risk have Lower Debt:Equity Ratios:
• 90:10 for and Accommodation-based Contract
• 85:15 for a Process –plant project with an Offtake Contract
• 80:20 for a Transport Concession
• 70:30 for a Power Plant Project with no Offtake Contract
• 50:50 for a Natural Resource Project

56. Financial Structuring in P3 Projects
• Debt Service Profile
─ Loan Interest Payments and Principal Repayment
─ Investors Look For Dividends Sooner than Later
─ Lenders Look to be Repaid as Rapidly as Possible
─ Debt Repayment Schedule Based:
• Term of Financing – Project-Finance Debt is much longer in term (repayment
period)
• Average Life (or Maximum Average Life) – How Rapid Risk Reduces Over the
Term
• Repayment Schedule – Start Date and Frequency of Repayment
• Flexibility in Repayment – “Target and Minimum” Repayment Structure

57. Financial Structuring in P3 Projects
• Interest Rate and Fees
─ International Project-Finance Floating Loan Rates Typically 2 – 3.5 %
over LIBOR
(LIBOR stands for Intercontinental Exchange London Interbank Offered Rate)
─ Fees Include:
• Arranging and Underwriting Fees
• Commitment Fees Paid on the Available But Undrawn Portion of Bank Debt
During Construction
• Agency Fees Payable to the Agent Bank or Security Trustee

58. The P3 Financial Model
• Input or Main Building Blocks include:
─ Macro-economic Assumptions
─ Project Costs and Funding
─ Operating Revenues and Costs
─ Accounting and Taxation Assumptions
• Outputs:
─ Determine Viability of the Project from Investors’ Point of View
─ Determine Viability of the Project from Offtaker’s / CA’s Point of View
─ Sensitivity and Risk Analysis for Lenders

59. The P3 Financial Model
• Functions of the Financial Model
─ Pre-Financial Close / Development Phase
• Evaluation & Reevaluation of Projects Financial Aspects and Sponsor’s
Economic Return
• Structuring the Finance and Reviewing the Sponsors’ Benefits under Different
Financial Terms
• Formulating Financial Provisions of the Project Contracts including LD Calc.’s
• Part of the Lenders Due Diligence Process
• Quantifying Critical Finance Issues
• Offtaker / CA Confirm Financial Viability
• Compare Proposals Submitted by Sponsors

60. The P3 Financial Model
• Functions of the Financial Model
─ Post-Financial Close
• Budgeting Tool
• Enables Lenders to Review Long-term Changes
• Enables Investors to Calculate the Value of their Investment
• Used by Investors to Calculate Compensation Event Payments
• Offtaker / CA Calculate Refinancing Gain
• Offtaker / CA Calculate Termination Sum

61. Private and Public Partnerships
Move Mainstream
Conclusions and Summary:
1. Infrastructure Overhaul in the U.S.
2. Increased Number of Projects procured using Alternative Project Delivery
Methods
3. Greater Frequency of P3 Procurement
4. Increased Participation For Civil Engineers
5. Greater Knowledge & Involvement with Project Finance
6. More Infrastructure Projects + Expanded Roles for Civil Engineers =
Greater and More Value

62. Private and Public Partnerships
Move Mainstream
Acknowledgements:
Principles of Project Finance
By E.R. Yescombe
Published by ElSevier Publishing

63. WPI will offer this Fall 2016
On-Line &
Monday Evenings 6:00 – 8:50 p.m.
CE590 - Capital Facility Planning and Financing in
Private and Public Partnerships
Email: gjfitch@wpi.edu

64. 64
CE590 – P3 Project Financing
QUESTIONS?