Risks & Advantages of P3 Projects by Sid Scott, Hill International


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Provides overview of the current status (March 2014) of public/private partnerships for development of horizontal and vertical infrastructure in the United States.

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Risks & Advantages of P3 Projects by Sid Scott, Hill International

  1. 1. Risks & Advantages on P3 Projects Prepared for: American Bar Association Division 4, Project Delivery Systems Presented by: 1 March 25, 2014 Sid Scott
  2. 2. 1. State of P3 – International and US 2. P3 Structure and Agreements 3. Challenges/Risks/Rewards 4. What is the Future of P3 Market? 5. Q & A Agenda 2
  3. 3. State of P3
  4. 4. 4 PPPs Defined According to the National Council for Public-Private Partnerships, a PPP is defined as: “A contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.”
  5. 5. Why Public-Private Partnerships? • Public entities continue to face budgetary problems –Infrastructure deteriorating –Major capital projects remain unfunded –Pressure to ease roadway congestion and provide other necessities to public –No desire to raise taxes in this economic climate • Solution P3s 5
  6. 6. 6 The Current Environment What’s the Problem? • In FY 2012, 42 states had budget shortfalls totaling $103 billion, • A shortfall totaling $54 billion across 30 states is forecast for FY 2013, • 46 states have been forced to cut services and 30 have raised taxes. Source: Center on Budget & Policy Priorities
  7. 7. The Current Environment (cont’d) 7 What’s the Problem? • Decision makers will soon be forced to make difficult decisions in order to meet the estimated need for $300 billion in urgent infrastructure projects over the next 5-7 years. • When new construction and renovations are added in, the estimate rises to $2.2 trillion over five years.
  8. 8. ASCE Report: $3.6 Trillion Needed to Improve U.S. Infrastructure (by 2020) 8 8
  9. 9. PPP Projects - Horizontal Yes No Not Definitive Map Legend Source: AGC of America – The Associated General Contractors of America 9 Horizontal
  10. 10. PPP Projects - Vertical Yes No Not Definitive Map Legend Source: AGC of America – The Associated General Contractors of America 10 Vertical
  11. 11. Status of P3s Internationally
  12. 12. P3 Structure & Agreements
  13. 13. What is a P3? • Formation of PPPs –Public and private sectors join together to identify, finance, build & operate infrastructure project –Infrastructure Project • Need identified by either public agency or private entity • Project to be used, at least in part, by general public or public agency 13
  14. 14. P3 and Project Delivery 14 PROJECT DELIVERY CONTINUUM Analysis of Alternatives FUNDING/ FINANCING: Public Funding Private Equity Tax Exempt Financing Taxable Financing If concession, BV/QBS w/ competitive negotiations Price Only PROCUREMENT: Best-Value (BV) BV/QBS with Competitive Negotiations PUBLIC SECTOR PUBLIC-PRIVATE-PARTNERSHIPS DESIGN- BID-BUILD DESIGN- BUILD (DB) DESIGN-BUILD- OPERATE- MAINTAIN (DBOM) LONG-TERM LEASE/ O&M CONCESSION DESIGN-BUILD- FINANCE OPERATE (DBFO) Separated Services Early Contractor/Developer Involvement Integrated Services/Project Lifecycle LEASE- DEVELOP-OPERATE CONCESSION Commercial Debt/Private Equity Innovative Finance Credits/Public Subsidies CM @ RISK (CM/GC) PROJECT DELIVERY:
  15. 15. How Are Public-Private Partnerships Structured? Financial Commitment Legal Relationship Security Legend 15
  16. 16. What Does Each Side Bring to the Table? • Public / Government Contributions – Property – Eminent Domain Powers – Ability to obtain tax-exempt bonds (PABs) – Ability to impose user fees (e.g., tolls) • Private Contributions – Introduction of Private Capital – Design/Construction Expertise (right people) – Operation and Maintenance Expertise (often long term) 16
  17. 17. State Agencies May Only Act Pursuant to Enabling Legislation 17Soure: National Conference of State Legislatures (NCSL.org) [Current through January 24, 2013]
  18. 18. P3 Agreements Statutory Requirements • P3 Enabling legislation confers authority for State Agencies to act • P3 statutes allow State Agencies to form partnerships with private entities for planning, construction and operation of Infrastructure Projects • Statutes may or may not set forth terms and conditions of partnering agreements 18
  19. 19. P3 Agreements Statutory Scope of Authority • Authority to freely negotiate duration of franchise • Broad authority to define terms of concession by agreement rather than public rate setting authority • Authority to broadly access private sector and local, state and federal public funding • Procurement through both solicited or unsolicited proposals • Procurement flexibility promoted by exempting the negotiation, selection and performance of projects from the State Public Procurement Act • Public ownership imputed to private entity for planning, zoning, and certain tax purposes 19
  20. 20. Rewards, Challenges, and Risks of P3 Projects
  21. 21. The Promise of P3s – Better, Faster, Cheaper • Better –Innovation –Financial success depends on quality of the project, and financial model • Faster –Develop and build sooner than with “pay as you go” public funding –76% of P3 Projects completed timely vs. 30% of traditional contracts (CA reports 83% of P3 Projects on time) – Source: Conference Board of Canada 21
  22. 22. Benefit to Investor 22 “What better asset in an economic downturn and unclear future than hard real-estate assets providing some measure of inflation protection.” Leonard Shaykin Managing Partner LambdaStar Infrastructure Partners
  23. 23. Challenges to the P3 Wave? • Public Perception – Monetization of “iconic assets” • Anxiety with putting “public” asset in the hands of private sector for 50 – 75 years • Foreign control over “vital” infrastructure, user fees, etc. • Perceived cost of money for municipal projects • Cost/Time of procurement • Loss of federal subsidies (Transportation) – Private Activity Bonds, TIFIA • Unrealistic Revenue projections or valuations of assets • Overuse of availability payment (AP) structured deals 23
  24. 24. Private Sector Risks “You have to understand the difference in risk allocation… The additional risk in a P3 project as a contractor (especially if you are an American contractor) is probably nothing you have ever seen before.” Magnus Eriksson Senior VP, Skanska Infrastructure Development Americas 24
  25. 25. 25 P3 Risks – Construction • Accuracy & Completeness of Design • Environmental policy/requirements • Labor Agreements • Scope Changes • Cost growth – Financial • Schedule slippage • Interest rate – Operational • Revenue • Level of Service/performance
  26. 26. 26 Typical Risk Transfer Scenario Under PPP Arrangements Transferred? Public/DBB PPP Performance Public Private X Interface Public Private X Scope Public Shared X Errors and Omissions Public Private X Interference/Coordination Public Private X Life Cycle Public Private X Performance Private Private Schedule Public Private X Cost Overruns Public Private X Changes in Scope Public Public Force Majeure Shared Shared Schedule Slippage Additions Public Private X Interest Rate Risk Public Private X Supply/Performance Risk Private Private Financing Risks Public Private X Defects Private Private Maintenance Level Public Private X Deferred Maint/Repair/Repl Public Shared X Defective Components Private Private Residual Value Public Shared X Revenue Public Shared X Service Level and Quality Public Shared X Maintenance and Life Cycle Risks Operations Risks Responsibility for Risk Development Risks Design Risks Construction Risks Financing Risks Vehicle Supply Risks Source: National Council for Public Private Partnerships
  27. 27. What is the Future of the P3 Market
  28. 28. • Cautious Optimism! • US predicted to be largest P3 market in world within 10 years based on current trends and deal flow (Source: Public Works Financing) 28
  29. 29. 1. Public Sector Champion 2. Statutory Environment 3. Public Sector Organized Structure (P3 program) 4. Careful assessment/allocation of risks 5. Detailed Contract (Business Plan) 6. Clearly Defined Revenue Stream 7. Realistic performance requirements (AP structure) 8. Stakeholder Support 9. Pick Partners Carefully Keys to Successfully Managing PPPs 29
  30. 30. Questions / Comments 30 Sid Scott
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