Lindgren Combined 18may10


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Public-Private Partnerships in High Speed Rail Projects

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Lindgren Combined 18may10

  1. 1. With Presentations By: PUBLIC – PRIVATE PARTNERSHIPS IN HIGH-SPEED RAIL DEVELOPMENT May 18, 2010 Brought to you by 1
  2. 2. Panelists • Kathryn Kusske Floyd, Dorsey & Whitney LLP • Stephen Small, P.Eng. Bilfinger Berger Project Investments Inc. • Jay Lindgren, Dorsey & Whitney LLP • Peter O’Neill, Bank of Ireland 2
  3. 3. Agenda • Market Demand & HSR Update – Kathryn Kusske Floyd • Introduction to P3 Projects – Steve Small • Legal Authority – Jay Lindgren • Lender Perspectives – Peter O’Neill 3
  4. 4. Market Demand & HSR Update Kathryn Kusske Floyd Dorsey & Whitney LLP 4
  5. 5. High Speed Rail in Washington, DC • The Obama Administration has made high speed rail development one of its top priorities • The American Reinvestment and Recovery Act included significant federal funding for high speed rail • The Administration has formally designated ten high speed rail corridors as eligible recipients of federal funding 5
  6. 6. The Issue Federal funding is not enough. But in a time when state and local governments face shrinking revenues, P3s have become a timely model for completing projects on time and on budget. – P3: A long-term performance-based contract between public sector and private sector to deliver public infrastructure 6
  7. 7. One Tool: P3s • Public-Private Partnerships – Accelerates infrastructure projects deemed impractical under traditional funding – Well-developed international tool – $200 billion capital available? 7
  8. 8. Advantages/Disadvantages Pros Cons • Risk-sharing • Long-term/complex contracts • Innovation and efficiency • Loss of public control • Public liquidity • Potential higher user costs • Public focus on other core functions • Risk of quality sacrifice in exchange for profits • Decreased reliance on traditional funding • Impact on public jobs • International investment • Loss of accountability 8
  9. 9. Introduction to P3 Projects Stephen Small, P. Eng. Senior Vice President – Development 9
  10. 10. Intro to P3 Structure • A P3 Project has the following key elements: – A long-term contract with public and private sector – Private sector provides - design, construction, financing, and operations of a public infrastructure; – Public sector provides payments over the life of the P3 Contract – (range from 20 to 40+ years); – Facility reverts to public-sector ownership at the end of the P3 Contract. 10
  11. 11. P3 Structure The traditional organizational chart in a P3 Project has the following characteristics: Authority – Authority is the ultimate client. PROJECT LEAD – Concessionaire enters into long term contract . D&C Team O&M Team Financing Team Financing Team – Design-Build Contract (Fixed term and fixed price) LEAD DESIGN O&M Subcontractors – Maintenance Contract Design Subs Construction Subs – Finance Arrangements . 11
  12. 12. Key Advantages for P3 Contracts Advantages Effective Risk Transfer for Authority Schedule and Cost certainty Long term standards and funding provided for OMR
  13. 13. P3 Timeline Preferred Financial RFQ RFP Bidder Close Construction EOI Short-list BAFO Starts Prequal Bidding Negotiation Phase Phase Phase 1-2m 1m 4-5m 1m 2-3 m 3-4 m Consortium Client Best and Final 3-way negotiations Client allocates risk and Evaluation Offer between project Evaluation submits tender consortium, public sector client and lenders 8 months to 16 months
  14. 14. Risk Sharing √: Primary Risk Taker √: Secondary Risk Taker Risk Allocation Government Concessionaire DB Contractor Operator Categories Finance √ √ Design / Engineering √ Construction √ Operating Cost √ √ Major Refurbishment – Lifecycle Costs √ √ Compared to a traditional Design-Build project, a P3 Project results in significant risks relating to: The costs of design and construction for the Facility; Market demand for the Facility (if applicable); Service provided by the Facility (Usage risk); and The Facility’s operation and maintenance costs. …being transferred from the Public Authority to the Project Company.
  15. 15. Do Public HSR Authorities Have Legal Authority to Build P3 Projects? Jay Lindgren Infrastructure Practice Group 15
  16. 16. Legal Authority Procurement Considerations • Legal Authority to Move Forward with P3 Projects: – Federal procurement considerations – State and local public authority procurement considerations • Enabling legislation: – Broad authority – Project specific or pilot program authority 16
  17. 17. Federal Considerations • SEP-15 – Special Experimentation Project Number 15 – Process for FHWA to identify new P3 approaches to project delivery – goal is to identify impediments in current laws, regulations, and practices to the greater use of P3 and private investment in transportation projects. – Allows U.S. Secretary of Transportation to waive requirements of Title 23 of the United States Codes – Applicant must be a State DOT
  18. 18. Federal Considerations • Private Activity Bonds (PABs) – Section 11143 of Title XI of SAFETEA-LU amends Section 142 of the Internal Revenue Code. – Adds highway and freight transfer facilities to the types of privately developed and operated projects for which PABs may be issued. – Allows private activity on these projects while maintaining the tax-exempt status of the bonds. – Law limits total amount of such bonds to $15 billion. As of January 2010, $6.3 billion had been allocated to seven projects, and $1 billion of that amount had been issued in PABs.
  19. 19. Federal Considerations • TIFIA – Transportation Infrastructure Finance and Innovation Act – Provides Federal credit assistance in the form of direct loans, loan guarantees, and standby lines of credit to finance surface transportation projects of national and regional significance. – Each dollar of Federal funds can provide up to $10 in TIFIA credit assistance. – Goal is to leverage Federal funds by attracting substantial private and other non-Federal co-investment in surface transportation projects.
  20. 20. State Enabling Legislation – Designated HSR Corridors • Chicago Hub State P3 Legislation? Covers HSR? Illinois No (but bill is pending) (bill pending) Indiana Yes Yes Missouri Yes No Wisconsin No Minnesota Yes No Ohio No Michigan No Kentucky No
  21. 21. State Enabling Legislation – Designated HSR Corridors • Northern New England State P3 Legislation? Covers HSR? New York No Connecticut No Massachusetts Yes Yes Vermont No New Hampshire No Maine No
  22. 22. State Enabling Legislation – Designated HSR Corridors • Southeast State P3 Legislation? Covers HSR? Florida Yes Yes Georgia Yes Yes South Carolina Yes No North Carolina Yes No Virginia Yes Yes Maryland Yes Yes
  23. 23. State Enabling Legislation – Designated HSR Corridors • Gulf Coast State P3 Legislation? Covers HSR? Texas Yes Yes Louisiana Yes Yes Mississippi Yes No Alabama Yes No Georgia Yes Yes
  24. 24. State Enabling Legislation – Designated HSR Corridors • Pacific Northwest State P3 Legislation? Covers HSR? Washington Yes Yes Oregon Yes Yes • South Central State P3 Legislation? Covers HSR? Texas Yes Yes Oklahoma No Arkansas No
  25. 25. State Enabling Legislation – Designated HSR Corridors • Single-State HSR Corridors Corridor State P3 Legislation? Covers HSR? California California Yes Yes Florida Florida Yes Yes Empire New York No Keystone Pennsylvania No
  26. 26. Lenders’ Perspective – Peter O’Neill
  27. 27. High Speed Rail – Too Big to Succeed? The amounts are staggering Conservative estimate for developing the 11 HSR corridors: – $500 billion. 2
  28. 28. Federal $ - a Drop in the Bucket Federal funds of $13 billion have been pledged by President Obama 2.6% of the costs of developing the 11 HSR corridors Where’s the rest of the money coming from? – State/Local? – PABs / TIFIA? – Private Capital? Ultimately it will have to be a combination of all of the above. Some “tracks” of the federal program explicitly favor projects that leverage federal funding with non-federal investments. 3
  29. 29. The European Experience European Union’s Trans European Network (“TEN”) EIB’s commitment of $12 billion to rail networks Dutch HSR (2004) had significant EIB Guarantee Facility (35% of total source) French Government is developing an extensive HSR network EIB funding also present here Significant use of Guaranteed Facilities in addition to State subsidies Private Capital The Lesson – Everyone needs to be involved. 4
  30. 30. Significant structural complexities Enormous size of these projects, multiple sources of funding etc will likely give rise to significant complexities in structuring. Examples include: – Timing of commitment of federal, state/local, private funds – Potential for cost overruns – how can this be mitigated – Revenue sources for the Project – patronage or availability? – Intercreditor issues – Integration issues – who operates the asset, schedules its use? – Permitting/Land Acquisitions – who bears the risk 5
  31. 31. PPP structures have addressed many of these risks PPP structures have for many years successfully mitigated risks associated with cost overruns, even on high value, complex projects Requirements for fixed-price, date certain construction contracts pass risks to the Design-Builder. PPP structures have also addressed risks associated with multiple funding sources – Milestone payment structures ensure interests are aligned. Complex intercreditor issues have also been addressed through PPPs – Use of PABS and TIFIA have been structured succesfully Basis of Revenue structures needs to be carefully considered – Patronage will involve significantly more complexity than Availability • Who bears risks associated with integrating use of asset by rail operator? • Will Private investors want some protection against competition 6
  32. 32. Risk Allocation Fundamental principle is that a risk should be borne by the party best placed to manage that risk Private capital will focus on ensuring that the split of risks between Government and the Private Sector are fair and equitable An additional area of complexity – what “government” does the Private Sector contractor (“Project Co”) deal with? Federal? State? What if HS network involves more than one state? 7
  33. 33. What does Private Capital focus on? How is it getting its money back? Robustness of cash flows at Borrower/Project Co level. – If there are delays, how long is Project Co kept whole? – If there are cost overruns, can the Contractor absorb these and still complete construction? – What is the experience of the Contractor – What other projects is it involved in or has provided guarantees in respect of? – Is there clear allocation of risk between project parties (“Integration Risk”) 8
  34. 34. Private Capital is ready and waiting! Very excited about the prospects for HSR development in the US A robust, tested and proven template is already in existence US and International contractors have generally had positive experiences The need is there Significant opportunity to drive economic growth. 9
  35. 35. Questions & Answers Please type your Questions in the Q & A box in the lower right hand corner of your screen
  36. 36. Contact Our Panelists Kathryn Kusske Floyd, Partner, DORSEY & WHITNEY (202) 442 - 3520 Peter O'Neill, Senior Vice President, Global Project Finance, BANK OF IRELAND (203) 391-5980 Steve Small, Senior Vice President of Development, BILFINGER BERGER PROJECT INVESTMENTS (604) 678-6532 Jay Lindgren, Chair, DORSEY & WHITNEY INFRASTRUCTURE PRACTICE GROUP (612) 492-6875
  37. 37. Thank You for Joining Us Please look for future webinars from Infocast at