Council of Development Finance Agencies -- Negotiating PPP/P3 Agreements August 7, 2013 Greg Daniels + 1 614 365 2789 greg.daniels@squiresanders.com Bruce Gabriel + 1 216 479 8746 bruce.gabriel@squiresanders.com Ed Johnson + 44 (0) 207 655 1097 edward.johnson@squiresanders.com
Squire Sanders Team Gregory R. Daniels T + 1 614 365 2789 E greg.daniels@squiresanders.com Education: University of Michigan, J.D., 2001 The Ohio State University, B.A., 1998 • Counsel to public and private entities on P3 parking construction and monetization transactions and a wide range of P3 transactions where government payments are subject to appropriation D. Bruce Gabriel T + 1 216 479 8746 E bruce.gabriel@squiresanders.com Education: Northwestern University Law School, J.D. and Kellogg Graduate School of Management, M.M., 1980 Coe College, B.A., 1976 • Global Public & Infrastructure Finance Practice Group Leader, with extensive public and structured finance experience, involving a variety of facilities and counsel roles • Counsel to the Cleveland-Cuyahoga County Port Authority in connection with its participation in the Cleveland Innerbelt Bridge DB(F) Project Edward Johnson T + 44 (0) 207 655 1097 E edward.johnson@squiresanders.com Education: University of Liverpool, LL.B (Hons), 1994 Inns of Court School of Law, 1995 • Counsel to project sponsors of UK health, education and transport projects • Counsel to the UK Government on five DBO highway projects with a capital value of approximately 2 £2 billion
Presentation Overview Introduction � Review of Basic Concepts � US Hybrid Tax-Exempt Debt Structure Part I: Negotiating the Terms � Basic Premise � Key Concepts and Features � Process: Inception to Execution � Public Entity Preparation � Project/Concession Agreement Part II: Managing Risks � Typical Project Risks � Construction Risk � Operation Risk � Financing Risk � Mitigation of Risks 3
What is a Public Private Partnership? “A set of contractual arrangements between public and private sector participants under which private sector participants play a greater role than has been traditional in the development and financing of public infrastructure. While the public sector usually retains ownership of the infrastructure, the private participants have increased discretion in determining how the project or task will be completed” Traditional US: Public Sector Design, Bid and Finance -- Private Sector Build -- Public Sector Operate and Maintain vs. PPP/P3: Public Sector Scope and Performance Requirements -- Private Sector Design, Build, Finance, Maintain and Operate 4
Simple PPP Contract Structure 5
Really Simple PPP/P3 Contract Structure 6
US Hybrid Tax-Exempt Debt Structure Opportunity � Tax-exempt, governmental use bonds – capital markets financing � Public entity’s subject to appropriation credit rating, without debt incurrence, based on Concession/Project Agreement � Passive role of Financing Authority with respect to Disbursement of Financing Proceeds to Contractor � Potentially off-balance sheet for contractor Challenges � Education and Understanding -- State Credit v. State Law Debt -- Federal Tax Requirements � Public sector decision-making processes � Documentation (accommodating taxable and tax-exempt financing) 7
US Hybrid Structure (cont’d) Parties � Public Entity, e.g., Department of Transportation � Private Contractors � Public Bond Issuing Authority � Corporate Bond Trustee � Surety Documents � Funding Agreement � Intercreditor Agreement � Bond Indenture � Direct Payment Agreement Projects � Florida � Ohio 8
PART I: Negotiating the Terms • Basic Premise • Key Phases of the PPP/P3 Process • Critical Initial Stages • Public Authority Preparation • PPP/P3 Concession/Project Agreement 9
Basic Premise – Cover All 3 P’s in PPP • P3’s must reflect the Public Interest � Retain ultimate control over the asset – state as guardian/custodian of public assets � Transparency required when dealing with public assets, services and funds � Obtain value for money � Pay for performance • P3’s must reflect the Private Interest � Reasonable profit and performance standards – usually best determined through open tender � Protects profit against identified risks, especially those controlled by the public body � Balances transparency with protection of proprietary trade secrets or intellectual property • Projects that reflect these interests will cover the third P: Partnership 10
Key Phases of the PPP/P3 Process Needs Analysis Needs Analysis Project Selection Project Selection Project Preparation Project Preparation Bidder Prequalification Bidder Prequalification Request for Proposals Request for Proposals PPP/P3 Contract Negotiation PPP/P3 Contract Negotiation Financial Close Financial Close Contract Management Contract Management Termination or expiry Termination or expiry 11
Critical Initial Stages Needs Analysis/Project Selection/Project Preparation ISSUE QUESTION Clarity of requirements Is the scope of the P3 project clear? Commercial interest Is there market interest from sponsor and investors? Project information Project launch information. Bidder qualification and evaluation mechanics. Affordability Budgets and approvals in place? Public Sector team Resourced team to manage process. Governance structures. Appointment of advisers. Value for money assessment Legal Processes Approvals. Does exciting law support PPP/P3? Public authority powers. Risk Allocation & Terms Draft PPP/P3 Contract and Conditions 12
How should a Public Authority Prepare for a P3/PPP Project? Avoid the mistakes and learn from experience � Lack of clarity of required outcome. � Lack of resources (headcount and experience). � Lack of understanding of the private sector perspective. � Lack of understanding of what the private sector can achieve. � Lack of clarity about the public authority’s statutory powers. � Incomplete/inaccurate information provided to bidders. � Overly ambitious timetable. � Political support and consistency. Team of specialists � Financial, legal and technical & P3 Unit � Public Policy � Public Education � Regulatory Framework � Legal Framework � Standardisation of P3/PPP Contract Documents 13
PPP/P3 Concession/Project Agreement Design/Build Issues � Preparation of design – what flexibility to make changes from preliminary design � Responsibility for zoning, environmental, building permits � Construction program and performance standards � Supervision of construction � Bonding/guaranty requirements � Caps on Liability of Subcontractors � Insurance requirements � Force majeure/Delay Events � Reporting/Confidentiality 14
Concession Agreement/Project Agreement (Cont.) Financing Issues � Proposed cost of construction, financing and operation � Revenue allocation – profit benchmarking/clawbacks � Appropriation/public approvals � Rate setting � Performance payment criteria � Rights of senior debt holders � Equity at risk � Public buy-back of asset at expiration (residual risk transfer) Termination Issues (Planned or Unplanned) � Default and termination provisions � Step-in rights of senior debt holders � Dispute resolution � Handback requirements 15
Concession Agreement/Project Agreement (Cont.) Operation/Maintenance Issues � Performance standards during operation/control/modification � Supervision of operations � Special conditions and cooperation regarding emergencies, safety and security � Force majeure � Insurance requirements � Performance Security and Guarantees � Caps on Liability of Subcontractors � Guarantee of public access � Reporting/Confidentiality 16
Concession Agreement/Project Agreement (Cont.) Compensation Events/Material Adverse Events � Duties to expand/build-out facilities in case of increased demand/deterioration of service levels � Other directives � Construction and operation of competing facilities � Risk of future changes in law and regulations � Taxes � Permitting/regulatory delays � Closures � Litigation � Demand/usage � Concession term and option to extend/early termination � Remedies 17
What happens when things go wrong? 18
Part II: Managing Risks • Risk Management Principles • Typical Project Risks • Construction Risk • Operation Risk • Financing Risk • Mitigation of Risk 19
PPP/P3 Risk Management Principles Fundamental principle � Risk should not generally sit with Project Company � Risk should sit with the party best able to deal with it Project Company “flow down” risks assumed under Project Agreement Risks assumed by Project Company are risks of funders � Limited recourse financing � Principal security is the revenue generated by the Project More risk = higher price (generally) 20
Typical Project Risks “Cradle to Grave” approach to risk � Construction � Operation � Political � Land acquisition/environmental � Legal/regulatory � Third party interface Handback General Principle � Project Company must allocate risks to those best placed to manage the risk � Typically Building Contractor or FM Provider/Operator Time for completion � Delay events � Long stop date for completion 21
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