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P3 Toolkit

P3-VALUE Webinars

Webinar - Introduction to Public-Private Partnerships

Presentation: PDF
Webinar recording: Audio

P3-VALUE Webinar - August 23, 2013

Patrick DeCorla-Souza
P3 Program Manager
Office of Innovative Program Delivery

Course Outline

  • Lesson 1 - What are P3s?
  • Lesson 2 - Benefits & Challenges of P3s
  • Lesson 3 - Types of P3s and Examples
  • Lesson 4 - Financing Tools
  • Lesson 5 - MAP-21 and Implications for P3s
  • Lesson 6 - Introduction to P3 Toolkit
  • Course Summary and OIPD Role

Course Objectives

After taking this course you should be able to:

  • Explain what P3s are, and how they can play a part in project delivery
  • Describe the benefits of P3s and challenges to their use
  • List key USDOT project finance tools that work in conjunction with P3s
  • Describe MAP-21 implications for P3s
  • Access resources to learn more

Lesson 1 - What are P3s?

What is a P3?

  • Public-Private Partnership (P3)
    • P3s are contractual agreements between a public agency and a private entity that allow for greater private participation in the delivery of projects
    • More than Design-Bid-Build
    • FHWA's Office of Innovative Program Delivery (OIPD) focuses on P3s that involve private financing

Conventional vs. P3

Conventional Projects (design-bid-build) P3 Projects (design-build-finance-operate-maintain)
Public sector takes on most risks (except construction) Risks shared between public and private sector
Public Financing (mostly) Private Financing (mostly)
Lowest bidder Best suited/best value
Operations and maintenance (O&M) and ongoing rehabilitation (if any) carried out by public agency once constructed O&M carried out by private sector; ongoing rehabilitation overseen by public sector stewardship of P3 agreement

Key Terms

  • A Concession is a long term lease of public facilities to a private party (concessionaire)
    • For new or existing facilities
  • A Special Purpose Vehicle (SPV) is a legal entity created to fulfill narrow, specified tasks
    • Isolates the financial risks from the parent company or companies
    • SPV is insulated from financial risks of the parent companies
  • Equity defines ownership interest in a corporation
    • Requires a higher rate of return than debt holders as equity interest is riskier
    • Can be lost in certain instances
  • Debt is a bond or loan, with an obligation to pay interest and principal at a later date
    • Debt has payment priority over equity
    • Includes Private Activity Bonds (PABs) and Transportation Infrastructure and Finance Act (TIFIA) loans
  • Leveraging is the degree to which an investor or business is utilizing borrowed money (debt)
    • If a project is leveraged at 70/30, 70% debt and 30% equity

Example Toll Concession

Example Toll Concession flow chart

Text of the flow chart

  • Concessionaire (SPV)
    • Public Sponsor
      • Subsidy flows to Concessionaire
      • Shared Revenue flows from Concessionaire
    • Equity Investors
      • Equity Investments flow to Concessionaire
      • Dividends flow from Concessionaire
    • Facility
      • Tool Revenue flows to Concessionaire
      • Funds to build, maintain and operate flow from Concessionaire
    • Lenders
      • Bonds, loans flow to Concessionaire
      • Repayments flow from Concessionaire

Example Availability Payment

Example Availability Payment Flow chart

Text of the flow chart

  • Concessionaire (SPV)
    • Public Sponsor
      • Availability Payment flows to Concessionaire (SPV)
    • Equity Investors
      • Equity Investments flow to Concessionaire
      • Dividends flow from Concessionaire
    • Facility
      • Funds to build, maintain and operate flow from Concessionaire
      • Toll and Other Revenue flows back to Public Sponsor
    • Lenders
      • Bonds, loans flow to Concessionaire
      • Repayments flow from Concessionaire

The Role of Equity

Equity can leverage additional funding from a project's revenue stream and help fill the funding gap

Total funding needed, with amount financable by debt and the gap that may be filled by equity

Cash Flow waterfall image

Text of the Cash Flow Waterfall

  • Project Revenues ↓
    • Revenue Fund ↓
      • O&M Fund ↓
        • Rehabilitation & Reconstruction Reserve Fund ↓
          • Senior Debt Service (Reserve) Fund ↓
            • Subordinate Debt Service (Reserve) Fund ↓
              • O&M Reserve Fund ↓
                • Equity Distributions

P3s Are Not

  • A source of revenue
  • Privatization of public infrastructure
  • A fit for every project
  • The answer to all state and local problems
  • Free to implement
  • Easy
  • Guaranteed to succeed

Test Your Knowledge

True or False:
Private equity provides new revenue.

Questions

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*1 to ask a question by phone

Lesson 2 - Benefits & Challenges

Why Undertake a Project as a P3?

When the public sector can get more value using P3 approach

  • "Value" can be:
    • Potential cost savings
    • Accelerated project delivery
    • Innovation and cutting edge technologies
    • Transfer of risk
    • Budget and cost certainty
    • High and predictable service quality
    • Conserving public sector debt capacity

Other Potential P3 Benefits

  • Brings together multiple financing sources required for large-scale projects
  • Introduces life-cycle perspective - better quality up front and potential for lower maintenance costs
  • Improved customer focus
  • Leverages each partner's strengths

Potential P3 Benefits to Private Sector

  • Private concessionaires are looking for a return on investment that is:
    • Long-term
    • Stable, predictable
    • Moderate risk
  • Opportunity to increase return through efficiencies, innovation and managing risks
  • But "profits" of private sector are generally more visible - and controversial - than the benefits to the public sector

Challenges in Using P3s

  • Public acceptance
  • Enabling legislation
  • Organizational Capacity
    • Knowledge gap
    • Different oversight/contract management approach required
  • High cost of private capital
  • Revenue constraints
    • Federal and state toll restrictions
    • Revenue shortfalls due to lower tax receipts
  • Difficulty in predicting traffic and revenue
  • Difficulty in identifying and pricing risk and proper risk allocation
  • Long term nature of P3 Agreements
    • Concern about loss of upside revenue potential to public
    • Inability to anticipate future performance issues or public needs

Key Considerations for P3s

  • Legal Framework:
    • Is there the necessary legal and institutional framework in place to support a P3 arrangement?
  • Institutional Capacity:
    • Does the agency have the organizational capacity to deliver a P3?
  • Project Characteristics:
    • Does delivery of the project as a P3 represent a value proposition for the public sector?
  • Market Interest:
    • Are there a sufficient number of qualified bidders who are interested?

Test Your Knowledge

True or False:
Private capital generally has a lower cost than traditional public methods such as bonding.

Questions

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*1 to ask a question by phone

Lesson 3 - Types of P3s and Examples

Risk Transfer to Private Sector

Procurement Structure Design Risk Construction Risk Financial Risk O&M Risk Traffic & Revenue Risk
Design-Bid-Build (DBB)   Partly      
Design-Build (DB) X X      
Design-Build-Finance (DBF) X X X    
DBFOM w/Availability Payment X X X X  
DBFOM w/Toll Concession X X X X X

Risks Associated with P3s

  • P3s are designed to allocate different risks to the party best able to manage them
  • Efficient risk management by the P3 concessionaire can reduce the cost of risks transferred to the concessionaire, reducing overall cost and generating "value for money."

VDOT Example Risk Allocation

Risk Traditional (Design-Bid-Build) Design-Build Design-Build-Finance-Operate-Maintain
Change in Scope Public Public Public
Nepa Approvals Public Public Public
Permits Public Shared Private
Right of Way Public Public Shared
Utilities Public Shared Shared
Design Public Private Private
Ground Conditions Public Public Private
Hazmat Public Public Shared
Construction Private Private Private
QA/QC Public Shared Private
Security Public Public Shared
Final Acceptance Public Private Private
O & M Public Public Private
Financing Public Public Private
Force Majeure Public Shared Shared

Types of P3s by Payment Model

  • Availability Payment
    • Periodic payment tied to performance
  • Toll Concession
    • Max. allowed toll rate by year of operation
    • Revenue sharing based on rate of return
    • Max. net present value (NPV) of revenue
    • Revenue sharing based on forecast revenue vs. actual revenue

Example of Revenue Sharing: TxDOT

  • Revenue 0% to 15% above forecast
    • Public share = 0%
  • Revenue 15% to 18% above forecast
    • Public share = 12.5% of excess
  • Revenue 18% to 21% above forecast
    • Public share = 25%
  • Revenue 21% to 23% above forecast
    • Public share = 50%
  • Revenue more than 23% above forecast
    • Public share = 75%

Types of P3s by Project Scope

  • Greenfield: At least some new facility construction
  • Brownfield: Takeover of operation/maintenance for an existing facility, possibly with future enhancement; a.k.a. "asset monetization"

Test Your Knowledge

True or False:
A private entity can manage all risks more efficiently than the public sponsor.

Questions

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*1 to ask a question by phone

Lesson 4 - U.S. DOT Financing Tools

Financing Tools Supporting P3s

  • TIFIA: Flexible, low-cost lending that addresses challenges such as revenue ramp up risk
  • PABs: Allows private sector to participate in tax-exempt market
  • Other Innovative Financing Tools:
    • Grant Anticipation Revenue Vehicles (GARVEEs)
    • State Infrastructure Banks
    • Section 129 Loans
    • Other U.S. DOT credit support programs

Example: Capital Beltway HOT Lanes

  • 14-mile segment of beltway based on a fixed-price, fixed-time, design-build contract, 80-year concession
  • Two new HOT lanes in each direction with variable tolls, HOV3 free
  • Congestion-free network for transit service
  • Replacement of aging infrastructure, including more than 50 bridges and overpasses
  • Used PABs and TIFIA loans

Lane Configuration: Beltway (I-495) HOT Lanes

Capital Beltway Project Financing

Source Amount ($000s)
PABs 589,000
TIFIA 588,922
VDOT Contribution 408,895
Equity 348,695
Interest Income During Construction 70,793
Total Sources 2,006,305

 

Uses Amount ($000s)
Construction, Oversight & Other Administrative Costs 1,508,477
Development Costs 65,936
Net Financing Costs 152,798
Ramp up Reserve 30,000
Revenue Stabilization Reserve 50,000
Capex Reserve 19,000
Debt Service Reserve 58,900
Project Enhancement Fund 15,000
Contingency 106,193
Total Uses 2,006,304

P3s Transfer Significant Financial Risks

  • Examples:
    • South Bay Expressway, San Diego, CA
    • Pocahontas Parkway, Richmond, VA
  • Impacts:
    • Equity holders absorb financial losses
    • Traveling public and government sponsor were insulated from financial impact
    • Two quality projects continue to serve users without interruption
  • Lessons:
    • Toll forecasting is difficult
    • P3s designed so that private partners accept financial exposure in exchange for their anticipated rate of return

Test Your Knowledge

True or False:
A P3 project may use financing from both PABs and TIFIA.

Questions

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*1 to ask a question by phone

Lesson 5 - MAP-21 Legislation and Implications for P3s

MAP-21 Implications

  • Programs
    • TIFIA: Expanded availability of low cost federal loans with flexible terms
    • Major Projects: Demonstrate consideration of P3 procurement option in Finance Plan
  • Tools and Guides
    • Model P3 contracts
    • Best practices to deliver value and protect the public interest
  • Technical assistance
    • U.S. DOT direct assistance
    • Center for Excellence in Project Finance - training and sharing of best practices

TIFIA

  • TIFIA is a federal lending program for credit assistance to transportation projects
    • Low interest rates and flexible terms
  • Prior to MAP-21 TIFIA budget would have supported about $1b. per year in lending
  • MAP-21 funding allows about $17 b. in lending over two years

Major Projects & P3s

  • Major Projects are projects with costs larger than $500 million receiving federal grants.
  • Project owners are required to demonstrate consideration of the "appropriateness of P3s in delivering the project"
  • FHWA has developed a P3 Screening Tool called P3-SCREEN available at: http://www.fhwa.dot.gov/ipd/p3/toolkit/checklists/

Model Contracts

  • By April 1, 2014 develop Model P3 Contracts for the most popular types of P3s
  • States will be encouraged to use Model Contracts as a template in their own contracts
  • FHWA initiated the model contract effort with a "Listening Session" to hear views on what should be in these contracts
  • Models will be educational

Best Practices

  • FHWA is required to post on its website "best practices" in the P3 area to:
    • Consider how public officials and the private sector can work together in the development of P3 projects
    • Include policies and techniques to protect the interests of the traveling public and State and local governments in P3 transactions.
  • FHWA is developing a Best Practices Guidebook

Technical Assistance & Center for Excellence

  • FHWA may provide technical assistance to State and local governments regarding P3s
    • Including assistance in whether P3s provide value as compared to traditional procurements
  • MAP-21 directs the creation of a "Center for Excellence in Project Finance"
    • Center to provide assistance, information, training, and best practices in project finance

Lesson 6 - P3 Toolkit

Innovative Delivery  flow of Revenue - Finance- Procurement

OIPD's Role in Transportation P3s

  • Tools, technical resources and training
  • Technical assistance
  • Facilitate P3s
  • TIFIA Federal credit support

P3 Toolkit

  • Legislation and Policy
    • Catalog of State experience in protecting the public interest while attracting private investment
  • Planning, Evaluation and Development
    • Educational tool - P3 Value for Money Analysis to Learn and Understand Evaluation (P3-VALUE)
    • Screening tool - P3-SCREEN
  • Procurement
    • Standardized contracts, best practices
  • Monitoring and Oversight
    • Best practices

Types of Tools

  • Fact sheets
    • Succinct information on topics of interest
  • Primers and Guides
    • Primers - High-level information
    • Guides - Detailed information for practitioners
  • Educational Tools
    • To help learn the evaluation concepts - P3-VALUE
  • Accessible at http://www.fhwa.dot.gov/ipd/p3/toolkit/

P3-VALUE Analytical Process

Value for Money (VfM) Analysis: Financial impacts from the perspective of the procuring agency

VfM Analysis with PSC and Shadow Bid analysis

P3-VALUE Tools

  • Risk Assessment Tool
    • Assists in identifying risks, risk allocation, mitigation strategies, potential cost and schedule impacts
  • Public Sector Comparator (PSC) Tool
    • Calculates risk-adjusted life cycle costs of conventional procurement
  • Shadow Bid Tool
    • Calculates costs of P3 procurement, including payments to private partner
  • Financial Assessment Tool
    • Compares PSC and Shadow Bid costs to calculate value for money

P3-VALUE Tool Integration

Chart showing P3 Tool Integration

Questions

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*1 to ask a question by phone

Course Summary

  • Lesson 1 - What are P3s?
  • Lesson 2 - Benefits and Challenges of P3s
  • Lesson 3 - Types of P3s & Examples
  • Lesson 4 - Financing Tools
  • Lesson 5 - MAP-21 and Implications for P3s
  • Lesson 6 - Introduction to P3 Toolkit
  • Course Summary and OIPD Role

For More Information

IPD Website:
www.fhwa.dot.gov/ipd/

IPD P3 Website:
www.fhwa.dot.gov/ipd/p3/

IPD Academy StaffNet Website:
http://staffnet.fhwa.dot.gov/ipd/academy.htm

Upcoming P3 Webinars

  • Sept 5: P3 Evaluation Overview
  • Sept 20: Project Risk Assessment 201

To register, please visit http://www.nhi.fhwa.dot.gov/resources/webconference/eventcalendar.aspx

Contact Information

Patrick DeCorla-Souza
P3 Program Manager
Office of Innovative Program Delivery

Federal Highway Administration
(202) 366-4076
Patrick.DeCorla-Souza@dot.gov

Thay N. Bishop, CPA, CTP
Senior Program Advisor/Capacity Builder
Office of Innovative Program Delivery

Federal Highway Administration
(404) 562-3695
Thay.Bishop@dot.gov

Questions

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Federal Highway Administration | 1200 New Jersey Avenue, SE | Washington, DC 20590 | 202-366-4000
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