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Public-Private Partnership (P3) Procurement: A Guide for Public Owners

March 2019
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7. Selection to Commercial and Financial Close

This chapter provides guidance on activities and considerations after selection through commercial and financial close. Table 13 presents the key goals and activities for this phase of the procurement.

Table 13. Goals and Activities – From Selection through Commercial and Financial Close
Goals after Selection Activities
Commercial and Financial Close
  • Negotiate the P3 agreement
  • Fulfill requirements of award and contract execution
  • Update management and stakeholders and obtain any required approvals to Commercial Close
  • Commercial close
  • Financial close

7.1. Negotiation of the P3 Agreement

The ability to engage in negotiations following selection of a proposer and prior to award, although not an essential requirement for P3s, has served as a highly useful tool for State and local agencies using P3s. Pre-award negotiations with the selected firm can proceed much more expeditiously than competitive negotiations with multiple firms. Like competitive negotiations, pre-award negotiations enable the agency to obtain modifications to the proposal in key areas (although for highway P3s, FHWA regulations limit the ability to obtain modifications through pre-award negotiations). In competitive procurements, pre-award negotiations are typically limited to:

  • Identifying and incorporating proposal commitments (over and above contract requirements).
  • Incorporating design and other concepts (e.g., ATCs) from selected proposer's proposal and those from unsuccessful proposers, including pricing impacts.
  • Adjustments in favor of the agency for any errors or gaps in the base case financial model.
  • Pricing adjustments due to intervening causes; e.g., movement in benchmark interest rates.
  • Other matters at the agency's election. 139

Prior to execution of a P3 agreement, the agency will review the selected proposer's proposal to identify those elements of the proposal that are deemed by the agency to exceed the requirements of the agreement (and which may have been viewed as such during the evaluation process). The agency will then send the selected proposer the list of perceived commitments and the parties will work together to develop a consolidated list of commitments that can be incorporated into the P3 agreement, usually in an exhibit. Once incorporated into the P3 agreement, the proposal commitments will be contractually binding on the concessionaire. This ensures that the agency will receive the benefits of the proposed added-value commitments that were included in the proposal and that may have been taken into consideration in the evaluation process.

Incorporating ATCs. Another major benefit offered by pre-award negotiations relates to the agency's ability to use competitive leverage to ask the selected firm to incorporate innovative concepts submitted by the unsuccessful proposers. This option is not available during competitive negotiations since that process involves requests for multiple firms to submit revised proposals, so that disclosure of one proposer's ideas to another would constitute an unfair practice that is prohibited under the Federal requirements for full, open and fair competition.

The RFP will describe the process for incorporation of any ATCs approved by the agency into the P3 agreement. The proposer's pre-approved ATCs may be incorporated into an exhibit, along with any conditions that may have been included in the agency's approvals. In addition, the agency may wish to incorporate ATCs from unsuccessful proposers into the P3 agreement. In such case, the agency will advise the selected proposer of the proposed ATC and the parties will negotiate any resulting change in price. The RFP also usually allows the agency to incorporate ATCs submitted by unsuccessful proposers into the P3 agreement through a Change Order after execution of the agreement. This option is not available during competitive negotiations, since that process involves requests for multiple firms to submit revised proposals, so that disclosure of one proposer's ideas to another would constitute an unfair practice that is prohibited under the Federal requirements for full, open, and fair competition.

Some P3 RFPs include a provision that provides the agency with the ability to draw on the selected proposer's proposal security if such proposer fails to engage in "good faith negotiations" with the agency. In such case, the RFP may describe the circumstances under which the selected proposer would be "deemed to have failed to engage in good faith negotiations." For the NTE project in Texas, for example, the selected proposer would forfeit its proposal security if (a) the proposer failed to attend and actively participate in reasonably scheduled negotiation meetings with TxDOT or (b) the proposer insisted upon terms or conditions for any documents to be negotiated or provided by the concessionaire that were inconsistent with the P3 agreement documents.

North Tarrant Expressway, Texas Negotiations

For the NTE Segments 1 & 2W project, TxDOT and the selected proposer had to negotiate and finalize an independent engineer agreement (IE Agreement) that was required to be in place prior to commercial close. Both the selected proposer and TxDOT had to agree to a negotiation schedule for the IE Agreement and to attend and actively participate in reasonably scheduled negotiation meetings. If the selected proposer failed to negotiate in good faith, as noted above, the proposer ran the risk of forfeiting its proposal security. However, if TxDOT or the independent engineer failed to negotiate in good faith, the proposer was thereby excused from reaching commercial close by the stated deadline and did not forfeit its proposal security. The Facility Agreement for NTE Segments 3A and 3B was a fully negotiated deal.

Even for the highly streamlined P3 procurements in Canada, the procurement process incorporates a limited negotiation period following selection of the preferred proponent, and often a reservation by the agency of the right to conduct broader negotiations. The right of the selected proposer to negotiate the terms of the project agreement following selection is limited to minor, mechanical amendments. However, RFPs for projects in Ontario may include a reservation of the right to identify the preferred proponent following negotiations with the first and second-ranked proposers either sequentially (if negotiations fail with the first-ranked proposer), or contemporaneously. Ontario's Highway 407 RFP provided that the agency may use the negotiations process to negotiate any aspect of the first- or second-ranked proposals or the project agreement, including any amendments to the project agreement required to revise the scope of the project if all proposal prices exceed the agency's project budget. Furthermore, if the final credit spreads are not consistent with the indicative credit spread benchmarks of the preferred proponent, or if the preferred proponent's lenders fail to provide satisfactory lenders' commitment letters and the situation is not rectified to the agencies' satisfaction, the agencies may, in their sole discretion, choose from a number of courses of action, including commencing negotiations with the second-ranked proposer, engaging in competitive negotiations with the two highest ranked proposers, and re-determining the rankings and proceeding with the preferred proponent. The NTE and Purple Line projects both included a pre-award negotiation step.

7.2. Requirements for Award and Execution of Contract

Requirements for award and execution of the contract (also known as commercial close) vary depending on agency practice, and may require approval by the agency's governing body or another agency. The requirements to be fulfilled by the proposer as a condition to award should be specified in the ITP. These typically include but are not limited to execution and delivery of the project agreement by the proposer, delivery of performance security, any parent guarantees, evidence of insurance, evidence of authorization, 140 legal opinions and other ancillary documents. For revenue-positive projects, the proposer may also be required to deposit an upfront payment. For projects where financial close occurs subsequent to commercial close, the proposer may be required to deliver a schedule identifying the timetable and steps for achieving financial close, as well as financial close security to ensure timely financing for the project. For some projects, financial close may be scheduled to occur concurrently with commercial close.

In both the U.S. and Canada, proposers are typically required to include commitment letters with proposals, confirming lenders' willingness to provide debt financing backed with credit committee approval. The commitment letters may contain conditions such as completion of due diligence and, in the case of the Denver Eagle P3 project, "all normal and customary contingencies or conditions precedent to funding."

For the NTE project, the conditions to commercial close included the provision of, among other things:

  • Evidence of corporate approval of the P3 agreement and certain other agreements, and of due authorization, execution, delivery and performance of each agreement.
  • A legal opinion from the concessionaire's counsel meeting RFP requirements.
  • Evidence of insurance required by the P3 agreement.
  • Evidence of licensing.
  • Various other agreements contemplated by the transaction (lease, lease escrow, intellectual property escrow, facility trust agreement, tolling services agreement, independent engineer agreement, and related documents).
  • An approved DBE Performance Plan.
  • Commitments to provide payment and performance security upon start of construction, in the form of either:
    1. A commitment letter from a licensed Surety regarding payment and performance bonds; or
    2. A commitment letter from a financial institution committing to provide a payment and performance letter of credit.
  • If applicable, guarantees from guarantor(s) in a form approved by TxDOT.
  • Security for the pre-development agreement (PDA) in a form approved by TxDOT.
  • If applicable, an executed lender's direct agreement (in the form attached to the RFP) and copies of executed initial funding agreements and initial security documents.
  • If applicable, a valid and binding form of financial close security.
  • The executed PDA.

The RFP for VDOT's Transform 66 Outside the Beltway project included similar conditions to commercial close.

7.3. Other Issues that May Affect Commercial Close

The RFP for a P3 project will identify the conditions for execution of the P3, which typically include execution of the P3 agreement and related documents as described in section 7.2. Where financial close is to occur concurrently with commercial close, the P3 agreement may specify that failure to obtain financing will result in forfeiture of the concessionaire's proposal security.

The execution of agreements for some projects may require approvals or reviews from either State or Federal agencies. For the NTE and LBJ Express projects, for example, State law required submittal of the P3 agreements to the State attorney general for a determination that such agreements are "legally sufficient." State law also required submittal of the P3 agreement and other documentation to the legislative budget board and the State auditor as well as publication of certain of the selected proposer's financial information.

As described in Appendix B, the enabling legislation for the Purple Line P3 procurement required a report to be submitted to the Maryland General Assembly with a 30-day review and comment period before submittal of the agreement to the Maryland Board of Public Works (BPW) for approval. These requirements serve to ensure transparency by providing the public with access to information regarding the solicitation process and the contract terms.

Agencies should review applicable State and local laws to determine the requirements that may apply with respect to P3 agreements in their jurisdiction.

7.4. Contract Start-up

Following commercial close, the activities to be undertaken are dictated by the terms of the P3 agreement. Although the primary focus at this point is on activities relating to the financial close, the agreement usually identifies other tasks to be performed during the period prior to financial close. For some projects, the agreement may provide for a limited notice to proceed with early work (or the right to proceed without a formal notice once specified conditions are met). In some cases, early work is undertaken at the concessionaire's risk, and in other cases the agency may agree to reimburse certain of the costs incurred by the concessionaire. The concessionaire is usually required to provide specified deliverables to the agency; for example, a detailed project schedule and updates to other information included in the proposal. The concessionaire will normally proceed with design activities and undertake other preliminary efforts to accelerate the post-financing project delivery schedule.

If the concessionaire's key contracts for the design-build phase (for example with its DB contractor and equipment suppliers) were not finalized prior to commercial close, they should be finalized prior to financial close and reviewed for compliance by the agency. An agreement with the O&M contractor should also be finalized prior to financial close, although certain terms may be subject to further review as the project proceeds.

This interim period also offers the agency an opportunity to prepare its team for administration of the P3 agreement. The procurement team may be asked to provide training sessions to ensure that the individuals responsible for contract administration are familiar with the contract terms and conditions, including commitments made by the concessionaire.

7.5. Financial Close

Financial close may occur concurrently with commercial close or sometime thereafter. If financial close is not concurrent with commercial close, as noted in section 7.2, the conditions to commercial close set forth in the RFP may include various requirements to ensure that financial close occurs as scheduled. One such condition is for the concessionaire to provide financial close security, and if financial close does not occur within the timeline set forth in the P3 agreement, the concessionaire's financial close security may be subject to forfeiture.

The requirements for financial close will vary from project to project, but P3 agreements typically include the following conditions:

  • Satisfaction of all of the conditions to commercial close, including execution of the P3 agreement.
  • Executed initial funding documents and initial security documents.
  • Executed lenders' direct agreement.
  • Legal opinions if not provided at commercial close.
  • An update of the audit and opinion obtained from the independent model auditor regarding the suitability of the base case financial model that incorporates any agreed upon proposed amendments to the base case financial model.

While the majority of the responsibility for achieving financial close belongs to the concessionaire, agencies also have some responsibilities in the financial close process.

7.5.1. Review of Loan Documents

A number of funding/financing agreements and loan documents are required in connection with the concessionaire's financing obligations under the P3 agreement (or under the RFP if financial close will occur concurrently with commercial close). The agency's primary concerns relate to requirements ensuring that the funds and project debt are used for the purposes authorized by the agreement and that the agency's interests are protected. For example, a P3 agreement may include provisions that:

  • Restrict lenders from obtaining a security interest in the agency's interest in the project, the project right-of-way (ROW) or the agency's rights under the P3 agreement.
  • Require the debt instruments to include a provision stating that the principal and interest owed under such instruments are valid claims against only the concessionaire and are not the obligation of the agency.
  • Obligate the lenders to acknowledge that they do not have the right to seek damages from the agency except with respect to the agency's breach of any obligations that it owes to lenders directly or obligations owed to the lender under the P3 agreement where the lender has succeeded to the concessionaire's interests.
7.5.2. Legal Opinions

Due to the size and complexity of P3 transactions, as well as the fact that the transactions include a finance component, each party involved in the transaction will likely have to provide legal opinions relating to the documents they sign. The documents required for commercial close (or, if not provided at commercial close, for financial close) typically include legal opinions from the agency's counsel as well as counsel to the concessionaire and key contractors, and financial close likely will require additional legal opinions from the agency, concessionaire, and others. The opinion from the agency's counsel should cover matters such as due authorization, execution, delivery, enforceability of the documents signed by the agency, confirmation that all required approvals have been obtained from third parties, and disclosure of litigation or other contracts relevant to the transaction. Opinions from other counsel will cover comparable issues with respect to their clients and the documents signed by their clients.

Opinions regarding authorization, execution and delivery serve as a form of due diligence and should be reviewed by competent counsel. Similarly, opinions disclosing relevant litigation and contracts should be provided by counsel with relevant knowledge. An enforceability opinion requires the opinion giver to review the project documents with reference to applicable law and identify aspects of the documents that the courts may not be willing to enforce. As an example, enforceability opinions typically include qualifications and exceptions for situations involving bankruptcy; if one of the parties becomes insolvent, bankruptcy law will apply and the party may be entitled to certain rights that are inconsistent with enforcement of the contract. Opinion letters also typically include a number of assumptions made by legal counsel relevant to the opinions given. P3 transactions are generally governed by the law of the State where the project is located, and enforceability opinions must be issued by attorneys licensed in that State.

Legal opinions are not normally required for DBB or DB contracts, so agency procurement personnel may not be familiar with the underlying issues associated with opinions. It is also possible that agency counsel involved in the transaction will not have been called upon to issue opinions for prior deals, in which case they may want to obtain copies of opinions issued with respect to other agency transactions such as bond deals. It is advisable for the procurement team to address issues associated with legal opinions early in the procurement process, so as to avoid unnecessary delays in the closing process. This both ensures that agency counsel will be in a position to issue necessary opinions when the deal closes, and that issues important to agency counsel are incorporated into the opinions to be provided by other counsel.

The parties should be aware that the legal opinion forms included in the procurement package are templates that will be modified by the issuing attorneys to conform to their standard practices and to address specific issues noted in legal review of the final documents. The closing schedule should require draft opinions to be provided for review and comment by the opinion recipients, and should include sufficient time to negotiate the terms of the final opinions. The American Bar Association, and various State and local bar associations, have published reports regarding legal opinions that should be consulted in drafting and negotiating legal opinions for P3 transactions. A list of reports can be found at https://www.americanbar.org/groups/business_law/migrated/tribar/.

7.5.3. Issues Relating to Financial Close

It is common practice among P3 projects in both the United States and Canada for the agency to assume interest rate risk between the benchmark rates and base rate at financial close for a specified period (the interest rate protection period), although there are many variations in approach. This practice provides the concessionaire an incentive to achieve financial close before the date the interest rate risk transfers to the concessionaire. If interest rates increase during the interest rate protection period, the agency will be responsible for any increased costs to the developer resulting from the increase. The agencies involved in both the NTE Segments 1 and 2W project and the Denver Eagle P3 project, for example, bore the risk of changes in interest rates (either positive or negative) for the period specified in the P3 agreements. For the NTE project, TxDOT bore the interest rate risk from seven days prior to the proposal due date to the earlier of (i) the date of financial close or (ii) the date specified in the P3 agreement as the interest rate protection end date, which was more than 1 year after the proposal due date. The developer reached financial close nine days before the interest rate protection period end date and, since interest rates went up during the period, the agency was responsible for paying an additional amount with public funds. For the Denver Eagle P3 project, the agency bore the interest rate risk for the period between the date the proposal was submitted and the earlier of (i) 6 months after the effective date of the proposal or (ii) the date of financial close. In Ontario, the agency also reserves the right to terminate the project agreement in the event of a severe market disruption.

For P3 projects in the United States, financial close often occurs months after commercial close. This may change as the market matures. In Canada's more mature market, financial close typically occurs within a day of commercial close, as the parties would not proceed to commercial close until the completion of all requirements for financial close other than rate-setting and insertion/amendment of related figures and provisions (and subject to formal delivery of documents).

The P3 agreement (or ITP if financial and commercial close occur concurrently) will identify circumstances that excuse the concessionaire for failure to reach financial close by the specified deadline. Justifiable reasons should relate to circumstances that are beyond the concessionaire's control, which may include the following, depending on the project.

  1. The agency's failure to complete the NEPA process prior to the deadline for financial close, or litigation challenging the NEPA review that is filed before lapse of the applicable statute of limitations that remains pending on the deadline for financial close.
  2. The agency's failure to deliver an opinion from its counsel in favor of lenders (if not previously provided).
  3. If the concessionaire's original financing includes PABs:
    • The agency's refusal or unreasonable delay in conduit issuance.
    • The agency's counsel's refusal to allow closing, where bond counsel gives an unqualified opinion sufficient to close (unless the opinion is unreasonable).
    • The agency's counsel's delay in authorizing the closing (beyond allowed turnaround times).
    • The failure of the PABs issuer or the agency to comply with the terms of the PABs agreement or the PABs allocation is rescinded or modified by the U.S. DOT.
    • The PABs allocation is terminated or expired such that the allocation is not available for financing.
  4. If the concessionaire's original financing includes TIFIA/RRIF:
    • The inability of U.S. DOT to close financing or provide financing on or prior to the deadline for financial close.
    • U.S. DOT's determination, through no fault of the concessionaire, to provide less than the full amount of funding assumed in the term sheet.
    • U.S. DOT's insistence, through no fault of the concessionaire, on materially inconsistent terms than those that were in the term sheet.
  5. A temporary restraining order or other form of injunction by a court that prohibits prosecution of any portion of the work that remains pending on the deadline for financial close.
7.5.4. Transportation Infrastructure Finance and Innovation Act

The TIFIA closing may occur simultaneously with the rest of the project financing, or may occur separately. Most commonly, the PABs or other project debt will price, and bond purchase agreements will be executed, prior to the TIFIA loan closing, but be issued shortly after. For the Purple Line project, the TIFIA loan closed on the same day the PABs were priced but several days before the PABs were issued. A TIFIA closing occurs when the U.S. DOT enters into a credit agreement and a term sheet with the borrower, which could be the P3 project sponsor or the P3 project's private sector partner. The credit agreement will articulate the type of TIFIA credit assistance, as well as the amount and terms of the TIFIA credit assistance, and the disbursement and repayment conditions.

7.5.5. Private Activity Bonds

As noted in section 2.4.4, PABs are issued by a public entity authorized under applicable State law to issue these types of bonds, with the P3 project's private sector partner liable for repayment of the obligation. A PABs closing involves the issuance of the bonds by the authorized public entity and the loan and transfer of the proceeds of the bond issuance to the P3 project's private sector partner. The concessionaire must use the bond proceeds to perform its responsibilities on the P3 project and for other uses related to the bond issuance, and must repay the issuer for the loaned bond proceeds with revenues or payments received in the course of performing the work on the P3 project.

7.5.6. Other Lender Requirements and Agreements

The P3 agreement typically includes provisions providing assurance to lenders that they have the right to step into the concessionaire's position in the event of a default. Typically, the agency and lender enter into a "Direct Agreement" describing each party's rights and remedies, and identifying the process to be followed if a concessionaire default occurs. FHWA's Model Public-Private Partnerships Toll Concessions Contract Guide includes a discussion regarding lender's issues. 141

Footnotes

139 See additional discussion regarding post-selection negotiations in Establishing A Public-Private Partnership Program: A Primer, dated November 2012, which can be accessed at https://www.fhwa.dot.gov/ipd/pdfs/p3/p3_establishing_a_p3_program_112312.pdf. [ Return to note 139. ]

140 That is, evidence that all requisite action has been taken by the governing body of the entity to authorize the transaction. [ Return to note 140. ]

141 Federal Highway Administration, Model Public-Private Partnerships Toll Concessions Contract Guide - Draft Addendum (Part 2), "Chapter 11. Lender Rights and Direct Agreement." Available at: https://www.fhwa.dot.gov/ipd/p3/toolkit/publications/model_contract_guides/core_toll_concession_part2/. [ Return to note 141. ]

 

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