Public Private Partnerships for Highway Projects

Public Private Partnerships for Highway Projects Project Selection and Decision Analysis

Dr. Mohamed Hegab, PE, PMP, CCM

ABOUT THE AUTHOR

Dr. Mohamed Hegab has over 20 years of diverse range of experience managing the project controls, budget, schedule, and claims on public, commercial, and construction projects. He has particular extensive expertise in project scheduling, budgeting, claim analysis, negotiations, and dispute resolution, cost estimating and controls. He has expertise in productivity analysis and improvement, and reengineering business processes. He is teaching project management, scheduling, cost estimating, labor productivity, and contract and specifications at California State University Northridge. He has authored several innovative technical papers that been published in prestigious journals.

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Public Private Partnerships for Highway Projects

Table of Contents ABOUT THE AUTHOR ......................................................................................2 INTRODUCTION .............................................................................................12 BACKGROUND INFORMATION ................................................................................ 14 Design-Bid-Build (DBB) Project Delivery .................................................... 15 Design-Build (DB) Project Delivery............................................................. 15 P3 Arrangements ....................................................................................... 16 ADVANTAGES AND LIMITS OF P3 PROJECTS ............................................................. 17 Possible P3 Advantages ............................................................................. 17 Important Risks Transferred through P3 Arrangements ........................... 18 Possible Limits to the P3 Structure ............................................................ 21 OBJECTIVES OF P3 PROJECTS IN THE STATE OF CALIFORNIA ......................................... 24 Government Partnerships with Other Public Agencies .............................. 24 A TRIO OF GOVERNMENT AGENCIES ALLOWED TO USE P3 CONTRACTS FOR SPECIFIC PROJECTS .......................................................................................................... 25 Caltrans ..................................................................................................... 25 AOC and the Judicial Council ..................................................................... 27 The HSRA ................................................................................................... 27 Project Phases ............................................................................................. 27 Conception, Planning Appraisal and Feasibility ...................................... 28 Design Phase ............................................................................................ 28 Construction .............................................................................................. 29 Maintenance and Operation .................................................................... 30 Financing ................................................................................................... 30 Bundling Projects ...................................................................................... 31 OPTIONS FOR P3 DELIVERY IN NEW INFRASTRUCTURE CONSTRUCTION ......................... 32 New Infrastructure Construction Private Fee Service Contracts ................ 32 P3 CHOICES FOR NEW FACILITIES........................................................................... 39 The Design Build Option ............................................................................ 39 Responsibilities and Roles in a Design-Build .............................................. 39 Definition of a Project ................................................................................ 40 Practices in Procurement ........................................................................... 40 Design-Build Improvements Using SAFETEA-LU and MAP-21 ................... 41 Projects ...................................................................................................... 42 THE DESIGN-BUILD-OPERATE-MAINTAIN PROJECT MODEL ........................................ 42

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Table of Contents Responsibilities ..........................................................................................43 Benefits ......................................................................................................43 Lifecycle Costing .........................................................................................43 The Procurement Process...........................................................................44 Specifications that are Standard ................................................................44 Projects ......................................................................................................45 DESIGN-BUILD-FINANCE.......................................................................................45 Two Main Reasons for DBF Procurements .................................................45 Financing Options for the Private Sector ...................................................46 Responsibilities and Roles in Design-Build Financing .................................46 Benefits ......................................................................................................47 Not Debt, but a Deferred Payment ............................................................48 DBF Procurement Practices ........................................................................48 Resources ...................................................................................................48 Projects ......................................................................................................48 DESIGN-BUILD-FINANCE-OPERATE-MAINTAIN .........................................................49 A Variety of Project Sponsors .....................................................................49 Responsibilities and Roles in a Design-Build-Finance-Operate-Maintain Project ........................................................................................................50 DBFOM (Design-Build-Finance-Operate-Maintain) Models.......................51 Projects ......................................................................................................52 EXISTING INFRASTRUCTURE FACILITIES .....................................................................54 O & M Concession Agreements..................................................................54 Responsibilities ..........................................................................................54 Practices in Asset Management.................................................................54 Projects ......................................................................................................55 LONG TERM LEASE CONCESSION AGREEMENTS .........................................................55 Options for Long Term Leases ....................................................................55 Recent Experience ......................................................................................56 Factors That Affect the Use of Long-Term Leases ......................................58 Possible Advantages of Long Term Leases .................................................58 Issues of Public Policy Associated with Long Term Leases .........................59 Projects ......................................................................................................60 DIFFERENT PROJECT DELIVERY METHODS COMPARED TO P3 ........................ 61 TRADITIONAL DESIGN-BID-BUILD (D-B-B)...............................................................61 Traditional Design-Bid-Build (D-B-B) Advantages ......................................63

Public Private Partnerships for Highway Projects Traditional Design-Bid-Build (D-B-B) Disadvantages ................................. 63 ALTERNATIVE DELIVERY METHODS ......................................................................... 63 DESIGN-BUILD (D-B) .......................................................................................... 64 Design-Build Advantages........................................................................... 65 Design-Build Disadvantages ...................................................................... 66 DESIGN-BUILD-OPERATE-MAINTAIN (DBOM) ........................................................ 68 Design-Build-Operate-Maintain (DBOM) Advantages .............................. 68 Design-Build-Operate-Maintain (DBOM) Disadvantages .......................... 70 DESIGN-BUILD-FINANCE-OPERATE-MAINTAIN (DBFOM) ......................................... 71 Design Build Finance Operate Maintain (DBFOM) Advantages ................ 72 Design Build Finance Operate Maintain (DBFOM) Disadvantages............ 73 ASSET PRIVATIZATION.......................................................................................... 74 PUBLIC AND PRIVATE SECTOR RESPONSIBILITIES........................................................ 75 SELECTION CRITERIA FOR P3 PROJECTS.................................................................... 77 BENEFITS TO THE PUBLIC ENTITY FROM PRIVATE FINANCING ....................................... 77 FUTURE REVENUE SOURCE TO REPAY THE PRIVATE PARTNER ...................................... 77 TRANSFERABILITY OF RISKS ................................................................................... 78 COMPLEXITY OF THE PROJECT................................................................................ 78 PROJECT SELECTION ATTRIBUTES ........................................................................... 78 SCREENING AND SELECTION PROCESS ..................................................................... 79 PROJECT SUITABILITY ........................................................................................... 80 Prospective for Further Benefits ................................................................ 80 Organization Readiness ............................................................................. 80 Project Readiness ...................................................................................... 81 Private Sector Interest ............................................................................... 81 Economic Possibility .................................................................................. 81 Project Scope ............................................................................................. 82 PROJECT SELECTION ............................................................................................ 82 PROJECT NOMINATION ........................................................................................ 83 PROJECT APPROVAL ............................................................................................ 83 PROJECT PIPELINE ............................................................................................... 83 P3 CONTRACTUAL STRUCTURE ......................................................................84 SUMMARY OF P3 OPTIONS................................................................................... 86 SUPPLY AGREEMENT ........................................................................................... 86

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Table of Contents PUBLIC ENTITY'S RESPONSIBILITIES .........................................................................86 PRIVATE ENTITY'S RESPONSIBILITY ..........................................................................87 MANAGEMENT AGREEMENT .................................................................................88 PUBLIC ENTITY'S RESPONSIBILITIES .........................................................................88 PRIVATE ENTITY'S RESPONSIBILITY ..........................................................................88 LEASE ...............................................................................................................90 Public Entity's Responsibilities ...................................................................90 Private Entity's Responsibilities .................................................................90 CONCESSIONS.....................................................................................................92 Public Entity's Responsibilities ...................................................................93 Private Entity's Responsibilities..................................................................93 ASSET PRIVATIZATION ..........................................................................................95 OVERVIEW OF CONCESSIONS .................................................................................96 DIAGRAM ..........................................................................................................97 PARTIES ............................................................................................................98 PUBLIC SECTOR...................................................................................................98 GOVERNMENT CONSULTANT .................................................................................99 PROJECT COMPANY ...........................................................................................101 FINANCE..........................................................................................................103 SPONSOR.........................................................................................................104 EXPERTISE........................................................................................................107 CUSTOMER ......................................................................................................109 SOURCES OF FINANCE ........................................................................................109 HOST GOVERNMENT ..........................................................................................110 INSTITUTIONAL INVESTOR....................................................................................111 BANK ..............................................................................................................111 MULTI-LATERAL DEVELOPMENT INSTITUTIONS.........................................................112 ECA ...............................................................................................................113 PRIVATE FIRM ...................................................................................................115 PROJECT AGREEMENTS................................................................................ 116 RETAINER ........................................................................................................117 Goals of using Retainer ............................................................................118 Retainer Contents ....................................................................................119 Fees ..........................................................................................................120

Public Private Partnerships for Highway Projects CONCESSION.................................................................................................... 123 Concession Agreement ............................................................................ 123 Goals of using Concession Agreements ................................................... 125 Concession Agreement Highlights ........................................................... 127 Performance Guarantees to the Government. ........................................ 140 DESIGN, CONSTRUCTION, OPERATION AND MAINTENANCE....................................... 141 The Government’s Concerns .................................................................... 141 EPC Agreement ........................................................................................ 143 Supply Agreement ................................................................................... 145 O&M Agreement ..................................................................................... 146 CUSTOMER AGREEMENTS................................................................................... 148 Off-Take Agreement ................................................................................ 148 Government Concerns ............................................................................. 148 P3 PROJECT LEGAL ASPECTS FOR CALIFORNIA ........................................................ 150 INTRODUCTION ................................................................................................ 150 TRADITIONAL BARRIERS TO P3 CONTRACTS ........................................................... 152 STATUTORY AUTHORIZATION .............................................................................. 152 INSURANCE, PAYMENT AND PERFORMANCE BOND, AND INDEMNITY ........ 158 INSURANCE...................................................................................................... 158 Insurance Coverage and Policies ............................................................. 158 Insurers .................................................................................................... 158 Deductibles .............................................................................................. 158 Primary Coverage .................................................................................... 159 Verification of Coverage .......................................................................... 159 Requirements of Contractor Insurance.................................................... 160 Project-Explicit insurance ........................................................................ 160 Waivers and Endorsements ..................................................................... 161 Subrogation Waivers ............................................................................... 161 No Recourse............................................................................................. 162 Adjustments of Insurance Coverage ........................................................ 162 Benchmarking of insurance Premium ..................................................... 163 Contesting Coverage Rejection ................................................................ 163 Insurance Requirements of Lender .......................................................... 164 Claims Prosecution .................................................................................. 164 Application for Insurance Proceeds ......................................................... 165 Terrorism Damage ................................................................................... 165

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Table of Contents PAYMENT, PERFORMANCE, AND O&M SECURITY....................................................167 Performance Security ...............................................................................167 Payment Security .....................................................................................167 Operations and Maintenance Security ....................................................168 Letters of Credit .......................................................................................169 Indemnification by Developer ..................................................................171 P3 BID DOCUMENTS AND SOLICITATION ..................................................... 173 PRE-QUALIFICATIONS .........................................................................................173 PROBLEMS WITH SELECTING THE LOWEST BID.........................................................173 Lowest Bidding Variations........................................................................174 SELECTING THE BEST VALUE .................................................................................174 Adjusted Lowest Bid Criteria using Weighted Selection...........................174 Procurement Negotiation ........................................................................175 LAWS RELATING TO CONTRACTS...........................................................................175 Brooks Act of 1972 ...................................................................................176 PROPOSALS FOR UNSOLICITED PROJECTS................................................................176 RENEGOTIATING CONTRACTS...............................................................................177 CRITERIA FOR SELECTING A CONTRACTOR...............................................................178 (CSFS) CRITICAL SUCCESS FACTORS ......................................................................179 TYPES OF CONTRACTS .......................................................................................180 Lump Sum or Fixed Fee Contracts ...........................................................180 Price per Unit Contracts ........................................................................180 Cost plus Contracts ..................................................................................181 Cost-Reimbursement Incentive Contracts ................................................182 Present-Value-of-Revenue (PVR) Contracts .............................................182 SHADOW TOLLS ................................................................................................183 Shadow Toll Usage in the United Kingdom ..............................................184 SELECTING CONTRACTORS IN THE UNITED KINGDOM ................................................184 SUMMARY OF P3 EVALUATION TECHNIQUES .............................................. 185 P3 EVALUATION TECHNIQUES .............................................................................185 FINANCIAL TEST/CASH FLOW ANALYSIS .................................................................185 VALUE FOR MONEY ANALYSIS..............................................................................185 THE VALUE FOR MONEY PROCESS ........................................................................186 Is P3 the Right Choice? .............................................................................186

Public Private Partnerships for Highway Projects SHADOW BID MODEL (SBM) AND PUBLIC SECTOR COMPARATOR (PSC) .................... 188 STRENGTHS AND WEAKNESSES OF THE VFM METHOD ............................................. 190 VFM BENEFITS................................................................................................. 191 SIZE AND COMPLICATION REQUIRED IN VFM ANALYSIS ............................................ 192 VFM PROCEDURES ........................................................................................... 193 VFM CONSIDERATIONS ...................................................................................... 194 VFM LIMITS .................................................................................................... 195 VFM APPLICATION INTERNATIONALLY .................................................................. 197 METHODS AND PRACTICE IN THE U.S. .................................................................. 202 VIRGINIA VFM POLICIES .................................................................................... 202 CALIFORNIA VFM PROCEDURES........................................................................... 203 ALLOCATION OF RISK ......................................................................................... 206 Optimal Risk Allocation ........................................................................... 206 Risk Assignment Matrix ........................................................................... 206 TYPICAL RISKS IN P3 PROJECTS ............................................................................ 207 LESSONS FROM INTERNATIONAL PROJECTS ................................................ 211 FUNDING TYPES ............................................................................................ 211 EUROPEAN PARLIAMENT (EP) ........................................................................ 212 Portugal ................................................................................................. 213 Spain ....................................................................................................... 213 United Kingdom .................................................................................... 214 Australia ................................................................................................ 214 PROJECT SELECTION AND ANALYSIS ...................................................................... 214 Portugal ................................................................................................. 215 Spain ....................................................................................................... 216 United Kingdom .................................................................................... 216 Australia ................................................................................................ 218 RISK MANAGEMENT AND ALLOCATION ................................................................. 220 Portugal ................................................................................................. 220 Spain ....................................................................................................... 221 United Kingdom .................................................................................... 221 Australia ................................................................................................ 222 PROCUREMENT PROCESS ................................................................................... 222 Portugal ................................................................................................. 222 Spain ....................................................................................................... 223

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Table of Contents United Kingdom ...................................................................................224 Australia .................................................................................................225 TRANSPARENCY ................................................................................................226 CONCESSION PERIODS ........................................................................................227 TECHNICAL STANDARDS AND CONTRACT DOCUMENTS .............................................227 CONTRACT CHANGE OVERSIGHT ..........................................................................228 PUBLIC INVOLVEMENT IN THE COMMISSIONING PROCESS..........................................228 INTERNATIONAL CASE STUDIES ................................................................... 230 SHAJIAO B POWER PLANT (CHINA) .......................................................................230 CHANNEL TUNNEL (U.K. AND FRANCE) .................................................................230 Construction and Financing .....................................................................231 Agreements ..............................................................................................232 WATER WORKS OF COCHABAMBA .......................................................................234 Selection Process Problems ......................................................................234 Project Inefficiency ...................................................................................235 Hefty investment......................................................................................235 Starting Rates under Cost ........................................................................235 Rate Increase Timing ...............................................................................235 Political and Social Issues.........................................................................236 P3 CALIFORNIA CASE STUDIES .............................................................................236 WASTEWATER TREATMENT FACILITY, BURLINGAME, CA ...........................................237 SR 91 EXPRESS LANES, ORANGE COUNTY, CA........................................................237 SOUTH BAY EXPRESSWAY (SR125), SAN DIEGO COUNTY, CA ...................................239 FOOTHILL/EASTERN TRANSPORTATION CORRIDOR (SR 261, 241, N 133), (OC, CA) ...240 SAN JOAQUIN HILLS TRANSPORTATION CORRIDOR, (SR 73) ORANGE COUNTY, CA .......241 ALAMEDA CORRIDOR RAIL (FREIGHT), LOS ANGELES COUNTY, CA .............................242 CURRENT DISCUSSION ISSUES ..............................................................................244 BIBLIOGRAPHY ............................................................................................ 245


Introduction

1 P3s (Public-Private Partnerships) are a method of delivering infrastructure projects that need to be completed. Governments all over the world have used it, although it is a fairly new method of delivery. Within these partnerships, government agencies and private firms work together to fund, design, construct, operate, and provide maintenance for large projects like public buildings, systems of transportation or highway projects. These P3 agreements require the governmental and private sectors to work together when deciding on how a project will go forward. Since the private sector will provide additional resources and expertise to the undertaking, the public agency expects to obtain additional rewards with a P3 arrangement that they normally would not receive if a conventional method of delivery were used to complete the project. A P3 is defined as an agreement between a government agency and a private firm to arrange service delivery and the assignment of obligations and liabilities between all of the partners involved. When a P3 contract is used, the public agency continues to be involved in the project throughout the entirety of it, but it is normally the responsibility of the private agency to design, build, provide financing for, operate and maintain the project. There are many different types of P3 arrangements, which involve differing levels of both involvement and risk from the public and private sector. One of the key elements of every P3 arrangement is, 12 | P a g e

Introduction in fact, the transfer of risk from the government onto the private firm. The aim is always to use the optimal capacities of the private sector and public sector so that all parties benefit from the agreement. When a private firm takes on the obligation of building and financing a stretch of roadway, it takes on the risks that are involved, for example, there may be delays in construction, an increase in interest rates, an increase in labor costs, or many other unforeseen changes. If a firm assumes the responsibility for the maintenance and operation of the roadway, it takes on even more liabilities. The volume of traffic might be lower than expected, or there may be unexpected occurrences such as earthquakes, icing or mudslides that increase the price of needed maintenance work. What would motivate a private firm to take on this type of risk? With risk comes the opportunity for profit. The private firm in the agreement gets a steady source of income for the long term that provides a reasonable return on their investment. Income may come from a fee that is charged for a service, a payment from the private agency, or a toll that is obtained from the users of the facility, as occurs when toll roads are built. Private entities also make use of their specific skills and specializations to increase the value of P3 arrangements. The private firm will often make use of efficiency or innovation to make up for some of the costs and risks that are involved in a project. For example, they may improve their income by providing for a very efficient flow of vehicles in a roadway project. In addition, the private firm is building their experience with P3 agreements, allowing them to market these skills to other government entities or sectors.


Background Information Government Agencies use Differing Methods to Procure Infrastructure Projects. Lately, California has begun to use the P3 method of delivering projects with the use of a private firm in two different infrastructure undertakings within the state. These include the construction of a completely new courthouse building for Long Beach and the Presidio Parkway, or Doyle Drive, highway project for San Francisco. Both of these arrangements stretch for 30 years and are going to cost the state approximately $3.4 billion. Because of the considerable expenses and the small amount of experience that California has with P3 arrangements, these agreements will provide the state with the maximum amount of advantages. Legislation in the state of California sets out the method for examining and giving approval for government infrastructure undertakings. There are set agencies that must give approval to the infrastructure project prior to P3 usage. For instance, in the case of facilities used for court proceedings, the State Public Works Board must examine them throughout the process, and the Legislature is required to give its approval to the facility once it is built. For roadway projects in California, the CTC (California Transportation Commission) must give approval. The process used for the approval of state projects requires them to undergo a set method that involves the recognition of an unmet need for the infrastructure, a study of how the undertaking will fit into the present system of infrastructure, determining the priority of the project and procuring financing for the undertaking. The process for approving and reviewing the project commonly involves processes that make use of a multistep review set during the entirety of the development of the project, from the concept stage through the environmental review, pre-project engineering, design, and final build.

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Introduction Existing legislation in California provides for three methods for project delivery, which include P3, design-build, and design-bidbuild. Government agencies within the state are free to use any of these methods to deliver an infrastructure undertaking that has gained construction approval. Design-Bid-Build (DBB) Project Delivery State agencies in California are able to use the DBB method for project delivery with any category or scope of infrastructure project. With this method of delivery, the stages of the project are normally accomplished in sequence. Normally, the engineering and architectural portion of the contract will be given out first so that the project may be developed. This phase of the contract is awarded based on a qualitative examination of the experience and qualifications of the engineer or architect. Sometimes employees of the government agency complete the design of a project. Once the project consists of specific drawings and plans, the selection of a contractor to build the structure is completed by the use of a bidding method. These contracts for the building of a project are given out objectively based on a competitive bidding process. After the piece of infrastructure is built, the government agency is responsible for the maintenance and operation of the project. The government provides for the expenses of DBB undertakings before they begin with either direct state funding or the sale of leaserevenue or general obligation bonds. Design-Build (DB) Project Delivery With the legislation currently in place, there are specific departments allowed to use the design-build method for project delivery. With this delivery type, the government agency normally enters into a contract with a private firm to undertake both the design and construction of the piece of infrastructure. There is no engineer or architect hired by the public agency because the private firm who undertakes the project subcontracts with another firm for

Public Private Partnerships for Highway Projects the design, and sometimes the building, work. The government agency gives out the DB agreement through a competitive process of bidding that takes into account variables such as the estimated cost, the build schedule, features in the design, and environmental or community factors. With a design-build project, the government still has the obligation to fund, operate, and manage the infrastructure project. A different kind of design-build project allows the government to confer the risks of design and construction onto a specific construction manager in lieu of a general contractor. This method is normally called a “construction manager at risk procurement.” With this type of DB, the government gives out a contract based on a set fee. The construction manager then assumes the obligation for the design of the project and asks for bids from material suppliers and construction and design subcontractors. The total of the solicited bids plus a surcharge makes up the complete cost paid by the government agency for the infrastructure project. P3 Arrangements P3s, or Public-private partnerships, refer to the contract arrangements among government agencies and private firms to provide for service delivery and responsibility and risk allocation among the participants, and include increased involvement of the private sector in the funding and completion of the infrastructure project. Within the state of California, three state agencies have the authorization to take part in P3 arrangements. These agencies include the HSRA (High Speed Rail Authority), the AOC (Administrative Office of the Courts, and Caltrans (California Department of Transportation). While there is variety in the types of P3s that can be arranged, in California the dominate type is a single agreement entered into with a private company that is 16 | P a g e

Introduction normally called a “joint venture of companies.” This contract covers the design, building, funding, maintenance, and daily operation of a piece of infrastructure. Within this discussion, a P3 is defined in this way to simplify, but the knowledge that there are variations on this norm (including the collaborating of public agencies with different public agencies) is important as well. There are many different structure types used in P3 arrangements because of the differing obligations of private firms in these agreements, which include the assumption of financial liability. In addition, differing types of P3 arrangements are best suited to the building of new infrastructure, while other types are best suited for operating or expanding upon infrastructure that is already in existence. Within the state of California, P3 arrangements are a hot topic of conversation and of late. A P3 agreement was entered into with a private firm that is a consortium for a variety of companies to encompass the design, building, financing, maintenance, and daily operation of an infrastructure project.

Advantages and Limits of P3 Projects P3 agreements are utilized by government agencies to accomplish projects that are difficult to complete using conventional methods of delivery. However, additional problems and limitations may be introduced when using a P3 agreement. Possible P3 Advantages • • • • • • •

Reduction of liability by transferring it to the private firm Stabilization of the costs and schedule Use of the best methods and practices for building and engineering Frees up public funding for other needed endeavors Fewer problems with infrastructure funding Infrastructure will be properly maintained Insulation from infrastructure financial problems

Public Private Partnerships for Highway Projects Reduction in Liability by the Transfer of Liability to the Private Firm P3 projects are also able to move the risks of an undertaking from the government agency onto a private partner firm. These liabilities may include those involving maintenance, operation, financing, or other unforeseen happenings. The biggest risks involve the design and building of the infrastructure project. For instance, when using the P3 structure, a private firm would shoulder the risk if the project design needed to change to take into account particular conditions at the site such as the finding of archeological remains or unforeseen soil conditions. In addition, the private entity would also bear the responsibility for overages in the price of the project that tend to be significant at times. Because of this risk transfer, the government may rid themselves of the requirement to provide extra government funding to complete a piece of infrastructure. The private firm would also be liable if the estimate of income from the project was higher than the actual income. Because they must ensure a return on their investment, private firms must work the cost of this risk assumption into the projected cost of the project and reflect it in their bids. The private firm, though, is often better equipped to take on the added risk than the public agency. Important Risks Transferred through P3 Arrangements Financial Risks • • • • • • • • •

Changes in the cost of a project Misjudging the rate of inflation Design and Building Risks Disagreements between building and design Discovery of endangered species Discovery of resources that are protected by legislation Discovery of hazardous materials Uncharted utility pipelines Delays in permitting and permissions

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Introduction Maintenance and Operation Risks • • •

Infrastructure deteriorates at a higher rate than expected Larger price of operation than was estimated Required future improvements

Financing and Income Risks • •

Lower levels of use for the facility Public distaste or avoidance of usage fees

Lower Variability in Construction Schedules and Costs A survey administered by the FHWA (Federal Highway Administration) that polled world governments showed that P3 projects resulted in improved schedule and cost certainty over conventional procurement methods in the design and building of these projects. There are many reasons for this, including the experience of the private company in handling possible price increases that come out of these risks and the existence of a cost maximum that may be built into the contract in which the private firm is required to foot the bill for any expenses that exceed the decided upon cost. Additionally, the public agency normally provides for an efficient method to inspect the design and building decisions that are agreed upon with the private firm, and that may help to avoid setbacks in the schedule for the infrastructure project. P3 projects that make use of ongoing funding may provide incentives to the private contractor to finish the project on time and have access to funds such as government payments or toll revenues to repay loans and provide a return on investment. Access to the Best Methods and Means of Building and Engineering P3 experts tend to believe that private companies are often more apt to come up with forward thinking project ideas and building methods than government agencies. This is partially because of the

Public Private Partnerships for Highway Projects specific skills and experience that a private company brings to the table. An increase in innovation in the design and building of a project may lead to a decrease in project expenses, an improved infrastructure quality, shortened build schedules and a smoother operating infrastructure project. Free up Government Funding for Other Undertakings For the most part, the use of a private firm’s own finances enables the public agency to use its funds to for other short-term projects, resulting in the provision of better infrastructure in a shorter period. Private financing may also allow for better terms of repayment in comparison to a conventional approach using public financing. For instance, if the loan period were drawn out over an extended period, then the amount that needed to be paid yearly would be reduced. The public funding that is freed up by the use of private financing is then available for other uses and needs. Fewer Problems with Project Financing Another advantage of the P3 structure is increased access to financing. A private firm can often finance a project at a time when the government agency might not be able to obtain financing. For instance, there is a constitutional requirement in California for voter approval of certain types of bonds for funding infrastructure undertakings that may cause a delay for the government when procuring the funds to start a project. The P3 project structure allows the government agency to get around this provision, providing for a quicker beginning for construction in some instances. Guarantee of the Quality of Maintenance Because of a lack of maintenance funding and the way in which this funding is given priority, many public agencies are not performing proper maintenance on their infrastructure. Since this maintenance is lacking, 72% of California’s roadways are not in good condition. This leads to very expensive replacement or major 20 | P a g e

Introduction rehabilitation projects. In the case of a P3 project, the public agency may require the private firm to maintain the piece of infrastructure at a required level. This will result in infrastructure that continues to be in good condition for the long term, enabling the state to decrease replacement and rehabilitation costs Shelter from Financial Problems Occurred During the Project An added advantage of using the P3 structure for financing is that the borrowing done by the private firm is not considered government debt. Because the private company holds it, the debt will not show up on governmental balance sheets as government debt. Based on publications by the United Nations Economic Commission for Europe and the FHWA, this is actually one of the reasons given by EU countries for their decisions to choose a P3 structure for infrastructure projects. This avoidance of official government debt is not only useful when they are very limited in the debt that they may carry, but it also adds to their ability to borrow money for other reasons. This reasoning, however, does not apply in California since they do not have debt limitations at this time. Possible Limits to the P3 Structure • • • • •

Higher project expenses Bigger chance of unexpected issues Decreased flexibility in the government’s priority Direct liabilities because of the staged method of delivery Fewer bidders who are qualified

Higher Project Expenses A P3 project, which by nature uses private sources of financing, often has a higher cost due than conventional procurement methods that use federal or state loans. Interest rates on private loans are typically about one percent higher than public loans, and

Public Private Partnerships for Highway Projects during times of crisis, such as the 2008 credit crunch, the interest difference may be as much as two or three percent. Additionally, a private firm will normally try for a profit of ten to twenty five percent of the total investment, driving costs up even higher. Bigger Chance of Unexpected Issues P3 agreements are wider in scope and duration then conventional procurement methods, including such things as the operation and long-term maintenance of the infrastructure. Because of this, there is more opportunity for things to go wrong. These issues may involve disagreements about the contract terms, the private firm being bought out, or the private firm having other priorities. Any of these problems may result in scheduling setbacks and a greater expense for the public agency. Decreased Flexibility in the Government’s Priority Because P3 projects cover a long duration, they obligate the government to fund the project throughout its life based on the conditions that are in order at the time that the agreement is decided. This may make it harder to change funding later when government priorities change. For instance, the contract in question might call for the removal of graffiti and litter from the roadway every seven days. If the need for graffiti and litter removal changes, altering this provision is hard. Additionally, by grouping many stages of the undertaking in one contract, P3 arrangements may make it harder for the public agency to change the way in which a project is managed. For instant, if the public agency wanted to change the way that a private firm addressed problems and inquiries about highway tolls, it would need to amend the agreement, and that might increase the total expense involved in completing the project. Direct Liabilities Because of the Staged Method of Delivery The processes involved in negotiating a P3 agreement is more complicated than the process needed to negotiate the contracts 22 | P a g e

Introduction used in conventional infrastructure project procurement methods. When using a P3 project delivery method, the government not only needs to consider the infrastructure’s design, building cost and completion schedule, but also issues that involve financing, maintenance and facility operation. P3 agreements also commonly include complicated talks between the government agency and the private firms who participate and give money to the undertaking. Because of this, a P3 agreement may require public agencies to take part in activities and take on liabilities that it does not have the needed experience to understand. This may cause issues if the government does not do an effective job of writing agreements or leaves out important issues from the contract. When this happens, it may result in cost overruns or a decrease in the quality of services provided. Fewer Bidders Who are Qualified Research shows that the more costly and complicated a project is the more advantages are gained from undertaking it using the P3 project format. Additionally, the private sector companies who undertake P3s are normally made up of many different companies who cooperate to put in a P3 bid given that each separate company is specialized in a particular part of the overall project (such as design, construction, day to day operations, maintenance or financing). Because of this, there is a very limited number of private firms who have the necessary financial reserves or specialized skills to undertake a P3 project, particularly by themselves. Experts state that P3 projects normally elicit one to three bids. A project that is similar in size might draw many more bids when using a conventional procurement method. This decrease in competition when a project is procured using the P3 approach may lead to an increase in price and a decrease in the quality of work.


Objectives of P3 Projects in the State of California Government Partnerships with Other Public Agencies The state may use other public agencies, as well as private firms, to help with the design, building, maintenance, and operation of a facility. When this happens, though, these organizations normally subcontract, through many or singular contracts, with all of the private firms involved completing the majority of the project work. This might include a situation where an agency might use financing provided by a municipality, a contract with a private firm for design and building services, and maintain different agreements with additional firms for the maintenance and operation of the facility. An example of a P3 project is “The Toll Roads” of Southern California. These consist of fifty miles of state highways in the south of Orange County that is tolled. They were built through the TCAs (Transportation Corridor Agencies), which are governed by local elected representatives. During 1987, the California Legislature gave the TCAs permission to fund the design, building, operation, and maintenance of many highways through tolls. The TCAs collaborated with private firms to complete the infrastructure project. Using P3 methods, the government can move much of the project liability onto the private sector. Since the private firm normally decides on construction and design issues, they are then obligated to bear the expense of any issues that come up during construction and to ensure that the facility is completed on schedule. Additionally, the private firm might also need to provide financing, which normally involves the cost of the building and design employees, materials and equipment. Because of these expenses, the agreement must include an income for compensating the private firm. This may involve things such as a toll or fee charged 24 | P a g e

Introduction to users of the facility or other forms of payment that will be discussed in detail later. However, the private firm does take onthe liability for whether or not the projected revenues materialize at the expected levels. Because it will take a long duration for a source of income (such as a toll) to provide for the financing and profit needs of a company, P3 agreement terms normally span between 25 and 100 years. P3 project procurement is normally more complicated than conventional procurement methods. With a P3 project, the government must analyze a group of possible bidders to see if they possess the necessary qualifications to design, construct, fund, maintain, and operate the infrastructure project. Once that is completed, the vetted bidders must turn in bids that the government agency examines to choose a preferred bidder. The P3 agreement is often given to the bidder that is able to deliver the highest value.

A Trio of Government Agencies Allowed to Use P3 Contracts for Specific Projects Current legislation allows for the use of P3 contracts for specific roadway and court building undertakings. (State legislation also allows particular local governments to make use of P3 methods for local infrastructure undertakings). Caltrans In 1989 Caltrans was allowed by Chapter 107 (AB 680, Baker) to begin using P3 contracts for four infrastructure undertakings. With this allowance, and allowances provided for in legislation that was to follow, the agency constructed 10 miles of express lanes that are tolled in Orange County in the middle of State Route 91. They also constructed State Route 125 that goes between the border crossing at Otay Mesa and the state roadway system in San Diego County. With every undertaking, Caltrans made use of a P3 agreement with

Public Private Partnerships for Highway Projects one private firm for the design, building, financing, maintenance, and operation of the infrastructure. These projects will be explained in further detail later. Caltrans received increased authority in 2009 to take part in P3 contracts (Chapter 2, SB 2X 4, Cogdill). This legislation gave Caltrans and the regional transportation authority’s permission to participate in as many P3 contracts as they need to in a wide range of roadway and transportation projects until the end of 2016. These laws did set out specific goals that these P3 agreements must meet, as decided by the CTC. These goals encompassed: • • • •

Shortened travel times. Improvements in safety or operation Measurable improvements in air quality Meeting an expected need on roadways

Additionally, these contracts must pass a sixty-day legislative and PIAC review process prior to being signed by Caltrans. Chapter 2 created the PIAC as an advisory commission that is headed by the secretary of the BT&H (Business, Transportation, and Housing) Agency. This commission is responsible for gathering information, best practices, research, and things learned in the process of completing P3 transportation projects worldwide. This commission is available to help both the regional transportation authorities and Caltrans select, evaluate, procure, and implement P3 projects. As of now, PIAC is made up of twenty members who volunteer their time and employees that are already included within the BT&H Agency’s resources. In the beginning of 2011, the Presidio Parkway project was undertaken by Caltrans as the first P3 project using the new Chapter 2 allowances. This specific P3 obligates the private firm to finish the second stage of the design and rebuilding of the Golden Gate Bridge’s southern approach and provide maintenance and operation of the highway for a thirty-year period. The state is going to compensate the private firm with an income that is predicted to reach about $1.1 billion throughout the agreement’s lifetime. 26 | P a g e

Introduction AOC and the Judicial Council As legislation stands, the judicial branch of the government may use P3s. State law also obligates the Judicial Council, who is in charge of making policy for the judicial branch of the government, and the AOC staff to come up with standards of performance to help with P3 project review, and obligates the DOF (Department of Finance) to approve P3 projects. The law also says that the AOC can only go forward with a P3 project when the legislature approves of these standards of performance. Budget Act of 2007 to 2008 This act instructed the AOC to compile data concerning the likely use of a P3 project structure to replace the courthouse in Long Beach. At the end of 2010, the AOC signed a P3 contract with a private firm to design, construct, finance, operate, and maintain a courthouse in Long Beach for a term of 35 years. In return, the state will pay the company a total of $2.3 billion. This project is currently the only AOC project that has used the P3 structure. The HSRA The HSRA was created and given the power to make use of a P3 contract to develop a High-Speed railway system to connect southern and northern California in 1996 by Chapter 796 (SB 1420, Kopp). However, this legislation did not set forth a certain method to approve or review P3 agreements for the HSRA and according to the law, the state legislature must approve all capital expenditures that the HSRA participates in. According to the 2012 HSRA business plan they will not participate in their inaugural P3 project until the year 2023 Project Phases Major transportation projects consist of six main phases of development: conception, design, building, operation, maintenance, and financing. With the exclusion of financing, the

Public Private Partnerships for Highway Projects phases normally proceed in a linear order. Financing may take many forms and often comes up at many times during the project development. The general timeline used for a transportation project is outlined below. Conception, Planning Appraisal and Feasibility The first phase of a transportation project is the conception phase in which the project goes through a detailed process of planning. This planning may range from the determination of the scope of the project to very technical information concerning the function, framework, and analysis of alternatives to the project. During this phase, an undertaking must be explained to those in power who will, in the end, approve or deny it. Though few of the costs of the project are involved in this phase, it is the most important phase for determining the cost of a project. During the future stages, the government’s ability to have an effect on the project price goes down, while the costs themselves increase. Design Phase Throughout the design phase, the private partner draws up detailed plans that incorporate the constraints and parameters originally set forth during the planning phase. This design phase sees the project go from the concept that was planned out to a final plan that shows both the function and features of the proposed infrastructure. The design is then filed with planning authorities so that the necessary permits may be obtained for the building phase. These permits are given if the plans are in compliance with all rules related to zoning, safety, health, and building codes. If the permits are not granted, it may cause delays, increased expenses and the possibility of a reduction in infrastructure function if the plans or scope must be changed to meet all of the requirements. 28 | P a g e

Introduction 30 Percent Design The contracting company normally does the design work in-house or subcontracts with a design and engineering firm to develop the concept plans. The development of these conceptual plans is a milestone known as the “30 percent design” phase. This is the point at which the schedule and expenses of a project can be more accurately determined. Once the project reaches this stage, the government agency has a last chance to decide the fate and delivery of the rest of the project. After this point, the project is simply too far along to give up completely. The only options for adjustment after this stage are an increase in expenses or a reduction in function. Completed Design With the conventional DBB procurement method, the undertaking is fully designed prior to the awarding of building contracts. Optimally, this design is completed with consideration of the building and operating phases. This is, in practice, is difficult because it requires the designer to have an accurate vision from the beginning of how a construction company would complete a complicated piece of infrastructure. Large infrastructure project designs are not ever truly completed. The design must be flexible enough to change when needed during the construction process in response to any new issues that emerge. Construction Building requires the management of the many different sources of resources, such as materials and labor, required to construct the finished project. The processes necessary to complete the construction of an infrastructure project are varied and require specific management and technical skills. While routine projects may allow a company to get by with habitual procedures, new and innovative projects must be undertaken by a firm capable of the

Public Private Partnerships for Highway Projects flexibility of management that is needed to adjust to complicated problems and situations. The final test of construction is the examination of the project before returning it to the government agency. Maintenance and Operation The following phase is the maintenance and operation of the facility, which must be done according to the targets and benchmarks set forth in the contract. This operation might also include collecting user fees, providing security, performing necessary repairs, landscaping, cleaning, and maintaining support facilities. Conventionally, all obligations are given back to the client after the build phase except for defect liability. After this, the customer takes care of the management of the facility. The agency will reap many advantages if they find an operator early in the process so that their needs may be considered before the final design is completed. The services provided during the operation phase must be kept up throughout the lifetime of the project and the infrastructure will need to be kept up over the entire lifespan of the project. Financing Conventionally, financing for a project is obtained from the government, normally with the use of taxes. Different strategies for delivery try to find savings and move costs onto the facility’s users. The government might also try to move financial risks onto private companies, although this does have an effect on the expenses involved in project completion. Though this work will discuss many of the important financing issues involved in large transportation infrastructure projects, financing that involves models of alternate delivery strategies are not fully covered. This work primarily focuses on who provides the project financing and the ways that these agencies use to 30 | P a g e

Introduction reduce their total financial liability as opposed to where they went to secure the needed financing. Because of the size of the finances needed to complete large infrastructure projects, it is normally hard to generalize about broad financing methods. The worldwide economy contains enough variability that each individual undertaking must be looked at individually. The financing methods may change as time progresses. For many years, the United States government paid ninety percent of the capital expenses for the Interstate Highways, but since it has been declared complete, it has seriously decreased its upkeep contributions. The economic vision in London may be very different in the future than it is now during the development of the cross rail. The long periods that large infrastructure projects span lead to the need, sometimes, to review the project financing options throughout the phases of project delivery Bundling Projects With the traditional “unbundled” model of project procurement, each project phase is looked at on its own. The project is completely designed prior to the beginning of the building phase, and the maintenance and operation phase is not considered until the construction is completed. Ways to gain efficiency through overlap are seldom considered. However, recently the government sector has sometimes encouraged experiments that combine, or “bundle,” some of these phases. This bundling is often supported because it encourages savings through the scope and scale involved.


Options for P3 Delivery in New Infrastructure Construction New Infrastructure Construction Private Fee Service Contracts With a private agreement fee service arrangement, a government agency gives the operating obligations of a facility to a private company, who then operates the facility. This is especially the case with bigger and more complicated undertakings, and sometimes, completes programs that benefit from strategic plans. Private program management agreements often improve financing, coordination of environmental approvals and research, building activities, and engineering work. Integrating Program and Financial Management Though the types of study and work government agencies need from private program management is variable, they often provide a wide range of construction, design, engineering and financing expertise. They may also participate in the recognition of needed facts and designing processes to gain missing information. Work may focus on methods to combine long-term capital projects into quicker construction times. Work may also involve planning strategies, the management of finances, and the management of design and building activities. Program management advisors have designed software for cash and project management and methods to deal with bond proceeds and capital funding. Capital Program Development Sometimes, facility owners hire a private program manager to improve their capital investment undertakings. This might include calculating and completing physical improvements to the infrastructure to improve the potential for revenue generation. This allows the owner to design capital-financing plans that the financial markets will be attracted to when the government agency 32 | P a g e

Introduction must sell the bonds that are needed for underwriting. The owner must show that they have a logical and financially sound capital program, in addition to the ability to organize the complicated environmental, design, engineering and building project that they are planning to finance. Project Example Profiles • •

Louisiana TIMED Program South Carolina 27 in 7

Public Private Partnerships for Highway Projects Louisiana TIMED Program Location: Louisiana (statewide) Borrower / Project Sponsor: LA DOTD (Louisiana Department of Transportation and Development) Program Areas Model: Highway / Bridge / Port / Airport Description: The Transportation Infrastructure Model for Economic Development (TIMED) Program is a transportation project costing $4.6 billion that was made with the intention of improving the economy of Louisiana through investment in transportation systems. This program started in 1989 with the approval of four cents per gallon levy on gas. TIMED involved the expansion of over 500 miles of state roads to four lane highways on eleven different roadways, and included new construction or widening on three large bridges, as well as improving the Louis Armstrong International Airport and the Port of New Orleans. This program was initially planned to be completed in 2004, but was widely lagging behind the timeframe for completion, so a new goal of 2031 was set for completion. During 2002, the Louisiana DOTD tried to help the program get back on schedule. New financing was arranged and they employed a private management firm LTM (Louisiana TIMED Managers) to manage the new time frame. A new project completion goal of 2010 was set. The TIMED program was unfortunately interrupted in 2005 by the hurricanes Rita and Katrina, which resulted in increasing expenses and delays stretching to 2013. The undertakings are running well over the estimated cost of $4.6 billion for the projects. 34 | P a g e

Introduction LTM operates as a part of the Louisiana DOTD and runs the whole delivery program including finances, public relations, schedules, design and engineering, and building oversight. Expense: $4.6 billion Funding Sources: Started as pay-as-you-go with a fuel tax and a single 1990 bond sale More revenue bond sales were issued in 2002 (insured by a dedicated 4¢ per gallon motor fuel tax) Louisiana DOTD assigned the program management contract through a competitive model based on quality. Contract / Project Delivery Method: Single construction agreements are currently being assigned with the use of the design-bid-build model. One of the bridge projects will use a design-build deliver method, which has been approved by the legislature, introducing the design-build concept to the Louisiana DOTD. Private Partner Program managers: (LTM) Louisiana TIMED Managers–A Joint venture of the LPA Group, Parsons Brinckerhoff, and GEC (Gulf Engineers & Consultants) Consultants: Cypress Capital Corporation - financial Lenders: Bondholders Status / Duration:

Public Private Partnerships for Highway Projects Louisiana DOTD now estimates a completion date of 2013 as opposed to the 2002 projection of 2031. The projects below have reached completion: • • • • • • • • • • • •

U.S. 90 expansion from Houma to Morgan City The West Bank Expressway in Jefferson Parish from Avenue D to Ames Blvd Improvements to the Louis Armstrong International Airport Improvements to the Port of New Orleans LA 15 Expansion U.S. 171 expansion from Lake Charles to Shreveport Improvements to Tchoupitoulas Street in New Orleans Improvements to West Napoleon Avenue John James Audubon Bridge U.S. 165 expansion U.S. 61 expansion Earhart Boulevard

These projects have yet to reach completion: • Fall of 2013 – Widening of the Huey P. Long Bridge • Replacement of the Florida Ave. Bridge (under reevaluation and excluded from program cost) • LA 3241 (under reevaluation and excluded from program cost) • U.S. 167 –is partially complete and construction on the remaining section is scheduled to start in early 2013 Financial Status: The bond sale in 1990 of $264 gave the project its startup funding, in partnership with the pay-as-you-go gasoline tax. Another $275 million bond sale occurred in 2002, a $548 million bond sale occurred in 2005, a $1.1 billion bond sale occurred in 2006 and a $484 million bond sale occurred in 2009.

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Introduction Project Innovations: A forward thinking program management partnership that combined both financial and program management. It also features a new mix of pay-as-you-go and debt financing to speed up project completion schedules significantly.

South Carolina’s 27 in 7 Project Location: South Carolina- statewide Borrower / Project Sponsor: SCDOT (South Carolina Department of Transportation) Program Areas Model: Bridge / Highway Description: This program featured a statewide push to accelerate completion of 200 roadway projects. It took place between 1999 and 2008, involved $5 billion, and decreased the time of completion from 27 to 7 years. SCDOT contracted with two private resource management and construction firms to strategically plan, manage the financial aspects, and coordinate design and construction plans. South Carolina was divided into two sections with Parsons Brinckerhoff in charge of the East and Fluor Daniel in charge of the West. The SCODT and FHWA collaborated closely to manage their partnership and administer many innovative financing projects. This 27 in 7 project included interstate expansion undertakings, interchange upgrades, a Southern Connector that spanned 16 miles, and the replacement of the Cooper River Bridge. All included, it

Public Private Partnerships for Highway Projects was the biggest undertaking that the SCDOT has ever embarked on. The CRM firm invented money and project management computer software and methods to manage projects in combination with bond proceeds by the SCDOT and the duo of CRM partners. Cost: $5.3 billion Funding Sources: CRMs each hold responsibility for $750 million worth of subprograms • Bonding • State Infrastructure Bank • TIFIA (Financing of the debt is funded by expected facility tolls and expected state and federal payments) Contract / Project Delivery Method: Program Management and additional Innovative P3s, Competitive “Best Qualified” RFP Process The CRM contracts were based on a fixed fee payment for management work over five years, and included a milestone award schedule for CEI and design services. Right-of-way services were given based on per-parcel fees. Private Partner Program managers: Parsons Brinckerhoff in the East and Fluor Daniel in the West Project Advisors / Consultants: N/A Lenders: USDOT TIFIA, Bondholders Duration / Status: Project completed in 2008 Financial Status: Closed 38 | P a g e

Introduction Innovations: This project was the first and largest CRM partnership within the US. The bonus and penalty program was designed to increase the incentives for controlling costs, customer satisfaction, staying on schedule and innovation. The savings that resulted for the SCDOT paid for the management cost of the private CRM partners hired by the department. Financial Status: The project was funded using both bonds and a pay-as-you-go system.

P3 Choices for New Facilities The Design Build Option A design-build project mixes two, normally separated tasks into one agreement. When using design-build project procurements, the government agency enters into one, fixed cost arrangement for both the designing and engineering and the building phases of the project. The private agency might consist of a lone company, a consortium of different companies, or another conglomerate put together for the specific undertaking. Responsibilities and Roles in a Design-Build When using a design-build method, the contracting company takes on the responsibility of the construction and design work, along with the liabilities that this work entails, all for a set cost. When this method is used, the government agency normally keeps the responsibility for funding, operating, and maintaining the infrastructure facility.

Public Private Partnerships for Highway Projects Own: Public Conceive: Public Design/Build: Private by fee agreement O&M: Public Financial Responsibility: Public Definition of a Project When using a design-build procurement process, the public agency needs to do some degree of engineering and design work to be able to define the project and properly prepare the documents for bid solicitation. Though the amount of design work that needs to be done is not set, highway sector experience shows that 10%-15% is normally enough. If there is too much planning done on a project the private sector may find the project unattractive because there will not be many opportunities to use innovation to eliminate expenses and reduce the schedule. However, a project that does not have enough planning done will have too many open questions concerning the scope and project features for a private firm to estimate accurately the costs and schedules. Practices in Procurement The normal procedure when using the design-build procurement method is to make use of the best value approach. Federal 40 | P a g e

Introduction guidelines encourage this approach, which considers both the qualifications and the specialized skills of the private partner that will be completing the work, in addition to the cost. Though there is not a set method for exacting which firm offers the best value, most public agencies request proposals that detail the relationship between cost and technical factors. Design-Build Improvements Using SAFETEA-LU and MAP21 The recent legislative changes to SAFETEA-LU and MAP-21 allow improvement when using design-build agreements. Section 1503 of SAFETEA-LU got rid of the $50 million minimum dollar amount for agreements that make use of designbuild methods not requiring special approval. This section also instructed the secretary to redo the rules that apply to design-build agreements so that transportation authorities may begin activities related to design-build agreements prior to receiving final approval from the NEPA. In particular, the rules may not specifically have to comply with the 1969 National Environmental Policy act prior to any organization requesting proposals, going forward with the awarding of design-build agreements, or giving notices to begin engineering and design work with design-build agreements. These changes have enabled private firms to be included in the process of project definition prior to approval from the NEPA. According to Section 1503, FHWA released a final regulation for design-build agreement regulations with the Federal Register in the August 17, 2007 issue. MAP-21 allows a greater share of Federal funding (usually 90% for Interstate Highway projects and 80% for other undertakings) for undertakings that make use of quickened project delivery methods, including design-build agreements. Section 1304 of MAP-21 gives a 5% boost to the share of Federal funding as a

Public Private Partnerships for Highway Projects percentage of the complete cost of the project, though it must be below 10% of the total apportionments from the state under the National Highway Performance Program, Metropolitan Planning and Surface Transportation Program. Projects • • • • • • • • • • • • • • •

183-A Turnpike in Austin, Texas Anton Anderson Memorial Tunnel in Porter-Whittier, Alaska Denver Union Station in Denver, Colorado E-470 Tollway in Denver, Colorado Central Texas Turnpike System (SH 130 [Segments 1-4]) in Austin, Texas Metropolitan Area Cooper River Bridge Replacement in Charleston, South Carolina Hiawatha Light Rail Transit in Minneapolis/St. Paul, Minnesota I-15 Corridor Reconstruction Project in Salt Lake City, Utah Intercounty Connector in Maryland Iway (I-195 Relocation Project) in Providence, Rhode Island Missouri Safe and Sound Bridge Improvement Program in the State of Missouri Reno Transportation Rail Access Corridor (ReTRAC) in Reno, Nevada Tren Urbano in San Juan, Puerto Rico Triangle Expressway in Raleigh-Durham, North Carolina U.S. 36 Managed Lanes / Bus Rapid Transit Project: Segments 1 and 2 in Denver Metro Area, Colorado

The Design-Build-Operate-Maintain Project Model The DBOM (design-build-operate-maintain) project model certainly makes use of integrated partnerships that mix the design and building skills required for design-build projects with the sills that are required for maintenance and operations. All of these 42 | P a g e

Introduction components are obtained from a private firm with an agreement and public sector financing. This procurement method is also known by a variety of other names including BOT (build-operatetransfer) and “turnkey” procurement. Responsibilities When using a DBOM agreement, one corporation is in charge of the design and building as well as the maintenance and operation of the facility for the long term. The public agency provides financing for the project and keeps the financial risk of operations as well as any additional proceeds from the facility operation. Benefits The advantages gained through the DBOM method include the combination of responsibility for functions that are normally scattered (design, building, operation, and maintenance) with one company. This lets the contractor take part in many efficiency advantages. The facility may be designed to use particular materials or construction equipment that will be beneficial to the company, plus the DBOM firm can plan the facility’s long-term maintenance plan before it is even built, including cost/benefit analyses for any changes. The firms in depth information of the specific project can be used to come up with a specific plan for maintenance that prepares for and deals with problems as the occur so that there is less risk of an small issue festering into a big one because it was not dealt with in the early stages Lifecycle Costing The advantages gained from "lifecycle costing" are of the utmost importance since the majority of government agencies expend more money in the maintenance phase of a project than they do in the building or expansion phase. Additionally, this method takes away the key maintenance problems from the politics that surround government budgets for maintenance, with government agencies

Public Private Partnerships for Highway Projects normally kept in the dark about how much money they will have each year. When this happens, they may have to their limited budget on the most immediate maintenance issues instead of using a more logical and money saving approach that involves prevention. The Procurement Process Government agencies give out DBOM contracts based on a competitive bidding process followed by an open tender proceeding. Bidders turn in their proposals based on information provided in the tender documents, and are normally required to give one price for the entire design, building, operation, and maintenance of the infrastructure for the length of time that is given in the documents. Bidders must also turn in documents detailing their qualifications so that the agency may make a comparison of the bids in relation to the qualifications of the company, as well as to ensure that the company awarded the contract has all of the necessary skills to complete the project. Specifications that are Standard Though an integrated DBOM method may lead to extensive rewards for the government agency, those who are not familiar with this method should be very careful to include all of the standards that must be met with the facility design, construction, maintenance, and operation. When using the DBOM procurement method, the government agency gives up much of the control that they normally have when using a conventional project delivery method. If the requirements are not stated from the beginning as project specifications, they will normally not be met. This is of particular importance since DBOM agreements often stretch over a span of more than 20 years.

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Introduction Projects • • •

Hudson-Bergen Light Rail in Hudson and Bergen Counties, New Jersey Las Vegas Monorail in Las Vegas, Nevada Tren Urbano in San Juan, Puerto Rico

Design-Build-Finance When using the DBF (design-build-finance) procurement method, a single contract is given for the design, building, and complete or partial facility financing. Obligations for the operation and maintenance of the infrastructure over the long term stay in the hands of the project sponsor. This method uses the DB approach’s efficiency while allowing the project sponsor to put off financing parts of the project, or the project in its entirety, until after the project’s building phase. Two Main Reasons for DBF Procurements There are two main motivations that project sponsors have when using a DBF procurement method: • •

Government restraints on cash flow The desire to put off payment

In instances where the sponsor of a project is experiencing constraints to their cash flow, this is going to specify the available funding for the project when the procurement takes place. The private company will need to procure financing to cover the project costs during this time. In some cases, the public agency might give a specific limit to the amount of money that it can give a contractor for every year that the project is active. This noted amount, in addition to the entire expense involved in the project will affect the extent of the period of repayment.

Public Private Partnerships for Highway Projects Additional procurements offered in the DBF form may take their motivation from the government agency’s need to put of paying for the facility. This may be because of a lack of present sufficient funding or the desire to make use of a deferred payment plan as an incentive for the private firm to finish the project construction early. These payment methods are similar to P3 DBFOM procurements, however, the private firm does not take on the risks involved in the revenue generation or operating the facility for the long term. With this method, the government agency asks bidders to give the expense of completing the facility in the present, with payments promised in the future. When they agree to a deferred payment plan, the private company takes on more risk than with a conventional DB agreement. These risks include the possibility of the promised funds not being available when the time comes. Financing Options for the Private Sector Private firms participating in a design-build may make use of different financing options. There are times at which they finance themselves and use their own funds for the build. At other times, they may finance through their own credit lines, or use a little bit of both of these methods. When extensive amounts of money are needed for a long-term loan, the private firm might use bonding, which is borrowing that is specific to the project at hand. The lenders would base the interest rates on the project risk and the likelihood that the government agency will fulfill its payment responsibilities. The approach used by the private company is determined solely by them, and is based mainly on how big they are, how much credit and money they have on hand and their risk tolerance. Responsibilities and Roles in Design-Build Financing When using a DBF delivery method, the private firm takes on most of the design activity, all of the building work, the financing (for 46 | P a g e

Introduction the short term) for a part of or all of the undertaking, and the risk that is involved in the whole endeavor, all for a set cost. In the case of a DB delivery method, the government agency keeps the responsibility for the long-term maintenance and operation of the facility. Own: Public Conceive: Public Design/Build: Private by fee agreement O&M: Public Financial Responsibility: At first Private / Later Public Benefits The benefits of a DBF are similar to those of a DB, since the government agency gains the efficiency of a simultaneous design and build for the project. When using a DBF method, the project is also financed, in the present, by the private company, in full or in part. This lets the public agency begin construction on the facility before they have the money to fund it. This model is especially helpful when the financing advantages allow for a quicker project completion.

Public Private Partnerships for Highway Projects Not Debt, but a Deferred Payment By law, a DBF contract is not a debt, but a payment that is put off. Instead of borrowing money, it is a promise of payment in the future. These payments may be made in little increments or through a set payment schedule after, or towards the end of, a project. Because of this, laws pertaining to DB procurements normally do not talk about financing. DBF Procurement Practices DBF procurements, like their DB counterparts, are given out based on the best value approach. Federal guidelines support this approach, which considers both the qualifications and technical abilities of the private firm as well as the expense. In this instance, the bidder’s price will include the cost of financing in addition to the design and building expenses. Though there is no set method for figuring the best value, proposal requests normally include information on both cost and qualifications. Resources Cleveland Innerbelt Procurement records and studies from the Ohio Department of Transportation’s Cleveland Innerbelt project Projects • • • • • •

95 Express in Miami, Florida I-4 / Selmon Expressway Connector in Tampa, Florida I-485 Charlotte Outer Loop in Charlotte, North Carolina Innerbelt Eastbound Bridge in Cleveland, Ohio I-75 Roadway Expansion (iROX) in Collier and Lee Counties, Florida Northwest Corridor Project in Atlanta, Georgia

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Introduction

Design-Build-Finance-Operate-Maintain When using the DBFOM (design-build-finance-operate-maintain) method for procurement, the obligation to design, construct, finance and operate the facility are included in the same contract for private firms. These agreements vary throughout the U.S., particularly in how much of the financing is obtained from private sources. One thing that ties all DBFOM projects together, however, is that they are financed in whole or in part by an income stream that has been committed to the project. Tolls are the income stream that is most often used, but availability payments are used as well for this purpose. Future income is used to secure bonds or other lending that provides the necessary cash to complete the project. These borrowed funds are sometimes shored up by grants from the private sector that may include money or things such as right-of-way or land grants. In some instances, private firms are expected to provide equity investments as well. A Variety of Project Sponsors A variety of organizations may sponsor DBOFM agreements including: • • • •

Departments of transportation Local Governments Transit agencies Toll authorities

In the rest of the world, where DBFOM agreements are normally use to build new toll road infrastructure projects, the financing is normally raised by private firms who take responsibility for the design, construction, financing, and operation of the undertakings. Because of the ability of government agencies in the U.S. to access tax-free low-interest financing, it normally makes more financial sense for the government agency involved to obtain the debt for the involved private firm. Federal borrowing tools also help to

Public Private Partnerships for Highway Projects reduce the financing expenses of private firms, including things such as private activity bonds. Additionally, public agencies may offer subsidies that are tied into the overarching lending package. In the end, any extra costs involved from private financing sources should be overcome by the saving gains from increases in efficiency or innovation caused by the private partner’s expertise. Responsibilities and Roles in a Design-Build-FinanceOperate-Maintain Project DBFOM concession agreements can be given for the building of a new project or for the expansion, upgrade, or modernization of an older piece of infrastructure. These agreements may stretch for 3050 years or longer, and are given out during a competitive bidding process. This process of procurements shifts much of the obligation to build and operate transportation facilities to the public sector. In most cases, the government agency keeps ownership of the facility, but with this kind of agreement, the private firm takes responsibility for the maintenance and operation of the facility according to the rules laid out in the concession agreement. Based on the source of revenue that the private firm uses and the assignment of income liability, in the U.S. private firms may have income liability exposure. This type of agreement appeals to public agencies since they can give access to lending and provide facility services with similar scheduling and expense efficiency advantages to both DB and DBOM procurement methods. Own: Public Conceive: Public or Private 50 | P a g e

Introduction Design/Build/ O&M: Private by fee agreement Financial Responsibility: Public, Public/Private, or Private DBFOM (Design-Build-Finance-Operate-Maintain) Models In the U.S. two DBFOM models have used Real Toll DBFOM Concession Agreements When this DBFOM model is used, incomes from tolls that are paid by the users of the facility are the main source of income for the P3 agreement. The private firm keeps the right to receive the income during the entire concession period, but takes the risk that the expected income may not be as much as what was estimated. In order to help the agreement along or make the agreement financeable, the public sector might give some financial aid such as subsidies, right-of-way concessions or even a guarantee of a minimum income. However, in the end the private firm believes that the income source will probably be enough to pay back the loans that were taken out, the interest involved, and provide for the needed firm profits. In order to provide protection for the public agency, most concession agreements include a provision that allows excess revenues to be shared between the agency and the private firm. Availability Payments in DBFOM Concessions When availability payments are added as a provision in a DBFOM concession agreement, the income risk is mitigated through payments by the sponsoring public agency. The agency agrees to make payments for services provided from the private firm to compensate for the design, building, maintenance and operation of the infrastructure for the agreed upon time. During this time, the

Public Private Partnerships for Highway Projects company is guaranteed a minimum income payment. These payments are normally used when a facility does not use tolls or when the income from the project will not pay for the financing expenses. These payments are often used as a way to gain financing from private or public sources. Availability payments are given based on milestones such as finishing construction, providing a set degree of service or based on specific metrics such as incident management, snow removal, or lane closures. Based on how the agreement is structured, the private firm may not be eligible for payments until the facility is built and operational, which may result in a higher need for financing upfront. Projects Real Toll Maintain • • • • • • •

Examples

of

Design-Build-Finance-Operate-

Downtown Tunnel / Midtown Tunnel / MLK Extension in the Cities of Norfolk and Portsmouth, Virginia Dulles Greenway in Loudoun County, Virginia I-495 Capital Beltway HOT Lanes in Fairfax County, Virginia IH 635 Managed Lanes in Dallas County, Texas North Tarrant Express in Dallas-Fort Worth Metroplex, Texas SH 130 (Segments 5-6) in Austin, Texas Metropolitan Area South Bay Expressway (formerly SR 125 South) in San Diego County, California

Availability Payment Examples of Design-Build-FinanceOperate-Maintain • •

Eagle Project in Denver Metro Area, Colorado I-595 Corridor Roadway Improvements in Broward County, Florida

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Introduction • •

Port of Miami Tunnel in Miami, Florida Presidio Parkway in San Francisco, California


Existing Infrastructure Facilities O & M Concession Agreements Government agencies use O&M (operation and maintenance) concession agreements to give responsibility to a private company for the operation and maintenance of a facility. These contracts cover both the management and service realms, and provide the advantage of nurturing efficiency and the use of technology. Private firms may be compensated through a set payment or through incentives in which they are awarded bonuses for achieving performance goals or obtaining specific levels of service. Responsibilities O&M agreements can be used to hand over responsibility for one piece of infrastructure, or many. They hand over responsibility for daily operation, which may include things such as grass maintenance and snow removal as well as large repairs and routine maintenance. When the government agency has control of repairs, they may have to be postponed due to political or budgetary reasons, but when a private firm has the responsibility for maintenance, they are able to use effective management practices to reduce the lifecycle cost of the infrastructure. Practices in Asset Management Asset management is the strategic management of the continuing need for maintenance of facilities including transportation infrastructure. It includes the financial analysis of options between vying options for maintenance investment, using the combination of financial and engineering study to find the most financially sensible option for investment. This method brings light to the upgrading, preservation, and necessary replacement of highway facilities through proper planning and money allocation. It normally encourages maintenance used to prevent problems 54 | P a g e

Introduction instead of waiting for the infrastructure to need repairs badly before performing the necessary maintenance. Projects •

Anton Anderson Memorial Tunnel in Porter-Whittier, Alaska

Long Term Lease Concession Agreements The P3 model requires long-term leases of pre-existing infrastructure that are financed through toll income to a private firm to run it for a defined period during which they may collect the toll income for the facility. In return, the private firm is required to operate, maintain, and sometimes improve the infrastructure. The private firm must often provide a concession fee to the government at the start of the agreement. These leases are assigned through a competitive process in which the bidder must be qualified and present a desirable offer to the government agency. The key provision in this bid is the concession fee amount. Other important variables are the bidder’s qualifications, credit worthiness, and the concession period length. Options for Long Term Leases Long-term transportation lease agreements are generally grouped into three categories: Debt transfer lease transactions The fee paid in these transactions by the public firm is used to decrease the public debt of the facility, without the public agency having to provide additional funding. In these agreements, the private firm must maintain the roadway to a set standard during the concession and the government may ask the company to borrow additional funds to fix condition or safety issues.

Public Private Partnerships for Highway Projects New construction lease and hybrid debt transfer transactions The fee paid in this transaction by the public firm is used to decrease the public debt of the facility, and the firm takes responsibility for construction of an extension to the existing toll facility. In this model there are not any payments made in addition to those that serve the debt under the prevailing roadway. Sometimes, additional construction may be necessary in the future depending on performance levels. Value extraction lease transactions The fee paid in this transaction by the public firm is used to decrease the public debt of the facility and to give the government agency a large amount of money that may be used for other projects. In these agreements, the private firm is required to perform required maintenance on the roadway during the concession period and possibly perform other repairs if needed for condition and safety reasons. Recent Experience Up through 2012, 5 key long-term leasing transactions have closed in the U.S. Table 1 (Recent Experience) Facility

Date

Length Lease Upfront Term Lease Payment

Lease Option

Chicago Skyway (Chicago, IL)

January 2005

7.8 miles

99 years

$1.83 billion

Value O&M extraction

Pocahontas Parkway (Richmond, VA)

June 2006 8.8 miles

99 years

$611 million

Hybrid

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Commitments

O&M Upgrade to electronic tolling Construction of the Richmond Airport Connector

Introduction Indiana Toll June 2006 157 Road miles (Northern IN) Northwest Parkway (Denver, CO)

75 years

November 8 miles 99 2007 years

Puerto Rico September 54.5 PR-22 and 2011 miles PR-5 (Northern PR)

40 years

$3.85 billion

Value O&M extraction

$303 million Debt $40 million transfer (placed in escrow; release contingent on parkway extension within specified timeframe)

$1.08 billion

O&M $200 million administrative fee (inflation adjusted total over lease term,) $60 million contribution toward parkway extension within specified timeframe

Value O&M extraction $356 million in upgrades and safety improvements

Public Private Partnerships for Highway Projects Factors That Affect the Use of Long-Term Leases Many factors affect the use of long-term leases. For the government agencies, the simple factors involved would include the financial and political environments of both local jurisdictions and single states. If it is conducive to these two factors, decision makers might think about using a lease. If the financial need does not exist, the government officials might analyze the possibility of leasing the toll facility to see if it would be worth it to contract the work out. In the eyes of the private firm, the main reason to approach a leasing opportunity is the return on investment. Moody's Investors Service has noted some key factors that enable a toll facility to be a good candidate for a long-term lease including: 1. Pre-built toll highways that experience limits to their ability to raise tolls politically 2. Roadways that belong to the public that do not have the required capital to provide funding for public programs 3. Roadways that depend on many users who do not live in the area, such as tourists or truckers, who will be less likely to protest privatization 4. Roadways that are in financial distress but may give a business base to companies that want to gain entry to the market in the United States Possible Advantages of Long Term Leases The possible benefits of long-term leases include:  The removal of politics from the process of setting tolls by transferring this task to the private company  The opportunity to decrease the cost to the public for maintaining, operating, and improving the roadway  Speeding up ongoing construction or necessary maintenance or improvements on the facility in question 58 | P a g e

Introduction  The restructuring of debt in toll roads that are not performing as expected and are at risk of defaulting  The opportunity to obtain significant upfront payments that may be needed for improving other infrastructure projects  The transfer of income and traffic risk onto the private sector  More effective management of assets by assigning the private firm maintenance and operational responsibilities, since they are more likely to perform these duties efficiently Issues of Public Policy Associated with Long Term Leases In order for an outcome to be beneficial, many issues of public policy must be carefully examined. The key issue is probably the possibility of undervaluing the leased facility. Competition may help to overcome this risk, as was seen when the Chicago Skyway was up for procurement. It is wise to consult with a financial advisor to determine the fair market value for the leased asset based on expected streams of income. Additional issues of policy should be examined based on the legality and the terms that define a lease so that the public interest is protected and everyone is treated fairly. These issues may involve:     

The loss of the public’s ability to set toll rates The loss of governmental income streams Possibly excessive toll rate increases Unequal return on the private firm’s equity Using tolls to provide for transportation improvements

The relative importance of each of these issues would depend on the infrastructure under consideration in addition to the ways that could account for or decrease these effects. For instance, the terms of a lease may provide for public input into the toll rates, and it is

Public Private Partnerships for Highway Projects possible to put a cap on the profits made by the private firm. In the Indiana Toll Road agreement, there were regulations put in place to make sure that the proceeds from the lease were used to provide improvements to the transportation systems in certain areas. The public sector does oversee the private firm’s performance and sets requirements for customer service, capital reinvestment, safety, and availability as part of the lease. These tools can be used to, effectively, look out for public interest. Projects • • • •

Chicago Skyway in Chicago, Illinois Indiana Toll Road in Indiana Pocahontas Parkway / Richmond Airport Connector in Greater Richmond, Virginia PR-22 and PR-5 Lease in Puerto Rico

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Different Project Delivery Methods Compared to P3

2


For a better understanding of the public private partnership delivery method, a review of the available methods in the industry should be presented. Every one of the delivery methods that are commonly used in transportation projects falls under two categories, traditional and alternative delivery methods. Each method has its own advantages and disadvantages. These methods are presented in the next section. Delivery methods have wide differences, from each element viewed separately, to everything being delivered through the same entity in a contract. By growing the number of delivery methods, there are increasing chances that the public entity will investigate a new method of delivery for a project internally based on the complexity and the expected costs.

Traditional Design-Bid-Build (D-B-B) Design-Bid-Build (D-B-B) is the “traditional” delivery method for construction projects. Under D-B-B, the public entity assumes the role of planning, financing, and operating projects. The public entity designates an internal design team or an external consulting agency to perform the design services. The design team starts the design process and once a 30% complete design have been achieved the environmental permits and approval process starts. From 30% to 100% of the design will be completed by the same team, a different team, or by canceling the project. It will depend upon a number of factors such as the time taken to get environmental approval or its priority among other projects.

Public Private Partnerships for Highway Projects Once the project achieves 100% completion, the public entity offers it in an open bidding process. Typically, contracts are granted to the bidder with the lowest bid. Some modifications may be applied such as using the qualification of the bidders in the selection process and then requesting bids form qualified bidders only or using the lowest responsible bidder, which implies evaluating the bids compared to the engineer's estimates in order to weed out any low bids that may result in a disability of delivering the project with such a low price. The construction contractor assumes responsibility for construction from the notice to proceed until the completion of the project. The public entity inspects and oversees the implementation of the project to in order to ensure its compliance with the final design. The contractor is held accountable for issues in construction, assuming the agency can adequately perform the inspection role or delegate it to consultants. Under D-B-B, the contractor might be held accountable for negligence or possibly a breach of warranty, but normally the public entity retains all project risk, such as design defects and design changes. The contractor often hires several subcontractors who focus on particular trades. Subcontractors are hypothetically responsible for their own contract with the contractor, while the general contractor is responsible to the owner. While the Owner is keeping risks, it should determine inadequacies at work carried out through both the contractor and subcontractors. Once issues are noticed, the owner should step in at the proper time, however; undertaking such risks limits the general contractor’s liability. Both public entities and the private sector like to adhere to the conventional methods. From the people’s aspect, the sensed openness imparts a certain amount of confidence. Accordingly, it has a low political risk. For the private sector, D-B-B has a lower financial risk.

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Different Project Delivery Methods Compared to P3 Traditional Design-Bid-Build (D-B-B) Advantages The D-B-B method has a number of advantages, such as: •

•

Designer is directly responsible to the owner. o Under D-B-B, the design team has a clear duty to protect the interests of the owner, including the long-term ones. Limited management, legal, and political obstacles o Since D-B-B has been the dominant delivery method for many years, the majority of public entities have developed best practices for it. Some entities reject using any other delivery method.

Traditional Design-Bid-Build (D-B-B) Disadvantages The D-B-B method has a number of disadvantages, such as •

•

Designers and owners may lack resources for inspection of work. o Inspecting work and supervising the contractor is a crucial task, as the contractor may get the temptation to cut corners or may not follow the specification willingly or unintentionally. Longer project duration. o Performing tasks sequentially extends the time needed to execute the project from the development phase throughout the closing phase. There is no concurrency of phases in D-B-B method.

Alternative Delivery Methods Alternative delivery methods (ADMs) are delivery methods that are different from the tradition delivery method (Design-BidBuild). The ADM takes into consideration the expertise of the provided sector. Combining private industry experience enables the public entities to consider its strong points when making policies. The non-traditional delivery methods are in continuous increase, while the traditional delivery methods are decreasing.

Public Private Partnerships for Highway Projects Each method has its strengths and weaknesses. In the next section, such strengths and weaknesses will be discussed. Perceptions regarding delivery methods have actually altered alongside increasing discontentment with the traditional delivery method (DBB). Strictly private or public ventures come with issues. Researchers have concluded that neither well-suited public entities nor perfect private ones exist. Each one has its own strengths and weaknesses. Accordingly, a mix between the two systems can reduce weaknesses and increase strengths. For purely development by a private entity, obstacles involve funding and exposure to technology obsoleteness and any changes in regulations. The public entities are pulled back by bureaucratic procedures, political interfering, and challenges to a sense of balance among performing operations, maintaining established facilities, and procuring new projects. Adding these issues to the inherited issues from the traditional delivery system, it has given the alternative delivery systems an increasing acceptance among some parties. Public-Private Partnership (PPP or P3) is defined as a contractual agreement formed between public and private partners, which allow more private entities to participate than in traditional delivery methods. The Alternative Delivery Methods are a bigger umbrella to methods that have more participation from the private entities.

Design-Build (D-B) In lieu of assigning a firm for a design and then independently adding another one for construction, design-build (D-B) is a bundled option whereby a solitary entity has full accountability for both design and construction tasks. D-B team can be a joint venture between two firms or two divisions in the same firm. One firm/division is specialized in design and the other in construction. Once a DB team is put together, a progressive strategy of bargaining normally leads to the contract of the guaranteed maximum price (GMP) for the completed design and specification. 64 | P a g e

Different Project Delivery Methods Compared to P3 The design process continues and once it reaches a certain level, the construction starts along with finalizing the design. Considerable time savings are associated with the concurrence of the construction and finalized design in D-B. D-B-B loses an amount of time in seeking one or more design firms to develop the project, and then, later down the road finding a contractor to construct it. Design-build is considered the framework of the alternative delivery methods. Most others have design-build at their root, and nail on a few more adjustments as presumed suitable. Design-Build Advantages The D-B method has a number of advantages, such as: •

•

•

One responsible entity o Design-build contracts present the clear roles and responsibilities of different parties. Risks are distributed more fairly than compared to D-B-B. The owner can hold a D-B firm accountable for poor performance effortlessly. With D-B, both the design and contraction parties are involved with a project from the early stages. Moreover, they cannot easily blame each other for every design change or defective drawing, as they are contractually bound and responsible as one entity to the owner. Construction starts early o Starting the project as early as at the 30% complete drawing mark can save years of work on the project and will achieve many savings, such as a lower inflation rates, a higher rate of investment (ROI), and faster occupancy/usage of the facility. Value engineering can be performed efficiently o D-B encourages revolutions in terms of design and construction techniques. The design phase in D-B projects is dynamic and subject to change based on

Public Private Partnerships for Highway Projects a contractor's suggestions. At the 30% design phase, the D-B firms utilize value engineering to come up with a better solution to the proposal. The owner has to make sure that the design is not compromised for the sake of a dominating contractor.

Design-Build Disadvantages The D-B method has a number of disadvantages such as: •

•

•

•

Delays and costs in the initial selection phase. o The D-B contract usually causes a solid negotiation period that lasts for several months. Time elapsed can lead to large increases in costs because of market fluctuations, which can hopefully be offset by savings down the road. Contractor Domination o In D-B, you can find occasions when the contractor takes on a prominent position, thus undermining the experience and feedback from the designer. The contractor has many more employees and can utilize its big team to go ahead with construction without a thorough design piece. With D-B, the owner is probably giving too much control to the design build team. Maintaining the conceptual designer to oversight the D-B team can help ensure some control over the project. Shortage of competitors o Occasionally, D-B RFPs have difficulty drawing the attention of qualified bidders. Although there is an increasing number of companies that concentrate on D-B, almost all D-B jobs combines both a designer and a contractor whose project portfolios include mainly conventional D-B-B jobs. The amount of work required to develop a D-B proposal is so much that it discourages a number of firms. Exclusion of small firms

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•

•

o The D-B delivery method is geared well for the large and globally known construction and design firms. These companies might possess whole divisions that offer purely D-B projects. These firms can also be appropriate to assure project funding and they are good fit for mega projects. Small and medium-sized firms reveal the frustration of not being able to infiltrate the D-B market. The increased interest in construction contractors and subcontractors also tends to boost costs. The private venture could be capable of countering this particular need through bringing in big contractors from outside the area that may provide the required labor, but governmental stress and anxiety to count on nearby companies could restrict this approach. Dismantling of bundled contracts o A D-B team may attempt to dismantle individual activities based on the way everything is developed. There is no indefinite guarantee of cooperation among private partners in a joint venture. Public entities fall under a pitfall regarding presuming the way the private sector is self-managing. D-B requires an apt public sector agency to deliver oversight in the private D-B consortium. Less controls over projects o Under conventional delivery method, the designer is mainly responsible to the owner, and may or may not allocate staff to supervise the construction contract for the owner within a kind of “Design plus Oversight” model. Because the designer in a D-B contract is a part of the contractor team, some owners feel that the D-B method negatively affects the designer’s efficiency, as well as ability to develop the best design for the owner, thus resulting in a lower quality. The owner may require a program manager to assist and to ensure that the design and implementation will confirm the owner’s objectives.


Design-Build-Operate-Maintain (DBOM) Design-build legal agreements may also request greater participation by including provisos that the private contractor operates and maintains the constructed facility for a number of years. This delivery technique is referred to as Design-BuildOperate-Maintain, or DBOM. A key parameter in DBOM agreements is the condition of the facility when its operation and maintenance is returned to the public entity. Hypothetically, this happens when the contractor is designing and building the facility while realizing that there is an operations and maintenance (O&M). Such an attitude may transfer the life-cycle risk back to the public entity in the event the operator is consistently able to renegotiate the agreement. DBOM contracts are popular on projects with user fees, including transit lines and toll roads. Operation and Maintenance (O&M) of these projects is twice as important as the standard Design Build projects because the quality of an operation is added to the quality of construction in affecting the revenue stream. The public entity may choose to keep, share, or completely transfer the usage risk of the facility. Such a decision is based on the confidence in the forecast of the income of this type of facility in addition to affecting the future needs through service quality and continuous improvements.

Design-Build-Operate-Maintain (DBOM) Advantages The DBOM method has a number of advantages, such as: •

Early operating firm participation o Having the operating firm under contract in the early stages of the development process allows for coordination between the contractor and the entity that will be running it. Design firms have more worries about constructability of the facility than how it will be operated. Accordingly, the most

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•

•

•

•

effective designs will not ensure solidly functional facility. A DBOM Joint Venture features an interest in both construction and operation practicality. High quality o DBOM prompts the contractor to investigate possible cost savings and quality enhancements that can support the operations and maintenance stages by investment during the development phase. Alternatively, an inadequate design can result in lower construction costs, which may be offset afterwards by increased Entire life-cycle cost analysis o DBOM requires a long-term assessment of the facility value. In many different ways, the length of a DBOM agreement is actually as crucial as the price of it. If a facility using a 30-year lifetime only has a 15-year DBOM term, then the contractor may not take into consideration the entire 30-year term while constructing the facility as the term of benefits lasts only 15 years. Transfer of facility demand risk o The future needs for the facility will influence its usage and revenue. When the contractor takes the O&M responsibility for a long term, an automatic risk of future demand is added to the formula. The more uncertainty of the future demand, the higher the bid associated with the project. The public entity should provide its forecast studies of future demand to give a clear picture to the bidder to achieve reasonable bids. Technology utilization o Trying to build an efficient facility for O&M, the DBOM contractor may utilize the latest technologies. For example, utilizing electronic toll collectors is an efficient way to collect tolls and is a cost efficient option that BDOM companies like to use. Given the fact that such technology leads to

Public Private Partnerships for Highway Projects less labor use, some entities may limit their usage for political reasons. •

Maintenance priorities o The public entity is restricted by an annually allocated budget and thereby may use a short-term benefit concept to get away from properly maintaining existing facilities. By delegating O&M to a DBOM entity, the maintenance of such a facility will be assured to be done to an acceptable level without affecting the public entity budget. Users of the facility will value the level of care provided by the DBOM to maintain their commitment.

Design-Build-Operate-Maintain (DBOM) Disadvantages The DBOM method has a number of disadvantages such as: •

•

End-of-contract negotiations o The public entity should include specifications within the contract to guarantee the facility will be in a well-functioning condition at the end of the operation term. Enforcing such requirement is challenging especially for a small public entity. Some public entities have a shortage in internal staff to perform operation and maintenance tasks. Renewing the operation and maintenance agreements just because they do not have the capacity to perform them is a huge mistake. It is recommended that the public agency offer the operation and maintenance agreement in a competitive bid to get the best possible agreement. Possible loss in public support o Certain facilities are thought to be core governmental services in the public mind. This concept can be shaken when the DBOM agreement

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•

proceeds. Having to pay for a service that was thought to be covered by the government can lead to the frustration of some public groups. Such frustration can affect policy makers who approved such an agreement. A fear of privatization of governmental services may arise among the public as a result from such agreements. Potential overlook of O&M responsibilities o DBOM delivery method requires the contractor to take into account the O&M phase of the agreement. For projects with short term O&M, the contractor sometimes ignores the operation and maintenance phase. Accordingly, the public entity needs to specify carefully its required terms of the O&M portion in the DBOM contract, and must enforce those terms of the contract.

Design-Build-Finance-Operate-Maintain (DBFOM) In a design, construction, finance, operations, and maintenance (DBFOM) contract, the private entity generally comes with own financing for 10%-30% of total project cost and seeks loan financing to cover the balance from the investment. The loan financing comes from commercial banks, international creditors, or bilateral governmental lenders. Private finance might be incorporated into D-B-B and D-B contracts, although, it is a bit more common to be in contracts that have O&M, in which the financing party accepts the extra risk. DBFOM will not really indicate that all project financing is supplied by the private partner. The private partner’s financial contribution might be merely a partial one, with the government collecting the remaining portion. This is common on rail transit projects, since revenues are usually inadequate to pay for operating costs, not to say capital costs.

Public Private Partnerships for Highway Projects Design Build Finance Operate Maintain (DBFOM) Advantages The DBFOM method has a number of advantages, such as: •

•

•

Private funding o Projects that could not be possible by any means through entirely public funding can be utilized under P3 model. Such funding offers the public entity securities regarding the use of its budget. The public entity would not be likely be able to cover the long term costs associated with the maintenance of the facility, which will reduce the risk of having the public walk away because of poor services. Risk sharing o Private financing enables risks to be distributed among the public entity, and the private entity, contractors, vendors, and the financing entity. The public entity will usually be involved in other aspects such as acquiring the site, decreasing legal concerns, and buying the output once the agreement period of the DBFOM is complete. Weed out bad projects o Particularly, once the repayment plan is mainly influenced by user fees, the private party just has an interest in projects that are backed by demand to secure their rate of return. The private party will extensively analyze the demand to make sure that they do not put themselves in a position of a risk of getting undesirable revenues. Such analysis eventually provides a clear benefit to society, as there is an unlikely chance for non-promising projects to be constructed.

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Design Build Finance Operate Maintain (DBFOM) Disadvantages The DBFOM method has a number of disadvantages, such as: •

•

Risk of financial default o When the private partner uses their own capital, it does so with small equity and a lot of debt. The private partner will not be in as strong of a position to raise taxes to cover a shortage in revenue as the government is. If the cost increases or revenue falls short behind its forecasted value, the private partner will be at a risk of default. Such a situation may leave the public entity with an underperforming facility that likely will have a negative cash flow. Some analysts debate that a private partner's bankruptcy is a good for the public entity because it can offer up the operation and maintenance of the facility for rebidding between interested parties. Other analysts, who are more pessimistic, assume that the private partner may fake a default to get the public entity to renegotiate the agreement. They consider the situation to be in favor of the private entity then because big projects have such a political weight that may force the government into a weaker position. Threading of the default of the operating firm may not lead to anything then. If the operator defaults and the project are profitable, the financing institutions may hire another firm to operate it. High interest rate for private entity debt o The public entities are frequently capable of getting loans on better terms compared to the private entities because of the ability to rely on taxes to pay for any shortage of funds. Private entities interest rates are 1-3% higher than the government rates.

Public Private Partnerships for Highway Projects Accordingly, the public entity should include a contingency term for the high interest rate paid on a debt when bidding a DBFOM contract. Relying on the tax benefit of depreciation may partially help in overcoming such a contingency.

Asset Privatization Privatization of transportation facilities is a subject that has been debated worldwide in recent years. In some countries, the private sector has sufficient financial power to acquire a lot of land that can be utilized to build a highway or even a transit line. In US history, this was the best way to originate most of the rail network. With a great deal of lands and potential growth, in addition to supporting regulations, governmental entities permitted private entities to acquire extended right of ways and gain the elevated value of the land achieved through the investment. Such approach reduced the need for public finance and risk; however, it switched significant value to the developers from the private sector. Currently, such a severe form of full privatization is uncommon within the US. Most land is either privately owned or is set for public use. SR-91 Express Lanes in Southern California, the Las Vegas Monorail, as well as the Dulles Greenway were extremely similar to any DBFOM except for one difference. Generally, for DBFOM, ownership is kept within the public entity. However, in the privatization ownership, it is shifted to the private entity for the life of the contract. Existing facilities or highways can be privatized as well, such as Indiana Toll Road (ITR) and the Chicago Skyway. For both of them, the private partner (the Australian/Spanish consortium of Macquarie/Cintra) paid a lump sum of money upfront for leasing the facility for 75 and 99 years respectively. Therefore, privatization can be done at any point of time; before construction or during operation. A key incentive for privatizing a preexisting facility would be that the public sector could avoid any political reaction from the need to increase tolls or transit fares, as long as those future increases are recognized by stakeholders to be beyond their legislators’ 74 | P a g e

Different Project Delivery Methods Compared to P3 control. Even though the public sector may have required the terms of toll or fare increases in the contract, it may argue when using a concessionaire. It is usually a one-time decision. It is really a decision with eventual political consequences, but additionally in principle, it will not likely be an issue again until later on within the concession period. The advantages and disadvantages with asset privatization are similar to those with a DBFOM structure. The main difference is the fact that by shifting the ownership to the private sector in a very privatization agreement; the public sector may abandon its power that could be kept under a DBFOM agreement. These powers may have to do with calculating toll rates, capacity expansion, and asset management. Any public entity, which is considering asset privatization, should choose which authorities it wants to keep, and then demand those requirements in the agreement.

Public and Private Sector Responsibilities The following chart sums up the different public and private sector roles and responsibilities under each of the aforementioned traditional and alternative delivery methods:

Different Project Delivery Methods Compared to P3 Table 2(Roles and Responsibilities under ADM Models)

Delivery Method

D-B-B

D-B

DBOM

DBFOM

Privatization

Designand Construction

Publicand/or Publicand/or MostlyPrivate MostlyPrivate MostlyPrivate Private(dependson Private(Public maydo (Publicmaydo (Publicmaydo (Publicmaydo whethernewor in-house design) ~30%designin- house) ~30%designin- house) ~30%designin- house) existingfacility)

Operations and Maintenance

Public

Public

Private

Private

Private

Ownership

Public

Public

Public

Public

Private

Private Publicsectoror users

Finance

Public

Public

Public

Publicand Private(oronly Private)

WhoPays?

Public

Public

Publicsectoror users

Publicsectoror users

Private

MostlyPrivate

WhoisPaid?

n/a

n/a

Publicand/or Private(Private Private mayassume minimalrevenue risk)

Whobears risk?

Public

Public&Private

Public&Private

MostlyPrivate


Selection Criteria for P3 projects For a public entity to select the P3 delivery method to be utilized in a project, the project has to reflect the objectives of such entity and meet its strategic goals and mission. Additionally, it should provide the best value to the public. Innovative design, construction, operation, maintenance, or financing of the project is expected from the P3 project. Public entity’s staff should rationally identify projects that private investment would fulfill a vital financial rule to complete a project. A number of attributes should be used to analyze any potential project to be delivered using the P3 method. Such attributes are explained below. Not all public infrastructure projects would reap the benefits of a P3 delivery method. It was found that identifying criteria for determining whether projects would be a good fit for P3 delivery method and is a recommended practice for public entities. Accordingly, the public entity should establish a criterion that offers a reasonable method of screening potential P3 projects. Such criteria should be manageable through the following methods:

Benefits to the Public Entity from Private Financing Identifying the benefits to the public entity from private financing of the project compared to public financing should be an essential criterion in deciding whether to use the P3 delivery method. Using public funds upfront may be a cause for delaying the project due to prioritization of projects. Typically, relatively expensive projectswith costs starting from the vast sums to billions of dollars-are more likely to reap the benefits of private financing, as it can take a long period to save up enough funds to create a large project without financing or to get approvals for public financing.

Future Revenue Source to Repay the Private Partner As part of the P3 agreement, the public entity pays the private entity back using one or multiple sources. Ideally, a project might have a passionate revenue source (like a toll or user fee) to pay back the private entity. The public entity can make payments to the

Public Private Partnerships for Highway Projects private partner from other public funding sources, including tax revenues.

Transferability of Risks Projects with significant known transferable risks to a private partner can be good candidates for the P3 delivery method. For example, a project with clearly identified risks (including the probability to generate enough revenue from a toll road to invest in the project) will be-suitable for the P3 delivery method. On the other hand, a project in its early stages of development with a completed environmental review may lack sufficient information to allow for an effective transfer of risk. Given these unknown risks, potential partners might be hesitant to enter into a P3 agreement for the project or may incorporate large premiums within their bid.

Complexity of the Project It is common to find that technically complex projects will be more inclined to relish the innovation or technical expertise accompanying P3 projects. Having a specialized project such as complex bridge or tunnel may be suitable for experienced private entity that can finish it fast utilizing its expertise under the P3 delivery method. On the other hand, a simple project such as repaving may not gain such a benefit from a P3 delivery method because of the lower chances to profit from the innovative and specialized expertise of the private partner.

Project Selection Attributes Selection of a project to be built using the P3 delivery method depends on a number of factors and elements. These factors are: • Potential to enhance the overall performance of the system or network of highways when the project is integrated with it • Potential enhancement of the overall safety of the system or network of highways • Providing a solution to a problem by increasing the capacity of a facility or a highway, reducing the negative effect of a high population in a nearby locality, or increasing the quality of 78 | P a g e

Different Project Delivery Methods Compared to P3 service • Financial evaluation of the project and the backing of it by an expected project revenue stream • Constructability of the project and the constraints that can face it during design, construction, maintenance, and operation, such as conflicts during construction and maintenance issues o This information is going to be employed to help assess the project’s financial feasibility. Project cost considerations will incorporate construction costs of the facility and the toll system if applicable, and facility operations and maintenance costs for the term in the project. • Potential social impacts on the locality including the right of way, noise, disruption during construction, environmental impacts, etc. • Tolerability of the project between stakeholders. Opponents should be offered mitigation to their oppositions. • Potential revenue of the project based on accurate feasibility studies. • Appeals to private entities to draw attention while meeting the public entities’ goals and objectives • Environmental influences of the project and evaluation of any mitigation that can be used. • Compatibility between the project and the overall plans of the public entity • Practicality of using toll stations on the project • Project overall cost, including the cost of the construction, operation, and maintenance of the project

Screening and Selection Process A procedure for identifying projects suitability for the P3 delivery method and the class of P3 ideal for each project. The P3 project screening procedure involves a four-step assessment process, as described below.


Project Suitability First, the project is evaluated for its suitability for the P3 delivery method. The project suitability criteria should be unbiased and standardized when assessing P3 projects. Facts about the project should be analyzed as a first step to identify project suitability to be delivered using P3 methods. Accordingly, after performing the suitability assessment, some projects may be eliminated because of clear incompatibility issues with the P3 delivery method. Prospective for Further Benefits Does private sector involvement suggest the prospect of value added? • • • • • •

Cost efficient and timely completed project delivery Creative methods for design, construction and Operations Effective risk allocation Financial administration Integration and/or synchronization issues Life cycle cost benefits

Organization Readiness Will the public entity be ready for the new delivery method before beginning the project? • • • • • • • •

Devoted competent P3 employees and/or consultants team Implemented conflict of interest policy Implemented regulations and rules Implemented standard P3 forms Localized governmental support / agreement on project delivery Obvious function assignment Obvious in house decision-making framework Project impacts the agency's long term and strategic plans

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Different Project Delivery Methods Compared to P3 Project Readiness Has the project development gotten into a phase that is certainly suitable to get started on / use P3 delivery method? • • • • • •

Permits approval, including environmental ones, status Preliminary design status Adequate layout permitting cost, along with a reasonably predicted completion date without inhibiting private partner creativity Job site readiness, including geotechnical studies, and constraints to allow cost estimating and risk identification. Third party agreements status High level project schedule status

Private Sector Interest Will the project be appealing for the private sector? • • •

Praiseworthy financial soundness Efficient involvement from private sector Remarks from the private sector

Economic Possibility Will a preliminary economic feasibility analysis reveal how the project could benefit from private partner financing? • • • • •

Robustness of public funding engagement / financial commitment Prospect / requirement of private money or perhaps financial obligation Possibilities pertaining to tolling (i.e. is enough income expected from tolling?) If fully funded by a private partner, will proposed public funding possibly be redirected to other projects? Stability of the Financial environment

Public Private Partnerships for Highway Projects Project Scope Will the project scope be appropriate for the P3 delivery method? • •

Evaluation of project scope options Construction expected cost ($250 million to $1.5 billion is an rule of thumb for practicality) • Project sophistication (such as design / construction challenges) • Method to incorporate the new O&M within current procedures It is expected that this assessment will make the verification procedures relatively fast and never require significant resources to execute. An assessment of the requesting office of the public entity should be periodically reviewed against these checklist items to validate its compatibility with the P3 delivery method.

Project Selection Assessing whether or not the P3 delivery method could be appropriate to accomplish project-specific goals compared to conventional delivery methods is the main goal of this step. It requires an assessment of the different delivery methods, including P3s and conventional design-bid-build (DBB) or even design-build (DB) to identify the capabilities of a P3 delivery method and the best specific P3 method to execute the project with reasonable overall life cycle cost. The analysis might necessitate clearly identifying project scope, anticipated risks, and quantification of project delivery options. It might additionally require assessment of qualitative aspects. Such a process may require allocation of resources to perform such analysis for a reasonable amount of time. A comprehensive financial analysis and a business case evaluating quantitative and qualitative factors are the expected outputs of this process to determine financial feasibility and comparison of practical delivery options.

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Project Nomination Project nomination step necessitates that both Suitability and Selection criteria have been met and that the project has to be taken to the next step to compete with other projects for public entity senior management approval. For California, it means submitting it to California Transportation Commission (CTC). Project must meet CTC’s guideline (see Resolution G-09-13) on P3 projects and satisfies SBX2 4.

Project Approval This step is a continuation of the previous step. After project nomination, a business case report is submitted to the senior management of the public entity. Once it is approved, the agency will be allowed to start the procurement process.

Project Pipeline Public entities that plan to use the P3 method frequently need to prepare for a stream of projects so it can easily decrease its expenses on the assessment procedure of each project. The entity has to have projects in different phases to secure a pipeline of P3 possibilities. The pipeline consists of projects that: • •

• • •

Have considerable approval of public and governmental back up. Higher probability to generate income or perhaps improve system capability using an efficient cash flow or other methods Higher value is expected using the P3 method compared to traditional delivery methods. Satisfy a high-priority transportation need. Sufficient enough environmental readiness to move forward


P3 Contractual Structure

3 The best suitable option for the public entity will depend on the potential risks, the responsibilities of the infrastructure project undertaken by the public entity and the private partner. The options arrange from a service agreement structure whereby the public entity is in charge of all aspects of the infrastructure project, except for the obligations specified in the public sector contracts on one hand, and a divestment of most infrastructure assets from the public entity's ownership and control, with the government maintaining any responsibilities through regulations on the other hand. The concession agreement is a third structure that falls between these two agreements. It is known as the P3 agreement. A concession agreement, deemed as a form of BOT (Build Operate Transfer), is usually the most complicated form of a contractual agreement. It is possible to understand the other P3 structures once the concession agreement structure is understood. The usual P3 options are set out herein below.

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P3 Options

Figure 1(P3 Options -Courtesy of FHWA)


Summary of P3 Options Allocation of responsibilities, risks and rights, between the public and private partners, can be a different form of one type of contracts to the other. The different types of contacts that affect responsibilities, risks, and rights of different parties are as follows: • • • • •

Supply Agreement Management Agreement Lease Concessions Asset privatization

Supply Agreement Supply agreement is an agreement between a supplier of products or services and the public entity (the contractor) or the operator to provide building materials or equipment required to build the infrastructure project. Concerning the supply agreement, the public entity maintains all the obligations to finance, build, operate, and maintain the infrastructure. If the public entity does not have the expertise to design build, operate, or maintain the facility, it will hire a supplier from the private entities to do such service in return for a certain fee. All revenues, that come from the project, is payable to the public entity. The following are the responsibilities of the public entity and the private entity:

Public Entity's Responsibilities • • • • • •

Ownership of the infrastructure facility Collection of revenue from the infrastructure facility Operation and maintenance of the infrastructure facility Establishment of required quality and performance measures Responsible for financing Enforcement and monitoring of agreements

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Private Entity's Responsibility •

Provision of specified services based on established quality and performance measures Supply Agreement Provide finance

Government

Finance, own, construct and operate.

Revenue

Supply Agreement

Project Supply goods or services as specifically provided under the supply agreement

Figure 2 (Supply Agreement - Courtesy of FHWA)

Sources of Finance (eg taxes, bonds and loans from banks or ECAs)

Pay Fees

Supplier


Management Agreement Through the management agreement format, the public entity owns the infrastructure and is responsible for the project's finance and construction, while the private entity is responsible for the operation and maintenance under an O&M agreement. The following are the responsibilities of the public entity and the private entity:

Public Entity's Responsibilities • • • • •

Ownership of the infrastructure facility Collection of revenue from the infrastructure facility Establishment of required quality and performance measures Responsibility for financing Enforcement and monitoring of agreements

Private Entity's Responsibility •

Operation and maintenance of the infrastructure facility

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Management Agreement Provide finance

Government Finance, own and construct. Revenue

O&M agreement

Project

Sources of Finance (eg taxes, bonds and Pay Fees

Operator Operate and maintain

Figure 3 (Management Agreement - Courtesy of FHWA)


Lease By using the lease agreement, the public entity finances and constructs the infrastructure facility. Once this mission is completed, the public entity keeps the ownership and allows a private entity to operate, manage, and maintain the facility. The private entity is entitled to keep the revenue in return for the operation, management, and maintenance of the facility. Public Entity's Responsibilities • • • •

Ownership of the infrastructure facility Establishment required quality and performance measures Responsibility for financing Enforcement and monitoring of agreements

Private Entity's Responsibilities • •

Operation and maintenance of the infrastructure facility Collection of revenue from the infrastructure facility

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Lease Government

Own, construct and finance

Projec t

Right to use and possess Obligation to operate and maintain.

Revenue

Figure 4 (Lease Agreement - Courtesy of FHWA)

Provide finance

Lease

Operator

Pay Rent

Sources of Finance (eg taxes, bonds and loans from banks or ECAs)


Concessions A standard concession P3 format shall include the private entity carrying out financing, building, operation, and maintenance of the facility in return for the revenue from operating the infrastructure facility. Usually, a consortium or a joint venture of companies represents the private entity. This consortium or joint venture must have the expertise in the design, construction, operation, and maintenance of the project. Usually, the private entity is financed from their own funds and debt. Most often, the construction of an infrastructure project requires a considerable amount of funding. The funding may be so significant that neither the public nor the private entity could perform it without financing. In a standard situation, lenders will loan money based on client's balance sheet. In case of project's failure, the client will be liable for the full amount of the loan. The borrower may be subject to bankruptcy if he cannot pay back the full amount of the loan. This type of financial risk is usually unacceptable by either the private or the public entity. The option of financing a project has allowed private entities, with experience in infrastructure development, to get financing to develop infrastructure projects with minimal amounts of funds taken from the parent companies forming the private partnership. This concept is sometimes called "off balance sheet" financial commitment because lending agencies lend money based on the strength of the project instead of the strength of balance sheets of borrowers. Since project funding mainly depends on the revenue of the project, project agreements should be completely developed. Comprehensive research should be performed to ensure the guarantee and consistency of the revenue. Project financing relies on the accuracy of assumptions and allocation of risks that usually increase project costs. Based on the limited funding basis, when the private entity does not pay the lenders, the lenders can reach 92 | P a g e

P3 Contractual Structure out for the sponsors, or the contractor to repay. In some cases, the lenders ask the public entity, owning the project, to pay. Probably, lenders will be paid through the anticipated income stream of the project. Accordingly, a fairly stream of income from the project is essential besides optional support from private entity's equity. The lenders request to get this recourse because of the uncertain value associated with infrastructure projects and the lack of the options to sell it, contrary to commercial properties, if the entity defaulted. The public entity contributes to this model by providing land, risk sharing and purchasing the provided services. The responsibilities of the public entity and the private entity are as follows: Public Entity's Responsibilities • • •

Ownership of the infrastructure facility when the concession expires Establishment of required quality and performance measures Enforcement and monitoring of agreements

Private Entity's Responsibilities • • • •

Ownership of the infrastructure facility during the concession duration Responsibility for financing Operation and maintenance of the infrastructure facility Collection of revenue from the infrastructure facility


Concession Transfer to the government at the end of the concession

Sources of Finance (usually project finance or bonds)

Revenue used as security for finance

Revenue

Figure 5 (Concession Agreement - Courtesy of FHWA)

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Project Construct, own and operate

Provide finance

Government

Project Company

Concession agreement


Asset Privatization Asset privatization or divestures is a model whereby the public entity transfers the ownership, management, and operation of the infrastructure facility to a private entity. The public entity may maintain some control through monitoring the fulfillment of regulations or licensing procedure.


Divesture Project Company

Government

Licenses

Provide finance

Sources of Finance (equity or debt)

Transfer of infrastructure asset

Revenue

Own and operate

Regulatory controls

Project

Figure 6 (Divesture Agreement – Courtesy of FHWA)

Overview of Concessions This section provides an overview of the P3 projects by describing the structure, the parties, and the sources of finance of a typical P3 project. Unfortunately, a P3 project rarely fits the description in this overview. Actually, the structure would look quite different if there is no separately incorporated project company, or if it does not involve private sector financing. Nevertheless, understanding this basic structure is a good introduction to understanding P3 projects.

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Expertise Public Sector Government consultant (eg legal, financial and technical adviser)

Sources of Finance Host government Institutional investor Bank

Expertise Engineer

Multi-lateral institution

Appointment Advice

Appointment

Financing

Appointment

Government (may incorporate the interests of various government agencies)

Contractor Supply

Supplier

Finance Lender

Debt finance

Concession

Supply

Project Company

Guarantee

Sponsor

Construction

Quasiequity finance

Assignment of revenue

Revenue stream

Security holder

Customer (May be the general public, or the government or a private

Figure 7 (Overview of Concessions – Courtesy of FHWA)

Operator

O&M Insurance

Equity Finance

Supply

Insurer Escrow agent


Parties A number of parties are involved in the P3 projects. These parties may have different roles than what is common in the traditional contracts.

Public Sector Public Entity Sometimes, the “public entity” here is called the “government.” It should be a state owned entity, a division or department of the state or government, a municipality, a county, city, or even a town. Generally, it is assumed that there is a single entity that acts as the "government" and that there are various competing interests of different departments and entities within the government. Actually, different agencies may have overlapping obligations and contradictory agendas. The conflict between governmental agencies or divisions may deter the private party from dealing with any of them. If the public entities cooperate to have one interest by changing the culture and the attitude towards other agencies, this will greatly help in the success of P3 projects. Moreover, this cooperation will help to, better, reflect the vision of the public entity, the facility users, and taxpayers in negotiating the terms of P3 projects. The public entity should play a vital role in P3 projects in order to ensure that they serve the public interest. The public entity often specifies the project. However, submission without solicitation from private parties might occur. The public entity selects the project and its scope, and then mandates the design, operation, and maintenance of the project to follow its objectives. Based on these requirements, the private entity will be selected based on an approved process of selection and bidding. Moreover, success will need support from the government in regulations, administration, legislation, and, sometimes, financial support is required as well. 98 | P a g e

P3 Contractual Structure The government plays various roles in determining the outcome. This depends on the P3 process of a particular government as well as the specific project entailed. An example of this may be the government asking the private sector to offer a proposal including design of ways to achieve required tasks and objectives. On the other hand, the government may offer a precise request for proposal if it has a concise and specific idea of the infrastructure project needed. Such action may limit the creativity of the private entity. The project organization may or may not involve the government in its operation. At times, governments possess shares in a project company allowing them the ability to exercise limited control. An example of this may be the government’s ability to nominate directors to a project organization’s board. On the contrary, the government’s interest in a project may be assuming interest in the infrastructure at the concession’s end. As an alternative, the government may be a main user of a service or product (as is with the electricity or water industry). This type of government interest will certainly affect a project’s bankability.

Government Consultant In a case of the government having little expertise in the aspects of a P3 transaction, knowledge and experience from in-house consultants may be required. Governments may also engage consultants from outside its network. The government could also be required to preserve outside consultants for services outside their realm of expertise.

Public Private Partnerships for Highway Projects Proper selection of high-quality consultants is crucial for a successful project. Governments may already have a pool of consultants available, which the government must choose an adequate individual for a project. Reputation, cost, and level of expertise are issues to consider when choosing consultants. Available on the World Bank’s website is a report labeled “A guide for hiring and managing advisors for private participation in infrastructure published” by the World Bank’s PPIAF unit. This is an excellent document to consult. Following are areas consultants are typically retained: Legal: In order to shape the legal formation of a project, judicial consultants are required to draft, review, and negotiate pertinent documentation. Financial: In order to establish a security package, lenders will require specific information about funding, foreign exchange, capital markets, and feasibility studies, etc. Financial consultants may be necessary for these matters. Technical: Technical experts may be necessary to determine whether a facility’s design and construction are acceptable. This includes the specifications and standards related to construction as well as the facility’s operation. Technical consultants are required to define the project, compile proposal request, and assess bids. Others Depending on the P3 project, consultants in the areas of pension, staffing, public relation, and the environmental sector may also be sought out during specific phases of a project. 100 | P a g e


Project Company At times, in the jurisdiction of the project, a project company or special purpose vehicle may be incorporated into the legal matter of the project. An alternative to this may be an unincorporated consortium. In this case, the sponsors hold the project assets. In addition, during the project delivery process, the government may require incorporation of a local organization. The project company with incorporated structure has key advantages including: Bankruptcy Remoteness (Project) When sponsors directly hold assets, one of them may become insolvent. In this case, the entire project’s assets could become subject to a claim by the insolvent individual’s liquidator. A corporate structure protects these assets from potential risk. The project company’s shares could be subject to liens, the ability to hold property as collateral. This is simply for the benefit of the rest of the project’s sponsors if bankruptcy is to take place. Bankruptcy Remoteness (Sponsors) Corporate structures are beneficial for sponsors in order to protect them from risk. Corporate entities have limited liability; therefore, if the project is not completed, or fails, the sponsors only have to assume responsibility up to the extent they have committed. Management Corporate structures are run by a board of directors instead of investors. Directors have the ability to perform actions in the best interest of the company regarding financial matters. Investors are more likely to act in the best interest of their investment rather than solely the project company.

Public Private Partnerships for Highway Projects Ownership of Project Assets A corporate structure is typically a more neutral structure because, as a company, it holds the project assets. In the case of an unincorporated structure, the assets are divided among each individual sponsor in relation to their investment. Security Lenders are typically more generous in offering financing under a corporate structure. New Sponsor Introduction When new sponsors are introduced to an organization within an unincorporated structure, amendments must be made concerning each project asset in the ownership forms. On the other hand, new sponsored being introduced into a corporate structure are simply issues new shares or share transfers. Note: With a P3 transaction, government approval may be necessary when introducing new sponsors. Sponsor Divestment Under a corporate structure, it is much easier for a sponsor to divest his interests. It may not be beneficial, however, to divest interests if the project requires the sponsors’ long-term commitments. Transfers of shares are typically significantly regulated. Government approval may be necessary with a P3 transaction. Jurisdiction Within a corporate structure, the sponsors would not be subject to jurisdiction risks in local court. The sponsors’ overall business would also not be at risk concerning local business regulatory compliance. Negative Covenant Non-Inclusion Typically, lenders would require very strict rules and covenants when providing financing in order to protect their investment. A corporate structure allows the project to be liable to these covenants rather than the sponsors. 102 | P a g e

P3 Contractual Structure Reporting Sponsors may not need to report the project’s liabilities within their personal accounts if they are involved in a corporate structure. This issue mostly depends on the amount the particular sponsor has investment in the project as well as his own accounting policies. The two specific disadvantages that exist for sponsors regarding a locally incorporated special purpose vehicle: Political Risk Increased political risks exist for companies that are incorporated. Tax Globally, several countries have tax advantages for incorporated companies; however, some tax disadvantages may exist.

Finance Following are descriptions of those who lend money to finance a project. These descriptions are categorized by the type of interest they hold in a project. Lenders provide the debt financing, sponsors hold share interests in a project, and bondholders hold interest in a company that is neither debt nor equity. Debt can be distinguished from equity in the following ways: Control Control differs significantly between shareholders and lenders. The majority of the shareholders are who have actual control of the project company. The project company has a board of directors heading the company’s direction; however, the shareholders can indirectly influence the company by appointing or removing those on the board of directors. They also can exercise their voting rights in a shareholders’ meeting. Lenders are limited to actions that are provided in the loan

Public Private Partnerships for Highway Projects agreements. An example of this would be the lenders limiting the project company’s ability to take on another loan or pay dividends. Profits Lenders are entitled to payment from a company in accordance with loan agreements. This is regardless if a company has made a profit or not. On the other hand, shareholders are prevented from declaring and paying profits by company laws unless it is earned. Shareholders’ potential gain is based upon whether the company’s value, whereas, lenders receive a predetermined interest rate. Priority Winding Up Upon a project company’s liquidation, the lenders have first priority to receive payment. If payment to lenders uses all the liquidation funds, shareholders do not receive any payment. Sponsors may provide various forms of financing through subordinated debt. Sponsors subscribe for equity in a project company.

Sponsor The project sponsors may be a variety of parties including one company, contractors, operators, suppliers, or a user of a product. Concerning the sponsor being a user of a product, the obligation comes from the project company to purchase products based on a take-or-pay agreement. Finally, a sponsor could be an investor who is solely interested in financial gain. A sponsor may be interested in a project company for several different reasons including:

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P3 Contractual Structure Shares The rights and requirements of the sponsors as shareholders are bound by the company laws determined by the jurisdiction of the project company. These may be changed in the formal organization document (by-laws, articles of association, etc.) of the project company. It would depend on the specific country laws or issues like confidentiality of the sponsors whether these were contained in a control or formal organizational document. No matter the documentation, the issues would be the same. For the purpose of this manual, reference will be made to the specific document overseeing the rights and obligations of the sponsors as shareholders’ agreements. Subordinated Debt Sponsors can advance funds to a project company as subordinated debt within a subordinated loan agreement. Typically, this only happens if the sponsors are currently company shareholders and within the proportion of the shareholding. Options Advance of funds may be conducted to a project company as a debt that is convertible to shares at specific exercise events. A project company may provide a variety of securities that could be options or other securities depending on the corporation’s law under the jurisdiction. Because these are an issue of securities to private shareholders, these are different from the issue mentioned in chapter 5.5 of quasi-equity securities. For this guideline, we will refer to these private agreements such as creating or underlying securities as an “options agreement.”

Public Private Partnerships for Highway Projects Lender A lender’s purpose is to contribute financing for a project. Typically, this financing is provided as a loan with an interest rate. The primary concern for a lender is that the borrower (in this case a project company) is able to repay the loan, including interest. In addition, the lender is concerned measures that would need to be taken in case the project company is not able to pay back the loan. A lender will examine a project company’s credit, including any of its guarantors, in order to assess the risk accompanying the project. The interest rate a lender offers is in conjunction with the level of risk of the project company. Higher risk results in a higher interest rate; lower risk results in a lower interest rate. For projects, interest rates tend to be higher because they involve a great risk than a typical loan secured by assets. Lenders will do research on a project in order to be sure the project company is in a position to repay the loan. Lenders are concerned with a project company’s ability to repay the loan and interest in the case that the project fails. A project’s security package usually includes the project company owned assets as well the assignment of the project agreements. A lender is going to look at a project company’s cash flow entitlements. Examples of these may be an off-take agreement or a customer agreement. An escrow agent could be utilized in order to keep project company revenues for security purposes. Compared with equity funding, debt funding is less expensive. A company, which acquires debt financing, is often described as acquiring advantage resulting in a better return rate for equity investor. High risk is equated with higher advantage. The project must generate enough revenue to pay interest costs compared with profits that do not have to be distributed if not enough income is produced in the case of the project failing. Debt finance sources include institutional investors, government sources, banks, and multilateral institutions. 106 | P a g e


Security holder For raising money to finance an infrastructure project, a project company could issue securities. Securities that typically offer a return at a specific interest rate would be bought by a security holder. A quasi-equity security is one in which a trustee enters into a trust deed for security holders agreeing on the securities’ specific conditions. Upon liquidation of a project company, quasi-equity will typically rank below lenders yet before equity holders unless the specific conditions are stated otherwise. Bonds represent securities for a project company in most jurisdictions, and dependent on the specific local regulations, a project company may not have much flexibility concerning a bond’s terms. An example of this may be an in-built option where the securities can be converted to shares within a company determined at a specific price. The holder of the security could perform this option if, at time of repayment, market price is higher than the price described in the option. Examples of security finance sources include multilateral institutions, bankers, and institutional investors.

Expertise Contractor The responsibility of a project’s construction lies with the contractor. For this guideline, this includes engineer, build, and design. Typically, through a procurement process (i.e., competitive tender process), a project’s contractor is selected by the government. For a typical PPP project, a project’s contractor is labeled a sub-contractor. The requirements of the government are established in a concession agreement made between the project company and the government. Within the EPC agreement are the contractor’s requirements. Also within the EPC agreement are the project company’s obligations to design and construct the facility.

Public Private Partnerships for Highway Projects Engineer At time, a project will hire an engineer for advising the project on technical aspects. An engineer’s role depends on the specifications of the project as well as the potential risks of the project. An engineer may have several roles. A contractor may hire an engineer to oversee a project’s technical areas. The project company may hire an engineer to advice concerning the contractor’s work under the EPC agreement. The government may hire an engineer to advice on the project concerning the project company’s concession agreement compliance. In addition, the government may utilize an engineer on the facility’s condition. Lenders may use an engineer for creating reports on the project’s progress in order to disburse funds and financing. For disputes regarding technical matters, an engineer may act as an arbiter. Operator When the project completed, the project company engages a firm to operate and maintain the infrastructure facility. An operator manages the infrastructure when the project is completed. The operator is typically the appointed contractor or even the project company. If the project company is not the operator then the relationship between the operating firm and Project Company must be guided by an O&M agreement, which can be named a services agreement. Insurer Lenders often request that the project company insure the projects because of the high risks associated with infrastructure projects. The project cost should include the insurance, as it is significant. Due to the risk associated with infrastructure project, the project company will likely need to take out insurance for the project. This would be a requirement from the lender in order to secure financing. The insurance is usually quite sizeable and 108 | P a g e

P3 Contractual Structure should be taken into consideration for the overall funding of the project. ECAs and other multi-lateral institutions like MIGA may offer political and commercial risk insurance. Escrow Agent At times, a lender may utilize an escrow agent for increased security and to assure revenue accumulating from the project is disbursed according to a pre-determined process. The escrow is usually a financial institution. The responsibility of the escrow agent is to hold and disburse the project company’s proceeds under the specifications of the loan agreement terms. The escrow agent will insist monies are disbursed in an even manner. Supplier Raw materials and/or equipment provided by suppliers may be delivered to the project company; however, they are typically delivered directly to the operator or contractor.

Customer The products or services that are produced by the infrastructure project are used by customers, which may be the government, public, or businesses. The products/services may be offered for free or at a subsidized rate, or customers may pay tariffs. If the customers are the public, the government would need to establish a tariff structure for the products/services with the project company. If the government or a private business is the customer, specific arrangements may need to be made and agreed upon in order to purchase infrastructure services.

Sources of Finance Financing may be provided as equity, debt, or quasi-equity instruments. Follows are examples of finance sources:


Host government At partial financial commitment from the government for a project may be necessary for sponsors or lenders to agree for funding. This may depend on the country, project risk, and sector. Depending on the country, government may provide funds for a project if it successfully passes a social cost-benefit analysis, but the private sector is not able to retain adequate benefits in order to make a project financially feasible. Following are examples of possible government financing: Direct equity investment. It is possibly a shareholder in a project company may be the government. If this is the case, the government is in a superior position to command the project by its equity in the project company. This can be done through the project company’s constitutional documents and shareholders’ agreement. A benefit of the government’s funding support for the project company may be help in obtaining regulatory clearances. A concession agreement may accomplish the objectives of offering the government partial control of a project ensuring the project ensuring the project obtains the required government aid. The government’s involvement and investment in a project does not always communicate to private investors that the government is committed to helping the project. Government involvement may actually discourage private investors from offering funding due to political interference. Direct loan On rare occasion, the government will issue a loan for a project company. For example, the government provided an interest free load of AUD$223 million for helping fund the Sydney Harbor Tunnel project.

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P3 Contractual Structure Stand-by loan A stand-by land may be issues under certain circumstances. Guarantee Forms of financial guarantees may be given to project lenders and sponsors from the government as a pre-condition. An example of a guarantee is a project’s operating revenue. Subsidies In order to cover the difference between the full commercial price and actual user charges, the government could provide subsidies especially where tariffs are supervised. The government’s financial commitment does not necessarily mean it will be provided up front, except for the case of direct equity investment. In this instance, lenders and sponsors will check into the government’s credit rating in order to determine the government’s reliability.

Institutional investor Institutional investors are fund managers who manage compiled funds and make calculated investments for its customers, which are investors. The responsibility of the fund managers are to invest funds in projects that will provide an adequate return on investment in correlation with the fund’s predetermined comfort level of risk. Each fund has its own regulations.

Bank The primary method for banks to provide funding for projects is through loans. Most commercial banks will offer project financing. For large financing projects, typically multiple banks will be utilized. Commercial banks are typically more flexible than multilateral institution lenders. Commercial banks are better able to specialized loans for meeting the needs of its borrowers.


Multi-lateral development institutions They are institution, formed by a number of countries. They offer financing and professional counseling for improvement purposes. Member countries are either improvement sponsors or debtor. These institutions provide financing in two forms; longterm loans, very long-term loans, or grants. Long-term loans are offered at market rates, while very-long-term loans are offered below market rates. Several different multi-lateral institutions exist that may offers financing for infrastructure projects. Debt and equity are common forms of financing, and this depends on the specific project or donor. Other types of aid may be offers besides a direct monetary item. An example of this may be a multilateral institution offering financing for a government’s equity contribution in the case that foreign exchange was in shortage. Each donor agency will have different regulations for investment as well as different forms of financing. The institution should directly be south for information if multilateral institutions or donor agencies are going to be used as financing sources. Main Multilateral institutions are: • • •

African Development Bank (AFDB) Asian Development Bank (ADB) European Bank for Reconstruction and Development (EBRD) • European Investment Bank(EIB) • Inter-American Development Bank Group (IDB, IADB) • Islamic Development Bank (ISDB) • World Bank For example, the World Bank offers a large amount of funding for projects in developing countries. Loan funding through the International Bank for Reconstruction and Development (IBRD) 112 | P a g e

P3 Contractual Structure and International Development Association (IDA) is offered by The World Bank. Two agreements are used by the IBRD and IDA regarding loan documentation. One is a “General Conditions” agreement and the other is a shorter agreement laying out the specifications of the loan. Two other general conditions documents exist which are relevant for loan guarantee agreements. One is for single currency loans and other is for fixed-spread loans. The IDA has a document entitled “General Conditions Applicable to Development Credit Agreements. The World Bank also offers guarantees. The financial requirements for commercial lenders by the government may be credit-enhanced using a partial guarantee by the World Bank. These are considered partial guarantees because, contingent upon success of the project, they only cover a least amount of risk and minimum debt. If the host government neglects to extend funds due under a concession agreement, then the World Bank would offer to settle the amount to the recipient of the guarantee. Repayment for the amount to the World Bank would still be required by the host government.

ECA ECA is an export credit agency (also known as Investment Insurance Agency), which is an institution that is private, governmental but managed privately, or mix of both. ECA is acting as a middle that acts as a liaison between exporters and governments to finance exports. The financing may be in a one of three forms; payment guarantees, credits, credit insurance, or mix of them. The form of financing is contingent on the directive given by ECA’s government. A critical source of long-term debt funding is ECAs. These are typically state-owned and they seek to promote the country’s exports. ECAs have broader terms than those provided from commercial banks, and they are typically subsidized. A downside

Public Private Partnerships for Highway Projects of ECAs is they may require a government guarantee containing specific terms. ECAs are typically utilized for financing goods and not civil works; this can be a constraint. The Consensus Rules exist to avert biased or improper competition by an ECA providing board conditions for helping its country’s exports. More offerings by ECAs include commercial and political risk insurance as well as interest rate support. Following are some countries and their ECAs: • • • • • • • • • •

Austria : O& KB Belgium : OND France : Compagnie Francaise D’assurance Pour Le Commerce Exterieur (COFACE) Germany : Hermes Kreditversicherungs-AG Italy : Istituto per i Servizi Assicurativi per il Commercio Estero (SACE) Japan : Japan Bank for International Cooperation (JBIC)/MITI Netherlands : Nederlandsche Credietverzekering Maatschappij (NCM) Switzerland : ORG United Kingdom : Export Credits Guarantee Department (ECGD) United States : Export-Import Bank of the United States (USEXIM)

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Private firm A private firm may finance a P3 project if the firm itself is the project’s contractor. The contractor must commit to specific resources in order to create the infrastructure according to the concession agreement. Lenders look to a private firm’s commitment who are contracted to manage the concession agreement determining if it should provide funds for the project. If specific assurances are made, other private firms may desire to help fund the project. Examples of these assurances may be a sponsor


4

Project Agreements

The key issues in relation to public-private partnerships are explained throughout this chapter. If there is not an officially incorporated firm involved in the contract, the group that has been chosen to run the piece of infrastructure in question should be substituted in place of the contracting firm. The contracts are organized as detailed below: •

Contract to keep public agency consultants (beneath the “Retainer” section);

•

Concession contracts giving the rights to operatea specific piece of infrastructure (beneath the “Concession” section);

•

Contracts involving the equity financing for a job (beneath the “Equity Finance” section);

•

Contracts involving the debt financing for a job (beneath the “Debt Finance” section);

•

Contracts that agree to grant quasi-equity financing for a job by the issue of certain securities like bonds (beneath the “Quasiequity Finance” section);

•

Contracts for designing, constructing, operating, and maintaining a facility(beneath the “Design, Construct, Operate and Maintain” section); as well as

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Project Agreements •

Contracts with consumers of the structure’s functions (beneath the “Off-take agreements” section)

These agreements are each addressed in their own section below. For each category, there is a section devoted to government concerns, which goes into detail about the issues of particular importance to government entities. The reason for a particular concentration on government issues is to make sure that their goals, issues and concerns are not overlooked during complicated and detailed contract negotiations. The “Key Issues” are also discussed for each contract type, detailing important and often negotiated points. This allows one to pay specific attention to these points when meeting with an attorney to ready a contract, or while making notes on a contract given by counterparty. These agreements have a tendency to be long and complicated, so by paying close attention to the key points from the viewpoint of the public agencies, it is possible to make sure that a reader does not lose themselves in the specifics. However, individual contract types are explained individually, be sure to take into consideration how they relate to each other. Contracts are dependent on each other, and they should work together as individual parts of a whole. Their organization and details should mesh as well. It is particularly important to ensure that provisions relating to jurisdiction, governing law, termination, force majeure, and default are consistent, if not identical.

Retainer Public agencies usually employ consultants in order to carry out a P3 project. Because of this necessity, there is an excellent publication available from the PPIAF unit of the World Bank. Published in July of 2001 and available on their website. It is titled “A Guide for Hiring and Managing Advisors for Private Participation in Infrastructure.” When a public agency is embarking on a P3 project, the retainer is the first type of contract that comes up. It refers to the contract

Public Private Partnerships for Highway Projects between the public agency and the consultants they hire. This retainer sets out the terms that govern the consultant’s services. The contracts that govern the relationships between public agencies and their advisers, discussed below, will be the same, no matter what type of P3 structure is used. Sometimes, this agreement is simply a letter written by the public agency’s consultants. The agency may be asked to sign a copy of this document to show that they acknowledge and agree to the contents, and then return it to the consultant. The public agency should make sure that the agreement looks out for the agency’s goals and interests before signing it, and request changes if necessary. Goals of using Retainer The main goals of the government’s agreements with its consultants are: Quality • The retainer itself does not directly imply the quality of the consultants, which is mostly dependent on their experience and reputation, as well as the way the public agency manages them. However, it is possible to elicit advice that is more useful by addressing certain issues within the retainer. Straight Forward Instructions • The retainer’s contract must clearly detail the extent of the work required, as well as guidelines for the communication process to take place between the consultants and the public agency. Incentives • A well-written retainer serves to bring the interests of the consultant in line with those of the public agency. This is sometimes arranged with a “success fee,” but the larger goals should be taken into account since the completing a P3 transaction without constraints might not be the best 118 | P a g e

Project Agreements thing for the government, particularly if done at a very high cost. Review • It is important to include a method by which the government agency reviews the performance of, and provides feedback to, the consultants. This section should concentrate on coming to a resolution through discussion and negotiation, as opposed to termination, though provisions should be made for termination of consultants or the hiring other consultants if needed. Changing consultants during the execution of a P3 project can lead to decreased private contractor confidence in the public agency, as well as project delays, increased costs and disruptions, so it should be avoided if possible. Cost •

The focus should be on value, not on the lowest cost when hiring consultants. Consultant fees do significantly affect the total project cost, but ineffective management can be even more costly. Quality consultants save money in the long run with excellent leadership, solid commitments, and clear directions. Paying the market cost for well-reputed, experienced consultants will ensure that the government’s interests are protected during the completion of P3 projects.

Trust • Trust is essential in the contractor/government relationship. There are often responsibilities that go beyond the official confines of the contract. It is best for all involved for the retainer to specify all obligations of both parties, including methods for resolving situations in which a conflict of interest and confidentiality agreements arise. Retainer Contents A retainer normally addresses the following points:

Public Private Partnerships for Highway Projects Scope of work • The public agency must make sure that the description of the proposed scope of work in the retainer matches the work that the agency needs the consultant to perform for the P3 project. Procedures • Even if it is not formally stated in the retainer agreement, the parties need to agree on the processes that they will use to complete the project as well as the criteria by which the consultant’s progress and work will be reviewed. Confidentiality • The public agency must make sure that all of the materials given to the consultant are kept confidential. In particular, it should make sure that it specifically states which information is confidential, and ensures that consultants use that information only for their roles as government consultants. The agreement should also specify that the public agency should be informed if confidentiality is breached, and that the expectation of confidentiality is extended to all employees, agents, and sub-contractors that the consultant might employ. Conflicts of Interest • In an ideal world, any government consultants would be without clients who might create a conflict of interest, but this can be difficult when you consider that consultants for P3 projects tend to be very specialized. With a limited number of qualified and experienced candidates, especially in countries with a quickly developing economy, it is sometimes not possible. At the very least, the consultant must inform the government agency of any conflicts of interest that do exist. Fees Fees may include the following: 120 | P a g e

Project Agreements Fixed fee • A consultant contract based upon a pure lump sum fee is quite rare. It is normally hard to tell up front the amount of resources or number of hours the consultant will need to provide to finish the job at hand. A fixed fee is normally used hand in hand with a variable cost format, such as a cost plus fixed fee payment system. Success fee • These are fees to be paid when a project is complete and are designed to serve as an encouragement for the consultant to strive to bring the contract to a successful conclusion. The ending point at which the fee is paid can vary based on the services that the consultant provides. For example, with a financial consultant “completion” might mean the closing of a transaction instead of the completion of a construction project. Time based fee • The majority of retainers are based on the time required in addition to an allowance for out of pocket costs. The public agency is required to pay the consultant based on the units of time that the project requires, which may be calculated in months, days, or hours. This format means that keeping a control on the overall fee becomes a key point for the agency. Most consultants will not accept a maximum fee amount, which is appropriate considering that the size and details of the project are subject to change with time. In these situations, it is appropriate to ask for an “estimate” from the consultant, with the understanding that if the needed compensation is going to go over the estimate, the consultant is expected to let the public agency know. This can result in a greater understanding of the consultant’s fees, a negotiation to reduce the overall cost, or an adjustment in the way things are done so that future projects are completed more efficiently.

Public Private Partnerships for Highway Projects Transaction value fee • Transaction value fee is a percentage of the total transaction. This type of pricing is rare in a normal P3 project, and normally occurs when working with financial consultants. When dealing with acquisitions, bond issues, acquisitions and initial public offerings this kind of feeis more common. Since financial consultants act as brokers that “sell” the offering in question, it gives them more motivation to obtain the best price. Professional liability • Consultants should be liable for damages in the event that they have been fraudulent or negligent with the advice that they give to government agencies. In the retainer, consultants sometimes try to limit their liability. The public agency must pay close attention to these exemptions to ensure that they are within reason. They should not accept a wide and generalized disclaimer that would exempt the consultant from fraudulent or negligent acts. However, liability protection from expectation losses is considered acceptable. Termination • This agreement sometimes includes a specific time period for the consultant’s tenure, and sometimes does not. In a best-case scenario, the public agency has the right to terminate the retainer at any time; however, this is not always possible. If nothing else, they should be able to end their agreement if the consultant’s services are not satisfactory. Most retainers are written so that both parties have the right to end the relationship at their discretion, though some require that the terminating party provide a specified period of notice. Some circumstances call for more strident termination rights, as in the case where a success fee is due. The public agency should not be allowed to end the contract for the purpose of avoiding payment of fees due. 122 | P a g e

Project Agreements

Concession Concession agreements are the agreed upon arrangements between the private sector companies and the government that are at the core of every P3 project. They detail many things including the guarantee of performance that the private sector contractor, sponsor, on party who encompasses both provides to the government. Within this section, the “concession agreement” refers to the contract giving the private corporation the rights to run a piece of infrastructure. This type of contract might also be referred to as a license, lease, or BOT agreement, based on the type of P3 structure that is used. The government can ensure that their interests are being served in a concession agreement are by passing legislation and buying sufficient interest in the private company so that they cannot make particular actions without government permission. In addition, it is wise for the public agency to necessitate that the sponsors of the project guarantee all articles mentioned in the concession agreement. Sometimes the project companies are specifically created in order to take part in the P3 project. By requiring the sponsor to take responsibility, it ensures that the partner has the record of accomplishment and degree of experience necessary for trust. This is not to be underestimated, particularly when the company is responsible for the building of infrastructure projects. Concession Agreement Concession agreements are the only contracts specific to P3 projects. All other contracts used in P3 projects are similar in both construction and content to contracts common in the corporate and commercial world. Concession agreements are the backbone of P3 transactions, setting out the pattern of the interactions between private companies and the government. It is an essential agreement for lenders, and helps to identify and assign the risks that might be encountered in the course of a project. This contract can be named

Public Private Partnerships for Highway Projects an “implementation agreement,” a “development agreement, or a “project agreement”; however, contracts named thusly might in actuality be EPC agreements. Within these guidelines, concession agreements are defined as a contract between a government entity and a private company in which the private company agrees to build and operate a specific service or structure. As compensation, the government entity gives the private company the rights to the service or structure and collect income from the services it provides. Moreover, the structures ownership may revert to the government once it is built, at which time the private company receives a lease to continue operations. At the end of the concession period, in most cases, the rights to operate the structure revert to the government. Nature of concession agreements The first thing that we need to inquire about when considering concession agreements is the definition of a “concession.” This will vary based upon the legislation in effect in the area where the P3 project is completed. Most countries who base their legislation on civil law, like France, maintain a section of legislation that addresses concessions specifically. In this situation, one must examine this legislation and consider how much it will affect the issues in this section. Specifically, in places where administrative laws apply and a concession is considered a “grant,” it might be revoked at the government’s whim during the execution of its administrative ability. This would obviously be of concern to lenders, and others in the private sector. Both the lenders and the sponsors need assurance that the rules governing their concession agreements are not subject to change or revoke at any time by the government. This assurance requires that concession agreements be considered under general contract law as opposed to administrative law. In this instance, the public agency participates in a concession agreement through its commercial capacity so that their rights and obligations in contracts apply as they would to any other organizations that would enter into contracts. If this is not the case, 124 | P a g e

Project Agreements the companies involved should consider how this changes the arrangements. The company involved might have issues concerning their rights, as well as the certainty of a return on their investment, that might have to be addressed with legislation. In all situations, the laws and regulations within the jurisdiction of the concession agreement must be taken into consideration. Goals of using Concession Agreements The government agency’s main goals in a concession agreement are: Availability of the infrastructure service • The contractor is responsible for making sure that the services offered are accessible to all who reside in the area of the service. Hopefully, there are wider policies and regulations to ensure accessibility in place, so that this issue does not have to be dealt with on the contract level. However, it might be necessary to include these provisions in developing countries or those without proper legislation. Even services provided through the private entity should serve all citizens, including people in rural areas and those in poverty. Quantity and Quality of infrastructure service • The private entity involved must provide the agreed upon services for the structure, defined by quality output, for duration specified in the contract. In order for the project to succeed, the private entity’s responsibilities must be well defined and articulated. Detail these terms in very specific and quantifiable language so that there is no confusion. The best measuring tools to use will depend on the type of industry that the structure falls under. Successful completion of the infrastructure asset • With the majority of P3 projects, the infrastructure asset is constructed and designed by private companies. The company should be required to complete construction in a

Public Private Partnerships for Highway Projects reasonable amount of time, and the structure that is designed and built should meet the goals that were set out. The public agency should not be held responsible for problems with the building or the design of the structure, unless it is a rare case in which the delays or defects were in fact the result of the public agency’s actions. Regulatory compliance • The contractor must be required to follow related environmental protection and safety standards. In countries that are still developing, their governmental regulations might not be sufficient. This may be rectified by contract specifications until proper laws are put into place. Acceptable tariff • The costs passed on to consumers must be “reasonable.” The definition of reasonable within this context can depend upon many variables not to exclude the cost of maintaining the infrastructure, the cost of providing the services, the rate that customers can afford, and the consequences that this cost will have on the economy as a whole since utilities such as electricity, gas and water are necessary to produce other economic necessities. Fair returns on investment • Toll structures serve three purposes. They give lenders the assurance that there will be enough income to cover the debt and interest, they give equity investors the income they need in order to both recover their investment and receive a reasonable return on it, and they provide profits for the private entity and the public agency to share in the case of unanticipated success. From the private entity’s perspective, this third reason may be debatable since they have provided the investment for the undertaking. They might see the profit, after paying for the debt and other investment costs, as theirs since they were the ones who took the risk involved. The counterpoint to this is that when there are “excessive” profits it is costing the public more than it should be. Because of this, concession agreements 126 | P a g e

Project Agreements commonly have sections that seek to even out profits made by contracting companies. These can take the form of a shortened contract time if the infrastructure reaches a specific amount of income, or a provision that income above a certain amount should be put aside for governmental use. Make sure that any provisions of this matter do not take away from the incentives that the contracting company has to operate efficiently Proper maintenance • The operator must perform the necessary repairs and maintenance because that is part of their responsibility to ensure that the structure is in proper working condition when the company transfers services back to the public agency at the end of the contract. Concession Agreement Highlights This section summarizes the key issues involved in the negotiation of a concession agreement. Keep in mind that all of these issues are interdependent, though they are considered separately in this discussion. For instance, the time involved in the concession period is normally decided by calculating a reasonable length of time in which the private firm can recoup the costs of borrowing and construction in addition to a fair profit that takes into account the risk they have taken on. Additionally, this is dependent on the fees the firm is allowed to charge users. For example, if the firm is allowed to set their own usage fees they can pass increased costs onto their users, so they will not be as worried about the risk of growing input costs. The subjects considered below are often issues addressed in concession agreements. At the heart of each of these subjects is the issue of risk allocation, which is addressed separately. Government input • The agreement should require the private firm to submit required information and designs to the public agency so that they can be review and oversee the process. However,

Public Private Partnerships for Highway Projects a requirement for the public agency to approve the design should be avoided so that they can avoid liability in the case that there is a fault in the facility. This avoids the possibility that the private firm can avoid liability by claiming that the government approved the plans, despite the discovered problems. Government’s Role • A P3 does not mean that the contracting company assumes the entirety of risk and responsibility for the project’s operation. Public agencies should consider providing contracting firms with rewards for investing, building, and operating facility services. Common incentives include: • Tax incentives – These sometimes consist of tax holidays, indirect tax exemptions, and import duty exemptions on construction materials, raw materials, and equipment. • Non-competition – The contracting firm may ask that the government guarantee that no competing facilities will be built. In this instance, it is important to remember that a balance must be created between the contracting company’s interests, and the cost that a monopoly will have on consumers. A compromise should be reached that will protect the interests of the contracting firm while supporting the growth of the country’s infrastructure. • Materials and labor supply – Providing available local labor may be the responsibility of the government. The government might also be required to secure the availability of the necessary materials to build and operate the facility, particularly if state owned monopolies are the suppliers for these materials. The contracting firm may ask that the government to assure them of a proper supply at a proper price. • Provision of assets and property – It is common for the government to provide the property necessary for construction projects. This normally includes rights to the property, surrounding facilities and access ways, and endures throughout the entire concession period. Sometimes these rights are given throughout the building 128 | P a g e

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•

•

•

phase, after which point they are transferred back to the government. The public company then leases the property for the remainder of their concession period. There are also concession agreements that require the contracting firm to repay the government for the cost of the property during the span of the agreement. Remittance of project profits – Laws restricting the conversion of currency or the export of project income may limit the ability to move profits out of the country. In the case of an out-of-country company, they may request that the government guarantee that they will be able to convert their currency and move their income to their home country without unnecessary problems. Logistical and network support – The project covered in the concession agreement might be just one piece within the larger infrastructure, as happens with electricity, communication networks and transportation. The government may need to provide additional support or the construction of additional facilities to connect the project to the existing network. Stand-by financing and guarantees – Governments do at times supply stand-by financing and guarantees for contracted projects. When a project company asks for these privileges, their proposals should be given careful attention. The project firm or their sponsors must take responsibility for events that are in their hands, such as a completion guarantee, not the government. An off-take agreement is a form of guarantee where the government will purchase a set minimum amount, assuring the contracting company a minimum amount of revenue. This kind of agreement is based upon the company being able to provide the required amount of facility services.

Standards • Minimum standards must be set within the concession agreement specifying the methods that will be used to ensure compliance and the consequences for noncompliance. The agreement must detail these standards,

Public Private Partnerships for Highway Projects rights to monitor them, and consequences for noncompliance at each of these points: o In the building phase for the facility’s technical design and construction plans and specifications; o When the construction is finished, the standards for maintaining and operating the structure; as well as o The point at which control of the structure reverts to the public agency, including the state of the facility and any guarantees that relate to the structure’s condition Concession period This refers to the span of time that the private firm is allowed to control the structure involved. Either this is a set period or, in some circumstances, the time required for the company to collect a specific return on their investment. Once the concession period is over, it is normal for their obligations and rights to expire, instead of terminating the entire concession agreement. This means that despite a transfer of control of the structure back to the public agency, the construction firm retains liability for guarantees that relate to the construction and design of the structure. The proper length of time for a concession period is dependent of many variables: • The cost of building the infrastructure project – If the construction costs are substantial, a longer duration is necessary for the private firm to recoup its costs and make a reasonable profit. • The expenses involved in choosing a private sector company – When the tendering process to choose a private firm is long and costly, longer concession terms make more sense. • The advantages of competition – Most of the time a concession gives the company a monopoly in the given market. This monopoly may not have many regulations to keep it under control since this would curtail private company’s desire to take on the project. In this case, a 130 | P a g e

Project Agreements

•

•

briefer concession period will increase competition. The concession period must still be long enough for the private company to recover their expenses and make a reasonable profit, but the ability to open the contract up to competitors inserts the advantage of competition back into the equation. Instead of being referred to as “competition in a market,” this phenomenon is referred to as “competition to a market.” Building the infrastructure asset – The paramount responsibility of the firm taking on the project in the concession agreement is commonly the building of a facility. It is considered normal to require the private company to design and build the structure, and specific instructions for the facility must be carefully described within the concession agreement. The task of designing and building of the facility is often subcontracted to a company on a turnkey basis with a fixed time and fixed fee under an EPC contract. Key issues in the concession agreement that concern the designing and building of a facility are discussed below: Time and cost – Since the private firm involved in the project depends on expected income from infrastructure use fees to cover the price of construction, these costs are often not detailed. However, agreements do usually specify the period of time within which the project is to be finished. When the construction is completed early there is often bonus compensation, and in the case of a firm failing to complete the project on time there may be a requirement for them to pay the government liquidated damages.

Public access fees One of the key issues when negotiating a project agreement is the tariff structure that will be used. This variable controls the earnings of the contracting firm, and serves as the income that

Public Private Partnerships for Highway Projects allows them to obtain financing. It is also a tool for the allocation of risk. The degree of risk the private company is willing to take on is proportional to their control over user fees. If they can control the fees that they charge, they are able to pass on increased costs to the consumer. There are both economic and social implications that result from the fees that public firms charge for infrastructure use, specifically in the case of services, such as roadways, that have not previously been subject to payment for use. This must be balanced against the need for private companies to acquire the income they need in order to finance, construct, and operate the service. The need for investment and the long-term success of a project require a fee system to compensate the private firm sufficiently. When the services are necessary for the public, the government must examine if controlling the fee structure is in the best interest of the community. This can be done by increasing competition, legislating prices, or establishing a public agency to oversee the tariffs. If a private firm or the government is the main consumer of the facility’s services, fees can be set with an “off-take agreement.” Power plants frequently operate with off-take agreements in which a government company purchases the power that they produce and distributes it to customers. This type of agreement gives the private firm a guaranteed source of income. Financers often ask that these agreements be assigned to them conditionally in order to provide payment security. These adjustments tend to help lenders see the project as less risky, and thus lead to lower borrowing expenses for the private contracting firms. Many specific details must be determined around this issue. •

Regulation – What methods should be used to control tariffs, if they should be controlled at all? These fees are sometimes controlled through contracts, the market, legislation, an independent organization, or a combination

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of all of these methods. There must be an equity maintained between the protection of the public from unjust price increases for needed services and the freedom of the contracted companies to set the fees they require to provide services. Fee Amount – These fees are normally determined using a formula as opposed to a specific price. For example: o Virginia’s Doswell Independent Power Project  Virginia’s Doswell Independent Power Project uses fixed input costs as the base of their pricing formula. The price of power is calculated by: Power Purchase Price = A + B+C+D Where: A is the fixed capacity price; B is the fixed fuel transportation price; C is the variable energy price; and D is the fuel storage price. o Mexico City’s La Venta-Colegio Militar Highway  The toll for the La Venta-Colegio Militar highway in Mexico City is calculated with a formula that uses a set “base price” combined with a factor to account for cost increases. The increases are based on input costs or inflation, and may be changed if the national consumer price index (NCPI) goes up by more than five percentage points, or every six months, using this formula: Highway Toll = Base Toll x (1 + A) Where: A is the percent increase in NPCI between the base date and the date of the last adjustment.

Public Private Partnerships for Highway Projects • • •

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Tariff format – The fees can be levied based on a one time fixed fee, on the quantity consumed, or on an amalgamation of the two. Equal Access and discrimination – Will different fees be charged to different groups such as heavy users or lowincome households? Integration – This includes the combining of tariffs with the fees for other services. This can be the case with transportation services, where train fares might be integrated with subway and/or bus fares. Administration – The expense of measuring usage and the probability-adjusted cost of collecting fees

Completion • The most important point in most projects is the successful building of the facility. The agreement must include a way for the public agency to ascertain when the infrastructure project is completed. • Consequences for delayed completion: Set dates must be set for the completion of facility construction. Depending on the project, other set dates might be helpful as well. There should be set consequences in place if these milestones are not completed on time. These consequences should take into account who caused the delay and if the circumstances were a risk that could be controlled by either the private firm or the public agency. • Rewards for early completion: It is appropriate for the government to provide a bonus in the event that the project is finished ahead of schedule. This bonus might be included already though if the concession period is fixed because there is a lengthened duration in which the facility is open and collecting fees. Change orders • The public agency commonly keeps the right to ask for a change order at its discretion. These may be used to change the scope, design, or specifications of a project. When this happens, the government must normally provide 134 | P a g e

Project Agreements compensation to the contracting firm for the added costs. These normally apply to facility construction as opposed to facility operation. Force majeure • Sometimes referred to as “compensation events” or “risk events,” force majeure refers to a party’s ability to resign from their contractual requirements if the completion of them becomes problematic or impossible because of unforeseen, no fault events that were unavoidable. These events include acts of god, tidal waves, volcanic eruptions, floods, earthquakes, war, civil war, riots, revolution, and civil disturbance and should be thoughtfully designed within the context of the project and the geographical area involved. Dispute Resolutions • The concession agreement must establish a method for resolving agreement disputes through either the courts or an arbitral body with jurisdiction. This court or arbitral body must have the confidence of both parties and the ability to enforce their judgments in the jurisdiction where assets are located. Many countries do not allow court judgments from other countries to be enforced within their borders; however, most countries have laws in place that allow the enforcement of awards won through arbitration. Arbitration also has the advantages of being flexible and private, with the option of choosing your own arbitrators. It also comes with the disadvantages of being difficult, expensive, full of delays, and requiring lots of attention. Choice of laws • The choice of law is usually that of the place in which the dispute is being resolved. It is rare, but parties can sometimes enter into the jurisdiction of one court while choosing the laws from another, meaning that the case will be decided by a court that must use the laws from a different jurisdiction. Proceedings of this nature might take

Public Private Partnerships for Highway Projects place in a location such as Singapore, where contracts are considered based on laws from the U.K. Stabilization • Since most concession agreements cover an extended duration, there is the chance that occurring events could greatly change the situation for all involved. This change can cause problems with the parties’ rights, responsibilities and risks, as well as the general nature of the concession agreement. For these situations, these contracts include “stabilization” clauses that can provide for the occurrence of “exceptional events,” which may include legislation changes, permit or license changes, economic problems or loss of assurance for basic investments. Termination • Concession agreements must include a provision for termination. This provision must detail: o The terms indicating when the government or the private contractor may terminate the agreement. The scope of this provision must be well thought out and may include events such as material breaches, or liquidation or insolvency of the private party; o The method by which the termination may take place. Normally a party wishing to terminate must provide notice to give financers the opportunity to step in if possible. This provision normally does not apply when there is no possible remedy for the situation or when the company is insolvent; o The payments, for costs up to that point, needed to compensate the private contractor for the resources they have invested in the project; o Confidentiality responsibilities and other obligations that continue despite the termination; o Financers will want to delay the ending of the concession agreement in order to receive their full payment. Contract termination provisions must be congruent with these step-in rights. 136 | P a g e

Project Agreements Risk allocation The allocation of risk is at the core of every provision detailed in the concession agreement. Lending for a project is dependent on the exacting calculation of the risk involved. All of the issues detailed above are methods of risk management. Common project risks are discussed below. •

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Completion and construction risks – These include construction delays and price overruns. For the most part, the risks involved in the facility design rest with the contracting company. The design company then transfers this risk to the building firm with an EPC contract detailing their responsibilities, normally for a set fee. Concession agreements tend to place all or most of the construction risks with the contracting firm. This firm might be resistant to some risks involved though, specifically those that are dependent on politics or the state of the country. The company may also refuse to take on risks where it lacks the possibility of performing due diligence. This could be the case if the facility is to be built on government land with disadvantageous sub-soil conditions. The contracting company might refuse to take responsibility for the risks that go along with the sub-soil conditions that cannot be prepared for. The government agency must closely examine the possibility of accepting these risks, and the construction firm might still be the best party to take on the risk. Counterparty credit risk – In order to mitigate this liability the public agency must make sure that it is dealing with a company that has a good reputation and credit rating. At times, when the contracting company is a freshly formed special purpose vehicle, it is responsible to acquire guarantees from sponsoring organizations that have a good reputation and credit rating.

Public Private Partnerships for Highway Projects • •

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Casualty risks – These risks are normally handled through insurance, but only come into play if the construction project involves considerable danger. Environmental risks – These risks may exist from the start or come up as the project progresses. Preexisting environmental conditions should be the responsibility of the government, if the government is providing the land for the project (this can be accomplished with indemnities and warranties), however, complying with environmental regulations, the cost of any required clean up, and any costs associated with abandonment should be shouldered by the private company. Once the transfer of control to the private contractor has taken place, they must follow all environmental regulations that apply. Contingent and property liabilities – These include property ownership protection that provides for payment in the case of government expropriation. Technology risks – The risks involved with the use of technology include unknown bugs that might have an effect on the project outcome and progress. Technology may also develop so quickly that the developments make the facility useless, or the new technology may render the technology used ineffective or the facility unable to compete. Price and demand risks – These can include the market for the product or service, the cost structure of the project, commodity prices, and differences in demand. The profits made from a facility depend on predictions concerning the income from the facility. Infrastructure projects involving electricity or toll roads depend heavily on paying customers. Normally, the private contractor would take on this risk, but there are some steps the government can take to help decrease such risks. These steps may include not constructing roadways that would compete with the toll road for the duration of the agreement, assuring income by guaranteeing to buy a set amount of services, or agreeing to pay the difference if expected incomes come up short. Risks of operation – These can include changes in technology and changing labor and fuel costs. Since

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concession agreements are normally long-term arrangements, the associated operating costs over the life of the contract are hard to predict. Two strategies are used to solve this problem. The government sometimes allows the contracting firm to extract the increase in cost from the users of the facilities. The other option involves long-term contracts for with reputable suppliers, though this entails the company forfeiting any future cost decreases. This type of agreement normally occurs with a governmental agency. This can greatly impact the expenses involved, and thus the risk involved in a project. Borrower and ownership risks – Sponsors need to have a vested interest in the success of the project; however, they also want to know that the venture is “bankruptcy remote.” Except in the case that a payback guarantee was given by the sponsors, the bankruptcy remote concept makes sure that their assets are away from risk if the contracting firm does not have enough money to meet its debts. Interest rate risks – The majority of worldwide financers lend based on the LIBOR (London Inter-Bank Offered Rate) rate (the rate of interest at which a London bank can borrow from banks, which is considered risk free) and an additional fee that takes into account the financer’s accounting of the existing project risks. Therefore, the contracting firm shoulders the risk of rising interest rates. Public agencies must take into account if this interest rate increase will be passed on to the public through an increase in tariffs. Exchange rate risks – Income from facility management will most likely be earned in the local currency, and the majority of foreign investors announce their profits in a foreign currency, so the contracting company’s project earnings may show, not the project’s success, but fluctuations in the exchange rate. This can also come into play when the financing for the project is obtained using a different currency. In this situation, the decrease in the value of the local currency can cause difficulties when making loan payments, sometimes resulting in a loan


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default by the contracting company. It is possible to hedge these risks by buying forward contracts. Change of legislation risks – Changes in the country’s laws may have negative effects on the project risks. Some say that since the government controls the legislation passed they should accept the liability for laws that negatively affect the project, though this is not easily translated into a legal contract. In practice, the contracting company must shoulder the risk of legislative changes as long as they have equal effects on both the contracting company and its competitors. The risk only lies with the government when the legislation would be discriminatory. Country and political risk – This includes risks that are encountered during civil and political unrest and include events such as civil strife and worker strikes.

Performance Guarantees to the Government. A performance guarantee entails one party (Party 1) assuring a second party (Party 2) that it will guarantee the success of a third party (Party 3), in situations where Party 3 would normally have a previous contractual responsibility to Party 2. Within the confines of a P3 project, this may include the sponsoring company assuring the public agency, and possibly the financers, of the successful responsibility of the contracting company. This guarantee normally entails their responsibility contained in the concession agreement to finish the building of the structure within cost and on time. The performance guarantee should address these main issues: Triggering event • When would a breach of the performance guarantee occur? This normally occurs when specific responsibilities of the concession agreement are breached. Default consequences • If the performance guarantee is triggered, a default on financial arrangements will occur as well. The complications, involving 140 | P a g e

Project Agreements the sponsors’ and the contract company’s responsibilities to their lenders and the government, must be dealt with. The government might need to assert its right to remedy on the contract company’s default depending on the financer’s step in rights. When the lender and the government both have a claim on damages against the sponsors, the damage calculations will be complicated, however, they both may have valid claims. Expiry The performance guarantee can expire at the end of the facilities build phase or continue for the entirety of the concession agreement. Indemnity A performance guarantee should not cover force majeure happenings, but must cover losses if the project is not completed, no matter where the fault lies.

Design, Construction, Operation and Maintenance The contracts that relate to the design, construction, operation, and maintenance of the infrastructure project are discussed in this section including those concerning the contracting company and its many consultants, sub-contractors and service providers. It also covers insurance and O&M, EPC, and supply agreements. The Government’s Concerns Agreements between the contracting company and the subcontractors that it hires seldom involve the government. Some argue that since the contracting company has taken on the task of building and running the piece of infrastructure, the government should not worry about these agreements, it should just make sure that the terms of the concession agreement are completed. However, the government must monitor the project, while avoiding unneeded meddling. This includes requiring copies of all insurance policies, O&Ms, EPCs and supply agreements (as well as any amendments or notices). These agreements concern the government because:


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With BOTs the facility being built will revert to the government when the concession agreement ends; The public must be assured of a good value since they support the facility with fees and tax money if government subsidies are provided. The government must make sure that the EPC agreement is appropriate since contractors commonly hold interest in the contracting companies; Public agencies might, either directly or indirectly, be assuring the contracting firm’s financiers of the facilities construction or performance; and The sponsor of the project may also be a supplier, operator, or even the contractor, and the government must make sure that the services provided are done so above the board. The government agency must make sure those insurance policies, O&Ms, EPCs, and supply agreements: Agree with and mirror the requirements of the concession agreement; Are conducting themselves without a conflict of interest on commercial terms; Comply with regulations and legislation having to do with the construction and operation of the project; The contracting company must perform the required maintenance on the structure, including preventative and scheduled maintenance tasks, to maintain the piece of infrastructure at an accepted standard; Ensure that when the facility is transferred back to the government when the concession period is over it is in good condition; When control of the facility is transferred to the government agency at the concession period end, the transferred assets include software licenses necessary for facility operation.

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Project Agreements EPC Agreement An EPC (engineering, procurement, and construction) agreement is normally the biggest expense that the project company has. This is the contract governing the relationship between the contractor and the project company to design, builds, and deliver the project infrastructure. The project is normally delivered as a “turnkey” transaction, meaning that the contractor takes on the responsibility for everything from the specific details of the design work, to the civil engineering work, to supplying, needed installation, and testing of the facility. Once it reaches this point, it is handed back over to the project firm. These contracts normally transfer the project company’s responsibilities for the design and building of the facility from the concession agreement onto the contractor. Banks will lend a set financial limit; however, they must be sure that the resources allocated are enough to finish building the facility. Because of this factor, the majority of EPC contracts are entered into with a set time limit and fixed cost. The EPC agreement also commonly features back-to-back responsibilities with the project firm’s government concession agreement. The project company is in essence sub-contracting its responsibility to design and build the infrastructure project to this other company. The project company does not completely transfer the risk over to their sub-contractors because the government may make a claim against the parent company if the infrastructure project is not completed appropriately, even if this is the fault of the sub-contractor.

EPC Agreement Highlights These key issues must be considered in an EPC agreement: •

Scope of work – Though it does not directly concern the government, a contractor is normally hired to build the project using a turnkey substructure


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Contract cost and payment schedule – These details need to be considered in conjunction with the financing arrangements for the project. Key dates - The EPC agreement must describe key dates by which certain design and construction milestones must be reached. These normally consist of dates on which the design is to be completed, the mechanical operations are competed, and the final approval of the facility. Completion Schedule – The completion schedule must be on par with the concession agreement. Project design - The contractor is normally responsible for the project design. The concession agreement should assure the government of its right to examine and approve this design, as well as that any problems with this design continue to be the responsibility of the parent firm, who are then free to give this responsibility to their contracting companies. Change orders – Provisions for change orders must consider the concession agreement’s assurance of the government’s rights. Remedies and defaults – This section defines the events that would mean default and the consequences that would result. Force majeure – These situations, in which the contractor would be released from its responsibilities, should be in line with the provisions of the concession agreement Performance tests – Acceptance testing should include the government so that they can make sure that the facility works according to the specifics included in the concession agreement. Guarantees, warranties, and indemnities- This agreement gives specific guarantees, warranties, and indemnities for the infrastructure project. These assurances are normally confined to the period before the facility is transferred back to the government. As soon as the piece of infrastructure reverts to the government these assurances will transfer as well. Liability Limitations – This issue concerns the distribution of risk among the project company and their contractor. Liquidated damages – In the case of a contractor failing to finish the construction within the required time they will probably be responsible to the project firm for the payment of “liquidated damages” because of this failure. These liquidated damages are an 144 | P a g e

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estimate of the expenses occurred by the project company because of the project delay instead of a penalty. Termination – The consequences and preceding events of termination should be set forth The FIDIC “Rainbow” There are standard form EPC contracts developed by the FIDIC fondly entitled the “Red Book”, “Yellow Book”, “Orange Book”, “Silver Book” and “Gold Book” (FIDIC stands for the Federation Interriationale des Ingenieurs-Conseils, otherwise known as the International Federation of Consulting Engineers). Construction contractors make use of these standard forms frequently. The “Gold Book” was developed for DBO projects in particular, and contains a standard EPC agreement for these projects. The most popular standard agreement is found in the “Red Book,” and is applicable to projects involving civil engineering. The “Yellow Book” is geared more for electrical and mechanical jobs, and the “Orange Book” is useful for turnkey design and builds agreements. Supply Agreement This agreement concerns the project firm and other project suppliers. It entails things such as a fixed-cost long-term supply contract from a dependable supplier (like a government agency). This would also include an arrangement in which the government provides oil at a set price to the project company. This type of agreement can be used to decrease the risk involved in a project. These arrangements may also include things such as equipment. In the case of a power plant, they would need electrical equipment, generators, turbines, and boilers. When the responsibility of building these parts is turned over to a contractor as a turnkey transaction, the equipment is normally purchased by the supplier instead of the project firm.

Public Private Partnerships for Highway Projects O&M Agreement O&M, or Services Agreements, are arrangement that takes place among the project firm and the contractor that will operate the facility after it is built. This operator is also sometimes a sponsor for the project firm. The O&M agreement should set out requirements for maintenance and efficiency of operation. These agreements normally specify fines for not meeting basic levels of efficiency and rewards for going above and beyond these levels. The concession agreement should define the terms of the O&M agreement, providing for the company’s responsibilities defined within. It should also be congruent with supply and EPC agreements that the project company has agreed to. The goals of the operation agreement of a facility are: •

Adequate supplies of the resources needed for operation (ex. Utilities, fuel, other materials);

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Meeting demand for the services that the facility offers; and

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Delivery of the facility’s services

O&M Agreement Highlights An O&M agreement must deal with these issues: •

The scope of an operator’s services – This is normally based on the operation and maintenance sections of the concession agreement.

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Terms – The term should not exceed the time limit set forth in the concession agreement.

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Insurance – Multiple varieties of insurance coverage may be required including, but not limited to, third-party liability, casualty, and business interruption policies. The theory behind insurance is that it allows both public and private parties to transfer unacceptable risks involved in a project from

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Project Agreements themselves onto an insurance company. The realities tend to work out differently though since policies related to P3 projects are expensive and the coverage is limited, with multiple exceptions. Before purchasing a policy, perform a cost benefit analysis. Sometimes, lenders insist on insurance, but there may be other more reasonable options available, such as stand-byloan government commitments, to cover the same risks. •

Payments – The specific details of operator payment need to be discussed including the method, timing, calculation, and currency of the payments required.

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Access to records and books – The operator should be required to provide access to its records and books for the project company, specifically the records concerning the calculation of fees and payments for remittance since the project company is dependent on the income that the operator brings in.

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Force majeure – This sections describes the events that would exempt the contractor from its O&M agreement responsibilities, they should be congruent with the concession agreement.

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Guarantees - This is normally based on the corresponding sections within the concession agreement.

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Warranties – This is normally based on the corresponding sections within the concession agreement.

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Indemnification – This concerns the distribution of risk between the operator and the project firm.

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Defaults and remedies – Describes the ramifications of default.

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Termination – The consequences of and preceding events to termination should be detailed.


Customer Agreements Customer agreements are arrangements between the project firm and the facility’s users. The revenue structure of the facility will determine if a customer agreement is necessary and the form and timing the agreement would require. When the facility agrees to deliver services for the long-term with a specific customer this arrangement is normally referred to as an “off-take agreement.” Off-Take Agreement In facilities that provide power generation, the second party in the off-take agreement is normally a government entity that is formed to distribute electricity. Since this agreement, pays for the services if they use it or not it is also called a “take-or-pay” agreement. Another example of this type of arrangement is the Channel Tunnel project in which long-term off-take agreements were arranged with the French and U.K. national railroads. As long as the buying party in the off-take agreement is worthy of credit, this type of arrangement greatly increases the ability of a project to secure financing, since it is guaranteed an income stream. A common off-take arrangement with a power facility involves two categories of payable fees. The first is a “capacity fee” which must be paid if the facility is operating above a minimum level as set in the agreement. The second is called an “energy fee.” This fee is normally determined based on the varying price of producing electricity while still making a profit. This fee is a government guarantee that the facility will receive a minimum income. Government Concerns In an off-take agreement, an entity, usually the government, agrees to purchase the services provided by the facility built and operated by the project company. This arrangement obligates the purchasing agency to pay for the services whether they use them or not. 148 | P a g e

Project Agreements This arrangement is an effective guarantee of a minimum income for the project firm. It is troublesome for the government since it necessitates the assumption of risks including currency, inflation, input prices, and demand risks for a lengthy amount of time. These agreements are often necessary, however, in order for financers to approve lending for these facilities. When entering into off-take agreements, the government must research the terms of the arrangement in detail. It is wise to pay particular attention to the following variables: Quantity When the government guarantees the minimum amount that it will purchase it is providing a guarantee of demand for the facility’s services since the government entity will cover the losses if there is not enough demand to cover the quantity of their purchase. Price Since the price paid for the purchases in an off-take agreement is normally based on a formula that takes into account input costs and a markup, the government bears the risk in the case of an input price increase. They must make sure that price increases are not due to factors, such as a lack of efficiency, that are within the project company’s control. Supply Aside from the guarantee part of the contract, an off-take agreement is simply a supply agreement. The project firm is obligated to provide the government with the agreed upon quantity and quality of goods or services at the agreed upon price. The project firm may not choose to provide these products or services to another party for a higher price instead of the government entity.


P3 Project Legal Aspects for California Introduction Public-Private Partnerships, otherwise known as P3 projects, are advertised as a state-of-the-art way to finance construction projects; however, they are really one of the most ancient ways to provide community projects. The many types of P3 arrangements effect the environment of construction financing. This segment addresses the ins and outs of the private financing market and the common barriers that get in the way of their widespread use. Lastly, P3 arrangements are examined in light of recent changes in California law, and an in-depth analysis is provided explaining the best ways to use this method for upcoming infrastructure projects. Even though P3 arrangements have experienced a revival in the US of late, it is not a new concept. These arrangements have been in use for years in Europe, Asia, and Africa though they were normally referred to as government concessions. It has also been used for decades in countries that are still developing since their governments sometimes do not have the credit necessary to undertake major infrastructure undertakings. This type of arrangement is also not new in the US. In actuality, an early US Supreme Court case concerned the fight between two private civilworks companies and the City of Boston in 1837. Proprietors of Charles River Bridge vs. The Proprietors of Warren Bridge (U.S. Supreme Court 9 L. Ed. 773 (1837)) were a clash of early P3 lending titans. In this case, the initial player had been given the privilege by the Massachusetts legislature to construct a bridge spanning the Charles River. This bridge united Boston and Charlestown, reducing the need for the once essential ferry. The plaintiff’s bridge connected Charlestown to Boston and thereby eliminated the need to operate the once relied upon ferry crossing. As compensation, this company made a deal to give an annual payment to Harvard College out of the tolls that were collected for 40 years in exchange for the rights to construct the bridge and to replace the lost ferry income. 150 | P a g e

Project Agreements This company sued the defendants when they constructed a competing bridge spanning the Charles River. The plaintiff argued that when the city incorporated the second bridge they violated their responsibilities evident in the contract they had with the first bridge builder. In their decision, the Supreme Court expounded upon whether the privileges of the first contract owner could be taken infringed upon by ensuing state legislation. They commented on the extraordinary courage and risk taken by the plaintiffs in building the first New England Bridge so close to the ocean and over dangerous waters. Nonetheless, the court decided that state legislation could be retroactive and not in violation of the US constitution as long as the first responsibility was not based in contract. They decided that the first bridge builder’s rights for the bridge were taken completely from the legislative act that allowed their incorporation. Because of this, their usage rights for the waters did not include exclusivity and were not violated by the second bridge. Even though this Court decision is more than 170 years old, the lessons learned from this case are still applicable in the world of P3 projects. Always read the fine print involved in governmentprivate corporation agreements and always try to nail down exclusive rights. In the broadest sense, P3 projects are those in which private companies supply facilities and services usually administered by government agencies. For some, the definition must include private financing. There are also those who see the P3 purely as an arrangement with a design-construct-finance-operate structure. (For more information read “A Primer on Public-Private Partnerships” written by Francois Michel). In actuality, this is a completely international phenomenon. More than a thousand P3 arrangements occurred in the European Union alone in the 15 years leading up to 2005. This included almost 200 billion Euros in investment (Francois Michel, supra).

Public Private Partnerships for Highway Projects In spite of the recent economic problems in the United States, the private investment potential is much larger and more robust than the market for public financing. Since investors expect high returns, P3 projects must assure investors of a healthy return on their investment in order to gain financing. Other factors include the tendency of private sector management and investment to make better use of technology and keep tighter restrictions on management and investment when compared to public agencies. Because of this, there are certain categories of projects in which the P3 model is a particularly good fit. These include projects that would not be possible without outside funding or drive.

Traditional Barriers to P3 Contracts The main obstacle in the way of P3 project implementation in the state of California is the existence of the legislation requiring the competitive bidding process. The design-bid-build traditional model for public projects has been the norm in California. This model requires private contractors to put in bids to build the project designed by a separate architect. With this process, the government agency provides the design, concept, financing, and parameters for the project and the contractor who puts in the lowest bid is awarded the contract. Once complete, the government takes over the operation of the infrastructure project until it is no longer needed.

Statutory Authorization Due to the ever-larger amounts of money needed for public works projects, the legislature has begun to change the traditional model with a series of legislative changes. Senate Bill Second Extraordinary Session 4 (SBX2 4) Chapter 2, Statutes of 2009 (Cogdill) was approved in 2009, giving legislative authority to Caltrans and the regional transportation authority’s until January 1st, 2017 to take part in an unlimited number of P3 projects and removing the restrictions on these projects that were 152 | P a g e

Project Agreements in place. SBX2 4 also provided for a demo program for designbuild projects throughout the state. The Public Contract Code 6800 et seq. (transportation), Public Contract Code 20688.6 (redevelopment agencies), and California Design Build statutes (Government Code 14661.1 and 70391.7 (state offices, prison and court facilities), and Public Contract Code 6800 et seq. (transportation), and Public Contract Code 20688.6 (redevelopment agencies) were also addressed in an amendment to this bill, which gives authorization for P3s under Streets and Highways Code §143. It is important to note that the California Transportation Commission (CTC) has the authority to approve P3s included in these sections. These projects are capped at 5 for local transportation agencies and 10 for Caltrans. Many groups from the construction industry are now evaluating this new legislation. There is the possibility, concerning the role of the CTC, that a company might take part in complicated vetting proceedings followed by a long and expensive period of negotiation with an agency. This is only to discover that the CTC rejects the deal based on the way in which the eligible agency handled the procurement proceedings, the perceived expense of the undertaking, or perhaps the final form of the drafted P3 arrangement. This legislation still symbolizes a turning point for P3 projects in the state of California. This may open the state up to overseas investment in its infrastructure projects, which is an area in which it trails other states and Canada. Some earlier California laws show the changes representative of P3’s importance as a financing option: AB 1467, added §§143 and 149.7 to the California Streets and Highways Code in 2006. This legislation enables transportation agencies to arrange lease agreements with both private and public

Public Private Partnerships for Highway Projects entities. This program limited the number of projects, but also authorized tool lanes dedicated to high-occupancy and allowed both solicited and unsolicited proposals. AB 521, in 2006, limited the amount of time that the Legislature has to review lease agreements, and limited the scope of their reviews with the amended §143 California Streets and Highways. §143 allow the department to “solicit proposal and accept unsolicited proposals.” Accordingly, solicited and unsolicited proposals are acceptable for P3 projects No express provision permits local/state/federal funds to be combined with private sector funds on a P3 project §143(e) (2) requires the initial toll to be set by the lease agreement and all increases to be approved by the department or regional transportation agency after a public hearing. §143 allow the department to “solicit proposal and accept unsolicited proposals.” Accordingly, solicited and unsolicited proposals are acceptable for P3 projects No express provision permits local/state/federal funds to be combined with private sector funds on a P3 project Authority to impose user fees is assigned by agreement in accordance with §143(e) (2), which requires the initial toll to be set by the lease agreement and all increases to be approved by the department or regional transportation agency after a public hearing. No express provision permits TIFIA loans to be used on P3 projects §143(b) (2) limits the number of projects to 4. §143(m) prohibits lease agreements after January 1 154 | P a g e

Project Agreements §143(b) (2) requires 2 of the 4 projects to be in Northern CA and the remaining 2 projects to be in Southern CA. §143(b) (2) requires the P3 to be for the “improvement of goods movement,” with “exclusive truck lanes and rail access.” The tolls may be continued after the lease expires, but they must be used to benefit the same facility. §143(k) allows the conversion of existing highways only for HOT lanes. §143(e) (1) requires toll revenues to go to the facility, debt, or the State Highway Account. §143(b) (3) requires negotiated lease agreements to be submitted to the State Legislature. The Legislature has 60 days from the day of submission to reject a lease agreement, otherwise it is deemed approved. The Legislature is prohibited from amending a lease agreement. Local public cannot reject a P3 proposal or negotiated P3 agreement because §143(b) (3) only requires a public hearing near the proposed facility’s location, but only the legislature has veto power. §143(d) (2) allow the transportation agency to utilize a variety of procurement approaches (These might include: calls for projects; competitive RFQ and RFPs; qualifications review followed by an evaluation of proposer concepts, use of design build, procurements based on financial terms such as return on equity rather than price; long-term asset leases for some period of up to 60 years or longer from the time operations commence) There is no explicit exemptions/supplemental procurement authority from the application of the state’s general procurement

Public Private Partnerships for Highway Projects laws as §143(n) applies certain provisions of California’s Public Contracts Code to design- build projects. §143Ib) (1) authorizes the public sector to grant long-term leases/franchises for the construction, operation and maintenance of toll facilities No express provision gives the public sector the authority to issue toll revenue bonds or notes or to form nonprofits and let them issue debt on behalf of a public agency No express provision gives the public sector the authority to hire its own technical and legal consultants No express provision permits the public sector to make payments to unsuccessful bidders for work product contained in their proposals No express provision permits the agency to charge application fees to offset its proposal review costs California has additionally added legislation so that P3s may be used in a wider range of projects: • •

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Cal. Streets & Highway Code §§ 149.1-149.6 gives the San Diego Association of Governments permission to engage in specific tolling and P3 projects. Cal Gov Code §§ 5956-5956.10 (AB 2660 (1996)) gives local governments the authorization to use P3s for a variety of “fee-producing infrastructure projects,” not to include toll roads on state highways (§ 5956.10). Act to amend sec. 143 (and add sec. 149.7) to the CA Streets and Highway Code in 2007 increased the type and number of P3s allowed. This also allowed regional transportation agencies and Caltrans to arrange comprehensive lease agreements with both private and public entities for the purpose of development.

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Project Agreements • •

Assembly Bill No. 521, in 2006 modified 1467 giving the legislature 60 days to respond to a submitted P3 lease agreement. Cal. Gov. Code 5956 - 5956.10, 5956-5956.10, and 5956.1 states that “It is the intent of the legislature that local governmental agencies have the authority and flexibility to utilize private investment capital to study, plan, design, construct, develop, finance, maintain, rebuild, improve, repair, or operate, or any combination thereof, feeproducing infrastructure facilities. Without the ability to utilize private sector investment capital to study, plan, design, construct, develop, finance, maintain, rebuild, improve, repair, or operate, or any combination thereof, fee-producing infrastructure facilities, the legislature finds that some local governmental agencies will not be able to adequately, competently, or satisfactorily retrofit, reconstruct, repair, or replace existing infrastructure and will not be able to adequately, competently, or satisfactorily design and construct new infrastructure.”


5

Insurance, Payment and Performance Bond, and Indemnity

Insurance Insurance Coverage and Policies Developer shall obtain, as well as maintain a source to be maintained or procured, insurance according to different policies. Insurers All the insurance needed here underneath shall be obtained from insurers, which during the time coverage starts, are licensed for doing business in the state of the project, as well as have existing management of policyholders there. These insurers’ category rating of financial size should not be less than “AX” per Financial Strength Ratings of A.M. Be stand Financial Size Category, apart from or otherwise approved in writing via the owner in a reasonable discretion. Deductibles Apart from the level expressly given otherwise in contract documents, the developer or contractor, while the case can be, will be accountable to pay all of the insurance deductibles, while the owner will have no responsibility for deductibles, claim amounts, and self-insured retentions beyond the necessary coverage. Some companies have the ability to offer self-insurance policies. When a necessary coverage associates self-insured retentions are required, the party responsible for self-insured retentions shall have an authorized representative issue letter to the owner stating 158 | P a g e

Insurance, Payment and Performance Bond, and Indemnity that they will be self-insured. An insurance policy needs to be obtained, stating that it will protect, as well as defend, the owner to the same extent like an insurer, thus providing coverage for the owner. Primary Coverage Every policy shall offer the required coverage without asking for any financial responsibility from any of the named insured entities. All of the other insurance requirements covered by either insurance company or self-insurance policy will be considered surplus of the standard insurance and no other party should be required to contribute to it. Verification of Coverage A developers required to obtain a new or renewal of an existing insurance policy 30 days before the expiration of a current insurance policy. In case the laws and regulation requires a shorter period, the developer should comply with it. The insurance binder shall be with latest ACORD form compatible with the necessary coverage without any disclaimer. ACORD, the Association for Cooperative Operations Research and Development, develops standards for the insurance industry. The owner may accept nonACORD forms in limited situations. The binder should include all of the insured’s. The insurance certificate should include coverage limits, subrogation waiver, deductibles, and termination articles for the policy incorporate as attachments with all of the additional insured on it. Such a policy must be signed by the authorized representative from the insurance company explained on certificate, including the licensed broker or agent. The insurance policy coverage cannot be cancelled from the insurer’s side due to any reason apart from premium non-payment, unless that statement might conflict with the diverse cancellation requirements. Besides, when they become accessible, the developer shall send to owner true copy of all insurance policies, alteration, replacement, or renewals of the insurance policy with all of the endorsements there. Moreover, acceptable evidence for payment of premium consequently must be provided.

Public Private Partnerships for Highway Projects In a case where the developer has not given the owner the required coverage and payment within ten days subsequent to receipt of the written request for owner can within three business days in written warning to developer. Owners can pay for the insurance coverage and the developer shall refund the owner for costs once it is requested. Additionally, owners will have the right without liability or obligation, to postpone any/all portions of work, throughout anytime that coverage proofs are not given. Requirements of Contractor Insurance The developer makes sure that every contractor has insurance that complies with required limits, and terms described in the contract documents when a contractor is not covered by developer’s liability insurance. Contractor is required to have its insurance policy to waive any subrogation rights against additional insured. Waiving subrogation rights will reduce the impact of issues on other parties. If an issue arose and the insurance company has to pay, it will not be able to go behind another liable party with this waiver in place. In case requested by the owner, the developer will quickly offer insurance certificates for evidencing coverage of every contractor. Throughout the construction period, the program of contractor controlled insurance is suitable to fulfill all of the insurance requirements given that these otherwise meets the requirements given. Project-Explicit insurance All of the insurance coverage needed to be given by the developer, lead engineering firm, lead contractor, as well as the lead maintenance and operations firm will be purchased particularly and completely for the project and it should expand to all the aspects of work, having coverage limits dedicated solely to project. Insurances can be dedicated to the project only with its limits and recognized premiums given that they meet all of the requirements explained.

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Insurance, Payment and Performance Bond, and Indemnity Waivers and Endorsements The developers required to offer insurance policies that go along with all of the requirements stated in the contract documents and follow its provisions in professional liability and worker’s compensation policies. The following items to be noted: • •

•

• • •

•

The insurance coverage may be applied separately for every named insured in whatever claim is raised until it exceeds the limits of an insurer’s liability Adding more insured’s for necessary policies will have no conditions, limitations, restrictions therefore exceptions for coverage beyond that apply underneath the policy usually. Protections of every additional insured will not be exaggerated by any distortion, action, or lapse of other insured’s. A commercial common liability policy will cover any responsibility arising out for omissions or acts of employees of the developer and the contractor engaged within the project with the amount contractors are given coverage underneath such a liability policy; The automobile insurance policy will cover the contractors that will during any time of the project transfer hazardous materials Except as specified otherwise, every policy will offer coverage per incident occurrence not per claim Any noncompliance from an insured does not mean changing any of the coverage provided to other insured’s. Such noncompliance can be in any policy, warranty breaching, or reporting of the provisions. Changes in the ownership for all or some portions of the project fall under the same considerations. Every policy will be endorsed for stating that coverage may not be voided, canceled, lapsed, suspended, reduced, or modified in reporting except with premium nonpayment for 60days and a 10 days’ notice from the owner.

Subrogation Waivers All parties in the project, including the developer and the owner,

Public Private Partnerships for Highway Projects should include a subrogation waiver of all the rights against each other on claims covered by insurance. Such a waiver will prevent insurance from going after the party causing the issue that the insurance had to pay for. The developer must require all of the contractors to offer similar waivers for all other parties involved in the project. For every policy that requires coverage for additional insured’s (as well as their relevant members, officers, employees, directors, project consultants, as well as agents) similar waivers will be included. No Recourse Apart from what specifically is given otherwise, the owner should not be responsible for any payment for insurance premiums owed by the developer. Adjustments of Insurance Coverage Adjustments to insurance requirements can be done in a number of cases. It can be by adjusting the coverage limits or coverage requirements. Throughout the operation and maintenance term, at least once every other year, the owner, and the developer will reevaluate the insurance coverage limits. Any dispute about adjustments of insurance limit will be resolved as per the dispute resolution article in the contract. Factors that affect such adjustments are: • • • •

Insurance claims and incidents in the project Status of the project Safety compliance/ non-compliance of the project Best practices in the insurance industry for transportation projects.

If the developer reveals that it has utilized diligent efforts with worldwide insurance and reinsurance markets for procuring the necessary insurance coverage, the owner may reconsider the required limits. Such reconsideration is usually under the conditions of no fault from the developers any of coverage, unattainable required coverage, or attainable required coverage with irrational commercial rates. Rational commercial rates are 162 | P a g e

Insurance, Payment and Performance Bond, and Indemnity the rates less than or equal to 200% of the benchmark for insurance premiums. For issues with partial requirement, the owner may offer good reliance optional insurance packages after reviewing the insurance market availability. The owner may be entitled to recollection of the savings resulting in elimination or modification of the insurance requirements. Moreover, the owner shall act as insurer of the reminder for covering an engaged insurance policy. For issues with all of the required insurance coverage, the owner may terminate the agreement and appropriate compensation to developers being calculated. In case the necessary insurance coverage is accessible in the market, the decision of an owner about approving or disapproving a discrepancy from requirements will be final, as well as not subject to dispute resolution articles. Benchmarking of insurance Premium The developer will bear the whole risk of all increases of insurance premiums throughNTP2 (notice to proceed for construction), and will not be permitted to claim such increases. The owner may allocate risks of dramatic increases in the insurance premiums using insurance benchmarking procedures. The owner should not contribute in any risks of insurance premium associated with extended or additional coverage beyond the necessary, or changes of premiums, which are, not a result of the market-related factors. A benchmarking procedure will happen at every insurance renewal phase or every other two years, whichever is longer or as specified in the contract documents. Contesting Coverage Rejection In case any Insurer for an insurance policy denies the coverage of any claims, the developer and the owner will cooperate, with good faith, to determine the feasibility and cost of disputing the rejection of coverage. In case the reported claims are a subject covered by the insurance favoring the owner or rejection is a result of letdown by a developer to meet the terms of insurance requirements, then a developer will bear all of the costs of challenging the rejection of coverage.

Public Private Partnerships for Highway Projects Insurance Requirements of Lender If the funding agency requires tougher insurance coverage requirements, the developer should take insurance terms that meet all of the valid requirements. Such tougher requirements can be an insurance coverage with higher limits, lower deductibles, with self- insured preservations, or wider coverage than necessary under the contract agreement. In case the developer carries an insurance coverage besides that which is required in the contract agreement, then the developer shall incorporate the owner, as well as its relevant directors, officers, members, agents, project consultants, and employees as additional insured’s. If the developer demonstrates to the owner that including these additional insured’s can increase premiums, the owner will elect to either pay the increase of the premium or give up additional insured conditions. Claims Prosecution The developer will be responsible to report, as well as processing all of the potential claims for the developer or the owner against insurance policies unless different directions are given by the owner in writing regarding insurance claims for the owner. The developers agree to present quickly and thoroughly all the matters that may escalate to insurance claims by developers or owners to insurers under the terms of claim procedures mentioned in the insurance policies. The owner as well must notify the developer of any potential claims in a timely manner. The developer should impose all of the legal rights using appropriate insurance policies and applicable laws. If the developer fulfilled the required obligation without solving the issue, necessary litigation and enforcement for judgments will be an option. The developer will be treated as if it has chosen to self-insure equal to complete insurance coverage amount that might have been accessible from the insurance company in a number of cases. These cases occur when the developer has not executed its obligations regarding insurance coverage that has been described in the contract agreements, or is incapable of enforcing and 164 | P a g e

Insurance, Payment and Performance Bond, and Indemnity collecting such insurance due to the failure to state claims in line with terms of insurance policies and to accuse claims industriously. Based on such an election of treatment, the developer’s liability or deduction from compensation will be assessed. However, such an election of treatment will not be assumed, if the developers not capable of collecting because of the insolvency or bankruptcy of the insurer, which at the time of an insurance policy being written meets the rating qualifications described. In such a case, the developer will exercise all efforts at its personal cost immediately to secure alternative insurance coverage to comply with insurance requirements in order to avoid all lapses in the insurance coverage. In case any developer does not act promptly with its obligations to report with applicable insurers, as well as practice any possible insurance claims sent by owner, then anowneris not obliged to report and process a claim with the insurer. Application for Insurance Proceeds Insurance proceeds are the payment of a claim by an insurance company. All the insurance proceeds expected for the damage of physical property on the project under all insurance policies necessary under the contract will be initially applied to its associated claim activities first. These activities can be to reconstruct, rehabilitate, repair, renew, reinstate, restore, or replace a part of the project. Terrorism Damage In case of damages caused by terrorism activities, the owner will pay for repairing or replacing physical damage of permanent property of the project. However, it will not pay for damage of any tools, equipment, machinery, job trailers, protective fencing, or any other temporary items utilized in performance for the work. Such payment from the owner comes in addition to the deductible paid by the developer for the incident. The developer’s yearly payments due to terrorism actions will be capped with a certain amount of money. Deductible and maximum yearly deductible paid due to terrorism activities will be adjusted yearly at the start

Public Private Partnerships for Highway Projects of every calendar year. If terrorism activities caused physical damage to a project property, the developer will within five days of the incident, submit a written notice to the owner, followed by a full written report of the claim, in twenty days. The written report will include comprehensive identification of the physical property’s damage, photos to support the claim, the range of required repair work, the proposed approach for performing required repair work, and the projected repair costs together with the supporting schedule of cost-loaded repairs. Within twenty days, the owner will assess the submitted report and provide its estimate of repair cost of the physical damage of the project property, which is subject to dispute resolution articles of the contract documents. To complete its assessment, the owner may request elaboration, explanation, or extra information from the developer. The developer should comply with such a request. Disaster repair work may be required from the developer with expectation of performance in accordance with the contract documents.

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Payment, Performance, and O&M Security Performance Security As a condition of the beginning of the design work and issuance of NTP 1, the developer will attain a performance security to secure a developer’s performance in the design phase to allow the developer to get NTP 2. Similarly, issuance of NTP 2 and commencement of construction with O&M work requires performance security for work during the construction phase. Performance security is usually 1-2 Million US Dollars. The performance security can be in the form of either a surety bond or a letter of credit. In case of surety bond requirements, it has to be issued by a certified surety or insurance company for issuing bonds in the project state with a rating not less than “AX” per Financial Strength Ratings of A.M. be stand Financial Size Category. Multiple oblige rider agreement is required in case the design-build contractor, not the developer, obtains the bonding and the owner has to be added as oblige. Because of lender’s rights, proceeds from surety bonds will be deposited in the escrow account to be utilized exclusively for remedying the performance defaulting and other related obligations. In case of letter of credit requirements, the developer has to comply with its requirements. The developer can switch between an approved security bond and letter of credit with a thirty-day notice to the owner and no lapsed time between them. Payment Security As a condition of the beginning of the design work and issuance of NTP 1, the developer will attain a payment security to secure developer’s payment for labor and materials in the design phase to allow the developer to get NTP 2. Similarly, issuance of NTP 2 and commencement of construction with O&M work requires payment

Public Private Partnerships for Highway Projects of a security during the construction phase. Payment security is usually multi-million US Dollars. The payment security can be in the form of either a surety bond or a letter of credit. In case of surety bond requirements, it has to be issued by a certified surety or insurance company for issuing bonds in the project state with a rating not less than “AX” per Financial Strength Ratings of A.M. Be stand Financial Size Category. Multiple oblige rider agreements are required in case the designbuild contractor, not the developer, obtains the bonding and the owner has to be added as oblige. Because of a lender’s rights, proceeds from surety bonds will be deposited in the escrow account to be utilized exclusively for remedying the payment defaulting and other related obligations. In case of letter of credit requirements, the developer has to comply with its requirements. The developer can switch between an approved security bond and a letter of credit with a thirty-day notice to the owner and no lapsed time between them. Operations and Maintenance Security Before approving the substantial completion of the project, the developer must get O&M Security, to secure operation and maintenance of the project, for the estimated cost of Operations &Maintenance of the project for two years. Such security has to be reevaluated every two years to account for the changes of operation and maintenance costs throughout the years. The O&M security can be in the form of either a surety bond or a letter of credit. In case of surety bond requirements, it has to be issued by a certified surety or insurance company for issuing bonds in the project state with a rating not less than “AX” per Financial Strength Ratings of A.M. be stand Financial Size Category. Multiple oblige rider agreements are required in case the O&M contractor, not the developer, obtains the bonding and the owner 168 | P a g e

Insurance, Payment and Performance Bond, and Indemnity has to be added as an oblige. The O&M security bond must be renewed by the developer fourteen days before expiration in case an expiration date is imposed on it. In case of letter of credit requirements, the developer has to comply with its requirements. The developer can switch between an approved security bond and a letter of credit with a thirty-day notice to the owner and no lapsed time between them. The owner may request the developer to get payment security to secure a developer’s payment for labor and materials during the O&M phase. In such a case, the owner shall compensate the developer with premium costs for payment security. Letters of Credit A Letter of credit is a document from a bank or similar financial institution to transfer the risk of not delivering service or product as promised from the seller to the banks guaranteeing to pay such amount in case of seller’s failure to perform. A Letter of credit is given to a seller based on depositing of the amount of the letter of credit on hold by the bank or against a line of credit. The letter of credit will be released when the seller fulfills the contract agreement with the buyer and will be liquidated if it fails to do so. The contract documents can mandate or give the option to use letter of credits by the developer. The contract agreement specifies the exact requirements, terms, and conditions for any letter of credit needed from the developer. The letters of credit will: •

Be fully funded and on reserve for prompt pay when requested through a note from the owner to liquidate all or


• •

•

• •

•

portions of it (once or several times) without presenting the original letter of credit. In alignment with contract requirements It should be valid for the whole project or renewed before thirty days of its expiration date to maintain continuous converge throughout the whole project. Be issued through a financial organization that is acceptable to the owner. The bank must have unsecured long-standing debt rating for minimum [“A”] from amongst the main national rating organizations. If for any reason such bank failed to maintain this rating, the developer shall offer another letter of credit given by an eligible financial institution within thirty days from date of losing such compliance or the owner can request extra security measures that are acceptable for protecting the interests of owner. The owner is named as the only payee or beneficiary. The owner can liquidate the letter of credit or portions of it with no prior notice except if the contract documents specify something else. Proceeds from the letter of credit , as well as use or apply proceeds as given in contract documents of letter of credit, in case o The developer has been unsuccessful in paying fees, liability, or obligations under contract documents o The developer fails to deliver to the owner a replacement or new letter of credit, with the same terms, within fourteen days prior to the expiration date. The developer’s only way to recover inappropriate payments or proceeds from the letter of credit will be to get from the owner a reimbursement of proceeds that are misapplied and any associated cost to the developer to

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•

•

increase the amount of letter of credit for the amount then necessary under appropriate provisions of the Agreement. The developer shall furnish and obtain all of the letters of credit, their renewals, and all of the charges imposed dues to drawing money from it on its own expense. In the event an owner’s rights, as well as interests under the Agreements are assigned, the developer will cooperate in order that concurrently with effectiveness of assignments, either substitute letters of credit, or suitable amendments to exceptional letters of credit will be delivered with assignee naming assignee as recipient, without any cost for the developer.

Indemnification by Developer •

• •

• •

•

The developer shall defend, release, indemnify or hold harmless Indemnified parties through and against any or all liabilities, claims, fines, damages, suits, judgments, causes for action, investigations, administrative or legal proceedings, losses and demands, in every case if incurred or asserted by or given to third party, by the developer or any of its agents, or subcontractors, for extent sourced by: The violation for the contract agreement Any violation to trademarks, patents, copyrights, other purportedly improper fraud, trade secrets, proprietary information, or inventions The failure to obey governmental policies, and laws, including environmental and hazardous materials The alleged or actual negligence, misconduct, violation of appropriate laws, or regulations related to the performance of work Any claims related to taxes for gross purchases, sales, or the usage of profits related to the project

Public Private Partnerships for Highway Projects •

•

• •

•

•

•

Any liens, or stop notices related to the project, including its legal and accounting related fees and expenses, given that the owner does not owe money to the developer that causes such liens or stop notices. Any claims for delay, inconvenience, disruption, or loss triggered by obstructing the progress or completion for work being done by other service providers Any dispute raised by a utility entity for damages because of issues in performing utility agreements Any performance related issues, misconduct, negligence, or breach of laws in obligations to a third party, including governmental agencies, that is delegated by the owner to the developer or that render the owner not capable to abide or perform the obligation to a third party Any bad faith, fraud, complete misconduct, violation, or negligence of laws in relation to real property purchase services under the contract documents Any intrusion, trespassing, emanation, nuisance of others’ properties outside the right of way or failure to obey contract requirement during construction or O&M phase related to others’ properties Errors, defects, discrepancies in the design or construction of project

The developer’s insurance obligations will not cover any loss caused by the negligence, misconduct, fraud, or bad faith of the indemnified party or a relief event of the developer obligation as stated in the contract documents. Employees’ claims will be covered under workers’ compensation.

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P3 Bid Documents and Solicitation

P3 Bid Documents and Solicitation

6 The process of procurement requires a long list of decisions, many of which are affected by the type of contracts involved. One of these decisions is the choice of a strategy for delivery. This section will discuss how contract rules may discourage or encourage using differing strategies for delivery, as well as identifying important issues that related to contracts.

Pre-Qualifications Many professional organizations have suggested that a two-phase process should be used when bidding on a contract. Right now, when bids are taken for a portion of a roadwork project, the winning bidder is normally picked because there bid was lowest, with other variables sometimes taken into consideration. These organizations propose that bidders must first prove that they are qualified before their bid can be accepted.

Problems with Selecting the Lowest Bid Selecting a contractor based on the lowest bid does not mean that the owner will end up paying the lowest cost. There are often cost overruns as construction progresses, unforeseen expenses as the design nears completion, and cost changes due to changes in the plans or renegotiation of contracts. It is also possible that the lowest bid is not enough to finish the job well or that in the rush to put in the lowest bid the contractor’s proposal and the owner’s vision lack congruence.


Lowest Bidding Variations The above problems can be mitigated somewhat by using one of two variations in low-bid selection. The first was proposed by William Vickrey, a well-known economist. He proposes that the contract should be given to the firm with the lowest bid; however, he suggests that the owner should pay the next-highest price. The idea is that because of this method, companies will submit bids that are more in line with the actual costs involved in the project. If a company puts in a bid that is higher than the actual cost of the work, not only will they be less likely to get the job, they would not have influenced their actual cost anyway. The amount paid to the successful company is set by their competitors. The other variation involves paying the winning contractor based on the median bid, as opposed to one of the two lowest bids. Advocates for this method point out that by choosing the median bid you weed out the extreme highs and lows, which might be based on errors in judgment or opinions, and end up with a bid that more accurately reflects the final cost.

Selecting the Best Value An alternative method for selecting a contracting firm is making a choice based on the perceived best value. This method has the advantage of weeding out companies that are inexperienced or incompetent. The disadvantage to this method is that relationships between the buyer and potential contractors can enter into the subjective decision-making process, resulting in favoritism. When this happens, the buyer is likely not getting the true best value. However, this risk can be minimized as long as there is vigorous bidding competition. Adjusted Lowest Bid Criteria using Weighted Selection Another form of allocation using the best value method is weighted selection. This method does not completely get rid of bias, but it 174 | P a g e

P3 Bid Documents and Solicitation does seek to give the process greater transparency. This is accomplished by using a formula that takes into accounts the bid and how qualified a company is in order to come up with a new adjusted price. The following chart is an example of this method given by the Design-Build Institute of America (DBIA). Table 3(Adjusted Lowest Bid Methods using Weighted Selection)

Bidder

Qualitative Factor

Bid

Adjusted Bid (Bid/ Qualitative factor)

A

0.80

$2,000,000

$2,500,000

B

0.95

$2,350,000

$2,473,684

C

0.60

$1,800,000

$3,000,000

D

0.50

$1,700,000

$3,400,000

As you can see, the company with the highest qualitative score also gave the highest bid, resulting in the highest adjusted price. The least qualified company also gave the lowest bid, but because of their low qualitative score, their adjusted price was actually the most expensive. The company in the middle, with a middle of the line price proposal, came in as the best bid when adjusted for qualifications, so they would receive the contract. Procurement Negotiation Also known as, bid shopping, negotiated procurement is a process in which the buyer actively negotiates with firms that have been preselected. During this period of negotiation, the buyer can share bids to increase the possibility of bargaining and competition, resulting in a reduced cost to the buyer.

Laws Relating to Contracts Despite the fact that taking into account a firm’s qualifications

Public Private Partnerships for Highway Projects tends to lead to better quality in the final project, because of the existing laws most agencies in the public sphere don’t have the ability to use those methods. They tend to be limited to the lowbid method, despite the disadvantages. Without an assessment of a firm’s qualifications, the low-bid method sometimes leads to poor quality of workmanship or materials, which tends to cost more in the long run. Brooks Act of 1972 Using the low-bid method to select firms for design service contracts has been forbidden at the federal level since 1972, when Congress enacted the Brooks Act, and 34 states have passed “mini Brooks Acts,” extending this prohibition to the state level. This law, however, does not cover contracts for construction, which does complicate any contracts that require both construction and design, since government agencies are still limited to low-bid selection methods when selecting construction firms. In a design/build project, the government agency would like to hire a company for construction first, using the low-bid method. Once the construction company gets the contract, they may request that the design company with the lowest bid also be used, as opposed to the most qualified design firm. In this situation, the Brooks Act is being ignored and the design/build project is in violation of federal and state statutes. Since a court determined that design/build projects that use low-bid methods violate state laws, it has created the opportunity for the use of some best value practices when choosing construction companies.

Proposals for Unsolicited Projects The bidding methods that we have discussed so far assume that the governments agencies ask for bids for specific projects that they have decided are needed. However, there may be times when private companies see a need that the government agencies have not, and decide to submit a proposal for a potential project. Many states, including California, have laws that allow unsolicited 176 | P a g e

P3 Bid Documents and Solicitation as well as solicited offers for projects alternative delivery methods. If the state does not want to complete the project that was suggested, it loses nothing. If it does want to go forward there is no provision that says it must choose the company that suggested the project, and it will probably have to ask for competing bids, driving the cost down further. Because of this, there is no reason to ban firms from proposing projects. This can result in useful suggestions that would not have otherwise been considered, as far as projects and financing options are concerned. Unsolicited proposals also allow government agencies to obtain a no cost estimate for the proposed project. If nothing else, these proposals can be considered for completion along with the other priorities the agency has. Some researchers suggest that private companies who submit these proposals receive no advantages since the contract will still be decided by an open bidding process. This theory does not take into consideration that the company submitting the proposal will still have the upper hand in bidding because the company would not have submitted the idea if it was not in tune with their specific skills and experience.

Renegotiating Contracts No matter which method government agencies use to decide who gets the contracts, there are sometimes unexpected issues that arise and lead to expensive contract renegotiation, without the benefit of competition. It was reported that forty percent of infrastructure construction contracts during the period of 19902004 were renegotiated. Internationally, in Latin America, more evidence of extensive contract negotiation was discovered through gathering and analyzing data from more than a thousand contract renegotiations that took place between 1985 and 2000. More than 50% of the road construction contracts over that period were renegotiated. Three years was the average amount of time that passed before contracts were renegotiated. In 16% of cases, the contractor and the public sector agency requested the negotiation, while 27% of the time, it

Public Private Partnerships for Highway Projects was the public agency alone and 57% of the time, it was the contractor alone. Three types of statistically significant political factors that had an effect on contract renegotiation within this data set were noted. First, if the contractor was a local company, the incidence of renegotiation increased. Secondly, the more government corruption that is taking place, the more likely it was that contracts were renegotiated. Finally, renegotiations increased right after elections, particularly those renegotiations that were initiated by the government. Governmental agencies are often at a disadvantage when contract renegotiations occur. The people who were involved in negotiating the first contract may no longer be there, and the new workers are often weaker negotiators. Another problem is that the private firms might be the only ones noting the details involved in the terms of the contract, and using these to take advantage of weakened governmental agencies by renegotiating. There are also anecdotes that tell of companies that count on renegotiations and change orders, which take place without competition, for most of their profit. Following Pareto’s 80/20 rule, most change orders are small in amount, while large ones are rare but cost more money. For example, in UK, it was reported that 82% in 2006 are costing less than £5,000, and change orders over £100,000made up 90% of the total cost, while representing less than 20% of the total number of change orders.

Criteria for Selecting a Contractor If a public sector agency is using a best value bid selection process, it is very important that they are both clear and transparent about the criteria they are using. The public sector agency must let the bidding contractors know what criteria will be used, how it will be used, and how the process will go forward. The government agency must be very specific about both the Requests for Proposals (RFPs) and the Requests for Qualifications (RFQs) so that they receive correct and valuable information that will be of use in the 178 | P a g e

P3 Bid Documents and Solicitation bidding process.

(CSFs) Critical Success Factors Critical success factors are key factors that special attention as they can make or break common measurement method in business Researchers found 18 CSFs for P3 projects. follows: • • • • • • • • • • • • • • • • • •

should be given a the project. It is a and data analysis. These CSFs are as

Transparency procurement process Competitive procurement process Good governance Well-organized and committed public agency Social support Shared authority between the public and private sector Thorough and realistic cost/ benefits assessment Project technical feasibility Appropriate risk allocation and risk sharing Commitment/responsibility of public/private sectors Strong and good private consortium Favorable legal framework Government involvement by providing guarantees Multi-benefit objectives Political support Stable macro-economic conditions Sound economic policy Available financial market

During 2005 in the United Kingdom, a survey to determine how important the 18 CSFs, Critical Success Factors, were for private companies as well as governmental agencies involved in collaborations. This chart, organized by relative importance, summarizes the results of the survey. The public sector and private sector find differing factors most important. While the public sector sees competition in the bidding process, effective governing, organization, and political support as the most important factors, private companies do not find these

Public Private Partnerships for Highway Projects factors very important. They care more about the content than they do about processes. It is understood in a culture where D-B-B still dominates. The factors that have to do with processes are apt to become more important to private companies as different strategies for delivery grow in popularity.

Types of Contracts The next step after deciding how to choose a contractor, and what criteria to use to evaluate them, is to figure out what method to use for contract payment. Many options are available, based on the amount of risk that the governmental agency and private company are both willing to take on. Lump Sum or Fixed Fee Contracts In this type of contract, the private agency accepts a fixed fee for the work to be done. It is best to use the fixed fee set up when both the public and private agencies are well informed about the work. This type of contract is sometimes a problem when alternative strategies for delivery are used in large projects. The uncertainty involved from possible hazards and the multitude of interfaces makes it hard for contractors to accept a fixed fee. Often, this type of contract is only possible when the lump sums are set for small parts of the bigger job, each on its own. The biggest problem that comes with a lump sum contract is that there is no incentive for the contracting company. When the price is the same, regardless of quality, a contractor is likely to rush through a project, leading to poor quality. Price per Unit Contracts With this type of contract, the necessary work is divided into specific parts, and a price is set based on the number of units of the work performed. The price paid is based on the number of units completed, and the price that was set for each unit. The price per unit contract works best when agencies both understand what needs to be done in a contract, but disagree on the quantities that will be 180 | P a g e

P3 Bid Documents and Solicitation involved. These contracts happen often in the field of construction, and are commonly used hand in hand with fixed fee contracts. Cost plus Contracts The cost plus contract has many subtypes, all of which have the same basic format. The contracting firm receives payment for labor and materials, plus an additional payment that represents the profit they are making. It is distinguished from the other contract types because of the incentives that it offers Cost plus Fixed Fee The payment is a set fee that is not dependent on the total cost of the project. Cost plus Fixed % The payment is a percentage of the total cost of the project. Cost plus Fixed Fee and Bonus The payment is a set amount; however, bonuses can be achieved by obtaining set goals. Cost plus Fixed Fee with Guaranteed Maximum Price (GMP) The payment is a set amount, but the final price cannot go over a certain amount. This type of contract is a type of insurance for the buyer, with the contracting firm taking on some of the risk, giving them an incentive not to exceed budget. Cost plus Fixed Fee with GMP and Bonus The payment is a set amount, but the final price cannot go over a certain amount. However, there are possible bonuses so that good outcomes are rewarded. There is an added risk for the contracting firm, but the bonus helps to mitigate this risk. For example, if the project goes over the intended budget, but is completed quickly, the bonus will help to cover the losses.

Public Private Partnerships for Highway Projects Cost plus Fixed Fee and Cost Savings Sharing The payment is a set amount; however, the contracting company splits any savings incurred with the owner. Cost-Reimbursement Incentive Contracts This type of contract begins with a fixed fee that can be changed at the completion of the project with a formula designed to account for penalties and bonuses when real costs do not coincide with expected costs. Since there is both a guaranteed high point to protect the buyer and low point to protect the contractor, both are insulated from gross miscalculations. Present-Value-of-Revenue (PVR) Contracts This type of contract is becoming more and more popular with jobs that have a set source of revenue. With a Present-Value-ofRevenue contract, the government agency picks the fee schedule and the rate of discount. Contractors place their bids based on the minimum user fee revenue they want to do the project. The lowest bidder wins. The main difference that sets this type of contract apart from the others is that the contract ends when the contractor gets the current amount of user revenue that is equivalent to its bid. At times when the need is lower than planned, the length of the contract is extended, if the need is higher than expected, the length of the contract is shorter. Sometimes the government agency will add a clause into the contract that lets them purchase their way out of the deal at any point as long as they will buy out the contractor based on what they are owed. This allows the public agency to end the agreement without harm to the contractor’s profits.119 PVR contracts provide many positives. They reduce the risk of renegotiations that turn out badly for government agencies. The risk of default disappears because even in the least positive outcome the contract length is just extended. Because of their objectivity, PVR contracts allow contractors who may not be as politically adept, even though they are excellent at what they do, to enter the bidding arena. The Severn and Queen Elizabeth II bridges in the U.K. are now using this type of contract. They will continue until the tolls 182 | P a g e

P3 Bid Documents and Solicitation collected are sufficient to cover the amount borrowed to build the bridges. This is expected to happen much sooner than expected. This type of contract minimizes risk for government agencies, while giving the contractor peace of mind because their return is guaranteed. The only risk taken on by the contractor is the length of time it will take for them to collect their entire pay. There are variables, such as inflation, that cause the contractor to prefer a quicker turn-around. PVR contracts are estimated to reduce the contractor’s risk by over 1/3.

Shadow Tolls When building a toll road or transportation project, private companies who are financing the projects in full or in part are taking a risk dependent on the income that will eventually come from the project. However, private companies can be paid for these projects without resorting to user fees. With a shadow toll based contract, the transportation department pays the contractor a set amount for each person who uses the structure, as opposed to each user paying a toll. This is not much of a difference from the contractor’s point of view, though they do not have to spend as much on collecting revenues. This method also makes toll collectors and license plate cameras unnecessary, since you only need to measure the vehicles entering the structure as long as the fee does not change based on the distance traversed. Supporters of the shadow toll paradigm suggest that this method encourages builders to create wanted thoroughfares, thus gaining the traffic needed to generate the income necessary to make the project possible. This method of financing is also more politically popular than toll roads. Despite the fact that the roadway is taxpayer funded, it is less visible because drivers do not have to pay for each use. Naysayers point out that because there is no payment for each use, users will treat the road as a freeway, leading to an increase in traffic congestion. Studies have shown that highways with minimal congestion get more traffic throughput, and thus offer more income

Public Private Partnerships for Highway Projects to the contractor, leading the contractor to design roads for better traffic flow. These naysayers also point out that taxpayers will end up paying more because more people will use a freeway with no tolls. Shadow Toll Usage in the United Kingdom After years of rejected shadow toll proposals, in 1994, the Public Transport Ministry agreed that it would be appropriate to encourage private companies to invest in building new roads. Ten DBFO road contracts had been awarded by 2006 using the shadow toll model, with a value of almost two billion dollars and a range of 770 km.

Selecting Contractors in the United Kingdom The HM Treasury in the UK asked financial and construction companies how they could improve innovation and involvement from private firms in 1993. Most of the people who responded recommended using two stages during the contract bidding process, with the first stage being prequalification, eliminating all but three or four companies, and the second bidding. They also suggested that in order for companies to give their best bid they needed a firm commitment from the government agency. Without this commitment, it simply was not cost efficient to bid.

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Summary of P3 Evaluation Techniques

7


P3 Evaluation Techniques When deciding if it would be best to complete a project as a P3, or the optimal way in which to structure the P3, government organizations should determine what the results would mean for their bottom lines for each option. Financial evaluation techniques for P3 projects may include the following:

Financial Test/Cash Flow Analysis This technique looks at the expected cash flow to examine the feasibility of differing procurement methods. This evaluation technique best suited for a specific proposal, or for a specific point in the development of that proposal, is dependent on what the government is trying to inquire about, as well as the nature of the available information. It is sometimes best to use both techniques for the same proposal, or to use each technique during different times in the proposal’s development.

Value for Money Analysis This technique evaluates the price and financial benefits, after adjusting for time and risk, of using different procurement processes for the same project in the same amount of time. To take into consideration the facts, such as legal hurdles, politics, and timing or scope differences, which cannot be taken into account with the VfM method when evaluating differing procurement

Public Private Partnerships for Highway Projects choices, a qualitative approach is useful to undertake either before, or as an addition to, VfM review in order.

The Value for Money Process Government agencies use the Value for Money (VfM) technique to examine the best approach to use for procurement in large-scale infrastructure undertakings, normally those requiring over $100 million in predicted capital. This type of evaluation technique looks to determine which procurement process will result in the best value for the governmental agency. This may take into account benefits such as business efficiency, private financing, innovation and the allocation of risk. When analyzing the differences between the P3 and traditional design-bid-build models for transportation infrastructure projects, VfM is the method used most often. This technique’s usefulness stems from its ability to determine the best “value for the money” when analyzing procurement methods, based on which requires the lowest cost after taking into account risk, lifecycle expenses, and all other applicable variables. Is P3 the Right Choice? VfM comparison enables government agencies to analyze the net public costs of differing project delivery choices, taking into account an adjustment for the risk involved. The VfM technique compares the projected costs and advantages (adjusted for risk) for a P3 project, during the length of the projected contract, to the projected costs and advantages completing the same task during the same period with a traditional design-bid-build model. VfM is an excellent tool that enables governmental leaders to analyze the intricacies involved in keeping or passing on the risk involved in projects, as well as understanding the long term value of a facility concession agreement to the government agency. Because of this, public agencies may make use of VfM 186 | P a g e

Summary of P3 Evaluation Techniques comparisons to help with: • Choosing the best procurement method for a proposal • Choosing the best bidder • Negotiations with a chosen company before finishing the P3 arrangement • Explaining procurement choices to the public at large VfM might be used to determine if it is more cost effective for the state department of transportation to add extra lanes to a major roadway and collect toll fees, or to contract with a private firm to shoulder the construction costs in order to receive the toll revenues. This can help determine if the state is better off paying more in order for a private company to assume the risks involved in return for instituting a dependable standard cost in the long run. The process for conducting a VfM comparison may vary; however, the fundamentals are the same throughout the countries discussed here. They all include: • Establishing a Government Comparator to project the lifelong expense involved in completing the process with conventional methodology • Projecting the life-long expense of the P3 option, with the use of a “shadow bid” or a private bid proposal during the pre-procurement phase • Producing a side by side analysis of the expenses for each option Different private agencies do these comparisons at different points in the project process. The United Kingdom does some type of VfM comparison at three different times during the process, while in Australia they usually do not perform the first VfM comparison until after the project is in the later stages and bids are in hand. Once actual bids have been received, it is possible for this analysis to be extremely detailed, and number-based.


Shadow Bid Model (SBM) and Public Sector Comparator (PSC) A Public Sector Comparator is a tool to compare the life cycle cost of the project, in net present value terms, if performed by the public entity compared by the private entity taking into consideration risk factors. While researching a PSC, many things are taken for granted, such as the ability of the government agency to finish the project at the same level of quality as the private sector. Since a PSC represents the basic cost for the government of the project over its lifetime, the measure is useful in helping the public sector predict the cost of traditional procurement methods. It is also helpful to use in any VfM comparisons made with P3 projects. When researching a PSC there must be a concentration on governmental expenditures and risks involved in the full duration of the project. A baseline cost model or a Public Sector Comparator that analyzes the life cycle expenses related to a project can help federal government agencies like the US Department of Transportation in its supervisory capacity of transportation projects that use federal monies, because it shows how the state agencies are preparing to oversee and keep up the infrastructure. A Shadow Bid Model is a projected cost for the government agency when the equivalent work is performed by a private firm as a part of a P3 RFP. The SBM is a projection by the government agency of a bid price that they might obtain from a private firm if the project is completed as a P3. These two evaluation tools may be calculated as the project is first being studied as a possibility, or before deciding on a procurement method to use and asking for bids. Once the public agency has received bids, it may examine how close the PSC was to the bids they obtained so that they can determine if the VfM continues to be in favor of a P3 before actually assigning the contract. 188 | P a g e

Summary of P3 Evaluation Techniques Government agencies normal use statistical and financial models to calculate the SBM and PSC for each proposed facility. One of these mathematical models, called the Monte Carlo simulation, makes use of statistical samples to give a range of projections describing the price of risk in the quantitative test. These statistical models are made to test a variety of possible results for the SBM and/or PSC. If the net expenditure forecast by the SBM is lower than the net expenditure forecast by the PSC, the P3 contract is a better value. If the undertaking does not have a positive cost projection, the NPV (Net Present Value) of the agreement is the necessary public agency allocation required for a private firm to complete the project. For the most part, the mathematical VfM test proposes to make an apple-to-apple analysis between a P3 contract and a traditional design-bid-build contract. When a cost of an item is the same, no matter what the procurement type, they are excluded from the VfM assessment. These costs include items such as project management and land acquisition. Only the costs that differ are counted in the VfM analysis to better help government agencies decide whether a P3 or a PSC is the better option. For example, a “competitive neutrality” modification is made in some Canadian and Australian projects in order to compensate for price factors that might provide a biased view of one delivery option. This modification may be used in the United States under comparable conditions. It would likely be used if tax differences or financing options would give an unfair advantage to one delivery option. For the mathematical comparison of the different project delivery methods to be valid, an identical quality of work must be expected of both the private sector and public sector options. Involvement in worldwide projects shows that public agencies at times experience

Public Private Partnerships for Highway Projects hardship with the expectation that both the public and private options will provide the same quality when they are estimating the cost used for the PSC. They often expect private firms involved in a P3 to deliver a higher level of quality through more modern structures and better customer service. In order for the PSC to be valid, it must be calculated with the assumption of an equal quality of work. Though the calculation of the SBM and PSC are important to the numerical VfM calculations, the conclusions of these two analyses must be evaluated along with qualitative factors. The qualitative factors include private firms’ willingness to accept the risk involved in the project and the competitiveness of the market. Qualitative and quantitative analyses usually represent the comprehensive VfM report and facilitate the decision making process.

Strengths and Weaknesses of the VfM Method When setting VfM and P3 composition procedures, the pluses and minuses VfM offers the system of taking proposals from their beginning stages to completion must be taken into consideration. Particular strengths and weaknesses of VfM are mentioned below to take them into consideration: Strengths • • •

Gives the government agency more knowledge of the risks and costs of a project May give an unbiased analysis, as long as it is undertaken with a systematic approach Greater popularity for P3, as long as the findings are made public, which encourages openness and shows the worth of the procurement

Weaknesses •

Making sure that every side of the project is well analyzed

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Summary of P3 Evaluation Techniques • •

is difficult Depending on how complex the data and the conclusions are, the results might be seen as showing a bias The results are not exempt from perceived or actual political influence

VfM Benefits A thorough VfM testing procedure has the possibility to greatly enhance a public agency’s ability to understand if a P3 project will actually provide benefits to the public. When done well, VfM assessment will help the government have a better grasp of the lifelong price tag a project will entail, give the P3 procurement process transparency, increase the value the taxpayers receive from their infrastructure facilities, and decrease the possibility of using the P3 method only as a way to make procurements that are foolish or not cost effective. Particularly when the project in question is a natural use of public funds, using a VfM assessment is wise from a public point of view. Because of this, P3s are considered a procurement possibility when a higher degree of quality or the delivery of more benefits for a lower price (VfM) are considered to be the main criteria for the decision to go with a public or private procurement method. Immediate financial shortages may also give government officials an overwhelming reason to choose the P3 option because of financial stresses. Unfortunately, there have been many instances where this has led to badly organized privately funded P3 projects being used to get around financial limits while taking on great financial risk. When looking back, several of these undertakings were shown to cost taxpayers more money in the long run, since they were only financial leases without the private firms taking on any risk. These include toll road projects in Hungary and Poland, as well as other shadow toll roadways throughout Europe, and Mexican toll road projects. In these instances, the public sector

Public Private Partnerships for Highway Projects simply obtained debt with private financing (and higher interest rates). There was no risk transfer to the private firms and the government ended up having to bail out the projects’ financers in order to avoid bankruptcy. Requiring a VfM assessment anytime that a P3 delivery method is used will provide more responsible use of the P3 delivery method, so that they are responsibly and transparently utilized. By using the concept of value with the NPV (Net Present Value) when examining delivery and funding alternatives, the government agency has a better understanding of the life-long expenses the taxpayers are committing to by using non-traditional construction and funding choices. If the government does not use a value analysis, even an unadvisable P3 might look inviting since it enables the government agency to abstain from large budget expenditures in the short term while avoiding the debt that would be needed to fund the investment needed for the infrastructure project. Even though these P3 undertakings might seem like the better deal at the time, in the long run they will end up costing the public more. The P3 procurement method should only be used when it is shown by VfM analysis to be better and more cost effective than a traditional public sector delivery model.

Size and Complication Required in VfM Analysis Though the reasoning behind VfM is to make sure that the government is getting the best value for its dollar, the actual study may be both lengthy and costly. Laying out and completing a P3 and finalizing a VfM study necessitates a considerable investment of both time and resources from highly specialized workers from many different professions that include engineering, legislation and financing, from both within and outside of the public agency. When the government does not often take part in P3s, they might find that they are better off contracting with outside professionals than hiring full time staff members to handle this work. 192 | P a g e

Summary of P3 Evaluation Techniques Government agencies that participate in a multitude of P3 projects even make use of a variety of both outside specialists and in-house staff in order to make the most efficient use of resources and make sure that P3 projects can be completed on time and efficiently. The resources that are needed for a P3 acquisition go beyond the introductory VfM study, the acquisition procedure, and the financial closing. Because of this, the after-closing expenses should be taken into account. Since projects acquired through the use of P3 delivery methods must be overseen by the government agency, and because VfM comparisons must be kept up to date throughout the project, the continuing governmental supervisory expenses and responsibilities should be taken into consideration.

VfM Procedures Procedures for Establishing Value for Money Even though there are important differences in the use of VfM techniques, below are the key elements of VfM: • Calculate a standard PSC (Public Sector Comparator) that predicts the possible cycle cost of completing the project with a conventional procurement method, making sure to include borrowing, maintenance, administration and capital costs; • Name and analyze the consequences, likelihood and timing of potential risks involved in the project and assign them to the private or public sectors; • Make adjustments to the PSC, taking into account expenses and risks, as well as competitive neutrality, and take away revenues that will result from the project (e.g. tolls); • Predict the possible risk-adjusted life cycle cost of the P3 option (SBM), taking into account the expenses incurred directly by the government; and • Compare SBM to PSC, if SBM is lower than PSC, the P3 option is financially sound.


VfM Considerations The basic presumptions needed in ordered to perform a VfM comparison are predictions of the life cycle costs involved with the project, predictions of the remaining value and shouldered risks, modifications for competitive neutrality, and discount percentages. The assumptions that follow are key ideas in any mathematical VfM calculation: Project life cycle costs •

All costs associated with building, procurement, administration, maintenance, operation and financing expenses, as well as inflation.

Risk Analysis •

All predicted cost of transferred and kept risks for differing delivery methods.

Competitive neutrality •

Modifications considering the plusses and minuses involved in competition that are unique to the public entity.

The project timeline must be taken into account in order to predict the timing of risks and life cycle expenses precisely, since they are essential to understanding the revenue generated by the project. There must be enough information to consider project risks and predict life cycle project expenses. Enough preparatory designing must be done on the undertaking so that there is a basic knowledge of the scope of the project, as well as any possible sources of income, alignments, and procurement methods. If the project includes tolls, a T&R (traffic and revenue) analysis may be a 194 | P a g e

Summary of P3 Evaluation Techniques helpful resource for predicting possible income and operation expenses. Preliminary information and estimation sources may include: • T&R analyses; • Preliminary engineering expense costs; and • Project financing and financial proposal Collecting the information and conducting the study necessary for a full VfM work up may take over half of a year; so plan to run a VfM comparison well before the environmental review process is complete, so that there is no lag in procurement. The study can be revised during the project development procedures as estimations are recalculated.

VfM Limits Though government agencies typically make use of a BCA (Benefit Cost Analysis) to decide if the social benefits of a project merit the societal expense, they normally do a VfM study after they have decided to go forward with a project and want to examine the best way to deliver it. Since VfM studies only take into account the finances involved in a project, they do not take into account the societal advantages of a quicker project completion. VfM studies simply look at the financial results of differing delivery methods from the point of view of the government agency sponsoring the project. Other benefits that the project might have for citizens are not taken into account, or are only considered in the qualitative analysis associated with the VfM study. An important inference in a VfM study is that the procurement methods under consideration are financially, technically and legally possible and that both methods can deliver the project in the same amount of time. Therefore, a VfM study that analyzes the differences between a government-financed PSC and a privately funded SBM is not applicable when the government makes the

Public Private Partnerships for Highway Projects decision to go with a P3 because conventionally funded procurement methods are not feasible. Despite this, a VfM study can be used to analyze the differences between a couple of privately funded procurement methods, for example, a DBFOM and a DBF. The method with which toll revenues will be handled should also be considered. Effectually these payments directly pass between the tool operator and the public. When the P3 operator is in charge of deciding toll rates, it is possible for them to raise toll income by asking the public to pay higher rates, as long as this is in line with the P3 contract. This added income should be counted with the Shadow Bid in the toll collection model. A lower NPV of the SBM that compares well with the PSC might be the outcome, despite equality in total expenses. How federal loan backing is handled must also be taken into consideration. The U.S. government has supplied many indirect and direct possibilities for subsidized lending for transportation infrastructure projects. These include subsidized direct financing including financing through the TIFIA (Transportation Infrastructure Finance and Innovation Act), bonds that offer tax credits (like the Build America Bonds), and debt that is exempt from taxation, including private activity and municipal bonds. Taking into account these programs in a VfM study may possibly result in different outcomes depending on if they are treated as external from the point of view of the P3 firm, the local government agency, or the state. A VfM study might also not take into account differing structures to the government agency’s payments throughout the life of the project. For instance, a PSC that includes DBF or DBB may include significantly larger payments in the beginning of the project compared to the payments that must be made throughout the life of the project to the DBFOM provider. When the payment patterns of 196 | P a g e

Summary of P3 Evaluation Techniques the possible choices are significantly different, these differences may make an important difference in the comparison since payments in the beginning have a higher value than payments made later on because of inflation.

VfM Application Internationally An overview of methods used internationally shows that VfM studies and PSC methods are widely used throughout a number of countries that have taken part in P3 projects during recent times. It can also be seen that the idea of VfM analyses and similar programs have been utilized at differing times in the evolution of each country’s P3 policies and usage, and also throughout the evolution of a P3 undertaking, from beginning though completion. The United Kingdom has been a leader in establishing and making use of the VfM study, and nations including Canada and Australia have established their VfM policies mostly based on those used in the UK. Recent approaches to VfM analysis are similar throughout the UK, Canada, and Australia. The VfM analysis in these nations is established upon: • A multistage method that is used at multiple points during a project or program; • Mathematical study, normally concentrating on the sustainability and possibility of an undertaking and if the positives exceed the negatives; • Mathematical study involving the determination of the income and expenses of a project over its lifespan and the deduction of the project’s revenue in comparison to the NPV calculations for the PSC and the P3 bidding; • Risk study, valuation, and appropriation for every procurement method. The evaluation of risk is one of the main variables used when determining the possible VfM for public procurement and P3s. These studies include


•

modifications to correct any distortions so that there is competitive neutrality between P3 and government sector choices; and Professional opinions to evaluate necessary differences in expenses, income and risk allocation included in the analysis of the P3 and public sector procurement choices.

Variations exist in the methods used among, and at times within, different nations. These variations may show the involvement of politics in the evaluation process, the basic procedures for finance planning and project evolution, or technical details involved in the process (ex. finding the needed rate of discount). However, it has the biggest effect on VfM, methods for deciding discount rates show variation between different countries. In the United Kingdom, the VfM approach they use requires the use of a standard discount rate to figure the NPF of the estimated income with P3 and public procurement. This is a simple method, which meshes well with a uniform method of VfM analysis. Using the UK’s method does have some disadvantages though, because it does not take into effect the undertaking’s particular risk profile, nor the actual capital expense to the public sector when it sponsors the infrastructure with public debt, or a private financing option that uses a mix of equity and debt known as a WACC (weighted average cost of capital). Canada and Australia use a discount rate calculated on a case-bycase basis so that they take into account the undertaking’s particular risk profile that envelops the income stream under P3 and public procurement. Even between the two countries though, their methods to determine the best discount rates to use differ. In Canada, the policy utilizes a unique proposal to determine the applicable discount rate based on the WACC for comparable undertakings. Using this method, the discount rate accounts for the particular risks of the project as well. 198 | P a g e

Summary of P3 Evaluation Techniques In Australia, the VfM policy uses a theoretical method by using the Capital Asset Pricing Model. This bases the discount rate on a risk free return rate that is based on the market as well as a markup for risk to describe the undertaking’s openness to the dangers of the market. Australia’s VfM policy gives the presumed undertaking’s betas (β) for the multiple project types. It calls for using varying discount rates to account for the distribution of systematic risks among the P3 contracting firm and the public sector. As long as systematic risk is shouldered by the P3 company, as per the agreement’s stated and implied risk allocation, the discount rate that is used to determine the P3 bid from the NPV must be greater in order to show the P3 company’s exposure to the systematic risks. Another variation in the international practice of VfM is the time at which the analyses are done. In every country they performed a VfM analysis more than once, however, the time at which the analysis was performed and the part it played in the procurement process was different in every country. Some nations make use of VfM studies at the start of the process to help assess the best method of procurement, while different countries make use of it to analyze bids from private companies. In other countries, the VfM testing occurs at many times during the procurement process, as well as during the construction process, and sometimes at the end of the final financial closing. The following table reviews different aspects of worldwide VfM policies. The definition of the PSC also varies between the countries. The table below summarizes various aspects of the international VfM practices.

Public Private Partnerships for Highway Projects Table 4 (Comparison between different international VfM models)

Important VfM Review Criteria

Canadian VfM Model

UK VfM Model

Australian VfM Model

Affordability;

Affordability;

Affordability;

Risk sharing;

Risk sharing;

Risk sharing;

competition;

Competition

Competition

National level (laws/regulations) Risk allocation; output specification; competition; contract duration; innovation; borrowing cost; management skills; performance; measurement; contract flexibility

State and National level Measurable service output;

Appropriate sector (for national support) VfM Oversight

VfM drivers

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State level Opportunity to bundle multiple services; Federal cost-sharing for P3s in selected sectors; Prior P3 experience in buildings sector; innovation; market capability; transfer of risk; government support

whole life costs; integration, operation maintenance; innovation; risk transfer; greater asset utilization; market capability

design and


Timing

VfM Tools

PSC is prepared before bids are invited; a full VfM is conducted after bids are received.

PSC is prepared before bids are invited; a full VfM is conducted after bids are received, during annual budgeting, assessed until contract close.

PSC is prepared before bids are invited; a full VfM is conducted after bids are received.

PSC

PSC

PSC

Risk matrix Same for PSC and P3; WACC

Same for PSC and P3, Predetermined and fixed; Riskfree rate of 3.5%

Risk-free rate of 3% (in real terms) plus risk premium

Financial (NPV); qualitative Financial market capacity in recession; public sector union opposition;

Financial (NPV); qualitative Subjective; simplistic

Financial (NPV); qualitative Inaccuracy; omitted risks; manipulation;

Discount Rate

VfM Analysis

Issues

PIT (Public interest test)

approach and enthusiasm varies by province; national support only for selected contract types and project categories

costly


Methods and Practice in the U.S. In the United States, public agencies have taken part in P3 projects in many different areas, including schools, health and medicine, prisons, transportation, water treatment and technology. The United States is still, however, a rookie when it comes to P3s, and does not have much uniformity in VfM protocol across state lines. The majority of P3 projects in the United States have been led by state agencies, so the market may be seen as splintered. In addition to using multiple methods, states have undertaken the pursuit of P3 projects with an incomplete knowledge of the use of cost analytics. However, many state governments have admitted that VfM studies are important, and some have begun the use of VfMs with their own procedures. Some states that are known to use VfM or related studies are California, Virginia, Texas, Florida, and Georgia. These states use VfM either because of state legislation or out of a desire to be proactive. Since governments will continually face budgetary restrictions as the population’s needs continue increasing with the requirement of improved infrastructure facilities, the use of P3 projects should become more widespread. This expanding interest in P3 projects will lead to more in depth study of VfM techniques, project expenses, and taxpayer value.

Virginia VfM Policies Virginia has accepted a VfM condition for their PPTA (Public Private Transportation Act) undertaking evolution process and has made their guidelines public. Based on these published guidelines, every project must be assessed with a VfM test in order to determine if it will result in worthwhile benefits to the public and Virginia if completed through the PPTS process. This assessment examines the value a project would have when delivered with the PPTS process in relation to the traditional completion methods that would otherwise be applied. This beginning VfM examination also informs the PPTA advisory panel’s decision about the best 202 | P a g e

Summary of P3 Evaluation Techniques procurement option. The PPTA headquarters provides updates to this original VfM analysis using information that comes with submitted private company proposals throughout the competitive bidding process to make sure that the undertaking keeps on providing VfM during the entire process. The applicable VfM method differs among types of projects and payment methods (for example, tolled projects vs. availability payment projects). For the final step in the VfM assessment, the PPTA staff conducts an ending VfM assessment that takes into consideration any added project data that has come to light after the first VfM assessment was completed and before advocating the pick of the selected proposer to the PPTA Committee. This up to date VfM assessment compares the updated VDOT PSC to the selected bidder’s proposal. This analysis is used in making the committee’s decision. This finalized assessment makes sure that the project will provide the needed value to Virginia. Since the new PPTA rules went into effect in 2010, there have not been any projects assessed using the updated VfM guidelines.

California VfM Procedures Despite the fact that California has enacted laws governing P3 projects, they do not have published VfM procedures. Caltrans and the SFCTA, however, have used VfM assessment techniques in their current Presidio Parkway project. The Presidio Parkway analysis of delivery options is a qualitative and quantitative study of the life cycle expenses for the project that analyzes the differences between conventional PSC methods with DBF and DBFOM methods. This mathematical analysis of the assessment looked at the life cycle expenses of the undertaking from the position of the public agency for the three delivery methods. This analysis, which used the shadow bid methodology, was the basis for a qualitative look at the three different delivery options. The

Public Private Partnerships for Highway Projects assessment analyzed the three methods based on how much they all met the objectives of the project. This translates to the VfM over the life of the project, risk allocation, expenses, and timeliness during and after the financial closing, the use of government funds, the level of service, and maintenance costs. It also examined the risk allocation levels in the four categories of risk: construction duration, maintenance, expense overages, and operations. Using both analyses, DBFOM came out on top. One of the main tasks during these assessments was deciding on the best discount rate. This task included looking at differing worldwide policies used in calculating discount rates and sensitivity assessments were conducted for all options. The following table shows the rates assessed and the range of the conclusions. In the end, the government agencies in charge elected to go with a before-tax WAAC rate of 8.5%. Despite the differing rates, the assessment still showed that the VfM was upheld under the DBFOM procurement method.

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Summary of P3 Evaluation Techniques Table 5 (VfM Analysis Discount Rate Results and Range for Presidio Parkway)

Approach

Value

DBB

DBF

DBFOM

Reference

Comments

U.K. VfM Model; in the U.S. based on OMB Circular A-94 projects with social benefits

The OMB A-94 rate is 7% real, to which is added inflation, assumed at 2.2% in this report.

Partnerships BC approach using Project pre-tax, time-weighted WACC, which is calculated from the project’s audited financial model

mirrors Austria's Model

Based on California taxable 30year bonds

Taxable bond does not include the implicit subsidy represented by the foregone tax revenues that are a cost to taxpayers

Based on California general obligation 30-year bonds

CA GO rate is a tax-exempt rate. See comments above.

(NPV$, Million) Social preference rate (social discount rate)

Project pre-tax timeweighted WACC (base case)

9.20%

8.50%

619

635

614

642

469

488

Risk free rate (government cost of capital rate) – taxable

7.50%

660

687

538

Risk free rate (government cost of capital rate) – taxable

5.50%

730

802

676


Allocation of Risk Optimal Risk Allocation A key area in P3 agreements for both the private and public sectors is the way in which project risks are allocated. “Optimal Risk Allocation” takes place when all risks involved in a project are placed with the party that is best able to work with and oversee the specific risks. This does not happen when the government agency assigns all risks involved in a project to the private firm. These results in the expenses of a project being much greater than if the risks were allocated correctly. When private firms are expected to take on a specific risk in the project, they include the expected cost of that risk into their bids. The government’s risk assignment approach may waver, based on the politics in place when the project is allocated and how much private sector involvement is expected. Private companies must be vigilant of this so that the proper risk assignment is obtained. Risk Assignment Matrix The assignment of project risks is difficult. The following table describes a proposed Risk Allocation Matrix that includes a multitude of project risks. A chart of this type is used when deciding which party should take on which existing risk. As this table shows, there is a multitude of risks present at differing points in the project’s completion. These risks might include politics, legislation changes, an increase in costs, force majeure, and environmental problems. How these risks are assigned will have an impact no just on the bids proffered by private firms, but it will also dictate if private firms show any interest in the project and if financers are willing to give private backing for the project. When risks are allocated well, it can be a winning situation for all involved, however, if it the risk allocation is unfair or one-sided the project will not be a success for all involved.

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Typical Risks in P3 Projects Table 6 (Risks in P3 Projects)

Type of Risk

Description

Assignment

Mitigation

Market Revenues

Customer willingness to pay for level of service (LOS) unknown; affects interest rate and marketability for project-based revenue financing Traffic and revenue below projections Competing/alternative projects Excessive capital maintenance Insufficient revenues to fund ongoing O&M

Public and Private (funders/ lenders)

Investment grade traffic and revenue studies accepted by rating agencies Adequate debt coverage ratios Adequate reserves Credit enhancement, insurance Toll adjustment flexibility Careful budgeting processes and O&M controls Non-compete protections

Technology Performance

Existing technology that is unproven in terms of revenue service

Private (vendors)

Warranties

Public Private Partnerships for Highway Projects Type of Risk Environmental Flaws or Delay

Completion Costs

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Description Lengthy studies, Permitting delays, Regulatory approval periods

Assignment Public

Mitigation Strong process management Private Partner assistance

Cost and schedule overruns

Private (construction contractor) and Public

Use of fixed price/guaranteed maximum contract Adequate contingency funds Liquidated damages Force majeure insurance Design and construction management/over sight by Public Partners (which may be outsourced) Financially viable Private Partners Specialized surety products Allowing Private Partners to undertake majority of design

Summary of P3 Evaluation Techniques O&M Costs

Excessive costs of operations Excessive capital maintenance expenditures Unpredictability of costs Regulation of DUC (direct user charges) rates and contractor ROR (rate of return)

Private (O&M contractor) and Public

Non-recourse financing Minimum guarantees Toll adjustment flexibility Credit enhancement, insurance Careful budgeting processes Capital asset replacement assurances Warranties, incentives, and penalties Financially viable Private Partners Use of private O&M contract Use of fixed price/guaranteed maximum pricing, with escalations and adjustments over time

Policy/Political Constraints/ Support

Uncertainties regarding public policy and changes in legislation Regulatory uncertainties Funding support

Public and Private

Persuasive and supported arguments for project Early regulatory agency involvement Public relations and citizen/policymaker education campaign Community engagement and buy-in strategy

Public Private Partnerships for Highway Projects Type of Risk

Description

Assignment

Mitigation

Phasing Timing and Resources

Uncertainties regarding initial vs. subsequent phase economics

Public and Private

Strong process management Early regulatory agency involvement Expedited and streamlined procurement process Early and continuous contact with other states and local governments

Liability

Construction Defects, Day-to-day operational expenses, Subcontractor claims, Environmental risks

Public and Private

Warranties Insurance Well-thought out allocation of risk in contract based upon party best able to control and mitigate Innovative insurance products

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Lessons from International Projects

8


Every country has its own process for the delivery and procurement of P3 projects. They all engage in comprehensive preplanning before any decisions are made to deliver an infrastructure project as a P3, though the reasons for their approaches differ. Nevertheless, a study of the process they use is instructive, especially since the differences in approach are very informative. One of the most important issues in all P3 projects is how the funding will be arranged. Since these funding types are essential to how the projects are planned and carried out, they are the first issue discussed in this section.

Funding Types All P3 project agreements must have a source of income or revenue in order to pay back financing, provide for operating expenses, support the capital involved, cover transaction expenses, and provide investors with income from their investments. Different nations use different processes in order to provide the necessary payments such as direct tolling, shadow tolls, or methods of paying the contracting firm directly. Direct tolling is straight forward and widely understood, the people who use the infrastructure simply pay a fee. The other two methods of payment are not as well understood. Normally a shadow toll refers to government payments to a contracting company that are based on the number of users of the infrastructure. However, in Spain and

Public Private Partnerships for Highway Projects Portugal, the shadow toll payment is a payment based on both availability and volume, and is connected to the service level, which is provided. The straightforward idea of the direct-payment system was introduced in the U.K. as the payment that the government provides to the contractor. This method consists of many parts, though service availability is the main one. Another possible source of additional revenue is income from the use of surrounding land for commercial purposes, including gas stations, utility corridors, or restaurants.

European Parliament (EP) The economic situation of each P3 project is studied by the EP (European Parliament), who then suggests a funding or tolling structure to the government. The government then makes the ultimate decision on what revenue structure is used. When the volume of traffic is predicted to be more than 15,000 vehicles every day, the EP normally suggests direct tolling, sometimes with permission given to the contracting company to use a pricing structure based on congestion. When the traffic volume is predicted to be fewer than 10,000 vehicles every day they tend to suggest a shadow toll arrangement. Furthermore, the public sector often uses a shadow toll arrangement for roads within cities. In places where the predicted volume of traffic is moderate, the EP recommends an approach that combines shadow and real tolls in a system that takes into account both the amount of traffic and service level of the infrastructure. Payment is split into a service payment and an availability payment guided by the amount of traffic and the level of service respectively. For these projects, the real toll aspect is universal and capped. The shadow tool component varies both based on the project, and throughout the project. When the traffic flow grows, the government portion of the toll income decreases since there is more income generated 212 | P a g e

Lessons from International Projects from traffic. They also consider getting rid of the shadow toll portion of payments all together when the real toll collections grow to a point where they are enough to cover the income requirements of a project. Portugal The country of Portugal uses both shadow and direct tools in order to provide P3 contracting companies with the necessary revenues. There are 1,553 miles of roadway in Portugal that are under P3 contract, 870 miles of this is covered with a real toll structure, 559 miles are under a shadow toll arrangement, and 124 miles of roadway are not tolled. These untolled sections are often used to connect other toll roads in a large concession agreement that involves multiple connecting roadways. Spain Spain also uses both shadow tolls and real tolls. The process begins with a government-conducted study of traffic volume to predict if the volume of traffic will enable a real toll structure. If there is not enough expected volume, a shadow toll structure is normally chosen to support the project. For the projects that use a real toll structure, Spain has lately started setting the structure and rate used for tolling in order to increase competition. Out of the 2,762 miles of Spain’s roadways that are under a P3 contract, 2,361 miles use a system based on real tolls, and 310 miles are under a shadow toll system. Within the Madrid area, the shadow toll structure dominates except one project that is funded solely through the real toll structure. These revenues are based on the service level and the volume of traffic. The majority of the roadways using real toll pricing structures are in the other regions of Spain. The Spanish also make use of toll free stretches of connecting roadways that are required as part of their concession agreements.

Public Private Partnerships for Highway Projects United Kingdom Aside from the M-6 (largest highway in UK), the highways in the UK that use P3 contracts make exclusive use of either direct payments or shadow tolls. Initial P3 agreements usually made use of shadow tolls decided on traffic volume alone. Current P3 agreements make use of a payment structure that takes into account a variety of factors including safety, congestion, the availability of lanes and minimum criteria for performance. However, in some projects, an availability payment is the utilized as the main payment based on level of service. Contractors normally suggest the level of direct government payments when they submit cost proposals as part of the procurement process. However, budget restrictions are forcing the United Kingdom to acknowledge that using real tolls is an option for future P2 projects. Australia Real tolls are the primary form of revenue for P3 projects in three states of Australia. Though the government may propose lump sum payments, bidders tend to request reductions in direct payments. The government in New South Wales usually sets the starting rate for tolls as well as the index used to raise it. In Queensland and Victoria, the starting rate for tolls is usually based on bids, with the government putting into place the long term structure for toll increases.

Project Selection and Analysis Figuring out if P3 delivery is right for a project is necessary, but not difficult. A U.K. representative stated that P3 projects may provide excellent value delivery, but are not likely to provide this value if the project is too large, complicated or not properly organized. Success is not dependent on luck; it is dependent on clearly defined requirements and preparation. This section sets out the process for doing this correctly. 214 | P a g e

Lessons from International Projects All countries see the importance that their transportation infrastructure plays in their overall success. Every nation has a master plan for their transportation needs, from which possible candidates for P3 projects are chosen. The scale involved in the projects is also often a requirement considered when choosing P3 candidates, since a larger scale may offset the large costs involved in the transactions required for P3 projects. The risk involved is also a big consideration for project assignment, and the assumption of long-term risk by the private sector is often a key factor in the choice of a P3 option. Spain and Portugal normally use common processes for deciding which projects should be delivered by P3, and Australia and the U.K. use similar methods. The main difference that separates these countries is the rationale they use to justify the use of P3 project formats. In Spain and Portugal, the feasibility study is done during the early stages of the process, and the decision is made mostly based on the possible transfer of risk. Australia and the U.K. use a set process that makes use of a PSC and VfM study, with the project being delivered as a P3 only if VfM is projected. Portugal This country has a National Road Plan that sets out present and future infrastructure needs and possible methods of execution. This map was revised in 2000, and set forth plans for traffic infrastructure construction and execution. Portugal has a 6% yearly increase in traffic, with a 12% rate of growth for its traffic infrastructure. Possible P3 projects are taken straight from the plans set forth in the 2000 proposal. Portugal actually plans to conduct most of the work involved by using P3 agreements. While planning projects, the EP does a feasibility study to look at the financial possibilities for using different financing schemes in future road projects. The main area of focus is the funding process to use with a specific part

Public Private Partnerships for Highway Projects of the roadway. The analysis studies if a shadow or real toll system would be best, recommends that option to the government of Portugal. After the decision on funding is completed, the program is set out for completion. Spain Spain has a transportation plan set through 2020 since 2005. They expect one fourth of the funding for these projects to come from P3 concession agreements. Every possible project goes through a “maturation phase” that goes on for 30 months. During this process, possible projects go through a thorough analysis and a development process. Throughout the analysis, the government does a feasibility study to decide many things, including the financial issues surrounding the project. When the government determines that appropriate risk can be shouldered by the private sector and financing is feasible, the project will probably go forward as a P3. After the analysis is finished, the delivery decision is complete, and the project goes through a phase of development, which includes an environmental study, the waiting periods for public disclosure have passed, and the extent and circumstances of the project are recorded, it is poised to begin the building phase. United Kingdom The U.K. has a program of Major Schemes as well as regional transportation plans for transportation. The choice of delivery mechanism will take into account program commitments, the priority of individual plans, the costs involved, and the traffic volume. When the cost is over £7.5 million, a private option is required to be the primary consideration, though projects with a value under £100 million are normally better delivered with traditional delivery methods. When a large project is set forth, the delivery option is decided by 216 | P a g e

Lessons from International Projects both the Procurement Division and Major Projects. When a P3 option is under consideration a VfM study is done that takes into account these five issues: • Is the project large enough to make up for the costs for the transaction, procurement, and execution? • Is it possible for the government to set out its requirements and the services needed? • Are there private companies with enough experience and the ability to deliver? • Is it possible to calculate the lifetime expenses required for services? • Is it possible to measure, appropriately, the performance of private firms involved? If VfM is shown to be achieved in this study, a PSC study is then conducted. The purpose of the PSC study is to decide if a P3 project provides cost effectiveness when compared to a traditional method of procurement across the lifetime of the project when both risks and expenses are taken into consideration. Once this study is completed, the delivery option decision is made. There is some controversy surrounding this method of using PSC and VfM studies. These issues have been stated by politicians in the U.K. Consecutive governments have used a process of private finance initiative (PFI) for times when the method is predicted to deliver VfM. PFI is the P3 delivery method with having the finance part facilitated by the private entity, which is similar to DBFOM. In 2002, the Prime minister stated that PFI plays a pivotal role in bringing the National Health Service infrastructure up to date. However, he said that it should be used in addition to, and not in place if, traditional tests. He also noted that it is not a “pass or fail test,” is not free from bias and does not take all of the factors involved into consideration. In spite of these complaints, these methods do incorporate a

Public Private Partnerships for Highway Projects standardized and reviewable process for making the decision for project delivery, instead of a process based on political motivations or the easiest route. It also provides for an inclusive financial analysis for each project, especially large ones. Australia In all of the examined states, transportation plans are central to the choice of likely P3 projects. All of the states use a VfM driven process that uses PSCs, similar to the U.K.’s methods to determine when a P3 project is preferred. The Office of Infrastructure Management in New South Wales is in charge of the State Infrastructure Strategy (SIS), the evolving 10 year infrastructure plan that greatly depends on the government Asset Strategies and Capital Investment Strategic Plans. In the process of modernizing and coming up with the SIS, localized strategies are considered. In Victoria, the transportation P3 projects come mainly from regional long-term plans, rather than state-centered plans. The City Link and East Link projects were planned as P3s 40 to 50 years ago. Victoria just finished an assessment of needs for an east-west road project in Melbourne. Main Roads in Queensland has an evolving Road Implementation Plan that spans 5 years. This proposal contains $16.2 billion for roadway projects. Queensland’s biggest city, Brisbane’s, city council is also involved in this plan with its “Brisbane Transport Plan Update 2006-2026.” The Trans Apex Study, conducted in 2004, looked at a road system for the inner city consisting of rings and three additional river crossings that can accommodate high traffic. Two of the projects contained in this study, the Airport Link and the North-South Bypass, are currently in process as P3 agreements. Each of these provinces stated that a major financial study should 218 | P a g e

Lessons from International Projects take place prior to choosing a P3 delivery option. This consistency suggests that the use of P3 options for project delivery is well established in Australia, particularly in the states that have embraced it. New South Wales led the way, with Victoria following. Though there is a bit of a rivalry between the two states, they have each learned from the experiences of the other as the approach has grown. This has even included the use of the same staff. Queensland has since joined in this approach. The key reasons for VfM in Victoria and New South Wales are very similar: • Better risk management: This includes a more thorough evaluation of risks, as well as proper transfer of risk to the private firms involved in the project. These risks include those involved in lifelong project cost management, the ownership of assets, and the provision of specific services. • Ownership and lifelong expenses: Since cost management and operational expenses are included in the design and building of the infrastructure, it becomes more efficient. • Single contact point: The costs involved in maintenance, continuing service provisions, operations, and refurbishment are the responsibility of a single party for the whole period of the contract. • Innovation: These may include better options or incentives for service delivery including service bundles to offer a better value and increase the use of nonessential services, information systems packages, and improvements to adjacent infrastructure. • Utilization of Assets: This incorporates the reduction of governmental costs by use of better efficiency in designs in order to provide better delivery of services, as well as creating additional asset generation from additional infrastructure uses. • Government and Society Wide Outcomes: This takes into

Public Private Partnerships for Highway Projects account the sometimes-qualitative benefits that are of interest to the government, including environmental and socioeconomic improvements. Queensland has also taken into account these factors. Projects are normally designed to incorporate these societal benefits, bringing the thinking on these issues full circle.

Risk Management and Allocation Every government agency studied noted that the proper allocation of risk is vital to a P3 project. If there is not enough possible risk transfer to the private firm during the life of a P3 project, then P3 delivery is not the best option. This issue has been discussed previously, but it is not possible to overemphasize its importance. The philosophy behind risk allocation differs among nations and provinces depending on markets, the financial situation of individual private firms, and how changes during the lifetime of a project are handled. Risk allocation differs among countries in their approach to P3 projects. The sections showing the greatest variation are based on market risk and condition changes over the lifetime of a project. These may include changes in legislation or latent defects in construction. The issue of competition is also handled differently among the countries studied. These risks are normally shouldered by the private firm involved in the contract, though there are exceptions, such as Competing Facility Provisions. Portugal A risk study is done prior to the start of the project to ensure a balance in the assumption of risk. Risk looks at the projected rate of return for the private contractor. If this rate is excessive, the EP looks at adjusting the extent of the project or decreasing the term 220 | P a g e

Lessons from International Projects of the contract. When this projected rate is less than is needed, the EP might offer a government subsidy or lengthen the period of the contract. After the project starts, the EP may consider rebalancing the terms of the contract if the income or expenses involved in the P3 agreement change to significantly help or hurt either the private sector or the public sector. Spain The Spanish approach is similar to that of Portugal. The public agency tries to allocate the risks of a project appropriately with the use of a knowledge gathering risk assessment. If this projection is too low it will add perks such as government subsidies, if it is too high it will adjust the scope of the work through the addition of connecting pieces of roadway or other project additions. After the start of the project, rebalancing may be considered if the financial or economic costs become unbalanced, or if the risk involved would hurt either the public or the private sector unfairly. There are two caveats that the Spanish legislation requires for this restructuring to occur. The change must occur over an extended time period, and it must have a meaningful financial effect on the affected party. This is because the original agreement was entered into for the good of the public and with the best data available, to support market stability, and to promote mutually successful outcomes. United Kingdom The U.K.’s Highways Agency knows that the proper assignment of risk is preferred over a total transfer of risk. With experience, the Highways Agency has tried to nurture a steady atmosphere for the allocation and management of risk through techniques like the introduction of a common baseline agreement document and methods such as risk allocation workshops and the discussion of

Public Private Partnerships for Highway Projects risk allocation prior to deciding on the final project contract. The U.K. also considers the shortening of the time frame for projects when the real life income greatly exceeds the predicted levels. Australia Like the U.K., states in Australia understand that the proper risk allocation is better than simply transferring all risk to the private company. All of the transportation P3 contracts that have been undertaken in these states use a real toll model, and all three states agree that the private firms should take on the risk of market downturns. This means that if the expected earnings do not occur, the private firm is responsible for losses. The wisdom of the P3 market in Australia allows this thinking to occur, with lenders and investors having the knowledge that the economy can help with financial difficulties through restructuring and other means.

Procurement Process In general, all of the countries discussed make use of a competitive process in selecting P3 companies. The main difference between the nations is the amount of bargaining that goes on during the procurement process. As the amount of bargaining increases during the process, so does the expense and time involved. Portugal Portugal makes use of practically a two part competitive method to come up with the best bidder. Every project requires about 20 EP workers and added technical and financial consultants. During the first part of the process, an ad is placed in the Official Journal of the European Union (OJEU) asking for bids for a period of about two months. These bids are then placed and the agency evaluates them on the following criteria: • Technical abilities 222 | P a g e

Lessons from International Projects • • • •

The cost to the government in NPV (Net Present Value) of shadow tolls or subsidies required for the bid Risk assignment and oversight plan Dates for the opening and full operation of the facility Strength of the company’s legal and financial structure

After this evaluation, which takes about three months, two companies are chosen. During the second stage of the process, the government agency begins to negotiate with the two chosen companies and after about two months selects the chosen bidder. Within two months, a contract is awarded and the financial closing takes another two months. The total process takes about a year. In order to increase the transparency of the process, all bids are made available to view for 10 days. Spain Spain makes use of an open competition model for choosing traffic infrastructure P3 projects. The government asks for bids and the interested companies give binding proposals that go along with the project’s conditions and requirements. The bidders may give as many as three alternative proposals. The proposals are evaluated based on the economic and technical qualities of the bids, though additional considerations may be used based on the project. The contract is awarded based on the company that offers the best financial advantages for the government. Normally, about twenty government employees keep track of all of the ongoing procurements. The government sees this method as both efficient and encouraging competition, while maintaining that it is essential to define the terms and expectations that each project must have from bidders. A financial closing is not necessary before the contract is awarded since the financial markets in Spain are used to the process and its standardized paperwork.

Public Private Partnerships for Highway Projects This open competition model provides savings in the transaction cost for projects. The process Spain uses costs the government about €300,000 to €500,000. The cost savings can be as much as 10%, based on a study done by the Polytechnic University of Madrid and the European Investment Bank. A possible downside to this method is that it sometimes brings too many bidders. Though multiple bidders increase the competition involved, too many bidders may decrease the likelihood of some qualified bidders getting involved, since there is a lesser likelihood of success, and it increases transaction costs. United Kingdom The U.K. normally uses a process involving negotiation for its P3 transportation projects. Based on the scope and difficulty of the project, both the government staff and consultants involved may greatly differ. There are four main stages involved in the process including prequalification, bidding, negotiation, and the awarding of the contract. The process is explained below. Prequalification includes: • PIN (Prior Information Notice) in order to let the market know that a solicitation is imminent. • An ad placed in the OJEU • Publication of the prequalification package, including the project details, submission requirements and testing criteria • Bidding includes: o The issuance of bid documents including instructions and guidance to tenders (bidders) (IGT), a model contract, draft schedules and a tentative design to show bidders the scope of the project o Distribution of bid circulars and responding to questions • Bid Submissions 224 | P a g e

Lessons from International Projects •

Consideration of bids, resulting in the choice of a PPB (Provisional Preferred Bidder), who would then likely become the preferred bidder

Australia The three states considered in Australia all normally abide by a competitive multistage process for procurements. Queensland and Victoria have both chosen to appoint interim agencies specifically to assign and complete transportation P3 projects such as the Southern and Eastern Integrated Transport Authority used to provide Victoria’s East Link project. The reasoning for forming a distinct agency is because they have experienced success with this method before. In addition, the sole focus of the agency is on the project, there is efficiency in decision-making, and the agency has the authority to interact with everyone involved fairly and transparently. The process starts, in these three states, with a call for EOI (Expressions of Interest). Once these are received, they create a short list and the agency publishes an in-depth RFP that includes: • Detailed facts concerning the public agency involved, important stakeholders, the sociopolitical conditions surrounding the project, and the objectives that must be fulfilled. • An explanation of the requirements for service delivery and the proposed method of payment • Design requirement details and the intended date for building completion. • Suggested allocation of risk and contractual arrangements • Explanation of the coming evaluation and processes used in selecting the procurement Once the bids are in from the included firms, negotiations begin. The finished proposals are tested against established criteria based

Public Private Partnerships for Highway Projects on the project at hand, including factors such as design features, the length of the concession and the toll structure. Based on this, a preferred bidder is chosen. Then, contracts are formed and the financing is established. These provinces ask for a proposal that fully conforms to the RFP as well as allowing proposals that differ or provide alternatives to the RFP in order to give private companies room to introduce new concepts or project ideas to the public agency.

Transparency The procurement process must be transparent. In order for it to work for the acquisition of public projects, it must be reliable, predictable and stable in the eyes of participants, legislatures, the public, and government officials. Because of the complication and scope of P3 projects, transparency must be maintained, particularly since they generate a large amount of interest from a variety of sources. This is especially true when funds are limited; it is unwise to lose them based on the poor structure of a project, or the fact that the project may not close. The countries studied are keenly aware of the importance of transparency and use different methods to make sure that the procurement process is transparent. In Portugal, every proposal they receive is visible to all respondents, while Spain asks for bids within specific parameters and based on published criteria for awarding the contracts. The U.K. hires officials to overlook its complicated negotiations and assure fairness. Australia has completed and is completing the most extensive transportation P3 projects on the planet. These are some of the methods and results that illustrate the importance of transparency for each country, so that their P3 programs maintain their credibility.

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Concession Periods Concession periods for contemporary P3 agreements tend to range between thirty and forty years. Portugal normally uses a 30-year standard time period for their concession agreements, and Spain has in the past agreements for up to 75 years, though their current agreements span from twenty-five to forty years. Governments base the concession period on the economic sensibilities of the project. In the U.K, the Highways Agency has been setting contracts for thirty year time periods of late. Australia tends to vary its concession periods based on the bids received. In the Airport Link/Northern Busway P3 project the agreed upon period is 45 years.

Technical Standards and Contract Documents For the most part, every county discussed has adopted a standard contract for use in P3 agreements. These contracts include the agreement, a common group of requirements and provisions, requirements and provisions that are specific to the contract, and either specific or common “sheets” or timelines. For every nation, differing technical specifications are set by government agencies for highway components and infrastructure. If any changes in these specifications are proposed by a private firm, they are usually considered during the early stages of the procurement process to ensure suitability. As the design and building phases progress, an independent inspector usually gives certification from time to time that the process is in agreement with the standards set forth from the beginning. At times, inexperienced contracts gave too much leeway to private firms where technical specifications were concerned, so countries now know that they must ensure that P3 agreements require a guarantee of proper engineering practices.


Contract Change Oversight Experience has also been helpful in the area of contract modification. In the beginning, contracts did not provide for the needed adaptability to ensure that they could be changed as the surrounding conditions required. For example, the Highways Agency in the United Kingdom is currently negotiating considerable changes to contracts that were enacted in 1996. In Spain and Portugal, they require a material, sustained effect to either the public or private sector’s bottom line in order to renegotiate a contract. The U.K. has lately begun a two-stage process for modifying contracts. When a major change is warranted, the contract is reviewed, putting it up for a possible renegotiation. The M25 project includes this new condition for contract review. If the changes are not major there is a step-change process built into the agreement that enables minor issues to be taken care of within the current agreement. These changes may be a result of changes in legislation, changes identified as eligible in the contract, changes to make way for enhancements or improvements in the project, or changes requested by the private firm. In Australia, the government normally negotiates as needed for changes in contracts, though it does have a set method to take care of both minor and major contract changes. At first, agreements involved a wide berth of reasons for contract change, though recent agreements have narrowed the range of events that can trigger contract modifications.

Public Involvement in the Commissioning Process As in all projects, a successful opening is dependent on commissioning activities. Though the technical issues and specifications are equal in importance to other methods of delivery, in P3 agreements there must be proper attention paid to the facility’s potential users, the customers who will make use of the transportation infrastructure. Though all countries encouraged the 228 | P a g e

Lessons from International Projects advertisement of the coming infrastructure to the public throughout the building process, Australia led the way in encouraging the involvement of the public during the period directly preceding the facility’s opening. Since all of their P3 projects employ direct tolls, this is a sensible approach since the users must understand the enforcement, rates and products involved in the tolling, as well as where they can access the infrastructure. Sometimes, a time period of free use is set before toll collection begins to let the public get familiar with the facility and to check operating systems. If proper attention is not paid to the users of the facility, private and public interests are both threatened with a loss of clientele and income.


9

International Case Studies

These are examples of actual P3 agreements used in infrastructure projects. They exemplify the ideas and principles already talked about, as well as the many different forms that P3 agreements assume.

Shajiao B Power Plant (China) The Shajiao B Power Plant was built in the Guandong Province of China. A state organization representing the government, Shenzhen Power Corporation, arranged a P3 agreement with HPCL to construct power stations. The expenses involved in the construction of the structure are significant, and financing is led by Citicorp International with a loan of ¥11 billion and US $600 million. Since Shenzhen Power Corporation is going to purchase the generated power, there is a guaranteed stream of income to provide the necessary security required for financing. Needed resources, such as coal, are guaranteed by a long-term contract for a set price by the Shenzhen Power Corporation.

Channel Tunnel (U.K. and France) Brittan is connected to the continent of Europe through the Channel Tunnel. The Channel Tunnel project, which was completed in 1994took seven years to build and. This piece of 230 | P a g e

International Case Studies infrastructure is composed of three 50 km long tunnels, with 38 km below the sea, and a mean depth of 40 m under the seabed. One of the tunnels links the other two and serves as a service tunnel and safe-haven. The other two tunnels contain rail lines. This is still the most extensive underwater tunnel on the earth. The project organization accounts for the fact that this was an ambitious, costly project that involved many variables, extensive negotiations, and a long and difficult financing process. The process of bidding for the Channel Tunnel (The Channel or The Euro channel) started in 1985. The contract was awarded to Eurotunnel in 1987 out of four short listed consortiums. They were successful in submitting a proposal to the British and French governments to complete this ambitious project. The agreement was originally to build and operate the channel until July 2042. The details of the agreement are explained below. Construction and Financing The project anticipated cost was $ 3.6 billion. The actual cost of $14.7 billion was financed privately, with funding actually occurring for the tunnel at various project stages. The beginning stage required many sources of funding before and right after beginning to build. Such fund was split between three tranches. Equity one was given from a collection of five banks and ten contractors, as founding shareholders, providing £47 million in equity. These parties handled the negotiations for contracts and credit among themselves. Equity number two started in October of 1986 and decreased the beginning investor’s stakes to those of minority shareholders. During this time, the credit arrangement was contracted, with fifty banks underwriting, and a total of 200 banks in syndication, resulting in £206 Million in funds. Tranche number three was a public issue of equity in November 1987.

Public Private Partnerships for Highway Projects Equity number three was funded by selling shared for every 220m at £3.50 million each resulting in £770 million. Another round of lending took place in November of 1990, around the time of the breakthrough of the first tunnel resulting in £566million as rights issue (offering addition shares to the existing shareholder to raise more capital). Another £2 billion of financing as credit was procured with difficulty. After the initial round of fundraising, it looked as if the actual costs had been underestimated, and they did indeed overrun the allowed budget, even with a 25% allowance. Financing institutions were required to waive many breaches in the credit arrangements from 1989. A third wave of lending took place after the tunnel was completed. The IGC (Intergovernmental Commission), an agency founded to oversee Eurotunnel’s concession agreement compliance, granted a certificate of operation. In May 1994, there was a rights issue that was introduced (Senior Debt) in addition to more borrowing. This rights issue was for £793million (Equity 5) There were additional issues that came up in 1992 with a Transmanache (the general contractor) claim £1.5 billion in additional construction costs, and 1993 concerning Le Shuttle wages, both of which were settled fairly quickly. During the fall of 1995, Eurotunnel declared that it was going to withhold the payment of interest for 18 months, setting off a round of finance renegotiations that led to a restructured plan in the fall of 1996. Agreements Concession A treaty between the English and French governments gave Eurotunnel the concession for the operation of the Channel Tunnel. 232 | P a g e

International Case Studies The initial agreement called for a 55-year term, but it has since been lengthened to a period of 64 years. This gives Eurotunnel the rights to tunnel operations until the year 2052. After this period, they are to turn the tunnel operations back over to the governments in good condition. This treaty also created the Safety Authority and the IGC to oversee concession agreement compliance and regulate operations. Construction The design-build agreement between Transmanache and Eurotunnel contracted Transmanche to perform the majority of the engineering work involved in both the tunnel completion and building the operational components. The relationship between Transmanache and Eurotunnel underwent a great amount of change throughout the building process. When the process started, Transmanache was a Eurotunnel majority shareholder, but when the second equity occurred, it lost this control as £206 million in shares were privately placed. The stresses of the drawn out building project were even more obvious when Transmanache claimed an additional £1.5 billion in construction expenses in April of 1992. This disagreement was settled by a panel provided for in the construction contract in April of 1994. Railways Usage Agreement The usage agreement from the railways is the only guaranteed income that the project has. With this agreement, Eurotunnel must put aside one-half of the tunnel’s capacity for the usage of the Belgian, French, and British railways for the use of their freight and Euro star trains. As compensation, the railways provide a set payment in addition to tolls that vary with the amount of traffic

Public Private Partnerships for Highway Projects using the infrastructure, as well as supplementing Eurotunnel’s costs of operation. There is a set minimum level for these payments during the first 12 years of use, so that Eurotunnel is provided with a guaranteed income to aid in financing.

Water Works of Cochabamba Water in Cochabamba, Bolivia was controlled by SEMAPA. A big percentage of populations are not connected to the water network. The city put the water works of Cochabamba for privatization under concession agreement. Aguas de Tunari Consortium was the only bidder. It was a consortium between the British firm International Waters (UK), Bechtel Enterprise Holdings (USA), Abengoa of Spain (Spain), and four Bolivian companies.City officials in Cochabamba and the Bolivian central government signed an agreement with Aguas de Tunari on September 3, 1999 for the building of the Misicuni Project to deliver water to Cochabamba (a $2.5 billion, 40-year concession). The contract had a guarantee of 15% return every year adjusted to US consumer price index. The civil disturbances and public rejection of this project began in November of 1999 and one civilian was killed. In early April of 2000, the contract was terminated because of selection problems, inefficiency, the price of the proposed services, the investment size, and political reasons explained below. Selection Process Problems Legislation passed in 1998 mandated a public international bidding effort in order to select a builder for the Misicuni project as well as a firm to provide water to Cochabamba. The organizations received the necessary documents, but Aguas de Tunari was the only one who brought a proposal to the government. This bid did not comply with the requirements set forth, so it was rejected. However, the government still entered into discussions with Aguas de Tunari out of which developed a new agreement that did not 234 | P a g e

International Case Studies require many of the things asked for when the government issued bidding documents Project Inefficiency There were two possibilities available to supply water for Cochabamba, the Misicuni project could provide a long-term supply of water, and the Coriana project could take care of the town’s water issues in 7 to 10 years. Multiple studies demonstrated that the Miscuni project was not financially or economically wise, and that the expenses involved were similar to the Coriani project option. Hefty investment The population that the agreement would serve is 500,000, while the investment was $109 million for five years and another $97 million in seven years. This compares to the La Paz concession contract that required an $80 million investment for a concession population of 1.5 million. Starting Rates under Cost The company, SEMAPA, providing water to the city of Cochabamba, had been charging usage rates that were below cost. This caused deficits and investment delays. Prior to the signing of the agreement, SEMAPA requested a twenty percent increase in rates to buff up the company’s ability to generate revenue in early 1999, though this increase in rates was never put into effect. Rate Increase Timing In January of 2000, after the agreement was signed, a 38% increase in rates went into effect. The purpose of this increase was to make up for the unimplemented 1999 increase in rates and to increase income for investment purposes. This rate addition was written into the concession agreement and began the season after the

Public Private Partnerships for Highway Projects public company’s entrance but before any enhancements in the quality of service or expansions in coverage had occurred. In addition, the reasoning used to explain the increase in rates was not the coverage of the cost of service, but rather the needs of the Misicuni project, that was beginning five years before it was scheduled. Political and Social Issues The Capitalization Ministry of Bolivia started providing water services in 1997 for the city of Cochabamba. The Coriani project was created by private companies that were not affiliated with the organization providing services. The Coriani project process was ended when the Cochabamba authorities, who were backing the Misicuni option, put a halt to it. Once the 1988 presidential election was completed, a decree was put into effect that required an international bidding process, in which the Misicuni project was included. The civil unrest was encouraged by peasants and vendors of well-water, though the peasants were not threatened or affected by the proposed contract.

P3 California Case Studies Toll roads operated by private companies may be included under AB bill 680, legislation that gives the state permission to contract with private firms to construct and operate toll roads without state funding. SR125, which is discussed below, is actually a DesignBuild-Finance-Operate P3 project. It could be argued that the other roadways are not actual P3s as defined on the DOT website as lease-develop-operate, long-term lease, design-build, or DBOT P3 project agreements. Project Finance case studies are available on www.barchanfoundation.com, the U.S. Department of Transportation websites, PublicFinance.com, and many other public finance publications and websites. The following examples 236 | P a g e

International Case Studies are a few of the important undertakings that show the width and the extent of P3 projects in the state of California.

Wastewater Treatment Facility, Burlingame, CA The city of Burlingame, near San Francisco, entered into a contract with Veolia to operate its 5.5 million gallon per day facility for the treatment of wastewater. This was the first P3 contract in the U.S. that provided for the transfer of operations of a municipality owned treatment facility to a private corporation. This contract has been renewed continuously for the past 30 years, giving it the honor of being the most long lasting P3 for municipal wastewater treatment in the U.S. It also is the recipient of the 1999 Nation Council for P3s Award. Location: Burlingame, CA Type of Project: O&M Project Start: 1972 Private Sponsor: Veolia Water North America Government Entity: City of Burlingame

SR 91 Express Lanes, Orange County, CA The facility is located in the median of a 16km area of the 91 Riverside Freeways and involves a four-lane toll section. This area experiences some of the worst gridlock seen in the United States. This project, delivered by a private company, intended to help the gridlock with the addition of toll express lanes in the middle of the

Public Private Partnerships for Highway Projects highway that use a toll system that varies based on the gridlock currently taking place in the remaining lanes. A thirty-five year concession agreement between the state of California and the California Private Transportation Company (CPTC) took place. When the contract ends the government agency will reclaim the facility operation. In December of 1995, this project opened and in January of 200, it3 was bought from CPTC by OCTC (OCTA’s old name) for a total of $204 million. This transaction, and the subsequent management by a government agency, resulted from a greatly debated non-competition clause that was included in the initial contract. This clause ended up putting off other needed projects in the area and, according to the opinions of the populace, added to the gridlock and traffic safety concerns. Type of Project: BOT Total Amount: $130 Million Private Sponsor: California Private Transportation Company (CPTC), Level 3 Communications, Cofiroute Corp, Granite Constructions. Government Entity: $7 million loan from Orange County Transportation Agency Lender: $35 million in long term loans (24 years) CIGNA Other Participants: $65 million in 14 year variable rate bank loans, Banque Nationale de Paris, Deutsche Bank, Societe Generale, Citibank, $20 million in private equity financing, $9 million subordinated debt to buy previously done engineering and environmental work from OCTA. 238 | P a g e

International Case Studies

South Bay Expressway (SR125), San Diego County, CA This brand new 12.5-mile stretch of highway connects San Diego’s only commercial port to the region’s highway network. The southernmost section, spanning 9.5 miles, of the expressway was built as an independently financed and maintained Fast Track toll road. The state of California has a contract with the San Diego Expressway, a limited partnership company, through which the private firm funds and constructs the roadway, passes the property rights back to California, then, under a 35 year contract, leases, runs, and maintains the facility. At the end of the contract, the State regains control of the property. The publicly and privately financed parts of the roadway are both being built by one contractor through two different contracts. The general partner, responsible for overseeing the undertaking and administration of the contracts is CTV (California Transportation Ventures, Inc.). The contractor is Washington Group International who is undertaking the construction with Parsons Brinckerhoff, Quade and Douglas, Inc. and J. Muller International is doing the design work. Work on this project started in 2003 and the facility was opened to the public in 2007. The $140 Million TIFIA loan was the first of its kind given to a toll road development undertaken by a private company. This fixed rate loan spans 38 years and the cost is the same as that of thirtyyear treasuries. A best value competitive bidding process was used, in which a design/build P3 process ensued in which the design price was mandated to each participant. The project sponsors created subsidiaries to handle the design work as a joint venture. Type of Project: DBFO (Design Build Finance Operate) Total Amount:

Public Private Partnerships for Highway Projects $635 Million ($138 million for connector and interchange) Private Sponsor: Washington Group (design-builder), California Transportation Ventures, Inc. (a wholly owned subsidiary of Macquire Infrastructure Group) Government Entity/Sponsor: CALTRANS Lenders: TIFIA program, bond-holders Finance: $140 million TIFIA loan, $160 equity from Macquarie Infrastructure Group Revenue Sources: Toll revenues Other Participants: $48 million from local developers in right-of-way grants, Commercial Debt (connector route: $132 million federal and local funding)

Foothill/Eastern Transportation Corridor (SR 261, 241, N 133), (OC, CA) A newly constructed infrastructure toll facility built by the Transportation Corridor Agencies (TCA) and made up of two main sections, the 27.7 mile Foothill Transportation Corridor and the 24 mile Eastern Transportation Corridor, which are the entire length of both SR 261 (State Route 261) and SR 241, and the northern part of SR 133. 240 | P a g e

International Case Studies This roadway will provide a direct path between northern San Diego County, Orange County’s southeast suburbs, and northern San Diego County. The project is first being built as a four to six lane highway, with additional climbing lanes and a capacity for future growth built into the median that may be used for transit use, HOV, or generalized purposes. Location: Orange County, California Type of Project: Design-build consortium; guaranteed completion date; design-bid; turnkey

maximum

price

and

Total Amount: $1.5 billion ($750 million in construction) Private Sponsor (see other participants) Government Entity: FETCA (Foothill / Eastern Transportation Corridor Agency), an agency set up in 1986 in order to operate, build, finance and plan the 52 mile system of public toll roads in Orange County.

San Joaquin Hills Transportation Corridor, (SR 73) Orange County, Ca It is a public toll infrastructure that is the first to be developed by the TCA. This structure consists of a six lane, 15 mile limited access roadway that is intended to help gridlock on the Pacific Coast Highway, as well as I-5 and I-405. The primary plans include six lanes and a median that may be used in the future for HOV lanes or other transportation options. The operation and

Public Private Partnerships for Highway Projects maintenance of the facility will be given to a private firm by way of a concession agreement. Type of Project: Design-build agreement with a guaranteed completion date and max cost Total Amount: $1.4 Billion ($790 million in design/construction) Lenders: Tax Exempt Bond Funds Government Entity: San Joaquin Hills Transportation Corridor Agencies (SJHTCA), a public agency, founded in 1986 to oversee, fund, build and manage the 15-mile system of public toll roads in Orange County. Public Resources Advisory Group (Lead Underwriters) First Boston (Initial Issuance 1993) Smith Barney (Refunding 1997) Status: Opened in November of 1996 to commercial traffic

Alameda Corridor Rail (Freight), Los Angeles County, CA This is one of the largest P3 contracts ever undertaken in the U.S. It includes a 20-mile cargo railroad path that connects the Ports of Long Beach and Los Angeles to the downtown Los Angeles rail yards. This project aids the flow of cargo to and from the ports, helps with gridlock, and gets rid of the railroad crossings on 200 surface streets. It also included bridge replacements and grade separations on both the north and south ends, and a ten mile, 33 242 | P a g e

International Case Studies foot deep and 50 foot wide trench to accommodate another rail line in the mid-corridor for $712 million.

Type of Project: Design-Bid-Build for north and south ends, Design-Build for midcorridor. Total Cost: $2.5 billion Private Sponsor: Port of Los Angeles & Port of Long Beach Government Entity: Alameda Corridor Transportation Authority - an agency with joint powers of the Cities and Ports of Long Beach and Los Angeles Type of Finance: $400 million USDOT loan; $1.2 billion in revenue-backed bonds; $394 million in grants from Ports of LA and Long Beach; $347 million from Los Angeles County MTA; $160 million in interest / other resources Lenders: USDOT & Bondholders Status: Project opened April 15, 2002


Current Discussion Issues As the use of P3s grows, there are many questions being asked by the financing community. As this realm continues to grow, the following questions are a few of the many that will need answers: • • • • •

•

What is the best combination of external and internal controls within a P3 project? Which accounting methods are best to improve incentives and oversight of P3s? What effects do tax structures have on the choice of P3s over conventional procurement methods? In what ways can procedural controls be replaced with transparency? What safeguards are necessary for local governments to undertake P3 projects? What parts of government should be developed to provide for risk assessment? What methods should be used to assess risks generated by P3s, how should these risks be included in the budgeting, and how should they be organized at the governmental level?

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“Los Angeles Metropolitan Transportation Authority (2011), “Public-Private Partnership Program – Recommendations for Business Case Development ASSOCIATION OF CORPORATE COUNSEL (2010),” TO P3 OR not TO P3” Caltrans (2010), “Analysis of Delivery Options for the Presidio Parkway Project.” CTC Project Proposal Report Submission Caltrans (2010),” Analysis of Delivery Options for the Presidio Parkway Project,” Caltrans. Caltrans, www.dot.ca.gov/p3/documents/prog_guide_final_draft_for_po sting.pdf Ernest C. Brown (2012),"California Infrastructure Projects: A Guide to Successful Contracting and Dispute Resolution" FHWA (2011),” P3-VALUE: Orientation Guide” FHWA (2011),” Value for Money State of the Practice” FHWA, http://www.fhwa.dot.gov/ipd/p3/defined/index.htm FHWA, http://www.fhwa.dot.gov/ipd/p3/tools_programs/sep15_txtoll_ application_08.htm FHWA, http://www.fhwa.dot.gov/ipd/pdfs/fact_sheets/p3_keyconsidera tions.pdf FHWA, http://www.fhwa.dot.gov/ipd/pdfs/faq_3.pdf FHWA, http://www.lao.ca.gov/reports/2012/trns/partnerships/P3_1107 12.aspx


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Maskin, Eric., and Tirole, Jean. "Public-Private Partnerships and Government Spending Limits." International Journal of Industrial Organization. 26.2 (2008): 412-20 Michael A. Kay (2009), "Transportation Megaproject Procurement: Benefits and Challenges for PPPs and Alternative Delivery Strategies, and the Resulting Implications for Crossrail" M.Sc. Thesis, MIT Middleton, William D. “San Juan’s World-class Metro – Statistical Data Included.” Railway Age. New York, NY: August 2000. Miller, John B. Case Studies in Infrastructure Delivery. The Kluwer International Series in Infrastructure Systems: Delivery and Finance. Boston, MA: Kluwer, 2002 Minnesota Department of Transportation (2013), “The Use of Life-Cycle Cost Analysis to Evaluate Public-Private Partnerships” MnDOT U.S. Department of Transportation. Federal Highway Administration. "Design-Build Effectiveness Study – Required by TEA-21 Section 1307(f)." Washington, DC: 2006. U.S. Department of Transportation. Federal Highway Administration. “Case Studies of Transportation Public-Private Partnerships in the United States.” Washington, DC. 2007. U.S. Department of Transportation. Federal Highway Administration. “Colorado’s T-REX: Mega, Multi-modal, Design-Build.” Washington, DC: 2007. U.S. Department of Transportation. Federal Highway Administration. “Manual for Using Public-Private Partnerships on Highway Projects.” Washington, DC: 2005. U.S. Department of Transportation. Federal Highway Administration. “PPP Case Studies: Hiawatha Light Rail Transit.” Washington, DC: 2004. U.S. Department of Transportation. Federal Highway Administration. “PPP Case Studies: Las Vegas Monorail.”

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U.S. Department of Transportation. Federal Highway Administration. “User Guidebook on Implementing PublicPrivate Partnerships for Transportation Infrastructure Projects in the United States.” Washington, DC: 2007. U.S. Department of Transportation. Federal Transit Administration. “Audit of the Tren Urbano Rail Transit Project.” Report Number: MH-2004-098. Washington, DC: September 29, 2004. U.S. Department of Transportation. Federal Transit Administration. “Introduction to New Starts.” http://www.fta.dot.gov/planning/newstarts/planning_environm ent_2608.html. Washington, DC: 2009. U.S. Department of Transportation. Federal Transit Administration. “New Starts Program Assessment, Appendix A: Case Study Report.” http://www.fta.dot.gov/documents/AppA_CaseStudyReport_FI NAL_2007-2-12.ppt. Washington, DC: February 12, 2007. U.S. Department of Transportation. Federal Transit Administration. “Report to Congress on the Costs, Benefits, and Efficiencies of Public-Private Partnerships for Fixed Guideway Capital Projects.” Washington, DC: 2007. U.S. Department of Transportation. Federal Transit Administration. Turnkey Experience in American Public Transit: A Status Report. Washington, D.C.: 1998. U.S. Department of Transportation. GARVEEs. http://www.innovativefinance.org/topics/finance_mechanisms/ bonding/bonds_garvees.asp. Washington, DC: 2009. U.S. Department of Transportation. TIFIA Program. http://tifia.fhwa.dot.gov/. Washington, DC: 2009. U.S. General Accounting Office. “Mass Transit: Review of the Tren Urbano Finance Plan.” http://archive.gao.gov/f0302/163482.pdf. March 31, 2000.


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U.S. PIRG Education Fund. “A Better Way to Go: Meeting America’s 21st Century Transportation Challenges with Modern Public Transit.” U.S. PIRG. Boston, MA; Washington, DC: 2008. United Nations Economic and Social Commission for Asia and the Pacific (2011),"A Legal Perspective of Public Private Partnerships" Vaillancourt Rosenau, Pauline. “Public-Private Policy Partnerships”. Cambridge, MA: MIT Press, 2000. Yescombe, E. R. Public-Private Partnerships: Principles of Policy and Finance. Amsterdam, Netherlands; Boston, MA; Burlington, MA: Elsevier; Butterworth-Heinemann, 2007

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Public Private Partnerships for Highway Projects

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