Council of Development Finance Agencies -- Negotiating PPP/P3 Agreements

Transcription

1 Council of Development Finance Agencies -- Negotiating PPP/P3 Agreements August 7, 2013 Greg Daniels greg.daniels@squiresanders.com Bruce Gabriel bruce.gabriel@squiresanders.com Ed Johnson + 44 (0) edward.johnson@squiresanders.com

2 Squire Sanders Team Gregory R. Daniels T E greg.daniels@squiresanders.com Education: University of Michigan, J.D., 2001 The Ohio State University, B.A., 1998 Counsel to public and private entities on P3 parking construction and monetization transactions and a wide range of P3 transactions where government payments are subject to appropriation D. Bruce Gabriel T E bruce.gabriel@squiresanders.com Education: Northwestern University Law School, J.D. and Kellogg Graduate School of Management, M.M., 1980 Coe College, B.A., 1976 Global Public & Infrastructure Finance Practice Group Leader, with extensive public and structured finance experience, involving a variety of facilities and counsel roles Counsel to the Cleveland-Cuyahoga County Port Authority in connection with its participation in the Cleveland Innerbelt Bridge DB(F) Project 2 Edward Johnson T + 44 (0) E edward.johnson@squiresanders.com Education: University of Liverpool, LL.B (Hons), 1994 Inns of Court School of Law, 1995 Counsel to project sponsors of UK health, education and transport projects Counsel to the UK Government on five DBO highway projects with a capital value of approximately 2 billion

3 Presentation Overview Introduction Review of Basic Concepts US Hybrid Tax-Exempt Debt Structure Part I: Negotiating the Terms Basic Premise Key Concepts and Features Process: Inception to Execution Public Entity Preparation Project/Concession Agreement 3 Part II: Managing Risks Typical Project Risks Construction Risk Operation Risk Financing Risk Mitigation of Risks

4 What is a Public Private Partnership? A set of contractual arrangements between public and private sector participants under which private sector participants play a greater role than has been traditional in the development and financing of public infrastructure. While the public sector usually retains ownership of the infrastructure, the private participants have increased discretion in determining how the project or task will be completed Traditional US: Public Sector Design, Bid and Finance -- Private Sector Build -- Public Sector Operate and Maintain vs. PPP/P3: Public Sector Scope and Performance Requirements -- Private Sector Design, Build, Finance, Maintain and Operate 4

5 5 Simple PPP Contract Structure

6 6 Really Simple PPP/P3 Contract Structure

7 US Hybrid Tax-Exempt Debt Structure Opportunity Tax-exempt, governmental use bonds capital markets financing Public entity s subject to appropriation credit rating, without debt incurrence, based on Concession/Project Agreement Passive role of Financing Authority with respect to Disbursement of Financing Proceeds to Contractor Potentially off-balance sheet for contractor 7 Challenges Education and Understanding -- State Credit v. State Law Debt -- Federal Tax Requirements Public sector decision-making processes Documentation (accommodating taxable and tax-exempt financing)

8 US Hybrid Structure (cont d) Parties Public Entity, e.g., Department of Transportation Private Contractors Public Bond Issuing Authority Corporate Bond Trustee Surety Documents Funding Agreement Intercreditor Agreement Bond Indenture Direct Payment Agreement Projects Florida Ohio 8

9 PART I: Negotiating the Terms Basic Premise Key Phases of the PPP/P3 Process Critical Initial Stages Public Authority Preparation PPP/P3 Concession/Project Agreement 9

10 Basic Premise Cover All 3 P s in PPP P3 s must reflect the Public Interest Retain ultimate control over the asset state as guardian/custodian of public assets Transparency required when dealing with public assets, services and funds Obtain value for money Pay for performance P3 s must reflect the Private Interest Reasonable profit and performance standards usually best determined through open tender Protects profit against identified risks, especially those controlled by the public body Balances transparency with protection of proprietary trade secrets or intellectual property Projects that reflect these interests will cover the third P: Partnership 10

11 Key Phases of the PPP/P3 Process Needs Analysis Project Selection Project Preparation Bidder Prequalification Request for Proposals PPP/P3 Contract Negotiation Financial Close Contract Management 11 Termination or expiry

12 Critical Initial Stages Needs Analysis/Project Selection/Project Preparation ISSUE Clarity of requirements Commercial interest Project information Affordability Public Sector team Legal Processes Risk Allocation & Terms and Conditions QUESTION Is the scope of the P3 project clear? Is there market interest from sponsor and investors? Project launch information. Bidder qualification and evaluation mechanics. Budgets and approvals in place? Resourced team to manage process. Governance structures. Appointment of advisers. Value for money assessment Approvals. Does exciting law support PPP/P3? Public authority powers. Draft PPP/P3 Contract 12

13 How should a Public Authority Prepare for a P3/PPP Project? Avoid the mistakes and learn from experience Lack of clarity of required outcome. Lack of resources (headcount and experience). Lack of understanding of the private sector perspective. Lack of understanding of what the private sector can achieve. Lack of clarity about the public authority s statutory powers. Incomplete/inaccurate information provided to bidders. Overly ambitious timetable. Political support and consistency. Team of specialists Financial, legal and technical & P3 Unit Public Policy Public Education Regulatory Framework Legal Framework Standardisation of P3/PPP Contract Documents 13

14 PPP/P3 Concession/Project Agreement Design/Build Issues Preparation of design what flexibility to make changes from preliminary design Responsibility for zoning, environmental, building permits Construction program and performance standards Supervision of construction Bonding/guaranty requirements Caps on Liability of Subcontractors Insurance requirements Force majeure/delay Events Reporting/Confidentiality 14

15 Concession Agreement/Project Agreement (Cont.) Financing Issues Proposed cost of construction, financing and operation Revenue allocation profit benchmarking/clawbacks Appropriation/public approvals Rate setting Performance payment criteria Rights of senior debt holders Equity at risk Public buy-back of asset at expiration (residual risk transfer) Termination Issues (Planned or Unplanned) Default and termination provisions Step-in rights of senior debt holders Dispute resolution Handback requirements 15

16 Concession Agreement/Project Agreement (Cont.) Operation/Maintenance Issues Performance standards during operation/control/modification Supervision of operations Special conditions and cooperation regarding emergencies, safety and security Force majeure Insurance requirements Performance Security and Guarantees Caps on Liability of Subcontractors Guarantee of public access Reporting/Confidentiality 16

17 Concession Agreement/Project Agreement (Cont.) Compensation Events/Material Adverse Events Duties to expand/build-out facilities in case of increased demand/deterioration of service levels Other directives Construction and operation of competing facilities Risk of future changes in law and regulations Taxes Permitting/regulatory delays Closures Litigation Demand/usage Concession term and option to extend/early termination Remedies 17

18 18 What happens when things go wrong?

19 Part II: Managing Risks Risk Management Principles Typical Project Risks Construction Risk Operation Risk Financing Risk Mitigation of Risk 19

20 PPP/P3 Risk Management Principles Fundamental principle Risk should not generally sit with Project Company Risk should sit with the party best able to deal with it Project Company flow down risks assumed under Project Agreement Risks assumed by Project Company are risks of funders Limited recourse financing Principal security is the revenue generated by the Project More risk = higher price (generally) 20

21 Typical Project Risks Cradle to Grave approach to risk Construction Operation Political Land acquisition/environmental Legal/regulatory Third party interface Handback General Principle Project Company must allocate risks to those best placed to manage the risk Typically Building Contractor or FM Provider/Operator Time for completion Delay events Long stop date for completion 21

22 Construction Risk Fixed price lump sum Compensation events Site condition and access Quality of works Certification of practical completion Damages for delay Liquidated and ascertained damages Parent company guarantee/performance bond Caps on Liability Operation of the asset to the required standard Continuous improvement/step change Change in law 22

23 Operation Risk Availability of the asset Payment mechanism Performance monitoring/helpdesk Rectifying performance failures Performance deductions/service failure points Warning notices/termination Handback Parent company guarantee Caps on liability Flow down of risk away from Project Company Subcontractor interface agreement 23

24 Financing Risk Financing Commitments Firmness/Capacity Availability of public authority financing to all bidders Interest rate risk Multiple layers of financing Fulfillment of conditions precedent Refinancing risks Demand Risks Technological innovation Risk of lesser demand Increased expenses in case of greater demand Flexibility to increase project capacity, or requirement? Increased profits in case of greater demand Appropriation Risk 24

25 Mitigation of Risk Performance security Parent company guarantee Performance Bond Retention Bond Reserve accounts Corporate security debenture/charge over shares Insurance Direct Agreements Authority Direct Agreement Subcontractor Direct Agreement Due Diligence Understanding of the sector and market precedent Identifying legitimate departures from market precedent Communication legal/technical/financial 25

26 A Few Examples Political Risk: Georgia shocks investor groups with late stage cancellation of procurement for toll lanes concession on GA/I-75&575 (December 1, 2011, Financing Risk: Consequences of Midway Airport Privatization Collapse (May 15, 2009, Reason Foundation) Operational Risk: New York to Repeat Chicago s Parking Meter Catastrophe ( June 13, 2012) New York Scraps Privatizing Parking Meters - WSJ.com Jan 26, 2013 Pittsburgh and Los Angeles also have put privatization plans on ice.... Chicago is in arbitration with Chicago Parking Meters LLC. 26

27 Worldwide Locations North America Latin America Europe & Middle East Asia Pacific Cincinnati Northern Virginia Bogotá+ Beirut+ Leeds Beijing Cleveland Palo Alto Buenos Aires+ Berlin London Hong Kong Columbus Phoenix Caracas+ Birmingham Madrid Perth Houston San Francisco La Paz+ Bratislava Manchester Seoul Los Angeles Tampa Lima+ Brussels Moscow Shanghai Miami Washington DC Panamá+ Bucharest+ Paris Singapore New York West Palm Beach Santiago+ Budapest Prague Sydney Santo Domingo Frankfurt Riyadh Tokyo Kyiv Warsaw 27 + Independent Network Firm