The Opportunities and Benefits of Partnerships with the Private Sector. Presentation to: Town of Richmond Hill Council Nov 4, 2015

Transcription

1 The Opportunities and Benefits of Partnerships with the Private Sector Presentation to: Town of Richmond Hill Council Nov 4,

2 About Infrastructure Ontario 2

3 IO s purpose and values We build, manage, finance, and enhance the value of Ontario public assets. People Oriented: Increase employee engagement Innovative: Expand the IO service offering around the core mandate Client Focused: Develop and maintain collaborative relationships with clients Execution Driven: Continue to execute IO s mandate in a manner that is consistent with a historically strong track record Diligent: Ensure proactive identification and mitigation of significant risks to the organization 3

4 IO s two divisions and four priorities Project Delivery AFP Infrastructure Development Manages planning, design, and delivery of major public infrastructure projects Commercial and Land Development Advises government clients to help generate revenue, reduce costs, and create efficiencies in how public services are delivered Maximizes the value of the provincially-owned real estate portfolio with the involvement of the private sector Real Estate and Lending Real Estate Management Manages the Ontario government s real estate portfolio, the second largest and one of the oldest real estate portfolios in Canada Loan Program Dedicated to providing financing solutions to help public sector clients renew infrastructure across Ontario 4

5 Alternative Financing and Procurement (AFP) Track Record Report (as of March 31, 2015) 98% of AFP projects completed on or below budget 73% of AFP projects on time or within a month of target date Health care AFPs (as of September 30, 2015) 34 new or expanded health care facilities 12 health care projects under construction 12 health care projects in market, planning, pre-tender 12,300,000 square feet of new health care space constructed Justice and public safety AFPs (as of September 30, 2015) 10 justice projects including courthouses and detention centres 18 Ontario Provincial Police facilities 3,500,000 square feet of new justice and public safety space constructed Civil infrastructure Transit Air Rail Link to Pearson International Airport is complete Construction of highway projects including the Rt. Hon. Herb Gray Parkway and Highway 407 Phases 1 and 2, with other highway projects planned including Highway 427 HOV Lanes Ottawa and Waterloo LRTs are in construction and Eglinton Crosstown LRT construction is anticipated 5

6 AFP: Past, present and future AFP Project Delivery Status (as of September 30, 2015) Projects Number Value Completed 52 $15.90 billion* Under Construction 21 $17.71 billion* IO s Market Update (issued June 2015) 20 $7.55 billion** * Capital costs are comprised of construction and design, short term financing, ancillary, early works, IO fees and transaction costs ** Design and construction costs only 6

7 Alternative Financing and Procurement 7

8 What is Alternative Financing & Procurement (AFP) The AFP model is an alternative to the Traditional project delivery model (Design-Bid-Build) AFP is Ontario s public private partnership model Utilizes private expertise and financing to rebuild infrastructure Ensures appropriate public control and ownership Integrates key project components (DBFM) using output specifications, encouraging design creativity which allows private sector to manage risks Provides appropriate risk sharing through the Project Agreement Ensures on time and on budget project delivery Payment only occurs only after construction is completed The AFP model ensures value for money In DBFM projects: Private sector is responsible for maintenance and lifecycle over 30 years, so the right incentive is created to build, maintain and hand back the asset on a whole lifecycle basis Allows deductions for poor performance against key performance indicators in monthly payment mechanism 8

9 Complex Projects Have Large Risks Risks during project planning and procurement Project budgeting Project requirements and specifications Lack of standard procurement documents Risks during construction Design errors Unforeseen geotechnical conditions Delays in obtaining permits Increases in cost of labour, materials, and equipment Weather General contractor performance Subcontractor performance Risks during the operating phase Latent defects Unforeseen maintenance costs Unforeseen life cycle costs Diminished residual value 9

10 Range of Infrastructure Delivery Models The spectrum of infrastructure delivery models ranges from traditional delivery to full privatization AFP/P3 delivery models in Canada fall in the middle of the spectrum DBF or DBFM appear to be the option for this project, however IO proposes to schedule a quick market sounding before making a decision. Design/ Bid/ Build Design/Build Typically a combination of Design/Build AND: Finance and/or Maintain and/or Operate Completely Private BF DBF DBFM DBFOM Degree of Private Sector Responsibility and Risk Entirely Public (Traditional) AFP or P3 Entirely Private (Market-based) The role of and risk to the private sector increases in the delivery of an infrastructure project 10

11 Risk Retained decreases with AFP TD DB DBF DBFM R T R T R T R T Amount of risk retained by owner is reduced as total size of risk pot decreases R = Retained T = Transferred 11

12 Traditional Approach to Capital Projects The Sponsor enters into individual contracts at each stage of implementation (potentially up to five) and retains much of the risk for the Project and each contract CONTRACTOR Construction Contract Warranties OPERATOR Operating Agreement Annual Capital Maintenance Program DESIGNER PROJECT MANAGER FINANCIER Borrowing Reserves Design Contract SPONSOR 12

13 AFP Approach to Capital Projects The Sponsor enters into one contract with Project Co. Project Co. is composed of the required disciplines to deliver the project and manage the risk on a turn-key basis in accordance with the Sponsor s specifications Contractor Construction Contract Warranties SPONSOR Designer Design Contract PROJECT CO. Operator Operating Agreement Annual Capital Maintenance Program INFRASTRUCTURE ONTARIO Financier Borrowing Reserves 13

14 Traditional vs. AFP Delivery Traditional Model Single Creative Source Functional Program Concept Drawings Working Design Tender and Award Construction Same Regardless of Model Multiple (3) Creative Sources Functional Program Performance Output Specifications Bidder s Concept Drawings Bidder s Concept Drawings Bidder s Concept Drawings Winning Bidder Working Design Construction AFP Model Confidential Design Review Meetings 14

15 Lifecycle Approach Project Companies take a year DBFM project view and assume the risk associated with their decisions. Equipment selection Materials of construction Plant configuration All routine and capital maintenance Level of automation DBFM decisions are to be compliant with all relevant regulations and owners technical and output specifications Project Lifecycle 15

16 Design Build Finance Maintain (DBFM) 16

17 Allocating Risk Risk is allocated to the party best able to manage and/or mitigate the risk Risks allocated to Private Client Shared e.g. Obligation to build to design, maintain schedule, perform periodic maintenance, absorb any deficiency in design defects and hand back e.g. Sponsor initiated scope changes e.g. Supervening Events (Delay, Compensation, Excusing causes, Relief Events & Force Majure), Compensation on Termination, Geotechnical, Environmental conditions of the site All risk allocation between the Private Sector and Public Sector is specified & captured in the Project Agreement and Schedules 17

18 Risk Transfer Under the DBFM Model Traditional DBFM - AFP Model Public Sector Risks Private Sector Risks Public Sector Risks Private Sector Risks Functional Program Design Financing Maintenance Lifecycle Facility Availability, Performance & Asset Value Construction Construction Schedule Output Specifications provide design requirements rather than a design solution Public Sector retains risk for Output Specification issues Functional Program Output Specs Design risk is transferred to the Private Sector Design Financing Scheduled Lifecycle Facility Availability, Performance & Asset Value Maintenance 18

19 DBFM or DBF choosing the right model DBFM projects offer the most risk transfer and maximum Value for Money (VfM) to the owner because: o Combining design, construction, maintenance and life cycle replacement with financing : Creates single point of accountability during procurement and contract management The single point of accountability is accountable to two masters aligned in interest Optimization of design, construction and maintenance drives the design builder on a holistic long term solution and creates a less expensive, more competitive bid Due diligence is required by both the procuring owner and the lender. The lender through the Technical Advisor also monitors the asset condition during the concession term o o Owner essentially gets a 30 year warranty on the asset 30 year cash flows are approved in principal and annual approval of maintenance funds is less discretionary DBF model does not offer the whole asset and lifecycle approach as the DBFM model and restricts private sector innovation as absence of Maintenance risk transfer requires the owner to spec more detail. The DBF model is suited for projects where: o The scope is limited to renovation or extension of an existing facility which will have a shared plant or an existing maintenance contract o The owner has an existing operations and maintenance team o Lack of Maintenance information for proponent teams to develop price without adding contingency 19

20 Design Creates Innovation and Lowers Costs Project specific output specifications (PSOS) tells the Proponents what Owner wants, not how to accomplish it - engineering is left to Project Co As a rule, performance-based requirements deliver better value for money than prescriptive ones PSOS define the required asset performance and reliability for each project PSOS allows DBFM Proponents to be creative and adapt Indicative design to provide a design which meets the program, quality, and reliability requirements of the Client-Sponsor as set out in PSOS PSOS sets out minimum compliance requirements Project must haves comprises a list of constraints it is not open-ended: PSOS is a source document for design evaluation and contractual compliance and is issued with RFP release because PSOS The Planning Design and Compliance Team (PDC) prepares the PSOS by: Confirming the Owner s project vision, objectives and requirements Facilitating User Group feedback sessions to extract detailed facility design, technical quality requirements 20

21 DBFM: Design Consultation Process Design Consultation Meeting (3x during RFP period) Respondent Design Submission # x Design Workshop with each Respondent RFP CLOSE Respondent A Respondent B Respondent C Design Consultation Team prepares responses to each submission Respondent A Respondent B Respondent C FINAL DESIGN PRESENTATION TO SPONSORS (Design Evaluation Team &/or Evaluation Committee) ~ day cycle EVALUATION OF RFP SUBMISSIONS Design Consultation Team includes: Technical Consultant Sponsor representatives Fairness Advisor IO Representatives 21

22 The Role of Financing in AFP A risk transfer tool, not a funding source! Project Co. capital costs and financing costs are at risk through construction and operations & maintenance (O&M) term (typically 30 years): Ensures on-time, on budget, on scope, on quality delivery Subject to deductions for quality or availability failures during O&M term Financing results in better Project Co./Contractor behavior than under traditional delivery models Lenders due diligence and contract oversight ensures that risk transfer in PA is enforced 22

23 Financing Rates - Recent Deals Project Short Term Bank (all in ) Short Term Bond (all in) Project A (2014) 2.20% n/a 4.54% Project B (2015) 2.26% 1.62% 4.17% Project C (2015) 2.70% 1.70% 3.76% All in rate includes: Base rate (generally GOC or Banker s Acceptance which are swapped) + Credit spread + Swap spread Current rates are trending higher than projects closed over the last 6 months Long Term Bond (all in) 23

24 AFP Project Timeline DBFM Introduction to IO & AFP Terms of Reference Preliminary VFM Assessment Memorandum of Understanding Due diligence on budget, scope and schedule Market Sounding Prepare Output Specs RFQ Released RFP Released RFP Closed Preferred Proponent Selection Commercial & Financial Close Construction with Monitoring Substantial Completion Project Development Phase Pre-transaction Phase Transaction Phase Construction Phase Maintenance Phase Approx. 4-6 months Approx months 24

25 Value for Money VFM 25

26 Value for Money (VFM) assessment Using taxpayers money responsibly The Value for Money (VFM) assessment compares project costs using the traditional project delivery model (public sector comparator) and the AFP model to determine which is the better value proposition VFM assessments are conducted by third-party accounting firms and are based on real project data A VFM assessment must demonstrate that the value of the AFP model outweighs the value of the traditional model in order for a project to proceed As part of IO s continuous improvement initiative, the VFM methodology is being refreshed to ensure: Greater transparency by improving rationales and definitions of risk categories / items and providing a comprehensive explanation on development of standardized values contained within the risk matrices VFM methodology is more grounded in actual data Sponsor input and feedback is incorporated into the Risk Matrices PSC Value for Money AFP Refreshed Risks Retained (Total risk retained and transferred is now lower) Ancillary Costs Financing Costs (Adjusted to reflect IO s new Base Costs Skin-in the Game Policy) (Lower under AFP as a result of Risk Premium offset by Innovation)

27 IO s role and Governance 27

28 Town as Owner At all times throughout the Project lifecycle, the Town will remain the owner of the Project. The Town will continue to provide the necessary oversight and mechanisms to ensure Town mandates and policies are achieved through the implementation of the Project. As the owner of the Project, the final decision making authority will rest with the Town. 28

29 IO s Role and Experience as Project Manager The Town, as the client and owner, retains the right to make final decisions and direct the project through the Joint Project Committee. Project Manager (Procurement Lead and Contract Manager during design and construction) IO has overall responsibility for managing the procurement as well as oversight of the construction contract. IO has budget, quality and schedule responsibility, subject to Town approval. IO has significant experience (over 60 projects) acting as project manger on a variety of asset classes IO and City roles during procurement and design & construction phase are as follows: Procurement Design & Construction IO Leads document development and manages the process for the following in consultation with City: o RFQ o RFP o Project Agreement o PSOS Outputs Leads contract administration Commercial and Legal Risk identification and mitigation Budget and schedule control Variation Management Claims Management Town Leads scope and facility program finalization Supports document development and is at the table during the procurement process Final approvals Supports design compliance Approves scope changes Fulfils regulatory role (OBC, Environmental) at arms length to AFP contract 29

30 Potential Project Management Org Chart IO as Project Manager Executive Steering Committee (ESC) The ESC will include senior executives from IO and the Town. If JPC cannot make a decision or if the decision exceeds the authority of JPC, the decision-making members of JPC will address the matter with their respective executives for further discussion and direction. Joint Project Committee (JPC) The JPC will act as a consensus-based decision-making body, including senior representatives from IO and the Town who have authority to make key Project decisions. It s role at a high level will include: o Accountability to deliver project on time, on budget o Provide direction and key approvals to the PMT, and approving matters brought forward by the PMT requiring JPC approval o Budget changes and variations approval over a certain limit Project Management Team (PMT) TBC (Co-Chair) TBC Executive Steering Committee (ESC) Infrastructure Ontario IO Support Team: Finance, Legal, Procurement and Communications TBC (Co-Chair) TBC Town Joint Project Committee (JPC) TBC (Co-Chair) TBC Town of Richmond Hill TBC (Co-Chair) TBC Town Support Team: Finance, Legal, Procurement, Communications Project Management Team (PMT) Will consist of senior working staff from the Town and IO The team will be responsible for the day-to-day management of the Project. Meetings are generally held on a weekly basis. Project Advisors Planning & Design Legal Transaction Fairness Insurance 30

31 IO s Resourcing and Roles IO has assembled a diverse group of professionals internally that work as a team to provide best customer experience. Major Projects: Is responsible for managing the project procurement (from RFQ to Financial Close). The Major Projects team develops the RFQ and RFP (including Output Specifications and Project Agreement) documents and manages the evaluation and negotiations with Proponents. Transaction Legal: Is responsible for retaining and managing external Legal Advisors who are responsible for drafting the Project Agreement. IO counsel coordinate the drafting with external legal and the client s legal team. IO s Major Projects and Transaction Finance are also involved in the document development. Transaction Finance: Is responsible for retaining and managing the Transaction/Financial Advisor who develops the VfM model at various stages of the procurement as well as developing and calibrating the payment plan and all financial submission forms of the RFP. Transaction Finance team also evaluates the financial submission at RFQ and RFP stages and includes the individuals from the clients finance department. Communications: works with clients Communications team to (i) develop Communications Plan and issue any project communiqué; and (iii) support in Public Engagement and Industry Outreach. Procurement: Is responsible for managing documents issuance to market, receiving submissions and reviewing them for compliance and managing the evaluation process. In addition senior management from each group are involved in the project as required. External advisors support the project as required. IO has vendors of record for most key advisors. Various IO groups are engaged at defined points in the process. By utilizing IO expertise on an as needed basis, advisor costs and Town staff resourcing requirements are optimized. 31

32 The AFP Model Will: Transfer design, build and operation risk to Project Co. Require no payment until substantial completion If late, at Project Co s cost Incent consortia to save through innovation Require consortia to include the entire concession lifecycle costs upfront No annual capital budget requests of the municipality Include provision in the project agreement that allows for sharing of future innovations and costs Allow deductions for poor performance against KPIs in monthly payment mechanism Ensure the asset is handed back to the Town in a predefined condition 32

33 Benefits to a Municipal Client Municipality sets all operating policies and retains control of the capital asset A true fixed price on-time, on-budget project delivery model no change orders Known operating costs for entire concession period Helps provide financially sustainable asset AFP process enhances project competition and drives innovation Special Purpose Vehichle structure ensures there is capital at-risk that incents compliant operations Provides a warranty through the operating concession 33

34 How IO Can Help? Pre-transaction assessment, advice and analysis Confirm project cost estimates Oversee preparation of Performance Output Specifications Drive scope detail Project costing prior to RFP release Manage procurement process: Market Sounding RFQ and RFP Preferred bidder selection (Project Co.) Project Agreement Commercial and Financial Close Construction oversight 34

35 Project Examples 35

36 Innovation case study St. Joseph s Healthcare Hamilton - West 5th Campus Key Innovations from Base Design: Smaller more compact building area. Changed site orientation of building from primarily west-facing to south-facing; more energy efficient with greater access to sunlight. Shorter travel distances for staff. Shortened construction schedule by demolishing existing space (rather than inefficiently working around it) and creating new space early in project rather than at the end of project. Used natural site grading to create 3 storey building on most of the site but 3 ½ storey on one part of the site to stay within 3 storey standard. Design of Winning Bidder Winning Bidder Bidder B Bidder C Budget Construction Cost $358M $498M $522M $467M Building Area (square feet) 735, , ,000 _ Design Score 86% 75% 70% _ Base Design

37 Examples of Private Sector Innovation Niagara Health System: Greenfield site, minimal municipal constraints Illustrative Scheme Bidder A Bidder B Debbie Sevenpifer, NHS CEO stated that the winning design was superior than what they would have achieved under a traditional approach (the illustrative design) Bidder C 37

38 Examples of Private Sector Innovation Women s College Hospital: Downtown site, extensive municipal approvals Illustrative Scheme Bidder A Bidder B The Women s College Board of Directors unanimously approved proceeding with the alternate approach developed by all three bidders a significant improvement over the illustrative scheme Bidder C 38

39 Runnymede Healthcare Centre Runnymede Healthcare Centre's redevelopment project resulted in the construction of a new 180,000 square foot complex built to replace the dated facility, which was over 100-years old. Located in downtown Toronto, Runnymede specializes in the care of complex and chronic medical conditions. Structure: Project Value: Features: Build Finance (BF) $63 Million Doubled capacity from 95 to 200 beds Expanded space for enhanced programs and specialty services such as respiratory therapy, occupational therapy, social services, and audiology services Wait times have been reduced Additional parking and landscape areas 39

40 Bridgepoint Health Completed in 2013, the new hospital is a LEED certified, 680,000-square-foot facility designed to provide care for individuals with complex chronic health conditions and advance research and education. The project also involved the restoration and renovation of the former Don Jail, which now functions as the hospital s administration building. Infrastructure Ontario and the Ministry of Health and Long-Term Care worked with Bridgepoint to redevelop the facility. Structure: Project Value: Features: Design Build Finance Maintain (DBFM) $622 million 10-storey, 472 bed, 680,000 sq. ft. hospital Larger modern rooms with more natural light In-ground therapy pool, more patient lounges and common areas 40

41 Durham Region Courthouse The Durham Region Courthouse project was the consolidation of eight previous justice locations into one large facility. Completed in 2009, the courthouse is a modern, barrier-free facility that provides Superior Court and Ontario Court justice services for the community and Durham region. Structure: Project Value: Features: Design Build Finance Maintain $334 million Thirty eight judicial hearing rooms, three motions rooms and three conference/settlement rooms Portable interpretation booths, infrared hearing assistance, remote video testimony rooms and video conferencing capabilities Enhanced security features, such as secured separate corridors for the public, in-custody accused and the judiciary Offices for Legal Aid Ontario, Family Law Information Centre, Children s Aid Society and probation and parole Most technologically advanced courthouse in Ontario One of the most energy efficient new Ontario government buildings 41

42 OPP Modernization The OPP Modernization project involved the construction of 18 new Ontario Provincial Police detachments, regional headquarters, and forensic identification services units in 16 communities across Ontario. The new facilities, which in many cases replaced buildings that had exceeded their useful life, feature up-to-date amenities to better support the demands of modern police operations and meet the needs of the community. Structure: Project Value: Features: Design Build Finance Maintain (DBFM) $292.7 Million Provide Ontario with more efficient and effective policing infrastructure that will enhance community safety and support Ontario s justice system. The new OPP buildings are designed and built to meet the Leadership in Energy and Environmental Design (LEED) Silver standards, incorporating environmentally sustainable construction practices and energy efficient design. 42

43 Pan Am / Parapan Am Athletes Village The Athletes Village is the largest infrastructure project associated with the 2015 Pan Am and Parapan Am Games. It will be located on an 80-acre site next to the Don River in Toronto s waterfront district. The Village will be home for 10,000 athletes, coaches and team officials during the games and will incorporate a full range of conveniences and amenities. Structure: Project Value: Features: Design Build Finance (DBF) $514 Million Construction of new roads and services, such as hydro, sewer, and water infrastructure The former industrial lands will be transformed into a beautiful, sustainable mixed-use neighbourhood Restoration of on-site historical buildings After the Games: More than 300 families will have access to affordable rental and ownership housing The new George Brown College residence will provide housing for 500 students 43

44 Comparison Sudbury Regional Hospital Phase I Traditional Procurement Contractor: PCL Construction Start: 1998 Construction End: 2004 Result: Scope creep, project delays, over budget Phase II AFP (Build-Finance) Contractor: Ellis Don Construction Start: 2007 Construction End: Dec 2009 Result: On time, on budget with demonstrable VFM 44

45 Comparison Abbotsford Hospital to VCC Vancouver Convention Centre Construction Management Contractor: PCL Architect: MCM Construction Start: 2004 Result: Six months late; over budget by 55% Abbotsford Hospital DBFOM P3 (Partnerships BC) Contractor: PCL Architect: MCM Construction Start: 2004 Result: On time, on/under budget for relatively more complex project 45

46 Appendix 46

47 Demystifying AFP Under AFP all assets remain publicly owned. Successor rights apply to workers in old facilities who move to new facilities. AFP is a more transparent way of accounting for public costs up front. Now that the Province has moved to accrual accounting the opportunities for so-called off-book structuring have for the most part been eliminated. 30-year maintenance costs are often part of the contract up front. Private finance transfers risk and is an investment in savings, not an added cost. When risk transfer is taken into account there is often a net benefit to involving some element of private finance. The majority of the finance during the operating period is public. And most importantly, finance is simply a means to an end. The objective is to align interests and transfer risk by withholding payment. Withholding payment requires private finance, but we do not set out to privately finance infrastructure. 47

48 Demystifying AFP You cannot get the benefits of private finance without private finance. Payment is made when the job is done, and the public sector has tremendous leverage to ensure the job gets done in a timely manner by the private sector. Private capital is a means not an end Many of the sectors requiring investment do not have revenue streams other than government grants (e.g., hospitals, public transit, justice and public safety facilities detachments). In other words private capital will never fund this infrastructure. Private capital can be used to finance the project to Substantial Completion The amount of private capital deployed should always be in proportion to the risk that is being offset. Progress payments and substantial completion payments should be used to optimize the amount of private finance. There is significant empirical data that modern project delivery techniques result in superior project delivery results A study by out of Australia confirmed that on average traditional delivery of large public projects results in cost overruns in the range of 18%, versus cost overruns in the range of 4% for modern project delivery techniques. The 4% figures is consistent with the IO track record of approximately 2.5% for large AFP projects. 48

49 Benefits of the AFP Delivery Model Project Planning Development and management of all project costs in an integrated fashion over entire project phase (construction, lifecycle and operations) for optimal cost allocation Generic output specifications Innovation achieved by having three creative sources for design Procurement Process Clear roles and responsibilities Strong governance Extensive due diligence Risk Transfer Design, scheduling delays, upkeep of facility, financial risks Warranty to the owner that the facility will be available in good condition over the long-term More opportunity for innovation with built-in penalties and incentives Standardization Use of templates to reduce costs and streamline project delivery schedule Project delivered on-time and on-budget (Payment occurs only after delivery completed) 49

50 Delivery Model - DBFM Design Transfer of most design and configuration risk Technical Requirements and Project Specific Output Specifications (PSOS) are developed by the Technical Advisor under direction of the Sponsors PSOS form the basis for detailed design to be developed by RFP Proponents during RFP Period. PSOS outlines what is required vs how to build the project Build Consortium to build the project in accordance with the Project Agreement (including the Technical Requirements and Project Specific Output Specifications) Build at a fixed price and by a fixed date 50

51 Delivery Model DBFM (cont d) Finance Consortium arranges financing for the project over D, B, F & M phases Payment structure anticipated to include interim and final substantial completion payments amounting to in aggregate to 50% or greater (depending on asset and size) of total build period capital costs Remaining project costs paid for in instalments over concession period Annual service payments commence after substantial completion Performance/availability based Payment Mechanism Maintain Project Co is required to maintain the asset to the agreed standard during the concession period Life cycle replacements must be in accordance with the proposal submission and Project Agreement (PA) The Owner prescribes in the PA the hand over condition of the asset at the end of the concession period 51

52 Payment Mechanism What is the Payment Mechanism? Payment Mechanism is a part of the AFP Project Agreement through which the Sponsor pays Project Co for the provision of facilities and services as contracted. Payment Mechanism is the contractual means of penalizing performance below required standards, as set out in the Output Specifications. What does the Payment Mechanism do? Tool for the Sponsor to penalize (through $ deductions and accumulation of Failure Points) Project Co. for poor service, poor quality or lack of availability. $ deductions for underperformance are adjusted from the Monthly Service Payments payable to Project Co Failure Points accumulate towards the issuance of Warning/Monitoring Notices Manages risk by incenting Project Co. to meet standards specified in the output specifications. Not intended to make the Sponsor whole or to compensate Sponsor for lost revenue. Sponsors fall under the Availability based Payment Mechanism category, where Project Co. is required to ensure that the facility is available for its intended use Payment is based on the availability of service, satisfaction of pre-set performance standards and inflation indexation Stable payment stream with no demand/volume risk 52

53 (Potential) Payment Structure Varies by asset class and project size Monthly Service Payments ( MSP ) Phase I Completion Interim Payment Substantial Completion SC Payment Sculpted Lifecycle payments Fixed Payments Construction Phase (depends on asset class and size): Design and construction by Project Co. Construction Financing Concession Term (30 years): Payments to Project Co. covering: Debt service Return on Equity Maintenance/Service* Lifecycle costs* * Components of the MSP that would be inflation indexed 53