Financing Tools for Public-Private Partnerships in Illinois

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Percival Curtis
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1 Financing Tools for Public-Private Partnerships in Illinois June 24, 2011 CHICAGO 111 West Monroe Street Chicago, IL (312) NEW YORK 330 Madison Avenue New York, NY (212) SALT LAKE CITY 201 South Main Street Salt Lake City, UT (801) SAN FRANCISCO 595 Market Street San Francisco, CA (415)

2 What is a Public-Private Partnership (PPP)? Public-Private Partnership an umbrella term Outsourcing Government entity hires private entity to carry out functions Public-Private Partnership Blend of outsourcing and privatization Privatization Sale (or long-term lease) of government-owned assets to private entity An agreement that draws on the skills and assets of both a public agency and a private entity to provide services or facilities for use by the public and shares the risks and rewards of the project. 2

3 PPPs Today Best candidates for PPPs provide a proven revenue stream A private partner provides initial funding for capital improvements, but must have a means of repaying the investment Income stream can be generated by a variety and combination of sources: fees, tolls, shadow tolls, tax increment financing, etc. Revenue stream must be assured for the length of the partnership 3

4 Participants in PPP Projects Government Entity Concessionaire Operator Financial Advisor to Government Entity Financial Advisor to Concessionaire/Equity Investor Equity Investor Lender to Concessionaire Underwriter/Placement Agent for debt Debt Holder Liquidity/Credit Support Provider 4

5 Case Study: Chicago Skyway Tripartite Agreement & Leasehold Mortgage Public- Sector Entity Concession/Project Agreement Banks/Capital Markets $$ Securities Special Purpose Vehicle (Project Company) $$ Equity Investors Shareholder & Equity Agreement Bond Insurance Financial Guaranty Insurer Design & Construction Agreement Designer Builder (to be added later for capital improvements) O&M/Services Agreement Operator/Service Provider Sub-Contractors 5

6 Choosing the Right PPP Arrangement What type of arrangement is right for the public agency and project? Outsourcing Public-Private Partnership Privatization Must consider Authority under enabling legislation or need for additional authority Need or desire for continuing control of the asset Restrictions on use or disposition of federally funded projects For example, Federal Highway Administration requires State to continue to ensure facility is properly maintained State to retain interest sufficient to allow take over if private entity is insolvent or fails to construct, operate or maintain facility 6

7 State Law Authority to Sell or Lease the Asset Restrictions on Ability to Sell or Lease Assets Illinois Municipal Code Section et seq. Illinois School Code Section 5-22 Illinois Park District Code Section

8 State Law Authority to Sell or Lease the Asset Possible Solution: Section 17(b) of Local Government Debt Reform Act The governing body of each governmental unit may sell, lease, convey, and reacquire either real or personal property, or any interest in real or personal property, upon any terms and conditions and in any manner, as the governing body shall determine, if the governmental unit will lease, acquire by purchase agreement, or otherwise reacquire the property, as authorized by this subsection or any other applicable law 8

9 Special Considerations Legal Tax In private hands is the facility subject to regulation as a utility or otherwise? Licenses, permits or approvals required of a private entity? Will public-sector procurement rules apply to the private entity? Is a lien or mortgage on the assets or revenues permitted? Is the asset subject to federal, state or local taxes or assessments while used by the private entity? Will mortgage recording, real estate transfer or other similar taxes apply? Must public tax-exempt debt be defeased because of change in use? 9

10 Special Considerations Public Debt Issues Can a mix of public debt (taxable or tax-exempt) and private debt optimize the capital structure? Does the private use affect existing tax-exempt funding? PPP is private use under existing IRS Rules. Proposed IRS Rules (not yet effective) on allocating public and private use 10

11 Contract Considerations Public agency operating controls - reports, inspections, etc. Policy issues - policing, safety, toll or service limits, minority contracting, labor and worker issues Arrangements for additional capital improvements and financing Liability and insurance Indemnifications - public agency s authority to provide indemnities for environmental or other liabilities Adverse future actions - changes in laws, regulations or public development of competing facilities Termination and enforcement What steps can be taken to compel performance Contractual provisions for resolution of disagreements 11

12 This document has been prepared by Chapman and Cutler LLP attorneys for informational purposes only. It is general in nature and based on authorities that are subject to change. It is not intended as legal advice. Accordingly, readers should consult with, and seek the advice of, their own counsel with respect to any individual situation that involves the material contained in this document, the application of such material to their specific circumstances, or any questions relating to their own affairs that may be raised by such material Chapman and Cutler LLP 12

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