P3 STRUCTURE CONSIDERATIONS. List of Contributors: James D. Piers Paul C. Wilson David M. Doubilet Donald M. Dalik

Transcription

1 P3 STRUCTURE CONSIDERATIONS List of Contributors: James D. Piers Paul C. Wilson David M. Doubilet Donald M. Dalik

2 Program Agreement Parties Usually multi-party arrangements require agreements among and between Sponsor, Proponent, Financier and others to fully implement the planned program. Usually a project finance type of structure, where recourse is limited. The Agreements have to therefore embody the various elements integral to the Program.

3 Program Agreement (cont d) Program Essential concept - Defines the public service objectives of the Sponsor, the minimum performance requirements of the Proponent and the security and recourse of the Financier. Programs can be open or closed. For example, if contracting for a municipal arena, it is not acceptable to turn it into a retail outlet. However, it could be open-ended, particularly where necessary for financial viability. As an example, by building and operating a municipal arena the Proponent could then have rights to an adjacent or ancillary retail development which it would not otherwise have had.

4 Program Agreement (cont d) Conditions Precedent Project planning and permitting Project Feasibility - Third party agreements (eg. construction contract), financing, bonding and definitive inter-party agreements regarding implementation. Operating arrangements, including definitive interparty operations parameters. Condition removal dates and execution of definitive project agreements or termination of arrangements.

5 Program Agreement (cont d) Establishment of Project Grant of necessary rights (eg. ground lease) must be done to permit Proponent and Financier to proceed with work on site. Outside date and cancellation notwithstanding grant. If certain milestones are not achieved by specified dates or full functionality not achieved by outside date then Sponsor has the right to cancel all agreements and grants. Enterprise Risk - Can the Proponent bring the Project on stream successfully?

6 Program Agreement (cont d) Operations Ongoing performance parameters to ensure delivery of the public service functionality contracted for. Breach of performance covenants can lead to varying remedies, including overall cancellation ( Project Risk ) - i.e. the program has been successfully brought on stream but cannot be maintained. Risk is that of Proponent/Financier as Sponsor continues to require the public service functionally inherent in the Program.

7 Ground Lease Assume Following Model Legal vehicle for transferring the use of land (improvements to be constructed) from the public to the private sector for the operation of the Project for finite period Traditionally lease of vacant lands without improvements but the expression often interchangeable with head leases or underlying leases where the land owner or head landlord takes a passive investor type role and the tenant or head tenant is the party primarily responsible for managing the infrastructure and subletting and licensing space and facilities to end users

8 Ground Lease Assume Following Model (cont d) However, P3 Project often calls for the public sector landlord ( Landlord ) to take a more active role than that of a mere investor/landlord Landlord may differ from Programme Sponsor ( Sponsor ) due to how governments administer and manage assets e.g. BCBC and BCAL Sponsor party to Ground Lease to protect its interest Common to all ground leases - long term with two factors often determining length, the lifespan of the major assets such as a building and in the Province of British Columbia Property Transfer Tax for leases exceeding 30 years

9 Ground Lease Use and Operation Strictly controlled; expect no changes permitted without approval of Landlord and Sponsor; Going dark will not be an option.

10 Ground Lease Improvements Buildings and other infrastructure generally built and totally financed by Tenant, although the design and construction will be approved by and monitored by Landlord and Programme Sponsor.

11 Ground Lease Maintenance, Repair and Replacement Responsibility rests entirely with Tenant; hence ground lease is truly a net one As Landlord and/or Sponsor are public entities, Landlord will state that it has a duty to ensure that the improvements are maintained, repaired and replaced to no less a standard than public sector would maintain them if it owned them

12 Ground Lease Maintenance, Repair and Replacement (cont d) Accordingly repair and maintenance lease terms (and when the landlord can step in and take over), become contentious for a P3 Project

13 Ground Lease Maintenance, Repair and Replacement (cont d) Prospective potential tenants should be prepared to have to live with lease terms and conditions which are more landlord favoured than in the private sector e.g. no exceptions for wear and tear and with a landlord looking over the tenant s shoulder at any time

14 Ground Lease Major Loss or Destruction Again, contentious and often time consuming to settle Generally Landlords require the insurable property to be fully replaced regardless if the loss is during the last year The ability to reimburse the Landlord with insurance proceeds as opposed to rebuilding in the event of a partial loss or destruction, is as a general rule not acceptable to public sector landlords, whose aim is to be able to hand back to their public owners a 30 year old improvement looking new

15 Ground Lease Rent Can often be difficult to settle given the nature of the Project Unlike the passive private sector investor who is taking no risk in the Project and therefore is satisfied if his rent is periodically adjusted based on the change in the value of the land (but not improvements), the public sector landlord often expects to participate in the income stream derived from the Project

16 Ground Lease Alterations and Changes Public perceives the Project to be for its benefit Landlord will want to exercise a great deal of control over any alterations and changes In addition to a structural type test, two other tests are: a monetary amount and aesthetics, i.e. any changes (even minor ones) that might be viewed by members of the public

17 Ground Lease Health, Safety and Environment Due to duty (legal or otherwise) placed on Landlord, its degree of involvement in monitoring these terms will be considerably higher than the private sector, where the landlord often relies upon government agencies or will only respond when something goes awry.

18 Ground Lease Assignment Expect because of public duty for Landlord to very much control i.e. to strictly follow lease terms such as Use and to have more detailed and higher business and financial reputation tests for assignee than in private sector

19 Ground Lease Subtenants and Licensees As in the private sector, the terms of these are best settled in advance, but again expect Landlord to exert a greater deal of control and administration.

20 Ground Lease Tenant Financing Lenders wishing to realize on their security should be prepared to step into the shoes of the tenant and thereby have no greater rights or privileges in a realization proceeding save and except when a new tenant is found acceptable to Landlord, lender may be released.

21 Ground Lease Rights on Default Landlord will want no responsibility for any of its obligations (which are few in any event). Much less tolerance in the public sector for a poorly run or shabby looking Project, therefore: Shorter time period to remedy all defaults than in a similar private sector lease. Also Landlord will want the right to step in itself and remedy tenant defaults on very short notice.

22 Ground Lease Cross Default Landlord wants to be able to take over a fully operating Project, so Default under the Lease will be a deemed default under any operating agreement and other security agreements e.g. covering financial participation and personal property, e.g. fixtures, furniture and equipment and often intellectual property rights.

23 Alternate Service Delivery ( ASD ) Structure Example of type of ASD form of P3 no capital works and fixed assets. Rather can focus on assets or even services. Asset lease and administration ASD.

24 Alternate Service Delivery ( ASD ) Structure Asset Program Agreement for the: provision of specified assets as requested by government agencies from time to time (e.g. Forests, Health, Attorney General ) Sourcing and delivery of assets. Ongoing administration, maintenance and replacement. Equipment lease terms.

25 Alternate Service Delivery ( ASD ) Structure Financing Program Agreement for the acquisition of assets: Equipment leases (frees up capital). Lease securitization structure. Agreed costs of capital. Access to sub-prime debt markets through use of short-term commercial paper facilities.

26 Alternate Service Delivery ( ASD ) Structure Financing Program Agreement for the acquisition of assets (cont d): Disintermediation and market efficiencies allow mid-term asset facilities to be established using short-term commercial paper markets (30 day term) which accesses the lowest cost sector of the yield curve and can give a lower cost of capital than direct government debt.

27 Alternate Service Delivery ( ASD ) Structure Various related agreements in such a structure: Liquidity Agreement, Indenture Trustee, Note Trustee, etc. Can be stand-alone or can require participation of equipment lessor as facility servicer and provider of overcollateralization (or retention).

28 Examples of Other Types of Programs (Ontario) Highway 407 Counsel to the Privatization Secretariat of the Province of Ontario. This was a complex multi-stage project involving many parties and interests, both inside and outside of government. With sale proceeds in excess of $3.1 billion, this was the largest privatization in Canadian history. This project has been recognized as an outstanding transaction by the Canadian Council of Public-Private Partnerships, receiving its gold award for project finance in 1999.

29 Examples of Other Types of Programs (Ontario) Highway 407 (cont d) We advised with respect to changes required in legislation, the drafting of legislation, the purchase and sale agreement, had primary responsibility for the drafting of the concession agreement and the tolling and congestion relief agreement, advised with respect to tax and environmental matters and provided all of the relevant labour and employment law advice.

30 Examples of Other Types of Programs (Ontario) Central North Correctional Centre Penetanguishene Counsel to the Ministry of Correctional Services in connection with a public-private partnership for the operation and maintenance of the Central North Correctional Centre in Penetanguishene as part of the Adult Infrastructure Renewal Project.

31 Examples of Other Types of Programs (Ontario) Central North Correctional Centre Penetanguishene (cont d) We advised with respect to the adequacy of laws and regulations, the request for qualifications and the request for proposals and drafted the services agreement.

32 Examples of Other Types of Programs (Ontario) Cook Chill Food Production Centre Milton Counsel for the Ministry of Correctional Services in connection with a public-private partnership for the operation of the Cook Chill Food production Centre in Milton, an alternative service delivery opportunity. We advised them with respect to the request for proposals and drafted the services agreement.

33 Examples of Other Types of Programs (Ontario) Integrated Justice Project Counsel to the Ministry of the Attorney General and the Ministry of the Solicitor General and Correctional Services with respect to a public-private partnership to restructure through increased automation the way in which the administration of justice is carried out in the Province of Ontario. We advised with respect to the negotiation and documentation of the agreement with the private sector consortium selected to implement the initiative.

34 Examples of Other Types of Programs (Ontario) Palladium Sports Complex (Corel Centre), Ottawa Counsel to the Ontario Ministry of Economic Development and Trade in connection with a loan to Palladium Corporation secured primarily by a ticket surcharge to finance ancillary transportation infrastructure (roads and overpass). This is an exceptionally complex transaction involving multiple lenders and stages and multiple parties, both public and private.

35 Examples of Other Types of Programs (Ontario) Palladium Sports Complex (Corel Centre), Ottawa We negotiated the loan and security terms and prepared loan and security documentation for the secured financing. We also negotiated the road construction contract on behalf of the Ministry. We have advised in respect of a financial restructuring of the transaction on an after tax basis, and are continuing to deal with various contingent issues.

36 Examples of Other Types of Programs (Ontario) Hospital Laboratories Services Joint Venture Counsel to MDS Inc. with respect to a joint venture between MDS Inc. and The Toronto Hospital leading to the creation of a publicprivate partnership for i. the automation and operation of hospital laboratory services at The Toronto Hospital based on a cost savings model for compensation, and ii. the provision of services by the joint venture to other GTA hospitals based on a cost savings model.

37 Examples of Other Types of Programs (Ontario) Hospital Laboratories Services Joint Venture (cont d) We led the negotiations with The Toronto Hospital on behalf of MDS Inc. and assisted in the structuring of the transaction and the drafting of documentation. We were involved in negotiating additional public-private alliances based upon a cost savings model.

38 Examples of Other Types of Programs (Ontario) Commercialization of Traffic Monitoring Systems (cont d) Counsel to the Ontario Ministry of Transportation with respect to the private sector commercialization of a publicly funded traffic monitoring system through a distribution licence and marketing agreement with a private sector corporation.

39 Conclusion every deal is different, particularly at this stage in P3 development in Canada. Not every proposed program will be feasible but many will be. What is needed is openminded, creative thinking to consider options on their merits and seek to provide new solutions where these can best meet the overall objectives of the Sponsoring government.

40 Examples of Other Types of Programs (Ontario) Commercialization of Traffic Monitoring Systems In conjunction with PricewaterhouseCoopers LLP we advised with respect to the ownership and commercialization of a computerized traffic monitoring system developed under contract for the Ministry by a team at Queen s University, including assisting in the selection of the appropriate marketing vehicle, due diligence ownership review, negotiation and drafting of distribution agreements.