So You Want to Buy the Brooklyn Bridge

So You Want to Buy the Brooklyn Bridge? There is a Way- By Using Public-Private Partnership and Concession Agreements Session Leader: Team Members: 1 Gregory W. Hummel, Bryan Cave LLP Greg S. Gilbert, Holland & Hart LLP Andrew Chapman, Macquarie Infrastructure and Real Assets

Public Private Partnerships The American Experience Presented to American College of Real Estate Lawyers 2015 Mid-Year Meeting March 27, 2015 Gregory Hummel Bryan Cave LLP 161 North Clark Street, Suite 4300 Chicago, Illinois 60601 312 -602 -5013 gregory. hummel@bryancave. com

What is P 3? § Broadly refers to a variety of transactions in which a public or quasi-public entity shifts some degree of control and responsibility for development and operation of a facility or a piece of infrastructure to be used by the public, or for governmental or other institutional purposes, to a private entity 3

Why are P 3 s Necessary, Important and Desirable? § Crying need – decrepit infrastructure § Capital available and seeking long term stable returns 4

International Infrastructure § Other countries investing heavily in infrastructure in a systematic and significant way § International infrastructure investment presents a competitive threat to the U. S. 5

Basic Project Delivery Options 6

Funding & Financing P 3 s § Source of payment in P 3 projects typically comprise some form of user fees (e. g. , tolls) or availability payments § Availability payments allow the most flexibility in setting rates for the use of a public improvement/public service, based on what the public entity views as appropriate compensation to the concessionaire for the service provided 7

Benefits of P 3 § Projects delivered on time and within budget § Risk and cost of maintenance borne by private entity § Allows for construction cost savings and reduced life cycle costs § Cost-spreading of public projects over the course of their useful life – Public entity gains access to outlay of private funds, but doesn’t have to repay them – Private partner earns return through its equity position, sharing in future profits 8

Benefits of P 3 § Generally provides positive and consistent customer experience § Allows public entity to focus on outcomes rather than means by which outcomes are achieved 9

P 3 Challenges § Our federal system – 50 different states and statutory schemes § Slow to be adopted in the US due to a patchwork of state enabling statutes § Also, lack of model concession agreement forms § Conventional procurement laws and practices based on final plans and detailed specifications especially the requirement to take the lowest responsible bidder in response to a competitive tender coming only and always from the public side 10

P 3 Challenges § Peculiarities of different classes of infrastructure roads favored over transit dominance of state DOTs transit in metropolitan areas that are not centrally and cohesively governed sewer and water typically well delivered at a fair price; P 3’s here do not generally deliver as clear benefits social infrastructure, like schools, hospitals and other facilities, delivered by special agencies or other not for profits these entities often lack powers to enter into P 3’s tendency of governmental entities to not charge the true cost of infrastructure delivery and maintenance public expectation of free services, they get the plant from willing host governments who do not level with their constituents about the initial outlays much less the cost of operation and maintenance 11

Six Keys to Successful Public Private Partnerships 1) The statutory and political environment – comprehensive framework law that drives a transparent selection process for both the right projects and the right public and private partners 2) Organized structure – this is primarily on the host government side – P 3 office that is knowledgeable, experienced and empowered 3) Detailed business plan – on both the public and private sides, often missing on the public side 4) Guaranteed revenue stream – availability payments preferable in this respect; however, robust offtake that can be reliably projected a feasible alternative; strong business plans help 5) Stakeholder support – who are they, how is a consensus among them achieved; a good framework law and P 3 office critical here 6) Partner selection – both regarding which public and private partners to choose, also among the parties comprising the private consortium who will provide the bundle of services that will be required by the concession agreement 12

History of P 3 in the United States § Some concession agreements prove to be bad deals either for the public, or private entity – Chicago Parking Meters for host government and Chicago Parking Garages for private sector § Lack of transparency (in some cases just perceived lack of transparency) has increased the public’s concern with regard to private profit motive § Accordingly, choose your P 3 prospects very carefully § The federal government is not a major P 3 participant § The expansion of P 3 s is significantly hindered by the lack of organized structure and clear and comprehensive regulatory framework at local, state, and national levels 13

Statutory Environment Must Allow For: § Transparency § Appropriate cost benefit analysis § Defined processes to ensure timely adoption and implementation § Integration of these factors into a framework which provides some degree of certainty for private parties 14

Virginia’s Approach § Two tier screening (high level and then detail level) § (High level) project identification assessing proposers’ qualifications and experiences, project characteristics, project financing, anticipated public support or opposition and project benefit and compatibility (both solicited and unsolicited) § (Detail level) as part of the detailed screening, a value for money analysis and a fourteen point inquiry into the project’s merits addressing the following: ‒ a topographical map depicting the location of the proposed project, ‒ a conceptual site plan, ‒ conceptual plans and elevations showing the general scope and configuration of the proposed project, ‒ a detailed description of the proposed participation of state and/or local agencies, ‒ a list of public utility facilities that would be crossed by the proposed project, ‒ a statement and strategy for securing all necessary property, 15

Virginia’s Approach ‒ ‒ ‒ ‒ 16 a detailed listing of firms that will be providing design and construction guarantees, a total life-cycle cost for the proposed project, a detailed discussion of assumptions regarding user fees or rates, discussion of any government support or opposition for the project, demonstration of consistency with appropriate local development plans, description of an ongoing performance evaluation system or database to track performance criteria, identification of executive management and the officers and directors of the firm submitting the proposal, and acknowledgement that the submission complies with the Virginia Ethics in Public contracting Act.

Where and Why has P 3 Worked? Transportation Projects § When there has been: – Appropriate cost benefit analysis – Constant and wide open public use, with related expectation and risk – Defined processes to ensure timely authorization and implementation – Integration of these features into a framework that provides some degree of certainty for private sector – Expert design and construction – Around-the-clock operation and maintenance for their life-cycle – Minimization of potential risk in the design, construction, and delivery phase by contracting them to a private party – Through contracting-out the maintenance so public can turn its future cost into a set of known payments 17

Miami’s Undersea Tunnel Undersea tunnel connecting Miami’s sea port and major highways § Undersea tunnel connecting Miami’s sea port and major highways (i) direct access between the sea port, I-395 and I-95; (ii) another access point to the port beside the port bridge; (iii) improvement in traffic by reducing the number of cars, trucks and cruise line buses from congested downtown streets § P 3 includes the design, build, finance, operation and maintenance – a 35 year concession agreement § MAT Concessionaire won the right to this concession through a competitive bidding process § One concessionaire is handling the entire operation and its payment is contingent on construction, availability and service quality milestones. 18

Florida’s I-595 § Involved the reconstruction, widening and resurfacing of the 10. 5 mile mainline in central Broward County 19

Florida’s I-595 § Florida first used availability-based P 3 for reversible express highway lanes on I-595 § However, unlike Miami’s undersea tunnel, I-595 lanes charge tolls in order to “optimize traffic flow” § A value for money analysis was conducted which concluded that an availability payment approach would lower the cost 8% from a traditional procurement § Under the concession agreement, Florida DOT pays I-595 Express LLC based on timely performance and retains control over toll setting and collection of revenue § This P 3 approach allowed this project to be built 15 years sooner than would have occurred with conventional procurement 20

A Part of I-495 (the Capital Beltway) § This project resulted from an unsolicited proposal which Virginia DOT saw as a better proposal, for among other reasons because its innovative design required fewer property takings § 85 year concession § Availability payment structure allowed the public entity to retain “excess” toll revenue – Dynamic tolling based on real-time traffic conditions – Although the concessionaire earned an adequate return on its investment, it did not capture the full benefit of the user fees generated by heavy traffic § Private Activity Bond combined with TIFIA financing 21

I-4 Ultimate § Includes design, construction, financing, maintenance, and operation for the $2. 3 B redevelopment of a 21 -mile stretch of I-4 in Orange and Seminole Counties of Florida § 40 year concession 22 § Dynamic tolling based on real-time traffic conditions in the 4 lanes this project adds; also the existing free general use lanes are maintained § Concession team includes key subcontractors, including project designer, builder and operator, who may or may not be investors in concessionaire § FDOT Construction Oversight Services (COS) to conduct regular audits of processes, procedures, materials and workmanship § U. S. DOT approved a $950 M loan, largest ever awarded for a P 3 Project § Florida DOT retains the toll revenue and controls the toll rates § I-4 Ultimate achieved financing using a syndicate of banks rather than using a tax exempt bond issuance

The Path Forward § There is a great need for P 3 in the United States; in order to Maintain our position in the global economy our infrastructure must be renewed § Replicable and scalable models exist in the United States to create a robust P 3 market in the near future § These models support not only traditional applications of P 3 such as transportation projects, but also “next generation” applications such as social infrastructure 23

Gregory Hummel - Partner Greg Hummel is a senior partner at the national and international law firm Bryan Cave LLP. He is based in Chicago where he leads the firm’s public private partnership practice. His work involves real estate development and finance, as well as, public and project finance. His over forty year career unfolded first as counsel to leading national developers, architect/engineers, construction companies, and commercial and investment banks. Today, his practice focuses on the economic development and job creation activities of cities, states and other units of government both in the United States and abroad. Infrastructure financing and development is an important part of his practice. In that regard, he co-chaired ULI Chicago’s Infrastructure Initiative. He has also advised public and private clients on public finance and economic development strategies all over the world including, among others, the governments of New Zealand its capital city Wellington, New South Wales, Australia, the U. S. Virgin Islands, U. S. cities of Chicago, Raleigh, and Hartford. Another facet of his practice is incentives where he has obtained financial benefits for private sector clients in the form of grants, tax credits and/or tax exempt debt in over twenty U. S. states. These incentives often make the difference between projects being feasible or not. 24 Chicago 161 N. Clark Street Suite 4300 Chicago, IL 60601 Phone: 312 -602 -5013 Email: gregory. hummel@bryancave. com

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