GEOFFREY S' YAREMA

1
AASHTO PROJECT FINANCE INSTITUTE
AN INSTITUTIONAL FRAMEWORK FOR PROJECT
FINANCE July 7-8, 2005 Boston, Massachusetts

• GEOFFREY S. YAREMA
• NOSSAMAN GUTHNER KNOX ELLIOTT LLP

2
Nossaman

• Law and consulting firm with unique specialty in
  procuring, contracting and financing large
  infrastructure projects
• Work exclusively for owners, not civil
  contractors
• Honored to work for more than 30 State DOTs and
  regional transportation authorities around the
  country
• Named by Public Works Financing as the 1 owner
  advisor each year since rankings began
• Projects named 1 of the year by AASHTO,
  Institutional Investor, Bond Buyer, ASCE, DBIA,
  ARTBA and many others
• Proud of our clients record of success

3
Focus of Discussion

• 1.0 Key Elements of a Successful Institutional
  Framework
• 2.0 Selecting a Project Delivery Plan
• 3.0 Implementing the Project Delivery Plan
• 4.0 Private Concessions the Next Frontier?

4
Key Elements of Successful Institutional
Framework

• 1.1 Anticipating sources of funds and knowing
  legal or market requirements each will impose
• 1.2 Identifying entity(ies) that will own and
  operate project and assuring they have needed
  state-level organization and legal powers
• 1.3 Securing the third party approvals required
  to build and operate
• 1.4 Are there good reasons to deliver project
  differently?

5
1.1 Sources of Funds

• Each funding source has its own
• Legal strings
• Market strings
• As a result, finance/funding plan is key driver
  of project delivery strategy

6
1.1 Sources of Funds Examples

• Federal funds
• Title 23/49 purposes
• Procurement restrictions
• Design-Build Rule
• SEP 14, 15
• TE-045
• Davis Bacon
• Tax-exempt debt
• Great asset
• BUT current IRS restrictions
• No long-term concessions
• No revenue sharing
• No private equity
• Proposed changes to private activity bond rules

7
1.1 Sources of Funds Examples

• Borrowing against project revenues
• Completion date certainty
• Capital/OM cost certainty
• Other indenture issues
• Gross v. net pledge
• Borrowing against other dedicated revenue streams
• Cost and schedule predictability less critical
  BUT
• Overruns and delays make other projects suffer
• TIFIA
• Eligibility criteria
• Springing lien

8
1.2 StateLevel Organization and Legal Powers

• Goals
• Institutional commitment to project
• Efficient project administration
• Need to ensure government sponsor(s) possesses
  all powers project will require
• Organizational Options
• Existing government agency
• Pass state legislation to supplement existing
  agency powers
• Create special office or division within existing
  agency
• Form and empower new special purpose agency to
  finance, build and operate
• Form special purpose agency to build and then
  transfer to existing agency to operate

9
1.2 StateLevel Organization and Legal Powers

• Selected Legal Powers
• Pre-Qualification
• Negotiation
• Best value selection
• Best project plan selection
• Long term durations
• Unsolicited proposals
• Call for projects
• Flexible agreement terms and conditions
• Utilize range of financing tools

10
1.3 Third Party Approvals

• Arising from land use
• NEPA and/or State equivalent
• Federal, state and local resource agency permits
• Arising from use of special assets
• Connecting to networks, like state highway
  systems
• Tolling interstate highways
• Concessioning existing assets originally funded
  with government grants

11
1.3 Third Party Approvals

• Arising from public debt issuance restrictions
• Volume caps
• Vote requirements
• Referenda
• Off balance sheet options
• Europe shadow tolls
• USA 63-20 non-profit corporations

12
1.4 Are There Good Reasons to Deliver Project
Differently?

• To justify deviating from tried and true,
  project delivery plans should offer significant
  advantages
• Accelerate project delivery
• Fix costs/schedule early in design phase
• Involve private sector early in project
  development process
• Shift risk and reduce claims
• Use private capital to leverage limited
  traditional government funding

13
2.0 Selecting a Project Delivery Plan

• 2.1 Options
• 2.2 Inputs and outputs for decision-making
• 2.3 How to make the decisions

14
2.1 Selecting a Project Delivery Plan Options

• Every project is delivered through a
  public-private partnership!
• Continuum from traditional approach to
  privatization
• What are the major options to consider?

15
2.1 Selecting a Project Delivery Plan Options

• 2.1.1 Traditional Pay-As-You-Go Tax Funding using
  Design-Bid-Build and Public Operations /
  Maintenance
• Most all U.S. surface transportation projects!
• Widely authorized by state legislatures with
  built-in federal bias
• Compelled in many jurisdictions
• Alternatives frequently require special state
  legislation and, where federalized, sometimes
  federal exemptions

16
2.1 Selecting a Project Delivery Plan Options

• 2.1.2 Traditional Funding Using Design-Build and
  Public Operations
• Utah I-15
• Colorado T-REX
• Minnesota Hiawatha LRT and Highway Program
• Reno ReTRAC
• Pasadena Gold Line LRT

17
2.1 Selecting a Project Delivery Plan Options

• 2.1.3 Traditional Funding using DBOM
• River Line LRT
• Hudson-Bergen LRT

18
2.1 Selecting a Project Delivery Plan Options

• 2.1.4 Dedicated Revenue Stream using DBOM or DBM
• Massachusetts Route 3 North
• Seattle Monorail Project

19
2.1 Selecting a Project Delivery Plan Options

• 2.1.5 Project Revenue Financing Using
  Design-Build and Public Operations
• TCA San Joaquin Hills and Eastern
• TxDOT SH 130 (Private Capital Maintenance)
• Colorado E-470
• WSDOT Tacoma Narrows Bridge (GO Bonds sized to
  match anticipated toll revenues)

20
2.1 Selecting a Project Delivery Plan Options

• 2.1.6 Project Revenue Financing Using Non-Profit
  Concession
• Las Vegas Monorail
• SCDOT - Greenville Connector
• VDOT - Pocahontas Parkway

21
2.1 Selecting A Project Delivery Plan Options

• 2.1.7 Project Revenue Financing Using For-Profit
  Concession
• Caltrans - CPTC SR-91 (pre-acquisition)
• Caltrans - CTV SR-125
• VDOT - Dulles Greenway
• Provinance of Ontario - Toronto Highway 407
• TxDOT Cintra/Zachry SH 130 (5-6) (under
  negotiation)
• TxDOT - I-635, SH 121, I-820/SH 183 (under
  procurement)

22
2.2 Inputs and Outputs for Decision-Making
2.2.2 OUTPUTS
2.2.1 INPUTS
ContractStructure
ProjectCharacteristics
SponsorPriorities
Competition Structure
23
2.2.1 Input Project Characteristics

• How mature are
• Project definition and configuration
• Environmental process
• Regulatory approvals
• Engineering and technical investigations
• ROW acquisitions
• Finance plan
• Traffic and revenue studies?
• How neatly packaged and ready for hard
  proposals/bids is a project?
• Has project progressed to point where private
  sector is willing to invest sweat equity and
  cost-share to help owner achieve feasibility?

24
2.2.1 Input Sponsor Priorities

• Congestion relief?
• Reduce impact to public?
• Encourage innovation?
• Accelerate project delivery?
• Leverage limited traditional government funding?

25
2.2.2 Output Contract Structure

• Pre-Development Agreement v. Implementation
  Agreement
• Design-Build
• DBM or DBOM
• Concession
• Private Equity with return on investment
• Tax-exempt financing with fees for services

26
2.2.2 Output Competition Structure

• Initiating the Competition
• Solicitating Propsals
• Accepting unsolicited
• Call for projects v. project - specific RFPs
• Submittal Requirements and Evaluation Options
• Qualifications-Based Proposal with
  Development/Financing Plan
• Proposals include plan of development and plan of
  finance
• Use where one or more major project elements are
  uncertain
• Typically procured and executed before record of
  decision on environmental impact assessment

27
2.2.2 Output Competition Structure

• Qualifications / Hard Pricing / Firm Financing
  Proposals
• Proposal includes definitive pricing and/or firm
  financing commitment
• Financial closing and notice to proceed expected
  within short time after selection
• Typically requires defined project with
  reasonable certainty and reasonably matured
  pre-development work
• May be procured and/or executed before or after
  record of decision on environmental impact
  assessment
• Best value (price and other factors) selection
• Results in concession or DB/DBOM

28
2.2.2 Output Competition Structure

• Qualifications-based Proposals with Conditional
  Financing
• Proposals include conditional financing
  commitment
• Sufficient project definition and maturity of
  pre-development work to enable a conditional
  financing commitment
• Developer completes pre-development work to
  achieve financial closing
• May be procured before or after record of
  decision on environmental impact assessment
• Best value selection
• Results in concession

29
2.3 Making the Decisions
HOW ARE PROJECTS IDENTIFIED?
DOT Selects
Private Sector Selects
DOT Issues Call for Project Proposals and
Qualifications
DOT Accepts Unsolicited Proposals
DOT Selects Projects
PATH 1
PATH 3
PATH 2
Paths are not mutually exclusive!
30

DOT Adopts Unsolicited Proposal Guidelines
Private consortium submits unsolicited proposal
Evaluate project against initial screening
criteria
Request supplemental information as needed
NO
Notify consortium
Does DOT want to pursue?
YES
(Continued on next slide)
31

Select Non-Packaged Project
Select Packaged Project
YES
Best Value
How is proposer selected?
Packaged Project
Qualifications
Request for competing proposals
Request for competing proposals
Qualifications based selection
Best value selection
Negotiate
Negotiate
32

Call for Project Proposals and Qualifications
Receive No Overlapping Projects
Receive Overlapping Projects
Request supplemental proposal information
YES
Request supplemental proposal information?
NO
Select projects based on project, qualifications,
development plan, financing plan
(no hard price)
One project Sequential projects Parallel projects
How many projects?
Negotiate
33

DOT Selects Projects
One project Sequential projects Parallel projects
How many projects?
How are proposers selected?
Qualifications, Development Plan, Financing Plan
Best Value
Package projects(s) engineering, environmental,
etc.
RFQ
Shortlist
RFP
Select based on best value (including hard price)
Negotiate
34
3.0 Implementing the Project Delivery Plan
35
4.0 Private Concessions A New Frontier?

• No!
• Extensive International Experience
• Some U.S. Experience

36
4.0 Overview of Concessions

• 4.1 Nomenclature
• 4.2 Key Contractual Elements
• 4.3 Concession Market

37
4.1 Nomenclature

• Concession
• Franchise
• Public-Private Partnership (P3)
• Build-Operate-Transfer (BOT)
• Build-Transfer-Operate (BTO)
• Design-Build-Finance-Operate (DBFO)
• Private Finance Initiative (PFI)

38
4.2 Key Contractual Elements

• Developer takes over project
• Completes development and operates and maintains
• Meets DOT standard
• Specified maximum term/duration
• Developer to provide Project financing with
  limited/no DOT financial commitment
• Developer entitled to collect project revenues
  subject to one or more limitations
• Direct Toll Rate Caps
• Indirect ROI/ROE Caps

39
4.2 Key Contractual Elements

• If revenue positive project, revenue sharing
  and/or upfront payment to DOT
• Developer obligation to add capacity as LOS
  degrades or based on other measure/time
• DOT right to terminate for convenience with
  payment to Developer based upon pre-determined
  formula
• Extent (if any) to which DOT should compensate
  Developer for unanticipated economic effects on
  project revenues

40
4.3 Concession Market

• 4.3.1 Examples Where Used
• 4.3.2 Examples of Market Players
• 4.3.3 U.S. Market Trends
• 4.3.4 Role of Traditional U.S. Design-Builders

41
4.3.1 Examples Where Used

• US
• SR 125 (CA)
• SR 91 (CA)
• Dulles Greenway (VA)
• Canada
• 407 (Toronto)
• Sea to Sky Highway (BC) non-tolled highway
• UK
• M6 Toll
• N4-N6 Kinnegad-Kilcock (Ireland)
• Shadow Toll Projects
• Australia
• M2/M4/M5 Motorways
• M7 Western Sydney Orbital

42
4.3.1 Examples Where Used

• Europe
• A86 (Paris ring road)
• A28 (France)
• Radial-4 (Spain)
• Vasco de Gama Bridge (Portugal)
• South America
• Maipo (Chile)
• Talca-Chillan (Chile)
• Asia/Middle East
• Cross-Israel Highway (Highway 6)
• Manila North Tollway

43
4.3.2 Examples of Market Players

• Australia
• Macquarie
• Transurban
• Spain
• Cintra/Ferrovial
• Dragados
• Abengoa
• France
• Vinci
• Egis

44
4.3.2 Examples of Market Players

• UK
• AMEC
• Balfour Beatty
• Germany
• Hochtief
• Bilfinger Berger
• Hong Kong
• Cheung Kong
• Sweden
• Skanska

45
4.3.3 U.S. Market Trends

• Current U.S. tax laws generally preclude mixing
  of tax exempt financing with private equity/debt
  or revenue sharing
• Over the last 5-8 years, most US highway
  agencies/advisors have favored the tax-exempt
  markets as the most efficient tool for financing
  infrastructure
• Result Less U.S. concessions

46
4.3.3 U.S. Market Trends

• Recent developments suggest a larger role for the
  private finance/concession model
• SR 125 (CA) and Detroit-Windsor Tunnel purchases
  by Macquarie
• Chicago Skyway Lease by between City of Chicago
  and Cintra
• Private Activity Bonds (PABs) included within
  current reauthorization bill would allow for up
  to 15 billion in tax exempt-financing to be
  mixed with private equity
• Trans-Texas Corridor 35 Agreement between TxDOT
  and Cintra Zachry

47
4.3.4 Role of Traditional U.S. Design-Builders
48
4.3.3 Role of Traditional U.S. Design-Builders

• Typical DB business model design, build, get
  paid and leave
• Bringing significant , retaining
  responsibility/risk during long-term OM period
  poses challenges to them
• In concession, still have critical role, but less
  likely to lead teams unless they restructure
  their business model
• Concessionaire/Developer will award a DB contract
  to DB contractor team

49
Contact

• Geoffrey S. YaremaNossaman Guthner Knox
  Elliott LLP
• 445 S. Figueroa Street
• Thirty-First FloorLos Angeles, CA 90071
• [phone]
• gyarema_at_nossaman.com
• www.nossaman.com