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

Public Private Partnerships (P3) 2

What is P3? 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 P3’s necessary, important and desirable?  Crying need – decrepit infrastructure  Capital available and seeking long term stable returns  Other countries investing heavily in infrastructure in a systematic and significant way  International infrastructure investment presents a competitive threat to the U.S. 4

Funding & Financing P3s Source of payment in P3 projects typically comprise some form of user fees (e.g., tolls) or availability payments, and to a lesser extent, lease 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 6

Benefits of P3 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 posistion, sharing in future profits 7

Benefits of P3 Generally provides positive and consistent customer experience Allows public entity to focus on outcomes rather than means by which outcomes are achieved 8

P3 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 9

P3 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; P3’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 P3’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 10

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 – P3 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 P3 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 11

The Slow Adoption of P3 in the United States 12

History of P3 in the United States The typical concession project is where private firms hold management and construction responsibilities, but no ownership Those rights are transferred back to the state after a fixed period of time 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 P3 prospects very carefully Canada P3 experience relevant here 13

Political Environment The federal government is not a major P3 participant The expansion of P3s is significantly hindered by the lack of organized structure and clear and comprehensive regulatory framework at local, state, and national levels –Virginia is notable exception 14

Statutory Environment Legislations must set clear and objective criteria that private providers must meet Establish a quality assurance system to ensure criteria are met States should consider including legislative criteria that are tied to specific “public” goals, such as non- discrimination, accessibility, safety, cost control, and due process 15

Where and Why has P3 Worked? P3s for public transit projects –Appropriate cost benefit analysis –Usually envision constant and wide open public use, with related expectation and risk –Defined processes to ensure timely authorization and implementation –Integrate these features into a framework that provides some degree of certainty for private sector –Require expert design and construction –Require around-the-clock operation and maintenance for their life-cycle –Public can minimize its potential risk in the design, construction, and delivery phase by contracting them to a private party –Through contracting-out the maintenance, public can turn its future cost into a set of known payments 16

Miami’s Undersea Tunnel Undersea tunnel connecting Miami’s sea port and major highways Guaranteed revenue stream: One concessionaire is handling the entire operation –Contingent on construction, availability, and service quality milestones Stakeholder support: Public obligation is $670 million 17

Florida’s I-595 Guaranteed revenue stream: Florida first used availability-based P3 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” 18

I-495 Guaranteed revenue stream: 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 Partners: Joint venture between Fluor and Transurban Private Activity Bond combined with TIFIA financing –$1 tax dollar = $4 in improvements 19

I-4 Ultimate Includes design, construction, financing, maintenance, and operation for the redevelopment if a 21-mile stretch of I-4 in Orange and Seminole Counties of Florida Guaranteed revenue stream: Dynamic tolling based on real-time traffic conditions Partners: Concession team includes key subcontractors, including project designer, builder and operator, who may or may not be investors in concessionaire Accountability: FDOT Construction Oversight Services (COS) to conduct regular audits of processes, procedures, materials and workmanship 20

P3 as a Tool for Social Infrastructure 21

Benefits of P3 for Social Infrastructure One of the primary arguments for private investment in social infrastructure is that competition in the marketplace tends to increase the quality and effectiveness of the service –The contractual arrangement of the P3 allows for governments to select providers through an open bidding process –Additionally, private entities are generally not subject to the same hiring restrictions as public employers; this allows more flexibility to attract the most qualified staff, resulting in higher quality services 22

Challenges of P3 in the Social Infrastructure Context Because of the public nature of these resources, there are a variety of different stakeholders; making these projects more complex that transportation P3s Turning responsibility of these resources over to private actors can raise issues of political fairness, stability, and accountability Commenters suggest here is the potential risk that the quality and accessibility of essential services may be compromised 23

Challenges of P3 in the Social Infrastructure Context Some commenters have suggested that the drive to meet standards at the lowest possible cost could incentivize private service providers to reduce or limit access to necessary services 24

Governor George Deukmejian Courthouse, Long beach 25

Governor George Deukmejian Courthouse First major civic building in in the U.S. to be delivered through P3 The courthouse was expressely authorized by the state’s Budget Act of 2007 Represented the California judiciary’s first “Performance-Based Infrastructure” (“PBI”) project The effort was a partnership between the State of California; Long Beach Judicial Partners LLC(“LBJP”); Clark Design/Build of California; and AECOM 26

Governor George Deukmejian Courthouse Under the terms of the agreement with LBJP the state would pay nothing until the building is occupied Thereafter the state would pay an annual service fee of $50 million –The fee includes the costs to design and construct the building, finance the project, the cost of operations, and the replacement of building equipment as it reaches the end of its useful life 27

Governor George Deukmejian Courthouse However, the annual fee may be adjusted based on performance –Specifically, the agreement contains a fee abatement in the event that adequate court space or functionality unavailable as needed Expansion room for additional courtrooms will be leased to the Los Angeles County for the next fifteen years, with rental revenue going to the state 28

Success of the Governor George Deukmejian Courthouse Due in large part to the agreement’s incentive structure, construction of the facility came in under budget and ahead of schedule A second key factor in its success was the engagement and oversight of the state, though the Administrative Office of the Courts (“AOC”) –The AOC took the lead in the procurement process Another key factor was the completion of a VfM analysis, which projected the state would save $26 Million through the Performance Based Infrastructure (3.5% of the total project value) 29

The Path Forward There is a great need for P3 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 Sates to create a robust P3 market in the near future These models support not only traditional applications of P3 such as transportation projects, but also “next generation” applications such as social infrastructure 30