Building Michigan Delivering Municipal Infrastructure through P3 June 12, 2014 Southfield, Michigan

2 Public-Private-Partnerships for Social Infrastructure

The Infrastructure Challenge 3 © 2014 Huron Consulting Group. All Rights Reserved. Global infrastructure investment needs by 2030 estimated at $57-$67 Trillion (OECD / WEF) US infrastructure needs estimated at over $7 Trillion (by 2030), just to keep pace with GDP It is expected that over 50% of these investments will not be able to be funded by public authorities in a timely manner (fiscal restraints, budget limitations, debt ceilings, repayment capacity, etc.). Standard & Poor’s estimates that the majority of public infrastructure spending will go to energy and transportation, putting other sectors at risk. With a ASCE rating of “D”, Michigan has extensive infrastructure investment needs in all sectors: $8.9 Billion for schools $15 Billion for water and wastewater systems Between $1.3-$2 Billion per year shortfall in transportation infrastructure funding Unmet need of $272 million related to government- funded parks across the state Unknown investment to repair and expand other infrastructure (buildings, dams, student housing, etc.) Global Infrastructure Deficit Michigan Investment Needs To bridge the funding gap, as well as to ensure that infrastructure and services are delivered as efficiently and cost- effectively as possible, public authorities are turning to alternative delivery and financing methods, such as public-private- partnerships (P3).

The P3 Promise 4 © 2014 Huron Consulting Group. All Rights Reserved. There is no universal definition of P3, but generally speaking P3 refer to any of a number of contracting arrangement involving risk-sharing, bundled services, and an asset life-cycle focus. Contracts are differentiated by risk allocation and scope of services:

The P3 Promise 5 © 2014 Huron Consulting Group. All Rights Reserved.

The P3 Promise 6 © 2014 Huron Consulting Group. All Rights Reserved.

The P3 Promise 7 © 2014 Huron Consulting Group. All Rights Reserved. There is no universal definition of P3, but generally speaking P3 refer to any of a number of contracting arrangement involving risk-sharing, bundled services, and an asset life-cycle focus. Contracts are differentiated by risk allocation and scope of services: The decision as to which delivery and finance structure should be utilized for each project should be based on an objective assessment of which structure provides the best “Value-for-Money” to the public over the life of the infrastructure asset.

© 2013 Huron Consulting Group. All Rights Reserved. Proprietary & Confidential. 8 M YTH B USTER : Financing costs are NOT the only (or even the primary) factor in determining Value-for-Money Value-for-Money

9 © 2014 Huron Consulting Group. All Rights Reserved. PlanningProcurementContractingFinanceConstructionOperationsTechnologyMaintenanceWrap-Up Operating Income / Revenues  After determining the “ PUBLIC SECTOR COMPARATOR ”, the same calculation is made under alternative cases (non-100% public service provision) to evaluate the VfM for each delivery structure.  Calculation of VfM require risk- adjusted financial projections and.  VfM is a key determinant in selecting the optimal delivery and financing structure for a project (“best practice”).  Given that VfM calculation is influenced by assumptions, it is often best to have an independent party perform the analysis. Beware of the optimism bias!  VfM can and should serve as a benchmark to evaluate projects during contract execution.

Benefits of P3 10 © 2014 Huron Consulting Group. All Rights Reserved. Q UICKER D ELIVERY OF I NFRASTRUCTURE : Global experience evidences that in 70% of P3 cases, infrastructure delivered early and under budget; A DDITIVITY & A DDITIONAL C APITAL : Private financing and extended repayment periods allow public authorities to deliver more infrastructure in short term; P RIVATE S ECTOR E FFICIENCIES : An average of 20%-25% savings in long-term “life-cycle” costs of the assets; N O DELIVERY, NO PAYMENT : Performance-based payments mean governments only pay for services that are delivered to satisfaction; Q UALITY OF S ERVICE : Incentive structures and private expertise result in higher service quality; E XPANDED I NVESTMENT O PPORTUNITIES : Limited financial risk profile associated with availability payments itself to stable investment opportunities (i.e., pension funds, private sector, etc.).

P3 for Social Infrastructure 11 © 2014 Huron Consulting Group. All Rights Reserved. No universal definition of social infrastructure. Social infrastructure assets generally include schools, universities, hospitals, courts, prisons, sports facilities and community housing. With social infrastructure, often full cost- recovery is not viable. Deferred maintenance also tends to be the norm. Financing of social infrastructure can take a variety of forms: 11 ■ Rail ■ Roads ■ Airports ■ Ports ■ Education ■ Public Buildings / Facilities ■ Social housing ■ Healthcare ■ Municipal Works Transport Social Infrastructure ■ Power generation and transmission ■ Oil and gas storage and transportation ■ Water and waste management Environment & Energy ■ Defence and National Security ■ IT backbone ■ Telecommunications infrastructure ■ National Broadband Other Key asset types Key Infra Sectors

P3 Financing for Social Infrastructure 12 © 2014 Huron Consulting Group. All Rights Reserved. 12

P3 Financing for Social Infrastructure 13 © 2014 Huron Consulting Group. All Rights Reserved. Other common financial mechanisms common for social sector P3: Smart subsidies, Capital grants, Minimum revenue guarantees, Blended financing Key issues: Debt treatment of availability payments Public sponsor credit rating Demand risk

P3 in the Social Sector 14 © 2014 Huron Consulting Group. All Rights Reserved. Generally, social infrastructure assets include schools, universities, hospitals, courts, prisons, sports facilities and community housing. Local authorities are increasingly using P3s to develop their social infrastructure. Several states have adopted broad P3 enabling legislation or are amending their existing P3 legislation to allow for more of these types of projects. There are several social infrastructure projects in active procurement or under consideration, including: The Long Beach Civic Center in California. The Consolidated Justice Facility project in Indianapolis, Indiana. Miami-Dade Water and Sewer Department's water treatment plant expansion. The Multnomah County Courthouse in Oregon. Prince George County's Storm Water project in Maryland.

The Long Beach Court House 15 © 2014 Huron Consulting Group. All Rights Reserved. Proprietary & Confidential. Project Summary ► Public-Private Partnership between the Judicial Council of California’s Administrative Courts (AOC) and Long Beach Judicial Partners, a consortium of engineering and construction firms led by Meridiam Infrastructure. ► After reaching financial close in 2010, Long Beach Court House became the first availability payment social infrastructure public-private- partnership in the United States.  100% privately financed over $492 M, with a 90/10 D/E capital structure.  Project structured as 35-year lease-leaseback contract (off-balance sheet).  Availability payments upon delivery (contingent upon compliance with performance indicators).  Long Beach Judicial Partners successfully refinanced in December Consortium issued $518.5 million of 6.88% Senior Secured Notes, due December 31, 2047, via private placement.  100% privately financed over $492 M, with a 90/10 D/E capital structure.  Project structured as 35-year lease-leaseback contract (off-balance sheet).  Availability payments upon delivery (contingent upon compliance with performance indicators).  Long Beach Judicial Partners successfully refinanced in December Consortium issued $518.5 million of 6.88% Senior Secured Notes, due December 31, 2047, via private placement.  By 2008, California had developed a significant backlog of delayed capital projects related to the courthouse system. The previous courthouse building had reached a state of disrepair, and the decision was made to construct a replacement building.  Long Beach sought out a private partner for a design-build-finance-operate-maintain contract.  By 2008, California had developed a significant backlog of delayed capital projects related to the courthouse system. The previous courthouse building had reached a state of disrepair, and the decision was made to construct a replacement building.  Long Beach sought out a private partner for a design-build-finance-operate-maintain contract. Deal StructureChallenges & Approach

The Consolidated Justice Facility Project 16 © 2014 Huron Consulting Group. All Rights Reserved. Proprietary & Confidential. ► In 2013, the city of Indianapolis decided to pursue a public-private partnership for the development of the Marion County Consolidated Justice Facility, a combined court, jail, and administrative complex. ► The project is actively in procurement, and has identified three potential private teams based on statements of qualifications received earlier this year. Project Summary  The private sector will develop, finance, operate, and maintain the 20-court courthouse, 3,500 bed jail facility, and administrative complex.  Private owners will sell back the center to the county over the course of 30 years.  The city hopes to develop addition revenue from the arrangement by transferring old city buildings to private ownership through sales.  The private sector will develop, finance, operate, and maintain the 20-court courthouse, 3,500 bed jail facility, and administrative complex.  Private owners will sell back the center to the county over the course of 30 years.  The city hopes to develop addition revenue from the arrangement by transferring old city buildings to private ownership through sales.  The City of Indianapolis decided to pursue a public private partnership with the purpose of financing the complex without increasing taxes, responding to years of studies which lobbied for the construction of a new facility.  The proposed arrangement would use a design-build-finance-operate-maintain delivery model, taking advantage of private sector savings and a low-interest environment.  The City of Indianapolis decided to pursue a public private partnership with the purpose of financing the complex without increasing taxes, responding to years of studies which lobbied for the construction of a new facility.  The proposed arrangement would use a design-build-finance-operate-maintain delivery model, taking advantage of private sector savings and a low-interest environment. Deal StructureChallenges & Approach 1 2 3

17 P3 Legal Framework in Michigan

18 Forging P3 for the Local Government: What the public sector should know when considering P3 for public buildings.

Miami-Dade Water and Sewer Expansion 19 © 2014 Huron Consulting Group. All Rights Reserved. Proprietary & Confidential. ► The Miami-Dade Water and Sewer Department (WASD) has developed a new capital improvement plan for water and sewer projects. ► With the passing of House Bill 85, access to the private market for investment on infrastructure projects has been increased. Project Summary  Design, Build, Finance, Operate, Maintain delivery model will be used for the first project.  In total, the capital plan allocates more than $7B in capital projects with potential for private sector investment.  Design, Build, Finance, Operate, Maintain delivery model will be used for the first project.  In total, the capital plan allocates more than $7B in capital projects with potential for private sector investment.  As of 2013, the EPA assessed a $16.5B need for investment in drinking water within the state.  In February 2014, the Miami-Dade Water and Sewer Department received responses from 31 bidders with expressions of interest to use P3 to develop cost-effective water capital projects.  As of March 2014, the South Miami Heights water treatment plant will be the first P3 project procured.  As of 2013, the EPA assessed a $16.5B need for investment in drinking water within the state.  In February 2014, the Miami-Dade Water and Sewer Department received responses from 31 bidders with expressions of interest to use P3 to develop cost-effective water capital projects.  As of March 2014, the South Miami Heights water treatment plant will be the first P3 project procured. Deal StructureChallenges & Approach 1 2 Project Summary

Value-for-Money 20 © 2014 Huron Consulting Group. All Rights Reserved.