PP U NIT 6 T HE O VERSIGHT AND A DMINISTRATION OF P UBLIC F UNDS Private Equity Financing for Public Capital Assets

PP U NIT 6 T HE O VERSIGHT AND A DMINISTRATION OF P UBLIC F UNDS Private Equity Financing for Public Capital Assets Since the 1980s, there has been worldwide growth in various forms of public-private- partnerships to attract private equity investment in public infrastructure Up until the 1980s, really the only public-private partnerships that existed were found in the electric power generation industry. There are some “hallmarks” of these types of “public-private” partnerships: 1. Private company must invest its own equity (“Skin in the game”) 2. There is a continuous public benefit 3. At the end of the day, the improvement is owned by the public

PP U NIT 6 T HE O VERSIGHT AND A DMINISTRATION OF P UBLIC F UNDS Private Equity Financing for Public Capital Assets Concession Contracting: This is the process the government will go through to award a contract to a private company to operate what the government considers a “public service” - It involves the government awarding a contract to one or more companies - For a fixed period of time - Usually for a fixed – or controlled – cost to the public for the service

PP U NIT 6 T HE O VERSIGHT AND A DMINISTRATION OF P UBLIC F UNDS Private Equity Financing for Public Capital Assets Concession Contracting: Your author identifies three different types of concessions 1. “Operating concession” – The private contractor both constructs and operates the new facility 2. “Operation of Existing System concession” – the private contractor is responsible for operating the system, as well as fixing and expanding the system 3. “Greenfield concession” – the private contractor is responsible for constructing and operating the new facility plus the private contractor is responsible for providing equity and financing the project.

PP U NIT 6 T HE O VERSIGHT AND A DMINISTRATION OF P UBLIC F UNDS Private Equity Financing for Public Capital Assets Build-Operate-Transfer (BOT) Your basic Operating Concession contract The government is responsible for 100% of the financing The private contractor is responsible for constructing and operating the asset PROS: CONS: 1. Financing guaranteed so asset is built 2. Public owns the asset 3. Public can take over operation at end of term 1. All of the risk on the public 2. If asset can’t be managed by contractor, liability to the public 3. No guaranteed revenue unless profit realized “Take-or pay”

PP U NIT 6 T HE O VERSIGHT AND A DMINISTRATION OF P UBLIC F UNDS Private Equity Financing for Public Capital Assets Build-Own-Operate-Transfer (BOOT) The private contractor, for a period of time, actually owns the asset The private contractor is responsible for constructing and operating the asset PROS: CONS: 1. “Skin in the game” 2. Not all of the risk is on the public 3. Negotiated price at end of contract term 1. Public does not own asset 2. No guarantee of financing 3. Price at the end of the term is not a “salvage price” Sale to the public at the end of the contract term for a negotiated price Private sector financing – not all public sector financing

PP U NIT 6 T HE O VERSIGHT AND A DMINISTRATION OF P UBLIC F UNDS Private Equity Financing for Public Capital Assets Divestiture/Privatization This is when the government decides to “dump” an asset for any variety of reasons: 1. The asset is beyond repair; 2. The asset does not pencil out anymore 3. The asset is no longer what the public views as “the proper role of government”

PP U NIT 6 T HE O VERSIGHT AND A DMINISTRATION OF P UBLIC F UNDS Private Equity Financing for Public Capital Assets Divestiture/Privatization There is a lot of controversy involved with the sale of a public asset 1. Is the public getting “fair market value” for the asset? 2. Is this asset still “valued” by the public 3. Is the asset still considered to be a part of an essential government function? 4. In the wake of 9/11, are there national security concerns?

PP U NIT 6 T HE O VERSIGHT AND A DMINISTRATION OF P UBLIC F UNDS Private Equity Financing for Public Capital Assets Q & A