Public Private Partnership 101 Part 2 Jonathan L. Gifford, Ph.D. National Governors Association State Planning Retreat on Public Private Partnerships – Arkansas October 7-8,

OUTLINE 1.Evidence of P3 impacts 2.What happens when things go wrong? –Renegotiations, Buy-outs and Transfers –Defaults, & Bankruptcies 2

~$10B in projects in last 4 years opened on or ahead of schedule 3 EVIDENCE Recent Successes ProjectCost*Successes I-495 Express Lanes (VA)$2.0Bopened ahead of schedule (2011) A-30 (Montreal),$1.7Bopened on schedule (2012) South Fraser Perimeter Road (British Columbia) $696Mopened ahead of schedule (2013) I-595 Managed Lanes (FL) $1.8Bopened on schedule (2014) I-95 Express Lanes (VA)$940Mopened ahead of schedule (2014) LBJ Expressway (TX)$2.6Bopened ahead of schedule (2015) * Public Works Financing P3 Projects Database

P3 Savings – Ex Ante Estimates Value for money (VfM) = how much $$ (if any) is saved through P3 versus conventional approach 4 EVIDENCE Retained risk by public sector Base cost Competitive neutrality Retained risk by public sector Cost of service payments (revenue stream) Net present value of cost Public Sector ComparatorP3 Model Value for Money Risk transferred to private sector Source: Grimsey, Lewis 2005, Morallos, Amekudzi 2008, Siemiatycki, Farooqi 2012

Review of 7 VfM Studies Project% Savings with P3$ Savings with P3 Presidio Parkway Phase II (CA)23.0%$147M I-595 Lanes (FL)4.2%$78M Port of Miami Tunnel (FL)27.5%$398M I-4 Ultimate (FL)34.0 – 35.0%$1.3B-$1.4B Brent Spence Bridge (OH)-- I-64 Lanes (VA)3.0%$89M I-85 Lanes (VA)10.0%$87M 5 EVIDENCE Source: Adapted from Kweun, Jeong Yun, Porter, K. Wheeler, and Jonathan L. Gifford. (2015) “A comparative analysis of value for money studies: highway public-private partnerships projects in the U.S.” (mimeo).

George Mason P3 Evidence Project Scope – What kinds of evidence are useful to decision makers about P3 impacts? – What kinds of evidence are currently being collected in the U.S. and elsewhere? – What is the gap between evidence needs and current practices – and how to close it with research, education & training. 6 EVIDENCE

Understanding renegotiations and buy-outs 7 RENEGOTIATIONS Renegotitations Modifications of the conditions of the P3 contractual agreements Buy-outs and transfers Acquisitions or transfer of the ownership of the Special Purpose Vehicle to a third-company Relevance Citizens concern with rent seeking and opportunism, mostly from the private sector

Renegotiations: 4 case studies under analysis 8 RENEGOTIATIONS State P3 Highways* P3 Highways with renegotiations* Cases under Analysis Alaska1-- California421 Colorado21- Florida131- Georgia11- Indiana21- Massachusetts1-- Michigan11- New Mexico11- North Carolina1-- South Carolina11- Texas104- Virginia653 TOTAL45186 California – SR 91 Express Lanes (SR19) Virginia – Dulles Greenway (DG) – Pocahontas Parkway (PP) – Downtown Tunnel / Midtown Tunnel / MLK Extension or Elizabeth River Crossings (ERC) *As of May 2015 Source: Public Works Financing and InfraDeals

SR 91 Express Lanes (SR91) 9 Los Angeles, California ConcessionaireLevel 3 Communications, Vinci Autoroute, & Granite Construction Financial close1993 Facility open1995 Revenue sourceToll Contract typeDBFOM Original cost (US$)88.3 million (1990) Project attribute10 miles (16.1km) road Renegotiations 2003: OCTA purchases the project for $341.5M to eliminate non-compete clause, after attempts to breach the contract by the public sector

Dulles Greenway (DG) 10 Loudoun, Virginia Concessionaire Shenandoah Group, Kellogg Brown & Root Financial close1993 Facility Open1995 Revenue sourceToll Contract typeDBFOM Original cost (US$)350 million (1993) Project attribute14 miles (22.5km) bridge Renegotiations 1995: Owners defaulted on debt. 1997: Tolls increased and speed limit increased 1999: Debt restructured. Project modified (from 2*2 lanes to 3*3 lanes) 2001: Extension of concession period (+20 years) 2004: Change in tolls (variable peak and discounted off-peak point-to-point rates) 2005: Macquarie Infrastructure Group (MIG) buys it 2013: Mechanism to define tolls is changed (highest: CPI+1%, real GDP, or 2.8%.)

VA SR895 Pocahontas Pkwy (PP) 11 Richmond, Virginia ConcessionaireFluor Daniel & Morrison Knudsen Financial close1998 Facility Open2002 Revenue sourceToll Contract typeDBFOM Original cost (US$)381 million (1998) Project attribute8.8 miles (14km) bridge Renegotiations 2006: Transurban USA buys it, concession period is extended to 99 years and investment increases: 1.6 mile, four-lane road and electronic tolling 2012: Transurban USA writes off equity but operation continues 2013: PP is not insolvent or in bankruptcy. Plans to transfer it to lenders. 2014: Transurban USA transfers operations to DBi Services

Downtown Tunnel/Midtown Tunnel/MLK Extension or Elizabeth River Crossings (ERC) 12 Norfolk, Virginia ConcessionaireSkanska & Macquiare Financial close2012 Facility OpenExpected 2017 Revenue sourceToll Contract typeDBFOM Original cost (US$)2,089 million (2012) Constructed Length2.2 miles (3.5km) bridge/tunnel Renegotiations 2012: toll delayed in exchange for $100 million 2014: toll decrease in exchange for $82.5 million 2015: removal of tolls for MLK Extension for $78 million*

Understanding Bankruptcy Default Situation when the SPV stops paying its debt service If the firm continues in this situation it may lead to two potential outcomes: debt restructuring or foreclosure Debt Restructuring When, after debt service is not paid, the debtor acts to pay debt, through the selling of assets or through the restructuring of the debt. Foreclosure or Liquidation When, after debt service is not paid, the lender acts to sell the asset to receive its money back 13 BANKRUPTCY

Operation began:2000 Revenue sourceTolls Contract typeDBFOM Original cost$85 million Project attribute21-mile road Year bankruptcy filed2004 Bankruptcy filer John Hancock Life Insurance and New York Life Insurance LawTexas Property Code Title 5 In brief: causes & aftermath of bankruptcy Cause: Demand lower than projected Actions: Sold in auction for $12 million to John Hancock Financial Services Inc. New owner holds-up TxDOT and gets $20 million for selling the road Current Status: - Toll road is open - Road is currently managed publicly by TxDOT 14 Texas Camino Colombia Bypass

Southern Connector Operation began:2001 Revenue sourceTolls Contract typeDBF Original cost$191 million Project attribute16-mile road Year bankruptcy filed2010 Bankruptcy filerConnector 2000 Association LawU.S. Bankruptcy Code Chapter 9 In brief: causes & aftermath of bankruptcy Cause: -Demand lower than projected--Demand drops during Great Recession -No-skin-in-the-game (63-20 nonprofit corporation) Actions: Reorganization plan approved in Aug Debt is restructured -The $200 million bonds are replaced with a new issue of $150 million bonds Current Status: -Tolls are increased -Toll road is open 15 South Carolina

South Bay Expressway (SBX) 16 San Diego, California Operation began:2007 Revenue sourceTolls Contract typeDBFOM Original cost$635 million Project attribute9.2-mile road Year bankruptcy filed2010 Bankruptcy filer California Transportation Ventures, Inc. LawU.S. Bankruptcy Code Chapter 11 In brief: causes & aftermath of bankruptcy Cause: -Environmental permit delay & community opposition -Demand lower than projected--Demand drops due to the Great Recession Actions: -Purchased by San Diego Association of Governments for $341.5m in Dec Current Status: -Toll road is open -Tolls were decreased

Foley Beach Expressway Operation began:1999 Revenue sourceTolls Contract typeDBFOM Original cost$44 million Project attribute1-mile bridge + 5 mile road Year bankruptcy filed2013 Bankruptcy filerAmerican Roads, LLC LawU.S. Bankruptcy Code Chapter 11 In brief: causes & aftermath of bankruptcy Cause: -Demand lower than projected--Demand drops due to the Great Recession -Parent company went bankrupt as the City of Detroit filed for chapter 9 bankruptcy, where it operated a tunnel. Actions: -American Roads LLC changes hands, from Alinda Capital Partners to Syncora, under allegations of fraudulent traffic and revenue studies Current Status: -Toll road is open 17 Alabama

Indiana Toll Road (ITR) 18 Indiana Operation began:2006 Revenue sourceTolls Contract typeDBFOM + OM Original cost$3.8 billion Project attribute157-mile road Year bankruptcy filed2014 Bankruptcy filerITR Concession Co. LLC LawU.S. Bankruptcy Code Chapter 11 In brief: causes & aftermath of bankruptcy Cause: -Great recession decreases interest rates playing against interest-rate swaps -Demand lower than projected--Demand drops during Great Recession Actions: -Purchased by IFM Investors for $5.72b in March 2015 Current Status: -Toll road is open

What is evidence telling us “when things go wrong”? (1) Concerns are not fully validated. – Exogenous shocks and contract complexity main culprits – Losses concentrate in the private sector – Minimal public sector losses compared to Europe and Latin America Bankruptcy legislation affects incentives. – Contracts are clear regarding how risks are shared. – Chapter 9 and 11 U.S. vs others: private sector needs to keep operating the facilities U.S. vs others: procedure favors restructuring to continue operations – Implication: costs of not reaching a deal accrues to equity holder 19

What is evidence telling us “when things go wrong”? (2) 20 Private sector is internalizing most of the financial losses. – Only in SBX we see gov. money lost (TIFIA loan) – TIFIA´s “springing lien” protected the public sector Active capital market increases options. – High demand for different levels of risk aversion – Implication: monopoly power of the incumbent private sector diminishes

Visit us at: p3policy.gmu.edup3policy.gmu.edu Jonathan L. Gifford, Ph.D. / +1(703) Expanding the evidence base Enhancing agency capacity Educating the workforce and community about P3s

References Grimsey, D., and M. K. Lewis. Are Public Private Partnerships Value for Money?: Evaluating Alternative Approaches and Comparing Academic and Practitioner Views. Accounting Forum, Vol. 29, No. 4, 2005, pp Kweun, Jeong Yun, Porter, K. Wheeler, and Jonathan L. Gifford. (2015) “A comparative analysis of value for money studies: highway public-private partnerships projects in the U.S.” (mimeo). Morallos, D., A. Amekudzi, C. Ross, and M. Meyer. Value for Money Analysis in U.S. Transportation Public-Private Partnerships. Transportation Research Record, Vol. 2115, 2009, pp Siemiatycki, M., and N. Farooqi. Value for Money and Risk in Public–private Partnerships. Journal of the American Planning Association, Vol. 78, No. 3, 2012, pp