1. Joseph L. Sullivan Hawkins Delafield & Wood LLP New York, NY Urban Water Council Water System Disaster Recovery Workshop - June 28-29, 2006 Biloxi, Mississippi HARNESSING THE PRIVATE SECTOR FOR RECOVERY: PUBLIC-PRIVATE PARTNERSHIPS AND PRIVATE ACTIVITY BONDS UNDER THE GULF OPPORTUNITY ZONE ACT Hawkin s Delafield & Wood LLP

2. 2 OVERVIEW Public Works Financing and Contracting Generally Gulf Opportunity Zone Act Public-Private Partnership Considerations Alternative Project Delivery Considerations

3. 3 HAWKINS PERSPECTIVE Public/Private Partnership Transaction Attorneys Top Tier Public Finance Firm Top Tier Public Contracts and Procurement Firm Public Project Finance Experience Water, Wastewater, Solid Waste, Power Sectors Privately Owned and Privately Financed Public Use Projects

4. PUBLIC WORKS FINANCING AND CONTRACTING GENERALLY

5. 5 TRADITIONAL PUBLIC WORKS FINANCING AND CONTRACTING Bid-build contracting Public operations Governmental obligation municipal bonds (revenue or tax secured) Projects are publicly owned Design, construction, operation and financing all separate functions

6. 6 ALTERNATIVE PUBLIC WORKS FINANCING AND CONTRACTING Design-build Design-build-operate Design-build-finance-operate Design-build-own-finance-operate

7. 7 PRIVATE ACTIVITY BONDS Private financing, ownership or leasing creates private activity bonds (“PAB’s”) PAB’s are not tax-exempt Exception: e xempt facility bonds Exempt facility bonds include water and wastewater projects (as well as housing) Exempt facility bonds subject to general state “volume cap” Uncertain availability of tax-exempt financing for water and wastewater PAB project

8. GULF OPPORTUNITY ZONE ACT

9. 9 QUALIFIED GULF OPPORTUNITY ZONE BONDS (1) “GO Zone” Bonds may be issued by Alabama, Louisiana or Mississippi (each a “GO Zone State”) or their political subdivisions Applicability to water and wastewater projects qualified project costs include costs of acquisition, construction, reconstruction or renovation of “public utility property” located in Gulf Opportunity Zone Standard PAB exempt facility “volume cap” restrictions do not apply But, new limit does apply ($2,500 x state population) AL: app. $11.4B; LA: app. $11.3B; MS: app. $7.3B

10. 10 QUALIFIED GULF OPPORTUNITY ZONE BONDS (2) GO Zone Bonds can be used for any capital purpose, public or private Exceptions No moveable fixtures or equipment can be financed No bond proceeds may be used for property specified in Sec. 144(c)(6)(B) (e.g., golf course, liquor store or gambling facility) Therefore, anticipate significant competition for cap among range of purposes

11. PUBLIC-PRIVATE PARTNERSHIP CONSIDERATIONS

12. 12 PRIVATE OWNERSHIP AND FINANCING Pros: Eases burden on municipal debt capacity Transfers risk of performance/project efficacy Competitive proposal-based procurement Cons: Loss of residual value of the asset Less public control Private ownership of an essential public asset is unusual Double the transactional complexity

13. 13 PRIVATE FINANCING AND PUBLIC OWNERSHIP Private financing does not necessarily require private ownership and loss of residual value Still permits private equity investment and assumption of municipal credit risk Still permits public control

14. ALTERNATIVE PROJECT DELIVERY CONSIDERATIONS

15. 15 LEGAL AUTHORITY FOR ALTERNATIVE PROJECT DELIVERY Limited legal authority in Louisiana and Mississippi No apparent authority for alternative project delivery in Alabama Options: Legislative action Concede project ownership to allow for competitive proposal based procurement with public oversight

16. 16 BENEFITS OF ALTERNATIVE PROJECT DELIVERY “Faster, Better, Cheaper” Speed of project development Guaranteed performance and regulatory compliance Substantial risk transfer 10-25% savings against “benchmark” Greater life cycle cost focus

17. 17 COST SAVINGS (DBO V. BB “BASELINE”) Owner TypeSavings Fulton County, GA WW$30M Stockton, CA WW$100M Lynn, MA WW$100M Cranston, RI WW$50M Seattle, WA W$75M Phoenix, AZ W$25M San Diego, CAW$40M SJ Capistrano, CA W$15M

18. 18 UNIFIED PROJECT RESPONSIBILITY Traditional design-bid-build (BB) trifurcates responsibility DB, DBO and ODB unify responsibility Comprehensive asset development and management under a single contract One contractor deals with all subs and equipment suppliers Avoids the cost and risk of disputes between the designer, builder and operator Easier administration

19. 19 DBO SAVINGS Source of savings Core competency Competition as to design; operator-driven Competition as to operation Cooperative relationship between designer, builder and operator Smaller contingency allowances Bulk consumables buying power Broader technology access Preventive v. breakdown maintenance Optimized balance between capital and operating costs Excessive redundancy eliminated

20. 20 RISKS RETAINED Owner’s risk under any delivery method Changes in law Force majeure Unusual raw water or influent parameters Pre-existing site and environmental conditions Buried infrastructure conditions General price inflation

21. 21 RISK TRANSFER (1) Design and Construction Risks Design liability Completion risk (delay and efficacy) Construction cost overruns Disputes between designer and builder Securing patents and licenses

22. 22 RISK TRANSFER (2) Operation and Maintenance Risks O&M cost overruns Regulatory compliance Capital maintenance Technological obsolescence Excess electricity consumption Market conditions (e.g., mkt. conditions affecting sludge disposal) Labor relations

23. 23 RISK TRANSFER (3) Permitting Risks Contractor design and technology control Permit terms and conditions Permit delays Permit non-issuance Atypical regulatory actions

24. 24 PROCUREMENT PROCESS RFQ RFP Vendor due diligence Vendor proposals Evaluation Selection (best value) Negotiation Authorization Execution

25. 25 INGREDIENTS FOR SUCCESS Initial strategic planning Thoughtful, well developed RFQ/RFP Creative and responsive proposals Clear, comprehensive contract Full proposer due diligence opportunity Fair and balanced risk allocation Outstanding leadership

26. 26 CONCLUSIONS GO Zone Act provides for greater opportunity to tap into private sector for the financing of water and wastewater projects GO Zone Bonds provide a useful mechanism for private, tax-exempt financing without conceding private ownership of an essential public asset Further consideration of alternative project delivery legal authority would be valuable Private ownership may be appropriate to enable the procurement of a project on a competitive proposal basis with public oversight

27. 27 FURTHER INFORMATION: Joseph L. Sullivan Hawkins Delafield & Wood LLP One Chase Manhattan Plaza New York, NY 10005 (212) 820-9513 jsullivan@hawkins.com jsullivan@hawkins.com www.hawkins.com