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How to Structure a P3 Deal July 21, 2015
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Importance of PPPs State of U.S. Infrastructure By 2020, U.S. infrastructure upgrades will require an investment of $3.6 trillion dollars with a projected funding shortfall of $1.6 trillion dollars. Current investment path would lead to loss of: $3.1 trillion in GDP, $1.1 trillion in U.S. trade value, 3.5 million jobs, $2.4 trillion in consumer spending, and 3,100 in annual personal disposable income. Infrastructure Financing Tools and Funding Mechanisms Federal, State, Municipal Government Funding (Pay as you go, or Debt) Corporate On-Balance Sheet Project Finance (Public-Private Partnerships) Evaluating Financing Options Importance of evaluating all options Tightening budgets and increased demands require innovation from traditional financing options Public-Private Partnerships present viable financing option to overcome budgetary constraints
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Evaluating Financial Sustainability of PPPs Common misperception is that PPPs are always a more expensive form of project delivery for Governments National Council for Public-Private Partnership’s (NCPPP) white paper, “Testing Tradition: Assessing the Added Value of Public-Private Partnership”, highlights that a thorough and proper evaluation of a PPP involves several analyses: Costs of deferred maintenance, repair, replacement Project timing Complete financial analysis using Value for Money assessment on Net Present Value (NPV) basis Establish Public Sector Comparator (PSC) as baseline to compare to PPP or privatized options Conduct full Life-Cycle (FLC) cost and revenue analysis for each option Value and assess transfer of risk more effectively Financing costs for projects may be higher for PPPs however FLC analysis often shows savings over time due to risk allocation, design, construction, and long-term O&M.
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PPP “Value for Money” The total cost of a PPP is often less than the Public Sector cost, as illustrated in the below Value for Money diagram 4 Public Sector CostPPP Cost [Public sector cost of project delivery] Adapted from “Testing Tradition Assessing the Added Value of Public-Private Partnerships” by National Council For Public-Private Partnerships, 2012]
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Example P3 Risk Allocation Risk CategoryPublicPrivateShared Environmental Land Acquisition Other Permits Cost Changes Completion Schedule Detailed Design Force Majeure Hazardous Materials O&M Costs Latent Defects Revenue Risk Interest Rates Equity Allocating Project Risk
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Public and Private Sector Transactions – Risk and Return 6 Expected Rate of Return Risk to Investor Tax- Exempt Debt Taxable Debt Mezz Debt Preferred or Tax Equity “Spread” 100% Recourse to Government Private Sector Transaction Public Sector Transaction Public-Private Risk Sharing Sponsor Equity
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PPP Capital Stack SPE owners do not finance all project requirements themselves. The capital stack - all the investment in the SPE - can have many different sources of capital or a simple debt / equity structure The capital stack demonstrates a positive relationship between risk and return. Investment grade debt assumes the least amount of risk and requires lowest return Sponsor equity assumes the greatest risk and requires the highest return Preferred or Tax Equity Mezzanine Investment Junior Debt Investment Grade Debt Sponsor Equity
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Tax Exempt—Public Sector Transaction Retail investor driven investment product Requires traditional credit/revenue streams Generally must obtain a published credit rating Fundamentals allow for 100% leverage and/or public entity can contribute cash equity Public ownership is preferred/necessary Debt Capacity is not an issue “Public Offering” costs of issuance Constrained by IRS Code Section 103(c) - Potential change in law Taxable Debt—Private Sector Transaction Multiple institutional investor types/classes to access Accommodates more diverse credit/revenue streams A published credit rating not required Maximum leverage is credit/structure driven Private ownership is typical “Private Placement/Loan” costs of issuance Municipal vs. Corporate Taxable Markets Tax Exempt and Taxable Debt
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Tax Equity—Private Sector Transaction Cash contributions in exchange for tax benefits/portion of project cash flows Return is based on “after-tax” basis, which incorporates tax savings it receives from ITC/PTC/depreciation benefits Limited investor universe (15-20 active participants) Approximately $3.6 billion of tax equity capacity in 2012, with a demand that exceeded $9 billion—only “best” projects considered Various structures available, such as lease pass-through and partnership-flips, based upon different return and ownership requirements Project Equity—Private Sector Transaction Investor equity return requirements Equity from developer/sponsor, venture, private sources Money can be left in the deal to act as equity (e.g., deferred development fee) Passive or active investor Tax Equity and Project Equity
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10 Debt Service Payments ESCO Special Purpose Entity Financier Assignment of Payments Energy and Water ECMs Public Sector Renewable Energy Project Public Sector Renewable Energy Project Public Sector Energy & Water Savings Projects Public Sector Energy & Water Savings Projects Debt Upgrade or New Generation Tax Equity Capital Proceeds Debt Service Equity Return Capital Proceeds Utility service/Savings payments EPC and O&M Payments Funding Proceeds Debt Service/Equity Returns Public Sector Agency Service Contract Services provided Performance Guaranty 3P Financing Structure- Energy Project
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Potential PPP Opportunities 11 Transportation Health Medical Facilities Ancillary infrastructure (offices / training facilities) Housing Civic and Utilities Transportation Corrections and Justice Schools, Colleges, Universities Tertiary Facilities Student Housing Community and Sports Facilities Local Government Facilities / Commercial Office Buildings Waste and Wastewater Facilities Roads and Highways Bridges and Infrastructure Ports and Airports Prisons Courthouses Education Energy Energy Efficiency / Renewable Energy Combined Heat and Power (Cogeneration) Plants, Power Plants Smart Grid /Microgrid Military Housing Low Income Housing
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Anita Molino President 617-226-8102 Direct 617.437.0150 Main amolino@bostonia.com This information has been prepared solely for information purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. No representation or warranty can be given with respect to the accuracy or completeness of the information, or that any future offer of securities, if any, will conform to the terms hereof. Bostonia disclaims any and all liability relating to this information, including without limitation, any express or implied representations or warranties for, statements contained in, and omissions from, this information.
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