The Governance Model: The Private-Public Partnership Embodiment Presented by Arthur L. Smith, President Management Anal

2. 2 Public-Private PartnershipsA Representative Definition A cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards. The Canadian Council for Public-Private Partnerships

4. 4 James F. Oyster School (cont.) The District could not afford to replace the school. But the school had one significant asset: it was located on a 1.7 acre parcel of land, far more than required for school purposes. This asset created the basis for a successful PPP, involving the District and a commercial developer. The private developer financed, designed, and built a 47,000 square foot state-of-the-art school on the site of the old Oyster School. The District deeded the excess land to the developer, who constructed a $29 million, nine-story, 211-unit apartment building on the site. The school was financed by a 35-year tax-exempt bond issue which is being retired through payments in lieu of taxes by the apartment building owner. In summary, the new school was constructed without expenditure of public funds.

5. 5 James F. Oyster School (cont.)

6. 6 Chesapeake Forest In 1999, a lumber company offered for sale a tract of 58,172 acres in the Chesapeake Bay watershed, including shoreline property. This land, all in the State of Maryland, included large segments of unbroken forest and more than 4,000 acres of wetlands, as well as established populations of several threatened and endangered species. Much of this land bordered on existing State–owned parkland and forest, creating a unique opportunity to buffer a large area from deforestation and development. However, the State faced several obstacles to this environmentally desirable goal: The State lacked funding to acquire the land The State lacked resources to manage the land after purchase (the State estimated that four full-time foresters and associated support services would be required) Cessation of timber harvesting would cause unacceptable disruption of the local economy in this largely rural part of the State

7. 7 Chesapeake Forest (cont.) The acquisition of the land was achieved through fairly traditional means. The State purchased one-half of the acreage using State funds, while the remaining 29,000 acres were purchased by an environmental non-profit which transferred ownership to the State. By December 2000, the State owned all of the Chesapeake Forest lands. The State, working with the non-profit environmental group, then sought to craft a Public-Private Partnership (PPP) with the following explicit objectives: Providing a steady flow of economic activity and employment to support local businesses and communities; Preventing the conversion of forested lands to non-forest uses; Contributing to improvements in water quality, as part of the larger Chesapeake Bay restoration effort; Protecting and enhancing habitat for threatened and endangered species; Maintaining soil and forest productivity and health; and, Protecting visual quality and sites of special ecological, cultural, or historical interest.

8. 8 Chesapeake Forest (cont.) To achieve these objectives, the State advertised, negotiated, and awarded a multiyear contract with a lumber company. This innovative agreement allows the company to harvest up to 1,000 acres of timber annually, an environmentally sustainable level. In return, the lumber firm is required to manage the Chesapeake Forest to the State’s silvicultural standards. Harvesting of timber is allowed only where consonant with the environmental objectives of water quality and wildlife habitat. The partners, State and timber company, share the profits generated from the sale of timber, with a 15 percent share of sales revenues also directed to the local county governments. To minimize risk to its private partner, the State agreed to compensate the lumber company for any losses in the first two years. However, this guarantee was never triggered, since the partnership has generated a profit every year since its inception. The lumber company is required to keep a fully accessible and transparent accounting system, open to the State’s review, and audited by an independent accounting firm.

9. 9 Chesapeake Forest

10. 10 Dulles Greenway New 22 kilometer limited access highway Provides alternative commuter route DBFO Real Toll Privately-financed with $40 million in equity and $310 million in privately-placed taxable debt Developers receive profits (if any) until their investment is recovered; profit limited to 18 percent Operation of the Greenway reverts to the State after 42.5 years Project completed in September 1995, six months ahead of schedule Due to failure to meet demand projections, fare reduced from $1.75 to $1.00 in 1996; raised to $1.15 in 1997 ($2.40 today) Project struggled due to lower-than-expected revenue; introduced VIP Miles Program (modeled after airline frequent flyer programs) State authorized increase in speed limit Debt restructured in 1999 Project began widening from four to six lanes in 2001

11. 11 Dulles Greenway (cont.)

12. 12 Dulles Greenway (cont.)

13. 13 Dulles Greenway (cont.) In Fiscal Year 2005, the project made a profit for the first time ($14 million), and is projected to remain profitable in the future Current use is over 70,000 cars per day For more information: www.dullesgreenway.com

14. 14 Characteristics of Public-Private Partnerships PPPs differ from traditional contracts in several key respects. These include: Financing. Traditional government contracts are government-funded. PPPs typically entail financing predominantly or in whole from the private sector. Risk Allocation. Traditional goods and services contracts have a fairly straightforward risk allocation model. PPPs require analysis and allocation of a broader spectrum of risks, which may include, but is not limited to, design and construction risk, force majeure, and others. The risk allocation is more complex than in traditional construction contracts, where demand risk, for example, would typically not be borne by the developer. Identification, disclosure, and appropriate allocation of risk is therefore critical in the PPP environment. Duration. PPP contracts frequently extend for 30 years or longer. This greatly complicates the difficulty of projecting service demand, and quantifying other risks such as technological and regulatory change, and currency fluctuation.

15. 15 The UNECE PPP Alliance Guideline The UNECE PPP Alliance has prepared a “best practices” guideline on Governance in Public-Private Partnerships for Infrastructure. The Guideline is aimed both at public sector policy makers, and representatives of the private sector and NGOs. It is designed to be of a special use to these constituencies in countries which are at a pre-PPP stage in their creation of an appropriate enabling environment for PPPs.

16. 16 PPP Guideline Governance Categories Governance can be defined as the exercise of political, economic, and administrative authority to manage a nation’s affairs.

17. 17 Document Structure Chapter 1, Benefits and Risks: PPPs can provide many benefits, but there are also risks that must be identified, analyzed, and allocated.

18. 18 Case Studies: Distribution by Sector

19. 19 Case Studies Listing

20. 20 Arbitration and PPPs Given the complexity and large dollar values of many PPPs, contract disputes are a real concern. Disputes can be costly and result in significant project delays. As a consequence there is a growing consensus the PPP contracts should contain an arbitration clause, with provisions for engaging international arbitration experts or bodies. Alternative solutions are also being explored, such as the London Underground’s designation of a PPP arbiter.

21. 21 Questions