PUBLIC-PRIVATE PARTNERSHIPS (P3) Issues, solutions and what’s next?

1. PUBLIC-PRIVATE PARTNERSHIPS (P3) Issues, solutions and what’s next? Chet Mitrani, Executive Vice President Willis North America September 20, 2012

2. LBJ EXPRESS

3. WHAT IS A PPP? • A Public-Private Partnership is a contractualagreement between a publicagency(federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each section (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.

4. P3 PROJECTS

5. CURRENT P3

6. COMPREHENSIVE DEVELOPMENTAGREEMENT (CDA) • 1. Current Types Of CDAs • Design / Build • Pre-Development Agreements • Concession Agreements • 2. CDA procurement • Unsolicited • Independent Proposals submitted at TxDOT’s request • 3. Project Transfer To TxDOT • At the end of the CDA term (Concession) • Transfer occurs after construction (Design/Build)

7. CURRENTLY EXECUTED CDAs IN TEXAS

8. CONVENTIONAL PROJECT DELIVER: DESIGN-BID-BUILD In the United States, most transportation projects are delivered using the Design-Bid-Build “(DBB”) model Public Owner • Designs project to 100% PS&E • Breaks project up into biddable scopes • The bidder submitting the lowest responsive bid is awarded the contract • Pays invoices out of available tax revenues and/or bond proceeds • Operates and maintains project itself or through separate contractor • Keeps integration, traditional construction, long term performance and revenue risks Private Parties • Design the project and perform construction under standard construction contracts and specifications • Have conventional rights to claims and change orders

9. CONVENTIONAL PROJECT DELIVER: WHY CHANGE? • DBB works well for many projects, but there are situations in which P3s can offer outcomes not available otherwise • Capture private sector innovation early in project development • Accelerate project delivery • Fix costs / completion date early in design phase • Encourage lifecycle cost efficiencies and quality facility performance • Shift risks and reduce claims that under DBB are public’s responsibility • P3s can offer more upfront capital formation than muni revenue bonds • Tax-exempt bond market has more conservative debt coverage ratios • Investor classes are different, offering different risk appetites • Private investors are willing to take more risk on toll revenues performance • Tax exempt borrowing rates available through $15B federal PABs program • Accelerated depreciation creates significant value for private equity

10. P3 SCREENING AND STRUCTURING INPUTS SCREENING OUTPUTS Technical Project Characteristics P3 Contract Terms Legal • P3 or Conventional • If P3, Which Type? RFP Submittal Requirements Sponsor Priorities Competition Structure Evaluation Criteria

11. TYPES OF P3 CONTRACTS • Design – Build – Finance • Availability Payment Concession • Toll Concession • Pre-Development Agreement • Asset Lease

12. PUBLIC PRIVATE PARTNERSHIPSINFRASTRUCTURECONTRACTUAL STRUCTURE – RISK ALLOCATION LENDERS / BONDS Senior & Subordinated Equity Sponsor A Equity Sponsor B Equity Sponsor C PUBLIC ENTITY Loan Agreement Financial Covenants, Remedies, Reserve and Insurance Requirements and Flow of Funds Concession Agreement Performance requirements, Risk Allocation, Schedule, Force Majeure, Relief Events PROJECT COMPANY Special Purpose Vehicle EPC Contract Insurance Requirements O&M Contract Insurance Requirements Sources and forms of Insurance and Guarantees Sources and forms of Insurance and Guarantees Supplier Contract CONSTRUCTION CONTRACTOR SUPPLIER O&M CONTRACTOR Sub-contracts Sub-contracts Sub-contracts Sub-Contractor Sub-Contractor Sub-Contractor

13. TYPES OF P3 COMPETITION STRUCTURES • Competitive Hard Bid • RFP requires: • Committed pricing and financing • Detailed technical proposal in response to pre-defined project • Award based on value or auction • Best Development and Finance Plan • RFP Requires: • Recommended approach to developing and financing project within specified general concept • Qualifications to work as successful private partner • Degree of sweat equity and capital committed to pre-feasibility phase • Award based on best plan, qualifications and pre-feasibility cost-sharing

14. TYPES OF P3 CONTRACTS DESIGN – BUILD – FINANCE • Suitable When Project Is: • Close to environmental clearance • Sufficiently designed for developer to guarantee price I completion date • Not 100°/o designed, to permit developer innovation • A gap exists between total project capital costs and identified public funding sources • The timing of available funding is spread over time and does not allow for levels of upfront capital needed to do the project • Savings from accelerated project delivery outweigh cost of private sector financing • Public Owner • Performs conceptual I preliminary design • Achieves environmental clearance • May provide some, but not all, capital funding

15. TYPES OF P3 CONTRACTS DESIGN – BUILD – FINANCE • Public Owner (cont.) • Oversees design and construction • Operates and maintains the project • Keeps long term revenue risk • Developer • Designs and builds the project • Assumes integration of design and construction and other development risks conventionally retained by public agencies • Finances the owner's shortfalls in cash flow • Provides debt financing via one or more mechanisms (i.e., deferred payment schedule, contractor loan, subordinated debt, financing of change orders) • Assumes interest rate risk on its financing • Guarantees price / completion

16. TYPES OF P3 CONTRACTS DESIGN – BUILD – FINANCE • Results In: • Greater price certainty with a lump sum price I guaranteed delivery date • Cost and time efficiencies • Provides owner cash flow financing, as needed • Examples • Florida DOT • 1-75 Road Expansion Project ($430M) • 95 Express ($122M) • SR-5 (US-1) Project ($112M) • Michigan DOT • 1-69 Reconstruction in St. Clair County ($38M) • 1-75/M-21 (Corunna Road) Bridge ($7.3M)

17. TYPES OF P3 CONTRACTS AVAILABILITY PAYMENT CONCESSION • Suitable When • Public owner has identified a dedicated source of revenue for the project (toll revenue or other source) • Public owner desires life-cycle cost efficiencies • Public owner wishes to retain direct toll rate setting authority and collection • Revenue or traffic volume is difficult to predict

18. TYPES OF P3 CONTRACTS AVAILABILITY PAYMENT CONCESSION • Public Owner - Same as Design-Build-Finance, except: • Pays private party based upon project availability and performance over extended period • Liable for fewer claims and change orders than DBF • Developer- Same as Design-Build-Finance, plus: • Operates and maintains the project for contract term (35 - 50 years) • Assumes life cycle performance risks • Primary compensation is through availability payments • May also receive milestone payments from the public owner upon reaching certain construction milestones • May receive federal tax benefits due to deemed "tax ownership"

19. TYPES OF P3 CONTRACTS AVAILABILITY PAYMENT CONCESSION • Availability Payments • Unitary payments for capital expenditures, O&M expenditures and financing costs • Amount bid by the developer as part of its proposal • Made periodically after substantial completion (e.g., monthly) • Fixed amount that may: • Be adjusted downward based on developer's performance with respect to quality, safety, lane availability, environmental provisions, etc. • Be adjusted by changes in an index (e.g., CPI) • Structure encourages early completion of the construction phase and quality facility performance • Examples • Florida DOT - 1-595 • Florida DOT - Port of Miami Tunnel • British Columbia MOT - Sea to Sky Highway

20. TYPES OF P3 CONTRACTS TOLL CONCESSION • Suitable When • Project will directly generate revenues • Traffic and revenue risk can be efficiently transferred to private sector • Political support exists for private sector toll collection and enforcement • Public Owner - Same as AP Concession, except: • Contributes no or limited public funds to project costs • Decides on toll rate setting mechanism over contract life • Relieved of all or most toll revenue risk • May receive share of toll revenue as/when benchmarks met • Possibly receives upfront payment from the developer

21. TYPES OF P3 CONTRACTS TOLL CONCESSION • Developer - Same as AP Concession, plus: • Collects tolls in accordance with rate-setting mechanism • Assumes all or most project traffic and revenue risk • May share excess toll revenues with public owner • Examples • TxDOT - SH 1307 Segments 5 and 6 • TxDOT- North Tarrant Express • TxDOT - I-635 • Virginia DOT - I-95/395 HOT Lanes

22. TYPES OF P3 CONTRACTS PRE-DEVELOPMENT AGREEMENTS • Suitable When • Project not yet completely defined • Financial feasibility not yet determined, but preliminarily has good potential • Public owner seeks private sector innovation in defining and accelerating an optimally feasible project • Environmental analysis is in the early stages • Procurement and Award • Public owner procures Developer on basis of "best development and financial plans" • Awards contract with two phases: • Initial phase to determine feasibility • Implementation phase

23. TYPES OF P3 CONTRACTS PRE-DEVELOPMENT AGREEMENTS • Initial Phase • Public and private partners "co-invest" in pre-development activities • Public owner retains complete control over environmental clearance process, with Developer performance of technical studies • Developer participates in project planning and design • Developer prepares master financial plan and master development plan • Developer may absorb some or all of its initial phase work - "sweat equity" • If project proves feasible, Developer has right of first negotiation for the agreement(s) covering the implementation phase • If unable to reach agreement, public owner retains right to separately procure • Implementation phase agreements can take form of: • Design-Build-Finance • Availability Payment Concession • Toll Concession

24. TYPES OF P3 CONTRACTS ASSET LEASE • Public Owner • Leases existing asset to private partner • Gets up front payment from private partner (monetizes the asset) • Gets facility back at the end of the lease • Private Partner • Gets right to any revenues (e.g., fees, tolls) from the facility • Implements fees I tolls in accordance with lease requirements • Maintains the facility in accordance with lease requirements • Examples • Indiana Toll Road ($3.8B up front payment; 75 year lease) • Chicago Skyway ($1.8B up front payment; 99 year lease) • Pocahontas Parkway (Pay off $500 M of existing debt, upgrade facility and cover other VDOT expenses; 99 year lease) •  Asset leases have been particularly controversial

25. CDAs & RISK ALLOCATION • CDAs DELEGATE RISK TO THE PARTIES BEST ABLE TO MANAGE IT. Assign to Owner Assign to Developer Shared Risk Concession Program Differs from Design / Build

26. RISK ALLOCATION & CONTRACTINGALLOCATING OTHER RISKS Right of Way Utility Relocations Differing Site Conditions Force Majeure Hazardous Materials Paleo / archaeo / bio Permits Railroads • Who can best control the risk? • Who can best manage the risk? • Are contractors willing to assume the risk? • How much will it cost?

27. DIFFERENT PROJECT DELIVERY TYPES & RISK SHARING1 1 Actual Risk Allocation may vary by specific project 2 Eminent Domain risks and delays retained by the owner

28. … SHARED RISK ALLOCATION PUBLIC RISK TRANSFER BY MODEL PRIVATE

29. INSURANCE ISSUES FOR DESIGN AND CONSTRUCTION PROFESSIONALS INVOLVED IN A PPP PROJECT • Insurability • PPP agreements must always be carefully checked against the professional liability policy • In the event that terms and conditions appear uninsurable, make sure that the Concessionaire understands that their interests – even if for a lesser amount -- are better served by an insured claim that by a potentially larger claim that has no insurance support

30. KEY PPP PROJECT INSURANCES - INSURANCE REQUIREMENTS • Construction Period • Construction “All Risks” • Construction “All Risks” Terrorism • Soft Costs/Delay in Opening • Third Party Public Liability • Statutory Insurances (Workers Compensation/EL) • Professional Liability (Design and Build) • Pollution Legal Liability • Auto Liability • Railroad Protective Liability

31. KEY PPP PROJECT INSURANCES - INSURANCE REQUIREMENTS • Operational Period • Property Damage “All Risks” • Property Damage “All Risks” Terrorism • Business Interruption • Third Party Public and Products Liability • Statutory Insurances (Workers Compensation/EL) • Pollution Legal Liability • Auto Liability • Professional Liability

32. WHY ARE THESE INSURANCES REQUIRED? • They protect the Public Agency, SPV, Lenders and other parties with an insurable interest in respect of • physical loss or damage to Project property/assets • earnings and additional costs of the SPV in respect of the above • incurred Third Party Legal Liabilities (bodily injury and property damage) • Without insurance the SPV could not accept the financial consequences of such risk events occurring

33. WHY IS THE INSURANCE REGIME UNDER PPP DIFFERENT TO STANDARD PROCUREMENT? • The Public Agency, Lenders and others with an insurable interest sit inside the insurance mechanism as a co-insured taking direct benefit for their separate insurable interest • Insurances to be procured on a project specific basis and not derived from parent company program. • Public Agency guidelines and Lender requirements seek to ensure specific conditions are in place defining the duties of the parties to the Project in terms of the operation of the ‘required insurances’

34. WHAT ARE THE KEY CONDITIONS OF A PPP INSURANCE REGIME? • Waiver of subrogation (Multiple Insured Clause) • Separate policy • Waiver of disclosure of material information • No obligation for premium payment • Additional insured • Control of claim monies (Loss Payee) • Notification of change in cover • Notice of cancellation and subsequent step in rights of various parties to the Project

35. PPP INSURANCES –CONSIDERATIONS & SOLUTIONS • Relief Events and Force Majeure • Premium increases– who bears the risk? • Insurance market capacity and market participants • Uninsurability • Excesses/Deductibles – who pays? • Meeting bid/tender requirements - what level of information is required – insurance proposals must remain “fluid” and negotiable until final design and construction timetable is known • Cost of insurance – provision for cost of insurance in the Financial Model; prevailing market cost + contingency amounts

36. PPP INSURANCES – CONSIDERATIONS & SOLUTIONS • Phased completion timetable • Overlap of ALOP/BI • Pre-existing property • Latent Defects • Environmental/Contamination issues • Contractor’s plant and equipment • Terrorism risk • Marine/Transit

37. PPP INSURANCES – CONSIDERATIONS & SOLUTIONS • Uninsurability • Definition of trigger of Uninsurability – what is the test? • What happens to the risk if it becomes uninsurable (Termination/Public Agency “insurer of last resort”)

38. WHAT DOES THIS MEAN FOR THE PROJECT INSURANCES? • Contractor/Lender uncertainty over “the risk of insurance” – cost and availability • Fear of the unknown from insurers on contractual requirements of PPP • No established insurance market experience of some risk exposures through PPP contracts • Unpredictable insurance market cycles • Sector specific claims impacting on competitive terms and also cost provision in Financial Model

39. RECENT TRANSACTIONS:Creating mobility options within existing highway corridors • If a public owner is interested in adding managed lanes to an existing facility, it might benefit from comparing two recent managed lanes projects: • I-595 Corridor Roadway Improvements Project (Florida DOT) • North Tarrant Express (Texas DOT) • I-595 Corridor Roadway Improvements Project Background: • Project covers 10.5 miles along I-595 in Fort Lauderdale, Florida • Improvements to the existing freeway and interchanges and the addition of reversible, congestion-priced managed lanes • $1.28 construction and 35 years of O&M (both free and managed lanes) • First availability payment-based P3 in the United States • Florida DOT unable to currently finance the project using DBB • Winning price - $275M under Florida DOT estimates (present value) • Successful financing despite economic crisis (bank financing)

40. RECENT TRANSACTIONS:Creating Mobility Options within Existing Highway Corridors North Tarrant Express Background • Toll concession and pre-development agreement • Phase 1 - 52 year toll Concession • Rebuild 13 miles of I-820/SH 183; add 2 new tolled managed lanes • Financing Package - $2.05 B • $400M of Private Activity Bonds - 30 year maturity • $650M TIFIA credit - 40 year term • $570M in public sector funding • $427M in equity from private partner (includes $43M from Dallas Police and Fire Pension System) - First time a U.S. pension fund has directly invested equity in a U.S. P3 project • Remaining Phases - Pre-Development Agreement • Texas DOT Goals for Phase 1: • To shift construction, lifecycle, performance and availability risks • To shift revenue risk, subject to rate setting restrictions and revenue sharing • Texas DOT used a toll concession to close funding gap • Reached financial close December 2009

41. RECENT TRANSACTIONS:Creating Mobility Options within Existing Highway Corridors • Comparison of I-595 and NTE • Both are complex, urban projects that involve reconfiguring and reconstructing existing Interstates to add managed lanes and make other improvements • Contrasting Agency Goals • Florida DOT - Maximize project availability (both managed lanes and general purpose lanes) • Texas DOT- Minimize state funding for the project • Availability Payments vs. Toll Concession (Reflection of Goals) • Florida DOT - Kept toll revenues and used an availability payment concession to achieve its goals (first such U.S. deal) • Texas DOT- Shifted toll revenue risk to achieve its goals

42. CURRENTLY IN PROCUREMENT

43. WHAT’S NEXT? Note: American Water Works Association identified the need for $1 Trillion over 25 years in the drinking water sector and waste water.