Public Private Partnerships Introduction to PPPs

1. Public Private PartnershipsIntroduction to PPPs Frederick J. Werner FHWA Resource Center Innovative Finance Team Federal Highway Administration-National Resource Center

2. Presentation Outline • What are PPPs? • Working definition • PPPs for existing, new and improved facilities • PPPs: Pros and Cons • Myths and facts about PPPs • The evolving US federal role • SAFETEA-LU innovative finance tools • Summary

3. What are PPPs? • Would anyone like to venture a guess? • Public component • Private component • Partnership component

4. Working Definition • PPPs are a legally-enforceable contractual agreement • Between a public sector and a private sector entity • Designed to develop and deliver a surface transportation project • Specific terms/provisions of contractual agreement can and do vary widely

5. Public Partner • Most commonly, the public partner is a state or provincial DOT • However, public partners can also include: • Local governments; highway and toll authorities • Port or bridge authorities; transit districts • Bi-state, multi-state or bi-national districts

6. Private Partner • Most commonly, large engineering or investment companies • However, private partners can also include: • Combinations of firms (joint ventures or consortia) • Individuals; groups of individuals • Quasi-public corporations

7. Partnership Arrangement • Can be structured as a simple contract; concession agreement; letter of intent; memorandum of understanding; hand-shake agreement (uncommon; for small value transactions) • Can address one-time events such as donation of land for ROW • Can address very long-term agreements whereby the private sector builds and/or operates a transportation facility

8. Partnership Arrangement • Arrangement may specify a minimum of private sector involvement, such as donation of land, a guaranty of public sector debt, or a willingness to self-assess to finance an improvement. • Arrangement may specify significant private sector involvement, whereby private sector invests its equity capital – cash on hand or borrowed funds – and agrees to design, build, finance, operate and maintain a given facility. • Many variations on private involvement for existing and new (“greenfield”) facilities, as well as significant improvements to existing facilities.

9. PPPs for Existing Facilities • Long-term concession for Chicago Skyway, late 2004: • $1.83 billion payment for 99 year lease • Long-term concession for Indiana Toll Road, early 2006: • $3.85 billion payment for 75 year lease

10. PPPs for New Facilities • 108 kilometer 407 ETR in Toronto • $630 million South Bay Expressway in San Diego • $3.2 billion Texas SH 130 in Austin • $2.5 billion Texas SH 121 in Dallas/Ft. Worth area (currently being negotiated) • Mexico City North Bypass

11. PPPs for Significant Improvements • Significant improvements to rail infrastructure: • Dakota, Minnesota & Eastern (DM&E) replaced rail on portion of 1100 mile system with $233 million US federal loan • DM&E plans to extend line 820 miles into Powder River Basin with $2.5 billion US federal loan • Texas Mexico replaced several hundred miles of rail with $50 million loan

12. PPP and Federal Credit • Many PPPs are supported through US federal credit programs: • TIFIA (Transportation Infrastructure Finance and Innovation Act) • RRIF (Railroad Rehabilitation and Improvement Financing program) • PABs (Private Activity Bonds) • SIBs (State Infrastructure Banks)

13. PPPs: Pros and Cons • Deep pools of investment capital looking to invest in assets for a very long period; funds looking for long-term income to match long-term liabilities (Tim Romer, Goldman Sachs). • Injection of equity capital to invest in other assets and access to funding outside municipal bond market (Trent Vichie, Macquarie Securities). • Transfer of project risk to private sector (Trent Vichie, Macquarie Securities).

14. PPPs: Pros and Cons • Public perception that critical “public” assets are controlled by private sector, often for very long periods, with related public safety and asset performance concerns. • Need to charge user fees in environments and/or markets unaccustomed to such charges (Caltrans). • Concern that PPP projects - especially those involving railroads and dedicated truck lanes - properly protect the environment. “The real obstacle to many PPP projects is not the politics, but environmental clearance” (Southern California Association of Governments). • Need to fit PPP projects into coherent long-term state plans (Caltrans).

15. Myths About PPPs • PPPs can solve all the nation’s infrastructure problems • Every project is a potential PPP • All PPPs will generate big financial rewards • The US is losing control of critical transportation assets • PPPs will replace the traditional federal-aid grant program

16. Facts About PPPs • State/local governments face challenges: • Fiscal stress and budget deficits • Growing need for new infrastructure • Need to rehabilitate decaying existing infrastructure • Public and private sector can share benefits: • Project delivery vs. concession income • Public and private sector can share project risks (environmental, financing, construction)

17. The Evolving Federal Role • Traditionally, the US federal government has financed highways through 80% grant programs • Pay-as-you-go approach • However, ISTEA, TEA-21 and SAFETEA-LU have provided alternative or “innovative” forms of non-grant assistance to advance projects • Goal is to leverage limited federal resources from: • Co-investment • Revenue expansion

18. SAFETEA-LU Facilitates PPPs • Innovative Finance initiatives: • Enhanced TIFIA credit program • Available for refinancings • Available for projects costing $50 million or more • Continued RRIF credit program • $15 billion in Private Activity Bond authority • Expanded SIB authority • Broader tolling authority on Interstates • Expanded use of design-build provisions

19. FHWA Initiatives • Secretary Mineta’s National Congestion Strategy • “Unleashing private-sector investment resources” • Use of SEP 15 waiving most federal-aid requirements on a trial basis • Use of SEP 15 coupled with a streamlined TIFIA credit application process

20. Revolutionary Change in PPPs • PPPs have been successful for wide variety of projects • Increases in equity market capacity and competition; domestic equity investors are joining international investors in PPP market • Electronic toll technology is facilitating public’s acceptance of user fees • GASB 34 (asset management) is changing traditional view of highway construction from an “expense” to an “investment” • PPPs are another important tool in our toolbox - if the right conditions are met!

21. In Summary ……… • Take advantage of changing US federal regulatory landscape • Leverage expertise of FHWA National Resource Center, Innovative Finance Team • Subject matter experts and solution providers • Expansive view – across FHWA and other modal programs • Broad view of needs – states, regions, nation, bi-national projects • Contact Information: Prabhat Diksit 720-963-3202; Frederick Werner 404-562-3680 • Additional Information • www.fhwa.dot.gov/innovative • www.fhwa.dot.gov/ppp

22. Conclusion Thank You!