Risk Management in Public-Private Partnerships TRB 88 th Annual Meeting

1. Risk Management in Public-Private PartnershipsTRB 88th Annual Meeting January 14, 2009 Thomas W. Pelnik III, P.E. Director, Innovative Project Delivery Division

2. Efficient 3P Risk Allocation • Allocate to party in best position to manage the risk • If neither better situated to manage risk, share it • Perform project risk assessment before procurement • Rate project risks according to likelihood and severity • (Aka apple pie risk allocation)

3. Efficient 3P Risk Allocation • Why might an Owner elect to use 3P? • $ No public funds to build it? • $ More efficient use of funds for developer to finance it? • Privatization / outsourcing initiative • Availability payments • $ Source of revenue? • New revenue source • Leverage limited public funds • $ Desire for greater cost and schedule certainty?

4. Virginia PPTA • Guiding Public Policies: • Private entities may develop and/or operate transportation facilities in more timely, more efficient, or less costly manner • Encourage investment by private entities in such facilities – Concept of Concession/Toll Revenues • Provide public and private entities “the greatest possible flexibility in contracting with each other” for the provision of the public services under the Act

5. Efficient 3P Risk Allocation • Allocate to party in best position to manage the risk • If neither better situated to manage risk, share it • Perform project risk assessment before procurement • Rate project risks according to likelihood and severity • More often allocated to developer compared to other contracting structures due to developer’s 1) strong project control, 2) ability to spread risk over time, 3) equity cushion, and • Owner’s desire to fix its costs

6. Efficient 3P Risk Allocation • Reduce likelihood and/or magnitude of risk before procurement through pre-development work, data generation/gathering, and due diligence • Compare cost of: • Risk retention vs. • Developer contingency to take risk transfer • Assess strength of competition • Assess appetite for risk transfers • Last, allocate risk

7. Real World 3P Risk Allocation • What happens when reality rears its head? • Project specific issues dictate risk allocation • Project need / urgency • Policy objectives • Availability of funds • Of course, we can always rely on “self-insurance” • … don’t all public agencies have that?

8. Key Risk Issues • Procurement / Political Risks • Revenue Risks • Regulatory Risks • Construction Risks • O&M Risks

9. Key Risk Issues • Procurement / Political Risks • Need for legislative approval • Change in political will in course of procurement • Fear of loss of public control • Fear of excessive profit • Fear of low quality or safety • WILL A CONTRACT BE AWARDED? • Risk assessment and mitigation • Sustained public support for project • Assess strength of public opposition • Public relations and media effort • Educate legislators • Contractual standards and requirements for quality, performance, oversight • Contract controls on projects via revenue sharing or limits on return on equity

10. Key Risk Issues • Revenue Risks • Macro-Economic Risks • Concessionaire takes all these risks • Inflation, recession, local and regional growth, travel demand influences, capital market conditions, technology change • Competing Policy or Competing Facility Risks • What happens if agency policy promotes HOV use to the detriment of revenue? • Is it in the public interest to provide a monopoly? Should the state have unfettered rights to develop any new facility? • What is the realistic opportunity for expansion within existing corridors?

11. Key Risk Issues • Regulatory Risks - Environmental Risks • NEPA • Concessionaires will not take NEPA risk • Lenders typically will not fund if NEPA litigation is pending • Possible to close before limitations period expires, but only with agency backstop • Major environmental permits - several approaches: • All in hand before bids • Developer responsible; schedule relief for regulatory delay • Developer responsible; cost and schedule relief if permit conditions more onerous than an assumed baseline • Agency responsible; cost and schedule relief for delay or more onerous conditions

12. Key Risk Issues • Construction • Non-compensable v compensable events • Force Majeure concept does not exist on normal VDOT project • Agency “self insurance” does not exist • Differing subsurface conditions? • Pre-existing hazardous materials • Owner changes to scope • Added work • Different requirements • Owner caused delays in performance of its obligations • Discriminatory changes in state law [very narrowly defined] • How does an agency account for such issues when it has no funds to address them?

13. Key Risk Issues • Operations and Maintenance • Non-compensable v compensable delays • Force Majeure concept does not exist on normal VDOT project • Agency “self insurance” does not exist • In the context of a long term agreement, concessionaire must accept changes in technology, practices, and standard of care [as applied to other similar facilities] • Pre-existing hazardous materials no longer an issue • Owner changes to scope • Added work • Different requirements no longer a change • Owner caused delays • Discriminatory changes in state law [very narrowly defined]

14. Key Risk Issues • Final Observations • Concession risk allocations and management are unique in many respects • Full range of revenue and cost risk allocations leads to complex, detailed documents • Long concession term as a going concern with equity investment and rates of return supports broader private risk assumption • Owner may obtain an improvement not otherwise affordable with public funds, with relatively definable risks/investment • Concessionaire must make its business decision whether to pursue the work

15. US 3Ps – What’s next? • Multi-modal focus • Efficient procurement and delivery process • Value for money • Multiple agencies

16. US 3Ps – What’s next? • Multi-modal focus • Comprehensive system operations • Manage congestion • Transit and HOV incentives? • Time of day speed limits? • Local or long trip focus? • Freight corridors?

17. US 3Ps – What’s next? • Efficient procurement and delivery process • Sophisticated owners • Few revenue positive projects • Blended funding sources • DBF • FOM • DBFOM • Availability payments • Shadow tolls

18. US 3Ps – What’s next? • Value for money • Public sector comparator • Performance standards • Lane availability • Maintenance standards • Congestion management • Safe operations

19. US 3Ps – What’s next? • Multiple agencies • Federal, state, regional, local • Large projects of regional or national significance • Local improvements or critical links • Dedicated, needs based funding for O&M

20. Questions? • For Additional Information • VDOT Website: • http://www.virginiadot.org/business/bu-ipd.asp • dusty.holcombe@vdot.virginia.gov • thomas.pelnik@vdot.virginia.gov