ITAC/Osler E-Health Forum October 20, 2009

1. ITAC/Osler E-Health Forum October 20, 2009 Renato Discenza Senior Vice-President Infrastructure Ontario

2. Infrastructure Ontario:A private company doing public service Among the world leaders in public infrastructure delivery Has two main business streams: 1. Alternative Financing and Procurement (AFP) Large, provincially-assigned infrastructure projects Over $14 billion in capital brought to the market since 2006 2. Loan Program Financed the development of over $4 billion in local projects Advanced over $2.0 billion in loans Over 220 public sector clients Successful since 2003 2

3. Infrastructure Ontario: Our Approach Build strong partnerships with public and private stakeholders Help broader public sector clients develop infrastructure projects Customize solutions to meet project needs Leverage IO’s knowledge and expertise Foster best practices in project management Project budget Project management reporting 3

4. What AFP is all about: Protecting the public interest AFP is: Integrating a project’s Design, Build, Finance and Maintenance components Risk/Reward re-balancing Value for money On time, on budget execution AFP is not: Privatization So why not call it PPP? Avoid privatization label

5. Differences from traditional procurement: Appropriate risk rebalancing between public and private sector Move the risk to those who can manage at least cost More opportunity for innovation with built-in penalties and incentives Payment starts only after delivery completed Lender due diligence brought in to achieve on-time, on-budget delivery Long term building maintenance concession tied in with building team (DBFM) “Warranty” to the Province that the facility/system will be available over the long term Integration of design and development with system maintenance and lifecycle costs What makes AFP different

6. The Levers for AFP Success • Value for Money (VFM) Assessment • Design-Build-Finance-Maintain (DBFM) model • Project Financing • Project Structure • Commercially Confidential Meetings (CCMs) • Output-Based Specs

7. Value For Money (VFM) Approach • A project can only be procured using AFP if it delivers Value For Money to the public sector • The IO Board only approves release of RFP or agree to selection of the preferred proponent if a positive Value For Money is clearly demonstrated • On average 8-15% VFM has been achieved on AFP projects • The risk matrix is a key component of the VFM calculation. Examples of risk categories: • Policy/Strategy Changes in Government Funding Policies • Design/Tender Sign off by User Group • Development/Build Acceleration to maintain schedule • System Maintenance Technology refresh requirements • Adoption/Change Mgmt User group training • Project Agreement Ambiguities in Agreement

8. What is Value for Money ? Value for Money ‘Shadow Bid’ or ‘Preferred Bid’ • Value for money is a process of comparing estimated costs using two delivery models to determine which is the better value proposition • The cost difference between Model # 1 and Model # 2 is the estimated Value for Money • AFP costs: Financing, Infrastructure Ontario overhead, Project advisors • Key AFP benefit: Risk transfer • The savings achieved through risk transfer more than offset additional AFP costs

9. Value for money assessment • Third-party tested and third-party delivered on individual projects • Based on comprehensive risk matrix • Federal P3 screening guidelines recommend using Infrastructure Ontario’s value for money methodology

10. Procurement Innovation:Commercially Confidential Meetings (CCMs) • CCM process is to meet with bidders 1-on-1 • Supplements general bidder meetings – intent is to engage in more meaningful dialogue with bidders • Negotiation of project agreement occurs through the CCM process • Design development, innovations, other topic-specific meetings foster discussion and understanding of complex projects 10

11. Procurement Innovation:Commercially Confidential Meetings (CCMs) • Benefits/Impact: • Meaningful dialogue and mutual understanding of positions and key commercial drivers • More robust/informed bids • Decreases likelihood of post-submission errors, contingencies 11

12. Design-Build-Finance-Maintain model Traditional AFP: Design-Build-Finance-Maintain (DBFM) Public Sector Risks Public Sector Risks Private Sector Risks Private Sector Risks Development Functional Program Functional Program Design Development Development Schedule Design Project Specific Output Specifications Development Schedule Financing Financing Facility Maintenance Scheduled Lifecycle System Maintenance Lifecycle System Availability, Performance & Asset Value System Availability, Performance & Asset Value

13. Design-Build-Finance-Maintain (DBFM) Sponsors Payments starting at Acceptance Testing Infrastructure Ontario Sponsor Ministry or Agency Government Cabinet directive Lenders’ Direct Agreement Lender Project Co Loan Integrated design/ delivery services Software Operational Services Deployment * For illustration only

14. DBFM model:Transaction phase timeline Substantial Completion / Operational Phase Financial Close and Development Start Evaluation of Proposals Commercial Close RFQ Released RFP Released Expiry of Concession Period Selection of Preferred Proponent 1 month 6 months 6months 4months 11 months

15. Other benefits of AFP and Infrastructure Ontario Managing costs Optimal cost combination: combines capital, operating, maintenance and life cycle costs Integration of design, development and system management Competitive whole life cycle cost proposals Good project planning Clear roles and responsibilities Strong governance Cost predictability Create right incentives Transfer financing Payment mechanism

16. Project Financing Structuring Elements The development of the optimal Project Financing approach involves several components.

17. Payment Mechanism • There are generally two types of payment mechanism structures: • Availability based • Project Co. is required to ensure that the solution is available for its intended use • Payment is based on the availability of service, satisfaction of performance standards and inflation indexation • Stable payment stream with no demand/volume risk • Volume-Based • Project Co.’s revenue is a function of service use • More volatile payment stream than availability-based structure • Risk often mitigated by inelastic demand for the service

18. Project Structure - Documentation Key documents that crystallize all aspects of the deal include: Project Agreement (PA): reflect the risk allocation among the parties. Main PA Provisions and Schedules: Compensation on Termination, Supervening Events, Refinancing, Lenders Direct Agreement (step in rights of the Lenders if the Project Co. fails to perform). Financial Model: All commercial and financial terms and conditions agreed to between Project Co. and the Project Sponsor must be embedded in the Financial Model and binds each party accordingly. Loan documentation between Project Co. and Lenders: Provisions and covenants will impose restrictions and financial discipline on the Project Co. and provide additional monitoring and serve to mitigate risk of default. Drop – down agreements between Project Co. and sub-contractors: Stipulates how risk is passed down or shared between Project Co. and its subcontractors. Identifies the stranded risks of Project Co., hence Project Sponsor’s exposure.

19. Output Specifications – Performance Based Requirements Sponsor defines the service required based on operational needs The operational requirements form the basis of the output specifications provided in the RFP to respondents Design development process undertaken during RFP process to provide information and clarification Respondent submits well-advanced solution for Sponsor evaluation 19

20. Lessons learned so far Benefits of the AFP process schedule-driven clear governance structure managing costs through standardization Importance of communication with industry, co-sponsors staging, managing market capacity issues with industry ensuring co-sponsor buy-in on IO approach, processes, tools Interest group opposition counter with transparency third-party validation 20