Public Private Partnerships (PPP) Private Equity Entity Consortium Agreements & Dispute Resolution

1. Public Private Partnerships (PPP)Private Equity Entity Consortium Agreements & Dispute Resolution Annual Program of the Claims Avoidance and Resolution Committee of the Construction Institute March 11, 2010 – Los Angeles

2. What is a Public Private Partnership (PPP)? • A PPP is a contractual agreement formed between a public agency (federal, state, or local) and a private sector entity, for the delivery of a service or facility for the use of the general public. 

3. The demand for infrastructure is at an all-time high. The need for infrastructure is not currently being met by relying upon traditional contracting methods Reduced risks for the public sector (financing, cost escalation, delays, etc.) Why go the PPP route?

4. Public agencies are increasingly turning to the private sector—in the form of PPP’s. PPP’s provide a more integrated financial, design, construction, maintenance, and operational solution to infrastructure projects These business models bring future projects to the present as public resources needed in a traditional design/build structure are replaced by private resources Why go the PPP route?

5. PPP Benefits may include: • Boosting economic growth through private sector investment • Accelerating the implementation of high priority projects for which the administrations have a lack of funds • Access to different sources of financing. Innovative private sector financial solutions • The prospect of building faster and less expensively

6. Increased quality—the private entity is responsible for maintaining the structure it built Allows the public agency to better use the private sector’s specialized expertise Allowing for the reduction in size of the public agency by the substitution of private sector resources Joint owner/contractor approach to safety and environmental objectives Additional PPP Benefits ….

7. Additional PPP Benefits …. • Increased likelihood of a non-adversarial relationship with common, rather than conflicting, project objectives • Place risk on the party best able to manage and control it. • The service or facility is turned back to the Public Administration after the concession period.

8. Risks that typically stay with the owner (public agency) include: • Land acquisition risks • Changes in the project requirements due to public needs • Changes in laws

9. Risks that typically stay with the owner (public agency) include: • Enforcement risk in toll projects • Unreasonable delays in obtaining government approvals • Site conditions—e.g. pre-existing hazardous materials, geotechnical conditions • Environmental delays • Changes in safety standards

10. PPP—Potential Risks • May require legislative action to get approval as a contracting method (depending on state or agency) • Possible higher costs of capital • Possible long development time frame prior to solicitation • Complicated contracts and potential hold-ups • Reduced owner flexibility with long-term contracts and lock-ins

11. Typical PPP Procurement Packages include: • Design-Build-Operate-Maintain –Transfer • Design-Build-Finance • Design-Build-Finance-Operate-Maintain • Asset Lease • Other variations of the above methods

12. Financing the PPP Project: • Revenue Sources • Debt/Equity Sources (to be repaid through revenue sources)

13. PPP Revenue Sources • Direct user charges (tolls, transit fares, user fees) • Shadow Tolls • Public Subsidies • Availability payments • Combination of the above

14. PPP Debt/Equity Sources: • Private shareholder equity • Non taxable Bonds (Private Activity Bonds) • Taxable bonds • Bank debt (senior and/or subordinated) • State infrastructure bank loans • Federal loans (Tifia program)

15. The Private Equity Entity Consortium (Design-Build-Finance-Operate-Maintain)

16. Typical Consortium Structure: • The consortium will typically consist of private investors— financer, builder, facilities (concession) management company and possibly a designer • Often in the form of a limited exclusive purpose corporation formed solely for the purpose of the project • Some of the major risks undertaken by the consortium include the risk for financing, design, construction, and facility operations • The design and construction obligations are transferred to the Design Build Joint Venture (DBJV) through the EPC Contract.. The obligations of the DBJV are backed-up by sureties and corporate guarantees

17. Typical Consortium Obligations: • The consortiums obligations are backed-up by the equity of the shareholders, guarantees from the Construction JV through the EPC agreement, and the O&M company (if any) through the O&M Services Agreement • Sureties— bonding backing the Construction JV obligations • Remaining obligations could be covered on a project finance non-recourse structure

18. Consortium Contractual Considerations: • Can be formed as a LLC, LLP, Joint Venture or Partnership. Responsibilities are several for the equity members • Will have a shareholders agreement (contract) that regulates the relationship between members • Is owned by the equity investors (shareholders) • The newly formed company will enter into various subcontracts and construction, operation-, maintenance and financial arrangements

19. Consortium Dispute Mitigation

20. Consortium Framework • Identify the proper and most advantageous legal structure of the consortium for the project • Establish accurate estimates and schedules by the construction JV and the operation and maintenance contractor • Identify Quality Control and Safety responsibilities • Evaluate the range of possible outcomes and likelihood of occurrence of each risk • Identify risk transfer and/or mitigation issues

21. Consortium Framework (cont’d) • Fair and equitable risk sharing • Risks should be borne by the partner best able to manage and handle each particular risk • Consortium bonding and insurance provisions • Professional design liability and insurance provisions • Produce outstanding results in the successful completion of the project (most disputes arise when things are not going well)

22. I-Key Contractual Issues to Minimize Disputes • Clear and complete understanding of the scope and responsibilities of each party • Fair and complete PPP agreement, consortrum agreement , EPC agreement, financial agreements, operation and maintenance agreements • Clear contractual arrangements centered on key performance indicators that will promote performance and minimize disputes • Legal agreement s that establishes and manages the relationships between the parties.

23. II-Additional Key Contractual Issues • Ensuring that the contract works effectively as a management tool • The contract must be drafted in a way that allows a joint collaborative effort to reach mutually rewarding goals • Legal advice on areas that impact consortium agreements including employment, tax, corporate, insurance, unfair competition and anti-trust issues

24. III-Additional Key Contractual Issues…. • What indemnification obligations does each of the shareholders have towards each other? • What are the financer’s rights and remedies with respect to default by the builder or concession manager? Example: if the concessionaire does not solve the default during the cure period provided, then the lender could step in. The lender usually has an additional cure period for default. Once it expires, the project would be in default. The outstanding debt amount is repaid through the guarantees supporting the consortium and the termination payments from the Public Authority

25. IV-Additional Key Contractual Issues…. • Does the Consortium Agreement contemplate a subsequent assignment of the consortiums rights to another party? Usually yes, but the assignment must be approved by the shareholders and Public Authority • Negotiate the best possible terms and conditions in the primary agreement with the public agency owner

26. V-Additional Key Contractual Issues…. • Clearly identify who is liable for the various risk elements of the project • Teaming agreements that could be exclusive or non-exclusive arrangements? • A contractual framework that is best suited to the management and avoidance of disputes • A contractual framework that defines the manners in which disputes are resolved

27. PPP Consortium Dispute Resolution

28. General Comments • PPP projects are not necessarily prone to disputes. • Furthermore, to date PPP projects have not been dispute-ridden nor is it anticipated that they will be in the future. • However, similar to other procurement methods disputes do arise and a contractual framework that is well-suited to handle disputes is needed. • Disputes often arise as a result of the lengthy contractual chain, down which parties will attempt to back-pass obligations through various flow-down clauses

29. Additional General Comments • The builder and financier need not be a shareholder in the consortium. • But when they aren’t disputes are more likely. • Usually a tiered system of dealing with disputes is provided for in the Consortium Agreement • Tiered dispute resolution provisions typically designate “senior executive negotiation” as the first step in resolving disputes. In other words, attempts should be made to resolve the dispute without outside intervention

30. Additional General Comments • It is very important to have well structured contracts so that the rights and remedies are clear and the dispute resolution procedure is clear, efficient, and flexible

31. Possible Consortium Dispute Resolution Provisions: • Senior executive negotiation • Negotiation • Mediation • Expert Determination • Arbitration • Court Proceedings

32. Negotiation • The first step where the consortium shareholders attempt to negotiate in good faith in an attempt to settle their dispute • Normally, the best course of action from the point of view of minimizing costs and disruption as well as maintaining good relationships

33. Mediation • Potentially very suitable for PPP disputes • Independent mediator • No settlement—no bearing on the future resolution of the dispute • Flexible—can accommodate any number of parties and issues • Allows the parties to control the process and eliminate issues promptly • Maintains a level of civility between consortium partners

34. Expert Determination or Dispute Resolutions Board • Dispute is referred to an individual with technical, contractual or legal expertise • Decision could be binding or non-binding • Advantages are speed, economy and confidentiality

35. Arbitration • Dependent on the parties entering into an agreement to resolve their dispute(s) • Arbitrator or arbitral tribunal renders a decision that is both binding and final and can be enforced by the courts • Alternative to litigation in court • Not well suited to multi-party disputes • Not well suited to related disputes under different contracts

36. Court Proceedings • The last step when all other dispute resolution methods have failed • Public and adversarial • Suited for multi-party disputes • Often preferred to arbitration as the final resort dispute resolution procedure for PPP’s