Public-Private Partnerships: Insights from the Canadian Model

1. Public-Private Partnerships: Insights from the Canadian Model SEPTEMBER 11, 2012 VIRTUAL SEMINAR PRESENTED BY: Sean Deakin, Courtney T.Walker ZURICH SURETY UNDERWRITING

2. PRESENTER BIOGRAPHY Sean Deakin is the Surety Manager for Zurich's Canadian operations with oversight for Contract Surety. Prior to joining Zurich in 2007, he held a number of underwriting and management positions with another large Canadian surety. With over 17 years surety experience, Mr. Deakin has been an active participant in the Canadian P3 (public-private partnership) marketplace and was a member of the Surety Association of Canada team tasked with negotiating industry acceptable terms with Infrastructure Ontario, the agency mandated to oversee all P3 activity in the Province of Ontario. Courtney Turnage Walker is an Assistant Vice President for Surety Product Underwriting for Zurich North America. She has been in the surety industry for over 20 years where she has been employed as a surety claims attorney, as outside counsel with a surety and fidelity specialty law firm, and as a risk manager for surety underwriting. Ms. Walker helped develop a P3 bond form for Zurich and has been involved in the risk analysis of several P3 projects. She is a member of the Louisiana and North Carolina Bar Associations, the American Bar Association and is active in the Fidelity and Surety Law Committee within the ABA.

3. WHAT WE WILL COVER TODAY

4. FIRST, A LITTLE CONTEXT….. PPP – WHAT IS IT??? • It is first and foremost, a risk transfer mechanism. • It is “a cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through appropriate allocation of resources, risk and rewards”* • It is all about “on-time, on-budget” project delivery, and that the private sector is better able to manage risk to achieve these two desired outcomes. • It is a model which seeks to address all of the risk factors which could potentially jeopardize “on-time, on-budget” delivery. • It is an effective, efficient delivery model which minimizes the cost of capital employed to develop infrastructure assets. * Canadian Council for Public Private Partnerships

5. A LITTLE MORE CONTEXT…PPP – WHAT IT IS NOT • It is not a mechanism to permit privatization of public assets. The public sector retains “ownership” of the underlying asset. • It is not purely a financial transaction. • It is not that the private sector can borrow money more cheaply than the government. • It is not a windfall for the construction community. • PPP is not a panacea or a “magic bullet”.

6. A TYPICAL PPP STRUCTURE M.O.R. Owner P.A. C.A. Project Co Lender(s) M.O.R. D.B.A. O.M.A. Surety Bond Design -Builder Operator M.O.R (Multiple Obligee Rider) P.A. (Project Agreement) C.A. (Credit Agreement) D.B.A.(Design Build Agreement) O.M.A. (Operation & Maintenance Agreement)

7. WHY DID CANADA LOOK TO PUBLIC-PRIVATE PARTNERSHIPS? • Concerns with conventional delivery models: • Schedule and cost overruns. • Under-performance, poor maintenance and operation. • Life-cycle maintenance and operational costs are difficult to predict / budget with underperforming assets. • Adversarial agreements largely premised on the lowest fee or price, with each party attempting to shift as much risk as possible onto the other. • Many public owners are focused solely on the capital cost and not the holistic life-cycle costs of infrastructure. As a result, value-added engineering which would serve to reduce life-cycle costs are often dismissed. • A large infrastructure deficit result from delayed replacement, deferred maintenance, demographic and geographic shifts.

8. THE FIRST STEPS…. • Looked to, and consulted with other countries which had either dealt with, or were facing similar challenges. • Consulted with other countries who had successfully developed a PPP market place. Principally, the United Kingdom and Australia. • Consulted with private sector stakeholders integral to the PPP process (concessionaires, lenders, funders, arrangers, rating agencies, the legal community, contractors, unions, the surety industry, etc.). • Identified infrastructure projects already in the procurement pipeline which might be suitable PPP candidates.

9. THE PRINCIPAL CHALLENGES IN DEVELOPING THE CANADIAN PPP MARKET PLACE • The need for a political champion. • The development of a consistent approach and documents across jurisdictions. • Each private sector stakeholder had differing risk tolerances, and potentially competing interests. • A political culture focused on near term (or existing term of office) costing of infrastructure procurement. • The need to collect and / or development the public sector expertise in a variety of disciplines under one roof. • A lack of understanding and a need for education regarding the PPP model, the value for money equation, and life-cycle costing considerations within the public sector and the average tax payer. • Concern within the Canadian construction community that the PPP model would prohibit Canadian contractors from participating.

10. WHERE DID WE HIT THE MARK? • Created Provincial Near Government Organizations (NGO’s) which were not subject to political will, but yet still accountable to the Canadian tax payer. Infrastructure Ontario, Infrastructure Quebec, Partnerships B.C., are all examples of NGO’s created for the sole purpose of sourcing PPP infrastructure procurement. • The mandate for these NGO’s incorporated all levels of public infrastructure procurement within their respective Provinces (ie. Municipal, Provincial Ministries of Transportation / Health, etc.). • Each NGO developed “in-house” expertise in finance, legal, engineering, construction, operations and maintenance. • Created a Federal Agency, PPP Canada, whose mandate is to “improve the delivery of public infrastructure by achieving better value, timeliness and accountability to taxpayers, through P3’s”.

11. WHERE DID WE HIT THE MARK?Continued… • Considerable consultation and negotiation with private sector stakeholders as to commercially available terms, risk transfer and abilities. • Most jurisdictions took a conservative approach to the implementation of PPP through a combination of a “P3 Light” approach (ie. Build-Finance) and not starting with their largest, most complicated projects. • Continued consultation with private sector stakeholders to “tweak” the model, and address the concerns / flaws inherent to the model and the documents on a project by project basis. This process continues today. • Did not take a “one size fits all” approach to the project documents.

12. WHERE DID WE HIT THE MARK?Continued…. • The NGO’s did not start from scratch in developing the underlying Project Agreement and related contracts. They looked to established documents in other common-law countries, borrowed what worked, developed the missing bits, and “Canadianized” the model. All of which was done in consultation with the private sector. • This approach of “borrowing” made it easier to implement the model in Canada as many of the key private stakeholders would be familiar with the terms and have already developed and understanding and comfort level with them.

13. ROOM FOR IMPROVEMENT AND AREAS OF CONTINUED FOCUS AND DEVELOPMENT • Further education and information dissemination as to the inherent value of PPP delivery is required within both government procurement agencies and the average Canadian Tax Payer. • The “Bundling” issue. • Making the PPP marketplace more accessible to a wider group within the domestic construction industry. • Transparency in the Value for Money equation. • Union resistance to the model. • Managing Pursuit costs to make the model attractive to a wider group of potential respondents. • Higher Transaction Costs. • More Revenue Risk Transfer.

14. CASE STUDY 1 : AUTOROUTE 25, MONTREAL, QUEBEC • The first PPP project delivered in the Province of Quebec after the establishment of Infrastructure Quebec. • Autoroute 25 has been in the planning stages since the 1970’s. • The project involved the DBFMO of a 7.2 kilometre (4.5 mile) section of the A25 highway, including a new 1.2 kilometre (.75 mile) bridge. • Project life cycle of 35 years including 4 year construction term and 31 year operational term. • Monthly availability payment with the Province retaining 100% of tolling revenues.

15. CASE STUDY 1 : AUTOROUTE 25, MONTREAL, QUEBEC - Continued • Risk transferred to the private sector which would normally be retained by the public sector included: Design, Construction, Cost, Scheduling, Commissioning, Selection of the Tolling System, Operation of the tolling system, Toll rate setting (in accordance with the agreement), Operation, Maintenance, Rehabilitation of the facility and tolling system, and Geotechnical Risks. • Public Sector Retained the risks for any undocumented soil contamination and the acquisition and ownership of the rights-of-way. • Estimated public sector costs if procured in a traditional bid-build model of $483.6 million. • Contracted with Concession A25 S.E.C. for $143.1 million resulting in a Value for Money savings of $226.1 million. • Construction finished on schedule in September of 2011, on budget (minor variances for Province retained risks – ie. Contaminated soil), and is currently in the O&M phase.

16. A CASE STUDY 2: STAVE LAKE WTP, MISSION AND ABBOTSFORD, BRITISH COLUMBIA • $300.0 million (est.) Waste Water Treatment Plant servicing the communities of Mission and Abbotsford British Columbia. • Planned PPP delivery incorporating Design, Build, Finance, Maintain and operation. • PPP Canada committed to contributing $65.0 million in financing for the project. • PPP delivery accepted by the Municipal Governments of both Abbotsford and Mission. • Estimated Value for Money in PPP procurement of roughly $60.0 million.

17. A CASE STUDY 2: STAVE LAKE WTP, MISSION AND ABBOTSFORD, BRITISH COLUMBIA - Continued • The Canadian Union of Public Employees (CUPE), were opposed to the planned project and undertook lobbying efforts against PPP procurement of the project. • Basic premise of CUPE’s resistance to the project was the “privatization” of the municipal water supply. • Both Municipalities put referendums to their constituents, and in both Municipalities PPP procurement was voted down.

18. QUESTIONS? If you do not have the opportunity to have your question addressed during the seminar, you may contact the presenter directly: Sean Deakin, Zurich Surety NA Tel: 416-586-2657 E-mail: sean.deakin@zurich.com