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Public-Private Partnerships: Evolution and Maturity

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Public-Private Partnerships: Evolution and Maturity 2016 Engineering & Construction Conference June 15–17, 2016 The Westin Austin Downtown Austin, Texas Public-Private Partnerships: Evolution and Maturity Micah Bible Lucian Spatoliatore Senior Manager, M&A Transaction Partner, M&A Transaction Services Services Deloitte & Touche LLP Deloitte Tax LLP Todd Wilson Jim Ziglar, Jr. Managing Director, M&A Senior Manager Transaction Services Deloitte Transactions and Deloitte & Touche LLP Business Analytics LLP 9:45 – 10:45 a.m. Contents Overview of the Market for U.S. Public-Private Partnerships (P3s) Potential Tax Implications for Companies Investing In P3s Update on Accounting and Financial Reporting Q&A Session Overview of US Public- Private Partnerships (PPPs or P3s) PPP Definition Public-private partnerships (“PPP”s or “P3”s) are contractual relationships in which the public and private sector agree to share the risks and rewards associated with a public asset. There are many types of PPP structures, but most share the following characteristics: • Long-term contractual arrangement with some regulatory element • Not a full legal asset sale • Designed to secure value or control costs for the public sector • Private sector contractor accepts risks and responsibility for (some or all of) design, construction, financing, maintenance and operations • Public sector retains strategic control over service delivery, may retain certain risks that it is able to handle more efficiently than the private sector, and either cedes revenue generated from asset or makes payments for performance • Payment to the private sector either comes directly from the project (revenue risk), or is a performance-based payment from the government (availability payment) Range of Project Delivery / Procurement Models Traditional Approach, PPPs, and Asset Sale A PPP is a contractual relationship in which the public and private sector agree to share the risks and rewards associated with a public asset. PPP Project 1 Project 2 Project 3 Project 4 Project 5 Project 6 Project 7 Project 8 Design Build Finance Maintain Operate Own More Public More Private Public Single Private Entity Infrastructure Landscape U.S. Infrastructure ownership, delivery and Unique U.S. characteristics operational models Public/ Private Public • State, Local and Public private (incl. “non-profit”) Authorities primarily Surface transportation most some responsible for infrastructure Ports some some Aviation all • Robust market for sub- Freight rail all sovereign debt (municipal bonds) Power/Energy some most Healthcare some most • Diversity of legal/regulatory “Social” framework across (education/corrections / most some some jurisdictions municipal buildings ) • Significant sectors that are Telecoms/Cable all “privatizing” overseas are Water/Wastewater most some already largely private in the Broadband some most U.S. Unique characteristics of U.S. market imply that PPP is likely to develop in markets, sectors and geographies where it brings unique value, and to continue to grow as it Copyright © 2016 Deloitte Development LLC. All rights reserved. is proven out. Commonly Cited Public Sector Benefits and Concerns in PPP Benefits Concerns • Accelerated delivery • Loss of public control and flexibility • Incentivized performance; improved • Private profits at the public’s expense project quality • Loss of future public revenues • Whole-life costing efficiencies • Risk of bankruptcy or default • Optimal allocation of risk • Accountability and transparency • Divesting “non-core” assets; • Pricing/regulation monetization of existing assets • Non-domestic capital; foreign • New capital source companies • Risk transfer • Labor concerns; loss of public sector jobs Designing the Structure An involved and systematic process is undertaken to structure the partnership. Desired partnership structure • Who can and should do what? Determine best – Capabilities “owner” of each – Financial project component – Risk Transfer • What Do I Want to Do? Define project needs • What are my Objectives? and priorities – Speed – Degree of Certainty – Efficiency – Innovation • What Am I Allowed to Do? Determine public authority – Legal Framework Quantitative& Analysis Qualitative – Political realities Design Build Finance Operate Maintain Own Project Components Summary of Completed PPP Transactions Stable number (4-5 per year) of transactions in US, but overall decrease in size. Canada has slowed this year. Number of transactions Average transaction size (in USD million) 25 1,200 1,000 20 800 15 600 10 400 5 200 0 - 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 USA Canada USA Canada Source: www.infra-deals.com Sectors (of PPPs closed since 2014) Transportation dominates P3s in US and Canada. (See Appendix for details) USA Canada Environment Environment Healthcare Healthcare Other Social Infrastructure Other Social Infrastructure Power Power Telecommunications Telecommunications Transport Transport Other Other Source: www.infra-deals.com Summary of PPP Transactions in the Pipeline (see Appendix for details) USA Canada 50 50 40 40 30 30 20 20 10 10 0 0 Number of transactions Number transactions of Number Environment Power Environment Power Social Infrastructure Telecommunications Social Infrastructure Telecommunications Transport Other Transport Other Source: www.infra-deals.com Funding and Financing • Funding is the revenue and capital that pay for the creation and ongoing maintenance of an asset or service. • Financing is the structure and related financing instruments that are used to leverage or securitize the funding revenues. Finance Traditional Leveraged with • Revenue bonds • Federal loans • Infrastructure banks Sources of Funds: Innovative • Project finance loans • Taxable bonds, PABs • Mezzanine, sub debt • Tolls/Fees/Rents • State and local resources • Investor Equity • Other oper. revenues • Federal funds • New Taxes (Sales, Funding payroll, etc.) Construction Uses of Funds: costs O&M costs Key Principles PPPs are a tool, not a panacea for infrastructure procurement • PPPs can offer alternative project delivery methods or financing mechanisms, but, in the long run, do not provide new money (funding) for infrastructure. Revenues to repay the private investment must come from the same sources of “public” funding – tolls, fees or taxes. • Therefore, PPPs are: − first, a procurement mechanism; − second, a financing mechanism; and − almost NEVER a funding mechanism. • The bulk of the value in PPPs comes from efficiencies in the design, construction, operations, and maintenance of an asset or service, not from financial engineering. Recent trends (1 of 2) • Tight municipal budgets are driving desire for more innovative procurement and financing methods that may not impair municipal borrowing capacity. • PPP activity has spread beyond a few core states and continues to grow: − Active: CA, CO, FL, GA, IL, IN, MD, NC, PR, TX, VA, PANYNJ − In-process: AZ, KY, NY, PA, WV − Considering: MI, CT, DC • U.S. market has been opening up to other types of private capital to fund infrastructure projects but the rate of growth has been uneven, largely based on − local political climate (and education), and − availability of creditworthy projects. • Continued momentum within certain states and at the federal level (e.g. White House and the US Treasury support P3s). Also, bipartisan support in both the House and the Senate to the concept of partnering with the private sector to deliver infrastructure projects. Recent trends (2 of 2) • Expanding interest by the Federal government in: − Procuring/ disposing of assets through PPPs − Providing long-term debt capital to projects through expanded or new credit programs • Most of the activity is still in the transportation sector, with social infrastructure growing in both Canada and the US. Some activity or discussion in water/wastewater infrastructure. • Investors have a significant amount of “dry powder” and are increasingly looking at opportunities in the secondary market. • Increasing consideration and use of a diversity of PPP structures − Delivery method: commercial/ financial structures ranging from DB through DBFOM − Revenue source: availability payment, revenue risk, hybrid − Financing: grants and other contributions used to lower overall capital costs Challenges to PPPs “Taking Off” Across the U.S. • Authority to use PPP • Political risk • Existing capital structures and revenue pledges • Timing challenges − Public sector procurement processes − Education of procurer • Availability of long-term low-cost debt capital • Accounting treatment Key Success Factors • Compelling benefits and credible analytical support – “value for money” • Clearly identified source for repayment – funding • Robust framework for protecting the public interest • Clear, regular communications with all stakeholders – “transparency” − Can require long “education” period for some stakeholders before transaction activity begins • Careful early-stage analysis and structuring • Efficient allocation of risk and reward • Flexibility and an understanding of available alternatives is key • Robust process designed to result in competitive bids, but also allowing for reasonable private sector innovation • “Partnership” approach begins before financial close Potential Tax Implications for Companies Investing in P3s Typical Forms of P3 Transportation Concessions Toll Concession vs. Availability Payments: Risk Allocations Availability Payments / Toll Concessions Shadow Toll Arrangements Concessionaire’s return is based on toll • Concessionaire assumes the
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