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Public Private Partnership 101
Part 2
Jonathan L. Gifford, Ph.D.
National Governors Association
State Planning Retreat on Public Private Partnerships – Arkansas
October 7-8, 2015
1
OUTLINE
1. Evidence of P3 impacts
2. What happens when things go wrong?– Renegotiations, Buy-outs and Transfers
– Defaults, & Bankruptcies
2
• ~$10B in projects in last 4 years opened on or ahead of schedule
3
EVIDENCE
Recent Successes
Project Cost* Successes
I-495 Express Lanes (VA) $2.0B opened ahead of schedule (2011)
A-30 (Montreal), $1.7B opened on schedule (2012)
South Fraser Perimeter Road (British Columbia)
$696M opened ahead of schedule (2013)
I-595 Managed Lanes (FL)
$1.8B opened on schedule (2014)
I-95 Express Lanes (VA) $940M opened ahead of schedule (2014)
LBJ Expressway (TX) $2.6B opened ahead of schedule (2015)
* Public Works Financing P3 Projects Database
P3 Savings – Ex Ante Estimates
• Value for money (VfM) = how much $$ (if any) is saved through P3 versus conventional approach
4
EVIDENCE
Retained risk by
public sector
Base cost
Competitive neutrality
Retained risk by
public sector
Cost of service
payments (revenue
stream)
Net
pre
sent
val
ue o
f cos
t
Public Sector Comparator P3 Model
Value for
Money
Risk transferred to
private sector
Source: Grimsey, Lewis 2005, Morallos, Amekudzi 2008, Siemiatycki, Farooqi 2012
Review of 7 VfM Studies
Project % Savings with P3 $ Savings with P3
Presidio Parkway Phase II (CA) 23.0% $147M
I-595 Lanes (FL) 4.2% $78M
Port of Miami Tunnel (FL) 27.5% $398M
I-4 Ultimate (FL) 34.0 – 35.0% $1.3B-$1.4B
Brent Spence Bridge (OH) - -
I-64 Lanes (VA) 3.0% $89M
I-85 Lanes (VA) 10.0% $87M
5
EVIDENCE
Source: Adapted from Kweun, Jeong Yun, Porter, K. Wheeler, and Jonathan L. Gifford. (2015) “A comparative analysis
of value for money studies: highway public-private partnerships projects in the U.S.” (mimeo).
George Mason P3 Evidence Project
• Scope
– What kinds of evidence are useful to decision makers about P3 impacts?
– What kinds of evidence are currently being collected in the U.S. and elsewhere?
– What is the gap between evidence needs and current practices – and how to close it with research, education & training.
6
EVIDENCE
Understanding renegotiations and buy-outs
7
RENEGOTIATIONS
Renegotitations• Modifications of the conditions of the P3
contractual agreements
Buy-outs and transfers• Acquisitions or transfer of the ownership of the
Special Purpose Vehicle to a third-company
Relevance• Citizens concern with rent seeking and
opportunism, mostly from the private sector
Renegotiations: 4 case studies under analysis
8
RENEGOTIATIONS
StateP3
Highways*P3 Highways withrenegotiations*
Cases underAnalysis
Alaska 1 - -
California 4 2 1Colorado 2 1 -
Florida 13 1 -Georgia 1 1 -Indiana 2 1 -Massachusetts 1 - -Michigan 1 1 -
New Mexico 1 1 -North Carolina 1 - -
South Carolina 1 1 -Texas 10 4 -
Virginia 6 5 3TOTAL 45 18 6
• California
– SR 91 Express Lanes (SR19)
• Virginia
– Dulles Greenway (DG)
– Pocahontas Parkway (PP)
– Downtown Tunnel / Midtown
Tunnel / MLK Extension or
Elizabeth River Crossings (ERC)
*As of May 2015Source: Public Works Financing and InfraDeals
SR 91 Express Lanes (SR91)
9
Los Angeles, California
Concessionaire Level 3 Communications, Vinci Autoroute, & Granite Construction
Financial close 1993
Facility open 1995
Revenue source Toll
Contract type DBFOM
Original cost (US$) 88.3 million (1990)
Project attribute 10 miles (16.1km) road
Renegotiations
• 2003: OCTA purchases the project for $341.5M to eliminate non-compete clause, after attempts to breach the contract by the public sector
Dulles Greenway (DG)
10
Loudoun, Virginia
ConcessionaireShenandoah Group, Kellogg Brown & Root
Financial close 1993
Facility Open 1995
Revenue source Toll
Contract type DBFOM
Original cost (US$) 350 million (1993)
Project attribute 14 miles (22.5km) bridge
Renegotiations
• 1995: Owners defaulted on debt. • 1997: Tolls increased and speed limit increased• 1999: Debt restructured. Project modified (from 2*2 lanes to 3*3 lanes)• 2001: Extension of concession period (+20 years)• 2004: Change in tolls (variable peak and discounted off-peak point-to-point rates)• 2005: Macquarie Infrastructure Group (MIG) buys it• 2013: Mechanism to define tolls is changed (highest: CPI+1%, real GDP, or 2.8%.)
VA SR895 Pocahontas Pkwy (PP)
11
Richmond, Virginia
Concessionaire Fluor Daniel & Morrison Knudsen
Financial close 1998
Facility Open 2002
Revenue source Toll
Contract type DBFOM
Original cost (US$) 381 million (1998)
Project attribute 8.8 miles (14km) bridge
Renegotiations
• 2006: Transurban USA buys it, concession period is extended to 99 years and investment increases: 1.6 mile, four-lane road and electronic tolling
• 2012: Transurban USA writes off equity but operation continues• 2013: PP is not insolvent or in bankruptcy. Plans to transfer it to lenders.• 2014: Transurban USA transfers operations to DBi Services
Downtown Tunnel/Midtown Tunnel/MLK Extension or Elizabeth River Crossings (ERC)
12
Norfolk, Virginia
Concessionaire Skanska & Macquiare
Financial close 2012
Facility Open Expected 2017
Revenue source Toll
Contract type DBFOM
Original cost (US$) 2,089 million (2012)
Constructed Length 2.2 miles (3.5km) bridge/tunnel
Renegotiations
• 2012: toll delayed in exchange for $100 million• 2014: toll decrease in exchange for $82.5 million • 2015: removal of tolls for MLK Extension for $78 million*
Understanding Bankruptcy
Default• Situation when the SPV stops paying its debt service• If the firm continues in this situation it may lead to two
potential outcomes: debt restructuring or foreclosure
Debt Restructuring• When, after debt service is not paid, the debtor acts to pay
debt, through the selling of assets or through the restructuring of the debt.
Foreclosure or Liquidation• When, after debt service is not paid, the lender acts to sell
the asset to receive its money back
13
BANKRUPTCY
Operation began: 2000
Revenue source Tolls
Contract type DBFOM
Original cost $85 million
Project attribute 21-mile road
Year bankruptcy filed 2004
Bankruptcy filer John Hancock Life Insurance and New York Life Insurance
Law Texas Property Code Title 5
In brief: causes & aftermath of bankruptcy
• Cause: Demand lower than projected • Actions: Sold in auction for $12 million to John Hancock Financial Services Inc.• New owner holds-up TxDOT and gets $20 million for selling the road• Current Status:
- Toll road is open- Road is currently managed publicly by TxDOT
14
Texas
Camino Colombia Bypass
Southern Connector
Operation began: 2001
Revenue source Tolls
Contract type DBF
Original cost $191 million
Project attribute 16-mile road
Year bankruptcy filed 2010
Bankruptcy filer Connector 2000 Association
Law U.S. Bankruptcy Code Chapter 9
In brief: causes & aftermath of bankruptcy
• Cause:- Demand lower than projected--Demand drops during Great Recession- No-skin-in-the-game (63-20 nonprofit corporation)
• Actions: Reorganization plan approved in Aug. 2012 - Debt is restructured- The $200 million bonds are replaced with a new issue of $150 million bonds
• Current Status:- Tolls are increased - Toll road is open 15
South Carolina
South Bay Expressway (SBX)
16
San Diego, California
Operation began: 2007
Revenue source Tolls
Contract type DBFOM
Original cost $635 million
Project attribute 9.2-mile road
Year bankruptcy filed 2010
Bankruptcy filerCalifornia Transportation Ventures, Inc.
Law U.S. Bankruptcy Code Chapter 11
In brief: causes & aftermath of bankruptcy
• Cause: - Environmental permit delay & community opposition- Demand lower than projected--Demand drops due to the Great Recession
• Actions: - Purchased by San Diego Association of Governments for $341.5m in Dec. 2011
• Current Status: - Toll road is open - Tolls were decreased
Foley Beach Expressway
Operation began: 1999
Revenue source Tolls
Contract type DBFOM
Original cost $44 million
Project attribute 1-mile bridge + 5 mile road
Year bankruptcy filed 2013
Bankruptcy filer American Roads, LLC
Law U.S. Bankruptcy Code Chapter 11
In brief: causes & aftermath of bankruptcy
• Cause:- Demand lower than projected--Demand drops due to the Great Recession- Parent company went bankrupt as the City of Detroit filed for chapter 9
bankruptcy, where it operated a tunnel.• Actions:
- American Roads LLC changes hands, from Alinda Capital Partners to Syncora, under allegations of fraudulent traffic and revenue studies
• Current Status: - Toll road is open 17
Alabama
Indiana Toll Road (ITR)
18
Indiana
Operation began: 2006
Revenue source Tolls
Contract type DBFOM + OM
Original cost $3.8 billion
Project attribute 157-mile road
Year bankruptcy filed 2014
Bankruptcy filer ITR Concession Co. LLC
Law U.S. Bankruptcy Code Chapter 11
In brief: causes & aftermath of bankruptcy
• Cause:- Great recession decreases interest rates playing against interest-rate swaps- Demand lower than projected--Demand drops during Great Recession
• Actions: - Purchased by IFM Investors for $5.72b in March 2015
• Current Status: - Toll road is open
What is evidence telling us with recent successes? (1)
• ~$10 billion in projects delivered– Most delivered early
– Most delivered at or near budget
19
What is evidence telling us “when things go wrong”? (1)
• Concerns are not fully validated.– Exogenous shocks and contract complexity main culprits
– Losses concentrate in the private sector
– Minimal public sector losses compared to Europe and Latin America
• Bankruptcy legislation affects incentives.– Contracts are clear regarding how risks are shared.
– Chapter 9 and 11
• U.S. vs others: private sector needs to keep operating the facilities
• U.S. vs others: procedure favors restructuring to continue operations
– Implication: costs of not reaching a deal accrues to equity holder
20
What is evidence telling us “when things go wrong”? (2)
21
• Private sector is internalizing most of the financial losses.– Only in SBX we see gov. money lost (TIFIA loan)
– TIFIA´s “springing lien” protected the public sector
• Active capital market increases options.
– High demand for different levels of risk tolerance
– Implication: monopoly power of the incumbent private sector diminishes
Visit us at: p3policy.gmu.edu
Jonathan L. Gifford, Ph.D.
[email protected] / +1(703)993-2275
22
Expanding the evidence base
Enhancing agency capacity
Educating the workforce and community about P3s