Introduction to Public-Private Partnerships (P3) Orlando, FL May 16, 2013

1. Introduction to Public-Private Partnerships (P3) Orlando, FL May 16, 2013

2. What We’ll Cover Introduction to Public Private Partnerships (P3) • The state of Infrastructure • What P3 is (and isn’t) • What makes P3 different in the US than in the UK or Canada? • What is needed for a successful P3 project? • How is P3 valued? • Dispelling the myths of P3

3. State of our Infrastructure and its Economic Impact • The ASCE’s “Failure to Act” (December 2012) paper states investment of $2.7 trillion is needed by 2020; likely funding available, $1.6 trillion. • The Congressional Budget Office says combined federal, state and local spending for roads and bridges now amounts to only $160 billion. • The investment gap between now and 2020 is $39 billion in airports, $16 billion in seaports and waterways, $846 billion in surface transportation, $107 billion in electricity, and $84 billion in drinking water and wastewater. • “Job losses will mount annually, and by 2020 it is predicted that there will be 3.5 million fewer jobs throughout the country,” the paper said. • “The expected impact for every household in the U.S. will be an average loss of more than $3,000 per year through 2020 in disposable personal income . . . due to job cutbacks and declining business productivity.”

4. Infrastructure Deficits by Sector

5. Population Growth Drives Demand 0% to -0.1% 0.1% to 0.5%% 0.6% to 1.0% >1% 1.1% 0.8% 0.7% 0.0% NH0.2% 0.6% 2.2% 0.8% 0.1% 0.3% 0.4% VT -0.1% 1.2% 1.6% 0.9% 1.4% 0.2% 0.3% MA0.6% 1.5% 0.7% 0.0% 0.1% 0.3% 1.4% 0.0% 0.2% 1.0% CT0.1% RI0.0% 0.5% 0.3% 1.3% 1.0% DE1.0% NJ0.3% 0.3% 0.9% 0.8% 1.7% 0.4% 1.1% 1.1% 0.4% 0.3% MD 0.8% DC2.1% 0.6% 1.2% 1.0% Source: U.S. Census Bureau HI1.0%

6. What states have P3 Legislation?

7. P3 Projects Around the Country UCF Convocation Center Dallas Omni Convention Center Hotel Washington State Dept. of Information FAU Innovation Village

8. What is P3? Definition:A contractual agreement between a public agency and a private entity under which skills, assets, risks, and rewards are shared in the delivery of a service or facility. • NCPPP identifies 18different legal and financial P3 structures (www.ncppp.org) based on who owns, finances, designs, builds, operates, or maintains the project.

9. What P3 is NOT? TANSTAAFL • Equity or debt require a return on capital and of capital • Identify revenue streams • Target alternative funding sources • Explore level of public support

10. What P3 is NOT? “One size does not fit all” Key to Success Creating a P3 structure that meets the specific financial, legal,andpoliticalconstraints of the client

11. What makes US P3 models different? There is no “one” P3 Model or Template to Follow • The US has an estimated 70,000 public entities • Municipalities, school districts, universities, community colleges, courts, public agencies, and authorities • Local statutes, financial constraints, politics • Wide range of projects • Income and non-income producing assets • Horizontal and vertical construction • No uniform P3 contracts • The exception: Military Housing • One client, the DOD • One contract form • Replicable over many projects (50 bases in 26 states)

12. What makes US P3 models different? Taxable vs. Tax-Exempt • IRC 103(a)- statutory provision excludes earned interest on municipal bonds from federal income tax • IRC 501(c)3- organized and operated exclusively for exempt purposes and none of its earnings may inure to any private shareholder or individual • 63-20 Corporations- power to issue municipal bonds, treated as debt obligations funded on behalf of, but not an obligation of a political entity • Public use and public ownershiprequirement

13. What makes US P3 models different? Taxable vs. Tax-Exempt Tax-exempt status can provide municipalities, public agencies, and not-for-profit institutions a 35% to 40% reduction in cost of occupancy

14. Case Study - Dallas Omni Hotel • 1,001-room city-owned hotelprovided necessary economic boost for under-performing 2.1 million SF convention center • Financed by $480 million taxable hotel revenue bondsunder the American Reinvestment and Recovery Act’s Build America Bonds saving the City over $3 million per year over 30 years • Team included Matthews Southwest as developer, Balfour Beatty as design-builder, First Southwest as financial advisor, and Omni Hotels as operator • Project delivered 3 months ahead of schedule, substantially under budget, and performing above pro-forma

15. What can P3 do for Public Entities? Closing Funding & Timing Gaps • Identify new revenue streams • Housing, Parking, Retail • Mixed Use, Economic Development • Create new tax or fee revenue • Hotel/Motel and Rental Car Tax • User fees and surcharges • TIF Districts • Access alternative funding sources • Government grants • EB5, New Markets Tax Credits • Monetize under-utilized assets • Sale or Lease • Operational savings can increase financing capacity • Not subject tovoter referendums or capital budget allocations

16. Case Study - Florida Atlantic University • 1,216-bed apartment style on-campus student housing village by BB Capital Group • FAU established a Direct Support Organization(DSO) to be the nominal owner of the facility authorized to issue tax-exempt debt • Waterfall: cash flow from existing student housing flows to new housing enhancing debt, then from new housing to FAU for any purpose • Strong revenue projections allowed FAU to clear $12 million from the housing bond sale to support other on campus infrastructure. • BB Capital invests through a junior debt piece of $3.4 million

17. What can P3 do for Public Entities? Risk Transfer • Transfer riskto the party best able to control it • Design risk • Construction risk • Schedule risk • Operating risk • Revenue risk • Financing & interest rate risk • Political risk • Takes advantage of private sector efficiencies and innovationsin construction, scheduling, and financing • Provides efficiencies in long-term operationsand maintenance (“life-cycle”) • Presents opportunity to combine public and private uses in mixed-use developments to leverage economic development

18. How is a P3 Proposal Valued? How do we know if a P3 is the best approach? • Public Sector Comparator (PSC) • The “benchmark” of standard public procurement • Costs of procurement and long-term operations • Value for Money(VfM) • Discount rate, “Time Value of Money” includes inflation, interest rates, and risk • What is the value to the public-sector of each risk is transferred? • Design and construction costs • Private sector procurement costs • Value of alternative financing • Value full life-cycle costs (O&M) “Up to 60% of P3 savings may come from risk transfer”

19. How is a P3 Proposal Valued Value for Money (VfM)

20. What are the keys to success? What is needed for a successful PPP • An essential facility needed today • A political champion, leader • Statutory environment (competitive procurement process, transparency, etc.) • Detailed contract (business plan with clear VfM) • Existing or proposed revenue streams • New tax, user fee revenue, or grants • Lease agreement • New revenue through economic development • Stakeholder support • Selection of “best value” partner and team

21. Case Study - WA Dept. of Information • Delivered through a 63-20 Corpfor the State of Washington • Lease/Leaseback 35-year term • Allowed state to avoid substantial front-end costs • Mission Critical facility • LEED® Platinum, 480,000 SF, 6-story building • $225 million total development budget • Developer Wright Runstad provided a maximum lease price for the state • First new building on state campus in over 2 decades

22. Frequently Asked Questions Dispelling the Myths • “I can borrow at lower rates than you can.” • General obligation debt (G.O.), tax-exempt financing vs. conventional private debt and equity • Small premium for accelerating delivery, reducing construction cost, and lowering interest rate risk • “I will lose control of the project.” • P3 is collaborative, transparent, and “open book” • “Off-balance sheet is not off-credit.” • Not considered “debt,” but a moral obligation • “Private partners make excessive returns” • Transparent, “open book” process • Transfer of risk to the party best able to manage it • Revenue sharing provisions • Contract rebalancing provisions • Alignment of interests

23. When should P3 be considered? As Early as Possible • The P3 process begins with the “need” and the “concept” • Identify and quantify the funding gap • Explore solutions to bridge the gap • The public sector may not be aware of all available funding and delivery options • Staff may not have the expertise to deliver a “once in a generation” facility • Could overlook a more efficient financial, scheduling, and operational solution

24. What are Potential P3 Projects? • Energy Retrofit • Financed through savings • Lighting, HVAC, building envelope, water, renewable energy, “net-zero” Municipal • Civic centers, city hall, administration • Libraries, parking • Police, fire, health, and public safety • Mission Critical facilities • Public Assembly • Convention and conference centers • Performing arts • Arenas and stadiums • Headquarter hotels Education • K-12 – schools, administration, sports • Higher Education - administration, athletics, student unions, housing, healthcare, parking, laboratories, and multi-use economic development Healthcare (Public and Non-Profit) • Ambulatory care clinics • Housing, MOB for staff physicians • Parking, central plants • Multi-use economic development Justice • Jails, detention centers • Courthouses

25. So What? • P3 and the Delivery of your Essential Facilities • Close a Funding Gap • Close a Timing Gap • Transfer Risk • Provide for Future Life-Cycle Costs • “You can’t solve a facilities problem with just a construction solution”

26. How to Increase Infrastructure Investment? • Remove legislative impediments to P3 and other forms of alternative delivery that will provide greater speed to market and greater risk transfer • Assemble top-flight P3 government advisory resources from the private sector (e.g., Partnerships BC, Infrastructure Ontario) • Prioritize projects that have the best P3 potential and issue RFP’s with people authorized to drive the procurement • Require demonstration that P3 has been explored before traditional appropriation or bond financing is requested • Create/fund infrastructure banks to backstop critical projects • Increase federal loan/backstop programs and modify them to include P3 (i.e., MAP-21)

27. Q & A