The Art of Structuring Public-Private Partnerships

1. Introduction The Art of Structuring Public-Private Partnerships 2013 National Community Development Association Southeast Regional Conference November 1, 2013 National Development Council

2. Overview NDC Housing and Economic Development Corporation History A national 501(c)(3) organization specializing in community and economic development finance Over $2 Billion in completed P3 projects A public mission and a private approach Headquartered in New York City National Development Council

3. Overview NDC HEDC Public-Private Partnerships National Development Council

4. Overview Our Mission To lessen the burdens of government, by helping governmentalentities efficiently develop buildings and infrastructure, reducing costs, creating jobs, and strengthening the local tax base. National Development Council

5. Overview History of Public-Private Partnerships PPP models developed in Europe, Canada, and Australia Focused primarily on major infrastructure development Toll roads Bridges Utility systems Public buildings - less common & primarily Canada Generally involve a private development team experienced in development, construction, and finance A Design-Build contractor An investment firm providing equity and debt financing A management company as necessary National Development Council

6. Overview Why has the U.S. been slower to embrace PPP development? Concern within the public sector that it could lose project control Almost fanatical adherence to the concept of lowest bidder An entrenched bureaucracy two hundred years in the making Differences between U.S. municipal debt structure and private taxable debt structure National Development Council

7. Overview Current State of the IndustryCommon manifestations of Public-Private Partnerships Privatization Toll roads Privatized student housing Sale of public assets Parking meters Public utilities Water Solid waste Subsidization Public contributions in support of a private project Sports stadiums Large redevelopment project Partnerships Balanced allocation between risk and reward Difference between privatization and partnership is a matter of degree National Development Council

8. Overview What does the public sector seek from the private sector? Access to cost savings through efficiency in development and / or operations Ability to avoid both statutory and regulatory constraints Ability to monetize public assets National Development Council

9. Overview What does the private sector seek from the public sector? Development opportunities in pursuit of fees and ongoing revenue Ability to lessen project risk or achieve project subsidy National Development Council

10. The Development Process It is critical to understand the difference between Public & Private Development Processes Without this knowledge, fair negotiations are not possible. National Development Council

11. The Development Process Contrasting the Public and Private Development Processes • Review of the differences between the public development process and the private development process • Understanding of the motives behind each process National Development Council

12. The Development Process – Comparing Public and Private Why do they build? Public Governmental needs Offices Fire stations Police station houses Needs of its citizens Roads Parking Parks Public utilities Often includes societal goals Green construction Public art Community development To reduce operating expenses Private To earn revenue Fees Cash flow Tax benefits Appreciation To accommodate operational needs National Development Council

13. The Development Process – Comparing Public and Private Project Conception Public Steps Identify a need Select a site Determine means of funding Initial authorization Characteristics Long gestation Many decision makers Prone to false starts Multiple goals Private Steps Identify an opportunity Establish site control Test the market Structure financing Characteristics Short gestation Defined line of authority Certainty of goal National Development Council

14. The Development Process – Comparing Public and Private Design & Pre-Development – Procurement Public Selection 1 or 2 step process Direct RFP = 1 step RFQ followed by RFP = 2 steps Selection guidelines Equality Selection on price or scoring – seldom qualitative Adherence to the solicitation, framework and timeline – no negotiation Inclusion of societal goals Private Negotiated or bid contracts Emphasis on price and qualifications National Development Council

15. The Development Process – Comparing Public and Private Construction A Different Approach to Risk Public Construction and Management Relies on process more than experience Involves multiple decision makers Prone to greater time delays Proscriptive change order process Imbalance in relationships – Seldom is the public sector on par with the private sector in allocating costs Without an experienced builder/developer, often resulting in a “learn as you go” process Private Construction and Management Relies on experience not process Efficient decision making Intense focus on timeline Experience and efficient change order process Controls its the relationships – Subs and General Contractors rely on relationships National Development Council

16. The Development Process – Comparing Public and Private Private Development Focus Efficiency and experience are paramount Success defined in terms of bottom line Time management saves money Flexibility to handle the unexpected Seeks opportunities to save money Higher cost financing Public Development Focus Legal framework is paramount Avoid controversy Proceeds deliberatively Time is subordinate to process Process to handle the unexpected Social and political goals are important Lower-cost financing National Development Council

17. The Development Process – Comparing Public and Private How each Manages Risks Public Tendency to increase cost to avoid controversy or perceived risk Frequent use of consultants Heavy reliance on contract language Tendency to treat cost over-run and change orders as legal issues before financial Political risk often trumps financial risk Time delays are secondary to process and consensus Private Experience Flexibility Controlled bidding in combination with negotiation Market knowledge Collaboration Control of the time line Constant pursuit of saving opportunity Negotiation and mediation before litigation National Development Council

18. The Development Process Forms of Delivery Design Bid Build GC-CM (Construction Manager at Risk) Design Build Private 63-20 501(c)(3) National Development Council

19. The Development Process Forms of Delivery: Design - Bid - Build Architect & Engineer Public Agency General Contractor Sub-contractors Sub-contractors Sub-contractors National Development Council

20. The Development Process Forms of Delivery : Design- Bid- Build The most common approach Linear in character Simply understood and explained Supported by extensive legal framework Advantages Intuitive structure Lowest potential for controversy in approach Disadvantages Does not allow for contractor input into design Often prone to extensive change orders and delay National Development Council

21. The Development Process Forms of Delivery: GC-CMGeneral Contractor-Construction Manager, or Construction Manager at Risk Public Agency Architect & Engineer General Contractor-Construction Manager Sub-contractors Sub-contractors Sub-contractors National Development Council

22. The Development Process Forms of Delivery: GC - CM An alternative public works process Design Team procurement outside of GC-CM contract GC-CM procurement governed by alternative public works rules An RFQ vs. RFP process Subcontractor bidding in a Low Bid Process National Development Council

23. The Development Process Forms of Delivery: GC-CM Advantages Adds a Construction Manager to assist the public Brings the General Contractor and Construction manager into the later design stages Allows for Qualification based bidding of the GC Disadvantages Lengthy and Procedural laden procurement process Difficult to verify pricing control Subject to scope and price creep in pre-development phase Maintains ContractualPrivity between the public agency and the GC-CM National Development Council

24. The Development Process GC-CM Process in 6 Steps (as outlined by the Seattle Dept. of Finance & Administrative Services) 2. Project Review & Documentation a. Complete Initial Project Review Form with any supporting documentation; submit to PCSD b. Prepare for Project Roundtable presentation 3. Bid Document Preparation a. Develop a selection plan including timeline b. Develop evaluation form and relative weight factors; prepare scoring form c. Prepare selection/bidding documents for advertisement d. Complete Request to Advertise form e. Edit and finalize documents f. Name Selection Committee members; secure confidentiality agreements g. Post to the City’s online solicitation webpage 1. Assess the Contracting Method a. Define project b. Evaluate project risks and development a Risk Assessment Matrix c. Secure and appropriate funding d. Confirm with Purchasing & Contracting Services Division (PCSD)appropriate contracting method e. Seek training in GC-CM delivery f. Seek out experienced and qualified Project Team (minimum 6 members, defined by City) 4. GC-CM Selection Process a. Make room arrangements for meetings b. Finalize scoring/evaluation sheets c. Finalize selection plan d. Prepare interview questions e. Facilitate scoring and evaluation sessions f. Lead interview sessions g. Prepare scoring matrix for bid opening h. Confirm final pricing and submit final scoring i. Prepare Notice of Final Ranking j. Notify proposers of final ranking, post online k. Finalize the work plan with the apparently successful proposer 5. GC-CM Pre-Construction Services a. Prepare and lead partnering sessions (consider hiring a facilitator) b. Establish/manage pre-construction deliverables c. Prepare and complete design documents d. Secure and appropriate funding e. Request GC-CM self-performance intention f. Approve final subcontracting plan g. Lead GMAX negotiations h. Partner with PCSD to determine any alternative subcontracting options i. Assist PCSD with Social Equity Program 6. Construction Services a. Finalize the construction documents b. Issue Notice to Proceed c. Approve all subcontractors prior to work d. Have pre-construction meeting e. Have A/E and inspection staff on-site during construction f. Partner with PCSD and the GC-CM to meet all social equity contracting goals g. Manage the construction, including change orders, buyouts, contingency usage and track all cost allocations as outlined in the matrix National Development Council

25. The Development Process Forms of Delivery: Design Build Public Agency Design-Build Team (Architect & Engineer, General Contractor) Sub-contractors Sub-contractors Sub-contractors National Development Council

26. The Development Process Forms of Delivery: Design Build An alternative public works process Design Team and General Contractor procured as a team A RFQ process followed by RFP Subcontractor bidding in a Low - Bid Process National Development Council

27. The Development Process Forms of Delivery: Design Build Advantages RFQ process based on project requirements not design Brings the Design Team and the General Contractor together in design process Potential for faster delivery Ability to establish early pricing Greater privatization of risk Disadvantages Potential for loss of control in design process Potential for quality control risks in development Pricing commonly includes allowances to accommodate design & development risk Difficult to repatriate project savings National Development Council

28. The Development Process Forms of Delivery: Private Owner - Developer General Contractor Architect & Engineer Sub-contractors Sub-contractors Sub-contractors National Development Council

29. The Development Process Forms of Delivery: Private Advantages No RFQ/RFP Negotiated contracts Brings the design team and the general contractor together in design process Fast delivery Ability to estimate early pricing Privatization of risk Disadvantages Likely requires more costly private financing structure National Development Council

30. The Development Process Forms of Delivery: 63-20 (A Private Hybrid) Public Agency Design Stage Developer Architect & Engineer General Contractor Not-For Profit National Development Council

31. The Development Process Forms of Delivery: 63-20 (A Private Hybrid) Public Agency Not-For-Profit Lease Construction & Operation Developer General Contractor Architect & Engineer Sub-contractors Sub-contractors Sub-contractors National Development Council

32. The Development Process Forms of Delivery: 63-20 or 501(c)(3) (A Private Hybrid) Advantages Brings the Design Team and the General Contractor together under the oversight of a Developer at the front end of the process. Maximizing public input Allows early pricing and iterative pricing Provides incentives and allows for cost savings to accrue to the public Potential for faster delivery Greater privatization of risk Breaks Contractual Privity Disadvantages Not suitable for small projects Not an easily understood or intuitive process Financed under a lease revenue bond and not a GO bond structure National Development Council

33. The Development Process Contrasting the Public and Private Financing Methods A review of the differences between public and private finance National Development Council

34. Financing Introduction to Financing Private Financing Combination of debt + equity Taxable Two Lenders - Construction loan followed by a Permanent loan Public Financing 100% debt Tax exempt National Development Council

35. Private Financing Private Financing A Balance of Debt and Equity Debt is 50-80% of a project Equity is 20-50% of a project National Development Council

36. Private Financing Summary of Private Financing Requires sources Equity + Construction Debt = Project Cost Permanent Debt to take out the Construction Loan & part or all of the Equity Cost is generally related to risk Cost relates to market and experience Equity costs more than debt National Development Council

37. Public Financing Public Financing 100% debt – Usually bonds (sometimes levies) Access to sources of debt not available to the private sector - taxable and tax exempt bonds A single financing for construction and permanent More focused on ability to pay Less focus on collateral and collateral value Construction interest is capitalized National Development Council

38. Public-Private Partnerships Public-Private Partnerships Public-Private Partnerships Private Development Public Development Subsidization Privatization National Development Council

39. Public-Private Partnerships Goals of a Public-Private Partnership Public Partner Goals: Certainty Efficiency Societal goals What does the public partner want from the private partner? Openness Risk transfer Private Partner Goal: Fair return What does the private partner want from the public partner? Flexibility to succeed National Development Council

40. Public-Private Partnerships Considering a Public-Private Partnership Does it lower costs? Does it reduce risk? Does it solve a significant problem? How does it impact societal goals? How does it impact project oversight and control? National Development Council

41. Public-Private Partnerships 1. Does it lower costs? Financing Structure Cost of Time Experience Staffing Motivation National Development Council

42. Public-Private Partnerships A. Financing - Things to consider Cost of funds Risk transfer Reserves Date certain delivery Guarantees Abatement Appropriation Ownership of asset National Development Council

43. Public-Private Partnerships B. Cost of time - Things to consider Decision making process Change orders Sequencing/critical path Inflation National Development Council

44. Public-Private Partnerships Example – Exterior Color Selection Process for a Public University DC coordinates with Project Manager (PM) to define exterior elements subject to color selection Design Consultant (DC) reviews Color Standards for intent DC assimilates information for review with Assoc. Vice Chancellor (AVC) and PM DC assesses facility and determines appropriate color scheme that meets the intent of the color standards DC prepares color boards, in consultation with Facilities Services Director and PM PM forwards recommended color scheme to DC Color Selection Committee finalizes recommendations on color scheme PM forms and chairs Univ. Color Selection Committee Facilities Services and Color Selection Committee approve the color board AVC advises Master Planning Committee of color selection Master Planning Committee seeks concurrence of Univ. Chancellor Color selection is made public National Development Council

45. Public-Private Partnerships C. Experience – Things to consider Management experience Ability to respond to problems Ability to realize opportunities Ability to control design process Value engineering In-house expertise vs. consultants National Development Council

46. Public-Private Partnerships D. Staffing – Things to consider Costs of in-house staffing Costs of consultants National Development Council

47. Public-Private Partnerships E. Motivation – Things to consider How are all parties motivated to save money? How are savings shared? National Development Council

48. Public-Private Partnerships 2. Does it reduce risk? Management of the schedule Responsibility for unforeseen conditions Ability to respond to issues of force majeure Oversight of design changes/change orders Control of contingency Failure to perform Guarantees Contractual privity Liquidated damages National Development Council

49. Public-Private Partnerships Waterfall of Construction Risk Management Quality of team – Developer, GC, subs, architect GMP Balanced contracting - controls on change orders Adequate contingencies Proper incentives Payment and performance bond Guarantees Contractual Privity National Development Council

50. Public-Private Partnerships Contractual Privity Definition: The connection or relationship between two parties, each having a legally recognized interest in the same subject matter (such as a transaction, proceeding, or piece of property). National Development Council