PPP Basic Concepts Case Study Application: Indiana Toll Road Ricardo Sanchez February 12, 2013

1. PPP Basic Concepts Case Study Application: Indiana Toll Road Ricardo Sanchez February 12, 2013

2. Index tion: concept, grounds for P3s and main players of highway P3s

3. 01 Introduction to PPP’s

4. 01. Definition of Public-Private Partnerships (PPP) Contractual arrangements between the public and private sector in which • the private sector assumes most of the risks of financing, constructing (or leasing) and operating and maintaining an infrastructure • in exchange for the right to future revenues or payments • for a specified term

5. 01. The driving forces of PPPs growth (I) Increasing demand for investment in highway construction, operation and maintenance projects due to: • Traffic congestion • Aging infrastructure • Population growth • Changing development patterns Decreased purchasing power of the traditional public funding mechanisms for funding highways (the gas tax) due to: • Increasing fuel efficiency of motor vehicles • Political resistance to increasing the gas tax • Depletion of the Highway Trust Fund

6. 01. The driving forces of PPPs growth (I) Increasing demand for investment in highway construction, operation and maintenance projects due to: • Traffic congestion • Aging infrastructure • Population growth • Changing development patterns Decreased purchasing power of the traditional public funding mechanisms for funding highways (the gas tax) due to: • Increasing fuel efficiency of motor vehicles • Political resistance to increasing the gas tax • Depletion of the Highway Trust Fund

7. 01. The driving forces of PPPs growth (II) THE CONSEQUENCE: • The private-sector capital becomes an attractive option to supplement or replace the public funds for highway projects OTHER BENEFITS THAT BRINGS THE PRIVATE-SECTOR PARTY: • Equity Invested at Risk • Accelerated project completion • Motivated and highly specialized management teams • Cost control and operational efficiency • Innovation and new technology • Improved customer service WHY SUCH BENEFITS? • Significant risks are allocated to the private sector who is rewarded for accepting such risks

8. 01. Main players in PPPs Projects

9. 01. Advantages of PPPs • Maximizes the use of each sector’s strength • Reduces public capital investment • Improves efficiencies – quicker completion • Shares risks • Mutual rewards • Improves aggregate overall costs efficiencies • Improves service to community

10. 02 TRADITIONAL VS ALTERNATIVE PROJECT DELIVERY METHODS

11. 02. Traditional Delivery Method : Design-Bid-Build Advantages: • Full control over design by public sponsor • Low-bid procurement encourages lowest construction cost • Ensures competition among private contractors • Consistent with the institutional framework (state agencies are structured and stuffed to procure highway projects following this traditional method) Disadvantages: • Impacts on cost and project schedule: constructor takes advantage of unanticipated design flaws to get additional payments (change orders) or of unanticipated site conditions to get project schedule relief • Project financed entirely with public funds • No synergies between design and construction phases Process: • Public sector develops design • Competitive bids for construction by private sector based on that design • Construction work is awarded to the lowest-price bid • Project financed with public funds • Public entity inspects compliance of the works with the design • Public entity operates and maintains the facility

12. 02. Alternative Delivery Methods • Increasing participation of private sector in the development of the projects: • Assuming significant project risks • Making available private sector funds

13. 02. Alternative Delivery Methods Design-Build-Finance-Operate-Maintain (toll) • +Risk of traffic is transferred to the private entity. The tolls, are used by private entity to repay the private sector funding • Design-Build-Finance-Operate-Maintain (availability) • + Risk of financing the project is transferred to the private sector: funds from private sources (i) Equity & (ii) debt are available. The tolls, are used by public entity to repay the private sector funding. • Design-Build-Operate-Maintain • + Encourages delivery of a higher quality project (to reduce life-cycle maintenance and rehabilitation costs) • Design-build • Faster project delivery • Design, construction and operational efficiencies • Quality improvements • Encourages innovation

14. 03 PPP Risk Allocation

15. 03. Design-Bid-Build Risk Allocation Design Construction Technology upgrades Environmental Operation & Management PUBLIC SECTOR Right of Way Traffic & Revenue Unforeseen conditions Change in law Integration Approval Process Customer acceptance Finance PRIVATE SECTOR

16. 03. Design-Build-Finance-Operation-Maintain Risk Allocation Construction Design Technology Financing Operation & Maintenance PrivateSector Traffic & Revenue Environmental PublicSector Approval Process Change in law Competing Facilities ROW Unforeseen Conditions Oversight Customer Acceptance Delay Events Termination Shared Public Private

17. 04 CONTRACTUAL STRUCTURE OF A HIGWAY P3 PROJECT

18. 04. Common structure of a highway P3 UPFRON PAYMENT EQUITY RETURN SERVICE CONCESSION AGREEMENT REVENUE SHARE – UPFRONT PAYMENT EQUITY CONTRIBUTION & PROVIDES SERVICES PUBLIC FUNDS TOLLS COLLECTION & ENFORCEMENT & BACK OFFICE SERVICES DEBT SERVICE TRANSACTION PAYMENTS LOAN FUNDS TOLL SYSTEMS DELOPMENT & INTEGRATION PROJECT DESIGN & CONSTRUCTION FIXED PAYMENT OM&R SERVICES LUMP SUM FIXED PRICE CONTRACT PRICE

19. 05 PPP’s Financing

20. ¿Whatis Project Finance? • Financingof a projectwherecreditorshave as main and onlyrepaymentsourcetherevenuesgeneratedbysuchproject. • Alsocalled non recourseorwithlimitedrecoursetothesponsor financing • As therepaymentsourceisthe cash generatedbytheproject, creditorsmake a careful and deepanalysis of thecertainty of thoserevenues in ordertominimizetherisk of notbeingrepaid. • Project Financeisgenerallynotapplicableto real stateor industrial projectswheremarketrisks are difficulttomitigate. ApplicabletoInfrastructureProjectslikeTollRoads .

21. WaystofinanceanInfrastructure Project • PrivateFinancing: • Financedwiththeinvolvement of a privateentity. • Takestheform of a PublicPrivatePartnership (P3). • Differentdegrees of private and/or public support. • The private investor invest equity at risk and expects a return. • PublicFinancing: • Financedby a publicentity. • No privateinvestmentisinvolved (equity). • Publicsupportvariesdependingontheproject: Revenue Bonds (e.g. NTTA projects) vs full supportfromstate.

22. The main sources of funding are: Equity: Provided by the Private Sector Debt: Funded by the Capital Market (Bonds) or Bank Loans Public Support: Usually in the form of direct subsidy or TIFIA Financing ¿Howis a typical P3 Project Financed? Sources of Funds Uses of Funds Equity Reserve Accounts Debt Interest & Fees Transaction Cost Public Support Civil Works Right of Way Tolling Systems Advisors Debt

23. P3 TypicalFlow of Funds Toll collection & other revenues Project O&M/CapexProviders OPEX & CAPEX Capital markets/ banks debt service Senior Debt Debt like public support Federal Government (TIFIA) other Public Entities Sponsors: dividends payment Equity 23

24. 05 PPP Case Study: Indiana Toll Road

25. ITR Barrier System • 24 miles long, connects the Chicago Skyway to the Ticket System • Open tolling system w/ 8 plazas • Strong competition with the I-94 • 431 million VMT (10% trucks), 26 million transactions recorded in 2012 • Cars pay $0.07/mi (cash) or $0.02/mi (ETC tag) • 5-axle trucks pay $0.22/mi 05. Indiana Toll Road • ITR Ticket System • 133 miles long, connects the Barrier system to the Ohio Turnpike • Closed system w/ 14 plazas • Few viable alternatives, occasionally competes with SH-20 and I-94 • 1.2 billion VMT (40% trucks), 21 million transactions recorded in 2012 • Cars pay $0.06/mi (cash) or $0.03/mi (ETC tag) • 5-axle trucks pay $0.24/mi Barrier System

26. 05. Existing Traffic & Revenue Light vehicles make up about 70% of the miles traveled on the ITR, making cars the largest market in terms of both number of users and VMT. Trucks are the most valuable asset to the ITR. 5-axle trucks (the most common variety) pay toll rates 3-4 times higher than cars and demonstrate an inelastic response to toll rate increases. Of the ITR’s $185m annual revenue, two-thirds comes from trucks.

27. 05. Trend in Traffic & Revenue The figures to the right show the average daily traffic on each ITR system in blue bars. Traffic is measured in full-length equivalent trips (FLET), which is calculated as VMT divided by the facility’s length. The annual revenue (nominal) collected from tolls in each year is shown by the red line. Note that while traffic has not recovered from the recession, revenue continues to increase as toll rates are increased annually.

28. 05. Indiana Toll Road Project History • Publicity financed and constructed during the 1950s. • Began operations in 1956 giving motorists easy access between the Midwest and the Eastern United States. • Operated by the Indiana Toll Road Commission from its inception. • INDOT assumes operations in 1981 from ITR Commission. • In 2006, ITRCC took over operation of Toll road. • ETC Tolling System implemented in 2008. • As of 2013, over $300 million has been invested in improvements to the ITR.

29. 05. ITR Privatization Process

30. Construction Financing Design ETC Implementation Operation & Maintenance ITRCC Traffic & Revenue Environmental IFA Approval Process Change in law Competing Facilities ROW Unforeseen Conditions Oversight Delay Events Termination Shared Public Private 05. ITR Risk Allocation Structure

31. 05. ITR PPP Contractual Structure IFA Lenders ITRCC FerrovialAgroman

32. 05. ITR Concession Agreement (I) • Lease Term: 75 years • Tolling Regime • Tolls increased every July 1st by the greater of CPI, Nom GDP/capita or 2% • Car tolls ‘freezed’ at 2006 rates for ETC users up to 2016 • Contract allows for certain toll optimization • IFA does not APPROVED new tolls but reviews compliance with contractual regulation

33. 05. ITR Concession Agreement (II) • Mandatory Expansion Works in Barrier Section (Widening to 3+3 lanes of x miles) • Implementation of ETC system no later than June 2008 • Capacity Expansions triggered at LOS D in urban areas and LOS C in rural areas • Performance Based Maintenance Standards • Example: Pavements

34. 05. ITR Financing

35. 06 CONCLUSIONS