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Privatizing Government: Will It Really Solve State Funding Woes?
Polling Question 1:Which of the following options is the most realistic for overcoming revenue shortfalls in the state’s budget?
1. Privatization
2. Tax hikes
3. Bonds
4. Reducing government spending
Polling Question 2:Which area will be best suited in the long term for privatization ?
1. State lottery
2. Toll roads and highways
3. Water/wastewater management
4. Airports and ports
5. Correctional facilities
Polling Question 3:Will privatization help solve the state’s budget woes?
1. Yes, privatization will be a long-term solution.
2. No, privatization will be only a short-term fix.
Source: California Department of Finance
California Revenues and Expenditures FY 1976-77 to 2007-08
07-0802-0397-9892-9387-8882-8377-78
40
30
20
10
0
-10
Percent Change, Year Ago
Total Revenues and TransfersTotal Expenditures
Source: Legislative Analyst’s Office
California Budget for Capital OutlayPercent, FY 1985-86 to 2007-08
07-0804-05
01-0298-99
95-9692-93
89-9086-87
100
80
60
40
20
0
PercentTransportationEducationOthers
Sources: U.S. Department of Transportation, U.S. Census Bureau, Milken Institute
California Growth Index: VMT, Lane Length and Population
1994 Value = 100
200520042003200220012000199919981997199619951994
125
120
115
110
105
100
95
1994 Index = 100
Vehicle Miles Traveled (VMT)Lane LengthPopulation
Sources: Global Insight, Milken Institute
Tax Burden2006
Least ExpensiveThird TierSecond TierMost Expensive
Source: U.S. Department of Transportation
Road ConditionsCalifornia vs. U.S., 2005
United StatesCalifornia
120
100
80
60
40
20
0
PercentVery Good GoodFair MediocrePoor
Source: U.S. Department of Transportation
Bridge ConditionsCalifornia vs. U.S., 2006
United StatesCalifornia
100
80
60
40
20
0
Percent
GoodDeficient
Costs to Relieve CongestionU.S. Urban Areas
Source: Reason Foundation
Urban Interstates and Freeway
Other Principal Arterials
Minor Arterials, Collectors, Local Streets
50000
25002.5
5
Costs to Relieve Congestion (US$ Mills.)
Highway Congestion in Urban Areas 2007
Source: Texas Transportation Institute
Rank Urban Area
Annual Delay per Traveler
(Hours) Travel Time Index
(Value)Congestion Cost
(US$ Millions)1 Los Angeles-Long Beach-Santa Ana, CA 72 1.50 9,3252 San Francisco-Oakland, CA 60 1.41 7,3833 Washington, DC-VA-MD 60 1.37 3,9684 Atlanta, GA 60 1.34 2,7475 Dallas-Fort Worth-Arlington, TX 58 1.35 2,730
11 New York-Newark, NY-NJ-CT 46 1.39 2,07612 Boston, MA-NH-RI 46 1.27 1,82013 San Diego, CA 57 1.40 1,70814 Seattle, WA 45 1.30 1,68715 Philadelphia, PA-NJ-DE-MD 38 1.28 1,41316 San Jose, CA 54 1.34 1,17617 Denver-Aurora, CO 50 1.33 1,12618 Orlando, FL 54 1.30 1,09919 Riverside-San Bernardino, CA 49 1.35 1,00520 Baltimore, MD 44 1.30 95524 Sacramento, CA 41 1.32 71130 St. Louis, MO-IL 33 1.16 459
All 437 Urban Areas 38 1.26 179
2030 State Congestion RankingsUrban Area Total
Source: Reason Foundation
Rank StateLane Miles Congested State
Lane Miles Needed State
Total Costs of Lane Miles Needed (US$ Billions)
1 California 8,730 California 13,132 California 121.92 Texas 7,986 Texas 12,929 Illinois 55.03 New York 4,735 Florida 8,536 Texas 49.14 Arizona 4,082 Colorado 4,668 New York 45.05 Florida 3,990 New York 4,512 Florida 38.76 Illinois 3,037 Pennsylvania 4,465 Michigan 27.17 Pennsylvania 2,456 Illinois 4,459 Pennsylvania 25.58 Michigan 1,785 North 4,361 Massachusetts 21.99 North Carolina 1,537 Arizona 3,813 D.C. 16.2
10 Georgia 1,516 Michigan 3,668 Georgia 14.3
Source: Reason Foundation
2030 Expected Travel Time Delay U.S. Urban Areas
Rank City Population in 2030
(Thousands) Congestion Index
in 20301 Los Angeles-Long Beach, CA 15,652 1.942 Chicago, IL 9,522 1.883 Washington, WA 5,973 1.874 San Francisco-Oakland, CA 4,968 1.865 Atlanta, GA 5,009 1.856 Miami, FL 7,551 1.847 Denver-Aurora, CO 3,210 1.808 Seattle-Tacoma, WA 3,963 1.799 Las Vegas, NV 1,029 1.79
10 Minneapolis-St. Paul, MN 3,370 1.7611 Baltimore, MD 2,437 1.7512 Portland, OR 2,513 1.75
Source: American Society of Civil Engineers
California Infrastructure Report Card2006
Category GradeAviation C-
Levees/Flood Control FPark/Open Space D+
Ports C+
Solid Waste BTransportation D+
Urban Runoff D+
Wastewater C+
Water C+
California's Infrastructure GPA C-
Annual Investment Needs $37 Billion
Sources: Public Policy Institute of California, California Infrastructure Coalition
Infrastructure Bond MeasuresOn the November 2006 State Ballot, All Approved
Funds (US$ Billions) Proposition
Transportation, Air Quality and Port Security 19.9 1BHousing and Emergency Shelter 2.9 1CEducation 10.4 1D K-12 7.3 Higher Education 3.1Disaster Preparedness and Flood Prevention 4.1 1EWater Quality, Safety and Supply, Flood Control, Natural Resource Protection, and Park 5.4 84Total 42.7
Source: RREEF
Case for Privatization
Problems with Old/Public Model
• Underinvestment
• Fees that are not cost-reflective
• High costs
• Low productivity
• Accountability; providing appropriate service level
• Shortages
Benefits of Privatized Model
• Increased investment
• Cost-reflective fees
• Improved incentives for efficiency
• Access to superior management
• Improved service quality
Forms of PrivatizationUsed by U.S. States
Contract 80.0%
Grant 5.7%
Franchise/Concession 5.0%
Public-Private Partnership 4.3%
Voluntary Action 1.8%
Voucher 0.7%
Other 2.5%
Source: RREEF
Privatization of Existing Toll Facilities2006
State Location RoadCost
(US$ Billions) TypeMI Detroit Detroit-Windsor Tunnel $0.07IL Chicago Skyway $1.83 99-Year LeaseIN Indiana Indiana Toll Road $3.85 75-Year LeaseVA Loudoun County Dulles Greenway $0.62
Total $6.37
Source: RREEF
Source: RREEF
New Public-Private PartnershipToll Roads in Operation
2006
State Location RoadCost
(US$ Billions)AL Tuscaloosa Black Warrior Pkwy. $0.025AL Montgomery Emerald Mt. Expwy Br. $0.004Al Foley Foley Beach Express $0.004AL Montgomery River Pkwy. Br. $0.012MO Lakeof the Ozarks Lakeof the Azarks Br. $0.040ND Fargo Fargo Br. $0.002CA Orange County 91 Express Lanes $0.130SC Greenville Southern Connector $0.191TX Laredo Camino Colombia $0.090VA Loudoun County Dulles Greenway $0.430VA Richmond Pocohontas Pkwy. $0.325
Total $1.293
Source: California Lottery
California Lottery Allocation of Revenues
Percent, 2006
Prizes Awarded 53.9%
Public Education 34.6%
Retailer Bonuses and Commissions
7.0%
Operating Expenses 2.8% Game Costs
1.6%
Source: La Fleur's World Lottery Almanac
California Lottery Expenditures Percent, 2006
Direct Cost 14.0%
Operating Expenses
25.0%
Retailer Compensation
61.0%
California Lottery As Percent of Sales, 2006
Source: California Lottery
Daily 34.0% Daily Derby
0.3%
Fantasy 5 4.1%
Hot Spot 4.6%
Mega Millions 12.7%
Super Lotto Plus
20.5%
Scratchers 53.8%
Source: La Fleur's World Lottery Almanac
2006 Lottery Sales Per Capita Sales, Selected States
States RankSales (US$) States Rank
Sales (US$)
Massachusetts 1 707 Delaware 1 903Georgia 2 342 South Dakota 2 890New York 2 342 West Virginia 3 865Connecticut 4 274 Massachusetts 4 707Maryland 4 274 Rhode Island 5 621New Jersey 6 267 New York 6 364Rhode Island 9 241 Georgia 7 342Delaware 22 145 Connecticut 9 274West Virginia 24 118 Maryland 9 274Colorado 27 96 New Jersey 11 267California 28 94 Colorado 27 96Arizona 36 75 California 28 94South Dakota 39 52 Arizona 36 75* Video Lottery Terminal
Without VLT* With VLT*
2006 Lottery Prize Payout Percent, Selected States
Source: La Fleur's World Lottery Almanac
StatesPrize Payout
(%)
Per Capita Sales*(US$)
Massachusetts 71.9 707Georgia 61.4 342Texas 61.2 159Florida 59.6 230New York 59.4 342Ohio 59.0 198New Jersey 57.4 267Michigan 57.3 219California 53.9 94* Sales from Video Lottery Terminals are not included.
Charter School Market Share 2006
Source: Reason Foundation
Rank Community Charter School
Market Share (%)1 New Orleans, LA 692 Dayton, OH 283 Washington, DC 254 Pontiac, MI 20
Kansas City, MO 20 Youngstown, OH 20
5 Chula Vista, CA 18 Detroit, MI 18 Southfield, MI 18 Toledo, OH 18
6 Cincinnati, OH 177 Brighton, CO 16
Cleveland, OH 16 Milwaukee, WI 16
8 Buffalo, NY 15 Mohave County, AZ 15
9 Dearborn, MI 14 Oakland, CA 14
10 Minneapolis, MN 13
California Charter School Facts
Sources: The Center for Education Reform, California Department of Education
Opening in 2007-2008 80Total Closed Since 1992 91Total Operating 710Total Enrollment 238,593Startups vs. Conversion Schools 84% vs. 16%Site-Based Schools vs. Others* 76% vs. 24%* Non-classroom-based or combination of site-based and non-site-based
Outcomes of Water and Wastewater Privatization Contract Renewals
Source: Reason Foundation
Renewed by Negotiation
75.0%
Renewed by Competition
10.0%
Won by Other Company
6.0%
Deprivatized 8.0%
Other 1.0%
Potential P3 Opportunities in California
Prisons/Jails
Courthouses and Other Facilities
Toll Roads and Goods Movement Transit and High Speed Rail
Lottery Others
Student Loan$100,000
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Student Loan$100,000
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Water
California History with Transportation P3s is “Mixed”
• AB 680 Toll Roads (1989) – Authorized Caltrans to undertake four “demonstration projects” for private construction and operation of toll roads. Only two projects were undertaken. Subsequent legislation, AB 1010 (2002), prohibited Caltrans from entering into new agreements after January 1, 2003.– SR 91 in Orange County and Riverside County
• California Private Transportation Company was initial franchise operator (constructed and opened in 1995)
• Litigation over “safety improvements” vs. “non-compete clause” was settled by Caltrans in late 1999• Multiple restructuring proposals were considered; ultimately purchased by OCTA after enactment of AB
1010• SR 91 presently generates net surplus (after operations and debt service) of $23 million per year• RCTC has adopted plans to extend public SR 91 toll lanes into Riverside County in cooperation with
OCTA– SR 125 in San Diego County
• Lease agreement completed and initial project studies and design commenced in 1991; environmental clearance not granted until 2001
• Received financing from Macquarie Infrastructure Group/California Transportation Ventures (CTV) and commenced construction in 2003; cost overruns necessitated enactment of SB 463 to extend lease agreement and tolling period
• Opening expected by end of 2007
• An early example of successful P3 project in California is the Alameda Corridor project– Benefit to the private sector was compelling, enabling container charges to secure revenue-backed financing– Innovative leveraging of federal dollars also was key to success
Even successful examples have been source of public controversy or challenges
Evolution of Infrastructure Project Public-Private Partnerships
• Increase in global liquidity• Patient international equity investors• Tax-exempt/taxable spread
compression• Private sponsor appetite for
infrastructure investments• Established long-term international
concession financing models• Established international credit and
rating criteria
Financial Markets Perspective
• Increased willingness to shift cost to users
• New focus on optimizing revenue streams
• Longer-term perspective on revenue generation capability of infrastructure assets
Government Perspective
Catalysts
New Paradigm for US Infrastructure Investment
through Public-Private Partnerships
• Fiscal challenges• Increasing capital needs• Lack of funding sources• Resistance to tax increases• Infrastructure maintenance/
development needs• Management of non-core assets• Operational cost savings• Accelerated project requirements
Evolution of Infrastructure Financings
• Shift to life-cycle financial analysis for construction and O&M• Shift in pricing regimes from cost-recovery to market-based with indexed
caps• Private investment replaces or supplements public debt• Long-term asset management transfers to private sector with public
oversight through contractual agreements• Long-term debt financing horizons considered investment grade (50 years
plus)• Deferred principal amortization (can be negative amortization)• Multiple rollovers/refinancings are modeled in base finance plan similar to
corporate finance model
As a result of recent concession financings, the following characteristics are becoming accepted for domestic infrastructure financings
Infrastructure Financing Dynamics: Ownership
• Public:– Control of operations and residual interest– Traditionally very conservative leverage with minimum A-category
rating targets• Public/Private:
– Public control of operations and residual interest in most cases– Opportunity to increase leverage at BBB rating category and/or with
private investment while keeping majority interest• Private:
– Public contractual control of operations and maintenance throughconcession agreements with residual value shifting to private investors
– Maximizes leverage and upfront capitalization of value
Partial or full private ownership may attract additional capital
Paradigm Shift Driven by Recent Market Developments
• Increased private sector interest in infrastructure investments presents new financing opportunities for public-private partnerships
• Market acceptance of long-term financing structures beyond traditional fully amortizing 30-40 year final maturity practice– Rating agencies: realize long-term debt repayment capability– Credit enhancers: assume embedded refinancing risk– Private investors: desire stable, long-term investment return
• Financing proceeds can be increased through extended final maturities, managed pricing regimes, and/or partial or full ownership sales
• Pricing regime and residual value policy is critical to the evaluation of options
Ability to unlock value in infrastructure assets not realized under traditional municipal financing can be applied to public, joint and private ownership models
Recent evolution of long-term financings of infrastructure projects
• P3 is a standard practice around the world and highly developed in Europe and Canada– A range of P3 approaches provide varying degrees of public sector control, risk transfer, and economic
benefit– Rationale increasingly compelling:
• Accelerating the implementation of high priority projects• Accessing new technology from the private sector• Accessing global private sector expertise• Private sector management of projects to control lifecycle cost and shift risk• Accessing financial resources of the private sector • Leveraging scarce public resources (personnel, monetary)
• National demand for infrastructure projects substantially outstrips resources from traditional financing tools
• P3 market is evolving in the United States with a broad spectrum of execution models– Brownfield Projects: Chicago Skyway and Indiana Toll Road– Greeenfield Projects: Port of Miami Tunnel, SH121 (Texas)
• Private sector participants view the world as their market and are ready to compete. They look for:– Senior leadership and commitment– An empowered team with professional advisors– Certainty of execution, with a transparent process– A level playing field (all bidders, public and private)– Projects that demand innovative solutions
P3 alternatives: used world wide, complex, and evolving
Summary and Conclusion
Public-Private Partnership: Case StudyGround Water Recovery San Juan Basin Desalter Project
• In December 2002, Lehman Brothers underwrote $32 million San Juan Basin Authority Lease Revenue Bonds. The Bonds funded a 5.14 MGD brackish water treatment facility using the reserve osmosis treatment process that will improve potable water to the City of San Juan Capistrano. The Bonds are limited obligations of the Authority, payable from lease payments to be made by the Water District. Neither the full faith and credit nor the taxing power of the Water District is pledged. The Project will receive a subsidy from the Metropolitan Water District as an incentive to develop alternative water sources.
• The Water District engaged ECO Resources under a 20-year fixed price design/build/operate Service Contract (with corporate guaran-tee) subject to performance-related liquidated damages at a capped amount. The District has the right to terminate the lease if ECO defaults on the Service Contract and the cure/replacement period expires. If the District terminates the lease under these situations, it would relieve them of their obligation to make lease payments and bondholders would have no other recourse for payment.
• Before Lehman Brothers was engaged, attempts by ECO, the City, and the Authority to finance the Project in financial markets proved uneconomical. Lehman Brothers worked with ECO, the City, and the Authority to restructure the transaction, including advising on revamping the Service Contract and the leasing structures during construction and operation. The transaction resulted in a structure in which ECO’s liabilities are capped, and the City is provided a reliable water source without construction or technology risk.
• Financial close reached with Lehman BrothersJanuary 2003
• City’s 1st attempted financing was uneconomicalLate 2002
• Lehman Brothers prices restructured transactionDecember 2002
• Water District engaged ECO ResourcesSeptember 2002
Timeline
Details of San Juan
Tunnel Concession Port of Miami Tunnel
• The Port of Miami Tunnel Project had been considered for over 25 years with numerous studies completed
• The State of Florida and the Florida DOT could not find the funding necessary for the Project• By 2006, the cost of the Port was estimated at over a billion dollars• By utilizing a design-build-finance-operate P3 structure, the total cost of the POMT came in
considerably less than a traditional procurement • The POMT is an extremely technically challenging project with many geotechnical risks• The transfer of much of the risk inherent in the Project to the private sector, coupled with cost
savings, has made the POMT a true example of the benefits of P3s
Public-Private Partnership: Case Study
• Financial close expectedNovember 2007
• Request for proposals released to the marketNovember 2006
• Request for qualifications submittedMarch 2006
• Request for proposals submittedMarch 2007
• Request for qualifications released to the market
February 2006
Timeline
Details of POMT
Public-Private Partnership: Case Study
The 100 Cambridge Street Project redeveloped existing unoccupied 565,000 sq. ft. 22 story Commonwealth of Massachusetts office building in Boston, MA
In May 2002, Lehman Brothers served as senior managing underwriter for the $195.8 million tax-exempt and taxable revenue bond offering through the Massachusetts Development Finance Agency, pursuant to a long-term ground lease from the Commonwealth of Massachusetts
- The bond structure consists of senior lien bonds and subordinate lien bonds with a 32 year final maturity. The Project includes a fully redeveloped Class A office tower as well as new construction of 75 condominium units and 35,000 sq. ft. of retail space on an existing street level plaza and the remodeling of the existing 415 space multi-level underground parking facility
The lower half of the office tower (12 floors of approximately 286,000 total sq. ft.) will be sub-leased back to the Commonwealth of Massachusetts at a below market rate of $22 per square foot on a ‘triple net’ (NNN) basis for an initial 50-year term with extensions
The Agency’s equity contribution to the project was $20 million or about 9% of the total capital structure
Public Facility 100 Cambridge Street Redevelopment Project
Details of 100 Cambridge Street Redevelopment Project
• 100 Cambridge Street Office building closed
June 2000
• Revitalized 100 Cambridge Street openedJanuary 2004
• Financial close reachedMay 2002
Timeline
Concept As Completed
International Experience
• Canada as an example:
– Infrastructure Ontario
– Partnerships British Columbia
Centre of Expertise/Best Practices is Critical
Centre of Expertise
• Project Management of Complex Projects• Best Practices Utilized• Examples:
– Pre-Feasibility– Business Case– Competitive Selection Process– Contract Negotiations– On-Going Project Monitoring
Centre of Expertise
• Beyond Project Management…
– Market Development
– Transparency and Fairness Requirements
– Communication
Key Principles
• Five key principles:
– The public interest is paramount.
– Value for money must be demonstrable.
– Appropriate public control/ownership must be preserved.
– Accountability must be maintained.
– All processes must be fair, transparent and efficient.
Canadian Experience
• Highways
• Bridges
• Rapid Transit
• Healthcare
New Hospital Facility
• Justice
• Energy
• Water Treatment
Borealis
• Started in 1999.
• $8 billion of invested and committed capital in infrastructure projects.
• Alternative asset investment manager for Ontario pension fund.
• 20% of pension fund assets committed to infrastructure investing.
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