public-private partnerships (p3) issues, solutions and what’s next?
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PUBLIC-PRIVATE PARTNERSHIPS (P3) Issues, solutions and what’s next?. Chet Mitrani, Executive Vice President Willis North America September 20, 2012. LBJ EXPRESS. WHAT IS A PPP?. - PowerPoint PPT PresentationTRANSCRIPT
PUBLIC-PRIVATE PUBLIC-PRIVATE PARTNERSHIPS (P3) PARTNERSHIPS (P3) ISSUES, SOLUTIONS AND ISSUES, SOLUTIONS AND WHAT’S NEXT?WHAT’S NEXT?
Chet Mitrani, Executive Vice PresidentWillis North America
September 20, 2012
LBJ EXPRESS
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PUBLIC - PRIVATE PARTNERSHIPS
WHAT IS A PPP?
A Public-Private Partnership is a contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each section (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.
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PUBLIC - PRIVATE PARTNERSHIPS
P3 PROJECTS
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Bluebonnet Contractors, LLC
Ferrovial Agroman / W.W. Webber
Concessionaire NTE Mobility Partners, LLC
Cintra / Meridiam Infrastructure $1.45 Billion
Trinity Infrastructure, LLC
Ferrovial Agroman / W.W. Webber
Concessionaire LBJ Infrastructure Group, LLC
Cintra / Meridiam Infrastructure$2 Billion
MAT Concessionaire, LLC
Bouygues Civil Works / Meridiam Infrastructure
$700 Million
Central Texas Highway Constructors, LLC
Ferrovial Agroman / Zachry Construction
Concessionaire – SH 130 Concession Co, LLC
Cintra / Zachry Infrastructure
Co-Broker with MarshSegments 5 & 6
$1 Billion
PUBLIC - PRIVATE PARTNERSHIPS
CURRENT P3
Fraser Transportation Group
ACS Infrastructure / Dragados Group / Zachry
South Fraser Perimeter RD Project
Vancouver, CA
$700 Million
NTE Mobility Partners – Segments 3A / 3B
Cintra / Meridiam
Fort Worth
$1.3 Billion
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PUBLIC - PRIVATE PARTNERSHIPS
COMPREHENSIVE DEVELOPMENTAGREEMENT (CDA)
1. Current Types Of CDAs Design / Build Pre-Development Agreements Concession Agreements
2. CDA procurement Unsolicited Independent Proposals submitted at TxDOT’s request
3. Project Transfer To TxDOT At the end of the CDA term (Concession) Transfer occurs after construction (Design/Build)
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PUBLIC - PRIVATE PARTNERSHIPS
CURRENTLY EXECUTED CDAs IN TEXAS
PROJECT DESCRIPTION COST OF CONSTRUCTION ($)
1 DFW Connector (Oct-09) Design/Build w/Maint Opt 1.5 billion
2 I-635 / LBJ Freeway (Sept-09) Concession 4 billion
3 North Tarrant Express Seg 1 & 2W (Jun-09)
Concession 1.1 billion
4 North Tarrant Express Seg 2-4 (Jun-09) Master Development Plan 750 million up to 4 billion
5 SH 130 Segments 5 & 6 (Mar-2007) Concession 1.35 billion
6 SH 130 Segments 1 - 4 (2002) Design/Build w/Maint Opt 1 billion
7 I-35 TTC (2005) Master Development Plan 4.4 billion
8 Toll Integrator (2004) Design/Build Raytheon 68 million
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PUBLIC - PRIVATE PARTNERSHIPS
CONVENTIONAL PROJECT DELIVER: DESIGN-BID-BUILD
In the United States, most transportation projects are delivered using the Design-Bid-Build “(DBB”) model
Public Owner Designs project to 100% PS&E Breaks project up into biddable scopes The bidder submitting the lowest responsive bid is awarded the contract Pays invoices out of available tax revenues and/or bond proceeds Operates and maintains project itself or through separate contractor Keeps integration, traditional construction, long term performance and
revenue risks
Private Parties Design the project and perform construction under standard construction
contracts and specifications Have conventional rights to claims and change orders
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PUBLIC - PRIVATE PARTNERSHIPS
CONVENTIONAL PROJECT DELIVER: WHY CHANGE? DBB works well for many projects, but there are situations in which P3s
can offer outcomes not available otherwise Capture private sector innovation early in project development Accelerate project delivery Fix costs / completion date early in design phase Encourage lifecycle cost efficiencies and quality facility performance Shift risks and reduce claims that under DBB are public’s responsibility
P3s can offer more upfront capital formation than muni revenue bonds Tax-exempt bond market has more conservative debt coverage ratios Investor classes are different, offering different risk appetites Private investors are willing to take more risk on toll revenues
performance Tax exempt borrowing rates available through $15B federal PABs
program Accelerated depreciation creates significant value for private equity
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PUBLIC - PRIVATE PARTNERSHIPS
P3 SCREENING AND STRUCTURING
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INPUTSINPUTS SCREENINGSCREENING OUTPUTSOUTPUTS
Project CharacteristicsProject Characteristics
Sponsor PrioritiesSponsor Priorities
• P3 or Conventional
• If P3, Which Type?
• P3 or Conventional
• If P3, Which Type?
P3 Contract Terms
P3 Contract Terms
Competition Structure
Competition Structure
TechnicalTechnical
LegalLegal
RFP Submittal RequirementsRFP Submittal Requirements
Evaluation Criteria
Evaluation Criteria
PUBLIC - PRIVATE PARTNERSHIPS
TYPES OF P3 CONTRACTS
Design – Build – Finance
Availability Payment Concession
Toll Concession
Pre-Development Agreement
Asset Lease
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PUBLIC - PRIVATE PARTNERSHIPS
Supplier Contract
PUBLIC PRIVATE PARTNERSHIPSINFRASTRUCTURECONTRACTUAL STRUCTURE – RISK ALLOCATION
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Equity Sponsor
A
Equity Sponsor
A
Equity Sponsor
B
Equity Sponsor
B
Equity Sponsor
C
Equity Sponsor
C
PROJECT COMPANYSpecial Purpose Vehicle
PROJECT COMPANYSpecial Purpose Vehicle
LENDERS / BONDSSenior & SubordinatedLENDERS / BONDSSenior & Subordinated PUBLIC ENTITYPUBLIC ENTITY
CONSTRUCTION CONTRACTOR
CONSTRUCTION CONTRACTOR SUPPLIERSUPPLIER O&M
CONTRACTORO&M
CONTRACTOR
Sub-ContractorSub-Contractor Sub-ContractorSub-Contractor Sub-ContractorSub-Contractor
Loan Agreement
Financial Covenants, Remedies, Reserve and Insurance Requirements and Flow of Funds
Concession Agreement
Performance requirements, Risk Allocation, Schedule, Force Majeure, Relief Events
Sub-contracts Sub-contracts Sub-contracts
EPC ContractInsurance
Requirements
O&M ContractInsurance
Requirements
Sources and forms of Insurance and Guarantees
Sources and forms of Insurance and Guarantees
PUBLIC - PRIVATE PARTNERSHIPS
TYPES OF P3 COMPETITION STRUCTURES
Competitive Hard Bid RFP requires:
Committed pricing and financing Detailed technical proposal in response to pre-defined project
Award based on value or auction
Best Development and Finance Plan RFP Requires:
Recommended approach to developing and financing project within specified general concept
Qualifications to work as successful private partner Degree of sweat equity and capital committed to pre-feasibility phase
Award based on best plan, qualifications and pre-feasibility cost-sharing
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PUBLIC - PRIVATE PARTNERSHIPS
DESIGN – BUILD – FINANCE
Suitable When Project Is: Close to environmental clearance Sufficiently designed for developer to guarantee price I completion date Not 100°/o designed, to permit developer innovation A gap exists between total project capital costs and identified public funding
sources The timing of available funding is spread over time and does not allow for levels
of upfront capital needed to do the project Savings from accelerated project delivery outweigh cost of private sector
financing
Public Owner Performs conceptual I preliminary design Achieves environmental clearance May provide some, but not all, capital funding
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TYPES OF P3 CONTRACTS
PUBLIC - PRIVATE PARTNERSHIPS
DESIGN – BUILD – FINANCE
Public Owner (cont.) Oversees design and construction Operates and maintains the project Keeps long term revenue risk
Developer Designs and builds the project
Assumes integration of design and construction and other development risks conventionally retained by public agencies
Finances the owner's shortfalls in cash flow Provides debt financing via one or more mechanisms (i.e., deferred
payment schedule, contractor loan, subordinated debt, financing of change orders)
Assumes interest rate risk on its financing Guarantees price / completion
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TYPES OF P3 CONTRACTS
PUBLIC - PRIVATE PARTNERSHIPS
DESIGN – BUILD – FINANCE
Results In: Greater price certainty with a lump sum price I guaranteed delivery date Cost and time efficiencies Provides owner cash flow financing, as needed
Examples Florida DOT
1-75 Road Expansion Project ($430M) 95 Express ($122M) SR-5 (US-1) Project ($112M)
Michigan DOT 1-69 Reconstruction in St. Clair County ($38M) 1-75/M-21 (Corunna Road) Bridge ($7.3M)
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TYPES OF P3 CONTRACTS
PUBLIC - PRIVATE PARTNERSHIPS
AVAILABILITY PAYMENT CONCESSIONSuitable When Public owner has identified a dedicated source of revenue for the
project (toll revenue or other source) Public owner desires life-cycle cost efficiencies Public owner wishes to retain direct toll rate setting authority and
collection Revenue or traffic volume is difficult to predict
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TYPES OF P3 CONTRACTS
PUBLIC - PRIVATE PARTNERSHIPS
AVAILABILITY PAYMENT CONCESSIONPublic Owner - Same as Design-Build-Finance, except: Pays private party based upon project availability and performance
over extended period Liable for fewer claims and change orders than DBF
Developer- Same as Design-Build-Finance, plus: Operates and maintains the project for contract term (35 - 50 years) Assumes life cycle performance risks Primary compensation is through availability payments
May also receive milestone payments from the public owner upon reaching certain construction milestones
May receive federal tax benefits due to deemed "tax ownership"
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TYPES OF P3 CONTRACTS
PUBLIC - PRIVATE PARTNERSHIPS
AVAILABILITY PAYMENT CONCESSIONAvailability Payments Unitary payments for capital expenditures, O&M expenditures and financing costs
Amount bid by the developer as part of its proposal Made periodically after substantial completion (e.g., monthly) Fixed amount that may:
Be adjusted downward based on developer's performance with respect to quality, safety, lane availability, environmental provisions, etc.
Be adjusted by changes in an index (e.g., CPI) Structure encourages early completion of the construction phase and quality facility
performance
Examples Florida DOT - 1-595 Florida DOT - Port of Miami Tunnel British Columbia MOT - Sea to Sky Highway
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TYPES OF P3 CONTRACTS
PUBLIC - PRIVATE PARTNERSHIPS
TOLL CONCESSION
Suitable When Project will directly generate revenues Traffic and revenue risk can be efficiently transferred to private
sector Political support exists for private sector toll collection and
enforcement
Public Owner - Same as AP Concession, except: Contributes no or limited public funds to project costs Decides on toll rate setting mechanism over contract life Relieved of all or most toll revenue risk May receive share of toll revenue as/when benchmarks met Possibly receives upfront payment from the developer
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TYPES OF P3 CONTRACTS
PUBLIC - PRIVATE PARTNERSHIPS
TOLL CONCESSION
Developer - Same as AP Concession, plus: Collects tolls in accordance with rate-setting mechanism Assumes all or most project traffic and revenue risk May share excess toll revenues with public owner
Examples TxDOT - SH 1307 Segments 5 and 6 TxDOT- North Tarrant Express TxDOT - I-635 Virginia DOT - I-95/395 HOT Lanes
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TYPES OF P3 CONTRACTS
PUBLIC - PRIVATE PARTNERSHIPS
PRE-DEVELOPMENT AGREEMENTS
Suitable When Project not yet completely defined Financial feasibility not yet determined, but preliminarily has good
potential Public owner seeks private sector innovation in defining and
accelerating an optimally feasible project Environmental analysis is in the early stages
Procurement and Award Public owner procures Developer on basis of "best development
and financial plans" Awards contract with two phases:
Initial phase to determine feasibility Implementation phase
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TYPES OF P3 CONTRACTS
PUBLIC - PRIVATE PARTNERSHIPS
PRE-DEVELOPMENT AGREEMENTS
Initial Phase Public and private partners "co-invest" in pre-development activities Public owner retains complete control over environmental clearance process,
with Developer performance of technical studies Developer participates in project planning and design Developer prepares master financial plan and master development plan Developer may absorb some or all of its initial phase work - "sweat equity" If project proves feasible, Developer has right of first negotiation for the
agreement(s) covering the implementation phase If unable to reach agreement, public owner retains right to separately procure
Implementation phase agreements can take form of: Design-Build-Finance Availability Payment Concession Toll Concession
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TYPES OF P3 CONTRACTS
PUBLIC - PRIVATE PARTNERSHIPS
ASSET LEASE
Public Owner Leases existing asset to private partner Gets up front payment from private partner (monetizes the asset) Gets facility back at the end of the lease
Private Partner Gets right to any revenues (e.g., fees, tolls) from the facility Implements fees I tolls in accordance with lease requirements Maintains the facility in accordance with lease requirements
Examples Indiana Toll Road ($3.8B up front payment; 75 year lease) Chicago Skyway ($1.8B up front payment; 99 year lease) Pocahontas Parkway (Pay off $500 M of existing debt, upgrade facility and cover other
VDOT expenses; 99 year lease)
Asset leases have been particularly controversial
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TYPES OF P3 CONTRACTS
PUBLIC - PRIVATE PARTNERSHIPS
CDAs & RISK ALLOCATION
CDAs DELEGATE RISK TO THE PARTIES BEST ABLE TO MANAGE IT.
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Assign to Owner
Assign to Developer
Shared Risk
Concession Program Differs from Design / Build
PUBLIC - PRIVATE PARTNERSHIPS
RISK ALLOCATION & CONTRACTINGALLOCATING OTHER RISKS
Who can best control the risk?
Who can best manage the risk?
Are contractors willing to assume the risk?
How much will it cost?
Right of Way
Utility Relocations
Differing Site Conditions
Force Majeure
Hazardous Materials
Paleo / archaeo / bio
Permits
Railroads
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PUBLIC - PRIVATE PARTNERSHIPS
DIFFERENT PROJECT DELIVERY TYPES & RISK SHARING1
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RISK TYPEDESIGN BID BUILD
DESIGN BUILD
AVAILABILITY PAYMENT
DESIGN BUILD FINANCE O/M (PASS-THROUGH)
CONCESSION FINANCE O/M 50 YEARS
Environmental Approval Owner Owner Owner Owner Owner
Environmental Compliance
Owner Shared Developer Developer Developer
Financing Owner Owner Developer Developer Developer
Design Owner Developer Developer Developer Developer
ROW Acquisition Owner Shared Developer2 Developer2 Developer2
Utility Delays Owner Shared Developer Developer Developer
Construction Shared Shared Developer Developer Developer
Schedule Delays Shared Developer Developer Developer Developer
O & M Owner Owner Shared Developer Developer
Traffic & Revenue Owner Owner Owner Shared Developer
1 Actual Risk Allocation may vary by specific project2 Eminent Domain risks and delays retained by the owner
PUBLIC - PRIVATE PARTNERSHIPS 28
… SHARED RISK ALLOCATION
DESIGN / BUILD D/B/FINANCE D/B/F OPERATIONAL / MAINTENANCE
BUILD-OPERATE-TRANSFER /
CONCESSION
Regulatory Regulatory Regulatory Regulatory
Approvals Approvals Approvals Approvals
Environmental Environmental Environmental Environmental
Customer Acceptance Customer Acceptance Customer Acceptance Customer Acceptance
Design Design Design Design
Traffic / Rev. Traffic / Rev. Traffic / Rev. Traffic / Rev.
Finance Finance Finance Finance
Technology Technology Technology Technology
R-O-W R-O-W R-O-W R-O-W
Construction Construction Construction Construction
O&M O&M O&M O&M
PUBLIC PRIVATERISK TRANSFER BY MODEL
PUBLIC - PRIVATE PARTNERSHIPS
INSURANCE ISSUES FOR DESIGN AND CONSTRUCTION PROFESSIONALS INVOLVED IN A PPP PROJECTInsurability PPP agreements must always be carefully checked against the
professional liability policy In the event that terms and conditions appear uninsurable, make
sure that the Concessionaire understands that their interests – even if for a lesser amount -- are better served by an insured claim that by a potentially larger claim that has no insurance support
PUBLIC - PRIVATE PARTNERSHIPS
KEY PPP PROJECT INSURANCES - INSURANCE REQUIREMENTS
Construction Period Construction “All Risks” Construction “All Risks” Terrorism Soft Costs/Delay in Opening Third Party Public Liability Statutory Insurances (Workers Compensation/EL) Professional Liability (Design and Build) Pollution Legal Liability Auto Liability Railroad Protective Liability
PUBLIC - PRIVATE PARTNERSHIPS
KEY PPP PROJECT INSURANCES - INSURANCE REQUIREMENTS
Operational Period Property Damage “All Risks” Property Damage “All Risks” Terrorism Business Interruption Third Party Public and Products Liability Statutory Insurances (Workers Compensation/EL) Pollution Legal Liability Auto Liability Professional Liability
PUBLIC - PRIVATE PARTNERSHIPS
WHY ARE THESE INSURANCES REQUIRED?
They protect the Public Agency, SPV, Lenders and other parties with an insurable interest in respect of physical loss or damage to Project property/assets earnings and additional costs of the SPV in respect of the
above incurred Third Party Legal Liabilities (bodily injury and property
damage) Without insurance the SPV could not accept the financial
consequences of such risk events occurring
PUBLIC - PRIVATE PARTNERSHIPS
WHY IS THE INSURANCE REGIME UNDER PPP DIFFERENT TO STANDARD PROCUREMENT? The Public Agency, Lenders and others with an insurable interest
sit inside the insurance mechanism as a co-insured taking direct benefit for their separate insurable interest
Insurances to be procured on a project specific basis and not derived from parent company program.
Public Agency guidelines and Lender requirements seek to ensure specific conditions are in place defining the duties of the parties to the Project in terms of the operation of the ‘required insurances’
PUBLIC - PRIVATE PARTNERSHIPS
WHAT ARE THE KEY CONDITIONS OF A PPP INSURANCE REGIME?
Waiver of subrogation (Multiple Insured Clause) Separate policy Waiver of disclosure of material information No obligation for premium payment Additional insured Control of claim monies (Loss Payee) Notification of change in cover Notice of cancellation and subsequent step in rights of various
parties to the Project
PUBLIC - PRIVATE PARTNERSHIPS
PPP INSURANCES –CONSIDERATIONS & SOLUTIONS
Relief Events and Force Majeure Premium increases– who bears the risk? Insurance market capacity and market participants Uninsurability Excesses/Deductibles – who pays? Meeting bid/tender requirements - what level of information is
required – insurance proposals must remain “fluid” and negotiable until final design and construction timetable is known
Cost of insurance – provision for cost of insurance in the Financial Model; prevailing market cost + contingency amounts
PUBLIC - PRIVATE PARTNERSHIPS
PPP INSURANCES – CONSIDERATIONS & SOLUTIONS
Phased completion timetable Overlap of ALOP/BI Pre-existing property Latent Defects Environmental/Contamination issues Contractor’s plant and equipment Terrorism risk Marine/Transit
PUBLIC - PRIVATE PARTNERSHIPS
PPP INSURANCES – CONSIDERATIONS & SOLUTIONS
Uninsurability Definition of trigger of Uninsurability – what is the test? What happens to the risk if it becomes uninsurable
(Termination/Public Agency “insurer of last resort”)
PUBLIC - PRIVATE PARTNERSHIPS
WHAT DOES THIS MEAN FOR THE PROJECT INSURANCES?
Contractor/Lender uncertainty over “the risk of insurance” – cost and availability
Fear of the unknown from insurers on contractual requirements of PPP
No established insurance market experience of some risk exposures through PPP contracts
Unpredictable insurance market cycles Sector specific claims impacting on competitive terms and also
cost provision in Financial Model
PUBLIC - PRIVATE PARTNERSHIPS
RECENT TRANSACTIONS:CREATING MOBILITY OPTIONS WITHIN EXISTING HIGHWAY CORRIDORS
If a public owner is interested in adding managed lanes to an existing facility, it might benefit from comparing two recent managed lanes projects: I-595 Corridor Roadway Improvements Project (Florida DOT) North Tarrant Express (Texas DOT)
I-595 Corridor Roadway Improvements Project Background: Project covers 10.5 miles along I-595 in Fort Lauderdale, Florida Improvements to the existing freeway and interchanges and the addition of
reversible, congestion-priced managed lanes $1.28 construction and 35 years of O&M (both free and managed lanes) First availability payment-based P3 in the United States Florida DOT unable to currently finance the project using DBB Winning price - $275M under Florida DOT estimates (present value) Successful financing despite economic crisis (bank financing)
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PUBLIC - PRIVATE PARTNERSHIPS
RECENT TRANSACTIONS:CREATING MOBILITY OPTIONS WITHIN EXISTING HIGHWAY CORRIDORS
North Tarrant Express Background Toll concession and pre-development agreement Phase 1 - 52 year toll Concession
Rebuild 13 miles of I-820/SH 183; add 2 new tolled managed lanes‒ Financing Package - $2.05 B‒ $400M of Private Activity Bonds - 30 year maturity‒ $650M TIFIA credit - 40 year term‒ $570M in public sector funding‒ $427M in equity from private partner (includes $43M from Dallas Police and Fire
Pension System) - First time a U.S. pension fund has directly invested equity in a U.S. P3 project
Remaining Phases - Pre-Development Agreement Texas DOT Goals for Phase 1:
To shift construction, lifecycle, performance and availability risks To shift revenue risk, subject to rate setting restrictions and revenue sharing
Texas DOT used a toll concession to close funding gap Reached financial close December 2009
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PUBLIC - PRIVATE PARTNERSHIPS
RECENT TRANSACTIONS:CREATING MOBILITY OPTIONS WITHIN EXISTING HIGHWAY CORRIDORS
Comparison of I-595 and NTE Both are complex, urban projects that involve reconfiguring and
reconstructing existing Interstates to add managed lanes and make other improvements
Contrasting Agency Goals Florida DOT - Maximize project availability (both managed lanes
and general purpose lanes) Texas DOT- Minimize state funding for the project
Availability Payments vs. Toll Concession (Reflection of Goals) Florida DOT - Kept toll revenues and used an availability payment
concession to achieve its goals (first such U.S. deal) Texas DOT- Shifted toll revenue risk to achieve its goals
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PUBLIC - PRIVATE PARTNERSHIPS
CURRENTLY IN PROCUREMENT
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PROJECT CITY LIMITS DELIVERY METHOD
TOTAL COST (4)
1 Grand Parkway SH 99 Houston F1, F2 and G Design / Build w/ Maint Opt
1.5 billion
2 Interstate 35 E Dallas LBJ 635 to Denton Concession or D /B 4 billion
3 North Tarrant Express Ft Worth Seg 3 A and 3 B Concession and D/B/B
500 million
4 The Horseshoe Dallas I 35 I 30 interchange
Design / Build or Concession
600 million
5 Border Highway Loop 375 Design Build
PUBLIC - PRIVATE PARTNERSHIPS
WHAT’S NEXT?
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PROJECT DESCRIPTION
Washington D.C.RFI August 12DDOT
22 Mile Priority Streetcar SystemPotential PPPDesign, Construction, Finance, Ongoing Operations and Maintenance
Allentown, PASeptember 2012Capital Value: $100 Million
Water LeaseCity Water & Sewer SystemPPP – Up to 50 Years
San Juan, Puerto RicoPlanningCapital Value: $360 Million
Light RailPPP5.3 Miles
Odessa, TexasJuly 2012Capital Value: $120 Million
Desalination PlantWater SupplyDesign, Build, Finance, Operations
Ontario, CanadaRFQ September 2012Capital Value: $350 Million
Providence Care HospitalPPPDesign, Build, Finance and Maintenance
Gloucester – Salem, NJRFI November 2012Capital Value: $326 Million
Wastewater Treatment PlantPotential PPP
Universities University of California – Student Housing, HotelsUniversity of Kentucky – Residence HallsOhio State – Parking Garage, LotsUniversity of Arizona – Student Housing
Note: American Water Works Association identified the need for $1 Trillion over 25 years in the drinking water sector and waste water.