Public Private PartnershipspA Presentation to the Association of Financial Professionals of Canada

Edmonton Chapter

March 20, 2013

Alternative Capital Financing OfficeAlberta Treasury Board and Finance

Presentation Topics

• P3 BasicsP3 Basics• Alberta’s P3s• Financing and Risk• Financing and Risk• Best Practices• Criticisms and Benefits• Questions

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P3 Basics - Traditional Project Delivery

Most common method of delivery is design-bid-build (DBB) with i d i (O&M) d d d loperations and maintenance (O&M) procured and managed separately

ProgramPlan

Design Build MaintainFacility Management

Services

Program Delivery

Manage Project

Traditional Procurement

Own Land

Own Building

Finance ProjectProcurement

Private partner Public sector

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P3 Basics - The Value Proposition

What if design and build is combined, i.e. a “DB”?S• Synergy

• Risk transfer• Innovation and efficiency

What if O&M is added, i.e. a “DBO” or “DBM”?• Life-cycle view• Risk transfer• Innovation and efficiency

What if financing is added, i.e. a “DBFO” or “DBFM”?• Provides alternative financing for projectProvides alternative financing for project• Brings added discipline from lender if funds at risk• Enforces risk transfer

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P3 Basics – Alternative Project Delivery

A P3 is a different, non-traditional way for government to create capital assets

ProgramPlan

Design Build MaintainFacility Management

Services

Program Delivery

Manage Project

P3 Procurement

Own Land

Own Building

Finance Project

Private partner Public sector

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Alberta’s P3 Definition

Government of Alberta defines a P3 as an infrastructure project in hi h iwhich a private contractor:

• Provides some or all of the financing;• Designs and builds;• Designs and builds;• Operates or maintains (an “extended warranty”); and• Receives payments from the government over an extended period of

time, subject to deductions for failing to meet contractually defined j g yperformance standards

A “DBFO” or “DBFM”

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Alberta’s P3 Projects

Constructed and operational:• Anthony Henday Southeasty y• Northeast Stoney Trail• Alberta Schools Alternative Procurement (ASAP) project, Phase 1 –

eighteen schools (K-4, K-6, K-9)A th H d N th t• Anthony Henday Northwest

• ASAP, Phase 2 – ten schools (K-6, 5-9, K-9)

Under construction:• Southeast Stoney Trail• Anthony Henday Northeast• ASAP, Phase 3 – 13 schools (K-5, K-6, K-9, K-12, 6-8, 9-12)

E Th W t /W t t T t t F iliti• Evan Thomas Water/Wastewater Treatment Facilities

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Typical P3 Arrangement

GovernmentDirect Lender Agreement

Concession Agreement

Agency Lenders(Debt)

Availability Payments

Capital Contribution

g

Agreement

Private Contractor(SPV)

Private Finance

Investment

yContribution

Subcontractors

Operating

OperateMaintain

Sponsors (Equity)Design

Build

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Examples of Companies Involved in Canadian P3 Projects

Contractors• AMEC Inc

Equity Providers/Project Leads• Acciona AMEC Inc.

• AXOR• Bilfinger Berger BOT*• Bouygues Building Canada

• Bilfinger Berger BOT• Carillion Canada Inc.• John Laing

Pl G • Brookfield LePage Johnson Controls• Carillion Canada Inc.*• Ellis Don*

Ferro ial

• Plenary Group• Macquarie• Hochtief• Fengate • Ferrovial

• Graham*• Grupo ACS• Peter Kiewit Sons Inc.

g• Innisfree• SNC-Lavalin

L d Peter Kiewit Sons Inc.• PCL Group• Serco North America

* Often participates as equity investor

Lenders• Non-CDN Banks• CDN Insurance Companies• CDN Pension Funds Often participates as equity investorCDN Pension Funds

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P3 Basics - The Value Proposition

• Consider the strengths ascribed to each of the public and private partners…

• Comparative Advantage of Government • Standard-setting • Leadership over extensive group g• Make, change, and enforce law • Prerogative to raise capital and

spend it

p g p• Eminent domain (can expropriate)• Vast communication lines with

public

• Comparative Advantage of Private Sector • Efficient • Timeline accountable• Specialized• Nimble, responsive, sense of

urgency

• Borderless• Innovative

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P3 Basics - The Value Proposition

• Government and private sector have different objectives• Parties’ interests are aligned in P3s • Merger of the comparative advantages provides P3 advantages • The guiding principle that “risk is to be allocated to the party best ableThe guiding principle that risk is to be allocated to the party best able

to manage it on a cost effective basis” is applied• Forcing a partner to take on responsibilities in the other’s domain can

lead to:lead to:• excessive project costs• relational or contractual problems• even project failure• even project failure

• Understanding one’s ability to manage risk lies at least in part with the comparative advantages of each party

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P3 Benefits

• Fixed price E li i• Earlier opening

• Fixed opening date• Better value for money y• Long term warranty• Future cost certainty

• P3 benefits are the result of appropriate risk allocation

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Earlier Completion

TraditionalDelivery

P3Delivery

Project Time Project TimeDeerfoot Trail Extension 5 yrs, 11 months

(1999-2004)SE

Anthony4 yrs,1 month(2003-2007)( ) y

Henday( )

SW AHD6 yrs, 5 months

(2000-06)NE Stoney Trail 3 yrs, 8 months

(2006-09)

NW Stoney Trail 6 yrs, 7 months(2003 - 09)

NW AnthonyHenday

4 yrs , 3 months(2007-11)

A f 1 h l 5 ASAP I2 yrs, 10 months

(2007 10)Average for 1 school 5 yrs ASAP I(18 schools)

(2007-10)

(tracked by Alberta Infrastructure) ASAP II

(10 schools)

3 yrs, 1 month(2009-12)

( )

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Value for Money (VfM)PROJECT PSC NPV BID NPV VFM

SE AHD (2004 $) $ 452 – 497M $493 M $4 M( $) $ $ $

NEST (2006 $) $1.0–1.1 B $650 M $350 M

NW AHD (2008 $) $1.6 B $1.4 B $200 M

SEST (2010 $) $1 8 B $ 769 M $1 BSEST (2010 $) $1.8 B $ 769 M $1 B

NE AHD (2012$) $2.2 B $1.8 B $371 M

ASAP I (2008 $) $752 M $634 M $97 M

ASAP II (2010 $) $358 M $253 M $105 M

ASAP III (2012 $) $332 M $289 M $43 M

EVAN THOMAS (2012$) $62 M $60 M $2 M

PSC – Public Sector Comparator (traditional procurement approach)NPV – Net present value

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VfM and Effect on Risk Transfer

300

200

250

o Gov't

Retained Risk

Value for Money

150

nt Value

 of C

ost to

Transferred Risk

Financing

Rehabilitation

O&M

50

100

Prese

Construction

Engineering or Procurement

0

Raw PSC Risk‐Adjusted PSC P3

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Mechanisms Used to Manage Risk

• Contractual – project agreement sets out responsibilities of contractor according to optimal project risk allocation

• Security – liquid security (letters of credit, bonds) required at various stages of the procurement process (bid stage, construction stage)

• Performance monitoring and inspections• Payment mechanism – monthly payments to the contractor include

deductions (penalties) for non-performance(p ) p• Private debt financing adds an additional layer of due diligence within

the Contractor’s team and layer of security for government• InsuranceInsurance

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Estimating Risk Costs

• Project risk register• Risk identification/definition• Allocation (government, partner, shared) for traditional and P3• In planning design procurement construction and O&MIn planning, design, procurement, construction, and O&M

• Risk cost estimation• Expert workshops

Lik lih d f– Likelihood of occurrence– Impact, if it occurs: Best case, Worst case, Expected case

• Monte Carlo simulation• Probability distribution of risk cost retained by government• Probability distribution of risk cost transferred to partner

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P3 Financing

• Financing is “project finance”, supported solely by project cash flows and therefore is ring-fenced or bankruptcy-remote

• Financing is paid back one of two ways – via revenue generating asset (e.g. toll road) or payments from public agency based on availability

• Availability approach is almost exclusively used in Canada

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PPP Spread Index (Source: Casgrain)

• The spread over long term GoCs – matches term of P3 contracts

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PPP Spread Index (Source: Casgrain)

• Bonds included in Index

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P3 Project Selection

• Project size - sufficient capital cost and operations/rehabilitation• Project scope can be clearly delineatedProject scope can be clearly delineated• Risks allocated to party best able to manage• Private sector has capacity and sufficient interest for competitive

processprocess• Term sufficient to generate value and fit with asset • Output specifications can be developed• Greenfield vs. brownfield• Generate value for money (VfM)

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Best Practices• Evaluate potential project (business case)

– Project scope– Business and operational impacts– Market sounding– Procurement alternatives– Risk analysis and allocation– Engineering, financial, legal analysis– Value for money– Qualitative factors– Project team– Schedule

• Obtain approvals• Develop communications strategy• Stick to schedule

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Best Practices• Develop standardized Agreement• Competitive bidding process

RFQ Sh li 3 bidd• RFQ – Shortlist to 3 bidders• RFP – Technical Submissions reviewed up front• Open dialogue between the Department and Proponents

– Agreement Meetings– Engineering Meetings– Q&A Process– Clarification Process

• Final submission – low price wins; or with subjective evaluation?• No negotiation after price submittedg p• Debriefing bidders• Fairness Auditor

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Criticisms of P3s

• Cost of financing (GoA vs Private)C b ff t b i ti f l li d li– Can be offset by innovation, economy of scale, earlier delivery

– Enforces risk transfer in agreement• Off-book financing

– Accounting standards don’t allow this– It’s not free money

• Private sector is making a profit– They do on traditionally delivered projects as well– Competitive procurement is conducted

• Small local contractors can’t participateSmall local contractors can t participate– They get involved through subcontracts

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Criticisms of P3s

• Lack of transparencyM i ht d t P3 th t diti l– More oversight and transparency on P3s than traditional

– Province posts P3 procurement documents, agreements, and VfMreports

• Public service levels suffer• Public service levels suffer– Service levels are defined and measured– More accountability and an extended warranty with long term

f b d t tperformance based contract• Government is privatizing public services

– Government owns infrastructure– Government remains accountable for delivery of public services

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