Financing Infrastructure Part I

Transcription

1 2008 ANNUAL MEETING AND EDUCATION CONFERENCE American College of Investment Counsel New York, NY Financing Infrastructure Part I 10:25 a.m. - 11:50 a.m. October 23, 2008 MODERATOR: Robert J. Gibbons Debevoise & Plimpton LLP PANELISTS: Felicity B. Gates Citi Infrastructure Investors Robert J. Keough John Hancock Financial Services, Inc. Elena Millerman Debevoise & Plimpton LLP

2 FINANCING PRIVATIZED PUBLIC INFRASTRUCTURE FACILITIES 2008 ACIC Annual Meeting and Education Conference October 23, 2008 OVERVIEW OF DEVELOPMENT OF PUBLIC-PRIVATE PARTNERSHIPS FOR INFRASTRUCTURE IN THE UNITED STATES By Robert J. Gibbons, Debevoise & Plimpton LLP, Partner Introduction Public-private partnerships (PPPs) have become a significant source of financing for public transportation infrastructure facilities, as well as a wide range of other public use facilities in Europe, Latin America and Asia. In contrast, with a few notable exceptions, PPPs have remained a rarity for public transportation infrastructure in the U.S., where public ownership and control is the norm. However, despite significant obstacles and a more lengthy ramp-up period than would have been preferred by avid proponents of privatization, the PPP movement is gaining momentum in the U.S. and spawning a new investment class that is of interest to institutional investors, pension funds and private equity funds seeking long term investments, with moderate but stable returns, backed by physical assets.

3 Introduction (continued) I will discuss key characteristics of PPPs, the historical setting of the PPP concept in the U.S, a few of the more noteworthy transactions, and some of the main factors affecting the development of PPPs in this country. What is a PPP? PPPs take many forms and can involve existing or new facilities. The essence of a PPP is the involvement of the private sector in the design, financing, construction, operation and/or maintenance of public infrastructure assets under an arrangement with a public sector partner in which the private sector entity assumes primary responsibility for the asset (and associated risks and benefits) subject to detailed standards governing the construction and operation of the relevant facilities and the setting of rates and charges to the public users.

4 What is a PPP? (continued) The private entity normally pays a lump sum and/or periodic payments to the public entity for the concession to operate, maintain and derive revenues from the privatized public facility. Where the PPP involves the construction of a new facility, the private sector partner is obligated to finance and undertake the relevant construction. Even in the case of an existing facility, the private sector partner is often obligated to finance significant improvements identified at the outset of the venture. The most successful PPP projects are ones where there is an appropriate allocation of risks and benefits between the public and private sectors. This subject will be addressed in some detail this morning by other panelists. A Brief History of Transportation PPPs in the US In the 18th and 19th centuries, privately constructed and operated toll roads and bridges were common. The transcontinental railroad was financed and constructed using numerous public-private partnerships between federal and state governments and the private railroad companies. In the late 19th and early 20th centuries, however, public and political sentiment turned against the private construction and operation of public infrastructure. The Great Depression of the late 1920 s and early 1930 s had a pronounced effect, as many private owners and operators of public transportation facilities went bankrupt, whereupon operations were taken over by the public sector.

5 A Brief History (continued) President Roosevelt s New Deal programs heralded a new age of publicly-funded infrastructure construction and operation, including roads and bridges, establishing the public sector as the main initiator, financier, constructor and operator of such programs. The decades since World War II witnessed the decline of privately-developed commuter rail systems and their passage into public hands, the prolific growth of the nation s federal highway system and the emergence of state and regional port, airport and roadway authorities. PPPs in the 1990s The current phase of PPPs in the US occurred in the 1990 s, with a handful of pathbreaking transportation projects that fell squarely within the PPP model. Leading PPP projects in the early and mid 1990 s: Dulles Greenway toll road in Virginia. SR 91 express lanes toll road project in California. JFK International Airport Terminal 4 in New York. PPPs in the late 1990 s: Camino Colombia toll road in Texas. Stewart International Airport in Newburg, New York.

6 PPPs in the 1990s (continued) Despite their initial roles as models of the PPP concept, three of the five projects noted above (SR 91 express lanes, Camino Colombia toll road and Stewart Airport) now reside in the public sector. PPPs in the 1990s (continued) The SR91 express lanes project was built in the median of the heavily congested Riverside Freeway in California, pursuant to a 35 year lease from the state to a private entity. The concession included a non-compete provision meant to prevent the public sector from increasing traffic capacity on other free roads in the vicinity to the financial detriment of the tolled express lanes. That provision proved to be a significant political problem as traffic congestion increased in the late 1990s. Proposals by the state to expand competing free roads resulted in litigation in 1999 and the eventual sale of the project to a regional public authority in 2003.

7 PPPs in the 1990s (continued) The Camino Colombia toll road in the vicinity of Laredo, Texas, which was intended to accommodate increased commercial traffic in the era of free trade with our southern neighbors, experienced traffic and toll revenues significantly below initial projections and was sold to the Texas Department of Transportation to become integrated into the state s own road expansive program. PPPs in the 1990s (continued) In 1999 Stewart International Airport became the first U.S. commercial airport to be privatized. However, in 2007, Stewart Airport returned to the public sector when the private concessionaire, the UK s National Express Group, sold its concession and lease rights to the Port Authority of New York and New Jersey, the governmental entity that operates the three major New York City area airports.

8 PPPs in the 1990s (continued) The other two (the Dulles Greenway and JFK Terminal 4) experienced severe challenges in their early years but have emerged in enviable financial and operational condition. PPPs in the 1990s (continued) The Dulles Greenway toll road, which reached financial close in 1993, has been widely cited as a model for US PPPs. Although initial traffic levels were substantially below projections, an adjustment of the toll rates and an increase in the speed limit enabled the initial debt to be successfully refinanced in 1999 with more liberalized amortization provisions. Significant traffic growth in subsequent years solidified the project s financial stability and propelled the addition of new lanes in both directions.

9 PPPs in the 1990s (continued) JFK Terminal 4 achieved commercial operation in May 2001 with much acclaim for its physical characteristics and healthy financial prospects, only to experience a major traffic and revenue downturn just 4 months later in the wake of 9/11. However, after a few challenging years, Terminal 4 has achieved the full measure of traffic and revenue growth and financial stability initially envisioned. US PPPs in the Current Decade Limited progress followed the PPPs of the 1990 s until, in 2005, a private consortium completed the purchase and long term financing of the 99-year concession to operate the Chicago Skyway Toll Bridge in exchange for an upfront payment of $1.83 billion to the City of Chicago. Then, in 2006, another private consortium was awarded the 75-year concession for the 157-mile Indiana Toll Road in exchange for the payment of $3.85 billion to the State of Indiana.

10 US PPPs in the Current Decade (continued) The remarkable success of the Chicago Skyway and Indiana Toll Road transactions in the mid-2000s attracted much attention from government officials and politicians because of the large up front payments that were realized from the disposition of assets that had long been in the public sector (and, in the case of the Skyway, had experienced a troubled history including default on the toll road revenue bonds issued to finance its original construction). US PPPs in the Current Decade (continued) These transactions also attracted the attention of a wide range of international infrastructure project developers and financial institutions who saw an opportunity to participate in an emerging privatization boom in the US, and triggered a frenzy of privatization activity in the US transportation sector.

11 US PPPs in the Current Decade (continued) Tangible evidence of the change in political climate is the fact that approximately half of the states have passed legislation to encourage PPPs, much of such legislation having been enacted in the short time since the completion of the Chicago Skyway transaction. US PPPs in the Current Decade (continued) In addition, various Federal legislative enactments of recent years have enhanced the prospects for infrastructure privatization by (i) removing certain obstacles to the privatization of public transportation facilities that were originally financed in part with Federal assistance (e.g., the removal of requirements for state and municipal governments to repay Federal grants out of the proceeds of the lease, sale or grant of a concession; the removal of prohibitions against the tolling of certain facilities funded with Federal assistance, etc.) and (ii) providing Federal funding and permitting liberalized tax exempt bond financing for certain qualified PPP projects.

12 US PPPs in the Current Decade (continued) However, recently there have been notable setbacks on the state legislative front. Last year, Texas which had been at the forefront of the movement to incorporate PPPs as a significant element of its ambitious road construction program, instituted a partial, two-year moratorium on privately financed toll roads throughout the state (with exemptions for certain existing projects) and gave regional public toll authorities the right to develop and operate toll roads in priority to PPPs. In New Jersey, earlier this year Governor Corzine rejected the vigorously promoted PPP model in favor of an alternative proposal for the monetization of the state s major toll roads under arrangements that retain control within the public sector. US PPPs in the Current Decade (continued) Several significant PPP transactions have achieved financial closure recently, including the $600 million Northwest Parkway in Colorado, the $2 billion Capitol Beltway high occupancy toll (HOT) lanes project on a segment of I-495 in Virginia, and the $1.1 billion project to construct and operate a portion of Texas SH-130 including a new 40-mile electronically tolled roadway between San Antonio and north Austin. In Florida, the 35-year concession for the new $914 million Port of Miami Access Tunnel was awarded earlier this year and proposals are due soon for the Alligator Alley (Everglades Parkway) project consisting of a 78-mile section of I-75 that traverses the southern portion of the state.

13 US PPPs in the Current Decade (continued) Two bellweather PPP transactions are at crucial stages as I write this presentation. Pennsylvania Turnpike The highly publicized efforts of Pennsylvania s Governor to achieve the privatization of the Pennsylvania Turnpike by the sale of a 75-year lease and concession for $12.8 billion to the consortium offering the highest bid in a competitive tender process was foiled by the Pennsylvania Legislature s failure to enact the necessary authorizing legislation on a timely basis. That would have been by far the largest PPP transaction to date in the U.S.

14 Chicago Midway Airport In the airport sector, the City of Chicago recently completed its competitive bidding process for the 99 year lease and concession to operate the Chicago Midway Airport as the only privatized major commercial airport in the U.S. The winning bid was for $2.51 billion. The closing of the transaction awaits the necessary approval of the Federal Aviation Administration, after an upcoming public hearing. Key Factors Affecting US PPPs

15 Economic Factors The ready access of state and local governmental entities to a large and liquid market for tax exempt bonds with relatively low interest rates has served as an impediment to the use of PPPs in the US. However, a shortage of governmental resources, increased pressure on tax revenues, and difficult financial markets are causing public entities to consider alternative ways to meet their transportation infrastructure needs. Economic Factors (continued) Although PPPs are also adversely affected by the current debt crisis, the private sector has the advantage of greater diversity and innovation in its financing sources. For example, the abundant supply of equity capital available for infrastructure PPP investment, including very sizable infrastructure funds recently launched by a number of investment banks and private equity firms, creates opportunity for PPPs in the current challenging economic environment.

16 Practical Considerations PPP proponents emphasize that (i) much of the transportation infrastructure in the US is in need of improvement and expansion, and is ripe for private sector ingenuity and efficiency, (ii) PPPs shift various risks, such as construction overruns and underperformance of the infrastructure asset, from the government to a private entity, (iii) PPPs allow the public sector to focus its resources on core governmental functions, and (iv) privatized infrastructure facilities are typically paid for by the direct users of those facilities and not by the tax paying citizenry at large. Public Policy Concerns Many US politicians and citizens are adverse to foreign entities being heavily involved in the development, operation and maintenance of US transportation infrastructure. Residents in most states have enjoyed toll-free travel since the inception of the federal highway system, and proposals to shift to a toll-based system with ever-increasing rates are often viewed with skepticism. There is also potential concern about the impact of the private sector s profit motive on the job security of union workers and governmental employees who may not be accustomed to the efficiency demands of the private sector, as well as concerns that the private sector will not exhibit an adequate degree of concern for the needs of the public beyond what is required to meet financial targets.

17 Public Policy Concerns (continued) However, PPP proponents are quick to note that PPP concession agreements typically contain extensive provisions designed to protect the public interest, including limitations on toll and fee increases, specific labor requirements intended to protect the local workforce, and comprehensive and exacting standards by which the facilities must be operated and maintained in order for the private operator to retain its concession rights. Conclusion There has been a slow but steady increase in the number of PPPs that have been proposed and consummated in the U.S. in the last few years as governmental officials, private developers, financial institutions and ordinary citizens become more familiar with the concept and demonstrate a willingness to consider PPPs among the alternatives available to meet our nation s growing need for modernization and expansion of our basic infrastructure during these current times of severe budgetary constraint.

18 Conclusion (continued) Recent US experience with PPPs demonstrates some vital lessons: The risks and benefits must be allocated appropriately between the public and private sector participants. The terms of the arrangement should be clearly documented, and each of the parties should be satisfied that it can truly live with the terms and conditions of the PPP for the entire term of the project. There must be a real element of partnership between the participants. The ultimate success or failure of the project may well depend on the capacity of each party to recognize and accommodate the needs of their private or public sector partner. Conclusion (continued) Infrastructure privatization transactions provide a potentially attractive source of investment for major financial institutions, and presumably a fruitful source of new, challenging and interesting legal representations for the lawyers of the ACIC.