P3s What You Need To Know Before The Proposal ACI-NA Winter Board & CEO Forum

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1 P3s What You Need To Know Before The Proposal ACI-NA Winter Board & CEO Forum Sheri Ernico, LeighFisher, Director Steve Morris, JACOBS Global Vice President Aviation Omni Scottsdale Resort & Spa at Montelucia Scottsdale, AZ February 10, 2017

2 Evolving Public-Private Partnership Models in the U.S. The recent difficulty congressional Republicans have had in moving forward on [Affordable Care Act] repeal does not bode well for reaching a quick agreement on tax reform or infrastructure funding and reinforces our view that a fiscal boost, if it happens, is mostly a 2018 story. - Alec Phillips, Goldman Sachs economist, as quoted by Bloomberg, February 7, 2017.

3 U.S. Airport Privatization Can Take Many Forms Privatization is not an all-or-nothing solution, in fact, most U.S. airports have a high degree of private-sector involvement LEAST PRIVATIZATION Partial Privatization Contracting Services Management Contract Design-Build-Finance-Operate-Maintain Full Privatization Long-Term Lease/Concession Agreement (including Airport Privatization Pilot Program) Private Airport Development MOST PRIVATIZATION 2 P3s What You Need To Know Before The Proposal

4 What is a Public Private Partnership (P3)? Government owns the project, but private entity finances it (and in some cases also operates it) Private project financing of public infrastructure generally includes: Private equity sponsor s equity investment generally equal to 10-20% Bank or bond debt (taxable or tax-exempt) secured by project revenues or availability payments due under the project agreement Project debt is non-recourse to the government Except in the case of availability payments where the public partner retains the revenues from the project as well as the risk that revenues will be lower than forecast 3 P3s What You Need To Know Before The Proposal

5 Alternative Strategies for Developer Financing and Operation Design Build Transfer at End of Operate & Maintain Finance Construction Lease Approach Construction Manager at Risk Design-Build-Operate-Maintain Design-Build-Operate-Transfer Design-Build -Operate-Maintain- Finance (DBOMF) Examples of the Design-Build-Finance-Operate-Maintain approaches for airports: Public-Private Partnership for Terminal Development (e.g., JFKIAT Terminal 4) Single Tenant Special Facility Terminal Lease (e.g., Terminal A/BOS) Multi-Tenant Special Facility Terminal Lease (e.g., Terminal One/JFK, Terminal 5/ORD) Special Facility Fuel System Leases (e.g., BOS, SFO) Second Party Cargo Development (e.g., FedEx/MEM) Third Party Cargo Development (e.g., PIT) Private Development of Consolidated Rental Car Facility (e.g., ANC, AUS) Private Parking Development (e.g., BDL, MSY) Private Solar Development (e.g., AUS, DEN) 4 P3s What You Need To Know Before The Proposal

6 Project Delivery Models: Range of Private Participation and Public Risk Build-Own-Operate-Transfer Degree of Risk Transfer Design-Build-Operate-Finance Design-Build-Operate Design-Build Degree of Private Sector Involvement 5 P3s What You Need To Know Before The Proposal

7 Typical Airport P3 Structure Airport Advisors Airport Sponsor Independent Engineer Equity Investors Equity Advisor Project LLC Lenders Lenders Technical Advisor Design Build Joint Venture Designer Operator Maintenance and Rehab Provider 6 P3s What You Need To Know Before The Proposal

8 Example of P3 Structure With Tax-Exempt Debt/JFK TOGA P3 transactions take a significant amount of up-front time to be successful but can still accelerate the project delivery Source: New York City Industrial Development Agency's (IDA) special facility revenue bonds series 2005, issued for the Terminal One Group Association LP (TOGA), Standard & Poor's Ratings Services, October 31, P3s What You Need To Know Before The Proposal

9 Three Types of Projects/Applicability of Availability Payments 1. Under revenue generating projects developer paid exclusively from revenues generated by project Airline unit terminals Cargo buildings Fuel systems Hotels Consolidated rental car facilities (ConRACs) 2. Under non-revenue generating projects developer paid from availability payments (potentially non-pledged revenues, e.g., CFCs, released revenues ) Ground access improvements (e.g., airport people movers, roadways) Airport warehouses (SAN) 3. Projects with combination of both revenue generating & non-revenue generating components Terminal improvements (e.g., Great Hall in DEN) Combined parking garage, ConRAC, ground transportation center, APM (e.g., LAX) 8 P3s What You Need To Know Before The Proposal

10 Two Models for Design-Build-Operate-Maintain/Finance Revenue Based Private developer retains dedicated revenue streams, pays ground rent to Airport, and sometimes shares in upside revenues Availability Payments Airport and sometimes tenants/users make payments to private developer subject to compliance with performance specifications Airport Tenants/ Users Airport Availability Payments Tenants/ Users Project Delivery Private Developer Project Delivery Private Developer Equity Debt Equity Debt Equity Investors Lenders Equity Investors Lenders Note: the Airport typically provides conceptual / preliminary design and retains responsibility for certain services (e.g., security, environmental approvals) 9 P3s What You Need To Know Before The Proposal

11 Other Considerations for Availability Payments Placement of Availability Payments in Flow of Funds under Bond Resolution Ability to Bifurcate and Segregate Availability Payments Components O&M components = O&M Expenses Life cycle CapEx = Renewal & Replacement Capital repayment = Bond Fund Pledge/Lien on Revenues (senior, subordinate, standalone, bottom bucket) How to deal with revenue streams outside of the GARB pledge (e.g., CFCs) Issues with parking revenues and need to Release Revenues under GARB resolution Protections For Airport in Event of Developer Bankruptcy 10 P3s What You Need To Know Before The Proposal

12 Value for Money Analysis / Qualitative and Quantitative Assessment Comparison of traditional project delivery approach to a P3 model Determine Airport goals/objectives and design model to evaluate these goals Quantitative inputs: Capital costs Sources of funding (debt, PFCs, grants, airport/private equity) Financing costs (tax-exempt bonds vs. equity and private debt, private sector risk premium, ROI) Property tax and sales tax exemption for public sector Operating expenses Revenue enhancements/innovation Pricing initiatives and controls Traffic stimulation Discount rate Qualitative inputs: Project delivery schedule IT/customer service innovations Market precedents Risk assessment (capital costs, political, implementation, bankruptcy Bond covenant hurdles (pledge of revenues, rate covenant, flow of funds, long-term lease) Airline and other stakeholder receptivity Collective bargaining agreements and public sector unions Loss of control (land uses, pricing, facility appearance) Community relations 11 P3s What You Need To Know Before The Proposal

13 Why Consider Using a P3? Project delivery Accelerated project completion relative to conventional public sector delivery approach Risk transferred to the private sector while ensuring projects are investment-grade and bankable Project financing Preserve senior lien debt financing capacity for other essential projects Diversify debt portfolio Provides lender financial oversight, which drives performance during construction and entire asset lifecycle Project economics Lower cost of construction with less procurement burdens, reduced risks for claims and change orders, and economies of scale for large developers Infrastructure Ontario reports typical CapEx savings of 30% or more with P3s Lower operating costs Reduced lifecycle costs (total cost of ownership) Higher non-aeronautical revenues 12 P3s What You Need To Know Before The Proposal

14 Why Consider Using a P3? Summary Can provide better Value-for-Money compared to conventional project delivery models Trade-off between: higher financing costs vs. potential for lower capital/operating costs, shorter construction period, enhanced innovation, and transfer of risks to a private partner Especially useful for large, complex projects Transparent and open process can lead to successful outcomes LaGuardia Central Terminal 13 P3s What You Need To Know Before The Proposal

15 Recommendations for P3 Transactions Carefully think through and plan the transaction - do not prematurely launch otherwise you waste other people s time/money and lose credibility Make sure you can complete the transaction have all the approvals committed Conduct a simple and transparent process for the bidding With clear evaluation criteria Make sure it is very clear who pays for what Make sure the contract is clear about who is responsible for what risks Specify performance and quality of service standards Prohibit the private operator from selling the lease for at least five years Make sure the risk/reward ratio is attractive and well-defined Allow for efficient and reasonable infrastructure development requirements for which the users are willing to acknowledge and pay the costs Carefully think through specifications for the contracts Clearly spell out rules for extending or renegotiating contracts, if any 14 P3s What You Need To Know Before The Proposal

16 Canadian Aviation P3 Market Situation Canadian airports currently operated by not-for-profit airport authorities The Canadian Transport Act (CTA) Review Report submitted to Parliament by the Minister of Transport, which recommends that the Government strengthen the viability, accountability, and competitiveness of the National Airports System by: Divesting the federal government of smaller federally owned airports Moving to a share-capital structure for the larger airports, with equity-based financing from large institutional investors To resolve issues applicable to airports regardless of the ownership/governance model, enacting legislation to implement certain provisions for all Canadian airports with scheduled services Significantly increasing funding for the Airports Capital Assistance Program to support safer, more efficient, reliable services at regional and local airports Transport Canada is reviewing the ownership structure of Canadian airports to assess the possibilities of transferring them to for-profit enterprises Investment bank Credit Suisse retained to study benefits of privatizing Canadian airports and to analyze privatization options 15 P3s What You Need To Know Before The Proposal

17 Project Delivery and Implementation Risks PPPs are rarely the lowest-cost way to procure infrastructure. [However] a wellstructured PPP can deliver better value for the public dollar. - Brookings, Private Capital, Public Good - Drivers of Successful Infrastructure Public-Private Partnerships, December 2014.

18 Public-Private-Partnership Procurement P3 Project Determination Develop Project Priorities Develop Process Workplan Access Sector Support & Stakeholders Define Project Support Team: Internal & External: Technical, Finance, Transaction P3 Plan Option (s) Selection Feasibility Planning: Legal/Regulatory/Policy/Politics Technical/Finance/Transaction Plans Develop Project Expectations Project Market Research Develop RFI Publication/Public Awareness Industry Discussions/Workshop (RFI) P3 Prequalification Development 17 P3s What You Need To Know Before The Proposal

19 Public-Private-Partnership Procurement Bid Package Preparations Quals/Proposal Competitive Dialog Qualifications Terms of Reference Draft Contract Bidding Requirements Proposal Development Financial Package Qualifications Terms of Reference Draft Contract Bidding Requirements Shortlist Workshops Concepts & Contract Final Bid Packages Bid Evaluation Contract Negotiations Final Contract Bid Evaluation Final Contract 18 P3s What You Need To Know Before The Proposal

20 Alternative Strategies for Developer Financing and Operation Suggested Process 1. Finalize Plan a. Internal Airport Department Programming/Planning b. Meeting with Potential Industry Partners c. Defining Finances Bond Covenants/Grants/Etc. 2. Program Performa Requirements a. Executive Presentation/Approval to Move Forward with Go/No Go (s) b. Authority/Board Presentation/Approval to Move Forward with Go/No Go (s) 19 P3s What You Need To Know Before The Proposal

21 Alternative Strategies for Developer Financing and Operation Suggested Process 3. Define Project Support Team a. Technical b. Financial c. Transaction 4. Industry Workshop (RFI) a. Present Program b. Opportunity for L/M/W/DBE inclusion 5. Develop RFQ a. Meeting all Airport Requirements for Qualifications b. Present Draft RFQ to Executive Committee/Authority/City 20 P3s What You Need To Know Before The Proposal

22 Alternative Strategies for Developer Financing and Operation Suggested Process 6. RFQ/Process Approval a. Executive Review/Approval b. Board Review/City/Approval 7. Procure RFQ a. Pre-Bid Conference b. Refine with Q & A s 8. Shortlist & Interview a. Qualify Firms/Teams Based on Point System b. Interview Based on Submittal with Point Evaluation 21 P3s What You Need To Know Before The Proposal

23 Alternative Strategies for Developer Financing and Operation Suggested Process 9. Workshops A. Workshop 1 a. Initial Understanding program parameters (Base Plan/Options) b. Initial Concept Development Discussion (Base Plan/Options) c. Financial Discussion/Expectations B. Workshop 2 a. Concept Developed meeting Airport Requirements/Parameters b. Instructions to Proposers (ITP) Draft Review c. Financial Discussion C. Workshop 3 a. Finalization of Concept/Development Plan (Airport Approved) b. ITP Final Review/Comments c. Final Financial Discussion 22 P3s What You Need To Know Before The Proposal

24 Alternative Strategies for Developer Financing and Operation Suggested Process 10. RFP Final Solicitation A. RFP Package 1 (Base Plan & Options) a. Design b. Management c. Operations B. RFP Package 2 (Base Plan & Options) a. Financial Package (s) 11. Evaluation/Selection a. Based on Selection Criteria b. Quantified Points System Selection 23 P3s What You Need To Know Before The Proposal

25 Alternative Strategies for Developer Financing and Operation Suggested Process 12. Implementation Adherence to Commercial & Financial Agreement (Predevelopment Agreement, Commercial and Financial Close) A. PMCM a. Design Management b. Construction Management c. Coordination Management: Selected Team and Client B. Financial Strategy a. Performance Based b. Revenue C. Asset Management a. LCCA ongoing b. Maintenance 24 P3s What You Need To Know Before The Proposal

26 Recently Completed P3 Transactions in the U.S. Airport Arena 2013: Luis Muñoz Marin International Airport,San Juan, Puerto Rico FAA Airport Privatization Pilot Program full privatization Aerostar doing well despite the Puerto Rico economy (and paying $615M for the concession and $200M in capex investments) Upgraded Terminals B and C Upgraded all terminal concessions Attracted new service 25 P3s What You Need To Know Before The Proposal

27 Luis Muñoz Marin International Airport,San Juan, Puerto Rico Contract Type Design/Build Contract with Interlink-Hunt JV - Jacobs served as prime design firm Aerostar interacted directly with Design/Build team No PMCM on board Sub-contractors were local Project Drivers Right-sized terminal from 52 gates to 34 gates Consolidated passenger screening checkpoint and airline ticket halls Increased airside concessions Schedule for Delivery The Project was phased as a fact track delivery Phase 1A and 1B Temporary facilities to permit close of Concourse B Phase 2 Concourse B construction start and completed Phase 3 Concourse C construction start 12/2014 and completed 12/ P3s What You Need To Know Before The Proposal

28 Luis Muñoz Marin International Airport,San Juan, Puerto Rico Ideal for Privatization More gates than needed Inefficient layout Concessions Upgrades Concourse D Risk Mitigation Schedule was major driver Major equipment shipments from US Local sub-contractors with different work ethic than US Local tax and licensing laws impact approach to financials and work New PAX Processing Area New Airside Concessions Concourse C Concourse B Concourse A 27 P3s What You Need To Know Before The Proposal

29 The New LGA Terminal B Bowery Bay Terminal A Central Terminal Building (B) Redevelopment Phase 1 Terminals C & D Redevelopment Phase 2 4 Passenger Terminals 360, 000 Annual Flights 26.9 Million Annual Passengers FAA Slot Controlled Airport 28 P3s What You Need To Know Before The Proposal

30 The New LGA Terminal B 29 P3s What You Need To Know Before The Proposal

31 The New LGA Terminal B 30 P3s What You Need To Know Before The Proposal

32 LGA Terminal B Lease Overview Fixed Lease Term Expiring December 30, 2050 Project Scope Fixed-price, guaranteed Design-Build contract with completion by a fixed date Design, construct, finance, operate and maintain the New Terminal B Project Revenues Airlines revenues related to the Existing and New Terminal Concession revenues Significant Private Funding for the New Terminal: $200 million equity commitment Performance Standards First-class operating condition & concession program comparable to similar facilities at airports of similar size 31 P3s What You Need To Know Before The Proposal

33 On-Going P3 Activities in the U.S. Airport Arena 1. Denver Great Hall - Jeppesen Terminal (team led by Ferrovial Airports ) Consolidate airline ticket counters and modify associated baggage handling system Consolidate/relocate TSA screening Redesign overall passenger experience 2. Los Angeles (LAX) Landside Access Modernization Program (LAMP) 5 teams submitted SOQs to deliver the automated people mover, the 1 st element of $5.5 billion LAMP The APM will connect 3 on-airport stations to local rail and transit services, a consolidated rent-a-car center (CONRAC), two Intermodal Transportation Facilities, and roadway improvements Developer to be paid with availability payments Denver Great Hall - Jeppesen Terminal LAX Landside Access Modernization Program 32 P3s What You Need To Know Before The Proposal

34 Public-Private-Partnership P3 Strategy Summary Strategic Programming & Planning Process Management Data Collection Constraint Understanding Scope Definition Base Plan Confirmation Options Development Resource & Partner Identification Investment Finance Return on Investment Plan Gov t, Regulatory & Policy Plan Partnership Terms Development Procurement Plan Contract Development Negotiations Strategy Contract Management Project Monitoring Dispute Plan Operations Plan Asset Management Maintenance Plan Financial Implementation Plan Transaction Oversight Plan 33 P3s What You Need To Know Before The Proposal

35 Sheri Ernico LeighFisher 555 Airport Boulevard, Suite 300 Burlingame, CA (650) Steve Morris Global Vice President Aviation JACOBS 600 Wilshire Blvd #1000 Los Angeles, CA USA