Identifying what goes into the project delivery decision making process for owners is important. With the adoption of new alternative models to accommodate fluctuating market conditions, the number of delivery model options are growing. This session will engage in a conversation about how legal issues, schedule, finance, cash flow and long-term operations all play into the complex challenging decision-making process and help identify when certain delivery models are optimal.
Transcription:
Diana Ramirez (00:00:09):
Good morning, afternoon, midday, whatever it is right now in Boston. Thank you so much for joining us today for the AI AI P3 bootcamp. Our understanding is a lot of you have a lot of substantive knowledge of P3, so maybe less a bootcamp and more a bit of an advancement in the course for you all. We want to make sure that we tailor the conversation. And first, let me introduce myself. I'm Diana Ramirez and I'm senior advisor at AI AI for public sector programming and engagement. I spent 30 plus years in the public sector, mainly in county government, Travis County, Texas, and Austin. And the last four in Harris County, Texas, Houston, the third largest, most diverse county in the nation. And the last two years I was a county administrator. So thank you so much for being here. We really appreciate it. And I'll turn it over to our speaking partners, Tad.
Tad Guleserian (00:01:13):
Thank you, Diana. Good morning everyone. My name is Tad Guleserian and I'm a managing director with CBG Building Company. CBG Building Company is probably not a common firm for many of you, but we are a contractor in the community base or social infrastructure space. We've been in this space doing public-private partnerships for over 20 years. Myself, I've been in this space for over 25 years, both on the finance side where I financed about five and a half billion dollars of P3s for the US Department of Defense on their MHPI program in various student housing and other P3s. So hopefully, as Diana said, we can engage in a very dynamic and conversational session. We certainly have slides as you'll see up behind us, but we're really hoping that this will become a conversation. We'll jump into dialogue on issues you are facing or issues that you're thinking about and have a dialogue where not only we are providing answers, but hopefully there's feedback from other colleagues around the room.
Matthew Neuringer (00:02:28):
Alright, how's everybody doing? My name's Matthew Neuringer. I'm really excited to be here. This is actually I think my fourth Bond Buyer infrastructure conference. I've been here basically since the genesis, and it's just really amazing to see how this has evolved from the first one to where we are today as far as the level of engagement, support, and I would say creativity from the US municipal finance market to want to do something that is outside of the box, innovative, creative, and ultimately looking at the end of the day to do what's in the best interest of their clients. And this is just another tool to potentially offer to your clients in order to get there, or if you are a government agency, your internal stakeholders. My name is Matthew Neuringer. I'm a partner at Orrick. Orrick, if you haven't heard of us, is a law firm of about 1,600 lawyers globally.
(00:03:36):
I'm one of about 250 in our energy and infrastructure group. And I'm also an honorary member of our public finance team just because I get the privilege and honor working with so many of them on a day-to-day basis where our transactions have a complete intersection between the two. And probably my most important role is as the pro bono counsel to the AI AI organization—Association for Improvement of American Infrastructure—I actually helped put this together. So thank you to Lisa and to AI AI and to Diana for doing this because really, and I walked around the room just to gauge some of the experience in the room, there's a lot of really significant experts in the room. And as Tad said, we want this to be a workshop. We've got plenty of time to dig into the details. Let's not worry about the schedule. Whatever is, from your perspective, some of the challenges that you're running into when you're thinking about P3, we want to talk about it.
(00:04:38):
If there's something on here where you say, "Actually we've run the permutations on that, we've run the analysis on that, we think that's a little pie in the sky," can we get into that? Let's do it. This is intended to really test what the value proposition is behind P3, when it makes sense to utilize it for your organizations and your projects, and trying to get the best out of this delivery model so that we can get projects built in the United States of America. In addition to being a partner at Orrick, I've also served in the Army; I was a JAG for about 13 years. Everything from a prosecutor, defense counsel, and also worked in state government in New York State as the chief of staff to a state senator. So I've had a broad background both on the public and private side. My practice is the same.
(00:05:28):
I spend half of my time representing governmental owners—everybody from public authorities to some of the largest municipalities in the country, like the City of New York—and have delivered probably over about 400 billion worth of projects through alternative delivery. That's everything from CMGC to progressive design-build to full on design-build-finance-operate-maintain public-private partnerships across the full spectrum of asset classes, from transportation to aviation to waste-to-energy to energy as a service. So definitely feel free to play "stump the chump" here because I've seen a lot of different projects and a lot of different structures, and I think the more specific and the more detail we can get, the more interesting this is going to be for folks. Okay, so I'm going to keep the cameraman active. I told him if he didn't get his steps in this morning, this is the opportunity.
(00:06:25):
So what is a P3? That's where we're going to start. Then we're going to get into risk allocation and value for money, break, and a Q&A. We're also going to have a poll because we want to hear from you. We want to hear what's important to you and where you want to focus. And with that, I do want to poll the room just very quickly: folks who are on the public sector side, if you could raise your hand, or have also worked in the public sector in the past? Yeah. Okay. How about on the developer side? Okay. Finance? Yeah. Okay, there we go. We know our audience, right? Any lawyers in the room? I need to know who the top secret spies are. Okay, there we go. Alright, perfect. Well, there's no secrets here. Everything is public. We're all friends. Any other groups? No.
Tad Guleserian (00:07:17):
I think you're good.
Matthew Neuringer (00:07:18):
I think we covered it. Okay, perfect. So what is a P3? What are we even talking about? Why are we here? Because I constantly walk into meetings and people think a P3 is a lease arrangement between a public sector client and a real estate developer for them to go build a mixed-use development project in an empty lot—that's effectively a privatization. We'll get into why that's not a P3, but a P3 is really what it sounds like: it's a partnership between the public sector and the private sector where the public sector is asking for a very specific need to be filled by the private sector, and they come up with a marriage through risk allocation and contractual arrangements that makes sense for both parties in the long term. And part of what we look for when we're thinking about defining a P3 is that there is risk capital at stake by the developer, whether that be in the form of debt and/or equity, but preferably equity as a component of it.
(00:08:30):
And ultimately, there is some type of long-term either operations or maintenance component. I get a lot of pushback from some of our folks in labor union states where they say, "Well, P3s are incompatible with our state because we have strong public sector labor unions and we want to keep our jobs with public sector labor unions." And we say P3s get done all the time in states with public sector labor unions, New York being one of them. And the structure can be tailored so that it works with the existing labor, whether it be on an energy project to a toll road, as long as there is a piece of the maintenance—and we'll talk about what piece that should be—that is able to be transferred from a risk perspective to the developer. So that's the fundamental principle that we look at when we're testing what is effectively a P3.
(00:09:24):
But it's definitely not free money, and it's just another delivery model. It's not really that creative or, frankly, that unique. It's the design and construction—that's design-build. There's O&M and it's finance. I think this term of P3 has become over-complicated around what it is we're talking about because it's really not that complex when you break it down. And part of what we're trying to do as an organization at AI AI is simplify this complexity so that the delivery model can be more accessible to more agencies, more municipalities, smaller projects, faster velocity, and easier from a transactional perspective. We don't need to spend years in procurement in order to deliver these projects. We should be able to deliver them much faster, especially on the smaller end.
Diana Ramirez (00:10:23):
Okay, so on the public sector perspective for why to do a P3: again, it's a procurement method, an alternative delivery method, and the beauty of it is that the public sector is retaining ownership of the asset. It's not privatization at all. One of the things that Matt just mentioned about acceleration of delivery is one of the key things. Those of you in the public sector understand public sector procurement laws are really difficult to get through and can slow things down immensely. So going through and having a P3 lots of times can help you accelerate the procurement process while still staying true and toeing the line on the legal requirements that your local government or university/school district might have to comply with. Transfer of risk is really significant. I think one of the issues that I've seen in my career in the public sector is that the public sector is not good at identifying all the risks in a project.
(00:11:33):
It's very high-level kind of construction risk, and you don't dig very much below that. Going into a P3, you really need to understand the risks and dig into it to understand how much this is really going to cost. And so being able to get to the optimum risk transfer is one of the key components of a P3 that, from my perspective in the public sector, was really important. And it was one of the things that I always focused on with my governing boards: having them understand the issues with identifying risk and transferring the appropriate amount. Transfer too much and it's too expensive; transfer too little, and you've got that risk on your side still, and it might cost you too much in the end anyway. Finally, the long-term lifecycle operations and maintenance I think is critical. I mean, there's nothing sexy for an elected body to consider spending tax dollars on maintenance of an asset.
(00:12:38):
That's why so many public sector organizations just have such a huge backlog of maintenance projects. So being able to build that into your P3 contract really helps the public sector organization just commit to that funding and making sure it's just part of the process. Operations sometimes can be taken out to the private sector or kept internal. I know, like in Texas, if you're looking at a jail project, the sheriff is responsible legally for operations of the jail. So you're never going to outsource operations, but you can outsource maintenance. So those are the kinds of things that you want to think about. And finally, on the performance side of things, when you have these P3 contracts for operations and maintenance, they are performance-based. So if you have good advisors and you're really working on having a long-term agreement with your private sector partners, having those performance metrics with consequences in your contract is a wonderful way to keep that accountability front and center for the long term. Tad, on the private side?
Tad Guleserian (00:13:59):
Thank you, Diana. As you look at the screen, a number of the items that Diana spoke about as being important to the public sector side are also important on the private sector side. The concept of accelerating project delivery: you're many times a developer lamenting sort of the delays, whether it's the permitting processes, going through the due diligence, and getting all the approvals. So the fact that the public sector wants the project delivered more quickly—that's an alignment. The partnership discussion that Matt was talking about is very much aligned with private sector interests as well. The transfer of risk that Diana spoke about: to the extent that the advisors to you are able to articulate and transfer risk appropriately, that can help bring down the cost of the project. If the private sector can take on some of those risks and mitigate those risks more effectively than the public sector can, in totality that can help not only accelerate delivery but also bring down the costs.
(00:15:07):
And another one that I look at up there is the long-term lifecycle. From the private sector, if we're going to be responsible—which in many P3s we are—for the lifecycle, which could be 30, 40, 50 years or more of this asset, we want to be entrusted with maintaining that asset. Perhaps it's not operating, as Diana said in certain cases, but we want to make sure that we're maintaining it so that we know we're doing the best we can to deliver that asset to you, not only at financial close and in construction close, but over the term of the agreement. And then turning our attention to the bullets on the private sector side, certainly it's an opportunity for the private sector to make an investment and earn a return. As Matt said, P3s are not free money; whether it's a payment that's got to be made on the bond or if it's a return that's going to the equity, that's an opportunity to make an investment for the private sector. And I'm sure Matt will talk about it later, but having that equity there provides a cushion; that provides some sort of protection back to the public sector if things go wrong. There's equity at risk.
(00:16:28):
So you better believe that the private sector developers, they're going to do what they can to correct any issues to protect their investment, which in many cases is in the tens of millions of dollars in these projects. Foster innovation: for those that have done this, you understand; for those that have not and are used to using more of a design-bid-build type of procurement methodology, that's not P3. P3 does not really want you in the progressive model to go to that level of detail in sort of your prescription of what the outcome should be. Really on a P3 model, you're focused on the outcomes. What do you want? You need a building of a certain size that can function in the following ways that is going to be maintained for the long term. You're sort of setting out the outcomes you're desiring, you're setting out some parameters, and then you're relying on the private sector teams—and I say teams plural because that gets to the last part, the competitive process—to come up with their own innovation.
(00:17:46):
How are we going to deliver this asset for you, the public sector owner? What might we do differently? What might we learn from our previous projects, bring innovation in, or other team members that have done this? So fostering that innovation can really lead to a step change in the asset that's being delivered and how it's maintained over time. And that feeds into that competitive process. A lot of these, whether it's a progressive P3 where the public sector is not getting a hard bid, but rather looking at qualifications, looking at high-level designs, looking at indicative budgets or preliminary budgets, and making a decision as to which team they want to engage with, negotiate with, and have a seat at the table in refining that vision for the asset. Or if it's in the more traditional fixed bid process where you're asking various teams to come up with a design solution that is ready to go to financial close within a matter of several months. Regardless, those are both competitive processes. They work to the benefit of the public sector, and the private sector is very used to this and is accustomed to performing in both realms, whether it's progressive or a fixed bid. I'll turn it back to Matt.
Matthew Neuringer (00:19:17):
Thanks. And actually, maybe we use this as a good opportunity. These are some of the perspectives that we've seen, but I know that we've got some people in the room that have worked on some of these projects as well. Maybe it'd be a good opportunity just if somebody could jump in and share: have you seen anything that either touches on these or is an additional perspective as to why somebody's chosen to do a P3 in the room? Any thoughts folks? I know we've got somebody from Austin Sound Transit for example that... Yeah, go ahead.
Audience Member 1 (00:19:58):
We're actually in the process—we just finished the decision with the delivery method for the rail alignment in Austin.
(00:20:08):
And we're going to be utilizing the progressive design-build method, but P3 was something that we looked at. One of the things with the way we're structured out in Austin as a local government corporation, we didn't have express authority to do a full P3 in state statute. So that was one of the cons, I guess more so than anything, especially given some of the legal challenges that we're going through right now just on our financing method; we didn't want to further complicate that. And then us as the delivery vehicle for this particular asset for the city of Austin, we have a well-developed team to manage the design process and manage the construction management process internally. So that was one of the things that we considered. And then I know you touched on the financing aspect as well. Us as a local government corporation can access the tax-exempt market and we'll have our own credit that's structured to be operating in the market.
(00:21:15):
So that was one of the considerations as well is our ability to access the financial market I think was a little cheaper in some of the analysis that we did, especially considering the P3 delivery method. So I know it's been done—P3 has been used for light rail alignments or other type of commuter rail alignments. I think in Boston, out here in Massachusetts areas, they're doing one as well—the Purple Line—and Denver FastTracks. Yeah, so it has been utilized, but it was one of the things that we considered.
Matthew Neuringer (00:21:52):
No, that's helpful. And honestly, the fact that they did the analysis is what's important. You did a value for money analysis. That's important. And frankly, I'd rather for them and any owner nine times out of 10 come to the conclusion that a P3 doesn't make sense and have done the analysis than run down the process because they think maybe it's going to get something that it's not. And then they only find out after they're well into a procurement that, "Oh man, we made a huge mistake. We thought that we could get this whole project for free," and now they're telling us it's going to cost some money. We've seen that time and time again where governments have assets, they think that they have value, and they think that if they bring that value to the market, the market is going to effectively create something for them without having hard commitments behind it.
(00:22:48):
And that most of the time, unless we're dealing with some real crown jewel assets, tends to be the case. And so in this situation, that's not a bad outcome for the P3 market because ultimately we only want projects to come out that make sense from a P3 perspective. Obviously political challenges, legislative... if you're looking at this in your state, making sure that you have the proper legislative authority to be able to select somebody from a best-value perspective, to be able to commit to a long-term contract that is going to have some type of financial commitment behind it, and that isn't debt but looks like debt, is something that often having a specific legislative authority behind it is really important. And then the consideration around cost of capital. We're happy to get into it. I know that folks are always interested in the tax-exempt—how do you do a P3 with tax-exempt financing outside of PABs conversation? We've been doing a ton in the last few years, especially on the energy side. And that structure we believe can be applied to any asset class from transportation all the way to aviation.
(00:23:52):
And so while we're churning quite a bit of energy as a service projects right now with tax-exempt financing, what we're seeing is that there's ways to calibrate the structure so that you can optimize it from a credit perspective and reduce the spread differential between a sort of pure project-financed P3 as priced in the bond market relative to what your typical GO debt or, in the case of a hospital or MTI debt or otherwise, would get even with equity. And that's another sort of misnomer that had always been perpetuated since some of the earlier projects: that you could not have true equity, which is the essence of the risk transfer in a tax-exempt financing for a P3, and that is no longer the case. And so we've got an approach on how to be able to do that, but I think we want it to be very clear to the Bond Buyer community that there is a way to do a P3 with tax-exempt financing in a way that mirrors your cost of capital as close as possible, still gets you the benefits of risk transfer, and still gets equity what it's looking for as well, which is long-term partnership and skin in the game. Any questions on that? Thoughts? Yes, Scott.
Audience Member 2 (00:25:34):
I want to dig into that. So we can issue tax-exempt bonds and then have lease payments or private pay payments come in for the equity side? That's what I'm hearing, but maybe I'm misunderstanding that.
Matthew Neuringer (00:25:49):
It can be structured in such a way that as the project performs—so once you're into the post-substantial completion process and the project is hitting all of its KPIs, right? It's exceptional in its performance—the debt has been paid, the O&M has been serviced... well, the bonds are still there, but I'm saying in the waterfall as you're sort of notching through the waterfall and there's effectively excess capital on the backend for purposes of what would be structured into the commercial documents as a development fee, which is very common in any commercial project—which is you have exceptional performance, you get a performance fee. That's essentially at the heart of what we're doing as a performance-based contracting methodology. So that performance-based fee is what ultimately would flush back to the developer through the nonprofit as a return on their equity. So it gets past the IRS, right? We're able to...
Audience Member 2 (00:27:01):
Yeah, so it's all structured in accordance to the 2017-13 Rev Proc for the qualified management services agreements?
Matthew Neuringer (00:27:14):
Yeah. So yes—and I'm not a tax lawyer, so that's a very important disclaimer—but I do talk to Chas quite a bit. So yeah, go ahead.
Audience Member 3 (00:27:31):
Well, back to your original question in terms of different perspectives: as you well know, we had a P3 that we were looking into that we ultimately didn't pursue, but I think one of the important perspectives that motivated it was the ability to enter into technologies and businesses that were not currently in our wheelhouse. With the San Francisco Public Utilities Commission, we do clean energy, we do hydro, we do solar. We're not in the gas business, but we had the opportunity to create biogas and had explored it. So being able to take advantage of technologies and perfecting businesses that we don't want to particularly staff and develop expertise in was a key motivator. I think the other perspective though, and this ties a little bit into the prior statement, is not simply the relative cost of tax exemption, but being able to do P3 for this without jeopardizing everything else we need to finance or other components of the project is an important consideration as well.
Matthew Neuringer (00:28:57):
Yeah, that's a great point. The point that Nikolai's raising in the context of a biogas conversion project, which was a biogas P3 that would convert the output from an anaerobic digestion facility—which was their primary asset that they invested through design-build multiple billions of dollars. And so the idea was: there's this whole technology risk, there's third-party offtake risk around gasification, cleaning it, selling it into the pipeline. We don't want to do that necessarily. If we could partner with somebody who's an expert at placing that type of gas into the market, let's do it.
(00:29:39):
But at the same time, we don't want to do it at the expense of the 2 billion anaerobic digesters. And so that is the type of careful calibration when you're working with clients or working internally around a P3 is thinking three or four steps ahead. How does this potential transaction impact my overall portfolio of assets, especially with tax-exempt debt? And this is something we look at a lot with sort of Brownfield P3 transactions that involve, "Hey, we're going to take an existing asset that's already been financed with tax-exempt debt potentially, and then maybe hand a piece of that over to a developer to upgrade, to improve, to operate, to maintain." What does that do to our tax exemption still workload? And that's something we think about a lot in project viability. There's ways to structure around it, but then sometimes is the question: is the juice worth the squeeze?
(00:30:39):
And in some cases there's things you can do on the front end to get ahead of it, but if you don't think about it on the front end, by the time you are in procurement, it is too late. So that's why we got to move fast, but we got to move slow to move fast. We have to move fast because we have a mandate in this country to deliver on infrastructure and energy at a pace that we haven't seen in many generations, but we have to move slow so we do it correctly. So any other thoughts, motivations?
(00:31:17):
The life cycle is at the heart of it. A lot of people ask, "Well, what's some of the core benefit of a P3?" and we'll get into this on slide eight on value for money. You see in value for money that the life cycle is the core of it. But I mean you should sit down with clients or internally and think about: what is it if we're going to do this type of transaction, are we going to get in the long term from this developer from a lifecycle perspective? What types of technology risk can they take off the table? What types of operational or maintenance risks can they take from the public sector and potentially optimize it? And where do we stop and where do they start? That type of analysis should be done very early on because that's going to go to the heart of what it is you're asking them to do and what the risk is that they can take.
(00:32:19):
And I think that's often a heavily negotiated component of these projects, but it's often a not well-thought-through component until you're too deep into the transaction. But this element of thinking about long-term O&M when you're designing the project and the company who has their capital on the line is there to orchestrate that... their maintenance provider is sitting there next to the designer and saying, "Hey, think about this from the perspective of: we are responsible for maintaining this for the next 50 years. How can we do that in the most efficient way that ensures that these high-level performance criteria are met for 50 years, notwithstanding technology changes, notwithstanding changes in weather patterns, notwithstanding all of the normal ordinary use that these assets are going to undertake?" And I think in order to get that true value, we do have to start to think fundamentally from an equity perspective what true skin-in-the-game equity actually has in order to ensure that harmonization between the two.
(00:33:37):
Because if all equity is an SPV pass-through and they've got a design-builder and they've got an O&M and they've flowed down every single risk and equity retains no risk, then their incentive to make sure that the DB and the O&M are actually getting it right isn't gone, but it's reduced. And that's one of the challenges that I pushed out a while ago and I continue to push out to folks in this industry: how do we think creatively around getting equity to really truly roll up their sleeves and get involved in making sure that the outcomes that we're saying we're guaranteeing are outcomes that they personally are involved in, because if they aren't able to achieve them, they stand to lose as a result?
Tad Guleserian (00:34:30):
Matt, if I could just chime in for a moment. What Matt just spoke about on the O&M and making sure that early on you've got the folks that are going to maintain and potentially operate the facility at the table—I'll tell you, whether it's me wearing the developer hat or me wearing the contractor hat, either way, that's critical and we ensure that at every transaction that we do. Because oftentimes the design firm, as good as they are, as many projects as they've designed, they've never operated a single project. They've designed it, but never operated it. Having the operator and having the maintenance team at the table to tell you that, "Hey, the way that you've designed..."—and I am pointing to a project that we just hit financial close in July of this year and we're under construction right now, a university residence hall. It was everything from, "Are we going to use trash shoots or are we going to use sort of a more of a concierge-type service on the trash removal?" the location of the trash shoots, location of the elevators for various reasons.
(00:35:37):
We redesigned those. Location of outdoor amenity spaces—which is going to be active, which is going to be passive, and why. So a lot of these questions—and I know this is a social infrastructure or community-based infrastructure example—but a lot of these questions and many more, we took input from the group that was going to operate the asset and input from the group that was going to maintain the asset, had the design team redesign it, and then the construction firm had to go reprice it because of these changes. But it's critical, as Matt pointed out: get those teams involved early because once it's designed and you're going to now go build it, it's too late to make those changes. You want them involved early so you get their input, get their experience, and get their value. They're the ones that have to live with it for 40, 50, 60 years.
Matthew Neuringer (00:36:29):
And I say, look, there's a lot of pressure points there. I'm in the middle of interface agreement negotiations right now, and we will get to the structure chart. Interface agreements with the DB, the developer, and the OM—the developer's kind of playing referee and DB is saying, "Well, it's my design and you're going to make some nice comments around O&M, great, but you're not responsible. You're not signing and sealing the drawings. You're not the EOR (Engineer of Record)." So at the end of the day, the effectiveness of the comments from the O&M will come from the developer who's going to say, "I want you to do that. This is my project. I've hired you." And unless they have a sophisticated level of understanding of the project and are willing to put their neck on the line for that, it's going to be hard to get that O&M input in the same way from a meaningful perspective. So it's just something to be aware of when we're thinking about... because you could talk high-level too, but when you get into some of these negotiations on these interface agreements, that's really where the heart of the risk often lies.
(00:37:54):
Diana, what sectors can we do P3 for?
Diana Ramirez (00:37:57):
Almost everything as you can see from here. And I think there are a couple of things when you talk about other municipal or community use facilities; I think you can do city halls as well, and rec centers. One of the case studies we have up near the end of the presentation is City of Pflugerville, and it's a new city hall, a new multi-generational rec center plaza, and then mixed-use development around it. So you really can go in lots of different directions with this. Again, the true value from the AI AI perspective is: do the value for money analysis, do check and see if P3 is valuable for this particular project structure. That's the key there. But we've seen a lot of roadways, highways, toll roads, bridges, mass transit, and now folks are getting more into the community-based infrastructure world, and I think that's what we're going to be seeing.
(00:39:05):
And then the energy side as well I think is really critical. And going back to the whole O&M discussion from previously, I think it's great that we heard from Austin Transit and San Francisco Utilities because you all were looking at your organizational capacity on the operations from the public sector side, and that's critical to make sure that you are really setting up your project for success and know whether you do have that capacity or you don't. At Travis County, when I was there, we did a civil and family courts facility; it was design-build-finance. Our facilities people just knew that they had the capacity to maintain the facility, got to ground opening and the facility opening, and then our maintenance folks said, "Oh, we can't hire the right people. We're not offering enough in salary." And so we had to go back after the fact and add on an operations and maintenance contract, which would've been cheaper if we had done it upfront and really worked internally to understand our organizational capacity to actually hire the right people. So I think it's really critical that... and I think those were two really great case examples of the public sector organization really looking very honestly internally on their organizational capacity. I think that's really critical.
Tad Guleserian (00:40:49):
And I think, Matt, I think we might touch on it later, but if you look at a lot of these examples that are on the board of different assets, one of the things that you'll notice is some of the assets up there have a revenue stream where they'll generate revenues and others do not. And that's where we'll talk about I think later, right, about availability payment versus demand risk or revenue risk. And again, just because an asset does not have a revenue stream—i.e., the courthouse, that's a perfect example—doesn't mean it can't be done as a P3 through availability payment type structures, but I think we'll touch on that later.
Matthew Neuringer (00:41:26):
And sometimes the asset has a revenue stream, but the government feels really comfortable managing the revenue stream where there's political angst around transferring revenue risk. And so you still want to get the benefits of lifecycle. And the next slide's actually a great segue. The benefits of a P3: you still want to get the benefits of a P3, but you don't want to risk the whole project based on transferring a risk that you don't really need to transfer. The Pennsylvania Major Bridges project is a great example of that. That was nine, several hundred million dollars bridges delivered on a progressive P3 process by Shikun & Binui and Macquarie. This was about three or four years ago, and it was a revenue-generating road and bridge, and the state said, "Politically, we need these bridges, but there is no chance based on the atmosphere that we're going to be able to transfer that revenue risk, and we feel very confident in the revenue risk."
(00:42:25):
And so they put that out as an availability payment project. And notwithstanding it, there was still a lot of political challenges because they were still actually tolling the roads even though the government was doing it. But if it was a P3, it probably would've been a non-starter where they were transferring the revenue risk. We were able to deliver that project from start to finish in about nine months, in part because we were focused on the true benefits that they were trying to get out from that P3 as opposed to calibrating the revenue risk component. And the same thing, I just saw it on a student housing project where the campus was heavily oversubscribed with students and just had plenty of excess capacity and said, "Why are we going to transfer this revenue risk? We feel very confident and comfortable in it, but we still want all these other benefits. Let's keep that and then we can deal with some of the political challenges of transferring revenue risk." Do you want to talk about benefits?
Tad Guleserian (00:43:27):
So I think we've touched on some of these, but a lot of what you see up there on the screens manifest themselves from experienced P3 developers, operators, and then the associated financiers and legal teams that come together to deliver the asset. But without going through every one of them, I think because we've touched on them in some of the previous slides, P3 is a delivery mechanism. It may not be appropriate for every project, but it's one that those of us up here think that for many projects it should be at least considered. Just calling out some of them: the budget certainty—even in a progressive public-private partnership, while you may not know the budget when you select the team with which you're going to negotiate and sit down at the table using that structure, you're certainly going to know it before you hit financial close. And the progressive P3 does allow the public sector to have input on the ultimate design, the way the facility will be operated, and the way the facility will be maintained so that is an additional benefit. But you will have cost certainty. Obviously, the fixed price P3, you'll know that when you select your team.
(00:45:02):
Risk transfer is, I think, one of the cornerstones of public-private partnerships, and it's trying to ascertain what are the risks, whether it's during construction or whether it's on an ongoing basis, that this project is likely to encounter, and which party or parties is best equipped to either mitigate or manage those risks over time. And a big one that everyone always talks about is sort of the environmental risks. Obviously on many projects—my developer hat is now on—I want the public sector (you've owned this land) I want you guys to take that risk. If you're going to look into transfer it, we can certainly mitigate it, but there are costs associated with that, and the costs for us to take on that type of environmental risk may outweigh the benefits. But it's a negotiation through folks like Matt and others that are on the legal side and the finance side.
(00:46:05):
At the end of the day, I think everybody, because it's a long-term partnership, ends up with a solution that they believe will work for them, the public sector, the private sector, etc. So in the end, I'll just leave with job creation because Matt talked about this earlier. Certainly during construction it's going to create a lot of jobs; that's pretty evident. On the O&M side, there's often the concern from labor unions that this is going to lead to a reduction in jobs—whoever is maintaining assets today for the public sector is going to lose and they're not going to be part of the ongoing maintenance of this facility. I think as Matt has shared previously, there's been a number of public-private partnerships wherein the private sector has continued to employ and use the individuals that were maintaining the asset. As in the case of Travis County, there was a previous civil courthouse in Travis County and there's a new courthouse now in Travis County, and in many cases, the individuals that were maintaining the existing moved over; their job may change a bit, but they're still employed. And then Matt, I'm sure, can provide additional answers. So anyways, a number of benefits up there. If there's interest in a specific one, call it out and we'll be happy to discuss it with you.
Matthew Neuringer (00:47:43):
And actually, this is the BS slide, so if there's anybody who wants to call BS on any of this, this is the opportunity. Because, seriously though, if you have experiences where you feel like, "Actually we should stress test some of this," or "Actually there's things that are not on here that should be on here," we have to be real about the benefits and we have to be real with our clients internally as organizations and externally as advisors about the benefits and the challenges. It's definitely not all rainbows and puppy dogs. It's tough. Some of these projects go sideways. It's not necessarily because they're a P3, it's just because the project itself was structured in such a way that it was destined for that outcome. And so the hope is that this structure creates robustness enough around the alignment of interest that you have a true partner on the other side that when stuff hits the fan, you're able to roll up the sleeves with a world-renowned expert who's seen this type of issue 30 different times and can address it and mitigate it for you. It's not that the projects are going to be easy.
(00:49:01):
It's not that for the projects you're going to be able to turn the keys over and let somebody else do it. They're still going to be tough. They're still going to be messy. It's just you're going to have another expert there to help manage it for you, and they might have a few hundred million dollars at stake. Okay, value for money. Anybody familiar with this? You raise your hand, Matt.
Diana Ramirez (00:49:22):
Lisa.
Matthew Neuringer (00:49:22):
Okay.
Diana Ramirez (00:49:23):
Lunch!
Matthew Neuringer (00:49:24):
Okay, I definitely don't want to have a hungry group—that becomes really dangerous. So why don't we take five minutes? You want to grab lunch and then we can bring it in and we can go right into the value for money. That sounds good.
Tad Guleserian (00:49:43):
Great. Thank you.
Matthew Neuringer (00:49:44):
And let us know in this interim if we're going at the right pace, if you want to use our high-tech QR code in the upper right-hand corner, we're going to have a poll. So you could just prompt it on your phone by scanning the QR code, or you go to
Tad Guleserian (00:50:28):
Everybody is experienced in P3s.
Matthew Neuringer (00:50:31):
That's right. And we'll go through some more of the poll questions in a second. Okay, there we go, shifting. So you can keep updating it—we'll prompt you into the rest of 'em, but you can keep updating 'em as you go through. So just to keep cracking on—and I always work while I'm eating, does that make sense? Or I always eat while I'm working, I don't know, but that's the intent here. So we'll have this as a working lunch. And what better way to have a fun lunch than talk about value for money analysis? So I heard Austin sounds like you did a VFM. Anybody else ever be involved in a VFM process? Value for money process loop? I'm sure Loop Capital has done a couple.
(00:51:32):
Any finance folks... has definitely done a number of them. So value for money analysis goes to the initial point of assessment. Once you've gone through your pre-project delivery analysis of, "Okay, what types of projects should we consider?" then once you know that, you can say, "Well, what's the right delivery model?" And you want to compare it against P3 against what was known as a public sector comparator. So what would you typically deliver the project with? Is that design-build? Is that design-bid-build? Is that CMGC? Maybe you want to test it against two different delivery models you typically use. So we have one project we're working on right now where we're testing P3 against design-build and CM. The intent is to have your baseline typical public sector comparator on the left, which is going to also have public financing—whatever you typically use for public financing of an infrastructure project as the control.
(00:52:46):
And then on the right-hand side is: what would this look like if we delivered it as a P3? And that value in the upper right-hand corner of the bar chart there on the P3 side is the ultimate value proposition of a public-private partnership. And if you take a look, the retained risk on the left-hand side is quite large. That's the red—is the retained risk in case you can't see and don't have a 15/20 eyesight. So retained risk is the red, financing's the light blue, base cost is sort of your design construction, pre-planning costs, ancillary—that's the gray. That's cost for lawyers; we're very small, not much of the transaction is the lawyer cost. The bankers too. And so the retained risk is really your big cost driver outside of turning wrenches and pouring concrete. And in a P3, the intent is that there should be enough juice to make it worth it in transferring the risk.
(00:53:57):
So when you have a project where there isn't a value proposition around risk transfer because it's something that's pretty straightforward and you can usually just do it the same way you normally do it, it probably doesn't pencil out. But there's some projects that have complexity, that have exceptional need, whether it be around acceleration technology, bringing some capability to the public sector that you don't have—that's where that value for money is driven. Any thoughts or questions about this? I mean, I have a lot of questions myself because I look at this and I'm like, "Well, how does this voodoo side work?" and a lot of it is if you're coming up with a bid cost and you're pricing risk, you go through an analysis of: what are your top 50 project risks? And then you come up with a probability: what's the probability they're going to materialize?
(00:54:52):
50%, 75%, 100%. And then you come up with a price. If it's permitting and you think that permitting is going to take an extra year potentially because you've got environmental challenges, then you might say that that's a risk that has a 75% chance of materializing that's going to cost the project, if it materializes 100%, $10 million. So then you would put 7.5 million towards that particular risk into your risk ledger, and then if you could transfer a portion of that to the developer, that's where the value starts to come together. And you do that all up and down the entire delivery model chain.
Diana Ramirez (00:55:32):
Is there—and this is something that came up in a question in the Inside Infrastructure monthly conversation earlier this month that AI AI hosts—we were talking about value for money and: when do you do it? Is it one and done or do you start kind of high-level and then hone in? Is there a best practice there?
Matthew Neuringer (00:55:57):
Certainly do it early on, and I would say do it with market intel as well. You don't want to do it in a box in the sense that you've just tested it internally with your advisors. Go out to the market, talk to them about some of the challenges you're having, get that feedback, then input it into your value for money. But you do want to update it as you go through the procurement. This is what you're going to use to sign off your stakeholders and your executives—to sign off on the value—and you need to come back to them before you go to financial close to say, "We've still got that risk transfer. We didn't just give away the whole deal that we thought we were going to get in order to sign this transaction." And then once you're at completion, best practices to continue to analyze whether or not you're getting that value because project administration is just as important as the process of getting from structuring to financial close. And how a project is implemented is frankly more important, obviously, than how you structure it on the front end.
(00:57:00):
Okay, so 80% in the room have experience with P3s—that's great. We've been trying to touch, and I did go around test the waters. I only had a few people say that this is terrible, so just stop doing what you're doing and change directions. But a few people say, "Hey, it's the right level." Some people say, "All right, I've heard this before," and there's people who've sat through me doing this before, so you've definitely heard it before. And what sectors? I heard there was an interest in the room about just how P3 could be used across sectors, and they could be used across sectors even in the same transaction. We're seeing a lot of housing projects, for example, student housing projects where they're combining energy plus student housing plus infrastructure.
Tad Guleserian (00:57:45):
All into the same. Yeah, I think on that note, Matt's absolutely right in the higher ed space. I think not only the advisors but the university understand straight up just doing a student housing project that can be done. What else can we add to it to bring more value to the university? And so as Matt said, whether it's adding energy, adding other components to it, we saw one where it was a student housing project and then it was a school out in the Midwest that added an animal husbandry facility—not something that you encounter every day, but there was enough juice on the student housing that they could add this additional asset to the same procurement.
Matthew Neuringer (00:58:33):
What's the performance metrics on that one?
Tad Guleserian (00:58:37):
Very interesting.
Matthew Neuringer (00:58:39):
Yeah. Okay, so cool. The data's coming in. We've got a lot of transportation focus here, which is good. Toll roads are back, people. We had to do a presentation through our partnership in the spring on, "Hey, what are you guys working on?" and it's like: the toll road P3 market is back hot. We've got three different projects happening in the US right now, and there's some other ancillaries, but toll roads have come into focus, especially in states that have a policy either by regulation or executive order or potentially even statute where, as a policy, they don't bond for transportation costs. So how else can you deliver projects that you don't necessarily have funding for on the front end? And so that's filling a very specific statutory need by having a revenue risk P3 project drive those transportation projects. We've also seen in Georgia a P3 project at closed SR 400 started off as an availability payment.
(00:59:43):
They reprocured it as a revenue risk project, and that allowed for the state of Georgia to get an exceptional amount of value capture upfront for those assets, as well as additional scope including transit corridor improvements up and down that entire corridor, which includes access points for buses and busing transit that just would not have been possible without the P3. And I think they ended up getting... it was a $12 billion transaction overall, a combination of PABs and TIFIA. So one of the largest financings on record for a P3 transaction for a revenue risk P3 project. Typically, you'll see sort of the spread with equity being about half the overall cost with debt the other, but depending on the calibration, that can go up or down. Obviously, in that transaction, all sources of capital needed to be pushed to their max, but the state got a significant check—I think it was about a 4 billion check upfront on day one. I think a lot of states are looking at that and saying, "Huh, what can we do to make ourselves attractive to the P3 market so that we can capture value up and down these different asset classes, not just in the transportation space?"
(01:01:08):
And we talked a little bit about this before I was trying to informally pull the room, but if you have anything specifically, we can certainly chat about it after as we're running up against the clock. Let us know because we want to make sure folks, if you had a pressing question or a pressing topic that you wanted to cover, raise it and we'll cover it. All right, so delivery methods. This is probably one of the most important screens to show if you're talking to your friends about what is a P3, because I think everybody is familiar with design-bid-build, right? That's how most infrastructure in the country is delivered. That's how most will continue to likely be delivered. Design-build has actually come as a very strong second now; I think the Design-Build Institute of America is saying that 30 to 40% of projects in the US now are starting to be delivered as design-build.
(01:02:15):
And then you have a mix of different components of design-build-finance. Everything green has a finance component: design-build-finance-maintain, design-build-finance-operate-maintain, availability payment, and DBFOM revenue risk. And the spectrum is structured so that the risk retained by the public sector is the most on the bottom-left hand quadrant, and the risk retained by the private sector is the most on the upper-right hand quadrant. So in the full upper-right hand corner is just a full-on privatization—that's that real estate lease deal I talked about at the beginning. And in the middle is really where the sweet spot is of the public-private partnership. And thinking about what works from a value for money perspective might mean that you flex in between these different delivery models to test whether or not the risk transfer is actually getting you the value that you're looking for on the transaction.
Tad Guleserian (01:03:20):
And I think tying it back to Matt's earlier slide with the two column charts and the value for money: if you were to do a value for money for the same project and looking at it, let's just say as a design-build-finance (the lower-left of the green) versus a DBFOM, because the amount of risk transfer is greater in a DBFOM as you're transferring the operations and maintenance as well, whereas in a DBF the public sector is retaining that, you're going to end up with different value for money analysis. To the extent that you're considering, maybe it's discussions with the public sector labor unions as to whether or not you want to include the operations and maintenance, you'll have to do effectively two different value for money analysis to look at a DBF versus a DBFOM and compare both back to what would be the same public sector comparator.
Matthew Neuringer (01:04:25):
We've seen some projects recently have to get restructured midstream because they didn't do that analysis as well, where they've gone down the path to DBFM and then they realize, "You know what? Actually, we should strip out the M because we don't have the money to do the M," right? But we still see the value in wrapping design-build-finance component and having that equity developer there to manage the process to get to close. That's an expensive process to go through, but there's still a demonstrated value around potentially having that financing partner there even without the maintenance component. And that is something you'd ideally figure out well before you go to market. The DBO... I will argue to say that DBO probably should be almost below DB just because even though it has more letters to it doesn't actually mean that you've transferred more risk.
(01:05:24):
And what I've seen—I think somebody mentioned, I think Diana you mentioned before that you kind of slapped on O&M to a DB contract—I've worked on deals that started off in the same type of asset class; they've historically done them with design-build with a bolt-on O&M contract. And then we took that as a baseline to convert it to a P3. And they said, "Well, we already have the O&M contract. Just use that." And once we got into it, we realized that the level of detail and risk and analysis around key performance indicators, around outcomes-based structuring that you would hope to see in a P3 project just had not even... they hadn't even scratched the surface on this sort of O&M bolt-on because you just didn't have that skin-in-the-game connective tissue with the equity forcing the two to come together.
(01:06:19):
And so I would say almost all of that ended up getting renegotiated and restructured for the P3. And so I think you will hear, if you're working on P3 projects or looking at P3, you're going to hear from a lot of people say, "Well, we could just do a DBO, right? That'll solve it." And it really doesn't. There are ways to get more out of O&M, but we could talk about that later in a non-finance structure. Okay, Tad, talk us through the progressive P3 process and what is this solving? What problem is this solving?
Tad Guleserian (01:06:55):
So earlier I had touched on the bottom, the greener arrow on the progressive P3 procurement. And if you go back five years—maybe not even five years—the P3 purists would say a public-private partnership must be price-based. And for the most part, that's how public-private partnerships were structured in Europe, Australia, Canada. But increasingly, both the private sector and the public sector are seeing the value that a progressive P3 can bring, particularly to assets that are complex and have a lot of different components—I'm really looking at the community-based infrastructure. It can certainly be applied to transportation and energy assets as well. But if you think about it, look at this building we're in: there's a lot of different components, whether you're looking at the structure with which this building was built... is it going to be steel? is it going to be concrete and steel?
(01:08:16):
How are we going to build the building to the systems that are in this building: the HVAC, the electrical, the way in which the plumbing is run to the myriad of finishes that are in not only this room, but when you go beyond this room. All of those components... and in a traditional or price-based P3, you may have four or five teams that are bidding on it and each of them are designing their building, and you select a bidder based upon their building. To the extent you want to make changes after you've accepted their bid, that team is going to go back and have to revise everything from the systems to the structure to the finishes, and with that comes additional costs. So you enter it thinking you're entering into a fixed price bid, but to the extent that you need to make changes, there's going to be changes to the cost and likely changes to the delivery time.
(01:09:25):
On the progressive P3, as it says here, it's qualifications-based largely. Traditionally what will happen in a progressive P3 is you have a qualifications that goes out and you're looking for teams to form and provide evidence that they're capable of executing upon the project that you're seeking to have delivered. You're looking for them to provide some preliminary sketches—it might be massing, there could be elevations. They're going to provide you a high-level response, and with that, they'll provide some pricing indications at that level of detail. And if you look up there—and I'm squinting here—the team selection occurs very early in that process. And what's happening is then the public sector and the selected team are now sitting down at the table and they're like, "Hey, we know you can deliver this project. We like you, we like the team members you've brought to the table, but we're going to need to change some things."
(01:10:42):
And collaboratively, the public sector and the private sector team are coming together. They're working together in a true partnership form and making revisions. As they progress through those revisions and developing business cases, etc., the cost of that project is getting more and more certain. As the design gets refined, the costs get refined and get more certain. And then before you hit financial close, this is the project that's going to get delivered. This is the price at which that project is going to get delivered. These are the services—O&M if it's part of it—that are going to be part of that project. And so while the ultimate price has not been set until later—it's not upfront when you were going through the RFP responses—in many ways, particularly on these complex transactions that have so many different components, the public sector likes the ability to have a seat at the table and be an active participant, actively involved in the delivery and the design of the ultimate project. One might say on a transportation facility where you're building so many lane miles of a road, maybe there's not as many components that need to be tweaked and perhaps a transportation asset might be better suited for a fixed price procurement. But this is sort of trying to give you the comparison of the two, and we're happy to delve into either one of them in greater detail if you guys desire.
Matthew Neuringer (01:12:36):
I think this is really important. Go ahead.
Tad Guleserian (01:12:37):
Questions back, Michael.
Audience Member 4 (01:12:40)
I just wanted to point out for those in the public sector that you can even kind of go down two different paths earlier on in the process. As you begin to think if you have a large capital project or a capital program and you think there might be some element that would be interesting to the private sector... I can give two examples of two different airports going in different directions. So the Charleston South Carolina airport was contemplating whether there might be private sector involvement and they went ahead and entered into a progressive development agreement with the private sector developer right early on in the process. And the two of them, the airport and the developer, are sitting side-by-side now over the past year, I would say, kind of going through how it might sort out best and what part of the program might be attractive to the private sector.
(01:13:45):
And if they come to some agreement, then they would take the next step with that developer, or even bid out again the development—they're not married necessarily to that developer. On the other hand, an airport not that far away from Charleston, Raleigh-Durham, decided they also have a large capital program, there might be some private sector interest in that, and they decided to just procure an advisor to help them sort through it. And that advisor, that procurement is still in the process right now, but whoever they select will sit down with them and go through their program, their management structure, where it might be most effective for the private sector. But those two avenues are available similar to the two avenues you have here.
Matthew Neuringer (01:14:39):
Thanks, Michael. And I think airports are a great example of one where it's nearly impossible, just given the airline interaction, to be able—if you want to transfer any of that airline risk—to do that as a full-on fixed-price, lump-sum, date-certain P3. And we'll get into it in the next slide as far as the core of this being: how do we de-risk the project so it operates on the delivery part as successful as possible? I know we had another question... that's a great question. So the storied project that I mentioned before, which is the Major Bridges Pennsylvania project that closed a couple of years ago, that was done in a progressive process. I will say unless it was a progressive process, we would have not been able to close that transaction on the timescales that we did. And part of the driver there was they needed to move very quickly.
(01:15:37):
There were political drivers around getting to a close, picking a developer, and being out of procurement before an election cycle. And that's one of the things... I mean, that's a real driver. Political risk is the biggest risk on every project. And so that was one of the drivers was: "Hey, this is a way for us to have a groundbreaking, get under contract, be underway." And also one of the other key risks was there were a lot of unknowns around; there were a lot of karst and geotechnical issues. So to be able to de-risk that with the actual delivery partner for nine months before locking in a price made a lot of sense. Same thing in the environmental; they didn't have a NEPA. How do you procure a developer if you don't have a NEPA? So being able to go through that preferred alternative analysis in real time with your developer partner as opposed to in a theoretical way adds for a lot of efficiencies.
(01:16:28):
So you're not doing that analysis twice because what we see in the fixed price world is oftentimes you're having to go back and do a NEPA reevaluation to accommodate for the fact that now they want trucks, whereas before we hadn't approved the NEPA on the basis of a 16-axle truck. So that's one of the few examples on the surface transportation side. But there are others now that are being delivered including progressive types. Even in the recent SR 400, there's an ability to bolt on another phase. And in the current GDOT project, there's another sort of phase two component to it as well where they're procuring the developer for one project and if they do a great job, they could potentially get another project. Tennessee has also built in components of that into their procurement for their P3.
(01:17:25):
Okay, so VFM risk transfer. So I want to skip that. This is always a bit of an esoteric one, but it shows you the optimum VFM is at the height of risk transfer, but not transferring too much risk because then you get carried away and then the project implodes because you've transferred too much risk to an overly eager developer who wasn't prepared to take it. This is the heart of the progressive process: you see all of these different components that go into a P3 contract that excite me as a P3 lawyer—force majeure, maintenance and lifecycle, environmental contamination. All of these challenges, which are opportunities, but challenges in any project—whether it's design-bid-build or P3—have a different treatment. And if you take a look at the P3, some of them can be transferred to the private sector. When you have a revenue risk component, you can transfer more risks to the private sector so long as they have flexibility around the way in which they can set the rates because they have a way to recover the cost of encountering the unanticipated risk.
(01:18:35):
But with an availability payment, which is a fixed long-term payment that doesn't fluctuate based on the unknowns that you encounter, it's harder to transfer those risks. And that's why on the revenue risk side, you might see more risks that are transferred to the private developer. But some of these shared risks like environmental contamination, subsurface conditions... I just touched on them in the context of the PA project. The idea is if you hire a developer and spend nine months with them in pre-development, that you can de-risk a lot of this and then you can actually transfer it effectively and without them holding too much contingency. You can effectively transfer any risk, but the question is whether or not the value that you're going to get for it makes any sense because the developer's holding a 100% contingency against it. Ideally, you want to transfer the risk with almost no contingency but pure price and scope. Does that make sense?
(01:19:36):
So that's what this is all about: calibrating this and then saying, "Well, you know what? Maybe the P3 doesn't necessarily make sense as a fixed-price procurement, but maybe it could make sense if we did it as a progressive." Because if we could de-risk all of these issues and transfer them, then the developer... then that VFM (the value comes from risk transfer) starts to make sense. So this is how all of these different things come together. Right. Okay, so we'll skip over these. This is the obligatory structure chart. Okay. So if we're talking about the P3 structure, you've got your special purpose project entity, your governmental agency at the top, equity on the right-hand side... so 10 to 40% depends on the nature of the deal. If it's an availability payment deal, you're at about 10%. And as I said before, with a revenue risk deal, you're at about 40, and then debt on the left, design-build and O&M being managed by the SPV.
(01:20:40):
And then what's not shown here is that interface agreement. And I think that's really... it's a shame, Lisa, we should add the interface agreement in here. Because the interface agreement is the art of bringing this all together and making sure that all three sides are talking. Now when I do this presentation and there is a Bond Buyer webinar, which you can see this cool graphic that we have, and we talk about the nonprofit structure, it shows this exact structure, but then layered on top of it in between the government and the SPV is the nonprofit, right? And then the debt comes up with the nonprofit as well. And that's how the nonprofit structure gets interjected into this. But everything else stays the same. So from a project finance perspective, you could still get this project finance homeostasis even with the tax-exempt financing approach. Anything you want to add? Okay, you want to jump on this?
Tad Guleserian (01:21:36):
Yeah. So we've talked a lot about risk and as Matt has suggested, risk transfer is really at the core of a public-private partnership. And so really what we're just looking here is you had different buckets of risk. Development risk is on the front end and as you move across from the left to the right, you're moving towards... development is all your upfront acquisition and permitting and all of that. Then you move into: can we actually get this thing built? Can we get it built on time? Can we get it built for the costs that we bargained for and what we were intending to? That's the completion risk. On an ongoing basis, you've got the operations and maintenance. Particularly, it's maintaining these assets to the levels that the public sector expects and is in the project agreements, which is critical. That's what provides the comfort back to the public sector that they're going to have an asset 30 years from now that's going to perform largely as it is performing on day one because it's being properly maintained.
(01:22:52):
And to the extent that it's not, there's typically deductions in the amount that it pays to the private sector O&M provider. Energy sources, similarly, you're maintaining those. Whether it's in an energy project, if it's maintaining the PV panels and the interconnects and all of that, and maintaining those assets over the course of the agreement. When you talk about demand risk, that really, as Matt was articulating earlier, whether or not the asset's used to the revenues generated or what was anticipated. If they're not and they fall short, then a demand risk largely falls on the private sector. And then that's where the equity cushion comes into play. And lastly, on the counterparty risk for an availability payment structure, that's where you're looking to the creditworthiness of the counterparty, the public sector. That's where the private sector is looking to that party. And are those appropriations coming forth over the course of the project agreement? I am getting some signal that we've sort of hit the time limit. So with that, I think we will leave you with some slides and I think these slides are available. Are they available?
Audience Member 5 (01:24:20):
Actually, if you give me your card, I can email them to you. I don't know that I have email addresses. So if you want to share email addresses, I'm happy...
Tad Guleserian (01:24:28):
Great. So if you didn't hear that, Lisa Boland in the back with AI AI... if you're interested in the slides, please provide your business card to her and she'll make these slides available. Matt, myself, and Diana will be here. If you have additional questions and you want to come up and talk about a project that you're considering or one that you're working on, we're happy to stay and help talk you through it. Thank you all. Matt, thanks.
Matthew Neuringer (01:25:00):
I will say track down Marshall Macomber too on the surface transportation progressive, because Maryland did try to go down the path of a progressive P3 and there's a lot of different complexities to why that didn't work out. But the intent was it was a multi-phase project, it was $9 billion. It was too complicated, too large to do it in one chunk at a fixed-price, lump-sum, date-certain proposal. But there were reasons, particularly around NEPA, that made it challenging from a progressive perspective. So it doesn't always work exactly, and I think it's just as important to learn from the projects that didn't succeed as to why they didn't succeed. So in the future, and you're getting started with consultants and engaging with your political stakeholders and thinking through what works and what doesn't, we look to those projects that have had challenges. And I think Marshall's a good resource for that. And he's here at the conference and on a panel with me tomorrow. So thanks everybody. And we're here at your disposal.