Transcript Slide 1

Hawkins
Delafield & Wood LLP
Urban Water Council
Water System Disaster Recovery
Workshop - June 28-29, 2006
Biloxi, Mississippi
HARNESSING THE PRIVATE SECTOR FOR
RECOVERY: PUBLIC-PRIVATE
PARTNERSHIPS AND PRIVATE ACTIVITY
BONDS UNDER THE GULF OPPORTUNITY
ZONE ACT
Joseph L. Sullivan
Hawkins Delafield & Wood LLP
New York, NY
OVERVIEW
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Public Works Financing and
Contracting Generally
Gulf Opportunity Zone Act
Public-Private Partnership
Considerations
Alternative Project Delivery
Considerations
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HAWKINS PERSPECTIVE
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Public/Private Partnership Transaction Attorneys
Top Tier Public Finance Firm
Top Tier Public Contracts and Procurement Firm
Public Project Finance Experience
Water, Wastewater, Solid Waste, Power Sectors
Privately Owned and Privately Financed Public
Use Projects
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PUBLIC WORKS FINANCING
AND CONTRACTING
GENERALLY
TRADITIONAL PUBLIC WORKS
FINANCING AND CONTRACTING
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Bid-build contracting
Public operations
Governmental obligation municipal
bonds (revenue or tax secured)
Projects are publicly owned
Design, construction, operation and
financing all separate functions
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ALTERNATIVE PUBLIC WORKS
FINANCING AND CONTRACTING
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Design-build
Design-build-operate
Design-build-finance-operate
Design-build-own-finance-operate
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PRIVATE ACTIVITY BONDS
Private financing, ownership or leasing creates private
activity bonds (“PAB’s”)
• PAB’s are not tax-exempt
• Exception: exempt facility bonds
• Exempt facility bonds include water and wastewater
projects (as well as housing)
• Exempt facility bonds subject to general state
“volume cap”
• Uncertain availability of tax-exempt financing for
water and wastewater PAB project
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GULF OPPORTUNITY ZONE
ACT
QUALIFIED GULF OPPORTUNITY
ZONE BONDS (1)
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“GO Zone” Bonds may be issued by Alabama, Louisiana
or Mississippi (each a “GO Zone State”) or their political
subdivisions
Applicability to water and wastewater projects
• qualified project costs include costs of acquisition,
construction, reconstruction or renovation of “public
utility property” located in Gulf Opportunity Zone
Standard PAB exempt facility “volume cap” restrictions do
not apply
But, new limit does apply ($2,500 x state population)
• AL: app. $11.4B; LA: app. $11.3B; MS: app. $7.3B
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QUALIFIED GULF OPPORTUNITY
ZONE BONDS (2)
GO Zone Bonds can be used for any capital
purpose, public or private
Exceptions
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No moveable fixtures or equipment can be financed
No bond proceeds may be used for property specified in
Sec. 144(c)(6)(B) (e.g., golf course, liquor store or gambling
facility)
Therefore, anticipate significant competition
for cap among range of purposes
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PUBLIC-PRIVATE
PARTNERSHIP
CONSIDERATIONS
PRIVATE OWNERSHIP
AND FINANCING
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Pros:
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Eases burden on municipal debt capacity
Transfers risk of performance/project efficacy
Competitive proposal-based procurement
Cons:
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Loss of residual value of the asset
Less public control
Private ownership of an essential public asset is unusual
Double the transactional complexity
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PRIVATE FINANCING AND PUBLIC
OWNERSHIP
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Private financing does not necessarily
require private ownership and loss of
residual value
Still permits private equity investment
and assumption of municipal credit risk
Still permits public control
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ALTERNATIVE PROJECT
DELIVERY CONSIDERATIONS
LEGAL AUTHORITY FOR ALTERNATIVE
PROJECT DELIVERY
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Limited legal authority in Louisiana
and Mississippi
No apparent authority for alternative
project delivery in Alabama
Options:
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Legislative action
Concede project ownership to allow for
competitive proposal based
procurement with public oversight
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BENEFITS OF ALTERNATIVE
PROJECT DELIVERY
“Faster, Better, Cheaper”
• Speed of project development
• Guaranteed performance and
regulatory compliance
• Substantial risk transfer
• 10-25% savings against “benchmark”
• Greater life cycle cost focus
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COST SAVINGS
(DBO V. BB “BASELINE”)
Owner
Type
Fulton County, GA
Stockton, CA
Lynn, MA
Cranston, RI
Seattle, WA
Phoenix, AZ
San Diego, CA
SJ Capistrano, CA
WW
WW
WW
WW
W
W
W
W
Savings
$30M
$100M
$100M
$50M
$75M
$25M
$40M
$15M
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UNIFIED PROJECT
RESPONSIBILITY
Traditional design-bid-build (BB) trifurcates
responsibility
DB, DBO and ODB unify responsibility
Comprehensive asset development and
management under a single contract
One contractor deals with all subs and equipment
suppliers
Avoids the cost and risk of disputes between the
designer, builder and operator
Easier administration
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DBO SAVINGS
Source of savings
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Core competency
Competition as to design; operator-driven
Competition as to operation
Cooperative relationship between designer, builder
and operator
Smaller contingency allowances
Bulk consumables buying power
Broader technology access
Preventive v. breakdown maintenance
Optimized balance between capital and operating costs
Excessive redundancy eliminated
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RISKS RETAINED
• Owner’s risk under any delivery
method
• Changes in law
• Force majeure
• Unusual raw water or influent
parameters
• Pre-existing site and environmental
conditions
• Buried infrastructure conditions
• General price inflation
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RISK TRANSFER (1)
• Design and Construction Risks
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Design liability
Completion risk (delay and efficacy)
Construction cost overruns
Disputes between designer and
builder
• Securing patents and licenses
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RISK TRANSFER (2)
• Operation and Maintenance Risks
• O&M cost overruns
• Regulatory compliance
• Capital maintenance
• Technological obsolescence
• Excess electricity consumption
• Market conditions (e.g., mkt. conditions
affecting sludge disposal)
• Labor relations
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RISK TRANSFER (3)
• Permitting Risks
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Contractor design and technology control
Permit terms and conditions
Permit delays
Permit non-issuance
Atypical regulatory actions
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PROCUREMENT PROCESS
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RFQ
RFP
Vendor due diligence
Vendor proposals
Evaluation
Selection (best value)
Negotiation
Authorization
Execution
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INGREDIENTS FOR SUCCESS
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Initial strategic planning
Thoughtful, well developed RFQ/RFP
Creative and responsive proposals
Clear, comprehensive contract
Full proposer due diligence opportunity
Fair and balanced risk allocation
Outstanding leadership
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CONCLUSIONS
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GO Zone Act provides for greater opportunity to
tap into private sector for the financing of water
and wastewater projects
GO Zone Bonds provide a useful mechanism for
private, tax-exempt financing without conceding
private ownership of an essential public asset
Further consideration of alternative project
delivery legal authority would be valuable
Private ownership may be appropriate to enable
the procurement of a project on a competitive 26
proposal basis with public oversight
FURTHER INFORMATION:
Joseph L. Sullivan
Hawkins Delafield & Wood LLP
One Chase Manhattan Plaza
New York, NY 10005
(212) 820-9513
[email protected]
www.hawkins.com
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