Public-Private Partnerships: In Search of a Paradigm Roger D. Stark Partner Kirkpatrick & Lockhart...
-
Upload
tony-devereaux -
Category
Documents
-
view
219 -
download
1
Transcript of Public-Private Partnerships: In Search of a Paradigm Roger D. Stark Partner Kirkpatrick & Lockhart...
Public-Private Partnerships:
In Search of a Paradigm
Roger D. StarkPartner
Kirkpatrick & Lockhart Nicholson Graham LLP(202) 778-9435
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 2
Introduction
Is financing predicated on credit capability or revenue reliability of P3 deals?
— Tax structuring plays a central role in U.S. transactions/requires customized analysis to preserve tax-exempt finance
— Successful P3s are an amalgam of structures and disciplines
WANTED: transactional paradigms
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 3
Summary of Presentation
Recent Developments
Structural Paradigms
Risk Mitigation/Document Paradigms
The Role of Government
Indicative Structures
Conclusions
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 4
What are P3s?
Public-private partnerships (P3s) :
Combine private sector capital with public sector commitments (and, sometimes, capital)
Procure plant and equipment, improve public services and/or improve the management of public sector assets
Focus on public service results, and thereby offer a more cost-effective approach to public sector risk management
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 5
Recent Developments (old news)
Increased Budget Constraints at the Federal, State and local level
Mistrust of merchant projects/market projections
Degradation of municipal credit quality
Heightened attention to regulatory and political risks
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 6
Structural Paradigms
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 7
Municipal Finance
General Obligation Municipal Bonds (tax exempt, indenture trustee)
Lease Purchase
Certificates of Participation
“non-appropriation risk” or “essential services”?
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 8
Project Finance
Firm, long-term revenues
Mitigation of market and regulatory risks
Fixed price, on-time, at-spec EPC to mitigate construction risks
O&M Agreement to mitigate operating risks
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 9
Privatization Models
Concession of public services
Build/Own/Transfer
Sale/Leaseback
“Contracting Out”
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 10
Private Finance Initiative (“PFI”)
Project Company/“OpCo”/D&B Contractor
Project Agreement defines construction/operation results and pushes various commercial and financial risks down to private sector participants
“Private consortia, usually involving large construction firms, are contracted to design, build, and in some cases manage new projects. Contracts typically last for 30 years, during which time the building is leased by a public authority.”
UK Dept. of Health Website: http://www.dh.gov.uk/ProcurementAndProposals/PublicPrivatePartnership/PrivateFinanceInitiative/fs/en
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 11
Transaction Risk Matrix
Allocation of Project Risks/Burdens
Financial Structure Development Construction Financing Permitting Project Operation
Municipal Finance GC Entity GC Entity GC Entity GC Entity GC Entity
Project Finance Sponsors EPC contractor, project entity, sponsors
Project entity and sponsors
Sponsors, EPC Contractor
O&M contractor, project entity, sponsors
Privatization Transaction Specific
Transaction Specific
Transaction Specific
Transaction Specific
Transaction Specific
PFI Project Company
Design/Build Contractor
Project Company Project Company, Design/Build Contractor
Project Company
GC Entity= Government controlled entity
Project Company= Privately controlled entity
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 12
Risk Mitigation Paradigms
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 13
Risk Mitigation (Lender Goals)
Mitigation of Construction Risk
Reliable cash flow/credit quality -- non-appropriation risk?
Mitigation of market risk
Mitigation of political risk -- “essential service”?
Bilateral contracts that integrate market requirements and mitigate market risks
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 14
Risk Mitigation (Documentary Paradigms)
Off-take Agreements
Service Contracts -- aka “Project Agreements”
Concession Agreements
Construction (EPC/Design Build) and O&M Agreements
Credit Facility Documentation -- “renting money”
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 15
Determine Available Alternatives for Creating Security Interests
What legal structures are available under local/foreign law for creating interests in property?
− (Assignments/trusts/pledges) Formalities of Execution (public vs. private instruments, recording
requirements)
− Compliance with local law formalities will affect enforceability and determine priority in bankruptcy
Understand Enforcement Mechanisms
− Public Sale Requirement (before Notary Public or Court)
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 16
Contract Rights (indicative)
FORM OF SECURITY STRUCTURE CREATION PERFECTION
Assignment (e.g., of (i) all rights and obligations, or (ii) right to receive payments under a contract (Cesión de Crédito), or (iii) all or some rights only (not obligations))
Public deed or private agreement
Present assignment vs. assignment effective (but subject to a “suspensive” condition)
Upon execution by all parties (i.e., assignee, assignor and counterparties) or, if signed only by assignee and assignor, upon notice of assignment to counterparty
Execution plus recording (e.g., Costa Rica and Guatemala recording required)
Counterparty’s consent may be expressly required for assignment
Trust:
Contribution of contract rights by holder thereof to (foreign or domestic) trust for the benefit of a third party (e.g., lender). Availability contingent on applicable law (e.g., Salvadorean law does not provide for creation of trusts)
Public deed or, in a few jurisdictions (e.g., Costa Rica), private agreement
Generally, notice to counterparty required
Pledge:
- of Economic Rights (e.g., El Salvador)
- of rights of use and leasing (e.g., Costa Rica)
Pledge agreement, typically by public deed or in some countries (e.g., El Salvador), private agreement (with signatures authenticated by a notary public)
Recording with applicable registries may be required (e.g., Costa Rica)
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 17
Stock (indicative)
FORM OF SECURITY STRUCTURE CREATION PERFECTION
Pledge of Shares Public deed or if private agreement, with signatures authenticated by a notary public. In some countries (e.g., Panama), pledge must be executed with the same formalities as underlying contract (e.g., loan agreement)
Typically, “possession” of share certificates required (i.e., physical delivery to pledgee)
- or delivery of share certificates to a third party trustee (e.g., Panama)
- or delivery of share certificates plus endorsement thereof and recording of pledge in the issuing company’s share registry - (e.g., Costa Rica and El Salvador)
Trust:
Contribution of shares by shareholder to a trust for the benefit of a third party (e.g., lender). Availability contingent on applicable law (e.g., Salvadorean law does not provide for creation of trusts)
Generally, trust agreement by public deed, or, (e.g., in Costa Rica) if private agreement, with signatures authenticated by a notary public
Delivery of share certificates to trustee
- Formal legal title to shares transferred to the trustee (e.g., Panama)
- Endorsement of share certificates and recording in issuer’s records may be required (e.g., Costa Rica)
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 18
Real Property (indicative)
FORM OF SECURITY STRUCTURE CREATION PERFECTION
Mortgage (Hipoteca de Bienes Inmuebles)
Variants:
- Antichresis (i.e., mortgage interest in rents and proceeds of real property) (available in Panama)
- Pledge of rights of possession (available in Guatemala)
Written agreement in a public deed (typically only if real property to be mortgaged is duly registered)
If property is unregistered, holder of possessory rights may pledge such rights (e.g., Guatemala) in private document
Recording with applicable registries
Trust
Contribution of real property by owner to trust in favor of a third party (e.g., lender)
Public deed of transfer to trustee Recording with applicable registries
Mortgage Bonds (Cédulas Hipotecarias) (available in Costa Rica)
Public deed. Can only be granted if no mortgage has been previously filed in same property
Recording required
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 19
Movable Personal Property (indicative)
FORM OF SECURITY STRUCTURE CREATION PERFECTION
Pledge Public deed or private agreement. Public deed required in a few jurisdictions (e.g., in Costa Rica, for assets required to be registered (e.g., vehicles, ships, aircrafts) and in El Salvador)
Importance of formalities in execution (in some countries must be same as underlying contract)
Possession required (i.e., delivery of movable property to pledge)
Recording in lieu of possession where recording is required or in the case of “registered” assets.
Express acceptance of pledge by lender sometimes required (e.g., Guatemala)
Pledge variants (available in Panama):
- Mortgage (Hipoteca de Bienes Muebles)
- General Pledge (Prenda General de Activos) only applicable to assets located outside Panama
Public deed
General pledge by public deed or private agreement legalized by notary public
Recording required
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 20
Receivables/Project Revenues/Bank Accounts (indicative)
FORM OF SECURITY STRUCTURE CREATION PERFECTION
Assignment (e.g., of right to receive payments under a contract (Cesión de Crédito))
Public deed or private agreement
Present assignment vs. assignment effective (but subject to a “suspensive” condition)
Upon execution by all parties (i.e., assignee, assignor and counterparties) or, if signed only by assignee and assignor, upon notice of assignment to counterparty
Pledge of funds in bank account(s) and, in some jurisdictions (e.g., Panama), in future deposits. Availability contingent on applicable law (e.g., pledge of bank accounts not recognized in Costa Rica)
Public deed or private agreement Transfer of title to bank account(s) to pledgee or third party depositor may be required
Trust
Contribution of bank account(s) by owner to a trust for the benefit of a third party (e.g., lender)
Execution of trust agreement (between the owner and the collateral trustee) pursuant to a public deed, with lender holding beneficial interests
Transfer of title to bank account(s) to trustee may be required
In some jurisdictions (e.g., Guatemala) notice of assignment of receivables must be served on each of the respective payors, or alternatively, their consent and acknowledgment must be obtained
Pledge of all assets (Prenda de Compañía) (available in El Salvador)
Public deed Recording required
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 21
Transactional Issues
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 22
Transactional Issues – Documentary Paradigms
PPAs
Fuel Supply Agreements
EPCs
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 23
Power Purchase Agreement
(“PPA”)
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 24
Goals
Reliable cash flow
Mitigation of market risk
Integration of bilateral contract arrangements with the requirements of wholesale market
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 25
Key Contract Provisions
Term: the term should be as long as tenor of debt financing, plus additional time to permit recovery of force majeure losses;
Character of Service: Consider distinction between selling to captive adjacent customer and selling into or via wholesale markets. If selling via the wholesale market, plant efficiency and dispatch patterns will determine fuel usage. (Consider issues re excess energy, energy trading and energy marketing);
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 26
Key Contract Provisions (cont’d)
Price: Traditional capacity/energy pricing may not be viable in sales to wholesale markets;
— Traditional capacity/energy pricing may not be viable in sales to wholesale market
— Contracts that track market pricing will provide lower leverage ratios
— “Associated Energy” or “Energy Block” contracts may provide alternative structures for optimizing financial leverage
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 27
Key Contract Provisions (cont’d)
Force Majeure Events: available to fuel suppliers also must be available to Owner under PPA (note civil code issues);
Events of Default:
— Standard of service typically based on 100% availability of the project’s committed capacity to the System Operator;
— Seller defaults should incorporate appropriate cover options and cure periods; avoid non-curable defaults by agreeing upon suitable economic or operational remedies.
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 28
Other Material Provisions
Operations & Maintenance
Billing & Payment
Liability/Indemnification
Changes in Law
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 29
Fuel Supply Agreements
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 30
Fuel Supply Contract
Basic Goal
Key Contract Provisions
Other Material Provisions
Regulation
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 31
Objectives of Contract
Reliable supply of fuel
Reliable pricing to realize pro forma economic objectives
Avoid/mitigate commercial/regulatory risks
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 32
Key Contract Provisions
Quantity
Character of Service
Point of Delivery
Price
Take-or-Pay
Term
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 33
Quantity
Keyed to projected PPA/system dispatch requirements
Pipeline fuel/balancing requirements must also be considered
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 34
Character of Service
Firm, interruptible or “quasi-firm”
Firm service typically required unless project has multi-fuel capability
“Portfolio” considerations if multiple fuel sources contemplated
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 35
Point of Delivery
Coordination of delivery points/receipt points in Supply and Transportation Contracts
Restrict number of delivery points if various suppliers providing gas
Title and risk of loss
— transfers from supplier to pipelines
— transfers from pipelines to LDCs
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 36
Price
Risk of fuel prices causing power pricing to exceed applicable normative values
Utilize indexed pricing, tracking accounts to mitigate pricing risks and (where feasible) multi-fuel arrangements
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 37
Take-or-Pay
Significant risk for all projects subject to dispatch (i.e., not “captive” projects)
Seek to mitigate through “make-up rights” and use of back-up fuels (to the extent consistent with project economics)
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 38
Term
Financing requirements typically result in term equal to or greater than term of post-construction financing
Shorter terms may be feasible if long-term pricing is likely to be out-of-market
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 39
Other Material Provisions
Supplier Credit
Conditions Precedent/ Commencement of Service
Force Majeure
Default and Remedies
Letter of Credit from Project
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 40
Other Material Provisions (cont’d)
Representations and Warranties
— title, quality
— match to equipment specifications
Right to Resell Gas
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 41
Pipeline Transportation Service
Gas Transportation Service
Pipeline Tariff
Peak Shaving
Regulation
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 42
Gas Transportation Service
Quantity
Point of Receipt/Point of Delivery
Quality
Rate
Balancing
Scheduling
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 43
EPC Contracts
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 44
Key Contract Provisions
Scope of Services
Standard of Performance
Payment Terms
Completion and Performance of the Project
Warranties
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 45
Scope of Services
Risk
“Bifurcation” leaves a gap between procurement and construction
Combined scope of supplier (off-shore) and constructor (on-shore) provides less than full EPC scope
Mitigation
Parent guarantee or Coordination Agreement
Coordination and integration of both scopes to ensure complete EPC coverage
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 46
Scope of Services (cont’d)
Risk
Change in required permits triggering change order
“Contractor Permits” definition too narrow triggering change order
Mitigation
Identify potential areas where required permits may change and negotiate pre-set change order amounts
Coordination and integration of both scopes to ensure complete EPC coverage
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 47
Standard of Performance
Potential Risk
Local practices and standards may differ from international standards required by debt and equity investors
Mitigation
Services to be performed in a “workmanlike” manner, in accordance with local law, applicable int’l standards and prudent utility practice
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 48
Payment Terms
Potential Risk
Insufficient liquidity to complete project due to dispute; payments disproportionate to value received
Mitigation
EPC price should be fixed, subject only to agreed change orders; retainage of 5%-25% withheld to ensure performance; payments keyed to project “milestone” events
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 49
Completion & Performanceof the Project
Potential Risk
Completion delays
Mitigation
Well-delineated standards for establishing project completion; liquidated delay damages keyed to interest costs on project construction debt
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 50
Completion & Performanceof the Project (cont’d)
Potential Risk
Project fails to perform at desired levels
Mitigation
Testing protocols to measure project performance (e.g., output, heat rate); liquidated damages for failure to attain specified performance levels
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 51
Warranties
Potential Risk
Latent defects in design, construction not discovered until after final completion
Mitigation
“Standard” warranties (1-2 yrs) of design, mat’ls, workmanship
“Suitability” warranty taking into account the intended use of the project
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 52
Other Provisions
Force Majeure
Defaults and Remedies
Scope Changes
Insurance
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 53
Force Majeure
Potential Risk
Unforeseen events that excuse contractor performance and/or increase project costs
Mitigation
Events available to contractor must also be available to Owner under PPA and fuel contracts
Special concerns re labor disputes
Must be conformed to civil code definitions of force majeure
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 54
Defaults & Remedies
Potential Risk
Material non-performance by the contractor
Mitigation
Defaults should be crafted with regard to local labor and lien laws
Owner remedies to include taking over the project (including all contractor work and subcontracts)
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 55
The Role of Government
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 56
Checklist for Government Support Arrangements
Authorization to do Business
Determinable Tax Liabilities (“PILOT” Agreements)
Credit Support for Governmental Obligations
Assistance in Obtaining Governmental Permits/Approvals
Mitigation of Change of Law Risks
Mitigation of Uninsurable Force Majeure Risks
Priority or Parity on State-Controlled Transportation Facilities (e.g., port facilities)
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 57
Assistance in Obtaining Governmental Permits/Approvals
Defining the Scope of Necessary Permits/Approvals/Regulatory Exemptions
Government Support to Facilitate Processing of Approvals
Applicability to Extensions and Renewals
Combine with due diligence of procurement rules and Franchise/Concession Requirements
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 58
The Way Forward: Role of Government
Traditional Government Financing
Governmental grants/Revolving Funds/“63-20” corporations to attract private capital
P3 Structures
Transaction-specific innovation
© 2006 Kirkpatrick & Lockhart Nicholson Graham LLP. All Rights Reserved 59
Some Indicative Structures
Federal/State Agency
Commercial Lenders
ProjectCompanyBorrower
Indenture/NotePurchase
Agreement
LoanAgreement
LoanAgreement
Capital MarketsOffering
Lead CommercialBanks
as Agents/Underwriters
Syndicate ofCommercial Banks
Collateral Agent/Trustee
CommonAgreement
LoanAgreement
CollateralTrust
Agreement
Credit Support
InstrumentCredit Support Entity
Security Agreements:Cash Collateral Agreement
Pledge AgreementAssignment Agreement
Mortgage
Typical Co-Financing Transaction
Credit Default Option
Counter Party Bank
Project Lender
Project Company
Municipal
EntityBPS = Basis Points
CEP = Credit Event Payment
$
$
$
Services
CEP
Zero
Fee x BPS
No credit event
Credit event
Credit Linked Note
Counter Party Bank
Project Lender
Project Company
Municipal
Entity
CEP = Credit Event Payment
$
$
$
Services
CEP
Principal
Interest on note
No credit event
Credit event
Principal
Legal Counsel
Design Engineer
Investment Banker
Revenue Modeler
Accountants
Rating Agency(ies)
Interconnection/GasDistribution Services
Provider
Parent Guarantor
O&M Provider
Sponsors Senior LendersTerm Notes -Banks -Public -Institutional InvestorsBank Revolver/LC Facility
-Subordinated Lenders
Subcontractors
Equipment and Material Suppliers
EPC Contractor
Parent Guarantor
WarrantiesPerformance Guarantees
Typical Energy Project Financing
Equity InvestmentShareholders Agreement
Fuel Supply ContractFixed PriceEPC Contract
Offtake AgreementO&M Agreement
Guarantees or
Support
PayingAgent
CollateralAgent
Funding Company
Passive EquityInvestors
Insurers
Fuel Supplier
Legal Counsel
Independent Engineer
Power and Natural GasConsultant
Insurance Consultant
Project Company
Power Marketer*
Power Purchaser(s)
ParentGuarantor*
ParentGuarantor
Transmission/ Services Agreement
Interconnection/Transmission Ag’t**
*Project company power marketer and its parent guarantor may be affiliated.
**May be provided by power offtaker in “tolling” (energy conversion) agreement.
Typical PFI Structure
Procuring Authority
Project Company’sShareholders
Project CompanyProject Company’s
Lenders
D&BContractor
OperatingContractor
Lender’s DirectAgreement
Loan andSecurityDocuments
Key: = contract = flow of money
Project Agreement
Conclusions
Estimated infrastructure needs exceed several hundred billion dollars
Without suitable mitigation, structural, legal, and regulatory risks may reduce flow of private capital to infrastructure projects
Governmental support central to overcoming investor concerns
Existing paradigms -- structures, documents, risks -- must be adapted to accommodate market demands