1. DC-#1210253 v1 World Bank Workshop: Current Developments in U.S. P3s Roger D. Stark Partner, K&L Gates 1601 K Street N.W. Washington DC 20006-1600 Roger.Stark@klgates.com 202/778-9435 June 18, 2008

2. 2 OVERVIEW

3. 3 Summary of Presentation  Focus first on strategic objective, then on process  Background on public finance and key paradigms  Legal constraints on P3s  Elements of successful P3s  Conclusions

4. 4 Background on P3s, Public Finance and Key Paradigms

5. 5 Combination of public and private finance components  A formula for success – due to the unique contributions available from each participant  Governmental power  Eminent domain  Taxing power  Access to tax-exempt financing  Private strengths  Construction expertise  Equity investor  Private procurement  Private management

6. 6 Key Elements of a P3  Contracts awarded based on “value for money,” not lowest bid  Capital or capital-equivalents provided by public and private parties  Reliable, long-term commitments  Flexibility in structuring contractual arrangements to best suit the economic, operational and policy goals of the parties  Assets with relatively high residual value

7. 7 “Traditional” Finance Paradigms  In the corporate world, capital is raised through equity as well as debt offerings  In the public sector, capital is raised primarily through the issuance of long term debt – bonds – in order to accomplish specific projects. Most public sector debt has an amortization term of 20-30 years; most debt is amortizing – often on a level payment basis

8. 8 Recent Developments  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

9. 9 Structural Paradigms

10. 10 Municipal Finance  General Obligation Municipal Bonds (tax exempt, indenture trustee)  “Private Activity” Revenue Bonds  Lease Purchase  Certificates of Participation (“non- appropriation risk,” “essential services”)

11. 11 Tax-Exempt Financing  Debt issued at lower interest rates, because the recipient does not include the interest in federal gross income  The structure of the debt is limited primarily by state law. Debt may be fixed rate, variable rate, auction rate, credit enhanced, un-credit enhanced, senior or subordinate lien  Bond insurance used to be a major factor in project financing and public private partnerships

12. 12 Tax-exempt lease purchases  Public partner enters into a long term agreement:  Providing for payments over time  Public participant has management of and control over the asset during the term of the lease  At the end of the lease term, public partner may acquire title to the property

13. 13 Conduit Financing  The public partner may participate as an issuer of debt solely to provide access to tax exempt financing  Public partner does not provide any direct financial support (i.e. taxes, revenues other than project revenues) to the project Bond Repayments ProjectTrustee Investors Government Issuer Trust agreement Bond proceeds Proceeds to pay cost Revenues from project Bonds

14. 14 Partnership Financing  The public partner may participate not only as an issuer, but also with a source of governmental revenues – governmentally imposed  Special excise taxes  Customer facility charges  Incremental tax revenues  Utility revenues (special revenues) ProjectTrustee Investors Government Issuer Trust agreement Bond proceeds Proceeds to pay cost Revenues from project (may be secondary or absent) Bond Repayments Bonds Govt. revenues

15. 15 63-20 Financing Option What it is: A mechanism created under federal tax law (Rev.Rul. 63-20; Rev. Proc. 82-26) that permits nonprofit corporations to issue tax-exempt debt How it works: Nonprofit corporation established under state law issues tax exempt bonds; proceeds used for a desired project; the nonprofit corporation is obligated to repay the debt from identified and pledged sources Applications: Unlimited, but particularly helpful in the P3 context

16. 16 Legal Counsel Design Engineer Investment Banker Revenue Modeler Accountants Rating Agency(ies) Parent Guarantor O&M Provider Sponsors Senior Lenders Term Notes -Banks -Public -Institutional Investors Bank Revolver/LC Facility Subordinated Lenders Subcontractors Equipment and Material Suppliers EPC Contractor Parent Guarantor Warranties Performance Guarantees Equity Investment Shareholders Agreement Project Input Contract Fixed Price EPC Contract Offtake Agreements/ Concessions/Project Agreements O&M Agreement Guarantees or Support Paying Agent Collateral Agent Funding Company Passive Equity Investors Insurers Supplier Legal Counsel Independent Engineer Market Consultants Insurance Consultant Project Company Offtake Purchaser(s) Parent Guarantor Subsidiary Infrastructure (e.g., rights-of-way)

17. 17 Typical PFI Structure Procuring Authority Project Company’s Shareholders Project Company Project Company’s Lenders D&B Contractor Operating Contractor Lender’s Direct Agreement Loan and Security Documents Key: = contract = flow of money Project Agreement

18. 18 Risk Mitigation Paradigms

19. 19 Risk Mitigation (Lender Goals)  Mitigation of Construction Risk  Reliable cash flow/credit quality—off-take and Concession Agreements (non- appropriation risk?)  Mitigation of market risks  Mitigation of political risk (“essential service”?)  Bilateral contracts that integrate market requirements and mitigate market risks

20. 20 P3 Risks  Political, regulatory and change of law risk  Additional costs of project oversight, documentation and execution may exceed savings from efficiencies  Market projections fail to pan out

21. 21 Design Bid Build Private Contract Fee Services Design Build Build Operate Transfer (BOT) Long Term Lease Agreement Design Build Finance Operate (DBFO) Build Own Operate (BOO) Other Innovative PPPs PUBLIC ResponsibilityPRIVATE Responsibility

22. 22 Legal Constraints on P3s

23. 23 Legal Constraints on Public Private Partnerships  Legal constraints generally arise as a result of the participation of a “public partner”  Why? -- Unlike private enterprise, public agencies are entirely creatures of state law. They have only those powers that are granted by a state constitution and by the state legislature.  The power of a state legislature is plenary  The state constitution limits the powers of a state legislature  As a result, any party dealing with a public agency is required to be aware of the constraints of state and local law. Any exercise of power by a local government beyond its express grant of authority (or that necessarily implied) is void. Let the private party beware.

24. 24 Lending of Credit  Most often (but not always) found in a State Constitution.  In order to protect the taxpayers from their elected representatives  Prohibits gifts of public funds to private parties  Prohibits lending of public credit to benefit private parties  Prohibits the acquisition of stock  Effect of limitation  Generally limits the ability of a public agency to be a “partner” with private enterprise  Prohibits public agency from guaranteeing the performance of what is essentially a private function  The public agency is limited in its ability to participate in the “upside” and the “downside” of a business venture

25. 25 The Role of Government

26. 26 Checklist for Government Support Arrangements  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 Facilities (e.g. port facilities)

27. 27 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

28. 28 Why do P3s succeed and why do they fail?  Politics/philosophical misunderstandings and differences  Key public/private distinctions  Constituencies: Shareholders vs. the general public  Control: Shareholders vs. state legislature  Motivation: General (and often unrelated) political issues (affecting the public partner) vs. internal political issues (affecting the private partner)  Sunshine Effect  Negotiations with a public partner invite public scrutiny  Public records issues  Public notice and public hearing requirements  Motivations of the parties negotiating may not be different; however, the reward systems are different  When parties who are not similarly situated are negotiating, the probability of miscommunication is enhanced and the opportunities for mistrust and communication breakdown escalate

29. 29 Conclusions  Risk sharing is the essence of P3s  Without suitable risk sharing, structural, legal, and regulatory risks may reduce flow of private capital to infrastructure projects  Existing paradigms must be adapted to accommodate changes in the market  Governmental support central to attracting private investment

30. 30 Roger Stark (Washington, D.C.) For more than 19 years, Mr. Stark has concentrated his practice on a wide variety of domestic and international energy and infrastructure transactions. His experience includes complex project and structured financings, mergers and acquisitions, privatizations and all manner of commercial agreements relating to energy and infrastructure. Building on over 10 years of domestic practice involving projects in 12 U.S. states, he has worked in over 16 Latin American countries and numerous other locations worldwide and is fluent in Spanish and proficient in Portuguese. He has structured, documented and/or closed over US$1 billion in complex infrastructure financings, including the first limited recourse electric sector financings in Kenya and Panama (representing the borrower and lender, respectively). He has also worked on a variety of domestic electric generation project financings utilizing conventional and non-conventional fuels (e.g., the two largest waste-tire-to-energy projects in the world and the first gas-fired co-generation plant located on a New York State superfund site). Mr. Stark’s practice also involves telecommunications and transportation infrastructure transactions and extends to regulatory matters, including advising a major multinational oil corporation on considerations, strategies and tactics for its entry into the electric power business and advising numerous clients on the rules and requirements of various U.S. and international energy regulatory structures. In addition, he has participated in a variety of contested regulatory and litigation/international arbitration matters concerning energy projects. Notably, he participated in a World Bank mission to advise the government of Argentina in connection with the proposed restructuring of its public service concessions after the peso crash of 2001. J.D., Vanderbilt Law School (1984), B.A., Queens College of the City University of New York (1981) +1.202.778.9435 roger.stark@klgates.com Speaker Bios

31. 31 Questions? This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. ©1996-2008 Kirkpatrick & Lockhart Preston Gates Ellis LLP. All Rights Reserved.