1. PPP Basic Concepts Case Study Application: Indiana Toll Road Ricardo Sanchez February 12, 2013

2. 2 Index 1.tion: concept, grounds for P3s and main players of highway P3s

3. 01 Introduction to PPP’s

4. 4 01. Definition of Public-Private Partnerships (PPP) Contractual arrangements between the public and private sector in which (i)the private sector assumes most of the risks of financing, constructing (or leasing) and operating and maintaining an infrastructure (ii)in exchange for the right to future revenues or payments (iii)for a specified term

5. 5 01. The driving forces of PPPs growth (I) Increasing demand for investment in highway construction, operation and maintenance projects due to: Traffic congestion Aging infrastructure Population growth Changing development patterns Decreased purchasing power of the traditional public funding mechanisms for funding highways (the gas tax) due to: Increasing fuel efficiency of motor vehicles Political resistance to increasing the gas tax Depletion of the Highway Trust Fund

6. 6 01. The driving forces of PPPs growth (I) Increasing demand for investment in highway construction, operation and maintenance projects due to: Traffic congestion Aging infrastructure Population growth Changing development patterns Decreased purchasing power of the traditional public funding mechanisms for funding highways (the gas tax) due to: Increasing fuel efficiency of motor vehicles Political resistance to increasing the gas tax Depletion of the Highway Trust Fund

7. 7 01. The driving forces of PPPs growth (II) THE CONSEQUENCE : The private-sector capital becomes an attractive option to supplement or replace the public funds for highway projects OTHER BENEFITS THAT BRINGS THE PRIVATE-SECTOR PARTY: Equity Invested at Risk Accelerated project completion Motivated and highly specialized management teams Cost control and operational efficiency Innovation and new technology Improved customer service WHY SUCH BENEFITS? Significant risks are allocated to the private sector who is rewarded for accepting such risks

8. 8 01. Main players in PPPs Projects

9. 9 01. Advantages of PPPs Maximizes the use of each sector’s strength Reduces public capital investment Improves efficiencies – quicker completion Shares risks Mutual rewards Improves aggregate overall costs efficiencies Improves service to community

10. 02 TRADITIONAL VS ALTERNATIVE PROJECT DELIVERY METHODS

11. 11 02. Traditional Delivery Method : Design-Bid- Build Process: Public sector develops design Competitive bids for construction by private sector based on that design Construction work is awarded to the lowest- price bid Project financed with public funds Public entity inspects compliance of the works with the design Public entity operates and maintains the facility Advantages: Full control over design by public sponsor Low-bid procurement encourages lowest construction cost Ensures competition among private contractors Consistent with the institutional framework (state agencies are structured and stuffed to procure highway projects following this traditional method) Disadvantages: Impacts on cost and project schedule: constructor takes advantage of unanticipated design flaws to get additional payments (change orders) or of unanticipated site conditions to get project schedule relief Project financed entirely with public funds No synergies between design and construction phases

12. 02. Alternative Delivery Methods 12 Increasing participation of private sector in the development of the projects: Assuming significant project risks Making available private sector funds

13. 02. Alternative Delivery Methods 13 Design-build Faster project delivery Design, construction and operational efficiencies Quality improvements Encourages innovation Design-Build-Operate-Maintain + Encourages delivery of a higher quality project (to reduce life-cycle maintenance and rehabilitation costs) Design-Build-Finance-Operate-Maintain (toll) +Risk of traffic is transferred to the private entity. The tolls, are used by private entity to repay the private sector funding Design-Build-Finance-Operate-Maintain (availability) + Risk of financing the project is transferred to the private sector: funds from private sources (i) Equity & (ii) debt are available. The tolls, are used by public entity to repay the private sector funding.

14. 03 PPP Risk Allocation

15. 03. Design-Bid-Build Risk Allocation Construction Technology upgrades Finance Design EnvironmentalChange in law Approval Process Right of WayIntegrationTraffic & Revenue Operation & Management Customer acceptance Unforeseen conditions

16. Public Sector 03. Design-Build-Finance-Operation-Maintain Risk Allocation ConstructionTechnology Customer Acceptance Delay Events FinancingEnvironmental Operation & Maintenance Competing Facilities Private Sector PublicSharedPrivate Design Unforeseen Conditions Approval Process Oversight Termination ROW Traffic & Revenue Change in law

17. 04 CONTRACTUAL STRUCTURE OF A HIGWAY P3 PROJECT

18. 18 04. Common structure of a highway P3 CONCESSION AGREEMENT REVENUE SHARE – UPFRONT PAYMENT TOLLS SERVICE EQUITY RETURN EQUITY CONTRIBUTION & PROVIDES SERVICES DEBT SERVICE LOAN FUNDS PROJECT DESIGN & CONSTRUCTION LUMP SUM FIXED PRICE OM&R SERVICES FIXED PAYMENT COLLECTION & ENFORCEMENT & BACK OFFICE SERVICES TRANSACTION PAYMENTS TOLL SYSTEMS DELOPMENT & INTEGRATION CONTRACT PRICE UPFRON PAYMENT PUBLIC FUNDS

19. 05 PPP’s Financing

20. ¿What is Project Finance? Financing of a project where creditors have as main and only repayment source the revenues generated by such project. Also called non recourse or with limited recourse to the sponsor financing As the repayment source is the cash generated by the project, creditors make a careful and deep analysis of the certainty of those revenues in order to minimize the risk of not being repaid. Project Finance is generally not applicable to real state or industrial projects where market risks are difficult to mitigate. Applicable to Infrastructure Projects like Toll Roads. 20

21. Ways to finance an Infrastructure Project Public Financing: Financed by a public entity. No private investment is involved (equity). Public support varies depending on the project: Revenue Bonds (e.g. NTTA projects) vs full support from state. 21 Private Financing: Financed with the involvement of a private entity. Takes the form of a Public Private Partnership (P3). Different degrees of private and/or public support. The private investor invest equity at risk and expects a return.

22. 22 The main sources of funding are: Equity: Provided by the Private Sector Debt: Funded by the Capital Market (Bonds) or Bank Loans Public Support: Usually in the form of direct subsidy or TIFIA Financing Civil Works Right of Way Tolling Systems Advisors Public Support Debt Equity Debt Interest & Fees Reserve Accounts Sources of Funds Uses of Funds Transaction Cost ¿How is a typical P3 Project Financed?

23. OPEX & CAPEX Project Senior Debt Equity Toll collection & other revenues O&M/Capex Providers Capital markets/ banks debt service Federal Government (TIFIA) other Public Entities Sponsors: dividends payment Debt like public support 23 P3 Typical Flow of Funds

24. 05 PPP Case Study: Indiana Toll Road

25. 25 05. Indiana Toll Road ITR Ticket System 133 miles long, connects the Barrier system to the Ohio Turnpike Closed system w/ 14 plazas Few viable alternatives, occasionally competes with SH-20 and I-94 1.2 billion VMT (40% trucks), 21 million transactions recorded in 2012 Cars pay $0.06/mi (cash) or $0.03/mi (ETC tag) 5-axle trucks pay $0.24/mi ITR Barrier System 24 miles long, connects the Chicago Skyway to the Ticket System Open tolling system w/ 8 plazas Strong competition with the I-94 431 million VMT (10% trucks), 26 million transactions recorded in 2012 Cars pay $0.07/mi (cash) or $0.02/mi (ETC tag) 5-axle trucks pay $0.22/mi Barrier System

26. 26 05. Existing Traffic & Revenue Light vehicles make up about 70% of the miles traveled on the ITR, making cars the largest market in terms of both number of users and VMT. Trucks are the most valuable asset to the ITR. 5-axle trucks (the most common variety) pay toll rates 3-4 times higher than cars and demonstrate an inelastic response to toll rate increases. Of the ITR’s $185m annual revenue, two-thirds comes from trucks.

27. 27 05. Trend in Traffic & Revenue The figures to the right show the average daily traffic on each ITR system in blue bars. Traffic is measured in full-length equivalent trips (FLET), which is calculated as VMT divided by the facility’s length. The annual revenue (nominal) collected from tolls in each year is shown by the red line. Note that while traffic has not recovered from the recession, revenue continues to increase as toll rates are increased annually.

28. 28 05. Indiana Toll Road Project History Publicity financed and constructed during the 1950s. Began operations in 1956 giving motorists easy access between the Midwest and the Eastern United States. Operated by the Indiana Toll Road Commission from its inception. INDOT assumes operations in 1981 from ITR Commission. In 2006, ITRCC took over operation of Toll road. ETC Tolling System implemented in 2008. As of 2013, over $300 million has been invested in improvements to the ITR.

29. 29 05. ITR Privatization Process Indiana Toll Road Privatization Process January 2005 Governor Mitch Daniels begins his first term after winning the election in November 2004. In his first term he introduced the Major Moves Project, which included a 75 year lease of the Toll Road. Winter 2005 Gov. Daniels entrusted Meyer Brown, Goldman Sachs and Wilbur Smith as the advisors for the structuring of Indiana’s lease, using the Chicago Skyway model as a guide. Spring 2005 The RFQ is released to the market Summer 2005 The RFP is released to the market Fall 2005 Four bids were submitted for consideration with the winning bid going to Cintra- MIG, a 50/50 consortium, for $3.8 Billion. Winter 2006 Legislation was passed for the Major Moves Project. April 12, 2006 Contract for the ITR lease is signed and three months remained to financial close. (IFA represented the State of Indiana) June 29, 2006 Financial close and transfer of operation to the Indiana Toll Road Concession Company.

30. 30 05. ITR Risk Allocation Structure IFA ConstructionETC Implementation Delay Events Environmental Operation & Maintenance Competing Facilities ITRCC PublicSharedPrivate Design Unforeseen Conditions Approval Process Oversight Termination ROW Traffic & Revenue Change in law Financing

31. 31 05. ITR PPP Contractual Structure ITRCC IFA Ferrovial Agroman Lenders

32. 32 05. ITR Concession Agreement (I) Lease Term: 75 years Tolling Regime Tolls increased every July 1 st by the greater of CPI, Nom GDP/capita or 2% Car tolls ‘freezed’ at 2006 rates for ETC users up to 2016 Contract allows for certain toll optimization IFA does not APPROVED new tolls but reviews compliance with contractual regulation

33. 33 05. ITR Concession Agreement (II) Mandatory Expansion Works in Barrier Section (Widening to 3+3 lanes of x miles) Implementation of ETC system no later than June 2008 Capacity Expansions triggered at LOS D in urban areas and LOS C in rural areas Performance Based Maintenance Standards Example: Pavements

34. 34 05. ITR Financing

35. 06 CONCLUSIONS