January 23, 2003 Prof. John B. Miller, MIT 1
Trends in North American Concession Arrangements
The Continuing Courtship Between Government and the Private Sector
January 23, 2003 Prof. John B. Miller, MIT 2
Summary of Presentation“New Wine in Old Bottles” – very few issues are new, only new technology and methods can be seen as “exciting”Neither the Government nor the Private Sector is Stupid –
Each should want the other to assume and bear reasonable risks, Yet each typically seeks the opposite result – to the frustration of all.
To produce a good Concession Agreement, the government must structure each project so that competitors can reasonably conclude that actual revenues can reliably be expected to cover costs plus a reasonable profit.
January 23, 2003 Prof. John B. Miller, MIT 3
Annual Costs
Debt Long Term
Finance Repay Lines of Credit
Gross tollRevenue
RepayEquity
Debt on
Financing
Lease PaidTo WMAA
Dulles Financial Structure
Order in WhichGross RevenueAreas Allocated
Example: Will Revenues Be Sufficient to Pay Expenses and Return on Equity?
January 23, 2003 Prof. John B. Miller, MIT 4
Balancing Revenue and Expense Risk for Major Public Infrastructure Projects
Who Should Bear What Risks?One: That Users Will Come? Two: That Users Will Pay Tolls? Set by Private Sector or Govt?Three: That Project Can Be Built as Designed?Four: On Time, so that Revenues Begin On Schedule?Five: Within Budget, so that Revenues are Sufficient to Pay Off the construction costs? Six: That Project can be maintained and repaired for budgeted costs?
January 23, 2003 Prof. John B. Miller, MIT 5
The Problem: Are the Estimates of Sources and Uses of Funds Reliable?
Time
Sources
Uses
Historical Sources
Historical Uses
Projected Sources of Funds
Projected Uses of Funds
Future
$$ Scenario 1 Sources
Scenario 1 Uses
January 23, 2003 Prof. John B. Miller, MIT 6
Factors Beyond the Control Of:Government
Performance of Design and Construction WorkCosts of Materials, Equipment, and Labor
Private Sector ConcessionairesGeneral Economic ConditionsMonetary PolicyTaxing PolicyTolling Policy on Other Projects
Either PartyWeather, Catastrophic Events
January 23, 2003 Prof. John B. Miller, MIT 7
Background Work at MITProjects Perform Differently With Changes in Two Key Inputs:
Choice of Project Delivery Method and Source of Project Finance
These Inputs Significantly Affect Four Key OutputsTechnology
Rate of Technology Change, Investment in TechnologyQuality of Design, Construction, ServiceCost (Including Commercial Terms):
Initial Delivery (Design and Construction)Cost of Operations and MaintenanceLife-Cycle Cost
Time from Project Authorization to Service
January 23, 2003 Prof. John B. Miller, MIT 8
Key Ingredients to a Sustainable Concessions Strategy
Government Defined ScopeHead-to-Head CompetitionFair Treatment of Actual CompetitorsTransparency (Fair Treatment of Potential Competitors)Safety Confirmed Open To Technological ChangeFinancial Analysis over the Project Life CycleA Dual Track Strategy (Public and Private Finance)A Scenario Approach to Capital ProgrammingPace as a Key Controlling Variable
January 23, 2003 Prof. John B. Miller, MIT 9
IIV
III II
Direct
Indirect
CombinedSegmented Project Delivery Method
Sour
ce o
f Pro
ject
Fin
ance
The Quadrant Framework
January 23, 2003 Prof. John B. Miller, MIT 10
This Slide Shows How Project Delivery Methods Fit Into The Quadrant Framework: The Five Basic Mechanisms (Shown In Blue, Have Been Adopted by the American Bar Association in its Model Procurement Code)
IIV
III II
Direct
Indirect
CombinedSegmented
DB Design Build
TKYTurnkey
DBO Design-Build-Operate
BOT Build-Operate-Transfer
BOO Build-Own-Operate
“Super”-TKY Turnkey with Finance
BOOT Build Own Operate Transfer
DBB Design-Bid-Build
CM Constr.Mangmt.
DBOT Design-Build-Operate Transfer
FT FastTrack
PPParallel Prime
DBOM Design-Build-Operate-Maintain
DBOM Design-Build-Operate-Maintain
DBFOM Design-Build-Finance-Operate-Maintain
O&M Operate-MaintainO&M Included in Quads I/II
Life
Cyc
le C
osts
Incl
uded
Qua
ds I/
II
Assigning Delivery Methods
January 23, 2003 Prof. John B. Miller, MIT 11
Wire Cable Technology From DBFO - Brooklyn Bridge
Prompt Transfer to Design- Bid-Build
January 23, 2003 Prof. John B. Miller, MIT 12
Innovation in Steel Technology From DBFO The Eads Bridge St. Louis
Prompt Transfer to Industry: From DBFO to All Delivery Methods
January 23, 2003 Prof. John B. Miller, MIT 13
Quadrant II Offers:“New Technology” Engine;Combined Delivery with
Private Sector’s MoneyNew Capital InvestmentNew PlayersDifferent Solutions New ServicesSustainable Opportunities30-40% Savings in Life Cycle $$
Quadrant I Offers:“Efficient Technology” Engine;Combined Delivery with Owner’s
Money Associated Capital InvestmentDifferent PlayersIncrementally Better SolutionsSustainable Opportunities20-40% Savings in Life Cycle $$
Quadrant IV Offers:“Isolated Technology” Engine;A Place to Diffuse Technology
From Quadrants I & IIFlexibility to Stop
At Design Completion
Quadrant III Offers:Few Advantages (Command + Control)Averse to New Technology
and To New Capital Example of Failure of This Strategy
US Superfund Contracting ProgramDescribed in App. C, Principles Text
CombinedCombined
IIIVIV
IIIIII IIII
DirectDirect
IndirectIndirect
SegmentedSegmented
18501850
19001900
19501950
20002000
The Quadrants Behave Differently
January 23, 2003 Prof. John B. Miller, MIT 14
Highway 407 ETR Project (Toronto) - Chapters 7 & 9 Cases Textbook
Doubling Vehicular Capacity Across Metro Toronto
Northumberland Bridge Project (New Brunswick/Prince Edward Island) Ch. 6 Cases Textbook
A Fixed Link to Replace Ferry Service to Prince Edward Island
Concessions That Attracted New Technology & Private Sector $$
January 23, 2003 Prof. John B. Miller, MIT 15
Highway 407 ETR Project (Toronto 1997/2001)
TechnologyCost
TimeQuality
No Stopping or Slowing for Toll CollectionEasy Billing ProceduresSmaller Footprint for Road (Lower Environmental Impact)Capacity Doubled Cross Toronto
Attracts Hughes Electronics to Toll Collection Business
Slotted Aloha (TDMA) Protocol adapted to civilian use
Technology Now Transferred to Cross Israel Xpway
On Time Project CompletionEntry into Service
$1.5 Billion initial cost in 1997$3.0 Billion Received in 2000 from Private Sector to Extend Road and Operate for 99 yrs1997 Debt Retired in Full and $1.5 B Excess Applied to Other Projects
INPUTS: DBO (I) then DBFO (II)
IIV
III IIPhase II
Phase I
OUTPUTS
January 23, 2003 Prof. John B. Miller, MIT 16
Northumberland Bridge (New Brunswick 1997)
TechnologyCost
TimeQualitySignificant Improvement in Service (Yr. Round)Designed for Ease of Construction, Repair, Maintenance
New Low Temp. Glues by DuPontGlobal Positioning Systems Extended to Set Major Bridge Components <1”New Design for Ice-Shields (Ice in meters)New Techniques for High-Strength Underwater Grout
Early Project CompletionEntry into Service
IIV
III II
30+% Savings in Life Cycle Costs $750 M SavingsBridge Transfers to Govt. in Yr. 35 for $1
INPUT: DBFO
OUTPUTS
January 23, 2003 Prof. John B. Miller, MIT 17
Troubling Patterns In US Concession Arrangements
Lack of Owner Commitment to ProjectsNo Commitment to Any Particular Project:
California Hwy SR91 and SR57Washington State Department of Transportation Public Private Partnership Program Minnesota Department of Transportation Public Private Partnership Program Wilmington, DE Waste Water Project
High Transaction Costs Incurred by the Private Sector
Dulles Greenway, California Hwy SR91, and Cal. Hwy SR57One Competitor (negotiating with itself)
January 23, 2003 Prof. John B. Miller, MIT 18
Bright Spots In North American Concession Awards
Northumberland Bridge – Prince Edward Island, CanadaVery Firm OWNER Commitment
Yields an Exceptionally Low Interest Rate
JFK International Arrivals Building, NYCEarly Assignment of Existing Cash Flow
Yields Exceptionally Strong Financing Package
Indianapolis Air Terminal Concession, Seattle Tolt Water Supply,New Jersey Hudson-Bergen Transit Line
Head-to-Head Competition Saves Toll Payers Money
Cal. Hwy SR91, Hwy 407, Tolt Water, Northumberland BridgeDelivery Methods in Quadrants I and II Drive Technological Innovation
January 23, 2003 Prof. John B. Miller, MIT 19
The Keys to Developing a Stable Strategy for Awarding Concessions
Government must understand the revenue and cost streamsBEFORE soliciting for private sector concession proposalsInclude “SWOT” Analysis (Strengths, Weakness, Opportunities, Threats)
Allocation of Risk To The Party Who Can Manage That RiskDesign, Construction, and Operation
Generally on Private SectorCompletion of project, contract obligation for total costs, and timing of costs
RevenuesHighly Dependent on Details of Project and How Government Has Structured that Project
Fare Rates – Typically shared, based on some type of control exercised by government over increases in tollsVolume of Toll Paying Users – Varies from Entirely Public to Entirely Private, and Anywhere in Between
All Public – Tolt DBO, All Private – Hong Kong Tunnels, New Hwy 407 PtII, Dulles Greenway, JFK IAB, Cal. Hwy SR91Mixed – Hong Kong Airport Fuel, Cargo, and Maintenance BOT’s, Northumberland Bridge
January 23, 2003 Prof. John B. Miller, MIT 20
Common Arrangements to Allocate Revenue Risk
Pure Private FinanceWhere Project Can Support Itself – e.g. Hong Kong Tunnels, JFK IAB
Three Government Strategies to Attract Concessionaires Where Project Is Not Viable First: Provide Cash Support to Concessionaires to Make Project Viable
Direct Subsidies (1% to 100%) – Northumberland BridgeShadow Tolls or Govt. Commits to Minimum Periodic Payment
Non-Cash, Indirect SubsidiesSecond: Improve the Reliability of Revenues
No Competing Service Allowed By GovernmentAdditional Protection for Intellectual Property Grant of Land, Grant of Development Rights
Three: Reduce Actual Cost to ConcessionaireTax Incentives (Waiver of Duties), Tax Exempt FinancingGovernment Paid Surveying & PlanningLand Acquisition Through CondemnationGovernment Collection of Revenue Stream at Its Cost
January 23, 2003 Prof. John B. Miller, MIT 21
Conclusions“New Wine” in “Old Bottles”Governments must structure projects:
First, so that competitors can reasonably expect that actual revenues will cover actual costs, and Second, for concessionaire to make a reasonable profit.
Key Question still has no Clear Answer:Under what circumstances are Government guarantees wise?
What is the effect of such guarantees on other projects? On other obligations of the government?
In the US, states are borrowing now against future grants of federal funding for road projects. Is it wise to force the next generation to fund infrastructure to be used today?
January 23, 2003 Prof. John B. Miller, MIT 22
SCHOOL DEGREE DATEM.I.T S.B. Civil Engineering June 1974
M.I.T. S.M. Soil Mechanics Aug. 1974
Boston University Juris Doctor, Law May 1977School of Law (3 yearprogram)
Boston University LL.M., Taxation May, 1982School of Law (2 yearprogram)
M.I.T. Ph.D., Infrastructure May, 1995Development Systems
Miller Educational Background
January 23, 2003 Prof. John B. Miller, MIT 23
Source InformationMiller Textbook: Principles of Public and Private Infrastructure Delivery, Kluwer, Oct 2000
Project Evaluation at the Portfolio LevelRegional, National, and International Infrastructure Delivery StrategiesChoice of Project Delivery and Finance Methods As They Affect:
Development and Deployment of New TechnologyCapital Formation and Investment in InfrastructureQuality, Cost, and Time Performance of Infrastructure Collections
Miller Textbook: Case Studies in Infrastructure Delivery, Kluwer, January 2002Describes Effect of Procurement Strategy on New Technologies, New Materials, New Techniques in 15 Major North American Infrastructure ProjectsPresents Research on Project Delivery, Project Evaluation, and Capital Programming to studentsBrings Significant Recent Infrastructure Projects To Life Through Problem Based Learning
800+ Federally Arranged Infrastructure Projects Between 1789 and 19333000+ Federally Arranged Projects Post 1933
Water TransportationWastewater Treatment
Hong Kong’s 1987-1997 Public Infrastructure Program50+ Projects
Public Works Financing Data Base of “Public Private Partnerships”2,592 Concessions worth $1.05 trillion (US) as of 10/01