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