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PUBLIC-PRIVATE

PARTNERSHIPS (P3)
ISSUES, SOLUTIONS AND
WHATS NEXT?
Chet Mitrani, Executive Vice President
Willis North America

September 20, 2012


LBJ EXPRESS

2
WHAT IS A PPP?

A Public-Private Partnership is a
contractual agreement between a public
agency (federal, state or local) and a
private sector entity. Through this
agreement, the skills and assets of
each section (public and private) are
shared in delivering a service or facility
for the use of the general public. In
addition to the sharing of resources, each
party shares in the risks and rewards
potential in the delivery of the service
and/or facility.

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P3 PROJECTS
Bluebonnet Contractors, LLC
Ferrovial Agroman / W.W. Webber
Concessionaire NTE Mobility Partners, LLC
Cintra / Meridiam Infrastructure
$1.45 Billion

Trinity Infrastructure, LLC


Ferrovial Agroman / W.W. Webber
Concessionaire LBJ Infrastructure Group, LLC
Cintra / Meridiam Infrastructure
$2 Billion

MAT Concessionaire, LLC


Bouygues Civil Works / Meridiam Infrastructure

$700 Million

Central Texas Highway Constructors, LLC


Ferrovial Agroman / Zachry Construction
Concessionaire SH 130 Concession Co, LLC
Cintra / Zachry Infrastructure Segments 5 & 6
Co-Broker with Marsh $1 Billion

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CURRENT P3

South Fraser Perimeter RD


Fraser Transportation Group Project
ACS Infrastructure / Dragados Group / Zachry Vancouver, CA
$700 Million

NTE Mobility Partners Segments 3A / 3B Fort Worth


Cintra / Meridiam $1.3 Billion

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COMPREHENSIVE DEVELOPMENT
AGREEMENT (CDA)
1. Current Types Of CDAs
Design / Build
Pre-Development Agreements
Concession Agreements

2. CDA procurement
Unsolicited
Independent Proposals submitted at TxDOTs request

3. Project Transfer To TxDOT


At the end of the CDA term (Concession)
Transfer occurs after construction (Design/Build)

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CURRENTLY EXECUTED CDAs IN
TEXAS

PROJECT DESCRIPTION COST OF


CONSTRUCTION ($)
1 DFW Connector (Oct-09) Design/Build w/Maint Opt 1.5 billion

2 I-635 / LBJ Freeway (Sept-09) Concession 4 billion

3 North Tarrant Express Seg 1 & 2W Concession 1.1 billion


(Jun-09)
4 North Tarrant Express Seg 2-4 (Jun-09) Master Development Plan 750 million up to 4 billion

5 SH 130 Segments 5 & 6 (Mar-2007) Concession 1.35 billion

6 SH 130 Segments 1 - 4 (2002) Design/Build w/Maint Opt 1 billion

7 I-35 TTC (2005) Master Development Plan 4.4 billion

8 Toll Integrator (2004) Design/Build Raytheon 68 million

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CONVENTIONAL PROJECT
DELIVER: DESIGN-BID-BUILD
In the United States, most transportation projects are delivered using the
Design-Bid-Build (DBB) model
Public Owner
Designs project to 100% PS&E
Breaks project up into biddable scopes
The bidder submitting the lowest responsive bid is awarded the contract
Pays invoices out of available tax revenues and/or bond proceeds
Operates and maintains project itself or through separate contractor
Keeps integration, traditional construction, long term performance and
revenue risks
Private Parties
Design the project and perform construction under standard construction
contracts and specifications
Have conventional rights to claims and change orders

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CONVENTIONAL PROJECT
DELIVER: WHY CHANGE?
DBB works well for many projects, but there are situations in which P3s
can offer outcomes not available otherwise
Capture private sector innovation early in project development
Accelerate project delivery
Fix costs / completion date early in design phase
Encourage lifecycle cost efficiencies and quality facility performance
Shift risks and reduce claims that under DBB are publics responsibility
P3s can offer more upfront capital formation than muni revenue bonds
Tax-exempt bond market has more conservative debt coverage ratios
Investor classes are different, offering different risk appetites
Private investors are willing to take more risk on toll revenues
performance
Tax exempt borrowing rates available through $15B federal PABs
program
Accelerated depreciation creates significant value for private equity

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P3 SCREENING AND
STRUCTURING

INPUTS SCREENING OUTPUTS

Technical
Project Characteristics P3 Contract
Terms
P3 or Conventional Legal

If P3, Which Type?


RFP Submittal
Requirements
Sponsor Priorities Competition
Structure Evaluation
Criteria

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TYPES OF P3 CONTRACTS

Design Build Finance

Availability Payment Concession

Toll Concession

Pre-Development Agreement

Asset Lease

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PUBLIC PRIVATE
PARTNERSHIPS
INFRASTRUCTURE
CONTRACTUAL STRUCTURE RISK ALLOCATION
LENDERS / BONDS Equity
Equity Equity
Equity Equity
Equity PUBLIC ENTITY
Senior & Subordinated Sponsor Sponsor Sponsor
Sponsor Sponsor Sponsor
A
A B
B C
C
Loan Agreement Concession Agreement
Financial Performance
Covenants, Remedies, Reserve and requirements, Risk Allocation, Schedule,
Insurance Requirements and Flow of Force Majeure, Relief Events
Funds
PROJECT
PROJECT COMPANY
COMPANY
Special
Special Purpose
Purpose Vehicle
Vehicle
EPC Contract O&M Contract
Insurance Sources and forms Sources and forms Insurance
Requirements of Insurance and of Insurance and Requirements
Guarantees Supplier Contract Guarantees

CONSTRUCTION O&M
SUPPLIER
SUPPLIER
CONTRACTOR CONTRACTOR

Sub-contracts Sub-contracts Sub-contracts

Sub-Contractor Sub-Contractor
Sub-Contractor Sub-Contractor

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TYPES OF P3 COMPETITION
STRUCTURES
Competitive Hard Bid
RFP requires:
Committed pricing and financing
Detailed technical proposal in response to pre-defined project
Award based on value or auction

Best Development and Finance Plan


RFP Requires:
Recommended approach to developing and financing project within
specified general concept
Qualifications to work as successful private partner
Degree of sweat equity and capital committed to pre-feasibility phase
Award based on best plan, qualifications and pre-feasibility cost-sharing

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TYPES OF P3 CONTRACTS

DESIGN BUILD FINANCE


Suitable When Project Is:
Close to environmental clearance
Sufficiently designed for developer to guarantee price I completion date
Not 100/o designed, to permit developer innovation
A gap exists between total project capital costs and identified public funding
sources
The timing of available funding is spread over time and does not allow for levels
of upfront capital needed to do the project
Savings from accelerated project delivery outweigh cost of private sector
financing
Public Owner
Performs conceptual I preliminary design
Achieves environmental clearance
May provide some, but not all, capital funding

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TYPES OF P3 CONTRACTS

DESIGN BUILD FINANCE

Public Owner (cont.)


Oversees design and construction
Operates and maintains the project
Keeps long term revenue risk

Developer
Designs and builds the project
Assumes integration of design and construction and other development
risks conventionally retained by public agencies
Finances the owner's shortfalls in cash flow
Provides debt financing via one or more mechanisms (i.e., deferred
payment schedule, contractor loan, subordinated debt, financing of change
orders)
Assumes interest rate risk on its financing
Guarantees price / completion

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TYPES OF P3 CONTRACTS

DESIGN BUILD FINANCE

Results In:
Greater price certainty with a lump sum price I guaranteed delivery date
Cost and time efficiencies
Provides owner cash flow financing, as needed

Examples
Florida DOT
1-75 Road Expansion Project ($430M)
95 Express ($122M)
SR-5 (US-1) Project ($112M)
Michigan DOT
1-69 Reconstruction in St. Clair County ($38M)
1-75/M-21 (Corunna Road) Bridge ($7.3M)

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TYPES OF P3 CONTRACTS
AVAILABILITY PAYMENT
CONCESSION
Suitable When
Public owner has identified a dedicated source of revenue for the
project (toll revenue or other source)
Public owner desires life-cycle cost efficiencies
Public owner wishes to retain direct toll rate setting authority and
collection
Revenue or traffic volume is difficult to predict

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TYPES OF P3 CONTRACTS
AVAILABILITY PAYMENT
CONCESSION
Public Owner - Same as Design-Build-Finance, except:
Pays private party based upon project availability and performance
over extended period
Liable for fewer claims and change orders than DBF

Developer- Same as Design-Build-Finance, plus:


Operates and maintains the project for contract term (35 - 50 years)
Assumes life cycle performance risks
Primary compensation is through availability payments
May also receive milestone payments from the public owner upon
reaching certain construction milestones
May receive federal tax benefits due to deemed "tax ownership"

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TYPES OF P3 CONTRACTS
AVAILABILITY PAYMENT
CONCESSION
Availability Payments
Unitary payments for capital expenditures, O&M expenditures and financing costs
Amount bid by the developer as part of its proposal
Made periodically after substantial completion (e.g., monthly)
Fixed amount that may:
Be adjusted downward based on developer's performance with respect to quality,
safety, lane availability, environmental provisions, etc.
Be adjusted by changes in an index (e.g., CPI)
Structure encourages early completion of the construction phase and quality facility
performance

Examples
Florida DOT - 1-595
Florida DOT - Port of Miami Tunnel
British Columbia MOT - Sea to Sky Highway

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TYPES OF P3 CONTRACTS

TOLL CONCESSION

Suitable When
Project will directly generate revenues
Traffic and revenue risk can be efficiently transferred to private
sector
Political support exists for private sector toll collection and
enforcement
Public Owner - Same as AP Concession, except:
Contributes no or limited public funds to project costs
Decides on toll rate setting mechanism over contract life
Relieved of all or most toll revenue risk
May receive share of toll revenue as/when benchmarks met
Possibly receives upfront payment from the developer

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TYPES OF P3 CONTRACTS

TOLL CONCESSION

Developer - Same as AP Concession, plus:


Collects tolls in accordance with rate-setting mechanism
Assumes all or most project traffic and revenue risk
May share excess toll revenues with public owner

Examples
TxDOT - SH 1307 Segments 5 and 6
TxDOT- North Tarrant Express
TxDOT - I-635
Virginia DOT - I-95/395 HOT Lanes

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TYPES OF P3 CONTRACTS

PRE-DEVELOPMENT AGREEMENTS

Suitable When
Project not yet completely defined
Financial feasibility not yet determined, but preliminarily has good
potential
Public owner seeks private sector innovation in defining and
accelerating an optimally feasible project
Environmental analysis is in the early stages

Procurement and Award


Public owner procures Developer on basis of "best development
and financial plans"
Awards contract with two phases:
Initial phase to determine feasibility
Implementation phase
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TYPES OF P3 CONTRACTS

PRE-DEVELOPMENT AGREEMENTS

Initial Phase
Public and private partners "co-invest" in pre-development activities
Public owner retains complete control over environmental clearance process,
with Developer performance of technical studies
Developer participates in project planning and design
Developer prepares master financial plan and master development plan
Developer may absorb some or all of its initial phase work - "sweat equity"
If project proves feasible, Developer has right of first negotiation for the
agreement(s) covering the implementation phase
If unable to reach agreement, public owner retains right to separately procure
Implementation phase agreements can take form of:
Design-Build-Finance
Availability Payment Concession
Toll Concession

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TYPES OF P3 CONTRACTS

ASSET LEASE
Public Owner
Leases existing asset to private partner
Gets up front payment from private partner (monetizes the asset)
Gets facility back at the end of the lease

Private Partner
Gets right to any revenues (e.g., fees, tolls) from the facility
Implements fees I tolls in accordance with lease requirements
Maintains the facility in accordance with lease requirements

Examples
Indiana Toll Road ($3.8B up front payment; 75 year lease)
Chicago Skyway ($1.8B up front payment; 99 year lease)
Pocahontas Parkway (Pay off $500 M of existing debt, upgrade facility and cover other
VDOT expenses; 99 year lease)
Asset leases have been particularly controversial

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CDAs & RISK ALLOCATION

Assign to Owner
CDAs DELEGATE
RISK TO THE Assign to Developer
PARTIES BEST ABLE
TO MANAGE IT. Shared Risk

Concession Program Differs from Design / Build

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RISK ALLOCATION &
CONTRACTING
ALLOCATING OTHER RISKS
Right of Way

Who can best control the risk? Utility Relocations

Differing Site Conditions


Who can best manage the risk?
Force Majeure

Are contractors willing to Hazardous Materials


assume the risk?
Paleo / archaeo / bio

How much will it cost? Permits

Railroads

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DIFFERENT PROJECT DELIVERY
TYPES & RISK SHARING 1
DESIGN DESIGN AVAILABILITY DESIGN BUILD CONCESSION
BID BUILD PAYMENT FINANCE O/M FINANCE O/M
RISK TYPE BUILD (PASS- 50 YEARS
THROUGH)

Environmental Approval Owner Owner Owner Owner Owner


Environmental Owner Shared Developer Developer Developer
Compliance
Financing Owner Owner Developer Developer Developer
Design Owner Developer Developer Developer Developer
ROW Acquisition Owner Shared Developer2 Developer2 Developer2
Utility Delays Owner Shared Developer Developer Developer
Construction Shared Shared Developer Developer Developer
Schedule Delays Shared Developer Developer Developer Developer
O&M Owner Owner Shared Developer Developer
Traffic & Revenue Owner Owner Owner Shared Developer

1 Actual Risk Allocation may vary by specific project


2 Eminent Domain risks and delays retained by the owner

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SHARED RISK ALLOCATION
PUBLIC RISK TRANSFER BY MODEL PRIVATE

DESIGN / BUILD D/B/FINANCE D/B/F OPERATIONAL / BUILD-OPERATE-


MAINTENANCE TRANSFER /
CONCESSION

Regulatory Regulatory Regulatory Regulatory


Approvals Approvals Approvals Approvals
Environmental Environmental Environmental Environmental
Customer Acceptance Customer Acceptance Customer Acceptance Customer Acceptance
Design Design Design Design
Traffic / Rev. Traffic / Rev. Traffic / Rev. Traffic / Rev.
Finance Finance Finance Finance
Technology Technology Technology Technology
R-O-W R-O-W R-O-W R-O-W
Construction Construction Construction Construction
O&M O&M O&M O&M

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INSURANCE ISSUES FOR DESIGN
AND CONSTRUCTION
PROFESSIONALS INVOLVED IN A PPP
PROJECT
Insurability
PPP agreements must always be carefully checked against the
professional liability policy
In the event that terms and conditions appear uninsurable, make
sure that the Concessionaire understands that their interests
even if for a lesser amount -- are better served by an insured claim
that by a potentially larger claim that has no insurance support

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KEY PPP PROJECT
INSURANCES - INSURANCE
REQUIREMENTS
Construction Period
Construction All Risks
Construction All Risks Terrorism
Soft Costs/Delay in Opening
Third Party Public Liability
Statutory Insurances (Workers Compensation/EL)
Professional Liability (Design and Build)
Pollution Legal Liability
Auto Liability
Railroad Protective Liability

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KEY PPP PROJECT
INSURANCES - INSURANCE
REQUIREMENTS
Operational Period
Property Damage All Risks
Property Damage All Risks Terrorism
Business Interruption
Third Party Public and Products Liability
Statutory Insurances (Workers Compensation/EL)
Pollution Legal Liability
Auto Liability
Professional Liability

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WHY ARE THESE INSURANCES
REQUIRED?
They protect the Public Agency, SPV, Lenders and other parties
with an insurable interest in respect of
physical loss or damage to Project property/assets
earnings and additional costs of the SPV in respect of the
above
incurred Third Party Legal Liabilities (bodily injury and property
damage)
Without insurance the SPV could not accept the financial
consequences of such risk events occurring

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WHY IS THE INSURANCE
REGIME UNDER PPP DIFFERENT
TO STANDARD PROCUREMENT?
The Public Agency, Lenders and others with an insurable interest
sit inside the insurance mechanism as a co-insured taking direct
benefit for their separate insurable interest
Insurances to be procured on a project specific basis and not
derived from parent company program.
Public Agency guidelines and Lender requirements seek to ensure
specific conditions are in place defining the duties of the parties to
the Project in terms of the operation of the required insurances

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WHAT ARE THE KEY
CONDITIONS OF A PPP
INSURANCE REGIME?
Waiver of subrogation (Multiple Insured Clause)
Separate policy
Waiver of disclosure of material information
No obligation for premium payment
Additional insured
Control of claim monies (Loss Payee)
Notification of change in cover
Notice of cancellation and subsequent step in rights of various
parties to the Project

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PPP INSURANCES
CONSIDERATIONS &
SOLUTIONS
Relief Events and Force Majeure
Premium increases who bears the risk?
Insurance market capacity and market participants
Uninsurability
Excesses/Deductibles who pays?
Meeting bid/tender requirements - what level of information is
required insurance proposals must remain fluid and negotiable
until final design and construction timetable is known
Cost of insurance provision for cost of insurance in the Financial
Model; prevailing market cost + contingency amounts

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PPP INSURANCES
CONSIDERATIONS &
SOLUTIONS
Phased completion timetable
Overlap of ALOP/BI
Pre-existing property
Latent Defects
Environmental/Contamination issues
Contractors plant and equipment
Terrorism risk
Marine/Transit

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PPP INSURANCES
CONSIDERATIONS &
SOLUTIONS
Uninsurability
Definition of trigger of Uninsurability what is the test?
What happens to the risk if it becomes uninsurable
(Termination/Public Agency insurer of last resort)

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WHAT DOES THIS MEAN FOR
THE PROJECT INSURANCES?
Contractor/Lender uncertainty over the risk of insurance cost
and availability
Fear of the unknown from insurers on contractual requirements of
PPP
No established insurance market experience of some risk
exposures through PPP contracts
Unpredictable insurance market cycles
Sector specific claims impacting on competitive terms and also
cost provision in Financial Model

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RECENT TRANSACTIONS:
CREATING MOBILITY OPTIONS WITHIN EXISTING
HIGHWAY CORRIDORS

If a public owner is interested in adding managed lanes to an existing


facility, it might benefit from comparing two recent managed lanes projects:
I-595 Corridor Roadway Improvements Project (Florida DOT)
North Tarrant Express (Texas DOT)

I-595 Corridor Roadway Improvements Project Background:


Project covers 10.5 miles along I-595 in Fort Lauderdale, Florida
Improvements to the existing freeway and interchanges and the addition of
reversible, congestion-priced managed lanes
$1.28 construction and 35 years of O&M (both free and managed lanes)
First availability payment-based P3 in the United States
Florida DOT unable to currently finance the project using DBB
Winning price - $275M under Florida DOT estimates (present value)
Successful financing despite economic crisis (bank financing)

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RECENT TRANSACTIONS:
CREATING MOBILITY OPTIONS WITHIN EXISTING
HIGHWAY CORRIDORS

North Tarrant Express Background


Toll concession and pre-development agreement
Phase 1 - 52 year toll Concession
Rebuild 13 miles of I-820/SH 183; add 2 new tolled managed lanes
Financing Package - $2.05 B
$400M of Private Activity Bonds - 30 year maturity
$650M TIFIA credit - 40 year term
$570M in public sector funding
$427M in equity from private partner (includes $43M from Dallas Police and Fire
Pension System) - First time a U.S. pension fund has directly invested equity in a
U.S. P3 project
Remaining Phases - Pre-Development Agreement
Texas DOT Goals for Phase 1:
To shift construction, lifecycle, performance and availability risks
To shift revenue risk, subject to rate setting restrictions and revenue sharing
Texas DOT used a toll concession to close funding gap
Reached financial close December 2009

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RECENT TRANSACTIONS:
CREATING MOBILITY OPTIONS WITHIN EXISTING
HIGHWAY CORRIDORS

Comparison of I-595 and NTE


Both are complex, urban projects that involve reconfiguring and
reconstructing existing Interstates to add managed lanes and make
other improvements
Contrasting Agency Goals
Florida DOT - Maximize project availability (both managed lanes and
general purpose lanes)
Texas DOT- Minimize state funding for the project
Availability Payments vs. Toll Concession (Reflection of Goals)
Florida DOT - Kept toll revenues and used an availability payment
concession to achieve its goals (first such U.S. deal)
Texas DOT- Shifted toll revenue risk to achieve its goals

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CURRENTLY IN PROCUREMENT

PROJECT CITY LIMITS DELIVERY TOTAL


METHOD COST (4)
1 Grand Parkway SH 99 Houston F1, F2 and G Design / Build w/ 1.5 billion
Maint Opt
2 Interstate 35 E Dallas LBJ 635 to Denton Concession or D /B 4 billion

3 North Tarrant Express Ft Worth Seg 3 A and 3 B Concession and 500 million
D/B/B
4 The Horseshoe Dallas I 35 I 30 Design / Build or 600 million
interchange Concession
5 Border Highway Loop 375 Design Build

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WHATS NEXT?
PROJECT DESCRIPTION
Washington D.C. 22 Mile Priority Streetcar System
RFI August 12 Potential PPP
DDOT Design, Construction, Finance, Ongoing Operations and Maintenance
Allentown, PA Water Lease
September 2012 City Water & Sewer System
Capital Value: $100 Million PPP Up to 50 Years
San Juan, Puerto Rico Light Rail
Planning PPP
Capital Value: $360 Million 5.3 Miles
Odessa, Texas Desalination Plant
July 2012 Water Supply
Capital Value: $120 Million Design, Build, Finance, Operations
Ontario, Canada Providence Care Hospital
RFQ September 2012 PPP
Capital Value: $350 Million Design, Build, Finance and Maintenance
Gloucester Salem, NJ Wastewater Treatment Plant
RFI November 2012 Potential PPP
Capital Value: $326 Million
Universities University of California Student Housing, Hotels
University of Kentucky Residence Halls
Ohio State Parking Garage, Lots
University of Arizona Student Housing

Note: American Water Works Association identified the need for $1 Trillion over 25 years in the drinking water sector and waste water.

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