Leveraging Private Capital for Infrastructure Renewal (2019)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

46 Appropriation risk: The risk that a public agency will be incapable of meeting its finan- cial obligations to the project because funds for the project fail to be obligated into its budget. Appropriation risks can affect projects in which the public agency is expected to make payments as a lump sum during the construction period, as APs during the life of the project, or as a result of other events occurring in the life of the project. Asset: Any item of economic value, either physical in nature (such as land) or a right to own- ership, expressed in cost or some other value, that an individual or entity owns. Availability payment (AP): A means of compensating a private concessionaire (referred to as an SPV, project company, or concessionaire in this synthesis) for its responsibility to design, construct, operate, or maintain a tolled or non-tolled roadway or other type of transportation infrastructure for a set period of time. APs are made by a public project sponsor (for example, a DOT or authority) based on particular project milestones or facility performance standards. Availability risk: The risk (especially from the public perspective) of the infrastructure not being available to use or not meeting quality requirements or expected performance levels. Base case: The financial description of a project in terms of costs, revenues, other variables and resulting conclusions. It is meant to represent the most likely/reasonable scenario. Base-case financial model: The base-case financial model agreed on between the parties at the date of financial close. It may be updated, amended, and adjusted from time to time. The base-case financial model typically includes all costs, revenues, and payments between parties, together with all parameters and assumptions underlying these calculations. Bidder (or proposer): In the broad sense, the company or a group of companies, such as a consortium, that submits a bid in response to an RFP (referred to as the P3 developer in this synthesis). A bidder could be a single party or a consortium of parties, each responsible for a specific element, such as constructing the infrastructure, supplying the equipment, or operating the business. In strict terms, the bidder is only the company or companies that commit to form the project company or private partner (also known as the SPV), with other members of the bidding consortium potentially acting as the nominated contractor. The government normally contracts only with the SPV or the company or companies that form it. Brownfield projects: From an investor perspective, project investments in infrastructure assets that were existing before the time of procurement or that were previously greenfield but are in operation at the time the investment is made. Concession: In this report, this term refers to a P3 contract that typically involves monetiza- tion of existing, or brownfield, highway and bridge facilities. Concessions involve the lease of Glossary

Glossary 47 existing publicly funded toll facilities to a concessionaire for a term in exchange for up-front payments. The private concessionaire will take over the facility operations and maintenance as well as life-cycle costs over the long duration of the lease (usually 50 to 99 years) as well as make contracted improvements. Concessionaire: In this report, this term refers to the SPV. Construction contract: An agreement entered into between the SPV and the construction contractor for the design and construction of the P3 project assets. Covenant: A legally binding commitment between the borrower or issuer of debt or bonds and the lenders or bondholders. Credit ratings: Credit quality evaluations of bonds and notes made by independent rating services. A higher bond rating generally results in a lower interest rate that the borrower must pay. Default: Failure to meet any obligation or term of a credit agreement, grant, or contract. Design–build (DB): A conventional procurement type where the private sector designs and builds the infrastructure against a price funded by the public budget. Payments for the works are typically made as construction progresses, and the government retains the full responsibility over the asset when construction is completed. Design–build–finance–operate–maintain (DBFOM): An alternative delivery P3 agreement in which the contractor develops the infrastructure with its own funds; that is, it will provide all or the majority of the financing. The contractor is also responsible for managing the infrastruc- ture life cycle (assuming the life-cycle cost risks) in addition to being responsible for current maintenance and operations. Due diligence: Review and evaluation of the project, the project contracts, and their related risks. The review is carried out by project investors and lenders before deciding to participate in/ lend to the project. The term may be also applied to the project preparation activities or some aspects of the preparatory works to be handled by the procuring authority before the tender launch. Dynamic tolling: Tolling levels that may vary in real time to respond to congestion. Dynamic tolling is related to facilities where there is a toll-free alternative so that drivers can use tolled or non-tolled options, depending on the level of traffic and the process. These projects may also be referred to as “express lanes.” Equity: Commitment of money from private sources made with the expectation of a financial return. Equity investors: Investors who finance a portion of the project’s capital expenditures, typi- cally as share capital or subordinated debt. Equity IRR: The IRR on the equity paid in by the investors, which is derived from distribu- tions (mainly dividends, capital shares amortization, repayment of junior debt, and interest on junior debt). Financial close: The point at which all the project documentation is signed, all the pre- conditions attached to the project’s financing have been met, and the project funding becomes available. Financial model: A digital spreadsheet computer file that incorporates, for the duration of the contract, all the investments, revenues, costs, and taxes as well as several analytical parameters and the relative inflation. The model also incorporates the free cash flow of both the project company and the equity investor.

48 Leveraging Private Capital for Infrastructure Renewal Gearing: The ratio of a company’s loan capital (debt) to the value of its equity. “Gearing” is used interchangeably with “leverage.” General obligation bond: A municipal security that has payments secured by a pledge of the full faith and credit of the issuer. The issuer covenants to meet payment requirements through every legal means at its disposal. This type of bond is generally considered to be the strongest form of security pledge. Greenfield projects: Projects with investments that relate to a P3 that has recently been awarded or is under construction and where there are significant new structures or significant upgrades of existing infrastructures. Infrastructure fund: A fund established to invest in infrastructure and that is managed by a fund manager. Institutional investor: A financial institution that purchases securities in large quantities. Internal rate of return (IRR) or financial IRR: The rate of return of an investment calculated from its projected cash flows. The IRR is also the discount rate that equates the pres- ent value of a future stream of cash flows to the initial investment. Lenders: Institutions that provide debt lending to the project; these are mainly banks and institutional investors providing debt through project bonds. Leverage: See “Gearing.” Life-cycle costs: The whole costs of an asset during the useful life of the infrastructure or during the life of the contract that regulates the management of the infrastructure. This includes the initial investment/costs of construction and any other maintenance work required to maintain the asset in an acceptable and constant technical state or condition. It can also include the state necessary to meet the performance requirements established in the contract. Limited recourse: Finance with limited guarantees from the sponsors. Municipal bond: A tax-exempt security issued on behalf of a state or any subdivision thereof, including cities, counties, and other local jurisdictions. Nonrecourse: Situation where an obligation (usually debt) is entered into, or a transaction is conducted, under the stipulation that it is without liability to the borrower, endorser, or seller if the borrower for any reason defaults on the obligation. Output specifications: The service requirements under a P3 that are defined on the basis of results rather than means. P3 agreement: The contract or agreement between the procuring authority and the private partner in a P3 project. Private-activity bond (PAB): Can be defined as either (1) a bond of which more than 10% of the proceeds will be used for nongovernmental purposes and that is going to be repaid from revenues received from a private entity, or (2) a bond that will have the lesser of 5% or $5 million of the proceeds being used for loans to nongovernmental entities. Privatization: The permanent transfer of a previously publicly owned asset to the private sector. Procuring authority or public-sector sponsor: The unit/body/department within a govern- ment that is tendering and contracting the project. The public counterpart in the P3 contract. This is usually the same unit or body that promotes the project (the public promoter). For

Glossary 49 example, the ministry or DOT, the ministry of finance, and so on. It also includes “public party,” “public partner,” “public authority,” and “grantor.” Public–private partnership (P3): An alternative project delivery structure under which a government contracts with a private firm to design, finance, construct, operate, and maintain (or any subset of those roles) an infrastructure asset on behalf of the public sector. Public-sector comparator (PSC): The risk-adjusted cost estimate, from the public perspec- tive, of a project being delivered under a conventional procurement method. It acts as a bench- mark against which to compare the projection of cost estimates for the authority under the P3 option; this is done to determine if the P3 option offers VfM. Ramp-up phase: The phase in a project’s life cycle immediately following construction. It is during this phase, the early years of operation, that a project’s revenue stream is established. Rate covenant: A contractual agreement in the legal documentation of a bond issue requiring the issuer to charge rates or fees for the use of specified facilities or operations at least sufficient to achieve a stated minimum debt service coverage level. Refinancing: A change in the financial structure or financial conditions done by renegotiat- ing the existing debt or raising new funds to substitute for the current fund providers. Some contracts provide for the refinancing gains to be shared with the public partner. Revenue bond: A bond that is payable from a specific source of revenue (typically from the facility for which the bond was originally issued) and that is not backed by a pledge of the full faith and credit of the issuer. Risk: An uncertain event that, if it occurs, may cause actual project outcomes to differ from expected outcomes. Secondary investors: Investors who invest in the private partner after financial close (usually in the early years of the operations phase), purchasing their shares from the primary investors. Shadow tolls (shadow fares): Shadow tolls or shadow fares (also known shadow tariffs) are paid by the government in lieu of the user. The term “shadow toll” is used for the particular type of tariff used for road projects. Shadow payments per volume are one of the two main types of payment mechanisms. Special-purpose vehicle (SPV): An entity created to undertake a single task or project to protect the shareholders with limited liability, often used for limited or nonrecourse financing. In establishing a project consortium, the sponsor or sponsors (referred to as the P3 developer in this synthesis) typically establish a private partner in the form of an SPV that contracts with the government. The SPV is an entity created to act as the legal manifestation of a project consor- tium with no historical financial or operating record that the government can assess. An SPV is a legal entity with no activity other than that connected with the project. Step-in rights: The government’s or the lender’s option to assume the contractual responsi- bilities of a project party through managing the contract in cases when that party is not meeting its obligations under such a contract. Transportation Infrastructure Finance and Innovation Act (TIFIA): A federal transpor- tation credit program that provides direct federal loans, lines of credit, and loan guarantees through the U.S. DOT. Value-for-money (VfM): Broadly speaking, to obtain or receive VfM means that spending the money was worthwhile; that is, the value of the product or service received equaled or exceeded

50 Leveraging Private Capital for Infrastructure Renewal the amount spent. The decision to spend (or invest in this context) was a wise one since net value for the payer was created. Weighted average capital cost (WACC): The WACC is the average cost of all the private financing resources of the project. It is a weighted average of the cost of the equity resources and the cost of debt. Windfall gains or outsize returns: Politically sensitive profits made by investors in P3s from high returns on investment, debt refinancing, or sale of investments.