Stanford Webinar: Infrastructure Project Finance

Now I’d like to introduce you to today’s featured presenter, Michael Bennon Michael Bennon is the Managing Director at the Stanford Global Project Center developing new initiatives to the GPC and managing their student programs in industry affiliations Mike’s research areas of interest for the center and work experience are in public sector finance, infrastructure and real estate investment and project organization design Mike served as a Captain in the US Army and US Army Corps of Engineers for five years, leading engineer units, managing projects, and planning for infrastructure development in the US, Iraq, Afghanistan, and Thailand Mike received a Bachelor’s Degree in Civil Engineering from the United States Military Academy at West Point and received an MSCE and MBA from Stanford University And by the way, if you like what you’re hearing today in Mike’s presentation, you may also be interested in taking his Stanford graduate course on Global Project Finance that’s being offered this upcoming winter quarter Mike will talk more about the class in a moment But we want to flag that enrollment is currently open until December 11th So feel free to visit the SCPD site to learn more about the course and enroll And now I’ll turn it over to Mike >> So I’ve got a lot of material to cover in a short period of time, but first, I’ll just take a couple minutes to plug my research program in the course So I work at the Stanford Global Projects Center So we’re an interdisciplinary research center at the university And we kind of work between the different department silos at the university to conduct interdisciplinary research And our topic is on innovation and infrastructure finance and development So we like to frame our research program as covering a broad spectrum and on one end of that spectrum we have institutional capital Let me see if I can enhance this, okay So on one end of that spectrum we have institutional allocations to infrastructure, so an institutional investor such as a pension fund or sovereign wealth fund More recently, some of these institutional investors have created allocations to the asset class, so we do research on that trend within the industry and the risks associated with infrastructure allocation On the other end of that spectrum, we do work on government policies and practices and infrastructure development So some of these include procurement practices, what I’ll be talking a little bit about today, in the United States And other topics include public policies in and around infrastructure development And finally we do case based research on the projects in which that institutional capital is invested in infrastructure And lastly, we also have a program on innovation and infrastructure development, and the trend of cities towards participating in the digital economy Now, for a quick overview of my course which is starting in January So, Global Project Finance really covers that whole spectrum of infrastructure development and project risk So part of the course is focused on the basics of project structuring and development from the concepts we’ll talk about today And then we also have modules on project risk assessment and then a large module on infrastructure investment So most of our class sessions involve a topical lecture by me and then a guest presentation from an industry executive, the head of a public procurement agency for infrastructure or an infrastructure fund manager, or a project developer, a financial advisor or even the manager of a pension portfolio The course objectives are generally to prepare students for a career in project finance and infrastructure development And for our assignment for the course we develop a financial model and a risk assessment for an infrastructure project, and we develop components of it over the course of the quarter This year its going to be a toll road investment So on to what project finance is So project finance involves the ring fenced financing of an infrastructure asset based on the microeconomics of the project itself, as opposed to the sponsor balance sheet or the city, or government’s balance sheet So infrastructure projects, they have a few distinct tasks that are required to complete them and manage them over the long term So they have to be designed, built, financed, and then operated and maintained Under traditional infrastructure procurement, the government essentially hires companies to complete all of those tasks, or uses internal staff to complete some of them but it generally procures them

separately and manages the interfaces between those contracts Under a project finance or as it’s also referred to as a public-private partnership or P3, essentially the government procures one contract for a private partner to complete all of those paths and then manage the interfaces between them The governments usually use this procurement model, the prime driver is to transfer the risk of infrastructure development to that private sector partner So infrastructure projects are some of the most risky enterprises that governments undertake I like to bucket the risks associated with infrastructure development into three buckets So one, it can of course take much longer to build than expected and go way over budget and those are commonly correlated It can also cost more to operate and maintain the asset than the government originally forecasts and then finally, for projects that are funded by a user fee, such as a toll road, there can be lower demand than what the government originally expected So that could cause a lack of funding in the future So governments as I mentioned generally use this procurement model to transfer risk to the private partner in developing and maintaining an asset So there’s a few criteria that we recommend for governments or project sponsors to consider when they’re assessing a potential project as a potential for project finance And so the first of those is simply scale Larger projects generally entail more risk, so this procurement model is really mostly suited to larger infrastructure projects The second factor is general project risk, so has the sponsor done one of these projects before, how did that go, is this a particularly unique project where there might be significant ONM risk or construction cost risk The third factor is flexibility So because of these, project finance generally entails a longer contract Generally if there’s a need for flexibility due to technology change or other factors, this procurement model might not be a good fit for that because it’s generally used for longer term contracts And then finally, the last factor is innovation So this procurement model because it combines construction and operation and maintenance into one contract, there’s opportunities for innovation for the contractor that’s building the asset because they have to both build it and operate and maintain it in the long term So that means they might make decisions during construction to optimize for lifecycle costs, instead of just the initial cost to build the asset So this slide shows the many parties involved in a complex infrastructure project and how they relate to one another Under a project finance structure So generally a special purpose vehicle or an SPV is created with the sole purpose of building and maintaining the infrastructure project The SPV will have equity investors, it will arrange for financing to build the project, and then it will also have contracts with the many contractors, and or operators needed to build the project It’ll also have a project development agreement with the sponsoring government So, onto our topic for today So to get straight to the point, this procurement model isn’t used in the United States at the same rate as it’s used in other developing economies globally So I like Canada and Australia as good comparators to the US because they’re also large land mass developed economies and federal democracy And this chart shows the usage of this procurement model in Australia and Canada, both in terms of the capital attracted, and the number of projects compared to the US So it’s pretty clear that it’s used much less in the United States which by population of course has a much larger economy than Canada and Australia The question is why hasn’t this model picked up in the United States Well I think this chart shows that it’s not due to demand So this chart shows all of the transportation and social public-private partnerships that had been procured in the United States, and it’s sourced from an industry publication So the start of each of these bars indicates the start of the procurement process from the sponsoring government So, typically when a government pursues one of these projects, it starts by issuing a request for qualifications, or RFQ,

to potential companies that would compete for the project The end of this bar is commercial close, or when the government effectively signs a contract with that infrastructure developer to then go and finance and then build the project For the red bars, the end of the bar is commercial close, or the contract signing For the grey bars, its when the project was cancelled So I think this charts indicates a couple of trends One is that demand for this procurement model in the United States is certainly increasing You can kind of see that by the start of procurement is kind of accelerating over time What’s also very clear from this chart is that successful procurements are not being completed at that same rate So in general, this procurement model does take a little bit longer to procure in the United States when you compare with other developed economies, like Europe But what makes the US particularly unique is the prevalence of project cancellation So you can see a lot of gray on this chart So this chart further illustrates what I think is an explanation of this trend in the United States So this shows a breakdown of infrastructure spending, both by capital projects, or spending for new infrastructure, and operation maintenance It’s also broken down by the federal government, and then our state and local governments So I think this chart debunks a bit of a myth about US infrastructure So a lot of media reports have indicated that part of the problem with US infrastructure is essentially that politicians don’t prioritize infrastructure enough in the United States And this indicates to me that this is only partially true, mainly for our federal government State and local governments, on the other hand, are actually increasing spending in real dollars to infrastructure and they’re particularly increasing it to maintenance So there’s been a big shift, essentially, in responsibility in the United States from spending primarily by the federal government to spending by state and local governments This slide indicates part of my explanation for why this procurement model of using project finance hasn’t picked up in the United States as it has in other developed economies So to explain this rather quickly, this chart shows infrastructure spending over time both on capital projects and on maintenance projects And so we use an institutional explanation for the unique circumstances of infrastructure development in the United States as it relates to project finance So essentially what I mean by that is a lot of our institutions, and by that I mean our public agencies for developing and maintaining infrastructure at the state and local level, were formed during very high levels of spending by the federal government And most of that spending was focused on capital cost Now federal spending is still primarily oriented towards capital costs, but the world that we exist in in the United States is a much different place than in the decades following World War II when heavy federal spending was supporting capital costs And our public institutions were essentially designed for that world as opposed to the situation that we’re currently in with that broad shift in responsibility towards our state and local agencies So part of our explanation is that our public institutions in the United States, primarily at the state and local level, aren’t really designed to manage procurements using project finance which has to account for all of the life cycle costs of an asset as opposed to just capital costs which are supported by the federal government So this is my last complex chart for today, so this is that same data on public-private partnerships, transportation and social infrastructure broken down by state So the x axis shows the number of projects that have been procured The size of each bubble is the relative amount of capital that the state’s been able to attract using this procurement model And then the y axis is the average procurement time for projects in that state Now I use this chart to illustrate basically the power of institutional change for public agencies in developing a new procurement model like project finance

So every state that has procured more than one of these projects, essentially has undergone some form of institutional change in its public agencies Just to highlight a few, so Texas, Florida and Virginia have all created P3 offices within their departments of transportation with varying levels of autonomy Colorado has created the High Performance Transportation Enterprise which procures projects in its state Indiana created the Indiana Finance Authority which has procured all of its P3s And then the city of Long Beach is a pretty unique example and it’s actually our case study for this morning, has procured two of the last three public-private partnerships in California just by one city alone, and we’ll talk a little bit more about that in a minute So none of these agencies would be a kind of fully autonomous alternative procurement agency like those that have been formed in Canada and Australia So I list a few here, a couple in Canada and a couple in In Australia that have been created to kind of manage this very different form of infrastructure procurement within their states These are all states or provincial agencies So, all of these agencies are different, but they share some common characteristics One is that they’re not sector based, so they report either to the treasury or directly into the state executive All of them manage infrastructure procurements that are completed using project finance or another kind of alternative structure for an infrastructure project These agencies are really designed to have the internal resources and the capacity to manage those alternative procurements as opposed to traditional infrastructure, which is very different They also all have an important role in reporting Because project finance involves a long-term contract, reporting is a special importance both on a programmatic level, and these agencies issue specific reports on their projects And so to kind of explain the trend of Canada and Australia adopting this procurement model at a faster rate, which we talked about earlier, all those projects were procured by organizations like these So what to do about this situation in the United States? Well, we have a few policy recommendations And these are specifically relating to federal policy So federal support for mega projects is especially important, especially projects that cross state or other institutional lines Lending support programs that are already in place or that are ramping up for project finance loans are also a helpful policy program and these are already in place Enabling project finance fact projects to access the municipal bond market is also a good federal policy Some of these are in place, and others have been proposed More importantly, I think, is the federal government’s institutional sport for state and local government It’s especially important so the Build America Bureau, which is newly formed, and the Transportation Investment Center These are both programs that help stage your local government, transition or use this procurement model and they distribute eventually best practices Those are our strong initiatives And then perhaps most importantly, one of my big federal policy recommendations is to create programs that fund projects based on the practices or innovative programs as opposed to just the economic benefits of the project itself So the new grant program at the Department of Transportation, the INFRA Grant program, I think is a step in the right direction I think that program could be significantly expanded to even provide funding support for infrastructure programs like the creation of a new infrastructure agency as opposed to just supporting an innovative project So now I’ll spend a few minutes talking about our specific case study for today This is the case of the Long Beach Civic Center which is currently under construction

I really like this project because it illustrates a lot of the concepts that I’ve talked about in terms of the project finance basis It illustrates some procurement concepts for how cities can use this procurement model and it’s a good case for a lot of the topics that we’ll talk about in my course So this project is essentially to tear down and replace the city hall It’s going to tear it down The project will build a new city hall to replace it The project will also develop a new headquarters for the city’s port authority, a new library and a new public park Once that project is developed, the company that’s building it is going to be responsible for operating and maintaining the buildings themselves for a 35- year concession The total financing costs for the project were about just over $500 million So what made this project a successful procurement? It’s still under construction currently Well, the reason the city was replacing its city hall was because back in 2005, the city determined that it was seismically deficient The building was about 40 years old, and it was rapidly decaying and the city determined that they needed to replace it because it didn’t meet seismic code The city didn’t replace it initially, but they conducted some studies And in 2013, the city chose to start pursuing a public-private partnership And I think there’s a few reasons that the city chose this procurement model as opposed to traditional infrastructure procurement One is that the first municipal building, P3, in the United States was also developed in the city of Long Beach So as a researcher on institutional development within the infrastructure industry, I think that’s an excellent trend, and that the city that procured the second project using this procurement model was, of course, the city that had the first use of this procurement model Another factor that led the city to use this project finance to develop this project was that the existing facility was deteriorating at a much more rapid pace than the city expected So there was a real deferred maintenance problem So when the city first came up with the cost estimate to rehabilitate the old building in 2006, they came up with an estimate As they were considering options for the redevelopment of the city hall, they’d been escalating the cost to rehab the old building at 5% in their internal estimates When they reassessed the building in 2013, their estimate they found that an additional more than $30 million of deferred maintenance had occurred on the building So the building was deteriorating at a much more rapid rate than they originally expected The third factor for this project, and probably the most important in kind of driving the city to use this procurement model, is the city simply calculated their annual cost to maintain the old facility So, they came up with an estimate that they were spending around 12 and half million dollars a year on the old facility And the city essentially just went to the market and said, we’ll spend $12.5 million a year and no more on the new facility, in terms of an annual payment And the city said it would index that to inflation So how did the city eventually get a much larger project for that same annual payment? So instead of just replacing the city hall, the project is going to build a new port authority building, a new library and a new city park Well, part of the factor there is that the old facility was sitting on a lot of unused public land So the developer of this project, once they complete all of those other facilities, they’re going to be permitted to develop some residential and commercial real estate on some of that unused public land So the city effectively used some of that unused land to offset the capital cost of developing a new city hall One of the other important factors for this project was a performance-based maintenance requirement So the contractor that builds the new facilities is going to be responsible for

maintaining them in the long term, and there’s specific performance requirements in the contract I highlight a couple on this slide, for example, elevators, and elevators out for maintenance was a big concern of city staff And so, there’s a specific requirement in the contract for the contractor to essentially repair elevators that are down for maintenance quickly, and if they they don’t, the city’s payments are reduced In fact, if enough elevators are out, then the city can deem part of some of the upper floors of the city hall not available, and does not pay rent effectively on that part of the building The maintenance requirements also have a handback requirement at the end of that 35 year concession So essentially, the Facility Condition Index, or FCI, has to still remain 20% at the end of that 35 year period So that essentially means that the building will be 20% deteriorated To put that into context, the old building, which was about 40 years old, had an FCI of 52% And the library, the old library that’s being replaced, had an FCI of 73% at the time the project started To put those numbers into perspective, those are clearly in the tear down territory for a public building And so, the city, at the end of the concession period will be able to inspect the facility to make sure that it meets that FCI of 20% The last aspect of this that I wanted to highlight was, the city was able to tailor the contract based on the different public agencies involved in the project So as I mentioned earlier, the city was having a deferred maintenance problem, so they transferred more of the maintenance responsibility to the private contractor The port facility is also going to be maintained by the contractor, but the port didn’t have the same maintenance problem on its existing assets And it wanted to perform more of the basic maintenance using its internal staff or contractors And so, for the port building, the contractor’s really going to be more responsible for major maintenance and rehabilitation, as opposed to minor maintenance The other, of course, unique factor of this project is because it’s funded on an annual availability payment The city effectively doesn’t make payments on the city hall or library facilities until they’re kind of turned over to the city Well, that was my case and topic for today I hope it was useful and if you’re interested in learning more about these concepts, our website’s And it’d be great to turn it over for some questions, thanks >> Mike, as need for water infrastructure funding increases, do you think bond funding, less than $50 million, will be in higher demand? Also, do you think bond financing and community involvement, community members participating in bond financing, will increase? >> Yeah, that’s a great question I definitely think that, of course, as there’s increasing demand for infrastructure, investment in smaller projects Most of those projects and most infrastructure generally is going to use traditional procurement And, of course, that could entail some bond financing, so I do think that it’ll increase In terms of the other part of your question, just focused on Project 5, so this procurement model is used in the water sector And there’s also some other forms of alternative procurement, in which it would be used for a long-term maintenance contract, but there wouldn’t necessarily be private financing And so, I think those procurement models will increase as more water utilities kind of turn to kind of long-term maintenance contracts In terms of project size, as I mentioned, this procurement model is generally used for smaller projects I put $100 million dollars as a good floor just to illustrate the complexity of the project Where there is an opportunity for smaller projects is in project bundling So that would be a case in which multiple utilities that require an investment effectively bundle their projects together, and procure one contract for all of the investments So that would be the real opportunity for project finance for

those smaller projects >> All right, thanks, let’s take another So we have a participant asking, are certain types of infrastructure projects more successful when using the P3 models? And he’s given the example of statistics with toll roads, airports, etc >> Yeah, so in general, I would say that the projects that entail more risk are better suited to this procurement model So a project such as a toll road that has funding risks, if there’s not enough drivers for the road that entails additional risk And therefore, this procurement model is a strong fit for that sector Airports is interesting, I mentioned the US is an outlier for this procurement model, and airports is the one sector where the US is probably the largest outlier So most airports that are in other international developed economies have been financed using project finance And in those cases, the remuneration for the investors and the airport are essentially, of course, the airline fees that use the airport But then also, things like parking or rents from the vendors in the airport, so there isn’t necessarily any single sector in which this procurement model is a particularly unique fit But in the US, at least, it’s mostly been used for toll roads, as I think the asker mentioned >> Right, so did these Canada or Australia P3 agencies have any special process for expedited environmental approvals? You spoke about them in your presentation >> Yeah, so I don’t think they necessarily have a process for going around traditional environmental approvals They do have kind of the expertise to manage the local environmental processes In procurement, so, essentially, to make those assessments during procurement I also think they do some programmatic level work So, just for example, infrastructure in New South Wales developed and maintains a 25 year infrastructure plan for the state So that kind of long term perspective, I think, can assist with, kind of, environmental approvals and planning by simply laying out the actual need specifically >> Great, so like staying in the global prospective can developing countries an example, like Indonesia immolate P3 approach with the large projects that you’re representing here? >> Yeah and then developing economies actually use this procurement model fairly often so that trend is more a phenomenon of multilateral bank policies, so several multilateral lenders like the World Bank require that project finance be used for some of their infrastructure projects So developing economies can certainly use this procurement model, it’s been used in Indonesia even for some small or infrastructure project They’re in for, more recently, some very large project I guess the requirement really is that in using project finance because the investment is really based on the project’s economics and not the balance sheet or credit of the sponsoring government For this particular model to be used is just additional scrutiny on the project itself So in order for this to be used in a developing economy, the government there would simply have to adequately appropriate funding for the project So in that way, project finance can be almost a tool to create additional scrutiny on the project itself, to make sure that the project economics and risks make sense >> Great, this one specifically is looking at your case study that you presented Who were the equity and debt investors in the Long Beach example, and what guarantees did they have against project cancellation? Or else, another way, who bore the development risk? Yeah that’s a really good question and if you may have noticed on my slide showing the completed and cancelled procurement there’s a lot of development risk, particularly in the United States To answer your question more specifically, I believe the contractor for Long Beach is an infrastructure developer called Plannery

and so they would be the equity I believe they actually arranged private financing, so a private loan for financing the project, that was just based on their assessment of the best way to finance the project for them In terms of development risk, it is a considerable factor and the companies that procure that compete for these projects do bear some development risk, mainly because as you can imagine, the costs for them to compete for the project and develop proposals is quite high Not sure of the specifics for Long Beach but I believe they included a stipend for essentially if they cancel the project, then the companies that were competing for it get a small payment to recoup their cost for pursuing the project, and that’s fairly common for one of these procurements and it’s a good practice for governments to incentivize competition I think >> Let’s see, so P3’s look very attractive for long term projects until the many states face a challenge of blended state and local funding requirements as well as moving much of maintainance to operating budgets How do you suggest P2 success for a blended funding model? >> Yeah, that’s a great question and I think it certainly is a big factor You know, a great example of state and local government I think that are really tackling that challenge would be Fargo, North Dakota, currently So they’re currently procuring a flood protection P3 and project and they’re really going through the process between, there’s two states involved, multiple municipalities And they’re really going through the process to determine who pays for what and blending that funding So the answer in terms of multiply funding sources, or funding coming from different pots is essentially through the project development process Those desperate agencies have to come together Another good example might Partnerships Victoria, one of the agencies in Australia, I mentioned So they have a practice that for one of these complex procurements they form a project board, and partnership Victoria sits on that board, but so does other agencies and sources of funding that are involved in the project in any way The board is how those agencies communicate and develop all the agreements necessary to complete the procurement Thanks so much for all these great questions Here’s another one Considering this model is fairly new, I’m wondering if there any statistics on average financial performance of the project from each stakeholder’s perspective There are some aggregates, statistics, that are published They’re in some ways, though there’s not mostly Of course these are private investments so there might not necessarily be returns That are reported by some of the companies or funds that invest in these projects So some of that information, privately held by companies of course, but there are some industry publications that publish data on, for example, the funds that have been raised to invest in infrastructure and for some specific projects there is also the public agency that procures them might publish funding support So, for data like revenue goes to investment returns >> It sounds like a lot of effort needs to be invested up front to create the detailed contract considering they are federal stakeholders What about the overhead related to enforcing the contract? >> That’s an excellent point so using project finance has higher transaction costs for completing the procurement in both of those costs that you mentioned in terms of sorting out the project lifecycle plan, essentially So there are additional transaction costs So when a government considers this procurement model, essentially if you break down the assessment into its simplest form, what they’re doing is they’re essentially valuing the risk that they’re transferring to the private partner And they’re weighing that against

things like the added transaction costs to complete the procurement Or if the project took the higher cost of the capital using project finance, which it should, they’ll be weighing that So they’re weighing some of their costs against the risk that they’re transferring through the procurement The overhead to enforcing, that’s an additional cost as well In general, most of these projects are procured using a performance based contract But there’s, so most of the contracts that use this model essentially permit the government to conduct an inspection To make sure that maintenance is being spent, or require the contractor to regularly report their maintenance activities So there are some costs there I think for a lot of these projects, that cost in particular is relatively low, but it really depends on the project itself >> Okay great Even broader question here from this participant What will be the optimal GDP percentage of company, I mean a country should assign to its infrastructure? >> Yeah [INAUDIBLE] >> Take on that [LAUGH] >> If you read academic literature on infrastructure, there’s a lot of economists that have spilt a lot of ink on that topic in particular It does vary widely There are some interesting studies actually coming out of China now Mainly because China invests a much higher percentage of its GDP in local infrastructure than really any developed economy And part of that is because China’s of course been rapidly urbanizing over the last few decades But there you see as a percent of GDP, I think it’s getting up toward 8%, whereas the US has been between two and 3% of GDP Personally, I don’t think there’s necessarily a right answer I think a lot of the discourse in academia or in public policy has been about targeting that appropriate percent of GDP invested in infrastructure When really infrastructure projects really justify themselves based on their microeconomics, not macroeconomics So, the specific impacts of a particular project really need to be assessed in order to be determined if it is going to be economically beneficial But that at least might give you a little bit of a range in terms of the US which is kind of on the low end between two and 3% Towards an outlier on the other end of upwards of 7% GDP >> Okay, we have a participant asking you to speak about P3 for aging energy assets, such as central plants >> Yeah, this is, so project finance, I didn’t, my discussion today was really focused on public infrastructure So transportation and social infrastructure But for energy project finance is actually been used in the United States in Globally at a much higher rate So for a P3 for an aging energy asset, I think that the problem Or what would need to be addressed in procurement is really the source of funding for the project So if it’s an aging infrastructure asset that requires rehabilitation The government or sponsoring body for that procurement would really have to identify a funding source So that might be if it’s an electric utility it might be part of its rate base or some other source of funding for the asset So it certainly has potential but really it comes down to identifying that revenue stream for the project >> Do all public private partnerships include allowing the private entity to have infrastructure that they can monetize? If there are other options, can you elaborate? That’s a lot of talking [LAUGH] And we get a lot of questions so [LAUGH] >> So in general the using project finance all of the cost to develop an asset and maintain it for the long term are accounted for So I guess to answer your question, using this procurement model the project has to be fully funded And the private company that wins the contract

And also importantly the financer, the source of debt financing for the project is going to really scrutinize this project to make sure it’s fully funded So by that metric there has to be a source of actual funding for a project that uses this model Maybe I could clarify just that using this procurement model in almost every case The private partner doesn’t get ownership of the infrastructure asset to monetize it So, usually it’ll just be a long-term contract In some cases, there’s privatization so the asset will be transferred in ownership to the contractor But most cases it’s not But I guess to answer your question yes there does have to be a source of funding if project finance was going to be used yeah >> What is the strongest case we made the government has incentive to keep infrastructure supply in balance to demand? How can I do so without the use of prices? >> Yeah, that’s an interesting question I mean, there is a whole industry in and around estimating the economic benefits of infrastructure development But that’s obviously a part definitely There’s a lot of science there, but there’s also a little bit of art in terms of estimating the benefits to a government of developing a new project It’s difficult to tell You know I think for some assets there can be pricing So I do think that’s part of the reason why projects that are funded by a user fee as opposed to general taxes It might be a more efficient way of generating funding for infrastructure because the people that benefit from the project are the people that pay for it Now I think, there should also be general public support or funding support for infrastructure So projects shouldn’t necessarily need to be just using toll roads as an example They shouldn’t necessarily only need to be funded by tolls Because toll roads also improve the economy And improve commute times I just to use this as an example, for people that don’t necessarily drive on the toll road And so because of that, I think there’s definitely a case for general taxes But to get to your question about the use of prices That’s why a lot of economists recommended user fee funding for toll roads or other infrastructure because it does give a direct indication of demand Do you have any examples of grid modernization projects that use P3? >> Yeah, so this is a relatively new sector I would say, I don’t have a very good example in the United States of a kind of grid modernization project There are some related projects So the state of Michigan recently procured a contract to essentially upgrade its lighting systems on some freeways around Detroit So that would be the source of funding for that project is essentially the energy savings that the state’s going to have over the long term And I think that the city of Washington, DC, is also in the process of procuring a street lighting project Chicago has recently procured a street lighting P3, so I think that’s kind of a related grid upgrade or pole upgrade project with a clear source of funding through cost savings So that would be maybe a proxy >> Okay, how about elaborating on infrastructure financing for energy, especially distributed energy resources or EV charging >> Yeah, so I guess the trouble with more distributed projects or EB charging projects for cities, there have been some smaller contracts to do that in the US In general I think those projects to really use project finance or to be procured as a public-private partnership, they usually have to be bundled because they’re generally kind of for smaller scale projects

But the procurement model could certainly be used for those I think for new technologies, like sometimes this procurement model, it can be slower to be adopted So in this case, if there’s an EV contract or kind of a I believe it was a distributed energy kind of a project So the most likely source of revenue there, of course, will be energy fees from users of those EV charging stations or from the community And so because it’s a relatively new sector, it’s kind of hard for companies to really forecast that revenue So in some cases, I would imagine for an EV project, if a city wants to pursue one of those using a public-private partnership, they might be able to transfer some of that demand risk to a private partner, but also potentially guarantee some payment over the long term for the project So it’s possible, but it’s difficult for some new technologies to really assess demand >> Looks like we have time for about one more question Who is the right expert to help develop legislation or a ballot initiative to create an optimized version of the Canada-Australia special procurement authority to encourage P3s? Seems like a good question to end on >> Yeah, so it’s interesting, I mean, there’s lobbyists for the infrastructure industry just like there are lobbyists for every industry And there is certainly experts that have kind of looked at the US federal policy in ways to incentivize some of these And so I think there’s some expert groups out there on infrastructure policy I guess one of the factors, of course, is that the agencies I mentioned aren’t necessarily federal agencies, although there have been some good programs created like the Build America Bureau at the federal government These are state level agencies, so it’s not necessarily DC that requires some convincing But I think like those state level agencies in Canada and Australia, once they were formed and they developed a track record of operating history, they really kind of took off from there So I think we’ll see what happens with our state level agencies here in the US And one of them might go out on a limb >> Great, with that we want to just thank you so much for your time today We hope you enjoyed the hour and encourage you to check out all of our offerings at And again, don’t forget you’ll be receiving a recording of this webinar to share with your friends and colleagues Thanks so much for taking the time to attend and have a great day >> Sure