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2013-02-21_Agenda Packet--Dossier de l'ordre du jourr. City of Saint John Common Council Meeting AGENDA Thursday, February 21, 2013 4:30 pm Council Chamber Please use Chipman Hill entrance S'il vous plait utiliser 1'entree Chipman Hill Si vous avez besoin des services en francais pour une reunion de Conseil Communal, veuillez contacter le bureau de la greffiere communale au 658 -2862. Pages 1. Call to Order - Prayer 1.1 Presentation: Introduction Business Case Methodology - Public Private 1 -44 Partnerships 2. Approval of Minutes 3. Approval of Agenda 4. Disclosures of Conflict of Interest 5. Consent Agenda 6. Members Comments 7. Proclamation 8. Delegations / Presentations 9. Public Hearings 10. Consideration of By -laws 11. Submissions by Council Members 12. Business Matters - Municipal Officers Powered By: S' � i)E- 1 13. Committee Reports 14. Consideration of Issues Separated from Consent Agenda 15. General Correspondence 16. Supplemental Agenda 17. Committee of the Whole 18. Adjournment City of Saint John Common Council Meeting Thursday February 21, 2013 Committee of the Whole 1. Call to Order Si vous avez besoin des services en frangais pour une r6union de Conseil Communal, veuillez contacter le bureau de la greffi6re communale au 658 -2862. Each of the following items, either in whole or in part, is able to be discussed in private pursuant to the provisions of section 10 of the Municipalities Act and Council / Committee will make a decision(s) in that respect in Open Session: 5:30 p.m. 8t" Floor Boardroom City Hall 1.1 Financial Matter 10.2(4)(c) 3 Introduction Business Case Methodology Presented to the City of Saint- John Section i - PPP Overview PwC Section 1 — PPP Overview What are Public Private Partnerships? - A generic definition ✓ There is no widely accepted definition ✓ Depends on country, politics and person ✓ General Definition: A contractual agreement formed between a government agency and a private sector entity that allows for greater private sector participation in the delivery of public infrastructure projects. • Owns assets, public service Private Skills, efficiencies and finance Partnership L J M Co- operation and risk sharing A. pwc 3 3 Section 1— PPP Overview Why do Governments use PPPs? Why PPPs? Provide access to innovation and best practices Greater schedule and cost certainty Allow for greater risk transfer More efficient infrastructure delivery Whole lifecycle planning and costing v' Public sector considerations Huge requirement for infrastructure Significant budgetary pressure on Governments Focus on core activities pWC 4 4 Section 1 — PPP Overview PPPs in practice Buildings & Real Estate Roads RL- Power Correctional Facilities Ferries Rail Ports Airports PWC 5 s Section 1 — PPP Overview PPPs throughout the world w pwc 6 6 Section 1 — PPP Overview Procurement methods Depending upon the Public Sector's requirements and the Project's characteristics, there are a variety of different project delivery or procurement methods. Increased Private Sector Involvement Legend UA DB: Design -Build DBB: Design- Bid -Build DBF: Design - Build- Finance DBFM: Design - Build- Finance - Maintain DBFOM: Design - Build- Finance - Operate- Maintain Often when people talk about a PPP project, they refer to a Project in which the private sector finances the initial construction costs (i.e. DBF, DBFM or DBFOM). pwc 7 7 Section 1 — PPP Overview Design- Bid -Build (DBB) /Crown Construct key features and structure ✓ Key Players • Public sponsor: Project definition, financing, product standards /specification & contractual terms • Designers: detailed design & contract administration • %_.on11dl:LUl�: CU11�LlUUL1U11 OC commissioning • O &M contractors ✓ Multiple separate contracts ✓ Design undertaken in detail before construction commences ✓ Owner heavily involved ✓ Responsibility for operations, maintenance and lifecycle retained by the public sector pwc 0 tr11V V1 L1JV 0 Section 1 — PPP Overview Design -Build (DB) key features and structure ✓ Key Players • Public sponsor: conduct extensive upfront project scoping, risk assessment and development of project • performance specifications • Contractors: detailed design, construction & commissioning • O &M contractors ✓ Fixed price contract for delivery within a specified timeline meeting required performances specifications ✓ Limited role for owner post contract award ✓ Responsibility for operations, maintenance and lifecycle retained by the public sponsor pwc 0 a Section 1 — PPP Overview Design - Build - Finance (DBF) key features and structure ✓ Similar to DB arrangement, however, the DB contractor (or a Special Purpose Vehicle (SPV)) is responsible for obtaining finance during the construction stage ✓ DB contractor is paid once it achieves "substantial completion" (i.e. a single bullet payment at end of construction) ✓ Additional due diligence undertaken by financiers, who provide construction finance (and are repaid with the proceeds from the substantial completion payment) ✓ Responsibility for operations, maintenance and lifecycle retained by the public sector pwc 10 Substantial completion payment Construction finance Subcontracts to acquire capability & expertise 10 Section 1 — PPP Overview Design - Bid - Finance - Operate and /or Maintain (DBFM1DBF0M) key features and structure Single entity responsible for Design, Build, Finance, Operate and /or Maintain (depending upon the scope of O &M) over a long term period (e.g. 30 year warranty) Private sector provides some, or all, of the finance with the public sector potentially advancing a portion of the funds during construction Private sector is paid based upon its actual performance of the services Risks allocated to the party best able to manage the risk A DB — Design O — Operations Build M - Maintenance PWC 11 Section 1 — PPP Overview Common misperceptions about PPPs Myth * 1: Public private partnerships are the same as privatization 0 There is no ownership transfer under PPPs. PPPs require an ongoing partnership between the private and public sectors. Full privatization merely transforms a public monopoly to a private Mo11VpU1 y J UUII 111011 1110 IJC11C111J U1 t t t � ale 11U l 1 ---1 MILUU. Myth * 2: By entering into a public private partnership, government loses control over the provision of services ® The public sector does not give up its ability to implement its policies or regulate the provision of services. The government establishes the ground rules and has the ability to shape the PPP contract to reflect its own objectives, policies and regulations. pwc 12 12 Section 1 — PPP Overview Common misperceptions about PPPs (Continued) Myth #3: The principal reason governments enter into PPPs is to avoid debt Government involves in PPPs to benefit from: increased efficiency shorter implementation time greater innovation better value in the delivery of services brought about by increased competition. The government and the ultimate users of the service are still responsible for servicing the debt. The emphasis is on structuring creative and cost - effective ways of delivering services, not on creative accounting. _. pWC 13 13 Section 1 — PPP Overview Common misperceptions about PPPs (Continued) ✓ Myth #4: The cost of service will increase to pay for the private partner's profit and financing cost • The government enters into a PPP if the cost of providing a given service is lower than the cost of government delivery, or if a higher level of service could be provided for the same price by the private partner. • The private partner's profit can only be realized through increased productivity or expansion of service, not through higher prices. • The level of risk transfer assumed by the private sector must be higher than the additional costs of private financing. • The selection of a private sector partner is subject to procurement, with a shortlist of three consortia submitting responses, which drives pricing competition. IL PWC 14 14 Section 2 - What Makes a Project Suitablefor PPPProcurement Pwc Section 2 — What Makes a Project Suitable for PPP Procurement Project characteristics of a typical PPP candidate ✓ Often involves the construction of new assets ✓ Service requirement ( "outputs ") stated by the public sector ✓ Public sector pays for provision of services ✓ Public sector monitors performance — penalty regime ✓ Project term linked to economic life of asset ✓ Significant risk transfer to private sector pwc 16 ift Section 2 — What Makes a Project Suitable for PPP Procurement PPPs are not suitable when: ✓ Project requirements cannot be easily defined. ✓ Risk transfer to the private sector is not possible or the risk premium is too high. ✓ The project is too small, is stand -alone and cannot be bundled, with a small financing requirement and will not generate PPP investor interest. pwc 17 17 Section 3 - PPP Basics Pwc Section 3 - PPP Basics Roles and responsibilities in a typical PPP structure ✓ The PPP structure transfers risk and rewards to the private partner by providing commercial and financial incentives; allows the public authority to have a single point of responsibility and accountability. Lenders A Service and Facilities Contractual Relationship SPV or Project Equity Company Providers I Service pwc 19 Build 19 Maintenance Service pwc 19 Build 19 Section 3 - PPP Basics Roles and responsibilities Public Sector ✓ Develops requirements and a contractual framework. ✓ Conducts the procurement process. ✓ Generally maintains ownership of the accAt tirniio-liniit tbA r�rniA�t {Akjkj% Ll x.111 V L&bAAV l.L 1. 1.11V • regains control of the asset when Private Sector ✓ Deliver assets on time and budget. ✓ Maintains and refurbishes assets. ✓ Finances construction of the project through equity and debt. ✓ Ensures that all elements of the project work together. the contract ends. ✓ Absorbs some project risks. ✓ Licenses right to design, build, ✓ Is responsible for the quality of finance, maintain, and operate the design, construction and the long - asset or service to the private entity. term performance of assets. ✓ Public sector retains the right to step - in and hold Project Co to account. IL PWC 20 ✓ The amount of private sector involvement and degree of risk transfer will vary depending on the type of PPP. 20 Section 3 — PPP Basics Payment profile ✓ The PPP payment profile is different to the traditional procurement payment profile. 300 250 200 2 150 100 50 0 Illustrative PSC Cashflows 1 6 11 16 21 26 Year ■ PSC 300 250 200 612150 100 50 0 Illustrative PPP Cashflows 1 6 11 16 21 26 Year DUN ✓ PPP payments are on a `no service no fee' principle. ✓ PPP payments commence once the facilities are available for use (however recent trends are for an upfront capital contribution from Government). PWC 21 21 Section 3 — PPP Basics Performance payments PPP payments are at risk. If the facilities are not available by the due date, the PPP provider does not get paid during this period (i.e. it loses its payment). This puts pressure on the private sector to meet the agreed upon deadlines. Pay111r-11 tJ d1 C based 'upoll per 6i manse. If the services are not provided to the required standard, the PPP payments are `abated' i.e. reduced. ® The amount that is abated increases for repeat failures. If the facilities are not available, the private sector will not get paid. pwc 22 22 Section 3 — PPP Basics Fixed price contracts Construction ✓ The public sector obtains a fixed price for construction. ✓ This makes the private sector responsible for any costs overruns, but allows it to benefit if a project comes in under budget. Operation and maintenance ✓ The public sector also obtains a high degree of cost certainty in regards to the O &M contract period. ✓ O &M payments are typically fixed for the term of the arrangement, but subject to escalation provisions. ✓ There may also be market testing or repricing mechanisms. IL PWC 23 23 Section 3 — PPP Basics Handover conditions ✓ P3 provider typically has the responsibility to operate and maintain the infrastructure over a long term period. ✓ At the end of the term of the project agreement, the responsibility for operating and maintaining the infrastructure will be transferred back to the public sector. ✓ The condition in which the infrastructure is transferred is generally referred to as the `Asset Handover Condition'. The Asset Handover Conditions specify: • the condition that the infrastructure will be handed back in; • the design life requirement after the end of the contract; and • how the handover inspection will be carried out prior to handover. ✓ To ensure that the Handover Conditions are achieved, the public sector will be able to withhold a portion of the availability payment if the assets are not in the required condition. pwc 24 24 Section 3 — PPP Basics Change mechanisms ✓ P3 arrangements tend to be long -term in nature, typically in the 30 years range. ✓ It is therefore inevitable that some changes will occur that cannot be reasonably anticipated at the start of the arrangement. ✓ P3 contracts include "Change Mechanisms" to deal with unanticipated changes in the contract. ✓ The nature of the `Change Mechanisms' will vary depending upon the type and extent of the potential change, but these mechanisms are drafted to ensure: • an efficient implementation of the change, • that the public interest is protected; and • that the private sector has to demonstrate the VFM outcome of any change (as evidenced through the use of competitive procedures). Pwc 25 25 Section 4 - Key stages in P3 procurement PwC Section 4 — Key stages in P3 procurement Key stages in P3 procurement The P3 delivery process has the following key stages: Project Financial nancial an >ManageFntj Contr Planning Approvals RFQ RFP ommercia P3 process needs to be Transparent and Fair: • Establish clear rules and an objective process; • Appoint an independent fairness advisor to monitor the process; • Facilitate competition; • Demonstrate Value for Money (VFM); and • Ensure appropriate Governance. pwC 27 27 Section 4 — Key stages in P3 procurement Key stages in P3 procurement Project > Approvals RF Planning Establish business needs and objectives. Evaluate delivery options. ,'' F.ctnblicli bncP nrniPt-tc r-nctc LI IJ l {..l A.1111J 11 / 1.1 IJ V {../ 1 V 1 V V I.IJ V V IJ L U Assess market interest (initial market sounding). Conduct P3 screen and initial risk assessment. v" Identify, allocate and quantify project risks. Financial and Contract Commercial Management Close pwC 28 28 Section 4 — Key stages in P3 procurement Key stages in P3 procurement Financial and Contract Project Planning Approvals RFQ RFP Commercial Close Management Conduct VFM analysis. Assess project capital requirement against the affordability envelope. �P�TP��111 �11C1YlPCC ('aCP L V V t/ 1 V {J ILJ l.L IJ 111 t/ IJ IJ \/ 1.1 IJ V Prepare reports for approvals. Develop and update project schedules based on expected time required for approvals. pwC 29 29 Section 4 — Key stages in P3 procurement Key stages in P3 procurement Financial and Contract , Project Planning Approvals RFQ RFP Commercial Management Close > >� > ✓ Formally advise the market of the Project, communicate proposed timeframes and key project information. ✓ Public sector reserves the right to withdraw from the process at any time. ✓ Respondents from the private sector prepare and submit RF response. ✓ Public sector assesses submissions against specific selection criteria (experience, financial capacity, resources etc). ✓ Public sector typically shortlists three bidders to proceed to RFP stage. ✓ Debrief respondents not shortlisted. pwc 30 30 Section 4 — Key stages in P3 procurement Key stages in P3 procurement Financial and Contract , Project Planning Approvals REP Commercial llli> > Close Management v RFP issued to short listed bidders and includes key information on the Project (timelines, output specification, payment mechanism and performance requirements, contractual documentation, evaluation criteria allU pr oposal Jl:lled'111eJ). Bidders develop detailed proposals and arrange financing for the Project. 0 Commercial /confidential /meetings (CCM) during the RFP Public sector evaluates submitted proposals. Preferred bidder is recommended. _. pWC 31 31 Section 4 — Key stages in P3 procurement Key stages in P3 procurement Project Plannin A royals RF RFP Financial an Contract g pp Commercial Management Close Government enters into limited negotiations with the preferred bidder. Clarification of bidder's detailed proposals. V` Finnlivntinn of Pn -XTmPnt Vlpi-linnicm (PAJ) nnrl inr-nrnnrntincr flip finnnoinl & 1111.111LJ"%- -LV11 V1 1 {..L Y 111V111 lVlt %-,XxL11111J111 \1 lVll CLXX%.l L11V 11111.L11\/1{..11 solution in the Project Agreement. '` Negotiation and finalization of contractual arrangement. If unable to finalize the Project Agreements, Government reserves the right to proceed with an alternative bidder or to terminate the process. Financial close — signing of the Project Agreements. pwC 32 32 Section 4 — Key stages in P3 procurement Key stages in P3 procurement Financial and Contract Project Planning > Approvals RFQ > RFP > Commercial Close Management 1 ✓ The project company delivers the Project. ✓ In high -level terms there are three stages: • inn ctrl i �ti nn VVi1/J Ll I.IV LiV ll' • service delivery (operational) stage; and • contract expiry or termination stage. ✓ Public sector sets up team to monitor contract. OL pwc 33 33 Section 4 — Key stages in P3 procurement Key Success Factors ✓ Pro - active support at senior levels (project champions). ✓ Clear objectives and priorities. ✓ Early involvement of stakeholders, timely and open communications. ✓ Strong project leader with dedicated team for the project. ✓ Experienced advisors (internal/ external). ✓ Well prepared business case with robust and detailed analysis. ✓ Well defined but not overly prescriptive output specs. ✓ Reasonable allocation of risks. ✓ Realistic commercial proposition in a relatively stable market. ✓ Flexibility and openness of both parties. ✓ Fair and transparent procurement process. IL pwc 34 34 Section 4 — Key stages in P3 procurement Lessons learned ✓ Unrealistic cost expectations. ✓ Overly prescriptive or broad scope. ✓ Failure to meet legitimate interests of stakeholders. ✓ Failure to allocate the risks to the parties best able to manage them. ✓ Lack of consistency. ✓ Not addressing employee issues up- front. ✓ Financial market volatility and capacity. ✓ Lack of collaboration and integration between key stakeholders. pwc 35 35 Section 5 - Achieving Valuefor Money (VFM) PwC Section 5 — Achieving Value for Money (VFM) What is VFM? ✓ Achieving Value for Money (VFM) should be the key consideration at all stages of the P3 procurement process. ✓ What is VFM? • "A value for money (VFM) analysis refers to the process of developing and comparing the total project costs, expressed in dollars measured at the same point in time, related to the Traditional Project Delivery and Alternative Financing and Procurement. - Infrastructure Ontario • "VFM describes the benefits to the public expected to be realized through a particular procurement method. Quantitative value for money is achieved through lower cost of a particular procurement method, whereas qualitative value is achieved when a particular procurement method better supports the goals and objectives of a project without necessarily costing less." - Partnerships BC pwc 37 37 Section 5 — Achieving Value for Money (VFM) How is it measured? • Estimate the costs of a project scenario that would reasonably be undertaken by the public sector • Typically constructed during the Business Case stage and finalized before bids are received • Must be based on same level of performance as P3 option • Can be compared with: — Shadow Bid: Cost estimate of expected private sector bids, prior to bid submission — Actual Bids: Actual costs of P3 bids received from vendors • Compare PSC and P3 Option on a standardized basis • Projects compared: — Before bids are first received, and when bids are first received — Prior to financial close L PWC 38 38 Section 5 — Achieving Value for Money (VFM) VFM Concepts -the Public Sector Comparator (PSC) ✓ Based upon the traditional form of public sector procurement. ✓ Estimate of the full cost of delivering the project to the same standard as required by the private sector under P3 procurement. ✓ Includes: Raw Capital, Operating and Lifecycle costs (pre -risk adjustment) • Competitive Neutrality adjustments (included to remove any advantages or disadvantages that accrue to the Government e.g. taxation) • Transferred Risk (i.e. risks that would be transferred to the private sector under P3) • Retained Risk (i.e. risks borne by the public sector) = Risk Adjusted PSC IL pwc 39 39 Section 5 — Achieving Value for Money (VFM) VFM Concepts - Risk and the PSC ✓ Important stage in determining the value of the PSC. ✓ Identify and quantify material project risks. ✓ Allocate risks between those: • transferred to the Private Sector; and • retained by the Public Sector. ✓ VFM is maximized by the optimal allocation of risk between the public and private sectors: • each risk should be allocated to the party best able to manage it. pwc 40 40 Section 5 — Achieving Value for Money (VFM) VFM Concepts - Risk and the PSC L pwc "Risks should be allocated to the party best able to manage them" Shared Government Private sector should retain risks should manage risks that are inherently that are inherently governmental commercial • Inflation • Design, Construction, • Changes to scope • Regulatory Commissioning • Planning • Taxation • Operating and maintenance permission costs • Force • Latent defect Majeure • Operating performance (existing) • Technology obsolescence • Project financing • Latent defect (new) • Responsive repairs 41 41 Section 5 — Achieving Value for Money (VFM) VFM Concepts - Shadow Bid Model ✓ The Shadow Bid model is a proxy of the public sector's cost under P3 procurement. ✓ It includes estimates of the private sector's: • construction costs; • operating and maintenance costs; • taxation treatment; • debt cost; and • equity returns. ✓ It also includes retained costs and risks by the public sector (e.g. procurement costs). ✓ The private sector estimate for the Shadow Bid model is replaced with the private sector's bid as the procurement proceeds. pwc 42 42 Competitive Neutrality (A) Raw PSC (base costs) (C) Retained risk and costs (D) Private Payments (E) Retained risk and costs (F) Competitive Neutrality (A) Transferred risk (B) Raw PSC (base costs) (C) Retained risk and costs (D) Retained risk and costs (F) Section 5 — Achieving Value for Money (VFM) VFM Equation • Finance costs • Bid costs L Pwc 44 • Optimum risk allocation • Competition • Innovation • Minimum lifetime costs or "Whole asset life" benefits 44