PGW: Lease It, Don’t Sell It, Wise Men Say

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BY JOE SHAHEELI/ One major Philadelphia asset attractive to outside buyers willing to spend a billion dollars or more is the Philadelphia Gas Works, a city-owned utility. It’s also the easiest of city assets to place on the market. But before the Mayor and City Council jump on the possibility of doing so, they need to listen to the advice given by two men who have a rich experience in selling utilities.

Both have been on both sides of such sales and their advice may have gone unnoticed, since no Council Members attended their appearance at a seminar sponsored by the Center City District. Hosted by CCDC’s Paul Levy, the event was to discuss “monetizing public assets, what works and what doesn’t.” He brought in these two wise men, who came loaded with experience and advice.

ADVISING against outright sale of PGW were utility-sale experts Tom Lancelot and Dana R. Levenson, at panel on City owned utility sales hosted by Center City District.

First to address the group of Center City business people was Dana Levenson, CFO of the Massachusetts Dept. of Transportation with oversight of that Commonwealth’s general aviation, airports, highways and registry of motor vehicles. He also is in charge of MassDOT’s real-estate and infrastructure-development activities and its forays into public-private partnerships. Prior to that, he spent four years at the Royal Bank of Scotland as managing director in charge of the firm’s infrastructure banking business in the Americas.

Sharing the stage with him was Tom Lanclot, a partner of William Blair & Co., a Chicago-based investment-banking and asset-management firm where he leads the Infrastructure Investment Banking Group. He has played an active role in innovative P3 financial-advisory assignments and financing transactions for clients in the public, nonprofit and private sectors.

Also on the panel was Joseph P. McLaughlin, Jr., director of the Institute for Public Affairs and assistant dean for external affairs for Temple University’s College of Liberal Arts, who helped explain why public assets in this city had a difficult road to go before becoming market-eligible. He said PGW was the only one totally within the control of city government, making it market-attractive.

Levenson and Lanclot advised this city government not to sell outright its gas utility. They also cautioned against using the money from any transaction for operating funds, with the simple statement, “Here today, gone tomorrow,” urging, instead, plowing those net sales dollars into other infrastructure projects and improvements. Putting up the PGW for sale, both agreed, would attract many bidders.

Pension and sovereign-wealth funds and other institutional investors are making significant allocations for infrastructure. There is a particularly strong demand for US infrastructure assets due to their stable and predictable cash flows. A typical term is likely 30 to 50 years to create sufficient return for investors commensurate with the risk undertaken.

Instead of selling PGW outright, both urge the Mayor and City Council to explore and develop a public-private partnership, a “P3”. It can be tailored to meet the City’s financial, policy and operational goals. It is not an outright sale of a public asset, since the City maintains ownership of the asset and sets operational, maintenance and safety standards.

JOSEPH P. McLAUGHLIN, JR., director of Temple’s Institute for Public Affairs and assistant dean for external affairs, contributed background information for the panel.

The infrastructure asset’s revenues are monetized by the private partner. The public agency receives an upfront payment, annuities, and/or a revenue-sharing arrangement. The private partner operates and maintains the asset and assumes most business, financial and capital risks. These are often structured as a long-term “revenue concession” and/or lease. The City pays the private partner preestablished, rent-like “availability payments” based upon the availability of the assets to the public. This creates budget certainty for the City over the life of the contract.

The private partner designs, builds (or rehabilitates), finances, operates and maintains the asset, based on strict delivery and performance requirements. The City’s payments may be reduced for underperformance or bonuses for exceptional performance.

Under a P3 agreement, the City can control user fees, design and construction standards, operating, maintenance and safety standards and other key parameters. The City also can control user-fee levels. The P3 agreement may include revenue-sharing or other arrangements to avoid financial windfalls to the private partner. The P3 agreement imposes detailed operating, maintenance and safety standards and capital-improvement requirements and it requires thorough management and oversight by the City. What is key is the fact, should problems arise with faulty performances by the private entity, the City may reclaim the asset without any payment to the private partner.

The benefits of a P3 approach are many. Private-sector financing opens the door to equity, longer-term debt and a wide array of financing tools. It can lead to savings in design and construction, as well as operations and maintenance. If a private firm assumes long-term risk allocation, the City can better concentrate on its core functions. It can access the best operational expertise and innovative technology. Finally, the long-term contract provides tax benefits to the private partner that can flow through as savings to the City.

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