Leasing Versus Privatization and Public Private Partnerships

National Standard Nigeria Infrastructure - July 29 2015 - LeasinThe term Public Private Partnership has become widely used globally and has many different meanings and understanding depending upon who you ask their opinion. The Nigeria government has recently began to Privatize Nigeria’s power industry as an example.

A Public Private Partnership is a commercial relationship between a private sector company and a government agency for the purpose of completing a project that will serve the public. Public-private partnerships can be used to finance, build and operate projects such as public transportation networks, parks and convention centers. Financing a project through a public-private partnership can allow a project to be completed sooner or make it a possibility in the first place. Public Private Partnerships often use private sector investments to finance a public project when sufficient public funding is not available.

an-2-CopyA background and statistics of Asset and Project Leasing for government real estate and infrastructure projects globally will assist to educate us on the past success and impact of leasing even as an option to loans and other forms of financing.

• Over the past twenty years more than 1,400 variations of lease and privately finance oriented government sponsored deals were created which represents an estimated capital value of approximately $500 billion in European Union countries alone.
• The U.S. Federal Government currently leases approximately 7,100 assets worldwide that are privately owned and privately financed including FBI Buildings, Social Security Offices, government hospitals, various government buildings, courthouses and Post Office Buildings generally on 20 year leases to the Federal government. This does not include State or local government leases which are also thousands of additional leases.
• In Canada, the Federal Government as well as Provincial government utilize a privately developed, privately financed and contracted or leased model for a large percentage of large government facilities as well as universities and government ran hospitals. Many of these projects are very large with project costs being several hundred million dollars or even over one billion in some cases.
Concession/PPP/Privatization Model
• Public Agencies dislike the PPP/Concession Model due to loss of “control”
• Primary driver for PPP is to obtain “Private Capital” rather than Public Financing
• Most Public Agencies “Think” PPP financing is “Expensive”

an-3-CopyLease Model

• Build to Suit lease “allows” Public Agency to retain 100% control
• 100% of Project Costs can be funded with totally Private Capital
• Build to Suit lease capital competes with bond rates; half that of Concession capital costs

We many times hear comments like, “But we don’t want to lease we want to own the property or asset”. For decades, government agencies have been misinformed as to the future value of public sector assets. Most believe that these assets appreciate in value over time, just as commercial properties do.

However, this is a grave mistake and a false truth! The majority of public assets actually “depreciate” in value as opposed to appreciating. Ultimately at the end of the asset’s economic life most become “liabilities” rather than assets to the municipality. This means that after the useful life of the property is over the property or asset must normally be torn down and rebuilt or undergo a very expensive refurbishment. As a Tenant, this liability is not a responsibility and falls to the Landlord. This is likely one of the main reasons the U.S. Federal Government leases over 7,100 properties and assets as opposed to owning. If ownership is still desired, the transaction can be structured to allow asset ownership to revert back to the municipality upon lease maturity under a finance lease or installment agreement or more commonly called a lease-purchase agreement.
Sample Types of Projects Financed with Lease Financing
• Administration or Municipal Buildings; courthouses, correctional facilities, city halls, community centers and others
• Convention Centers or Tourism Related Developments
• Sporting Venues
•Hospitals and Healthcare Facilities (profit and non-profit)
•Economic Development Focused Initiatives that involve real estate or other asset development needs
• Airports and Public Transportation
• Infrastructure, Public Works and Utilities; energy, water, sewer etc.
• Public Housing
• Universities and K-12
• Roads, pipelines and infrastructure
• Commercial Real Estate Buildings

Other Lease Benefits
• Many bonds require designated revenue streams to support bond funding. Utilizing the Public Private Investment model it’s not necessary to increase taxes or pledge additional revenue streams.
• This frees up the governmental entity to use their bonding capacity for additional projects and needs. Total debt may be decreased by engaging in this program compared to bond financing, which may in turn increase their credit rating.
• Expanded funding. Usually a governmental entity is limited to their bonding capacity for project size.
• Payments are made from the operating budget vs. a capital budget outlay.

Global Sovereign & Infrastructure Investors
National Standard develops and finances infrastructure and real estate assets by bridging the gap between the public authorities’ financing requirements and their need to deliver long-term infrastructure assets and services, with the expertise and efficiencies provided by private sector developers and private capital

A strategic player in global infrastructure markets and sovereign based investing, National Standard partners with sovereign, sub-sovereign and local governments, private developers and like-minded corporations to help design infrastructure development and capital programs.
Russell Duke is Chairman & Managing Principal at National Standard Finance, LLC and is based in Atlanta, Georgia. Mr. Duke can be reached at RDuke@NatStandard.com. www.NatStandard.com

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