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<title>November 2009: From Shovel Ready Projects to Sustainable Partnerships</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" width="375" height="75"><p align="left"><b><u><br>
</u></b><u><b>November 2009</b></u></p>
<p class="MsoTitle" style="margin-bottom: .0001pt" align="center">
<span style="font-variant: small-caps"><font size="6">From Shovel Ready
Projects <br>
to Sustainable Partnerships</font></span></p>
<p><strong>By Roger Feldman --
</strong><b>Andrews Kurth, LLP</b><strong><br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine
Magazine: 2009/</em>11/22)</font></p>
<div>
<p class="style11" style="margin-bottom: 0pt">
</p>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black">The most important of all the
American Recovery and Reinvestment Act of 2009 (the “Stimulus Act” or “ARRA”)
initiatives could be the reformulation of the DoE Renewable Energy Loan
Guarantee Program. This could be true not because of what facilities
actually commence construction before the September 30, 2011, cut off
established by ARRA, but because it could be the precursor of several
new forms of public-private partnerships (“P3”) for
alternative/renewable energy and for cleantech. While difficult
economic situations and their legislative fixes come and go, innovative
ways of doing business take root and proliferate.<br>
</span></p>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black">Several factors point to this
possible conclusion: </span></p>
<p class="MsoListBullet" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="font-family: Symbol; color: black"><br>
�<span style="font:7.0pt "Times New Roman"">
</span></span><span lang="X-NONE" style="color:black">The scope of the
definition of renewable energy is comprehensive, and overlaps some of
the categories eligible for tax exempt finance and/or for the incentives
(such as the grant program for up-front monetization of renewable energy
tax credits which otherwise would have to be earned via production over
time).</span></p>
<p class="MsoListBullet" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="font-family: Symbol; color: black"><br>
�<span style="font:7.0pt "Times New Roman"">
</span></span><span lang="X-NONE" style="color:black">There are respects
in which the Federal government either is “privatizing” its own loan
reviewing activities or devolving such privatization to eligible state
development finance organizations, in either case creating a broader
range for private participation in public-private partnerships.</span></p>
<p class="MsoListBullet" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="font-family: Symbol; color: black"><br>
�<span style="font:7.0pt "Times New Roman"">
</span></span><span lang="X-NONE" style="color:black">A model is
established for creation of a separate entity, outside of the Department
of Energy, which can use a variety of public credit support mechanisms
to assist privately sponsored/privately structured projects--in the
energy efficiency as well as the energy production spheres. It is a
model which the Senate is seeking to execute.</span></p>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black"><br>
How can all of this be attributed to one section (� 1705) of the ARRA?
That statute basically adapted a notably unsuccessful Federal program to
credit-enhance project financing of innovative new technology proposals
already substantially market-worthy. ARRA refocused the program on
commercially feasible, “shovel ready,” renewable energy finance projects
that could be sources of near term job creation.</span></p>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black"><br>
It did so in conjunction with other provisions of ARRA designed to
facilitate new commingling of certain types of renewable energy
incentives. The ban against tax exempt treatment of interest on debt on
Federally-guaranteed projects remains. But the statute did leave open
the right to combine U.S. Treasury “grants,” <i>i.e.</i>, monetization
of tax credit incentives, for use with projects issuing public
guaranteed debt. While effectively mandating private equity
contributions at a minimum of 20% of project costs, it did not preclude
utilizing public assistance from state or local entities to reduce
overall debt requirements. There are no restrictions on projects whose
underlying credit support is derived from contracts or other
arrangements with public entities. Effectively up to 64% of project
debt can be Federally guaranteed.</span></p>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black"><br>
Some of the loan guarantee program’s specifics point in the direction of
a wider definition of “renewable energy” at least on the energy
production side. While energy efficiency and conservation are not
covered by the statutory definition, included as
loan-guarantee-financeable were several typed of projects which produce
thermal energy, rather than electric energy. As a consequence thereby,
included in the loan guarantee eligible definition are many technologies
which can serve the needs of different types of public jurisdictions,
such as district heating and cooling, solid waste combustion, waste
gasification, and cogeneration. (These activities are also, in turn,
eligible for other Federal incentives under the expansive energy
efficiency provisions of the Stimulus Act (many of which are implemented
at the state and local level). In effect, the range of public-private
cooperation in the field of “energy” was broadened in a way that may be
expected to be carried forward by future programs and developers.</span></p>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black"><br>
In addition, building on the framework of the prior statute--but looking
outward to the practices of other Federal agencies’ rule-making--with
grudging assistance from the Office of Management & Budget--the DoE
approved a new type of implementation mechanism for the Loan Guarantee
Program: the Financial Institutions Partnership Program (“FIPP”). FIPP
is aimed at streamlining the old, arduous, fully
governmentally-administered, loan guarantee program. Its specific
innovation (for DoE, through not for certain other Federal agencies) is
the delegation to selected financial institutions, which meet the DoE
standards for review capability, the responsibility of vetting qualified
projects and presenting them to the DoE. While the carrot to the
sponsoring institutions is obviously the fees from private clients,
there is an important requirement as well. To be a qualified lender, a
bank or other institution must be prepared to have “skin in the game”,
<i>i.e</i>., to hold a portion of the debt issued for the project which
was not guaranteed by the Federal government. There is no incremental
fee charged for the Federal loan guarantees. DoE loan guarantees are
not subordinate to any other loan guarantees. The intention clearly is
to assure that qualified lenders do not become merely deal conveyor
belts, with no surviving interest in the projects which they champion.</span></p>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black"><br>
<br>
Under the first FIPP solicitation, would-be qualified lenders must
appear at the Federal government’s doorstep with a fully structured
project financing from a developer in hand, with all of the pieces
assembled except the applied-for Federal guarantee for a portion of the
debt, which would, of course, serve to materially lower the price of
project debt. The lender’s service to the Federal government and to
itself is performance of the “due diligence” which goes into the
packaging of marketable deals. (This is a different model than either
the privatization concessions or public-private partnerships which have
characterized, for example, the municipal services area.) In effect,
FIPP re-arranges the risk allocation of a P3 in a different manner
between government-financial institution-user than had previously been
the case.</span></p>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black">A second form implementation of
the loan guarantee program has recently been outlined in DoE’s Request
for Information (“RFI”) for “Financial Institutions Partnering Program:
Partnerships With Public and Non-Profit Development Finance Organization
Co-Lending Opportunities” (so-called “DFOs”). The RFI was designed to
identify which DFOs may have the ability to perform the functions that
qualified private financial institutions under FIPP can, and also have
the financial strength to retain a portion of the non‑Federally
guaranteed debt (<i>i.e.</i>, at least 5% of project costs for the life
of the loan) for their own accounts. </span></p>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black"><br>
It is important to recognize the proposed characteristics of
participating DFOs which the regulations contemplate. The DoE welcomes
DFOs proposing innovative and collaborative lending mechanisms that
utilize regional, local, and other partnerships. </span></p>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black"><br>
The DFOs must already be legally empowered to invest public capital or
funds and/or guarantee third party investment. They cannot be debt and
equity providers in the same transaction. DFO means of obtaining funds
for injection into projects is more circumscribed. Investment of
project financed type conduit debt is limited to those DFOs able to show
a track record of low defaults on other types of analogous conduit issue
fields. Overall, DFOs may not simply be in the business of putting
their own or an affiliated governmental or non-profit’s capital at
risk. Additionally, DFOs may not be just “conduit financing
institutions”; those that are principally in the grant or equity
investment aspects of financing are discouraged from being investors.
For DFOs, it is primarily corporate, full recourse rather than project
financing, which is DoE’s targeted sweet spot. They may also, however,
take advantage in structuring projects of available state and assistance
programs, or (if they are so empowered) apply their moral obligation
backstop to debt issued in conjunction with projects which are not
Federally guaranteed. </span></p>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black"><br>
The information from sponsors to be elicited by the DFO, and the
documentation developed for packages submitted to the DoE, are to be of
equivalent quality to that received for negotiated project financings or
other forms of commercial financing. DoE must find that DFOs meet
institutional performance standards imposed by FIPP on third party
lenders. All of DoE’s criteria for potential DFOs are at once broad in
potential scope of DFO makeup, stringent in identification of DFO
characteristics, and extremely demanding in their performance level
requirements.</span></p>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black"><br>
It is more or less novel for the Federal government to reach out to the
states to facilitate (even realize fees on) a program designed for the
development of projects for private parties. It is creative to seek to
synthesize project developments with the local incentives as well. It
represents, in short, an expanded model for public-private partnerships
based on investment, while not foreclosing service arrangements with
public or not-for-profit facilities.</span></p>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black"><br>
What is being done in the energy loan guarantee area represents
potential intellectual capital for design of future P3s. But the
institutional superstructure created thereby potentially remains as
merely a temporary edifice erected in the Great Recession and receding
from sight as the perceived linkage of renewable energy and job creation
possibly fades into night on September 30, 2011.</span></p>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black"><br>
But that is not necessarily so. Currently proposed as part of the
Senate’s version of an energy bill is the concept of an established
free-standing “CEDA” (Clean Energy Deployment Administration) operated
independently of the Department of Energy. Broadly speaking, CEDA would
be able to extend loan guarantees on an on-going basis, and to build
upon the innovation of the Department of Energy Loan Guarantee Program.
It would draw on the lessons learned by the Overseas Private Investment
Corporation and the Export-Import Bank, with respect to assisted project
and corporate financing in tandem with private institutions. While it
has not, up until now, been contemplated that CEDA could guarantee tax
exempt debt issued for otherwise eligible energy facilities, that idea
is being given some play. Far from being a relic of ARRA, CEDA could
prove to be the new launching pad for public-private partnerships in the
energy field using lessons learned in the ARRA loan guarantee program.</span></p>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black"><br>
In sum, the DoE Loan Guarantee Program may prove to point the way to
different and more effective form of public-private partnerships, for
the following reasons:</span></p>
<ul>
<li>
<p class="MsoListBullet2" style="text-indent: -.2in; margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black">Encompassing energy sectoral
definitions--with overlaps with other non-energy activities;</span></li>
<li>
<p class="MsoListBullet2" style="text-indent: -.2in; margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black">Involving roles for
financial institutions in a manner consistent with sound economics;</span></li>
<li>
<p class="MsoListBullet2" style="text-indent: -.2in; margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black">Involvement of Federal-state
collaboration with the private sector;</span></li>
<li>
<p class="MsoListBullet2" style="text-indent: -.2in; margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black">Potential linkage of
governmentally assisted P3s with government buying power;</span></li>
<li>
<p class="MsoListBullet2" style="text-indent: -.2in; margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black">Consistency and
compatibility with other available tax and incentives;</span></li>
<li>
<p class="MsoListBullet2" style="text-indent: -.2in; margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black">Resulting innovation in the
provision of public services.</span></li>
</ul>
<p class="BodyText05SS" style="margin-top: 0; margin-bottom: 0">
<span lang="X-NONE" style="color:black">In sum, moving the shovel ready
present projects to a sustainable model for public-private partnerships.</span></p>
<p class="MsoNormal"><span lang="X-NONE" style="color:black">
</span></p>
<p class="BodyText05SS"><span lang="X-NONE" style="color:black"> </span></p>
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text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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