CREATIVE SOLUTIONS TO PPP RISKS Presented by: Jeremy Terndrup

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CREATIVE SOLUTIONS TO PPP RISKSPresented
byJeremy Terndrup Vyacheslav Andriyko

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What is PPP?
Public Private Partnership (PPP) is an
alternative to standard public sector procurement
of capital assets by up-front payment. PPP can
be described as, An agreement between a Public
and Private Entity in which a Private Entity
delivers goods or services under the Public
Entities Regulatory Authority for a financial
return. A typical PPP structure involves the
creation of a single stand-alone company/business
financed and operated by the private sector. The
purpose is to create the asset and then deliver
the service to the public sector in return for
payment equal to the service levels provided.
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New concept?

• UK first to develop the PFI concept as is known
  today, but..
• the concept of a working partnership between the
  private sector and public bodies is well
  established. Compagnie Generale des Eaux,
  launched in 1853 and the founders of the Veoila
  Environment, was contracted to supply water to
  the city of Lyons. The company was awarded a 50
  year contract to supply water to Paris in 1860.

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PPP Model an example
The consortium company joint venture model
Government Customer
Operation
Finance
Construction investor
Services delivered in return for annual charge
Equity and sub debt finance
Facilities mgmt (FM) investor
Procuring Authority/ Public Agency, and ongoing
users of public services
Special Purpose Vehicle
Unitary charge payment
3rd party equity investor
Carried out under contract
Debt finance
Debt investor
Construction contractor
Facilities mgmt (FM) operator
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Why is PPP needed?
There are 2 key objectives in commissioning a PPP
Project

• Maximise value for money (VFM) of providing
  service over a long timescale of 20-30 years or
  more having taken account of all the risks.
  Maximising efficiency and innovation is key to
  achieving VFM.
• Enable public sector to procure services in a
  manner consistent with economic policy in
  particular where public sources of funding are
  lacking/in short supply.

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Benefits of PPP

• Relieve Public sector cash constraints
• PPP allows public and private sectors to
  concentrate on activities that best suit their
  respective skills
• Procurement efficiency
• Improved accountability
• Risk management
• Enhance quality and quantity of infrastructure

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UK PPP/PFI experience

• The Private Finance Initiative (PFI) was launched
  by UK Treasury in 1992
• Applied to a wide range of projects (road, rail,
  tram, rail, airport, hospital, IT, telecoms,
  water, sewage, military, prisons etc)
• Now accounts for 10-15 of public services budget
• 630 UK PFI projects
• 40 billion investment
• UK model is being applied (in modified forms)
  throughout Europe

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PPP/PFI Credentials some examples

• Home Office HQ PFI project in the UK - value
  311 million
• Sydney Harbour Tunnel project first major
  transport PFI in Australia
• Cyprus Airports BOT project scheme closed 20
  years after first mooted, reserve bidder stepped
  in
• A41 France motorway PPP project 55 year tenor
  worth 941million
• Port of Miami Tunnel (POMT) and access
  improvement PPP project value 1 billion

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Responsibility
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The Insurance Schedule and Insuring Clauses
within the Concession and Loan Agreements

• The Minimum Insurance Requirement Schedule within
  Concession and Loan Agreements details the
  required insurances to be procured during the
  phases of the project e.g. construction and
  operational
• The Schedule defines the operative cover, policy
  limits, levels of deductible, principal
  extensions and exclusions based on prevailing
  insurance market conditions
• The Schedule contains a Broker Letter of
  Undertaking (BLU) providing undertakings on
  behalf of the placing Broker
• The insurance clauses define the regime and
  mechanism under which the required insurances
  operate for the Project period

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Key PPP Project Insurances

• Insurance requirements on a co-insured basis
  during the construction phase

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Key PPP Project Insurances (contd)

• Insurance requirements on a co-insured basis
  during operational phase

• Operational Period
• Property Damage All Risks
• Property Damage All Risks Terrorism
• Business Interruption
• Business Interruption Terrorism
• Third Party Public and Products Liability
• Statutory Insurances (Workers Compensation/EL -
  not co-insured)
• Pollution Legal Liability
• Auto Liability
• Depending on the nature of the project, there may
  be a requirement for
• specialist project related insurances e.g.
  Aviation, MARINE, Professional
• Liability (operational)

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Why are these insurances required?

• They protect the Public Agency, SPV, Lenders and
  other parties with an insurable interest in
  respect of
• physical loss or damage to Project
  property/assets
• earnings and additional costs of the SPV in
  respect of the above
• incurred Third Party Legal Liabilities (bodily
  injury and property damage)
• Without insurance the SPV could not accept the
  financial consequences of such risk events
  occurring

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Role of Insurance

• Means of Risk Transfer SPV is constrained to a
  much greater degree in terms of manner in which
  it can adopt its business to prevailing risk
  environment. Insurance is a tool used for the
  transfer of risk.
• Coverage will generally be bought on a wide basis
  with low deductibles to ensure minimum risk is
  retained at SPV level.
• Project Insurances relied upon by main project
  related parties as a key mechanism for the
  management of risk.

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Why is the insurance regime under PPP different
to standard procurement?

• The Public Agency, Lenders and others with an
  insurable interest sit inside the insurance
  mechanism as a co-insured taking direct benefit
  for their separate insurable interest
• Insurances to be procured on a project specific
  basis (in the main) and not derived from parent
  company programme.
• Public Agency guidelines and Lender requirements
  seek to ensure specific conditions are in place
  defining the duties of the parties to the Project
  in terms of the operation of the required
  insurances

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What are the key conditions of a PPP insurance
regime?

• Non vitiation protection (Multiple Insured
  Clause)
• Waiver of subrogation (Multiple Insured Clause)
• Separate policy
• Waiver of disclosure of material information
• No obligation for premium payment
• Additional insured
• Control of claim monies (Loss Payee)
• Notification of change in cover
• Notice of cancellation and subsequent step in
  rights of various parties to the Project

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PPP Insurances considerations solutions

• Relief Events and Force Majeure
• Premium increases who bears the risk?
• Insurance market capacity and market participants
• Uninsurability
• Excesses/Deductibles who pays?
• Bid costs funding bid process sunk cost,
  which can amount to million per project
• Meeting bid/tender requirements - what level of
  information is required insurance proposals
  must remain fluid and negotiable until final
  design and construction timetable is known
• Cost of insurance provision for cost of
  insurance in the Financial Model prevailing
  market cost contingency amounts

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PPP Insurances considerations solutions

• Phased completion timetable
• Overlap of ALOP/BI
• Pre-existing property
• LAD interface with ALOP
• Latent Defects
• Environmental/Contamination issues
• Contractors plant and equipment
• Terrorism risk
• Marine/Transit

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PPP Insurances considerations solutions

• Premiums Who bears the risk?
• Firm Pricing Is it achievable?
• Alternatives
• Cap and Collar premium movement mechanism
• Firm Price X years RPIX thereafter
• Benchmarking annual pass through cost
• Public Agency Related Claims increasing premiums.
  Who bears this risk how is it stipulated within
  the Concession Agreement?

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PPP Insurances considerations solutions

• Insurance Market Capacity
• Size and nature of risk exposures
• Market security issues
• Importance of quality risk data
• Number of Market participants

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PPP Insurances considerations solutions

• Uninsurability
• Uninsurability
• Definition of trigger of Uninsurability what is
  the test?
• What happens to the risk if it becomes
  uninsurable (Termination/Public Agency insurer
  of last resort)

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PPP Insurances considerations solutions

• Deductibles Who pays?
• Public Agency accepts no liability?
• Public Agency liability for Public Agency default
  and/or negligence only (Public Agency Related
  Claims)
• Must link to general Indemnity provisions

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What does this mean for the project insurances?

• Contractor/Lender uncertainty over the risk of
  insurance cost and availability
• Fear of the unknown from insurers on contractual
  requirements of PPP
• No established insurance market experience of
  some risk exposures through PPP contracts
• Unpredictable insurance market cycles
• Sector specific claims impacting on competitive
  terms and also cost provision in Financial Model
• Short term underwriting stance for both cover
  provision and pricing

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PPP Project Insurances working examples

• Project Insurance Package making the package
  fit with the contractual obligations and the
  financial model to the Lenders and Government
  Agency satisfaction
• Structure of Project Insurance Package where
  project affordability is an issue
• Covering off unidentified risks through an
  insurance solution to ensure bankability of
  project
• Utilisation of premium efficiencies via Annual
  Insurance Programmes

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An Introduction to PPP

• Questions?