PUBLIC PRIVATE PARTNERSHIPS PPP The Advantages

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PUBLIC - PRIVATE PARTNERSHIPS PPPThe
Advantages Limitations
January 2005 UPU, Berne
T.M.Blaiklock Tel [phone] e-mail
tmblaiklock_at_aol.com
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Investment Projects in Public Services

• OPTIONS for Government
• Implement a project conventionally, funded
  ex-budget or with loans against Govt. guarantee
• OR
• Implement project as a PPP (or PFI).
• Note
• PPP provision of a public service by the
  private sector
• PFI capital investment by private sector for
  public service provision

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What is a PPP?

• The Public Sector (i.e. Government)
• - identifies the demand for a public service
• - defines the service outputs
• - agrees long-term concession (franchise) for
  the service
• - payment made against performance measures
• - imposes regulatory regime
• The Private Sector
• - provides service
• - design, builds, finances, operates and
  maintains the service and
  the
  assets
• - operates within regulated environment
• i.e. public interest requirements

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PPP in Public Services
Benefits
Constraints

• off-balance sheet (?)
• introduces private sector capital
• introduces private sector practices
  efficiencies
• promotes competitive markets
• facilitates innovation

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On or Off Balance Sheet?
PPP is Off Balance Sheet if (a)
construction/completion risk carried by PPP
concessionaire AND (b) either demand or
availability risk carried by PPP
concessionaire. ref. EU Decision for Balance
Sheet Treatment of PPPs Feb 2004 Note
PPPs can create contingent liabilities for
purchaser of services
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ELEMENTS OF PROJECT FUNDING
At Risk
Equity Debt
Typical Debt/Equity Ratios
Hotels property 50/50 Industrial projects
70/30 Infrastructure power 80/20 PPPs
90/10
No Risk

• Grants and subventions

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SOURCES OF FUNDS PPPs
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PPP INVESTMENT CRITERIA

• IRR / Equity IRR
• Investment Period

At Risk
Equity Debt
No Risk

• Grants and subventions

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SOURCES OF FUNDS PPPs
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Question against what security are loans
provided?Answer
SECURITY FOR LENDERS

• sovereign or government risk
• corporate risk
• cash-flows
• limited / non-recourse
• Project Financing
• PPP Concessions

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History of PPPs
UK, Europe Rest of World excl. USA
Cash-Flow / Bank, ECA IFI Loans - - - - - - -
- Bond Issues
Govt. Corp. Gtees
Private Co.s - - - - - - - - - Privatisations - -
- - - - -Services - - - - - - - -
North Sea Oil
Minerals Nat. Resources
Power Telecoms Infrastructure Public
Services

PFI
PPP
U.S.A.
- - - - - - - - - - - - - - - - - - Industrial
Revenue Bonds - - - -- - - - - Comm. Bk. Loans--
Municipalities Govt. Agencies
Private Corporations, PICs - - - - - - - - - - -
- - - - - - - - - - - - - - - - -
Turnpikes Power Oil/gas Pipelines Airports,
Water- - - - - - - - - - -
PPP
2000
1990
1980
1970
1960
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FUNDING STRUCTURE PPP
Regulatory Regime.

Contractor
Operator Maintenance
Purchasers
Sales Contract.
Revenues
Construction Contract
O M Contract
O M Payments(1).
Supply Contract
Escrow Acct.
Supplier raw materials fuel
PROJECT COMPANY Concessionaire
Surplus(3)
Debt Service Payments (2)
Share Subscription Agreement
Loan Aggts.
Dividends
Concession Aggt. e.g. PPP
Lenders ECAs IFIs banks (Inter-credit
. Aggt.)
3rd Party Gtees.
Investors
The Engineer
GOVERNMENT Purchaser of Public Service
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PPP AGREEMENTS

• 1 Implementation Agreement.
• 2 Concession Agreement
• 3 Construction Contract
• 4 Operations Contract
• 5 Maintenance Contract
• 6 Raw Materials Supply Contract
• 7 Sales Purchase Contract
• 8 Special-Purpose Company Documents
• 9 Share Subscription Contracts
• 10 Loan Agreements
• 11 Inter-creditor Agreement
• 12 Escrow Account / Trustee Arrangements
• 13 Insurance
• 14 Licences Permits Bills Decrees

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PPP INVESTMENT CRITERIA

• IRR / Equity IRR
• Investment Period

At Risk
Equity Debt

No Risk

• Cover Ratios
• Risk Analysis

• Grants and subventions

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Project Finance House of Risk
Construction Contract
Permits Licences Bills Decrees
Insurance
Concession Implementation Aggt.
Mortar Risk
Sales Contract
O M Contract
Inter- creditor Escrow Aggts.
Supply Contract
Share- holders Aggt.
SPCo Docs
Loan Aggts.
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PPP RISK MATRIX
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PPP LENDERS CRITERIA
Debt Service Cover Ratio periodic Free
Cash Flow
Fixed Charges
Free Cash Flow Net Operating
Profit plus depreciation less
increase in working capital less
incremental cap. expenditure less
tax Fixed Charges loan principal
interest payts. plus mandatory dividends,
lease payts.
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PPP v. Conventional Project Funding?
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CONVENTIONAL FUNDING STRUCTURE (1)PAID FROM
GOVERNMENT BUDGET
Contractor or Supplier

EPC Contract
PURCHASER Govt. Agency
BUDGET FUNDS
Govt.
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CONVENTIONAL FUNDING STRUCTURE (2)GOVERNMENT
GUARANTEE
Contractor or Supplier

EPC Contract
PURCHASER Govt. Agency
Equity Grant / Subvention
Loan Aggts.
Lenders ECAs IFIs banks (Inter-credit.
Aggt.)
The Engineer
Govt.
Govt. Gtee
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Cost of Conventional Project Purchase

• METHODOLOGY
• 1 Prepare a Public Sector Comparator PSC
• 2 Undertake a Value for Money VFM
  assessment

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Cost of Conventional Project Purchase

• Methodology for PSC
• 1 Base Cost estimates (NB. full life cycle)
• 2 Concept of Optimism Bias
• 3 Risk assessment allocation
• NB. subjectivity of risk
• 4 Value Retained Risks
• 5 Value Transferable Risks

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Project Cash-Flows
Revenues less Opcosts
240
205
Value
180
200
110
100
2004 today
2006
2005
0
Time
2004 Today
2005
2007
2008
2009
2010
- 100
Capital Costs
(120)
(90)
- 200
(180)
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PSC v. PPP
139.05
125.10
Optimism Bias 39.82
NPV Cost of Service Payments 120.00
Cost NPV _at_ 3.5
Option A is better than PSC
NPV Base Costs 94.13
Retained Risk 5.10
Retained Risk 5.10
PSC
PPP Option A
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PSC v. PPPValue for Money
1 evaluate PPP bids versus PSC 2 identify
material factors not included in PSC
e.g.- - wider cost savings
efficiencies - innovation - technology
transfer - quality of service delivery -
wider economic social benefits dis-benefits
(e.g. pension
transfer issues)
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The PPP Bid Process
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THE PPP PROJECT PROCESS
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THE PROJECT PROCESS

Time
Phases
PPP
Govt.
Pre-Qualification
2-3mth (2 mth)
3-6 mth (3 mth)
Tendering
3 mth (3 mth)
Negotiations
Formation of SPC Complete Financial
Aggts.
3-9 mth (3 mth)
Financial Close
3-6 mth (2 mth)
Total 14-27mth (13 mth)
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PPPsIssues Arising

• employment issues transfer of staff to the
  PPP option
• basis of Public Sector Comparator (PSC) and
  Value for Money (VFM)
• e.g. discount rate to be use the assessment and
  allocation of risk
• common contractual terms and documents
• windfall gains from re-financing the nature
  of the Partnership
• short-term perspective of investors secondary
  equity
• contingent liability of Govt. contractual
  payments
• EU procurement rules conflicts with realistic
  negotiation process

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PPPsIssues Arising

• lack of skills in utility operations original
  investors sell-off
• high up-front bidding costs for PPP
  concessions.
• Impact of financial strength of bidders
• skills shortage in sponsor Govt. departments
  and agencies.
• independence of financial advisors and
  conflicts of interest
• public interest companies safety v.
  profits (transport)
• complexity of PPP are the costs justifiable?
• Govt. life cycle shorter than project maturity
  of PPPs

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PPP in Public Services
Benefits
Constraints

• off-balance sheet
• introduces private sector capital
• introduces private sector practices
  efficiencies
• promotes competitive markets
• facilitates innovation

• complex structure documents
• time-consuming to arrange
• high up-front costs
• demands significant senior staff attention
• project choice important
• PSC methods need refining
• difficult to resolve when in default
• needs legal framework
• corporate governance (?)

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USEFUL SOURCES OF INFORMATION

• www.hm-treasury.gov.uk
• www.dft.gov.uk
• www.nao.gov.uk
• www.scotland.gov.uk
• www.parliament.uk
• www.partnershipsuk.org.uk
• www.europa.eu.int
• www.worldbank.org
• www.ebrd.org
• www.ipfa.org
• www.partnerships.vic.gov.au
• _________
• PFI Report IFR Project Finance Intl.
• Euromoney Project Finance Infrastructure Journal

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Some PPP Applications
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TYPES OF PUBLIC SERVICE PROJECT

• Power Stations thermal nuclear hydro CHP
  wind.
• Mass Transit metros LRTs bus-ways.
• Road, Rail Bridges toll-roads.
• Water Industry irrigation desalination
  clean/dirty water.
• Public Services offices school buildings
  hospitals prisons law courts
• ___________________
• Air Transport airports ATC IT systems.
• Ports container ports bulk handling.
• Oil Gas pipelines refineries facilities.
• Petrochemicals agro-industries.

Regulated PPPs
Unregulated non-PPP
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UK PPPs Sectors

• Health 11
• Transport 6
• Defence 4
• Water Waste Water 6
• Accommodation Police 4 )
• Accommodation Education 21 )
• Accommodation Health 17 )
• Accommodation Other 11 )
• IT Education 1
• IT health 3
• IT - Other 12
• Prisons 4
• 100
• Total Value Euro 50 billion

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Source Infrastructure Journal Aug 2002
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Typical PPP Contractual Structure

e.g prisons hospitals schools office
buildings warehouses
Govt. Agency or Trust
Concession Aggt.
Payts. For Availability
Shareholders
SPCo
Financiers
Building Contractor Facilities Manager
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Min. of Defence Facilities Management PPP

• Project to provide warehousing services for
  the Navy
• Client Royal Navy
• Value Euro 40 million
• Benefits innovation flexibility
• efficient use of property
• cuts transport costs
• Note post 2003, min. PPP value Euro 30
  million

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Inland Revenue HM Customs ExciseOffice
Building PPP

• Project to sell and lease back 600 office
  buildings in UK
• Value Euro 600 million
• PPP Concessionaire Mapeley UK Ltd.
• Benefits flexibility
• efficient property management for Govt.
• Issues Mapeley not financially strong,
  although shareholders strong.
• Mapeley UK Ltd based offshore in tax haven
• NB there are many successful UK office
  building PPPs

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Magistrates Courts IT System PPPLibra
Project

• Project to provide IT system for the Crown
  Prosecution Service and for Courts management
• Client Lord Chancellors Office (i.e.
  Government)
• PPP Concessionaire ICL / Fujitsu
• Value Euro 400 million
• Issues changes in specifications
• underestimate of R D costs
• lack of understanding of PPP for both parties
• difficulties when problems arose
• Result No more IT PPPs in the UK

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Navcanada Air Traffic Control PPP

• Project to provide air traffic services in
  Canada
• PPP Concessionaire Navcanada (Crown / trust
  corp.)
• Value Euro 600 million
• Issues strong predictable cash-flows
• hard currency revenues
• non-Government interference
• private sector management regime
• off balance sheet
• Result survived commercial impacts of 9/11,
• cf. NATS in UK.

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