closing the infrastructure gap: the role of public-private partnerships p r srinivas industry lead...
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Closing the infrastructure gap:
The role of public-private partnershipsP R Srinivas
Industry Lead – THL
Deloitte Touche Tohmatsu India Private Limited
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©2008 Deloitte Touche Tohmatsu India
Organization
• Introduction
• The Case for Public Private Partnerships
• PPP Market Maturity Curve
• Moving Up the Maturity Curve
• Conclusion on PPP
• Tourism and PPP
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IntroductionThe Global infrastructure gap
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IMPACT
Reduced Productivity
• More than 50% of the decline in labor productivity in US during 1970s & early 80s
• Driving on roads in need of repair costs U.S. motorists $54 B per year in extra vehicle repairs & operating costs - $ 275 per motorist.
Safety Problems
• Outdated & substandard road & bridge design, pavement conditions, & safety features are factors in 30 % of the fatal highway accidents each year.
Competitiveness
• Underinvestment can reduce a country’s competitiveness. • In Latin America, competitiveness of many regional companies reduced because inadequate transport infrastructure has increased logistics costs.
Traffic Congestion
• Imposes huge costs on the economy- unpredictable travel times, environmental damage, property damage, delays & lost production.
• Americans spend 3.5 billion hours a year stuck in traffic, costing the economy $67.5 billion annually.
IntroductionImpact of the infrastructure deficit
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PUBLIC-PRIVATE PARTNERSHIPS
Introduction : Putting PPPs in ContextTraditional Funding vs. Public-Private Partnerships
• The public sector procures a service, not an asset, from the private sector
• The public sector requirements are defined in output terms as part of the procurement providing opportunity for innovation and risk transfer
• Private sector generally responsible for design, build, finance, operation and maintenance over long term contract period
• Payments linked with performance. Revenue earned through a mix of direct tolls, availability payments and/or performance payments.
• Significant levels of risk transfer to the private sector over life of contract. Risks are allocated to the party that is best able to manage them.
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Conceptual Model
Sale / PrivatizationLicense / Franchise or
ConcessionPublic / Private PartnershipConventional Ownership
Governance / Ownership Structures
Privatization
Methods of Alternative Service Delivery
Licensing / Franchising PartnershipExternal Purchase of
ServiceSpecial Operating
AgencyDirect Delivery
LOW HIGHTransfer of Risk from Government to Partner
Capital Markets Financing
Methods of Financing
User Fees / Revenue SourcesDedicated Government
Financing
− Project-based financing
− Equity
− Debt
− Bank borrowing
− Securitization / monetization of assets
− Bonds
− Revenue stream
− Tolls
− Shadow tolls
− Availability payments
− Other like payments
− Government borrowing
− Government grants
− Government capital allocation
Traditional InnovativeMethods of Financing
Conceptual Model for Structure / Delivery Mechanisms and Financing Methods
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• Properly structured PPPs enable governments to focus on outcomes, instead of inputs. Governments can focus leadership attention on the outcome-based public value they are trying to create.
• PPPs enable public sector to spread cost of infrastructure investment over the lifetime of the asset. Private sector has strong incentive to complete the project ASAP because they need the stream of revenues to repay the capital costs.
• Well-designed PPPs help maintain infrastructure by transferring maintenance requirements for a facility to the private partner.
• Shifting long-term operation & maintenance responsibilities to the private firm creates incentive to ensure long term construction quality as it is responsible for those costs many years down the road. Experience from several countries has demonstrated savings from PPPs during the construction phase of the contract.
• Private-sector infrastructure providers - rely on user fees from customers for revenue –thus have a strong incentive to provide superior customer service.
Bring Construction Forward
Ensuring that assets are properly maintained
Cost Savings
Strong Customer Service Orientation
Enables the Public Sector to Focus on Outcomes & Core Business
The case for PPPsBenefits of PPPs
• Payments are aligned to the delivery of project objectives- thus PPPs have a solid track record of on-time or early construction completion.
On-Time & On- Budget Delivery
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The case for PPPs Example Funding Model and Risk Profiles
Traditional Funding Example
Cost overrun
Construction Phase
Estimated Capital Cost
Tim
e ov
erru
n Running costs overrun
Estimated running costs
Construction Phase
0 5 25 Years
$Public sector pays for services / assets as they are provided. Full costs of construction are paid in advance of operational commencement. Due to limited risk transfer, most cost overruns also become liabilities for the public sector.
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The case for PPPsExample Funding Model and Risk Profiles
PPP Funding Example
No Payment
Construction Phase
Service payments and/ or direct charges to users
$
0 5 25 Years
Operating Phase
Direct charges to Users
Under PPP, the private sector generally does not receive income until the service / asset is available for use. Income is generated from direct charges to users and / or payments from the public sector. The public sector only pays as services are delivered. The private sector accepts significant level of risk transfer from public sector in lieu of opportunity to generate a financial return.
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PPP projects require a careful management of risks during construction and operation
Cost to
PublicSector
Public Delivery
Retained Cost / Revenues
Risks
Raw Cost / Revenues
PPP Delivery
Retained Cost / Revenues
Raw Costs / Revenues
Retained Risk
Value for Money (value of risk transferred)
Sample high-level cost profile of delivery options
The PPP delivery approach may not have lower direct project costs. However, there are additional benefits that must be quantified in the Value for Money analysis.
The PPP delivery approach may not have lower direct project costs. However, there are additional benefits that must be quantified in the Value for Money analysis.
PPP Delivery includes profit, taxes and cost of capital
The case for PPPs
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• Comparison between the public and private sector cost of capital should be appropriate. And the gap between private and public costs of capital has narrowed over the years.
• PPPs by allocating the risk efficiently lower costs and bring more value for money. Also private sector efficiency generates economies that outweigh higher costs of borrowing .
• Fee increases can be limited by contract to pre-determined rate and by using other mechanisms - availability fee, shadow tolling, subsidies, link to ability to pay etc.
• Private provider cannot take facility with it when it is unable to continue contract - govt. gets free facility
Higher Cost of Capital
Failure to Realize Value for Money
Customers of the Service Will End Up on the Short End of the Stick
Govt. is Forced to Bail Out PPP Projects When Demand Fails to Meet Projections
The case for PPPsAddressing objections to PPPs
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PPP maturity model
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PPP maturity model
Stage one:
• Establish policy & legislative framework
• Initiate central PPP policy unit to guide implementation
• Develop deal structures
• Get transactions right & develop public sector comparator model
• Begin to build marketplace
• Apply early lessons from transport to other sectors
Stage two:
• Establish dedicated PPP units in agencies
• Begin developing new hybrid deliveries models
• Leverage new sources of funds from capital markets
• Use PPPs to drive service innovation
• PPP market gains depth – use is expanded to multiple projects & sectors
Stage three:
• Refine new innovative models
• More creative, flexible approaches applied to roles of public & private sector
• Use of more sophisticated risk models
• Greater focus on total lifecycle of project
• Sophisticated infrastructure market with pensions funds & private equity funds
• Underutilized assets leveraged into financial assets
• Organizational & skill set changes in government implemented to support greater role of PPPs
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Moving up the maturity curveCommon pitfalls to avoid
Common Pitfalls
Poor SetupInappropriate PPP model
applied to project
Too much focus on the Transaction
Failure to Realize Value for Money
Lack of Clarity on Project Objectives
Lack of Internal Capacity
Inadequate planning
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Moving up the maturity curveLife-cycle perspective
• Governments need a full life-cycle approach (e.g., a clear framework) for partnerships that confer adequate attention to all phases of a PPP—from policy and planning, to the transaction phase, and then to managing the concession.
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Moving up the maturity curveUse more innovative models
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Moving up the maturity curveSelecting an appropriate model
Source: Building Flexibility: New Delivery Models for Public Infrastructure Projects, Deloitte Research, 2005.
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Moving up the maturity curveUnlocking value from assets
• Governments are increasingly looking at their portfolio of assets to determine how to realise the maximum value from these assets by exchanging them for other assets or services that might serve more pressing needs.
• Public assets tend to be sited in prime locations; often have excess land or control of adjacent properties. The government can use these as equity to partner with the private sector to create new facilities and develop the existing assets. This not only unlocks value from these assets but also helps to meet critical infrastructure needs.
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Conclusion on PPP
• The infrastructure challenge before governments today may seem overwhelming. Slowly governments are realizing that inaction is simply not an option.
• PPPs alone are not a panacea. Rather, they are one tool governments have at their disposal for infrastructure delivery—a tool that requires careful application. By making the best use of the full range of delivery models that are available and continuing to innovate, the public sector can maximize the likelihood of meeting its infrastructure objectives and take PPPs to the next stage of development.
• This development, in turn, will enable this relatively new delivery model to play a far larger role in closing the infrastructure gaps bedeviling governments across the world.
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Tourism and PPP
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Tourism Planning – some fundamentals
Long-term destination ‘vision’
5-year development strategy
Physical masterplan
Individual projects
Economic policy context
Identify core ‘values’
Identify core assets
Identify target markets
Sustainable framework
Regional cooperation
Competitive positioning
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New paradigms in destination development and marketing
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Visioning
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What is a ‘vision?
• An inspired view of the long-term future
– a destination’s “place in the sun” at the end of the 21st century
• Aspirational
– Must appeal to aspirations and emotions of all stakeholders
A vision provides the inspiration that binds all stakeholders to a common purpose
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Developing a vision
Stateeconomicobjectives
Stakeholderaspirations
ConsumerPerceptions
CompetitivePositioning
TourismAssets
TourismVision
ForMP
Extensive study of the State’s economic policy, tourism assets, consumers and consultation with all stakeholders is essential
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Tourism and Economic Development
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Tourism and economic development
• Today, tourism and economic development are inseparable and mutually supportive
• “the images that a nation has in tourism, inward investment and …export inevitably overlap and coalesce…Success will depend on handling this in a sophisticated and co-ordinated fashion…”
• “The creation of celebrity and emotional appeal through …(destination development and marketing)… opens the way for other economic development-oriented agencies to communicate to would-be investors...”
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Core values and assets
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“The cultural aspect of national image is irreplacable and uncopiable because it is uniquely linked to the country itself; it is reassuring because it links the country’s past with its present; it is enriching
because it deals with non-commercial activities; and it is dignifying because it shows the spiritual and intellectual qualities of the
country’s people and institutions.”
Destination ‘values’
• Tourism development must capture a destination’s “values”
– the very essence or spirit of the destination
– its ‘identity’
– its people – their spirit, their purpose, their values, their beliefs
– its culture
– its intellect
Extensive consumer research is required to identify a destination’s core values
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©2008 Deloitte Touche Tohmatsu IndiaNew Zealand Campaign focussing on its core values
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• Singapore
• Hong Kong product pillars
– Shopping
– Dining
– City-Harbour-Green
– Heritage & festivals
• Kerala focus areas
– Backwaters
– Eco-tourism
– Ayurveda
“Moving through Asia…you find city after city of ‘look-alikes’…As these cities evolve, they increasingly resemble each other…”
Focus on unique assets
• Focus on principal ‘products’ that are truly unique in the world
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“One such destination… campaign which transcended the commodity nature of product and which promised a unique (yet credible) experience was the ‘India Changes You’ campaign…
It’s breathtaking.”
But what is today’s tourism product?
• Facilities and attractive urban environments, while necessary, are no longer differentiators
• Today’s destination winners are:
– ‘experiences’ that meet aesthetic needs
– rich in emotional meaning– ‘how do we want to feel on our holiday’
– provide symbolic and self-expressive benefits:– ‘who can we be on holiday’– lifestyle indicator
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Identification of target markets
• Target markets not based on regions or countries
• Extensive and ongoing consumer research
– perceptions, image, experience, satisfaction, competition
• Today’s target markets are prioritised by sub-segments:
– purpose of visit
– geographic sub-regions
– demographics and life stage
– behaviour and psychographics
• Example - Life Stage segments as target markets:
– Young Couples, age 26-35yrs, no kids
– Mid-Career Married With Kids, 31-45yrs
– Achievers Married With Kids, 46-60yrs
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Successful destinations create points of parity where competitors are seeking an advantage, and amplify points of difference in other areas to achieve competitive advantage
Competitive positioning
• Today’s tourism strategies are all about beating the competition and stealing market share
• Competition has been re-defined
– experiences
– ‘clusters’
• Competitive assessment
– sophisticated, research-based– performance within target markets– strategies, plans, NTO capabilities– consumer / trade perceptions
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• “Together in Asia”
– TAT, STB,. HKTB
• Asean Tourism Forum
Regional cooperation
• Cooperation, even with competitors, is becoming crucial for survival
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2nd Deloitte Central Europe PPP Training Seminar, Prague 12 & 13 April 2006
Tourism Strategy
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Strategy - elements
Marketing Product Development Policy Framework Destination Management
Image and positioning Product enhancement Government-industry partnerships Industry partnerships
Branding Product additions Investment environment Visitor experience
Promotions and campaigns Infrastructure Facilitation Service excellence
Market focus by regions Competitive benchmarking Regional issues Host community issues
Market focus by segments Human resource development
Visitor arrivals Reduction of transaction costs
Visitor expenditure International access
Visitor experience
PR and communications
Pricing
Overall (master) strategy
Identify elements of strategy*
Analyse specific strategic issues under each strategy element (examples below)
Vision
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2nd Deloitte Central Europe PPP Training Seminar, Prague 12 & 13 April 2006
The Master Planning Approach
Master Plans and Projects
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Applicability
• State, regional, or local level
• Macro to micro
• Physical and institutional elements
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Overall approach
• Regional, competitive perspective
• Phased development
– Long term vision
– Short term implementation
• Intensive research
– Destinations and attractions
– Market
• Impact Scoping
– Environmental
– Economic
• Implementation oriented
– Investment / project / site specific
– Private sector participation
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Paramount objective
• Enhance economic benefits in a sustainable model:
– Increase visitation
– Increase length of stay
– Increase expenditure
• Increase investment (private) in tourism projects
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2nd Deloitte Central Europe PPP Training Seminar, Prague 12 & 13 April 2006
Regional and destination level planning
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Centres for development
• Regional development strategy:
– Destination hubs for development
– Attractions for development
– Attractions for improvement
– Bankable projects
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2nd Deloitte Central Europe PPP Training Seminar, Prague 12 & 13 April 2006
Site and micro level planning for bankable projects
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©2008 Deloitte Touche Tohmatsu India
Site development micro plans
• Conceptual Plans
• Development Briefs
• Project Profiles
• Feasibility Studies
• Implementation Frameworks
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2nd Deloitte Central Europe PPP Training Seminar, Prague 12 & 13 April 2006
Way forward to implementation
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©2008 Deloitte Touche Tohmatsu India
Private sector participation
• Identification and availability of sites and projects
• Concepts, Feasibility Studies, Project Profiles
• Recommendations on ideal public-private partnership structure, per project
• Valuation, public-private partnership financial terms
• Terms of reference
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©2008 Deloitte Touche Tohmatsu India
Other micro plans
• Economic and Financial Analysis
• Environmental Scoping
• Marketing Plan
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©2008 Deloitte Touche Tohmatsu India
Strategy recommendations
• Infrastructure and Transport
• Other New Projects
• Investment and Financing
• Policy, Organisation, Institutions
• Human Resources and Training
• Linkages with other Sectors of Economy
• Conservation
• Environmental enhancements
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