Defence PFI / PPPs

Opportunities for the Baltic States?

© Berwin Leighton Paisner LLP, London

Overview

Catalyst for Defence PPP Opportunities

UK Experience:– Accommodation– Training/Simulator Assets– Assets based Projects– Infrastructure based Projects

Lessons from UK MoD PPP Experience

Catalyst for Defence PPP Opportunities 1

March 2004 – Baltic States join NATO.– Global threat - move away from purely Warsaw Pact/North

Atlantic facing Defence Force.– End of “Cold War” emphasis – Multi-national armed forces

must now be able to move quickly to wherever they are needed around the world, but still be hard hitting and flexible.

– The right mix of forces can be drawn to mount short-notice, medium-scale operations of all kinds - from disaster relief to high intensity war-fighting – under NATO, European, UN coalition or national auspices.

Catalyst for Defence PPP Opportunities 2

Changing Armed Forces – more expeditionary – means greater need for more

equipment and logistical support. – Need for small expeditionary force – highly skilled, mobile,

reactive & highly equipped.

Equipment Need– Use of PFI/PPP to reduce large “on balance sheet”

traditional procurements and transfer key risks to the private sector for logistic, operational support?

Regional Defense Co-operation– BALTBAT, BALTRON, BALTNET & BALTDEFCOL– NATO as procuring body (i.e. Submarine Rescue Service)?

UK Experience

1995/96 – First UK MoD Defence PFI

Around 40 PFI/PPP Projects awarded by the UK MoD.

Dedicated Private Finance Unit – committed to procurement excellence.

Widest variety of projects in any UK PFI/PPP Sector – most innovation.

Currently the largest PPP Projects in procurement in the UK are Defence Sector based.

Four Main Types of UK Defence PPP/PFI:– Accommodation Based Projects– Training/Simulator Transactions– Asset-Based Transactions– Infrastructure Transactions

UK Defence PPP/PFI

Accommodation Based Projects

Design, Build (Refurbish), Finance and Operate (DBFO).Payment based on availability criteria.Use of Surplus Land & Development opportunities to bring affordability savings.Used to secure new accommodation for UK MoD on a wide variety of programmes:– Offices - MoD Main Building in London (MoD HQ), Northwood– Barracks - Allenby & Connaught, Project MoDEL– Housing – Portsmouth Housing Projects– Schools/Training – Defence Sixth Form College– Others – Defence Animal Centre (DAC)

Training/Simulator Based Projects

Design, Build, Finance and Operate (DBFO) Model.Private Sector ownership of assets and maintenance obligations.Payment based on asset availability and agreed usage (i.e. hours/days) in Simulator deals, but emerging innovative procurement models for pure training-based projects (i.e. pass rates).Examples include :– Military Flight Training – UKMFTS & DHFS– Wider Training Projects – Defence Training Review (DTR) &

RSME– Simulators – LAFT, MSHATF, TSTS, Attack Helicopter &

Hawk.

Asset Based Projects

Design, Build, Finance and Operate (DBFO) Model.Contractor owned, Contractor Operated (“CoCo”).“Take-or-Pay” payment stream, with deductions for unavailability.Use of Third Party Revenue (3PR) to reduce cost to Public Sector.Examples include :– Air-to-Air Refuelling & Transport – FTSA.– Strategic Sealift Services – Ro Ro Project.– Vehicles – HET, “C” Vehicles, FFTU and Whitefleet.– Helicopters – Sea & Rescue (SAR)– Logistics – Field Electrical Power Supplies (FEPS)– Satellites – Skynet 5

Infrastructure Based Projects

Structure dependent on underlying deal.

Benefits of UK MoD buying power, consolidation of existing estates and services.

Use of Third Party Revenue/Surplus Land to drive affordability benefits to UK MoD.

Examples include :– Marine Services – FPMS– Water/Wastewater – Project Aquatrine– Communications – VLF Naval Comms.– Storage – Nuclear Submarine Fuel Project

Lessons from UK MoD PPP Experience

Use of Standardised Contracts – Pros/Cons.Key Issues for Public Sector: – Affordability (use of 3PR);– IPR Rights (upgrades, whole-life issues);– Security (export licences);– Continuity of Service for front-line contractor supplied assets

(Sponsored Reserves); and– Value for Money (long-term & refinancing).

Use of Commercial Off-the-Shelf Technology (COTs) to assist fundability of PPP deals.Need for Innovation – dialogue with MoD PFU.Timescale to Close.

Questions?

Strategic Sealift Project