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Framework & first results of PPP “virtual” site visit project
Ansgar Kauf - Serge BodartExperts in Infrastructure Project Development
24 February 24 February 20120111
Objectives of PPP “virtual” site visit project
Key learnings for government officialsWhen PPPs are an appropriate optionSuccess factors
Importance to learn from practical case studiescross sector approach to infrastructure & services5 projects chosen by UNECE: virtual site visits, videos supplemented by case studies and trainer’s notesApplying 7 principles for good governance in PPP
2
Infra Sectors many appropriate for PPP ?Economic Infrastructure Social
Infrastructure Transport Public utilities
(supply) Public utilities
(disposal) Communications
Land transport Road Rail Public Transport
Energy Telecommunications Fixed lines Mobile Broadband
Health Diagnosis Therapy / Treatment Care Rehabilitation Taking care of the
elderly Education Children / adolescents Adults Elerdly Culture Sports Mass sports Competition Leisure Administration Safety and security Penitentiary system Policy Security
Electricity Coal Oil / Gas Atomic Renewable Energies Sun Water Wind Bio mass Energy distribution Long-distance heating Gas Storing Transport Distribution
Heating Oil Atomic Bio mass
Water Inland Overseas Ports
Air Airport services Airlines Air traffic control
Waste households industrial
Information Technology
E-Government
Multimodal Inland terminals (road, rail, freight) Cruise terminals
Water
Fresh water households industrial
Waste water / Sewage rain water households industrial
Source: Barbara Weber, Hans Wilhelm Alfen (2009) Infrastrukturinvestitionen – Projektfinanzierungen und PPP
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Very broad range of infra types & services- Are there overriding issues and success factors?
UN ECE: 7 good governance principles in PPP
5
1. Policy & strategy2. Admin. Capacity Building 3. Adequate legal frame-
works & Regulation 4. Risk identification/ transfer5. PPP Procurement 6. Putting people 1st
7. Environment / sustainability Higher priority
Broad range of issues, high complexity, where to start?
“Update” good governance principles in PPP
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I. “Vital conditions”
II. “Enabling conditions”
III. “Operating conditions”
1. Policy & strategy2. Admin. Capacity Building 3. Adequate legal frame-
works & Regulation 4. Risk identification/ transfer5. PPP Procurement 6. Putting people 1st
7. Environment / sustainability
1. Policy & strategy2. Putting people 1st
- assess user needs & demand- involve all other stake holders- scope economic projects3. Admin. Capacity Building 4. Adequate legal frame-
works & Regulation 5. Risk identification/ transfer6. PPP Procurement 7. Environment / sustainability
Infrastructure Development & Financing Gap
Across all infrastructure sectors - water, energy, transport and social services – governments face an ever growing dilemma.
Traditional public procurement falls short of bridging the gap between available public finances and infrastructure develop-ment needs, both in advanced and developing countries.
Shortcomings in the Public sector - finances: debt laden, budgets are subject to short term political
pressure and lobbying- difficulties to invest cost efficiently. Although more user finance
is needed, risk to be swallowed by budget deficit- Lack of life-cycle approach in design, costing, operations
Is there a viable way out? - Involving private sector via PPP: - Project optimization & operation over the life-cycle: = “bundling” the design-financing-construction-operation
However, fundamentals of projects and sector strategy must be right (user demand, economic rationale, legal and commercial frameworks) and the government must be competent (or “have (or contract) the expertise”) for implementing PPPs successfully
Not all projects lend themselves to PPP – but which ones ?- PPP stress test & risk analysis and allocation (see later)
Infrastructure Development & Financing Gap
From Needs to solutions: Benefits & Costs
From Needs to solutions: Benefits & Costs
1st : Needs assessment: - Which service ?- for how many users ?
2nd : Develop Solutions (Options) -> Benefit-Cost analysis: choose best Option
3rd : financial model: - cost: CAPEX / OPEX- income: users / public budget - investment: debt & equity- risks and guaranties
Vital to find realistic revenue streamneither private sector, nor banks donate money. They pre-finance a project, to recoup Revenue source?the investment from the budget or the users
1. Tap new revenue sources (direct usercharges supplementing or replacing future rents paid by public authority): develop more projects that are self-financingthrough users and private investors.
2. use public & user funds more efficiently :thanks to performance orientation, tapping private efficiency in investment, cost-efficient design and operations & maintenance: Thus, PPPs achieve
• lower life-cycle cost and • increase operational efficiency.
0 to 1 y
5 to 10 y
15 to 35 y
-
O & M
Tax payers
Budget
Users
Charges
Public procurement & funding
PPP procurementPublicly - financed - Privately
Public Private Partnerships ≠
Building without money
Who foots the bill?
0 to 5 y
5 to 10 y
15 to 35 y
-
Pre-Planning,Acquisition
O & M
Design, / Syst.Integration
Build / Turnkey
Finance
Tax payers Budget
UsersCharges
Public procurement & funding
PPP procurement Budget - financed - User
Rehabilitate&
Modernize
Operation & Maintenance
Time
Public sector Private sector
equity 0
Banks« Bridge finance
»
Loan
Loan
PPP does not mean building without money -
Start with1) self-financing concessions,
commercially viable (sufficient user demand !)
2) PPP with user pay, viable thanks to public subsidy
3) Other needed projects, 100% budget and public finance, if possibl private O & M, > 80 %
Right mix & Priorities: user pay & budget stream in PPP
“Decision making pyramid”
For public planner & Regulator
PPP stand alone
public
PPP subsidized
1
2
3
Finance by PPP for majority of projects
Start with
Majority of projects
O & M *
* O peration & Management
Think « in networks », not single projects Work from a prioritized master plan
Pre- PLANNING
& Acquisition
FINANCEDESIGN / System
IntegrationBUILD / Turnkey
OPERATION &
MAINTEN.
MODERNIZE
HAND BACK
Tender
INVEST INVEST
Transfer back
The PPP life‐cycle : phases and Contracts
Asset SaleBOO: Build-Own-Operate
BOT: Build-Operate-TransferDBFO/M: Design-Build-Finance-Operate/Maintain
Contracting model (incl. modernization)Leasing / AffermageDBOM: Design-Build-Operate-MaintainO&M: Operation & Maintenance
DB-W: Design-Build with Warranty
DB: Design-Build = Design & Construct (DC)CM@Risk: Construction Manager at Risk
Contract MaintenanceFee-Based Contract Services(consulting, installation, technical)
B2B
Generally not in public infrastructure / service
Concession(private finance
/ equity)
Long Term Contract(“pre-finance”, no equity)
Works contracts(including turnkey)
Services contracts
Product Delivery
High Risk
Long Term
Short termLow Risk
Fully Privatize
PPP
Tradit.Public
Approach Contract type Risk & Duration
Range of Options: from tradit. procurement to PPP
The PPP life‐cycle : phases and Contracts
Pre- PLANNING
& Acquisition
FINANCEDESIGN / System
IntegrationBUILD / Turnkey
OPERATION &
MAINTEN.
MODER- NIZE
Specialized
Consulting
D‐B CM@Risk
Design‐Build Construction Manager at Risk
Preservation
Asset Management
D‐B‐O‐M
Design‐Build‐Operate‐Maintain
D‐B‐F‐O/M BOT/BTO BOO/BOOT
Design‐Build‐Finance‐Operate Build‐Operate‐TransferBuild‐Own‐Operate/Build‐Own‐Operate‐Transfer
CAPITAL PROJECTS
LONG‐TERMMAINTENANCECONTRACTS
INVEST INVEST
Source: ‐
Finnish Road enterprise ‐
US Fed. Highway Administr.
On Network: trend to bundling for increasing efficiency gains
Bundling or Unbundling?
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However:Splitting Network provision & its use: Trend to unbundling
Bundling or Unbundling?
17
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Bundling or Unbundling?
Risk management principles
Source: Vijay_Sarma, Risk Management in PPP Projects, 2007
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Price risk to be included in PPP price. That is why a PPP project is more expensive in absolute tems.
This additionnal cost is then compensated by efficiency gains
Risk management principles
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Main risks
General Grantor Concession aire
D&C Contract.
O&M Contract.
Change in law X (X) (X) (X)Political and social risk XDevelopment phase : Preliminary and Design Services
Grantor Concession aire
D&C Contract.
O&M Contract.
Expropriation X (x)Planning and Design services / cost and delay
X
Permits and authorizations X (X)
Construction phase Grantor Concession aire
D&C Contract.
O&M Contract.
Existing infrastructure / utilities conditions XGround conditions (Geology / Contamination)
(X) X
Constr. price overrun (Lump sum price) XConstr. price escalation (X) XConstruction delay overrun XUnforeseen events / Force majeur X (X)
Operation phase Grantor Concession aire
D&C Contract.
O&M Contract.
Permits and authorisation XUser demand / Revenues XRevenue collect./accounting/fraud/ violation (X) X XSupply of services / level performances XEnforcement X XO&M costs overrun XPrice escalation (X) XUnforeseen events / Force Majeur X XHeavy Repair and Maintenance X X
Risk allocation
1. Policy (devising a coherent strategy and framework, in which PPPs have their place)
2. Putting people first, scoping adequate projects- Is the project needed, for which users (social and economic justification)
- involving all stake-holders - Develop project scope and functions acc.to needs and financiability3. Capacity-Building (administrative) Expertise4. Adequate legal frameworks and Regulation5. Risk (appropriate transfer to private partner)6. PPP Procurement (transparent, efficient, competition -2 steps)7. The environment / sustainable development
-> UN Guidebook on promoting Good Governance in PPP: http://www.unece.org/fileadmin/DAM/ceci/publications/ppp.pdf
Good governance principles in PPP
Lessons provided by video case studies
Case studyKey principle
Burgdorf (CH)
Manila Water (PH)
Manila Dia- lysis (PH)
Romania Dialysis
Lesotho Hospital
Annecy-GVA motorway (F)
1. Policy & strategy X X
2. Putting people 1st, scope econ. projects X X X X ?
3. Capacity-Building (administrative) X X X
4. Adequate legal frameworks & Regulation
X X
5. Risk identification/ transfer X X X X X X?
6. PPP Procurement X X X X X X
7. Environment / sustainability
X X
Case studyKey principle
Burgdorf (CH)
Manila Water (PH)
Manila Dia- lysis (PH)
Romania Dialysis
Lesotho Hospital
Annecy-GVA motorway (F)
1. Service contract
2. Management contract
3. Leasing / Affermage X X
4. Contracting Model
5. Concession (DBFO) – availability fee
X X
6. Concession (DBFO / BOT) - demand risk
X X
7. Full privatisation
PPP contract types of the 5 video case studies
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THANK YOU FOR YOUR ATTENTIONTHANK YOU FOR YOUR ATTENTION!!Ansgar Kauf, [email protected]
Serge Bodart, [email protected]
Operator (O&M)
Mainten. subcontracto
r
Techn.Advisor
“Infra Authority”(Government)
Construction JV
Systems- Products / equipment
Sub-contractors
Designer
Private ConsortiumConcession company Shareholders
Public Sector Comparator (“PSC”)
Costs for con-
struction & operation
Transferable risks in a PPP
model
Focus on Advantage
Net
pre
sent
val
ue o
f pay
men
ts in
m E
UR
__
Advantage = „Value for Money“ e.g. due to:
l Risk transfer
l Efficiency gains
Economies of scale
Economies of scope
Saving potentials
Private Know-how
Financial innovations
Competition
……PPP - ProjectTraditional Project
(Public Sector Comparator)
Independent Risks
Zahlungen der ASFINAG
Efficiency gains
Costs for con-
struction & operation
Risk premium of the private
partner
Procurement as an PPP model only if Vfm is generated!
PPP does not mean building without money - Who foots the bill?
0 to 1 y
5 to 10 y
15 to 35 y
-
Pre-Planning,Acquisition
O & M
Design, / Syst. Integration
Build / Turnkey
Finance
Tax payers Budget
Users Charges
Public procurement & funding
PPP procurementPublicly - financed - Privately
Rehabilitate&
Modernize
Operation & Maintenance
Time
Public sector Private sector
equity
0
Banks« Bridge finance
»
Loan
Loan
Risk Category General / project spec.
Occurrence Allocation toPublic Sector Private Sector
Planning / permitting Development Phase
X
Land acquisition / Right of way Development Phase
X
Political & social Throughout Project Cycle
X
Regulation & administration Operation Phase X Change of Law Operation Phase X (X)Force Majeure Throughout
Project Cycle X (X)
Completion Risk - Design - Construction
Construction Phase
X X
Cost overruns Construction Phase
X
Technology Construction / Operation Phase
X
User demand / Revenue X (greenfield)
X(brownfield)
Financial - Interest rate - Foreign exch. exposure - Tax rate change risk - Inflation risk
Operation Phase
(X)
X X X X
Operating performance Operation Phase X....
Allocation of typical Risks in PPP
My table is probably to detailed (good for the note, but I would
here differentiate the
of the project – see my table
PPP Market Maturity curve
• The above “ PPP Market Maturity curve” is from Deloitte and Touche (USA LLP), but would require (included the UN ECE Guidebook on Promoting good governance in PPPs. The one in the guidebook is over 5 years old and, due to the impact of the 2008 financial crisis and the recent one in the EU, it does not reflect the market / country reality any more.
Ironically, the UK is not the most mature country case any more, in terms of activity, at least. Italy being a bit contradictory. Others like Greece fell back into stage one, or may be practically at a 0 stage. several Greek PPPs are in insolvency, at the present moment. And certain developing countries are in a better position for launching new projects than several developed European ones, that had still been PPP leaders in 2007. See for example the new leaders: Brazil, India, to a lesser extent, but still: Croatia, Poland, and surprisingly even Albania (which is maturing as a road developer). Even China is becoming a leader, however, in its own unconventional ways.
What
kind
of message are we
trying
here
to give
?
• So for PPP days 2012, I see the following priorities, as to developing countries and their aptitude for PPPs. There is quite a disparity between two groups, each of them having different basic needs: 1. dynamic developing countries that are even PPP drivers - still a lot to be done in terms of PPP governance principles (tender and legal frameworks), but they have good economic basics for PPPs. With the combination of good economics and still strong needs in governance, they could become a driver for the UNECE PPP initiative – it is always good to have candidates with a reasonable chance of success. 2. somewhere in the midfield of these countries: CIS, etc.- however, there could be unconventional cases, like Ghana and others (interesting to check). 3. least developed countries (LDCs, particularly the African ones) – highest needs in PPP development assistance. However, in certain case questionable if a PPP approach would make sense now. It would also be interesting to go through the list of UN ECE member countries.
PPP Market Maturity curve
What
kind
of message are we
trying
here
to give
?