EuropeanInvestmentBank

Basic concepts Jaime BarraganJaime Barragan

EIB – European Investment BankEIB – European Investment Bank

IADB, 8-9 December 2005IADB, 8-9 December 2005

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CostsCosts

Dividends

Capex

Opex

Debt Debt serviceservice

Public sector body

Private Special

Purpose Co.Ris

k a

pp

eti

te

plus

RevenuesRevenuesSenior

lenders

Subordinated

lendersFinancial

equityinvestors

minus

Paying users

Dividends

What is a PPP?A Complex Web of Contracts & Cash Flow

Construction Co.

Operating Co.

SponsorSponsorSponsor

ShareholdersShareholders

AgreementAgreement

EPCEPC

ContractContract

O&M O&M

ContractContract

CustomerCustomer

ContractContract

ConcessionConcession

AgreementAgreement

LoanLoan

ContractContract

DirectDirect

AgreementAgreement

70 to 95% Debt70 to 95% Debt3

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PPP

Definitions

The term public-private partnership is not defined at Community level. In general, the term refers to forms of cooperation between public authorities and the world of business, which aim to ensure funding, construction, renovation, management or maintenance of an infrastructure or the provision of a service.

EC, Green Paper on PPPs

Many definitions & interpretations across Europe

Ingredients: Public service responsibilities Private sector expertise Bundling of operation &

construction Incentives for innovation &

performance

Risk sharing Private finance Long term contracts

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Key Characteristics

Cashflow (un)certainty Credit intensive. Long Term Highly structural Large Low Margins Mature in some markets, innovative in other

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Process

Assesment of the market. Need for the project. Technical feasibility Financial Feasibility Support/commitment Letter. Award. Due diligence Mandate/syndication Docummentation Financial closing Administration

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Main Risks

Cashflow. Construction Risk. Operating Risk Participant Risk Supply Risk Market Risk Infrastructure Risk Environmental Risk

Political Risk Force Majeur Foreign Exchange

Risk Engineering Risk Syndication Risk Funding Risk Legal Risk

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Forms of private participation

commercializedpublic enterprise

• Continuous spectrum of partnerships, with private sector taking variable degrees of risk

• Other Hybrid or intermediate forms possible• Differ in duration, financing & risk transfer

Private O&M + financing Private O&M

BOO divestiture

concession BOT/DBFO

lease managt.

contractsservice

contracts

PPP

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Choosing the right structureKey questions

Is legal/institutional/economic framework ready? Who decides (local v central authorities)? Is there robust political support for PPP? Is project revenue generating/cost recovery? Is purpose to delegate service to consumers or just to

build & operate a large new asset? What risks will private sector take? Is PPP timetable compatible with other constraints?

PPP is a policy choice NOT a quick fix

EuropeanInvestmentBank

Economics

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PPP Investment Rationale

Conventional model:Definition of inputsProcurement of assets

PPP model:Definition of outputsProcurement of service

Encouraging the private sector to:apply expertise for better service delivery innovate in finding new technical solutionsoptimise the capital component of projectsenter contracts with appropriate risk sharing

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Sources of Value-for-Money

Bundling Life-cycle approach

Risk sharing Better risk management

Private asset ownership Control over asset and adoption of

cost saving innovation & efficient contracting

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Is the legal and institutional framework right? High quality capital planning is essential

How is risk to be transferred and to whom? Just substituting private for public capital won’t give value for

money. Is risk sharing realistic?

Is the scope of procurement correct? Is there private sector expertise? Will there be competition?

Is public sector team skilled & experienced? Will evaluation be robust? Can deal be closed?

Is there a credible public sector comparator? The test for the value of risk transfer

Tests of value for money

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PPP is not a “free lunch”

Transaction costsBidding, negotiation, monitoringRenegotiation over life-cycle

Pursuit of cost efficiency may impact service quality

Institutional and administrative capacity requirements

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PPPs and the macroeconomy

Accounting rules affect incentives They may bias the public sector for PPPs

No macroeconomic case for or against PPPs No automatic link between cost efficiency and

aggregate growth

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Economics Summary

PPPs can boost cost efficiency at the project level.

Need to be mindful about service quality, transaction costs, and institutional requirements.

No macroeconomic case for or against PPPs, but they must be accounted for appropriately.

Life-cycle transaction costs, benefits & value-for-money are key to public policy decision.

EuropeanInvestmentBank

Experiences

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EU15 Experience - PPPs mainly in transport and buildings

51%

6%

11%

7%

3%

9%

13%

0%

Rail (LU & CTRL)

Roads, brigdes, etc.

Health

Education

Police & prisons

Defence

Airports

Other83%

5%

5%7%

UK Non-UK

Sector split of signed PPP contracts in EU by value

Source:ProjectWare, HM Treasury

EuropeanInvestmentBank

Successful procurement

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Requirements for successful PPP Preparation

Employ Good Advisors – Spend to Save

Don’t Rush – Political Deadlines Weaken Negotiating Position

Research and Choose Appropriate PPP Model – To Suit Local Market & Law

Maintain Competition – Avoid Tempting Single Bidder Offers, Minimum Two BAFOs

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Requirements for successful PPP Implementation

Simple Payment Mechanisms – Significant Performance Element But Not Too Many Parameters

Equity Level Appropriate to Risk – Returns Not Taken Too Early

Independent Supervision and Good Quality Reporting – Early Warnings, Prompt Remedial Actions (covered in agreement)

Minimise Third Party Involvement – Provides Excuses for Poor Performance

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Value-for-Money

Early review based on sector experience Build into bid evaluation process Flexible use of Public Sector Comparator Allow for optimism bias Adjust for risk transfer Allow alternative bids & innovation

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Sustaining the partnerships

Budget for adequate monitoring Transparent reporting to maintain public

confidence Early warning systems for essential public

services Financial “health“ monitoring of major

contractors Independent audit reports to “learn lessons”