11

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

4

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

6

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?

16

However:Splitting Network provision & its use: Trend to unbundling

Bundling or Unbundling?

17

18

Bundling or Unbundling?

Risk management principles

Source: Vijay_Sarma, Risk Management in PPP Projects, 2007

20

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

21

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

25

THANK YOU FOR YOUR ATTENTIONTHANK YOU FOR YOUR ATTENTION!!Ansgar Kauf, ansgarkauf@bluewin.ch

Serge Bodart, info@sybodart.com

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

?