PPPs and CompetitivenessPPPs and Competitiveness

PPP is above all

arobust and disciplined procurement process

PPP is above all

arobust and disciplined procurement process

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The virus spreads ...The virus spreads ...

Countries with active / developing PPP programmes include: Australia, Austria, Brazil, Belgium, Bulgaria, Canada, Chile, Colombia, Cyprus, Czech Republic, Egypt, France, Germany, Greece, Hungary, India, Indonesia, Ireland, Italy, Jamaica, Japan, Korea, Malaysia, Malta, Mexico, Morocco, Netherlands, Nigeria, Pakistan, Peru, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Taiwan, Trinidad & Tobago, Turkey, US and UK…and more…

Now more than 50 countries have PPP programmes…..

Countries with active / developing PPP programmes include: Australia, Austria, Brazil, Belgium, Bulgaria, Canada, Chile, Colombia, Cyprus, Czech Republic, Egypt, France, Germany, Greece, Hungary, India, Indonesia, Ireland, Italy, Jamaica, Japan, Korea, Malaysia, Malta, Mexico, Morocco, Netherlands, Nigeria, Pakistan, Peru, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Taiwan, Trinidad & Tobago, Turkey, US and UK…and more…

Now more than 50 countries have PPP programmes…..

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PPP / PFI in the LAC regionPPP / PFI in the LAC region

National PPP / PFI programme

Incipient PPP / PFI programme

Subnational PPP programme

MIF support to PPP

MIF / IDB evaluation

Relevant prior experience

Common SectorsCommon Sectors

Transport Education

Prisons Health

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Common Sectors (cont’d)Common Sectors (cont’d)

Also Also • HousingHousing• CourtsCourts

• TechnologyTechnology

Also Also • HousingHousing• CourtsCourts

• TechnologyTechnology

Defence Leisure

Government Offices Waste Treatment

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…… and now

Climate ChangeMitigation

& Adaptation

Scale of PPPsScale of PPPs• Large-scale infrastructure– Transport– Education– Health– Government Buildings – facilities management

• Smaller initiatives– Alliances with business partners

The weakness of traditional procurementThe weakness of traditional procurement• Project selection often driven by political rather than social or economic priorities• Project design and structuring is inadequate : modern infrastructure projects are technically,

financially and institutionally complex• The public sector’s negotiating capacity vis-a-vis the private sector places it at a significant

disadvantage at every stage, both prior to award and during project implementation• Project implementation is usually marred by significant delays and cost-overruns, which make a

nonsense of the project’s projected economic viability, and, owing to inadequate risk distribution, lead to growing contingent liabilities for government

• The quality of the asset is often below standard, leading to high maintenance costs or even premature replacement or abandonment

• The quality of the projected services consequently falls well below public expectations, leading to loss of political credibility and public perceptions of cronyism between the political and private sector

• Poorly designed projects either find it difficult to raise finance and when they do succeed, it often comes on punitively expensive terms and conditions

• From the private sector’s viewpoint, badly designed projects often bring financial problems which threaten their very survival

• Overall, projects take longer and are delivered more unsatisfactorily than election promises made, with inevitable erosion of popular political support.

• Project selection often driven by political rather than social or economic priorities• Project design and structuring is inadequate : modern infrastructure projects are technically,

financially and institutionally complex• The public sector’s negotiating capacity vis-a-vis the private sector places it at a significant

disadvantage at every stage, both prior to award and during project implementation• Project implementation is usually marred by significant delays and cost-overruns, which make a

nonsense of the project’s projected economic viability, and, owing to inadequate risk distribution, lead to growing contingent liabilities for government

• The quality of the asset is often below standard, leading to high maintenance costs or even premature replacement or abandonment

• The quality of the projected services consequently falls well below public expectations, leading to loss of political credibility and public perceptions of cronyism between the political and private sector

• Poorly designed projects either find it difficult to raise finance and when they do succeed, it often comes on punitively expensive terms and conditions

• From the private sector’s viewpoint, badly designed projects often bring financial problems which threaten their very survival

• Overall, projects take longer and are delivered more unsatisfactorily than election promises made, with inevitable erosion of popular political support.

PPPs are not standardised internationallyPPPs are not standardised internationally

Each Country’s approach to PPP is:

• Designed to meet the policy objectives of its Government

• Developed to complement other public procurement and public service delivery methods

• Implemented according to the available public and private sector resources

• Adapted to local best practice and procurement context

Each Country’s approach to PPP is:

• Designed to meet the policy objectives of its Government

• Developed to complement other public procurement and public service delivery methods

• Implemented according to the available public and private sector resources

• Adapted to local best practice and procurement context

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Guiding PrinciplesGuiding Principles

• Project decisions

– Deciding on project scope, affordability etc

– Investigating the benefits of different procurement strategies

• Managing the procurement process to deliver the required project benefits

– Good deal for the public sector – risk transfer, price etc

– Timescales

– Bid Costs

– Institutional Capacity to deliver the procurement process

• Project decisions

– Deciding on project scope, affordability etc

– Investigating the benefits of different procurement strategies

• Managing the procurement process to deliver the required project benefits

– Good deal for the public sector – risk transfer, price etc

– Timescales

– Bid Costs

– Institutional Capacity to deliver the procurement process

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Common features of PPP Programmes Common features of PPP Programmes

• Applied across a broad range of sectors where major capital investment is required

• Based upon long-term (e.g. greater than 10 years) arrangements

• Private sector capital at risk to performance in the delivery of public services

• Fixed price, output-based contracts

• Optimal risk transfer to the private sector

• Applied across a broad range of sectors where major capital investment is required

• Based upon long-term (e.g. greater than 10 years) arrangements

• Private sector capital at risk to performance in the delivery of public services

• Fixed price, output-based contracts

• Optimal risk transfer to the private sector

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Key Principles of UK PPP Contracts for Services (Private Finance Initiative - PFI)

Key Principles of UK PPP Contracts for Services (Private Finance Initiative - PFI)

1. Authority transfers responsibility and risk for asset / service to Contractor.

2. Contractor takes on obligations for c.20-30 years.

3. Contractor designs, builds, finances, operates (DBFO), maintains asset and provides services.

4. Lenders fund Contractor on limited recourse basis.

5. Authority pays “Unitary Charge” for available / acceptable service.

6. The PPP Contract (and associated documents) must regulate a network of relationships.

1. Authority transfers responsibility and risk for asset / service to Contractor.

2. Contractor takes on obligations for c.20-30 years.

3. Contractor designs, builds, finances, operates (DBFO), maintains asset and provides services.

4. Lenders fund Contractor on limited recourse basis.

5. Authority pays “Unitary Charge” for available / acceptable service.

6. The PPP Contract (and associated documents) must regulate a network of relationships.

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JV vs. PPPPPS as public service facilitator

JV vs. PPPPPS as public service facilitator

Project

Public Sector Private Sector

Assets $$$

O & M

Service Product

End User

Public Sector Private Sector

Assets

$$$

O & M

End User

Project Service

PublicService

Shared Risk and Responsibility“Conflict of Interests”

Public Sector retains responsibility& Optimal Risk Transfer

ServiceContract

Why embark on a PPP Programme ?Why embark on a PPP Programme ?

• Improved value-for-money procurement of public services.

• Reform / modernisation of public services.

• Contestability in delivery of public services.

• Antidote to short-termism in both public and private sectors.

• Improved transparency of costs of public services delivery.

• Overcome capital budget constraints.

• Improved value-for-money procurement of public services.

• Reform / modernisation of public services.

• Contestability in delivery of public services.

• Antidote to short-termism in both public and private sectors.

• Improved transparency of costs of public services delivery.

• Overcome capital budget constraints.

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Comparison with Conventional ProcurementComparison with Conventional Procurement

Under conventional public sector procurement, expenditure is input-based: ie., the Government pays

whether or not the required service is delivered

Whereas:

Under PPP, the public sector only pays if and to the extent the required services are delivered, year-after-year

“output – based”

Under conventional public sector procurement, expenditure is input-based: ie., the Government pays

whether or not the required service is delivered

Whereas:

Under PPP, the public sector only pays if and to the extent the required services are delivered, year-after-year

“output – based”

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Key Drivers of Value for MoneyKey Drivers of Value for Money

• Output based contracts

• Whole life-of-asset costings

• Single point responsibility – integration / scope

• Innovation

• Competition

• Economies of scale

• Capital at risk to long term performance

• Risk transfer

• Output based contracts

• Whole life-of-asset costings

• Single point responsibility – integration / scope

• Innovation

• Competition

• Economies of scale

• Capital at risk to long term performance

• Risk transfer

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Value for Money: Traditional Cost / Payment Pattern

Value for Money: Traditional Cost / Payment Pattern

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Paym

ents

( $

)

Time (Years)0 3 10 15

Construction

O & M Costs

Paying for “inputs”

Cost Overruns

Cost Overruns Extension

Delay Costs

“40 %” Optimism bias

Quality of Asset

P ay m

e nt (

£ )

Time (Years)0 3 10 15

Construction period

no payment

Public Sector pays for service/outputs

Operational period

Payment against delivery

Value for Money: PPP / PFI Payment Mechanism

Value for Money: PPP / PFI Payment Mechanism

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Benefits of Project FinanceBenefits of Project Finance

• Limited recourse finance projects are more highly structured commercially than public sector or corporate financed alternatives

• Each party is to bear only those risks which are appropriate

• Only way to fund much-needed infrastructure

• Increased flow of inward investment

• Greater pool of project sponsors and associated innovation

• Financial and commercial know-how transfer

• More projects implemented

• Limited recourse finance projects are more highly structured commercially than public sector or corporate financed alternatives

• Each party is to bear only those risks which are appropriate

• Only way to fund much-needed infrastructure

• Increased flow of inward investment

• Greater pool of project sponsors and associated innovation

• Financial and commercial know-how transfer

• More projects implemented

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Lender Due Diligence : Public Sector AllyLender Due Diligence : Public Sector Ally

Risk identification, assessment, allocation and sharing• Environment

• Technical

• Commercial

• Markets

• Financial

• Insurance

• Legal

Risk identification, assessment, allocation and sharing• Environment

• Technical

• Commercial

• Markets

• Financial

• Insurance

• Legal

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Benefits of Long Term ContractsBenefits of Long Term Contracts

• Security of supply / service provision / asset availability

• Security of cashflow / asset allocation / utilisation

• Amortisation of asset capital cost over economic life – ease authority affordability

• Price certainty for Authority

• Revenue reliability for finance

• Raising term debt finance (maximise gearing)

• Investor confidence to commit with capital and resources

• Aids off balance sheet treatment

• Security of supply / service provision / asset availability

• Security of cashflow / asset allocation / utilisation

• Amortisation of asset capital cost over economic life – ease authority affordability

• Price certainty for Authority

• Revenue reliability for finance

• Raising term debt finance (maximise gearing)

• Investor confidence to commit with capital and resources

• Aids off balance sheet treatment

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PPPs in SurinamePPPs in Suriname

• Infrastructure– Transport• Roads• Regional Airports

– Education• Primary Schools

– New Build– Refurbishment

– “Wider Markets Initiatives”• New uses for existing public sector assets

• Infrastructure– Transport• Roads• Regional Airports

– Education• Primary Schools

– New Build– Refurbishment

– “Wider Markets Initiatives”• New uses for existing public sector assets

The link between school buildingsand better education