structuring of ppp

7/24/2019 Structuring of Ppp

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STRUCTURING/DELIVERING

INFRASTRUCTURE CENTRIC

SOLUTIONS THROUGH PPPS

PROF. B.P.MISHRA

XIMB

1


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WHY PPP?

Availability of private sector finance (most commonly cited reason)

Through PPPs, governments can leverage private sector finances tomeet the infrastructure needs

Achieving greater Value for Money (VFM) through efficiency gains

n principle, PPPs can improve VFM by!

Incentivizing on-time and within-budget delivery

Optimizing life cycle costs

Providing an opportunity to innovate

Optimizing the risk allocation

Value for Money achieved by PPPs is often debated"


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EXPECTATIONS OF GOVERNMENT

& PRIVATE SECTOR

Government

Private

sector

Harness private sector efficiencies (on-time, within-budget delivery, innovation)

Augment government resources

Provide better value for money

Facilitate improved access and service delivery

iable business opportunity

Fair distribution of ris! " responsibility #ransparency in procurement

$onsistency in legal and regulatory framewor!

%table political and economic environment

#


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PPP LIFE CYCLE PROCESS

PPP development pipeline PPP operationPPP identification

Phase &'Full

feasibility,

PPP

preparation,

Clearance

Phase 'Procurement,

Final

approval,

Award

Phase 'Strategic planning,Project pre

feasibility, PPP

suitability testing,

!nternal

clearance

Phase *'!mplementation

and monitoring

$


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NEED ANALYSISPURPOSE & KEY ELEMENTS

Collect information on e#isting service levels

!dentify the service need and its scope based onsta%eholder consultation and government priorities

Provide e#plicit but broad description of the service need

to be met and its objectives

&ecision to proceed to the options analysis stage

nables government to more accurately assess the service needs " definethe delivery levels re.uired in line with government priorities

!dentify service need&efine delivery

outcomes

'eed analysis

template

&


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NEED ANALYSIS

"nly ()* of city gets drin%ing

water for + hours a day

naccounted for water -F./ is

+)*

$0AMP1$PA2AM$3$2S

s there a pressing need for

change in service'

/hat are the desired outputs0Focus on services not assets

4))* connectivity

5)* collections

6uality standards to be met

/hat are the e1pected benefitsto sta!eholders0Are these in line withGovernment2s priorities0

!mproved access to drin%ing water

for population

&rin%ing water is 7overnment8s

top priority

(


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!ncreases focus on projects

that may achieve

government priorities

Shifts emphasis to

identification of full

delivery need before

assessing the ways to

achieve it

9elps early

identification of %ey

sta%eholders and

potential

opportunities andconflicts

Facilitates clear

agreement and

documentation of

objectives at the outset

NEED ANALYSISBENEFITS

!dentify

Agree

$mphasis

Focus

:enefitsof 'eed

Analysis

*

)


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SERVICE NEEDS DELIVERY OPTIONS

& OUTPUT SPECIFICATIONSA CLASSIFICATION EXERCISE

34%ervice5eed

3&46elivery+ption

34+utput

specification

#raffic congestion

#ime ta!en to travel from point A to7 has tripled in past 8 years

$onstruct a new road

9:; of storm water drains to be de-

silted before onset of monsoons(before :th hours of water supply in aday

*


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OPTION ANALYSISPURPOSE & KEY ELEMENTS

'ote;


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$onfirm need analysis

3o revisit the findings of 'eed Analysis to ensure that these are

still valid -in case there is a time gap between need analysis and

option analysis/

KEY ELEMENTS OF OPTION ANALYSIS

Confirm needanalysis

Consideroptions

$valuateoptions

"ption analysistemplate

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$onsider options (one or a combination)

$#isting asset options

'onasset options

'ew asset based options



Consideroptions

$valuateoptions


1"


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SERVICE NEED AND DELIVERY

OPTIONS: AN EXAMPLE

Range of possible delivery options

$riteria 6escription 1ample

1isting asset

solutions

$#isting infrastructure held by government might be

used= 3his may involve upgradation or refurbishment to

bring the infrastructure to re>uired standard

.idening of roads to

+?5 lanes from

e#isting @? lanes

5on-asset

solutions

Service needs may be met without creating additional

assets, through reconfiguring the means of servicedelivery, demand management, etc=

3raffic restrictions or

improvements intraffic management

5ew asset

based solutions

'ew infrastructure may be developed, in case service

need cannot be met by above two options=

Construct a parallel

@? lane road

%ervice need' ?educe traffic congestion

1#


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ILLUSTRATION OF OPTION ANALYSIS

UNDER MULTIPLE CONSTRAINTSNEED: PROVIDE !" X # ELECTRICITY IN $ DISTRICTS OF A

STATE

Affordability

Political will

&istribution

franchise to

reduce power theft

:alance industrial ?

agri ? domestic supply

to reduce pea% demand

&ifferential tariffs tomanage pea% demand

Purchasing

power from

other states

1oo% for

renewable

generation

sources

!mproving metering to

achieve accurate billing

:udget

3ime horiBon

'ote; Multiple options may be pursued in tandem for service delivery

!ncrease

conventional-thermal/

generation

Shifting to 9V&S

distribution to

improve efficiency

!mproving

transmission

networ%

maintenance

to increase

efficiency

1%


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-utcomes

$#ecutive summary

&escription of service re>uirements

Project function, objectives and critical success factors

Alignment with strategic objectives

Sta%eholder identification

"ption analysis

Project delivery alternatives

Preliminary ris% assessment

Preferred option

Actions to progress to the feasibility stage

Supporting documents

Signoff


Consideroptions

$valuateoptions


1&


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Allows consistent

ran%ing of

proposals using

similar criteria

Allows identification of

process to manage ris%s

Facilitates

allocation of

resources to

proposals that are

most feasible

Facilitates identification of the level

of supporting studies re>uired

9elps identify and

>uantify critical

asset investment

issues early in the

project lifecycle

Provides a sound

basis for %ey

strategic decisions

to meet service

delivery

objectives, cost

effectively

OPTION ANALYSISBENEFITS

:enefitsof

"ption

Analysis6uantify

investments

Allocate

resources

Service

delivery

2an%proposals

Supportingstudies

!dentify

processes

1(


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PRE%FEASIBILITY ANALYSISPURPOSE

@ey .uestions'

.hether the project is prima facie feasibleD

.hether the project is suited for development as a PPPD

3o >uic%ly establish that the identified project has merit to be

ta%en up by the government sponsor, and then a high level chec%

to verify suitability of the project being developed as a PPP

1)


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Facilitates a >uic%

chec% regarding

amenability of the

project as a PPP

9elps in optimiBing project

development e#pendituresby weeding out projects

with a poor business case

9elps in overall

prioritiBation of

resources andefforts from a

government

contracting

agency8s

perspective

9elps the government

contracting agency to

plan ahead to establish

wor% plans, budgets,

approvals, etc=

Clearly

establishes the

initial case to

justify ta%ing

up the project

PRE%FEASIBILITY ANALYSISBENEFITS

:enefits

of PFA

"ptimises

e#pense

!nitialbusiness

case

Plan

ahead

Allocate

resources

Suitability

as a PPP

",

*


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NEED FOR TRANSACTION ADVISOR TA'SCOPE OF WORK VS. SKILLS

3echnoeconomic feasibility analysis

Procurement planning

Project structuring

Project mar%eting

Sta%eholder consultations

:idding and contract award Communication

egal due diligence

Project 3eam!ransaction

"dvisors

!asks involved in project development !echnical

egal

#inancial

$conomic

Procurement

Project management

Social and environmental

%ange of skills needed

"1


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TRANSACTION ADVISOR(S

SELECTION: GUIDING PRINCIPLES

3ransparencyas much information as possible should

be made publicly available

Fairness all parties should be treated e>ually

Costeffectivenesscosts should be minimiBed without

sacrificing >uality

Freedom from

conflicts of interestthe selection process should avoid both

actual and perceived conflicts of interest

""


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$ost evaluation

Score for lowestpriced proposal 4))

3he proposal score can be calculated as

per the given formula;

S G 4)) # Fm ? F

S is the financial score

Fm is the lowest priced proposal

F is the price of the proposal being

considered

$ombined score

.eightage

3echnical score 5)*

Financial score @)*

Proposals are ran%ed as per combinedscore

TRANSACTION ADVISOR(S

SELECTION: )CBS METHODOLOGY

uality evaluation

Advisor8s e#perience

Methodology

Hey personnel

3ransfer of %nowledge

Participation by nationals

3otal

) 4)

@) ()

I) +)

) 4)

) 4)

4))

"%


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PROJECT INCEPTION * APPOINTING

TRANSACTION ADVISOR

Prepare to evaluate bids 2eceive bids $valuate technical proposal $valuate financial proposal FinaliBe and sign the contract with 3A

$stablish bid evaluation panel &efine terms of reference Prepare :id Pac%age Publish advertisement, brief bidders and respond to

>ueriesPrepareto

select

3ransaction

Advisor

Appointa

3ransaction Advisor

"&


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Cntroduction project, its objectives and aligning themwith institutions strategic vision

%cope of wor! Feasibility study of the project and bidprocess management and procurement of PPP partner

-if applicable/

7ac!ground !nstitutional mandate to proceed with theproject, bac%ground documentation and preparatory

wor%, budget of the project PPP feasibility study deliverables Components,

presentation and submission re>uirements for the

feasibility study report

PPP procurement deliverables Administration ofbidding process, evaluation of bids, PPP agreement

negotiations, management plans, agreement signature,close out report, case study and financial closure

?e.uired #A s!ill, e1perience, remuneration andmanagement

?ules of bidding, bid submission re.uirements and bidevaluation

KEY CONSTITUENTS OF TOR

6efine #erms of?eference

"(


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PPP STRUCTURINGKEY ISSUES

.oes the PPP involve building ne/ assets to provide the service

(capital e0penditure), or does it re1uire the private partner for

operations and management of the service only'

2hich roles /ould the private sector carry out' For e0ample, /ho

/ould provide the finance' 2ho /ould design and construct'

2ho /ould o/n the assets'2hat /ould be the duration of the PPP contract'

3o/ are the various pro4ect ris+s allocated bet/een the private and

public partners'

2hat /ould be the ma4or revenue sources for the pro4ect 5 /hether

from charges to users (direct tolls), or payment from government forthe services (shado/ tolls or annuity)'

s the demand for the infrastructure service e0pected to be stable

over the period of the contract'

")


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SCOPEKEY ISSUES

The scope of the PPP pro4ect does not have to be same as the scope

of the overall pro4ect

It can be less& e'g' in an airport project& PPP element may be limited

to landside activities& while airside facilities like runway construction

can be done by the public sector It can be more e'g' adding rights for developing adjoining land in a

road project& say to enhance bankability& is likely to result in

enlarging the initial scope beyond road development

The scope of the PPP pro4ect is defined in terms of tas+s and

responsibilitiesAnd is related to the respective assets that are to be designed, built,

financed, maintained and operated

6cope 7ost

recovery

.uration PPP modal

variants

"*


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DURATIONE.G. SPECIFIC PROJECTS IN THE ROADS

SECTOR THROUGHOUT THE WORLD EXHIBIT

SIGNIFICANT VARIATIONS IN DURATION

6cope 7ost

recovery

.uraon PPP modal

variants

#1


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HOW TO DEFINE THE DURATION?SOME GUIDANCE PROVIDED BY MCA

%ector Advised duration as per


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A+,-0,- F2,345627862 9220+; ,+ ,2,004


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D43,+= A+,-909@ 5> 24-44 2644= 2442 4+4809

The ob4ective of developing infrastructure is to meet present and

future demand

2e /ill need to estimate future demand in order to!

0esign the capacity of an infrastructure

$stimate possible future revenues resulting from user charges

$stimate other future benefits resulting from use of the infrastructure asset

To allo/ prospective bidders to prepare their business case for

preparation of bids

0emand forecasts have proved to be inaccurate on many occasions

#&


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WHAT IS THE IMPLICATION?IN CASES WHERE DEMAND RISK IS TRANSFERRED TO PRIVATE PARTNER

f actual demand is more thanestimate!

Private partner might earn more than

the pro4ected revenues

nfrastructure capacity might be

insufficient

f actual demand is less than estimate!

Private partner may earn less than the

pro4ected revenues

Tariffs may have to be increased

:overnment may have to step in and

provide support or even ta+e over

the underta+ing

#(


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R4,ENSURE ACCURATE DEMAND FORECAST

A poor demand estimate can adversely affect pro4ect outcomes

A robust demand estimate is usually!

,rounded in realistic economic and demographic scenarios

,ives ade)uate attention to the likely impact of any competing facility

1ased on a thorough assessment of the willingness to pay

onservative in assuming revenues and does not unduly shy away in

accommodating higher growth scenarios 2while determining design

capacity3

arried out by e+perts using reliable data sources

4elected from amongst a range of highly possible scenarios

#)


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COST ESTIMATES: WHY RELEVANT?INACCURATE COST ESTIMATES ARE A SIGNIFICANT RISK FOR PPPS

2e /ill need to estimate the costs (capital and recurring) in orderto!

"ssess the funding re)uirements

"ssess whether the costs can be offset by future benefits 2from an

economic perspective3 or future revenues 2from a financial perspective3

"rrange funding either from public sources or private sources depending

upon the outcome of the value for money analysis

f the cost estimate is inaccurate then!

Project will have shortage of funding in case cost estimate is lower than

actual

Project will have e+cess funding and higher financing costs if cost estimate

is higher than actual

f the cost estimate is not properly substantiated then ban+s /ill

re1uire detailed due diligence and revision of estimate before

committing to the financing pac+age #*


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COST ANALYSISKEY ISSUES

-ptimism bias

6cope changes

;and ac1uisition

7learances

$,


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OPTIMISM BIASMITIGATE THROUGH ADE)UATE CONTINGENCY PROVISIONS

6ystematic tendency to underestimate costsAde1uate level of contingencies should be built9in to compensate

optimism bias

;evel depends on level of certainty re1uired

plifts on top of costestimate to compensate"ptimism bias

3o establish ma# re>uiredbudget with ()* certainty

3o establish ma# re>uiredbudget with 5)* certainty

2oads 4(* I@*

2ail )* (K*

:ridges E tunnels @I* ((*

Source; H &epartment of 3ransport @))

$1


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KEY CONSIDERATIONSTO MITIGATE RISK OF COST OVERRUNS AND DELAYS

Conduct proper due diligence in defining the scope of civil wor%s

and other %ey parameters of structuring

$nsure ade>uate contingencies

$nsure e#peditious land ac>uisition -for instance through early

consultation with project affected persons/

$nsure effective interface with other %ey sta%eholders, e=g=

relevant departments for statutory clearances and utility shifting,

users, media, civil society groups etc=

Conduct periodic reviews and underta%e course corrections where

necessary

$"


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RECAPENSURE ACCURATE COST ESTIMATE

Thin+ /hole life costing


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WHY IS RISK ANALYSIS IMPORTANT?INFRASTRUCTURE IS RISKY BUSINESS

%isk analysis has proven to be absent or rudimentary on many occasions

To identify and value ris+s

To ensure accurate and ris+ ad4usted input for the

financial and economic analysis

To ensure accurate input for the Value for Money

analysis

To understand the +ey ris+s of a pro4ect and addressthem accordingly

$$


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TYPICAL INFRASTRUCTURE RISKS

Political risk

%evenue

risk

#inancial

risk

0emand

risk

and ac)uisition riskonstruction

risk

!echnology

risk

Performance

risk

#orce

/ajeure

risk

Operation and

/aintenance risk

%egulatory

risk

%I454

$%


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RECAPENSURE ADE)UATE RISK ANALYSIS

dentify +ey ris+s


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RELEVANCE OF ECONOMIC ANALYSISAN UNECONOMICAL PROJECT CAN NEVER BE A GOOD PPP

The economic analysis 4ustifies the pro4ect

f pro4ect is not 4ustified, sta+eholders may 1uestion the pro4ect>s

rationale

The economic analysis 4ustifies if necessary use of publicresources e?g? fiscal support? n other /ords, should government

contribute to the pro4ect'

The economic analysis indicates if users are /illing and able to pay

$conomic justification is a prere)uisite for a PPP

$(


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ECONOMIC JUSTIFICATIONTHE CRITERIA

Net Present Value > 0

Economic IRR (EIRR) > Social Discount Rate

Benefit : Cost Ratio > 1

$)


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FINANCIAL ANALYSIS:


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FINANCIAL ANALYSIS:

WHY RELEVANT?TO INDICATE THE FINANCIAL VIABILITY

f PPP pro4ect is not commercially viable it is li+ely to fail to attract

private partners

Therefore it is crucial for the government to do a financial analysis

in order to design a PPPpro4ect in terms of ris+ allocation

A PPP pro4ect should be ban+able in terms of meeting the

re1uirements of investors

To ensure commercial viability the government may simulate the

private sector perspective on the pro4ect through a shado/ bid

%,


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KEY ASSUMPTIONS RE)UIRED

Amount of debt financing

7ost of debt

Amount of e1uity financing

7ost of e1uity

2eighted average cost of capital

nflation

%1


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VIABILITY GAP FUNDING VGF' SCHEME

evolving fund /ithin Ministry of Finance6upports PPP infrastructure pro4ects /hich are!

$conomically justifiable but 6O! viable commercially


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RECAPDESIGN A BANKABLE PPP


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WHY VFM IS RELEVANT?To decide /hether or not to pursue the pro4ect as PPP

"t the end of .#/ analysis phase& and"fter bidding 2to e+amine whether the winning bid delivers e+pected

.#/3

A robust VFM analysis can also be helpful in!

Optimizing PPP structure and the underlying risk sharing arrangement

6egotiations& to )uickly assess the impact of changes in risk sharingarrangement

$stablishing acceptability threshold for bids

!he financial analysis may design a bankable PPP' 7owever& unless it also

delivers .alue for /oney it may not be superior to traditional procurement

%$

DEFINING VALUE FOR


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DEFINING VALUE FOR

MONEY

IN INDIA YET TO BE DEFINED'

.alue for /oney represents economy& efficiency and effectiveness' In PPP

projects& .#/ means that the provision of the institutional function or the

use of the public sector property by a private party or 8.& in terms of the

oncession "greement& results in the benefit to the institutions defined in

terms of cost& price& )uality& )uantity& risk sharing and a combination thereof'

2/anual of PPP9 4outh "frica3

%%

VALUE FOR MONEY


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is+ transferD effective balance re1uired, meaning! %isks are directly translated into financial implications

%isks should be transferred to the party best able to manage it in the most

cost effective manner

-utput based specification of contract

Focus on /hole life cycle costs

;ong9term nature of contracts

Performance measurement and incentives

7ompetition amongst bidders

Private sector management s+ills

VALUE FOR MONEY FOPTIMAL RISK ALLOCATION EFFICIENCY GAINS'

%&

VALUE FOR MONEY ANALYSIS


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naccuracy@inade1uacy of datancomplete identification of +ey ris+s

;ac+ of consensus on discount rates

2ilful manipulation of analysis by vested interest

Time inconsistency (post9analysis, inordinate delays in actual

bidding)

Analysis may be very e0pensive

Eo robust public sector alternative@comparator

Source; PP!AF 7ridlines L!s the public sector comparator right for developing countriesD -@))+/

VALUE FOR MONEY ANALYSISCOMMON ISSUES OR CONCERNS

%(


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PUBLIC SECTOR COMPARATORMOST COMMON VFM ANALYSIS TOOL

Applied upon revie/ of bidsTo compare value for money estimate of the preferred bid to the

alternative of public procurement

All transaction costs that are already incurred are to be treated as sun+

costs


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RECAPENSURE A PROPER VALUE FOR MONEY ANALYSIS

Agree on level of detail of the analysis ;uantitative or )ualitative

4imple risk analysis or sophisticated risk analysis

Agree on perspective and discount rate


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HOW TO DEFINE THE OPTIMAL

STRUCTURE?BY ANALYSING AND VALUING THE OPTIONS

s the PPP financially

viable'

s the PPP

better'

s the pro4ect /arranted'

The optimal structure

provides the ma0imumValue for Money to the

public sector

6ub4ect to the condition of

a positive value to the

private sector, and

6ub4ect to the conditionof a positive value to

the society at large

.alue for /oney

analysis

#inancial .iability

Indicator

$conomic

analysis

&,


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WHY IS REGULATION RELEVANT?


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WHY IS REGULATION RELEVANT?TO PROTECT THE PUBLIC INTEREST

Avoid e0cessive profits i?e? /indfall gainscaused by circumstances not related to the

performance of the infrastructure developer

=0amples!

0emand growth beyond e+pectation

%efinancing

&"

FORMS OF REGULATION


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FORMS OF REGULATIONTO BALANCE INTERESTS OF INVOLVED STAKEHOLDERS

o Cenefit sharing

o eduction of duration

o ate of return regulation

o Price cap regulation

o 6liding9scale price cap regulation

o Cenchmar+ approaches


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BENEFIT SHARINGMOST COMMON IN INTERNATIONAL PRACTICES

f traffic e0ceeds target, the e0cess profit /ill be shared %9%

For e0ample

If "ctual "verage !raffic e+ceeds !arget !raffic by more than


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REDUCTION OF DURATIONAS PER MCA

f traffic e0ceeds target, the duration /ill be reduced pro9rataFor e0ample

!he concession period shall be deemed to be modified by @'=> per @ >shortfall or e+cess

In other words& if "ctual "verage !raffic is => less than !arget !raffic&

concession period will be shortened by A'=>

mplies a ris+ for the public sector i?e? /hen /ill the concession end,

/hen /ill it need to re9tender

&%


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HOW CAN YOU REGULATE?

Contract

La

&

&


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than%s

structuring of ppp

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