PUBLIC -
PRIVATE PARTNERSHIPS [00PP00
The Advantages & Limitations
January 2005
UPU, Berne
TMB
T.M.Blaiklock
Tel : [44]208-255-3851
e-mail: tmblaiklock@aol.com
Investment
Projects in Public Services
OPTIONS for Government:
OR
Note:
PPP = provision of a public service by the private sector
PFI
= capital investment by private sector for public service provision
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What is a
PPP?
The Public Sector (i.e. Government):
- identifies the demand for a public service
- defines the service outputs
- agrees long-term concession (franchise) for the service
- payment made against performance measures
-
imposes regulatory regime
The Private Sector:
- provides service;
- design, builds, finances, operates and maintains the service and the assets;
- operates within regulated environment
[i.e. 00ublic interest00requirements]
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PPP
in Public Services
introduces private sector capital
introduces private sector practices & efficiencies
promotes competitive markets
facilitates innovation
Benefits
Constraints
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00n00or 00ff Balance Sheet00
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PPP is
00ff Balance Sheet00if:
(a) construction/completion risk carried by PPP concessionaire;
AND
(b) either demand or availability
risk carried by PPP concessionaire.
[ref.
EU Decision for Balance Sheet Treatment of PPP00 : Feb 2004]
Note: PPP00
can create contingent liabilities for purchaser of services
ELEMENTS OF PROJECT FUNDING
At Risk:
No Risk:
Equity
Debt
Hotels & property = 50/50
Industrial projects = 70/30
Infrastructure & power = 80/20
PPPs = 90/10
Typical Debt/Equity Ratios:
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SOURCES
OF FUNDS : PPP00
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PPP INVESTMENT
CRITERIA
At Risk:
No Risk:
IRR / Equity IRR Investment Period
Equity
Debt
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SOURCES
OF FUNDS : PPP00
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Question: against
what security are loans provided?
Answer:
[ limited / non-recourse ]
00roject Financing00/i>
00PP Concessions00/i>
SECURITY FOR LENDERS
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History
of PPP00
2000
1990
1980
1970
1960
UK, Europe & Rest
of World [excl. USA]
North Sea Oil
Minerals
Nat. Resources
Power & Telecoms
Infrastructure& Public Services
00FI
00PP00/b>
U.S.A.
Govt. & Corp. Gtees
Municipalities
Govt. Agencies
-
- - - - - - - - - - - - - - - - - Industrial Revenue Bonds -
- - -- - - - - Comm. Bk. Loans--
Cash-Flow / Bank, ECA &
IFI Loans - - - - - - - - Bond Issues
Turnpikes; Power; Oil/gas Pipelines;
Airports, Water- - - - - - - - - - -
Private Co.s - - - - - -
- - - Privatisations - - - - - - -Services - - - - - - -
-
Private Corporations, PIC00
- - - - - - - - - - - - - - - - - - - - - - - - - - - -
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00PP00/b>
FUNDING STRUCTURE : PPP
PROJECT COMPANY
[Concessionaire]
Contractor
Investors
Lenders
[ECAs; IFIs; banks]
(Inter-credit.
Aggt.)
Construction
Contract
Share Subscription
Agreement
Loan Aggts.
Purchasers
Escrow
Acct.
Sales Contract.
Revenues
Debt
Service
Payments (2)
O & M
Payments(1).
Surplus(3)
Dividends
Supplier
[raw materials;
fuel]
Operator &
Maintenance
Supply
Contract
O & M Contract
3rd Party
Gtees.
Regulatory Regime.
The
Engineer
GOVERNMENT
Purchaser of
Public Service
Concession
Aggt.
[e.g. PPP]
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PPP AGREEMENTS
1 : Implementation Agreement.
2 : Concession Agreement
3 : Construction Contract
4 : Operations Contract
5 : Maintenance Contract
6 : Raw Materials Supply Contract
7 : Sales Purchase Contract
8 : Special-Purpose Company Documents
9 : Share Subscription Contracts
10: Loan Agreements
11 : Inter-creditor Agreement
12 : Escrow Account / Trustee Arrangements
13 : Insurance
14 : Licences; Permits;
Bills & Decrees;
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PPP INVESTMENT
CRITERIA
At Risk:
No Risk:
IRR / Equity IRR Investment Period
Equity
Debt
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Concession
[Implementation]
Aggt.
Construction
Contract
Sales
Contract
O & M
Contract
Supply
Contract
SPCo
Docs
Share-
holders00/b>
Aggt.
Loan
Aggts.
Inter-
creditor
&
Escrow
Aggts.
Insurance
Permits;
Licences;
Bills &
Decrees
Project Finance
00ouse of Risk00/i>
Mortar
= Risk
PPP RISK
MATRIX
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PPP LENDERS00
CRITERIA
Debt Service Cover Ratio [periodic] : = Free Cash Flow
Fixed Charges
Free Cash Flow = Net Operating Profit
[plus : depreciation]
less : increase in working capital
less : incremental cap. expenditure
less : tax
Fixed Charges = loan principal + interest payts.
[plus : mandatory dividends, lease payts.]
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PPP v.
Conventional Project Funding?
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CONVENTIONAL
FUNDING STRUCTURE (1)
PAID FROM GOVERNMENT BUDGET
PURCHASER
Govt. Agency
Contractor
or Supplier
Govt.
EPC
Contract
BUDGET
FUNDS
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CONVENTIONAL
FUNDING STRUCTURE (2)
GOVERNMENT GUARANTEE
PURCHASER
Govt. Agency
Contractor
or Supplier
Govt.
Lenders
[ECAs; IFIs; banks]
(Inter-credit.
Aggt.)
EPC
Contract
00quity00/font>
Grant / Subvention
Loan Aggts.
The
Engineer
Govt. Gtee
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Cost of
Conventional Project Purchase
METHODOLOGY:
1: Prepare a Public
Sector Comparator [00SC00
2: Undertake a Value
for Money [00FM00
assessment
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Cost of
Conventional Project Purchase
Methodology for PSC:
1: Base Cost estimates (NB. full life cycle);
2: Concept of 00ptimism Bias00/font>
3: Risk assessment & allocation
[NB. subjectivity of 00isk00;
4: Value Retained Risks;
5: Value Transferable Risks;
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Project
Cash-Flows
Value
Time
2004
[Today]
2005
2006
2007
2008
2009
- 100
- 200
+ 100
2010
+ 200
0
2004
[today]
2005
(120)
(180)
(90)
+ 110
+ 180
+ 205
+240
Revenues
less Opcosts
Capital
Costs
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Optimism Bias
[39.82]
Retained
Risk
[5.10]
PSC
NPV
Cost
of
Service
Payments
[120.00]
Retained
Risk
[5.10]
PPP
Option A
Cost
[NPV
@ 3.5%]
NPV
Base Costs
[94.13]
PSC
v. PPP
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139.05
125.10
Option A is better
than PSC
PSC v.
PPP
00/u>Value
for Money00/u>
1: evaluate PPP bids versus PSC
2: identify material factors not included in PSC
e.g.:-
- wider cost savings & efficiencies;
- innovation;
- technology transfer;
- quality of service delivery;
- wider economic & social benefits & dis-benefits
(e.g. pension transfer issues)
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The PPP
Bid Process
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THE PPP
PROJECT PROCESS
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THE PROJECT
PROCESS
Pre-Qualification
Tendering
Negotiations
Formation of SPC
Complete Financial Aggts.
Financial
Close
Phases
Time
2-3mth
(2 mth)
3-6
mth (3 mth)
3 mth
(3 mth)
3-9 mth (3
mth)
3-6 mth
(2 mth)
PPP
Govt.
Total:
14-27mth (13 mth)
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PPPs
Issues Arising
basis of Public Sector Comparator (PSC) and Value for Money00(VFM):
e.g.
discount rate to be use; the assessment and allocation of risk
windfall gains from re-financing : the nature of the 00artnership00/font>
short-term perspective of investors: secondary equity
contingent liability of Govt. contractual payments
EU procurement rules: conflicts with realistic negotiation process
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PPPs
Issues Arising
high up-front bidding costs for PPP concessions.
Impact of financial strength of bidders;
independence of financial advisors and conflicts of interest
00ublic interest companies00: safety v. profits (transport)
complexity of PPP: are the costs justifiable?
Govt. life cycle shorter than project maturity of PPPs
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off-balance sheetintroduces private sector capital
introduces private sector practices & efficiencies
promotes competitive markets
facilitates innovation
complex structure & documents time-consuming to arrange high up-front costs demands significant senior staff attention project choice important PSC methods need refining difficult to resolve when in default needs legal framework corporate governance (?)
Benefits
Constraints
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PPP in Public Services
USEFUL
SOURCES OF INFORMATION
_________
PFI Report; IFR Project Finance Intl.;
Euromoney
Project Finance; Infrastructure Journal
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Some PPP
Applications
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TYPES
OF PUBLIC SERVICE PROJECT
Mass Transit: metros; LRTs; bus-ways.
Road, Rail & Bridges: toll-roads.
Water Industry: irrigation; desalination; clean/dirty water.
Public Services : offices; school buildings; hospitals; prisons; law courts
___________________
Ports: container ports; bulk handling.
Oil & Gas: pipelines; refineries; facilities.
Petrochemicals & agro-industries.
Industrial Plants : aluminium; steel; cement.
Regulated
[PPP00]
Unregulated
[non-PPP]
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UK
PPPs : Sectors
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100%
[Total Value = ~ Euro 50 billion]
[Source: Infrastructure Journal]
Aug 2002
= 53%
Typical PPP Contractual Structure
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Shareholders
SPCo
Govt. Agency
[or Trust]
Financiers
Building Contractor
Facilities
Manager
e.g : prisons
hospitals
schools
office buildings
warehouses
Concession
Aggt.
Payts. For
Availability
Min. of
Defence : Facilities Management PPP
Project: to provide warehousing services for the Navy
Client : Royal Navy
Value: ~ Euro 40 million
Benefits: innovation & flexibility
efficient use of property
cuts transport costs
[ Note: post 2003, min. PPP value = ~ Euro 30 million]
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Inland
Revenue & HM Customs & Excise
Office Building PPP
Project: to sell and lease back 600 office buildings in UK
Value: ~ Euro 600 million
PPP Concessionaire: Mapeley UK Ltd.
Benefits: flexibility
efficient property management for Govt.
Issues: Mapeley not financially strong, although shareholders strong.
Mapeley UK Ltd based offshore in tax haven
[NB: there are many successful UK office building PPP00]
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Magistrates
Courts: IT System PPP
[00ibra00Project]
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Project: to provide IT system for the Crown Prosecution Service and for Courts management
Client : Lord Chancellors00 Office (i.e. Government)
PPP Concessionaire: ICL / Fujitsu
Value: ~ Euro 400 million
Issues: changes in specifications
underestimate of R & D costs
lack of understanding of PPP for both parties
difficulties when problems arose
Result: No more IT PPP00 in the UK
Navcanada
Air Traffic Control PPP
Project: to provide air traffic services in Canada
PPP Concessionaire: Navcanada (Crown / trust corp.)
Value: ~ Euro 600 million
Issues: strong predictable cash-flows
hard currency revenues
non-Government interference
private sector management regime
off balance sheet
Result: survived commercial impacts of 9/11,
cf. NATS in UK.
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