SESSION 2 Tuesday 9.30 – Selection of PPP Projects

PPP project “suitability test” Scale of the project Significant service or operational requirements User charges / third party income Existence of a competitive market Stability of future demand Expression of demand in output terms Measurement of performance in output terms Opportunity for significant risk allocation to the private sector Capacity of the public sector

Scale of the project Projects need to be of sufficient scale to justify using the PPP approach and to attract market interest. Current guidance is that projects involving private finance need to be of the scale of at least $20 million to be viable. The government may bundle a number of smaller projects together in order to reach an appropriate scale.

Significant service or operational requirements Projects that combine design, build, operate, maintain and finance to reduce interface risk by having one party responsible for all aspects of the project make good PPPs. PPP projects with significant ‘upfront’ construction costs and minimal whole-life operating and maintenance costs unlikely to deliver added value.

Third Party Income/User Charges User charges are charges to the public for use of the asset or services provided under the PPP arrangement that form part of the income stream to the PPP Company. Are they acceptable? Third Party Income is extra income that can be generated by the PPP Company outside of the core income source. Is this realistic?

Existence of a Competitive PPP Market in a Sector? If no local history, soft market test Market consultation may be needed to: ▫ identify or clarify suitable options or solutions; ▫ determine the bankability of, and the market interest in, the proposed project; ▫ evaluate the risks that will be transferred; and ▫ assess the private sector’s willingness to accept the required degree of risk transfer.

Stability of Future Demand PPP contracts are long-term, typically 25 to 30 years. Upside - private sector must develop integrated, long-term solution Downside - if service not needed after, say 10 years, compensation paid to the private sector Therefore, not prudent to enter into a long term PPP arrangement for an asset or service for which the demand is likely to be unstable.

Stability of Future Demand - IT Apart from specialised cases, general consensus is that PPP is not suitable as a procurement method for projects containing a significant IT element that is likely to be superseded in the short term for the following reasons: ▫ Typical I.T. projects tend to have a life span in the region of three to five years; ▫ The difficulty of predicting the technological advances five years ahead, let alone twenty years from contract commencement; ▫ Integrating different IT systems increases the complexity of the project.

Can Project Requirements be expressed in Output Terms? Outputs are the end result of the project without specifying the means Increases benefit from private sector innovation in how they choose to deliver the service Keep essential items expressed in input terms to a minimum If government wishes to retain control of construction and design of a project, unlikely to be a good PPP

Can Performance be measured in Outputs? Successful PPP payment mechanism - performance outputs must be clearly defined, unambiguous, measurable and enforceable Key features: ▫ no payments made until the service is available ▫ single unitary charge for the service ▫ deductions for substandard performance Concession projects allow the private partner to levy a charge on users of the asset/service. Performance failure should lead to levying of a financial penalty

Significant Risk Transfer Optimal risk transfer secuers vfm Risks should rest with the party best placed to manage them. Key risk headings in PPP might be: ▫ Commissioning Risk ▫ Planning Risk ▫ Construction Risk ▫ Design Risk ▫ Latent Defect Risk ▫ Demand Risk

Significant Risk Transfer continued ▫ Operating Risk (core and non-core) ▫ Obsolescence Risk (facility/technology) ▫ Upgrade Risk ▫ Financial Risk ▫ Environmental Risk ▫ Force Majeure Risk ▫ Change of Law Risk ▫ Residual Value Risk

Public Sector Capacity PPP projects require skill sets not readily available in the Public Sector External advisers should advise, not take responsibility Need committed and competent public officials on the project team Training needs to be carefully handled