PPP Policy Framework for St. Petersburg William Dachs The World Bank St. Petersburg- May 22, 2008

Background St. Petersburg has embarked on one of the largest PPP programs in the world Four mega-projects, multi-hundred billion Ruble investment City PPP Law and Federal Concession Laws provide framework Committee for Investments and Strategic Projects has played a key role in the PPP programme to date The City supported by the World Bank has done a lot of work examining best practice to apply to the City

What are the City’s objectives? To implement socially important projects in the City, To increase the involvement of private investments into the economy, To provide effective use of City assets and To improve the quality of goods, works and services provided to consumers

Objectives will be met by… Implementation of PPP projects that… are affordable to the City and its people, which offer good value for money in the services they provide and in the risks that they transfer to the private sector a solid framework for appraising projects

How will the City do it? Four Key Challenges to policy framework To implement a clear project preparation and approval system by setting out a clear approval process for PPP projects To improve coordination of activities by being clear on the allocation of responsibilities between Committees To standardize systems by systemizing the project processes so that the time taken to prepare projects is reduced and the outcomes of the project are consistently of a high standard To widen the range of PPP projects in the City By examining all sectors methodically for potential PPP projects

Investment committees to provide training PPP training program on Use of standard PPP methodologies Project appraisal and risk management PPP projects at inception, feasibility study, bidding, negotiation, and contract management stages Sector specific training on international and domestic experience in PPPs Other international conferences and training relevant to the City Available to all City Committees and Agencies.

Standardized Procedures and Documents Investments Committee will develop detailed guidance material and methodologies for use by all City Committees on PPP Projects Project initiation, project screening and the appointment of advisors PPP feasibility studies PPP Bidding and negotiation PPP Implementation, contract management and monitoring Standardized PPP Agreement (Contractual) provisions

Who will coordinate? An appropriate forum should act as the coordination and policy committee responsible for ensuring that the City PPP programme is consistent with the principles and objectives of the City law oversee the communication and marketing of the PPP to all local stakeholders including the public and to international investors

City’s Policy on Unsolicited Proposals International experience shows that unsolicited proposals will not be able to replace the strong role for government The City should maximize competition and transparency by subjecting all unsolicited proposals to competitive bidding However the City should accept unsolicited proposals where the private sector has identified a potential PPP project It must be technically innovative and it must not be for a project identified by the City for development as a PPP or other form of open tender

PPP Policy Framework for St. Petersburg THANK YOU !!! William Dachs The World Bank Wdachs@worldbank.org

William Dachs The World Bank St. Petersburg- May 22, 2008 PPP Project Cycle William Dachs The World Bank St. Petersburg- May 22, 2008

Outline Typical PPP project cycle Timeline & milestones Stakeholders: Where they fit in?

Timeline 1 month 2-6 months 6-24 months 10-30 years 13

Developing and approving a PPP in Victoria, Australia

Process flow of PPP projects: Phase I Project Inception Guidance Note 1 Advisory service (Internal) Economic/Financial/Technical Milestone List of PPPs with preparation funding allocated Timeline 3-4 weeks

Process flow of PPP projects: Phase II Feasibility Guidance Note 2 Advisory service Economic/Financial/Technical/Legal/Environmental Milestones Decrees approving F/S and bidding documents Timeline 2-6 months

Process flow of PPP projects: Phase III Procurement Guidance Note 4 Advisory service Economic/Financial/Technical/Legal/ Environmental Milestone Approval of Final Contracts Timeline 6-24 months

Process flow of PPP projects: Implementation Phase Contract Management Guidance Note 5 Advisory service As needed Milestone Project Implementation Timeline Project Life

Detailed timelines for Procurement Phase Possible investors’ conference Issue RFQ documents Appoint per-qualified bidders Issue final RFP documents Possible expression of Interest Prepare RFQ documents RFQ response Phase Evaluate RFQ responses Issue RFP documents Prepare draft RFP documents Consultation with bidders Prepare amendments to RFP documents Feasibility Study Completed institution due diligence Continuing and completing land acquisition and EIA processes, legislative or regulatory Processes to enable project, third party agreements 4 to 8 weeks 3 to 6 weeks 4 to 16 weeks Decree approving project FS Decree approving project bidding documents Tender Commission

Procurement Phase timeline contd 2 Issue final RFP documents Bid submission date Selection of preferred Bidder or decides on BAFQ Selection of Preferred bidder Bid preparation Bid evaluation BAFO documents BAFO preparation BAFO evaluation Prepare evaluation summary report 6 to 20 weeks 3 to 8 weeks 2 to 3 weeks 5 to 10 weeks Tender Commission Tender Commission

Procurement Phase timeline contd 3 Govt announces Preferred Bidder PPP agreement signing Financial closure Negotiation of PPP agreement Prepare evaluation report including negotiation strategy Fulfillment of funding conditionalities Prepare Final Approvals Prepare PPP agreement management plan Prepare close-out report and case study 12 to 26 weeks 2 to 6 weeks

Typical PPP project structure and stakeholders Political and Macroeconomic Risks FX Risks and Refinancing Risks Shareholders Regulatory Risks Granting Authority Lenders / Bondholders Shareholder’s Agreement Concession Agreement Regulatory & Demand Risks Operator Project Company Services Purchaser End-users Operation & Maintenance Agreement (O&M) Purchase Agreement (e.g., power purchase agreement) Performance Risks Construction Contracts Regulatory and Performance Risks Construction Contractor Raw Material Supplier Supply Agreement (e.g., gas supply agreement) Completion Risks

Stakeholders roles: Public side Line Committees Project execution authority and signatory in the PPP agreement Committee on Finance Allocates explicit and contingent budget support Part of approval process throughout project cycle Committee for Investment and Strategic Projects Implements policy for strategic investments of the City Develops and implements projects classified as strategic investments Committee for Economic Development, Industrial Policy and Trade Implements economic development policy on industry, trade, consumer markets Manages special economic zones Other relevant committees (housing policy, public health, environmental etc.)

Public Stakeholders contd. Committee on City Property Management Manages public property of both the City and the Federal government Signatory to City/Federal property on lease agreements Tariff Policy Committee Set tariffs for power, solid waste, housing subsidies, public utilities Does not set tariffs for public transport, toll roads, parking or airports PPP Support Unit Assist Line Committees with PPP expertise throughout PPP project cycle City government Promulgates City PPP Law City budget support Federal government Federal Concession law Federal funding support

Stakeholders: Non-Public side Private sector Investor (equity) Lender (debt) Sponsor (contractors, operators) Advisor (legal, technical, transaction etc.) Users of services (direct beneficiaries) E.g. toll road users, hospital patients/doctors, electricity consumers Environmental groups (primary and secondary effects of the project) Affected groups (indirectly interested groups)

PPP Project Cycle THANK YOU !!! William Dachs The World Bank Wdachs@worldbank.org

Phase I: Project Inception William Dachs The World Bank St. Petersburg- May 22, 2008

Objective: Project Inception …is to screen projects for suitability for development as a PPP …not same as a feasibility study to demonstrate viability …nor a test whether a PPP is better than a publicly funded project

Where to start? Step 1: Screening for suitability as a possible PPP Step 2: Appointing a project manager and project team Step 3: Appointing a transaction advisor 2929

Step 1: Project screening Initial needs analysis and project screening through a Project Concept Document [Full needs analysis and solution options analysis are done in feasibility study phase based on the institution’s initial assessment of needs and options at inception] List the project on database and assign responsible committees/agencies 30

Project screening is an important step Helps to exclude projects that will not offer value for money if developed as PPPs and allows: Early identification of potentially good PPPs Savings in development costs and time Competition and focus from private sector Improves probability of value for money

Aligning sector priorities and objectives Line committee assisted by PPP Support unit screens projects to: Demonstrate that the project aligns with the institution's strategic objectives Move away from project by project approach to overall sector approach Identify and analyze the available budget(s) Demonstrate the institution's commitment and capacity Specify the outputs Define the scope of the project

Criteria used in project screening Scale Present value of capital costs at min of €20 million or Rubles 725 million Difficult to create better VfM through small scale PPPs due to high transaction costs Output specification Service delivery as basis of project’s performance indicator over the whole life of the project Opportunities for risk transfer Allocation of risk to a private party is primary driver When risk transfer is limited, VfM for PPP vs. Public procurement is limited Applying the risk matrix during project screening can test risk transfer opportunities Competitive market Should be a minimum of two active private sector providers

Criteria contd. Possibility for innovation or particular skills from the private sector Test for historic development of innovative solutions in a particular sector by the private sector Time available for development Careful consideration to allow adequate time for development of PPP projects If genuinely not possible, only then consider quicker alternatives Likely costs and City support required Costs should include known and explicit costs as well as contingent fiscal obligations Assessment should include public financial support needed and city’s strategic objectives

Indicative Risk Matrix Availability Completion Cost over-run Design Environmental Exchange rate Force Majeure Inflation Insolvency Insurance Interest rate Demand Operating Regulatory Residual value Change in law Technology Subcontractor

If project not selected, then Potential PPP or not? If project selected, then Listed in a database and registered to formally carry out a feasibility study At this stage, estimate Advisor fees, project management fees and appropriate budget PPP unit should research to estimate costs realistically If project not selected, then Forms part of the normal budget process

Constraints in identification of PPPs Lack of information to make realistic estimates Scope of the project may change with new information Public budget constraint as the main driver instead of efficiency gains Sector strategic objectives change Lack of political commitment Value for money (VfM) and efficiency gains are difficult to quantify Unrealistic expectations for the private sector Political pressure to select certain projects

Step 2: Ensuring effective project management Relevant line committee and PPP support unit should ensure effective project management by: Identifying budgets Appointing project manager Appointing project team Setting up project secretariat Including the project in strategic focus of the government Considering federal funding for project development and/or operation 38

Role of a project manager Project manager is institution’s anchor and champion throughout the PPP project cycle Manages the appointment and work of the transaction advisor through feasibility and PPP procurement Manages the PPP agreement for the project term, representing the institution Project manager may be appointed on contract or from within the institution Within ensures capacity building and continuity Senior management position, within Line Committee. Full-time job 39

Step 3: Appointing transaction advisor Typically a consortium of professional consultants, from one or more firms, which works collectively as a team Under the management of project manager and the oversight of project team Contracts with the institution through the lead firm Assures a single point of accountability Easier to manage than a diverse group of advisors Exceptions are environmental consultants and external reviews/auditors who should be independent 40

What does a transaction advisor do? Phase II: PPP feasibility study, transaction advisor does all the detailed financial, technical and legal work required to prepare the project. The advisor completes feasibility study to a standard that will enable the project to obtain necessary decision to execute the PPP agreement by issuance of City Regulation Phase III: PPP procurement, transaction advisor helps institution to implement PPP procurement, including preparing all documents for level II and III approvals, and completes close-out report and case study Phase IV: Contract management onwards, transaction advisor may be retained to support the City 41

Transaction advisor’s skills and experience 42

Advantages of good transaction advisors Experience in similar transactions Protection against costly, avoidable mistakes Access to national and international best practice Technical strength to the City’s project team Enhancement of investor confidence Opportunity for skills development among government officials Single point of accountability for getting the job done well and on time 43

Getting value for money from transaction advisors Should be viewed as an investment and not simply an expense Important to balance the need for top quality technical assistance with the need to keep overhead costs of preparing the PPP in check Appointment process and contract terms aim to get optimal value for money from the transaction advisor 44

Managing advisors through the project cycle Requires good management and effective leadership and oversight by the City From defining the advisor’s terms of reference, to selection, and throughout their term of appointment Recruiting reputable and expensive advisors… Should not prevent the City from understanding the outputs in advisor’s work in order to make key decisions on the design and procurement of the project 45

Appointing a transaction advisor: avoiding common pitfalls Appoint after project passed screening and listed as potential PPP Retain until after signing of PPP Agreement Ensures continuity and accountability Procurement must be accordance with applicable federal law Law focuses only on prices of services currently Difficult to quantify advisor’s experience as a selection factor Terms of reference should be precise and focused on clear deliverables Set realistic timetables, budgets and output-based incentives 46

Avoiding common pitfalls contd. Terms of reference should be precise and focused on clear deliverables Set realistic timetables, budgets and output-based incentives Selection of advisors should be: Transparent & fair: avoid hiring additional consultants Free of conflict of interest: either close ongoing consultancies or clearly separate Understand limitations in the use of international consultants as they might lack local knowledge and experience International and local advisors should be paired to ensure knowledge transfer 47

Phase I: Project Inception THANK YOU !!! William Dachs The World Bank Wdachs@worldbank.org