ENSURING SUITABLE USE OF THE PPP MODEL – FOCUS ON VALUE FOR MONEY 24 NOVEMBER 2016 Windhoek RAUNA MUKUMANGENI

STRUCTURE OF PRESENTATION Guidelines for a successful PPP program Principles for getting value for money in infrastructure Discussion on financing options for land servicing Conclusion

SUCCESSFUL PPP PROGRAM Political commitment (political will, stability & policy continuity) Conducive legislation (PPP Bill, PPP Policy) A clear legal and regulatory framework is crucial to govern Government's partnership with the private sector to achieve a sustainable solution through a sound implementation of PPPs. Expertise (capacity building in both the private & public sectors(institutional capacity) PPP unit facilitates a number of capacity development initiatives (structured training programs, knowledge sharing discussions, forum presentations & media releases) Project prioritization (focus to improve success rates, aligned to the national development program) PPP conducive laws and institutions (laws enabling PPPs) i.e. China, weak administrative structures hindered the full adoption of PPP It is also possible that some of the projects may fail or may be terminated prior to the projected term of the project, for a number of reasons including changes in government policy,

AS PER THE NATIONAL PPP POLICY – KEY PRINCIPLES TO BE FOLLOWED WHILE STRUCTURING A PPP PROJECT The Ministry of Finance is responsible for PPP policy. It ensures that the model is applied correctly by monitoring PPP projects. Importantly, the PPP unit actively works with relevant ministries and other government entities in order to conceptualise, prepare and bring to market credible private participation opportunities. 5. Risk Allocation Optimal risk sharing, party best able to manage the risk 7. Output Orientation Service specifications, performance measures 1. Value for Money A function of service outcome, risk transfer and financial implications 3. Competitive Pressure Competitive procedures to select private partners 6. Affordability Demand on Govt. budget, affordability of user fees 8. Accountability Line agencies continue to be accountable for service delivery 2. Public Interest Design & implement projects to serve public interest 4. Transparency Disclosure policies, public consultations, confidentiality of intellectual property, formal approvals 8 KEY PRINCIPLES

PRINCIPLES FOR GETTING VFM Value for money, will be a combination of the service outcome to be delivered by the private sector, together with the degree of risk transfer and financial implications for government. VfM check in Namibia is done at 2 stages, during the feasibility stage and before signing the PPP agreement VfM: An important aspect when determining the merit of entering into any PPP. The value of infrastructure lies in the economic and social activities it supports and the cost to put infrastructure in place is simply an expenditure, not a guarantee that value will be created. Follow the required best practices: risk transfer; competitive pressure; robust contract (clear statements of requirements, responsibilities) Not all infrastructure projects are suitable for PPP e.g. roads (no traffic!) In order to recognize projects that will create value, the following should be considered: Is the infrastructure aligned with the socio-economic situation of the country: Every country is different economic, social & financial Demand: is there a need for the project? Social demand Economic demand Welfare: is the project viable? is the project the best alternative? Benefits at the lowest possible costs. Cost effectiveness analysis (Cost comparison) More direct economic benefits (efficiency gains). Cost benefit analysis Whether or not PPP (v.s. traditional public procurement methods) is the most suitable delivery method and will meet the intended outcomes of the project All possible solutions should be analysed; whole life cost cycle (long term costs i.e. operating and maintenance); costs are realistic Do not hesitate to say NO to PPP in favor of another option with a favourable VfM Infrastructure can increase economic and social welfare Social: pressure to accelerate infrastructure delivery Financially: Namibia is fiscally constraint Understand the economy and the actual drivers before proposing projects. Target projects that can create employment in the long run Social demand: Target the social backlogs, listen to what the people are saying Economic demand: rising property prices Implementation: it is not enough that a project fits in the development context, is affordable by society and has efficiency gains. The delivery mechanism must be able to achieve the promised benefits Repayment of the infrastructure is a challenge vs. financing it Countries like Greece, Cyprus and Portugal, their fiscal position worsened partially because of PPP

PRINCIPLES FOR GETTING VFM Affordability: Can society bear the cost? Is the financing on/off budget? Financing and repayment Tax-payers - social projects (health because of their no revenue stream), project represents the best use of public funds User fees Competition VfM is achieved through the competitive tendering process which is based on the economically most advantageous offer principle, to deliver the best deal). Risk allocation A careful analysis of the long-term development objectives and risk allocation is essential. Better party able to handle (e.g. construction/design risk, Private sector; government- political risk) Implementation: implementing capacity (ability to effectively implement & manage)? Demonstrate the institutional capacity to effectively implement Money spent is not a guarantee for value creation Experiences: Portugal & Cyprus, PPP were part of their fiscal programs Feasibility studies/ different studies can

Financing options for land servicing (PPP adverse VfM) Local authorities have two available options to finance land servicing if internal resources are not available: Presented to the Cabinet Committee on land related matters November 2016 Evaluation of land servicing deals PPP Local Authority appoints a private developer; LA avails land, developer sources funding and services the land. Bank Financed Local Authority sources funding directly from bank and services the land, through their traditional procurement process It was presented at the CCL recently

Typical structure of Land deals PPP with Developer Bank Financed Land Owner Local Authority Financing Developer sources funding from bank LA sources funding from bank Servicing Developer services the land LA procures contractor to service land Sale of Land Developer (SPV) responsible for selling land - revenue is ring-fenced LA responsible for selling land - revenue is ring-fenced Profits After payment of cost, Profit shared btw LA and Developer ~ 50:50 After payment of cost, 100% of Profit goes to the LA.

Comparing alternatives: PPP v.s. bank financing Output   Inflows Outflows Profit Revenue from sales Principle loan Interest on Loan Management Fees Equity contribution by developer  Profit Profit Share "PPP" with Developer Municipality Developer Deal 1 115 495 800 55 000 000 16 457 479 825 000 72 282 479 43 213 321 21 606 661 In case bank financed (if Bank Financed) 55,000,000 LA do not do competitive procurement. Unsolicited procurement should be discouraged. There does not have to be profit sharing. Better deals in the interest of the LA should be negotiated If equity contribution by the developer is required, the LA gets a worse deal, profits reduce further In case of bank financing, in this case, the municipality would have walked away with over N$ 21 million in additional profits The implied profit margin of the private sector is estimated at 32% p.a. (in this conservative scenario)

CONCLUSION Importantly, our assessments shows that in case of land servicing bank financing shall be the cost efficient option Land servicing projects are short duration and relatively simple to execute projects (minimal risk factors, therefore limited efficiency gains through the PPP route) Lending for such developments can be undertaken as ‘project finance’; here the revenues from land sales are ring-fenced for servicing of debt (the balance sheet strength of the municipalities would not be a constraint) In some cases, poorly conceived PPP projects may lead to adverse VfM such as in the land service case. Such deals should be discouraged. If followed properly, through PPPs, governments extract long-term VfM through appropriate risk transfer to the private sector over the life of the project – from design/ construction to operations/ maintenance. In order to achieve a successful PPP, a careful analysis of the long-term development objectives and risk allocation is essential. All policy guidance on PPPs insists that developer selection is undertaken through a competitive and transparent method. The legal and institutional framework in the country also needs to support the PPP model of service delivery and provide effective governance and monitoring mechanisms for PPPs. A well drafted PPP agreement for the project should clearly allocate risks and responsibilities. Let us make sure we create value not just spend money Trust what our evidence-based analysis is telling us

Thank You Rauna Mukumangeni Contact: Rauna Mukumangeni Deputy Director, Public Private Partnerships Ministry of Finance, Republic of Namibia.   Tel: +264 61 2092617(O) +264 811608432 (M) Email: rauna.mukwambi@mof.gov.na