Introduction to Public Private Partnerships Module 1 2013

Module Structure Good Governance Funding PPPs Developing an OBC Effective procurement Risks in PPPs Sustainability Lessons and recommendations

Definition of PPP Public private partnerships (PPPs) are agreements between government and the private sector for the purpose of providing public infrastructure, community facilities and related services. The private sector enter into a contract with government for the design, delivery, and operation of the facility or infrastructure and the services provided. The private sector finance the capital investment and recover the investment over the course of the contract. The asset transfers back to the public sector at the end of the contract 3

Degree of private sector risk Degree of private sector involvement Range of PPPs Adapted from Canadian Council PPP 2009 Privatisation Concession DBFM-operate PPP Models Design build finance maintain Degree of private sector risk Build and finance Operate and maintain Design and build Degree of private sector involvement

Principles of PPPs Output based specification Contracting Authority defines the service required Design of the works to deliver that service lies with the private sector Output based specification The contract can be for 25/30 years plus Long-term contractual arrangements Value for money Transfer of risk Competition will drive best value Gives public sector access to innovation Market competition Whole life costing Cost measured against conventional procurement. Whole life costs and quality are combined to gauge VFM Transfer of design and construction risk Risk of ownership transferred to the private sector Long term responsibility for building operation and maintenance Focus on reducing cost

Typical SPV structure for PPPs Government PPP Agreement Private Sector (Special Purpose Vehicle) (SPV) Equity Shareholding Loan agreement Debt Subcontractors Subcontractor Construction Subcontractor Operations

PPP and Traditional Procurement

Governance - principles Participation Decency Transparency Accountability Fairness Efficiency

Funding - Project finance The financing of long-term infrastructure is based upon a non-recourse or limited recourse financial structure where the debt and equity used to finance the project are paid back from the cash flows generated by the project.

Project finance High gearing requiring less equity Tax benefits Public sector use of revenue Long term debt funding

Why use PPPs? Focus on outputs PPPs make projects affordable Better value for money over the lifetime of the project More efficiency in procurement Faster project delivery with more projects in a defined timeframe Risks are allocated to the party best able to manage the risk

Why use PPPs? (2)

Outline Business Case

Critical stages of a PPP Initial feasibility Procurement phase Construction phase Operation phase

Stages in procurement Procurement strategy stage Qualification and selection stage Dialogue Award

Phase 5 Contract management Procurement Process Phase 1 Pre-Procurement Phase 2 Pre-qualification Phase 3 Competitive dialogue Phase 4 Final bid financial close Phase 5 Contract management Pre -Procurement Official Journal European Union (OJEU Prequalification questionnaire (PQQ) Invitation to participate in dialogue (ITPD) Invitation to submit detailed solution (TSDS) Preferred Bidder Financial Close Contract management Prepare Documents Preparation and evaluation of bidder documents Project Selection Brief development Market testing Financial Close

Risks in PPP Optimal risk sharing Risk borne by the party best able to manage it Risk management Identification Allocation Mitigation

Stages of risk management Risk identification Risk quantification Risk allocation Risk mitigation Risk monitoring and control

Sustainability Embedded environmental and social safeguards Focus on longer timescales Public, business and government working in partnership

What makes a successful PPP? Political will Government commitment PPP Champion Clear output specification Appropriate risk sharing Value for money Performance management

Conclusions PPPs allow the injection of private sector capital Undertake projects for the benefit of the citizens, including the socially and economically disadvantaged Allows governments to approach projects hitherto unobtainable due to lack of funding Provide incentives to the private sector to adopt green criteria Embraces the MDGs PPPs allow the injection of private sector capital

End-of-Module Questions 1. Which of the following best describes PPP projects? Using funding from public borrowing. Local government sets the specification Public sector details design and pays for the construction Government sets the required outputs and funding is provided by the private sector. Answer: d) 2. What is the name of the organisation created to design, build finance and maintain the asset? Answer: Special Purpose Vehicle - SPV

End-of-Module Questions 3. Which of the following are critical to good governance? Funding for the project Clarity and openness Putting the public first Transferring the risk to the private sector. Answer: b) and c) 4. Which one of the following would not be described as an international investor? a) Banks b) Pension funds c) Insurance companies d) Employees holding shares through an employee share scheme. Answer: d)

End-of-Module Questions 5. The term sustainability refers to? Maintaining resource use at current or higher levels Keeping the natural environment and society in a happy healthy and functional state Holding or increasing the value of human life Focus on fulfilling short term need. Answer: b) 6. Risks should be borne by the party best able to manage them. a) True b) False Answer: a)

End-of Module Questions 7. What does an OBC demonstrate? a) That a project is economically sound, financially viable and will be well managed b)That a project meets market expectation c) That significant profit will accrue for the public and private sector d) None of the above Answer: a) 8. What are the phases in a PPP project life cycle? Answer: Initial feasibility, Procurement phase, Construction phase, and Operational phase 9. Match up the boxes. Service contracts Design, build, finance Concession contracts Private sector managing services Construction contracts Public sector provides management support