International Experience with PPPs and Meeting the MDGs Towards Effective Partnerships Between the Public and Private Sectors in Bahrain RebelGroup Advisory Netherlands. 12.10.2008 Stakeholder Briefing International Experience with PPPs and Meeting the MDGs Rolf Dauskardt 12 October 2008 rolf.dauskardt@rebelgroup.com +31 612506624

Contents 1. Foreword 2. Role of PPPs Internationally in Reaching MDGs 3. Use of PPPs in Different Sectors 4. How Some Countries have Promoted PPPs 5. Promoting PPPs in Bahrain

1. Foreword “An internationally competitive economy needs internationally competitive infrastructure …“ “Effective infrastructure investment and service delivery is critical for managing rapid urbanization…”

2. Role of PPPs Internationally and for MDGs Major global shift toward use of PPPs – seen in all regions: North America, Europe, Australasia, Middle East, Asia, Latin America, Africa New source of investment for infrastructure (limited public budgets) More efficiency / effectiveness in services (poor public performance record) Realize more value from public assets (value creation and capture) It is no longer a question of ‘if PPPs’ ?, but rather ‘when and how PPPs’ ?

Traditional Procurement vs PPP The public and private sectors have always worked together… Companies have paid taxes Companies have supplied governments with goods Companies have constructed projects for the government Traditional infrastructure procurement Gov designs / finances Private company constructs Government owns / operates / maintains Contribution of private sector limited to construction Frequent construction cost overruns, delays Poor operation and maintenance of services by governments Simple tendering based on cheapest price offered to do the job Example Government designs a bridge joining 2 islands Runs tender and gets cheapest construction company to build it Government pays for the construction from the budget When built the government operates and maintains the bridge If anything goes wrong the government pays

PPPs are Fundamentally Different Formal contract between public and private partner (over the years duration the service will be provided) – usually multiple years duration Entered through competitive procurement – not just price, negotiated procurement Using output specification – government specifies ‘what’, private sector can define ‘how’ With suitable risk allocation between parties Putting private investment at risk With regulation or contract management of performance of the private partner Example Government defines output = connection to let 1,000 vehicles p.d. travel between islands Government tenders for best solution over 30 years – e.g. ferry, tunnel, bridge?? After negotiated tender government enters 30-year contract with private company Private company designs, builds, finances bridge, then operates and maintains it for 30-years Private company receives payment if the bridge works and is available for traffic Government checks on safety and availability If the bridge is closed, or unsafe, the private company looses money

PPP Value Drivers

Value for Money VfM = relationship between what is invested and the quality, coverage and price of services delivered Well structured PPPs can deliver better VfM than public sector provision Examples N31 Road, 25km, DBFM, € 80m, 15 years 21% better VfM Finance Ministry Building, DBFMO, € 175m, 25 years 15% better VfM Delfuent Water Sanitation Plant, DBFMO, € 450m, 30 years 17% better VfM

Why can PPPs Deliver Better Value for Money? PPPs let Public Sector and Business do what they do Best! Private Innovation, use of technology Professional management Good project and lifecycle management Efficiency Technology Maintenance practices Financing Public Policy setting National planning Regulation Looking after public interest

PPP Models Management Ownership / capital investment Private Public Service Contract Maintenance of equipment Ownership: remains with public sector Risk profile: private sector receives a fee for their services Duration: 1 - 5 years approx. Mgt. Contract Facility management O & M, supply Risk profile: private sector receives a fee, partially linked to performance. No / very limited capital investments by private sector. Duration: 5 – 15 yrs. approx. Lease Full responsibility for services Operational investments Risk profile: Revenue risk with private sector; major investments made by public sector, minor investments made by private sector Duration: 10 – 30 yrs approx. Full Privatisation Complete transfer to private Duration: In perpetuity Public Ownership / capital investment DBFMO / Concession Investments into new (DBFMO) or existing (concession) infrastructure made by private sector full system operation by private sector Ownership of infrastructure / facilities with private sector for duration of contract Risk profile: Budget-based: revenue risk with government, Revenue-based: revenue risk with government. Technical, financial, operational risks fully with private sector Duration: 20 – 50 years. approx. Simpler PPPs More Complex PPPs PPP Models

Two Important PPP Structures 1. “Off-Budget” PPPs Traditional BOT model Revenues collection from users given to private partner (e.g. tolls paid on a toll road) Project is “off the budget” of government as revenues flow directly to private sector Used only where there are substantial revenues that can be directly charged to users ‘US model’ 2. “On-Budget” PPPs DBFMO model Revenues collection stays with government Government pays private partner to make the service available (availability payments) Project is “on the budget” of government as revenues flow through government Can be used widely for services paid by users, or for those paid through taxes ‘European model’

Tools for PPPs Public Sector Feasibility study PPP options assessment PPP Business Case – financial modeling Public Private Comparator (PPC) Model Public Sector Comparator (PSC) Model Negotiated procurement strategies Private Sector Lifecycle financial modeling Project finance structuring Operational / technical tools Public and Private Sector PPP project structuring Transaction strategy

Contribution to MDGs Strengthen economy of Bahrain = jobs and tax revenues Improve service coverage Companies can apply MDG principles (e.g. gender promotion) in PPPs PPPs can create opportunities for disadvantaged groups and unemployed ‘Pro-poor add-ons’ can be included to PPPs Human and financial resources of government are freed up to address welfare issues

3. Use of PPPs in Different Sectors If value drivers used properly and deal well structured PPPs can be applied almost anywhere… Physical Infrastructure Social Infrastructure Strategic Infrastructure

Physical Infrastructure PPPs Large capital investment, substantial revenue flows, long time frames Such as roads, railways, bridges, tunnels, ports, airports, etc. Westlink M7, Sydney, Australia – BOT ‘Off-Budget’ 40 km motorway linking the M2, M4 and M5 motorways Built, operated, maintained as fully tolled gateless motorway (electronic toll charges) 34-year concession No governmental guarantees N31 Leeuwarden – Drachten Highway, The Netherlands – DBFM ‘On-Budget’ Upgrade and double the lanes of 13 km motorway 15-year DBFM € 78m project Payments fully on an availability basis

Social Infrastructure PPPs Such as education, health, welfare systems, social housing, etc. Tunbridge Wells Hospital, UK – DBFO £307 m project Development of Pembury hospital 30-year DBFO Payments are on an availability basis Facility, not the doctors and nurses! Benelux Bundle of 200 Schools Refurbish and expand 200 schools 30-year DBFO structure, separation of financing and construction in different PPPs Payment on availability basis Bundling necessary as each school is too small to be a viable PPP!

Strategic Infrastructure PPPs Such as prisons, military, policies, border management, etc. Benoni Emergency Services, South Africa Fire & paramedic / ambulance services PPP Payment based on availability and performance Strong penalty conditions Good increase in service levels Skynet Military Satellites, UK 3 new satellites with high speed data transfer Sued for Army, Royal Navy and RAF globally 18 years DBFMO £ 2.6 billion PFI deal Paid on availability of data service Unused data capacity can be sold to Nato or other friendly nations

4. How Some Countries have Promoted PPPs UK – Private Finance Initiative Netherlands – PPS programme South Africa – National PPP Programme Canada – P3 programme Egypt – new PPP policy, PPP Unit and Pilot PPP Transactions !! PPP Units now in many countries And many, many more country experiences … These countries have found ways to strengthen the understanding and cooperation between the public and private sectors through partnerships !

Some PPP Units and What they Do Information and Guidance Advisory Support and Funding Approval Resource center (dissemination) PPP guidance material Intensive project specific advice Funding for PPP preparation (a) Role as a project developer (B) Role in contract monitoring De jure or de facto approval power of PPPs Andhra Pradesh, India: AP Infrastructure Authority  British Columbia, Canada: Partnerships BC Gujarat, India: Gujarat Infrastructure Development Board Ireland: National Development Finance Agency -- Italy: Project Finance Unit Netherlands: PPP Knowledge Center Philippines: BOT Center South Africa: PPP Unit, National Treasury United Kingdom: Partnerships UK Victoria, Australia: Partnerships Victoria

What Government and Business Address Political and social commitment PPP vision and clear commitment from government Create certainty Local and National government policy Supportive policy Structure, process, issues Legal Framework Enabling laws Remove obstacles to PPPs in existing and sectoral laws Market capacity Build understanding and capacity of private sector to respond Cost recovery issues Sufficient cost recovery from users Set up payment mechanisms through government Taxation, reporting and accounting framework Tax treatment of PPP investments Inclusion of PPPs in government budget Financing sector issues Capital market conditions Capacity and interest in long term financing of infrastructure Technical and organizational issues Developing technical information on service provision Clear and transparent procurement process Trust Develop understanding and trust between public and private sectors Stakeholders Ensure public is consulted and concerns addressed

Some PPP Projects in the Gulf and Middle East Jordan / As-Samra Wastewater Treatment Plant – DBFMO on 25-year concession agreement with combined private, local government and donor financing (MIGA Guarantee) Jordan / Queen Alia International Airport – BOT for maintenance, expansion, rehabilitation and modernization. $450m Kuwait / Sulaibiya Wastewater Treatment Plant – 30-year BOT

PPP Projects in the Gulf and Middle East [2] Jordan / Gas Transmission Pipeline – 30-year DBFMO concession for a natural gas pipeline from Aqaba to Amman and the Syria Border. Approx $500m structured debt / equity Morocco / Guerdane Irrigation Project – 30-year concession for an irrigation network Tunisia / Independent Power Producers – 20-year BOOT and 30 Mw gas plant

5. Promoting PPPs in Bahrain Vision / Strategy for PPPs in Bahrain Role of PPPs in the competitive development of Bahrain Forms of that PPPs Bahrain wants to establish Key infrastructure and services where PPPs are wanted – e.g. transport, energy, water, education, social, etc. Commitment of the government and the private sector to PPPs This should be developed jointly by government and business Institutional Arrangements for PPPs Identify the champions for PPPs Responsibility in government for structuring and tendering PPP projects Public interest checks – value for money, procedural Possible PPP Unit in Bahrain? Tools for PPPs How expertise needed by the public and private sectors to structure PPPs will be obtained PPP Transactions / Deal Flow !!!!! Identify priority projects for PPPs in key sectors Conduct pilot PPP transaction with external support

Opportunities and Challenges for Government and Business in Bahrain Major opportunities for government and business in infrastructure PPPs are not “business as usual” Means changes for Public sector (from direct provider, to organiser and regulator) Private sector (from simple construction, to integrated lifecycle projects) Financial sector (short term corporate finance, to long term infrastructure project finance) New knowledge, skills, expertise and tools needed

Future of PPPs in Bahrain An internationally competitive economy needs competitive infrastructure PPPs for flagship infrastructure projects, and smaller scale (social) infrastructure PPPs can help Bahrain to… Build an internationally competitive economy Fully reach the MDGs