European Investment Bank Jaime Barragan EIB – European Investment Bank IADB, 8-9 December 2005 Basic concepts Jaime Barragan EIB – European Investment Bank IADB, 8-9 December 2005

? Costs Dividends Capex Opex Debt service Public sector body Private Special Purpose Co. Risk appetite plus Revenues Senior lenders Subordinated lenders Financial equity investors minus Paying users Dividends What is a PPP? A Complex Web of Contracts & Cash Flow Construction Co. Operating Co. Sponsor ShareholdersAgreement EPCContract O&MContract CustomerContract ConcessionAgreement LoanContract DirectAgreement 70 to 95% Debt 3

3 PPP Definitions The term public-private partnership is not defined at Community level. In general, the term refers to forms of cooperation between public authorities and the world of business, which aim to ensure funding, construction, renovation, management or maintenance of an infrastructure or the provision of a service. EC, Green Paper on PPPs t Many definitions & interpretations across Europe t Ingredients: t t Public service responsibilities t t Private sector expertise t t Bundling of operation & construction t t Incentives for innovation & performance t t Risk sharing t t Private finance t t Long term contracts

4 Key Characteristics t Cashflow (un)certainty t Credit intensive. t Long Term t Highly structural t Large t Low Margins t Mature in some markets, innovative in other

5 Process t Assesment of the market. Need for the project. t Technical feasibility t Financial Feasibility t Support/commitment Letter. Award. t Due diligence t Mandate/syndication t Docummentation t Financial closing t Administration

6 Main Risks t Cashflow. t Construction Risk. t Operating Risk t Participant Risk t Supply Risk t Market Risk t Infrastructure Risk t Environmental Risk t t Political Risk t t Force Majeur t t Foreign Exchange Risk t t Engineering Risk t t Syndication Risk t t Funding Risk t t Legal Risk

7 Forms of private participation commercialized public enterprise Continuous spectrum of partnerships, with private sector taking variable degrees of risk Other Hybrid or intermediate forms possible Differ in duration, financing & risk transfer Private O&M + financingPrivate O&M BOO divestiture concession BOT/DBFO lease managt. contracts service contracts PPP

8 Choosing the right structure Key questions t Is legal/institutional/economic framework ready? t Who decides (local v central authorities)? t Is there robust political support for PPP? t Is project revenue generating/cost recovery? t Is purpose to delegate service to consumers or just to build & operate a large new asset? t What risks will private sector take? t Is PPP timetable compatible with other constraints? PPP is a policy choice NOT a quick fix

European Investment Bank Economics

10 PPP Investment Rationale Conventional model: òDefinition of inputs òProcurement of assets PPP model: òDefinition of outputs òProcurement of service Encouraging the private sector to: òapply expertise for better service delivery òinnovate in finding new technical solutions òoptimise the capital component of projects òenter contracts with appropriate risk sharing

11 Sources of Value-for-Money  Bundling  Life-cycle approach  Risk sharing  Better risk management  Private asset ownership  Control over asset and adoption of cost saving innovation & efficient contracting

12 t Is the legal and institutional framework right?  High quality capital planning is essential t How is risk to be transferred and to whom?  Just substituting private for public capital won’t give value for money. Is risk sharing realistic? t Is the scope of procurement correct?  Is there private sector expertise? Will there be competition? t Is public sector team skilled & experienced?  Will evaluation be robust? Can deal be closed? t Is there a credible public sector comparator?  The test for the value of risk transfer Tests of value for money

13 PPP is not a “free lunch”  Transaction costs  Bidding, negotiation, monitoring  Renegotiation over life-cycle  Pursuit of cost efficiency may impact service quality  Institutional and administrative capacity requirements

14 PPPs and the macroeconomy  Accounting rules affect incentives  They may bias the public sector for PPPs  No macroeconomic case for or against PPPs  No automatic link between cost efficiency and aggregate growth

15 Economics Summary  PPPs can boost cost efficiency at the project level.  Need to be mindful about service quality, transaction costs, and institutional requirements.  No macroeconomic case for or against PPPs, but they must be accounted for appropriately.  Life-cycle transaction costs, benefits & value-for- money are key to public policy decision.

European Investment Bank Experiences

17 EU15 Experience - PPPs mainly in transport and buildings UKNon-UK Sector split of signed PPP contracts in EU by value Source:ProjectWare, HM Treasury

European Investment Bank Successful procurement

19 Requirements for successful PPP Preparation t Employ Good Advisors – Spend to Save t Don’t Rush – Political Deadlines Weaken Negotiating Position t Research and Choose Appropriate PPP Model – To Suit Local Market & Law t Maintain Competition – Avoid Tempting Single Bidder Offers, Minimum Two BAFOs

20 Requirements for successful PPP Implementation t Simple Payment Mechanisms – Significant Performance Element But Not Too Many Parameters t Equity Level Appropriate to Risk – Returns Not Taken Too Early t Independent Supervision and Good Quality Reporting – Early Warnings, Prompt Remedial Actions (covered in agreement) t Minimise Third Party Involvement – Provides Excuses for Poor Performance

21 Value-for-Money t Early review based on sector experience t Build into bid evaluation process t Flexible use of Public Sector Comparator t Allow for optimism bias t Adjust for risk transfer t Allow alternative bids & innovation

22 Sustaining the partnerships t Budget for adequate monitoring t Transparent reporting to maintain public confidence t Early warning systems for essential public services t Financial “health“ monitoring of major contractors t Independent audit reports to “learn lessons”