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Cityscape jeddah jun 2011

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This is the presentation that I made at Cityscape Jeddah in June this year. Some comments are available on several Middle East web sites such as Arab News link attached …

This is the presentation that I made at Cityscape Jeddah in June this year. Some comments are available on several Middle East web sites such as Arab News link attached http://arabnews.com/economy/article453469.ece )

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  • An agreed drawdown schedule is agreed to cover the initial EPC costs over a construction period of say 2-3 years. Once the construction phase has been completed and the facilities fully drawn down, you move into the operations phase. During the operations phase debt service repayments are made from dividend receipts on a fairly uniform basis over the remaining tenor of the relevant facility.
  • The difficulty is that in some emerging economies and/or economies in transition such principles are often ignored at the time when PPP appears to the government as an alternative to the public financing of infrastructure due to some misconceptions. The most frequent misconceptions are the following:Contracts are sufficient for getting started In PPPs, only a strong contract between the parties is needed. Putting in place the overall legal, policy and institutional framework can wait: In an effort to start a PPP programme quickly, governments have been under a wrong assumption that it was sufficient to put in place a strong contract with the private sector and that establishing the legal, policy and institutional framework could begin afterwards. This misconception has resulted in insufficient attention to policy, legal and institutional frameworks in PPPs. Projects once started often unravel. Such a practice cannot work if governments wish to develop a deal flow. The success or failure of PPPs can often be traced back to the initial design of PPP policies, legislation and guidance or the lack thereof. PPPs are all embracing panaceas that can be implemented all at once irrespective of the competence, knowledge and skills on the part of governments: PPPs are very complex but Governments have been eager to start as quickly as possible without pacing themselves. Such a myth lead to countries with no experience of PPPs to launch numerous projects before they have the capacity and knowledge, leading them often to repeat the mistakes of those who started earlierPPPs provide a number of infrastructure assets, roads, bridges, power plants etc., to Governments either free or little cost and no risk: Often sponsors have tended to ‘over sell ‘the promise of PPPs to countries and to hide the extent to which governments share risks and provide support to projects. The misconception that the private sector can do everything itself leads to a poor understanding of the Government’s own role in PPPs, which is critical. Governments do need to share costs and accept certain risks with the private entity. Such a perspective can induce poor risk optimization, which in turn will lead to higher costs of projects PPPs are sophisticated technical financial transactions. PPPs are certainly highly technical. However the risk is that governments view them solely as financing instruments when in fact they represent a very different way of working. This sometimes leads to a failure to ask whether the project is acceptable to the public. Do they want it? People tend to be overlooked and projects go ahead with it being assumed that the projects will be socially acceptable. Policy makers need to give emphasis to shareholder returns but must also focus on improving the delivery of essential services to the general public. Using a PPP can bring private money into public coffers and be an additional source of payment for government departments. In countries with weak experience of mixing private funding with public funding, there is sometimes little understanding on the need of governments to let the private sector obtain a return on their investments. The funding provided is not a fund to be used either part or in whole for public civil servants. The financing provided has to earn a return for the private sector. It is not an extra fund for public sector use untied to specific projects. This myth has been the basis for corruption

Transcript

  • 1.
  • 2. Citycsape Jeddah
    Effective Partnerships
    Structuring “win-win” Public-Private Partnerships (PPP) in real estate and infrastructure projects
    11 June 2011
    John Davie
    Chairman, Altra Capital Limited
    Past Chairman, UK Government PPP Advisory Group
    Member, Saudi British Joint Business Council
  • 3. What is PPP?
    • A method of providing public services, not simply for buying infrastructures.
    • 4. It should contain
    • 5. an expectation of service improvement
    • 6. a commitment to transparency
    • 7. the dismantling of monopolies and the reform of public services
    • 8. A PPP project typically involves a long-term arrangement in which the public sector will contract with the private sector to deliver a service in exchange for regular performance-based payments
    www.altracapital.com
  • 9. Maintenance Concession
    BOOT Concession
    Design-build
    Design-build-operate-transfer
    Asset Capitalisation
    Design-Build-Finance-
    Maintain-Operate
    Design-bid-build
    Turnkey Delivery
    Divestiture
    Traditional
    Public Sector
    Procurement
    Build-Operate-
    Transfer
    (BOT)
    Private Finance
    Initiative (PFI)
    UK PPP Model
    Build-Own-Operate
    (BOO)
    Public Owner/
    Operator/
    Financier
    Public Owner/
    Financier
    Public Owner
    Private
    Concessionaire
    Operator
    Operator
    Contractor
    Operator
    Contractor
    Contractor
    Engineer
    Engineer
    Engineer
    Operator
    Contractor
    Engineer
    What is PPP?


    Private Sector Leading
    Public Responsibility
    Private Sector
    Privatisation
    Private Owner
    www.altracapital.com
  • 10. A cardinal principle behind the PPP
    • Intended to transform government departments from being owners and operators of assets into purchasers of services from the private sector
    www.altracapital.com
  • 11. What are public services?
    • Previously been considered as services delivered by government employees to members of the public.
    • 12. Public services must be defined in terms of their intrinsic nature, rather than how they are delivered. A more appropriate definition is....
    ‘… any service provided for large numbers of citizens, in which there is a potentially significant market failure (broadly interpreted to include equity as well as efficiency), justifying government involvement – whether in production, finance or regulation’
    www.altracapital.com
  • 13. BOT – Typical projects in Middle East
    • Repayment profile depends upon each particular debt tranche. Typically, there is:
    • 14. an ECA tranche
    • 15. a conventional tranche
    • 16. an Islamic tranche
    • 17. an equity bridge tranche
    • 18. All projects are different but a typical repayment profile might be as follows:
    • 19. Conventional and Islamic term facility ; 20 years
    • 20. ECA facility; 14 years
    • 21. EBL-bullet payment, repayable 5 years after FC
    • 22. Working Capital facility ; revolving credit facility
    www.altracapital.com
  • 23. Direct
    Agreement
    Government
    Fee to SPC
    for use of Facility
    based on
    Performance/
    Payment
    Collateral or subvention
    Equity – 20% - 35%
    Insurance/
    Guarantees
    Project Company
    (SPC)
    Operations
    (Soft Services)
    Holding
    Company
    Senior Debt
    Equity
    Service/Operator
    Charge
    Build/Renew/
    Maintenance Costs
    Equity
    Construction &
    Maintenance
    (Hard Services)
    How PPP Works
    Loan
    Agreement
    Concession/
    Project
    Agreement
    Debt
    Repayment
    Debt
    Equity and
    sub-debt
    Sub-contractors
    Sub-contractors
    www.altracapital.com
    © Altra Capital Limited 2011
  • 26. Total nominal cash flow
    100%
    PFI - % Total cash flows to equity partners
    80%
    % Remaining
    60%
    PFI - % Total payments
    remaining
    40%
    20%
    DBMO - % Total payments remaining
    0%
    0 3 6 9 12 15 18 21 24 27 30
    Time
    Percentage of total nominal cash flow remaining in a typical DBMO and PFI model and percentage of total cash Flows to equity remaining in a PFI model
  • 27. UK – signed PFIs by financial year
    www.altracapital.com
  • 28. UK – signed PFIs by financial year
    www.altracapital.com
  • 29. Some lessons learnt
    • Stable long term policy commitments if changes are to be made across markets
    • 30. Scrutinise the deliverability of a project before real engagement with the market.
    • 31. Project Governance
    • 32. Programme delivery platforms
    • 33. Mix of mandatory procedures and support
    • 34. Proper attention paid early on to the operational phase of projects
    • 35. A view about what you want the market to look like in 5 -10 years’ time.
    www.altracapital.com
  • 36. History
    • Saudi Arabia has a history of being very innovative in its approaches to privitasation.
    • 37. 2002 the SEC approved a series of measures aimed at promoting the activities of the private sector with the aim of achieving greater national economic growth.
    • 38. 80s /90s UK initiatives brought private sector into activities once considered preserve of Government
    • 39. first privatizing state-owned industries,
    • 40. then private sector management and funding for public sector projects – the Private Finance Initiative
  • Saudi Arabia - strengths
    • capital market is relatively large
    • 41. the monetary system is stable
    • 42. government commitment is strong
    • 43. government movement toward private sector and investors to participate in the development process is encouraging
    • 44. experience of local and international banks in funding projects has been successful
    • 45. willing to participate in future projects, provided they have an assurance of project viability and profitability.
  • The Misconceptions
    • Contracts are sufficient for getting started In PPPs, only a strong contract between the parties is needed. Putting in place the overall legal, policy and institutional framework can wait
    • 46. PPPs are all embracing panaceas that can be implemented all at once irrespective of the competence, knowledge and skills on the part of governments
    • 47. PPPs provide a number of infrastructure assets, roads, bridges, power plants etc., to Governments either free or little cost and no risk
    • 48. PPPs are sophisticated technical financial transactions
    • 49. Using a PPP can bring private money into public coffers and be an additional source of payment for government departments
    www.altracapital.com
  • 50. An Ethical Thought
    • The genius of the UK PPP model for PPPs is the creative tension induced by private capital at risk
    • 51. To mirror this simply by eliminating interest is missing an opportunity
    • 52. Islamic finance cannot be reduced to its economic components
    • 53. Islamic finance carries ethical, social, political and religious dimensions that informs its structure.
    • 54. Islamic financial institutions should foster social justice as well as generate wealth
    • 55. Similar to the wider objectives of many of the commissioning agents of PPP projects
    www.altracapital.com
  • 56. Government
    Direct
    Agreement
    Performance/
    Payment
    Equity – 20% - 35%
    Insurance
    Concessionaire/
    SPV
    Debt/Equity
    Funders
    Operations
    (Soft Services)
    Loan Agreement
    Securitypackage
    Service/Operator
    Charge
    Build/Renew/
    Maintenance Costs
    Construction &
    Maintenance
    (Hard Services)
    How PPP Works
    Hiba – gift?
    Ijara – lease?
    Istisna – custom manufacturing?
    Musharaka – partnership ?
    www.altracapital.com
  • 59. Government
    Direct
    Agreement
    Performance/
    Payment
    Collateral or subvention
    Equity – 20% - 35%
    Insurance
    Concessionaire/
    SPV
    Debt/Equity
    Funders
    Operations
    (Soft Services)
    Loan Agreement
    Securitypackage
    Service/Operator
    Charge
    Build/Renew/
    Maintenance Costs
    Construction &
    Maintenance
    (Hard Services)
    How PPP Works
    www.altracapital.com
  • 62. Government
    Direct
    Agreement
    Performance/
    Payment
    Equity – 20% - 35%
    Insurance
    Concessionaire/
    SPV
    Debt/Equity
    Funders
    Financing SPV
    Mudarib
    Operations
    (Soft Services)
    Loan Agreement
    Investors / Subscribers
    Rabb Al-Mal
    Securitypackage
    Service/Operator
    Charge
    Build/Renew/
    Maintenance Costs
    Construction &
    Maintenance
    (Hard Services)
    How PPP Works
    Mudaraba
    www.altracapital.com
  • 65. Government
    Direct
    Agreement
    Performance/
    Payment
    Insurance
    Concessionaire/
    SPV
    Financing SPV
    Mudarib
    Operations
    (Soft Services)
    Loan Agreement
    Security package
    Service/Operator
    Charge
    Build/Renew/
    Maintenance Costs
    Construction &
    Maintenance
    (Hard Services)
    How PPP Works
    Mudaraba
    Investors / Subscribers
    Rabb Al-Mal
    www.altracapital.com
  • 66. Government
    Direct
    Agreement
    Performance/
    Payment
    Return on
    Investment
    (no interest)
    Financing SPV
    Mudarib
    Insurance
    Project SPV
    Sponsor/Developer
    Operations
    (Soft Services)
    Investors / Subscribers
    RabbAl-Mal
    Service/Operator
    Charge
    Build/Renew/
    Maintenance Costs
    Construction &
    Maintenance
    (Hard Services)
    How PPP Works
    Debt & Equity
    (Muharaba, Istisna
    Salem, etc)
    Mudaraba
    www.altracapital.com
  • 67. Thank Youwww.altracapital.comLondon : jamesdavie@altracapital.com Abu Dhabi: aimanarbab@altracapital.com