Workshop 72


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  • This highlights that deals have been reasonably well represented in each category but equipment deals are fewer in number but tend to be much higher in value This effect is partly due to FSTA – the largest single deal ever closed in the UK, but reflects a general trend for higher capital value I’ll now look at a sample of case studies that KPMG has advised on to highlight some of the range and richness of types of deal that MOD has done in the UK My examples include some of the most interesting deals form each of accommodation, training and equipment and highlight not only the range of models that have been sued but some of the other key issues that have been addressed- including the ability to generate third party revenues from MOD assets and the use of contractor employed sponsored reserves to be deployed in theatre
  • Workshop 72

    1. 1. Public Private Partnerships Enhancing Performance and Funding Infrastructure ASMC’s 2009 Professional Development Institute May 28, 2009 Brad Watson, Partner, Global Infrastructure and Projects Group
    2. 2. Overview <ul><li>Summary of P3 fundamentals </li></ul><ul><li>Applying P3 concepts in defense – an overview of the UK experience </li></ul>
    3. 3. Summary of P3 Fundamentals
    4. 4. What is a Public-Private Partnership? <ul><li>A business relationship wherein the public and private sectors share: </li></ul><ul><ul><li>Risks </li></ul></ul><ul><ul><li>Rewards </li></ul></ul><ul><ul><li>Responsibility for success or failure </li></ul></ul><ul><li>The term “partnership” is not intended to imply a legal partnership </li></ul>Less Risk Transfer to the Private Sector More Risk Simple Operating Contract Accessing Private Sector Financing Running the Service as a Stand Alone “Business” Transfer to the Private Sector
    5. 5. Overview <ul><li>Two fundamental requirements for a P3 </li></ul><ul><ul><li>Private sector must genuinely assume risk </li></ul></ul><ul><ul><li>Value for money must be demonstrated for any expenditure by the public sector </li></ul></ul><ul><li>Achieving value for money with a P3 </li></ul><ul><ul><li>Better allocation of risk </li></ul></ul><ul><ul><li>Better incentives to perform </li></ul></ul><ul><ul><li>Integration of service needs with facility design </li></ul></ul><ul><ul><li>Clearer focus on respective responsibilities </li></ul></ul><ul><ul><li>Continuing commercial incentive </li></ul></ul><ul><ul><li>More potential for efficiencies </li></ul></ul><ul><li>P3s represent a new method of delivery – a tool is needed to: </li></ul><ul><ul><li>Demonstrate that alternative delivery is advantageous </li></ul></ul><ul><ul><li>Ensure that value for money is achieved from the actual RFP bids </li></ul></ul>
    6. 6. P3s by Sector <ul><li>Characteristics of a sector where a P3 model might be considered: </li></ul><ul><ul><li>“ Non-core” government service </li></ul></ul><ul><ul><li>Definable business or cost centre </li></ul></ul><ul><ul><li>Limited integration with other services </li></ul></ul><ul><ul><li>Ability to charge user fees </li></ul></ul><ul><ul><li>Impact of failure relatively low </li></ul></ul><ul><li>Characteristics of a sector where a P3 model would not likely be considered: </li></ul><ul><ul><li>Importance of maintaining public confidence and/or safety </li></ul></ul><ul><ul><li>Policy control not easily imbedded in a contract </li></ul></ul><ul><ul><li>Impact of failure relatively high </li></ul></ul><ul><li>Relative importance of each factor will vary by jurisdiction </li></ul><ul><li>Sectors where P3s have been implemented: </li></ul><ul><ul><li>Highways, Bridges, and Rail </li></ul></ul><ul><ul><li>Defense </li></ul></ul><ul><ul><li>Airport and Air Navigation </li></ul></ul><ul><ul><li>Water Treatment, Transmission, and Distribution </li></ul></ul><ul><ul><li>Power Generation, Transmission, and Distribution </li></ul></ul><ul><ul><li>Gas Transmission and Distribution </li></ul></ul><ul><ul><li>Marine and Ports </li></ul></ul><ul><ul><li>Justice/Corrections </li></ul></ul><ul><ul><li>Hospitals and healthcare </li></ul></ul>
    7. 7. The Public Sector’s Interest in P3s <ul><li>Improve efficiency in the delivery of an existing good or service: </li></ul><ul><ul><li>Airport maintenance support equipment (Canada DoD) </li></ul></ul><ul><ul><li>Municipal garbage collection </li></ul></ul><ul><li>Deliver a new good or service: </li></ul><ul><ul><li>SH 130, Segments5&6 (Texas) </li></ul></ul><ul><ul><li>Alberta Schools (Canada) </li></ul></ul><ul><ul><li>Northwood Military Headquarters (UK) </li></ul></ul><ul><li>Leverage existing assets for up-front value: </li></ul><ul><ul><li>Chicago Skyway </li></ul></ul><ul><ul><li>Airport concessions </li></ul></ul>
    8. 8. Contrasting P3 Business Models <ul><li>Various forms of P3 business models exist </li></ul><ul><li>Two key dimensions </li></ul><ul><ul><li>Delivery method – degree of service delivery segmentation </li></ul></ul><ul><ul><li>Financing method – degree of public vs. private sector funding </li></ul></ul>Private Finance Combined Service Delivery Public Finance Segmented Service Delivery DBB DB DBO DBFO Full Concession Op Contract
    9. 9. P3 Feasibility Financial Feasibility Implementation Considerations Acceptability Operations & Maintenance Design & Construction Legislation Project Feasibility System Interface
    10. 10. The Need for a Public Sector Comparator <ul><li>General Definition: </li></ul><ul><ul><li>“ Hypothetical, risk adjusted, whole-life costs of a project if the project is procured traditionally.” </li></ul></ul><ul><ul><li>Most-likely alternative approach as the reference point </li></ul></ul><ul><ul><li>Used to justify implementing a project using a non-traditional approach </li></ul></ul><ul><li>Typically developed and refined throughout the transaction process </li></ul><ul><ul><li>Broad estimates at transaction planning stage </li></ul></ul><ul><ul><li>Further detailed in consideration of delivery options </li></ul></ul><ul><ul><li>Final value for comparison with actual bids </li></ul></ul><ul><li>Ultimately, focuses on the financial impact of rejecting the RFP bids </li></ul>
    11. 11. Use of PSC Issues <ul><li>Complexity and subjectivity in converting risks into dollars </li></ul><ul><li>Estimation optimism </li></ul><ul><li>Selection of the Discount Rate </li></ul><ul><li>Adjusting for information availability </li></ul><ul><li>Disclosure of PSC to bidders </li></ul><ul><li>Tendency to over-simplify and ignore other decision criteria (e.g., broader economic benefit, labour relations, safety) </li></ul>
    12. 12. Typical Procurement <ul><li>Determine project scope and business model </li></ul><ul><li>Issue request for qualifications </li></ul><ul><li>Evaluate and create short-list </li></ul><ul><li>Issue request for proposals </li></ul><ul><li>Evaluate and select “winner” </li></ul><ul><ul><li>Negotiate as required </li></ul></ul><ul><li>Achieve commercial close </li></ul><ul><li>Achieve financial close </li></ul>
    13. 13. Basic P3 Structure Maintenance Company Dividends Grant or Periodic Payment Repayments + interest Loans Overheads & Tax Construction payments Maintenance & Life Cycle payments Equity Shareholders Debt Funders Government Third Parties Contractor Project Company Maintenance and lifecycle services Services Concession fee and/or Revenue Share
    14. 14. P3 Project Risk Profile
    15. 15. Typical P3 Business Terms <ul><li>Project term </li></ul><ul><li>Toll rates/schedule of allowable user fees </li></ul><ul><li>Rights to revenue </li></ul><ul><li>Revenue share </li></ul><ul><li>Technical provisions </li></ul><ul><li>Financing </li></ul><ul><li>Capacity improvements </li></ul><ul><li>Handback requirements </li></ul><ul><li>Competing facilities </li></ul><ul><li>Relief events </li></ul><ul><li>Compensation events </li></ul><ul><li>Force majeure </li></ul><ul><li>Termination provisions and compensation upon default </li></ul><ul><li>Insurance requirements and project security provisions </li></ul><ul><li>Others </li></ul>
    16. 16. Key Lessons Learned <ul><li>P3s do not fit all situations – careful assessment is required </li></ul><ul><li>Value for money must be demonstrated, and private entity must genuinely assume risk </li></ul><ul><li>A PSC evaluation will help to demonstrate value for money </li></ul><ul><li>Creating a business case forces the project team to clearly define a project </li></ul><ul><li>Do not underestimate the importance of achieving buy-in on all facets of a P3 project </li></ul>
    17. 17. P3s in the UK Defense Sector
    18. 18. UK Defense P3s – Overview <ul><li>Defense has proven on one of the most varied and dynamic sectors for P3s in the UK </li></ul><ul><li>Some 49 defense P3 projects have closed in the UK over the last 12 years with a total capital value of almost £9bn out of a UK total of £53bn </li></ul><ul><li>The UK market has been driven by several key factors: </li></ul><ul><ul><li>The checkered history of managing complex procurements to cost and time </li></ul></ul><ul><ul><li>Affordability issues favouring payments spread over longer periods </li></ul></ul><ul><ul><li>Initially, achieving off-balance sheet structures </li></ul></ul>
    19. 19. Number of Transactions <ul><li>The graphs illustrate the number and value of closed deals to date in each of the accommodation, training & support and equipment sectors </li></ul>Total: Closed UK PFI Deals 0 10 20 30 40 50 60 Total UK PFI Total Total Equipment Total Accommodation Total Training and Support Closed UK PFI Deals (Capital Value) 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Total UK PFI £m Total Equipment Total Accommodation Total Training and Support
    20. 20. Types of Transactions <ul><li>Asset based PFI transactions have been a key ingredient in UK defense P3s, but we have also seen: </li></ul><ul><ul><li>Major programs in service-based strategic partnering </li></ul></ul><ul><ul><li>More recently, in “alliancing” for equipment build and “through life” support </li></ul></ul><ul><li>The characteristics of the deals have varied greatly depending on their requirements and degree of risk transfer </li></ul><ul><li>The more standardized, lower risk programs, such as single and married accommodation projects have generally been the easiest to complete as the risk profile and requirements are easily understood </li></ul><ul><li>But the UK has successfully closed deals covering: </li></ul><ul><ul><li>Major fixed infrastructure </li></ul></ul><ul><ul><li>Synthetic and live training </li></ul></ul><ul><ul><li>Front line equipment </li></ul></ul>
    21. 21. UK Defense Projects – Examples <ul><li>Medium Support Helicopter Aircrew Training </li></ul><ul><li>UK Military Flying Training System </li></ul><ul><li>Defense Training Review Package </li></ul><ul><li>Heavy Equipment Tank Transporter </li></ul><ul><li>Strategic Sealift Service </li></ul><ul><li>Future Strategic Tanker Aircraft </li></ul><ul><li>Maritime Industrial Strategy </li></ul>
    22. 22. Summary <ul><li>The UK has found substantial scope for P3s in the defense sector including: </li></ul><ul><ul><li>Equipment </li></ul></ul><ul><ul><li>Training </li></ul></ul><ul><ul><li>Facilities </li></ul></ul><ul><ul><li>Strategic partnering </li></ul></ul><ul><li>Successful models have been introduced to deliver all of these types of requirement </li></ul><ul><li>Key cost, time and sustained performance benefits have been proven </li></ul><ul><li>Understanding the requirements, catering effectively for change over time and a realistic approach to risk transfer are key ingredients in any successful deal </li></ul>
    23. 23. Contact Information: Brad Watson 416.777.8142 [email_address]
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