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MENA Region PPP Development Strategy and Success Framework
 

MENA Region PPP Development Strategy and Success Framework

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There seems to be an 8 Years cycle for PPP’s in Developing Countries which can be extrapolated with caution to other World Regions. The world investments in PPP peaked in Year 2008, thus, we could ...

There seems to be an 8 Years cycle for PPP’s in Developing Countries which can be extrapolated with caution to other World Regions. The world investments in PPP peaked in Year 2008, thus, we could in 2012 be at the cycle bottom with the next 4-5 exhibiting a strong drive towards PPP investments. The presentation addresses the Middle East / MENA convergence in PPP’s highlighting the various challenges in regards to infrastructure development, socio-economy development and as well as PPP pipeline projects update in the region.

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    MENA Region PPP Development Strategy and Success Framework MENA Region PPP Development Strategy and Success Framework Presentation Transcript

    • Regional Convergence in PPP MENA PPP Projects Success Framework – Regional PPP Development Strategy 3rd Annual ME PPP – Qatar, February 2012Loay Ghazaleh – Advisor - B. Sc. Civil Eng. , MBA 1
    • Presentation IndexMENA PPP Scio - Economic OutlookMENA PPP Initiatives / Early SuccessesPPP Global Adaptation / LearningPPP Options & Projets StructurePPP Projets Success FrameworkPPP Regional Deveopment Strategy 2
    • MENA PPP Socioeconomic OutlookBalancing Factors or Another Europe in 5 Years ! Cash Flow - PPP Planning Lifecycle Costs – must comply – needed for to repayments to legislation, poli prevent delays cies and due to cash guidelines shortages Budget / Affordability - Project commitments framework to be reflected in the budget 3
    • MENA Infrastructure Supply Side• Relatively high infrastructure investment in recent years has succeeded in ensuring basic infrastructure access to the vast majority of MENA citizens, yet significant infrastructure investments are needs coupled with financial pressures on Government debts and budget deficits• The connection rate to the electricity grid by households is around 90 percent; access to acceptable water and sanitation services is above 70 percent, however, connectivity for the most part utilizes old / inefficient systems and industrial connectivity is still way below needed capacity.• The penetration of mobile telephony has reached the level witnessed in industrialized countries.• Paved roads represent between 60 to 70 percent of the total road network. 4
    • MENA Infrastructure Demand Forecast• There are some considerable challenges that MENA countries need to overcome in order to move the infrastructure agenda forward .• Good demand drivers exist like attractive investment alternatives, pension fund and insurance companies diversification into new asset class and poor historical Public output performance• The installed generation capacity of the electricity sector is estimated to be 20 percent below the aggregate demand for electricity across countries in MENA.• The prevalence of highly subsidized electricity & water tariffs induces wasteful use of electricity& water therefore increasing pressures for expansion of electricity generation capacity.• Energy & Water subsidies cost the region the equivalent of 10 percent of its GDP in 2006, whereas reducing these subsidies could raise the region GDP by 3 - 4 percent.• Urban congestion is growing and therefore increasing transaction costs for businesses or commuting times for workers (In Cairo, the average speed of vehicles is as low as 9 km/h )• It is estimated that the total economic and social cost of congestion is about 5 percent of GDP. In Teheran, it is estimated that commuters spent around 4.5 million hours/day in traffic.• The quality and reliability of Infrastructure services are a real challenge which constrains competitiveness, regional economic activity and growth prospects 5
    • MENA Infrastructure Investment Forecast• Private investments in infrastructure in MENA have grown significantly since 1994, but at a lower rate than in other regions.• MENA countries need to create 40 million new jobs in the next ten years to meet the fast growing labor force.• This will require sustaining the economic growth at around 7 percent per year in the next ten years which cannot be achieved without significant investments in infrastructure.• The annual volume of infrastructure projects financed in MENA is estimated to have grown from US$25 billion in 2007 to US$27 billion in 2008,before sharply declining by June 2009 to US$6 billion due the global financial crisis (Investments in PPP in the Middle East and North Africa almost tripled between 2000 and 2007)• Middle Income Countries in MENA will need to invest the equivalent of 9.2 percent of their yearly GDP, in order to sustain their economic growth prospects. This represents a total investment effort between US$75 to 100 billion a year, of which 33 percent is earmarked for the maintenance of the existing stock of infrastructure.• The Arab world invests about $60 billion a year in infrastructure, but to sustain current growth rates, it needs about $100 billion annually.• To meet this $40 billion gap, a smart mix of public sector engagement in coordination with financing and expertise from the private sector is essential. 6
    • Opportunities in GCC Power, Utilities and Infrastructure• Long-standing problems like high unemployment, limited access to finance and weak regulatory frameworks are the forefronts in MENA Region.• There are more live projects in the MENA region than anywhere else• Qatar are planning projects worth $20 billion over 5 years• Saudi Arabia is planning to spend $400 billion in the same period• Oman is budgeting $2.43 billion for capital investments in 2010• Abu Dhabi is spending $68 billion in public transport schemes alone• Oman projecting a total government spending of $10 billion for the construction industry in year 2012, an increase of 23 per cent over 2011. 7
    • Opportunities in GCCTransport Sector• The GCC Transport and Railways Conference held in Qatar, October, 2011 (Sponsored by Qatar Railways Company (RAIL) in association with the General Secretariat of the GCC, the Federation of GCC Chambers, the Qatar Chamber of Commerce and Industry, and others)• Investments of more than US$ 200 Billion already allocated to the development of transport systems, with the rail networks and metro projects reaching US$ 100 Billion.• The national GCC railway projects, a 2200 km network that will be carry passengers and goods at speeds of 200 km/h and 80-120 km/h, and will link the six Gulf countries at a total cost of more than US$ 15.4 billion. Commissioning of the entire network is expected by 2018 A.D.• It’s forecasted that GCC GDP to reach around US$ 2 trillion and a total population of around 53 million in the year 2020 A.D. 8
    • Opportunities in MENA Social Housing• Affordable housing for the MENA region has an estimated shortfall of 3.5 million units -JLL Consultancy – 2012.• Saudi Arabia has the largest shortfall in the Gulf of 500,000 plus homes followed by 40,000 homes in Bahrain, 20,000 in the UAE and 15,000 in Oman .• KSA Construction Housing Pipeline Projects valued at US$ 29 billion for 2012.• Sharjah has a shortfall of 5,000 affordable homes. Sharjah ruler unveiled initiate in 2012 for affordable housing.• Bahrain government signed early 2012 a record BD208m ($550m) with a local developer to build more than 4,000 affordable homes.• Saudi Arabia needs 1.65 million new homes by 2015 (275,000 units a year). Total commitment is $130bn on social projects with $67bn allocated for 500,000 new homes and $400 billion for infrastructure projects.• Bahrain forecasts the need for about 350,000 new residential units to be added to existing stock by 2030 with $1.1bn to be spent every year up to 2020, and then $242m annually up to 2030, (EDB report). 9
    • GCC PPP Activity Update (KFH 2010 report)• With huge government surpluses, securing finance is not the overriding factor behind the PPP push in the GCC countries, rather, it is the goal to deliver projects more efficiently, grant the private sector a greater economic role and assist with the diversification of the local economy.• Since 2010; over 50 PPP contracts were signed in the GCC region. These projects require investments of more than USD 60 billion.• As of September 2010, the UAE had signed off an estimated USD20 billion worth of PPPs, with some USD7 billion accounted for by Abu Dhabis utility sector.• Kuwait government rolled out in mid-2010 through Partnerships Technical Bureau (PTB) – a PPP unit - PPP program comprising 32 projects and requiring investment of USD28 billion in various sectors - Transportation, real estate, healthcare, utility projects and recycling factories under B.O.T system with the largest being the estimated USD10 billion Kuwait national rail scheme. 10
    • PPP Pipeline Projects – GCCMar-10 KSA Airport Cities PPPJul-10 KSA Airport Cities PPPAug-10 KSA High Speed Railway PPPSep-10 KSA - GCC Railway Network PPPApr-10 KSA - Jeddah Airport PPPAug-11 KSA - Mecca Mass Rail Transit PPPApr-10 KSA - Medina Airport PPPJul-10 KSA - Medina Medina International Airport PPPAug-10 Kuwait Metro Rail PPPSep-11 Kuwait Recycling factories PPP / B.O.TSep-10 Oman Railway Network PPPJul-11 Qatar - Doha Metro PPPOct-10 UAE Railway PPPDec-10 UAE Union Railway PPPAug-10 UAE - Abu Dhabi Mafraq-Ghweifat Highway PPPJul-11 UAE - Abu Dhabi Airport PPPOct-10 UAE - Dubai Water PPP 11
    • PPP Pipeline Projects – Rest of MENAOct-10 Egypt Rod el-Farag Highway PPPSep-11 Egypt Egyptian Refining CompanySep-11 Egypt Suez 650 MW Steam Thermal PlantSep-11 Egypt Taxi Replacement SchemeJul-10 Egypt - Alexandria University Hospital PPPJul-11 Egypt - Alexandria Hospital PPPFeb-10 Egypt - Cairo Wastewater treatment plant PPPJul-10 Egypt - Cairo-Alexandria Cairo-Alexandria Freeway PPPSep-10 Jordan Rail Transit / Way PPPJul-10 Jordan - Amman Light Rail PPPJul-10 Jordan - Amman Ring Road Highway PPPSep-11 Morocco Railway LineSep-11 Morocco - Casablanca Drinking Water Supply -Rabat Hasdrubal Oil and Gas FieldSep-11 Tunisia DevelopmentSep-11 Tunisia Road Project VI 12
    • MENA PPP Initiatives / Successes 13
    • MENA PPP Environment• There are some considerable challenges for MENA region in moving the infrastructure agenda forward.• PPP investments in MENA region Countries have essentially been contractual rather than being based on a larger legislative framework.• Some ministries in some countries have developed expertise in structuring a very specific PPP category like telecommunications, roads or sanitary / water.• The procurement process, dispute resolution and regulation / tariff setting arrangements have generally been subject to a contractual arrangement rather than independent laws, regulations and regulators. 14
    • GCC PPP Activity in the Last 10 Years (Kuwait Finance House – KFH- 2010 report)• GCC PPP contracts during the last ten years amounted to USD 628 billion with over 100 PPP-type agreements, of which half can be classified as management contracts.• In terms of PPP deals concluded, Saudi Arabia has the highest number at 45 with power and desalinations share of the PPP market was near 90 percent of the total spent.• Management contracts (Often seen as the first step towards privatizations) have been used extensively in used in regional seaport and airports projects.• The UAE and Saudi Arabia represent the largest markets for PPP especially IWPP (energy and water projects).• The first IPP in GCC (Al-Manah independent power project ) was signed in 1994 in Oman.• In 1998 Abu Dhabi successfully launched the restructuring of the Abu Dhabi utility sector and formed Abu Dhabi Water Electricity Authority (ADWEA) on BOO basis.• Oman re-launched its own utility privatization program in 1999 and was followed in 2000 by Qatar and in 2003 by both Bahrain and Saudi Arabia.• In 2002, the regions first sewage treatment plant (STP) PPP was awarded at Sulaibiya in Kuwait (USD 400 million) 15
    • Regional Infrastructure Regulatory Forum - December 2009• Jordan’s Ministry of Planning and International Cooperation (MOPIC), and in collaboration with the Public-Private Partnerships Infrastructure Facility (PPIAF) and the International Finance Corporation (IFC) launched in Amman on December 7, 2009, the first Regional Conference on Infrastructure Reform and Regulation in the MENA region.• The Conference adopted a final resolution to launch a process towards the establishment of the “Middle East and North Africa Infrastructure Regulatory Forum” of which the objectives will be to promote the cooperation among infrastructure regulators within and across countries in MENA.• A working group was formed to work jointly with World Bank in bringing the process forward. The Membership of the Forum will be open to all relevant organizations responsible for regulation and that are based in the MENA states. 16
    • Middle East and North Africa Infrastructure Regulatory Forum• Cooperation among stakeholders , regulators dialogue and knowledge- sharing can serve to;- Accelerate reform progress,- Promote best practice and- Enhance the harmonization of infrastructure networks.- promote the adoption of common rules, norms and standards,• A multi-sector regional Forum of infrastructure Regulation can serve as a valuable platform for- Experience and information sharing across borders and sectors,- Problem-solving, and the dissemination of best practices.- Knowledge sharing center providing capacity building services 17
    • Arab Financing Facility for Infrastructure (AFFI) World Bank Group & Islamic Development Bank Infrastructure Facility • The World Bank Group (IFC), in cooperation with the Islamic Development Bank, set up a $1 billion facility (the public side of investments will be financed via an initial $200 million from the World Bank) to close the infrastructure gap in the Middle East and North Africa. • This regional investment vehicle supports both conventional and Shariah- compliant investment in infrastructure which will attract untapped, alternative sources of financing.” • The Facility focus is cross-border PPP infrastructure projects like electricity networks and rail, road and maritime networks and projects with regional impact like the plans for large-scale concentrated solar power production in Morocco to increase the regional integration and competitiveness. • IFC supports cross-border projects that commercial banks would consider too risky without IFC’s involvement. • World Bank lending to the MENA region for infrastructure, including electricity, transport and water, has exceeded $1 billion a year. 18
    • ADB (African Development Bank) Investment UpdateNorth African Countries : Algeria, Egypt, Libya, Mauritania, Morocco, and Tunisia.• The Bank Group started operations in the North Africa sub region in 1968 – one year after the other sub regions.• Loan and grant approvals for the sub region totaled UA 1.47 billion in 2010, which is a rise of 40.0 % above the 2009 level of UA 1.05 billion. ( ADB uses UA units of accounts which is SDR and is nearly equivalent to 1.5 USD)• North Africa’s approvals represented 40 % of total Bank Group approvals, which makes it the main beneficiary sub region during the year.The key projects approved for North Africa were:• Suez 650 MW Steam Cycle Thermal Power Plant in Egypt;• Increasing capacity on Tangiers–Marrakech Railway Line in Morocco;• Road Project VI in Tunisia;• Drinking Water Supply in the Rabat Casablanca in Morocco;• Egyptian Refining Company Project in Egypt;• National Program for Taxi Replacement Scheme in Egypt;• Oil and Gas Field Development Project in Tunisia;• Public Administration Reform Support Program, Phase IV in Morocco. 19
    • IFC-World Bank IFC is currently active in both projects financing and advisory services in the MENA region ( GCC countries are excluded from the financing) IFC mission is to foster sustainable economic growth in developing countries by financing private sector investment, mobilizing capital in the international financial markets, and providing advisory services to businesses and governments. IFC has expanded its advisory services to improve the business enabling environment and encourage public-private partnerships for the development of infrastructure. Reducing infrastructure bottlenecks—especially in transportation& power sector is a strategic priority for IFC to support the region’s sustained long term growth. 20
    • IFC-World Bank Advisory - 2010EGYPT SAUDI ARABIA• Cairo-Alexandria Freeway • Airport cities• Alexandria University • Madinah International Hospitals AirportJORDAN SYRIA• Amman Ring-Road • First Independent Power• Amman Light Rail ProjectPAKISTAN YEMEN• FAISALABAD ELECTRIC • First Independent Power SUPPLY COMPANY (FESCO) Project 21
    • MENA PPP Laws• PPP draft law to be approved in Lebanon. - October 23, 2010• Dubai´s PPP law will be approved in the first quarter of 2011- drafted by Roads and Transport Authority (TRA) but it is not specific to transport- January 13, 2011• PPP law draft ready for private comments in Jordan (Privatization law was passed in Jordan in year 2000)- July 12, 2010• PPP law for Egypt ( under process) - drafted by Finance Ministrys Public- Private Partnership (PPP) Central Unit - August 23, 2010• In 2009 Kuwait announced its intention to pursue the private power route. 22
    • MENA PPP Government InitiativesCountry Sectors Law PPP UnitJordan water, airport, ring road, , airport Privatization & PPP YesLebanon Energy (IPP 435 MW) Privatization & PPP YesEgypt Rail, roads, water, STP, health, education Privatization & PPP YesAlgeria Rail, roads Project wise Laws ?Tunisia Solar, roads, oil & gas (production sharing) Project wise Laws YesMorocco Solar, railway, water transmission. Project wise Laws YesBahrain Energy (IPP),STP, waste treat. , housing Mortgage - Housing YesQatar Metro Sector Laws MoBaTKuwait STP, metro, railway, recycling factories. PPP PTBUAE Energy (IWPP), water taxi, airport PPP RTAOman Energy (IPP) STP, railway, housing Mortgage - Housing ?Saudi Arabia IWPP, STP, housing, airport Cities, GCC rail Mortgage - Housing ?Yemen IPP (400 MW) Sector Law ? 23
    • Jordan - Water Sector• Since 1997, the Government continually issued strategy, policies and investment program: • 2002 – 2011 Sector Plan and Investment Program • Action Plan 2002 – 2006. • Water Utility Policy • Ground Water, Wastewater and Irrigation Policies • New Water Strategy for Jordan for Water Demand Management (WDM) and Public Private Partnership (PPP)• Institutional responsibilities lies with Ministry of Water and Irrigation (MWI)• Management Contract selected due to • Improvement of Services with Reduced Risks to Government • Results in Significant Improvement, in System Operation • Improvement of Organizational Reform of Operations • Good First Step Towards Significant PPP 24
    • Egypt – Full PPP ProgramEgypt has led MENA Countries with 22 PPP Deals valued at $15.4bn achieving financialclosure between 1990 and 2007Performance-based contracts under concession (affordability or a hybrid of both). • Output is specified by Line Ministries while input is by the private sector • Under the PPP contract the Government retains total strategic control • Adoption and localisation of international successful PPP models (UK based) • Supportive legislative environment , new legal framework for PPP projects (Draft under finalization for Submission to Cabinet and Parliament)Standard PPP Contracts • Standardization of procurement documentation and procedures • Creation of regulatory bodies for post contract implementation • Establishing a PPP Central Unit at Ministry of Finance as well as Satellite Units. • PPP Pipeline Projects in Social Infrastructure (Education &Health Sectors), Wastewater Treatment Plants and Transportation Sector 25
    • PPP Global Adaptation / Learning 26
    • Countries PPP Knowledge Sources 27
    • HM Treasury References 28
    • WB PPP Knowledge Reference 29
    • International PPP Center of Excellence Initiative 30
    • Neighboring Countries PPP Actions 31
    • PPPs Evolutionary Phases START (Infancy) Stage Two (Establishment) Stage Three (Maturity)•Introduce PPP concepts •Introduce legislative •Fully defined, comprehensivefor Public discussions reform “system”•Explore PPP models •Publish policy and practice •Legal impediments removed guidelines •PPP models refined and Stage One (Emerging) •Establish dedicated PPP replicated•Define policy framework unit/s •Sophisticated risk allocation•Test legal drafts • Refine PPP delivery •Committed, long-term deal flow models•Identify project pipeline •Long-term political consensus •Continue to foster local /•Develop PPP concepts int’l marketplace •Use of full-range funding sources•Apply lessons from including pension funds and •Expand project pipelineearlier deals to other private-equitysectors •Extend to new sectors •Well-trained civil service•Start to build the local •Leverage new sources of applying lessons from PPPmarketplace funds experience 32
    • PPP Market Maturity Curve – UN Publications 33
    • Governments & Institutions objectives in PPPs • Fiscal objectives (defers the cost of capital investments, reduce apparent borrowing by government ) • Economic objectives: – expected efficiency gains – more reliable completion of projects on time and on budget – expected greater management skills / know how of private sector • Political objectives – reduce role of the State / the Government – weaken influence of public sector trade unions Fiscal Objectives Economic Objectives Political Objectives Limits on government IMF spending/borrowing Efficiency Develop global market Limits on government EU borrowing, debt (stability Efficiency Develop internal market pact) Reduce role of state, extend National Limits on government Efficiency, reduced public role of private sector, governments borrowing spending weaken unions Local Efficiency, reduced public Reduce local taxes ? governments spending 34
    • 35
    • PPP Program - Integrated Approach – Key Notes No perfect design for regulation and institutions  Changing market condition needs to Vision – Strong Political Institutional be reflected in PPP framework by Will Accepted By The modifying and updating regulatory Framework – Building and institutional design Public / Users Capacity, National (Empowered Public) Policy  Competition & transparency principles need to be kept Government’s proactive use of Viable / VFM PPP vision, policy & sustainability in market Projects Pipeline creation is important. Taxpayers / users engagement in PPP Funding – Priority Legal & Regulatory dialogue Funding Framework – Clear & Friendly Business Supporting local financing institutions / Strategies, Building Environment To PPP’S . local development funds is key. Local Financial Supply Oversight Procedures - Side – Infrastructure Transparency, Competiti In house skill within the government is of crucial importance to build Funds on, Monitoring capacity , to monitor and create PPP pipeline projects 36
    • POLICY AND LEGAL FRAMEWORKS & SUPPORT FUNCTIONS Comprehensive PPP Law – Investment , Funding & Technical (PPP Contract Type/s) and Legal Powers to contract out the services Dispute Resolution Mechanisms – Independent Chamber Open & Transparent Public Procurement / Tender Law Clearly Defined Gov. / PPP Unit Role in – Budgeting Allocation / Oversight , Progress Monitoring & PPP Projects Approvals and Contract Management – performance-linked payments/penalties. Sector & Scope of Sector Law – Ex. How to own a pipeline in a public road? Private / Public Land Acquisition Law Easements / Way leaves / Permits , etc PPP Implementation Structures – Technical Public / Private Interface Offices. Integration of PPP into Public Procurement w/ Multi Stage Financial & Scio-economic Appraisal Procedures (Rationale for use of PPP’s (Business Case) , Suitability & VFM Assessment) , Guidelines for PPP’s Pre-qualification , Tender And Bidder Selection. Standardized PPP Bidding Documents Unsolicited Bids Procedures. Standardized PPP Contracts / Asset (Facility) Type or PPP Model / Structure Information dissemination – data, networking, training Guidance – model contracts, tools, case studies Facilitating functions – political/advisory support, funding 37
    • Criterias & Performance for PPPsCriteria for PPPs (PPP Project Test)  Affordability for the Public Sector & Desired Gains  Financially viable for the Private Sector  Appropriate Risk and Reward Balance for Public and Private Sector  Public Sector - value for money (VFM – True Cost) Verses traditional PSCPPP Performance & Monitoring : World lessons  National audit authorities need to be involved in assessing PPP VFM (UK NAO)  Periodic reports for progress , learning and benchmarking are needed.  Public and private sector may need to acquire new skills to commence a PPP program.  Sufficient ‘deal flow’ is critical to justify the high transaction costs and to promote effective competition.  Procurement programs need to be managed to minimize costs (e.g. standardized documentation) and maximize competition (e.g. timing of contract notices).  National PPP Task Forces / PPP units can play key role in securing VFM in programs.  Globally , cost and time performance in major infrastructure generally good, performance in IT & Social PPP sectors generally weak. 38
    • PPP Projects Value Drivers Less PPP Value Added Driver More PERFORMANCE-BASED PAYMENT MECHANISM: Above-par performance should give higherUnitary Fixed Payments profitability, low performance should trigger Performance Payments penalties. OUTPUT SPECIFICATIONS: Relates to the private sectors ability to deliver the services at lowerLimited Incentive Contracts costs, or to provide better quality at the same Output Based Contracts cost to the user. INTELLIGENT RISK ALLOCATION: Risk to be allocated to the party that is best to manage ,Wrong Risks Allocation mitigate or absorb it. Wrong risks allocation Optimal Risk Allocation reduces PPP value. LIFECYCLE OPTIMIZATION: Integrating different components and phases increases the More project phases inMultiple Project Phases performance over the PPP lifecycle and reduces interface problems. one hand FORMAL CONTRACTING: Clear legal recourse inSimple Contracts case of disputes increases clarity and reduces Complex Contracts risk. COMPETITION / FUNCTIONING MARKET: Competition from adequate number ofLimited Competition companies increases value-for-money. PPPs More competition without competition are inefficient. PRIVATE FINANCING: Private financing results inPublic Financing strong oversight from debt and equity providers Private Financing which increases project performance. 39
    • UNECE Guidelines On Governance In PPPs  Coherent PPP No! , You need a policy framework with PPP pilot project will start the processPolicy direction, responsibilities and goals. No! , capacity building withinStrong Enabling PPP’s projects should focus on ring Government & setting up institutionsInstitutions fencing are needed. PPP’s have prescriptive rules and tight No! , Overall framework should beLegal Framework control flexible.Cooperative risk PPP’s provide assets to governments at No! , Governments must assume somesharing no risk and no cost risks and offer some subsidy.Transparency in No! , Competition allows selecting the In PPP’s no tender required…Partner selection best fit (partner /project)Putting people In PPP’s its best to Keep people out: No! , People need to be put first.First they do not understand the complexitySustainable In PPP’s one have to choose between No! , Project can make profit and stillDevelopment profit and social & environment … achieve social and environmental goals. 40
    • Key to Successful PPP’s Alignment of proposed projects to strategic plans and mandates. Vertical alignment in terms of national and also provincial priorities to enhance “buy in”. Proper groundwork at inception with regards to option analysis: clear VFM Attracting private investors . Appointing good transaction advisors: well rounded experience, no conflict of interest. Clear contract terms and conditions to avoid contract re-negotiation. PPP PRO’s PPP CON’sCompetitive Process Complex Structures & DocumentsIncreased Transparency Time-Consuming to Arrange / TenderOff Balance Sheet Consideration Higher Borrowing Costs Than Public FinancingPrivate Sector Efficiencies and Innovation No different than EPC ContractsCommercial Risk Sharing Difficult to Resolve When In DefaultAcceleration of Infrastructure Provision Project Choice ImportantFaster Implementation Skill Deficit for AdministrationReduced Whole Life Costs High Transaction CostsBetter Risk Allocation Structured RisksBetter Incentives to Perform Needs Legal FrameworkImproved Quality Of Service Can be achieved at High PriceGeneration of Additional Revenues Collection Issues & CostsEnhanced Public Management Public Perception and Political Reactions 41
    • PPP Units – A World Trend !• There are no single design of PPP unit, design to fit local the context• PPP unit is not a prerequisite nor a guarantee for successful PPP• PPP unit need to demonstrate leaderships and specialties• Most countries commence PPP programs in Transport, Energy, Water, Wastewater and later migrate to other sectors like – Health, Education, Energy, Water, Waste Treatment.• Rate of ‘migration’ to other sectors reflects both national priorities and existing legal frameworks.• Tendency for project to cascade from central to local government / municipalities.• Line ministries which have a long experience in traditional procurement may not want to cooperate with new agency MoF – Policy Formulation & Line ministries/ local Gov’t Fiscal / Budgetary Control Project Implementation 42
    • PPP Units Design Notes – Function Wise• Design factors for PPP units include size and type of government ( Federal / non Federal) , decentralizing from central government to local / state governments, where within government infrastructure delivery "sits" and the size and growth of the PPP program (measured as the ratio of PFI/PPP investment to the total investment in public services).• It is highly desirable that the roles of PPP Policy Development (Institutional Fr amewor k and development of top line guidance like value for money) and PPP Pr ojects Appr ovals are not within the scope of the same PPP unit that serves as centre of best practice and expertise (Project Development) or coordination unit.• To be effective, a PPP unit needs to be able to build up experience and retain institutional memory project and lessons leant wise. This can be a challenge of sitting within the public sector. In all cases the public sector needs to have experience of managing financial, legal and technical advisory roles if these functions are sourced out . 43
    • PPP Units Design Notes – Government System Wise• In a Federal system (like India, Australia, UAE and USA), the relationship between Federal and State Units depends on the responsibilities of the different levels of government with the federal government role as Project Developer is less significant, however, the financing / guarantees role of the Federal still exists.• In non federal, centralized system the role of the PPP unit needs to fit with the existing structures of government considering the extent to which levels of government / Line ministries have control over their own budgetary resources or have private finance units or are permitted to generate own revenues . At the early stage of PPP development, it is usual to start with a central PPP unit, however, as the program grows; the need to avoid excessive deficiencies stemming from centralization needs to be addressed.• In Constitutional democracies with strong parliamentary processes, PPP units are preferably located in the Ministry of Finance to exercise fiscal and budgetary control with Ministry of Planning or Mega Projects being also other preferred locations. 44
    • PPP Units Should Also Resolve Government Failures!Government Failures PPP Units FunctionsPolicy & Strategyundefined , not clear Marketing & PromotionPoor Procurement PPP Units functions Policy Formulation &Incentives need to Coordination accommodatePoor information Information and Guidance Governments failuresdissemination - StandardizationPoor Contract Project Advise – TechnicalManagement AssistanceLack of Coordinationamong stakeholders PPP Units associated with Project Development Successful PPP Programs;Lack of complex projectsskills & analysis Funding Preparation Partnership UK (PUK)Poor Transaction Contract Monitoring & Partnership VictoriaManagement & High Costs South Africa PPP Unit ControlLack of Information Approval Power 45
    • Examples of Location & Roles of PPP UnitsPolicy Setting / Monitoring / Collaboration / Investment Fiscal Control Budget Control Coordination Promotion Ministry of Ministry of Ministry Ministry of Finance / Finance / (Authority) of Business & Treasury or Treasury or Planning / TradeEconomic Unit Economic Unit Ministry of , Ministry of Mega Projects Industry PPP PPP PPP PPP Unit Unit Unit Unit 46
    • Examples of Roles , Location & Funding of PPP Units Victoria, Nether- BC, CA Ireland Italy Philip. SA UK Aus. lands Guidance        Project Advise         PPP Development    Funding Preparation    Monitoring      Approval Power    PV, Australia Inside the Government PBC, Canada (All are funded by the Government) UK Treasury Task Force Outside the government (Private) PIMAC, Korea Public / Private (Generates Revenue - Advisory Services) PUK, UKMultitier PPP units exist in countries where project development , financing andapprovals are bundled together. Example in UK , the Treasury Task force ( located inMoF is the approval authority) while PUK ( Partnership UK , a semi private unit) doesthe Project Development in line with satellite units from line Ministries. 47
    • PPP Other Sources - International Law UNCITRAL – UN Commission for International Trade Law, website – http://www.uncitral.org.• Significant work toward the harmonization of private international law.• Numerous translations of documents (French, Spanish, Arabic, Chinese, and Russian). UNIDROIT – Int’l Institute for the Unification of Private Law , website – http://www.unidroit.org.• Best-known accomplishment = UNIDROIT Principles of International Commercial Contracts. 48
    • PPP Other Sources - Arbitral Institutions Permanent Court of Arbitration – http://www.pca-cpa.org. Int’l Center for the Settlement of Investment Disputes – http://www.worldbank.org/icsid/. International Chamber of Commerce (ICC) – http://www.iccwbo.org/index_court.asp. London Court of International Arbitration (LCIA) – http://www.lcia-arbitration.com/lcia/lcia/index.htm. American Arbitration Association (AAA) – http://www.adr.org/index2.1.jsp. WWW Virtual Library Arbitration – http://www.interarb.com/vl/pages/. 49
    • PPP Options & Projets Structures  Toll Roads  Airports  Seaports, Water Transport  Rail ( Railway, monorails, etc) Transportation  Underground Transport  Electricity  Gas  Water Regulated Utilities  Hospitals  Schools  Prisons  Social Housing Social Infrastructure  Broadcast Networks  Mobile Telephony  Satellites Cables  Terrestrial / Submarine Cable Communications 50
    • Generic - Risk Scales & Durations for PPP’s • Privatization & Divestiture (Highest Private risk) • DBFO & BO Concession contract - Revenue or off- take - (25 -30 yrs) • DBOT, BOT (25 yrs) • Lease / Afterimage contracts (5 – 10 yrs) • JV, Partnerships ( varies but has a life time with dissolving mechanisms) • Sale & lease back (8 – 15 yrs) • Operation & Management ( O&M) Contracts (3-5 yrs) • Service Contracts (1- 3 yrs w/ renewals) • Technical assistance – discrete tasks - (Lowest Private risk) 51
    • Comparisons ! – More Common PPP’s Aggregat Approx. Construction, Operational PPP PPP Operators Demand Scheme e Risk Duration Rehabilitation Env. Risk & Technical Type Examples Revenue Risk % ( + / -) Years Risk Risk Nearly Service Sale (Privatization Non 100% regulated) , Private, if Telecomm. Lifetime Private Private Private& Divestiture PPP Private Facility / License needed Risk re-sale Full Users charges ( VolumeConcessions Direct or shadow 90% Caps and (BOO) / Highways, payments) / Private / / or Off Private / Design PPP IPP, IWPP, 25 - 30 Based on Private Private 10% take by PublicFinance Build Hospitals Performance Public the Operate (Availability/ Public (DFBO) Delivery) STPs , Water Production, 70%DBOT,BOOT, Social Users charges / Joint Private / Private / BOT (turkey PPP Housing, 20 - 25 Off take Private Public / Private 30% Public delivery) Education Agreement Private Public facilities, Prisons, Lease / Sewer, 60% Afterimage Transmission 5 - 10, w/ Fee based on Public ( for the Private / More on (not the PPP lines. Renewal collected needed Private Public 40% Private side same!) Electricity Provisions revenues facilities) Public 52 Contracts Distribution
    • Comparisons ! – Less Common PPP’s Aggregate Approx. Construction, Operational PPP PPP Operators Demand Scheme Risk Duration Rehabilitation Env. Risk & Technical Type Examples Revenue Risk % ( + / -) Years Risk Risk JV , Partnerships Lifetime Solar ( usually high tech Nearly w/ Users charges / Generation, with environmental PPP balanced dissolving Off take Joint Joint Joint Joint Waste toimpact or Production (50% / 50%) mechanis Agreement Energy, sharing -oil & gas) ms Common in Airlines, Sale / Lease back Government 20% Private Direct - Capital / Contracts ( Asset is Public ( for the PPP Building , / 80% 8 - 15 Operational Public Public Negotiated leased back to the needed facilities) Sports Public Lease agreement Public) venues Public, Operation & Airports & 10% Private Minimum Contractual Private / Private /Management (O & M) PPP Seaports, / 90% 3-5 N/A volume (lump sum) Public Public Contracts land fills Public guarantees by PublicService / Maintenance Contracts, Technical The usual Nearly Contractual / On Assistance Non outsourcing 100% Public 1-3 call / job card fee N/A Public Public Public (Government PPP PSC. Risk ( Discrete Tasks)Procurement - Design - Build or EPC) 53
    • Comparisons ! - PPP Versus Privatizations Public-Private Partnerships Privatizations / JV’sWater, Wastewater Treatment, Electricity Generation Telecommunications , Some Water ServicesHospitals , Hotels, Sports Venues Electricity generating , Transmission / Delivery NetworksRoads, Bridges, Rails Production of Oil and Natural Resources (sharing)Social Housing, Schools, Prisons ( Social infrastructure) Poorly Managed Large Assets.A new special purpose vehicle (SPV) is formed - Project Existing state-owned assets are sold directly to a private sectorCompany , owned by the private sector entity, often after an international / local tenderThe SPV develops, finances and completes the Title to the assets is transferred to the private sector entityinfrastructure necessary to deliver the projectFull operational control is transferred to the public sector Private sector entity owns the assets and can dispose of themat the end of the agreed “concessionary” period , while the after contractually imposed deadlines and benchmarks (lock intitle to the asset remains with the public sector in BOT period)and most utilitiesThe SPV delivers the service and receives agreed-upon Because the asset has been permanently transferred to thecompensation . Compensation to the private sector can be private sector, the public sector benefits are gained throughin the form of tariffs paid by service users or directly by the receiving the acquisition price, improved efficiency , tax andgovernment, or a combination royalty payments 54
    • Comparisons ! - Risk Areas of Private ,PPP & EPC Public Projects Private Project Public Private Traditional EPC Development Partnership (PPP) Procurement No Public Public side has Public Side has Urban Planning Influence good influence total Control No Public Public Side has Public Side has Execution Speed Influence good Influence total Control No Public Guarantees of Contractor Guarantees Influence Private Investor Guarantees Project Financing Private Investor Private Investor Public Side Market Risks Private Investor Fair Risk Sharing Public Side Economical Benefits Benefit From Sustainable Sustainable - Public Side Property Sale Benefits Benefits 55
    • Comparisons ! - Tax-Exempt Financing Versus PPP – Government Perspective Tax-Exempt Financing Public-Private Partnerships• Strengths Strengths – Tax-exempt interest (deductable)  Strength of private equity credits – Tax credit  Addition of equity cushion – Existing relationships with insurers  Market demand for infrastructure projects – Retains operational control of assets  Transfer of operating risk  Ability to continue oversight• Challenges – Market access issues Challenges – Future financial viability of bond insurers  Shift to executive oversight – Full retention of operating risk  Equity partners belief in future growth – Revenue shortfalls, unprotected.  Public policy implications/transfer of revenue stream 56
    • PPP Risks - The More Familiar Risk Type Risk Mitigation Environmental and safetyEnvironment and EIA before and after, Both parties to agree on the constraints defined in theSafety Risks Environmental impact. Concession Agreement Risk to be borne by Concessionaire. Acquisition of land risk by Government before construction start. Tools; Time delays & cost overrun risks, - Fixed price turnkey contractsConstruction Risks geotechnical risks -Warranties (bonds), - Liquidated damages clauses. -Clear input or output or performance specifications. Tools include; - Equipment Suppliers guarantees Performance based risks,Technical - Proven technologies operating costs, managementOperation Risks - Performance guarantees. failure. - Raw materials / feedstock agreements - Public Authority involvementRevenue Risk in Minor risk in existing facilities Often acceptable risk level is borne by Concessionaireexisting facilities / unless forecasts after (adequate provision on tariff in Concessioninfrastructure improvements are exaggerated. Agreement). Often not possible for Concessionaire to bear all theRevenue Risk in risk. Tools include;newly-built Major risk in newly-built facilities - Off take agreementfacilities / like traffic volume, tariff setting. - Caps ( floors / ceiling)infrastructure 57 - Revenue build up period
    • PPP Risks - The Less Familiar Risk Type Risk Mitigation - Structure ( Debt / Equity) - Optimal Equity 30 – 10% - IRR / NPV - IRR (15 % -25%) -Debt Service Cover Ratio - 1.5 ( can be as low as 1.1 with string offFinancing Risks - Tax Status / Benefits take agreements) - Others - Exchange Risks, Sovereign - Translates into tax account treatment Credit Ratings, etc. - Financial derivatives hedging. - Refinancing - SyndicationLegal Risks Regulatory framework, concession / Experienced (high priced) Lawyers. Clear sector laws. documents. International Arbitration set. Compliance to contractual terms in a Mitigation through Risk Guarantee (IBRD andPolitical Risks / Concession Agreement. [Currency MIGA). Transferred Risk can be insured –Government Inconvertibility, Confiscation, Political risk insurance. World Bank providesPerformance Risks Expropriation, Nationalization, Civil Partial Risk Guarantees. Remaining risks can Strife, War, etc.]. Force majeure can be be borne by Lenders. included 58
    • Risks Perspectives Access to PPP Development Best Value for Acceptable Contracts Speed Money Financial Return Pipeline Government Concessionaire Incentives to Risk Mitigation Transfer Risk & Control Access To Minimize / Access ToPayment Source Private Capital Re-use Capital Revenue Stream Risk Risk Risk Risk Identification Analysis Allocation Monitoring 59
    • Understanding Political Economic Connection 60
    • Political Risk Agencies - (Social-Political-Economic) Financial Risk Agencies / Ratings BERI , PRS , Prince, ICRG S & P , Moody’s, Milken Index , Fitch IBCA Hybrid Risk Models / Rating Agencies - (Financial Focus and Political Causes) Economist (Magazine) Chase Manhattan Bank Euro money Institutional Investor POLITICAL RISK FACTORS ECONOMIC & FINANCIAL RISKsEthnic Social Tensions Domestic Economic ProblemsStrife, Armed Insurrection International Economic ProblemsUrbanization Low Wages / Labor Cost / High ProductivityDecentralization Good Infrastructure / TelecommunicationBad Neighbors Restricted Import / ExportCommodity Dependence High Commodity PricesInternational Trade Agreements Expedient FDI Screening / ApprovalsRegional Trade Agreements Favorable Taxation / Tax HolidayCorruption Third Party Cost / Biding CostStaleness / Illegitimacy Debt in Default / Rescheduled / Non PaymentDemocracy /Opposition Tolerance Reasonable Gov. Bonds Risk PremiumLiberties / Unrestricted Internet Service Oriented / Competitive MarketPowerful Private Interests Limited CreditworthinessState Owned Enterprises Restrictions on PrivatizationCompetent Local Management Partners Access to Bank FinanceForeign Control / Foreign Equity Ownership allowed Liberal Labor Laws / Modest Termination BenefitsNon-Repatriation/Non-Payments Fiscal Monetary Expansion / Capital FlightCreeping Appropriation Exchange Controls/ConvertibilityMIGA Membership / OPIC Insurance Available Liquid / Transparent Stock Market 61Stable Regulation & Law Enforceability Access to Capital Markets
    • PPP Projets Success Framework 62
    • PPP Projects Success Framework – EPEC Adopted 1. Choice of Project - Only sustainable projects should be launched 2. Choice of Funding & Risk Sharing - Fit with Project structure 3. Choice of Procurement Procedure – In line with Project complexity 4. Choice of Financial Structure - Balancing spreads and risks 5. Whole Contract Life Management - Renegotiations to the benefit of all parties.  The main driver of the PPP contract duration should remain technical (life-cycle and obsolescence considerations), rather than financial!  The legal framework of PPP’s should remain flexible enough to meet the conditions of success.  Guarantees should be given more systematically to private operators, in order to have the best possible use of public funds.  Resorting to guarantees to secure private financing can expose the government to hidden and often higher costs than traditional public financing 63
    • 1. Project Choice - Sustainable Projects Decision makers must choose the projects that are desirable from the socio- economic point of view and respond to real demand and needs. e.g.:  Which will enable the economic development of a market or a region;  Which will save time and increase safety, in the case of a road;  Which will save lives, in the case of a hospital, etc. A desirable project means a high socio-economic IRR (Internal Rate of Return) A high socio-economic utility makes the payment of a tax or a toll politically more acceptable. Experience shows , if contracts do not meet the condition of a high socio-economic IRR, problems necessarily arise:  Bankruptcy of operator (in case of traffic risk)  Skyrocketing public debt (if large grants are needed)  Political legitimacy problems with regards to final users and tax payers  And in the end: reputation problems for all partners 64
    • PPP Projects According to RevenueUsers Pay (Termed as Concessions when users pay)• Traditional BOT model• Revenues collected from users usually by the private partner (e.g. tolls paid on a highway or bridge)• Project is “off the Government budget” as revenues flow directly to private sector• Used only where there are substantial revenues that can be directly charged to users• It is estimated that about 10% of receipts relate to toll collecting (without automated systems).Everybody Pay (Termed as PFI when the Public makes regular payments)• Annuity scheme or availability model• Revenue collected can be either from users directly to private partner or may stay with government and Government opts to make regular payments for making the service available (availability / shadow payments)• Project is often “on the Government budget” as revenues flow through Government• Can be used widely for services paid by known users, or for those paid through taxes or in countries where tolling is not socially acceptable.• There is no expenditure for toll collecting General tendency to move from toll to availability based payments in road projects. Also Innovative use of payment mechanisms to focus on public sector objectives are becoming trend. Examples from the road sector ; User tolls – to pass costs to users; Availability payments – to reduce congestion; Accident rate premium – to improve safety. 65
    • PPP Transactions – Economic PartneringHighways (Concessions – BOO, BOT, BTO) & Rails (BTO)• Direct tolled – i.e. users pay full cost or partial cost (Government Subsidy) – compete on costs – e.g. Malaysia, Australia.• Shadow tolled – users don’t pay directly but all pay indirectly via tax & fuel surcharge etc – compete on subsidy amount – e.g. IndiaAirports /Sea Ports (usually Management Contracts)• Long term management contracts that may include capital works – e.g. Australia, Srilanka, Cambodia, KSA, Jordan• Government may agree to minimum thru-put and provides core custom & immigration functionsWater & Power -IPP, IWPP- (Concessions – BOO, BOOT)• Government agree on minimum uptake (usually 80 -90% the rest sold in open market – e.g. Indonesia, Malaysia, GCC (IWPP) , Egypt, Jordan, Lebanon, Yemen.• Government may agree to pass-thru cost on fuel.Power -Solar (Concessions)• Similar to power – e.g. Morocco, Tunisia 66
    • PPP Transactions – Environmental Partnering Landfills (usually outsourcing – O & M Contracts) • Private Partner to takeover waste treatment and landfill management , may include methane extraction – e.g. Malaysia , Indonesia • Governments agrees to management fees and • Governments usually approves combustion power plant on site for internal use as well as sale to power grid Waste to Energy (recycling of solid waste / used tires) (usually JV’s) • Reduces excessive gas emissions while stimulating private sector demand. • Private Partner to takeover waste conversion to energy – e.g. Bahrain. • Governments agrees on energy sale to power grid Sewerage Treatment Plants (STP) – ( usually BOO / BOT, transmissions usually BOOT) • Population and business levels increase leading to increased waste generation • Private Partner to takeover sewerage treatment • Government agree on off take (usually distribution to farms is by the Government) – e.g. GCC ( Bahrain) 67
    • PPP Transactions – Social PartneringHospitals (usually DBOF) / Prisons (usually BOT)• Private Partner to build the facility , manage it for a set time and operate noncore service like catering, parking etc• Government provides the doctors, nurse ,wardens etc and operates the core services – e.g. Lesotho, AustraliaSchools/ Sports Venue / Shopping Malls (usually DBOF)• Private Partner bids on cost, design and facility management for a set time & run noncore services – e.g. Australia, Egypt.• Government runs core services of teaching / tutoring or agrees to use the facility for an agreed periodPublic / Government / Affordable housing (usually BOOT)• Private Partner to build, lease and maintain for a set period – e.g. Malaysia, GCC ( KSA, Oman, Bahrain)• Government agrees to minimum lease for a set period / off take and / or allows co-developments on site 68
    • PPPs and Value for Money (VFM) Achieving optimal allocation of risk is the most important factor in structuring a PPP- Does the private sector’s price for taking project risks represent good value for money?- Is the private sector’s return on capital appropriate to the level of risk being taken? Facilitating and making incentives on time and on project budget implementation: – No service / no pay. – Incentives to cost control. Optimization of capital & maintenance expenditure over project life. Innovation in design and financing structures. Improving management of operational risks. Optimal risk allocation  reduced cost of risk Reduced cost of risk  better Value for Money No presumption that PPP’s will always prove better Value for Money than conventional Public Sector Contracts (PSC / EPC) 69
    • (VFM) Higher Than Forecasts Costs in EPC /PPPsEvidence on construction projects from the UK’s National Audit Office Conventional procurement (PSC) PPP procurement Cost overruns for the public sector 73% 22% Delay in project delivery 70% 24% 70
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    • 2. Funding & Risk Sharing - Fit with ProjectFunding translates into;Who should bear the demand risk?Who will pay for the infrastructure/service? Payment by users - when the principal source of revenue for the private operator is by users , the operator bears the demand risk. Payment by taxpayers (i.e. public budget) means that the demand risk is not transferred to the operator.The choice of funding must be based on a trade-off between: The marginal cost of public funds collection. The willingness not to exclude users from the infrastructure (problem associated with the payment by users). 72
    • PPP Major Funding Sources Credit Political Loan Equity Loans Guarantees Risk Guarantees /Insurance InsuranceSponsor Private  Commercial Banks   Capital Markets    Insurance Cos.     Private Equity Funds  PublicMultilateral  IBRD   IFC     MIGA OPIC    Development Banks  (IADB, EIB, EBRD, CAF,   BNDES, ASD, AFDB)Export Credit Agencies  (Ex-Im Bank-US,ECGD - UK,EDC - Canada, HERMES -     Germany, COFACE - France) 73
    • Managing Fiscal Risks in PPP’s• PPP’s create fiscal obligations that are long term and binding future generations and tax payers.• Accurate design of PPP’s requires that the fiscal cost and risk of the major contractual obligations be identified, quantified and mitigated.Direct, debt-like obligations• Availability payment for the use of facilities• For PPP hospitals, schools, prisons and a like, PPP deal also requires government to allocate funds for government doctors, nurses, and teachers, guards who will run the facilities built, maintained & operated by the private sector.Explicit contingent obligations• Government guarantees to repay investors cost and agreed returns• Revenues and exchange rate guarantees.• Shadow payments for assets provided by private sector.Implicit contingent obligations• Taking over private debt if developer becomes financially distressed• Implicit use guarantees in PPA – Power Purchase Agreements, off take agreements. 74
    • 3. Procurement Choice – In line with Complexity Classical competitive bidding aiming at minimizing financial costs fits well with simple contracts, whereas negotiated procedures (e.g. through competitive dialogue / with a set of criteria’s) fit better with complex contracts In terms of incentives, complex contracts fit better with Cost Plus schemes and simple contracts fit better with fixed price regulation schemes. Procurement procedures should be adapted to the project type, in order to prevent opportunistic behavior, and should also favor strict prequalification and additional award criteria. Unsustainable offers should be legally excluded.  Classical procurement procedures are not a guarantee for fair competition: bid rigging, first mover advantage (incumbents renewal), etc.  Renegotiation & opportunism costs need to be guarded against! ( for example, lengthy post negotiation can jeopardize the project) 75
    • PPP Procurement Process Planning process - Planning requires time and money - worth the investment - Fund supporting project development – needed. - Cross sector dialogue including Treasury - required - Check and balance – are key Market testing - Testing the interest of market is crucial - The market condition can impact risk sharing - Transparency should be kept Procurement method - Prioritization - Solicited or unsolicited proposal - Prequalification, 2 envelope bidding - Award criteria (VFM , PPP Versus PSC ) - Time management 76
    • Unsolicited Proposals in PPP• Can be useful in early stage of PPP program especially at local governments level , however, often the Public Sector then lacks the fiscal and knowledge capacity to analyze projects• Attract private sector investors ( Proponents) by giving initiatives and incentives• Priority set for proposals without asking government support• Genuine unsolicited proposals can wash out network effect of entrenched infrastructure development• More scrutiny is required , additional requirement for value for money tests are needed.• Competition is key , opportunity for counter proposals should be given thus providing level playing field• Common is some countries like Chile, Argentina, South Korea, South Africa< India, Italy and Malaysia 77
    • Steps in PPPs Procurement - PPP Project Life Cycle What are the steps?Project Preparation – Service Provider Selection Contract Management -Funding Approval – Technical RFP & Bid Financial1. Prioritise Key Project 4. Project Dev. 7. Final Negotiation Objectives2. Agree Project Concept Team, Gov ernance, Signing contract, financial3. Obtain Stakeholder Approval close Timeline, execution plan 1. Service Need 5. Bid Preparation 8. Contract Mgmt. Output specifications EOI/ Short listing, RFP Construction, monitoring, Dispute settlement, 2. Option Appraisal Bid Doc communications and Report on EPC / PPP Approval finally commissioning options, VFM 6. Bid Evaluation 9. Renegotiations 3. Business Case Preferred bidder selection Due to changing Affordably/public interest conditions Project/ Project 10. Turn Over Funding Finalization Upon expiry of the Approval Review concession agreement 78
    • 4. Financial Structure Choice - Balancing The financial structure of a project is usually composed of loans (banks or bonds), shareholder loans, equity and grants. The continuing financial crisis has shown that there should be a systematic follow-up of the main events occurring during the life of a contract, in order to balance spreads and risks:  During the crisis: spreads have skyrocketed - projects became unfeasible.  In the crisis: spreads have gone back but not to normal levels. If spreads are too low, banks cannot pay for their risk. One should also take into account the asymmetry regarding the way public entities and private operators absorb risks. The allocation of risks must take into account this asymmetry. Grants and/or guarantees should be adjusted accordingly. Due to the financial crisis, loan maturity has been shortened. State support may be needed. 79
    • Risk Transfer PPP Stakeholders & Risk Transfer Host Government / Public Authority Legal /regulatory framework & support functions Advisors – Legal Contracting PPP , Technical & Authority (is) Financial Equity Investors SPV / Project Company Arranging Bank (Borrower) .Made up of Banks Syndicate Project Sponsors - Equity Investors. Hedge Providers Input Contracts Currency & Interest Guaranteed long Rate, Multilaterals, P term supply olitical Risk Insurers of inputs / feedstock Off Taker Guaranteed revenue stream to project. Can be the Public Contracting Authority or MoF Equipment Supplier Contractor(s) ,EPC O&M Contractor(s) Warranties & Supply - Risk transfer – Interface Pass down of penalties for Agents Agreements. Can Turnkey Contract , Contract availability payments be bundled in EPC penalties , bonds. , performance, etc.Risk Duration 3 – 5 Years 25 - 30 Years ( Risk by Project Company) 80
    • Corporate & Project Finance Debt 100 Project Financing provided Mezzanine Funds Equity provided by by banks / IFIs sponsors 81
    • Structuring Project Finance 82
    • Project Long Term FinancingProject cash flows must be sufficient to service (interest and principal)All risks to lenders must be eliminated• Construction ,Market ,Consumption ,Operating ,Inflation & Credit risk• Other risks as applicable –Refinancing, Interest rate, Exchange rateAdvantages• Enables high debt to equity ratio , Releases Investors equity• Enables equity risk sharing in projects• Funds can invest into SPV• Avoids refinancing riskDisadvantages• More restrictions in use of funds• Restrictive covenants (debt service cover ratios etc)• More complex documentation (risk mitigation)• Less flexible administration (most changes require lenders consent) 83
    • 5. Management – Allow Renegotiations All contingencies cannot be anticipated (changes in the legal environment, force majeure, innovation, changes in demand, environmental and technical constraints. Contract will necessarily evolve over time/be renegotiated. Renegotiation clauses , conditions of execution , adjustment should be specified in the contract. Renegotiation should be viewed to the advantages of 3 parties (Public entity, Users, Private operator). Fair and transparent renegotiation is the essence of the contract. Necessary conditions for a good management of the life of the contract:  Fair behavior of both parties  Technical skills  Experience and capacity building  Flexibility and adaptation to local customs  The threat of sanction (must be credible) to enable self enforced good practices.  Non written aspects of the contractual relationship (trust, reputation, etc.) are key elements for success. 84
    • Typical PPP Project Administration & Risks Political and Macroeconomic Risks Regulatory Shareholders – Risks Equity Investors FX Risks and Regulatory Refinancing Risks Shareholder’s Authority Agreement Lead / Syndicate Banks Guarantees & Bond Holders Concession Granting PS SPV - Agreement Authority Operator - Project Production Operation & Maintenance Company Purchase / Off Services Operator - Agreement(s) (O&M) Take Agreement Purchaser / Delivery Off TakerPerformance Interface Construction Regulatory and Agreement Contracts Supply / Feedstock Performance Risks Agreement Risks Construction Contractor(s) Raw Material / Feedstock Supplier Completion Risks 85
    • PPP Example Structures 86
    • PPP Regional Strategy & Readiness Actions? Diagnosis? 87
    • MENA PPP Investments Comparisons PPI Data Base – Data Source• The PPI (Private Participation in Infrastructure) database is a multi-donor- funded facility and is maintained by PPIAF (Public Private Partnership Advisory Facility).• The database is the most sophisticated attempt so far to create a global database of PPI / PPP projects which helps to understand the pattern and scale of PPP deals in world regions.• The PPI database does not cover social infrastructure / PFI-model PPPs. It does cover Energy (electricity and natural gas), Telecommunications, Transport• (airports, seaports, railways, toll roads), and Water and Sewerage (treatment plants and utilities).• The PPIAF PPI database identifies four types of project: Management and Lease contracts; Concessions, Greenfield projects, and Divestitures / Privatization. Divestitures (either full or partial) are not considered PPPs. 88
    • World Regions by Sector (1990 – 2010 , Total Count & Investment – million USD) Sector Project Count Total Investment (US$ million) Telecom 798 761,394 Energy (Example Next) 1,952 548,279 Transport 1,291 275,597 Water and sewerage 731 62,543 Grand Total 4772 1,647,813 1,800,000 6,000 1,600,000 5,000 1,400,000 Number 1,200,000 4,000Million USD 1,000,000 3,000 800,000 600,000 2,000 400,000 1,000 200,000 0 0 Latin America … Latin America … Europe and… Europe and… East Asia and… East Asia and… Middle East… Middle East… Sub-Saharan… Sub-Saharan… South Asia South Asia Grand Total Grand Total 89
    • Example From the Energy Sector (1990 – 2010) Number of PPP Projects & InvestmentNumber of PPP Projects by Region Region Concession Divestiture Greenfield Management Total No. ProjectsEast Asia and Pacific 61 92 454 2 609Europe and Central Asia 26 173 66 12 277Latin America and the Caribbean 86 97 449 3 635Middle East and North Africa 5 3 25 0 33South Asia 1 22 266 1 290Sub-Saharan Africa 17 8 65 18 108Grand Total 196 395 1,325 36 1,952 6% Total No. Projects East Asia and Pacific 15% 31% Europe and Central Asia 2% Latin America and the Caribbean Middle East and North Africa South Asia 32% 14% Sub-Saharan Africa 90
    • Example From the Energy Sector (1990 – 2010) Investments of PPP Projects - US$ millionUS$ million Investment in PPP by Region Region Concession Divestiture Greenfield Management Total InvestmentEast Asia and Pacific 5,479 24,297 95,212 0 124,987Europe and Central Asia 7,599 45,802 27,846 12 81,258Latin America and the Caribbean 70,352 29,103 92,991 210 192,656Middle East and North Africa 6,607 224 10,902 0 17,733South Asia 22 10,692 110,617 144 121,475Sub-Saharan Africa 1,899 1,310 6,955 5 10,170Grand Total 91,958 111,428 344,523 371 548,279 2% Total Investment million USD 23% East Asia and Pacific 22% Europe and Central Asia 3% Latin America and the Caribbean 15% Middle East and North Africa South Asia 35% Sub-Saharan Africa 91
    • MENA PPP Commitment in Mil USD - 2011 ( 81 Billion USD Total)World Bank and PPIAF, PPI Project Database. (http://ppi.worldbank.org) Date: 10/07/2011 MENA PPP Total Investment Commitments in US$ millions - 2011 60,000 50,000 40,000 30,000 20,000 10,000 0 Energy Telecom Transport Water and sewerage2008 - Investment commitments to infrastructure projects amounted to US$155 b (Peak).2008 - Investment commitments in South Asia reached US$30 billion.2008 - Investment commitments in MENA reached US$12 billion.2008 - Investment commitments in Latin America and Caribbean amounted to US$40 billion.2008 - Investment commitments in Europe and Central Asia at US$45 billion. 92
    • Snap of MENA Region History in PPP’s 93
    • World Cycle in PPP’s – MENA Region Challenge ! There seems to be an 8 Years cycle for PPP’s in Developing Countries (which can be extrapolated with caution to other World Regions). The world investments in PPP peaked in Year 2008 , thus , we could in 2012 be at the cycle bottom with the next 4-5 exhibiting a strong drive towards PPP investments. 94
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    • Advantages to Regional PPPs Approach in MENA• Promoting standardization of national legal and institutional frameworks which can help mega cross-border projects progress more smoothly.• Sharing knowledge amongst countries will help standardize national PPP enabling frameworks and procedures around established good practice which will stimulate intra-regional investment flows as smaller PPPs can be better handled by the region sponsors / developers and financiers.• Small and medium scale PPP projects replicate relatively easily across and within across national borders. They are less complex; have a shorter implementation timeline and can lay successful replicable track record across the region.• Investment into PPP projects will be stimulated by a strong regional approach. International investors will be encouraged by upgrading of PPP enabling frameworks around global good practice. 96
    • Advantages of Small / Medium Size PPP Projects in MENA Region • Smaller projects have great potential as they are more “doable” because of lower costs and less complexity and can benefit greatly from a central coordination and knowledge consolidation structures since smaller PPPs projects replication depends upon the designs being consolidated and disseminated. • Small scale projects, once designed, can be replicated and adopted in other countries like in the affordable housing sector thus the costs of project preparation are reduced . Also these projects offer innovative opportunities to serve previously un- or underserved communities, or to combine services for subsidized and unsubsidized users (e.g. rural telecoms and hospitals) • Municipal authorities, which have smaller budgets and limited fund- raising powers can benefit from this approach as in small scale power generation / environmental / waste treatment Projects. Other creative in the use of PPPs include private provision of street lighting or other services linked with advertising rights. Also micro-franchising for water distribution, can be another applications. 97
    • MENA / GCC – PPP Expertise CenterThere are many advantages to pooling general expertise on PPPs in a RegionalCentral PPP Unit, Key functions of a PPP Unit include:• Being a center of cross-cutting technical, project management and financial expertise;• Promoting / Funding small scale replicable PPP Projects;• Gathering and disseminating database information and performance indicators; (institutional memory)• Designing and rolling out training to line ministries and sub-national governments as necessary, and so on.• Linking together different agencies, government units involved in cross border PPP infrastructure projects.• Governments, Politician, consumer, other stakeholder awareness and media center for PPP.• A regional Community of Practice (CoP) to share knowledge and experience on PPPs in different infrastructure sectors; and initiate practical capacity building on a series of smaller-scale sub-sectors can dramatically push the PPP agenda in the MENA / GCC Members Countries. 98
    • MENA / GCC – Affordable Housing Expertise CenterThere are many advantages to approaching the Affordable Housing Sector in aseparate regional MENA /GCC context for the following reasons;• It is intrinsically different from other types of PPP as mortgage laws , government guarantees to developers and land ownership issues are still evolving in the region and are subject to various considerations and are uncertain if clarity can be established once the regulations are passed.• The relatively weak financial and construction local markets to undertake such projects whereas earlier lessons from the property development boom in the region demonstrated structural problems in the approach that can not be entirely pinned on the market down turn. It is therefore, unrealistic to assume that the regional Developers / Contractors can bundle JV ‘s / long alliances in areas of financing, facility management and assume the usual risks in PPP’s.• Speedy delivery of Mega Projects are needed to accommodate the severe shortages in the region that are linked to socioeconomic stability. The luxury of a long drawn PPP bidding process simply is not there. Thus a need exists to explore other variations of PPP Models that considers the time frame, the Developers / Contractors strengths in the region and the local condition of the financial markets. One model that can explored for the region in the Affordable Housing Sector is the German Forfeit Model in which the Developer / Contractor pre-agrees with the Government Unit / Contracting Party to transfer / sell his rights in the Project once completed to the financing institution, thus the relationship becomes between the Government Unit and the Financers and the Developer / Contractor is released 99
    • Initial Situation - Problem Tree (UNDA Adapoted) Limited number of PPP projects and questionable efficiency of PPP projects Problems in regulating PPP projects and Difficulties in PPP project Lack of interest in PPP projectsStrategic management of PPP programme implementationEffects Deficiencies in operating environment and lack of capacity in Governments to promote, Develop, operate and manage PPP projects Lack of institutional mechanism for Lack of awareness at the policy Lack of easily accessible relevant capacity building, information sharing Making level concerning PPP Information and knowledge on PPPs And Project development facilityCauses Unassessed Lack of knowledge Lack of cooperation Lack of cooperation Suitable capacity state concerning specific between agencies between Building materials and Of PPP requirements involved in government other training materials readiness (legal, financial, implementing PPP agencies and are not readily available regulatory, etc.) projects training institutions 100
    • Initial Situation - Object Tree (UNDA Adapoted) Increased number and investments, in and efficiency of PPP projects Strategies designed and legal Establishment of a regular Improved project implementation And regulatory regime established PPP programme processEnd to create conducive environment Improved operating environment and enhanced capacity of Governments to promote, develop operate and manage PPP projects/programmes National awareness capacity development through networking On-line PPP capacity-building in creating conducive of PPP units and the private sector Facility resources and environment for PPP relevant project information PPP Global Alliance development accessible to all parties through an inter-regional meetings PPP regional Alliance System installation through an regional meetingMeans PPP National meetings and National training National programmes capacity-building workshops institutions Action plans Internet-based PPP-readiness assessment PPP-readiness assessment system development 101
    • PPP Resource Base Model (UNDA Adapoted) Human Financial Physical Natural Sources of Institutions Gov`t Policies Resources Resources Infrastructure Resources TechnologyEmployed Universities and Education/ Regulation Banks Transportation AirResidents colleges Training Policy Ground water Economic+Skilled Public finance +Roads Federal labs +Zoning and rivers development Informal Seashore and Private research+Unskilled +Air Social service +Permitting investors forests institutions+Under- Non-profit loan Plants and Corporate Community +Rail +Environmentalemployed funds animals research centers based RenewableUnemployed Venture capital +Water Religious Taxes stocksNot in labor Non-renewable Other lenders Public utilities Cultural Servicesforce stocks+Retired +Water Environmental +Policepersons+Youth +Sewerage Unions +Fire+Homemakers Private utilities +Solid wasteEntrepreneurs +Gas +Electric +Telephone Real estate 102
    • WBG - Financial Support for PPP’s Financial Products Advisory Services Hard Currency: Institutional Building Capacity: Loans (Investment & Policy, IBRD, IDA)  PPIAF On-lending facilities  WSP Co-financing schemes (A/B Loans, IFC)  BNPP (Bank & Netherlands Partner) Guarantees (IBRD, IDA, IFC, MIGA)  TAF (PIDG) Insurance (MIGA)  FIAS Equity and related products (IFC) Local Currency: Project (transaction) Execution: Currency Conversion Option (FSL)  DEVCO (IFC Advisory Services) Currency swap  GPOBA Guarantees  Cities Alliance  PIDG (EAIF, Guarantco, Infraco – also includes financing products) 103
    • European Investment Bank PPP FinancingEIB was created by the Treaty of Rome in 1958, to provide long-term finance forprojects promoting European integration.  Subscribed capital EUR 163.7bn, 25 Member States of the European Union.  Trans European Networks / links to New Neighborhood Countries.  Outside the EU, EIB operates on special mandates from the European Union.EIB Financing Principles : Key lessons  Competitive tendering. Sector focus in PPP programs.  Non-exclusivity - support of all bidders through bidding stage.  Investment Grade Risks on strategic public services.  EIB Complementary with and leveraging of banks and capital markets.  EIB benefits passed to end-users/taxpayer.  Utility Risk and Utility Reward.  Evidence of project performance.  Effective payment mechanisms. 104
    • Building Regional PPP Capacity Proposed Regional PPP Development Strategy REGIONAL EXPERTISE CAPACITY BUILDING – REGIONAL KNOWLEDGE, ARBITRATIONConduct PPP Diagnosis CENTER , ETC. & Readiness Self INCREASE ATTRACTIVITYAssessment – Country OF CROSS BORDER PPP – Wise - EstablishPerceptions of the PPP Action RETAIN POLITICAL & MARKET RISK , PPP / JV SETUPS Environment & Reconcile Areas of Plans SUPPORT TO LOCAL Concern ENTERPRISES & LOCAL FINANCIAL INSTITUTIONS – INCENTIVES & GUARANTEES DEVELOPMENT OF MEDUIM SIZE REPLICABLE PPP‘S IN INFRASTRUCTURE & SOCIAL PPP‘S -HOUSING, EDUCATION 105
    • Source; UN Publications 106
    • loayg@works.gov.bh; loay.ghz@gmail.com 00973-36711547 107