Public Private Partnerships (Ppp) And Affordable Housing By David Hoicka

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Public Private Partnerships (PPP) and Affordable Housing by David Hoicka. Review of PPP as a £60 billion, $90 billion industry and its application to Affordable Housing

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Public Private Partnerships (Ppp) And Affordable Housing By David Hoicka

  1. 1. Public Private Partnerships (PPP) and Affordable Housing Review of PPP as a £60 billion, $90 billion industry and its application to Affordable Housing Presentation prepared by David Hoicka 12 Cost PPP Project Expenses 10 8 Prepare 6 Build 4 Maintain & Earn "The Long Tail" 2 0 1 2 3 4 5 6 7 8 9 10 11 Years 12 UK Stanhope PFI Copyright © David Hoicka 2007
  2. 2. Contents 1. What is PPP and Project Finance 3 2. PPP experience in the United Kingdom 12 3. PPP possibilities in other countries 21 4. How to set up a PPP: Practical Steps 24 2 Public Private Partnerships and Affordable Housing, by David Hoicka
  3. 3. 1. What is PPP and Project Finance
  4. 4. History Of PPP & Project Finance “Most people think of project finance as a relatively new phenomenon, yet its history can be traced back hundreds if not thousands of years.” Harvard Business School 4 Public Private Partnerships and Affordable Housing, by David Hoicka
  5. 5. PPP 700 Years Ago  When: 1299 (700 years ago) earliest recorded Public Private Partnership  Who: English Crown and Florentine merchant bank Frescobaldi  What: Finance exploration & development of silver mine in Devon England  Payment: As much silver as Florentine Bank could mine during one year. 5 Public Private Partnerships and Affordable Housing, by David Hoicka
  6. 6. How PPP Works 12 Cost PPP Project Expenses 10  Public Private 8 Prepare Partnership (PPP) 6 Build finances building and Maintain & Earn 4 "The Long Tail" long-term maintenance 2 with private 0 1 2 3 4 5 6 7 8 9 10 11 Years 12 contractors 12 Cost Compare: Some Non-Maintenance Project Expenses 10 procurements are Prepare 8 one-time purchase, Build 6 with use or sale. Use Up or Sell 4 "Maintenance Not Included" Maintenance is not 2 included. 0 6 Public Private Partnerships and 1 2 3 4 5 6 7 8 9 10 11 Years 12 Affordable Housing, by David Hoicka
  7. 7. Why PPP? PPP satisfies a need for off-budget finance  Need:  Government Minister wants to build schools & hospitals  Schools & hospitals are built, then maintained for years  no budget available, cannot borrow  Response:  PPP Off Budget Finance – lower government public debt, usually does not affect government bond rating  “Rent to Own” – similarities to equipment lease  “Buy Now, Pay Later” – future years & governments pay  Use private skills and efficiencies, usually higher price  Transfer some Risks to Private Companies for a fee (but Government retains ultimate risk) 7 Public Private Partnerships and Affordable Housing, by David Hoicka
  8. 8. PPP Examples 12 Cost PPP Project Expenses 10 8 Prepare 6 Build 4 Maintain & Earn "The Long Tail" 2 0 1 2 3 4 5 6 7 8 9 10 11 Years 12 PPP works best to build and maintain Long-Term Assets  Long-Term Projects:  school, hospital, sewage treatment plant, bridge, gov’t office building  Long-Term Maintenance:  Includes: Hard maintenance – repair roofs, windows etc  Excludes: Soft maintenance – janitorial  Project Finance:  Payments spread over many years  Non-Recourse, Off-Budget 8 Public Private Partnerships and Affordable Housing, by David Hoicka
  9. 9. PPP Project Risks In theory, many risks are transferred to the private contractor. Government ultimately has risk of failure or non-performance. Some General PPP Risks:  Bankruptcy of Contractor  Poor quality work  Increased costs: (a) initially, and (b) over contract term  Cash Flow: PPP is technically “off-budget”. However, PPP payments have to be paid. This leads to future cash flow and budget payment constraints for government agency  Scope Changes: PPP is usually a long-term contract, sometimes 30 years. Needs can change, requiring changes in scope partway through contract.  Financial Market Changes: interest rates, exchange rates  Staff changes: (a) in government, and (b) in contractor 9 Public Private Partnerships and Affordable Housing, by David Hoicka
  10. 10. Housing PPP Learning Curve Housing PPP has its own special issues:  Advisor Knowledge. Some concerns have been expressed about the level of advisers' understanding of housing issues. Financial and Legal Advisers need sufficient and appropriate housing as well as PPP expertise. [UK Office of Deputy Prime Minister, & Dept of Communities]  Different Skills Needed. All parties involved in Housing PPPs have had varying degrees of involvement in PPP schemes in other markets. While this has been helpful in many respects, the fact that everyone is bringing their understandings and expectations from different sectors can sometimes create as many problems as it solves. [UK Office of Deputy Prime Minister]  Not easy to translate concepts. Many assumed that it would be easy to translate the PPP concept to housing and that PPP schemes would be easier to complete than has been the case. [UK Office of Deputy Prime Minister] 10 Public Private Partnerships and Affordable Housing, by David Hoicka
  11. 11. Housing PPP Project Risks Housing PPP Risks:  Costs. Greatly increased costs, in some cases up to 2 to 3 times the original estimate. [UK Office of Deputy Prime Minister]  Bidders. Number of potential bidders in the market for Housing PPPs may be shrinking.  Credit. Credit risk profile for housing PFIs varies considerably from that of other PFIs. Market participants must gain a clear understanding of the risks of housing PFIs and how best to mitigate them within the structure of the project [Standard & Poor‟s]  Vandalism, misuse, excessive wear & tear 11 Public Private Partnerships and Affordable Housing, by David Hoicka
  12. 12. 2. PPP experience in the United Kingdom £60 Billion $90 Billion
  13. 13. PPP in the UK – a History Margaret • Privatization Thatcher • Private Finance Initiative John Major (PFI) • Public Private Partnership Tony Blair (PPP) Private Finance/PPP has now grown to £60 Billion ($90 Billion) in the UK 13 Public Private Partnerships and Affordable Housing, by David Hoicka
  14. 14. Housing is 2.1% of £60 Billion UK PPPs Capital Value Value (BD, % # UK PPP Category (£, millions) millions) Value Projects Transportation 20,181 15,136 33.4% 18 Hospitals & Community Health 12,069 9,052 19.9% 13 Schools 8,523 6,392 14.1% 34 Roads & Bridges 3,299 2,474 5.5% 267 Offices 2,905 2,179 4.8% 20 IT Infrastructure & Software 2,868 2,151 4.7% 74 Military Buildings 2,322 1,742 3.8% 14 Waste Management 1,535 1,151 2.5% 36 Equipment 1,457 1,093 2.4% 33 Housing 1,269 951 2.1% 16 Water & Sewage Treatment 960 720 1.6% 15 Police & Fire 717 537 1.2% 27 Street Lighting 588 441 1.0% 208 Prisons & Detention Centres 564 423 0.9% 19 Telecom 530 397 0.9% 8 Courts, Libraries & Museums 406 305 0.7% 18 Recreation 199 149 0.3% 20 Energy 113 85 0.2% 16 Grand Total 60,503 45,377 100.0% 856 Source: HM Treasury and Partnerships UK Data through 2007 14 Public Private Partnerships and Affordable Housing, by David Hoicka
  15. 15. Only 5% of UK PPP Social Housing Units are Home Ownership Rentals Home 95% Ownership 5% UK PPP Social Housing Units Rentals Home Ownership 19,612 951 95% 5% Source: HM Treasury and Partnerships UK Data through 2007 15 Public Private Partnerships and Affordable Housing, by David Hoicka
  16. 16. PPP Housing 5+ Years to Start PPP Housing: Years until Contract Signing London Borough of Islington Round 1 Manchester City Council 5.2 Years Avg. Reading Borough Council Leeds City Council London Borough of Newham Sandwell Metropolitan Borough… London Borough of Camden London Borough of Islington Round 2 Oldham Metropolitan Borough… 6 Yr Avg Manchester City Council Ashford Borough Council London Borough of Lewisham 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0  The average time from start of design until contract signing, is more than 5 years. Round 2 is slower than Round 1.  About 20,000 units are scheduled to be mostly refurbished under UK‟s Round 1 and Round 2 PFI/PPP. 16 Public Private Partnerships and Affordable Housing, by David Hoicka
  17. 17. UK Housing PPP – Manchester Plymouth Grove Remodelled Estate • 436 homes demolished • 663 refurbished rentals • 660 new homes for sale • „Green Route‟ thru town • 3 neighbourhood parks • new village centre, with shops, community facilities • £37 million subsidy • 3.8 years to sign contract 17 Public Private Partnerships and Affordable Housing, by David Hoicka
  18. 18. UK Housing PPP – Stanhope Stanhope Regenerated Housing Estate • 410 homes demolished • 312 refurbished rentals • 144 new homes for sale • playgrounds, footpaths and landscaping • new commercial centre, with shops, community facilities, library • £26.7 million subsidy • 6.2 years to sign contract 18 Public Private Partnerships and Affordable Housing, by David Hoicka
  19. 19. UK Transportation PPP – London Tube London Underground “Infraco” Contracts  £450m extra cost of private debt over public bonds  5 years to sign contracts  2 separate maintenance and renewal contacts for 30 years  £15.7 billion present value, pricing review every 7½ years  PPP Costs: £90 million success fees, £275m bidders costs paid to winning bidders, £180m costs to govt.  18 to 20% returns to Infracos, premium over normal to attract private management 19 Public Private Partnerships and Affordable Housing, by David Hoicka
  20. 20. Other PPPs in UK  Infrastructure: airport terminal, bridges, highways, power stations, waste to energy, wastewater treatment plants, tram/light rail, 19 street lighting contracts  Health: new or renovate 188 hospitals & 48 clinics  Schools: 208 schools at all levels  Community: Police, fire stations, prisons, courts, libraries, museums, government offices, sports facilities  Equipment: Medical CT and MRI Scanning System, Linear Accelerator; Ro-Ro Ferries, Military Aircraft and Helicopters 20 Public Private Partnerships and Affordable Housing, by David Hoicka
  21. 21. 3. PPP possibilities in other countries
  22. 22. PPPs for other countries There are many possible PPPs for other countries which follow the PPP financial structure building and maintaining Long-Term Assets:  Power Plants, Desalination Plants, STPs.  Al Ezzel independent power project, July 2004. Suez-Tractebel and Gulf Investment Corporation. BNP Paribas (financial adviser), Freshfields Bruckhaus Deringer (legal adviser), and Mott MacDonald (technical adviser).  Hidd Power Company, January 2006. Consortium of International Power, Sumitomo Corporation and Suez-Tractebel, $600m direct loan from the Japan Bank for International Co-operation. Same advisors.  Airport Terminal, Railway Station  Bridges, Causeways, Roads, Streetlights & Signs  Hospitals, schools, libraries, government offices 22 Public Private Partnerships and Affordable Housing, by David Hoicka
  23. 23. PPPs for Public Works and Housing Many projects match the PPP financial profile, building and maintaining Long-Term Assets  Sewage Treatment Plant (STP) and Network  Power Plants, Water Desalination Plants  District Cooling Plant (DCP)  Bridges, Roads, Streetlights & Signs  Schools, hospitals, clinics, government buildings 23 Public Private Partnerships and Affordable Housing, by David Hoicka
  24. 24. 4. How to set up a PPP: Practical Steps
  25. 25. Preparing a PPP There are several steps to prepare a PPP 1. Research and prepare Outline Business Case 2. Select Financial, Legal, Technical Advisors 3. Business Plan and Financing Model 4. Prepare PPP Structure and Documents 5. Prequalification and Tender of Contractors 6. Compare estimates with actual 7. Contract Negotiations and Contract Signing 8. PPP Supervision over time 25 Public Private Partnerships and Affordable Housing, by David Hoicka
  26. 26. Cost of PPP Advisors  Project bureaucracy is costly for local authorities. Set up costs of £2 million were charged from PPP Programs. Legal costs can be huge as a number lawyers are involved - acting for the local authority, bidders and funders. London Housing  Preparing a 30-year PPP contract is costly for both authorities and bidders. Generally even in todays more settled UK PPP Market, which is infinitely more mature and experienced, procuring authorities can expect to spend at a minimum £250,000 on external advisers for even the most simple of schemes. I would generally expect the successful bidder to spend about double what the public sector spends. UK Office of Deputy Prime Minister, & UK Department of Communities 26 Public Private Partnerships and Affordable Housing, by David Hoicka
  27. 27. Governmental PPP Offices Many international governments have established PPP Advisory Offices (similar to PMO Project Management Offices), to assist PPP organization, e.g.  UK – Partnerships UK, HM Treasury  British Columbia, Canada  Victoria, Australia  Korea  Portugal  South Africa (“scant impact on infrastructure deals”)  Philippines (“some success”)  Jamaica (“little success”)  Bangladesh (“little success”) Source: World Bank Report on PPP in Infrastructure Around the World, September 2007 27 Public Private Partnerships and Affordable Housing, by David Hoicka
  28. 28. PPP Size and Financial Structure  The UK Treasury has determined that PPP funded projects need to be large enough in capital value to ensure that the transaction costs of procurement are not disproportionately large. All UK PPPs must now be larger than £20m ($30m).  The chart shows that most PPP project funding is bank debt. Bond finance appears only the largest transactions. Corporate finance is only appropriate for the smallest projects. # Projects 50 40 PPP Funding Sources 30 Bond Funding Corporate Funding 20 Bank Funding 10 0 28 Public Private Partnerships and Affordable Housing, by David Hoicka
  29. 29. PPP Participants and Advisors This next section lists current major PPP participants and advisors: 1. Equity Capital Investors 2. Project Bank Lenders 3. Financial Advisors 4. Legal Advisors 5. Technical Advisors 6. Construction Contractors 29 Public Private Partnerships and Affordable Housing, by David Hoicka
  30. 30. PPP Equity Capital Investors This chart shows the top ten initial equity investors in UK PPP project companies between 2004 and 2007. The chart is ordered in terms of the total capital value (£m) of the projects in which they are involved, multiplied by the proportion of the equity contributed by each investor. The Capital Value shown is the total project capital value, not the amount of each investor‟s actual cash investment. Equity Investors (# Projects) Leveraged PPP Capital Value (£ millions) Innisfree (12) Equion/John Laing (8) RBS (7) Skanska (3) Balfour Beatty (5) Bank of Scotland (12) HSBC (3) Bilfinger Berger (5) AMEC (2) Barclays (10) 0 200 400 600 800 1,000 1,200 30 Public Private Partnerships and Affordable Housing, by David Hoicka
  31. 31. PPP Project Bank Lenders This chart details the top ten UK PPP lenders between 2004 and 2007 to bank-financed projects. Bank Lenders (# Projects) PPP Project Capital Value (£ millions) Bank of Scotland (17) SMBC (13) RBS (9) Dexia (16) NIB Capital (13) DEPFRA (6) EIB (5) Bank of Ireland (7) Barclays (13) Lloyds TSB (3) 0 200 400 600 800 1,000 1,200 1,400 31 Public Private Partnerships and Affordable Housing, by David Hoicka
  32. 32. PPP Financial Advisors This chart details the top ten UK PPP financial advisors over last 3 years. The most active advisor has been PricewaterhouseCoopers, followed by the other members of the “Big Four” and also Grant Thornton and with Robson Rhodes in sixth position. The advisors listed in positions seven to ten are investment banks or boutique advisory firms. Financial Advisors (# Projects) PPP Project Capital Value (£ millions) Price W Cooper (52) KPMG (22) Deloitte (26) Grant Thornton (25) Investec (4) Ernst & Young (20) Macquarie (6) Quayle Munro (11) Abros (6) Robson Rhodes (15) 0 500 1,000 1,500 2,000 2,500 32 Public Private Partnerships and Affordable Housing, by David Hoicka
  33. 33. PPP Legal Advisors The following chart details the top ten UK PPP legal advisors. It shows that the largest law firms are largely absent from the PPP market now, although they are present on some of the larger transactions. Legal Advisors (# Projects) PPP Project Capital Value (£ millions) Pinsent Masons (26) Addleshaw G. (21) CMS Cameron (7) Shepherd & W. (11) Dundas & Wilson (8) Denton Wilde (9) Bevan Brittan (17) Eversheds (15) Wragg and Co. (8) Nabarro Nathan. (10) 0 500 1,000 1,500 2,000 2,500 33 Public Private Partnerships and Affordable Housing, by David Hoicka
  34. 34. PPP Technical Advisors This chart details the top ten UK PPP technical advisors between 2004 and 2007. In general, fee rates for technical advisors are a little lower than for legal and financial advisors. Technical Advisors (# Projects) PPP Project Capital Value (£ millions) Mott Macdonald (19) Turner & Towns. (17) Cyril Sweett (12) Davis Langdon (7) EC Harris (15) Faithful & Gould (9) WS Atkins (6) Currie & Brown (10) Gleeds (9) Appleyards Cons. (4) 0 500 1,000 1,500 2,000 2,500 34 Public Private Partnerships and Affordable Housing, by David Hoicka
  35. 35. PPP Construction Contractors The following chart details the top ten UK PPP construction contractors . These ten contractors cover projects with a total capital value of £8.1bn, being 63% of the total available UK PPP market data. Therefore, just over a third of projects have construction contractors outside the top ten. Construction Co. (# Projects) PPP Project Capital Value (£ millions) Carillion (13) Balfour Beatty (11) Skanska (4) AMEC (6) Bovis (3) KBR (1) Laing O'Rourke (4) Taylor Woodrow (1) Costain (5) Interserve (5) 0 200 400 600 800 1,000 1,200 1,400 1,600 35 Public Private Partnerships and Affordable Housing, by David Hoicka

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