PPP often involves a new discipline for the public sector to define the long-term service that it wants to buy over the long term, and the associated payment mechanisms necessary to incentivise the private sector to deliver the service on time and within the budget. It requires a system of checks and balances to ensure a fair balance of rights and responsibilities between public and the private sector. Due to these disciplines, PPP, as a form of public service procurement, will usually lead to reform of public service delivery through service improvement, a commitment to transparency and best value for money.This is a very complex structure, but very well worth embarking on it if done properly. Both the public sector and the private sector need to develop new skills. It also offers great opportunities for new local businesses – but they may need considerable hep from experienced people like us.
Romania ranks 110th in the world on infrastructure development (e.g. Transport infrastructure: Romania has the lowest road density in the EU). Whereas the size of the market and the sophistication of the financial market are quoted by International Economic forums as the main attraction points for foreign investors, the poor state of infrastructure is the major deterrent and a real obstacle to Romania’s economic development. Infrastructure development is therefore crucial for Romania and represents the top priority for the Government. Given reduced budgetary revenues and the low absorption of EU funds, PPP is given much more importanceS&PBBB- Stable – S&P Considered lowest investment grade FitchBB+ long-term foreign-currency and BBB- long-term local-currency rating –highest speculative grade
Romanian banks, mired in the second- biggest recession in the European Union, will probably see bad loans peak in mid-2011, according to Fitch Ratings.The use of bonds to finance PPPs has differed widely among member states. They have been used most extensively in countries with significant private-sector pension schemes having long-term liabilities that need to be matched to long-term assetsAlthough alternatives to public bonds and bank loans are being discussed, for the time being these two solutions remain the principal options for debt finance in the PPP market.Since 2007 Romania has implemented its private pension funds system. This system is mandatory for workers under age 35 and optional for workers between age 35 and 45The ultimate aim of the mandatory private pension system is to provide annuities (pensions) starting from the standard retirement age This is potentially ripe territory for investments into PPPs.
The onset of the global financial crisis in the second half of 2008 raised major concerns about the ability of PPP projects in the developed and developing world to access finance. During the credit crunch, changes in the industry were essentially imposed by a lack of capacity in the senior debt and bond markets:Equity investors perceive that there is much less senior debt funding available, and that banks are less willing to provide finance for the full lifetime of the PPP.Refinancing has changed from being an attractive opportunity to becoming a downside risk for deals written during the credit crunch; deals that may need to be refinanced between 7 and 10 years into the project. This is essentially a risk for equity investors, but could have implications for the public sector.The banks’ margin has increased and there is pressure to increase the proportion of equity to debt. Perceptions about the required level of equity vary from 15% to 30%, compared to the previous level that was typically 10%. The required rate of return by equity investors is perceived to be rising. To the extent that these perceptions are accurate, it is possible that if international capital markets stabilise, there will be renewed interest in refinancing as the market regains competitive pressures. Whereas the senior debt market is perceived to be in crisis, this is not the case with the primary equity market. However, the secondary equity market is perceived to be less buoyant than before the credit crunch took effect.The crisis has had an impact on PPP financing, but not, as it turns out, as severe as the more pessimistic predictions. But financing is being achieved under very different conditions, with greater risks being absorbed by government, greater levels of support from government or public sector financial institutions, and with considerably increased costs of debt.The picture is of course a nuanced one, with a few countries leading the rebound and investment being driven by large projects. PPP investments in the developed world have in general held up better than had been feared at one point.
“.......... A second attempt to construct the Comarnic-Brasov highway with Vinci under this public procurement law failed in April 2010, when Vinci announced it could not get bank financing......” Other significant infrastructure projects (Bechtel construction of the Transylvania Highway), which is not being constructed under a PPP regime but a simple build and transfer arrangement have been mired in problems due to alleged failure by Bechtel to meet construction milestones (allegations coming from the government) and alleged failure of the government to meet payment obligations (allegations coming from Bechtel). To date, they have (since 2004), delivered roughly 50 km for use of the 416 km project (between Brasov and the Hungarian border). 5 service concession contracts for 10 petrol stations – completed in 2008National training programme for more than 200 experts at central and local level – completed in 2008The contract for the first pilot project in the road sector, Comarnic – Brasov highway was signed in January 2010.6 solid waste management projects in various stages of execution under ISPA fundingNational strategy for promoting and implementing PPP projects with the support from the European PPP Expertise Centre under development
London brcc ppp investmnet feb 2011 v2
Funding & Implementation of Infrastructure Projects in Romania<br />Opportunities for PPP Finance<br />10 February 2011<br />John Davie<br />Chairman – Altra Capital Limited<br />Former chairman – British Expertise<br />Former chairman – UKTI PPP Export Advisory Group<br />www.altracapital.com<br />
Who is Altra Capital?<br /><ul><li>Altra is an independent management and advisory group
Altra is committed to encourage social improvement by placing an ethical approach to business at its heart
Altra offers several core areas of expertise including:
the dismantling of monopolies and the reform of public services
A PPP project typically involves a long-term arrangement in which the public sector will contract with the private sector to deliver a service in exchange for regular performance-based payments</li></ul>www.altracapital.com<br />
comprehensive and rigorous impact assessment, monitoring and evaluation
significant new skills to perform this</li></ul>www.altracapital.com<br />
A cardinal principle behind the PPP <br /><ul><li>Intended to transform government departments from being owners and operators of assets into purchasers of services from the private sector</li></ul>www.altracapital.com<br />
Background <br /><ul><li>Romania ranks 110th in world on infrastructure development
Sophistication of financial market are main attraction points for foreign investors
Poor state of infrastructure is the major deterrent and real obstacle to Romania’s economic development
Infrastructure development is crucial for Romania and represents top priority for the Government.
Given reduced budgetary revenues and low absorption of EU funds, PPP is given much more importance
Encouraging feasible PPP projects is one stated priority of Government’s anti-crisis programme </li></ul>www.altracapital.com<br />
Core messages<br /><ul><li>Government committed to using the PPP instrument for infrastructure development; in fact, encouraging the implementation of feasible PPP projects is one of the stated priorities of the Government’s anti-crisis programme
There is a real market and keen appetite for PPPs at the local and central level in view of the current state of the public finances
Limited experience of the public sector in development and implementation of PPP projects </li></ul>www.altracapital.com<br />
Capacity challenge <br /><ul><li>The PPP Central Unit, although experienced and professional is understaffed (6 people)
The local and central government lack the necessary expertise to plan and implement PPP projects
There is no quality control authority, the PPP Unit advice is optional </li></ul>www.altracapital.com<br />
The credit crunch<br /><ul><li>Changes are imposed by a lack of capacity in senior debt and bond markets
Equity investors perceive much less senior debt funding
Refinancing changed from attractive opportunity to downside risk; deals may need refinancing between 7 and 10
Banks’ margin increased - pressure to increase proportion of equity to debt.
Equity investors Required rate of return perceived to be rising.
Secondary equity market is perceived to be less buoyant than before the credit crunch took effect.</li></ul>www.altracapital.com<br />
Total nominal cash flow<br /> 100%<br />PFI - % Total cash flows to equity partners<br />80%<br />% Remaining<br />60%<br />PFI - % Total payments <br />remaining<br />40%<br />20%<br />DBMO - % Total payments remaining<br />0%<br />0 3 6 9 12 15 18 21 24 27 30 <br />Time<br />Percentage of total nominal cash flow remaining in a typical DBMO and PFI model and percentage of total cash Flows to equity remaining in a PFI model<br />www.altracapital.com<br />
Romania <br /><ul><li>Romania lacks credible PPP success stories
Attempts at significant PPP projects have been unsuccessful due to political changes in Romania </li></ul>“........unfortunately, I have represented the Ministry of Transportation in 2004 in the attempted development of the Bucharest- Ploiesti highway (Strabag) and Comarnic-Predeal highway (Vinci) under the old PPP Law. These efforts failed when the government changed in November 2004 and both these contracts, which had been heavily negotiated and initialized, were simply dropped by the new government......”<br />www.altracapital.com<br />
Implementation of PPP (1)<br /><ul><li>Mandatory provisions of the PPP Law that impact the PPP Contract:
the PPP Contract approved by Romanian Government or the local authority entering the contract</li></ul>Altra wishes to express our thanks to: <br /><ul><li>Ancuta Delia Leach, Partner in Wolf Theiss Si Asociatii
Ileana Buia, Senior Trade Development Adviser at the British Embassy in Bucharest</li></ul>www.altracapital.com<br />
Implementation of PPP (2)<br /><ul><li>Project Company: