Saudi Mega Transport and Infrastructure Projects
18 September 2013
Social Infrastructure sector- Regional best practices
i...
Confidential – All Rights Reserved – Ernst & Young 2013
Contents
Section Page
1 Public Private Partnerships Principles 2
2...
Confidential – All Rights Reserved – Ernst & Young 2013 9
1 Background
Confidential – All Rights Reserved – Ernst & Young 2013
Background
The need for social infrastructure is in continuous inc...
Confidential – All Rights Reserved – Ernst & Young 2013 19
2 Different Delivery Models
Confidential – All Rights Reserved – Ernst & Young 2013
Examples of Different Delivery Models
► We have set out below a sh...
Confidential – All Rights Reserved – Ernst & Young 2013
Benefits of Different Delivery Models
Category Characteristics DBB...
Confidential – All Rights Reserved – Ernst & Young 2013
PPP: Potential benefits
Public Private Partnerships could be used ...
Confidential – All Rights Reserved – Ernst & Young 2013 9
3 Public Private Partnership Principles
Confidential – All Rights Reserved – Ernst & Young 2013
Public Private Partnership Defined
PPP are “legal agreements” betw...
Confidential – All Rights Reserved – Ernst & Young 2013
Typical PPP Project’s Structure
11
The Government
The Concession
A...
Confidential – All Rights Reserved – Ernst & Young 2013
The Concession Agreement
► The output specification sets the servi...
Confidential – All Rights Reserved – Ernst & Young 2013
Risk Type Mitigation
Pre-completion ▶ Cost over-runs
▶ Delays
a) F...
Confidential – All Rights Reserved – Ernst & Young 2013
Typical PPP Cost and Revenue Profile
16TimeOverruns
Estimated Runn...
Confidential – All Rights Reserved – Ernst & Young 2013
Potential Benefits of Public Private Partnership
► Improving finan...
Confidential – All Rights Reserved – Ernst & Young 2013
4 Affordable & Social Housing Sector
49
Confidential – All Rights Reserved – Ernst & Young 2013
Common challenges in the Affordable Housing sector
Supply Demand
P...
Confidential – All Rights Reserved – Ernst & Young 2013
What is the Government and Private Sector’s role?
Private Sector n...
Confidential – All Rights Reserved – Ernst & Young 2013
What is the Government and Private Sector’s role?
Private sector s...
Confidential – All Rights Reserved – Ernst & Young 2013
5 The Educational Sector
Confidential – All Rights Reserved – Ernst & Young 2013
HighlyCentralizedDecisionMaking
TraditionalPublicEducationSystems
...
Confidential – All Rights Reserved – Ernst & Young 2013
Contracting Form Description Examples
Management contracts Governm...
Confidential – All Rights Reserved – Ernst & Young 2013
Contact Us
Abraham Akkawi
Head of Infrastructure & PPP Advisory Se...
Confidential – All Rights Reserved – Ernst & Young 2013
24
Ernst & Young
Assurance Tax Transactions Advisory
About Erns...
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Saudi mega transport and infrastructure projects

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Saudi mega transport and infrastructure projects

  1. 1. Saudi Mega Transport and Infrastructure Projects 18 September 2013 Social Infrastructure sector- Regional best practices involving the private sector in PPPs, BOT or Outsourcing
  2. 2. Confidential – All Rights Reserved – Ernst & Young 2013 Contents Section Page 1 Public Private Partnerships Principles 2 2 Different Delivery Models 5 3 Public Private Partnership Principles 4 Affordable & Social Housing Sector 8 5 The Educational Sector 9 #1
  3. 3. Confidential – All Rights Reserved – Ernst & Young 2013 9 1 Background
  4. 4. Confidential – All Rights Reserved – Ernst & Young 2013 Background The need for social infrastructure is in continuous increase ► Fast growing nations in the middle east ► Awareness of social needs increased after the Arab Spring Need to optimize the social accommodation supply ► Limited budgets ► To avoid unnecessary costs in the procurement and operations of the social accommodation ► Not enough housing to meet either the existing populations requirements or the expanding population growth. ► The pressing need is for affordable housing for mid to low income Saudis. ► The cost and responsibility of primary infrastructure development. The new trend of achieving the most form the private sector expertise ► Creativity ► Enhanced experience/credentials in the sector
  5. 5. Confidential – All Rights Reserved – Ernst & Young 2013 19 2 Different Delivery Models
  6. 6. Confidential – All Rights Reserved – Ernst & Young 2013 Examples of Different Delivery Models ► We have set out below a short commentary on commonly used delivery models that are used for developing major Infrastructure Projects: Design-Bid-Build (DBB) Design-Build (DB) Public-Private Partnerships (PPP) ► Design-Bid-Build (DBB): traditional model, which is the most commonly used delivery model ► Design-Build (DB): could be considered as an innovative option which is being increasingly used ► Public-private Partnership (PPP): considered as an innovative procurement option and is also becoming more widely used, it may include both models involving demand risk transfer to the service provider and can include or exclude the provision of external financing Key characteristics of DBB model: ► Separate contracts for design and construction ► Contractor selection usually based entirely on the lowest cost ► Design documents are 100% complete in advance of the construction contract tender Key characteristics of DB model: ► Single contract for design and construction ► Contractor selection based on technical merit and price ► Schedule allowing for overlapping design and construction ► Contractor expected to provide a lump sum fixed price and to commit to delivery schedule Key characteristics of PPP (DBFOM) model: ► Single contract for design, construction, financing and operation & maintenance ► Risks are assigned based on each party able to manage them ► Contractor responsible for life-cycle cost optimization of the asset ► Private finance can (if required) be provided in form of equity and debt 19
  7. 7. Confidential – All Rights Reserved – Ernst & Young 2013 Benefits of Different Delivery Models Category Characteristics DBB D&B PPP Schedule Shortest Schedule Delivery Schedule Certainty Cost Cost Certainty Lowest Tender Price Early Cost Estimates Whole Life Efficiency Quality High Quality Assets High Quality Service for users Sustainability Overall sustainability of project Partnership Delivering Innovation Dealing with technical complexities 3 2 1 1 2 2 2 1 2 1 1 3 3 3 3 1 1 1 2 3 3 1 1 3 3 1 2 3 3 3 3 3 3 20
  8. 8. Confidential – All Rights Reserved – Ernst & Young 2013 PPP: Potential benefits Public Private Partnerships could be used be used to help resolve the issues of: ► Attracting private sector interest in mid to low income housing; ► Innovation and quality of design and construction of new housing; and ► Attracting long term private finance into the sector. PPP’s provide good value for money when there is: ► Major capital investment program (efficiencies of scale savings) ► Private sector has knowledge and expertise to deliver services ► Requirements/services can be specified as ‘outputs’ ► Facilities and services can be costed (whole life basis) ► Procurement costs are not disproportionate ► Technology is not susceptible to fast-paced change ► Incentives for the private sector to perform can be established
  9. 9. Confidential – All Rights Reserved – Ernst & Young 2013 9 3 Public Private Partnership Principles
  10. 10. Confidential – All Rights Reserved – Ernst & Young 2013 Public Private Partnership Defined PPP are “legal agreements” between government and private sector entities for the purpose of providing public infrastructure, community facilities, and related services. Typically the partners share risk, reward and responsibility – for a shared investment (Not all Projects are suitable to be delivered as PPP, Partners could be public sector or not-for-profit and PPP are only one of the tools in the tool box) 9
  11. 11. Confidential – All Rights Reserved – Ernst & Young 2013 Typical PPP Project’s Structure 11 The Government The Concession Agreement Project Co. (SPV) Lenders (Debt) Shareholders (Equity) Design & Construction Operations & Maintenance
  12. 12. Confidential – All Rights Reserved – Ernst & Young 2013 The Concession Agreement ► The output specification sets the service outputs required. Moreover the assets Handover Requirements specify the asset condition at the end of concession term prior to handing over the asset back to the Government. ► The payment mechanism determines how the Government will remunerate the SPV, balancing positive and negative financial incentives to meet the output specification and the performance region based on clear prescribed KPIs along with agreed performance threshold levels. ► Contractual remedies in the form of warning notices, step-in and termination rights underpin incentives to perform. Output specification & Handover Requirements Performance regime Payment mechanism Performance Contractual remedy Main Elements of the Concession Agreement 12
  13. 13. Confidential – All Rights Reserved – Ernst & Young 2013 Risk Type Mitigation Pre-completion ▶ Cost over-runs ▶ Delays a) Fixed price turnkey contracts b) Warranties/penalties/incentives c) Fixed project specification d) Strong contractors Post-completion ▶ Revenue forecasts ▶ Revenue build-up ▶ Operating costs ▶ Management failure a) Committed supply contracts b) Committed off-take contracts c) Strong operators d) Performance guarantees Technical ▶ Performance ▶ Environmental ▶ Safety a) Warranties b) Proven technologies c) Public consultation and approval Financial ▶ Structure: debt//equity ratio, e.g. 75/25 ▶ Structure: return on capital ▶ Structure: risk/reward ratio ▶ Foreign exchange ▶ Debt service cover ratio ▶ Taxation a) Equitable ROE (e.g. 15-20%) b) Acceptable cover ratios (e.g. 1.5-2.0) c) Escrow reserve accounts d) Dividend constraints e) Loan syndication f) Insurance/financial derivatives g) Standby funding arrangements Legal ▶ Regulatory framework ▶ Concession law a) Experienced lawyers b) Clear, simple documents Political ▶ Regime stability ▶ Force majeure ▶ Political intervention a) Clear regulatory regime b) Investment insurance c) IFI support Sample Public Private Partnership Risk Matrix 15
  14. 14. Confidential – All Rights Reserved – Ernst & Young 2013 Typical PPP Cost and Revenue Profile 16TimeOverruns Estimated Running Cost Running Cost Overruns Cost Overruns Estimated Capital Cost Construction Phase Operation & Maintenance Phase Conventional public Procurement 0 5 10 15 20 Payments Payment based on usage Payment based on availability No payments until facilities ready Construction Phase Operations & Maintenance Phase PPP procurement 0 5 10 15 20 Payments
  15. 15. Confidential – All Rights Reserved – Ernst & Young 2013 Potential Benefits of Public Private Partnership ► Improving financial risk sharing since risks are negotiated to rest with the party who is best to manage them. ► Facilitating and incentivizing project implementation on time and within budget. ► Optimizing capital, infrastructure services and maintenance expenditure over project life. ► Make the cost of services more visible. ► Allow government agency to focus on functions where it has a comparative advantage (i.e. Policy, guidelines and oversight). ► Using innovative design, operation and financing structures. ► Improving management of operational risks, thereby reducing risk provisioning costs ► Allowing for synergies between participating organizations. ► Improved timeliness and adherence to specifications in delivery of infrastructure and related services. ► Improved quality in delivery of post-construction services. ► Improving the reach of infrastructure facilities ► Access and securing specialized skills & technology that may not be available in public sector. ► Facilitate the deployment of more public facilities by the private sector. ► Address infrastructure and service gaps more quickly than under traditional public procurement. ► Provide for a predictable assets and service quality levels at end of contract period, through handover specifications. Improved Service Levels Reduced Costs (Value for Money) PPPs: An Effective and Efficient Service Delivery Model Public Private Partnerships could be used be used to help resolve the issues of: ► Attracting private sector interest in mid to low income housing, develop education programs and assets, and providing third party finance; ► Quality of design and construction. 17
  16. 16. Confidential – All Rights Reserved – Ernst & Young 2013 4 Affordable & Social Housing Sector 49
  17. 17. Confidential – All Rights Reserved – Ernst & Young 2013 Common challenges in the Affordable Housing sector Supply Demand Priceincrease Affordabilitydecline Housing & Planning laws not in place Some uncertainty of land ownership Private Land not being developed for housing Speculative land holding Housing finance not readily accessible to all households Finance not as readily available to residential developers
  18. 18. Confidential – All Rights Reserved – Ernst & Young 2013 What is the Government and Private Sector’s role? Private Sector needs to bring: ► Innovative Construction Solutions. ► Efficiencies of Delivery. ► Deliver real homes in vibrant neighborhoods. ► Develop unique identities and facilitate social integration. ► Integrate whole life considerations into design. ► Design Energy Efficiency into Housing Units. ► Financing solutions (including PPP, BOT). ► Financially strong and proven sponsors and developers. ► Experienced operators and maintainers.
  19. 19. Confidential – All Rights Reserved – Ernst & Young 2013 What is the Government and Private Sector’s role? Private sector support. ► Government to partner with private sector to increase the provision of infrastructure and housing versus the land ready for development. ► Instruments to encourage the private sector to invest include PPP’s BOT’s etc. ► Government – A facilitator, creating the right legal and regulatory framework to facilitate private sector and charity involvement, a commissioner of services. ► Private Sector – Assume the responsibility of providing housing stemming from the expansion and development of financial investment and construction markets. ► Charities – In cooperation with both Government and Private Sector create new support mechanisms for those who cannot access the market via the private sector.
  20. 20. Confidential – All Rights Reserved – Ernst & Young 2013 5 The Educational Sector
  21. 21. Confidential – All Rights Reserved – Ernst & Young 2013 HighlyCentralizedDecisionMaking TraditionalPublicEducationSystems ResourcesdonotFlowtoEducation improvements Allocation of students to schools is state controlled Top down control over curriculum & resources Inspection focuses on compliance rather than performance Teacher’s creativity is discouraged Curriculum updates based on rigid schedule State provided educational material and resources State assigned teachers and principals Little authority given to school admin to influence school performance Resources primarily used to support large number of staff Salary increments to unqualified teachers consume budget increases Old deteriorating school infrastructure Overcrowded classrooms Lack of professional development for teachers Lack of advanced technologies and communication facilities Lowqualityeducationwithhighresourcedrainage PrivateSectorParticipationinPublicEducation ImprovedResourceUtilizationHigherAutonomyinDecisionMaking Improved training and development systems Improved classroom availability Provision of advanced technologies Salary increments are performance and qualification based School manages allocation of resources to maximize benefit Improved infrastructure More authority given to school admin to enable competition School provided material and resources School management’s involvement in teachers recruitment & selection Curriculum updates based on priority needs and global developments Encourages innovative teaching techniques Schools’ management involvement on curriculum setting Periodical performance measurement for school and students Parental choice of schools (Encourages competition among schools) ImprovedEducationqualityandresourceutilization Traditional Systems vs. Private Participation 36
  22. 22. Confidential – All Rights Reserved – Ernst & Young 2013 Contracting Form Description Examples Management contracts Government contracts with private sector to manage an existing public service/set of services using public infrastructure. Staff are employed by the public sector. ► Contract schools, United States ► PPPs for public schools management, Abu Dhabi ► Independent schools, Qatar Operational contracts Government contracts with a private provider to manage an existing public service/set of services using public infrastructure. Staff are employed by the private sector. ► Contract schools, United States ► Colegios en Concesión (Concession Schools), Colombia ► Fe y Alegría, Latin America/Spain Service delivery Contract / Vouchers - Subsidies Government contracts with the private sector to deliver a specified service/set of services using private infrastructure. Vouchers are common delivery tools this model ► Government Sponsorship of Students in Private Schools, Côte d’Ivoire ► Alternative Education, New Zealand ► Educational Service Contracting, Philippines Auxiliary/professional Services contracts/ Affiliations arrangements / Non core services Auxiliary / professional services: Government contracts with the private sector to undertake education-related functions such as school review, schooling improvement or curriculum development. Non core services: Private sector provision of services such as student transportation, catering, student dorms, facilities cleaning, Information technology infrastructure etc ► Contracting out Local Education Authority functions, United Kingdom ► Pitágoras Network of Schools, South America ► Sabis Network of Schools, Middle East/Europe/North America Infrastructure provision contracts Government contracts with the private sector for the provision of educational infrastructure. Contracts can involve finance, design, construct, and long term maintenance ► Private Finance Initiative, United Kingdom ► New Schools’ Project, Australia ► Public–Private Partnerships (P3) for Educational Infrastructure, Canada ► Offenbach and Cologne Schools Projects, Germany ► Montaigne Lyceum, Netherlands Models and International Examples of PPPs in Education Hybrids of the above models are used to produce ultimate solutions that fit local contexts 37
  23. 23. Confidential – All Rights Reserved – Ernst & Young 2013 Contact Us Abraham Akkawi Head of Infrastructure & PPP Advisory Services – Middle East Ernst & Young Phone: + 971 2 417 4556 Mobile (UAE) : + 971 50441 8830 Email - abraham.akkawi@ae.ey.com 42
  24. 24. Confidential – All Rights Reserved – Ernst & Young 2013 24 Ernst & Young Assurance Tax Transactions Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www ey com Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients The Middle East practice of Ernst & Young has been operating in the region since 1923 For over 85 years, we have evolved to meet the legal and commercial developments of the region Across the Middle East, we have over 4,400 people united across 20 offices and 15 Arab countries, sharing the same values and an unwavering commitment to quality We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com/me © 2013 Ernst & Young All rights reserved

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