Public Private Partnerships Deloitte

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Working together to Improve Pubic Infrastructure and Services

Public Private Partnerships Deloitte

  1. 1. Public Services Public-Private Partnerships: Working together to Improve Pubic Infrastructure and Services
  2. 2. Table of Contents Bridging the Infrastructure Gap ..................................................................................... 3 What are Public-Private Partnerships? ........................................................................... 4 PPP Range of Options .................................................................................................... 5 PPP Risk-Reward Curve and Compensation Models ......................................................... 6 Value for Money: PPPs versus Pure Public Investment .................................................... 8 Benefits and Challenges of PPPs .................................................................................... 9 The PPP Life Cycle ....................................................................................................... 10 Global Trends in PPPs .................................................................................................. 11 Deloitte’s PPP Services ................................................................................................ 13 Public-Private Partnership ii
  3. 3. Governments and public authorities are increasingly turning to public-private partnerships (PPPs) to deliver efficient and cost-effective infrastructure and services. PPPs can help public sector entities shorten delivery times, share risks, achieve better value for their money and increase innovation in their infrastructure and provision of services. Such partnerships allow private sector organizations to apply their skills and experience to infrastructure development and operation and mobilize finances for long-term infrastructure investments. PPPs are not without challenges, however. These partnerships are complex and relatively inflexible structures. PPP procurement and implementation also can be lengthy and costly, making it unsuitable for some projects. Governments and public authorities should seek advice from outside consultants to help them design PPP programs and projects that will achieve their intended objectives, while also increasing their value for money. Bridging the Infrastructure Gap In today’s global economy, the ability to deliver goods and services in a timely and cost-effective manner is critical. National and local governments and public authorities are constantly looking for ways to expand and modernize their public infrastructure and services. Improved infrastructure and services are a necessary precondition for successful and sustainable economic growth and social development. However, governments have limited financial resources to devote to capital expenditures and expanded public services. To bridge the gap between available public resources and the cost of needed infrastructure and services and to ensure that infrastructure and services are delivered as efficiently and cost-effectively as possible, public authorities are increasingly turning to public-private partnerships (PPPs). Through an infusion of private capital and managerial and operational experience, PPPs can ease fiscal restraints and boost efficiency in the provision of public infrastructure and services. Despite their potential, however, PPPs are highly complex policy instruments and must be fully understood and professionally implemented and managed if they are to deliver on their potential. PPPs can help improve public infrastructure and services through shorter delivery times, better value for money and increased innovation across a range of sectors. However, implementing a PPP program or project is not easy. Significant political, legal, regulatory and institutional hurdles must be overcome in order to move from a traditional, public sector model of public service delivery toward one in which public and private sectors work together in a partnership that serves their interests as well as the interests of citizens and other users of infrastructure. Public-private partnerships can help improve public infrastructure and services through shorter delivery times, better value for money and increased innovation across a range of sectors. The Growing Infrastructure Gap The infrastructure gap – the amount of investment required to meet core infrastructure needs – is large and growing. On average, developing countries need to spend 5 percent of their gross domestic product (GDP) annually on infrastructure capital expenditures in order to sustain and expand essential public infrastructure. This constant challenge requires bold approaches and practical solutions, such as PPP. Public-Private Partnership 3
  4. 4. What are Public-Private Partnerships? There is no single, universally accepted definition of public-private partnerships. PPPs often mean different things to different people, which can make assessing and comparing international experience in such partnerships difficult. In general, PPPs refer to forms of cooperation between public authorities and the private sector to finance, construct, renovate, manage, operate or maintain an infrastructure or service. At their core, all PPPs involve some form of risk sharing between the public and private sector – to provide the infrastructure or service. The allocation of sizable and, at times significant, elements of risk to the private partner is key in distinguishing a PPP from the more traditional public sector model of public service delivery. There are two basic forms of PPPs: contractual and institutional. Although institutional PPPs have been quite successful in some circumstances, particularly in countries with well-developed institutional and regulatory capacities, contractual PPPs are significantly more common, especially in developing economies. Although there is no universal consensus about the definition of public-private partnerships, the following elements typically characterize a PPP: The infrastructure or service is funded, in whole or in part, by the private partner. Risks are distributed between the public partner and private partner and are allocated to the party best positioned to manage each individual risk. PPPs are complex structures, involving multiple parties and relatively high transaction costs. PPPs are a procurement tool where the focus is payment for the successful delivery of services (the performance risk is transferred to the private partner). PPPs are output-/performance-based arrangements – as opposed to the traditional input-based model of public service delivery – where the focus is payment for the successful delivery of services. PPPs typically involve bundled services (i.e., design, construction, maintenance and operation) to increase synergies and discourage low-capital/high – operating-cost proposals. In general, PPPs offer a new and dynamic approach to managing risk in the delivery of infrastructure and services.1 1 Although PPPs are considered a new concept that has gained prominence in the last 20 years, PPPs have actually been around for hundreds of years, wherever the private sector has been involved in the delivery of traditional public services (i.e., water, roads, rail and electricity). Public-Private Partnership 4
  5. 5. PPP Range of Options PPPs fall somewhere between the traditional public sector model of public service delivery and full privatization. Within this range, however, an infinite number of potential PPP transaction structures can be employed, depending on the public sector’s objectives and needs. The specific transaction design depends on several factors, including the targeted risk transfer, the legal and institutional environment, accepted industry norms and the financial realities of the proposed transaction. Figure 1. Multiple types of PPP transaction structures Public-Private-Partnerships Works & Lease Management BOT/BOOT Divestitures/ Service Agreements Contracts Concessions Privatization Contracts (LDO, etc.) Low High Extent of private sector risk PPPs fall somewhere between the traditional public sector model of public service delivery and full privatization. Within this range, however, an infinite number of potential PPP transaction structures can be employed, depending on the public sector’s objectives and needs. PPP Glossary at a Glance Common terms and acronyms associated with public-private partnerships include: Service contract: The government contracts with a private entity to provide services the government previously performed. Management contract (MC): The government contracts with a private entity to operate and manage a facility or provide multiple services. Lease: The government leases the public infrastructure to a private operator for a fee. The private operator takes on the operational risk. In some instances, the lease agreement can include investment requirements (i.e., lease-develop-operate contract structures). Concession: The government or public authority grants a private entity exclusive rights to provide operate and maintain an infrastructure asset for a specified period of time. The private partner assumes significant investment risk, while the public sector retains ownership of the original asset. Examples include: Rehabilitate, operate and transfer (ROT): A private sponsor rehabilitates an existing facility, then operates and maintains the facility at its own risk for the contract period. Rehabilitate, lease or rent, and transfer (RLT): A private sponsor rehabilitates an existing facility at its own risk, leases or rents the facility from the government owner, then operates and maintains the facility at its own risk for the contract period. Build, rehabilitate, operate and transfer (BROT): A private developer builds an add-on to an existing facility or completes a partially built facility and rehabilitates existing assets, then Public-Private Partnership 5
  6. 6. PPP Glossary at a Glance operates and maintains the facility at its own risk for the contract period. Greenfield projects: A private entity or public-private joint venture builds and operates a new facility for the period specified in the project contract. The facility may or may not return to the public sector at the end of the concession period. Greenfield projects can be organized into categories: Build, lease and transfer (BLT): A private sponsor builds a new facility largely at its own risk, transfers ownership to the government, leases the facility from the government and operates it at its own risk up to the expiration of the lease. Build, operate and transfer (BOT): A private sponsor builds and operates a new facility at its own risk and then transfers the facility to the government at the end of the contract period. The private sponsor may or may not own the assets during the contract period. This is also commonly referred to as design-build-finance-operate (DBFO). Build, own and operate (BOO): A private sponsor builds, owns and operates a new facility at its own risk. Design-build-finance-transfer (DBFT): A private entity finances and constructs the infrastructure asset which gives it the incentive to complete the project on time and within budget. The asset is only paid for by the public sector when it has been completed. This is common under the private finance initiative (PFI) model. Divestiture: The government transfers public infrastructure an asset, either in part or in full, to the private sector. Generally, the government will include certain conditions with the sale of the asset to ensure that improvements are made and services continue to be delivered. PPP Risk-Reward Curve and Compensation Models Given that PPPs allocate certain risks to the private partner, the private entity must be compensated for assuming these risks (Figure 1). Generally speaking, the greater the risk, the greater the required return. Figure 2. Risk-reward Relationship by Type of PPP High Concession Divestiture BOT Rewards (Returns) Lease Management Contract Service Contract Low Low Risk High Risk Reward Relationship by the Type of PPP Public-Private Partnership 6
  7. 7. In PPP arrangements, the private partner is typically compensated through either: User-based payments (i.e., toll roads, airport or port charges) Availability payments from the public authority [i.e., PFI, power purchase agreements (PPAs), water purchase agreements (WPAs)] A combination of the above In user-based payment structures, the government or public authority often needs to provide some financial support to the project to mitigate specific risks, such as demand risk, or to ensure that full cost recovery is compatible with affordability criteria and the public’s ability to pay. Government support mechanisms can take many forms, such as contributions, investments, guarantees and subsidies, but they should be carefully designed and implemented to allow for optimal risk allocation between the public and private sectors. When government supports are present, the objective is to increase private capital mobilization per unit of public sector contribution. Availability payments are at the heart of one form of PPP, the PFI model. This system provides capital assets for the provision of public services. Developed in the U.K., this model is used for a large number of infrastructure projects and gives the private sector strong incentives to deliver infrastructure and services on time and within budget. PFIs simultaneously allow governments and public authorities to spread the cost of public infrastructure projects over several decades. This creates greater budget certainty, while also liberating scarce public resources for other social priorities. Government Support Mechanisms Hosting governments can provide financial support to or reduce the financial risk of a project in many ways. Common forms of government support mechanisms include: Cash subsidy. The government or public authority agrees to provide a cash subsidy to a project. It can be a total lump sum or a fixed amount on a per unit basis, and payments can be made either in installments or all at once. Payment guarantee. The government agrees to fulfill the obligations of a purchaser (typically a publicly owned enterprise) with respect to the private entity in the case of non-performance by the purchaser. The most common example of this is when a government guarantees the fixed payment of an off-take agreement (e.g., PPA or WPA) between a private entity and the publicly owned enterprise. Debt guarantee. The government secures a private entity’s borrowings by guaranteeing repayment to creditors in case of default. Revenue guarantee. The government sets a minimum variable income for the private partner; typically this income is from customer user fees. This form of guarantee is most common in roads with minimum traffic or revenue set by a government. Public-Private Partnership 7
  8. 8. Value for Money: PPPs versus Pure Public Investment Not all projects are suitable for PPPs, which should provide equivalent or better value for money than a 100 percent public sector approach. Not all projects are suitable for public-private partnerships, which should provide equivalent or better value for money than a 100 percent public sector approach. Value for money is a key driver in public-private partnerships. Value for money does not simply equate to selecting the cheapest bid or lowest price for an asset; it means opting for the best long-term solution for service delivery. It involves analyzing the total long-term costs (life cycle costs) of service delivery and evaluating the concomitant benefits to the public at large. When compared to a public sector approach, incremental benefits of PPPs may accrue from: Speedier implementation of infrastructure projects Better service and coverage Life cycle focus of service delivery/reduced life cycle (long-term) costs Improved efficiency and innovation Risk sharing designed to create incentives to succeed Value for money is a key driver in public-private partnerships. Value for money does not simply equate to selecting the cheapest bid or lowest price for an asset; it means opting for the best long-term solution for service delivery. What’s behind the growth in PPPs? Governments and public authorities are increasingly turning to PPPs for several reasons: Governments have limited financial resources to devote to capital expenditures. Governments are in need of greater efficiency and more performance-based service delivery. The private sector has skills and experience that can be applied to infrastructure development and operation. The private sector can mobilize finances for long-term infrastructure investments, which is an attractive risk-return opportunity for many private sources of capital. Public-Private Partnership 8
  9. 9. Benefits and Challenges of PPPs Public-private partnerships are not intended to entirely replace the traditional public sector model of public service delivery. PPPs are just one tool, among many, available to governments and public authorities to develop infrastructure and services. PPPs have shown potential in addressing infrastructure shortages and achieving good value for money. Benefits of PPPs include: Speedier implementation of infrastructure projects. Because payments are tied to infrastructure and service delivery, PPPs have a solid track record of completing construction on time or ahead of schedule. In addition, because PPPs generally allow the public to spread the cost of the infrastructure investment over the lifetime of the asset, the public sector can move ahead with infrastructure projects without waiting for significant upfront capital. This allows the public to benefit from the investment much sooner than with traditional “pay-as-you-go” financing. Budget leveraging/additional capital. By shifting financing responsibilities to a private party, public-private partnerships result in an infusion of private capital into public infrastructure and services. This mobilization of additional capital allows governments to increase their overall level of investment in infrastructure development. Customer service orientation. Given the use of performance – based incentives, PPPs have a well-established track record of improving quality and service levels. Specialist private service providers offer experience in their respective fields. Private sector innovation also can facilitate the provision of continued high-quality services. In addition, as the public sector divests itself from day-to-day service provision, it can act as a more effective regulator, focusing on ensuring that the private partner maintains required customer service levels. Improved efficiency and cost savings. Private sector efficiency, coupled with an optimal risk allocation, can create significant cost savings in the delivery of public infrastructure and services. Cost savings from PPPs typically come from lower construction expenses, reduced life cycle costs, improved efficiency and lower costs of associated risks. Generation of additional revenues. Innovation and the private sector profit motive can create incentives for the private partner to develop new and creative sources of revenue from public infrastructure. These new sources of income can be shared with the public sector, creating additional revenue for other public sector priorities. Private sector development/investment opportunities. As the cornerstone of any modern economy, the private sector is constantly searching for new investment opportunities. PPPs provide stable, long-term investment possibilities for the private sector, as well as the opportunity to enter into service sectors previously monopolized by public authorities. Public sector focus on strategic functions and outcomes. By liberating the public sector from the direct provision of non-strategic services, governments can focus their scarce resources on their core mission. Because PPPs generally allow payments to be spread the cost of the infrastructure investment over the lifetime of the asset, the public sector can move ahead with infrastructure projects without waiting for significant upfront capital. This allows the public to benefit from the investment much sooner than with traditional “pay-as-you-go” financing. Public-Private Partnership 9
  10. 10. Despite their potential, however, PPPs are not a panacea. Public-private partnerships can create the following challenges: PPPs are complex and relatively inflexible structures. PPP procurement and implementation can be lengthy and costly, making it unsuitable for some projects. PPPs place additional responsibility on the public sector, which must be prepared to act as a competent counterpart and regulator. This may require a different set of government proficiencies (i.e., managers skilled in negotiation, contract management and risk analysis). PPPs may lead to higher user charges once implicit or explicit subsidies are removed. This is not necessarily a direct consequence of the PPP, but the public may perceive the increased rates and charges as a result of the private partner’s required return on investment. PPPs do not achieve absolute risk transfer. The public sector will retain some risks. Not all projects are suited for PPPs. Although PPPs offer significant benefits as an infrastructure delivery tool, they can generate considerable problems if handled incorrectly. For this reason, governments and public authorities should seek help from outside advisors to support the development of public sector capacity to implement and manage PPP programs, and to support the implementation of specific projects. Seeking external advice can help governments design PPP programs and projects that will achieve their intended objectives, while also increasing their value for money. The PPP Life Cycle When implementing PPPs, governments need to adopt a life cycle perspective. Success depends, in great part, on a government’s capacity to execute and manage innovative partnerships. All too often, governments place too much emphasis on the transaction, overlooking other critical factors. The transaction is an important component of a PPP, but it is only a small part of a broader framework. Equally important are establishing the legal, regulatory, institutional and policy framework components for the PPP; securing stakeholder buy-in; managing the change process; applying appropriate risk models; developing adequate oversight and monitoring structures; and incorporating the PPP into broader sector strategies. In order for PPPs to be successful, they need to be implemented within a broad policy framework that takes into account all phases of the PPP life cycle. When implementing public-private partnerships, governments need to adopt a life- cycle perspective. Success depends, in great part, on a government’s capacity to execute and manage innovative partnerships that take into account all phases of the PPP life-cycle. Leading Practice: The Centralized PPP Unit Increasingly, governments are establishing centralized PPP units to set policies and drive the PPP process. The functions of such organizations include: Vetting potential PPP projects to confirm that they meet specified minimum standards. Standardizing processes and leading practices to bring certainty to the market. Serving as a knowledge base and source of technical assistance to government institutions and agencies. Championing legal, regulatory and institutional reforms, as needed. Promoting PPP projects and initiatives. Public-Private Partnership 10
  11. 11. The PPP life cycle generally involves three major phases: Policy and planning phase. In this phase, governments establish the legal, regulatory, institutional and policy framework for the PPP. This includes capacity building, institutional strengthening and developing leading practices to ensure that PPP program objectives are obtained. The policy and planning phase is critical to determining the eventual success or failure of any PPP initiative. Transaction phase. This phase helps secure the best value for money through a quantitative and qualitative analysis of project options (i.e., feasibility studies), the establishment of performance standards and incentives and the implementation of open and competitive processes to select the private partner. It is essential to structure the deal so that it is bankable, while simultaneously achieving optimal risk allocation. Competitive incentives involved in the procurement process also help achieve better value for money. The transaction phase is completed when project agreements have been formalized and the private partner has achieved financial close for the project. Partnership and implementation phase. During this phase, the private partner operates the infrastructure facility, while the government provides oversight and compliance monitoring. The partnership phase involves several stages, including construction, operations and management, and termination/asset handover. Other activities during this stage may include dispute resolution, renegotiations and developing regulations. This long-term relationship requires an effective governance structure, as well as trained government officials who can act as competent PPP counterparts. Global Trends in PPPs During the past 10 years, governments and public authorities have increasingly turned to PPPs as an infrastructure delivery tool in multiple sectors. This trend shows no sign of slowing. Although the PPP experience can vary greatly from country to country or region to region, Table 1 summarizes some principal PPP infrastructure opportunities. Table 1. PPP infrastructure opportunities Indicative Representative Sector Sub-sectors PPP models challenges Airports Demand risk Transport BOT, BTO, BOOT, Seaports PFI, concession, Opposition to tolls and Roads MC, divestiture, tariff increases Railroads other Competing facilities Electricity Pricing and risk Energy BLT, BOOT, Natural gas allocation sensitivity concession, MC, divestiture, other Policy/regulatory risk Treatment plants Political sensitivity Water and Sewerage BT, BLT, BOOT, Utility concession, MC, Cost recovery divestiture, other School Project scaling Education DBFO/DBFOM infrastructure Adequate risk transfer (PFI), MC Research facilities Other Public-Private Partnership 11
  12. 12. Indicative Representative Sector Sub-sectors PPP models challenges Hospital Political sensitivity Health DBFOM (PFI), MC, infrastructure Project scaling/ other Clinical and non- transaction costs clinical services Insurance implications Public buildings Demand and revenue Municipal works/ urban PFI, BTO, BOT, Public housing risk regeneration/ social BOOT, BOO, other welfare District heating Cost recovery Sports and leisure Project scaling/transaction Parking/transport costs Others Correctional Political sensitivity Prisons DB, DBOM, BTO, facilities Performance measure BOO, MC Other Defense Political sensitivity Other DB, DBFOM (PFI) IT BOO, MC, other Project scaling Value for money Other During the past 10 years, governments and public authorities have increasingly turned to PPPs as an infrastructure delivery tool in multiple sectors. This trend shows no sign of slowing. Public-Private Partnership 12
  13. 13. Deloitte’s PPP Services Deloitte offers advisory services relating to virtually all phases of the public-private partnership life cycle. We take an integrated, holistic view of PPPs and work collaboratively with our clients to provide measurable and sustainable PPP initiatives that offer them the best value for money. Representative PPP Engagements in Developing Countries 2: Afghanistan: Privatization support for an Afghan telecom company. Bulgaria: Comprehensive due diligence and transaction advisory services on airport concession transactions, valued in excess of 1 billion USD. Curacao: Assessment of PPP opportunities for key infrastructures. Transaction support to an international airport. East Africa: Assessment and report preparation on PPP project preparation support facility. Egypt: Capacity development and training for central PPP unit; preparation of PPP toolkit. PPP for industrial estates and special economic zones. Jordan: Management support program for work on the Aqaba Port, including PPP transaction and analytical support across infrastructures (port, airport, rail, logistics, desalination, etc.). Kosovo: Development of a centralized PPP policy initiative (including the legal, regulatory, institutional and policy framework), as well as options assessment for multi-sector PPP projects (pipeline development). Montenegro: Master plan preparation for international airport system. Russia: Multi-model transport PPP feasibility study for major port; assessment of leading airport PPP practices on behalf of a major Siberian international airport. UAE: Development of project methodology for industrial development projects using PPPs; toolkit preparation and training. Deloitte works with our clients to establish a legislative and regulatory PPP framework, support institutional reform, build human capacity and develop transactions. We offer services in each of the three PPP phases: Policy and planning phase: Legal and regulatory framework strengthening Institutional development Creation of centralized PPP unit Creation of standardized practices, procedures and toolkits Capacity building, training and organizational development Strategic planning for PPP programs Marketing/public relations Complete program management for PPP units and infrastructure funds and facilities 2 BearingPoint Acquisition: On March 23, 2009, BearingPoint reached an agreement to sell substantially all of the assets of its Public Services practice, including contracts with the federal government, to Deloitte as part of a previously announced restructuring of its business. On April 17, 2009, the Court approved this agreement, and on May 8, 2009 Deloitte closed the acquisition of substantially all of the assets of BearingPoint’s North American Public Services practice, including its Emerging Markets Practice. Public-Private Partnership 13
  14. 14. Transaction phase: Financing and implementation options assessment for PPP project candidates Financial modeling for value for money, public vs. private and transaction design decisions Legal and institutional environment due diligence PPP transaction management Transaction design and development Preparation of tender documentation Investor outreach and marketing Tender management Negotiations and contract closure Design of project oversight and governance structure Partnership and implementation phase: Transition assistance Contract oversight and monitoring Development of contract governance models Contract management assistance PPP project and program assessment Capacity building and training Benchmarking leading practices Deloitte understands that public-private partnerships are just one tool for infrastructure and service delivery. We help our clients honestly assess all financing and implementation options. Deloitte’s Service Offerings are Designed to Accomplish Key Public Sector Objectives: Improved public governance of infrastructure and utilities Enhanced financial performance of infrastructure assets Value for money in service delivery Strategic engagement of private sector partners Deloitte’s PPP services are offered through our Infrastructure, Privatization and Utilities (IPU) practice, part of our Global Emerging Markets Group. Our passionate and dedicated professionals manage PPP advisory engagements around the world, cooperating extensively with Deloitte consultants in Europe, the Middle East and North Africa (MENA region), and others as appropriate. Deloitte’s Emerging Markets Advisory Division With more than $300 million in annual revenue and 600 employees worldwide, Deloitte’s Global Emerging Markets Advisory Division offers a broad range of economic governance and private sector development services to developing countries worldwide. For more than 15 years, we have implemented leading practice standards in all aspects of financial management, capital investment planning, public and private sector development, and government reform through its consulting projects in developing countries around the world. Deloitte’s world-class financial management and public services professionals offer our public and private sector clients the skills and experience they need to manage and implement critical projects and meet pressing challenges. Public-Private Partnership 14
  15. 15. Deloitte has implemented projects in some of the most difficult locations in the world, facing severe institutional, logistical and infrastructure constraints. Because we are both management and technology consultants, we understand the technical challenges of a particular project as well as its cultural and political context. This allows us to deliver results-oriented, execution-driven solutions to help our clients achieve desired results. Key clients Bilateral donors (USAID, DFID, CIDA) Multilateral donors (the World Bank, IFC, ADB, EU) Host-country governments and development and investment agencies Commercial partners from numerous industry sectors The IPU practice has completed more than 100 engagements in more than 40 countries, with transactions valued in excess of 3 billion USD in cash and committed investments. Public-Private Partnership 15

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