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Introduction to Public Private Partnerships (PPP’s) - June 2010


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With the increase in public debt, 100% privately funded initiatives are now re-emerging yet experience had shown earlier that early successes of privatization programs were short lived and led later to bailouts / subsidy by Governments. PPP,s are likely to remain a better way to allocate the risks based on each entity’s ability to manage , mitigate and absorb risks. This brief highlights various aspects of PPP’s in terms of explaining the various PPP’s models and PPP’s transactions types, fiscal risks in PPP’s, PPP’s best practices and how to create an enabling PPP Environment. Major MENA PPP’s projects preview of is highlighted.

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Introduction to Public Private Partnerships (PPP’s) - June 2010

  1. 1. Introduction to PPP June 2010 Loay Ghazaleh, Advisor – Ministry of Works, BahrainMBA 2000 (Thunderbird); B.Sc. Civil Eng 1986 (Texas A & M) 973 36 711547,; Private Partnerships – Models 1PPP Transactions – Sectors Examples 5Managing Fiscal Risks in PPP’s 7PPP Best Practices 8Enabling PPP Business Environment 9PPP Advisory Services 10MENA PPP’s 2010 Projects Update 11
  2. 2. Public Private Partnerships – ModelsWith the increase in public debt, 100% privately funded initiatives emerged- privatizations - and risks were transferred in whole to the private sector,however, early successes of privatization programs were short lived and ledlater to bailouts / subsidy of the private sector by Governments. PPP,s havesince taken momentum as a better way to allocate the risks between theprivate and public sector, based on each entity’s ability to manage risks.Thus PPP providing the service or facility more efficiently and at a lowercost to the end user emerged in most infrastructure sectors like – RailTransport, Roads, Airports, Ports, Hospitals, Water and Sanitation, Utilities& Energy / Power, Telecommunication Schools, Affordable Housing andeven Prisons.In a PPP scheme, mainly four categories of risks can be presented:Political and Legal Risks: These risks are typically taken by the Government(with some guarantees if needed). They can be mainly of three natures: (i)acts of force majeure, war, civil disturbance; (ii) change of legislation; andgovernment policy change, e.g., changes in regulatory regime, impossibilityor unwillingness of the Government to meet its contractual obligations.Technical Risks: They are the construction or rehabilitation risks, whichinclude risks on completion, quality, delays, cost overruns and projectmodification. These risks are typically assumed by the concessionaire.Commercial Risks: The commercial risks arise because of the uncertainty ofdemand levels due to the possible improvement of an alternativeinfrastructure, facility or service. The commercial risks should in theory betaken by the concessionaire. However, sometimes these risks may be toohigh to be taken only by the concessionaire and therefore the allocation ofcommercial risks remains project specific.Economical and Financial Risks: These risks are due to the uncertainty ofeconomic growth, inflation rate, risk of interest rates, convertibility ofcurrencies, and exchange rate. They are assumed by the concessionaire.However, some unforeseen change of circumstances might not always beassumed by the private sector.1|Page –Introduction to PPP
  3. 3. Stakeholders and roles in PPP - Balance act among stakeholders • Public sector - Specify requirements and guarantees • Private sector (Investors / Operators) - Build facilities, support service – expertise & skills • Finance institutions – provide funds to the private sector • End User (Consumers ) – the public or off taker – make payments for the serviceRisk Scales for Private Sector Participation with Government • Privatization & Divestiture (Highest Private risk) • DBFO & BO Concession contract - Revenue or off- take - (25 -30) • 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)2|Page –Introduction to PPP
  4. 4. Popular PPP modelsBOOT- Build Own Operate Transfer, variations - BOT, and BODBFO-Design Build Finance Operate, variations DBOTBLT- Builds Lease TransferBMT-Build Manage TransferConcession Mechanisms • A Classical concession - BOT model (Build-Operate-Transfer) - can be defined as a system through which a public authority grants specific rights to an organization (private or semi-public) to build, rehabilitate, maintain and operate an infrastructure / asset for a given period. The company bears the technical risk (during the construction and the maintenance), the operation risk, most of the commercial risk and financial risks. The infrastructure / asset which are usually owned since the beginning by the public sector revert to it at the end of the contract. • Variations on the BOT include the BOOT (Build-Own-Operate- Transfer) and BOO (Build-Own-Operate). In the latter case, the contract grants the right to build and operate the infrastructure / asset, which is not however subsequently transferred to the public sector; there is an actual private ownership in this case and the concession periods are extended indefinitely without a fixed expiration date. The government only agrees to purchase the services produced for a fixed length of time. • Operation-Maintenance (OM) - The private sector is responsible for all aspects of operation and maintenance.3|Page –Introduction to PPP
  5. 5. Two Common PPP Structures1. Users Pay (Unknown Users) • 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.2. Everybody / Known Users Pay • 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 collecting4|Page –Introduction to PPP
  6. 6. PPP Transactions – Sectors ExamplesEconomic - Partnering to generate economic growth1. Highways• 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. India2. Air/Sea Ports• Long term management contracts that may include capital works – e.g. Australia, Srilanka, Cambodia• Government may agree to minimum thru-put and provides core custom & immigration functions3. Power (IPP)• Government agree on minimum uptake (usually 80 -90% the rest sold in open market – e.g. Indonesia, Malaysia• Government may agree to pass-thru cost on fuel.Social - Partnering to provide community service1. Hospital / Prison• 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, Australia5|Page –Introduction to PPP
  7. 7. 2. School/Units/Sports Venue• Private Partner bids on cost, design and facility management for a set time & run noncore services – e.g. Australia• Government runs core services of teaching / tutoring or agrees to use the facility for an agreed period3. Public / Government housing• Private Partner to build, lease and maintain for a set period – e.g. Malaysia• Government agrees to minimum lease for a set period / off take and / or allows co-developments on siteEnvironmental - Partnering to improve living environment1. Landfills / waste treatment• 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 grid6|Page –Introduction to PPP
  8. 8. Managing Fiscal Risks in PPP’sPPP’s create fiscal obligation that are not captured by traditional measuresof government dept and are often long term and binding futuregenerations and tax payers. Accurate fiscal monitoring and good use anddesign of PPP’s require that the fiscal cost and risk of the major contractualobligations be identified, quantified and mitigated.Typical fiscal risks: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.7|Page –Introduction to PPP
  9. 9. PPP Best PracticesPPP projects should be goal-directed and focus on results; there should beperiodic progress monitoring during implementation; there should be anindependent project team reporting to a steering committee consisting oftop representatives from both the public and private sectors; political andeconomic risks should be spread around at an early stage; there should beadequate and clear working methods and agreements.Factors that contribute to the achievement of best value in PPP projects;Thorough and realistic cost/benefit assessment, technical feasibility,detailed risk analysis / appropriate risk allocation and full life-cycle andvalue for money (VFM) concepts adaptation. Well-organized and goodgovernance In PPP projects drive for faster project completion, curtails incost escalation, and keeps maintenance cost adequately accounted for.Factors that impede the achievement of best value in PPP projects;high cost of the PPP procurement process, lengthy and complexnegotiations, difficulty in specifying the quality of service, pricing of facilitymanagement services, potential conflicts of interests among those involvedin the procurement, and the public sector clients inability to manageconsultants.Therefore the success formula for PPP projects is based on convergence ofgovernment expectation and private sector requirements as follows; • Government Expectation - Maintaining strategic control on the service - Increase in quality of service – safety & quality control. - Affordable tariffs and social benefits. • Private Sector Requirements - Profitability assurance. - Proportioned risk. - Enabling environment.8|Page –Introduction to PPP
  10. 10. Enabling PPP Business EnvironmentWhile private developers are becoming more selective in choosing theasset class - infrastructure, is still preferred - and in demanding higherquality and more “bankable” guarantees - as financing new PPP’s is stillmore on the debt side - with clearer forms of public support and risksharing, yet their interest in PPP’s can be enhanced by more enabling PPPbusiness environment.Among the factors that impede Investors interest are the followings; • Inconsistent Government / public policies • Lack of transparency, reduced competition • High tendering / bid process costs • Complex negotiation processes, slow /long decisions cycle • Lack of political & legislative support / high political debates. • Fiscal & monetary reform agenda not in place. • Public opposition / social issues. • Low service volumes, low income levels, unwillingness to pay commercial rates for service • Tax and Customer reforms not in place / toll collections issues. • Uncertain economic growth path (GDP , unemployment ) • Foreign investment regulation, trade flows not established. • Unclear maintenance / operation standards • Inadequate domestic capital markets capacity to manage transaction; lack of mechanisms to attract long-term finance from private sources at affordable rates. • Local private sector non involvement9|Page –Introduction to PPP
  11. 11. PPP Advisory ServicesFee-based advisory services are sometimes needed to gain PPP traction bybuilding capacity via series of support programs with communityinvolvement to gain early buy-in. The fees are usually based on a retainerand a success fee at closing of the PPP transactions. Typical advisoryservices include;Strategy - Making infrastructure PPP’s commercially viable • Analysis of economic, regulatory and policy issues • Market’s perception of project strengths and weaknesses • Strategy definition, sustainability – stakeholder’s perspective. • Solutions to social issues (retrenchment / retraining) • Institutional reforms proposals. • Assessment of long term country debt access and guarantees • Project development studies – demand analysis ,environment and social assessment, costs estimates, risks analysis • Financial structuring (the correct risk sharing, PPP / tariff model), technical, legal aspects and general procedures with continual stakeholder’s feedback into transaction structure.Bidding - Transparent international competitive contracts • Pre-qualification criteria tailored to market realities • Marketing of business opportunities to selected investors • Examining bidders funding commitment – contributing banks • Recommending appropriate concessionaire/sBuilding support • communication / media plan • Political & legislative leadership / regulations outlines • Project governance • Building community support10 | P a g e – I n t r o d u c t i o n t o P P P
  12. 12. MENA PPP’s 2010 Projects UpdateCompleted Projects • Saudi Arabia, hajj terminal: 20 years BTO for the rehabilitation and expansion of the KAIA – King Khalid International Airport - Hajj terminal was awarded in Dec 2006 to the Saudi Bin Ladin Group in association with Airports De Paris .Size: us$250 m. • Saudi Arabia, KAIA Desalination: 20 year BOT agreement to develop a new 30.000 m3/day desalination plant to provide potable water the Jeddah airport and its associated facilities was awarded to the SETE consortium in Dec 2006. Size: us$ 35 m. • Jordan, Queen Alia international airport: the rehabilitation and expansion of the Qaia airport was awarded in April 2007 to a consortium led by Airports De Paris management. Size: us$ 700 million.11 | P a g e – I n t r o d u c t i o n t o P P P
  13. 13. Ongoing Projects, 2010 • Saudi Arabia, airport cities: development of commercially oriented “airport cities” around the airport of Jeddah, Dammam and Riyadh. • Saudi Arabia, Medina airport: expansion and rehabilitation of the prince Mohammed bin Abdul-Aziz airport. • Egypt, new Cairo waste water and potable water: construction and operation of a 250,000 m3/day waste – water treatment plant and a 500,000 m3/ day potable water plant for new Cairo. • Egypt, Alexandria hospital PPP: construction and non-clinical maintenance of two hospitals and a blood bank in Alexandria. • Yemen IPP: construction and operation of an IPP of up to 400mw. • Lebanon, IPP: sale/ concession of a 435 mw power plant at Deir Ammaar, and the construction, operation, and maintenance of a new 450 mw IPP plant. • Jordan, Amman ring road: implement the first road PPP in Jordan by construction of a 118km expressway circling Amman. • EGYPT, NEW SCHOOLS PPP: construction and management of 345 new schools on a PPP basis. • Egypt, Cairo –Alexandria road: concession of the Cairo Alexandria freeway, with possible inclusion of the Port Said- Marsa Matrouh northern coastal road.12 | P a g e – I n t r o d u c t i o n t o P P P