PPP Presentation to Ogun State Executive Committee 2014

Executive Committee
Some useful knowledge to makes the difference
between success and failure of a PPP program
Ogun 2014 Retreat
28 January 2014
John Davie
Chairman Altra Capital Limited
Visiting Professor Faculty of Business and Law, London Metropolitan University
Past Chairman UKTI PPP Sector Advisory Board

The standard PPP route map!!

• A method of providing public services, not simply for buying
infrastructures
• It should contain
• an expectation of service improvement
• a commitment to transparency
• the dismantling of monopolies and the reform of public services
• OWNERSHIP of projects belongs to the sponsoring MINISTRY,
Department or Agency
What is PPP?

A fundamental principle behind the PPP
• PPP is intended to transform government departments from
being owners and operators of assets into knowledgeable
purchasers of services from the private sector
• This will ease Government cash flow if properly deployed

Indicators
Cartegena
1994 2005
No of employees per 1,000 connections 15 2.3
Percentage of domestic metering 30% 99%
Unaccounted for water 60% 41%
Hours of service / day 7 24
Response to complaints (days) 6 0.5
Some successes
Source : Water Supply and Sanitation Sector Board of the World Bank

The single most important thing that government MUST do is
What is most important?
Which comes from using high quality experienced advisers
Provide high quality useable data and facts
Prepare high quality project development work

Government’s advisors
• Success of the programme depends on the organisation
of government and its ability to use advisory services
• Strong government team
• outside expertise for
• identifying internal changes necessary to meet government
objectives
• recommending best way to implement change
• assisting in the implementation
• PPP specialist advisers can be broadly divided into 4 types:
• financial
• legal
• technical
• project management

• PPP is a contractual arrangement between a government
entity and a private firm which incentivises the private
firm to effectively and efficiently design, build, maintain
and finance public infrastructure
• There are two main types:
• User-Pay PPP where the private firm takes revenue and/or
demand risk
• User-Pay PPP is usually called a concession
• Annuity based PPP where the government retains those risks
• Annuity based PPP is usually called a DBFO
Two main types of PPP?

• 100+ countries doing / contemplating PPP programmes
• comparatively low proportion of these have actually succeeded
• all countries looking at doing PPP are in competition for a limited
international pool of advisors, capital and operators
• international experience has shown that certain key factors need
to be in place for a successful programme to take place
• most important factor in ensuring good quality projects, which
benefit the country concerned, is proper training for government
officials tasked with running these PPP projects
• the NAO in UK, S&P, EU and UN have all highlighted lack of
government training as a major barrier to successful PPPs which
often means the public sector gets a very poor deal
Global Competition

How important is using private sector finance?

A snapshot of investment needs
• The UK estimates that £320 billion of
investment in social and economic
infrastructure will be needed over the next
five years
• 70% of which will have to be sourced from
the private sector
• The IFC has indicated that the Middle East and Africa regions have
the lowest amount of private infrastructure investment in the world
• IMF estimates Nigeria’s infrastructure will require $14.2 billion per
year over the next decade, or about 12 percent of GDP

• Basle III effectively tripled the size of the capital
reserves that the world’s banks must hold
against losses
Why are banks not lending?
• Top 19 banks
• Risk-weighted assets are around
$167,000,000,000,000
• Current Core Tier 1 = $3,340,000,000,000
• Basle III Core Tier 1 = $11,690,000,000,000
• An additional $8,350,000,000,000
• They do not trust each other!

• Contracts are sufficient for getting started in PPPs – only a strong
contract between the parties is needed. Putting in place the
overall legal, policy and institutional framework can wait
Some Misconceptions



• PPPs are all embracing universal remedy that can be
implemented all at once irrespective of the competence,
knowledge and skills on the part of governments
• PPPs provide a number of infrastructure assets, roads, bridges,
power plants etc., to Governments either free or little cost and no
risk
• PPPs are sophisticated technical financial transactions
• Using a PPP can bring private money into public coffers and be an
additional source of payment for government departments

Equity
Equity
Fee to SPC
for use of Facility
based on
Performance/
Payment
Project Company
(SPV)
Direct
Agreement
Build/Renew/
Maintenance Costs
Construction &
Maintenance
(Hard Services)
Operations
(Soft Services)
Service/Operator
Charge
Guarantees
Collateral or subvention
Senior Debt
Loan
Agreement
Debt
Repayment
Debt
Concession/
Project
Agreement
Sub-contractors Sub-contractors
Capital
Insurance
CompaniesDebt
Insurance
Rating AgenciesDebt
Rating
Re-Payments
Equity and Loan Stock
Post 2008 – 30% - 40%
• Specialist Bank
• Contractor
• Operator
Equity and
Loan Stock
Repayment
Equity and
Loan StockEquity and
Loan Stock
Government
(Awarding Authority)
They will
have very competent
advisors
You
need competent
advisors
They
have competent
advisors
Holding
Company

Key issues for banks in PPP projects
Micro
• Well defined projects; clarity on
output specification
• Strong, experienced contractors
• Credible completion undertakings
• Appropriate allocation of risk
reflected in payment regime
• High quality predictable cash flows
– low volatility
• Alternative service providers in the
event of bank’s step-in
• Adequate termination protection
• Protection from other adverse
events, change in law, force
majeure, insurance etc.
Macro
• Legal regime permitting taking of
security and enforcement of
contractual rights
• Political commitment to PPP and to
specific projects
• Competition amongst construction
companies
• Availability of service providers
• Availability/capacity of long-term
debt market
• Availability of project equity
• Established exit route for project
equity
• Transparent procurement process.

Some lessons learnt
• Stable long term policy commitments if changes are to be
made across markets
• Scrutinise the deliverability of a project before real
engagement with the market
• Project Governance
• Programme delivery platforms
• Mix of mandatory procedures and support
• Proper attention paid early on to the operational phase of
projects
• A view about what you want the market to look like in 5 -
10 years’ time.

The financing tool-box
Mezzanine
Low risk Medium risk High risk
Equity
>20%
15-20%
<10%
Return
Senior
Debt

What is risk?

The single most important thing that government MUST do is
Reminder - what is most important?
Provide high quality useable data and facts
Prepare high quality project development work
Using high quality experienced advisers

Thank You
www.altracapital.com
johndavie@altracapital.com

PPP Presentation to Ogun State Executive Committee 2014

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