Introduction to Public Private Partnerships

Module 1

2013

Module Structure

Good GovernanceFunding PPPsDeveloping an OBCEffective procurementRisks in PPPsSustainabilityLessons and recommendations

Definition of PPP

Public private partnerships (PPPs) are agreements between government and the private sector for the purpose of providing public infrastructure, community facilities and related services.

The private sector enter into a contract with government for the design, delivery, and operation of the facility or infrastructure and the services provided.

The private sector finance the capital investment and recover the investment over the course of the contract.

The asset transfers back to the public sector at the end of the contract

Range of PPPsAdapted from Canadian Council PPP 2009Design and buildOperate and maintainBuild and financeDesign build finance maintainDBFM-operateConcessionPrivatisationPPP ModelsDegree of private sector involvementDegree of private sector risk

Principles of PPPsCost measured against conventional procurement.Whole life costs and quality are combined to gauge VFM

Long term responsibility for building operation and maintenanceFocus on reducing cost

Transfer of design and construction riskRisk of ownership transferred to the private sector

Typical SPV structure for PPPsGovernmentPPP AgreementPrivate Sector(Special Purpose Vehicle)(SPV)Loan agreement DebtSubcontractorsSubcontractorConstructionSubcontractorOperationsShareholdingEquity

PPP and Traditional Procurement

Governance - principlesParticipationDecencyTransparencyAccountabilityFairnessEfficiency

Funding - Project financeThe financing of long-term infrastructure is based upon a non-recourse or limited recourse financial structure where the debt and equity used to finance the project are paid back from the cash flows generated by the project.

Project financeHigh gearing requiring less equity

Tax benefits

Public sector use of revenue

Long term debt funding

Why use PPPs?

Focus on outputsPPPs make projects affordableBetter value for money over the lifetime of the projectMore efficiency in procurementFaster project delivery with more projects in a defined timeframeRisks are allocated to the party best able to manage the risk

Why use PPPs? (2)

Outline Business Case

Critical stages of a PPPInitial feasibility

Procurement phase

Construction phase

Operation phase

Stages in procurementProcurement strategy stage

Qualification and selection stage

Dialogue

Award

Prepare DocumentsPreparation and evaluation of bidder documentsFinancial CloseProcurement ProcessProject SelectionBrief developmentMarket testing

Risks in PPPOptimal risk sharingRisk borne by the party best able to manage itRisk managementIdentificationAllocationMitigation

Stages of risk management

SustainabilityEmbedded environmental and social safeguards

Focus on longer timescales

Public, business and government working in partnership

What makes a successful PPP?Political willGovernment commitmentPPP ChampionClear output specificationAppropriate risk sharingValue for moneyPerformance management

ConclusionsUndertake projects for the benefit of the citizens, including the socially and economically disadvantagedAllows governments to approach projects hitherto unobtainable due to lack of fundingProvide incentives to the private sector to adopt green criteriaEmbraces the MDGsPPPs allow the injection of private sector capital

End-of-Module Questions1. Which of the following best describes PPP projects?Using funding from public borrowing.Local government sets the specificationPublic sector details design and pays for the constructionGovernment sets the required outputs and funding is provided by the private sector.Answer: d)2. What is the name of the organisation created to design, build finance and maintain the asset?Answer: Special Purpose Vehicle - SPV

End-of-Module Questions3. Which of the following are critical to good governance?Funding for the projectClarity and opennessPutting the public firstTransferring the risk to the private sector.

Answer: b) and c)4. Which one of the following would not be described as an international investor? a) Banks b) Pension funds c) Insurance companies d) Employees holding shares through an employee share scheme.

Answer: d)

End-of-Module Questions5. The term sustainability refers to? Maintaining resource use at current or higher levelsKeeping the natural environment and society in a happy healthy and functional stateHolding or increasing the value of human lifeFocus on fulfilling short term need.

Answer: b)6. Risks should be borne by the party best able to manage them. a) True b) False

Answer: a)

End-of Module Questions7. What does an OBC demonstrate? a) That a project is economically sound, financially viable and will be well managed b)That a project meets market expectation c) That significant profit will accrue for the public and private sector d) None of the above

Answer: a)8. What are the phases in a PPP project life cycle? Answer: Initial feasibility, Procurement phase, Construction phase, and Operational phase 9. Match up the boxes.

Service contractsDesign, build, financeConcession contractsPrivate sector managing servicesConstruction contractsPublic sector provides management support

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