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Public Private Partnerships in the Baltics and EuropeVilnius, 22-23 November 2006

DAY I, TOPIC IV

Structuring and Implementing PPPs: Risk Allocation and Mitigation

1. UK/European PPP Experience and Lessons2. Risks in PPP Projects

Scott DicksonSenior Associate, Projects GroupBerwin Leighton Paisner LLP, London

22 November 2006

[5440725]

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1. UK/European PPP Experienceand Lessons

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History of PFI in the UK

1992: Launch of the Private Finance Initiative by the Conservative Government

1997 to date: changes introduced by the Labour Government, including relaunch as Public Private Partnerships (PPPs)

Policy development now rests with HM Treasury, including standardisation

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European takeup and globalisation

Includes Italy, France, Portugal, Germany, Spain, Greece, Austria, Ireland, Netherlands, Scandinavia, Hungary, PolandEarly projects – Finland (roads)Increasing deal pipeline

Keep an eye on experience further away: Canada, Australia, Central/South America, South Africa, Japan

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Key drivers for PFI

Neglected and crumbling infrastructure and public assets

Need for investment, avoiding the public balance sheet

Failures of public procurement

Political consistency – move from public to private

Utilisation of private sector expertise

Promotion of value for money and more efficient of use of resources

Promotion of innovation (especially design)

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Tested benefits/success of PFI

Transferred risk from the public authority to private sectorHarnessed private sector skills and expertiseIntroduced competition into procurement of public assetsPayment linked to performance– deductions for unavailability and poor

performance– incentive for private sector to deliver

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UK sector breakdown (by capital value)

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UK sectors (by capital value) – in figures

Health (21%)

Transport (18%)

Defence (15%)

Education (13%)

Scotland/Wales (13%)

Other accommodation projects (government buildings, prisons) (12%)

Housing (4%)

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UK position today….

700 signed projects worth £46bn500 operational projectsStandard contractual/risk positionsCommoditised marketPipeline: Health, Defence, Transport, Education, Housing, WasteMarket uncertainty – health projectsGrowth of other sectors – defence, housing, waste

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Consequences of UK commoditised market….

Tight returns

Interest moved to the margins:– bundling– long-term relationships– new structures, including not-for-profit– funding competitions– secondary market

Opportunities in Europe

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Lessons (1): development aide-mémoire

Choosing projects - sectors/assets

Assemble the right public sector team

Robust business case

Analysis and allocation of risks

Learn from early projects

Project planning and management

Legal framework in place

Standardisation/co-ordination

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Lessons (2): general

Understand the private sector

Take long term approach and sell project flow to attract private sector

Communication with stakeholders

Deal with opposition

Promote innovation

Limit transaction costs

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2. Risks in PPP Projects

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Thinking about project risks

Risk transfer/balance sheetvs Value for moneyAnalysis of risksSpecifics: Sectoral/GeographicalFunder expectations/bankabilityAlways open for negotiation?vs Transaction costsUK settled risk allocationPrivate sector: risk mitigation

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Public sector – scoping the project

Full risk transferPricing/Value for money considerations– example: condition of existing buildings– impossibility of rational pricing?– risk premium too high?– consider competitive bidding environment

Approach– methodical analysis– justifiable risk transfer– consider value for money– bankable– consistent

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Categorisation of risks, with examples

Construction– failure of design– cost of materials– delay/incorrect time estimate– condition of site/existing buildings– change in law

Operational– failure of perform– incorrect cost estimates– change in public authority requirements– change in law

Pure financial risks– tax– inflation– insurance costs

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Risk mitigation/management

Contractual/negotiation(inc ringfencing)Private sector passdownSPV managementInsuranceSenior fundingEquity funding

Effects of secondary market/portfolio risk spreading

Decreasing Sponsor Appeal

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Recommendations

Public authorityEarly analysis of the project risk matrixTake soundings from funding market

Private sectorWork on risks register/internal compliancePricing/mitigation issuesEarly discussions with insurance advisers

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Vilnius, 22 November 20061. UK/European PPP Experience and Lessons2. Risks in PPP Projects

Scott DicksonSenior Associate, Projects Group

t: +44 (0)20 7760 4392e: scott.dickson@blplaw.com

Berwin Leighton Paisner LLPAdelaide HouseLondon BridgeLondon EC4R 9HA

t: +44 (0)20 7760 1000f: +44 (0)20 7760 1111 www.blplaw.com